Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
|
|
|
| |
x |
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
OR
|
|
|
| |
o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE |
SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
Commission File No. 0-22446
DECKERS OUTDOOR CORPORATION
(Exact name of registrant as specified in its charter)
| |
|
|
|
Delaware
|
|
95-3015862 |
(State or other jurisdiction of
incorporation or organization) |
|
(I.R.S. Employer
Identification No.) |
| |
|
495-A South Fairview Avenue, Goleta, California |
|
93117 |
|
(Address of principal executive offices) |
|
(Zip Code) |
Registrant’s telephone number, including area code:
(805) 967-7611
Securities registered pursuant to Section 12(b) of the
Act:
| |
|
|
| Title of each class |
|
Name of each exchange on which registered |
| |
|
|
|
None
|
|
None |
Securities registered pursuant to Section 12(g) of the
Act:
Common Stock, $.01 par value
(Title of Class)
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 o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K (§229.405
of this chapter) is not contained herein, and will not be
contained to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Exchange Act
Rule 12b-2). Yes x No o
Aggregate market value of the Common Stock of the registrant
held by non-affiliates of the registrant on June 30, 2004
based on the closing price of the Common Stock on the NASDAQ
National Market System on such date was $278,083,416.
The number of shares of the registrant’s Common Stock
outstanding at March 8, 2005 was 12,303,458.
Portions of registrant’s definitive proxy statement
relating to registrant’s 2005 annual meeting of
stockholders, which will be filed pursuant to
Regulation 14A within 120 days after the end of
registrant’s fiscal year ended December 31, 2004, are
incorporated by reference in Part III of this
Form 10-K.
DECKERS OUTDOOR CORPORATION
For the Fiscal Year Ended December 31, 2004
Index to Annual Report on Form 10-K
2
PART I
General
We are a leading designer, producer and brand manager of
innovative, high-quality footwear and the category creator in
the sport sandal and luxury sheepskin footwear segments. Our
footwear is distinctive and appeals broadly to men, women and
children. We sell our products through quality domestic
retailers and international distributors and directly to
end-user consumers through our websites and catalogs. Our
primary objective is to build our footwear lines into global
lifestyle brands with market leadership positions.
We market our products under three proprietary brands:
|
|
| |
Teva. Teva is our outdoor lifestyle brand and the
category creator for the sport sandal segment. Teva was created
in the 1980’s to serve the demanding footwear needs of the
professional river guide community, and this authentic heritage
and commitment to function and performance remain core elements
of the Teva brand. We have expanded Teva’s sport sandal
line to include casual open-toe footwear, as well as hiking
boots, trail running shoes, amphibious footwear and other rugged
outdoor footwear styles. |
| |
| |
UGG. UGG is our luxury brand and the category
creator for luxury sheepskin footwear. Our UGG line has enjoyed
several years of strong growth and positive consumer
receptivity, driven by consistent introductions of new styles,
introductions of UGG products in the fall and spring seasons and
geographic expansion of distribution. We carefully manage the
distribution of our UGG line within high-end specialty and
department store retailers in order to best reach our target
consumers, preserve UGG’s retail channel positioning and
maintain UGG’s position as a mid- to upper-price luxury
brand. |
| |
| |
Simple. Simple is our moderately priced
“anti-brand,” serving the needs of a youthful,
irreverent consumer base seeking the comfort of athletic
footwear but the styling of more traditional, understated,
“back-to-basics” footwear. We have recently revised
the Simple line to focus on its successful legacy models,
including sneakers, clogs, sandals and other casual footwear. In
addition, Simple enables us to selectively leverage our core
footwear design and production competencies for channels of
distribution not served by Teva or UGG. |
We believe our ability to continue to grow our future sales,
earnings and market share has been significantly enhanced
through achievement of three key recent initiatives:
|
|
| |
Teva Rights Acquisition. From 1985 until November
2002, we sold our Teva products under a license arrangement with
Teva’s founder, Mark Thatcher. In November 2002, we
acquired all of the Teva Rights from Mr. Thatcher and his
wholly-owned corporation, Teva Sport Sandals, Inc. The
acquisition enabled us to gain ownership of the Teva Internet
and catalog business and allowed our brand managers to broaden
the Teva line into attractive casual open-toe lines and rugged
outdoor closed-toe footwear. This expansion of the Teva product
line has increased the appeal of the brand and expanded our
overall retail placement. The acquisition also enabled us to: |
|
|
|
| |
• |
eliminate significant royalties and other license costs; |
| |
| |
• |
eliminate product line expansion constraints under our former
license agreement; |
| |
| |
• |
realize license opportunities for the Teva brand into additional
brand-appropriate outdoor categories; and |
| |
| |
• |
enhance our ability to recruit and retain key senior management. |
|
|
| |
Organizational Restructuring. In the last several
years, we have reorganized our management infrastructure and
developed a decentralized approach that gives our brand managers
greater control over product development, marketing, and
distribution for their respective brands. This approach
strengthens our product development efforts and enables each
brand manager to react quickly to important market |
3
|
|
| |
trends and concentrate on the footwear demands of our customers
and end-user consumers. Our brand teams are highly focused on
developing new products and marketing programs that drive strong
sales growth but remain true to each brand’s heritage. As a
result, we have generated gross margins of 42.4% in 2003 and
42.1% in 2004 and achieved compound annual sales growth of
approximately 47.2% since 2002. Our central management team
provides important expertise in disciplines common to each of
our brands, including sourcing, time-to-market, quality control,
credit, information systems technology and overall management of
our capital resources. |
| |
| |
UGG Repositioning. UGG gained brand recognition in
the U.S. beginning in 1979 and was adopted as a favored
brand by the California surf community. We acquired UGG in 1995
and have carefully re-positioned the brand as the luxury
sheepskin collection sold through high-end retailers. While our
sales have grown steadily over the past seven years, over the
past few years UGG has benefited from significant national media
attention and celebrity endorsement through our marketing
programs and product seeding activities, further raising the
profile of UGG as a luxury sheepskin brand. We intend to further
support UGG’s market positioning by carefully expanding the
selection of styles available in order to build consumer
interest in our UGG collection. We also remain committed to
limiting distribution of UGG through high-end retail channels. |
Largely as a result of these three recent initiatives, our net
sales have increased by 77.4%, from $121,055,000 in 2003 to
$214,787,000 in 2004 and our income from operations has
increased by 118.4% from $19,438,000 in 2003 to $42,462,000 in
2004. For 2004, wholesale shipments of Teva, UGG and Simple
represented 38.9%, 47.4% and 4.5% of our total net sales,
respectively. Sales of our brands through our Internet and
catalog division are in addition to our wholesale shipments and
generated 9.2% of total net sales in 2004.
History
We were founded by Doug Otto in 1973 as a domestic manufacturer
of sandals. We originally manufactured a single line of sandals
under the Deckers’ brand name in a small factory in
Carpinteria, California. Since then, we have grown through the
development and licensing of proprietary technology, targeted
marketing and selective acquisitions. In 1985, we entered into
our first license agreement for Teva sport sandals with
Teva’s founder, Mark Thatcher. In 1986, we developed the
Universal Strapping System, establishing Teva as the sport
sandal category-creator and generating significant national
attention for the Teva brand.
We experienced a period of rapid growth during the late
1980’s and completed our initial public offering in 1993.
As our sales grew, we terminated our manufacturing operations in
the U.S., Mexico and Costa Rica, and today independent
manufacturers in the Far East, Australia and New Zealand
manufacture all of our footwear products for us. We maintain our
own offices in China and Macau to monitor the operations of our
Far East manufacturers.
In order to diversify our sales and leverage our product
development and sourcing capabilities, we completed the
acquisition of Simple from its founder in a series of
transactions between 1993 and 1996. In 1995, we acquired UGG
from its founders. After our acquisition of UGG, we initiated a
re-positioning of the line, focusing on comfort, luxury and
premium distribution channels and developing products that
appeal to consumers in a variety of climates.
From 1985 until November 2002, we sold our Teva products under a
licensing arrangement with Teva’s founder, Mark Thatcher.
In November 2002, we acquired all of the Teva Rights from
Mr. Thatcher and his wholly owned corporation, Teva Sport
Sandals, Inc. The Teva Rights include the Teva Internet and
catalog business and all patents, trade names, trademarks and
other intellectual property associated with the acquired Teva
assets.
4
Business Strategies
We seek to differentiate our brands by offering diverse lines
that emphasize authenticity, functionality, quality and comfort
and products tailored to a variety of activities and demographic
groups. Key elements of our business strategies are:
|
|
| |
Build Leading Global Brands. Our mission is to
build niche footwear lines into global brands with market
leadership positions. Our Teva and UGG brands began as footwear
lines appealing to a narrow core enthusiast market. We have
since built these lines into substantial global lifestyle brands
with significant potential for further growth and line
extension. Across our brands, our styles remain true to the
brands’ heritage but have been selectively extended over
time to broaden their appeal to men, women and children seeking
high quality, comfortable styles for everyday use. Furthermore,
we actively manage our brands to ensure that we reach brand
appropriate retail distribution channels. We believe that
building our domestic and international brand image is best
accomplished through a decentralized management structure that
empowers a single brand manager to coordinate all aspects of
brand image, from product development to marketing and retail
channel management. |
| |
| |
Sustain Brand Authenticity. We believe our ability
to grow our brands, sustain strong gross margins and maintain
strong market share results, in part, from consumer loyalty to
the heritage of our brands. We believe Teva consumers are
passionate and serious about the outdoors, and our marketing
programs feature national advertising in outdoor-oriented media
as well as grass roots marketing through sponsorship of outdoor
events and professional athletes. These marketing efforts
reinforce the river-guide heritage of Teva and Teva’s
positioning as a highly technical, performance-oriented footwear
leader. Our UGG marketing strategy highlights the brand’s
positioning as functional footwear, but also as a premium,
luxury collection. UGG is primarily marketed through national
print advertising in major women’s magazines and through
our retailers and their catalogs and advertising. We promote our
Simple brand by emphasizing Simple’s heritage sneaker and
clog businesses in marketing targeted to youth-oriented markets
in major U.S. cities. Our key marketing objective for
Simple is to reintroduce the brand to the marketplace using a
grass roots approach in our marketing and media plan. We have
focused our advertising on our “we clog” and “we
sneaker” campaigns in alternative weekly publications and
other non-mainstream media. |
| |
| |
Drive Demand Through Innovation and Technical
Leadership. We believe our reputation for innovation and
technical leadership distinguishes our Teva and UGG products
from those of our competitors and provides us with significant
competitive advantages. Our proprietary Universal Strapping
System launched Teva’s popularity in the mid-1980’s.
Recent technical advances in our Teva footwear include our
Liquid Frame Technology, our Wraptor technology and our
Wraptor-Lite technology, all designed to provide maximum
stability, support and comfort under rugged usage. We recently
introduced closed-toe footwear, which represented approximately
12.5% of Teva’s net sales in 2004. In the Fall 2004 season,
we introduced new Teva styles that incorporate Vibram®
soles and Gore-Tex® fabrics. We continue to develop
innovative styles, products and product categories for our UGG
collection in order to support UGG’s positioning as a
functional lifestyle brand, which can be worn in a variety of
climates and weather conditions. UGG has benefited from
expansion into non-boot casuals, sheepskin-trimmed footwear and
styles combining sheepskin with fine-grade suede and leathers,
all designed to expand our market share in new categories and
increase our sales in the fall and spring. |
| |
| |
Maintain Efficient Development and Production
Process. We believe our product development processes
enable us to produce leading edge products on a timely and a
cost effective basis. We design our products domestically. We
maintain on-site supervisory offices in Pan Yu City, China and
Macau that serve as local links to our independent manufacturers
in the Far East, enabling us to carefully monitor the production
process, from receipt of the design brief to production of
interim and final samples and shipment of finished product. We
believe this local presence provides greater predictability of
material availability, product flow and adherence to final
design specifications than we could otherwise achieve through an
agency arrangement. |
5
Growth Strategies
Our growth will depend upon our broadening of the products
offered under each brand, expanding domestic and international
distribution, licensing our brand names and developing or
acquiring new brands. Specifically, we intend to:
|
|
| |
Introduce New Categories and Styles under Existing
Brands. We intend to increase our sales by developing
and introducing additional footwear products under our existing
brands that meet our high standards of performance,
practicality, authenticity, comfort and quality. We have
expanded Teva’s open-toe footwear category by launching new
casual styles. We have also introduced several closed-toe lines
under the Teva brand, including amphibious footwear, hikers,
trail runners and other rugged outdoor footwear. We plan further
expansion into the hiking, trail running and rugged outdoor
arenas, where the aggregate market is considerably greater than
the market size for Teva’s core sport sandals. We have
expanded our UGG collection to incorporate additional styles and
fabrications in order to further penetrate the fall, spring and
winter seasons. We have expanded our men’s and kids’
business for 2005 and have introduced a cold-weather series
featuring sheepskin and Gore-Tex®, which will be delivered
in Fall 2005. We expect to grow our Simple brand with the
re-focus on our heritage clog and sneaker categories for both
men and women. Simple has introduced “comfy” sandals,
leveraging another of our core competencies. By introducing new
categories under our brands, in particular, the closed-toe
footwear under Teva and the Spring product offerings under UGG,
we believe we have expanded the selling seasons for our brands
which has resulted in increased sales and has contributed to a
more balanced year round business for each of these brands. |
| |
| |
Expand Domestic Distribution. We believe that we
have significant opportunities to increase our sales by
expanding domestic distribution of our products. Our Teva brand
has generally been distributed through the outdoor specialty and
sporting goods retail channels. We have identified the potential
for expansion into additional retail channels through the
development of special make-up styles for retailers who have
limited store overlap with our core specialty outdoor and
sporting goods customers. UGG has historically realized a
substantial portion of its sales in California. Over the past
several years we have experienced increasing demand for
UGG distribution outside California, and we expect to
capitalize on significant demand in the Midwest and East Coast
markets. For Simple, we are repositioning the brand by focusing
on our legacy styles in order to re-connect with our consumer
base and by broadening the appeal of Simple to new channels of
distribution. The legacy products are primarily clogs,
athletic-inspired sneakers and comfort sandals. |
| |
| |
Expand International Distribution. In 2004, our
international net sales totaled $39,368,000, representing
approximately 18.3% of total net sales. We believe significant
opportunities exist to market our products abroad, and we intend
to selectively expand their distribution worldwide. We have
entered into an agency agreement with a firm in the United
Kingdom for the coordination of our sales, distribution,
marketing and advertising efforts in the European markets. For
UGG, in particular, we have greatly expanded our international
efforts, increasing the number of international distributors
from six at December 31, 2002 to 13 at December 31,
2004. |
| |
| |
Pursue Licensing of Brands in Complementary Product
Lines. We are pursuing selective licensing of our brand
names in product categories beyond footwear. In 2004, we hired a
Vice President of Corporate Licensing, who has extensive
licensing experience at several leading companies in our
industry, to coordinate the efforts for the licensing of
products that complement our trademark-protected products. We
successfully launched UGG handbags and outerwear in 2004
and have signed a license for UGG cold weather accessories,
which are expected to begin deliveries in the Fall 2005 season.
We have also initiated a domestic Teva licensing program,
consisting of U.S. licenses for men’s sportswear,
headwear, eyewear, timepieces and socks, and have signed a
Canadian sportswear license. We expect to begin deliveries for
all of these items in 2005. We are developing additional
licensing programs carefully to ensure that licensed goods
remain consistent with our brands’ heritage. Because this
licensing strategy is in its early stages, and due to the lead
times required to bring the products to market, we have only
recently begun to recognize license revenues and we do not
expect significant incremental net sales and profits from |
6
|
|
| |
licensing in the near future. However, we believe licensing
revenues may become a more significant portion of our net sales
and profits over time if our licensees can sell the licensed
products in the quantities they have promised. For the year
ended December 31, 2004, our licensees began to ship their
products and, accordingly, we recognized net license revenues of
$950,000, primarily related to our UGG handbag and
outerwear licenses. |
| |
| |
Build New Brands. We intend to continue to focus
on identifying, developing or acquiring, and building new
brands. We have been successful previously in identifying
entrepreneurial concepts for innovative, fashionable footwear
targeted at niche markets and building these concepts into
viable brands utilizing our expertise in product development,
production and marketing. We intend to continue to identify and
build new brands that demonstrate potential for significant
future growth. |
Products
Our primary product lines are:
|
|
| |
Teva Sport Sandals and Footwear. “The brand
of choice for the new outdoor athlete.” We believe there
has been a general shift in consumer preferences and lifestyles
to include more outdoor recreational activities, including
hiking, trail running, bouldering, kayaking, kite boarding and
whitewater river rafting. These consumers typically seek
footwear specifically designed with the same quality and high
performance attributes they have come to expect from traditional
athletic footwear. The first Teva sport sandal was developed in
the 1980’s to meet the demanding needs of professional
rafting guides navigating the Colorado River and the rugged
Grand Canyon terrain. As our core consumers’ pursuits have
evolved, we have retained our outdoor heritage while adding new
products to our line, including slides, thongs, amphibious
footwear, trail running shoes, hiking boots and rugged
closed-toe footwear. Our brand remains popular among
professional and amateur outdoorsmen seeking authentic,
performance-oriented footwear, as well as general footwear
consumers seeking high quality, durable and comfortable styles
for everyday use. |
Our Teva line comprises six core footwear collections:
|
|
| |
Originals. The Originals Series is a collection of
sandals and thongs utilizing Teva’s classic rugged
architecture. The Originals Series leverages the Teva brand
heritage as the inventor of the sport sandal and remains a
distinctive choice for both performance-oriented users and
casual buyers. Our Originals feature our proprietary Universal
Strapping System or Wraptor technology as well as cellular
rubber, molded EVA or polyurethane mid-soles and high-quality
nylon webbing or leather designed to hold the foot firmly in
place. Our U.S. patent on our Universal Strapping System,
which we utilize in most of our Teva sandals, expires in
September 2007. |
| |
| |
Hydro. The Hydro Series builds upon our legacy as
the category leader in whitewater-designed footwear. Hydro
consists of sandals and closed-toe amphibious footwear built for
high performance and rugged outdoor use. This series includes
men and women’s sport sandals and other outdoor footwear
ideal for professional and amateur outdoor enthusiasts and
adventurers. Our Hydro Series incorporates many proprietary
technologies including our Wraptor, Universal, or Liquid Frame
technologies as well as quick draining monofilament mesh,
specially formulated sticky rubber outsoles designed to adhere
to slippery rocks, form fitting neoprene and water-repelling
leathers. |
| |
| |
Terrain. The Terrain Series is a line of sandals
and closed-toe footwear that incorporates Teva technologies and
is designed for use in rugged outdoor environments such as
hiking trails and canyons. The Terrain Series includes
performance walking sandals and running sandals, as well as
hiking boots and trail running shoes. To meet our
consumers’ expanded needs and to provide them with the best
product possible, we have partnered with many of the
world’s leading providers of footwear technology for
specialty component materials, including Vibram®, Five
Ten® and Gore-Tex®. |
| |
| |
Nomadic. Our Nomadic Series is a collection of
leather casual sandals and closed-toe footwear true to
Teva’s performance-oriented outdoor heritage but designed
for more casual use. The Nomadic Series consists of men’s
and women’s leather and suede sandals, closed toe shoes,
slides and clogs |
7
|
|
| |
featuring rugged, contemporary styles for the traveler and
adventurer. Our 2005 line includes several closed-toe styles
featuring our patent-pending
flipsoletm,
a removable insole that can be easily converted to a flip-flop. |
| |
| |
Sun and Moon. Our Sun and Moon Series features
fun, youthful and colorful slides and thongs in a variety of
materials including waterproof leather, nylon, suede and air
mesh. The Sun and Moon Series is designed to leverage our
sandal-making capabilities and to appeal to fashion-oriented
consumers seeking pre-activity and post-activity footwear
alternatives that express a casual lifestyle and individual
spirit. |
| |
| |
Kids and Infants. Our children’s series is an
assortment of sandals incorporating a variety of materials
including leather, waterproof suede, nylon, neoprene and mesh,
as well as slip-on water shoes, hikers and other styles of
amphibious footwear. In addition, for the 2005 season, we have
expanded our product offering with a variety of styles of
sandals and closed-toe footwear, including an assortment of
styles that are reflective of our adult offerings. |
We intend to continue to build upon Teva’s broad and deep
line of performance and casual footwear. Our Spring 2005 line
features 126 different product styles with manufacturer’s
suggested domestic retail prices for adult sizes ranging from
$20.00 to $120.00.
UGG Footwear. “The premier brand in luxury
and comfort sheepskin.” Beginning in 1979, UGG gained brand
recognition in the U.S. for sheepskin boots and slippers
and was later adopted as a favored brand by the California surf
community. We acquired the brand in 1995 and expanded the
collection, offering consumers a luxurious and distinctive look
in sheepskin fabrications.
Our UGG product line comprises seven core footwear collections:
|
|
| |
Classic Collection. We offer a complete line of
sheepskin boots built on the heritage and distinctive look of
our first product, the Classic Sheepskin boot. Our Classic
Collection products are distinctive in styling, featuring an
array of neutral and fashion colors. Our Classic Collection
includes styles for men, women and children. |
| |
| |
Ultra Collection. The Ultra Collection builds upon
the heritage of our original Classic. These boots are designed
with our comfort system, featuring a multi-surfaced lugged
bottom with a heel-cushioning insert that offers enhanced
traction, support and comfort. Our Ultra Collection also
features a three-part insole designed to provide all-day comfort
and support and a reflective barrier that captures body heat to
create a natural foot warming mechanism. Our sheepskin products
are naturally thermostatic, keeping feet comfortable across a
wide range of temperatures. This collection features styles for
men, women and children. |
| |
| |
Casual Collection. This women’s collection
features a more tailored and refined look with sheepskin
combined with smooth leather uppers and suede in distinctive
patterns and styles. This collection features a variety of
shoes, clogs and boots and provides UGG consumers with the
versatility to utilize sheepskin styling for a wider variety of
occasions and outfits. |
| |
| |
Metropolitan Collection. This is a new collection
of women’s styles for the Fall 2005 season. The
Metropolitan Collection features styles that combine high
quality suede uppers with sheepskin linings, including models
with high fashion, bohemian and other casual stylings. |
| |
| |
Cold Weather Collection. This collection is
designed for men and women seeking more rugged styling. The Cold
Weather line features a Vibram® outsole and waterproof
Gore-Tex® uppers designed to withstand colder, wetter
climates. |
| |
| |
Fluff Momma Collection. This is our most playful
and distinctive style for women. The Fluff Momma features
untrimmed and colored sheepskin fleece exposed on the entire
boot. |
| |
| |
Slipper Collection. Our popular Slipper Collection
builds upon the UGG reputation for comfort, warmth and
luxury. We offer a wide selection of styles and colors for men,
women and children. |
8
We have expanded our UGG collection from the Classic
Sheepskin boot to a broad footwear line for men, women and
children in a variety of styles, colors and materials designed
for wear in a variety of climates and occasions. Over the last
few years, our line expansion strategies have resulted in
significantly increased exposure for our UGG collection and
have contributed to the growth of UGG’s year round
business. The manufacturer’s suggested domestic retail
prices for adult sizes for the UGG collection range from
$55.00 to $300.00.
Simple Casual Footwear. “The brand of choice
for a simple, uncomplicated lifestyle.” The Simple line of
casual shoes combines the comfort of athletic footwear
construction with the simple, understated styling of
“back-to-basics” casual footwear. Simple was launched
in the 1990’s as an anti-brand that catered to
21-35 year old consumers who were looking for an
alternative to the flashy athletic footwear brands that were
saturating the market. Since then, we’ve expanded into a
full line of clogs, sneakers, and sandals; and in 2005, we are
introducing our new Unclog and Green
Toetm
segments to the line.
Our product line is comprised of these five key categories,
which range in price from $20.00 to $80.00:
|
|
| |
Sneakers. We’ve evolved our classic sneaker
collection with successful styles like the Sugar. We continue to
keep this segment fresh by updating colors and materials
seasonally. We’ve introduced several new sneaker styles
that incorporate a sneaker specific
pedbedtm,
durable rubber outsoles, and leather and suede uppers. |
| |
| |
Clogs. Building on the heritage of our original
clogs, our current clog series features the
pedbedtm
and updated material and color options. |
| |
| |
Unclogs: This collection is our twist on the
traditional casual segment. It features oxfords, loafers, and
boots that incorporate our comfortable
pedbedtm
with suede and leather uppers. |
| |
| |
Sandals: We offer a range of warm weather footwear
for men and women in rich leathers and colorful nubucks. We also
offer a flip-flop program that caters to the surf channel of
distribution. |
| |
| |
Green
Toetm:
The Green
Toetm
segment represents an effort on the part of Simple to reduce the
ecological footprint made by shoes around the world. All Green
Toe products are made with 100% natural materials (textiles and
rubbers), use water-based glues, and soy-based dyes. This
collection is currently comprised of two styles for men and
women. |
Licensing
To capitalize on the strength of our brands, we are pursuing the
licensing of our brand names for use in complementary product
categories beyond footwear. As part of this approach, in 2004,
we hired a Vice President of Corporate Licensing, who has
extensive licensing experience at several leading companies in
our industry, to coordinate the efforts for the licensing of the
Teva, UGG and Simple trademarks on products ranging from
sportswear and outerwear to bags, packs and other accessories.
Products sold under license began selling at retail in the third
quarter of 2004. For the year ended December 31, 2004, we
recognized net license revenues of approximately $950,000.
We have initiated a Teva licensing program with strategic
partners, which currently consist of U.S. licenses for
men’s sportswear, headwear, eyewear, timepieces, and socks,
as well as a Canadian license for men’s sportswear. We are
selectively developing additional licensing programs to ensure
that licensed goods remain consistent with Teva’s brand
heritage. In addition, we have signed license agreements for
UGG handbags and related small leather goods, outerwear,
and cold weather accessories, and have several other
UGG related licensing opportunities under consideration,
including “at home” apparel, home accessories and
other categories to complement our UGG business. We are
also planning to expand our licensing program to the
international markets.
BHPC Global Licensing, Inc. is a full service licensing agency
that we initially used to assist us in identifying licensing
candidates and coordinating our licensing business until August
2004, when we hired our Vice President of Corporate Licensing to
coordinate these efforts for us. We pay BHPC a commission on
royalty income that we receive related to licensing agreements
that BHPC coordinated on our behalf. In 2004, we paid BHPC
approximately $168,000. BHPC is owned by one of our directors,
Daniel L. Terheggen.
9
Products made under license are sold primarily through the same
retail channels as our footwear product offering. Our licensing
agreements generally give us the right to terminate the license
if specified sales targets are not achieved.
Sales and Distribution
We distribute our products in the U.S. through a dedicated
network of approximately 40 independent sales representatives.
Our sales representatives are organized geographically and visit
retail stores to communicate the features, styling and
technology of our products. In addition, we have five employee
sales representatives who serve as key account executives for
several of our largest customers.
Our sales force is divided into two teams, one for Teva and one
for UGG and Simple, as the UGG and Simple brands are
generally sold through non-outdoor specialty and non-sporting
goods distribution channels and are targeted toward a different
consumer than our Teva brand. The sales manager for each brand
recruits and manages his or her networks of sales
representatives and coordinates sales to national accounts. We
believe this approach for the U.S. market maximizes the
selling efforts to our national retail accounts on a
cost-effective basis.
Internationally, we distribute our products through 35
independent distributors. Shipments to Europe are primarily
facilitated through third party distribution in the Netherlands.
All other international shipments are made directly from our
independent manufacturers.
Our principal customers include specialty retailers, selected
department stores, outdoor retailers, sporting goods retailers
and shoe stores. Our five largest customers accounted for
approximately 25.2% of our net sales for 2004, compared to 20.5%
for 2003. No single customer accounted for more than 10.0% of
our net sales in 2004 or 2003, except that a West Coast based
upscale department store, which is a significant customer for
each of our three brands, accounted for 14.1% of net sales in
2004.
Teva. We sell our Teva products primarily through
specialty outdoor and sporting goods retailers such as REI,
Eastern Mountain Sports, L.L. Bean, Dick’s Sporting Goods
and The Sports Authority. We believe this retail channel is the
first choice for athletes, enthusiasts and adventurers seeking
technical and performance-oriented footwear. Furthermore, we
believe that our Teva products are best sold by retailers who
appreciate and can fully market the technical attributes of our
products to the consumer. We also sell a limited selection of
styles and special make-up Teva products through selected
retailers in order to reach consumers who are less
outdoor-oriented but who seek out our products due to their
durability, comfort and fit.
UGG. We sell our UGG products primarily
through high-end department stores such as Nordstrom, Neiman
Marcus and Marshall Field’s, as well as independent
specialty retailers such as Fred Segal, David Z. and Sport
Chalet. We believe these retailers support the luxury
positioning of our brand and are the destination shopping choice
for the consumer who seeks out the fashion and functional
elements of our UGG products.
Simple. Our Simple products are targeted primarily
towards independent specialty retailers and select department
stores that target consumers seeking comfortable, high quality
footwear at a fair price. Key accounts such as J. Jill,
Nordstrom, Journeys, and REI cater to consumers in our
demographic — men and women between the ages
of 21 and 35.
In 2004, we distributed products sold in the U.S. through
our 126,000 square foot distribution center in Ventura,
California. In 2005, we are also distributing products from an
additional 175,000 square foot U.S. distribution
center in Camarillo, California. Our distribution centers
feature an inventory management system that enables us to
efficiently pick and pack products for direct shipment to
retailers across the country. For certain customers requiring
special handling, each shipment is pre-labeled and packed to the
retailer’s specifications, enabling the retailer to easily
unpack our product and immediately display it on the sales
floor. All incoming and outgoing shipments must meet our
rigorous quality inspection process.
See the discussion of the cash flow cycle, inventories and other
items of working capital under “Liquidity and Capital
Resources”.
10
Consumer Direct
We acquired the Internet and catalog business as part of the
acquisition of the Teva Rights. The consumer direct business
enables us to reach consumers through our Internet business
under the Teva.com, UGGs.com,
UGGAustralia.com and SimpleShoes.com Internet
addresses and through direct mailings. Our mailing list includes
approximately 300,000 consumers who have purchased at least once
in the past 36 months. We currently average approximately
600 direct orders daily. In late 2003 we moved our order
fulfillment operations from Flagstaff, Arizona to our
distribution center in Ventura, California in order to reduce
the cost of order cancellation, minimize out of stock positions
and further leverage our distribution center occupancy costs. We
generally sell our products through our direct channels at
approximate retail prices, enabling us to capture the full
retail margin on each direct transaction.
Marketing and Advertising
Our brands are generally advertised and promoted through a
variety of consumer print advertising campaigns. We benefit from
highly visible editorial coverage in both consumer and trade
publications. Each brand’s dedicated marketing team works
closely with targeted accounts to maximize advertising and
promotional effectiveness. We incurred approximately $7,456,000,
$6,594,000 and $8,687,000 in advertising, marketing and
promotion expenses in 2002, 2003 and 2004, respectively.
Teva. We use several marketing methods to promote
the Teva brand, including:
|
|
|
| |
• |
a targeted print advertising campaign; |
| |
| |
• |
promotions at a variety of festivals, events and competitions; |
| |
| |
• |
sponsorship of local athletes and national athletes such as the
Teva Whitewater Team, the Teva U.S. Mountain Running Team
and the Cannondale Mountain Bike Team; |
| |
| |
• |
discount programs to professional river guides, kayakers,
mountain bikers and rock climbers; |
| |
| |
• |
product seeding with professional athletes; and |
| |
| |
• |
in-store promotions. |
We advertise the Teva brand through the placement of print
advertisements in leading outdoor magazines such as
Backpacker, Outside, National Geographic Adventurer, Hooked
on the Outdoors and Paddler. As we have added new
product categories to the Teva brand, we have broadened our
advertising presence to reach new consumers. To support our
introduction of Teva trail running shoes, we advertise in
Trail Runner and Running Times, among other
publications. We also advertise in more mainstream publications
such as Men’s Journal, Sports Illustrated, and
Organic Style in order to support our casual footwear
lines.
The Teva brand is closely associated with outdoor lifestyle
pursuits such as river rafting, kayaking, mountain biking,
hiking and trail running. We sponsor outdoor events in the U.S.
including the Teva Mountain Games at Vail, the Teva Vail Trail
Running Series, the Santa Cruz Surf Kayak Festival in Santa
Cruz, California, the Telluride Bluegrass Festival in Telluride,
Colorado and the Reggae on the River event in Garberville,
California, among others. We believe our sponsorship of these
events further links our Teva brand with its outdoor heritage
and generates increased product exposure and brand awareness.
Internationally, we sponsor outdoor events in France,
Switzerland and Italy in order to increase our brand visibility
to the core European outdoor consumer.
We sponsor some of the world’s best male and female
professional and amateur athletes across several sports. Our
Teva promotional team attends events across the U.S. in
dedicated, state-of-the-art promotional vehicles prominently
featuring our Teva logo. The promotions team showcases Teva
products at events and provides consumers with the opportunity
to see and sample our latest styles. We recently initiated a
partnership with Volkswagen whereby the Teva technical
representatives and Team Teva athletes are outfitted in seven
Teva branded Volkswagen Eurovans and seven Volkswagen Touaregs
for travels across the U.S. We believe by outfitting and
sponsoring these highly visible athletes and teams, we create
brand and product awareness among our targeted consumers at a
relatively low cost.
11
UGG. We seek to build upon the success of our UGG
national print advertising campaign. We currently advertise in
upscale national magazines such as Vogue, ELLE, and O
Magazine. We believe such advertising is an effective means
to target our intended consumers and to convey the high quality
and luxurious appeal of UGG products. We also benefit from
editorial coverage of the UGG collection. Articles have appeared
in such magazines as Glamour, InStyle, Cosmopolitan, Marie
Claire, People, US Weekly, Maxim, Shape, Self, O Magazine
and Real Simple. In 2003, UGG was awarded “Brand
of the Year” by Footwear News, a leading industry
trade publication. In 2004, UGG was awarded “Brand of the
Year” by Footwear Plus, another leading trade
publication, and was recognized with the ACE Award for the
“it” accessory of the year by the Accessories Council.
We also actively seek to place UGG products at selected events.
During the 2002 Winter Olympic Games we outfitted all of the
children in the Children of the Light performance with UGG
boots. During the Medal Ceremonies, Olympic staff presenting
medals to the Olympic athletes also wore UGG boots. We believe
this product placement further strengthened the consumer’s
image of UGG products as high quality, luxurious sheepskin goods
well-suited for use in cold weather.
We also have improved visibility of the UGG brand through
placement of the product in selected television shows and
feature films. UGG products have appeared on numerous shows,
including Entourage, Six Feet Under, The Oprah Winfrey Show,
Judging Amy, The King of Queens, Still Standing, Will and Grace,
Everwood, The George Lopez Show, Jeopardy and Saturday
Night Live. Our marketing efforts have also resulted in UGG
product appearances in the following recent and upcoming feature
films: Fever Pitch starring Drew Barrymore and Jimmy
Fallon, White Chicks starring the Wayans Brothers,
Surviving Christmas starring Ben Affleck and Christina
Applegate, Raising Helen starring Kate Hudson and
Wicker Park starring Josh Hartnett. In addition, UGG has
been embraced by Hollywood celebrities, who are often seen and
photographed wearing UGG boots. This celebrity exposure for UGG
has been the subject of recent publicity including articles in
US Weekly, USA Today, People and
People.com. UGG boots have been a featured item on
the Oprah Winfrey gift show in 2000 and 2003 and her surprise
baby shower for military families in 2004. We believe our target
consumer identifies with celebrities and that greater exposure
further heightens awareness of the brand and stimulates sales.
Simple. The Simple consumer identifies with a
certain irreverent culture, and we seek to reach that consumer
through a focused grassroots marketing approach that will
introduce the brand to influential communities around the
country. These marketing efforts will focus on the following
cities: Los Angeles, San Francisco, New York City, Chicago,
Boulder, Austin and Nashville. In support of our grassroots
initiatives, we will focus on advertising in alternative weekly
publications, which will provide us with the opportunity to
reach a large number of people through a cost efficient,
non-mainstream medium.
Simple will continue to work with its public relations agency to
get editorial placement of key styles in youth and trend
magazines, television shows, independent films and with
cutting-edge influential artists and musicians. Our efforts have
resulted in product appearances in Teen People, Maxim, Nylon,
Lucky and Surfing Girl, and product appearances on VH1 and
MTV.
Product Design and Development
The design and product development staff for each of our brands
creates and introduces new innovative footwear products that
combine our standards of high quality, comfort and
functionality. The design function for all of our brands is
performed by a combination of our internal design and
development staff plus outside design firms. By introducing
outside firms to the design process, we believe we are able to
review a variety of different design perspectives on a
cost-efficient basis and anticipate color and style trends more
quickly.
To ensure that Teva’s high performance technical products
continue to satisfy the requirements of our historical consumer
base of performance-oriented “core enthusiasts,” our
design staff solicits input from our Team Teva whitewater
athletes, the Teva U.S. Mountain Running Team and other
professional outdoorsmen, as well as several of our retailers,
including REI, Eastern Mountain Sports, Dick’s Sporting
Goods and L.L. Bean. We regularly add new innovations,
components and styles to our product line based on their input.
For example, our Fall 2005 Teva offering features several styles
of casual closed toe footwear with our new
12
Flipsoletm
technology, a removable midsole that can be easily removed and
converted to a thong, making it two shoes in one. We have also
incorporated our proprietary Wraptor technology into performance
running sandals, an assortment of hikers and certain styles of
our high performance guide sport sandals specifically targeted
at professional outdoorsmen and adventurers. In addition, for
added traction and durability, we have incorporated various
materials in our Teva sandals, including Spider
Rubber — a sticky, non-slip rubber outsole material
for use across wet and dry terrain, Traction Rubber —
a highly durable and abrasion resistant material designed
specifically for the extra rigors of land use, and River
Rubber — a non-slip material designed to offer
superior grip on smooth wet surfaces such as rocks, fiberglass
and raft rubber.
Our UGG and Simple products are designed to appeal to consumers
seeking our distinctive and innovative styling. We strive to be
a leader in product uniqueness and appearance by regularly
updating our UGG and Simple lines, which also generates further
awareness and interest in the UGG and Simple collections. We
believe our ability to incorporate up-to-date styles without
deviating from UGG’s classic look, combined with
performance-oriented features consumers have come to expect,
results in continued enthusiasm for our brand in the marketplace.
In order to ensure quality, consistency and efficiency in our
design and product development process, we continually evaluate
the availability and cost of raw materials, the capabilities and
capacity of our independent contract manufacturers and the
target retail price of new models and lines. The design and
development staff works closely with brand management to develop
new styles of footwear for their various product lines. We
develop detailed drawings and prototypes of our new products to
aid in the conceptualization and to ensure our contemplated new
products meet the standards for innovation and performance our
consumers demand. Throughout the development process, members of
the design staff coordinate internally and with our domestic and
overseas product development, manufacturing and sourcing
personnel toward a common goal of developing and producing a
high quality product to be delivered on a timely basis.
Manufacturing
We do not manufacture our footwear. We outsource the
manufacturing of our Teva, Simple, and UGG footwear to
independent manufacturers in the Far East. We also outsource the
manufacturing of our UGG footwear to independent manufacturers
in Australia and New Zealand. We have no long-term contracts
with our manufacturers. As we grow, we expect to continue to
rely exclusively on independent manufacturers for our sourcing
needs.
The production of footwear by our independent manufacturers is
performed in accordance with our detailed specifications and is
subject to our quality control standards. To ensure the
production of high quality products, many of the materials and
components used in production of our products by the independent
manufacturers are purchased from independent suppliers
designated by us. Excluding sheepskin, we believe that
substantially all the various raw materials and components used
in the manufacture of our footwear, including rubber, leather
and nylon webbing are generally available from multiple sources
at competitive prices. We outsource our manufacturing
requirements on the basis of individual purchase orders rather
than maintaining long-term purchase commitments with our
independent manufacturers.
At our direction, our manufacturers currently purchase the
majority of the sheepskin used in our products from one tannery
in New Zealand and three in China. We maintain a constant dialog
with the tanneries to monitor the supply of sufficient high
quality sheepskin available for our projected UGG footwear
production. To ensure adequate supplies for our manufacturers,
we forecast our usage of top grade sheepskin one year in advance
at a forward price. We believe supplies are sufficient to meet
our needs in the near future but we continue to search for
alternate suppliers in order to accommodate any unexpected
future growth.
We have instituted pre-production and post-production
inspections to meet or exceed the high quality demanded by
consumers of our products. Our quality assurance program
includes on-site inspectors at our independent manufacturers who
oversee the production process and perform quality assurance
inspections. We also inspect our products upon arrival at our
U.S. distribution center.
13
Patents and Trademarks
We now hold 16 U.S. patents, two patents in each of
Australia and China and one patent in each of Canada, New
Zealand, South Korea, Germany, France, Japan and the United
Kingdom for Teva footwear. In addition, we have pending patent
applications in Australia, Hong Kong, Mexico, Germany, France,
Belgium, Luxembourg, the Netherlands, Italy, Switzerland, the
United Kingdom and the U.S. Our U.S. patent for the Teva
Universal Strapping System, which is used in most of our Teva
sandals, expires in 2007. As a result of the expiration of the
applicable period during which foreign patent applications were
required to have been filed by the former licensor, we do not
and cannot hold certain patent rights for Teva footwear in
certain countries. We also currently hold Teva trademark
registrations in the U.S. and in many other countries, including
France, Germany, the United Kingdom, Japan and Australia. We
regard our proprietary rights as valuable assets and vigorously
protect such rights against infringement by third parties.
Deckers and its predecessor, Mark Thatcher, have successfully
enforced their intellectual property rights in the courts and
other forums, obtaining numerous judgments, consent judgments
and settlement agreements that uphold the validity of
Deckers’ patent, trademark and trade dress rights.
We currently hold UGG trademark registrations in the U.S. and in
more than 40 other countries, including the countries in the
European Community, Canada, Japan and Australia, among others.
We also hold various Simple trademark registrations around the
world, including registrations in the U.S. and in more than 40
foreign countries worldwide. We have also selectively registered
style category names and marketing slogans. In addition, we hold
two design patents for our Simple footwear products and have two
pending design patent applications for UGG footwear products.
Seasonality
Our business is seasonal, with the highest percentage of Teva
net sales occurring in the first and second quarters of each
year and the highest percentage of UGG net sales occurring in
the third and fourth quarters, while the quarter with the
highest percentage of annual net sales for Simple has varied
from year to year. With the dramatic growth in UGG in recent
years, combined with the introduction of a fall Teva line, net
sales in the last half of the year have exceeded that for the
first half of the year. Given our expectations for each of our
brands in 2005, we currently expect this trend to continue.
Nonetheless, actual results could differ materially depending
upon consumer preferences, availability of product, competition
and our customers continuing to carry and promote our various
product lines, among other risks and uncertainties. See
“Risk Factors.”
Backlog
Historically, we have encouraged our customers to place, and we
have received, a significant portion of orders as pre-season
orders, generally four to eight months prior to shipment date.
We provide customers with incentives to participate in such
pre-season programs to enable us to better plan our production
schedule, inventory and shipping needs. Unfilled customer orders
as of any date, which we refer to as backlog, represent orders
scheduled to be shipped at a future date and do not represent
firm orders. The backlog as of a particular date is affected by
a number of factors, including seasonality, manufacturing
schedule and the timing of shipments of products as well as
variations in the quarter-to-quarter and year-to-year preseason
incentive programs. The mix of future and immediate delivery
orders can vary significantly from quarter to quarter and year
to year. As a result, comparisons of the backlog from period to
period may be misleading.
Competition
The casual, outdoor, athletic and fashion footwear markets are
highly competitive. We compete with numerous domestic and
foreign footwear designers, manufacturers and marketers. Our
Teva footwear line primarily competes with Nike, adidas-Salomon,
Timberland, Merrell and Columbia Sportswear. Our UGG footwear
line primarily competes with Merrell, Acorn, Aussie Dogs,
LB Evans and Timberland, as well as retailers’ own
private label footwear. In addition, due to the popularity of
our UGG products, we face increasing competition from a
significant number of competitors selling “knock-off
“products. Our Simple footwear line primarily competes with
Steve Madden, Dr. Marten, Camper, Kenneth Cole, Skechers,
Diesel,
14
Guess? and Puma. Some of our competitors are significantly
larger and have significantly greater resources than we do.
Our three footwear lines compete primarily on the basis of brand
recognition and authenticity, product quality and design,
functionality and performance, fashion appeal and price. Our
ability to successfully compete depends on our ability to:
|
|
|
| |
• |
shape and stimulate consumer tastes and preferences by offering
innovative, attractive and exciting products; |
| |
| |
• |
anticipate and respond to changing consumer demands in a timely
manner; |
| |
| |
• |
maintain brand authenticity; |
| |
| |
• |
develop high quality products that appeal to consumers; |
| |
| |
• |
appropriately price our products; |
| |
| |
• |
provide strong and effective marketing support; and |
| |
| |
• |
ensure product availability. |
We believe we are particularly well positioned to compete in the
footwear industry. Our diversified portfolio of footwear brands
and products allows us to operate a business that does not
depend on any one demographic group, merchandise preference or
product trend. We have developed a portfolio of brands that
appeals to a broad spectrum of consumers. We continually look to
acquire or develop more footwear brands to complement our
existing portfolio and grow our existing consumer base.
Employees
At December 31, 2004, we employed approximately
156 full-time employees in our U.S. facilities and
31 full-time employees located in China and Macau, none of
whom is represented by a union. We believe our relationships
with our employees are good.
Available Information
Our internet address is www.deckers.com. We post links to
our website to the following filings as soon as reasonably
practicable after they are electronically filed with or
furnished to the Securities and Exchange Commission
(“SEC”): annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and
any amendment to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended. All such filings are available through our
website free of charge. Our filings may also be read and copied
at the SEC’s Public Reference Room at 450 Fifth
Street, NW, Washington, DC 20549. Information on the operation
of the Public Reference Room may be obtained by calling the SEC
at 1-800-SEC-0330. The SEC also maintains an Internet site that
contains reports, proxy and information statements, and other
information regarding issuers that file electronically with the
SEC. The address of that site is www.sec.gov.
Our corporate headquarters is located in Goleta, California. We
have two distribution centers in Ventura and Camarillo,
California, and our Internet and catalog operations are located
in Flagstaff, Arizona. We also have a small office in China to
oversee the quality and manufacturing standards of our products
and a small office in Macau to coordinate logistics. We have no
manufacturing facilities, as all of our products are
manufactured by independent manufacturers in the Far East,
Australia and New Zealand. We lease, rather than own, all of our
facilities. Our facilities are leased from unrelated parties. We
consider our facilities to be suitable for our needs.
15
|
|
| |
The following table reflects the location, use and approximate
size of our significant real properties: |
| |
|
|
|
|
|
|
| |
|
|
|
Approximate | |
| Facility Location |
|
Description |
|
Square Footage | |
| |
|
|
|
| |
|
Camarillo, California
|
|
Warehouse Facility |
|
|
175,000 |
|
|
Ventura, California
|
|
Warehouse Facility |
|
|
126,000 |
|
|
Goleta, California
|
|
Corporate Offices |
|
|
30,000 |
|
|
China
|
|
Office Facility |
|
|
4,200 |
|
|
Flagstaff, Arizona
|
|
Internet/Catalog Vacant Warehouse |
|
|
3,000 |
|
|
Flagstaff, Arizona
|
|
Internet/Catalog Office Facility |
|
|
2,400 |
|
|
Macau
|
|
Office Facility |
|
|
2,000 |
|
|
|
| Item 3. |
Legal Proceedings |
We are involved in routine litigation arising in the ordinary
course of business. Such routine matters, if decided adversely
to us, would not, in the opinion of management, have a material
adverse effect on our financial condition or results of
operations. Additionally, we have many pending disputes in the
U.S. Patent and Trademark Office, foreign trademark offices
and U.S. federal and foreign courts regarding unauthorized
use or registration of our Teva, UGG and Simple trademarks. We
also are aware of many instances throughout the world in which a
third party is using our UGG trademark within its Internet
domain name, and we have discovered and are investigating
several manufacturers and distributors of counterfeit Teva and
UGG products. We have contacted a majority of these unauthorized
users and counterfeiters and in some instances may have to
escalate the enforcement of our rights by filing suit against
the unauthorized users and counterfeiters. Any decision or
settlement in any of these matters that allowed a third party to
continue to use our Teva, UGG or Simple trademarks or a domain
name with our UGG trademark in connection with the sale of
products similar to our products or to continue to manufacture
or distribute counterfeit products could have an adverse effect
on our sales and on our intellectual property, which could have
a material adverse effect on our results of operations and
financial condition.
|
|
| Item 4. |
Submission of Matters to a Vote of Security Holders |
None.
16
PART II
|
|
| Item 5. |
Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities |
Our common stock is traded on the NASDAQ National Market under
the symbol “DECK.” The following table shows the range
of low and high closing sale prices per share of our common
stock as reported by the NASDAQ National Market for the periods
indicated.
| |
|
|
|
|
|
|
|
|
|
| |
|
Common Stock | |
| |
|
Price Per Share | |
| |
|
| |
| |
|
Low | |
|
High | |
| |
|
| |
|
| |
|
Year ended December 31, 2003:
|
|
|
|
|
|
|
|
|
| |
First Quarter
|
|
|
$3.45 |
|
|
|
$4.99 |
|
| |
Second Quarter
|
|
|
$4.20 |
|
|
|
$6.69 |
|
| |
Third Quarter
|
|
|
$6.40 |
|
|
|
$10.13 |
|
| |
Fourth Quarter
|
|
|
$11.22 |
|
|
|
$20.81 |
|
|
Year ended December 31, 2004:
|
|
|
|
|
|
|
|
|
| |
First Quarter
|
|
|
$17.70 |
|
|
|
$27.68 |
|
| |
Second Quarter
|
|
|
$22.94 |
|
|
|
$30.28 |
|
| |
Third Quarter
|
|
|
$26.93 |
|
|
|
$34.76 |
|
| |
Fourth Quarter
|
|
|
$32.05 |
|
|
|
$48.02 |
|
As of March 8, 2005, there were approximately 110 record
holders of our common stock.
DIVIDEND POLICY
We have not declared or paid any cash dividends on our common
stock since our inception. We currently anticipate that we will
retain all of our earnings for the continued development and
expansion of our business and do not anticipate declaring or
paying any cash dividends in the foreseeable future. Moreover,
our debt facilities contain covenants expressly prohibiting us
from paying cash dividends.
17
|
|
| Item 6. |
Selected Consolidated Financial Data |
We derived the following selected consolidated financial data
from our consolidated financial statements, which have been
audited by KPMG LLP, independent registered public accounting
firm. Historical results are not necessarily indicative of the
results to be expected in the future. You should read the
following consolidated financial information together with our
consolidated financial statements and the related notes and
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations.”
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2000 | |
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except per share data) | |
|
Statement of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Teva wholesale
|
|
$ |
79,732 |
|
|
$ |
61,221 |
|
|
$ |
64,849 |
|
|
$ |
72,783 |
|
|
$ |
83,477 |
|
| |
UGG wholesale
|
|
|
15,310 |
|
|
|
19,185 |
|
|
|
23,491 |
|
|
|
34,561 |
|
|
|
101,806 |
|
| |
Simple wholesale
|
|
|
16,328 |
|
|
|
10,853 |
|
|
|
10,159 |
|
|
|
7,210 |
|
|
|
9,633 |
|
| |
Internet/catalog
|
|
|
— |
|
|
|
— |
|
|
|
608 |
|
|
|
6,501 |
|
|
|
19,871 |
|
| |
Other
|
|
|
2,368 |
|
|
|
202 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
113,738 |
|
|
|
91,461 |
|
|
|
99,107 |
|
|
|
121,055 |
|
|
|
214,787 |
|
|
Cost of sales
|
|
|
63,540 |
|
|
|
52,903 |
|
|
|
57,577 |
|
|
|
69,710 |
|
|
|
124,354 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Gross profit
|
|
|
50,198 |
|
|
|
38,558 |
|
|
|
41,530 |
|
|
|
51,345 |
|
|
|
90,433 |
|
|
Selling, general and administrative expenses
|
|
|
37,168 |
|
|
|
33,940 |
|
|
|
34,954 |
|
|
|
32,407 |
|
|
|
47,971 |
|
|
Litigation expense
(income)(1)
|
|
|
400 |
|
|
|
2,280 |
|
|
|
3,228 |
|
|
|
(500 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Income from operations
|
|
|
12,630 |
|
|
|
2,338 |
|
|
|
3,348 |
|
|
|
19,438 |
|
|
|
42,462 |
|
|
Other expense (income)
|
|
|
295 |
|
|
|
(473 |
) |
|
|
504 |
|
|
|
4,554 |
|
|
|
2,239 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Income before income taxes and cumulative effect of accounting
change
|
|
|
12,335 |
|
|
|
2,811 |
|
|
|
2,844 |
|
|
|
14,884 |
|
|
|
40,223 |
|
|
Income taxes
|
|
|
5,320 |
|
|
|
1,185 |
|
|
|
1,224 |
|
|
|
5,730 |
|
|
|
14,684 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Income before cumulative effect of accounting change
|
|
|
7,015 |
|
|
|
1,626 |
|
|
|
1,620 |
|
|
|
9,154 |
|
|
|
25,539 |
|
|
Cumulative effect of accounting change, net of $843,000 income
tax
benefit(2)
|
|
|
— |
|
|
|
— |
|
|
|
(8,973 |
) |
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net income (loss)
|
|
$ |
7,015 |
|
|
$ |
1,626 |
|
|
$ |
(7,353 |
) |
|
$ |
9,154 |
|
|
$ |
25,539 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income before cumulative effect of accounting change
|
|
$ |
0.77 |
|
|
$ |
0.18 |
|
|
$ |
0.17 |
|
|
$ |
0.91 |
|
|
$ |
2.32 |
|
|
Cumulative effect of accounting
change(2)
|
|
|
— |
|
|
|
— |
|
|
|
(0.96 |
) |
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic net income (loss)
|
|
$ |
0.77 |
|
|
$ |
0.18 |
|
|
$ |
(0.79 |
) |
|
$ |
0.91 |
|
|
$ |
2.32 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income before cumulative effect of accounting change
|
|
$ |
0.74 |
|
|
$ |
0.17 |
|
|
$ |
0.17 |
|
|
$ |
0.77 |
|
|
$ |
2.10 |
|
|
Cumulative effect of accounting
change(2)
|
|
|
— |
|
|
|
— |
|
|
|
(0.92 |
) |
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Diluted net income (loss)
|
|
$ |
0.74 |
|
|
$ |
0.17 |
|
|
$ |
(0.75 |
) |
|
$ |
0.77 |
|
|
$ |
2.10 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
|
9,093 |
|
|
|
9,247 |
|
|
|
9,328 |
|
|
|
9,610 |
|
|
|
11,005 |
|
| |
Diluted
|
|
|
9,476 |
|
|
|
9,661 |
|
|
|
9,806 |
|
|
|
11,880 |
|
|
|
12,142 |
|
18
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
As of December 31, | |
| |
|
| |
| |
|
2000 | |
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
9,057 |
|
|
$ |
16,689 |
|
|
$ |
3,941 |
|
|
$ |
6,662 |
|
|
$ |
10,379 |
|
|
Working capital
|
|
$ |
40,482 |
|
|
$ |
41,387 |
|
|
$ |
22,453 |
|
|
$ |
22,803 |
|
|
$ |
69,854 |
|
|
Total assets
|
|
$ |
77,712 |
|
|
$ |
85,884 |
|
|
$ |
122,412 |
|
|
$ |
121,026 |
|
|
$ |
176,551 |
|
|
Long-term debt, including current installments
|
|
$ |
1,495 |
|
|
$ |
449 |
|
|
$ |
39,028 |
|
|
$ |
30,287 |
|
|
$ |
— |
|
|
Total stockholders’ equity
|
|
$ |
64,095 |
|
|
$ |
66,532 |
|
|
$ |
65,227 |
|
|
$ |
70,524 |
|
|
$ |
140,996 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
The litigation expense (income) includes: (i) expenses of
$2,180,000 in 2001 and $3,228,000 in 2002 related to a lawsuit
filed against us in Montana in 1995 which we settled and paid in
full in 2002, and (ii) expenses of $400,000 in 2000,
expenses of $100,000 in 2001 and income of $500,000 in 2003
related to a European anti-dumping duties matter that was
ultimately resolved in our favor in 2003. |
| |
| (2) |
Our adoption of Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets, on
January 1, 2002 resulted in a goodwill impairment charge of
$8,973,000 (net of the related income tax benefit of $843,000),
or $0.92 per diluted share, during 2002. |
19
|
|
| Item 7. |
Management’s Discussion and Analysis of Financial
Condition and Results of Operations |
FORWARD-LOOKING STATEMENTS
This report and the information incorporated by reference in
this report contain forward-looking statements. We sometimes use
words such as “anticipate,” “believe,”
“continue,” “estimate,” “expect,”
“intend,” “may,” “project,”
“will” and similar expressions, as they relate to us,
our management and our industry, to identify forward-looking
statements. Forward-looking statements relate to our
expectations, beliefs, plans, strategies, prospects, future
performance, anticipated trends and other future events.
Specifically, this report and the information incorporated by
reference in this report contain forward-looking statements
relating to, among other things:
|
|
|
| |
• |
our business, growth, operating and financing strategies; |
| |
| |
• |
our product mix; |
| |
| |
• |
the success of new products; |
| |
| |
• |
our licensing strategy; |
| |
| |
• |
the impact of seasonality on our operations; |
| |
| |
• |
expectations regarding our net sales and earnings growth; |
| |
| |
• |
expectations regarding our liquidity; |
| |
| |
• |
our future financing plans; and |
| |
| |
• |
trends affecting our financial condition or results of
operations. |
We have based our forward-looking statements largely on our
current expectations and projections about future events and
financial trends affecting our business. Actual results may
differ materially. Some of the risks, uncertainties and
assumptions that may cause actual results to differ from these
forward-looking statements are described in “Risk
Factors.” In light of these risks, uncertainties and
assumptions, the forward-looking events and circumstances
discussed in this report and the information incorporated by
reference in this report might not happen.
You should completely read this report, the documents that we
filed as exhibits to this report and the documents that we
incorporate by reference in this report with the understanding
that our future results may be materially different from what we
expect. We qualify all of our forward-looking statements by
these cautionary statements and we assume no obligation to
update such forward-looking statements publicly for any reason.
Overview
We are a leading producer and brand manager of innovative
high-quality footwear and the category creator in the sport
sandal and luxury sheepskin footwear segments. Our products are
marketed under three recognized brand names that we own:
|
|
|
| |
• |
Teva: High performance sport sandals and rugged outdoor footwear; |
| |
| |
• |
UGG: Authentic luxury sheepskin boots and other
footwear; and |
| |
| |
• |
Simple: Innovative shoes that combine the comfort elements of
athletic footwear with casual styling. |
We sell our three brands through our retail customers and
directly to our end-user consumers through our Internet and
catalog retailing business. We sell our footwear in both the
domestic market and the international markets. Independent third
parties manufacture all of our footwear.
20
Our business has been impacted by several important trends
affecting our end markets:
|
|
|
| |
• |
The markets for casual, outdoor and athletic footwear have grown
significantly during the last decade. We believe this growth is
a result of the trend toward casual dress in the workplace,
increasingly active outdoor lifestyles and a growing emphasis on
comfort. |
| |
| |
• |
Consumers are more often seeking footwear designed to address a
broader array of activities with the same quality, comfort, and
high performance attributes they have come to expect from
traditional athletic footwear. |
| |
| |
• |
Our customers have narrowed their footwear product breadth,
focusing on brands with a rich heritage and authenticity as
market creators and leaders. |
By emphasizing our brand image and our focus on comfort,
performance and authenticity, we believe we can better maintain
a loyal consumer following that is less susceptible to
fluctuations caused by changing fashions and changes in consumer
preferences.
Set forth below is an overview of the various components of our
business, including some of the important factors that affect
each business and some of our strategies for growing each
business.
Our Teva lines experienced strong market acceptance in recent
years. Teva’s products have benefited recently from several
factors, but most prominently a general shift in consumer
preferences and lifestyles to include more outdoor recreational
activities. At the same time, our consumers are increasingly
purchasing our Teva products for everyday wear, and our Teva
brand now includes several closed-toe footwear lines. As a
result, our brand remains popular among professional and amateur
outdoorsmen seeking authentic, performance-oriented footwear, as
well as general footwear consumers seeking high quality, durable
and comfortable styles for everyday use.
To capitalize on the growth of outdoor recreational activities
and the acceptance of certain footwear products for everyday
use, we have selectively expanded the distribution of our Teva
product lines outside our core outdoor specialty and sporting
goods channels. Through effective channel management, we believe
we can continue to expand into new distribution channels without
diluting our outdoor heritage and our appeal to outdoor
enthusiasts. Through channel appropriate product line expansion,
we plan to continue to broaden our product offerings beyond
sport sandals to new products that meet the style and functional
needs of our consumers.
We initially produced Teva products under license from the
inventor of the Teva technology, Mark Thatcher. In November
2002, we purchased from Mr. Thatcher the Teva worldwide
assets, including the Teva Internet and catalog business and all
patents, trade names, trademarks and other intellectual property
associated with the acquired Teva assets, or Teva Rights. As a
result of our purchase of the Teva Rights, we have adopted a
strategy to expand the Teva brand and more fully develop its
potential.
Since early 2003, our UGG brand received increased media
exposure, which contributed to broader public awareness of the
UGG brand and significantly increased demand for the collection.
We believe that the increased media focus on UGG was driven by
the product’s unique styling and resulting brand name
identification, Australian heritage and adoption by high-profile
film and television celebrities as a favored footwear brand. We
believe this increased media attention has enabled us to
introduce the brand to consumers much faster than we would have
ordinarily been able to. As a result of the subsequent rapid
growth in demand, we were sold out of key UGG products
throughout much of 2004, and given the long lead times required
to replenish our inventory, we have been unable to fill many
retailer reorders and many direct Internet and catalog orders.
Continuing a strategy utilized with our UGG casual line, we have
been shifting a portion of our UGG sheepskin boot production
from factories in Australia to three factories in China where
the production capacity is much greater and quality standards
are comparable.
21
We believe the fundamental comfort and functionality of UGG
products will continue to drive long-term consumer demand.
Recognizing that there is a significant fashion element to UGG
and that footwear fashions fluctuate, our strategy seeks to
prolong the longevity of the brand by offering a broader product
line suitable for wear in a variety of climates and occasions
and by limiting distribution to selected higher-end retailers.
As part of this strategy, we have expanded our product line over
time from 52 models in 2002 to 86 models in 2005.
Increased media exposure has also broadened appeal for our UGG
products. UGG has been a well-known brand in California for many
years and has only recently become a recognized brand across the
remainder of the country. We believe that a portion of
UGG’s increased demand is due to our continued geographical
expansion across the U.S. In addition, we have recently
begun to expand our distribution and marketing overseas in order
to satisfy virtually untapped international markets. We believe
the international markets represent an attractive opportunity to
grow UGG’s sales.
We depend on a limited number of key resources for sheepskin,
the principal raw material for our UGG products. Four suppliers
currently provide all of the sheepskin purchased by our
independent manufacturers. The top grade sheepskin used in UGG
footwear is in high demand and limited supply. In addition,
sheep are susceptible to hoof and mouth disease, which can
result in the extermination of the infected herd and could have
a material adverse effect on the availability of sheepskin for
our products. The supply of sheepskin can also be adversely
impacted by drought conditions. Our potential inability to
obtain top grade sheepskin for UGG products could impair our
ability to meet our production requirements for UGG in a timely
manner and could lead to inventory shortages, which can result
in lost potential sales, delays in shipments to customers,
strain on our relationships with customers and diminished brand
loyalty. There have also been significant increases in the
prices of footwear quality sheepskin as the demand for this
material has increased. Any further price increases will likely
raise our costs, increase our costs of sales and decrease our
profitability unless we are able to pass higher prices on to our
customers. While we believe the supply of top quality sheepskin
has improved for the 2005 season, we still expect the demand for
this material to continue to outpace supply, leading to
shortages and our inability to produce as much of certain styles
as our customers would like to order. Looking beyond the next
year, if demand continues to be strong, we would expect the
supply of top grade sheepskin to continue to increase in
response to the demand. However, we have little control over the
supply or the overall demand for top grade sheepskin and,
accordingly, can provide no assurances about the sufficiency of
future supplies of top grade sheepskin.
Following three consecutive years of net sales declines in our
Simple product line through 2003, we recently implemented a
strategy to improve Simple’s results of operations and
generate renewed interest in the Simple brand. As a result, net
sales for Simple increased 34% in 2004 leading to slightly
positive earnings from operations for the brand, a significant
improvement over the 2003 loss from operations for Simple of
$1,176,000. Instrumental in this turnaround has been the renewed
emphasis on product, where we began a process of repositioning
our Simple product line by focusing on our successful legacy
collections, including clogs and sneakers, and narrowing the
number of styles available. At the same time, we have refocused
our sales and distribution efforts. While Simple products are
sold through many of the same retailers that carry our Teva and
UGG lines, the Simple products will also, in some cases, be sold
through distribution channels that are precluded from offering
our Teva and UGG brands. We expect our Simple brand to
experience growth as we successfully implement our product line
rationalization and channel management strategies.
|
|
|
Internet and Catalog Retailing Overview |
We acquired our Internet and catalog retailing business in
November 2002 as part of the acquisition of the Teva Rights. Our
Internet and catalog retailing business, which today sells all
three of our brands, enables us to meet the growing demand for
all of these products and, because this business sells its
products at retail prices, it also provides us with an
opportunity to add significant incremental operating income.
Managing our Internet business requires us to focus on
generating Internet traffic to our websites, effectively convert
website visits into orders and maximize average order sizes. To
drive our catalog order business, we distribute approximately
550,000 catalogs every six months. Overall, our consumer direct
business benefits from the
22
strength of our brands and, as we grow our brands over time, we
expect our Internet and catalog retailing business to increase.
We have recently embarked on a strategy to license our
well-known and respected footwear brands to complementary
products outside of footwear, generally in the apparel and
accessories categories. To date, we have entered into six
licensing agreements for Teva, including domestic licenses for
men’s sportswear, timepieces, eyewear, headwear and socks
and a Canadian license for sportswear. We also have three
licensing arrangements for UGG for handbags and other small
leather goods, outerwear and cold weather accessories. We are
pursuing additional licensing opportunities for our brands both
in the U.S. and abroad. Because this licensing strategy is in
its early stages, and due to the lead times required to bring
the products to market, we have only recently begun to recognize
license revenues and we do not expect significant incremental
net sales and profits from licensing in the near future.
However, we believe licensing revenues may become a more
significant portion of our net sales and profits over time if
our licensees can sell the licensed products in the quantities
they have promised. For the year ended December 31, 2004,
our licensees began to ship their products and, accordingly, we
recognized net license revenues of $950,000, primarily related
to our UGG handbag and outerwear licenses. The minimum net
annual royalties that we are scheduled to receive under the nine
existing licensing agreements, assuming renewal options are
exercised, are $453,000 in 2005, $978,000 in 2006, $1,281,000 in
2007, $1,344,000 in 2008 and $1,391,000 in 2009. The activity
within the licensing segment is very small in relation to the
consolidated operations and, therefore, separate segment
information is not presented.
Seasonality
Our business is seasonal, with the highest percentage of Teva
net sales occurring in the first and second quarters of each
year and the highest percentage of UGG net sales occurring in
the third and fourth quarters, while the quarter with the
highest percentage of annual net sales for Simple has varied
from year to year.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2003 | |
| |
|
| |
| |
|
First Quarter | |
|
Second Quarter | |
|
Third Quarter | |
|
Fourth Quarter | |
| |
|
| |
|
| |
|
| |
|
| |
|
Net sales
|
|
$ |
36,102,000 |
|
|
$ |
24,342,000 |
|
|
$ |
24,894,000 |
|
|
$ |
35,717,000 |
|
|
Income from operations
|
|
$ |
8,087,000 |
|
|
$ |
4,678,000 |
|
|
$ |
1,782,000 |
|
|
$ |
4,891,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
| |
|
| |
| |
|
First Quarter | |
|
Second Quarter | |
|
Third Quarter | |
|
Fourth Quarter | |
| |
|
| |
|
| |
|
| |
|
| |
|
Net sales
|
|
$ |
44,272,000 |
|
|
$ |
40,546,000 |
|
|
$ |
55,797,000 |
|
|
$ |
74,172,000 |
|
|
Income from operations
|
|
$ |
9,628,000 |
|
|
$ |
9,274,000 |
|
|
$ |
9,358,000 |
|
|
$ |
14,202,000 |
|
With the dramatic growth in UGG in recent years, combined with
the introduction of a fall Teva line, net sales in the last half
of the year exceeded that for the first half of the year. Given
our expectations for each of our brands in 2005, we currently
expect this trend to continue. Nonetheless, actual results could
differ materially depending upon consumer preferences,
availability of product, competition and our customers
continuing to carry and promote our various product lines, among
other risks and uncertainties. See “Risk Factors.”
23
Results of Operations
The following table sets forth certain operating data for the
periods indicated.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2002 | |
|
2003 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
Net sales by location:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$ |
78,278,000 |
|
|
$ |
98,710,000 |
|
|
$ |
175,419,000 |
|
|
International
|
|
|
20,829,000 |
|
|
|
22,345,000 |
|
|
|
39,368,000 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total
|
|
$ |
99,107,000 |
|
|
$ |
121,055,000 |
|
|
$ |
214,787,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net sales by product line and consumer direct business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Teva:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Wholesale
|
|
$ |
64,849,000 |
|
|
$ |
72,783,000 |
|
|
$ |
83,477,000 |
|
| |
Internet/catalog
|
|
|
255,000 |
|
|
|
3,687,000 |
|
|
|
4,759,000 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total
|
|
|
65,104,000 |
|
|
|
76,470,000 |
|
|
|
88,236,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
UGG:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Wholesale
|
|
|
23,491,000 |
|
|
|
34,561,000 |
|
|
|
101,806,000 |
|
| |
Internet/catalog
|
|
|
310,000 |
|
|
|
2,300,000 |
|
|
|
14,415,000 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total
|
|
|
23,801,000 |
|
|
|
36,861,000 |
|
|
|
116,221,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
Simple:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Wholesale
|
|
|
10,159,000 |
|
|
|
7,210,000 |
|
|
|
9,633,000 |
|
| |
Internet/catalog
|
|
|
43,000 |
|
|
|
514,000 |
|
|
|
697,000 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total
|
|
|
10,202,000 |
|
|
|
7,724,000 |
|
|
|
10,330,000 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
Total
|
|
$ |
99,107,000 |
|
|
$ |
121,055,000 |
|
|
$ |
214,787,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations by product line and consumer
direct business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Teva wholesale
|
|
$ |
12,011,000 |
|
|
$ |
21,739,000 |
|
|
$ |
24,901,000 |
|
|
UGG wholesale
|
|
|
6,589,000 |
|
|
|
10,002,000 |
|
|
|
31,674,000 |
|
|
Simple wholesale
|
|
|
279,000 |
|
|
|
(1,176,000 |
) |
|
|
45,000 |
|
|
Internet/catalog
|
|
|
194,000 |
|
|
|
1,148,000 |
|
|
|
5,533,000 |
|
|
Unallocated overhead costs
|
|
|
(15,725,000 |
) |
|
|
(12,275,000 |
) |
|
|
(19,691,000 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
Total
|
|
$ |
3,348,000 |
|
|
$ |
19,438,000 |
|
|
$ |
42,462,000 |
|
| |
|
|
|
|
|
|
|
|
|
24
The following table sets forth certain operating data as a
percentage of net sales for the periods indicated, and the
increase (decrease) in each item of operating data between the
periods.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
|
Percent Increase (Decrease) | |
| |
|
| |
|
| |
| |
|
2002 | |
|
2003 | |
|
2004 | |
|
2002 to 2003 | |
|
2003 to 2004 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Net sales
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
22.1 |
% |
|
|
77.4 |
% |
|
Cost of sales
|
|
|
58.1 |
|
|
|
57.6 |
|
|
|
57.9 |
|
|
|
21.1 |
|
|
|
78.4 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Gross profit
|
|
|
41.9 |
|
|
|
42.4 |
|
|
|
42.1 |
|
|
|
23.6 |
|
|
|
76.1 |
|
|
Selling, general and administrative expenses
|
|
|
35.3 |
|
|
|
26.8 |
|
|
|
22.3 |
|
|
|
(7.3 |
) |
|
|
48.0 |
|
|
Litigation expense (income)
|
|
|
3.2 |
|
|
|
(0.4 |
) |
|
|
— |
|
|
|
* |
|
|
|
(100.0 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Income from operations
|
|
|
3.4 |
|
|
|
16.0 |
|
|
|
19.8 |
|
|
|
480.6 |
|
|
|
118.4 |
|
|
Interest expense and other
|
|
|
0.5 |
|
|
|
3.7 |
|
|
|
1.1 |
|
|
|
803.6 |
|
|
|
(50.8 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Income before income taxes and cumulative effect of a change in
accounting principle
|
|
|
2.9 |
|
|
|
12.3 |
|
|
|
18.7 |
|
|
|
423.3 |
|
|
|
170.2 |
|
|
Income taxes
|
|
|
1.2 |
|
|
|
4.7 |
|
|
|
6.8 |
|
|
|
368.1 |
|
|
|
156.3 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Income before cumulative effect of a change in accounting
principle
|
|
|
1.7 |
|
|
|
7.6 |
|
|
|
11.9 |
|
|
|
465.1 |
|
|
|
179.0 |
|
|
Cumulative effect of a change in accounting principle
|
|
|
(9.1 |
) |
|
|
— |
|
|
|
— |
|
|
|
* |
|
|
|
0.0 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net income (loss)
|
|
|
(7.4 |
)% |
|
|
7.6 |
% |
|
|
11.9 |
% |
|
|
* |
|
|
|
179.0 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| * |
Calculation of percentage change is not meaningful. |
|
|
|
Year Ended December 31, 2003 Compared to Year Ended
December 31, 2004 |
Overview. In 2004, we had net sales of
$214,787,000 and income from operations of $42,462,000 compared
to net sales of $121,055,000 and income from operations of
$19,438,000 in 2003. These results were primarily due to
increased demand for all three of our product lines during the
year.
Net Sales. Net sales increased by $93,732,000, or
77.4%, from $121,055,000 in 2003 to $214,787,000 in 2004. Net
sales increased in 2004 due primarily to: (1) an increase
in the number of units sold for each of our three brands,
resulting in a 51.6% overall increase in the volume of footwear
sold from 5,063,000 pairs in 2003 to 7,678,000 pairs in 2004,
and (2) the expansion of the Internet and catalog retailing
business. In addition, the weighted average wholesale selling
price per unit increased 13.3% from $23.03 in 2003 to $26.10 in
2004, caused by an increase in sales of UGG products, which
generally carry higher average selling prices, partially offset
by increased sales of Teva thongs, which generally carry a lower
average selling price than sales of our other products, and
lower average selling prices on the closeout sales in 2004
compared to 2003.
Net wholesale sales of Teva increased by $10,694,000, or 14.7%,
from $72,783,000 in 2003 to $83,477,000 in 2004. This increase
was primarily due to increased sales volume of sport sandals
resulting from an improvement in retail sell-through, increased
sales in the international markets, selective addition of new
distribution channels in our domestic market, increased sales
volume of thongs and slides and increased sales volume of
certain styles of the recently introduced closed-toe footwear
offerings. See “— Overview — Teva
Overview” above.
Net wholesale sales of UGG increased by $67,245,000, or 194.6%,
from $34,561,000 in 2003 to $101,806,000 in 2004. This was
largely as a result of the growing popularity of the brand,
significantly increased brand awareness and considerable
celebrity exposure, as well as the fulfillment of the pent-up
demand for the UGG product in the first half of 2004. We also
increased our sales of UGG products to the international
markets, resulting in an increase in international UGG sales of
$12,326,000, or 1269.4%, from $971,000 in 2003 to $13,297,000 in
2004. The UGG sales volume increase was also due to strong
retail sell-through, expansion of the product line to include
more women’s and kids’ boot styles and continued
geographical expansion across the U.S. See
“— Overview — UGG Overview” above.
25
Net wholesale sales of Simple increased by $2,423,000, or 33.6%,
from $7,210,000 in 2003 to $9,633,000 in 2004. This increase was
due to several factors, including strong initial sales to
retailers (sell-in) of the Simple shearling boots in the third
quarter of 2004. The increase in Simple sales in 2004 was also
due to a renewed interest in the Simple brand, including
continued growth in the sales of the Sugar and other sneaker
styles, and the successful introduction of the new line of
Simple clogs. The Simple sneaker and clog styles have continued
to retail well; however, while initial sell-in of the Simple
shearling boots was strong, the sell-through to consumers of
this type of boot at these price points, including sell-through
of similarly-priced products offered by competitors, was slow
and accordingly these shearling styles will not be carried
forward in the 2005 Simple product line. The sell-through of
these shearling boots, as well as similar products offered by
competitors, was not strong as the boots were mid-priced boots
with retail selling prices in the $50 to $80 range, which was
too close to the $110 selling price of the similar Classic boot
offering from UGG, which was by far the preferred brand by
consumers. See “— Overview — Simple
Overview” above.
Net sales of the Internet and catalog retailing business
increased by $13,370,000, or 205.7%, from $6,501,000 in 2003 to
$19,871,000 in 2004. In 2003, net sales of the Internet and
catalog retailing business included retail sales of Teva of
$3,687,000, UGG of $2,300,000 and Simple of $514,000. In 2004,
net sales of the Internet and catalog retailing business
included retail sales of Teva of $4,759,000, UGG of $14,415,000
and Simple of $697,000. The increase in net sales of the
Internet and catalog retailing business was due to the increased
demand for the underlying brands, increased awareness of the
Internet site and increased consumer acceptance of online
purchasing. Our Internet sales for UGG were especially strong,
increasing 526.7% in 2004 compared to 2003, as consumers who
were unable to find the UGG products at their local retailers
frequently searched the Internet for availability of the UGG
products, which further contributed to increased sales for our
Internet and catalog retailing business. See
“— Overview — Internet and Catalog
Retailing Overview” above.
International sales for all of our products increased by
$17,023,000, or 76.2%, from $22,345,000 in 2003 to $39,368,000
in 2004, representing 18.5% of net sales in 2003 and 18.3% of
net sales in 2004. The higher dollar amount of international
sales resulted from our sales of more UGG product to the
international markets in order to begin to expand in those
territories, our international expansion strategy and the lower
relative pricing to European customers due to the strength of
the Euro.
Gross Profit. Gross profit increased by
$39,088,000, or 76.1%, from $51,345,000 in 2003 to $90,433,000
in 2004. As a percentage of net sales, gross profit margin
decreased slightly from 42.4% in 2003 to 42.1% in 2004. The
decrease in gross profit margin was due in part to the
significant increase in UGG sales during 2004, which generally
carry a lower gross margin than Teva, an increase in airfreight
costs in our efforts to improve deliveries of UGG products, and
the non-recurrence of last year’s gain caused by the
favorable impact of selling in Euros in the European markets in
2003, whereas all sales were denominated in U.S. dollars in
2004. These factors were partially offset by a higher volume of
Internet sales, which carry a higher gross margin than items
sold at wholesale prices, a reduced impact of closeout sales,
lower overhead costs per pair, and the addition of approximately
$950,000 of net license revenues, primarily related to UGG
handbags and outerwear.
Selling, General and Administrative Expenses.
Selling, general and administrative expenses, or SG&A,
increased by $15,564,000, or 48.0%, from $32,407,000 in 2003 to
$47,971,000 in 2004. As a percentage of net sales, SG&A
decreased from 26.8% in 2003 to 22.3% in 2004 largely due to the
continued leverage of operating costs on the increased sales
volume. The increase in the dollar amount of SG&A expenses
was due to a combination of factors, including increased sales
commissions of $3,817,000 on the higher sales volume; increased
payroll costs of $3,764,000 attributed to increased performance
compensation on the significantly improved operating results
combined with an increase in headcount to support the
substantial growth; increased warehouse and distribution costs
of $1,563,000; higher legal costs associated with increased
efforts to protect our intellectual property rights of
$1,523,000; increased costs of our growing Internet and catalog
retailing business of $1,442,000; increased marketing and
advertising costs of $1,067,000; and, other general increases in
costs to support the increased sales.
26
Litigation Income. In 2003, we received a
favorable resolution in a European anti-dumping duties matter in
the amount of $500,000.
Income from Operations. Income from operations
increased by $23,024,000, or 118.4%, from $19,438,000 in 2003 to
$42,462,000 in 2004. This was due primarily to the factors
discussed above.
Income from operations of Teva wholesale increased by
$3,162,000, or 14.5%, from $21,739,000 in 2003 to $24,901,000 in
2004. This increase was largely due to the $10,694,000, or
14.7%, increase in net sales and a reduction in bad debt expense
of $547,000. These were partially offset by increases in Teva
selling commissions of $593,000 on the higher sales volume,
increased payroll costs of $256,000 and the non-recurrence of
last year’s gain caused by the favorable impact of selling
in Euros in the European markets in 2003, whereas all sales were
denominated in U.S. dollars in 2004.
Income from operations of UGG wholesale increased by
$21,672,000, or 216.7%, from $10,002,000 in 2003 to $31,674,000
in 2004. This was largely due to the $67,245,000, or 194.6%
increase in net sales, partially offset by a $3,190,000 increase
in sales commissions on the higher sales volume, increased
airfreight costs of $3,374,000, increased payroll costs of
$985,000 and increased advertising and marketing costs of
$1,161,000.
Income from operations of Simple wholesale increased by
$1,221,000 from a loss from operations of $1,176,000 in 2003 to
income from operations of $45,000 in 2004. This was primarily
due to a $2,423,000, or 33.6%, increase in net sales during the
period combined with an increase in gross margin resulting from
a reduced impact of inventory write-downs and closeout sales in
2004 compared to 2003.
Income from operations of our Internet and catalog business
increased by $4,385,000, or 382.0%, from $1,148,000 in 2003 to
$5,533,000 in 2004. This was largely due to the $13,370,000, or
205.7%, increase in sales during the period, partially offset by
a corresponding increase in related costs.
Unallocated overhead costs increased by $7,416,000, or 60.4%,
from $12,275,000 in 2003 to $19,691,000 in 2004. These costs
included increased payroll costs, increased warehouse and
distribution costs and increased legal costs associated with
protection of our intellectual property rights that support our
business segments.
Other Expense (Income). Net interest expense was
$4,557,000 in 2003 compared with $2,236,000 in 2004. The
interest expense resulted principally from the borrowings
incurred to finance our purchase of the Teva Rights in November
2002. The decrease in interest expense for 2004 reflects the
repayment of outstanding borrowings, partially through the
equity offering in May 2004, offset by the prepayment penalties
and the write-off of a pro rata share of the previously
capitalized loan costs incurred as a result of paying down our
debt early. Other expense (income) exclusive of net interest
expense was not material in either period.
Income Taxes. In 2003, income tax expense was
$5,730,000, representing an effective income tax rate of 38.5%.
In 2004, income tax expense was $14,684,000 representing an
effective income tax rate of 36.5%. The decrease in the
effective tax rate was primarily due to the restructuring our
international operations, which resulted in a reduced effective
tax rate.
Net Income. In 2003, net income was $9,154,000, or
$0.77 per diluted share. In 2004, net income was
$25,539,000, or $2.10 per diluted share. The dramatic
increases in net income and earnings per diluted share resulted
from the factors discussed above.
|
|
|
Year Ended December 31, 2002 Compared to Year Ended
December 31, 2003 |
Overview. In 2003, we had net sales of
$121,055,000 and income from operations of $19,438,000 compared
to net sales of $99,107,000 and income from operations of
$3,348,000 in 2002. These results were due in part to increased
demand for our Teva and UGG product lines, partially offset by a
decline in net sales of our Simple product line. In addition,
2003 was the first full year of operations following our
acquisition in November 2002 of the Teva Rights, which resulted
in the elimination of royalty and other license costs of
$4,495,000 and resulted in net sales of $6,501,000 attributed to
our Internet and catalog retailing business that was a part of
the Teva Rights acquisition. The acquisition of the Teva Rights
resulted in significant new borrowings and incremental interest
expense in 2003 of $4,557,000.
27
Net Sales. Net sales increased by $21,948,000, or
22.1%, from $99,107,000 in 2002 to $121,055,000 in 2003. Net
sales increased in 2003 due primarily to: (1) an increase
in the number of units sold of Teva and UGG offset in part by a
decline in the number of units sold of Simple, resulting in a
22.9% overall increase in the volume of footwear sold from
4,120,000 pairs in 2002 to 5,063,000 pairs in 2003, and
(2) the inclusion of the Internet and catalog retailing
business obtained as part of the Teva Rights acquisition. This
increase in unit sales volume was partially offset by a 2.7%
decline in average selling price per unit from $23.66 in 2002 to
$23.03 in 2003.
Net wholesale sales of Teva increased by $7,934,000, or 12.2%,
from $64,849,000 in 2002 to $72,783,000 in 2003. This increase
was primarily due to increased sales volume of sport sandals
resulting from an improvement in retail sell-through, the
favorable impact of the strong Euro on European sales, selective
addition of new distribution channels in our domestic market,
increased sales volume of thongs and slides and increased sales
volume of certain styles of the recently introduced closed-toe
footwear offerings. See “— Overview —
Teva Overview” above.
Net wholesale sales of UGG increased by $11,070,000, or 47.1%,
from $23,491,000 in 2002 to $34,561,000 in 2003. This was
largely as a result of heightened demand in 2003 caused by the
growing popularity of the brand, significantly increased brand
awareness and considerable celebrity exposure. The UGG sales
volume increase was also due to strong retail sell-through,
expansion of the product line to include more casual footwear
styles and continued geographical expansion across the
U.S. See “— Overview — UGG
Overview” above.
Net wholesale sales of Simple decreased by $2,949,000, or 29.0%,
from $10,159,000 in 2002 to $7,210,000 in 2003. This decline was
caused by a variety of factors, including competition in the
casual footwear market and a $668,000 decline in sales volume in
the international markets. These volume declines were partially
offset by a $469,000 increase in sales volume of the moderately
priced Simple suede, fleece-lined boot, which we introduced in
the fourth quarter of 2003. See
“— Overview — Simple Overview”
above.
For the period from the November 25, 2002 acquisition date
through December 31, 2002, net sales of the Internet and
catalog retailing business totaled $608,000, including retail
sales of Teva of $255,000, UGG of $310,000 and Simple of
$43,000. In 2003, net sales of the Internet and catalog
retailing business aggregated $6,501,000, including retail sales
of Teva of $3,687,000, UGG of $2,300,000 and Simple of $514,000.
See “— Overview — Internet and Catalog
Retailing Overview” above.
International sales for all of our products increased by
$1,516,000, or 7.3%, from $20,829,000 in 2002 to $22,345,000 in
2003, representing 21.0% of net sales in 2002 and 18.5% of net
sales in 2003. The higher dollar amount of international sales
resulted from our international expansion strategy in 2003
combined with the favorable impact of the strong Euro while the
lower percentage of international sales to net sales for 2003
reflects the growth of our domestic business.
Gross Profit. Gross profit increased by
$9,815,000, or 23.6%, from $41,530,000 in 2002 to $51,345,000 in
2003. As a percentage of net sales, gross profit margin
increased from 41.9% in 2002 to 42.4% in 2003. The increase in
gross margin was due to several factors, including an above
average gross margin at the newly acquired Internet and catalog
retailing business, the favorable impact of the strong Euro and
lower production overhead costs per pair, partially offset by an
increase in closeout sales.
Selling, General and Administrative Expenses.
Selling, general and administrative expenses, or SG&A,
decreased by $2,547,000, or 7.3%, from $34,954,000 in 2002 to
$32,407,000 in 2003. As a percentage of net sales, SG&A
decreased from 35.3% in 2002 to 26.8% in 2003. The decrease in
the dollar amount of SG&A expenses was primarily due to the
elimination of Teva royalty expenses and related Teva license
cost amortization of $4,495,000. In addition, we had a
$1,281,000 decrease in bad debt expense which was largely due to
improvements in our credit and collections staff, improvements
in our credit and collections policies and procedures and the
non-recurrence of the 2002 collections difficulties encountered
during the initial stages of the implementation of a new
enterprise resource planning, or ERP, computer system. While we
believe these improvements will continue to benefit our future
collections efforts, we can provide no assurances about the
levels of future bad debt expenses, as many other factors
contribute to our overall bad debt risk including
28
the future financial strength of our customers, which is
difficult to predict. We also experienced a reduction in overall
advertising expenses of $862,000. These cost reductions were
partially offset by increased operating expenses related to the
newly acquired Internet and catalog retailing business of
$1,715,000. SG&A expenses as a percentage of net sales
decreased in 2003 due to the overall reduction in SG&A
expenses as discussed above as well as the leverage of our fixed
costs over a larger revenue base.
Litigation Expense (Income). In 2002, we recorded
special litigation charges of $3,228,000 related to a lawsuit
filed against us in the state of Montana in 1995. The case was
settled and paid in full in November 2002. In 2003, we received
a favorable $500,000 resolution in a European anti-dumping
duties matter.
Income from Operations. Income from operations
increased by $16,090,000, or 480.6%, from $3,348,000 in 2002 to
$19,438,000 in 2003. This was due primarily to:
(1) increased gross profit contribution of $9,815,000,
(2) elimination of the Teva royalty expenses and related
Teva license cost amortization of $4,495,000, (3) the
non-recurrence of the 2002 litigation costs of $3,228,000 and
(4) improved profitability resulting from the acquisition
of the Internet and catalog retailing business in November 2003
of approximately $954,000.
Income from operations of Teva wholesale increased by
$9,728,000, or 81.0%, from $12,011,000 in 2002 to $21,739,000 in
2003. This increase was largely due to the $7,934,000 increase
in net sales, the elimination of $3,739,000 of Teva royalty
expense and $756,000 of Teva license cost amortization, a
decrease in Teva advertising and marketing costs, and a
reduction in bad debt expense of $965,000. These were partially
offset by increases in Teva selling commissions on the higher
sales volume and increased payroll costs of $783,000.
Income from operations of UGG wholesale increased by $3,413,000,
or 51.8%, from $6,589,000 in 2002 to $10,002,000 in 2003. This
was largely due to the $11,070,000 increase in net sales,
partially offset by a $583,000 increase in sales commissions on
the higher sales volume, increased payroll costs of $232,000,
increased advertising and marketing costs and the non-recurrence
of a $300,000 chargeback received from a factory in 2002.
Income from operations of Simple wholesale decreased by
$1,455,000 from income from operations of $279,000 in 2002 to a
loss from operations of $1,176,000 in 2003. This was primarily
due to a $2,949,000 decline in net sales during the period
attributed to both the domestic and international markets. In
addition, the Simple brand was negatively affected by the
increased impact of closeout sales and increased payroll costs
in 2003.
Income from operations of our Internet and catalog business
increased by $954,000, or 491.8%, from $194,000 for the period
from the November 25, 2002 acquisition date through
December 31, 2002 to $1,148,000 in 2003. This was largely
due to the full year impact during 2003 and the general
continued growth in popularity of online sales.
Unallocated overhead costs decreased by $3,450,000, or 21.9%,
from $15,725,000 in 2002 to $12,275,000 in 2003. This was
largely due to the net change in litigation expense (income) of
$3,728,000 between 2002 and 2003.
Other Expense (Income). Net interest expense was
$406,000 in 2002 compared with a net interest expense of
$4,557,000 in 2003. This was primarily due to our significantly
increased borrowings in order to finance our purchase of the
Teva Rights in November 2002. In addition, in connection with
early repayments of $2,000,000 of subordinated notes in June
2003 and $2,000,000 in December 2003, we incurred approximately
$380,000 of expenses, including prepayment penalties and the
write-off of a pro rata share of the previously capitalized loan
costs. Other expense (income) exclusive of interest expense
(income) was not material in either year.
Income Taxes. In 2002, income tax expense was
$1,224,000, representing an effective income tax rate of 43.0%.
In 2003, income tax expense was $5,730,000 representing an
effective income tax rate of 38.5%. The decrease in the
effective tax rate was primarily due to two factors. First, the
rate reduction occurred as certain non-deductible Teva license
amortization costs were eliminated in connection with the Teva
Rights
29
acquisition. Second, we restructured our international
operations, which resulted in a reduced effective tax rate.
Net Income. On January 1, 2002, we
implemented Statement of Financial Accounting Standards, or
SFAS, No. 142, Goodwill and Other Intangible Assets,
which requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized to earnings but
instead be reviewed periodically for impairment. The
implementation of SFAS No. 142 resulted in a goodwill
impairment charge of $8,973,000 (net of the related income tax
benefit of $843,000), or $0.92 per diluted share, during
2002. This non-cash impairment charge included a write down of
approximately $1,200,000, on an after tax basis, for Simple
goodwill and approximately $7,800,000 for UGG goodwill. We
recorded the impairment charge as a cumulative effect of a
change in accounting principle in the accompanying consolidated
statement of operations for 2002. In 2002, net income before
cumulative effect of a change in accounting principle was
$1,620,000, or $0.17 per diluted share, and the net loss
after the cumulative effect of a change in accounting principle
was $7,353,000, or $0.75 per diluted share. In 2003, net
income was $9,154,000, or $0.77 per diluted share.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements other than operating
leases. See “— Contractual Obligations”
below. We do not believe that these operating leases are
material to our current or future financial condition, results
of operations, liquidity, capital resources or capital
expenditures.
Liquidity and Capital Resources
In May 2004, we completed a follow-on public stock offering and
used a portion of the proceeds to repay all outstanding
borrowings, including all debt associated with the acquisition
of the Teva Rights. We finance our working capital and operating
needs using a combination of the proceeds from the 2004 stock
offering, cash generated from operations and the credit
availability under our $20,000,000 revolving credit facility.
The seasonality of our business requires us to build inventory
levels in anticipation of the sales for the coming season. Teva
generally begins to build inventory levels beginning in the
fourth quarter and first quarter in anticipation of the spring
selling season that occurs in the first and second quarters,
whereas UGG generally begins to build its inventories in the
second quarter and third quarter to support sales for the fall
and winter selling seasons, which historically occur during the
third and fourth quarters. However, given the currently
increased demand for UGG products, we have also built our
December 31, 2004 inventory levels to support the increased
sales expectations for UGG’s Spring 2005 season. Our Simple
product line is less seasonal and less significant to total
inventory than our Teva and UGG lines.
Our cash flow cycle includes the purchase of these inventories,
the subsequent sale of the inventories and the eventual
collection of the resulting accounts receivable. As a result,
our working capital requirements begin when we purchase the
inventories and continue until we ultimately collect the
resulting receivables. Given the seasonality of our Teva and UGG
brands, our working capital requirements fluctuate significantly
throughout the year. The cash required to fund these working
capital fluctuations is generally provided using a combination
of our internal cash flows and borrowings under our revolving
credit facility.
Cash from Operating Activities. Net cash provided
by operating activities decreased from $17,627,000 in 2003 to
$12,416,000 in 2004. The decrease in net cash provided by
operating activities in 2004 was largely due to a larger
increase in trade accounts receivable of $25,394,000 resulting
from significant year end sales and a larger increase in
inventory of $16,420,000 in 2004, partially offset by an
improvement in net earnings of $16,385,000, a larger increase in
trade accounts payable and accrued expenses of $10,328,000 and
the $6,030,000 income tax benefit attributable to the exercise
of stock options in 2004. Net working capital at
December 31, 2004 improved by $47,051,000, or 206.3%, from
$22,803,000 in 2003 to $69,854,000 in 2004, primarily as a
result of the sale of common stock in our follow-on public stock
offering in May 2004.
Cash from Investing Activities. Net cash used in
investing activities was $705,000 in 2003 and $16,873,000 in
2004. Net cash used in investing activities in 2004 was
primarily a result of $15,475,000 of net purchases of short-term
investments in order to improve the yield on available cash, and
$1,441,000 of
30
purchases of property and equipment. In 2003, net cash used in
investing activities was comprised almost entirely of purchases
of property and equipment. The increase in purchases of property
and equipment in 2004 compared to 2003 occurred as we replaced
tradeshow booths and our phone system in 2004 and we began the
expansion and build out of our distribution center.
Cash from Financing Activities. In 2003, net cash
used in financing activities aggregated $14,091,000, including
the repayment of long-term debt of $8,934,000 and the repurchase
of all outstanding convertible preferred stock for $5,938,000,
offset by proceeds from stock issuances of $781,000. In 2004,
net cash provided by financing activities aggregated $8,213,000,
including cash received from the issuances of common stock of
$38,500,000, primarily in connection with the follow-on public
stock offering in May 2004, which was used, in part, to pay off
all remaining long-term debt.
Our liquidity consists primarily of cash, short-term
investments, trade accounts receivable, inventories and a
revolving credit facility. At December 31, 2004, working
capital was $69,854,000 including $10,379,000 of cash and
$15,475,000 of short-term investments. Cash provided by
operating activities aggregated $12,416,000 in 2004. Trade
accounts receivable increased by 123.8% from $18,745,000 at
December 31, 2003 to $41,957,000 at December 31, 2004
largely due to the 107.7% increase in net sales during the
fourth quarter ended December 31, 2004 compared to the
fourth quarter of last year. In addition, the fourth quarter
sales were weighted more heavily toward the end of the fourth
quarter, with a 130.5% increase in sales in the month of
December of 2004 compared to December 2003, which further
contributed to the increase in trade accounts receivable at year
end. Accounts receivable turnover improved from 6.1 times in
2003 to 7.7 times in 2004. This improvement resulted from the
hiring of more qualified credit and collections staff, the
improvement in collections policies and procedures and the
strength of our brands, which provides strong incentive for
customers to pay us timely so that we can avoid placing then on
credit hold, which would delay shipments of their future orders.
During the same period, inventories increased by 68.1% from
$18,004,000 at December 31, 2003 to $30,260,000 at
December 31, 2004, reflecting a $1,703,000 increase in Teva
inventory, an $11,083,000 increase in UGG inventory and a
$530,000 decrease in Simple inventory at year end. Overall,
inventory turnover improved from 3.6 times in 2003 to 5.5 times
in 2004. The $1,703,000 increase in Teva inventory occurred
because the factories delivered more Teva products in 2004 for
the 2005 season than they did in 2003 for the 2004 season, due
to our efforts to improve our on-time deliveries of complete
orders to our customers earlier for the 2005 spring season. The
increase in Teva inventory was also needed to support an
expected increase in Teva sales for the first quarter of 2005
compared to actual sales for the first quarter of 2004. The
$11,083,000 increase in UGG inventory at December 31, 2004
is in support of our expectations for significantly higher UGG
sales in the first quarter of 2005, resulting from the carryover
of holiday sales as well as the deliveries of the first Spring
product offering for UGG. The $530,000 decrease in Simple
inventory at December 31, 2004 reflects our continuing
efforts to reduce the levels of our closeout inventories, to
bring our Simple inventory into stock closer to when we expect
it to be shipped to our customers, and to refocus the line and
the related inventory levels on a fewer number of core styles.
Our revolving credit facility with Comerica Bank-California
provides for a maximum availability of $20,000,000 subject to a
borrowing base. In general, the borrowing base is equal to 75%
of eligible accounts receivable, as defined, and 50% of eligible
inventory, as defined. Up to $10,000,000 of borrowings may be in
the form of letters of credit. The facility bears interest at
the lender’s prime rate (5.25% at December 31, 2004)
or, at our option, at LIBOR (2.40% at December 31, 2004)
plus 1.00% to 2.50%, depending on our ratio of liabilities to
earnings before interest, taxes, depreciation and amortization,
or EBITDA, and is secured by substantially all of our assets.
The facility includes annual commitment fees, which were
$100,000 for 2004 and $60,000 for 2005. The facility expires on
June 1, 2006. At December 31, 2004, we had no
outstanding borrowings under the facility, no foreign currency
reserves for outstanding forward contracts and no outstanding
letters of credit. We had credit availability under the facility
of $20,000,000 at December 31, 2004.
On November 25, 2002, we completed the acquisition of the
Teva Rights from Mark Thatcher and his wholly owned company,
Teva Sport Sandals, Inc., for approximately $62,300,000,
including transaction costs
31
of approximately $300,000. We paid cash in the amount of
$43,000,000 and issued to Mr. Thatcher a junior
subordinated note in the principal amount of $13,000,000,
convertible preferred stock of $5,500,000, 100,000 shares
of common stock valued at approximately $368,000 and options to
purchase 100,000 shares of common stock valued at
approximately $187,000. The $13,000,000 junior subordinated note
included a coupon interest rate of 7.00% and an additional
interest rate of 2.00%, which was to be accrued and paid at the
maturity date in 2008. The note allowed prepayment without
penalty. Concurrent with the acquisition, we entered into an
employment agreement for advice on Teva matters with
Mr. Thatcher through November 2007, which provides for an
annual base salary of $276,875, and we received a non-compete
agreement from Mr. Thatcher, which expires two years after
termination of employment.
In connection with the Teva Rights acquisition, we entered into
two additional financing arrangements, including a $7,000,000
term loan from Comerica Bank-California and a $14,000,000
subordinated note from The Peninsula Fund III Limited
Partnership, both unrelated parties.
As mentioned above, in May 2004 we completed a follow-on public
offering of our common stock in which we sold
1,500,000 shares of newly issued common stock and
2,000,000 shares of our common stock were sold by selling
stockholders. Using a portion of the proceeds from this stock
offering, as well as the cash flow from operations, between
January 2003 and June 2004 we repurchased all of the outstanding
convertible preferred stock and repaid all of the outstanding
debt incurred for the acquistion of the Teva Rights.
Upon the completion of the public offering and repayment of our
outstanding debt, the borrowing availability under our revolving
credit facility became the full $20,000,000 amount of the
facility, subject to the borrowing base lending requirements.
The agreements underlying the bank credit facility contain
several financial covenants including a quick ratio requirement,
profitability requirements and a tangible net worth requirement,
among others, as well as a prohibition on the payment of
dividends. We were in compliance with all covenants at
December 31, 2004, and remain so as of the date of this
report.
Capital expenditures totaled $1,441,000 in 2004 and related
primarily to the replacement of certain computer equipment and
trade show booths, the upgrade of our phone system and the build
out of our newly leased distribution center. We currently have
no material commitments for future capital expenditures but
estimate that the capital expenditures for 2005 will range from
$2,500,000 to $3,500,000 and will include further distribution
center expansion, a new UGG trade show booth and upgrades of
certain other computer equipment. The actual amount of capital
expenditures for 2005 may differ from this estimate, largely
depending on any unforeseen needs to replace existing assets.
Contractual Obligations. The following table
summarizes our contractual obligations at December 31, 2004
and the effects such obligations are expected to have on
liquidity and cash flow in future periods.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Payments Due by Period | |
| |
|
| |
| |
|
|
|
Less than | |
|
|
|
More than | |
| |
|
Total | |
|
1 Year | |
|
1-3 Years | |
|
3-5 Years | |
|
5 Years | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Operating lease obligations
|
|
$ |
8,144,000 |
|
|
$ |
2,274,000 |
|
|
$ |
3,690,000 |
|
|
$ |
2,180,000 |
|
|
|
— |
|
We previously had significant interest payment requirements on
the long-term debt obligations discussed above. However, since
we paid off all the outstanding balances on our long-term debt,
we have no future interest payments scheduled.
We believe that internally generated funds, the available
borrowings under our existing credit facilities and cash on hand
will provide sufficient liquidity to enable us to meet our
current and foreseeable working capital requirements. However,
risks and uncertainties that could impact our ability to
maintain our cash position include our growth rate, the
continued strength of our brands, our ability to respond to
changes in consumer preferences, our ability to collect our
receivables in a timely manner, our ability to effectively
manage our inventories and the volume of letters of credit used
to purchase product, among others. See “Risk Factors”
for a discussion of additional factors that may affect our
working capital position.
32
Impact of Inflation
We believe that the relatively moderate rates of inflation in
recent years have not had a significant impact on our net sales
or profitability.
Critical Accounting Policies
Revenue Recognition. We recognize revenue when
products are shipped and the customer takes title and assumes
risk of loss, collection of relevant receivable is probable,
persuasive evidence of an arrangement exists, and the sales
price is fixed or determinable. Allowances for estimated
returns, discounts, and bad debts are provided for when related
revenue is recorded. Amounts billed for shipping and handling
costs are recorded as a component of net sales, while the
related costs paid to third-party shipping companies are
recorded as a cost of sales.
In addition, the preparation of financial statements in
conformity with accounting principles generally accepted in the
U.S. requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities,
disclosures about contingent liabilities and the reported
amounts of net sales and expenses during the reporting period.
Management bases these estimates and assumptions upon historical
experience, existing, known circumstances, authoritative
accounting pronouncements and other factors that management
believes to be reasonable under the circumstances. Management
reasonably could use different estimates and assumptions, and
changes in estimates and assumptions could occur from period to
period, with the result in each case being a potential material
change in the financial statement presentation of our financial
condition or results of operations. We have historically been
accurate in our estimates used for the reserves and allowances
below. We believe that the estimates and assumptions below are
among those most important to an understanding of our
consolidated financial statements contained in this report.
Allowance for Doubtful Accounts. We provide a
reserve against trade accounts receivable for estimated losses
that may result from customers’ inability to pay. We
determine the amount of the reserve by analyzing known
uncollectible accounts, aged trade accounts receivables,
economic conditions, historical experience and the
customers’ credit-worthiness. Trade accounts receivable
that are subsequently determined to be uncollectible are charged
or written off against this reserve. The reserve includes
specific reserves for accounts, which are identified as
potentially uncollectible, plus a general reserve for the
balance of accounts. Reserves have been fully established for
all expected or probable losses of this nature. The gross trade
accounts receivable balance was $45,238,000 and the allowance
for doubtful accounts was $1,796,000 at December 31, 2004,
compared to gross trade accounts receivable of $20,871,000 and
allowance for doubtful accounts of $1,581,000 at
December 31, 2003. Our use of different estimates and
assumptions could produce different financial results. For
example, a 1.0% change in the rate used to estimate the reserve
for the accounts not specifically identified as uncollectible
would change the allowance for doubtful accounts at
December 31, 2004 by $390,000.
Reserve for Sales Discounts. A significant portion
of our domestic net sales and resulting trade accounts
receivable reflects a discount that the customers may take,
generally based upon meeting certain order, shipment and payment
timelines. We estimate the amount of the discounts that are
expected to be taken against the period-end trade accounts
receivable and we record a corresponding reserve for sales
discounts. We determine the amount of the reserve for sales
discounts considering the amounts of available discounts in the
period-end accounts receivable aging and historical discount
experience, among other factors. The reserve for sales discounts
was approximately $1,485,000 at December 31, 2004 and
$545,000 at December 31, 2003. Our use of different
estimates and assumptions could produce different financial
results. For example a 10.0% change in the estimate of the
percentage of accounts that will ultimately take their discount
would change the reserve for sales discounts at
December 31, 2004 by $148,000.
Allowance for Estimated Returns. We record an
allowance for anticipated future returns of goods shipped prior
to period-end. In general, we accept returns for damaged or
defective products but discourage returns for other reasons. We
base the amount of the allowance on any approved customer
requests for returns, historical returns experience and any
recent events that could result in a change in historical
returns rates, among other factors. The allowance for returns
was $1,731,000 at December 31, 2004 and $1,245,000 at
33
December 31, 2003. Our use of different estimates and
assumptions could produce different financial results. For
example, a 1.0% change in the rate used to estimate the
percentage of sales expected to ultimately be returned would
change the reserve for returns at December 31, 2004 by
approximately $595,000.
Inventory Write-Downs. Inventories are stated at
lower of cost or market. We review the various items in
inventory on a regular basis for excess, obsolete and impaired
inventory. In doing so, we write the inventory down to the lower
of cost or estimated future net selling prices. At
December 31, 2004, inventories were stated at $30,260,000,
net of inventory write-downs of $1,176,000. At December 31,
2003, inventories were stated at $18,004,000, net of inventory
write-downs of $882,000. Our use of different estimates and
assumptions could produce different financial results. For
example, a 10.0% change in the estimated selling prices of our
potentially obsolete inventory would change the inventory
write-down amount at December 31, 2004 by approximately
$310,000.
Valuation of Goodwill, Intangible and Other Long-Lived
Assets. We periodically assess the impairment of
goodwill, intangible and other long-lived assets based on
assumptions and judgments regarding the carrying value of these
assets. We test goodwill and nonamortizable intangible assets
for impairment on an annual basis based on the fair value of the
reporting unit (goodwill) or assets (nonamortizable
intangibles) compared to its carrying value. We consider other
long-lived assets to be impaired if we determine that the
carrying value may not be recoverable. Among other
considerations, we consider the following factors:
|
|
|
| |
• |
the assets’ ability to continue to generate income from
operations and positive cash flow in future periods; |
| |
| |
• |
our future plans regarding utilization of the assets; |
| |
| |
• |
any changes in legal ownership of rights to the assets; and |
| |
| |
• |
changes in consumer demand or acceptance of the related brand
names, products or features associated with the assets. |
If we consider the assets to be impaired, we recognize an
impairment loss equal to the amount by which the carrying value
of the assets exceeds the estimated fair value of the assets. In
addition, as it relates to long-lived assets, we base the useful
lives and related amortization or depreciation expense on the
estimate of the period that the assets will generate sales or
otherwise be used by us.
In 2002, SFAS No. 142, “Goodwill and Other
Intangible Assets,” became effective and as a result,
we recorded a goodwill impairment charge in the first quarter of
2002. See note 13 to the accompanying consolidated
financial statements.
Recent Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board, or
FASB, issued FASB Interpretation, or FIN No. 46,
Consolidation of Variable Interest Entities, an interpretation
of Accounting Research Bulletin, or ARB No. 51.
FIN No. 46 addresses the consolidation by business
enterprises of variable interest entities as defined in the
Interpretation. FIN No. 46 generally applies
immediately to variable interests in variable interest entities
created after January 31, 2003 and to variable interests in
variable interest entities obtained after January 31, 2003.
The application of FIN No. 46 did not have a material
effect on our consolidated financial statements. In December
2003, the FASB revised FIN No. 46 to exempt certain
entities from its requirements and to clarify certain issues
arising during the implementation of FIN No. 46. The
adoption of this revised interpretation in the first quarter of
2004 did not have any impact on our consolidated financial
statements.
On October 22, 2004, the American Jobs Creation Act
(AJCA) was signed into law. The AJCA includes a special
one-time 85 percent dividends received deduction for
certain foreign earnings that are repatriated. In December 2004,
the FASB issued FASB Staff Position No. FAS 109-2 (FSP
FAS 109-2), “Accounting and Disclosure Guidance for
the Foreign Earnings Repatriation Provision within the American
Jobs Creation Act of 2004.” FSP FAS 109-2 provides
accounting and disclosure guidance for this repatriation
provision. We have begun our evaluation of the effects of this
provision. Although FSP FAS 109-2 is effective immediately,
34
we will not be able to complete our evaluation until after
Congress or the Treasury Department provides additional
clarifying language on key elements of the provision. We expect
to complete our evaluation of the effects of the repatriation
provision within a reasonable period of time following the
publication of the additional clarifying language.
In November 2004, the FASB issued Statement of Financial
Accounting Standards, or SFAS No. 151, “Inventory
Costs — An Amendment of ARB No. 43,
Chapter 4”. SFAS No. 151 amends the guidance
in ARB No. 43, Chapter 4, “Inventory
Pricing”, to clarify the accounting for abnormal amounts of
idle facility expense, freight, handling costs, and wasted
material (spoilage). SFAS No. 151 is effective for
fiscal years beginning after June 15, 2005 and is required
to be adopted in the first quarter of fiscal 2006. We do not
expect the adoption of SFAS No. 151 to have a material
impact on our consolidated financial statements.
In December 2004, the FASB issued SFAS No. 123R
(revised 2004), “Share-Based Payment”.
SFAS No. 123R supersedes APB Opinion No. 25, and
requires all share-based payments to employees, including grants
of employee stock options, to be recognized in the financial
statements based on their fair values beginning with the first
interim or annual period after June 15, 2005. The pro forma
disclosure permitted under SFAS No. 123 will no longer
be an alternative to financial statement recognition.
SFAS No. 123R requires the determination of the fair
value of the share-based compensation at the grant date and the
recognition of the related expense over the period in which the
share-based compensation vests. We are required to adopt the
provisions of SFAS No. 123R effective July 1,
2005. The adoption of this Statement is expected to result in an
additional expense for the year ending December 31, 2005 of
approximately $400,000, which will be recorded in the third and
fourth quarters of 2005.
35
RISK FACTORS
Our short- and long-term success is subject to many factors
beyond our control. Stockholders and potential stockholders
should carefully consider the following risk factors in addition
to the other information contained in this report and the
information incorporated by reference in this report. If any of
the following risks occur, our business, financial condition or
results of operations could be adversely affected. In that case,
the value of our common stock could decline and stockholders and
potential stockholders may lose all or part of their
investment.
Risks Relating to Our Business
|
|
|
Our success depends on our ability to anticipate fashion
trends. |
Our success depends largely on the continued strength of our
Teva, UGG and Simple brands and on our ability to anticipate,
understand and react to the rapidly changing fashion tastes of
footwear consumers and to provide appealing merchandise in a
timely manner. Our products must appeal to a broad range of
consumers whose preferences cannot be predicted with certainty
and are subject to rapid change. We are also dependent on
customer receptivity to our products and marketing strategy.
There can be no assurance that consumers will continue to prefer
our brands, that we will respond quickly enough to changes in
consumer preferences or that we will successfully introduce new
models and styles of footwear. Achieving market acceptance for
new products also will likely require us to exert substantial
marketing and product development efforts and expend significant
funds to create consumer demand. A failure to introduce new
products that gain market acceptance would erode our competitive
position, which would reduce our profits and could adversely
affect the image of our brands, resulting in long-term harm to
our business.
|
|
|
Our UGG brand may not continue to grow at the same rate it
has experienced in the recent past. |
Our UGG brand has experienced strong growth over the past few
years, with net wholesale sales of UGG products having increased
from $23,491,000 in 2002 to $101,806,000 in 2004, representing a
compound annual growth rate of 108.2%. We do not expect to
sustain this growth rate in the future. UGG may be a fashion
item that could go out of style at any time. UGG represents a
significant portion of our business, and if UGG sales were to
decline or to fail to increase in the future, our overall
financial performance would be adversely affected.
|
|
|
We may experience shortages of top grade sheepskin, which
could interrupt product manufacturing and increase product
costs. |
We depend on a limited number of key resources for sheepskin,
the principal raw material for our UGG products. In 2004, four
suppliers provided all of the sheepskin purchased by our
independent manufacturers. The top grade sheepskin used in UGG
footwear is in high demand and limited supply. In addition,
sheep are susceptible to hoof and mouth disease, which can
result in the extermination of an infected herd and could have a
material adverse effect on the availability of top grade
sheepskin for our products. Additionally, the supply of
sheepskin can be adversely impacted by drought conditions. Our
potential inability to obtain top grade sheepskin for UGG
products could impair our ability to meet our production
requirements for UGG in a timely manner and could lead to
inventory shortages, which can result in lost potential sales,
delays in shipments to customers, strain on our relationships
with customers and diminished brand loyalty. Additionally, there
have been significant increases in the prices of top grade
sheepskin as the demand for this material has increased. Any
further price increases will likely raise our costs, increase
our costs of sales and decrease our profitability unless we are
able to pass higher prices on to our customers.
|
|
|
If we do not accurately forecast consumer demand, we may have
excess inventory to liquidate or have difficulty filling our
customers’ orders. |
Because the footwear industry has relatively long lead times for
design and production, we must commit to production tooling and
production volumes many months before consumer tastes become
apparent. The
36
footwear industry is subject to fashion risks and rapid changes
in consumer preferences, as well as the effects of weather,
general market conditions and other factors affecting demand.
Our large number of models, colors and sizes in our three
product lines exacerbates these risks. As a result, we may fail
to accurately forecast styles and features that will be in
demand. If we overestimate demand for our products, we may be
forced to liquidate excess inventories at a discount to
customers, resulting in higher markdowns and lower gross
margins. Further, the excess inventories may prolong our cash
flow cycle, resulting in reduced cash flow and increased
liquidity risks. Conversely, if we underestimate consumer
demand, we could have inventory shortages, which can result in
lost potential sales, delays in shipments to customers, strains
on our relationships with customers and diminished brand
loyalty. This may be particularly true with regard to our UGG
product line, which continues to experience strong consumer
demand and rapid sales growth.
|
|
|
We may not succeed in implementing our growth strategy. |
As part of our growth strategy, we seek to enhance the
positioning of our brands, extend our brands into complementary
product categories and markets through licensing, expand
geographically and improve our operational performance. Another
element of our growth strategy is our licensing initiatives. We
may not be able to successfully implement any or all of these
strategies. If we fail to do so, our rate of growth may slow or
our results of operations may decline, which in turn could have
a negative effect on the value of our stock.
|
|
|
Our financial success is limited to the success of our
customers. |
Our financial success is directly related to the success of our
customers and the willingness of our customers to continue to
buy our products. We do not have long-term contracts with any of
our customers. Sales to our customers are generally on an
order-by-order basis and are subject to rights of cancellation
and rescheduling by our customers. If we cannot fill our
customers’ orders in a timely manner, our relationships
with our customers may suffer, and this could have a material
adverse effect on us. Furthermore, if any of our major customers
experiences a significant downturn in its business, or fails to
remain committed to our products or brands, then these customers
may reduce or discontinue purchases from us, which could have a
material adverse effect on our business, results of operations
and financial condition.
|
|
|
Establishing and protecting our trademarks, patents and other
intellectual property is costly and difficult. If our efforts to
do so are unsuccessful, the value of our brands could suffer. |
We believe that our trade names, copyrights, trade secrets,
trademarks, patents, trade dress and designs are of value and
are integral to our success and our competitive position. Some
countries’ laws do not protect proprietary intellectual
property rights to the same extent as do U.S. laws. From
time to time, we discover products in the marketplace that
infringe upon our trade name, trademark, patent, trade dress,
design rights and other intellectual property. If we are
unsuccessful in challenging a third party’s products on the
basis of patent and trade dress rights, continued sales of such
competing products by third parties could adversely impact our
business, financial condition and results of operations.
Furthermore, our efforts to enforce our trademark and other
intellectual property rights are typically met with defenses and
counterclaims attacking the validity and enforceability of our
trademark and other intellectual property rights. Similarly,
from time to time we may be the subject of litigation
challenging our ownership of intellectual property. Loss of our
Teva, UGG or Simple trade name, trademark, patent, trade dress
or other intellectual property rights could have a material
adverse effect on our business.
We face particularly strong challenges to our UGG trademark in
Australia, where many Australian manufacturers sell competitive
footwear on the Internet. Our trademark registrations in
Australia are subject to challenge, which we are contesting. In
addition, certain Australian sheepskin boot manufacturers are
alleging that the UGH, UGG-BOOT and the UGG Australia trademarks
are not valid as being generic terms for sheepskin boots. If the
challenges are successful, our rights in the trademarks,
including our ability to prevent Australian competitors from
using these trademarks in commerce in Australia, will be
adversely affected. Although we derived less than 1% of our
revenue in the UGG product line from Australian sales in 2004,
our ability to prevent Australian competitors from using the
marks on the Internet and in other channels
37
of trade that may reach consumers in other countries, including
the United States, could also be adversely affected and the
integrity of our UGG brand could be harmed by the association
with inferior products.
|
|
|
We may lose pending litigation and the rights to certain of
our intellectual property. |
We are currently involved in several informal disputes, disputes
in the U.S. Patent and Trademark Office and foreign
trademark offices, and disputes in U.S. federal and foreign
courts regarding infringement by third parties of our trade
names, trademarks, trade dress, copyrights, patents and other
intellectual property and the validity of our intellectual
property. Any decision or settlement in any of these disputes
that renders our intellectual property invalid or unenforceable,
or that allows a third party to continue to use our intellectual
property in connection with products that are similar to ours
could have an adverse effect on our sales and on our
intellectual property, which could have a material adverse
effect on our results of operations and financial condition.
|
|
|
Counterfeiting of our brands can divert sales and damage our
brand image. |
Our brands and designs are constantly at risk for counterfeiting
and infringement of our intellectual property rights, and we
frequently find counterfeit products and products that infringe
on our intellectual property rights in our markets as well as
domain names that use our trade names or trademarks without our
consent. We have not always been successful, particularly in
some foreign countries, in combating counterfeit products and
stopping infringement of our intellectual property rights.
Counterfeit and infringing products not only cause us to lose
significant sales, but also can harm the integrity of our brands
by associating our trademarks or designs with lesser quality or
defective goods.
In particular, we are experiencing more infringers of our UGG
trademark and more counterfeit products seeking to benefit from
the consumer demand for our UGG products. Enforcement of our
rights to the UGG trademarks faces many challenges due in part
to the proliferation of the term UGG in third party domain names
that promote counterfeit products or otherwise use the trademark
UGG without our permission. In spite of our enforcement efforts,
we expect such unauthorized use to continue, which could result
in a loss of sales for authorized UGG products and a diminution
in the goodwill associated with the UGG trademarks.
|
|
|
As our patents expire, our competitors will be able to copy
our technology or incorporate it in their products without
paying royalties. |
Patents generally have a life of 20 years from filing, and
some of our patents will expire in the next ten years. For
example, the patent for our Universal Strapping System used in
Teva sandals will expire in September 2007. Our Universal
Strapping System is currently used in most of our Teva sandals.
Once patent protection has expired, our competitors can copy our
products or incorporate our innovations in their products
without paying royalties. To combat this, we must continually
create new designs and technology, obtain patent protection and
incorporate the new technology or design in our footwear. We
cannot provide assurance that we will be able to do so. Sales of
our Teva sandals may decline significantly if we incorporate
substitute technologies in lieu of our Universal Strapping
System for our Teva sandals.
|
|
|
Because we depend on independent manufacturers, we face
challenges in maintaining a continuous supply of goods that meet
our quality standards. |
We use independent manufacturers to produce all of our products,
with almost all of the production occurring among four
manufacturers in China. We depend on these manufacturers’
ability to finance the production of goods ordered and to
maintain manufacturing capacity. The manufacturers in turn
depend upon their suppliers of raw materials. We do not exert
direct control over either the independent manufacturers or
their raw materials suppliers, so we may be unable to obtain
timely delivery of acceptable products.
In addition, we do not have long-term contracts with these
independent manufacturers, and any of them may unilaterally
terminate their relationship with us at any time or seek to
increase the prices they charge us. As a result, we are not
assured of an uninterrupted supply of products of an acceptable
quality from our independent manufacturers. If there is an
interruption, we may not be able to substitute suitable
alternative
38
manufacturers because substitutes may not be available or they
may not be able to provide us with products or services of a
comparable quality, at an acceptable price or on a timely basis.
If a change in our independent manufacturers becomes necessary,
we would likely experience increased costs, as well as
substantial disruption of our business and a resulting loss of
sales.
Similarly, if we experience a significant increase in demand and
a manufacturer is unable to ship orders of our products in
accordance with our timing demands and our quality standards, we
could miss customer delivery date requirements. This in turn
could result in cancellation of orders, customer refusals of
shipments or a reduction in purchase prices, any of which could
have a material adverse effect on our sales and financial
condition. We compete with other companies for the production
capacity and the import quota capacity of our manufacturers.
Accordingly, our independent manufacturers may not produce and
ship some or all of any orders placed by us.
|
|
|
If raw materials do not meet our specifications or if the
prices of raw materials increase, we could experience a high
return rate, a loss of sales or a reduction in our gross
margins. |
Our independent manufacturers use various raw materials in the
manufacture of our footwear that must meet our specifications
generally and, in some cases, additional technical requirements
for performance footwear. If these raw materials and the end
product do not perform to our specifications or consumer
satisfaction, we could experience a higher rate of customer
returns and a diminution in the image of our brands, which could
have a material adverse effect on our business, financial
condition and results of operations.
There may be significant increases in the prices of the raw
materials used in our footwear, which would increase the cost of
our products from our independent manufacturers. Our gross
profit margins are adversely affected to the extent that the
selling prices of our products do not increase proportionately
with increases in their costs. Any significant unanticipated
increase in the prices of raw materials could materially affect
our results of operations. No assurances can be given that we
will be protected from future changes in the prices of such raw
materials.
|
|
|
Our independent manufacturers are located outside the U.S.,
where we are subject to the risks of international commerce. |
All of our third party manufacturers are in the Far East,
Australia and New Zealand, with the vast majority of production
performed by four manufacturers in China. Foreign manufacturing
is subject to numerous risks, including the following:
|
|
|
| |
• |
tariffs, import and export controls and other non-tariff
barriers such as quotas and local content rules; |
| |
| |
• |
increasing transportation costs due to energy prices or other
factors; |
| |
| |
• |
poor infrastructure and shortages of equipment, which can delay
or interrupt transportation and utilities; |
| |
| |
• |
foreign currency fluctuations; |
| |
| |
• |
restrictions on the transfer of funds; |
| |
| |
• |
changing economic conditions; |
| |
| |
• |
changes in governmental policies; |
| |
| |
• |
environmental regulation; |
| |
| |
• |
labor unrest, which can lead to work stoppages and interruptions
in transportation or supply; |
| |
| |
• |
political unrest, which can interrupt commerce and make travel
dangerous; and |
| |
| |
• |
expropriation and nationalization. |
39
In particular, because most of our products are manufactured in
China, adverse change in trade or political relations with China
or political instability in the Far East could severely
interfere with the manufacture of our products and could
materially adversely affect our results of operations.
Uncertainty regarding the short-term and long-term effects of
the severe acute respiratory syndrome, or SARS, and the outbreak
of avian influenza in China and elsewhere in the Far East could
disrupt the manufacture and transportation of our products,
which would harm our results of operations.
We are also subject to general risks associated with managing
foreign operations effectively and efficiently from the U.S. and
understanding and complying with local laws, regulations and
customs in foreign jurisdictions. These factors and the failure
to properly respond to them could make it difficult to obtain
adequate supplies of quality products when we need them,
resulting in reduced sales and harm to our business.
|
|
|
Our business could suffer if our independent manufacturers,
their suppliers or our licensees violate labor laws or fail to
conform to our ethical standards. |
We require our independent contract manufacturers, their
suppliers and our licensees to meet our standards for working
conditions, environmental protection and other matters before we
are willing to place business with them. As a result, we do not
always obtain the lowest cost production. We do not control our
independent manufacturers, their suppliers or their respective
labor practices. If one of our independent contract
manufacturers or one of their suppliers violates our labor
standards by, for example, using convicted, forced or indentured
labor or child labor, fails to pay compensation in accordance
with local law or fails to operate its factories in compliance
with local safety regulations, we likely would immediately cease
dealing with that manufacturer (or, in the case of a supplier,
we would likely require our manufacturer to immediately cease
using that supplier), and we could suffer an interruption in our
product supply. In addition, the manufacturers’ or their
suppliers’ actions could damage our reputation and the
value of our brands, resulting in negative publicity and
discouraging customers and consumers from buying our products.
Similarly, we do not control our licensees or any of their
suppliers or their respective labor practices. If one of our
licensees violates our labor standards or local laws, we would
immediately terminate the license agreement, which would reduce
our license revenue. In addition, the licensee’s actions
could damage our reputation and the value of our brands. We also
may not be able to replace the licensee.
|
|
|
If our licensing partners are unable to meet our expectations
regarding the quality of their products or the conduct of their
business, the value of our brands could suffer. |
One element of our growth strategy depends on our ability to
successfully enter into and maintain license agreements with
manufacturers and distributors of products in complementary
categories. We will be relying on our licensees to maintain our
standards with their manufacturers in the future, and any
failure to do so could harm our reputation and the value of the
licensed brand. The interruption of the business of any one of
our material licensing partners due to any of the factors
discussed immediately below could also adversely affect our
future licensing sales and net income. The risks associated with
our own products will also apply to our licensed products in
addition to any number of possible risks specific to a licensing
partner’s business, including, for example, risks
associated with a particular licensing partner’s ability to:
|
|
|
| |
• |
obtain capital; |
| |
| |
• |
manage manufacturing and product sourcing activities; |
| |
| |
• |
manage labor relations; |
| |
| |
• |
maintain relationships with suppliers; |
| |
| |
• |
manage credit risk effectively; and |
| |
| |
• |
maintain relationships with customers. |
Our licensing agreements generally do not preclude our licensing
partners from offering, under other brands, products similar to
those covered by their license agreements with us, which could
reduce the sales of
40
our licensed products. In addition, if we cannot replace
existing licensing partners who fail to perform adequately, our
net sales, both directly from reduced licensing revenue and
indirectly from reduced sales of our other products, will suffer.
|
|
|
If our brand managers cannot properly manage the licensees of
their respective brands, our growth strategy could be
impaired. |
Our growth strategy and future profits depend upon each of our
brand managers finding and successfully managing licensees for
each of their respective brands. Our brand managers may not be
able to successfully implement the licensing aspect of our
growth strategy and to develop and manage profitable license
arrangements. We compete for opportunities to license our brands
with other companies who have greater resources than we do and
who may have more valuable brands and more licensing experience
than we do. As a result, even if we do identify a suitable
licensee, we may lose the opportunity to a competitor. Our brand
managers’ failure to execute our licensing strategy
successfully could negatively impact our results from operations.
|
|
|
We may be unable to successfully identify, develop or
acquire, and build new brands. |
We intend to continue to focus on identifying, developing or
acquiring and building new brands. Our search may not yield any
complementary brands, and even if we do find a suitable brand we
may not be able to obtain sufficient financing to fund the
development or acquisition of the brand. We may not be able to
successfully integrate the management of a new brand into our
existing operations, and we cannot assure you that any developed
or acquired brand will achieve the results we expect. We compete
with other companies who have greater resources than we do for
the opportunities to license brands or buy other brands. As a
result, even if we do identify a suitable license or
acquisition, we may lose the opportunity to a competitor who
offers a more attractive price. In such event, we may incur
significant costs in pursuing a license or an acquisition
without success.
|
|
|
Our quarterly sales and operating results may fluctuate in
future periods, and if we fail to meet expectations the price of
our common stock may decline. |
Our quarterly sales and operating results have fluctuated
significantly in the past and are likely to do so in the future
due to a number of factors, many of which are not within our
control. If our quarterly sales or operating results fall below
the expectations of investors or securities analysts, the price
of our common stock could decline substantially. Factors that
might cause quarterly fluctuations in our sales and operating
results include the following:
|
|
|
| |
• |
variation in demand for our products, including variation due to
changing consumer tastes and seasonality; |
| |
| |
• |
our ability to develop, introduce, market and gain market
acceptance of new products and product enhancements in a timely
manner; |
| |
| |
• |
our ability to manage inventories, accounts receivable and cash
flows; |
| |
| |
• |
our ability to control costs; |
| |
| |
• |
the size, timing, rescheduling or cancellation of orders from
customers; |
| |
| |
• |
the introduction of new products by competitors; |
| |
| |
• |
the availability and reliability of raw materials used to
manufacture our products; |
| |
| |
• |
changes in our pricing policies or those of our independent
manufacturers and competitors, as well as increased price
competition in general; |
| |
| |
• |
the mix of our domestic and international sales, and the risks
and uncertainties associated with our international business; |
41
|
|
|
| |
• |
our ability to forecast future sales and operating results and
subsequently attain them; |
| |
| |
• |
developments concerning the protection of our intellectual
property rights; and |
| |
| |
• |
general global economic and political conditions, including
international conflicts and acts of terrorism. |
In addition, our expenses depend, in part, on our expectations
regarding future sales. In particular, we expect to continue
incurring substantial expenses relating to the marketing and
promotion of our products. Since many of our costs are fixed in
the short term, if we have a shortfall in sales, we may be
unable to reduce expenses quickly enough to avoid losses.
Accordingly, you should not rely on quarter-to-quarter
comparisons of our operating results as an indication of our
future performance.
|
|
|
Loss of the services of our key personnel could adversely
affect our business. |
Our future success and growth depend on the continued services
of Doug Otto, our Chairman of the Board, Chief Executive Officer
and President, Scott Ash, our Chief Financial Officer, Bob
Orlando, the President of the Teva Division, Connie Rishwain,
the President of the UGG and Simple Divisions, Pat Devaney,
Senior Vice President of Global Sourcing, Production and
Development, Janice Howell, Vice President of Operations, John
Kalinich, Vice President of Consumer Direct, and Tracey Nelson,
Vice President of Corporate Licensing, as well as other key
officers and employees. The loss of the services of any of these
individuals or any other key employee could materially affect
our business. Our future success also depends on our ability to
identify, attract and retain additional qualified personnel.
Competition for employees in our industry is intense and we may
not be successful in attracting or retaining them.
|
|
|
We conduct business outside the U.S., which exposes us to
foreign currency and other risks. |
Our products are manufactured outside the U.S., and our
independent manufacturers procure most of their supplies outside
the U.S. We sell our products in the U.S. and
internationally. Although we pay for the purchase and
manufacture of our products primarily in U.S. dollars and
we sell our products primarily in U.S. dollars, we are
routinely subject to currency rate movements on
non-U.S. denominated assets, liabilities and income since
our foreign distributors sell in local currencies, which impacts
the price to foreign customers. We currently do not use currency
hedges since substantially all our transactions are in
U.S. dollars. Future changes in foreign currency exchange
rates may cause changes in the dollar value of our purchases or
sales and materially affect our results of operations.
|
|
|
Our most popular products are seasonal, and our sales are
sensitive to weather conditions. |
Sales of our products, particularly those under the Teva and UGG
brands, are highly seasonal and are sensitive to weather
conditions. Extended periods of unusually cold weather during
the spring and summer can reduce demand for Teva footwear.
Likewise, unseasonably warm weather during the fall and winter
months may reduce demand for our UGG products. The effect of
favorable or unfavorable weather on sales can be significant
enough to affect our quarterly results, with a resulting effect
on our common stock price.
|
|
|
We depend on independent distributors to sell our products in
international markets. |
We sell our products in international markets through
independent distributors. If a distributor fails to meet annual
sales goals, it may be difficult and costly to locate an
acceptable substitute distributor. If a change in our
distributors becomes necessary, we may experience increased
costs, as well as substantial disruption and a resulting loss of
sales.
42
|
|
|
Our sales in international markets are subject to a variety
of laws and political and economic risks that may adversely
impact our sales and results of operations in certain
regions. |
Our ability to capitalize on growth in new international markets
and to maintain the current level of operations in our existing
international markets is subject to risks associated with
international sales operations. These include:
|
|
|
| |
• |
changes in currency exchange rates which impact the price to
international consumers; |
| |
| |
• |
the burdens of complying with a variety of foreign laws and
regulations; |
| |
| |
• |
unexpected changes in regulatory requirements; and |
| |
| |
• |
the difficulties associated with promoting products in
unfamiliar cultures. |
We are also subject to general political and economic risks in
connection with our international sales operations, including:
|
|
|
| |
• |
political instability; |
| |
| |
• |
changes in diplomatic and trade relationships; and |
| |
| |
• |
general economic fluctuations in specific countries or markets. |
Any of the abovementioned factors could adversely affect our
sales and results of operations in international markets.
International trade regulations may impose unexpected duty
costs or other non-tariff barriers to markets while the
increasing number of free trade agreements has the potential to
stimulate increased competition; security procedures may cause
significant delays.
Products manufactured overseas and imported into the U.S. and
other countries are subject to import duties. While we have
implemented internal measures to comply with applicable customs
regulations and to properly calculate the import duties
applicable to imported products, customs authorities may
disagree with our claimed tariff treatment for certain products,
resulting in unexpected costs that may not have been factored
into the sales price of the products.
We cannot predict whether future domestic laws, regulations or
trade remedy actions or international agreements may impose
additional duties or other restrictions on the importation of
products from one or more of our sourcing venues. Such changes
could increase the cost of our products, require us to withdraw
from certain restricted markets or change our business methods,
and could generally make it difficult to obtain products of our
customary quality at a desired price. Meanwhile, the continued
negotiation of bilateral and multilateral free trade agreements
by the U.S. and our other market countries with countries other
than our principal sourcing venues may stimulate competition
from manufacturers in these other sourcing venues, which now
export, or may seek to export, footwear to our market countries
at preferred rates of duty, though we are uncertain precisely
what effect these new agreements may have on our operations.
Finally, the increased threat of terrorist activity and the law
enforcement responses to this threat have required greater
levels of inspection of imported goods and have caused delays in
bringing imported goods to market. Any tightening of security
procedures, for example, in the aftermath of a terrorist
incident, could worsen these delays.
We depend on our computer and communications systems.
We extensively utilize computer and communications systems to
operate our Internet and catalog business and manage our
internal operations. Any interruption of this service from power
loss, telecommunications failure, failure of our computer
system, failure due to weather, natural disasters or any similar
event could disrupt our operations and result in lost sales. In
addition, hackers and computer viruses have disrupted operations
at many major companies. We may be vulnerable to similar acts of
sabotage, which could have a material adverse effect on our
business and operations.
43
We rely on our management information systems to operate our
business and to track our operating results. Our management
information systems will require modification and refinement as
we grow and our business needs change. If we experience a
significant system failure or if we are unable to modify our
management information systems to respond to changes in our
business needs, then our ability to properly run our business
could be adversely affected.
Risks Related to Our Industry
Because the footwear market is sensitive to decreased
consumer spending and slow economic cycles, if general economic
conditions deteriorate many of our customers may significantly
reduce their purchases from us or may not be able to pay for our
products in a timely manner.
The footwear industry historically has been subject to cyclical
variation and decline in performance when consumer spending
decreases or softness appears in the retail market. Many factors
affect the level of consumer spending in the footwear industry,
including:
|
|
|
| |
• |
general business conditions; |
| |
| |
• |
interest rates; |
| |
| |
• |
the availability of consumer credit; |
| |
| |
• |
weather; |
| |
| |
• |
taxation; and |
| |
| |
• |
consumer confidence in future economic conditions. |
Consumer purchases of discretionary items, including our
products, may decline during recessionary periods and also may
decline at other times when disposable income is lower. A
downturn in economies where our licensing partners or we sell
products, whether in the U.S. or abroad, may reduce sales.
In addition, we extend credit to our customers based on an
evaluation of each customer’s financial condition. Many
retailers, including some of our customers, have experienced
financial difficulties during the past several years, thereby
increasing the risk that such customers may not be able to pay
for our products in a timely manner. Our bad debt expense may
increase relative to net sales in the future. Any significant
increase in our bad debt expense relative to net sales would
adversely impact our net income and cash flow and could affect
our ability to pay our own obligations as they become due.
We face intense competition, including competition from
companies with significantly greater resources than ours, and if
we are unable to compete effectively with these companies, our
market share may decline and our business could be harmed.
The footwear industry is highly competitive, and the recent
growth in the market for sport sandals, casual footwear and
other products manufactured by our licensees has encouraged the
entry of many new competitors into the marketplace as well as
increased competition from established companies. A number of
our competitors have significantly greater financial,
technological, engineering, manufacturing, marketing and
distribution resources than we do, as well as greater brand
awareness in the footwear market. Our competitors include
athletic and footwear companies, branded apparel companies and
retailers with their own private labels. Their greater
capabilities in these areas may enable them to better withstand
periodic downturns in the footwear industry, compete more
effectively on the basis of price and production and more
quickly develop new products. In addition, access to offshore
manufacturing has made it easier for new companies to enter the
markets in which we compete, further increasing competition in
the footwear industry.
Additionally, efforts by our competitors to dispose of their
excess inventories may significantly reduce prices that we can
expect to receive for the sale of our competing products and may
cause our customers to shift their purchases away from our
products.
44
We believe that our ability to compete successfully depends on a
number of factors, including the quality, style and authenticity
of our products and the strength of our brands, as well as many
factors beyond our control. Maintaining our competitiveness
depends on our ability to defend our products from infringement,
our continued ability to anticipate and react to consumer tastes
and our continued ability to deliver quality products at an
acceptable price. If we fail to compete successfully in the
future, our sales and profits will decline, as will the value of
our business, financial condition and common stock.
Consolidations, restructurings and other ownership changes in
the retail industry could affect the ability of our wholesale
customers to purchase and market our products.
In the future, retailers in the U.S. and in foreign markets may
undergo changes that could decrease the number of stores that
carry our products or increase the concentration of ownership
within the retail industry, including:
|
|
|
| |
• |
consolidating their operations; |
| |
| |
• |
undergoing restructurings; |
| |
| |
• |
undergoing reorganizations; or |
| |
| |
• |
realigning their affiliations. |
These consolidations could result in a shift of bargaining power
to the retail industry and in fewer outlets for our products.
Further consolidations could result in price and other
competition that could reduce our margins and our net sales.
Terrorism, government response to terrorism and other world
events could affect our ability to do business.
We market and sell our products and services throughout the
world. The September 11, 2001 terrorist attacks disrupted
commerce across the U.S. and in many other parts of the world.
World events, including the threat of similar attacks in the
future, and the impact of the U.S.’s military campaigns may
cause significant disruption to commerce throughout the world.
We are unable to predict whether the threat of new attacks or
the resulting response will result in any long-term commercial
disruptions or do long-term harm to our business, results of
operations or financial condition. To the extent that future
disruptions further slow the global economy or, more
particularly, result in delays or cancellations of purchase
orders for our products or delays in shipping, our business and
results of operations could suffer material damage.
Risks Relating to Our Common Stock
Members of management own sufficient shares to substantially
control our company.
At March 8, 2005, Doug Otto beneficially owned
approximately 15.2% of our common stock and all of our executive
officers and directors as a group beneficially owned
approximately 17.8%. The ownership positions of Mr. Otto
and our executive officers as a group, together with the
anti-takeover effects of the Delaware General Corporation Law
and provisions of our certificate of incorporation, our bylaws
and our stockholder rights plan, would likely delay, defer or
prevent a change in control of our company, may deprive our
stockholders of an opportunity to receive a premium for their
common stock as part of a change in control and could have a
negative effect on the market price of our common stock.
Our common stock price has been volatile, which could result
in substantial losses for stockholders.
Our common stock is traded on the NASDAQ National Market. While
our average daily trading volume for the 52-week period ended
March 8, 2005 was approximately 402,000 shares, we
have experienced more limited volume in the past and may do so
in the future. The trading price of our common stock has been
and may continue to be volatile. The closing sale prices of our
common stock, as reported by the NASDAQ National Market, have
ranged from $22.94 to $48.02 for the 52-week period ended
March 8, 2005. The
45
trading price of our common stock could be affected by a number
of factors, including, but not limited to the following:
|
|
|
| |
• |
changes in expectations of our future performance; |
| |
| |
• |
changes in estimates by securities analysts (or failure to meet
such estimates); |
| |
| |
• |
quarterly fluctuations in our sales and financial results; |
| |
| |
• |
broad market fluctuations in volume and price; and |
| |
| |
• |
a variety of risk factors, including the ones described
elsewhere in this report. |
Accordingly, the price of our common stock is volatile and any
investment in our securities is subject to risk of loss.
Future sales of our common stock could adversely affect our
stock price.
Future sales of substantial amounts of shares of our common
stock in the public market, or the perception that these sales
could occur, may cause the market price of our common stock to
decline. In addition, we may be required to issue additional
shares upon exercise of previously granted options that are
currently outstanding.
Anti-takeover provisions of our certificate of incorporation,
bylaws, stockholder rights plan and Delaware law could prevent
or delay a change in control of our company, even if such a
change of control would benefit our stockholders.
Provisions of our certificate of incorporation and bylaws, as
well as provisions of Delaware law, could discourage, delay or
prevent a merger, acquisition or other change in control of our
company, even if such a change in control might benefit our
stockholders. These provisions could also discourage proxy
contests and make it more difficult for you and other
stockholders to elect directors and take other corporate
actions. As a result, these provisions could limit the price
that investors are willing to pay in the future for shares of
our common stock. These provisions might also discourage a
potential acquisition proposal or tender offer, even if the
acquisition proposal or tender offer is at a price above the
then current market price for our common stock. These provisions
include the following:
|
|
|
| |
• |
a board of directors that is classified so that only one-third
of directors stand for election each year; |
| |
| |
• |
authorization of “blank check” preferred stock, which
our board of directors could issue with provisions designed to
thwart a takeover attempt; |
| |
| |
• |
limitations on the ability of stockholders to call special
meetings of stockholders; |
| |
| |
• |
a prohibition against stockholder action by written consent and
a requirement that all stockholder actions be taken at a meeting
of our stockholders; and |
| |
| |
• |
advance notice requirements for nominations for election to our
board of directors or for proposing matters that can be acted
upon by stockholders at stockholder meetings. |
We adopted a stockholder rights plan in 1998 under a stockholder
rights agreement intended to protect stockholders against
unsolicited attempts to acquire control of our company that do
not offer what our board of directors believes to be an adequate
price to all stockholders or that our board of directors
otherwise opposes. As part of the plan, our board of directors
declared a dividend that resulted in the issuance of one
preferred share purchase right for each outstanding share of our
common stock. Unless extended, the preferred share purchase
rights will terminate on November 11, 2008. If a bidder
proceeds with an unsolicited attempt to purchase our stock and
acquires 20% or more (or announces its intention to acquire 20%
or more) of our outstanding stock, and the board of directors
does not redeem the preferred stock purchase right, the right
will become exercisable at a price that significantly dilutes
the interest of the bidder in our common stock.
46
The effect of the stockholder rights plan is to make it more
difficult to acquire our company without negotiating with the
board of directors. However, the stockholder rights plan could
discourage offers even if made at a premium over the market
price of our common stock, and even if the stockholders might
believe the transaction would benefit them.
In addition, we are subject to Section 203 of the Delaware
General Corporation Law, which limits business combination
transactions with 15% or greater stockholders that our board of
directors has not approved. These provisions and other similar
provisions make it more difficult for a third party to acquire
us without negotiation. These provisions apply even if some
stockholders would consider the transaction beneficial.
|
|
| Item 7A. |
Quantitative and Qualitative Disclosures About Market
Risk |
Derivative Instruments. Although we have used
foreign currency hedges in the past, we no longer utilize
forward contracts or other derivative instruments to mitigate
exposure to fluctuations in the foreign currency exchange rate
as all of our purchases and sales for the foreseeable future
will be denominated in U.S. currency.
Although our sales are denominated in U.S. currency, our
sales may be impacted by fluctuations in the exchange rates
between the U.S. dollar and the local currencies in the
international markets where our products are sold. If the United
States dollar strengthens, it may result in increased pricing
pressure on our distributors, which may have a negative impact
on our net sales. We are unable to estimate the amount of any
impact on sales attributed to pricing pressures caused by
fluctuations in exchange rates.
Market Risk. Our market risk exposure with respect
to financial instruments is to changes in the “prime
rate” in the U.S. and changes in LIBOR. Our revolving line
of credit provides for interest on outstanding borrowings at
rates tied to the prime rate or at our election tied to LIBOR.
At December 31, 2004, we had no outstanding borrowings
under the revolving line of credit. A 1.00% increase in interest
rates on our current borrowings would have no impact on income
before income taxes.
|
|
| Item 8. |
Financial Statements and Supplementary Data |
See Item 15 and page 49 for an index to the
consolidated financial statements and supplementary information
included herein.
|
|
| Item 9. |
Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure |
None.
|
|
| Item 9A. |
Controls and Procedures |
The Company’s Chief Executive Officer, Douglas B. Otto, and
Chief Financial Officer, M. Scott Ash, with the participation of
the Company’s management, carried out an evaluation of the
effectiveness of the Company’s disclosure controls and
procedures pursuant to Exchange Act Rule 13a-15(e). Based
upon that evaluation, the Chief Executive Officer and the Chief
Financial Officer believe that, as of the end of the period
covered by this report, the Company’s disclosure controls
and procedures are effective in making known to them material
information relating to the Company (including its consolidated
subsidiaries) required to be included in this report.
Disclosure controls and procedures, no matter how well designed
and implemented, can provide only reasonable assurance of
achieving an entity’s disclosure objectives. The likelihood
of achieving such objectives is affected by limitations inherent
in disclosure controls and procedures. These include the fact
that human judgment in decision-making can be faulty and that
breakdowns in internal control can occur because of human
failures such as simple errors, mistakes or intentional
circumvention of the established processes.
Although there were no significant changes to our internal
controls or in other factors that could significantly affect our
internal controls subsequent to the Evaluation Date, we have
completed our efforts regarding compliance with Section 404
of the Sarbanes- Oxley Act of 2002 for our fiscal year ending
47
December 31, 2004. The results of our evaluation are
discussed below in the Report of Management on Internal Control
Over Financial Reporting.
This effort included internal control documentation and review
under the direction of senior management. During the course of
our evaluation, we reviewed identified data errors and control
problems and confirmed that appropriate corrective actions,
including process improvements, were undertaken. These
improvements included formalization of policies and procedures,
improved segregation of duties and additional monitoring
controls. Many of the components of our internal controls are
also evaluated on an ongoing basis by members of our
organization. The overall goals of these various evaluation
activities are to monitor our internal controls, and to modify
them as necessary. Our intent is to maintain the internal
controls as dynamic systems that change as conditions warrant.
REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING
Management of Deckers Outdoor Corporation (the
“Company”) is responsible for establishing and
maintaining adequate internal control over financial reporting
as defined in Rules 13a-15(f) and 15d-15(f) under the
Securities Exchange Act of 1934. The Company’s internal
control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements
for external purposes in accordance with accounting principles
generally accepted in the United States of America. Internal
control over financial reporting includes those written policies
and procedures that:
|
|
|
| |
• |
pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and
dispositions of the assets of the Company; |
| |
| |
• |
provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with accounting principles generally accepted in the
United States of America; |
| |
| |
• |
provide reasonable assurance that receipts and expenditures of
the Company are being made only in accordance with authorization
of management and directors of the Company; and |
| |
| |
• |
provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of
assets that could have a material effect on the consolidated
financial statements. |
Internal control over financial reporting includes the controls
themselves, as well as the monitoring of practices and actions
taken to correct deficiencies as identified.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s
internal control over financial reporting as of
December 31, 2004. Management based this assessment on
criteria for effective internal control over financial reporting
described in “Internal Control — Integrated
Framework” issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Management’s
assessment included an evaluation of the design of the
Company’s internal control over financial reporting and
testing of the operational effectiveness of its internal control
over financial reporting. Management reviewed the results of its
assessment with the Audit Committee of our Board of Directors.
Based on this assessment, management determined that, as of
December 31, 2004, the Company maintained effective
internal control over financial reporting.
KPMG LLP, independent registered public accounting firm, who
audited and reported on the consolidated financial statements of
the Company included in this report, has issued an attestation
report on management’s assessment of internal control over
financial reporting.
|
|
| Item 9B. |
Other Information |
None.
48
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
| |
|
|
|
|
| |
|
Page | |
| |
|
| |
|
Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
50 |
|
|
|
|
|
53 |
|
|
|
|
|
54 |
|
|
|
|
|
55 |
|
|
|
|
|
56 |
|
|
|
|
|
57 |
|
| |
|
Consolidated Financial Statement Schedule
|
|
|
|
|
|
Valuation and Qualifying Accounts
|
|
|
78 |
|
All other schedules are omitted because they are not applicable
or the required information is shown in the Company’s
consolidated financial statements or the related notes thereto.
49
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
The Board of Directors and Stockholders
Deckers Outdoor Corporation:
We have audited the accompanying consolidated financial
statements of Deckers Outdoor Corporation and subsidiaries as
listed in the accompanying index. In connection with our audits
of the consolidated financial statements, we also have audited
the financial statement schedule as listed in the accompanying
index. These consolidated financial statements and financial
statement schedule are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Deckers Outdoor Corporation and subsidiaries as of
December 31, 2003 and 2004, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2004, in conformity
with U.S. generally accepted accounting principles. Also in
our opinion, the related consolidated financial statement
schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
As discussed in note 13 to the consolidated financial
statements, the Company adopted Statement of Financial
Accounting Standards No. 142, Goodwill and Other
Intangible Assets, on January 1, 2002.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of the Company’s internal control over
financial reporting as of December 31, 2004, based on
criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO), and our report dated
March 11, 2005 expressed an unqualified opinion on
management’s assessment of, and the effective operation of,
internal control over financial reporting.
Los Angeles, California
March 11, 2005
50
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
The Board of Directors and Stockholders
Deckers Outdoor Corporation:
We have audited management’s assessment, included in the
accompanying Report of Management on Internal Control Over
Financial Reporting appearing under Item 9A, that Deckers
Outdoor Corporation maintained effective internal control over
financial reporting as of December 31, 2004, based on
criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO). Deckers Outdoor
Corporation’s management is responsible for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting. Our responsibility is to express an opinion
on management’s assessment and an opinion on the
effectiveness of the Company’s internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
management’s assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A company’s internal control over financial
reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A
company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions
of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance
with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that Deckers
Outdoor Corporation maintained effective internal control over
financial reporting as of December 31, 2004, is fairly
stated, in all material respects, based on criteria established
in Internal Control — Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Also, in our opinion, Deckers Outdoor
Corporation maintained, in all material respects, effective
internal control over financial reporting as of
December 31, 2004, based on criteria established in
Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Deckers Outdoor Corporation and
subsidiaries as of December 31, 2003 and 2004, and the
related consolidated statements of operations,
stockholders’ equity and comprehensive income (loss), and
cash flows for each of the years in the three-year period ended
December 31, 2004, and the related financial statement
schedule, and our report dated March 11, 2005 expressed an
unqualified opinion on those consolidated financial statements
and financial statement schedule.
51
Our report also refers to the Company’s adoption of
Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets, on
January 1, 2002.
Los Angeles, California
March 11, 2005
52
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2003 and 2004
| |
|
|
|
|
|
|
|
|
|
|
| |
|
2003 | |
|
2004 | |
| |
|
| |
|
| |
|
Assets
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
| |
Cash and cash equivalents
|
|
$ |
6,662,000 |
|
|
$ |
10,379,000 |
|
| |
Short-term investments
|
|
|
— |
|
|
|
15,475,000 |
|
| |
Trade accounts receivable, less allowance for doubtful accounts
and sales discounts of $2,126,000 and $3,281,000 as of
December 31, 2003 and 2004, respectively
|
|
|
18,745,000 |
|
|
|
41,957,000 |
|
| |
Inventories
|
|
|
18,004,000 |
|
|
|
30,260,000 |
|
| |
Prepaid expenses and other current assets
|
|
|
694,000 |
|
|
|
1,491,000 |
|
| |
Deferred tax assets
|
|
|
2,137,000 |
|
|
|
3,240,000 |
|
| |
|
|
|
|
|
|
| |
|
Total current assets
|
|
|
46,242,000 |
|
|
|
102,802,000 |
|
|
Property and equipment, at cost, net
|
|
|
2,969,000 |
|
|
|
2,838,000 |
|
|
Trademarks
|
|
|
51,152,000 |
|
|
|
51,152,000 |
|
|
Goodwill
|
|
|
18,030,000 |
|
|
|
18,030,000 |
|
|
Intangible assets, net
|
|
|
1,390,000 |
|
|
|
1,137,000 |
|
|
Other assets, net
|
|
|
1,243,000 |
|
|
|
592,000 |
|
| |
|
|
|
|
|
|
| |
|
$ |
121,026,000 |
|
|
$ |
176,551,000 |
|
| |
|
|
|
|
|
|
| |
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
| |
Notes payable and current installments of long-term debt
|
|
$ |
3,792,000 |
|
|
$ |
— |
|
| |
Trade accounts payable
|
|
|
11,220,000 |
|
|
|
16,524,000 |
|
| |
Reserve for returns
|
|
|
1,245,000 |
|
|
|
1,731,000 |
|
| |
Accrued sales commissions
|
|
|
623,000 |
|
|
|
1,714,000 |
|
| |
Accrued payroll
|
|
|
2,657,000 |
|
|
|
3,623,000 |
|
| |
Other accrued expenses
|
|
|
434,000 |
|
|
|
2,631,000 |
|
| |
Income taxes payable
|
|
|
3,468,000 |
|
|
|
6,725,000 |
|
| |
|
|
|
|
|
|
| |
|
Total current liabilities
|
|
|
23,439,000 |
|
|
|
32,948,000 |
|
| |
|
|
|
|
|
|
|
Long-term debt, less current installments
|
|
|
26,495,000 |
|
|
|
— |
|
|
Deferred tax liabilities
|
|
|
568,000 |
|
|
|
2,607,000 |
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
| |
Series A preferred stock at liquidation preference,
$0.01 par value. Authorized 5,000,000 shares
(1,375,000 designated as Series A); no shares issued and
outstanding at December 31, 2003 and 2004
|
|
|
— |
|
|
|
— |
|
| |
Common stock, $0.01 par value. Authorized
20,000,000 shares; issued 10,703,433 shares and
outstanding 9,730,481 shares at December 31, 2003;
issued and outstanding 12,183,080 at December 31, 2004
|
|
|
97,000 |
|
|
|
122,000 |
|
| |
Additional paid-in capital
|
|
|
27,115,000 |
|
|
|
71,959,000 |
|
| |
Retained earnings
|
|
|
43,052,000 |
|
|
|
68,591,000 |
|
| |
Accumulated other comprehensive income
|
|
|
260,000 |
|
|
|
324,000 |
|
| |
|
|
|
|
|
|
| |
|
Total stockholders’ equity
|
|
|
70,524,000 |
|
|
|
140,996,000 |
|
| |
|
|
|
|
|
|
| |
|
$ |
121,026,000 |
|
|
$ |
176,551,000 |
|
| |
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
53
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2002, 2003 and 2004
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2002 | |
|
2003 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
Net sales
|
|
$ |
99,107,000 |
|
|
$ |
121,055,000 |
|
|
$ |
214,787,000 |
|
|
Cost of sales
|
|
|
57,577,000 |
|
|
|
69,710,000 |
|
|
|
124,354,000 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Gross profit
|
|
|
41,530,000 |
|
|
|
51,345,000 |
|
|
|
90,433,000 |
|
|
Selling, general and administrative expenses
|
|
|
34,954,000 |
|
|
|
32,407,000 |
|
|
|
47,971,000 |
|
|
Litigation expense (income)
|
|
|
3,228,000 |
|
|
|
(500,000 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Income from operations
|
|
|
3,348,000 |
|
|
|
19,438,000 |
|
|
|
42,462,000 |
|
|
Other expense (income):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Interest expense, net
|
|
|
406,000 |
|
|
|
4,557,000 |
|
|
|
2,236,000 |
|
| |
Other expense (income)
|
|
|
98,000 |
|
|
|
(3,000 |
) |
|
|
3,000 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
504,000 |
|
|
|
4,554,000 |
|
|
|
2,239,000 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Income before income taxes and cumulative effect of a change in
accounting principle
|
|
|
2,844,000 |
|
|
|
14,884,000 |
|
|
|
40,223,000 |
|
|
Income taxes
|
|
|
1,224,000 |
|
|
|
5,730,000 |
|
|
|
14,684,000 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Income before cumulative effect of a change in accounting
principle
|
|
|
1,620,000 |
|
|
|
9,154,000 |
|
|
|
25,539,000 |
|
|
Cumulative effect of a change in accounting principle, net of
income tax benefit of $843,000
|
|
|
(8,973,000 |
) |
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Net income (loss)
|
|
|
(7,353,000 |
) |
|
|
9,154,000 |
|
|
|
25,539,000 |
|
|
Less preferred stock redemption premium
|
|
|
— |
|
|
|
(438,000 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Income (loss) applicable to common stockholders
|
|
$ |
(7,353,000 |
) |
|
$ |
8,716,000 |
|
|
$ |
25,539,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
Basic income per common share before cumulative effect of a
change in accounting principle
|
|
$ |
0.17 |
|
|
$ |
0.91 |
|
|
$ |
2.32 |
|
|
Cumulative effect of a change in accounting principle
|
|
|
(0.96 |
) |
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Basic net income (loss) per common share
|
|
$ |
(0.79 |
) |
|
$ |
0.91 |
|
|
$ |
2.32 |
|
| |
|
|
|
|
|
|
|
|
|
|
Diluted income per common share before cumulative effect of a
change in accounting principle
|
|
$ |
0.17 |
|
|
$ |
0.77 |
|
|
$ |
2.10 |
|
|
Cumulative effect of a change in accounting principle
|
|
|
(0.92 |
) |
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Diluted net income (loss) per common share
|
|
$ |
(0.75 |
) |
|
$ |
0.77 |
|
|
$ |
2.10 |
|
| |
|
|
|
|
|
|
|
|
|
|
Weighted average common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
|
9,328,000 |
|
|
|
9,610,000 |
|
|
|
11,005,000 |
|
| |
Diluted
|
|
|
9,806,000 |
|
|
|
11,880,000 |
|
|
|
12,142,000 |
|
See accompanying notes to consolidated financial statements.
54
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND
COMPREHENSIVE INCOME (LOSS)
Years Ended December 31, 2002, 2003 and 2004
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note | |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Accumulated | |
|
Receivable | |
|
|
|
|
| |
|
Preferred Stock | |
|
Common Stock | |
|
Additional | |
|
|
|
Other | |
|
From | |
|
Total | |
|
Comprehensive | |
| |
|
| |
|
| |
|
Paid-In | |
|
Retained | |
|
Comprehensive | |
|
Stockholder/ | |
|
Stockholders’ | |
|
Income | |
| |
|
Shares | |
|
Amount | |
|
Shares | |
|
Amount | |
|
Capital | |
|
Earnings | |
|
Income | |
|
Former Officer | |
|
Equity | |
|
(Loss) | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Balance at December 31, 2001
|
|
|
— |
|
|
|
— |
|
|
|
9,324,357 |
|
|
$ |
93,000 |
|
|
$ |
25,689,000 |
|
|
$ |
41,251,000 |
|
|
$ |
123,000 |
|
|
$ |
(624,000 |
) |
|
$ |
66,532,000 |
|
|
|
|
|
|
Fair value of equity issued as consideration in the acquisition
of Teva (note 12)
|
|
|
1,375,000 |
|
|
$ |
5,500,000 |
|
|
|
100,000 |
|
|
|
1,000 |
|
|
|
554,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
6,055,000 |
|
|
|
|
|
|
Fair value of options issued under Teva license agreement
(note 7)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
111,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
111,000 |
|
|
|
|
|
|
Common stock issued under stock incentive plan
|
|
|
— |
|
|
|
— |
|
|
|
124,896 |
|
|
|
2,000 |
|
|
|
442,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
444,000 |
|
|
|
|
|
|
Common stock issued under the employee stock purchase plan
|
|
|
— |
|
|
|
— |
|
|
|
11,870 |
|
|
|
— |
|
|
|
37,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
37,000 |
|
|
|
|
|
|
Net loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(7,353,000 |
) |
|
|
— |
|
|
|
— |
|
|
|
(7,353,000 |
) |
|
$ |
(7,353,000 |
) |
|
Write off of note receivable from stockholder/former officer
|
|
|
— |
|
|
|
— |
|
|
|
(100,000 |
) |
|
|
(1,000 |
) |
|
|
(623,000 |
) |
|
|
— |
|
|
|
— |
|
|
|
624,000 |
|
|
|
— |
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
130,000 |
|
|
|
— |
|
|
|
130,000 |
|
|
|
130,000 |
|
|
Unrealized losses on hedging derivatives
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(729,000 |
) |
|
|
— |
|
|
|
(729,000 |
) |
|
|
(729,000 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(7,952,000 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2002
|
|
|
1,375,000 |
|
|
|
5,500,000 |
|
|
|
9,461,123 |
|
|
|
95,000 |
|
|
|
26,210,000 |
|
|
|
33,898,000 |
|
|
|
(476,000 |
) |
|
|
— |
|
|
|
65,227,000 |
|
|
|
|
|
|
Repurchase preferred stock (note 6)
|
|
|
(1,375,000 |
) |
|
|
(5,500,000 |
) |
|
|
— |
|
|
|
— |
|
|
|
(438,000 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(5,938,000 |
) |
|
|
|
|
|
Common stock issued under stock incentive plan
|
|
|
— |
|
|
|
— |
|
|
|
262,577 |
|
|
|
2,000 |
|
|
|
874,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
876,000 |
|
|
|
|
|
|
Tax benefit attributable to stock options
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
445,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
445,000 |
|
|
|
|
|
|
Common stock issued under the employee stock purchase plan
|
|
|
— |
|
|
|
— |
|
|
|
6,781 |
|
|
|
— |
|
|
|
24,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
24,000 |
|
|
|
|
|
|
Net income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
9,154,000 |
|
|
|
— |
|
|
|
— |
|
|
|
9,154,000 |
|
|
$ |
9,154,000 |
|
|
Foreign currency translation adjustment and reversal of
unrealized hedging losses
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
736,000 |
|
|
|
— |
|
|
|
736,000 |
|
|
|
736,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
9,890,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003
|
|
|
— |
|
|
|
— |
|
|
|
9,730,481 |
|
|
|
97,000 |
|
|
|
27,115,000 |
|
|
|
43,052,000 |
|
|
|
260,000 |
|
|
|
— |
|
|
|
70,524,000 |
|
|
|
|
|
|
Common stock issued under follow-on offering
|
|
|
— |
|
|
|
— |
|
|
|
1,500,000 |
|
|
|
15,000 |
|
|
|
34,446,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
34,461,000 |
|
|
|
|
|
|
Compensation expense from nonvested stock units
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
61,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
61,000 |
|
|
|
|
|
|
Common stock issued under stock incentive plan
|
|
|
— |
|
|
|
— |
|
|
|
910,262 |
|
|
|
10,000 |
|
|
|
4,083,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4,093,000 |
|
|
|
|
|
|
Tax benefit attributable to stock options
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
6,030,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
6,030,000 |
|
|
|
|
|
|
Common stock issued under the employee stock purchase plan
|
|
|
— |
|
|
|
— |
|
|
|
42,337 |
|
|
|
— |
|
|
|
224,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
224,000 |
|
|
|
|
|
|
Net income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
25,539,000 |
|
|
|
— |
|
|
|
— |
|
|
|
25,539,000 |
|
|
$ |
25,539,000 |
|
|
Foreign currency translation adjustment
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
64,000 |
|
|
|
— |
|
|
|
64,000 |
|
|
|
64,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
25,603,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
— |
|
|
$ |
— |
|
|
|
12,183,080 |
|
|
$ |
122,000 |
|
|
$ |
71,959,000 |
|
|
$ |
68,591,000 |
|
|
$ |
324,000 |
|
|
$ |
— |
|
|
$ |
140,996,000 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
55
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2002, 2003 and 2004
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2002 | |
|
2003 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net income (loss)
|
|
$ |
(7,353,000 |
) |
|
$ |
9,154,000 |
|
|
$ |
25,539,000 |
|
| |
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Cumulative effect of accounting change
|
|
|
8,973,000 |
|
|
|
— |
|
|
|
— |
|
| |
|
Depreciation and amortization of property and equipment
|
|
|
1,535,000 |
|
|
|
1,463,000 |
|
|
|
1,534,000 |
|
| |
|
Amortization of intangible assets
|
|
|
1,049,000 |
|
|
|
276,000 |
|
|
|
253,000 |
|
| |
|
Provision for doubtful accounts
|
|
|
1,785,000 |
|
|
|
504,000 |
|
|
|
580,000 |
|
| |
|
Write-off of inventory
|
|
|
1,099,000 |
|
|
|
1,329,000 |
|
|
|
1,898,000 |
|
| |
|
Loss (gain) on disposal of assets
|
|
|
23,000 |
|
|
|
3,000 |
|
|
|
(5,000 |
) |
| |
|
Loss on write-down of assets
|
|
|
— |
|
|
|
59,000 |
|
|
|
— |
|
| |
|
Deferred tax provision
|
|
|
656,000 |
|
|
|
1,752,000 |
|
|
|
936,000 |
|
| |
|
Stock compensation
|
|
|
192,000 |
|
|
|
119,000 |
|
|
|
339,000 |
|
| |
|
Write-down of debt issuance costs
|
|
|
— |
|
|
|
287,000 |
|
|
|
671,000 |
|
| |
|
Tax benefit attributable to stock options
|
|
|
— |
|
|
|
445,000 |
|
|
|
6,030,000 |
|
| |
|
Changes in operating assets and liabilities, net of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
(Increase) decrease in:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Trade accounts receivable
|
|
|
(2,224,000 |
) |
|
|
1,602,000 |
|
|
|
(23,792,000 |
) |
| |
|
|
|
Inventories
|
|
|
650,000 |
|
|
|
(2,266,000 |
) |
|
|
(14,154,000 |
) |
| |
|
|
|
Prepaid expenses and other current assets
|
|
|
943,000 |
|
|
|
89,000 |
|
|
|
(832,000 |
) |
| |
|
|
|
Refundable income taxes
|
|
|
995,000 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
Other assets
|
|
|
286,000 |
|
|
|
256,000 |
|
|
|
15,000 |
|
| |
|
|
Increase (decrease) in:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Trade accounts payable
|
|
|
(844,000 |
) |
|
|
(1,696,000 |
) |
|
|
5,304,000 |
|
| |
|
|
|
Accrued expenses
|
|
|
(506,000 |
) |
|
|
1,515,000 |
|
|
|
4,843,000 |
|
| |
|
|
|
Income taxes payable
|
|
|
732,000 |
|
|
|
2,736,000 |
|
|
|
3,257,000 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
Net cash provided by operating activities
|
|
|
7,991,000 |
|
|
|
17,627,000 |
|
|
|
12,416,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Cash paid for acquisition of Teva
|
|
|
(43,254,000 |
) |
|
|
(75,000 |
) |
|
|
— |
|
| |
Purchases of short-term investments
|
|
|
— |
|
|
|
— |
|
|
|
(31,250,000 |
) |
| |
Proceeds from sales of short-term investments
|
|
|
— |
|
|
|
— |
|
|
|
15,775,000 |
|
| |
Proceeds from sale of property and equipment
|
|
|
— |
|
|
|
33,000 |
|
|
|
43,000 |
|
| |
Purchase of property and equipment
|
|
|
(1,477,000 |
) |
|
|
(663,000 |
) |
|
|
(1,441,000 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
Net cash used in investing activities
|
|
|
(44,731,000 |
) |
|
|
(705,000 |
) |
|
|
(16,873,000 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Borrowings under line of credit
|
|
|
19,075,000 |
|
|
|
42,706,000 |
|
|
|
— |
|
| |
Repayments under line of credit
|
|
|
(14,300,000 |
) |
|
|
(47,481,000 |
) |
|
|
— |
|
| |
Proceeds from issuance of long-term debt
|
|
|
21,000,000 |
|
|
|
— |
|
|
|
— |
|
| |
Repayments of long-term debt
|
|
|
(290,000 |
) |
|
|
(4,159,000 |
) |
|
|
(30,287,000 |
) |
| |
Loan fees paid
|
|
|
(1,343,000 |
) |
|
|
— |
|
|
|
— |
|
| |
Cash paid for repurchase of preferred stock
|
|
|
— |
|
|
|
(5,938,000 |
) |
|
|
— |
|
| |
Cash received from issuances of common stock
|
|
|
400,000 |
|
|
|
781,000 |
|
|
|
38,500,000 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
24,542,000 |
|
|
|
(14,091,000 |
) |
|
|
8,213,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
Effect of exchange rates on cash
|
|
|
(550,000 |
) |
|
|
(110,000 |
) |
|
|
(39,000 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
Net change in cash and cash equivalents
|
|
|
(12,748,000 |
) |
|
|
2,721,000 |
|
|
|
3,717,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of year
|
|
|
16,689,000 |
|
|
|
3,941,000 |
|
|
|
6,662,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$ |
3,941,000 |
|
|
$ |
6,662,000 |
|
|
$ |
10,379,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Interest
|
|
$ |
264,000 |
|
|
$ |
3,640,000 |
|
|
$ |
1,512,000 |
|
| |
|
Income taxes
|
|
$ |
836,000 |
|
|
$ |
1,607,000 |
|
|
$ |
4,597,000 |
|
Supplemental disclosure of noncash investing and financing
activities:
In 2002, the Company issued to the seller 1,375,000 shares
of Series A preferred stock with a value of $5,500,000,
100,000 shares of common stock with a value of $368,000,
options to purchase 100,000 shares of common stock
with a value of $187,000 and $13,000,000 of long-term debt in
connection with the acquisition of Teva.
See accompanying notes to consolidated financial statements.
56
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003 and 2004
|
|
| (1) |
The Company and Summary of Significant Accounting Policies |
(a) The Company and
Basis of Presentation
The consolidated financial statements include the accounts of
Deckers Outdoor Corporation and its wholly owned subsidiaries
(collectively referred to as the “Company”). All
intercompany balances and transactions have been eliminated in
consolidation.
The Company builds niche products into global lifestyle brands
by designing and marketing innovative, functional and
fashion-oriented footwear, developed for both high performance
outdoor activities and everyday casual lifestyle use.
(b) Inventories
Inventories, principally finished goods, are stated at the lower
of cost (first-in, first-out) or market (net realizable value).
Market values are determined by historical experience with
discounted sales, industry trends and the retail environment.
(c) Revenue
Recognition
The Company recognizes revenue when products are shipped and the
customer takes title and assumes risk of loss, collection of
relevant receivable is probable, persuasive evidence of an
arrangement exists, and the sales price is fixed or
determinable. Allowances for estimated returns, discounts, and
bad debts are provided for when related revenue is recorded.
Amounts billed for shipping and handling costs are recorded as a
component of net sales, totaling $993,000, $2,041,000, and
$3,863,000 for the years ended December 31, 2002, 2003, and
2004, respectively. Related costs paid to third-party shipping
companies are recorded as a cost of sales, totaling $1,124,000,
$2,057,000, and $4,094,000 for the years ended December 31,
2002, 2003, and 2004, respectively.
(d) Goodwill and
Other Intangibles Assets
Intangible assets consist primarily of goodwill, trademarks,
patents, and noncompete covenants arising from the application
of purchase accounting. On January 1, 2002, the Company
adopted Statement of Financial Accounting Standards
(“SFAS”) No. 142, Goodwill and Other
Intangible Assets (“SFAS 142”). Accordingly,
goodwill and intangible assets with indefinite useful lives are
no longer amortized, but instead tested for impairment at least
annually, on December 31 of each year, in accordance with
the provisions of SFAS No. 142. Intangible assets with
estimable useful lives are amortized over their respective
estimated useful lives to their estimated residual values and
reviewed for impairment in accordance with
SFAS No. 144, Accounting for Impairment or Disposal
of Long-Lived Assets (“SFAS 144”).
In connection with the implementation of SFAS 142, a
goodwill impairment charge of $8,973,000 (net of related income
tax benefit of $843,000) was recorded for the year ended
December 31, 2002. There were no impairments during the
years ended December 31, 2003 and 2004.
(e) Impairment of
Long-Lived Assets
SFAS 144 provides a single accounting model for long-lived
assets to be disposed of. SFAS 144 also changes the
criteria for classifying an asset as held for sale and broadens
the scope of businesses to be disposed of that qualify for
reporting as discontinued operations and changes the timing of
recognizing losses on such operations. The Company adopted
SFAS 144 on January 1, 2002. The adoption of
SFAS 144 did not have a significant impact on the
Company’s consolidated financial statements.
57
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial
Statements — (Continued)
In accordance with SFAS 144, long-lived assets, such as
property and equipment, and purchased intangibles subject to
amortization are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount
of an asset to estimated undiscounted future cash flows expected
to be generated by the asset. If the carrying amount of an asset
exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the
asset exceeds the fair value of the asset.
|
|
| (f) |
Depreciation and Amortization |
Depreciation of property and equipment is computed using the
straight-line method based on estimated useful lives ranging
from one to seven years. Leasehold improvements are amortized on
the straight-line basis over their estimated economic useful
lives or the lease term, whichever is shorter.
|
|
| (g) |
Fair Value of Financial Instruments |
The fair values of the Company’s cash equivalents, trade
accounts receivable, prepaid expenses and other current assets,
refundable income taxes, trade accounts payable, accrued
expenses, and income taxes payable approximate the carrying
values due to the relatively short maturities of these
instruments.
The fair value of the Company’s revolving credit line
approximates the carrying value due to variable interest rates
associated with the credit line.
The fair values of the Company’s other notes payable are
estimated by discounting future cash flows of each instrument at
rates currently available to the Company for similar debt
instruments of comparable maturities by the Company’s
bankers. The fair values of these notes approximate the carrying
value.
The Company accounts for stock-based compensation under the
provisions of Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation
(“SFAS 123”), as amended by SFAS 148.
Under the provisions of SFAS 123 and SFAS 148, the
Company has elected to continue to measure compensation cost for
employees and nonemployee directors of the Company under the
intrinsic value method of APB No. 25 and comply with the
pro forma disclosure requirements under SFAS 123 and
SFAS 148. The Company applies the fair value techniques of
SFAS 123 and SFAS 148 to measure compensation cost for
options/ warrants granted to nonemployees.
As discussed in note 1(u), the Financial Accounting
Standards Board, or FASB, recently issued
SFAS No. 123R (revised 2004), “Share-Based
Payment” which supersedes APB Opinion No. 25, and
requires all share-based payments to employees, including grants
of employee stock options, to be recognized in the financial
statements based on their fair values beginning with the first
interim or annual period after June 15, 2005.
58
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial
Statements — (Continued)
The following table illustrates the effects on net income (loss)
if the fair value-based method had been applied to all
outstanding and unvested awards in each period. See assumptions
used to determine the fair value of the awards in note 6.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2002 | |
|
2003 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
Net income (loss), as reported
|
|
$ |
(7,353,000 |
) |
|
$ |
9,154,000 |
|
|
$ |
25,539,000 |
|
|
Add stock-based employee compensation expense included in
reported net income, net of tax
|
|
|
109,000 |
|
|
|
73,000 |
|
|
|
215,000 |
|
|
Deduct total stock-based employee compensation expense under
fair value-based method for all awards, net of tax
|
|
|
(494,000 |
) |
|
|
(596,000 |
) |
|
|
(1,015,000 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
Pro forma net income (loss)
|
|
$ |
(7,738,000 |
) |
|
$ |
8,631,000 |
|
|
$ |
24,739,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
Pro forma net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
$ |
(0.83 |
) |
|
$ |
0.85 |
|
|
$ |
2.25 |
|
| |
Diluted
|
|
$ |
(0.79 |
) |
|
$ |
0.74 |
|
|
$ |
2.05 |
|
(i) Use of
Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets, liabilities,
net sales, and expenses and the disclosure of contingent assets
and liabilities to prepare these consolidated financial
statements in conformity with accounting principles generally
accepted in the U.S. Significant areas requiring the use of
management estimates relate to inventory reserves, allowances
for bad debts, returns and discounts, impairment assessments and
charges, deferred taxes, depreciation and amortization,
litigation reserves, fair value of financial instruments, fair
value of acquired intangibles, assets and liabilities, and
hedging activities. Actual results could differ from these
estimates.
(j) Research and
Development Costs
Research and development costs are charged to expense as
incurred. Such costs amounted to $1,092,000, $1,099,000, and
$1,438,000 in 2002, 2003, and 2004, respectively.
(k) Advertising,
Marketing, and Promotion Costs
Advertising production costs are expensed the first time the
advertisement is run. All other costs of advertising, marketing
and promotion are expensed as incurred. These expenses charged
to operations for the years ended 2002, 2003, and 2004 were
$7,456,000, $6,594,000, and $8,687,000, respectively. Included
in prepaid and other current assets at December 31, 2003
and 2004 were $221,000 and $851,000, respectively, related to
prepaid advertising and promotion expenses for programs to take
place after December 31, 2003 and 2004, respectively.
(l) Income Taxes
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect
on deferred taxes of a change in tax rates is recognized in
income in the period that includes the enactment date.
59
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial
Statements — (Continued)
(m) Income (Loss)
per Share
Basic income (loss) per share (“EPS”) is computed by
dividing net income (loss) available to common stockholders by
the weighted average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution from
securities that could share in the earnings of the Company.
Antidilutive securities are excluded from diluted EPS.
The reconciliations of basic to diluted weighted average shares
are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2002 | |
|
2003 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
Income (loss) used for basic and diluted income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Income before cumulative effect of a change in accounting
principle
|
|
$ |
1,620,000 |
|
|
$ |
9,154,000 |
|
|
$ |
25,539,000 |
|
| |
Cumulative effect of a change in accounting principle, net of
income tax benefit
|
|
|
(8,973,000 |
) |
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Net income (loss) — diluted
|
|
|
(7,353,000 |
) |
|
|
9,154,000 |
|
|
|
25,539,000 |
|
| |
Less redemption premium on preferred stock
|
|
|
— |
|
|
|
(438,000 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Net income (loss) available for common stockholders —
basic
|
|
$ |
(7,353,000 |
) |
|
$ |
8,716,000 |
|
|
$ |
25,539,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in basic computation
|
|
|
9,328,000 |
|
|
|
9,610,000 |
|
|
|
11,005,000 |
|
|
Dilutive effect of stock options
|
|
|
327,000 |
|
|
|
882,000 |
|
|
|
1,137,000 |
|
|
Dilutive effect of convertible preferred stock
|
|
|
151,000 |
|
|
|
1,388,000 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Weighted average shares used for diluted computation
|
|
|
9,806,000 |
|
|
|
11,880,000 |
|
|
|
12,142,000 |
|
| |
|
|
|
|
|
|
|
|
|
The dilutive effect of convertible preferred stock above relates
to preferred stock that was outstanding between
November 25, 2002 and December 3, 2003. The Company
repurchased all of the outstanding preferred stock on
December 3, 2003.
Options to purchase 286,000, 217,000 and 10,000 shares
of common stock at prices ranging from $4.80 to $9.88, $9.88 to
$19.00 and $33.10 were outstanding during 2002, 2003 and 2004,
respectively, but were not included in the computation of
diluted earnings per share because the options’ exercise
price was greater than the average market price of the common
shares during the respective periods, and therefore their
inclusion would be antidilutive. Nonvested stock units in the
amount of 59,750 shares were outstanding at
December 31, 2004 but were not included in the computation
of diluted earnings per share because they were antidilutive.
|
|
| (n) |
Foreign Currency Translation |
The Company considers the U.S. dollar as the functional
currency. Assets and liabilities of the foreign operations
denominated in local currencies are translated at the rate of
exchange at the balance sheet date. Net sales and expenses are
translated at the weighted average rate of exchange during the
period. The effects of translation are recorded in other
comprehensive income as currency translation adjustment.
The Company may enter into foreign currency forward contracts in
the ordinary course of business to mitigate the risk associated
with foreign exchange rate fluctuations related to sales of
goods in Eurodollars. Derivative financial instruments are not
used for speculative purposes. At December 31, 2004, the
Company had no foreign currency forward contracts.
60
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial
Statements — (Continued)
In accordance with Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and
Hedging Activities, these foreign currency cash flow hedges
are recorded at fair value in the accompanying balance sheet
with unrealized gains and losses on outstanding foreign currency
forward contracts recorded in the financial statements as a
component of other comprehensive income, net of deferred taxes,
to the extent they are effective hedges. When the transaction
occurs, the effective portion of the gain or loss from the
derivative designated as a hedge of the transaction is
reclassified from accumulated other comprehensive income to the
same statement of operations line item affected by the hedged
forecasted transaction due to foreign currency fluctuations. Any
terminated derivatives or ineffective portion of gains and
losses resulting from changes in the fair value of the
derivatives is recognized in current earnings. The ineffective
portion of these gains and losses, which results primarily from
the time value component of gains and losses on forward
contracts, was immaterial for all periods presented.
(p) Comprehensive
Income (Loss)
Comprehensive income is the total of net earnings (loss) and all
other nonowner changes in equity. Except for net income (loss),
foreign currency translation adjustments, and unrealized gains
and losses as a result of hedging activities, the Company does
not have any transactions and other economic events that qualify
as comprehensive income as defined under SFAS No. 130.
(q) Business
Segment Reporting
Management of the Company has determined its reportable segments
are strategic business units. The four reportable segments are
the Teva, UGG and Simple wholesale divisions and the
Company’s Internet and catalog retailing business.
Information related to these segments is summarized in
note 10.
(r) Cash
Equivalents
The Company considers all highly liquid investments with
original maturities of three months or less to be cash
equivalents.
(s) Short-term
Investments
Short-term investments, which consist of market auction rate
preferred securities are classified as “available for
sale” under the provisions of SFAS No. 115,
“Accounting for Certain Investments in Debt and Equity
Securities.” Accordingly, the short-term investments are
reported at fair value, with any unrealized gains and losses
included as a separate component of stockholders’ equity,
net of applicable taxes. Realized gains and losses, interest and
dividends are included in interest expense, net. The fair value
of the short-term investments approximated cost at
December 31, 2004, based on quoted market prices.
(t) Reclassifications
Certain reclassifications have been made to the 2002 and 2003
balances to conform to the 2004 presentation.
(u) New Accounting
Standards
In January 2003, the Financial Accounting Standards Board, or
FASB, issued FASB Interpretation, or FIN No. 46,
Consolidation of Variable Interest Entities, an interpretation
of Accounting Research Bulletin, or ARB No. 51.
FIN No. 46 addresses the consolidation by business
enterprises of variable interest entities as defined in the
Interpretation. FIN No. 46 generally applies
immediately to variable interests in variable interest entities
created after January 31, 2003 and to variable interests in
variable interest entities obtained after January 31, 2003.
The application of FIN No. 46 did not have a material
effect on the Company’s
61
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial
Statements — (Continued)
consolidated financial statements. In December 2003, the FASB
revised FIN No. 46 to exempt certain entities from its
requirements and to clarify certain issues arising during the
implementation of FIN No. 46. The adoption of this
revised interpretation in the first quarter of 2004 did not have
any impact on the Company’s consolidated financial
statements.
On October 22, 2004, the American Jobs Creation Act (AJCA)
was signed into law. The AJCA includes a special one-time
85 percent dividends received deduction for certain foreign
earnings that are repatriated. In December 2004, the FASB issued
FASB Staff Position No. FAS 109-2
(FSP FAS 109-2), “Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision within
the American Jobs Creation Act of 2004.” FSP FAS 109-2
provides accounting and disclosure guidance for this
repatriation provision. The Company has begun its evaluation of
the effects of this provision. Although FSP FAS 109-2 is
effective immediately, the Company will not be able to complete
its evaluation until after Congress or the Treasury Department
provides additional clarifying language on key elements of the
provision. The Company expects to complete its evaluation of the
effects of the repatriation provision within a reasonable period
of time following the publication of the additional clarifying
language.
In November 2004, the FASB issued Statement of Financial
Accounting Standard, or SFAS No. 151, “Inventory
Costs — An Amendment of ARB No. 43,
Chapter 4”. SFAS No. 151 amends the guidance
in ARB No. 43, Chapter 4, “Inventory
Pricing”, to clarify the accounting for abnormal amounts of
idle facility expense, freight, handling costs, and wasted
material (spoilage). SFAS No. 151 is effective for
fiscal years beginning after June 15, 2005 and is required
to be adopted by us in the first quarter of fiscal 2006. The
Company does not expect the adoption of SFAS No. 151
to have a material impact on its consolidated financial
statements.
In December 2004, the FASB issued SFAS No. 123R
(revised 2004), “Share-Based Payment”.
SFAS No. 123R supersedes APB Opinion No. 25, and
requires all share-based payments to employees, including grants
or employee stock options, to be recognized in the financial
statements based on their fair values beginning with the first
interim or annual period after June 15, 2005. The pro forma
disclosure permitted under SFAS No. 123 will no longer
be an alternative to financial statement recognition.
SFAS No. 123R requires the determination of the fair
value of the share-based compensation at the grant date and the
recognition of the related expense over the period in which the
share-based compensation vests. The Company is required to adopt
the provisions of SFAS No. 123R effective July 1,
2005. The adoption of this Statement is expected to result in an
additional expense for the year ending December 31, 2005 of
approximately $400,000, which will be recorded in the third and
fourth quarter of 2005.
Effective August 1, 1992, the Company established a 401(k)
defined contribution plan. Substantially all employees are
eligible to participate in the plan through tax-deferred
contributions. The Company matches 50% of an employee’s
contribution up to $1,200 per year. Matching contributions
totaled $90,000, $67,000 and $92,000 during 2002, 2003 and 2004,
respectively. In addition, the Company may also make
discretionary profit sharing contributions to the plan. The
Company did not make profit sharing contributions for the years
ended December 31, 2002, 2003 or 2004.
62
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial
Statements — (Continued)
|
|
| (3) |
Property and Equipment |
Property and equipment is summarized as follows:
| |
|
|
|
|
|
|
|
|
|
| |
|
2003 | |
|
2004 | |
| |
|
| |
|
| |
|
Machinery and equipment
|
|
$ |
5,602,000 |
|
|
$ |
6,441,000 |
|
|
Furniture and fixtures
|
|
|
663,000 |
|
|
|
666,000 |
|
|
Leasehold improvements
|
|
|
724,000 |
|
|
|
927,000 |
|
| |
|
|
|
|
|
|
| |
|
|
6,989,000 |
|
|
|
8,034,000 |
|
|
Less accumulated depreciation and amortization
|
|
|
4,020,000 |
|
|
|
5,196,000 |
|
| |
|
|
|
|
|
|
| |
Net property and equipment
|
|
$ |
2,969,000 |
|
|
$ |
2,838,000 |
|
| |
|
|
|
|
|
|
During 2004, the Company wrote-off certain fully depreciated
assets with an original cost of $395,000.
|
|
| (4) |
Notes Payable and Long-Term Debt |
Notes payable and long-term debt consists of the following:
| |
|
|
|
|
|
|
|
|
| |
|
2003 | |
|
2004 |
| |
|
| |
|
|
|
Revolving line of credit with Comerica Bank (described below)
|
|
$ |
— |
|
|
$ |
— |
|
|
Term loan with Comerica Bank, secured by all assets of the
Company, interest (4.37% at December 31, 2003) at
Bank’s base rate or LIBOR plus a margin, as defined,
principal payment of $1,750,000 due on May 31, 2004 with
equal monthly payments of $292,000 beginning June 30, 2004,
with final payment due on November 25, 2005, fully repaid
in 2004
|
|
|
7,000,000 |
|
|
|
— |
|
|
Secured subordinated note, payable in quarterly principal
installments of $1,500,000 beginning November 2007, interest at
a rate of 16.75%, of which 12.00% is payable monthly and 4.75%
is payable at maturity, compounded monthly, due November 2008. A
prepayment penalty ranging from 4.00% to 5.00% is incurred for
any portion repaid prior to November 2004, fully repaid in 2004
|
|
|
10,000,000 |
|
|
|
— |
|
|
Unsecured junior subordinated 9.00% note payable to the
seller of Teva, interest payable in annual installments at a
rate of 7.00% through November 2008. Principal and additional
interest of 2.00% are due in November 2008, compounded annually,
fully repaid in 2004
|
|
|
13,287,000 |
|
|
|
— |
|
| |
|
|
|
|
|
|
| |
|
|
30,287,000 |
|
|
|
— |
|
|
Less current installments
|
|
|
3,792,000 |
|
|
|
— |
|
| |
|
|
|
|
|
|
| |
|
$ |
26,495,000 |
|
|
$ |
— |
|
| |
|
|
|
|
|
|
We amended the Facility with Comerica Bank-California (the
“Bank”) in March 2005. As amended, the Facility
expires June 1, 2006 and provides for a maximum
availability of $20,000,000 subject to a borrowing base. In
general, the borrowing base is equal to 75% of eligible accounts
receivable, as defined, and 50% of eligible inventory, as
defined. The accounts receivable advance rate can increase or
decrease depending on our
63
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial
Statements — (Continued)
accounts receivable dilution, which is calculated periodically.
Up to $10,000,000 of borrowings may be in the form of letters of
credit. The Facility bears interest at the Bank’s prime
rate (5.25% at December 31, 2004) or at our option, at
LIBOR (2.40% at December 31, 2004) plus 1.00% to 2.50%,
depending on our ratio of liabilities to earnings before
interest, taxes, depreciation and amortization
(“EBITDA”), and is secured by substantially all
assets. The Facility included an upfront fee of $230,000 and
includes subsequent annual commitment fees of $100,000 for 2004
and $60,000 for 2005. At December 31, 2004, the Company had
no outstanding borrowings under the Facility, no foreign
currency reserves for outstanding forward contracts and no
outstanding letters of credit. We had credit availability under
the Facility of $20,000,000 at December 31, 2004.
The agreements underlying the Facility prohibit the payment of
dividends and contain several financial covenants including a
quick ratio requirement, profitability requirements and a
tangible net worth requirement, among others. The Company was in
compliance with all covenants at December 31, 2004.
Components of income taxes are as follows.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Federal | |
|
State | |
|
Foreign | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
| |
|
2002:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Current
|
|
$ |
53,000 |
|
|
$ |
(7,000 |
) |
|
$ |
522,000 |
|
|
$ |
568,000 |
|
| |
Deferred
|
|
|
493,000 |
|
|
|
163,000 |
|
|
|
— |
|
|
|
656,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
546,000 |
|
|
$ |
156,000 |
|
|
$ |
522,000 |
|
|
$ |
1,224,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Current
|
|
$ |
2,043,000 |
|
|
$ |
483,000 |
|
|
$ |
1,452,000 |
|
|
$ |
3,978,000 |
|
| |
Deferred
|
|
|
1,334,000 |
|
|
|
418,000 |
|
|
|
— |
|
|
|
1,752,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
3,377,000 |
|
|
$ |
901,000 |
|
|
$ |
1,452,000 |
|
|
$ |
5,730,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Current
|
|
$ |
9,930,000 |
|
|
$ |
2,073,000 |
|
|
$ |
1,745,000 |
|
|
$ |
13,748,000 |
|
| |
Deferred
|
|
|
629,000 |
|
|
|
293,000 |
|
|
|
14,000 |
|
|
|
936,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
10,559,000 |
|
|
$ |
2,366,000 |
|
|
$ |
1,759,000 |
|
|
$ |
14,684,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign income before income taxes and cumulative effect of a
change in accounting principle was $1,310,000, $4,220,000 and
$7,261,000 during the years ended December 31, 2002, 2003
and 2004, respectively.
64
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial
Statements — (Continued)
Actual income taxes differed from that obtained by applying the
statutory federal income tax rate to earnings before income
taxes as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2002 | |
|
2003 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
Computed “expected” income taxes
|
|
$ |
967,000 |
|
|
$ |
5,060,000 |
|
|
$ |
14,078,000 |
|
|
State income taxes, net of federal income tax benefit
|
|
|
166,000 |
|
|
|
623,000 |
|
|
|
1,895,000 |
|
|
Other
|
|
|
91,000 |
|
|
|
47,000 |
|
|
|
(1,289,000 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
1,224,000 |
|
|
$ |
5,730,000 |
|
|
$ |
14,684,000 |
|
| |
|
|
|
|
|
|
|
|
|
The tax effects of temporary differences that give rise to
significant portions of deferred tax assets and deferred tax
liabilities at December 31, 2003 and 2004 are presented
below:
| |
|
|
|
|
|
|
|
|
|
|
|
| |
|
2003 | |
|
2004 | |
| |
|
| |
|
| |
|
Deferred tax assets, current:
|
|
|
|
|
|
|
|
|
| |
Uniform capitalization adjustment to inventory
|
|
$ |
483,000 |
|
|
$ |
487,000 |
|
| |
Bad debt and other reserves
|
|
|
1,576,000 |
|
|
|
2,725,000 |
|
| |
State taxes
|
|
|
78,000 |
|
|
|
557,000 |
|
| |
Prepaid expenses
|
|
|
— |
|
|
|
(529,000 |
) |
| |
|
|
|
|
|
|
| |
|
Total deferred tax assets, current
|
|
|
2,137,000 |
|
|
|
3,240,000 |
|
| |
|
|
|
|
|
|
|
Deferred tax liabilities, noncurrent:
|
|
|
|
|
|
|
|
|
| |
Amortization of intangible assets
|
|
|
(224,000 |
) |
|
|
(1,896,000 |
) |
| |
Depreciation of property and equipment
|
|
|
(344,000 |
) |
|
|
(711,000 |
) |
| |
|
|
|
|
|
|
| |
|
Total deferred tax liabilities, noncurrent
|
|
|
(568,000 |
) |
|
|
(2,607,000 |
) |
| |
|
|
|
|
|
|
| |
|
|
Net deferred tax assets
|
|
$ |
1,569,000 |
|
|
$ |
633,000 |
|
| |
|
|
|
|
|
|
In order to fully realize the deferred tax assets, the Company
will need to generate future taxable income of approximately
$8,000,000. The deferred tax assets are primarily related to the
Company’s domestic operations. Domestic taxable income for
the years ended December 31, 2003 and 2004 was
approximately $1,272,000 and $15,879,000, respectively. Based
upon the level of historical taxable income and projections for
future taxable income over the periods in which the deferred tax
assets are deductible, management believes it is more likely
than not that the results of future operations will generate
sufficient taxable income to realize the net deferred tax assets
and, accordingly, no valuation allowance has been recorded.
As of December 31, 2004, withholding and U.S. taxes
have not been provided on approximately $12 million of
unremitted earnings of our non-U.S. subsidiaries because
the Company has currently reinvested these earnings permanently
in such operations. Such earnings would become taxable upon the
sale or liquidation of these subsidiaries or upon remittance of
dividends.
In December 2004, the FASB issued FASB Staff Position
No. FAS 109-2 (“FAS 109-2”),
“Accounting and Disclosure Guidance for the Foreign
Earnings Repatriation Provision within the American Jobs
Creations Act of 2004 (“AJCA”).” The AJCA
introduces a limited time 85% dividends received deduction on
the repatriation of certain foreign earnings to a
U.S. taxpayer (repatriation provision), provided certain
criteria are met. FAS109-2 provides accounting and disclosure
guidance for the repatriation provision. Although FAS 109-2
is effective immediately, we do not expect to be able to
complete our evaluation of the repatriation
65
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial
Statements — (Continued)
provision until after Congress or the Treasury Department
provides additional clarifying language on key elements of the
provision. In January 2005, the Treasury Department began
to issue the first of a series of clarifying guidance documents
related to this provision. We expect to complete our evaluation
of the effects of the repatriation provision in 2005. The range
of possible amounts that we are considering for repatriation
under this provision is between zero and $12 million. The
Company is currently unable to reasonably estimate the related
range of income tax effects of the potential repatriation.
The Company is authorized to issue 5,000,000 shares of
preferred stock with a par value of $0.01, of which
1,375,000 shares are designated as Series A Preferred
Stock. The 1,375,000 shares of Series A Preferred
Stock were issued to Mark Thatcher in connection with the
acquisition of Teva (note 12). In December 2003, the
Company redeemed all of the outstanding Preferred Stock. In
connection with the redemption, the Company paid
Mr. Thatcher a premium of approximately $438,000, which was
recorded as a reduction of additional paid-in capital. The
premium reduced income applicable to common stockholders and,
therefore, is reflected in the income per share calculations.
The Company’s 1993 Stock Incentive Plan (the “1993
Plan”) provides for 3,000,000 shares of common stock
that are reserved for issuance to officers, directors,
employees, and consultants of the Company. Awards to 1993 Plan
participants are not restricted to any specified form and may
include stock options, securities convertible into or redeemable
for stock, stock appreciation rights, stock purchase warrants,
or other rights to acquire stock. Under the 1993 Plan, 124,896,
262,577 and 910,262 shares of common stock were issued to
employees in 2002, 2003, and 2004, respectively.
66
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial
Statements — (Continued)
Common stock option activity under the 1993 Plan for the years
ended December 31, 2002, 2003 and 2004 is as follows:
| |
|
|
|
|
|
|
|
|
| |
|
|
|
Weighted | |
| |
|
|
|
Average | |
| |
|
|
|
Exercise | |
| |
|
Shares | |
|
Price | |
| |
|
| |
|
| |
|
Outstanding at December 31, 2001
|
|
|
1,580,800 |
|
|
$ |
3.80 |
|
|
Granted
|
|
|
624,400 |
|
|
|
4.13 |
|
|
Exercised
|
|
|
(107,900 |
) |
|
|
2.32 |
|
|
Canceled
|
|
|
(165,300 |
) |
|
|
3.26 |
|
| |
|
|
|
|
|
|
|
Outstanding at December 31, 2002
|
|
|
1,932,000 |
|
|
|
4.04 |
|
|
Granted
|
|
|
206,000 |
|
|
|
18.75 |
|
|
Exercised
|
|
|
(238,100 |
) |
|
|
3.19 |
|
|
Canceled
|
|
|
(125,400 |
) |
|
|
7.51 |
|
| |
|
|
|
|
|
|
|
Outstanding at December 31, 2003
|
|
|
1,774,500 |
|
|
|
5.62 |
|
|
Granted
|
|
|
26,000 |
|
|
|
29.04 |
|
|
Exercised
|
|
|
(899,600 |
) |
|
|
4.24 |
|
|
Canceled
|
|
|
(10,800 |
) |
|
|
11.31 |
|
| |
|
|
|
|
|
|
|
Outstanding at December 31, 2004
|
|
|
890,100 |
|
|
|
7.62 |
|
| |
|
|
|
|
|
|
|
Options exercisable at December 31, 2002
|
|
|
1,245,900 |
|
|
|
4.07 |
|
|
Options exercisable at December 31, 2003
|
|
|
1,168,800 |
|
|
|
4.36 |
|
|
Options exercisable at December 31, 2004
|
|
|
517,000 |
|
|
|
6.79 |
|
The per share weighted average fair value of stock options
granted during 2002, 2003, and 2004 was $2.25, $10.83, and
$16.83, respectively, on the date of grant using the
Black-Scholes option pricing model with the following weighted
average assumptions: 2002 — expected dividend yield of
0%, stock volatility of 48.46%, risk-free interest rate of
3.70%, and an expected life of seven years; 2003 —
expected dividend yield of 0%, stock volatility of 51.70%,
risk-free interest rate of 3.70%, and an expected life of seven
years; 2004 — expected dividend yield of 0%, stock
volatility of 52.85%, risk-free interest rate of 3.97%, and an
expected life of seven years.
67
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial
Statements — (Continued)
The following table summarizes information about stock options
outstanding and exercisable at December 31, 2004.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Options Outstanding | |
|
Options Exercisable | |
| |
|
| |
|
| |
| |
|
|
|
Weighted | |
|
Weighted | |
|
|
|
Weighted | |
| |
|
Number | |
|
Average | |
|
Average | |
|
Number | |
|
Average | |
| Range of |
|
Outstanding | |
|
Remaining | |
|
Exercise | |
|
Exercisable at | |
|
Exercise | |
| Exercise Price |
|
December 31, 2004 | |
|
Contractual Life | |
|
Price | |
|
December 31, 2004 | |
|
Price | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
$1.56 to $3.12
|
|
|
155,100 |
|
|
|
4.08 years |
|
|
$ |
1.82 |
|
|
|
155,100 |
|
|
$ |
1.82 |
|
|
$3.60 to $3.71
|
|
|
131,600 |
|
|
|
7.09 years |
|
|
|
3.61 |
|
|
|
67,200 |
|
|
|
3.60 |
|
|
$4.03 to $4.80
|
|
|
315,700 |
|
|
|
7.21 years |
|
|
|
4.24 |
|
|
|
124,100 |
|
|
|
4.22 |
|
|
$6.21 to $8.50
|
|
|
89,000 |
|
|
|
3.06 years |
|
|
|
7.37 |
|
|
|
89,100 |
|
|
|
7.37 |
|
|
$19.00
|
|
|
172,700 |
|
|
|
8.92 years |
|
|
|
19.00 |
|
|
|
55,500 |
|
|
|
19.00 |
|
|
$24.17 to $33.10
|
|
|
26,000 |
|
|
|
8.19 years |
|
|
|
29.04 |
|
|
|
26,000 |
|
|
|
29.04 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
890,100 |
|
|
|
6.59 years |
|
|
|
7.62 |
|
|
|
517,000 |
|
|
|
6.79 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In December 2004, the Company replaced its annual employee
stock option grant with a grant of Nonvested Stock Units
(“NSU’s”), which are accounted for as variable
awards under APB 25. The NSU’s entitle the employee
recipients to receive shares of common stock in the Company,
which vest in quarterly increments during the year ended
December 31, 2008, subject to achievement of certain
performance targets. For the 2004 grant, the maximum quantity
that is available to vest is 59,750 for all participants in the
aggregate. The fair value of the aggregate NSU’s granted in
2004 was $2,808,000 as of December 31, 2004, of which
approximately $61,000 was recorded as an expense in 2004. The
Company currently intends to use NSU’s rather than stock
options in its future compensation programs.
In August 1995, the Company adopted the 1995 Employee Stock
Purchase Plan (the “1995 Plan”). The 1995 Plan is
intended to qualify as an Employee Stock Purchase Plan under
Section 423 of the Internal Revenue Code. Under the terms
of the 1995 Plan, as amended, 300,000 shares of common
stock are reserved for issuance to employees who have been
employed by the Company for at least six months. The 1995 Plan
provides for employees to purchase the Company’s common
stock at a discount below market value, as defined by the 1995
Plan. Under the 1995 Plan, 11,870, 6,781 and 42,337 shares
were issued in 2002, 2003, and 2004, respectively. Consistent
with the application of APB Opinion No. 25, no
compensation has been recorded for stock purchases.
The Company adopted a stockholder rights plan in 1998 to protect
stockholders against unsolicited attempts to acquire control of
the Company that do not offer what the Company believes to be an
adequate price to all stockholders. 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 was 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
68
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial
Statements — (Continued)
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.
The rights have no voting power and expire on November 11,
2008. The Company may redeem the rights for $0.01 per right
until the right becomes exercisable.
As discussed in note 12, on November 25, 2002, the
Company acquired the worldwide Teva patents, trademarks and
other assets. Prior to the acquisition, the Company had been
selling its Teva line of sport sandals and other footwear since
1985, pursuant to various license arrangements with Mark
Thatcher, the inventor of the Teva sport sandal and previous
holder of the Teva patents and trademarks.
In 1999, the Company signed a new license agreement (the
“License Agreement”) for Teva, which was effective
January 1, 2000. Under the License Agreement, the Company
received the exclusive worldwide rights for the manufacture and
distribution of Teva footwear through 2004. In connection with
the License Agreement, the Company paid the licensor a licensing
fee of $1,000,000 and issued the licensor 428,743 shares of
its previously unissued common stock with a fair value of
$1,608,000. The Company recorded the license as an intangible
asset for the value of the cash and common stock issued pursuant
to the License Agreement. In addition, the Company agreed to
grant the licensor not less than 50,000 stock options on the
Company’s common stock annually, with an exercise price at
the market value on the date of grant. The fair value of options
granted under the License Agreement aggregated $111,000 in 2002.
In connection with the 1999 Teva license renewal, the Company
received an option to buy Teva from Mr. Thatcher, which was
subsequently renegotiated in 2001. On November 25, 2002,
the Company completed the acquisition of Teva.
The License Agreement provided for royalties using a sliding
scale ranging from 5.0% to 6.5% of annual sales, depending upon
sales levels, and included minimum annual royalties ranging from
$4,400,000 in 2002 to $7,600,000 in 2011. The agreement also
required minimum advertising and promotional expenditures of
5.0% of annual sales for domestic sales and 6.5% for
international sales. In addition to the minimum advertising and
promotional costs, the Company and the licensor had agreed to
each contribute annually 0.5% of annual sales toward the
promotion of the Teva brand and trademark, with or without
particular reference to individual styles.
Royalty expense related to Teva sales was included in selling,
general, and administrative expenses in the accompanying
consolidated financial statements and was $3,739,000 during the
year ended December 31, 2002.
Subsequent to acquiring Teva on November 25, 2002, the
Company ceased granting stock options and paying royalties on
Teva footwear sales and owns all Teva rights and assets
worldwide.
69
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial
Statements — (Continued)
|
|
| (8) |
Commitments and Contingencies |
|
|
| |
The Company leases office facilities under operating lease
agreements, which expire through December 2009. Future minimum
commitments under the lease agreements are as follows: |
| |
|
|
|
|
|
|
Year ending December 31:
|
|
|
|
|
| |
2005
|
|
$ |
2,274,000 |
|
| |
2006
|
|
|
2,198,000 |
|
| |
2007
|
|
|
1,492,000 |
|
| |
2008
|
|
|
1,163,000 |
|
| |
2009
|
|
|
1,017,000 |
|
| |
|
|
|
| |
|
$ |
8,144,000 |
|
| |
|
|
|
Total rent expense for the years ended December 31, 2002,
2003, and 2004 was approximately $1,188,000, $1,271,000 and
$1,341,000, respectively.
An action was brought against the Company in 1995 by Molly
Strong-Butts and Yeti by Molly, Ltd. (collectively, Molly) which
alleged, among other things, that the Company violated a certain
nondisclosure agreement and obtained purported trade secrets
regarding a line of winter footwear which Deckers stopped
producing in 1994. A jury verdict was obtained against the
Company in district court in March 1999 aggregating $1,785,000
for the two plaintiffs. In August 2001 the U.S. Court of
Appeals for the Ninth Circuit affirmed the district court’s
decision for a judgment against the Company, resulting in a
settlement of approximately $2,000,000, including interest,
which the Company paid in November 2001. In addition, the court
of appeals reversed the district court’s refusal to
consider an award of exemplary damages or attorney fees and
remanded to the district court for further proceedings. On
September 30, 2002, a federal judge ruled that the Company
must pay an additional $4,290,000 to Molly, including $2,450,000
of exemplary damages and $1,840,000 to cover the
plaintiff’s attorney fees. Deckers and Molly agreed to
settle without going to appeal for the total sum of $4,000,000
in 2002. The accompanying consolidated statement of operations
for the year ended December 31, 2002, the final year of
this litigation, included litigation costs of $3,228,000 related
to this matter.
In 1997, the European Commission enacted anti-dumping duties of
49.2% on certain types of footwear imported into Europe from
China and Indonesia. Dutch Customs had issued an opinion to the
Company that certain popular Teva styles were covered by this
anti-dumping duty legislation. Based on this opinion, Dutch
Customs sought anti-dumping duties of approximately $500,000
from the Company, which the Company had appealed. Nevertheless,
the Company expensed the $500,000 prior to 2002 in accordance
with SFAS 5, Accounting for Contingencies. In 2003,
an appeals court ruled that the duties were not levied by the
appropriate governing body and nullified the entire claim. As a
result of this favorable final ruling, the Company reversed the
previously established $500,000 accrual in 2003, which is
reflected as an increase to income from operations in the
accompanying consolidated statement of operations for the year
ended December 31, 2003.
70
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial
Statements — (Continued)
Overall, the litigation expense (income) in the accompanying
consolidated statement of operations for the years ended
December 31, 2002, 2003 and 2004 includes the following:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2002 | |
|
2003 | |
|
2004 |
| |
|
| |
|
| |
|
|
|
Molly litigation
|
|
$ |
3,228,000 |
|
|
$ |
— |
|
|
$ |
— |
|
|
Anti-dumping duties matter
|
|
|
— |
|
|
$ |
(500,000 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
3,228,000 |
|
|
$ |
(500,000 |
) |
|
$ |
— |
|
| |
|
|
|
|
|
|
|
|
|
The Company is currently involved in various other legal claims
arising from the ordinary course of business. Management does
not believe that the disposition of these matters will have a
material effect on the Company’s financial position or
results of operations.
|
|
| (9) |
Foreign Currency Forward Contracts |
The Company uses foreign currency forward contracts to hedge the
foreign currency exposure associated with a portion of its
forecasted transactions in foreign currency. These forward
contracts are designated as foreign currency cash flow hedges
and are recorded at fair value in the accompanying consolidated
balance sheet. The effective portion of gains and losses
resulting from recording forward contracts at fair value are
deferred in accumulated other comprehensive income in the
accompanying consolidated balance sheet until the underlying
forecasted foreign currency transaction occurs. When the
transaction occurs, the effective portion of the gain or loss
from the derivative designated as a hedge of the transaction is
reclassified from accumulated other comprehensive income to the
same statement of earnings line item affected by the hedged
forecasted transaction due to foreign currency fluctuations.
Because the amounts and the maturities of the derivatives
approximate those of the forecasted transactions, changes in the
fair value of the derivatives are expected to be highly
effective in offsetting changes in the cash flows of the hedged
items. Any terminated derivatives or ineffective portion of
gains and losses resulting from changes in the fair value of the
derivatives is recognized in current earnings. The ineffective
portion of these gains and losses, which results primarily from
the time value component of gains and losses on forward
contracts, was immaterial for all periods presented.
At December 31, 2004, the Company had no foreign currency
forward contacts.
|
|
| (10) |
Business Segments, Concentration of Business, and Credit Risk
and Significant Customers |
The Company’s accounting policies of the segments below are
the same as those described in the summary of significant
accounting policies, except that the Company does not allocate
interest, income taxes, or unusual items to segments. The
Company evaluates performance based on net sales and profit or
loss from operations. The Company’s reportable segments are
strategic business units responsible for the worldwide
operations of each of its brands. They are managed separately
because each business requires different marketing, research and
development, design, sourcing and sales strategies. The earnings
from operations for each of the segments includes only those
costs which are specifically related to each brand, which
consist primarily of cost of sales, costs for research and
development, design, marketing, sales, commissions, royalties,
bad debts, depreciation, amortization and the costs of employees
directly related to the brands. The unallocated corporate
overhead costs are the shared costs of the organization and
include, among others, the following costs: costs of the
distribution center, information technology, human resources,
accounting and finance, credit and collections, executive
compensation, facilities costs and the 2002 and 2003 litigation
expense (income). The operating income derived from Internet and
catalog sales to third parties is separated into two components:
(i) the wholesale profit is included in the operating
income of each of the three brands, and (ii) the retail
profit is included in the operating income of the
Internet/catalog segment.
71
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial
Statements — (Continued)
Business segment information is summarized as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2002 | |
|
2003 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
Net sales to external customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Teva wholesale
|
|
$ |
64,849,000 |
|
|
$ |
72,783,000 |
|
|
$ |
83,477,000 |
|
| |
UGG wholesale
|
|
|
23,491,000 |
|
|
|
34,561,000 |
|
|
|
101,806,000 |
|
| |
Simple wholesale
|
|
|
10,159,000 |
|
|
|
7,210,000 |
|
|
|
9,633,000 |
|
| |
Internet/catalog
|
|
|
608,000 |
|
|
|
6,501,000 |
|
|
|
19,871,000 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
99,107,000 |
|
|
$ |
121,055,000 |
|
|
$ |
214,787,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
Income from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Teva wholesale
|
|
$ |
12,011,000 |
|
|
$ |
21,739,000 |
|
|
$ |
24,901,000 |
|
| |
UGG wholesale
|
|
|
6,589,000 |
|
|
|
10,002,000 |
|
|
|
31,674,000 |
|
| |
Simple wholesale
|
|
|
279,000 |
|
|
|
(1,176,000 |
) |
|
|
45,000 |
|
| |
Internet/catalog
|
|
|
194,000 |
|
|
|
1,148,000 |
|
|
|
5,533,000 |
|
| |
Unallocated overhead
|
|
|
(15,725,000 |
) |
|
|
(12,275,000 |
) |
|
|
(19,691,000 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
3,348,000 |
|
|
$ |
19,438,000 |
|
|
$ |
42,462,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Teva wholesale
|
|
$ |
1,217,000 |
|
|
$ |
502,000 |
|
|
$ |
401,000 |
|
| |
UGG wholesale
|
|
|
13,000 |
|
|
|
21,000 |
|
|
|
30,000 |
|
| |
Simple wholesale
|
|
|
57,000 |
|
|
|
42,000 |
|
|
|
31,000 |
|
| |
Internet/catalog
|
|
|
2,000 |
|
|
|
41,000 |
|
|
|
92,000 |
|
| |
Unallocated overhead
|
|
|
1,295,000 |
|
|
|
1,133,000 |
|
|
|
1,233,000 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
2,584,000 |
|
|
$ |
1,739,000 |
|
|
$ |
1,787,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Teva wholesale
|
|
$ |
142,000 |
|
|
$ |
64,000 |
|
|
$ |
226,000 |
|
| |
UGG wholesale
|
|
|
16,000 |
|
|
|
30,000 |
|
|
|
19,000 |
|
| |
Simple wholesale
|
|
|
69,000 |
|
|
|
4,000 |
|
|
|
111,000 |
|
| |
Internet/catalog
|
|
|
— |
|
|
|
151,000 |
|
|
|
151,000 |
|
| |
Unallocated overhead
|
|
|
1,250,000 |
|
|
|
414,000 |
|
|
|
934,000 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
1,477,000 |
|
|
$ |
663,000 |
|
|
$ |
1,441,000 |
|
| |
|
|
|
|
|
|
|
|
|
72
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial
Statements — (Continued)
| |
|
|
|
|
|
|
|
|
|
| |
|
2003 | |
|
2004 | |
| |
|
| |
|
| |
|
Total assets from reportable segments:
|
|
|
|
|
|
|
|
|
| |
Teva wholesale
|
|
$ |
85,491,000 |
|
|
$ |
87,640,000 |
|
| |
UGG wholesale
|
|
|
18,033,000 |
|
|
|
51,407,000 |
|
| |
Simple wholesale
|
|
|
4,231,000 |
|
|
|
4,538,000 |
|
| |
Internet/catalog
|
|
|
440,000 |
|
|
|
446,000 |
|
| |
|
|
|
|
|
|
| |
|
$ |
108,195,000 |
|
|
$ |
144,031,000 |
|
| |
|
|
|
|
|
|
The assets allocable to each reporting segment generally include
accounts receivable, inventory, intangible assets and certain
other assets, which are specifically identifiable with one of
the Company’s business segments. Unallocated corporate
assets are the assets not specifically related to one of the
segments and generally include the Company’s cash,
refundable and deferred tax assets, and various other assets
shared by the Company’s brands.
Reconciliations of total assets from reportable segments to the
consolidated financial statements are as follows:
| |
|
|
|
|
|
|
|
|
|
| |
|
2003 | |
|
2004 | |
| |
|
| |
|
| |
|
Total assets from reportable segments
|
|
$ |
108,195,000 |
|
|
$ |
144,031,000 |
|
|
Unallocated refundable income taxes and deferred tax assets
|
|
|
2,107,000 |
|
|
|
3,225,000 |
|
|
Other unallocated corporate assets
|
|
|
10,724,000 |
|
|
|
29,295,000 |
|
| |
|
|
|
|
|
|
| |
Consolidated total assets
|
|
$ |
121,026,000 |
|
|
$ |
176,551,000 |
|
| |
|
|
|
|
|
|
The Company sells its footwear products principally to customers
throughout the U.S. The Company also sells its footwear
products to foreign customers located in Europe, Canada,
Australia, and Asia, among other regions. International sales to
unaffiliated customers were 21.0%, 18.5%, and 18.3% of net sales
for the years ended December 31, 2002, 2003, and 2004,
respectively. The Company does not consider international
operations a separate segment. The Chief Operating Decision
Maker does not review such operations separately, but rather in
the aggregate with the aforementioned segments. Management
performs regular evaluations concerning the ability of its
customers to satisfy their obligations and records a provision
for doubtful accounts based upon these evaluations. For the
years ended December 31, 2002, 2003 and 2004, no single
customer exceeded 10% of consolidated net sales, except that one
customer, which is a customer of the Company’s Teva, UGG
and Simple segments, accounted for 14.1% of consolidated net
sales for the year ended December 31, 2004. As of
December 31, 2003, the Company had one customer
representing 13.8% of net trade accounts receivable. As of
December 31, 2004, the Company had one customer
representing 22.0% of net trade accounts receivable.
Approximately $17,000,000 of trademarks and $466,000 of goodwill
is held in Hong Kong by a subsidiary of the Company.
Substantially all other long-lived assets are held in the United
States.
The Company’s production and sourcing is concentrated
primarily in the Far East, with the vast majority being produced
at four independent contractor factories in China. The
Company’s operations are subject to the customary risks of
doing business abroad, including, but not limited to, currency
fluctuations, customs duties, and related fees, various import
controls and other nontariff barriers, restrictions on the
transfer of funds, labor unrest and strikes and, in certain
parts of the world, political instability.
73
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial
Statements — (Continued)
|
|
| (11) |
Quarterly Summary of Information (Unaudited) |
Summarized unaudited quarterly financial data are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2003 | |
| |
|
| |
| |
|
March 31 | |
|
June 30 | |
|
September 30 | |
|
December 31 | |
| |
|
| |
|
| |
|
| |
|
| |
|
Net sales
|
|
$ |
36,102,000 |
|
|
$ |
24,342,000 |
|
|
$ |
24,894,000 |
|
|
$ |
35,717,000 |
|
|
Gross profit
|
|
|
16,240,000 |
|
|
|
11,832,000 |
|
|
|
9,502,000 |
|
|
|
13,771,000 |
|
|
Net income
|
|
|
4,203,000 |
|
|
|
2,006,000 |
|
|
|
481,000 |
|
|
|
2,464,000 |
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
$ |
0.44 |
|
|
$ |
0.21 |
|
|
$ |
0.05 |
|
|
$ |
0.21 |
|
| |
Diluted
|
|
$ |
0.37 |
|
|
$ |
0.17 |
|
|
$ |
0.04 |
|
|
$ |
0.19 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
| |
|
| |
| |
|
March 31 | |
|
June 30 | |
|
September 30 | |
|
December 31 | |
| |
|
| |
|
| |
|
| |
|
| |
|
Net sales
|
|
$ |
44,272,000 |
|
|
$ |
40,546,000 |
|
|
$ |
55,797,000 |
|
|
$ |
74,172,000 |
|
|
Gross profit
|
|
|
20,406,000 |
|
|
|
18,906,000 |
|
|
|
22,235,000 |
|
|
|
28,886,000 |
|
|
Net income
|
|
|
5,382,000 |
|
|
|
5,087,000 |
|
|
|
5,822,000 |
|
|
|
9,248,000 |
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
$ |
0.55 |
|
|
$ |
0.47 |
|
|
$ |
0.50 |
|
|
$ |
0.78 |
|
| |
Diluted
|
|
$ |
0.49 |
|
|
$ |
0.43 |
|
|
$ |
0.46 |
|
|
$ |
0.72 |
|
On November 25, 2002, the Company completed an acquisition
of the worldwide Teva patents, trademarks, and other assets from
Mark Thatcher, the Company’s former licensor and the holder
of the Teva patents and trademarks and his wholly-owned
corporation, Teva Sport Sandals, Inc., the owner of the Teva
Internet and catalog business. As a result of the acquisition,
the Company now owns all of the Teva worldwide assets including
all patents, tradenames, trademarks and all other intellectual
property, as well as Teva’s existing catalog and Internet
retailing business, which includes the operations of Teva Sport
Sandals, Inc. As a result of the acquisition, the Company will
experience cost savings by not having to pay royalties and is
able to control and build the Teva brand.
The aggregate purchase price was approximately $62,300,000. The
Company paid cash in the amount of $43,300,000, including
transaction costs of $300,000, and issued junior subordinated
notes of $13,000,000, preferred stock with a fair value of
$5,500,000, 100,000 shares of common stock valued at
approximately $300,000 and options to
purchase 100,000 shares of common stock valued at
approximately $200,000. The preferred stock was valued based on
its redemption value, and stock options were valued based on the
Black-Scholes valuation model.
The results of the operations of Teva Sport Sandals, Inc. are
included in the consolidated statement of operations from the
acquisition date.
74
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial
Statements — (Continued)
The following table summarizes the fair value of the assets and
liabilities assumed at the date of acquisition:
| |
|
|
|
|
|
|
Net current assets
|
|
$ |
357,000 |
|
|
Property and equipment
|
|
|
88,000 |
|
|
Trademarks
|
|
|
51,000,000 |
|
|
Intangible assets
|
|
|
1,580,000 |
|
|
Goodwill
|
|
|
11,174,000 |
|
| |
|
|
|
| |
Net assets acquired
|
|
$ |
64,199,000 |
(1) |
| |
|
|
|
|
|
| (1) |
Includes $1,899,000 of amounts previously capitalized, primarily
for payments to Mark Thatcher for contract extensions of the
option to purchase the Teva patents and trademarks. |
Intangibles of $51,000,000 were assigned to registered
trademarks that are not amortized for financial reporting
purposes, but are expected to be amortized and fully deductible
for income tax reporting purposes. The remaining $1,580,000 of
acquired intangible assets consists primarily of patents and has
a weighted average useful life of approximately seven years. The
$11,174,000 of goodwill is expected to be fully deductible for
income tax purposes but is not amortizable for financial
reporting purposes. The entire goodwill balance was recorded to
the Teva segment. Such allocations were based upon an
independent appraisal of the assets acquired in accordance with
SFAS No. 141, Business Combinations.
The following table summarizes supplemental statement of income
(loss) information for the year ended December 31, 2002 on
a pro forma basis as if the acquisition had occurred on
January 1, 2002, along with the actual results for the
years ended December 31, 2003 and 2004 for comparison
purposes.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2002 | |
|
2003 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
Pro forma net sales
|
|
$ |
101,267,000 |
|
|
$ |
121,055,000 |
|
|
$ |
214,787,000 |
|
|
Pro forma net income before cumulative effect of a change in
accounting principle
|
|
|
1,341,000 |
|
|
|
9,154,000 |
|
|
|
25,539,000 |
|
|
Cumulative effect of a change in accounting principle, net of
tax benefit
|
|
|
(8,973,000 |
) |
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Pro forma net income (loss)
|
|
$ |
(7,632,000 |
) |
|
$ |
9,154,000 |
|
|
$ |
25,539,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Pro forma net income before cumulative effect of a change in
accounting principle
|
|
$ |
0.14 |
|
|
$ |
0.91 |
|
|
$ |
2.32 |
|
| |
Cumulative effect of a change in accounting principle
|
|
|
(0.95 |
) |
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Pro forma net income (loss)
|
|
$ |
(0.81 |
) |
|
$ |
0.91 |
|
|
$ |
2.32 |
|
| |
|
|
|
|
|
|
|
|
|
75
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial
Statements — (Continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2002 | |
|
2003 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
Diluted income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Pro forma net income before cumulative effect of a change in
accounting principle
|
|
$ |
0.14 |
|
|
$ |
0.77 |
|
|
$ |
2.10 |
|
| |
Cumulative effect of a change in accounting principle
|
|
|
(0.91 |
) |
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Pro forma net income (loss)
|
|
$ |
(0.77 |
) |
|
$ |
0.77 |
|
|
$ |
2.10 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| (13) |
Goodwill and Other Intangible Assets |
In July 2001, The Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards
No. 142 (SFAS 142), Goodwill and Other Intangible
Assets. SFAS 142 requires that goodwill and intangible
assets with indefinite useful lives no longer be amortized to
earnings but instead be reviewed periodically for impairment,
including an annual test performed on December 31. The
Company implemented this accounting standard on January 1,
2002, resulting in a goodwill impairment charge of $8,973,000
(net of the related income tax benefit of $843,000) during the
year ended December 31, 2002, based on a relief from
royalty valuation analysis. This noncash impairment charge
included a write-down of approximately $7,800,000 for UGG
goodwill and approximately $1,200,000 on an after-tax basis for
Simple goodwill. As a result of these write-downs, UGG has
approximately $6,100,000 of goodwill remaining at
December 31, 2002 and Simple has no remaining goodwill,
which has been included in intangible assets in the accompanying
consolidated balance sheets. The impairment charge has been
recorded as a cumulative effect of a change in accounting
principle in the Company’s consolidated statement of
operations for the year ended December 31, 2002.
In accordance with SFAS 142, the Company did not record any
goodwill amortization for the years ended December 31,
2002, 2003 or 2004.
Summary of Intangible Assets
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
As of December 31, 2004 | |
| |
|
| |
| |
|
|
|
Weighted | |
|
|
| |
|
Gross | |
|
Average | |
|
|
|
Net | |
| |
|
Carrying | |
|
Amortization | |
|
Accumulated | |
|
Carrying | |
| |
|
Amount | |
|
Period | |
|
Amortization | |
|
Amount | |
| |
|
| |
|
| |
|
| |
|
| |
|
Amortizable intangible assets
|
|
$ |
1,858,000 |
|
|
|
6 years |
|
|
$ |
721,000 |
|
|
$ |
1,137,000 |
|
|
Nonamortizable intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Trademark
|
|
$ |
51,152,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Goodwill
|
|
|
18,030,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
69,182,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate amortization expense for amortizable intangible assets
for the years ended December 31, 2002, 2003 and 2004 was
$1,049,000, $276,000 and $253,000, respectively. Estimated
amortization expense for the next five years is: $310,000 in
2005, $310,000 in 2006, $268,000 in 2007, $129,000 in 2008 and
$119,000 in 2009.
76
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial
Statements — (Continued)
The Company has initiated a program to selectively license its
brand names in product categories beyond footwear. The Company
currently has three domestic licenses for UGG, consisting of
licenses for handbags, outerwear and cold weather accessories.
The handbag and outerwear licensees began delivering products in
2004, whereas the cold weather accessories licensee is expected
to begin deliveries in the Fall 2005 season. The Company has
also initiated a Teva license program, which currently includes
five domestic license agreements, consisting of
U.S. licenses for men’s sportswear, headwear, eyewear,
timepieces and socks, and has signed a Canadian sportswear
license. The Teva licensees are expected to begin delivering
products in 2005.
For several of its initial licensing arrangements, the Company
used BHPC Global Licensing, Inc. (“BHPC”), a full
service licensing agency, to identify candidates and coordinate
its licensing business. The Company pays BHPC a commission on
license income related to the licensing agreements that BHPC
coordinated on its behalf. In 2004, The Company paid BHPC
approximately $168,000. BHPC is owned by one of our directors,
Daniel L. Terheggen.
The Company recognizes license income upon shipment of the
products by the licensees and records a corresponding fee to
BHPC for the underlying shipments. License income, net of any
fees to BHPC, is included in net sales in the accompanying
statement of operations. For the year ended December 31,
2004, the Company recognized net license revenues of
approximately $950,000, primarily related to our UGG handbag and
outerwear licenses.
77
Schedule II
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Three Years Ended December 31, 2002, 2003 and 2004
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Balance at | |
|
|
|
|
|
Balance at | |
| |
|
Beginning | |
|
|
|
|
|
End of | |
| |
|
of Year | |
|
Additions | |
|
Deductions | |
|
Year | |
| |
|
| |
|
| |
|
| |
|
| |
|
Year ended December 31, 2002:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Allowance for doubtful accounts
|
|
$ |
2,014,000 |
|
|
|
1,785,000 |
|
|
|
1,846,000 |
|
|
|
1,953,000 |
|
| |
Reserve for sales discounts
|
|
|
806,000 |
|
|
|
713,000 |
|
|
|
837,000 |
|
|
|
682,000 |
|
| |
Reserve for sales returns
|
|
|
1,235,000 |
|
|
|
2,293,000 |
|
|
|
2,273,000 |
|
|
|
1,255,000 |
|
|
Year ended December 31, 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Allowance for doubtful accounts
|
|
$ |
1,953,000 |
|
|
|
504,000 |
|
|
|
876,000 |
|
|
|
1,581,000 |
|
| |
Reserve for sales discounts
|
|
|
682,000 |
|
|
|
741,000 |
|
|
|
878,000 |
|
|
|
545,000 |
|
| |
Reserve for sales returns
|
|
|
1,255,000 |
|
|
|
3,791,000 |
|
|
|
3,801,000 |
|
|
|
1,245,000 |
|
|
Year ended December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Allowance for doubtful accounts
|
|
$ |
1,581,000 |
|
|
|
580,000 |
|
|
|
365,000 |
|
|
|
1,796,000 |
|
| |
Reserve for sales discounts
|
|
|
545,000 |
|
|
|
1,508,000 |
|
|
|
568,000 |
|
|
|
1,485,000 |
|
| |
Reserve for sales returns
|
|
|
1,245,000 |
|
|
|
7,104,000 |
|
|
|
6,618,000 |
|
|
|
1,731,000 |
|
See accompanying report of independent registered public
accounting firm.
78
PART III
Item 10. Directors and Executive Officers of the
Registrant
We have adopted a written code of ethics that applies to our
principal executive officer, principal financial and accounting
officer, controller and persons performing similar functions.
Our code of ethics is designed to meet the requirements of
Section 406 of the Sarbanes-Oxley Act of 2002 and the rules
promulgated thereunder. To the extent required by law, any
amendments to, or waivers from, any provision of the code will
be promptly disclosed publicly either on a report on
Form 8-K or on our website at www.deckers.com.
All additional information required by this item, including
information relating to Directors and Executive Officers of the
Registrant, is set forth in the Company’s definitive proxy
statement relating to the Registrant’s 2005 annual meeting
of stockholders, which will be filed pursuant to
Regulation 14A within 120 days after the end of the
Company’s fiscal year ended December 31, 2004, and
such information is incorporated herein by reference.
|
|
| Item 11. |
Executive Compensation |
Information relating to Executive Compensation is set forth
under “Proposal No. 1 — Election of
Directors” in the Company’s definitive proxy statement
relating to the Registrant’s 2005 annual meeting of
stockholders, which will be filed pursuant to
Regulation 14A within 120 days after the end of the
Company’s fiscal year ended December 31, 2004, and
such information is incorporated herein by reference.
|
|
| Item 12. |
Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters |
Information relating to Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters is set
forth under “Proposal No. 1 — Election of
Directors” in the Company’s definitive proxy statement
relating to the Registrant’s 2005 annual meeting of
stockholders, which will be filed pursuant to
Regulation 14A within 120 days after the end of the
Company’s fiscal year ended December 31, 2004, and
such information is incorporated herein by reference.
|
|
| Item 13. |
Certain Relationships and Related Transactions |
Information relating to Certain Relationships and Related
Transactions is set forth under “Proposal
No. 1 — Election of Directors” in the
Company’s definitive proxy statement relating to the
Registrant’s 2005 annual meeting of stockholders, which
will be filed pursuant to Regulation 14A within
120 days after the end of the Company’s fiscal year
ended December 31, 2004, and such information is
incorporated herein by reference.
|
|
| Item 14. |
Principal Accountant Fees and Services |
Information relating to Principal Accountant Fees and Services
is set forth under “Proposal No. 1 —
Election of Directors” in the Company’s definitive
proxy statement relating to the Registrant’s 2005 annual
meeting of stockholders, which will be filed pursuant to
Regulation 14A within 120 days after the end of the
Company’s fiscal year ended December 31, 2004, and
such information is incorporated herein by reference.
PART IV
|
|
| Item 15. |
Exhibits and Financial Statement Schedules |
Consolidated Financial Statements and Schedules required to be
filed hereunder are indexed on page 49 hereof.
79
| |
|
|
|
|
| Exhibit | |
|
|
| | |
|
|
| |
2.1 |
|
|
Certificate of Ownership and Merger Merging Deckers Corporation
into Deckers Outdoor Corporation. (Exhibit 2.1 to the
Registrant’s Registration Statement on Form S-1, File
No. 33-67248 and incorporated by reference herein) |
| |
3.1 |
|
|
Amended and Restated Certificate of Incorporation of Deckers
Outdoor Corporation. (Exhibit 3.1 to the Registrant’s
Registration Statement on Form S-1, File No. 33-67248
and incorporated by reference herein) |
| |
3.2 |
|
|
Restated Bylaws of Deckers Outdoor Corporation.
(Exhibit 3.2 to the Registrant’s Registration
Statement on Form S-1, File No. 33-67248 and
incorporated by reference herein) |
| |
#10.1 |
|
|
1993 Employee Stock Incentive Plan. (Exhibit 99 to the
Registrant’s Registration Statement on Form S-8, File
No. 33-47097 and incorporated by reference herein) |
| |
#10.2 |
|
|
Form of Incentive Stock Option Agreement under 1993 Employee
Stock Incentive Plan. (Exhibit 10.9 to the
Registrant’s Registration Statement on Form S-1, File
No. 33-67248 and incorporated by reference herein) |
| |
#10.3 |
|
|
Form of Non-Qualified Stock Option Agreement under 1993 Employee
Stock Incentive Plan. (Exhibit 10.10 to the
Registrant’s Registration Statement on Form S-1, File
No. 33-67248 and incorporated by reference herein) |
| |
#10.4 |
|
|
Form of Restricted Stock Agreement. (Exhibit 10.11 to the
Registrant’s Registration Statement on Form S-1, File
No. 33-67248 and incorporated by reference herein) |
| |
#10.5 |
|
|
Employment Agreement with Douglas B. Otto. (Exhibit 10.13
to the Registrant’s Registration Statement on
Form S-1, File No. 33-67248 and incorporated by
reference herein) |
| |
#10.6 |
|
|
First Amendment to Employment Agreement with Douglas B. Otto.
(Exhibit 10.14 to the Registrant’s Registration
Statement on Form S-1, File No. 33-67248 and
incorporated by reference herein) |
| |
#10.7 |
|
|
Second Amendment to Employment Agreement with Douglas B. Otto.
(Exhibit 10.15 to the Registrant’s Registration
Statement on Form S-1, File No. 33-67248 and
incorporated by reference herein) |
| |
#10.8 |
|
|
Third Amendment to Employment Agreement with Douglas B. Otto.
(Exhibit 10.30 to the Registrant’s Registration
Statement on Form S-1, File No. 33-67248 and
incorporated by reference herein) |
| |
#10.9 |
|
|
Deckers Outdoor Corporation 1995 Employee Stock Purchase Plan.
(Exhibit 4.4 to the Registrant’s Registration
Statement on Form S-8, File No. 33-96850 and
incorporated by reference herein) |
| |
#10.10 |
|
|
Amended Compensation Plan for Outside Members of the Board of
Directors. (Exhibit 10.42 to the Registrant’s Form
10-Q for the period ended September 30, 1996 and
incorporated by reference herein) |
| |
#10.11 |
|
|
Extension Agreement to Employment Agreement with Douglas B.
Otto. (Exhibit 10.36 to the Registrant’s Form 10-K for
the period ended December 31, 1996 and incorporated by
reference herein) |
| |
10.12 |
|
|
Shareholder Rights Agreement, dated as of November 12,
1998. (Exhibit 10.39 to the Registrant’s Form 10-Q for
the period ended September 30, 1998 and incorporated by
reference herein) |
| |
10.13 |
|
|
Revolving Credit Agreement dated as of February 21, 2002
among Deckers Outdoor Corporation, UGG Holdings, Inc. and
Comerica Bank — California. (Exhibit 10.21 to the
Registrant’s Form 10-K for the year ended December 31,
2001 and incorporated by reference herein.) |
| |
#10.14 |
|
|
Employment Agreement dated March 29, 2002 between Douglas
B. Otto and Deckers Outdoor Corporation. (Exhibit 10.22 to
the Registrant’s Form 10-Q for the period ended
March 31, 2002 and incorporated by reference herein.) |
| |
10.15 |
|
|
Asset Purchase Agreement dated as of October 9, 2002 by and
Among Mark Thatcher, Teva Sport Sandals, Inc. and Deckers
Outdoor Corporation. (Exhibit 2.1 to the Registrant’s
Form 8-K/A filed February 7, 2003 and incorporated herein
by reference.) |
| |
10.16 |
|
|
Disclosure letter associated with the Asset Purchase Agreement.
(Exhibit 2.2 to the Registrant’s Form 8-K/A filed
February 7, 2003 and incorporated herein by reference.)+ |
80
| |
|
|
|
|
| Exhibit | |
|
|
| | |
|
|
| |
#10.17 |
|
|
Employment Agreement dated November 25, 2002 between John
A. Kalinich and Deckers Outdoor Corporation. (Exhibit 10.20
to the Registrant’s Form 10-K for the period ended
December 31, 2002 and incorporated by reference herein) |
| |
#10.18 |
|
|
Employment Agreement dated November 25, 2002 between Mark
Thatcher and Deckers Outdoor Corporation. (Exhibit 10.21 to
the Registrant’s Form 10-K for the period ended
December 31, 2002 and incorporated by reference herein) |
| |
10.19 |
|
|
Unsecured Subordinated Promissory Note dated November 25,
2002 between Mark Thatcher and Deckers Outdoor Corporation.
(Exhibit 10.22 to the Registrant’s Form 10-K for the
period ended December 31, 2002 and incorporated by
reference herein) |
| |
10.20 |
|
|
Note Purchase Agreement dated as of November 25, 2002 by
and among Deckers Outdoor Corporation and The Peninsula
Fund III Limited Partnership. (Exhibit 10.23 to the
Registrant’s Form 10-K for the period ended
December 31, 2002 and incorporated by reference herein) |
| |
10.21 |
|
|
Amended and Restated Credit Agreement, dated as of
November 25, 2002, by and among Deckers Outdoor
Corporation, UGG Holdings Inc., and Comerica Bank-California.
(Exhibit 10.24 to the Registrant’s Form 10-K for the
period ended December 31, 2002 and incorporated by
reference herein) |
| |
10.22 |
|
|
Amendment Number One to Amended and Restated Revolving Credit
Agreement dated April 29, 2003. (Exhibit 10.1 to the
Registrant’s Form 10-Q for the period ended June 30,
2003 and incorporated by reference herein) |
| |
10.23 |
|
|
Amendment Number Two to Amended and Restated Revolving Credit
Agreement dated June 27, 2003. (Exhibit 10.2 to the
Registrant’s Form 10-Q for the period ended June 30,
2003 and incorporated by reference herein) |
| |
10.24 |
|
|
Amendment Number One to Senior Subordination Agreement dated
April 29, 2003. (Exhibit 10.3 to the Registrant’s
Form 10-Q for the period ended June 30, 2003 and
incorporated by reference herein). |
| |
10.25 |
|
|
Amendment Number Two to Senior Subordination Agreement dated
June 27, 2003. (Exhibit 10.4 to the Registrant’s
Form 10-Q for the period ended June 30, 2003 and
incorporated by reference herein) |
| |
10.26 |
|
|
Amendment Number Three to Amended and Restated Revolving Credit
Agreement between the Company and Comerica Bank —
California dated as of August 6, 2003. (Exhibit 10.1
to the Registrant’s Form 10-Q for the period ended
September 30, 2003 and incorporated by reference herein) |
| |
10.27 |
|
|
Amendment Number Four to Amended and Restated Revolving Credit
Agreement between the Company and Comerica Bank-California dated
as of November 13, 2003 (Exhibit 10.27 to the
Registrant’s Form 10-K for the period ended
December 31, 2003 and incorporated by reference herein) |
| |
10.28 |
|
|
Amendment Number Three to Senior Subordination Agreement dated
November 13, 2003 (Exhibit 10.28 to the
Registrant’s Form 10-K for the period ended
December 31, 2003 and incorporated by reference herein) |
| |
#10.29 |
|
|
Employment Agreement effective as of January 1, 2004
between Douglas B. Otto and Deckers Outdoor Corporation
(Exhibit 10.29 to the Registrant’s Form 10-K for the
period ended December 31, 2003 and incorporated by
reference herein) |
| |
#10.30 |
|
|
Employment Agreement effective as of January 1, 2004
between M. Scott Ash and Deckers Outdoor Corporation
(Exhibit 10.30 to the Registrant’s Form 10-K for the
period ended December 31, 2003 and incorporated by
reference herein) |
| |
#10.31 |
|
|
Employment Agreement effective as of January 1, 2004
between Patrick C. Devaney and Deckers Outdoor Corporation
(Exhibit 10.31 to the Registrant’s Form 10-K for the
period ended December 31, 2003 and incorporated by
reference herein) |
| |
#10.32 |
|
|
Employment Agreement effective as of January 1, 2004
between Constance X. Rishwain and Deckers Outdoor Corporation
(Exhibit 10.32 to the Registrant’s Form 10-K for the
period ended December 31, 2003 and incorporated by
reference herein) |
81
| |
|
|
|
|
| Exhibit | |
|
|
| | |
|
|
| |
#10.33 |
|
|
Employment Agreement effective as of January 1, 2004
between Robert P. Orlando and Deckers Outdoor Corporation
(Exhibit 10.33 to the Registrant’s Form 10-K for the
period ended December 31, 2003 and incorporated by
reference herein) |
| |
10.34 |
|
|
Lease Agreement dated November 1, 2003 between Ampersand
Aviation, LLC and Deckers Outdoor Corporation for office
building at 495-A South Fairview Avenue, Goleta, California,
93117 (Exhibit 10.34 to the Registrant’s Form 10-K for
the period ended December 31, 2003 and incorporated by
reference herein) |
| |
10.35 |
|
|
Exclusive Independent Contractor Representation Agreement
between Deckers Outdoor Corporation and BHPC Marketing, Inc.
effective as of January 1, 2003 for representation of the
Teva brand (Exhibit 10.35 to the Registrant’s Form
10-K for the period ended December 31, 2003 and
incorporated by reference herein) |
| |
10.36 |
|
|
*Amendment Number Five to Amended and Restated Credit Agreement
between the Company and Comerica Bank — California
dated as of February 28, 2005. |
| |
10.37 |
|
|
*Lease Agreement dated September 15, 2004 between Mission
Oaks Associates, LLC and Deckers Outdoor Corporation for
distribution center at 3001 Mission Oaks Blvd., Camarillo, CA
93012 |
| |
10.38 |
|
|
*First Amendment to Lease Agreement between Mission Oaks
Associates, LLC and Deckers Outdoor Corporation for distribution
center at 3001 Mission Oaks Blvd., Camarillo, CA 93012, dated
December 1, 2004. |
| |
14.1 |
|
|
Deckers Outdoor Corporation’s Code of Ethics for Senior
Officers, as approved by the Board of Directors on
December 5, 2003. (Exhibit 14.1 to the
Registrant’s Form 10-K for the period ended
December 31, 2003 and incorporated by reference herein) |
| |
21.1 |
|
|
*Subsidiaries of Registrant. |
| |
23.1 |
|
|
*Consent of Independent Registered Public Accounting Firm. |
| |
31.1 |
|
|
*Certification of the Chief Executive Officer pursuant to Rule
13A-14(a) under the Exchange Act, adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
| |
31.2 |
|
|
*Certification of the Chief Financial Officer pursuant to Rule
13A-14(a) under the Exchange Act, adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
| |
32.1 |
|
|
*Certification pursuant to 18 U.S.C. Section 1350,
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002. |
|
|
| + |
Certain information in this Exhibit was omitted and filed
separately with the Securities and Exchange Commission pursuant
to a confidential treatment request as to the omitted portions
of the Exhibit. |
| |
| # |
Management contract or compensatory plan or arrangement. |
82
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 |
| |
(Registrant) |
| |
| |
/s/ Douglas B. Otto
|
| |
|
| |
Douglas B. Otto |
| |
Chief Executive Officer |
Date: March 16, 2005
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
dates indicated.
| |
|
|
|
|
|
|
| |
/s/ Douglas B. Otto
Douglas
B. Otto |
|
Chairman of the Board, President and Chief Executive Officer |
|
March 16, 2005 |
| |
/s/ M. Scott Ash
M.
Scott Ash |
|
Chief Financial Officer (Principal Financial and Accounting
Officer) |
|
March 16, 2005 |
| |
/s/ Gene E. Burleson
Gene
E. Burleson |
|
Director |
|
March 16, 2005 |
| |
/s/ John M. Gibbons
John
M. Gibbons |
|
Director |
|
March 16, 2005 |
| |
/s/ Rex A. Licklider
Rex
A. Licklider |
|
Director |
|
March 16, 2005 |
| |
/s/ Daniel L. Terheggen
Daniel
L. Terheggen |
|
Director |
|
March 16, 2005 |
83