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 September 30, 1998
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 IRS Employer Identification
of incorporation
or organization)
495-A South Fairview Avenue,
Goleta, California 93117
- --------------------------------------------------------------------------------
(Address of principal (zip code)
executive offices)
Registrant's telephone number, including area code (805) 967-7611
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of the issuer's class of common stock,
as of the latest practicable date.
Outstanding at
CLASS November 19, 1998
---------------------------- --------------
Common stock, $.01 par value 8,505,770
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DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Table of Contents
Page
----
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 1998
and December 31, 1997 1
Condensed Consolidated Statements of Operations for the
Three-Month Period Ended September 30, 1998 and 1997 2
Condensed Consolidated Statements of Operations for the
Nine-Month Period Ended September 30, 1998 and 1997 3
Condensed Consolidated Statements of Cash Flows for the
Nine-Month Period Ended September 30, 1998 and 1997 4-5
Notes to Condensed Consolidated Financial Statements 6-11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12-20
Part II. Other Information
Item 1. Legal Proceedings 21
Item 2. Changes in Securities 21
Item 3. Defaults upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
Signature 22
3
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
ASSETS
Current assets:
Cash $ 3,830,000 3,238,000
Trade accounts receivable, less allowance for
doubtful accounts of $1,191,000 and $1,092,000 as of
September 30, 1998 and December 31, 1997, respectively 14,832,000 23,037,000
Inventories 16,471,000 18,979,000
Prepaid expenses and other current assets 1,881,000 2,190,000
Refundable income taxes 4,482,000 --
Deferred tax assets 1,357,000 1,357,000
------------ ------------
Total current assets 42,853,000 48,801,000
Property and equipment, at cost, net 2,959,000 2,509,000
Intangible assets, less applicable amortization 20,853,000 21,866,000
Note receivable from supplier, net 597,000 966,000
Other assets, net 583,000 551,000
------------ ------------
$ 67,845,000 74,693,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank credit facility $ 8,470,000 --
Notes payable -- 2,000,000
Current installments of long-term debt 112,000 107,000
Trade accounts payable 3,805,000 3,629,000
Accrued expenses 2,031,000 3,821,000
Income taxes payable -- 22,000
------------ ------------
Total current liabilities 14,418,000 9,579,000
------------ ------------
Long-term debt, less current installments 599,000 7,983,000
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 9,478,722 shares and outstanding
8,505,770 shares at September 30, 1998; issued
9,419,431 shares and outstanding 8,789,431 shares
at December 31, 1997 85,000 88,000
Additional paid-in capital 22,708,000 25,034,000
Retained earnings 30,659,000 32,633,000
------------ ------------
53,452,000 57,755,000
Less note receivable from stockholder/officer 624,000 624,000
------------ ------------
Total stockholders' equity 52,828,000 57,131,000
------------ ------------
$ 67,845,000 74,693,000
============ ============
See accompanying notes to condensed consolidated financial statements.
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DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
THREE-MONTH PERIOD ENDED
SEPTEMBER 30,
---------------------------------
1998 1997
------------ ------------
Net sales $ 13,558,000 20,783,000
Cost of sales 12,251,000 13,453,000
------------ ------------
Gross profit 1,307,000 7,330,000
Selling, general and administrative expenses 9,374,000 6,454,000
------------ ------------
Earnings (loss) from operations (8,067,000) 876,000
Other expense (income):
Interest expense (income), net 150,000 (57,000)
Minority interest in net income of unconsolidated
subsidiary -- 98,000
Miscellaneous expense 70,000 10,000
------------ ------------
Earnings (loss) before income taxes
(benefit) (8,287,000) 825,000
Income taxes (benefit) (3,154,000) 357,000
------------ ------------
Net earnings (loss) $ (5,133,000) 468,000
============ ============
Net earnings (loss) per share:
Basic $ (0.60) 0.05
Diluted (0.60) 0.05
============ ============
Weighted average shares:
Basic 8,506,000 8,997,000
Diluted 8,506,000 9,069,000
============ ============
See accompanying notes to condensed consolidated financial statements.
2
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DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
NINE-MONTH PERIOD ENDED
SEPTEMBER 30,
-------------------------------
1998 1997
------------ ----------
Net sales $ 76,877,000 83,327,000
Cost of sales 49,111,000 48,515,000
------------ ----------
Gross profit 27,766,000 34,812,000
Selling, general and administrative expenses 29,580,000 26,838,000
Loss on factory closure -- 500,000
------------ ----------
Earnings (loss) from operations (1,814,000) 7,474,000
Other expense:
Interest expense, net 836,000 324,000
Minority interest in net income of unconsolidated
subsidiary -- 17,000
Miscellaneous expense 73,000 4,000
------------ ----------
Earnings (loss) before income taxes (benefit) (2,723,000) 7,129,000
Income taxes (benefit) (749,000) 3,082,000
------------ ----------
Net earnings (loss) $ (1,974,000) 4,047,000
============ ==========
Net earnings (loss) per share:
Basic $ (0.23) 0.45
Diluted (0.23) 0.45
============ ==========
Weighted average shares:
Basic 8,673,000 8,996,000
Diluted 8,673,000 9,062,000
============ ==========
See accompanying notes to condensed consolidated financial statements.
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DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
NINE-MONTH PERIOD ENDED
SEPTEMBER 30,
---------------------------------
1998 1997
------------ ------------
Cash flows from operating activities:
Net earnings (loss) $ (1,974,000) 4,047,000
------------ ------------
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation and amortization 1,998,000 1,861,000
Provision for doubtful accounts 550,000 300,000
Loss on factory closure -- 500,000
Non-cash stock compensation 84,000 --
Minority interest in net income of unconsolidated
subsidiary -- 17,000
Changes in assets and liabilities:
(Increase) decrease in:
Trade accounts receivable 7,655,000 498,000
Inventories 2,508,000 10,627,000
Prepaid expenses and other current assets 309,000 1,275,000
Refundable income taxes (4,482,000) --
Note receivable from supplier 369,000 258,000
Other assets (32,000) (302,000)
Increase (decrease) in:
Accounts payable 176,000 (843,000)
Accrued expenses (1,790,000) 305,000
Income taxes payable (22,000) 99,000
------------ ------------
Total adjustments 7,323,000 14,595,000
------------ ------------
Net cash provided by operating activities 5,349,000 18,642,000
------------ ------------
Cash flows from investing activities:
Proceeds from sale of property and equipment 147,000 13,000
Purchase of property and equipment (1,582,000) (1,218,000)
Cash paid in connection with Ugg acquisition (2,000,000) (351,000)
Purchase of intangible assets -- (200,000)
Cash paid to stockholder/officer for loan -- (624,000)
------------ ------------
Net cash used in investing activities (3,435,000) (2,380,000)
------------ ------------
(Continued)
See accompanying notes to condensed consolidated financial statements.
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DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows, Continued
(Unaudited)
NINE-MONTH PERIOD ENDED
SEPTEMBER 30,
---------------------------------
1998 1997
------------ ------------
Cash flows from financing activities:
Gross proceeds from notes payable and long-term
debt 22,054,000 --
Repayments of notes payable and long-term debt (20,963,000) (9,048,000)
Cash paid for repurchases of common stock (2,529,000) (728,000)
Cash received from issuances of common stock 116,000 676,000
------------ ------------
Net cash used in financing activities (1,322,000) (9,100,000)
------------ ------------
Net increase in cash 592,000 7,162,000
Cash at beginning of period 3,238,000 1,287,000
------------ ------------
Cash at end of period $ 3,830,000 8,449,000
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 834,000 449,000
Income taxes 3,780,000 2,263,000
============ ============
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 condensed 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, 1997 included in the Company's
Annual Report on Form 10-K.
(2) Earnings (loss) per Share
Basic earnings (loss) per share represents net earnings (loss) divided by
the weighted-average number of common shares outstanding for the period.
Diluted earnings (loss) per share represents net earnings (loss) divided
by the weighted-average number of shares outstanding, inclusive of the
dilutive impact of common stock equivalents. During the three-month and
nine-month periods ended September 30, 1997, 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. For the three and nine month periods
ended September 30, 1998, the Company had a net loss and, accordingly,
inclusion of the stock options would be anti-dilutive. As a result, the
impact of stock options was not included in the computations for these
periods and the resulting weighted average number of shares used in the
basic computation and the diluted computation are the same.
The reconciliations of basic to diluted weighted average shares are as
follows:
THREE-MONTH PERIOD ENDED
SEPTEMBER 30,
-------------------------------
1998 1997
------------ ----------
Net earnings (loss) $ (5,133,000) 468,000
------------ ----------
Weighted average shares used in basic 8,506,000 8,997,000
computation
Dilutive stock options -- 72,000
------------ ----------
Weighted average shares used for diluted
computation 8,506,000 9,069,000
------------ ----------
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DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(2) Earnings (loss) per Share (Continued)
Options to purchase 743,000 shares of common stock at prices ranging from
$5.50 to $15.00 were outstanding during the three months ended September
30, 1998, but were not included in the computation of diluted earnings per
share because the options were anti-dilutive, as the Company incurred a
net loss. Options to purchase 419,000 shares of common stock at prices
ranging from $8.13 to $15.00 were outstanding during the three months
ended September 30, 1997, 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.
NINE-MONTH PERIOD ENDED
SEPTEMBER 30,
-------------------------------
1998 1997
------------ ----------
Net earnings (loss) $ (1,974,000) 4,047,000
------------ ----------
Weighted average shares used in basic 8,673,000 8,996,000
computation
Dilutive stock options -- 66,000
------------ ----------
Weighted average shares used for diluted
computation 8,673,000 9,062,000
------------ ----------
Options to purchase 691,000 shares of common stock at prices ranging from
$5.50 to $15.00 were outstanding during the nine months ended September
30, 1998, but were not included in the computation of diluted earnings per
share because the options were anti-dilutive, as the Company incurred a
net loss. Options to purchase 443,000 shares of common stock at prices
ranging from $7.50 to $15.00 were outstanding during the nine months ended
September 30, 1997, 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.
(3) Inventories
Inventories are summarized as follows:
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
Finished goods $15,347,000 14,081,000
Work in process 44,000 1,189,000
Raw materials 1,080,000 3,709,000
----------- ----------
Total inventories $16,471,000 18,979,000
=========== ==========
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DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(4) Credit Facility
The Company has a revolving credit facility with a bank (the
"Facility"), to be used for working capital and general corporate
purposes, secured by substantially all assets of the Company. Up to
$12,000,000 of borrowings may be in the form of letters of credit. The
Facility requires the Company to pay down the outstanding balance to
less than $2,500,000 for at least thirty consecutive days during the
thirteen-month period ending July 31, 1999.
As a result of the third quarter loss, the Company was not in compliance
with certain covenants in the Facility at September 30, 1998, including
the tangible net worth requirement and the EBITDA coverage ratio. The
Company has subsequently obtained waivers of the non-compliance from the
bank with respect to these covenants.
At September 30, 1998, the Facility provided for a maximum borrowing
availability of $25,000,000, under which the Company had borrowed
$8,470,000 and had outstanding letters of credit of $9,889,000 as of
such date. On November 20, 1998, the Company and the bank increased the
maximum borrowing availability to $40,000,000 through May 31, 1999, and
$25,000,000 from June 1, 1999 to July 1, 1999, all subject to a
borrowing base of eligible assets, as defined. The expiration date was
changed to July 1, 1999 from August 1, 2000.
At September 30, 1998, the Facility provided for interest at the bank's
prime rate (8.25% at September 30, 1998) plus up to 0.25%, depending on
whether the Company satisfies certain financial ratios. Alternatively,
the Company had the ability to elect borrowings to bear interest at
LIBOR plus 1.5% to 1.75%, depending on whether the Company satisfies
such financial ratios. In conjunction with the increase in the maximum
borrowing availability, the Facility, as amended, provides for interest
at prime (8.25% at September 30, 1998) plus 1.5%.
(5) Income Taxes
Income taxes (benefit) 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 September 30, 1998 the Company experienced an income
tax benefit of $3,154,000, as a result of the Company's third quarter
loss. This represents an effective income tax rate of 38.1%. For the
three months ended September 30, 1997, the Company had income tax
expense of $357,000, representing an effective income tax rate of 43.3%.
For the nine months ended September 30, 1998 the Company experienced an
income tax benefit of $749,000, as a result of the Company's loss for
the period. This represents an effective income tax rate of 27.5%. For
the nine months ended September 30, 1997, the Company had income tax
expense of $3,082,000, representing an effective income tax rate of
43.2%.
(6) Recently Issued Pronouncements
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards (FAS) No. 130, "Reporting Comprehensive
Income" and FAS No. 131, "Disclosure about Segments of an Enterprise and
Related Information." FAS No. 130 establishes standards for reporting
and display of comprehensive income and its components. FAS No. 131
supersedes previous reporting requirements for reporting on segments of
a business enterprise. FAS No. 130 and FAS No. 131 are effective for
periods beginning after December 15, 1997.
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DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(6) Recently Issued Pronouncements (Continued)
The Company adopted FAS No. 130 "Reporting Comprehensive Income" on
January 1, 1998. The only difference between "net earnings (loss)" and
"comprehensive income (loss)" for the Company is the impact from foreign
currency translation adjustments. Foreign currency translation
adjustments were immaterial to the Company's condensed consolidated
financial statements. Accordingly, net earnings (loss) approximated
comprehensive income (loss) for the three and nine-month periods ended
September 30, 1998 and September 30, 1997.
Since FAS No. 131 is not required for interim reporting in the year of
adoption, the Company plans to adopt this standard in the preparation of
its annual financial statements to be included in the December 31, 1998
Form 10-K. As FAS No. 131 only requires additional disclosures, the
Company expects there will be no impact on its financial position or
results of operations from the implementation.
In June 1998, the FASB issued FAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." FAS No. 133 modifies the accounting
for derivative and hedging activities and is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. Since the
Company does not presently invest in derivatives or engage in hedging
activities, SFAS No. 133 will not impact the Company's financial
position or results of operations.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1 ("SOP 98-1"), "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." The
Company will adopt SOP 98-1 effective in 1999. The adoption of SOP 98-1
will require the Company to modify its method of accounting for
software. Based on information currently available, the Company does not
expect the adoption of SOP 98-1 to have a significant impact on its
financial position or results of operations.
(7) Contingencies
An action was brought against the Company in 1995 whereby the plaintiff
alleges, among other things, that the Company violated certain
non-disclosure agreements and infringed purported trade secrets
regarding certain footwear products and capitalized on the information
by developing a competing product and incorporating certain concepts or
technologies into other product lines. The complaint seeks specified
damages of $15 million and other unspecified damages. The Company
believes such claims are without merit. The Company anticipates that
this matter will proceed to trial in 1999. The Company has contested,
and intends to continue contesting this claim vigorously. A motion for
summary judgment seeking dismissal of this matter is pending. The
Company does not anticipate that the ultimate outcome of the complaint
will have a material adverse effect upon the Company's financial
position, results of operations or cash flows.
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DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(7) Contingencies (Continued)
The European Commission has enacted anti-dumping duties of 49.2% on
certain types of footwear imported into Europe from China and Indonesia.
Dutch Customs has issued an opinion to the Company that two of the most
popular Teva(R) styles, the Valkyrie and the Storm, are covered by this
anti-dumping duty legislation. The Company does not believe that these
styles are covered by the legislation and is working with Customs to
resolve the situation. In the event that Customs makes a final
determination that such styles are covered by the anti-dumping
provisions, the Company expects that it would have an exposure to prior
anti-dumping duties from 1997. In addition, if Customs determines that
these styles are covered by the legislation, the duty amounts could
cause such products to be too costly to import into Europe from China in
the future. As a result, the Company may have to cease shipping such
styles from China into Europe in the future or may have to begin to
source these styles from countries not covered by the legislation. The
Company is unable to predict the outcome of this matter and the effect,
if any, on the Company's condensed consolidated financial statements.
The Company has commenced a recall of its Spring 1998 Teva(R) universal
nylon infant sandals as the Company has determined that the sandals do
not meet the Company's standards of quality and performance. The sandals
covered by the proposed recall were shipped between September 1997 and
August 1998. The Company believes that approximately 65,000 pairs of
these sandals were shipped during this period, resulting in net sales of
approximately $800,000. The Company intends to seek recovery of loss, if
any, from the independent factory which produced the sandals. The
Company has recorded an estimated loss of $460,000 as of September 30,
1998, related to this matter.
In October 1998, the Company was served in an action brought by a
Plaintiff claiming, among other things, breach of contract and
misrepresentation related to the Company's sale of its interest in
Trukke Winter Sports Products, Inc. ("Trukke") to the founder of Trukke,
rather than to the Plaintiff. The Plaintiff contends, among other
things, that a letter of intent between the Company and the Plaintiff
was a binding agreement. The Company vigorously denies such assertions.
The Company does not anticipate that the ultimate outcome of the
Complaint will have a material adverse effect upon the Company's
financial position, results of operations or cash flows. This action
will be heard in the federal district court in Pocatello, Idaho.
10
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DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(8) Subsequent Event
On October 9, 1998, the Company adopted a shareholder rights plan. The
Company adopted the plan to protect shareholders against unsolicited
attempts to acquire control of the Company that do not offer what the
Company believes to be an adequate price to all shareholders. As part of
the plan, the Board of Directors of the Company declared a dividend of
one preferred share purchase right (a "Right") for each outstanding
share of common stock, par value $0.01 per share (the "Common Shares"),
of the Company. The dividend is payable to stockholders of record on
December 1, 1998 (the "Record Date"). In addition, one Right shall be
issued with each Common Share that becomes outstanding (i) between the
Record Date and the earliest of the Distribution Date, the Redemption
Date and the Final Expiration Date (as such terms are defined in the
Rights Agreement) or (ii) following the Distribution Date and prior to
the Redemption Date or Final Expiration Date, pursuant to the exercise
of stock options or under any employee plan or arrangement or upon the
exercise, conversion or exchange of other securities of the Company,
which options or securities were outstanding prior to the Distribution
Date, in each case upon the issuance of the Company's common stock in
connection with any of the foregoing. Each Right entitles the registered
holder to purchase from the Company one one-hundredth of a share of
Series B Junior Participating Preferred Stock, par value $0.01 per share
(the "Preferred Shares"), of the Company, at a price of $50.00, subject
to adjustment.
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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 September 30, 1998 Compared to Three Months Ended
September 30, 1997
Net sales decreased by $7,225,000, or 34.8%, between the three months
ended September 30, 1998 and 1997. Sales of Teva(R) footwear decreased
to $4,219,000 for the three months ended September 30, 1998 from
$4,365,000 for the three months ended September 30, 1997, a 3.4%
decrease. This decrease was a result of the product recall announced
during the quarter, which reduced net sales by the amount of expected
returns. Sales of Teva(R) footwear represented 31.1% and 21.0% of net
sales in the three months ended September 30, 1998 and 1997,
respectively. Net sales of footwear under the Simple(R) product line
decreased 44.5% to $5,849,000 from $10,542,000 between the three months
ended September 30, 1998 and 1997. The decrease in Simple(R) sales
occurred due to a decline in demand for the Simple(R) products caused by
a variety of factors including competition, an abundance of similar
products at retail, and a general decrease in the popularity of the
products. Sales of Ugg(R) footwear decreased 24.1% to $2,576,000 from
$3,396,000, representing 19.0% of sales in 1998 and 16.3% in 1997. The
decrease in sales of Ugg(R) is due primarily to timing issues, as
certain styles did not arrive from factories in time for them to ship
out prior to September 30, 1998. Overall, international sales for all of
the Company's products decreased 37.4% to $3,320,000 from $5,301,000,
representing 24.5% of net sales in 1998 and 25.5% in 1997. This decrease
was primarily due to a decrease in Simple(R) sales in the international
markets. The volume of footwear sold decreased 23.4% to 534,000 pairs
during the three months ended September 30, 1998 from 697,000 pairs
during the three months ended September 30, 1997, for the reasons
discussed above.
The weighted average wholesale price per pair sold during the three
months ended September 30, 1998 decreased 12.6% to $23.80 from $27.23
for the three months ended September 30, 1997. The decrease was
primarily due to higher volumes of Teva(R) and Simple(R) close-outs.
Cost of sales decreased by $1,202,000, or 8.9%, to $12,251,000 for the
three months ended September 30, 1998, compared with $13,453,000 for the
three months ended September 30, 1997. Gross profit decreased by
$6,023,000, or 82.2%, to $1,307,000 for the three months ended September
30, 1998 from $7,330,000 for the three months ended September 30, 1997
and decreased as a percentage of net sales to 9.6% from 35.2%. The
decrease in gross margin during the quarter was due to several factors.
As a result of the Simple(R) sales decline, the Company experienced
approximately $1,600,000 of inventory write-downs on excess Simple(R)
inventory. In addition, the Company experienced write-downs of Teva(R)
raw materials inventory at the end of the 1998 Teva(R) season and also
as a result of the Company's third quarter closure of its Mexican
factory, the last remaining Company-owned manufacturing facility. The
Teva(R) materials write-downs, resulting primarily from these items,
aggregated approximately $900,000. Also, discounted sales accounted for
a greater proportion of total sales in 1998 than in 1997. Lastly, the
Company announced a product recall on the Teva(R) nylon infant sandals,
as discussed in Note 7 to the Condensed Consolidated Financial
Statements, during the third quarter of 1998. The Company recorded a
loss of approximately $460,000 related to this recall, of which
approximately $360,000 was included as a reduction of gross profit and
approximately $100,000 was included in selling, general, and
administrative expenses.
Selling, general and administrative expenses increased by $2,920,000, or
45.2%, for the three months ended September 30, 1998, compared with the
three months ended September 30, 1997, and increased as a percentage of
net sales to 69.1% in 1998 from 31.1% in 1997. In its continuing efforts
to improve sales growth, the Company continued to increase advertising
and marketing costs and continued to increase its research and
development efforts to improve design as well as to improve the
transition from design to production. Accordingly, the Company incurred
approximately $720,000 more
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in advertising and marketing costs and approximately $390,000 more in
research and development costs in the third quarter of 1998 than in the
third quarter of 1997. The Company also experienced an increase in bad
debt expense of approximately $450,000, an increase in warehouse costs
of approximately $175,000, increased sample expenses of approximately
$230,000, product recall costs of approximately $100,000 and incurred
severance costs of approximately $200,000 in conjunction with the
closure of the Mexican manufacturing facility in the third quarter of
1998. In addition to the above, the increase in selling, general and
administrative expenses as a percentage of net sales was a consequence
of certain costs being fixed and not decreasing proportionately with the
reduction in sales.
Net interest expense was $150,000 for the three months ended September
30, 1998 compared with net interest income of $57,000 for the three
months ended September 30, 1997, primarily due to increased borrowings
on the Company's credit facility in the current year.
For the three months ended September 30, 1998 the Company experienced an
income tax benefit of $3,154,000, as a result of the Company's third
quarter loss, reflecting the Company's ability to recover income taxes
previously paid. This represents an effective income tax rate of 38.1%.
For the three months ended September 30, 1997, the Company had income
tax expense of $357,000, representing an effective income tax rate of
43.3%. The decrease in the effective income tax rate is due to certain
non-deductible expenses, primarily goodwill amortization, which were a
greater proportion of earnings (loss) before income taxes in the three
months ended September 30, 1998 than in the three months ended September
30, 1997. In addition, for California state income tax purposes, net
operating losses cannot be carried back to offset income taxes
previously paid in prior years and, therefore, the income tax benefit is
reduced accordingly.
The Company had a net loss of $5,133,000 for the three months ended
September 30, 1998 as compared with net earnings of $468,000 for the
three months ended September 30, 1997 due to the reasons discussed
above.
Nine Months Ended September 30, 1998 Compared to Nine Months Ended
September 30, 1997
Net sales decreased by $6,450,000, or 7.7%, between the nine months
ended September 30, 1998 and 1997. Sales of Teva(R) footwear
increased to $53,146,000 for the nine months ended September 30, 1998
from $49,370,000 for the nine months ended September 30, 1997, a 7.6%
increase. Sales of Teva(R) footwear represented 69.1% and 59.3% of net
sales in the nine months ended September 30, 1998 and 1997,
respectively. Net sales of footwear under the Simple(R) product line
decreased 34.3% to $16,940,000 from $25,766,000 between the nine months
ended September 30, 1998 and 1997. The decrease in Simple(R) sales
occurred due to a decline in demand for the Simple(R) products caused by
a variety of factors including competition, an abundance of similar
products at retail, and a general decrease in the popularity of the
products. Sales of Ugg(R) footwear decreased 8.3% to $2,815,000 from
$3,069,000, representing 3.7% of sales in the nine months ended
September 30, 1998 and 1997. Overall, international sales for all of the
Company's products decreased 2.8% to $18,986,000 from $19,541,000,
representing 24.7% of net sales in 1998 and 23.5% in 1997. The volume of
footwear sold decreased 6.4% to 2,893,000 pairs during the nine months
ended September 30, 1998 from 3,090,000 pairs during the nine months
ended September 30, 1997, for the reasons discussed above.
The weighted average wholesale price per pair sold during the nine
months ended September 30, 1998 decreased slightly by 1.0% to $25.24
from $25.50 for the nine months ended September 30, 1997. The decrease
occurred as a result of an increase in the proportion of footwear sold
at closeout prices in 1998 compared to 1997. This decrease was partially
offset by the impact of price increases in the Spring 1998 Teva(R)
product line as well as increased selling prices for Teva(R) and
Simple(R) in certain European markets, as the Company began selling
directly to retailers at higher prices than those previously charged to
distributors in those markets in 1997.
Cost of sales increased by $596,000, or 1.2%, to $49,111,000 for the
nine months ended September 30, 1998, compared with $48,515,000 for the
nine months ended September 30, 1997. Gross profit decreased by
$7,046,000, or 20.2%, to $27,766,000 for the nine months ended September
30, 1998 from $34,812,000 for the nine months ended September 30, 1997
and decreased as a percentage of net sales to 36.1% from 41.8%. The
decrease in gross margin during the period was due to several factors.
As a result of the Simple(R) sales decline, the Company experienced
inventory write-downs on excess Simple(R) inventory. In addition, the
Company experienced write-downs of Teva(R) raw materials inventory
throughout the nine month period ended September 30, 1998, partially as
a result of the Company's third quarter closure of its Mexican factory,
the last remaining Company-owned manufacturing facility. Also, the
Company experienced increased air freight costs during the nine months
ended September 30, 1998 compared to the nine months ended September 30,
1997. In addition, discounted sales accounted for a greater proportion
of total sales in 1998 than in 1997. Lastly, the Company announced a
product recall on the Teva(R) nylon infant sandals during the third
quarter of 1998. The Company recorded a loss of approximately $460,000
related to this recall, of which approximately $360,000 was included as
a reduction of gross profit and approximately $100,000 was included in
selling, general, and administrative expenses.
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Selling, general and administrative expenses increased by $2,742,000, or
10.2%, for the nine months ended September 30, 1998, compared with the
nine months ended September 30, 1997, and increased as a percentage of
net sales to 38.5% in 1998 from 32.2% in 1997. In its continuing efforts
to improve sales growth, the Company continued to increase advertising
and marketing and continued to increase its research and development
efforts to improve design as well as to improve the transition from
design to production. Accordingly, the Company incurred approximately
$530,000 more in advertising and marketing costs and approximately
$800,000 more in research and development costs in the nine month
period ended September 30, 1998 than in the nine month period ended
September 30, 1997. The Company also experienced an increase in
warehouse costs of approximately $410,000, an increase in sample
expenses of approximately $250,000, increased European office expenses
of approximately $220,000, product recall costs of approximately
$100,000 and incurred severance costs of approximately $200,000 in
conjunction with the closure of the Mexican manufacturing facility in
the third quarter of 1998. This increase was partially offset by the
non-recurrence of the costs associated with the 1997 litigation with the
former shareholders of Ugg. In addition to the above, the increase in
selling, general and administrative expenses as a percentage of net
sales was a consequence of certain costs being fixed and not decreasing
proportionately with the reduction in sales.
Net interest expense was $836,000 for the nine months ended September
30, 1998 compared with net interest expense of $324,000 for the nine
months ended September 30, 1997, primarily due to increased borrowings
on the Company's credit facility in the current year.
For the nine months ended September 30, 1998 the Company experienced an
income tax benefit of $749,000, as a result of the Company's loss for
the period, reflecting the Company's ability to recover income taxes
previously paid. This represents an effective income tax rate of 27.5%.
For the nine months ended September 30, 1997, the Company had income tax
expense of $3,082,000, representing an effective income tax rate of
43.2%. The decrease in the effective income tax rate is due to certain
non-deductible expenses, primarily goodwill amortization, which were a
greater proportion of earnings (loss) before income taxes in the nine
months ended September 30, 1998 than in the nine months ended September
30, 1997. In addition, for California state income tax purposes, net
operating losses cannot be carried back to offset income taxes
previously paid in prior years and, therefore, the income tax benefit is
reduced accordingly.
The Company had a net loss of $1,974,000 for the nine months ended
September 30, 1998 as compared with net earnings of $4,047,000 for the
nine months ended September 30, 1997 due to the reasons discussed above.
Outlook
This "Outlook" section, the last paragraph under "Liquidity and Capital
Resources" and the discussion under "Seasonality" contain a number of
forward-looking statements including forward-looking statements relating
to sales expectations, the potential impact of certain litigation, the
potential imposition of certain customs duties, the potential impact of
the Teva(R) license expiration, the potential impact of the Year 2000 on
the Company and the impact of seasonality on the Company's operations.
All of the forward-looking statements are based on current expectations.
Actual results may differ materially.
Sales Expectations. The Company has offered an early delivery program
for Teva(R) for the fourth quarter of 1998, which encourages retailers
to receive shipments of product in the fourth quarter of 1998, which
shipments the Company believes would ordinarily ship in the first
quarter of 1999. The Company offered a similar program in the fourth
quarter of 1997. Based on sales orders through November 13, 1998, the
Company believes that sales of Teva(R) product in the fourth quarter of
1998 will exceed the corresponding sales in the fourth quarter of 1997
and believes that Ugg(R) sales in the fourth quarter of 1998 will exceed
sales of Ugg(R) in the fourth quarter of 1997. Simple(R) sales were down
by 34.3% for the nine months ended September 30, 1998 as compared to the
same period last year. The Company expects sales of Simple(R) to
continue to be lower for the fourth quarter of 1998, compared to the
fourth quarter of 1997.
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The foregoing forward-looking statements regarding sales expectations
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, both of
which would adversely affect the Company's results of operations,
financial condition and cash flows. The Company is also dependent on its
customers continuing to carry and promote its various lines. The
Company's sales can be adversely impacted by the ability of the
Company's suppliers to manufacture and deliver products in time for the
Company to meet its customers' orders. In addition, 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.
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;
its ability to attract and retain key employees; and the general risks
associated with doing international business including foreign exchange
risks, duties, quotas and political instability.
Sales of the Company's products, particularly those under the Teva(R)
and Ugg(R) 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(R) line. Likewise,
unseasonably warm weather during the fall and winter months could
adversely impact demand for the Company's Ugg(R) product line.
Potential Impact of Certain Litigation. An action was brought against
the Company in 1995 whereby the plaintiff alleges, among other things,
that the Company violated certain non-disclosure agreements and
infringed purported trade secrets regarding certain footwear products
and capitalized on the information by developing a competing product and
incorporating certain concepts or technologies into other product lines.
The complaint seeks specified damages of $15 million and other
unspecified damages. The Company believes such claims are without merit.
The Company anticipates that this matter will proceed to trial in 1999.
The Company has contested, and intends to continue contesting this claim
vigorously. A motion for summary judgment seeking dismissal of this
matter is pending. The Company does not anticipate that the ultimate
outcome of the complaint will have a material adverse effect upon the
Company's financial position, results of operations or cash flows.
In October 1998, the Company was served in an action brought by a
Plaintiff claiming, among other things, breach of contract and
misrepresentation related to the Company's sale of its interest in
Trukke Winter Sports Products, Inc. ("Trukke") to the founder of Trukke,
rather than to the Plaintiff. The Plaintiff contends, among other
things, that a letter of intent between the Company and the Plaintiff
was a binding agreement. The Company vigorously denies such assertions.
The Company does not anticipate that the ultimate outcome of the
Complaint will have a material adverse effect upon the Company's
financial position, results of operations or cash flows. This action
will be heard in the federal district court in Pocatello, Idaho.
Potential Imposition of Duties. The European Commission has enacted
anti-dumping duties of 49.2% on certain types of footwear imported into
Europe from China and Indonesia. Dutch Customs has issued an opinion to
the Company that two of the most popular Teva(R) styles, the Valkyrie
and the Storm, are covered by this anti-dumping duty legislation. The
Company does not believe that these styles are covered by the
legislation and is working with Customs to resolve the situation. In the
event that Customs makes a final
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determination that such styles are covered by the anti-dumping
provisions, the Company expects that it would have an exposure to prior
anti-dumping duties from 1997. In addition, if Customs determines that
these styles are covered by the legislation, the duty amounts could
cause such products to be too costly to import into Europe from China in
the future. As a result, the Company may have to cease shipping such
styles from China into Europe in the future or may have to begin to
source these styles from countries not covered by the legislation. The
Company is unable to predict the outcome of this matter and the effect,
if any, on the Company.
Potential Impact of Teva License Expiration. Mark Thatcher, owner of
Teva Sport Sandals, Inc., has engaged a financial advisor to explore
various strategic options for the Teva(R) brand. The Company is in
continuing negotiations with Thatcher, pursuing various options
including a renewal of the existing license. The Company is hopeful that
it will be able to successfully negotiate a favorable arrangement with
Thatcher. In the event that the Company does not come to a favorable
arrangement with Thatcher, the Company will not be able to sell Teva(R)
products beyond August 31, 2001, which would result in a material
adverse impact on the Company's results of operations, financial
condition and cash flows.
Year 2000 Issue. The Year 2000 issue results from computer hardware or
software programs written using two digits to identify the year. These
computer programs and hardware were designed and developed without
consideration of the impact of the upcoming change in the century. As a
result, such systems may not be able to properly distinguish between
years that begin with a "20" and years that begin with a "19". If not
corrected, such hardware and software programs could create erroneous
information by or at the year 2000, causing the Company, or its
customers or suppliers, to become unable to process normal business
transactions accurately or at all.
State of Readiness. The Company's Year 2000 compliance strategy includes
several overlapping phases, which the Company has defined as follows:
Identification -- This phase involves the identification of the hardware
and software systems used by the Company which could be adversely
impacted by the Year 2000 issue. It includes identification of
information technology ("IT") systems and non-IT systems (including
telecommunications systems and systems associated with facilities --
such as utilities and security, among others), as well as identification
of the impact that Year 2000 issues may have on the Company's key third
party relationships (including customers, suppliers and financing
sources, among others).
Analysis -- This phase involves the determination of the likelihood,
impact and magnitude of potential Year 2000 non-compliance for each of
the items in the areas previously identified in the Identification
phase.
Conversion -- This phase involves the development and execution of a
plan to bring the previously identified items into Year 2000 compliance.
Testing -- This phase involves the testing of the various systems to
ascertain that the conversion procedures were successful at bringing the
systems into compliance.
Implementation -- This phase involves putting the various Year 2000
compliant systems into use in the Company's operations.
The Company is continuing to assess the readiness of its various systems
for handling the Year 2000 issue. The Company is currently in the
Conversion phase of its Year 2000 strategy with respect to its
enterprise business systems. These include the Company's systems for
order entry and processing, allocations, inventory, receivables,
payables and financial reporting. The Company has determined that its
existing enterprise business systems are not currently Year 2000
compliant. The Company is working
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simultaneously on two alternative courses of action to remedy this
situation. First, the Company is working on making the necessary
revisions and alterations to its existing system in order to bring it
into compliance. At the same time, the Company is upgrading the system
with the current version of the underlying software, which the software
vendor has stated is Year 2000 compliant. The Company currently
anticipates completion of the conversion phases by March 31, 1999.
With respect to the Company's remaining IT systems, including desktops,
networks and several departmental hardware and software systems, its
non-IT systems, as well as the readiness of its external business
partners, the Company is in the Identification phase. The Company
expects completion of the Identification and Analysis phases for the
remaining IT and non-IT systems by December 31, 1998 and currently
anticipates completion of the conversion and testing phases by June 30,
1999. The Company's plan for addressing the readiness of its key
external business partners includes requesting information from these
partners regarding their own readiness to address their Year 2000
issues, and an assessment of the potential impact that any
non-compliance might have on the Company's operations. The various
phases for this segment have commenced and are expected to continue
throughout 1999.
Estimated Costs. The Company currently estimates that total costs
related to all phases of the Year 2000 strategy with respect to its
enterprise business systems will aggregate $300,000. This estimate is
for outside goods and service providers only, and does not include the
time and costs associated with its in-house employees. In addition, the
estimated costs to bring the remaining IT and non-IT systems into
compliance and to address and remedy any non-compliance issues at its
key business partners are not yet determinable, but will likely exceed
$200,000. These costs are expected to be funded through operating cash
flows and bank facilities. The Company does not currently anticipate
using any independent verification or validation processes. The Company
anticipates that the Year 2000 compliance efforts will ultimately result
in the deferral of other IT projects. However, the deferral of such
projects is not expected to have a material adverse impact on the
Company's results of operations, financial condition or cash flows. The
estimated Year 2000 compliance costs are based on the Company's current
assessment of its Year 2000 situation and could change significantly as
the Year 2000 compliance strategy progresses. As of September 30, 1998,
the Company has incurred Year 2000 compliance costs of less than
approximately $100,000.
Risks and Contingency Plan. Although the Company is not aware of any
material operational issues associated with preparing its internal
systems for the year 2000, there can be no assurance that there will not
be a delay in, or increased costs associated with, the implementation of
the necessary systems and changes to address the Year 2000 issues, and
the Company's inability to implement such systems and changes in a
timely manner could have a material adverse effect on future results of
operations, financial condition and cash flows.
The potential inability of the Company's business partners to address
their own Year 2000 issues sufficiently and timely remains a risk which
is difficult to assess. Among other things, the Company is currently
highly dependent on the combination of approximately 12 key suppliers,
primarily located in the Far East, for the production of its footwear
products. The failure of one or more of these suppliers to adequately
address their own Year 2000 issues could cause them to be unable to
manufacture or deliver product to the Company on a timely basis,
materially adversely impacting the Company's results of operations,
financial condition and cash flows. In addition, the inability of one or
more of the Company's significant customers to become compliant could
adversely impact the customers' operations, thus impacting the Company's
sales to those customers.
The Company's Year 2000 compliance efforts are subject to many
additional risks including the following, among others: the Company's
failure to adequately identify and analyze issues, convert to compliant
systems, fully test converted systems, and implement compliant systems;
unanticipated issues or delays in any of the phases of the Company's
strategy; the inability of customers, suppliers and other business
partners to become compliant; breakdown of local and global
infrastructures resulting from the non-compliance of utilities, banking
systems, transportation, government and communications systems.
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As the Company has not yet completed various phases of its internal
readiness and has not yet determined the readiness of its key business
partners, the Company cannot yet fully and accurately identify and
quantify the most reasonably likely worst case Year 2000 scenario at
this time. However, the Company is currently assessing scenarios and
will take steps to mitigate the impact of these scenarios if they were
to occur. This contingency planning will continue and the Company
expects to more fully address such contingencies by the end of the first
quarter of 1999.
The Company's above assessment of the risks associated with Year 2000
issues is forward-looking. Actual results may vary for a variety of
reasons including those described above.
This "Outlook" section, the last paragraph under "Liquidity and Capital
Resources" and the discussion under "Seasonality" contain a number of
forward-looking statements including forward-looking statements relating
to sales expectations, the potential impact of certain litigation, the
potential imposition of certain customs duties, the potential impact of
the Teva(R) license expiration, the potential impact of the Year 2000 on
the Company and the impact of seasonality on the Company's operations.
All of the forward-looking statements are based on current expectations.
Actual results may differ materially. The Company cautions the reader
not to rely on these forward-looking statements. The Company disclaims
any intent or obligation to update these forward-looking statements.
Liquidity and Capital Resources
The Company's liquidity consists of cash, trade accounts receivable,
inventories and a revolving credit facility. At September 30, 1998,
working capital was $28,435,000, including $3,830,000 of cash. Cash
provided by operating activities aggregated $5,349,000 for the nine
months ended September 30, 1998. Trade accounts receivable decreased
35.6% from December 31, 1997 to September 30, 1998 as a result of the
third quarter 1998 sales decline and the normal seasonality of the
business. Inventories decreased 13.2% from December 31, 1997 to
September 30, 1998, reflecting a decrease in raw materials and work in
process inventories between December 31, 1997 and September 30, 1998.
The decrease in these inventories was largely due to the Company's
closure of its Mexican manufacturing facility in the third quarter of
1998, and the Company's overall exit from the footwear manufacturing
business. Whereas a portion of the Company's footwear products have
historically been manufactured directly by the Company, requiring the
Company to purchase and warehouse raw materials inventories, the Company
is currently shifting toward the purchase of 100% of its footwear
products as finished goods from unrelated suppliers. As a result of this
shift, the raw materials and work in process inventories have decreased.
The overall decrease in inventories since December 31, 1997 was also due
to the normal seasonality of the business.
The Company has a revolving credit facility with a bank (the
"Facility"), to be used for working capital and general corporate
purposes, secured by substantially all assets of the Company. Up to
$12,000,000 of borrowings may be in the form of letters of credit. The
Facility requires the Company to pay down the outstanding balance to
less than $2,500,000 for at least thirty consecutive days during the
thirteen-month period ending July 31, 1999.
As a result of the third quarter loss, the Company was not in compliance
with certain covenants in the Facility at September 30, 1998, including
the tangible net worth requirement and the EBITDA coverage ratio. The
Company has subsequently obtained waivers of the non-compliance from the
bank with respect to these covenants.
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At September 30, 1998, the Facility provided for a maximum borrowing
availability of $25,000,000, under which the Company had borrowed
$8,470,000 and had outstanding letters of credit of $9,889,000 as of
such date. On November 20, 1998, the Company agreed to increase the
maximum borrowing availability to $40,000,000 through May 31, 1999, and
$25,000,000 from June 1, 1999 to July 1, 1999, all subject to a
borrowing base of eligible assets, as defined. In addition, as part of
the amendment, (1) the expiration date was changed to July 1, 1999 from
August 1, 2000, (2) the tangible net worth requirement, as defined, was
adjusted to equal $31,500,000 plus 75% of net earnings subsequent to
September 30, 1998 (based on such formula the tangible net worth
calculation was $31,562,000 at September 30, 1998) and (3) the interest
rate was increased to the bank's prime rate (8.25% at September 30,
1998) plus 1.5% from the bank's prime rate plus up to 0.25%, while the
LIBOR pricing option was eliminated.
At November 19, 1998, the Company had outstanding borrowings of
$15,742,000 and outstanding letters of credit of $8,681,000,
resulting in an overadvance of $1,531,000 compared to the formula for
calculating availability under the amended Facility.
With respect to the EBITDA coverage ratio, the Company and the bank have
had verbal discussions and have orally agreed that certain one-time
charges incurred by the Company, including the inventory write-downs,
the closure of the Mexican manufacturing facility and the product
recall, should be excluded from the calculation going forward.
The bank's agreement to amend the Facility is subject to satisfaction of
certain conditions, including (1) execution of definitive documentation
acceptable to the bank and (2) no material adverse change subsequent to
September 30, 1998 in the financial condition or business of the Company
nor any material decline in the underlying collateral or a substantial
or material portion of the assets of the Company.
The Company has an agreement with a supplier, Prosperous Dragon, to
provide financing to the supplier. At September 30, 1998, $2,097,000 was
outstanding ($597,000 net of allowance). The note is secured by all
assets of the supplier and bears interest at the prime rate (8.25% at
September 30, 1998) plus 1%.
Capital expenditures totaled $1,582,000 for the nine months ended
September 30, 1998. The Company's capital expenditures related primarily
to a new warehouse management system at the Company's Ventura County,
California distribution center, molds purchased for production, upgrades
to corporate computer systems and a new booth for European tradeshows.
The Company currently has no material future commitments for capital
expenditures.
In February 1998, the Company's Board of Directors approved an increase
in the number of shares of common stock authorized for repurchase under
its existing stock repurchase program from 900,000 shares to 1,200,000
shares. 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. 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 the first nine months of 1998 for cash consideration of $2,529,000.
In connection with the bank's commitment to increase the Company's
maximum borrowing availability, the amended facility does not provide
for the ability to repurchase additional shares.
Even assuming resolution of the existing situation with the bank, the
Company may not have sufficient funds from internally generated funds,
available borrowings under such credit facilities and cash on hand to
provide sufficient liquidity to enable it to purchase all inventory
under its current plan for the 1999 season, in which case the Company
may be required to scale back such plan. 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. See also the discussion regarding forward-looking
statements in the preceding "Outlook" section.
Seasonality
Financial results for the outdoor and footwear industries are generally
seasonal. Sales of each of the Company's different product 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.
Based on the Company's historical experience, the Company would expect
greater sales in the first and second quarters than in the third and
fourth quarters. The actual results could differ materially depending
upon consumer preferences, availability of product, competition, and the
Company's customers continuing to carry and promote it's various product
lines, among other risks and uncertainties. See also the discussion
regarding forward-looking statements under "Outlook".
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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
For recently issued pronouncements, see Note 6 to the Condensed
Consolidated Financial Statements.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings. An action was brought against the Company in 1995
whereby the plaintiff alleges, among other things, that the Company violated
certain non-disclosure agreements and infringed purported trade secrets
regarding certain footwear products and capitalized on the information by
developing a competing product and incorporating certain concepts or
technologies into other product lines. The complaint seeks specified damages of
$15 million and other unspecified damages. The Company believes such claims are
without merit. The Company anticipates that this matter will proceed to trial in
1999. The Company has contested, and intends to continue contesting this claim
vigorously. A motion for summary judgment seeking dismissal of this matter is
pending. The Company does not anticipate that the ultimate outcome of the
complaint will have a material adverse effect upon the Company's financial
position, results of operations or cash flows.
In October 1998, the Company was served in an action brought by a Plaintiff
claiming, among other things, breach of contract and misrepresentation related
to the Company's sale of its interest in Trukke Winter Sports Products, Inc.
("Trukke") to the founder of Trukke, rather than to the Plaintiff. The Plaintiff
contends, among other things, that a letter of intent between the Company and
the Plaintiff was a binding agreement. The Company vigorously denies such
assertions. The Company does not anticipate that the ultimate outcome of the
Complaint will have a material adverse effect upon the Company's financial
position, results of operations or cash flows. This action will be heard in the
federal district court in Pocatello, Idaho.
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
10.39 Shareholder Rights Agreement, dated as of November 12,
1998.
10.40 Letter agreement between Deckers Outdoor Corporation and
Wells Fargo Bank, dated November 20, 1998.
(b) Reports on Form 8-K. The Company filed the following Current
Reports on Form 8-K:
(1) Form 8-K filed on November 6, 1998 (Item 5 - On November 2,
1998, the Company issued a press release announcing that Mark
Thatcher, owner of Teva Sports Sandals, Inc., has engaged an
investment firm for purposes of exploring various strategic
options for the Teva(R) brand. See Exhibit 99.1).
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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: November 23, 1998 /s/ M. SCOTT ASH
-----------------------------------------
M. Scott Ash, Chief Financial Officer
(Duly Authorized Officer and
Principal Financial and
Accounting Officer)
22