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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________ .
COMMISSION FILE NO. 0-22446
DECKERS OUTDOOR CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-3015862
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
495-A SOUTH FAIRVIEW AVENUE, GOLETA, 93117
CALIFORNIA
(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
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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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (sec. 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. [ ]
Aggregate market value of the Common Stock of the registrant held by
nonaffiliates of the registrant on February 29, 2000 based on the closing price
of the Common Stock on the NASDAQ National Market System on such date was
$17,039,747.
The number of shares of the registrant's Common Stock outstanding at
February 29, 2000 was 9,065,005.
Portions of registrant's definitive proxy statement relating to
registrant's 2000 annual meeting of shareholders, which will be filed pursuant
to Regulation 14A within 120 days after the end of registrant's fiscal year
ended December 31, 1999, are incorporated by reference in Part III of this Form
10-K.
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DECKERS OUTDOOR CORPORATION
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
INDEX TO ANNUAL REPORT ON FORM 10-K
PAGE
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PART I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 18
Item 3. Legal Proceedings........................................... 18
Item 4. Submission of Matters to a Vote of Security Holders......... 18
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 19
Item 6. Selected Financial Data..................................... 20
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 21
Item 7A Quantitative and Qualitative Disclosures about Market
Risk........................................................ 27
Item 8. Financial Statements and Supplementary Data................. 27
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 27
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 49
Item 11. Executive Compensation...................................... 49
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 49
Item 13. Security Relationships and Related Transactions............. 49
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 50
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PART I
ITEM 1. BUSINESS
GENERAL
The Company designs and markets innovative, function-oriented footwear that
have been developed for high-performance outdoor, sports and other lifestyle
related activities, as well as for casual use. Currently, the Company offers
three primary product lines under the following recognized brand names:
Teva(R) -- high-performance sports sandals and casual footwear;
Simple(R) -- innovative shoes that combine the comfort elements of athletic
footwear with casual styling; and Ugg(R) -- authentic sheepskin boots and other
footwear. Teva is a registered trademark of Mark Thatcher, the inventor and
licensor of Teva Sport Sandals. Simple and Ugg are registered trademarks of the
Company and its subsidiaries. All of the Company's footwear possess the common
features of high quality with a primary focus on functionality and comfort. In
1999, the Company sold approximately 4,143,000 pairs of footwear. Revenues from
sales (domestic and international) of Teva products have been $79,935,000,
$67,916,000 and $61,863,000 during 1999, 1998 and 1997, representing 72.9%,
66.5% and 58.0% of net sales, respectively. For financial information regarding
the Company's industry segments, see note 12 to the accompanying consolidated
financial statements.
MARKET OVERVIEW
The casual, outdoor and athletic footwear market is comprised of footwear
worn for casual everyday use and for outdoor and athletic activities such as
hiking, boating, basketball, tennis, fitness and jogging. The market for such
footwear has grown significantly during the last decade, and even more recently
there appears to be a shift from traditional athletic footwear toward more
casual and outdoor footwear. This shift has occurred as consumers have accepted
the more understated look in contrast to the traditional athletic shoes that had
gained popularity in previous years. The Company believes that the principal
reasons for the growth in sales of such footwear have been the growing
acceptance of casual wear including the increasing casualization of the
workplace, increasingly active consumer lifestyles and the growing emphasis on
comfort.
A recent development in the overall footwear market has been the
significant growth of the outdoor segment as well as the growing emphasis on
comfort. Outdoor footwear includes shoes, boots and sandals for outdoor
recreational activities such as hiking, river rafting, camping and casual wear.
Companies engaged in the outdoor footwear market include Nike, Adidas,
Timberland, Columbia and Salomon. The Company believes that the growth in
outdoor footwear is driven by several factors including a general shift in
consumer preferences and lifestyles to include more outdoor, sports and
recreational activities such as hiking and camping. In addition, the increasing
popularity of extreme sports, including skateboarding, snowboarding, kayaking
and river rafting, among others, has created an additional emphasis and
awareness of outdoor activities and lifestyles. As consumers engage in outdoor
activities, they typically desire footwear specifically designed for these
purposes, yet they demand the same level of quality and high performance that
they have come to expect from traditional athletic footwear. In addition, more
consumers are turning to an emphasis on casual and comfortable footwear and
apparel, including the trend toward casual workplaces. The Company believes that
its products have benefited from this growing trend and that its footwear
addresses consumers' demands for highly functional footwear that is durable as
well as comfortable and fashionable.
The casual, outdoor and athletic footwear markets are generally
characterized by a high level of recognition of brand names, logos and
trademarks. Unique and identifying features create brand awareness among
consumers and allow a favorable reputation to be transferred to new products.
The manufacture of casual, outdoor and athletic footwear is typically conducted
overseas through independent manufacturers. Casual and athletic footwear is
distributed through athletic footwear stores, department stores and specialty
retailers. Outdoor footwear is generally distributed through these channels as
well but is to a large extent distributed through outdoor specialty retailers.
Retailers may purchase footwear on a "futures" basis (orders placed at a
discount in advance of a season) or an "at once" basis (orders placed and filled
immediately). Futures orders allow the Company to more accurately predict its
manufacturing and sourcing needs. By placing futures orders, retailers are also
able to reduce the risk that the Company will be unable to meet the
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retailer's delivery requirement. Retailers are generally encouraged to purchase
goods on a futures basis by receiving discounts or special payment terms not
otherwise available.
RISK FACTORS
This Annual Report on Form 10-K contains a variety of forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 including forward-looking statements in this "Risk Factors" section, the
"Outlook" section, the last paragraph under "Liquidity and Capital Resources",
the discussion under "Seasonality" and other statements in this Annual Report.
These forward-looking Statements relate to sales and operating expense
expectations, the potential imposition of certain customs duties, the potential
impact of a non-renewal of the Teva license due to the Company's potential
failure to meet required sales minimums in 2004 or 2008, the potential impact of
certain litigation, the potential impact of the Year 2000 issue on the Company,
the potential impact of economic factors and conditions, the potential impact of
the Company's dependence on foreign manufacturers, the potential impact of
competition, the potential impact of the Company's dependence upon key
personnel, the potential impact of weather conditions, and the impact of
seasonality on the Company's operations. These forward-looking statements
involve known and unknown risks, uncertainties and other factors which may cause
the actual results, performance or achievement of the Company, or industry
results, to differ materially from any future results, performance or
achievements expressed or implied by such forward-looking statements. The
factors listed below represent certain important factors the Company believes
could cause such results to differ. These factors are not intended to represent
a complete list of the general or specific risks that may affect the Company.
Other risks may be significant, presently or in the future, and the risks set
forth below may affect the Company to a greater extent than indicated.
Teva License Agreement
The Company has been selling its Teva line of sport sandals and other
footwear since 1985 pursuant to various exclusive licensing arrangements with
Mark Thatcher, the inventor of the Teva sport sandal and owner of the Teva
patents and trademark. In June 1999, the Company signed a new exclusive footwear
license agreement with Mr. Thatcher. The agreement is effective January 1, 2000
and continues through December 31, 2004. If minimum annual sales levels are
achieved in 2004, the license automatically renews for an additional four years,
through December 31, 2008. If minimum annual sales levels are achieved in 2008,
the license automatically renews again through December 31, 2011. However, if
the minimum annual sales levels are not achieved in 2004 or 2008, the license
expires and the Company will no longer be able to sell Teva footwear. Also, Mr.
Thatcher may terminate the licensing agreement if the Company breaches its
obligations under the agreement. Sales of Teva footwear and apparel accounted
for approximately 72.9%, 66.5% and 58.0% of the Company's net sales for fiscal
years 1999, 1998 and 1997, respectively. The termination of the license would
have a material adverse effect on the Company's results of operations.
Brand Strength; Changes in Fashion Trends
The Company's success is largely dependent on the continued strength of the
Teva, Simple and Ugg brands (collectively, "Deckers Brands") and on its ability
to anticipate the rapidly changing fashion tastes of footwear customers and to
provide merchandise that appeals to their preferences in a timely manner. There
can be no assurance that consumers will continue to prefer the Deckers Brands or
that the Company will respond in a timely manner to changes in consumer
preferences or that the Company will successfully introduce new models and
styles of footwear. Achieving market acceptance for new products will also
likely require substantial marketing and product development efforts and the
expenditure of significant funds to create consumer demand. Decisions with
respect to product designs often need to be made many months in advance of the
time when consumer acceptance can be determined. As a result, the Company's
failure to anticipate, identify or react appropriately to changes in styles and
features could lead to, among other things, excess inventories and higher
markdowns and lower gross margins due to the necessity of providing discounts to
retailers. Conversely, failure by the Company to anticipate consumer demand
could result in inventory shortages, which can adversely affect the timing of
shipments to customers, negatively impacting retailer and
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distributor relationships and diminishing brand loyalty. The failure to
introduce new products that gain market acceptance would have a material adverse
effect on the Company's business, financial condition and results of operations,
and could adversely affect the image of the Deckers Brands.
Inventory Risk
The footwear industry has relatively long lead times for design and
production of product and, thus, the Company must commit to production tooling
and to production in advance of orders. In addition, the industry is highly
subject to fashion risks and changes in consumer preferences. If the Company
fails to accurately forecast consumer demand, or if there are changes in
consumer preference or market demand after the Company has made such production
commitments, the Company may encounter difficulty in filling customer orders or
in liquidating excess inventory, which may have an adverse effect on the
Company's sales, margins and brand image.
Quality and Performance
In response to consumer demand, the Company also uses certain specialized
fabrics and materials in its footwear. The failure of products using such
fabrics and materials to perform to the Company's specifications or customer
satisfaction could result in a higher rate of customer returns and could
adversely affect the image of the Deckers Brands, which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Economic Cyclicality and Footwear Retailing
The footwear industry historically has been subject to cyclical variation,
with purchases of footwear tending to decline during recessionary periods. This
cyclicality could adversely affect the Company's business. In addition, various
retailers, including some of the Company's customers, have experienced financial
difficulties during the past several years, thereby increasing the risk that
such retailers may not pay for the Company's products in a timely manner. No
assurance can be given that the Company's bad debt expense will not increase
relative to net sales in the future. Any significant increase in the Company's
bad debt expense relative to net sales would adversely impact the Company's net
earnings and cash flow and could affect the Company's ability to pay its
obligations as they become due.
Dependence on Foreign Manufacturers
Virtually all of the Deckers footwear products are manufactured by third
party suppliers in the Far East, Costa Rica, Australia and New Zealand, with the
vast majority of production occurring in China. There can be no assurance that
the Company will not experience difficulties with such manufacturers, including
reduction in the availability of production capacity, errors in complying with
product specifications, inability to obtain sufficient raw materials,
insufficient quality control, failure to meet production and delivery deadlines
or increases in manufacturing costs. In addition, if the Company's relationship
with any of its manufacturers were to be interrupted or terminated, alternative
manufacturing sources will have to be located. The establishment of new
manufacturing relationships involves numerous uncertainties, and there can be no
assurance that the Company would be able to obtain alternative manufacturing
sources on terms satisfactory to it. If a change in its suppliers becomes
necessary, the Company would likely experience increased costs, as well as
substantial disruption and a resulting loss of sales.
Foreign manufacturing is subject to a number of risks, including work
stoppage, transportation delays and interruptions, political instability,
foreign currency fluctuations, changing economic conditions, expropriation,
nationalization, imposition of tariffs, import and export controls and other
non-tariff barriers (including quotas) and restrictions on the transfer of
funds, environmental regulation and other changes in governmental policies. The
Company may also experience general risks associated with managing operations
effectively and efficiently from a far distance and understanding and complying
with local laws, regulations and customs. There can be no assurance that such
factors will not materially adversely affect the Company's business, financial
condition and results of operations.
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Products manufactured overseas and imported into the United States and
other countries are subject to duties collected by the Customs Service in the
applicable country. Customs information submitted by the Company is subject to
review by the Customs Service. The Company is unable to predict whether
additional customs duties, quotas or restrictions may be imposed on the
importation of its products in the future. The enactment of any such duties,
quotas or restrictions could result in increases in the cost of such products
generally and might adversely affect the sales or profitability of the Company.
The European Commission has enacted anti-dumping duties of 49.2% on certain
types of footwear imported into Europe from China and Indonesia. Dutch Customs
has issued an opinion to the Company that certain popular Teva styles are
covered by this anti-dumping duty legislation. The Company believes that this
opinion is inappropriate and is working with Dutch Customs to resolve the
situation. In the event that Dutch Customs makes a final determination that such
styles are covered by the anti-dumping provisions, the Company expects that it
would have an exposure to prior unpaid anti-dumping duties for 1997 of
approximately $500,000. In addition, if Dutch Customs determines that these
styles are covered by the legislation, the duty amounts could cause the affected
Teva products to be too costly to import into Europe from China in the future.
As a precautionary measure, the Company has obtained, and is using, alternative
sourcing for the potentially impacted products from sources outside of China in
an effort to reduce the potential risk in the future. See "Risks of Foreign
Operations/Restrictions on Imports."
Competition and Infringing Products
The outdoor and footwear industries are both highly competitive, and the
recent growth in the markets for sports sandals and casual footwear has
encouraged the entry of many new competitors as well as increased competition
from established companies. Many of the Company's competitors have substantially
greater financial, distribution and marketing resources, as well as greater
brand awareness in the footwear market, than the Company. In addition, the
general availability of offshore manufacturing capacity allows rapid expansion
by competitors and new market entrants. The Company believes that it has been
able to compete successfully because of the brand recognition, quality and
selective distribution of its products. From time to time, the Company also
discovers products in the marketplace that infringe upon patent and trademark
rights held by or licensed to the Company. Under the Company's licensing
arrangement with the licensor of the Teva products, Mark Thatcher, Mr. Thatcher
initially may bring proceedings to halt infringement of the Teva patents and
trademark. If Mr. Thatcher elects not to bring such proceedings, the Company may
initiate such proceedings, with the prior written consent of Mr. Thatcher. To
date, Mr. Thatcher has vigorously pursued infringements following discovery. To
the extent permitted in its agreement with Mr. Thatcher, the Company will
vigorously pursue infringements in the event Mr. Thatcher elects not to do so.
However, if Mr. Thatcher or the Company is unsuccessful in challenging a third
party's products on the basis of patent and trademark infringement, continued
sales of such products by that or any other third party could adversely impact
the Company's business, financial condition and results of operations. See
"Business -- Competition" and "Business -- Legal Proceedings."
Dependence on Key Personnel
The Company's continued success will depend upon its ability to retain
Douglas B. Otto, its Chairman of the Board and Chief Executive Officer, Peter
Benjamin, its President and Chief Operating Officer and a core group of key
executive officers and employees. Mr. Otto and Mr. Benjamin have employment
agreements with the Company through 2001 and 2000, respectively. Mr. Otto's
agreement prohibits him from competing with the Company for one year following
termination. However, none of the other executive officers is subject to
agreements that restrict his or her ability to compete with the Company
following termination of employment. The Company believes that its future
success will depend in large part on its ability to attract and retain highly
skilled personnel. Competition for such personnel is intense, and there can be
no assurance that the Company will be successful in attracting and retaining
such personnel. The loss of certain key employees or the Company's inability to
attract and retain other qualified employees could have an adverse impact on the
Company's business.
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Intellectual Property
The Company believes that its trademarks, technologies and designs are of
great value. From time to time, the Company may be the subject of litigation
challenging its ownership of certain intellectual property. Loss of the
Company's Simple or Ugg trademark rights or the ability to use the licensed Teva
trademarks could have a serious impact on the Company's business. Because of the
importance of such intellectual property rights, the Company's business is
subject to the risk of counterfeiting, parallel trade or intellectual property
infringement.
Economic Factors
The Company's business is subject to economic conditions in the Company's
major markets, including, without limitation, recession, inflation, general
weakness in retail markets and changes in consumer purchasing power and
preferences. Adverse changes in such economic factors could have a negative
effect on the Company's business.
Weather Conditions
Sales of the Company's products, particularly those under the Teva and Ugg
lines, are very sensitive to weather conditions. Extended periods of unusually
cold weather during the spring and summer could adversely impact demand for the
Company's Teva line. Likewise, unseasonably warm weather during the fall and
winter months could adversely impact demand for the Company's Ugg product line.
Tax Rate Changes
If the Company were to encounter significant tax rate changes in the major
markets in which it operates, it could have an adverse effect on its business.
Substantial Ownership of the Company
At December 31, 1999, Douglas B. Otto and all executive officers and
directors of the Company, as a group, owned approximately 36.9% and 46.3%,
respectively of the outstanding shares of the Company's Common Stock. Due to
such ownership position, Mr. Otto, whether acting alone or together with one or
more of the other executive officers of the Company, would likely be able to
control the affairs and policies of the Company and would likely be able to
elect a sufficient number of directors to control the Company's Board of
Directors and to approve or disapprove any matter submitted to a vote of the
stockholders. The ownership positions of Mr. Otto and the executive officers of
the Company, as a group, together with the anti-takeover effects of certain
provisions in the Delaware General Corporation Law (the "DGCL"), in the
Company's Certificate of Incorporation and Bylaws, and in the Company's
shareholder rights plan would likely have the effect of delaying, deferring or
preventing a change in control of the Company. Such factors could have a
negative effect on the market price of the Company's Common Stock.
The Company adopted a shareholder 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
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from the Company one one-hundredth of a share of Series B Junior Participating
Preferred Stock, par value $0.01 per share (the Preferred Shares), of the
Company, at a price of $50.00, subject to adjustment.
The rights have no voting power and expire on November 11, 2008. The rights
may be redeemed by the Company for $.01 per right until the right becomes
exercisable.
BUSINESS STRATEGY
Management's mission is to build niche products into global brands and its
business strategy is to offer diverse lines of footwear that emphasize
functionality, quality, comfort and technical performance tailored to a variety
of activities and demographic groups. Specifically, the Company's business
strategy emphasizes the following elements:
Introduce New Products under Existing Brands. The Company intends to
leverage consumer recognition of its existing brands by developing and
introducing additional innovative footwear products that satisfy the Company's
high standards of practicality, comfort and quality. The Company believes the
introduction of additional products at a variety of price points, such as the
range of new models in its Teva, Simple and Ugg lines which are offered in the
Company's 2000 product offerings, have broadened the Company's customer base,
further diversified the Company's product lines, and helped reduce the effects
of seasonality on the Company's sales. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Seasonality." Relying on the
public awareness and demand for the Teva name, the Company has expanded this
brand's product offering considerably for 2000. The Spring 2000 line includes
the Wraptor performance running sandal, featuring a newly introduced strapping
system which provides for a continuously adjusting fit, as well as other
features normally found in high-performance running shoes. The Spring 2000 line
also includes the addition of neoprene kayak booties, reef walkers and surf
booties, walking sandals with newly introduced uppers, and several other newly
introduced styles. For Fall 2000, the Company has significantly expanded its
Teva offering with the introduction of hiking boots, featuring the Wraptor
technology, and cold weather snow boots. Extensions of new introductions from
1999 include expanded offerings in the Bluewater series for boating enthusiasts
and more styles added into the amphibious Torrent series of footwear for river
guides, kayakers and rafters. As part of the Company's strategy for the Simple
brand, the 2000 product line is targeting a younger consumer with "hipper"
silhouettes that are more relevant to today's fashions. The line focuses on
lifestyle comfort based products such as clogs, sandals, casuals and
non-performance sneakers that are priced affordably. In 2000, the Company will
expand its Ugg product line beyond its heritage boots and slippers by adding a
variety of new, more streetwise and fashion products including clogs, chukka
boots, moccasins and apres ski boots, as well as more weather-resistant boots
with water resistant leathers.
Pursue Additional Market Opportunities. Management intends to continue to
consider new markets for its existing line of products. For the years ended
December 31, 1999, 1998 and 1997 international net sales totaled $28,738,000,
$24,194,000 and $26,704,000, representing 26.2%, 23.7% and 25.0% of net sales,
respectively. Management believes that significant opportunities exist to market
its products abroad and intends to selectively expand its distribution
worldwide. To bolster these efforts, in 1997 the Company opened a European
office to service the European market and an office in Japan to service the
Asian market. In addition, the Company has hired experienced senior-level
executives to manage its European and Asian markets in efforts to further expand
sales in these markets.
Acquire or Develop New Brands. The Company intends to continue to focus on
identifying and building new brands for growth. The Company has been successful
in the past in taking the concepts of entrepreneurs for innovative, fashionable
footwear targeted at niche markets and building the products into viable brands
and intends to continue to identify concepts for potential future niche products
which have the potential of developing into successful brands or product lines.
PRODUCTS
The Company currently offers three primary product lines: (1) Teva sport
sandals and footwear; (2) Simple casual footwear; and (3) Ugg sheepskin
footwear. Each of these lines, as well as individual models
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within these lines, is designed to appeal to various demographic groups. The
Company's footwear products emphasize function, comfort and technical
performance, and are suitable for a variety of demanding outdoor and athletic
activities, as well as casual and everyday use. The Company's products are
designed and marketed to promote a high level of brand name recognition and
consumer appeal by combining functional and creative designs with quality
materials and construction. The Teva footwear and the Simple footwear lines are
generally previewed twice per year, once in the summer for deliveries that
commence in the fall and once in the winter for the following back to school and
fall season. The Ugg line of sheepskin footwear is generally previewed in the
winter with most deliveries occurring in the following fall and winter. The
following sets forth a summary description of each of the Company's primary
product lines along with a range of domestic suggested retail prices.
Teva Sport Sandals and Footwear. The Teva sport sandal is one of the first
sport sandals to be developed and is popular among outdoor enthusiasts and the
general public. The Company licenses the Teva patents and trademark from Mark
Thatcher, a professional river guide who invented the Teva sport sandal. The
terms of such licenses run through 2011, subject to achieving certain minimum
sales levels beginning in 2004. Certain styles of the Teva sport sandal
incorporate a proprietary strapping configuration ideally suited for outdoor
activities such as hiking, boating and river rafting. This strapping system
consists of high-quality nylon webbing or leather, is fully adjustable, and
holds the foot firmly to the sandal's durable, cellular rubber, molded EVA,
polyurethane or leather footbed. Teva sport sandals are extremely durable and
many of the styles are water resistant. The Spring 2000 line includes nearly 100
different models designed for a variety of uses. The Wilderness Series, a
category of sandals built for high performance and rugged outdoor use, includes
21 models of men's and women's sandals. The Utility Series includes 15 styles,
combining elements of sport performance with casual everyday comfort. This
series includes a variety of sandals, slides and thongs, including many of the
brand's most popular styles. The Spring 2000 line includes an expanded variety
of Precision sport sandals and footwear, including the newly-introduced Wraptor
performance running sandal, an expanded offering of Circuit walking sandals, the
Bluewater collection of boating and deck footwear and the XPD collection of
sandals and footwear, featuring patterned uppers of performance air-mesh,
water-resistant suede, nylon webbing and Dri-Tec linings. Continuing on the
success of recent years, the Spring 2000 line includes 32 styles of men and
women's leather casuals, including an updated version of the City Sport
collection of women's casual sandals. The Spring 2000 Children's category has
been expanded to include 9 different styles of nylon and leather sandals. The
Fall 2000 line includes the introduction of several styles of closed footwear
including a variety of hiking boots, neoprene booties, snowboots and leather
casuals. The domestic manufacturer's suggested retail prices for adult sizes of
Spring 2000 Teva footwear products range from $19.95 to $99.95.
Simple Casual Footwear. The Simple line consists of casual shoes that
combine the comfort and function of athletic footwear construction with the
simple, understated styling of "back-to-basics," casual lifestyle footwear. For
2000, the Simple line has been refocused toward the teen and twenty-something
market, where the brand had been successful in prior years. The Simple product
line includes a variety of comfortable, fashionable, basic shoes for men and
women including sneakers, sandals, slides, clogs and leather casuals. For Spring
2000, Simple is offering 54 models. The Spring 2000 collection reflects the
Company's re-emphasis on a younger consumer, as evidenced by its expansion to 22
different models of sneakers. The Spring 2000 line also includes 23 different
styles of clogs and leather casuals and 11 models of sandals for men and women.
The domestic manufacturer's suggested retail prices for adult sizes for the
Spring 2000 line range from $39.99 to $94.99.
Ugg Sheepskin Footwear. Ugg is a line of authentic sheepskin footwear,
popularized in Australia in the 1960's and 1970's. These sheepskin boots,
slippers and other footwear styles have high-grade fleece linings which act as a
natural insulator, keeping feet warm and comfortable. The 2000 Ugg line offers a
range of 47 models of casual, fashionable and streetwise styles in various
colors, including several new styles of shoes and boots for men and women. The
2000 line includes several styles with new innovative fashionable uppers and
several styles with water resistant leather treatments to address more inclement
weather conditions. The 2000 line also includes an updated "Street Collection"
with products designed for more fashionable and functional everyday use in both
warm and cold climates, including expansion of the Birch collection and the
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addition of the women's Solvang clog. The domestic manufacturer's suggested
retail prices for adult sizes for the Ugg line range from $50.00 to $275.00
The Company also sells imported hand-woven casual apparel under the Picante
label, through a 50% owned subsidiary. Sales of this brand account for a minimal
portion of the Company's revenues.
MARKETING AND DISTRIBUTION
The Company's products are distributed throughout North America by a
network of approximately 55 independent sales representatives, organized
geographically, who make sales, visit retail stores to train personnel and
review sales of the Company's footwear on a periodic basis. The Company's sales
managers for each brand manage their networks of representatives, recruit
experienced sales representatives in the industry and coordinate sales to
national accounts. The Company currently sells its products internationally
through independent distributors. The Company's goal is to promote retail sales
of the Company's products at attractive profit margins for its accounts through
selective distribution and marketing, targeted toward distinct groups of
consumers. As a result of this approach, the Company's accounts have a strong
incentive to devote greater selling space to the Company's products, and the
Company is better able to assess consumer preferences, the future ordering needs
of its customers and inventory requirements.
The Company's principal domestic customers include specialty retailers,
upscale department stores, outdoor retailers and athletic footwear stores which
market products consistent with the Company's standards and, in the case of
Teva, have been approved by the Company's licensor. The Company's five largest
customers accounted for approximately 17.3% of the Company's net sales for the
year ended December 31, 1999, compared to 17.5% for the year ended December 31,
1998. No single customer accounted for more than 10% of the Company's net sales
for the years ended December 31, 1999 or 1998.
In order to encourage accounts to place orders early in the season, the
Company has implemented a preseason discount program under which accounts are
offered discounts on preseason orders placed. The Company's strategy is to
emphasize this "futures" program, as compared to "at once" sales, in order to
stabilize its supply arrangements, reduce the risk of customer cancellations and
to benefit from the significant positive impact of the program on the Company's
inventory costs, sourcing schedule and allocation of marketing resources.
Consistent with prior years, the Company offered an early delivery program for
the spring 2000 season during the fourth quarter of 1999. This early delivery
program allows the Company to reduce the impact of peak inventory warehouse
utilization during the Spring and provides retailers the opportunity to have
earlier sell through, lengthening the retail selling season and increasing the
potential for inventory turns at retail. While the Company continues to see the
benefits of these programs, in 1999 the Company focused efforts at balancing
these benefits with the Company's continuing efforts to improve gross margin and
cash flow. As a result, the Company reduced the discount offered and the
extended payment terms associated with the fourth quarter of 1999 spring early
delivery program.
Domestic deliveries generally originate from the Company's 126,000 square
foot warehouse facility in Ventura County, California. International deliveries
originate from offshore factories or distribution centers in Canada and the
Netherlands.
ADVERTISING AND PROMOTION
The Company attempts to maximize the impact of its advertising, public
relations and promotional expenditures by utilizing media that provide high
visibility within targeted market segments. The Company's brand names are
generally advertised and promoted through a variety of consumer print
advertising campaigns in addition to highly visible editorial coverage in both
consumer and trade publications. Retail presence and "point of purchase"
materials along with production packaging provide additional visible brand
support. The Company's in-house marketing departments for each brand work
closely with targeted accounts in many aspects of these activities.
The Company continues to advertise its Teva brand through a national print
advertising campaign targeted at various different demographic groups. For its
core outdoor market, Teva advertises in several
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outdoor-related magazines, including Backpacker, Outside, Mountain Bike,
Paddler, and Climbing, among others. In addition, to promote its newly
introduced Wraptor running sandal, Teva is advertising in Runner's World,
Running Times, Sports Network, and Trail Runner, among other publications. With
the broadened appeal of the Teva offerings, including the leather casual models,
the Company has also focused its print advertising toward more mainstream print
publications, including Men's Journal, Fast Company, Shape, Maxim, Self and
Walking Magazine, among others. In addition, for its Spring 2000 line, the
Company has pre-produced 30 and 60 second radio and television advertising spots
which the Company makes available to its Teva retailers. These retailers add
their tag-lines to the spots and use them to advertise in their regional
markets.
In order to maintain the Company's historically high visibility among core
enthusiasts such as professional river rafters, kayakers, mountain bikers and
rock climbers, Teva products are given or sold at professional discounts to
members of this group. In order to further bolster the loyalty of these
individuals, the Company offers a category called the "Wilderness Series,"
incorporating the latest technological developments and highest quality
materials. In 1996, Teva was the official supplier to the United States Canoe
and Kayak Team. Additionally, Ugg was selected by Champion Sportswear to provide
footwear for the winter 1994 and the summer 1996 U.S. Olympic athletes. By
outfitting these highly visible teams, the Company creates awareness among
targeted consumers at relatively low cost.
In addition, the Company has traveling promotional and technical
representatives who represent the Teva brand at a wide variety of festivals,
outdoor sporting events and competitions. Teva is sponsoring over thirty events
in 2000. The highlight events include the Sea Otter Classic Bike Race, Teva
Oregon Cup, Jeep Whitewater Festival, Grandma's Marathon, Ben & Jerry's Folk
Festival, Vermont Free Reggae Festival, Reggae on the River, Teva Whitewater
Cup, Gauley Festival and the Telluride Bluegrass Festival, among many others.
The Teva mobile promotions team attends the events in dedicated promotional
vehicles where they showcase Teva products and provide consumers with the
opportunity to see and try on the latest styles.
With respect to the Simple product line, the Company launched a national
print advertising campaign which will appear this year in alternative and youth
focused consumer magazines such as Wallpaper, Nylon, Jump and Blue. In addition,
the marketing effort focuses around grass roots advertising that includes
advertising on popcorn bags, billboards, website advertising and "Go Cards". A
rigorous public relations campaign will focus on obtaining magazine editorial
placement in addition to newspaper and television coverage. Recent public
relations coverage has appeared in Footwear News, People Magazine, YM Magazine,
Footwear Plus, Bikini Magazine, Shape Magazine, Code Magazine and Sportswear
International. These public relations efforts have also resulted in Simple
products appearing in feature films including: The League, starring Al Pacino,
Cameron Diaz and James Woods; The Story of Us, starring Bruce Willis, Michelle
Pfeiffer and Paul Reiser; Sundowning, starring Kirk Douglas and Dan Aykroyd; and
Kimberly, starring Robert Mailhouse and Gabrielle Anwar.
Simple launched its Website, www.simpleshoes.com, in October of 1999 and by
fall 2000 will be updating the site to include consumer active chat rooms, photo
essays and extensive dealer locators and links. It will also be state of the art
in technology and capability while remaining visually clean and simple. Simple
was awarded "Consumer Choice for Brand of the Year" by shoesonthenet.com for
1999.
Simple's marketing efforts are performed internally by an in-house Simple
marketing team, which works to promote the Simple brand positioning of being
"simple" and "down to earth".
In 2000, the Company plans to continue to build on the success of the Ugg
1999 national print advertising campaign. The Company continues to target a
luxury consumer who seeks high quality, luxurious and fashionable products for
cold weather. The Company expects to advertise Fall 2000 Ugg products in upscale
publications such as In Style, Elle, Shape, Fashions of the NY Times and Vogue.
In addition, the Company also continues to target the Ugg brand's core surf
audience with ads in Surfing and Longboard magazines. Regional advertising in
local newspapers rounds out the Company's Ugg print advertising program. In
addition to this national print advertising campaign, the Ugg brand is being
supported by national public relations and product placement efforts. In-house
marketing personnel work closely with a public relations firm and a product
placement agency to gain brand visibility in popular magazines, television shows
and feature films.
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Recent editorial coverage includes articles in magazines such as In Style,
Cosmopolitan, Paper, Jane, YM Magazine, Shape, Self, and Us. Television coverage
of Ugg product includes shows such as Dharma and Greg, Suddenly Susan, X Files,
Mad About You, Dawson's Creek, 3rd Rock from the Sun, Friends, Will and Grace,
Ally McBeal, 7th Heaven and Party of Five. These public relations efforts have
also resulted in Ugg product appearances in the following feature films: Seven
Girlfriends, starring Jamie Gertz and Mimi Rogers; Two Goldsteins, starring
Elliot Gould and Alicia Witt; Hanging Up, starring Meg Ryan, Lisa Kudrow and
Diane Keaton; Panic, starring William H. Macy and Neve Campbell; Snow Day,
starring Chevy Chase; and More Dogs Than Bones, starring Whoopi Goldberg and
Mercedes Ruehl.
In 1999, 1998 and 1997, the Company incurred $5,602,000, $5,847,000 and
$4,096,000 respectively, for advertising, marketing and promotional expenses. In
addition to these expenditures, the Company's 31 international distributors
spend additional amounts for marketing the Company's brands within their
respective territories. The Company is required under its Teva license agreement
to spend a minimum amount for advertising and promoting the Teva products, based
on a percentage of sales. Under the Company's Teva License Agreement, signed in
June 1999, the Company has agreed to increase the Teva marketing expenditures,
depending on sales levels and varying by territory. In addition to the minimum
contractual marketing expenditures, the Company and the licensor have agreed to
each contribute annually a certain percentage of sales toward the promotion of
the Teva brand and trademark, with or without particular reference to individual
Teva styles. The Company's obligations with respect to this additional Teva
brand promotion begin in 2001.
DESIGN AND PRODUCT DEVELOPMENT
The design and product development staff for each of the Company's brands
creates and introduces new innovative footwear products that are consistent with
the Company's standards of high quality, combined with comfort and
functionality. In connection with the Company's 1999 streamlining, the Company
was restructured from a Company organized by functions to a Company aligned by
brand, with each brand as a separate profit center. As part of this
streamlining, the previously existing design department was disbanded and
reassigned to the Company's various brands. In doing so, the Company was able to
eliminate certain positions, obtain efficiencies and reduce design and
development costs considerably. As a result, research and development costs
aggregated $1,607,000, $2,393,000 and $1,780,000 in 1999, 1998 and 1997,
respectively, reflecting the operational efficiencies gained in 1999.
With respect to Teva, in order to ensure that the Company's high
performance technical products continue to satisfy the requirements of its
historical customer base of performance-oriented "core enthusiasts," the
Company's design staff solicits comments and feedback from its licensor and
professional outdoorsmen, as well as certain of its retailers, including REI,
Track 'n Trail and L.L. Bean. Certain models are modified and technical
innovations are developed in response to such comments and feedback. The Company
adds new innovations, components and styles to its product line continually. For
example, the Company recently designed and introduced new technologies in its
Wraptor running sandals, Circuit walking sandals, Bluewater boating and deck
footwear and its XPD line of innovative cross-terrain products. Also, the Fall
2000 Teva product line includes significant expansion into closed footwear
styles, including snow boots and a line of hikers, featuring Teva's
patent-pending Wraptor technology. In addition, for added traction and
durability, the Company has incorporated Spider Rubber(TM) into several styles,
including its high performance Wilderness Series.
While Teva continues to develop high performance sport sandals by
continually updating and designing new styles for this category, the Company
also continues to increase its focus on the casual footwear market through its
Teva, Simple and Ugg brands. The Company continues to introduce and offer new
styles of leather and other casual footwear for men and women and has expanded
its offering under its collection of Teva children's sandals for Spring 2000.
The Company has also expanded the leather casuals offering under the Simple line
for 2000. By monitoring changes in consumer lifestyles and preferences and then
focusing first on function and practicality, the Company develops footwear
designed to appeal to quality-minded consumers seeking comfortable casual
footwear.
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At the time of the Company's 1995 acquisition of Ugg Holdings, Inc., the
basic Ugg product needed to be updated and to be sourced at lower costs. Since
then, the Company has taken steps to update the Ugg products and make them
functional for use in cold and wet climates. For example, the popular Ultra
styles of men's and women's boots have been updated with new lug outsoles to
improve traction. In addition, the 2000 Ugg line includes an updated "Street
Collection" with products designed for more fashionable and functional everyday
use in both warm and cold climates. New Ugg additions for 2000 include the
Solvang clog, an expanded Birch collection, an expanded Fluff collection, and
the Adirondack collection of all weather boots and chukkas. More fashionable and
unique upper styles help to differentiate Ugg from the low cost imitation
brands.
Integral factors in the design and product development process include an
evaluation of the availability and cost of raw materials, the capabilities of
the factories that will manufacture products and the target retail cost of new
models and lines. The design and development staff works closely with brand
management to develop new styles of footwear and components for their various
product lines. Drawings and prototypes are utilized to produce samples of
proposed new concepts. Throughout the development process, members of the design
staff coordinate closely with each other and with the Company's product
development, manufacturing and sourcing personnel toward a common goal of
developing and sourcing a high-quality product that will be delivered on a
timely basis. The Company endeavors to minimize the risk of changing fashion
trends by offering a diverse line of functional products and closely monitoring
sales to its accounts after introduction.
PRODUCT SOURCING
The Company currently sources the majority of its Teva footwear from the
Far East, and sources a small portion from Costa Rica. In addition, the Company
imports nearly all of its finished Simple footwear from independent contract
manufacturers in the Far East and imports the majority of its finished Ugg
footwear from independent contract manufacturers in Australia, New Zealand and
the Far East. The majority of Picante casual apparel is manufactured in
Guatemala at a wholly owned subsidiary of Heirlooms, Inc., a 50% owned
subsidiary of the Company.
In 1997 and 1998, the Company closed its California and Mexican
manufacturing facilities. As a result of the closure of these facilities, the
Company is no longer involved in the direct manufacture of footwear, but rather
sources completed footwear entirely from independent subcontractors. As the
Company continues to grow, it expects to continue to rely heavily on its
independent subcontractors for its sourcing needs.
The manufacturing of footwear by the Company's independent subcontractors
is performed in accordance with detailed specifications provided by the Company
and is subject to quality control standards. In efforts to ensure the production
of high quality products, many of the materials and components used in
production are purchased from independent suppliers designated by the Company.
The Company believes that its completed footwear as well as the various raw
materials and components used in the manufacture of the footwear, including
rubber, leather, nylon webbing and sheepskin, are generally available from
multiple sources at competitive prices.
The Company generally does not have any long-term agreements with the
manufacturers or suppliers of its products, but does business based on
individual purchase orders.
QUALITY CONTROL
The Company has instituted inspections and other procedures to satisfy the
high quality demanded by users of the Company's products. The Company's quality
assurance program includes inspection procedures at the factory level as well as
a final inspection upon arrival at the Company's distribution center. The
Company uses on-site inspectors at its independent suppliers who oversee the
production process and perform quality assurance inspections. In addition, the
products undergo further inspection procedures prior to being accepted at the
Company's distribution center.
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LICENSES
Teva License. The Company has 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 the owner of the Teva
patents and trademark. Mr. Thatcher owns five United States patents on designs
used in Teva sport sandals and has a United States trademark registration for
the Teva mark.
On June 7, 1999, the Company signed a new license agreement (the "License
Agreement") for Teva, which became effective January 1, 2000. Under the License
Agreement, the Company has the exclusive worldwide rights for the manufacture
and distribution of Teva footwear through 2004. Apparel and other non-footwear
products are not covered by the License Agreement. The License Agreement is
automatically renewable through 2008 and through 2011 under two renewal options,
provided that minimum required sales levels are achieved. These minimum annual
sales levels are established at amounts which are in excess of the annual sales
levels which have been achieved to date.
As with the previous arrangement, the License Agreement provides for a
sliding scale of royalty rates, depending on sales levels, and includes
guaranteed minimum annual royalty amounts. Additionally, the License Agreement
provides for an increase in the required amount of marketing expenditures,
depending on sales levels and varying by territory. In addition to the minimum
contractual marketing expenditures, the Company and the licensor have agreed to
each contribute annually a certain percentage of sales toward the promotion of
the Teva brand and trademark, with or without particular reference to individual
Teva styles. The Company's obligations with respect to this additional Teva
brand promotion begin in 2001.
As additional consideration, 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 valued at $1,608,000. The Company has recorded the license as an
intangible asset equal to the cash and fair market value of the stock issued on
the date of the License Agreement. These shares are subject to various
contractual and other holding period requirements. In addition, the Company has
agreed to grant the licensor not less than 50,000 stock options on the Company's
common stock annually, at the fair market value on the date of grant.
The licensor retains the rights to approve the quality of the licensed
products produced, all marketing, advertising and promotional plans and
materials, and the distribution channels and customers to whom the Company can
sell the licensed products. In addition, the License Agreement provides for
minimum annual research and development spending levels for the Company with
respect to the Teva products and restricts the volume of closeouts and seconds
which the Company is able to sell each year.
The License Agreement provides that the licensor, in his sole discretion,
may take any action against parties believed to be infringing upon the
licensor's trademark, patents and other intellectual property. The licensor is
fully responsible for any legal and other costs incurred in such actions and is
entitled to any recovery resulting from the actions. The Company may not
participate in any such action or in any other action regarding the infringement
of the Teva intellectual property without the licensor's prior written consent.
In the event that the license term is automatically renewed beyond 2004,
the Company must achieve minimum annual sales levels for the years 2005 through
2011. These minimum annual sales levels are based upon certain percentages of
net sales in the preceding calendar year. If the Company is not able to achieve
the minimum annual sales levels for two years during a renewal term, the License
Agreement can be terminated at the option of the licensor.
During the term of the License Agreement, including the renewal terms, the
Company is prohibited from manufacturing, marketing, selling and distributing
any sandals other than Teva sandals. In addition, for the two years following
the termination of the License Agreement, the Company is prohibited from
manufacturing, marketing, selling and distributing sandals, in general. However,
the Company may continue to manufacture, market, sell and distribute all styles
and models of sandals offered under its Simple product line which existed as of
the date of the License Agreement as well as all styles subsequently approved by
the licensor.
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The License Agreement can be terminated under several circumstances, if
they remain uncured for specific periods of time. These circumstances include
the following, among others: if either party becomes insolvent or bankrupt; if
the Company offers sandals which compete with the Teva products or otherwise
engages in activities which compete with the Teva products; if the Company
transfers substantially all of its property or stock to other parties; if the
Company sells unapproved merchandise in violation of the License Agreement; or
if the Company or the licensor otherwise violate or breach the terms of the
License Agreement.
The Company also received an option to buy Teva and all of its assets,
including all worldwide rights to all Teva products (the "Option Agreement").
The option price is based on formulas tied to net sales of Teva products and
varies depending on when the option is exercised. The option price includes a
cash component, as well as the issuance of the Company's common stock and
additional options to purchase the Company's common stock. In addition, upon
exercise of the purchase option, the Company has agreed to employ the licensor
and a key employee of the licensor for a period of five years and to nominate
and effect the election of the licensor to the Company's Board of Directors. The
Company's option is exercisable during the period from January 1, 2000 to
December 31, 2001 and during the period from January 1, 2006 to December 31,
2008. The Company is currently evaluating the possibility of exercising the
option in the January 1, 2000 to December 31, 2001 period. The payment of the
purchase price must be completed within 90 days of the exercise of the purchase
option. If the Company exercises its purchase option, but subsequently fails to
complete the purchase within the 90 day payment period, the purchase option and
the Option Agreement will automatically be terminated. If the Company does not
elect to exercise its option to acquire Teva, the licensor has the option to
acquire the Teva distribution rights from the Company for the period from
January 1, 2010 to December 31, 2011, the end of the license term, and the
option price is based on a formula tied to the Company's earnings before
interest, taxes, depreciation and amortization.
In 1996, the Company exercised its right of first refusal with respect to
the licensing of apparel under the Teva name and began selling Teva apparel in
1997. Under the apparel license agreement, the Company had the exclusive rights
to manufacture and sell Teva apparel in the United States, Canada, Mexico, Japan
and other countries in the world where licensor has registered Teva as a
trademark and the Company has received licensor's written approval. The Company
intends to continue to deliver its Spring 2000 Teva apparel line under the
previous apparel license agreement. Following the Spring 2000 season, the
Company intends to discontinue Teva apparel. The licensor is currently
evaluating other potential licensees for Teva apparel.
HEIRLOOMS, INC. AGREEMENT
The Company and Bob Eason, the designer and founder of Picante clothing,
entered into an agreement that became effective in December 1993, pursuant to
which the Company became a 50% owner of Heirlooms, Inc. ("Heirlooms"), the
manufacturer and distributor of Picante clothing. Mr. Eason transferred to
Heirlooms all of his rights to the related products. The Company has also agreed
to extend credit to Heirlooms, which aggregated $3,211,000 at December 31, 1999.
All obligations of Heirlooms to the Company under such credit arrangement are
secured by the assets of Heirlooms. Mr. Eason is employed as President of
Heirlooms on an at-will basis.
PATENTS AND TRADEMARKS
Mr. Thatcher holds five United States patents and one patent in each of
Australia, New Zealand, Korea, Germany, France and the United Kingdom for Teva
footwear. As a result of the expiration of the applicable period during which
foreign patent applications were required to have been filed, Mr. Thatcher does
not and cannot hold such patent rights in other countries. Mr. Thatcher also
currently holds Teva trademark rights in the United States and in several other
countries, including, among others, France, Germany, the United Kingdom, Japan
and Australia. Mr. Thatcher's patent and trademark rights are licensed to the
Company under the license agreements discussed previously. Both the Company and
Mr. Thatcher regard such proprietary rights as valuable assets, and the Company
cooperates with Mr. Thatcher in vigorously protecting such rights against
infringement by third parties. To date, Mr. Thatcher has successfully enforced
his patent and trademark rights in all 20 concluded lawsuits brought against
such third parties. Under certain circumstances, if Mr. Thatcher declines to
challenge a potential infringement, the Company may bring an
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infringement action at its own cost, with Mr. Thatcher's prior written consent.
See "Licenses -- Teva License."
The Company owns the Simple and Ugg trademarks and has applied for or
received registrations for them in the United States and in many foreign
countries. The Company has selectively registered style category names and
marketing slogans. In addition, the Company holds two design patents for its
footwear products.
The Company has acquired the patent and trademarks for Alp(R) sport sandals
and has registered the Deckers trademark. The trademark registrations for the
Picante mark in the United States and Benelux (Belgium, Netherlands and
Luxembourg) and the mark for Rancho Picante in the United States are currently
held by Heirlooms, Inc.
BACKLOG
Historically, the Company has encouraged and has received a significant
portion of its orders as preseason orders, which are generally placed by
customers approximately four to eight months prior to shipment date. The Company
has emphasized this "futures" business, as compared to "at once" sales, as it
allows the Company to better forecast its inventory requirements and assists
with the Company's sourcing schedule. As a result, the Company provides its
customers with incentives to participate in such preseason programs. Unfilled
customer orders ("backlog"), as of any date, represent orders scheduled to be
shipped at a future date and do not represent firm sales. The mix of future and
immediate delivery orders can vary significantly from quarter to quarter and
year to year. The backlog as of a particular date is affected by a number of
factors, including seasonality and the scheduling of manufacture and shipment of
products as well as variations in the quarter to quarter and year to year
preseason incentive programs. As a result, comparisons of backlog from period to
period are not meaningful and the Company's backlog at any given time is
generally not indicative of sales levels expected to be achieved in the future.
COMPETITION
The casual, outdoor and athletic footwear markets are highly competitive.
The Company believes that currently its largest competitors of the Teva line are
Nike, Adidas, Timberland, Columbia and Salomon. The principal competitors of
Simple's casual line include DKNY, Steve Madden, Nine West, Doc Marten and
Kenneth Cole and of Simple's sneakers line include Skechers, Tommy Hilfiger,
Polo Sport, Vans and Airwalk. Ugg's competitors include Acorn, Aussie Dogs and
Minnetonka, as well as retailers' private label footwear.
Competition in the Company's footwear is primarily based on brand
awareness, product quality, design, price points, fashion appeal, marketing,
distribution, performance and brand positioning. The Company's Teva line of
footwear competes primarily on the basis of its authenticity and consumer brand
recognition as one of the first sandals of its kind, as well as its high
performance nature and its diversity of styles offered. In addition, several of
the most popular styles employ a distinctive patented strapping system, which
contributes to performance and the brand's consumer recognition. The Company
competes through its Simple line as an alternative brand offering a diversity of
simple, back-to-basics styles designed for a variety of recreational and leisure
activities. Ugg competes primarily on the basis of its authenticity as well as
its brand name recognition, identifiable with the United States sheepskin
footwear market. The Company believes its business strategy has resulted in
increased awareness for its brands. However, no assurance can be given that in
the future the Company will be able to maintain or further increase its brand
awareness, maintain or increase its market share or respond to changing consumer
preferences.
RISKS OF FOREIGN OPERATIONS/RESTRICTIONS ON IMPORTS
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 non-tariff barriers
(e.g., quotas), the cost of transportation, restrictions on the transfer of
funds, labor unrest and strikes, and in certain parts of the world, political
instability. Countries where the Company's products are
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manufactured and sold may, from time to time, seek to increase customs duties or
impose other non-tariff barriers (e.g., quotas), all of which have the potential
to affect the Company's operations and its ability to maintain or increase the
current level of importation of the Company's products. The Company is unable to
predict the likelihood or frequency of the occurrence of any of these events.
The products imported by the Company into the United States are subject to
various duty rates which are established by law. At the present time these
duties range between 8.5% and 12.5% of the entered value of footwear with uppers
made principally of leather or sheepskin, and 6.0% and 37.5%, plus $.90 per
pair, of the entered value of footwear with uppers made principally of synthetic
textiles or plastic. Certain products imported by the Company are exempt from
duties pursuant to laws pertaining to products manufactured in certain
beneficiary countries. "Entered value" means the value taken into account for
purposes of determining the amount of any customs duties or any other duties
which may be imposed on the importation of any property. In general, the entered
value is normally based on the price paid or payable by the Company to the
seller of the imported merchandise. Certain footwear and components manufactured
in countries designated as beneficiary countries for purposes of the Caribbean
Basin Economic Recovery Act, using components and ingredients of United States
origin, may be imported without payment of duties. Tariff preferences are also
available pursuant to the North American Free Trade Agreement for qualifying
footwear products and components originating in Mexico or Canada.
From time to time, the Company may be subject to claims for additional
duties arising as a result of the United States Customs Service, or similar
agencies of foreign countries, disagreeing with the classification and/or
valuation used by the Company to enter various styles of footwear.
The United States Trade Representative ("USTR") is required by the Trade
Act of 1974, as amended by the Trade and Tariff Act of 1984, the Omnibus Trade
and Competitiveness Act of 1988 and the 1994 Uruguay Round Agreements Act to
submit an annual National Trade Estimates Report on Foreign Trade Barriers (the
"NTE Report") identifying significant restrictions or barriers on United States
access to foreign markets. In January 1999, the President reinstated, by
Executive Order, the "Super 301" Provisions of the Trade Act. Relying on the NTE
Report, the USTR is required to report to Congress any trade barriers, trade
distorting practices and particular countries identified as priorities for trade
liberalization.
On April 30, 1997, the USTR designated China for monitoring under Section
306 of the 1974 Trade Act. This provision focuses on compliance with bilateral
trade agreements and allows the U.S. government to impose a variety of sanctions
if a party fails to comply with the terms of a bilateral agreement. The USTR
noted on April 30, 1999, that the United States will continue to monitor China's
commitment under the 1995 IPR Enforcement Agreement and the June 17, 1996 IPR
Accord to insure compliance.
In June 1999, President Clinton extended non-discriminating "normal trade
relations" ("NTR," formerly "most favored nation") trading status with China
through June 2000. While NTR status has been extended for another year, this
topic has traditionally been the subject of vigorous debate, and the Company is
unable to predict if the United States will revoke China's NTR status at some
point in the future. If a revocation of NTR status were to occur, it would
result in significantly higher duties on imports from China.
On April 30, 1999, the USTR announced that 37 countries had been placed on
the "special 301" watch list and 16 countries on the priority watch list because
of intellectual property protection concerns. Watch list countries include:
Australia, Canada, Denmark, Costa Rica, and Korea. The Company is unable to
predict whether or not additional countries will be added to the priority watch
list, or if any other actions will be imposed by the United States and if such
actions were taken, whether such actions would include footwear imports or
otherwise result in increased costs for the Company's products or restrict the
supply of footwear, generally, or of the Company's footwear in particular.
The European Commission has enacted anti-dumping duties of 49.2% on certain
types of footwear imported into Europe from China and Indonesia. Dutch Customs
has issued an opinion to the Company that certain popular Teva styles are
covered by this anti-dumping duty legislation. The Company believes that this
opinion is inappropriate and is working with Dutch Customs to resolve the
situation. In the event that Dutch Customs makes a final determination that such
styles are covered by the anti-dumping provisions, the
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Company expects that it would have an exposure to prior unpaid anti-dumping
duties for 1997 of up to approximately $500,000. In addition, if Dutch Customs
determines that these styles are covered by the legislation, the duty amounts
could cause the affected Teva products to be too costly to import into Europe
from China in the future. As a precautionary measure, the Company has obtained,
and is using, alternative sourcing for the potentially impacted products from
sources outside of China in an effort to reduce the potential risk in the
future.
The European communities also impose quantitative limits on imports from
China of certain leather upper and textile upper footwear. The Company is unable
to predict how long the anti-dumping duty and import quota restrictions will
remain in effect or changes in the scope or severity of such restrictions.
EMPLOYEES
At December 31, 1999, the Company employed approximately 112 full-time
employees in its U.S. facilities, 7 at its European subsidiary and 28 at its
Hong Kong subsidiaries, none of whom is represented by a union. The Company
believes its relationship with its employees is good.
ITEM 2. PROPERTIES
The Company leases approximately 30,000 square feet for its corporate
offices in Goleta, California and approximately 126,000 square feet for its
warehouse facility in Ventura County, California. The Company also leases
approximately 1,000 square feet of office space in the Netherlands for its
European sales and marketing efforts, approximately 2,000 square feet of office
space in Macau for its Far East staff and less than 1,000 square feet of office
space in Japan to support the Asian sales efforts. The terms of the lease for
the Company's European facilities call for "at-will" termination. The Company
paid approximately $1,091,000 in rent for all of its facilities in 1999. The
terms of the leases for the Company's corporate offices and its Ventura County
warehouse expire in 2001. The lease for the Company's Macau office space expires
in August 2000 and the Japanese office is rented on a month-to-month basis. The
Company's Ugg subsidiary leases approximately 23,000 square feet of office and
manufacturing space in Oregon through March 2000 which it has subleased, as
Ugg's operations have been consolidated with the Company's other facilities. The
Company believes that its existing corporate, manufacturing and warehousing
space will be adequate to meet its current and foreseeable requirements, and
that suitable additional or alternative space will be available as needed on
commercially reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
An action was brought against the Company in 1995 in the United States
District Court, District of Montana (Missoula Division), by Molly Strong-Butts
and Yetti by Molly, Ltd. (collectively, "Molly") which alleged, among other
things, that the Company violated a non-disclosure agreement and obtained
purported trade secrets regarding a line of winter footwear which Deckers
stopped producing in 1994. A jury verdict was obtained against the Company in
March 1999 aggregating $1,785,000 for the two plaintiffs. The Company is
appealing the verdict and continues to believe such claims are without merit.
The Company intends to continue contesting this claim vigorously.
The Company is also involved in routine litigation arising in the ordinary
course of business. Such routine matters, if decided adversely to the Company,
would not, in the opinion of management, have a material adverse effect on the
financial condition or results of operations of the Company. From time to time,
Mr. Thatcher and the Company are also involved in other legal proceedings to
protect the Teva patents and trademarks from infringement by third parties. Any
decision or settlement in any such infringement proceeding which allowed a third
party to continue to manufacture and sell the products at issue could have an
adverse effect on the Company's sales to the extent such other products are
purchased in lieu of the Company's products.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded in the National Market System of the
NASDAQ stock market (the "NMS") under the symbol "DECK."
As of February 29, 2000, the number of holders of record of the Common
Stock was 155, and the number of beneficial owners was approximately 1,650.
1999 1998
-------------- --------------
HIGH LOW HIGH LOW
----- ----- ----- -----
First Quarter....................................... $3.56 $1.75 $8.50 $7.13
Second Quarter...................................... 5.25 1.88 7.94 6.63
Third Quarter....................................... 4.13 2.75 7.50 4.56
Fourth Quarter...................................... 3.63 2.56 5.25 1.25
The Company has never declared or paid cash dividends on its capital stock.
The Company currently intends to retain any earnings for use in its business and
does not anticipate paying any cash dividends in the foreseeable future. Payment
of dividends is within the discretion of the Company's Board of Directors and
will depend upon, among other factors, the Company's earnings, financial
condition and capital requirements. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
In June 1999, the Company issued 428,743 shares of Common Stock to Mark
Thatcher, the licensor of the Teva patents and trademark. The shares were issued
in connection with the Teva license agreement, as partial consideration to Mr.
Thatcher for the license agreement. The issuance of the shares to Mr. Thatcher
was exempt from the registration requirements of the Securities Act of 1933
pursuant to Section 4(2) of such act.
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ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth selected consolidated financial data of the
Company as of and for each of the years in the five-year period ended December
31, 1999.
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA
Net sales................................... $109,666 $102,172 $106,713 $101,838 $102,334
Cost of sales............................... 64,538 65,592 62,453 61,009 65,856
-------- -------- -------- -------- --------
Gross profit...................... 45,128 36,580 44,260 40,829 36,478
Selling, general and administrative
expenses.................................. 38,378 39,378 35,648 32,989 32,373
Loss on factory closure..................... -- -- 500 -- --
-------- -------- -------- -------- --------
Earnings (loss) from operations... 6,750 (2,798) 8,112 7,840 4,105
Other expense............................... 1,508 1,320 143 1,241 1,382
-------- -------- -------- -------- --------
Earnings (loss) before income
taxes (benefit)................. 5,242 (4,118) 7,969 6,599 2,723
Income taxes (benefit)...................... 2,358 (1,211) 3,445 2,943 1,287
-------- -------- -------- -------- --------
Net earnings (loss)............... $ 2,884 $ (2,907) $ 4,524 $ 3,656 $ 1,436
======== ======== ======== ======== ========
Net earnings (loss) per common share:
Basic..................................... $ .33 $ (.34) $ .50 $ .40 $ .13
Diluted................................... $ .32 $ (.34) $ .50 $ .39 $ .13
======== ======== ======== ======== ========
Weighted-average common shares outstanding:
Basic..................................... 8,834 8,632 8,961 9,248 9,324
Diluted................................... 8,981 8,632 9,012 9,292 9,352
======== ======== ======== ======== ========
AT DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS)
BALANCE SHEET DATA
Current assets.............................. $ 49,044 $ 59,309 $ 48,801 $ 49,348 $ 50,031
Current liabilities......................... 10,386 17,174 9,579 9,618 6,262
Total assets................................ 73,482 84,373 74,693 74,897 74,917
Long-term debt, less current installments... 6,276 15,199 7,983 10,290 15,170
Total stockholders' equity.................. 56,820 52,000 57,131 54,989 53,485
======== ======== ======== ======== ========
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto. This Annual Report on Form
10-K includes forward-looking statements within the meaning of Section 21E of
the Securities Exchange Act of 1934 that involve risk and uncertainty, such as
forward-looking statements relating to sales and operating expense expectations,
the potential imposition of certain customs duties, the potential impact of
certain litigation, the potential impact of the Year 2000 on the Company and the
impact of seasonality on the Company's operations. Actual results may vary. Some
of the factors that could cause actual results to differ materially from those
in the forward-looking statements are identified in the accompanying "Risk
Factors" section, the last paragraph under "Liquidity and Capital Resources",
the discussion under "Seasonality" and other sections of this Annual Report on
Form 10-K.
RESULTS OF OPERATIONS
The following table is derived from the Company's statement of operations
and sets forth, for the periods indicated, certain operating data as a
percentage of net sales.
YEARS ENDED DECEMBER 31,
--------------------------
1999 1998 1997
------ ------ ------
Net sales................................................... 100.0% 100.0% 100.0%
Cost of sales............................................... 58.8 64.2 58.5
----- ----- -----
Gross profit...................................... 41.2 35.8 41.5
Selling, general and administrative expenses................ 35.0 38.5 33.4
Loss on factory closure..................................... 0.0 0.0 0.5
----- ----- -----
Earnings (loss) from operations................... 6.2 (2.7) 7.6
Other expense............................................... 1.4 1.3 0.2
----- ----- -----
Earnings (loss) before income taxes (benefit)..... 4.8 (4.0) 7.4
Income taxes (benefit)...................................... 2.2 (1.2) 3.2
----- ----- -----
Net earnings (loss)......................................... 2.6% (2.8)% 4.2%
===== ===== =====
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Net sales increased by $7,494,000, or 7.3%, between the years ended
December 31, 1999 and 1998. Aggregate net sales of Teva increased to $79,935,000
for the year ended December 31, 1999 from $67,916,000 for the year ended
December 31, 1998, a 17.7% increase. This increase was a result of an expansion
of the overall sandal market, strength in international markets and a general
increase in the popularity of the Teva brand. Net sales of Teva represented
72.9% and 66.5% of net sales in the years ended December 31, 1999 and 1998,
respectively. Net sales of footwear under the Simple product line decreased
23.1% to $15,329,000 from $19,939,000 from the year ended December 31, 1998. The
decrease in Simple sales resulted from an unsuccessful attempt at positioning
the brand to appeal to older customers. The brand has since been refocused to
appeal to the teen and twenty-something market, where the brand had been
successful in prior years. Net sales of Ugg increased 11.3% to $11,920,000 for
the year ended December 31, 1999 from $10,710,000 for the year ended December
31, 1998. This increase was primarily due to a successful third quarter early
delivery program, which caused retailers to carry the goods at retail earlier in
the season, resulting in additional sales. Also, the Company successfully
launched several new styles under the Birch series of casual Ugg footwear in
1999, appealing to a broader customer base. Overall, international sales for all
of the Company's products increased 18.8% to $28,738,000 from $24,194,000,
representing 26.2% of net sales in 1999 and 23.7% in 1998, reflecting continued
expansion in the European and Asian markets. The volume of footwear sold
increased 5.1% to 4,143,000 pairs during the year ended December 31, 1999 from
3,941,000 pairs during the year ended December 31, 1998, for the reasons
discussed above.
The weighted-average wholesale price per pair sold during the year ended
December 31, 1999 increased 2.5% to $25.46 from $24.84 for the year ended
December 31, 1998. The increase was primarily due to
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a reduced impact of closeouts and discounts in 1999, partially offset by the
impact of a shift in sales mix toward international sales, which generally have
a lower average selling price than sales in the domestic market.
Cost of sales decreased by $1,054,000, or 1.6%, to $64,538,000 for the year
ended December 31, 1999, compared with $65,592,000 for the year ended December
31, 1998. Gross profit increased by $8,548,000, or 23.4%, to $45,128,000 for the
year ended December 31, 1999 from $36,580,000 for the year ended December 31,
1998 and increased as a percentage of net sales to 41.2% from 35.8%. The
increase was primarily due to the non-recurrence of the significant charges
incurred in 1998. These charges included raw materials write-downs, partially as
a result of the closure of the Company's Mexican manufacturing facility in the
third quarter of 1998, significant finished goods inventory write-downs,
primarily related to the Simple brand, and a product recall on the Teva nylon
infant sandals due to a defect in production by a contract manufacturer. In
addition, the increase in gross margin was due to improved product sourcing and
pricing and a reduction in materials and finished goods write-downs. The gross
margin increase was also attributed to the Company's exit from the footwear
components business in the latter half of 1998, which business typically carried
a low gross margin.
Selling, general and administrative expenses decreased by $1,000,000, or
2.5%, for the year ended December 31, 1999, compared with the year ended
December 31, 1998, and decreased as a percentage of net sales to 35.0% in 1999
from 38.5% in 1998. The decrease in selling, general and administrative expenses
was primarily due to lower payroll and related costs resulting from the 1999
reorganization, reduced costs at the Company's overseas locations, and lower
marketing and advertising expenditures. In addition, the Company greatly
improved its cost control efforts in general in 1999. These improvements were
partially offset by increased bad debt expenses, legal and other costs
associated with the Company's Molly litigation, and employee severance costs
related to the Company's reorganization in 1999.
Net interest expense increased to $1,404,000 for the year ended December
31, 1999 from $1,171,000 for the year ended December 31, 1998, primarily due to
an increase in the average outstanding borrowings under the Company's credit
facility during the first six months of 1999 versus the same period of 1998.
This was partially offset by the impact of lower average outstanding borrowings
in the last half of the year and lower average borrowing rates in 1999 than in
1998.
For the year ended December 31, 1999, income tax expense was $2,358,000,
representing an effective income tax rate of 45.0%. For the year ended December
31, 1998, the Company experienced an income tax benefit of $1,211,000, as a
result of the Company's loss for the period, reflecting the Company's ability to
recover income taxes previously paid. This represented an effective income tax
rate of 29.4% in 1998. The difference in the effective income tax rate as
compared to the expected rate is largely attributed to the impact of
non-deductible expense items, primarily goodwill amortization and state income
tax expenses.
For the year ended December 31, 1999, the Company's net earnings increased
to $2,884,000 compared to a net loss of $2,907,000 for the year ended December
31, 1998, for the reasons discussed above.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Net sales decreased by $4,541,000, or 4.3%, between the years ended
December 31, 1998 and 1997. Sales of the Teva line increased to $67,916,000 for
the year ended December 31, 1998 from $61,863,000 for the year ended December
31, 1997, a 9.8% increase. The increase in Teva sales was partially due to an
increase in sales under the Company's early delivery program in 1998, compared
to that in 1997. Under this program, retailers were encouraged to take early
delivery of spring product in the fourth quarter in an effort to expand the
length of the selling season. In addition, the Company introduced several
successful new styles and experienced a general increase in demand for the Teva
products. Sales of Teva products represented 66.5% and 58.0% of net sales for
the years ended December 31, 1998 and 1997, respectively. Net sales of footwear
under the Simple product line decreased 31.0% to $19,939,000 from $28,901,000
between the years ended December 31, 1998 and 1997. Simple sales represented
19.5% of sales in 1998 and 27.1% of sales in 1997. The decrease in Simple sales
occurred due to a decline in demand for Simple products caused by a variety of
factors, including competition, an abundance of similar products at retail, and
a general decrease in the popularity of the products. Sales of Ugg footwear
increased 16.8% to $10,710,000 in 1998 from $9,169,000 in 1997, representing
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10.5% of sales for the year ended December 31, 1998 and 8.6% for the year ended
December 31, 1997. The increase in Ugg sales was due to a general increase in
demand for the products, caused in part by an improved print advertising and
public relations campaign in 1998. In addition, the Company's overall sales
declined as the Company exited two businesses since 1997. The Company sold its
interest in the Trukke line of winter sport boots effective December 31, 1997
and ceased its business of supplying of footwear components for independent
factories in the Far East during the third quarter of 1998. In the aggregate,
the reduced sales contribution from these two businesses was $2,928,000.
Overall, international sales for all of the Company's products decreased 9.4% to
$24,194,000 from $26,704,000, representing 23.7% of net sales in 1998 and 25.0%
in 1997. This decrease in international sales was caused in part by the
reduction in sales of footwear components in the Far East, when the Company
exited that business in 1998. The volume of footwear sold worldwide increased
2.0% to 3,941,000 pairs during the year ended December 31, 1998 from 3,865,000
pairs during the year ended December 31, 1997, for the reasons discussed above.
The weighted-average wholesale price per pair sold during the year ended
December 31, 1998 decreased by 4.4% to $24.84 from $25.97 for the year ended
December 31, 1997. The decrease occurred as a result of an increase in the
proportion of footwear sold at closeout prices in 1998 compared to 1997,
primarily related to the Simple line.
Cost of sales increased by $3,139,000, or 5.0%, to $65,592,000 for the year
ended December 31, 1998, compared with $62,453,000 for the year ended December
31, 1997. Gross profit decreased by $7,680,000, or 17.4%, to $36,580,000 for the
year ended December 31, 1998 from $44,260,000 for the year ended December 31,
1997 and decreased as a percentage of net sales to 35.8% from 41.5%. The
decrease in gross margin during the period was due to several factors. As a
result of the Simple sales decline, the Company experienced inventory
write-downs on excess Simple inventory, as well as an increase in the volume of
Simple closeouts. In addition, the Company experienced write-downs of Teva raw
materials inventory, partially as a result of the Company's closure of its
Mexican manufacturing facility, the last remaining Company owned manufacturing
facility. The Company also experienced increased airfreight costs in 1998
compared to 1997. Lastly, the Company announced a product recall on the Teva
nylon infant sandals during 1998. The Company recorded a loss of approximately
$460,000 related to this recall, of which approximately $360,000 was included as
a reduction of gross profit and approximately $100,000 was included in selling,
general and administrative expenses.
Selling, general and administrative expenses increased by $3,730,000, or
10.5%, for the year ended December 31, 1998, compared with the year ended
December 31, 1997, and increased as a percentage of net sales to 38.5% in 1998
from 33.4% in 1997. In its continuing efforts to improve sales growth, the
Company increased its advertising and marketing and increased its research and
development to improve design as well as to improve the transition from design
to production. Accordingly, the Company incurred approximately $1,880,000 more
in advertising, marketing and promotion costs, including $130,000 of in-house
costs, and approximately $613,000 more in research and development costs in 1998
than in 1997. The Company also experienced an increase in warehouse costs of
approximately $730,000, an increase in Teva apparel operating costs of
approximately $340,000, an increase in costs associated with its management
information systems of approximately $460,000, an increase in sales sample
expenses of approximately $220,000, increased European office expenses of
approximately $140,000, product recall costs of approximately $100,000, and
severance costs of approximately $200,000 in conjunction with the closure of the
Mexican manufacturing facility in 1998.
Net interest expense was $1,171,000 for the year ended December 31, 1998
compared with net interest expense of $344,000 for the year ended December 31,
1997, primarily due to increased borrowings on the Company's credit facility in
1998 compared to 1997.
For the year ended December 31, 1998, the Company experienced an income tax
benefit of $1,211,000, as a result of the Company's loss for the period,
reflecting the Company's ability to recover income taxes previously paid. This
represents an effective income tax rate of 29.4%. For the year ended December
31, 1997, the Company had income tax expense of $3,445,000, representing an
effective income tax rate of 43.2%. The change in the effective income tax rate
is due to certain non-deductible expenses, primarily goodwill amortization,
which were a greater proportion of earnings (loss) before income taxes in 1998
than in 1997. In
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addition, for California state income tax purposes, net operating losses cannot
be carried back to offset income taxes previously paid in prior years and,
therefore, the income tax benefit is reduced accordingly.
The Company had a net loss of $2,907,000 for the year ended December 31,
1998 as compared with net earnings of $4,524,000 for the year ended December 31,
1997 due to the reasons discussed above.
OUTLOOK
Sales and Operating Expense Expectations. The Company's sales under the
Teva product line increased to a record $79,935,000 in 1999. For 2000, the
Company expects net sales of Teva to be relatively flat compared to 1999,
reflecting the effects of two offsetting factors. Domestically, the Company
expects lower sales to retailers in the athletic footwear channels as a result
of apparent weakness in this segment of the market. The Company expects this
decrease to be offset by continued expansion in its international markets,
particularly in Europe and Asia, and through its greatly expanded Fall 2000
product offering of closed footwear.
The Company experienced an 11.3% increase in Ugg sales in 1999. The Company
currently expects a continued increase in Ugg sales for 2000, as the Company
focuses on geographical expansion outside of California and product
diversification in its casual footwear offering.
For 1999, Simple sales declined 23.1% compared to 1998. The Company is
refocusing its Simple efforts toward the teen and twenty-something market, where
the Simple brand had been successful years ago. The Company currently expects
sales under the Simple line to increase in 2000 compared to 1999.
The Company's selling, general and administrative expenses decreased to
35.0% of sales in 1999 from 38.5% of sales in 1998. The Company plans to
continue to focus on improving its operating efficiencies in 2000, and expects
that the resulting selling, general and administrative expenses will continue to
decrease as a percentage of sales in 2000.
Year 2000 Issue. The Year 2000 issue results from computer hardware or
software programs written using two digits to identify the year. These computer
programs and hardware were designed and developed without consideration of the
impact of the change in the century. As a result, without correction, such
systems may not be able to properly distinguish between years that begin with a
"20" and years that begin with a "19". If not corrected, such hardware and
software programs could create erroneous information by or at the year 2000,
causing the Company, or its customers or suppliers, to become unable to process
normal business transactions accurately or at all.
The Company is not aware of any material Year 2000 failures which have
occurred in its systems or at its key business partners. While the Company
believes that it has achieved Year 2000 compliance, the Company's Year 2000
compliance is still subject to additional risks including the following, among
others: the Company's failure to adequately identify and analyze issues, failure
to identify a Year 2000 system failure within its internal systems or at a key
business partner, failure to convert to compliant systems, failure to fully test
converted systems, and failure to implement compliant systems; unanticipated
issues or delays in any of the phases of the Company's strategy; the inability
of customers, suppliers and other business partners to identify and communicate
any potential Year 2000 system failures which they experience; and the breakdown
of local and global infrastructures resulting from the non-compliance of
utilities, banking systems, transportation, government and communications
systems.
The Company's above assessment of the risks associated with Year 2000
issues is forward-looking. Actual results may vary for a variety of reasons
including those described above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity consists primarily of cash, trade accounts
receivable, inventories and a revolving credit facility. At December 31, 1999,
working capital was $38,658,000 including $1,633,000 of cash. Cash provided by
operating activities aggregated $18,209,000 for the year ended December 31,
1999. Trade accounts receivable decreased 10.2% since December 31, 1998,
reflecting the decrease in sales during the
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fourth quarter of 1999 compared to the fourth quarter of 1998, caused by a
reduction in both the discounts and extended payment terms offered as incentives
for the Teva early delivery program, as well as the effect of the warm holiday
weather on Ugg reorders. The changes in the Teva program were made as part of
the Company's ongoing efforts to improve gross margin and cash flow. Inventories
decreased 23.5% since December 31, 1998 as a result of several factors,
including a change in the European fulfillment process such that the Company no
longer maintains a stock of goods in Europe, but rather fills distributor orders
via goods shipped directly from independent factories to a European distribution
center, where the goods are immediately transferred to the distributors. In
addition, the Company reduced its footwear raw materials inventory to zero,
marking the completion of its transition from footwear manufacturing.
On January 21, 1999, the Company entered into a new revolving credit
facility (the "Facility") with a new lender. The new Facility provides a maximum
availability of $50,000,000, subject to a borrowing base of up to 85% of
eligible accounts receivables, as defined, and 65% of eligible inventory, as
defined. Up to $15,000,000 of borrowings may be in the form of letters of
credit. The Facility bears interest at the lender's prime rate (8.50% at
December 31, 1999), or at the Company's election at an adjusted Eurodollar rate
plus 2%. The Facility is secured by substantially all assets of the Company. The
agreement underlying the Facility includes a tangible net worth covenant,
requiring the Company to maintain tangible net worth, as defined, of
$30,000,000. The Company was in compliance with this covenant at December 31,
1999. As a result of the Company's signing of the new Teva license agreement in
1999, the expiration of the Facility has been extended through January 21, 2002.
At December 31, 1999, the Company had outstanding borrowings of $5,834,000 under
the Facility and had outstanding letters of credit aggregating $3,561,000.
Under the terms of the Facility, if the Company terminates the arrangement
prior to the expiration date of the Facility, the Company may be required to pay
the lender an early termination fee ranging between 1% and 3% of the Facility's
commitment amount, depending upon when such termination occurs.
Capital expenditures totaled $947,000 for the year ended December 31, 1999.
The Company's capital expenditures related primarily to molds purchased for use
in the production process as well as various computer hardware and software
purchases. The Company currently has no material future commitments for capital
expenditures.
The Company's Board of Directors has authorized the repurchase of up to
2,200,000 shares of common stock under a stock repurchase program. Such
repurchases are authorized to be made from time to time in open market or in
privately negotiated transactions, subject to price and market conditions as
well as the Company's cash availability. Under this program, the Company
repurchased approximately 973,000 shares for aggregate cash consideration of
approximately $7,499,000 through December 31, 1998. No shares were repurchased
during the year ended December 31, 1999. At December 31, 1999, approximately
1,227,000 shares remain available for repurchase under the program.
On June 7, 1999, the Company signed a new license agreement (the "License
Agreement") for Teva, which becomes effective January 1, 2000. Under the License
Agreement, the Company receives the exclusive worldwide rights for the
manufacture and distribution of Teva footwear through 2004. The License
Agreement is automatically renewable through 2008 and through 2011 under two
renewal options, provided that minimum required sales levels are achieved. As
with the previous arrangement, the new license agreement provides for a sliding
scale of royalty rates, depending on sales levels. Additionally, the Company has
agreed to increase the contractual marketing expenditure, depending on sales
levels and varying by territory, effective June 7, 1999. As additional
consideration, 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
valued at $1,608,000. The Company has recorded the license as an intangible
asset equal to the cash and fair market value of the stock issued on the date of
the License Agreement. These shares are subject to various contractual and other
holding period requirements. In addition, the Company has agreed to grant the
licensor not less than 50,000 stock options on the Company's common stock
annually, at the fair market value on the date of grant.
The Company also received an option to buy Teva and all of its assets,
including all worldwide rights to all Teva products. The option price is based
on formulas tied to net sales of Teva products and varies depending on when the
option is exercised. The Company's option is exercisable during the period from
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26
January 1, 2000 to December 31, 2001 or during the period from January 1, 2006
to December 31, 2008. If the Company does not exercise its option to acquire
Teva, the licensor has the option to acquire the Teva distribution rights from
the Company for the period from January 1, 2010 to December 31, 2011, the end of
the license term, and the option price is based on a formula tied to the
Company's earnings before interest, taxes, depreciation and amortization. The
exercise of either option will require a significant amount of additional
financing. There are no assurances that the additional financing will be
available.
Apparel and other non-footwear products are not covered by the License
Agreement. However, the Company intends to continue to deliver its Spring 2000
Teva apparel line under the previous apparel license agreement. Following the
Spring 2000 season, the Company intends to discontinue Teva apparel. The
licensor is currently evaluating other potential licensees for Teva apparel.
The Company believes that internally generated funds, the available
borrowings under its existing credit facility, and the cash on hand will provide
sufficient liquidity to enable it to meet its current and foreseeable working
capital requirements. However, risks and uncertainties which could impact the
Company's ability to maintain its cash position include the Company's growth
rate, its ability to collect its receivables in a timely manner, its ability to
effectively manage its inventory, and the volume of letters of credit used to
purchase product, among others.
SEASONALITY
Financial results for the outdoor and footwear industries are generally
seasonal. Sales of each of the Company's different product lines have
historically been higher in different seasons with the highest percentage of
Teva sales occurring in the first and second quarter of each year and the
highest percentage of Ugg sales occurring in the fourth quarter, while the
quarter with the highest percentage of annual sales for Simple has varied from
year to year.
Based on the Company's historical experience, the Company would expect
greater sales in the first and second quarters than in the third and fourth
quarters. The actual results could differ materially depending upon consumer
preferences, availability of product, competition, and the Company's customers
continuing to carry and promote its various product lines, among other risks and
uncertainties. See also the discussion regarding forward-looking statements
under "Outlook".
OTHER
The Company believes that the relatively moderate rates of inflation in
recent years have not had a significant impact on its net sales or
profitability.
RECENTLY ISSUED PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" is effective for fiscal years
beginning after June 15, 2000. Statement of Financial Accounting Standards No.
133 addresses the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and hedging activities. The
Statement standardizes the accounting for derivative instruments by requiring
that an entity recognize those items as assets or liabilities in the statement
of financial position and measure them at fair value. The Company is evaluating
the Statement's provisions to determine the effect on its financial statements.
In addition, the impact of the Statement will depend on the terms of future
transactions.
26
27
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14(a) and page 28 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
Not applicable.
27
28
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
PAGE
----
Independent Auditors' Report................................ 29
Consolidated Balance Sheets as of December 31, 1999 and
1998...................................................... 30
Consolidated Statements of Operations for each of the years
in the three-year period ended December 31, 1999.......... 31
Consolidated Statements of Stockholders' Equity for each of
the years in the three-year period ended December 31,
1999...................................................... 32
Consolidated Statements of Cash Flows for each of the years
in the three-year period ended December 31, 1999.......... 33
Notes to Consolidated Financial Statements.................. 34
Consolidated Financial Statement Schedule:
Valuation and Qualifying Accounts......................... 48
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.
28
29
INDEPENDENT AUDITORS' REPORT
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 generally accepted auditing
standards. 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, 1999 and 1998 and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999 in conformity with 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.
KPMG LLP
February 18, 2000, except for the
last paragraph of note 9, which is
as of March 17, 2000.
29
30
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
ASSETS (note 6)
1999 1998
----------- -----------
Current assets:
Cash and cash equivalents................................. $ 1,633,000 $ 263,000
Trade accounts receivable, less allowance for doubtful
accounts of $1,813,000 and $1,204,000 as of December
31, 1999 and 1998, respectively........................ 24,396,000 27,180,000
Inventories (note 4)...................................... 18,103,000 23,665,000
Prepaid expenses and other current assets................. 2,235,000 2,178,000
Refundable income taxes (note 8).......................... 1,624,000 4,267,000
Deferred tax assets (note 8).............................. 1,053,000 1,756,000
----------- -----------
Total current assets.............................. 49,044,000 59,309,000
Property and equipment, at cost, net (note 5)............... 2,125,000 2,994,000
Intangible assets, less applicable amortization............. 22,037,000 20,702,000
Note receivable from supplier, net (note 7)................. -- 782,000
Other assets, net........................................... 276,000 586,000
----------- -----------
$73,482,000 $84,373,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt (note 6)........... $ 125,000 $ 6,236,000
Trade accounts payable.................................... 7,261,000 7,947,000
Accrued expenses.......................................... 3,000,000 2,991,000
----------- -----------
Total current liabilities......................... 10,386,000 17,174,000
----------- -----------
Long-term debt, less current installments (note 6).......... 6,276,000 15,199,000
Commitments and contingencies (notes 10 and 11)
Stockholders' equity (note 9):
Preferred stock, $.01 par value. Authorized 5,000,000
shares; none issued.................................... -- --
Common stock, $.01 par value. Authorized 20,000,000
shares; issued 10,037,957 and outstanding 9,065,005 at
December 31, 1999; issued 9,495,631 and outstanding
8,522,679 at December 31, 1998......................... 91,000 85,000
Additional paid-in capital................................ 24,743,000 22,813,000
Retained earnings......................................... 32,610,000 29,726,000
----------- -----------
57,444,000 52,624,000
Less note receivable from stockholder/former officer...... 624,000 624,000
----------- -----------
Net stockholders' equity.......................... 56,820,000 52,000,000
----------- -----------
$73,482,000 $84,373,000
=========== ===========
See accompanying notes to consolidated financial statements.
30
31
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE-YEAR PERIOD ENDED DECEMBER 31, 1999
1999 1998 1997
------------ ------------ ------------
Net sales (notes 10 and 12)....................... $109,666,000 $102,172,000 $106,713,000
Cost of sales..................................... 64,538,000 65,592,000 62,453,000
------------ ------------ ------------
Gross profit............................ 45,128,000 36,580,000 44,260,000
Selling, general and administrative expenses...... 38,378,000 39,378,000 35,648,000
Loss on factory closure (note 3).................. -- -- 500,000
------------ ------------ ------------
Earnings (loss) from operations......... 6,750,000 (2,798,000) 8,112,000
------------ ------------ ------------
Other expense (income):
Interest expense, net........................... 1,404,000 1,171,000 344,000
(Gain) loss on disposal of assets............... 3,000 13,000 (51,000)
Minority interest in net loss of unconsolidated
subsidiary................................... -- -- (45,000)
Miscellaneous expense (income).................. 101,000 136,000 (105,000)
------------ ------------ ------------
1,508,000 1,320,000 143,000
------------ ------------ ------------
Earnings (loss) before income taxes
(benefit)............................. 5,242,000 (4,118,000) 7,969,000
Income taxes (benefit) (note 8)................... 2,358,000 (1,211,000) 3,445,000
------------ ------------ ------------
Net earnings (loss)..................... $ 2,884,000 $ (2,907,000) $ 4,524,000
============ ============ ============
Net earnings (loss) per share:
Basic........................................... $ 0.33 $ (0.34) $ 0.50
Diluted......................................... $ 0.32 $ (0.34) $ 0.50
============ ============ ============
Weighted-average shares:
Basic........................................... 8,834,000 8,632,000 8,961,000
Diluted......................................... 8,981,000 8,632,000 9,012,000
============ ============ ============
See accompanying notes to consolidated financial statements.
31
32
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE-YEAR PERIOD ENDED DECEMBER 31, 1999
STOCKHOLDER/
COMMON STOCK ADDITIONAL FORMER NET
------------------- PAID-IN RETAINED OFFICER NOTE STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS RECEIVABLE EQUITY
--------- ------- ----------- ----------- ------------ -------------
Balance at December 31, 1996... 8,983,556 $90,000 $26,790,000 $28,109,000 $ -- $54,989,000
Common stock repurchased....... (330,000) (3,000) (2,578,000) -- -- (2,581,000)
Common stock issued under stock
incentive plan............... 126,000 1,000 771,000 -- (624,000) 148,000
Common stock issued under the
employee stock purchase
plan......................... 9,875 -- 51,000 -- -- 51,000
Net earnings................... -- -- -- 4,524,000 -- 4,524,000
--------- ------- ----------- ----------- --------- -----------
Balance at December 31, 1997... 8,789,431 88,000 25,034,000 32,633,000 (624,000) 57,131,000
Common stock repurchased....... (342,952) (3,000) (2,525,000) -- -- (2,528,000)
Common stock issued under stock
incentive plan............... 57,572 -- 213,000 -- -- 213,000
Common stock issued under the
employee stock purchase
plan......................... 18,628 -- 91,000 -- -- 91,000
Net loss....................... -- -- -- (2,907,000) -- (2,907,000)
--------- ------- ----------- ----------- --------- -----------
Balance at December 31, 1998... 8,522,679 85,000 22,813,000 29,726,000 (624,000) 52,000,000
Common stock issued under Teva
license agreement............ 428,743 4,000 1,604,000 -- -- 1,608,000
Common stock issued under stock
incentive plan............... 91,352 1,000 284,000 -- -- 285,000
Common stock issued under the
employee stock purchase
plan......................... 22,231 1,000 42,000 -- -- 43,000
Net earnings................... -- -- -- 2,884,000 -- 2,884,000
--------- ------- ----------- ----------- --------- -----------
Balance at December 31, 1999... 9,065,005 $91,000 $24,743,000 $32,610,000 $(624,000) $56,820,000
========= ======= =========== =========== ========= ===========
See accompanying notes to consolidated financial statements.
32
33
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE-YEAR PERIOD ENDED DECEMBER 31, 1999
1999 1998 1997
------------ ------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss)......................................... $ 2,884,000 $ (2,907,000) $ 4,524,000
------------ ------------ -----------
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization of property and equipment... 1,804,000 1,276,000 1,235,000
Amortization of intangible assets......................... 1,322,000 1,362,000 1,271,000
Provision for doubtful accounts........................... 1,820,000 589,000 966,000
(Gain) loss on disposal of assets......................... 3,000 13,000 (51,000)
Loss on factory closure................................... -- -- 500,000
Stock compensation........................................ 87,000 166,000 84,000
Minority interest in net loss of unconsolidated
subsidiary.............................................. -- -- (45,000)
Changes in assets and liabilities (net of effects of
acquisitions and dispositions):
(Increase) decrease in:
Trade accounts receivable............................. 964,000 (4,732,000) (5,575,000)
Inventories........................................... 5,562,000 (4,686,000) 5,951,000
Prepaid expenses and other current assets............. (57,000) 12,000 1,448,000
Deferred tax assets................................... 812,000 (399,000) 265,000
Refundable income taxes............................... 2,643,000 (4,267,000) --
Note receivable from supplier......................... 782,000 184,000 372,000
Other assets.......................................... 260,000 (233,000) (159,000)
Increase (decrease) in:
Trade accounts payable................................ (686,000) 4,318,000 (1,870,000)
Accrued expenses...................................... 9,000 (830,000) 948,000
Income taxes payable.................................. -- (22,000) (963,000)
------------ ------------ -----------
Total adjustments.................................. 15,325,000 (7,249,000) 4,377,000
------------ ------------ -----------
Net cash provided by (used in) operating
activities....................................... 18,209,000 (10,156,000) 8,901,000
------------ ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment................ 10,000 142,000 --
Purchase of property and equipment.......................... (947,000) (1,916,000) (1,731,000)
Cash paid for acquisitions, net of cash received............ -- (2,000,000) (954,000)
Cash paid for intangible assets............................. (1,000,000) -- --
------------ ------------ -----------
Net cash used in investing activities.............. (1,937,000) (3,774,000) (2,685,000)
------------ ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (repayments of) notes payable and long-term
debt...................................................... (15,034,000) 13,345,000 (1,799,000)
Cash received from issuances of common stock................ 132,000 138,000 739,000
Cash paid for repurchases of common stock................... -- (2,528,000) (2,581,000)
Cash paid to stockholder/former officer..................... -- -- (624,000)
------------ ------------ -----------
Net cash provided by (used in) financing
activities....................................... (14,902,000) 10,955,000 (4,265,000)
------------ ------------ -----------
Net increase (decrease) in cash and cash
equivalents...................................... 1,370,000 (2,975,000) 1,951,000
Cash and cash equivalents at beginning of year.............. 263,000 3,238,000 1,287,000
------------ ------------ -----------
Cash and cash equivalents at end of year.................... $ 1,633,000 $ 263,000 $ 3,238,000
============ ============ ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest................................................ $ 1,380,000 $ 1,092,000 $ 524,000
Income taxes............................................ $ 2,492,000 $ 3,800,000 $ 3,437,000
============ ============ ===========
Supplemental disclosure of noncash investing and financing activities:
In connection with the Ugg shareholder settlement in 1997, the Company
incurred $2,000,000 of debt which was allocated to goodwill.
In connection with the Teva license renewal in 1999, the Company issued
428,743 shares of common stock valued at $1,608,000.
In 1999, additional paid-in capital increased by $109,000 in connection with
the exercise of nonqualified stock options.
See accompanying notes to consolidated financial statements.
33
34
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
(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 subsidiaries (collectively referred to as the
Company). All significant intercompany balances and transactions have been
eliminated in consolidation.
The Company designs, manufactures and markets innovative function-oriented
footwear and apparel, developed specifically for high-performance outdoor,
sports and other lifestyle-related activities as well as for casual use. The
Company's products are offered under the Teva, Simple, Ugg and Picante brand
names.
(b) Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
(net realizable value).
(c) Revenue Recognition
Revenue is recognized upon shipment of the merchandise. Allowances for
estimated returns and discounts are provided when related revenue is recorded.
(d) Long-Lived Assets
It is the Company's policy to account for long-lived assets, including
intangibles, at amortized cost. As part of an ongoing review of the valuation
and amortization of long-lived assets, management assesses the carrying value of
such assets if facts and circumstances suggest that it may be impaired. If this
review indicates that the long-lived assets will not be recoverable, as
determined by a nondiscounted cash flow analysis over the remaining amortization
period, the carrying value of the Company's long-lived assets would be reduced
to its estimated fair market value based on discounted cash flows.
(e) Depreciation and Amortization
Depreciation of property and equipment is computed using the straight-line
method based on estimated useful lives ranging from three to ten years.
Leasehold improvements are amortized on the straight-line basis over their
estimated economic useful lives or the lease term, whichever is shorter.
Goodwill and other intangibles are amortized on the straight-line basis
over periods of 20 to 30 years, and 5 to 15 years, respectively. Accumulated
amortization at December 31, 1999 and 1998 was $5,114,000 and $4,042,000,
respectively.
(f) Fair Value of Financial Instruments
The fair values of the Company's cash and cash equivalents, trade accounts
receivable, prepaid expenses and other current assets, refundable income taxes,
trade accounts payable and accrued expenses 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.
34
35
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
(g) Stock Compensation
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). Under the provisions of SFAS 123, the Company has
elected to continue to measure compensation cost under APBO No. 25 and comply
with the pro forma disclosure requirements.
(h) Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets, liabilities, revenues and expenses and the
disclosure of contingent assets and liabilities to prepare these consolidated
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from these estimates.
(i) Research and Development Costs
Research and development costs are charged to expense as incurred. Such
costs amounted to $1,607,000, $2,393,000 and $1,780,000 in 1999, 1998 and 1997,
respectively.
(j) 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 1999, 1998
and 1997 were $5,602,000, $5,847,000 and $4,096,000, respectively. Included in
prepaid and other current assets at December 31, 1999 and 1998 was $726,000 and
$484,000, respectively, related to prepaid advertising and promotion expenses.
(k) 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.
(l) Earnings per Share
Basic earnings (loss) per share (EPS) includes no dilution and is computed
by dividing 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.
35
36
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
The reconciliations of basic to diluted weighted-average shares are as
follows:
1999 1998 1997
---------- ----------- ----------
Net earnings (loss) used for basic and diluted
earnings (loss) per share................... $2,884,000 $(2,907,000) $4,524,000
========== =========== ==========
Weighted-average shares used in basic
computation.............................. 8,834,000 8,632,000 8,961,000
Dilutive effect of stock options............ 147,000 -- 51,000
---------- ----------- ----------
Weighted-average shares used for
diluted computation............... 8,981,000 8,632,000 9,012,000
========== =========== ==========
Options to purchase 596,000, 698,000 and 572,000 shares of common stock at
prices ranging from $3.00 to $13.75, $5.50 to $13.75 and $7.50 to $15.00 were
outstanding during 1999, 1998 and 1997, respectively, but were not included in
the computation of diluted earnings (loss) per share because the options'
exercise price was greater than the average market price of the common shares.
Options to purchase 811,000 shares of common stock at a price of $1.56 per share
were outstanding during 1998, but were not included in the computation of
diluted loss per share because the options were antidilutive, as the Company
incurred a net loss for the year.
(m) Foreign Currency Translation
Assets and liabilities of the foreign operations denominated in local
currencies are translated at the rate of exchange at the balance sheet date.
Expenses have been translated at the weighted-average rate of exchange during
the period of existence. Foreign currency translation adjustments were
immaterial to the accompanying consolidated financial statements.
(n) Comprehensive Income
The Company reports comprehensive income under SFAS No. 130. Comprehensive
income is the total of net earnings (loss) and all other nonowner changes in
equity. Except for net earnings (loss) and foreign currency translation
adjustments, the Company does not have any transactions and other economic
events that qualify as comprehensive income as defined under SFAS No. 130. As
foreign currency translation adjustments were immaterial to the Company's
consolidated financial statements, SFAS No. 130 did not affect the Company's
financial reporting.
(o) Business Segment Reporting
The Company adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, effective in 1998. SFAS No. 131 establishes
new standards for reporting information about business segments and related
disclosures about products and services, geographic areas and major customers,
if applicable. Management of the Company has determined its reportable segments
are strategic business units that offer geographic brand images. Significant
reportable business segments are the domestic Teva, Simple and Ugg brands.
Information related to these segments is summarized in Note 12.
(2) ACQUISITION
Effective August 1, 1995, the Company acquired all of the issued and
outstanding shares of Ugg Holdings, Inc. and subsidiaries (Ugg), which
manufactures and markets a line of sheepskin footwear, for cash consideration
and related acquisition costs of $12.2 million and a note payable to sellers of
$500,000.
36
37
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
Additionally, the Company was required to make future payments equal to 2 1/2%
of net sales of Ugg, as defined in the agreement for the years ended March 31,
1996 through March 31, 2000, plus an amount equal to earnings before income
taxes for Ugg for the year ended March 31, 1996 (collectively referred to as the
earn-out payments). Pursuant to this provision, the Company paid additional cash
consideration of $351,000 in 1997. During 1997, the former stockholders of Ugg
gave notice of a demand for arbitration regarding the earn-out payments,
asserting that additional payments were due them. In September 1997, the Company
and the former Ugg stockholders reached an agreement. In addition, the remaining
Ugg stockholders who were not a party to the arbitration agreed to accept the
same economic terms as those involved in the arbitration. The settlement called
for total payments of $2.6 million to be made to the former stockholders, thus
eliminating any future due payments. As of December 31, 1997, the Company had
unpaid notes payable to the former stockholders of $2 million, which were paid
in full in January 1998. These amounts are included in the overall purchase
price and allocated to goodwill. During 1997, the Company incurred legal and
other administrative costs associated with the arbitration aggregating $607,000.
Such costs were charged to operations as incurred. This acquisition was
accounted for as a purchase and the results of Ugg's operations are included in
the Company's consolidated financial statements from the date of acquisition.
The excess of the purchase price over the estimated fair values of the net
assets acquired aggregating $17,505,000 has been recorded as goodwill and is
being amortized over 30 years.
(3) FACTORY CLOSURE
In March 1997, the Company closed its California manufacturing facility.
The Company has moved the related production requirements to other independent
subcontractors in the Far East and Costa Rica. In connection with the closure,
the Company incurred property and equipment write-downs, employee severance and
other exit costs aggregating $500,000.
(4) INVENTORIES
Inventories are summarized as follows:
1999 1998
----------- -----------
Finished goods.................................... $17,841,000 $22,396,000
Work in process................................... 119,000 35,000
Raw materials..................................... 143,000 1,234,000
----------- -----------
Total inventories....................... $18,103,000 $23,665,000
=========== ===========
(5) PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
1999 1998
---------- ----------
Machinery and equipment........................... $5,897,000 $5,185,000
Furniture and fixtures............................ 650,000 616,000
Leasehold improvements............................ 547,000 535,000
---------- ----------
7,094,000 6,336,000
Less accumulated depreciation and amortization.... 4,969,000 3,342,000
---------- ----------
Net property and equipment.............. $2,125,000 $2,994,000
========== ==========
37
38
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
(6) LONG-TERM DEBT
Long-term debt consists of the following:
1999 1998
---------- -----------
Revolving line of credit, secured by substantially
all the assets of the Company.................... $5,834,000 $20,751,000
Unsecured note payable in quarterly installments of
$41,700, including interest at a rate of 7.93%,
due December 2003................................ 567,000 684,000
---------- -----------
6,401,000 21,435,000
Less current installments.......................... 125,000 6,236,000
---------- -----------
$6,276,000 $15,199,000
========== ===========
The aggregate maturities of long-term debt as of December 31, 1999 are as
follows:
2000..................................................... $ 125,000
2001..................................................... 136,000
2002..................................................... 5,981,000
2003..................................................... 159,000
----------
$6,401,000
==========
On January 21, 1999, the Company replaced its existing credit facility with
a revolving credit agreement with a new financial institution. Under the
agreement, the Company is permitted borrowings up to $50,000,000, subject to a
borrowing base up to 85% of eligible accounts receivable and 65% of eligible
inventory, as defined. Up to $15,000,000 of borrowings may be in the form of
letters of credit. The agreement bears interest at the lenders' prime rate (8.5%
at December 31, 1999) or, at the Company's election, an adjusted Eurodollar rate
plus 2%. The facility is secured by substantially all assets of the Company and
expires January 21, 2002. Additionally, under the terms of the agreement, should
the Company terminate the arrangement prior to the expiration date, the Company
may be required to pay the lender an early termination fee ranging between 1%
and 3% of the commitment amount, depending upon when such termination occurs.
The agreement underlying the credit facility includes a tangible net worth
covenant. At December 31, 1999, the Company was in compliance with the terms of
the agreement.
(7) NOTE RECEIVABLE FROM SUPPLIER
The Company had an Equipment Purchase and Loan Agreement, as amended, with
a Hong Kong supplier (the Supplier) to provide up to $4,000,000 of financing.
The Supplier produced completed footwear and footwear components for sale to
Holbrook, Ltd., a wholly owned subsidiary of the Company (Holbrook).
The note was secured by all the assets of the Supplier and bore interest at
prime plus 1%. The outstanding balance of the note was repaid in December 1999.
38
39
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
(8) INCOME TAXES
Components of income taxes (benefit) are as follows:
FEDERAL STATE TOTAL
---------- --------- -----------
1997:
Current..................................... $3,108,000 $ 900,000 $ 4,008,000
Deferred.................................... (509,000) (54,000) (563,000)
---------- --------- -----------
$2,599,000 $ 846,000 $ 3,445,000
========== ========= ===========
1998:
Current..................................... $ (866,000) $ 54,000 $ (812,000)
Deferred.................................... (105,000) (294,000) (399,000)
---------- --------- -----------
$ (971,000) $(240,000) $(1,211,000)
========== ========= ===========
1999:
Current..................................... $1,702,000 $ (48,000) $ 1,654,000
Deferred.................................... 420,000 284,000 704,000
---------- --------- -----------
$2,122,000 $ 236,000 $ 2,358,000
========== ========= ===========
Actual income taxes (benefit) differ from that obtained by applying the
statutory federal income tax rate to earnings (loss) before income taxes
(benefit) as follows:
1999 1998 1997
---------- ----------- ----------
Computed "expected" tax expense (benefit)...... $1,782,000 $(1,400,000) $2,710,000
State income taxes, net of federal income tax
benefit...................................... 259,000 (288,000) 492,000
Losses of subsidiary not deductible............ -- 241,000 --
Other.......................................... 317,000 236,000 243,000
---------- ----------- ----------
$2,358,000 $(1,211,000) $3,445,000
========== =========== ==========
39
40
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities at December 31,
1999 and 1998 are presented below:
1999 1998
---------- ----------
Deferred tax assets:
Uniform capitalization adjustment to inventory............ $ 175,000 $ 171,000
Inventory obsolescence reserve............................ 20,000 9,000
Bad debt and other reserves............................... 896,000 1,445,000
Amortization of intangible assets......................... 415,000 518,000
Net operating loss carryforwards.......................... 228,000 620,000
State taxes............................................... 21,000 --
---------- ----------
Total gross deferred tax assets................... 1,755,000 2,763,000
Less valuation allowance.................................. (228,000) (509,000)
---------- ----------
Deferred tax assets, net of allowance....................... 1,527,000 2,254,000
---------- ----------
Deferred tax liabilities:
Depreciation of property and equipment.................... 193,000 319,000
Other..................................................... 281,000 179,000
---------- ----------
Total deferred tax liabilities.................... 474,000 498,000
---------- ----------
Net deferred tax assets........................... $1,053,000 $1,756,000
========== ==========
Although the Company incurred an operating loss in 1998, it returned to
profitability in 1999 and 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. Certain federal and state tax laws reduce
the availability of net operating losses generated outside the group which is
not consolidated for tax return purposes. Accordingly, management has provided a
full valuation allowance against such losses.
Refundable income taxes as of December 31, 1999 and 1998 arise primarily
from the overpayment of estimated taxes.
(9) STOCKHOLDERS' EQUITY
In February 1998, the Company amended the 1993 Stock Incentive Plan (1993
Plan). Under the terms of the amended 1993 Plan, 2,000,000 shares of common
stock 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, 91,352, 57,572 and 126,000
shares of common stock were issued in 1999, 1998 and 1997, respectively,
including 100,000 shares in 1997 issued to an officer of the Company, which was
financed through the issuance of a note receivable to such officer (bearing
interest at 6.39%, secured by the underlying Company stock, with principal and
interest due April 18, 2002) and common stock options exercised as noted below.
40
41
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
Common stock option activity under the 1993 Plan for the years ended
December 31, 1999, 1998 and 1997 is as follows:
WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
Outstanding at December 31, 1996.......................... 613,750 $8.59
Granted................................................. 237,500 7.96
Exercised............................................... (26,000) 5.65
Canceled................................................ (108,000) 9.08
---------
Outstanding at December 31, 1997.......................... 717,250 8.42
Granted................................................. 925,000 2.23
Exercised............................................... (34,250) 1.40
Canceled................................................ (99,000) 9.17
---------
Outstanding at December 31, 1998.......................... 1,509,000 4.73
Granted................................................. 533,100 2.68
Exercised............................................... (57,500) 1.56
Canceled................................................ (843,000) 5.08
---------
Outstanding at December 31, 1999.......................... 1,141,600 3.68
=========
Options exercisable at December 31, 1999.................. 428,820 $5.11
=========
The per share weighted-average fair value of stock options granted during
1999, 1998 and 1997 was $1.54, $1.25 and $4.44, respectively, on the date of
grant using the Black-Scholes option pricing model with the following
weighted-average assumptions: 1999 -- expected dividend yield of 0%, stock
volatility of 48.5%, risk-free interest rate of 5.3% and an expected life of
seven years; 1998 -- expected dividend yield of 0%, stock volatility of 48.5%,
risk-free interest rate of 4.7% and an expected life of seven years;
1997 -- expected dividend yield of 0%, stock volatility of 43.3%, risk-free
interest rate of 6.1% and an expected life of seven years.
The Company applies APB Opinion No. 25 in accounting for its plans. Had the
Company determined compensation cost based on the fair value at the grant date
for its stock options under SFAS No. 123, the Company's net earnings (loss)
would have been changed to the pro forma amounts below:
1999 1998 1997
---------- ----------- ----------
Pro forma net earnings (loss)................. $2,714,000 $(3,400,000) $4,318,000
========== =========== ==========
Pro forma net earnings (loss) per share:
Basic....................................... $ 0.31 $ (0.39) $ 0.48
Diluted..................................... $ 0.30 $ (0.39) $ 0.48
========== =========== ==========
In August 1995, the Company adopted the 1995 Employee Stock Purchase Plan
(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, 100,000 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 fair market value, as defined by the 1995 Plan. Under the 1995 Plan,
22,231, 18,628 and 9,875 shares were issued in 1999, 1998 and 1997,
respectively. Consistent with the application of APB Opinion No. 25, no
compensation has been recorded for stock purchases.
41
42
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
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 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 rights
may be redeemed by the Company for $.01 per right until the right becomes
exercisable.
The Company's Board of Directors has authorized the repurchase of up to
2,200,000 shares of common stock under a stock repurchase program. Under this
program, the Company repurchased 330,000 shares in 1997 for cash consideration
of $2,581,000, 343,000 shares in 1998 for cash consideration of $2,528,000 and
no shares in 1999 were repurchased. At December 31, 1999, 1,227,000 shares
remained available for repurchase under the program.
On March 17, 2000, the Company's Board of Directors approved an amendment
to the 1995 Plan, subject to stockholder approval, to increase the total number
of shares reserved for issuance thereunder to 300,000 shares.
(10) LICENSING AGREEMENT
The Company has 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 sports sandal and owner of the Teva patents
and trademark.
On June 7, 1999, the Company signed a new license agreement (the License
Agreement) for Teva, which is effective January 1, 2000. Under the License
Agreement, the Company receives the exclusive worldwide rights for the
manufacture and distribution of Teva footwear through 2004. The License
Agreement is automatically renewable through 2008 and through 2011 under two
renewal options, provided that minimum required sales levels are achieved. As
with the previous arrangement, the new license agreement provides for a sliding
scale of royalty rates, depending on sales levels. Additionally, the License
Agreement provides for an increase in the required amount of marketing
expenditures, depending on sales levels and varying by territory. As additional
consideration, 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 has recorded the license as an
intangible asset for the value of the cash and common stock issued pursuant to
the License Agreement. The shares are subject to various contractual and other
holding period requirements. In addition, the Company has agreed to grant the
licensor not less than 50,000 stock options on the Company's common stock
annually, at the fair market value on the date of grant.
42
43
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
The Company also received an option to buy Teva and all of its assets,
including all worldwide rights to all Teva products. The option price is based
on formulas tied to net sales of Teva products and varies depending on when the
option is exercised. The Company's option is exercisable during the period from
January 1, 2000 to December 31, 2001 or during the period from January 1, 2006
to December 31, 2008. If the Company does not exercise its option to acquire
Teva, the licensor has the option to acquire the Teva distribution rights from
the Company for the period from January 1, 2010 to December 31, 2011, the end of
the license term, and the option price is based on a formula tied to the
Company's earnings before interest, taxes, depreciation and amortization.
Royalty expense related to Teva sales is included in selling, general and
administrative expenses in the accompanying consolidated financial statements
and was $4,128,000, $3,657,000 and $3,503,000 during the years ended December
31, 1999, 1998 and 1997, respectively. Advertising expense, which is included in
selling, general and administrative expenses in the accompanying consolidated
financial statements, related to Teva sales was $3,378,000, $3,261,000 and
$1,960,000 during the years ended December 31, 1999, 1998 and 1997,
respectively.
(11) COMMITMENTS AND CONTINGENCIES
The Company leases office facilities under operating lease agreements which
expire through December 2001.
Future minimum commitments under the lease agreements are as follows:
Year ending December 31:
2000................................................... $ 914,000
2001................................................... 843,000
----------
$1,757,000
==========
Total rent expense for the years ended December 31, 1999, 1998 and 1997 was
approximately $1,091,000, $1,122,000 and $1,153,000, respectively.
An action was brought against the Company in 1995 by Molly Strong-Butts and
Yetti by Molly, Ltd. (collectively, "Molly") which alleged, among other things,
that the Company violated a certain nondisclosure agreement and obtained
purported trade secrets regarding a line of winter footwear which Deckers
stopped producing in 1994. A jury verdict was obtained against the Company in
March 1999 aggregating $1,785,000 for the two plaintiffs. The Company is
appealing the verdict and continues to believe such claims are without merit.
The Company intends to continue contesting this claim vigorously. The Company,
based on advice from legal counsel, does not anticipate that the ultimate
outcome will have a material adverse effect upon its financial condition,
results of operations or cash flows.
The European Commission has enacted antidumping duties of 49.2% on certain
types of footwear imported into Europe from China and Indonesia. Dutch Customs
has issued an opinion to the Company that certain popular Teva styles are
covered by this antidumping duty legislation. The Company believes that this
opinion is inappropriate and is working with Customs to resolve the situation.
In the event that Customs makes a final determination that such styles are
covered by the antidumping provisions, the Company expects that it would have an
exposure to prior unpaid antidumping duties from 1997 of up to approximately
$500,000. In addition, if Customs determines that these styles are covered by
the legislation, the duty amounts could cause such products to be too costly to
import into Europe from China in the future. As a precautionary measure, the
Company has obtained, and is using, alternative sourcing for the potentially
impacted products
43
44
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
from sources outside of China in an effort to reduce the potential risk in the
future. The Company is unable to predict the outcome of this matter and the
effect, if any, on the Company's consolidated financial statements.
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.
(12) 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 income taxes or unusual items to segments.
The Company evaluates performance based on net revenues and profit or loss from
operations. The Company's reportable segments are strategic business units that
offer geographic brand images. They are managed separately because each business
requires different marketing, research and development, design, sourcing and
sales strategies. Business segment information is summarized as follows:
1999 1998 1997
---- ---- ----
Sales to external customers:
Teva, domestic......................... $ 58,858,000 $ 54,775,000 $ 50,573,000
Simple, domestic....................... 10,821,000 13,699,000 21,554,000
Ugg, domestic.......................... 11,920,000 10,710,000 9,169,000
Other.................................. 28,067,000 22,988,000 25,417,000
------------ ------------ ------------
$109,666,000 $102,172,000 $106,713,000
============ ============ ============
Intersegment sales:
Teva, domestic......................... $ 891,000 $ 1,171,000 $ 1,539,000
Simple, domestic....................... 230,000 150,000 315,000
Ugg, domestic.......................... 5,000 -- --
Other.................................. 3,224,000 8,702,000 8,732,000
------------ ------------ ------------
$ 4,350,000 $ 10,023,000 $ 10,586,000
============ ============ ============
Earnings (loss) from operations:
Teva, domestic......................... $ 2,567,000 $ (1,473,000) $ 2,363,000
Simple, domestic....................... 1,644,000 (1,973,000) 1,823,000
Ugg, domestic.......................... (68,000) (1,091,000) (321,000)
Other.................................. 2,510,000 1,551,000 4,388,000
------------ ------------ ------------
$ 6,653,000 $ (2,986,000) $ 8,253,000
============ ============ ============
Depreciation and amortization:
Teva, domestic......................... $ 1,383,000 $ 1,326,000 $ 1,057,000
Simple, domestic....................... 213,000 267,000 244,000
Ugg, domestic.......................... 635,000 635,000 575,000
Other.................................. 895,000 410,000 630,000
------------ ------------ ------------
$ 3,126,000 $ 2,638,000 $ 2,506,000
============ ============ ============
44
45
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
1999 1998 1997
---- ---- ----
Net interest expense (income):
Teva, domestic......................... $ 1,092,000 $ 229,000 $ (597,000)
Simple, domestic....................... -- 51,000 154,000
Ugg, domestic.......................... 366,000 938,000 803,000
Other.................................. (54,000) (47,000) (16,000)
------------ ------------ ------------
$ 1,404,000 $ 1,171,000 $ 344,000
============ ============ ============
Capital expenditures:
Teva, domestic......................... $ 185,000 $ 1,382,000
Other.................................. 762,000 534,000
------------ ------------
$ 947,000 $ 1,916,000
============ ============
Total assets:
Teva, domestic......................... $ 55,432,000 $ 67,467,000
Simple, domestic....................... 7,593,000 8,358,000
Ugg, domestic.......................... 26,121,000 24,680,000
Other.................................. 641,000 7,255,000
------------ ------------
$ 89,787,000 $107,760,000
============ ============
The Teva, domestic operating segment includes shared costs of the
consolidated group, including domestic payroll costs, facilities costs,
warehouse costs and other administrative costs. The Company has allocated costs
to the Simple-domestic, Ugg-domestic and other segments based on a percentage of
revenues for each of these segments. Because each segment's sales volume and the
resulting allocation of shared costs continually change, the allocations to
individual segments may or may not be reflective of the actual costs directly
attributable to each segment.
In addition, virtually all shared assets, capital expenditures and the
related depreciation of these assets are generally included in the Teva-domestic
segment. As a result, this segment has a disproportionately high amount of these
items, while the other segments have a disproportionately low amount.
45
46
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
Reconciliations of net sales, earnings (loss) from operations and total
assets from segment information to the consolidated financial statements are as
follows:
1999 1998 1997
---- ---- ----
Total sales for reportable segments.............. $114,016,000 $112,195,000 $117,299,000
Elimination of intersegment revenues............. (4,350,000) (10,023,000) (10,586,000)
------------ ------------ ------------
Consolidated net sales................. $109,666,000 $102,172,000 $106,713,000
============ ============ ============
Total earnings (loss) from operations for
reportable segments............................ $ 6,653,000 $ (2,986,000) $ 8,253,000
Intersegment profit change in beginning and
ending inventories............................. 97,000 188,000 359,000
Unallocated loss on factory closure.............. -- -- (500,000)
------------ ------------ ------------
Consolidated earnings (loss) from
operations........................... $ 6,750,000 $ (2,798,000) $ 8,112,000
============ ============ ============
Total assets for reportable segments............. $ 89,787,000 $107,760,000
Elimination of profit in ending inventories...... (22,000) (118,000)
Elimination of intersegment investments.......... (14,905,000) (15,268,000)
Elimination of intersegment receivables.......... (4,055,000) (14,024,000)
Unallocated refundable income taxes and deferred
tax assets..................................... 2,677,000 6,023,000
------------ ------------
Consolidated total assets.............. $ 73,482,000 $ 84,373,000
============ ============
The Company sells its footwear products principally to customers throughout
the United States. The Company also sells its footwear products to foreign
customers located in Europe, Canada, Australia and Asia, among other regions.
Export sales to unaffiliated customers were 26.2%, 23.7% and 25.0% of net sales
for the years ended December 31, 1999, 1998 and 1997, respectively. 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, 1999, 1998 and 1997, the Company
had no single customer exceeding 10% of net sales. As of December 31, 1999 and
1998, the Company had no single customer exceeding 10% of trade accounts
receivable.
The Company's production and sourcing is concentrated primarily in the Far
East, with the vast majority being produced at several 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.
46
47
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
(13) QUARTERLY SUMMARY OF INFORMATION (UNAUDITED)
Summarized unaudited financial data are as follows:
1999
---------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
Net sales............................. $38,040,000 $31,360,000 $18,244,000 $22,022,000
Gross profit.......................... 17,223,000 13,756,000 5,721,000 8,428,000
Net earnings (loss)................... 2,245,000 1,668,000 (1,275,000) 246,000
=========== =========== =========== ===========
Net earnings (loss) per share:
Basic............................... $ 0.26 $ 0.19 $ (0.14) $ 0.03
Diluted............................. $ 0.26 $ 0.19 $ (0.14) $ 0.03
=========== =========== =========== ===========
1998
---------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
Net sales............................. $32,177,000 $31,142,000 $13,558,000 $25,295,000
Gross profit.......................... 13,537,000 12,922,000 1,307,000 8,814,000
Net earnings (loss)................... 1,753,000 1,406,000 (5,133,000) (933,000)
=========== =========== =========== ===========
Net earnings (loss) per share:
Basic............................... $ 0.20 $ 0.16 $ (0.60) $ (0.11)
Diluted............................. $ 0.20 $ 0.16 $ (0.60) $ (0.11)
=========== =========== =========== ===========
47
48
SCHEDULE II
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
THREE-YEAR PERIOD ENDED DECEMBER 31, 1999
BALANCE AT
BEGINNING OF BALANCE AT
DESCRIPTION PERIOD ADDITIONS DEDUCTIONS END OF PERIOD
----------- ------------ ---------- ---------- -------------
Year ended December 31, 1997:
Allowance for doubtful accounts......... $1,292,000 $ 466,000 $ 666,000 $1,092,000
Reserve for sales discounts............. 141,000 492,000 377,000 256,000
Reserve for inventory obsolescence...... 1,014,000 1,594,000 1,040,000 1,568,000
Allowance for doubtful note
receivable........................... 1,000,000 500,000 -- 1,500,000
========== ========== ========== ==========
Year ended December 31, 1998:
Allowance for doubtful accounts......... $1,092,000 $ 589,000 $ 477,000 $1,204,000
Reserve for sales discounts............. 256,000 1,053,000 655,000 654,000
Reserve for inventory obsolescence...... 1,568,000 2,543,000 1,221,000 2,890,000
Allowance for doubtful note
receivable........................... 1,500,000 -- -- 1,500,000
========== ========== ========== ==========
Year ended December 31, 1999:
Allowance for doubtful accounts......... $1,204,000 $1,820,000 $1,211,000 $1,813,000
Reserve for sales discounts............. 654,000 734,000 1,098,000 290,000
Reserve for inventory obsolescence...... 2,890,000 1,165,000 3,292,000 763,000
Allowance for doubtful note
receivable........................... 1,500,000 -- 1,500,000 --
========== ========== ========== ==========
48
49
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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 2000 annual meeting of shareholders, which will be filed pursuant
to Regulation 14A within 120 days after the end of the Company's fiscal year
ended December 31, 1999, and such information is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to Executive Compensation is set forth in the
Company's definitive proxy statement relating to the Registrant's 2000 annual
meeting of shareholders, which will be filed pursuant to Regulation 14A within
120 days after the end of the Company's fiscal year ended December 31, 1999, and
such information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information relating to Security Ownership of Certain Beneficial Owners and
Management is set forth in the Company's definitive proxy statement relating to
the Registrant's 2000 annual meeting of shareholders, which will be filed
pursuant to Regulation 14A within 120 days after the end of the Company's fiscal
year ended December 31, 1999, 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 in the Company's definitive proxy statement relating to the
Registrant's 2000 annual meeting of shareholders, which will be filed pursuant
to Regulation 14A within 120 days after the end of the Company's fiscal year
ended December 31, 1999, and such information is incorporated herein by
reference.
49
50
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Consolidated Financial Statements and Schedules required to be filed
hereunder are indexed on page 28 hereof.
(b) Reports on Form 8-K. The Company filed the following Current Reports on
Form 8-K:
(1) Form 8-K filed on June 17, 1999 (Item 5 -- On June 8, 1999, the
Company issued a press release announcing that it signed a new exclusive
footwear licensing agreement with licensor Mark Thatcher, owner of Teva
Sport Sandals, Inc., that will become effective January 1, 2000.)
(c) Consolidated Financial Statements and Schedules required to be filed
hereunder are indexed on page 28 hereof.
(d) Exhibits
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 Agreement for Sales of Assets, dated January 26, 1995,
between Ken and Nancy Young and Deckers Acquisition
Corporation. (Exhibit 10.36 to the Registrant's Form 10-K
for the period ended December 31, 1994 and incorporated by
reference herein)
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EXHIBIT
- -------
10.10 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)
10.11 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)
10.12 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)
10.13 Limited Recourse Secured Promissory Note between Diana M.
Wilson and Deckers Outdoor Corporation, dated April 18,
1997. (Exhibit 10.38 to the Registrant's Form 10-Q for the
period ended March 31, 1997 and incorporated by reference
herein)
10.14 Stock Pledge Agreement between Diana M. Wilson and Deckers
Outdoor Corporation, dated April 18, 1997. (Exhibit 10.39 to
the Registrant's Form 10-Q for the period ended March 31,
1997 and incorporated by reference herein)
10.15 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)
10.16 Loan and Security Agreement by and among Congress Financial
Corporation (Western) and Deckers Outdoor Corporation,
Deckers Outdoor Corporation International, Simple Shoes,
Inc., Ugg Holdings, Inc. and Heirlooms, Inc., dated January
21, 1999. (Exhibit 10.40 to the Registrant's Form 10-K for
the period ended December 31, 1998 and incorporated by
reference herein)
10.17 *Teva License Agreement, By and Between Mark Thatcher and
Deckers Outdoor Corporation, dated June 7, 1999. (Exhibit
10.41 to the Registrant's Form 10-Q for the period ended
June 30, 1999 and incorporated by reference herein)
10.18 *Intellectual Property Option Agreement, By and Between Mark
Thatcher, an Individual, and Deckers Outdoor Corporation, a
Delaware Corporation, dated June 7, 1999. (Exhibit 10.42 to
the Registrant's Form 10-Q for the period ended June 30,
1999 and incorporated by reference herein)
21.1 Subsidiaries of Registrant.
23.1 Independent Auditors' Consent.
- ---------------
* Certain information in this Exhibit was omitted and filed separately with the
Securities and Exchange Commission pursuant to a granted confidential
treatment request as to the omitted portions of the Exhibit.
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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)
Date: March 29, 2000 /s/ DOUGLAS B. OTTO
--------------------------------------
Douglas B. Otto
Chief Executive Officer
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
- ----------------------------------------- Chairman of the Board
Douglas B. Otto and Chief Executive Officer
/s/ M. SCOTT ASH Chief Financial Officer
- ----------------------------------------- (Principal Financial and Accounting
M. Scott Ash Officer)
/s/ KARL F. LOPKER
- -----------------------------------------
Karl F. Lopker Director
/s/ GENE E. BURLESON
- -----------------------------------------
Gene E. Burleson Director
/s/ REX A. LICKLIDER
- -----------------------------------------
Rex A. Licklider Director
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