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, 1997
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 022446
DECKERS OUTDOOR CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 953015862
- --------------------------------------------------------------------------------
(State or other jurisdiction of incorporation or IRS Employer Identification
organization)
495A S. 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, 1997
---------------------------- -----------------
Common stock, $.01 par value 8,930,531
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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, 1997 and December 31, 1996 1
Condensed Consolidated Statements of Earnings for the Three-Month Period Ended
March 31, 1997 and 1996 2
Condensed Consolidated Statements of Cash Flows for the Three-Month
Period Ended March 31, 1997 and 1996 3-4
Notes to Condensed Consolidated Financial Statements 5-6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7-10
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
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DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
ASSETS MARCH 31, DECEMBER 31,
1997 1996
------------ ------------
Current assets:
Cash and cash equivalents $ 1,481,000 1,287,000
Trade accounts receivable, less allowance for
doubtful accounts of $1,491,000 and
$1,292,000 as of March 31,
1997 and December 31, 1996, respectively 28,975,000 17,866,000
Inventories 21,336,000 24,930,000
Prepaid expenses and other current assets 2,359,000 3,643,000
Deferred tax assets 1,622,000 1,622,000
------------ ------------
Total current assets 55,773,000 49,348,000
Property and equipment, at cost, net 2,668,000 2,794,000
Intangible assets, less applicable amortization 20,617,000 20,805,000
Note receivable from supplier, net 1,863,000 1,838,000
Other assets, net 250,000 112,000
------------ ------------
$81,171,000 74,897,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 101,000 99,000
Trade accounts payable 4,418,000 5,494,000
Accrued expenses 5,276,000 3,042,000
Income taxes payable 1,773,000 983,000
------------ ------------
Total current liabilities 11,568,000 9,618,000
------------ ------------
Long-term debt, less current maturities 12,789,000 10,290,000
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value. Authorized 5,000,000 -- --
shares; none issued
Common stock, $.01 par value. Authorized 20,000,000
shares; issued 9,293,431 and outstanding 8,958,556
at March 31, 1997; issued 9,283,556 and outstanding
8,983,556 at December 31, 1996 90,000 90,000
Additional paid-in capital 26,625,000 26,790,000
Retained earnings 30,099,000 28,109,000
------------ ------------
Total stockholders' equity 56,814,000 54,989,000
------------ ------------
$81,171,000 74,897,000
============ ============
See accompanying notes to condensed consolidated financial statements.
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DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings
(Unaudited)
THREE-MONTH PERIOD ENDED
MARCH 31,
-------------------------------
1997 1996
------------ ----------
Net sales $ 34,441,000 28,772,000
Cost of sales 19,491,000 16,182,000
------------ ------------
Gross profit 14,950,000 12,590,000
Selling, general and administrative expenses 10,770,000 9,849,000
Loss on factory closure 500,000 --
------------ ------------
Earnings from operations 3,680,000 2,741,000
Other expense (income):
Interest expense 252,000 282,000
Minority interest in net loss of subsidiary (81,000) (63,000)
Miscellaneous expense (income) 4,000 (148,000)
------------ ------------
Earnings before income taxes 3,505,000 2,670,000
Income taxes 1,515,000 1,191,000
------------ ------------
Net earnings $ 1,990,000 1,479,000
============ ============
Net earnings per common and common equivalent shares $ 0.22 0.16
============ ============
Weighted average common and common equivalent shares
outstanding
9,040,000 9,304,000
============ ============
See accompanying notes to condensed consolidated financial statements.
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5
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
THREE-MONTH PERIOD ENDED
MARCH 31,
-------------------------------
1997 1996
------------ ---------
Cash flows from operating activities:
Net earnings $ 1,990,000 1,479,000
------------ ----------
Adjustments to reconcile net earnings to net cash provided
by (used in) operating activities:
Depreciation and amortization 663,000 460,000
Provision for doubtful accounts 450,000 1,235,000
Minority interest in net loss of subsidiary (81,000) (63,000)
Loss on factory closure 500,000 --
Changes in assets and liabilities:
Increase in trade accounts receivable (11,309,000) (6,077,000)
Decrease in inventory 3,594,000 1,991,000
Decrease in prepaid expenses and other current
assets 1,284,000 1,347,000
Decrease in refundable income taxes -- 2,418,000
Increase in note receivable from supplier (275,000) (196,000)
Decrease (increase) in other assets (263,000) 357,000
Decrease in accounts payable (1,076,000) (58,000)
Increase in accrued expenses 2,315,000 1,480,000
Increase in income taxes payable 790,000 --
------------ ----------
Total adjustments (3,408,000) 2,894,000
------------ ----------
Net cash provided by (used in) operating
activities (1,418,000) 4,373,000
------------ ----------
Cash flows from investing activities:
Purchase of property and equipment (724,000) (220,000)
------------ ----------
Net cash used in investing activities (724,000) (220,000)
------------ ----------
(Continued)
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DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows, Continued
(Unaudited)
THREE-MONTH PERIOD ENDED
MARCH 31,
---------------------------
1997 1996
--------- ----------
Cash flows from financing activities:
Proceeds from (repayments of) notes payable and
long-term debt 2,501,000 (3,800,000)
Repurchase of common stock (165,000) --
Other -- 21,000
----------- ----------
Net cash provided by (used in) financing
activities 2,336,000 (3,779,000)
----------- ----------
Net increase in cash and cash equivalents 194,000 374,000
Cash and cash equivalents at beginning of period 1,287,000 3,222,000
----------- ----------
Cash and cash equivalents at end of period $ 1,481,000 3,596,000
=========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 245,000 269,000
Income taxes 726,000 141,000
=========== ==========
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.
See accompanying notes to condensed consolidated financial statements.
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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, 1996 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, 1997 and December 31, 1996 is summarized as
follows:
MARCH 31, DECEMBER 31,
1997 1996
----------- ------------
Raw materials $ 2,447,000 3,239,000
Work in process 974,000 1,197,000
Finished goods 17,915,000 20,494,000
----------- -----------
Total inventory $21,336,000 24,930,000
=========== ===========
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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) Legal Proceedings with Former Ugg Shareholders
Some of the former shareholders of Ugg Holdings gave notice of a demand
for arbitration regarding the periodic payments due under the
acquisition agreement. These former shareholders are asserting claims
that additional payments are due them. The Company does not believe
these claims are meritorious. On April 23, 1997, the former
shareholders filed their claims and the Company filed its counterclaims
against the former shareholders. On May 7, 1997, the Company and the
former shareholders had a status conference with the arbitrator. The
date for arbitration is pending.
(6) Recently Issued Pronouncements
The Financial Accounting Standards Board issued Statement No. 128,
"Earnings per Share" ("FAS 128"), in February 1997. FAS 128 is
effective for both interim and annual periods ending after December 15,
1997. The Company will adopt FAS 128 in the fourth quarter of 1997. FAS
128 requires the presentation of "Basic" earnings per share which
represents income available to common shareholders divided by the
weighted average number of common shares outstanding for the period. A
dual presentation of "Diluted" earnings per share will also be
required. The Diluted presentation is similar to the current earnings
per share presentation. Management believes the adoption of FAS 128
will not have a material impact on the Company's earnings per share.
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DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months Ended March 31, 1997 Compared to Three Months Ended March
31, 1996
Net sales increased by $5,669,000 or 19.7% between the three months
ended March 31, 1997 and 1996. Sales of the Teva(R) line increased from
$18,600,000 for the three months ended March 31, 1996 to $24,252,000
for the three months ended March 31, 1997, a 30.4% increase. Sales of
Teva(R) products represented 64.6% and 70.4% of net sales in the three
months ended March 31, 1996 and 1997, respectively. The Company
experienced a continued increase in the net sales of footwear under the
Simple(R) product line, which increased 15.3% from $7,983,000 to
$9,206,000 between the three months ended March 31, 1996 and 1997.
Overall, international sales for the Company's products increased 2.9%
from $9,035,000 to $9,297,000, representing 31.4% of net sales in 1996
and 27.0% in 1997. The combination of these factors led to a net
increase in the volume of footwear sold, which increased from 1,107,000
pairs during the three months ended March 31, 1996 to 1,319,000 pairs
during the three months ended March 31, 1997, a 19.2% increase.
The weighted average wholesale price per pair sold during these
respective periods increased from $24.88 to $25.93 or by 4.2%. The
increase in the average wholesale price primarily relates to the
non-recurrence of the sale of certain Teva(R) sport sandals at
discounted prices in the first quarter of 1996, which selling prices
approximated the carrying value of the inventory.
Cost of sales increased by $3,309,000 to $19,491,000 for the three
months ended March 31, 1997, compared with $16,182,000 for the three
months ended March 31, 1996, an increase of 20.4%. Gross profit
increased by $2,360,000, or 18.7%, to $14,950,000 for the three months
ended March 31, 1997 from $12,590,000 for the three months ended March
31, 1996 and decreased as a percentage of net sales to 43.4% from
43.8%. The slight decrease in gross profit margin as a percentage of
net sales is primarily the result of the closure of the Company's
California manufacturing facility in March 1997. The Company recorded a
$500,000 charge to operations for the closure during the three month
period ended March 31, 1997.
Selling, general and administrative expenses increased by $921,000, or
9.4%, between the three months ended March 31, 1996 and March 31, 1997
and decreased as a percentage of net sales from 34.2% in 1996 to 31.3%
in 1997. The $921,000 increase was the result of increased net sales.
The decrease as a percentage of net sales was largely a result of the
non-recurrence of certain Ugg operating expenses which occurred in the
first quarter of 1996. These 1996 costs related to Ugg's Carlsbad
facility, which was subsequently closed and integrated into Deckers'
operations in the second quarter of 1996. In addition, the Company
experienced lower bad debt expense in the first quarter of 1997 than in
the first quarter of 1996. The decrease 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.
Income taxes were $1,515,000 for the three months ended March 31, 1997,
representing an effective income tax rate of 43.2% compared with income
taxes of $1,191,000 for the three
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months ended March 31, 1996, representing an effective income tax rate
of 44.6%. The higher effective income tax rate in 1996 compared to 1997
is due to certain non-deductible expenses and losses being a greater
proportion to earnings before income taxes in 1996 than in 1997. Such
non-deductible items include the amortization of goodwill and 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 $1,990,000 for the three months ended
March 31, 1997 as compared with net earnings of $1,479,000 for the
three months ended March 31, 1996, an increase of 34.6%, for the
reasons discussed above.
Outlook
This outlook section contains a number of forward-looking statements,
all of which are based on current expectations. Actual results may
differ materially.
Although net sales of the Simple(R) product line for the first quarter
of 1997 increased 15.3% over net sales during the first quarter of
1996, the Company anticipates that sales of the Simple(R) line will not
grow at the same rate as sales grew in 1996. The Company currently
expects that sales of Simple(R) shoes in 1997 will be flat or slightly
higher than sales in 1996. Sales of Ugg(R) footwear are expected to be
slightly lower in 1997 than sales of Ugg(R) footwear in 1996, which
were approximately $14.8 million. The Company anticipates that any
decrease in the rate of sales growth or decrease in sales for the
Simple(R) and Ugg(R) lines will be more than offset by sales of the
Teva(R) product line.
The foregoing forward-looking statements represent the Company's
current analysis of trends and information. Actual results could be
affected by a variety of 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, both of which could 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. In addition, sales of each of
the Company's different lines have historically been higher in
different seasons, with the highest percentage of Teva(R) sales
occurring in the first and second quarter of each year, the highest
percentage of Simple(R) sales occurring in the third quarter and the
highest percentage of Ugg(R) sales occurring in the fourth quarter.
Consequently, the results for these product lines are highly dependent
on results during these specified periods. The Company cautions the
reader not to rely on the forward-looking statements in this section.
They merely represent the Company's current assessment of trends and
information and may not be indicative of actual future results. The
Company disclaims any intent or obligation to update these
forward-looking statements.
Liquidity and Capital Resources
The Company's liquidity consists of cash and cash equivalents, trade
accounts receivable, inventories and a revolving credit facility. At
March 31, 1997, working capital was $44,205,000 including $1,481,000 of
cash and cash equivalents. Cash used in operating activities aggregated
$1,418,000 for the three months ended March 31, 1997. Trade accounts
receivable increased 62.2% from December 31, 1996 to March 31, 1997,
largely due to increased Teva(R) sales
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occurring primarily in the latter part of the first quarter of 1997.
Inventories decreased 14.4% during this period for the same reason.
The Company has a revolving credit facility with a bank (the
"Facility"), providing a maximum borrowing availability of $25,000,000
based on certain eligible assets, as defined. 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 (8.50% at
March 31, 1997) 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
$10,000,000 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, 1997, the Company had borrowed $11,525,000 under the Facility
and had approximately $9,582,000 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, 1997.
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
$1,863,000 (net of related allowance) was outstanding at March 31,
1997. The note is secured by all assets of the supplier and bears
interest at the prime rate (8.50% at March 31, 1997) plus 1%.
Capital expenditures totaled $724,000 for the three months ended March
31, 1997. The Company's capital expenditures related primarily to
leasehold improvements associated with the Company's move to new
facilities in Goleta, California. 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 further future payments equal to 2 1/2% of
net sales of Ugg Holdings for the years ending March 31, 1996 through
March 31, 2000, and an amount equal to earnings before income taxes of
Ugg Holdings, as adjusted for certain items, for the year ended March
31, 1996. In May 1996, the Company made a $495,000 payment to the
former shareholders related to its required payments for the year ended
March 31, 1996.
In 1996, the Company's Board of Directors authorized the repurchase of
up to 300,000 shares from time to time in open market or in privately
negotiated transactions, subject to price and market conditions. During
1996, the Company repurchased 300,000 shares of the Company's
outstanding common stock for cash consideration of $2,390,000. In
February 1997, the Company's Board of Directors authorized the
repurchase of up to an additional 300,000 shares. During the three
months ended March 31, 1997, the Company repurchased 25,000 shares for
cash consideration of $166,000. From April 1, 1997 through May 8, 1997,
the Company repurchased 37,900 shares for cash consideration of
$259,000.
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.
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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.
Other
The Company believes that the relatively moderate rates of inflation in
recent years have not had a significant impact on its net sales or
profitability.
Recently Issued Pronouncements
The Financial Accounting Standards Board issued Statement No. 128,
"Earnings per Share" ("FAS 128"), in February 1997. FAS 128 is
effective for both interim and annual periods ending after December 15,
1997. The Company will adopt FAS 128 in the fourth quarter of 1997. FAS
128 requires the presentation of "Basic" earnings per share which
represents income available to common shareholders divided by the
weighted average number of common shares outstanding for the period. A
dual presentation of "Diluted" earnings per share will also be
required. The Diluted presentation is similar to the current earnings
per share presentation. Management believes the adoption of FAS 128
will not have a material impact on the Company's earnings per share.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Some of the former shareholders of Ugg Holdings gave notice of a demand
for arbitration regarding the periodic payments due under the
acquisition agreement. These former shareholders are asserting claims
that additional payments are due them. The Company does not believe
these claims are meritorious. On April 23, 1997, the former
shareholders filed their claims and the Company filed its counterclaims
against the former shareholders. On May 7, 1997, the Company and the
former shareholders had a status conference with the arbitrator. The
date for arbitration is pending.
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 10.37 Extension and Restatement of Employment
Agreement between Diana M. Wilson and
Deckers Outdoor Corporation, dated April 18,
1997.
Exhibit 10.38 Limited Recourse Secured Promissory Note
between Diana M. Wilson and Deckers
Outdoor Corporation, dated April 18, 1997.
Exhibit 10.39 Stock Pledge Agreement between Diana M.
Wilson and Deckers Outdoor Corporation,
dated April 18, 1997.
Exhibit 11.1 Statement of Computation of Earnings per
Share.
(b) Reports on Form 8-K. None
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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, 1997 ----------------------------------------------
M. Scott Ash, Chief Financial Officer
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
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