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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, 2000
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 (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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 28, 2001 based on the closing price
of the Common Stock on the NASDAQ National Market System on such date was
$20,451,232.
The number of shares of the registrant's Common Stock outstanding at
February 28, 2001 was 9,168,477.
Portions of registrant's definitive proxy statement relating to
registrant's 2001 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, 2000, 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, 2000
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.......... 48
Item 11. Executive Compensation...................................... 48
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 48
Item 13. Security Relationships and Related Transactions............. 48
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 49
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PART I
ITEM 1. BUSINESS
GENERAL
The Company builds niche products into global lifestyle brands by designing
and marketing innovative, functional and fashion-oriented footwear, developed
for both high performance outdoor activities and everyday casual lifestyle use.
Currently, the Company offers three primary product lines under the following
recognized brand names: Teva(R) -- high-performance sports sandals and rugged
outdoor 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 2000, the Company sold approximately
4,265,000 pairs of footwear. Revenues from sales (domestic and international) of
Teva products have been $79,732,000, $80,963,000 and $68,870,000 during 2000,
1999 and 1998, representing 70.1%, 72.9% and 66.5% of net sales, respectively.
For financial information regarding the Company's industry segments, see note 9
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. The Company believes
that the principal reasons for the growth in sales of such footwear have been
the growing acceptance of athletic footwear as casual wear and the growing
acceptance of casual wear, in general, including the increasing casualization of
the workplace, increasingly active consumer lifestyles and the growing emphasis
on comfort.
Over the last few years the overall footwear market has seen 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 their
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delivery requirements. 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 expectations regarding sales and
earnings per share, expectations regarding the Company's liquidity, 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 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, the potential impact of the possible acquisition of Teva and the
impact of seasonality on the Company's operations. These forward-looking
statements are based on the Company's expectations as of March 2001. No one
should assume that any forward-looking statement made by the Company will remain
consistent with the Company's expectations after the date the forward-looking
statement is made. The Company disclaims any obligation to update any such
factors or to publicly announce the results of any revisions to any of the
forward-looking statements contained in this Annual Report on Form 10-K. 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 became 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. These
required minimum annual sales levels exceed the annual sales levels achieved by
the Company to date. 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 70.1%, 72.9% and 66.5% of the Company's
net sales for fiscal years 2000, 1999 and 1998, 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
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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 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
materials in its footwear. The failure of products using such 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
and can be negatively impacted by decreased consumer spending or softness in the
retail market. 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, 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,
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nationalization, imposition of tariffs, import and export controls and other
non-tariff barriers (including quotas), 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.
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.
In 1997, the European Commission enacted anti-dumping duties of 49.2% on
certain types of footwear imported into Europe from China and Indonesia. Dutch
Customs has issued an opinion to the Company that certain popular Teva styles
are covered by this anti-dumping duty legislation. The Company has been
contesting the opinion and is working with Dutch Customs to resolve the
situation. The Company has since 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. In the event that Dutch Customs
makes a final determination that the anti-dumping provisions are applicable, the
Company would have an exposure for prior unpaid anti-dumping duties during 1997
of approximately $400,000. Recently, the European Commission added an
explanatory note to the anti-dumping legislation which effectively strengthened
its position. As a result of this recent development, the Company recorded a
$400,000 charge to selling, general and administration expenses to accrue for
the potential loss on this matter during the year ended December 31, 2000.
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 into the marketplace 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 competing products by third
parties 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 2002, 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
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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.
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.
Substantial Ownership of the Company
At December 31, 2000, Douglas B. Otto and all executive officers and
directors of the Company, as a group, owned approximately 35.9% and 46.7%,
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 pursuant to a
shareholder rights agreement (the Rights Agreement) 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 of the Company (the Common Shares).
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
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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.
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 were 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." In Spring
2000, the Company successfully launched the Trail Wraptor and Wraptor Technology
into the running market and then in the fall of 2000 entered the hiking market
with the Summit series consisting of the Challenger, North Rim, and Quest models
which utilize the new Teva Wraptor Technology. The Quest quickly gained momentum
in the hiking market at key retail points for the Company. Expanding on the
acceptance of the Trail Wraptor running sandal and the Quest, the Company
launched the Road Wraptor, Women's Wraptor (runner) and Women's Quest hiker in
2001. The Company will also make a commitment to the women's market by expanding
its line of women's fitness walking sandals with the Kinetic Circuit, the
improved Pretty Rugged Nylon and expanded Leather Casual category. Also, the
Company is expanding its offering of water sport specific products in the XPD
Hydro category with the newly organized Team Teva, an elite squad of the world's
best male and female whitewater athletes. The Company will use Team Teva's
knowledge to expand its technical offerings in this category. As the Company
moves to the future, the Company plans to strengthen existing categories and
expand into new channels of distribution. The 2000 and 2001 Simple product lines
target consumers in the sixteen to twenty-five year old youth market. 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
expanded its Ugg product line beyond its heritage boots and slippers by adding a
variety of new, more streetwise and fashion-oriented products including clogs,
chukka boots, and apres ski boots, as well as cold 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, 2000, 1999 and 1998 international net sales totaled $31,135,000,
$28,859,000 and $24,254,000, representing 27.4%, 26.0% and 23.4% 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, the Company has opened a Netherlands office
to service the European market and an office in Japan to service the Asian
market.
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.
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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 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:
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 2001 line includes more than
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
16 models of men's and women's sandals. The Utility Series which includes
several of the most popular styles, has 11 styles that combine elements of sport
performance with casual everyday comfort. The Surf Series includes 11 styles of
slides and thongs offered in a variety of materials including leather, nylon,
suede and airmesh. The Spring 2001 line includes an expanded variety of
Precision sport sandals and footwear, including the newly-introduced Trail
Wraptor and Road Wraptor performance running sandals, a collection of Circuit
walking sandals, the Marine collection of boating and deck footwear, the Hydro
collection of water shoes and booties, and the newly introduced Summit
collection of hikers incorporating the Wraptor technology. Continuing on the
success of recent years, the Spring 2001 line includes 25 styles of men's and
women's leather casuals, including a variety of sandals, slides and clogs. The
Spring 2001 Children's category has been expanded to include 15 different styles
of nylon and leather sandals. The domestic manufacturer's suggested retail
prices for adult sizes of Spring 2001 Teva footwear products range from $19.95
to $129.95.
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. The
Simple product line includes a variety of comfortable, fashionable, basic shoes
for men and women including sneakers, sandals, slides, clogs and leather
casuals. The Spring 2001 collection reflects the Company's emphasis on a younger
target consumer in the sixteen to twenty-four year old age group. For Spring
2001, Simple is offering a total of 69 models including 32 styles for men and 37
for women. The Spring 2001 line includes 21 styles of sneakers with leather and
suede uppers, 20 styles of sandals and thongs and 28 styles of leather casual
and clogs in a variety of colors. The domestic manufacturer's suggested retail
prices for adult sizes for the Spring 2001 line range from $29.99 to $99.99.
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 2001 Ugg line offers a
range of 52 models of casual, fashionable and streetwise styles in various
colors, including several new styles of shoes and boots for men and women. The
2001 line includes several styles with new innovative fashionable uppers and
several styles with water resistant leather treatments to address more inclement
and cold weather conditions. The 2001 line also includes products designed for
more fashionable and functional everyday use in both warm and cold climates,
including several new styles in its successful Ultra, Birch, Solvang,
Adirondack,
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Fluff and Slipper collections. The domestic manufacturer's suggested retail
prices for adult sizes for the Ugg line range from $50.00 to $275.00.
MARKETING AND DISTRIBUTION
The Company's products are currently distributed throughout the United
States by a network of approximately 41 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. Beginning in
2000, the Company added a separate dedicated independent sales force for the
Simple and Ugg brands as these products are sold through different distribution
channels and are targeted toward a different consumer than the Company's Teva
brand. 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 its 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 20.4% of the Company's net sales for the
year ended December 31, 2000, compared to 18.1% for the year ended December 31,
1999. No single customer accounted for more than 10% of the Company's net sales
for the years ended December 31, 2000 or 1999.
In order to encourage accounts to place orders early in the season the
Company has continued with 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 2001 season to be delivered the fourth quarter of 2000. This early
delivery program allows the Company to reduce the impact of peak warehouse
inventory levels 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.
Domestic deliveries generally originate from the Company's 126,000 square
foot warehouse facility in Ventura County, California. European deliveries
originate from a distribution center in the Netherlands, while all other
international deliveries originate from offshore factories.
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 outdoor-related magazines,
including Backpacker, Outside, Kayak, Elevation, Paddler, and Climbing, among
others. In addition, to promote its newly introduced Wraptor running sandal,
Teva is advertising in Runner's World, Sports Network, and Walking Magazine,
among other publications. With the broadened appeal of the
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Teva offerings, including the leather casual models, the Company has also
focused its print advertising toward more mainstream print publications,
including Shape, Maxim and Sailing, among others.
In order to maintain the Company's historically high visibility among core
outdoor 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. The Company actively sponsors several of the world's best male and
female whitewater athletes. By outfitting and sponsoring these highly visible
athletes, 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 twenty events
in 2001, including the Teva Whitewater Series, a series of whitewater rafting
and kayaking events held between April and August at locations in California,
Oregon, Washington and Colorado, as well as France and Switzerland. Teva
sponsors and promotes these events in order to increase the Company's visibility
for its core outdoor consumer, in addition to the significant marketing
available to the more mainstream public with the increasing popularity of
viewing these extreme sports. In addition to the Teva Whitewater Series, the
Teva promotional team attends and sponsors other events including the Santa Cruz
Surf Kayak Festival in Santa Cruz, California, Grandma's Marathon in Duluth,
Minnesota, The Telluride Bluegrass Festival in Telluride, Colorado, and Reggae
on the River in Garberville, California, among 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 has continued its
national print advertising campaign. Simple print advertisements will appear in
alternative and youth focused consumer magazines such as Jane, Nylon and Lucky.
In addition, the marketing effort focuses around grass roots advertising
including advertising on 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, Teen People, Nylon Magazine,
YM Magazine, Footwear Plus, Shape Magazine, Code Magazine and Surfing Girl.
These public relations efforts have also resulted in Simple products appearing
on television shows such as Friends, Ally McBeal, Dawson's Creek, Tucker and
MTV.
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 2001, the Company plans to continue to build on the success of the Ugg
1999 and 2000 national print advertising campaigns. 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 2001 Ugg
products in upscale publications such as Vogue and O Magazine.
In November 2000, Ugg's were featured on the Oprah Winfrey Show as her
choice of one of ten gift-giving ideas for the holiday season and each member of
the studio audience received a free pair of Ugg boots on the air. The show aired
several times from the week before Thanksgiving through Christmas, providing the
Ugg brand with nationwide exposure.
In addition to this national 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. Recent editorial coverage includes articles in magazines such
as Harper's Bazaar, In Style, Cosmopolitan, Marie Claire, Maxim, Jane, YM
Magazine, Shape, Self, O Magazine and Real Simple. Television coverage of Ugg
product includes shows such as Dharma and Greg, Once and Again, Dawson's Creek,
E.R., King of Queens, Will and Grace, Ally McBeal, 7th Heaven, Everybody Loves
Raymond, Two Guys and a Girl and Providence. These public relations efforts have
also resulted in Ugg product appearances in the following feature films: Hanging
Up, starring Meg Ryan, Lisa Kudrow and Diane Keaton; The Kid,
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starring Bruce Willis and Lily Tomlin; Mission Impossible II, starring Tom
Cruise and Thandie Newton; Panic, starring William H. Macy and Neve Campbell;
Snow Day, starring Chevy Chase; and Dragonfly, starring Kevin Costner and Kathy
Bates.
In 2000, 1999 and 1998, the Company incurred $7,108,000, $5,602,000 and
$5,847,000 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 Teva products, based on
a percentage of sales. 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.
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. The Company was restructured in 1999 from a company organized by
functions to a company aligned by brand, with each brand as a separate profit
center. As part of this reorganization, the previously existing design
department was disbanded and reassigned to the Company's various brands. In
addition, much of the design is currently provided by independent design firms
which perform the design function on an outsourced basis. 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 $1,076,000, $1,607,000 and $2,393,000 in 2000, 1999 and 1998,
respectively, reflecting the operational efficiencies gained under this new
approach.
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 several of its retailers, including REI 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 its new Wraptor technology, a two-part system
with a continuous strap which travels under the arch and then crosses over the
instep to provide a snug, solid fit. This technology has been incorporated in
these Trail Wraptor and Road Wraptor running sandals, as well as the newly
introduced line of hikers. 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 offerings under its collection of Teva children's sandals for Spring 2001.
The Company has also added several new styles of clogs, sandals, sneakers and
leather casuals to its offerings under the Simple line for 2001. 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.
In recent years, the Company has taken steps to update the Ugg products in
order to make them more 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 2001 Ugg line
includes several styles of its rugged Adirondack collection of foul weather
boots. New Ugg additions for 2001 include several new styles in its popular
Ultra collection and high-end Fluff collection, as well as new slippers and
shoes for everyday casual use. More fashionable and unique upper styles help to
differentiate Ugg from the low cost imitation brands.
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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 all of its Teva and Simple footwear and a
portion of its Ugg footwear from independent contract manufacturers in the Far
East. The Company imports the remainder of its Ugg footwear from independent
contract manufacturers in Australia and New Zealand.
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 contractors. As the Company
continues to grow, it expects to continue to rely heavily on its independent
contractors for its sourcing needs.
The manufacturing of footwear by the Company's independent contractors 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 of product 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.
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 seven 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.
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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.
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 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 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.
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.
In connection with the execution of the License Agreement in 1999, the
Company received an option to buy Teva and virtually all of its assets,
including all worldwide rights to all Teva products. The Company's original
option was exercisable during the period from January 1, 2000 to December 31,
2001 or during the period from January 1, 2006 to December 31, 2008. On January
22, 2001, the option agreement was amended, extending the first option window
for two additional years. As a result, the first option window is January 1,
2000 through December 31, 2003. The Company paid Mr. Thatcher $1.6 million as
consideration for this extension. The option price is based on formulas tied to
net sales of Teva products and varies depending on when the option is exercised.
For the first option period, the option price is for an amount equal to the
greater of (i) $61.6 million or (ii) 75% of the largest calendar year revenues
since January 1, 2000 for the Teva brand,
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plus $1.6 million. In addition, the Company would issue to Mr. Thatcher 100,000
shares of common stock and options to purchase 100,000 shares of common stock.
The purchase price for the second option period, January 1, 2006 to December 31,
2008, is equal to 110% of the average of the aggregate sales for all Teva
products for the two calendar years since January 1, 2000 with the highest
aggregate net sales. If the Company does not exercise its option to acquire
Teva, the licensor has the option to acquire the Teva distribution rights from
the Company for the period from January 1, 2010 to December 31, 2011, the end of
the license term, and the option price is based on a formula tied to the
Company's earnings before interest, taxes, depreciation and amortization. The
Company is currently evaluating the possibility of exercising the option in the
January 1, 2000 to December 31, 2003 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.
HEIRLOOMS, INC. AGREEMENT
Since 1993, the Company and Bob Eason, the designer and founder of Picante
clothing, were parties to an agreement pursuant to which the Company owned 50%
of Heirlooms, Inc. ("Heirlooms"), the manufacturer and distributor of Picante
clothing. In January 2001, the Company sold its 50% interest in Heirlooms back
to Mr. Eason for cash of approximately $1,200,000 and a note receivable of
approximately $420,000, which is secured by a secondary security interest in the
assets of Heirlooms. The selling price was for an amount that approximated the
net carrying value of the underlying assets and, accordingly, the resulting gain
on the sale is not expected to be significant.
PATENTS AND TRADEMARKS
Mr. Thatcher holds seven United States patents and one patent in each of
Australia, New Zealand, Korea, Germany, France, China, Japan 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 Agreement 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 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.
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
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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 Steve Madden, Nine West, Doc Marten, Camper, and
Kenneth Cole and of Simple's sneaker/sandal line include Skechers, Diesel, Steve
Madden and Guess. Ugg's competitors include Acorn, Aussie Dogs, LB Evans and
Timberland, 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 as a recognized
brand in the outdoor market, its 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 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.
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.
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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. On April 28,
2000, USTR again designated Paraguay and China for "Section 306 monitoring" to
ensure both countries comply with the commitments made to the United States
under bilateral intellectual property agreements. This means that USTR will be
in a position to move directly to trade sanctions if there is slippage in either
country's enforcement of bilateral IPR agreements.
In June 2000, President Clinton extended non-discriminating "normal trade
relations" ("NTR," formerly "most favored nation") trading status with China
through June 2001. 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. It is noted that
bilateral agreements negotiated with China concerning that country's accession
to the World Trade Organization require that the United States grant permanent
NTR to China and in its report of May 1, 2000, USTR announced that the granting
of permanent NTR was its top trade expansion priority.
On April 28, 2000, the USTR announced that 39 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 among
others: 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.
In 1997, the European Commission enacted anti-dumping duties of 49.2% on
certain types of footwear imported into Europe from China and Indonesia. Dutch
Customs has issued an opinion to the Company that certain popular Teva styles
are covered by this anti-dumping duty legislation. The Company has been
contesting the opinion and is working with Dutch Customs to resolve the
situation. The Company has since 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. In the event that Dutch Customs
makes a final determination that the anti-dumping provisions are applicable, the
Company would have an exposure for prior unpaid anti-dumping duties during 1997
of approximately $400,000. Recently, the European Commission added an
explanatory note to the anti-dumping legislation which effectively strengthened
its position. As a result of this recent development, the Company recorded a
$400,000 charge to selling, general and administration expenses during the year
ended December 31, 2000 to accrue for the potential loss on this matter.
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, 2000, the Company employed approximately 105 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.
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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 and 2,600 square feet in China for its Far East staff and less
than 1,000 square feet of office space in Japan to support the Asian sales
efforts. The Company paid approximately $1,072,000 in rent for all of its
facilities in 2000. The terms of the lease for the Company's European facilities
call for "at-will" termination. The term of the lease for the Company's
corporate office expires on October 31, 2001 and the Company is currently in
discussions with the lessor regarding extending the lease term beyond October
31, 2001. The lease for the Company's Ventura County warehouse expires in
December 2003 and the lease for the Company's Macau office space expires in
August 2003. The lease for the Company's China office expires in June 2001. The
Japanese office is rented on a month-to-month basis. The Company believes that
its existing corporate, manufacturing and warehousing space will be adequate to
meet its current and foreseeable requirements, or that suitable additional or
alternative space for the Company's corporate office 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 SECURITY HOLDERS
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 28, 2001, the number of holders of record of the Common
Stock was 152, and the number of beneficial owners was approximately 1,712.
2000 1999
-------------- --------------
HIGH LOW HIGH LOW
----- ----- ----- -----
First Quarter....................................... $4.13 $2.50 $3.56 $1.75
Second Quarter...................................... 4.13 2.94 5.25 1.88
Third Quarter....................................... 6.50 3.00 4.13 2.75
Fourth Quarter...................................... 5.86 4.13 3.63 2.56
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 execution of the new Teva License Agreement. The issuance
of the shares to Mr. Thatcher was exempt from 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, 2000.
YEARS ENDED DECEMBER 31,
------------------------------------------------
2000 1999 1998 1997 1996
-------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA
Net sales....................................... $113,738 111,099 103,534 108,135 103,196
Cost of sales................................... 63,540 66,051 67,268 64,049 62,569
-------- ------- ------- ------- -------
Gross profit.......................... 50,198 45,048 36,266 44,086 40,627
Selling, general and administrative expenses.... 37,568 38,298 39,064 35,474 32,787
Loss on factory closure......................... -- -- -- 500 --
-------- ------- ------- ------- -------
Earnings (loss) from operations....... 12,630 6,750 (2,798) 8,112 7,840
Other expense................................... 295 1,508 1,320 143 1,241
-------- ------- ------- ------- -------
Earnings (loss) before income taxes
(benefit)........................... 12,335 5,242 (4,118) 7,969 6,599
Income taxes (benefit).......................... 5,320 2,358 (1,211) 3,445 2,943
-------- ------- ------- ------- -------
Net earnings (loss)................... $ 7,015 2,884 (2,907) 4,524 3,656
======== ======= ======= ======= =======
Net earnings (loss) per common share:
Basic......................................... $ .77 .33 (.34) .50 .40
Diluted....................................... .74 .32 (.34) .50 .39
======== ======= ======= ======= =======
Weighted-average common shares outstanding:
Basic......................................... 9,093 8,834 8,632 8,961 9,248
Diluted....................................... 9,476 8,981 8,632 9,012 9,292
======== ======= ======= ======= =======
AT DECEMBER 31,
------------------------------------------------
2000 1999 1998 1997 1996
-------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
BALANCE SHEET DATA
Current assets.................................. $ 53,650 49,044 59,309 48,801 49,348
Current liabilities............................. 13,168 10,386 17,174 9,579 9,618
Total assets.................................... 77,712 73,482 84,373 74,693 74,897
Long-term debt, less current installments....... 449 6,276 15,199 7,983 10,290
Total stockholders' equity...................... 64,095 56,820 52,000 57,131 54,989
======== ======= ======= ======= =======
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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 expectations regarding sales and earnings
per share, expectations regarding the Company's liquidity, the potential impact
of certain litigation, the potential impact of the possible acquisition of Teva
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. These forward-looking statements are based on the Company's
expectations as of March 2001. No one should assume that any forward-looking
statement made by the Company will remain consistent with the Company's
expectations after the date the forward-looking statement is made. The Company
disclaims any obligation to update any such factors or to publicly announce the
results of any revisions to any of the forward-looking statements contained in
this 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,
--------------------------
2000 1999 1998
------ ------ ------
Net sales................................................... 100.0% 100.0% 100.0%
Cost of sales............................................... 55.9 59.5 65.0
----- ----- -----
Gross profit...................................... 44.1 40.5 35.0
Selling, general and administrative expenses................ 33.0 34.5 37.7
----- ----- -----
Earnings (loss) from operations................... 11.1 6.0 (2.7)
Other expense............................................... 0.2 1.3 1.3
----- ----- -----
Earnings (loss) before income taxes (benefit)..... 10.9 4.7 (4.0)
Income taxes (benefit)...................................... 4.7 2.1 (1.2)
----- ----- -----
Net earnings (loss)......................................... 6.2 2.6 (2.8)
===== ===== =====
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Net sales increased by $2,639,000, or 2.4%, between the years ended
December 31, 2000 and 1999. Aggregate net sales of Teva decreased to $79,732,000
for the year ended December 31, 2000 from $80,963,000 for the year ended
December 31, 1999, a 1.5% decrease. This decrease occurred as the Company sold
significantly fewer products to the athletic retail channels as the Company did
not target this distribution channel in 2000. This decrease was partially offset
by an increase in sales in international markets and the introduction of hikers
and other closed Teva footwear in the Fall of 2000. Net sales of Teva
represented 70.1% and 72.9% of net sales in the years ended December 31, 2000
and 1999, respectively. Net sales of footwear under the Simple product line
increased 5.1% to $16,328,000 from $15,529,000 from the year ended December 31,
1999. The increase in Simple sales was driven primarily by increased sales in
the United States on strength in its clog and sandal categories, partially
offset by weakness in the brand's international markets. Net sales of Ugg
increased 26.5% to $15,310,000 for the year ended December 31, 2000 from
$12,104,000 for the year ended December 31, 1999. This increase was fueled by
early cold weather and the introduction of new models in 2000, as well as
endorsement on Oprah Winfrey's television program and magazine. In addition, the
Company was successful in its continued efforts to expand its Ugg business
beyond its historically strong California business. Overall, international sales
for all of the Company's products increased 7.9% to $31,135,000 from
$28,859,000, representing 27.4% of net sales in 2000 and 26.0% in 1999,
reflecting Teva's expansion in the European and Asian markets. The volume of
footwear sold increased 2.9% to 4,265,000 pairs
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during the year ended December 31, 2000 from 4,143,000 pairs during the year
ended December 31, 1999, for the reasons discussed above.
The weighted-average wholesale price per pair sold during the year ended
December 31, 2000 increased 0.2% to $25.51 from $25.46 for the year ended
December 31, 1999. The slight increase was primarily due to fewer discounted
sales in 2000 and a higher volume of Ugg sales in 2000, which carry a much
higher average selling price than Teva and Simple. This was 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, as well as
the Company sold a higher proportion of lower priced footwear such as children's
styles and thongs.
Cost of sales decreased by $2,511,000, or 3.8%, to $63,540,000 for the year
ended December 31, 2000, compared with $66,051,000 for the year ended December
31, 1999. Gross profit increased by $5,150,000, or 11.4%, to $50,198,000 for the
year ended December 31, 2000 from $45,048,000 for the year ended December 31,
1999 and increased as a percentage of net sales to 44.1% from 40.5%. The
increase was primarily the result of improved inventory management, the reduced
impact of sales returns and discounted sales and improved pricing and sourcing.
The Company carries its inventories at the lower of cost or market, using a
reserve for inventory obsolescence to adjust the carrying values to market where
necessary based on ongoing reviews of estimated net realizable values of its
inventories. For the year ended December 31, 2000, the Company had net additions
to the reserve for inventory obsolescence of approximately $435,000, reflecting
inventory write-downs to estimated market values for Teva and Simple in the
United States and write-downs of Canadian Teva and Simple inventory in
connection with the shift to a distributor for that territory. For the year
ended December 31, 1999, the Company had a net decrease in the reserve for
inventory obsolescence of approximately $2,127,000 as the Company sold the
underlying inventory for which a write-down had previously been recorded. A
substantial portion of the reduction of the inventory reserve was related to
Simple finished goods that were reserved in 1998 and were subsequently sold at
discounted prices in 1999.
Selling, general and administrative expenses decreased by $730,000, or
1.9%, for the year ended December 31, 2000, compared with the year ended
December 31, 1999, and decreased as a percentage of net sales to 33.0% in 2000
from 34.5% in 1999. The decrease in selling, general and administrative expenses
as a percentage of sales was primarily due to the non-recurrence of the special
charges incurred in the first half of 1999 related to severance costs and
litigation, as well as reductions in apparel operating costs, warehouse costs
and European operating costs. These reductions were partially offset by
increased marketing and promotional spending in 2000 compared to 1999 and the
increase in the reserve for exposure to European anti-dumping duties in 2000.
Net interest expense decreased to $67,000 for the year ended December 31,
2000 from $1,404,000 for the year ended December 31, 1999, primarily due to
significantly decreased average borrowings on the Company's credit facility in
2000, partially offset by higher average interest rates.
For the year ended December 31, 2000, income tax expense was $5,320,000,
representing an effective income tax rate of 43.1%. For the year ended December
31, 1999, income tax expense was $2,358,000, representing an effective income
tax rate of 45.0%. The decrease in the effective income tax rate in 2000 is
largely attributed to the reduced impact of the non-deductible goodwill
amortization.
For the year ended December 31, 2000, the Company's net earnings increased
143.2%, to $7,015,000 from $2,884,000 for the year ended December 31, 1999, for
the reasons discussed above.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Net sales increased by $7,565,000, or 7.3%, between the years ended
December 31, 1999 and 1998. Aggregate net sales of Teva increased to $80,963,000
for the year ended December 31, 1999 from $68,870,000 for the year ended
December 31, 1998, a 17.6% 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
23.0% to $15,529,000 from
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23
$20,159,000 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 $12,104,000 for the year ended December 31, 1999
from $10,873,000 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 19.0% to $28,859,000 from $24,254,000, representing 26.0% of net sales
in 1999 and 23.4% in 1998, reflecting 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 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 $1,217,000, or 1.8%, to $66,051,000 for the year
ended December 31, 1999, compared with $67,268,000 for the year ended December
31, 1998. Gross profit increased by $8,782,000, or 24.2%, to $45,048,000 for the
year ended December 31, 1999 from $36,266,000 for the year ended December 31,
1998 and increased as a percentage of net sales to 40.5% from 35.0%. 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.
For the year ended December 31, 1999, the Company had a net decrease in the
reserve for inventory obsolescence of approximately $2,127,000 as the Company
sold the underlying inventory for which a reserve had previously been recorded.
A substantial portion of the reduction of the inventory reserve was related to
Simple finished goods that were reserved in 1998 and were subsequently sold at
discounted prices in 1999. For the year ended December 31, 1998, the Company
recorded net additions to the reserve for inventory obsolescence of
approximately $1,322,000 to reflect finished goods inventory write-downs,
primarily on the Simple brand, as a result of weaker than expected Simple sales
and to reflect write-downs on Teva raw materials inventories in connection with
the Company's exit from the footwear manufacturing business.
Selling, general and administrative expenses decreased by $766,000, or
2.0%, for the year ended December 31, 1999, compared with the year ended
December 31, 1998, and decreased as a percentage of net sales to 34.5% in 1999
from 37.7% 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.
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24
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.
OUTLOOK
Sales and Earnings per Share Expectations. Due, in part, to a softening
economy, a more cautious retail environment and an apparent trend toward
retailers buying closer to season, the Company currently expects net sales for
the fiscal year ending December 31, 2001 to range from $100 million to $105
million and expects fully-diluted earnings per share to range from $0.65 to
$0.70. The Company currently expects sales and earnings to be down during the
first half of 2001 versus the same period last year. The Company also expects
third quarter revenues to be flat to down slightly compared to the third quarter
of 2000 and expects year over year gains beginning in the fourth quarter on the
strength of the Ugg brand and the introduction of new Teva and Simple product
for Spring 2002, including a line of more progressive Teva sandals, hikers and
trailrunners. For the calendar year 2001, the Company currently expects sales of
its Teva product line to range from $71 million to $73 million; Simple to range
from $13 million to $15 million; and Ugg to range from $16 million to $17
million.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity consists primarily of cash, trade accounts
receivable, inventories and a revolving credit facility. At December 31, 2000,
working capital was $40,482,000 including $9,057,000 of cash. Cash provided by
operating activities aggregated $14,651,000 for the year ended December 31,
2000. Trade accounts receivable decreased 5.1% since December 31, 1999, despite
a 6.3% increase in sales during the fourth quarter of 2000 compared to the
fourth quarter of 1999. The decrease is due to the reduction in receivables from
European retailers since December 31, 1999, as a result of the Company's shift
to selling only to distributors in late 1999, whereas the Company previously
sold to a combination of distributors and retailers in 1999. Inventories
decreased 5.3% since December 31, 1999 as a result of a decrease in Canadian
inventory with the closure of that warehouse as the Company transitioned to
using a distributor in that territory, a decrease in Ugg inventory resulting
from the increase in Ugg shipments in the fourth quarter, partially offset by an
increase in Simple domestic inventories. In addition, the decrease in both
accounts receivable and inventories resulted from the Company's continuing
efforts to strengthen the balance sheet and maximize cash flows.
The Company has a credit facility ("the Facility") which 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 (9.50% at
December 31, 2000), or at the Company's election at an adjusted Eurodollar rate
plus 2%. The Facility is secured by substantially all assets of the Company and
expires January 21, 2002. 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, 2000. At December 31, 2000, the Company had no
outstanding borrowings under the Facility and had outstanding letters of credit
aggregating $2,214,000. The Company had credit availability under the Facility
of $10,530,000 at December 31, 2000.
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 $2,323,000 for the year ended December 31,
2000. The Company's capital expenditures related primarily to various computer
hardware and software purchases, molds purchased for use
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in the production process, trade show booths and promotional vehicles. 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 prior to 1999. No shares were repurchased during the
years ended December 31, 1999 and 2000. At December 31, 2000, approximately
1,227,000 shares remain available for repurchase under the program.
In 1999, the Company received an option to buy Teva and virtually all of
its assets, including all worldwide rights to all Teva products. The Company's
original option was exercisable during the period from January 1, 2000 to
December 31, 2001 or during the period from January 1, 2006 to December 31,
2008. On January 22, 2001, the Company amended its option agreement, extending
the first option window for two additional years. As a result, the first option
window is January 1, 2000 through December 31, 2003. The Company agreed to pay
Mr. Thatcher $1.6 million as consideration for this extension. The option price
is based on formulas tied to net sales of Teva products and varies depending on
when the option is exercised. For the first option period, the option price is
for an amount equal to the greater of (i) $61.6 million or (ii) 75% of the
largest calendar year revenues since January 1, 2000 for the Teva brand, plus
$1.6 million. In addition, the Company would issue to Mr. Thatcher 100,000
shares of common stock and options to purchase 100,000 shares of common stock.
The purchase price for the second option period, January 1, 2006 to December 31,
2008, is equal to 110% of the average of the aggregate net sales for all Teva
products for the two calendar years since January 1, 2000 with the highest
aggregate net sales. If the Company does not exercise its option to acquire
Teva, the licensor has the option to acquire the Teva distribution rights from
the Company for the period from January 1, 2010 to December 31, 2011, the end of
the license term, and the option price is based on a formula tied to the
Company's earnings before interest, taxes, depreciation and amortization. The
exercise of either option will require a significant amount of additional
financing. There are no assurances that the additional financing will be
available.
In the event that the Company exercises its option to acquire the Teva
brand, the Company would acquire virtually all assets including all Teva
patents, tradenames, trademarks and all other intellectual property. The Company
currently has the worldwide license for Teva footwear and pays the licensor a
royalty ranging from 6.5% to 5.0% of net sales of Teva products. By acquiring
Teva, the Company would eliminate the payment of royalties to the licensor. In
addition, the Company would own the Teva name and be able to pursue extension of
the brand into other areas including apparel, outdoor gear and similar items,
either through licensing to others or otherwise. The Company believes there are
significant opportunities in this area given the strength of the Teva brand in
the outdoor market. In conjunction with the Company, the licensor has already
developed licensing arrangements for Teva apparel in the United States and
Japanese markets and is currently pursuing apparel licensees for additional
territories. By acquiring Teva, the Company would receive these existing royalty
income streams, as well as any royalties from additional future licensees. Also,
upon exercise of the option, the Company would own the licensor's rapidly
growing and profitable Teva catalog and internet retailing business.
The Company believes that by exercising its option to acquire Teva, it will
be able to significantly improve its earnings before interest, taxes,
depreciation and amortization ("EBITDA"). In 2000, the Company sold
approximately $80 million of Teva products, paying a royalty of approximately
$4.3 million and incurring approximately $0.8 million of additional costs that
the Company believes could have been eliminated had the Company owned Teva
outright. In addition, the licensor's catalog/internet business yielded earnings
before income taxes of approximately $0.5 million in 2000. Accordingly, had the
Company owned Teva in 2000, it would have been able to improve its EBITDA by
approximately $5.6 million.
For 2004, the first year following the end of the first option window, the
Company currently expects that its net sales of Teva products will be in excess
of $108 million. Based on this sales level, the acquisition of Teva would
eliminate royalty expense of at least $6.1 million and achieve other savings of
approximately
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$1.1 million. In addition, the earnings before income taxes provided from the
licensor's catalog/internet business is expected to yield approximately $0.9
million in 2004 and the royalty income from apparel licensees in the United
States and Japan alone, based on minimums in the existing apparel license
agreements, would be approximately $0.3 million. As a result, the combined
savings and additional operating income generated from the acquisition of Teva
would increase the Company's EBITDA by approximately $8.4 million in 2004.
The Company continues to evaluate various alternatives for financing the
potential acquisition of Teva. While no assurances can be given, the Company
believes it will be able to obtain the necessary financing. Given the wide range
of financing possibilities, the EBITDA amounts above for 2000 and 2004 do not
consider the impact on interest expense resulting from the potential issuance of
additional debt or any potential dilution impact on earnings per share resulting
from any potential issuance of additional capital stock for the potential
acquisition. The amounts above also do not consider any increase in depreciation
or amortization resulting from the acquisition.
The Company believes that internally generated funds, the available
borrowings under its existing credit facility, and the cash on hand will provide
sufficient liquidity to enable it to meet its current and foreseeable working
capital requirements. 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.
Historically, the Company's sales have been greater in the first and second
quarters, Teva's strong selling season, than in the third and fourth quarters.
However, given the Company's current expectations for a decrease in Teva sales
for the first half of 2001 compared to 2000 combined with the anticipated
continuing increase in Ugg sales in the Fall of 2001, the Company currently
expects sales in the fourth quarter to equal or exceed the sales levels for the
second quarter of 2001. The actual results could differ materially depending
upon consumer preferences, availability of product, competition, and the
Company's customers continuing to carry and promote its various product lines,
among other risks and uncertainties. See also the discussion regarding
forward-looking statements under "Risk Factors".
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
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (FASB No. 133). FASB No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for other hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. As issued, FASB No. 133 is effective for all fiscal quarters of
all fiscal years beginning after June 15, 1999. In June 1999, the Board issued
Statement of Financial Accounting Standards No. 137 "Accounting for Derivative
Instruments and Hedging Activities-Deferral of the Effective Date of FASB No.
133" (FASB No. 137). FASB No. 137 delays the effective date of FASB No. 133 to
all fiscal quarters of all fiscal years beginning after June 15, 2000, with
earlier application encouraged. The implementation of FASB No. 133 will not have
a material impact on the financial statements.
26
27
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation" (FIN 44). FIN 44 provides guidance for issues arising in applying
APB Opinion No. 25, "Accounting for Stock Issued to Employees". FIN 44 applies
specifically to new awards, exchanges of awards in a business combination,
modification to outstanding awards, and changes in grantee status that occur on
or after July 1, 2000, except for the provisions related to repricings and the
definition of an employee which apply to awards issued after December 15, 1998.
Application of FIN 44 did not have an effect on the Company's financial
reporting.
In July 2000, the Emerging Issues Task Force reached a consensus on EITF
Issue 00-10, Accounting for Shipping and Handling Fees and Costs, which
clarified the financial statement classification for shipping costs reimbursed
by customers. Issue 00-10 becomes effective during the fourth quarter of fiscal
years beginning after December 15, 1999. The Company adopted this Issue on
October 1, 2000. In accordance with this Issue, approximately $1.4 million of
shipping cost reimbursements have been reclassified as an addition to net sales
for each of the years ended December 31, 2000, 1999 and 1998, and approximately
$1.2 million, $1.5 million and $1.7 million, respectively, of shipping costs
incurred were reclassified as additions to cost of goods sold. In the past these
amounts had been reported on a net basis within operating expenses. The
implementation of this Issue had no effect on the Company's net earnings or
earnings per share.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Derivative Instruments. The Company does not invest, and during the year
ended December 31, 2000 did not invest, in market risk sensitive instruments.
Market Risk. The Company's market risk exposure with respect to financial
instruments is to changes in the "prime rate" in the United States and changes
in the Eurodollar rate. The Company's credit facility provides for interest on
outstanding borrowings at prime rate, or at the Company's election at an
adjusted Eurodollar rate plus 2%. At December 31, 2000, the Company had no
outstanding borrowings under this credit facility.
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, 2000 and
1999...................................................... 30
Consolidated Statements of Operations for each of the years
in the three-year period ended December 31, 2000.......... 31
Consolidated Statements of Stockholders' Equity for each of
the years in the three-year period ended December 31,
2000...................................................... 32
Consolidated Statements of Cash Flows for each of the years
in the three-year period ended December 31, 2000.......... 33
Notes to Consolidated Financial Statements.................. 34
Consolidated Financial Statement Schedule
Valuation and Qualifying Accounts......................... 47
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 auditing standards generally
accepted in the United States of America. 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, 2000 and 1999 and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2000 in conformity with accounting
principles generally accepted in the United States of America. 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
Los Angeles, California
February 14, 2001
29
30
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
ASSETS (Note 4)
2000 1999
----------- -----------
Current assets:
Cash and cash equivalents................................. $ 9,057,000 $ 1,633,000
Trade accounts receivable, less allowance for doubtful
accounts of $2,144,000 and $1,813,000 as of December
31, 2000 and 1999, respectively........................ 23,143,000 24,396,000
Inventories (note 2)...................................... 17,146,000 18,103,000
Prepaid expenses and other current assets................. 1,541,000 2,235,000
Refundable income taxes (note 5).......................... 119,000 1,624,000
Deferred tax assets (note 5).............................. 2,644,000 1,053,000
----------- -----------
Total current assets.............................. 53,650,000 49,044,000
Property and equipment, at cost, net (note 3)............... 2,998,000 2,125,000
Intangible assets, less applicable amortization............. 20,471,000 22,037,000
Other assets, net........................................... 593,000 276,000
----------- -----------
$77,712,000 $73,482,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current installments of long-term debt
(note 4)............................................... $ 1,046,000 $ 125,000
Trade accounts payable.................................... 8,020,000 7,261,000
Accrued payroll........................................... 1,646,000 1,023,000
Other accrued expenses.................................... 2,456,000 1,977,000
----------- -----------
Total current liabilities......................... 13,168,000 10,386,000
----------- -----------
Long-term debt, less current installments (note 4).......... 449,000 6,276,000
Commitments and contingencies (note 8)
Stockholders' equity (note 6):
Preferred stock, $.01 par value. Authorized 5,000,000
shares; none issued.................................... -- --
Common stock, $.01 par value. Authorized 20,000,000
shares; issued 10,108,929 and outstanding 9,135,977 at
December 31, 2000; issued 10,037,957 and outstanding
9,065,005 at December 31, 1999......................... 91,000 91,000
Additional paid-in capital................................ 25,003,000 24,743,000
Retained earnings......................................... 39,625,000 32,610,000
----------- -----------
64,719,000 57,444,000
Less note receivable from stockholder/former officer...... 624,000 624,000
----------- -----------
Total stockholders' equity........................ 64,095,000 56,820,000
----------- -----------
$77,712,000 $73,482,000
=========== ===========
See accompanying notes to consolidated financial statements.
30
31
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE-YEAR PERIOD ENDED DECEMBER 31, 2000
2000 1999 1998
------------ ------------ ------------
Net sales (note 9)............................... $113,738,000 $111,099,000 $103,534,000
Cost of sales.................................... 63,540,000 66,051,000 67,268,000
------------ ------------ ------------
Gross profit........................... 50,198,000 45,048,000 36,266,000
Selling, general and administrative expenses
(note 7)....................................... 37,568,000 38,298,000 39,064,000
------------ ------------ ------------
Earnings (loss) from operations........ 12,630,000 6,750,000 (2,798,000)
------------ ------------ ------------
Other expense:
Interest expense, net.......................... 67,000 1,404,000 1,171,000
Loss on disposal of assets..................... 57,000 3,000 13,000
Other.......................................... 171,000 101,000 136,000
------------ ------------ ------------
295,000 1,508,000 1,320,000
------------ ------------ ------------
Earnings (loss) before income tax
expense (benefit).................... 12,335,000 5,242,000 (4,118,000)
Income tax expense (benefit) (note 5)............ 5,320,000 2,358,000 (1,211,000)
------------ ------------ ------------
Net earnings (loss).................... $ 7,015,000 $ 2,884,000 $ (2,907,000)
============ ============ ============
Net earnings (loss) per share:
Basic.......................................... $ .77 $ .33 $ (.34)
Diluted........................................ .74 $ .32 $ (.34)
============ ============ ============
Weighted-average shares:
Basic.......................................... 9,093,000 8,834,000 8,632,000
Diluted........................................ 9,476,000 8,981,000 8,632,000
============ ============ ============
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, 2000
STOCKHOLDER/
COMMON STOCK ADDITIONAL FORMER NET
------------------- PAID-IN RETAINED OFFICER NOTE STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS RECEIVABLE EQUITY
--------- ------- ---------- ---------- ------------ -------------
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
(note 7)................... 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
Fair value of options issued
under Teva license
agreement (note 7)......... -- -- 78,000 -- -- 78,000
Common stock issued under
stock incentive plan....... 40,671 -- 118,000 -- -- 118,000
Common stock issued under the
employee stock purchase
plan....................... 30,301 -- 64,000 -- -- 64,000
Net earnings................. -- -- -- 7,015,000 -- 7,015,000
--------- ------- ---------- ---------- -------- ----------
Balance at December 31,
2000....................... 9,135,977 $91,000 25,003,000 39,625,000 (624,000) 64,095,000
========= ======= ========== ========== ======== ==========
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, 2000
2000 1999 1998
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss)......................................... $ 7,015,000 2,884,000 (2,907,000)
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization of property and equipment... 1,374,000 1,804,000 1,276,000
Amortization of intangible assets......................... 1,566,000 1,322,000 1,362,000
Provision for doubtful accounts........................... 1,994,000 1,820,000 589,000
Loss on disposal of assets................................ 57,000 3,000 13,000
Change in deferred tax assets............................. (1,591,000) 812,000 (399,000)
Stock compensation........................................ 130,000 87,000 166,000
Changes in assets and liabilities:
(Increase) decrease in:
Trade accounts receivable............................. (741,000) 964,000 (4,732,000)
Inventories........................................... 957,000 5,562,000 (4,686,000)
Prepaid expenses and other current assets............. 841,000 (57,000) 12,000
Refundable income taxes............................... 1,505,000 2,643,000 (4,267,000)
Note receivable from supplier......................... -- 782,000 184,000
Other assets.......................................... (317,000) 260,000 (233,000)
Increase (decrease) in:
Trade accounts payable................................ 759,000 (686,000) 4,318,000
Accrued expenses...................................... 1,102,000 9,000 (830,000)
Income taxes payable.................................. -- -- (22,000)
----------- ----------- -----------
Net cash provided by (used in) operating
activities....................................... 14,651,000 18,209,000 (10,156,000)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment.............. 19,000 10,000 142,000
Purchase of property and equipment........................ (1,755,000) (947,000) (1,916,000)
Cash paid for acquisitions, net of cash received.......... -- -- (2,000,000)
Cash paid for intangible assets........................... -- (1,000,000) --
----------- ----------- -----------
Net cash used in investing activities.............. (1,736,000) (1,937,000) (3,774,000)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under line of credit.......... (5,834,000) (14,917,000) 13,451,000
Proceeds from notes payable............................... 644,000 -- --
Repayments of long-term debt.............................. (431,000) (117,000) (106,000)
Cash received from issuances of common stock.............. 130,000 132,000 138,000
Cash paid for repurchases of common stock................. -- -- (2,528,000)
----------- ----------- -----------
Net cash provided by (used in) financing
activities....................................... (5,491,000) (14,902,000) 10,955,000
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents...................................... 7,424,000 1,370,000 (2,975,000)
Cash and cash equivalents at beginning of year.............. 1,633,000 263,000 3,238,000
----------- ----------- -----------
Cash and cash equivalents at end of year.................... $ 9,057,000 1,633,000 263,000
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest................................................ $ 352,000 1,380,000 1,092,000
Income taxes............................................ 5,971,000 2,492,000 3,800,000
=========== =========== ===========
Supplemental disclosure of noncash investing and financing activities:
In connection with the Teva license renewal in 1999, the Company issued
428,743 shares of common stock valued at $1,608,000.
In connection with the exercise of nonqualified stock options, additional
paid-in capital increased by $17,000 and $109,000 in 2000 and 1999,
respectively.
In 2000, the Company incurred $715,000 of long-term debt in connection with
the acquisition of $568,000 of property and equipment and $147,000 of
prepaid expenses.
See accompanying notes to consolidated financial statements.
33
34
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
(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 builds niche products into global lifestyle brands by designing
and marketing innovative, functional and fashion-oriented footwear, developed
for both high performance outdoor activities and everyday casual lifestyle use.
(b) Inventories
Inventories 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 for 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 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, 2000 and 1999 was $6,680,000 and $5,114,000,
respectively.
(f) Fair Value of Financial Instruments
The fair values of the Company's cash equivalents, trade accounts
receivable, prepaid expenses and other current assets, refundable income taxes,
trade accounts payable 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, 2000 AND 1999
(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 for employees and nonemployee
directors of the Company under APB No. 25 and comply with the pro forma
disclosure requirements. The Company applies the fair value techniques of SFAS
123 to measure compensation cost for options/warrants granted to nonemployees.
(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 $1,076,000, $1,607,000 and $2,393,000 in 2000, 1999 and 1998,
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 2000, 1999
and 1998 were $7,108,000, $5,602,000 and $5,847,000, respectively. Included in
prepaid and other current assets at December 31, 2000 and 1999 were $414,000 and
$726,000, respectively, related to prepaid advertising and promotion expenses
for programs that take place after December 31, 2000 and 1999, respectively.
(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) is computed by dividing net earnings
(loss) available to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
from securities that could share in the earnings of the Company. Antidilutive
securities are excluded from diluted EPS.
35
36
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000 AND 1999
The reconciliations of basic to diluted weighted-average shares are as
follows:
2000 1999 1998
---------- --------- ----------
Net earnings (loss) used for basic and diluted
earnings (loss) per share..................... $7,015,000 2,884,000 (2,907,000)
========== ========= ==========
Weighted-average shares used in basic
computation................................ 9,093,000 8,834,000 8,632,000
Dilutive effect of stock options.............. 383,000 147,000 --
---------- --------- ----------
Weighted-average shares used for
diluted
computation......................... 9,476,000 8,981,000 8,632,000
========== ========= ==========
Options to purchase 267,000, 596,000 and 698,000 shares of common stock at
prices ranging from $5.50 to $13.75, $3.00 to $13.75 and $5.50 to $13.75 were
outstanding during 2000, 1999 and 1998, 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
during the respective periods. Options to purchase 811,000 shares of common
stock at a price of $1.56 per share were outstanding and considered dilutive
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
The Company considers the U.S. dollar as the functional currency for all of
its domestic and foreign operations. 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
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, the Company's net income was the
same as comprehensive income for all periods presented.
(o) Business Segment Reporting
Management of the Company has determined its reportable segments are
strategic business units. Significant reportable business segments are the Teva,
Simple and Ugg brands. Information related to these segments is summarized in
note 9.
(p) Reclassifications
Certain reclassifications have been made to the 1999 and 1998 balances,
specifically related to shipping and handling fees to conform to the 2000
presentation.
(q) Shipping and Handling Fees
The Company adopted Emerging Issues Task Force Issue 00-10 (EITF 00-10),
Accounting for Shipping and Handling Fees and Costs, effective October 1, 2000.
EITF 00-10 established new guidelines for
36
37
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000 AND 1999
classification of shipping and handling costs billed to and collected from
customers. Pursuant to EITF 00-10, amounts billed for shipping and handling
costs are recorded as a component of revenue. Related costs paid to third-party
shippers are recorded as a cost of revenues. Management has retroactively
reclassified these amounts from selling, general and administrative expenses to
revenues and cost of revenues. Approximately $1.4 million of shipping cost
reimbursements have been reclassified as an addition to net sales for each of
the years ended December 31, 1999 and 1998 and approximately $1.5 million and
$1.7 million, respectively, of shipping costs incurred were reclassified as
additions to cost of goods sold.
(2) INVENTORIES
Inventories are summarized as follows:
2000 1999
----------- ----------
Finished goods..................................... $16,968,000 17,841,000
Work in process.................................... 48,000 119,000
Raw materials...................................... 130,000 143,000
----------- ----------
Total inventories........................ $17,146,000 18,103,000
=========== ==========
(3) PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
2000 1999
---------- ---------
Machinery and equipment.............................. $7,758,000 5,897,000
Furniture and fixtures............................... 1,012,000 650,000
Leasehold improvements............................... 567,000 547,000
---------- ---------
9,337,000 7,094,000
Less accumulated depreciation and amortization....... 6,339,000 4,969,000
---------- ---------
Net property and equipment................. $2,998,000 2,125,000
========== =========
37
38
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000 AND 1999
(4) NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt consists of the following:
2000 1999
---------- ---------
Revolving line of credit, secured by substantially
all the assets of the Company...................... $ -- 5,834,000
Note payable for purchase of computer equipment,
secured by underlying equipment, payable in
quarterly installments of $74,200, including
interest at a rate of 9.51% through May 2002....... 410,000 --
Note payable to the minority shareholder of the
Company's Heirlooms subsidiary in connection with
the minority shareholder's pending acquisition of
the Company's interest in the subsidiary, payable
on demand, including interest at a rate of 9.5%.... 644,000 --
Unsecured note payable in quarterly installments of
$41,700, including interest at a rate of 7.93%, due
December 2003...................................... 441,000 567,000
---------- ---------
1,495,000 6,401,000
Less current installments............................ 1,046,000 125,000
---------- ---------
$ 449,000 6,276,000
========== =========
The aggregate maturities of long-term debt as of December 31, 2000 are as
follows:
2001..................................................... $1,046,000
2002..................................................... 290,000
2003..................................................... 159,000
----------
$1,495,000
==========
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. At December 31, 2000, $10,530,000 was available under
such credit facility. 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 (9.5%
at December 31, 2000) 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, 2000, the Company was in compliance with the terms of
the agreement.
38
39
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000 AND 1999
(5) INCOME TAXES
Components of income tax expense (benefit) are as follows:
FEDERAL STATE TOTAL
----------- --------- ----------
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
=========== ========= ==========
2000:
Current...................................... $ 5,492,000 1,419,000 6,911,000
Deferred..................................... (1,286,000) (305,000) (1,591,000)
----------- --------- ----------
$ 4,206,000 1,114,000 5,320,000
=========== ========= ==========
Actual income tax expense (benefit) differs from that obtained by applying
the statutory federal income tax rate to earnings (loss) before income taxes as
follows:
2000 1999 1998
---------- ---------- -----------
Computed "expected" income tax expense
(benefit)................................... $4,194,000 $1,782,000 $(1,400,000)
State income taxes, net of federal income tax
benefit..................................... 688,000 259,000 (288,000)
Losses of subsidiary not deductible........... -- -- 241,000
Other......................................... 438,000 317,000 236,000
---------- ---------- -----------
$5,320,000 $2,358,000 $(1,211,000)
========== ========== ===========
39
40
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000 AND 1999
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities at December 31,
2000 and 1999 are presented below:
2000 1999
---------- ----------
Deferred tax assets:
Uniform capitalization adjustment to inventory............ $ 455,000 $ 175,000
Inventory obsolescence reserve............................ 15,000 20,000
Bad debt and other reserves............................... 1,656,000 896,000
Amortization of intangible assets......................... 705,000 415,000
Net operating loss carryforwards.......................... 114,000 228,000
State taxes............................................... 247,000 21,000
---------- ----------
Total gross deferred tax assets................... 3,192,000 1,755,000
Less valuation allowance.................................. (228,000) (228,000)
---------- ----------
Deferred tax assets, net of allowance....................... 2,964,000 1,527,000
---------- ----------
Deferred tax liabilities:
Depreciation of property and equipment.................... 39,000 193,000
Other..................................................... 281,000 281,000
---------- ----------
Total deferred tax liabilities.................... 320,000 474,000
---------- ----------
Net deferred tax assets........................... $2,644,000 $1,053,000
========== ==========
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, 2000 and 1999 arise primarily
from the overpayment of estimated taxes.
(6) STOCKHOLDERS' EQUITY
In February 2001, the Company amended the 1993 Stock Incentive Plan (1993
Plan), subject to stockholder approval. Under the terms of the amended 1993
Plan, 3,000,000 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, 40,671, 91,352 and 57,572 shares of common stock were issued in 2000, 1999
and 1998, respectively, including 100,000 shares issued in 1997 to an officer of
the Company, which was financed through the issuance of a note receivable of
$624,000 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, 2000 AND 1999
Common stock option activity under the 1993 Plan for the years ended
December 31, 2000, 1999 and 1998 is as follows:
WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
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
Granted............................................... 215,500 3.28
Exercised............................................. (21,800) 2.23
Canceled.............................................. (56,400) 3.37
---------
Outstanding at December 31, 2000........................ 1,278,900 3.66
========= =====
Options exercisable at December 31, 2000................ 636,400 $4.28
========= =====
The per share weighted-average fair value of stock options granted during
2000, 1999 and 1998 was $1.95, $1.54 and $1.25, respectively, on the date of
grant using the Black-Scholes option pricing model with the following
weighted-average assumptions: 2000 -- expected dividend yield of 0%, stock
volatility of 50.47%, risk-free interest rate of 5.8% and an expected life of
seven years; 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.
The Company applies APB Opinion No. 25 in accounting for its stock option
plans. Had the Company determined compensation cost based on the fair value of
the options at the grant date under SFAS No. 123, the Company's net earnings
(loss) would have been changed to the pro forma amounts below:
2000 1999 1998
---------- ---------- -----------
Pro forma net earnings (loss)................. $6,686,960 $2,714,000 $(3,400,000)
========== ========== ===========
Pro forma net earnings (loss) per share:
Basic....................................... $ .74 $ .31 $ (.39)
Diluted..................................... $ .71 $ .30 $ (.39)
========== ========== ===========
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 as amended, 300,000 shares of common stock are reserved for issuance to
employees who have been employed by the Company for at least six months. The
1995 Plan provides for employees to purchase the Company's common stock at a
discount below market value, as defined by the 1995 Plan. Under the 1995 Plan,
30,301, 22,231 and 18,628 shares were issued in 2000, 1999 and 1998,
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, 2000 AND 1999
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 $.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 $.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 342,952 shares in 1998 for cash consideration
of $2,528,000 and no shares in 1999 or 2000 were repurchased. At December 31,
2000, 1,227,048 shares remained available for repurchase under the program.
(7) 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 was effective January 1, 2000. Under the License
Agreement, the Company received the exclusive worldwide rights for the
manufacture and distribution of Teva footwear through 2004. 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 and is amortizing this over the remaining term of the
license. 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, with an
exercise price at the market value on the date of grant.
In 1999, the Company received an option to buy Teva and virtually all of
its assets, including all worldwide rights to all Teva products. The Company's
original option was exercisable during the period from January 1, 2000 to
December 31, 2001 or during the period from January 1, 2006 to December 31,
2008. On January 22, 2001, the Company amended its option agreement, extending
the first option window for two
42
43
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000 AND 1999
additional years. As a result, the first option window is January 1, 2000
through December 31, 2003. The Company agreed to pay Mr. Thatcher $1.6 million
as consideration for this extension. The option price is based on formulas tied
to net sales of Teva products and varies depending on when the option is
exercised. For the first option period, the option price is for an amount equal
to the greater of (i) $61.6 million or (ii) 75% of the largest calendar year
revenues since January 1, 2000 for the Teva brand, plus $1.6 million. In
addition, the Company would issue to Mr. Thatcher 100,000 shares of common stock
and options to purchase 100,000 shares of common stock. The purchase price for
the second option period, January 1, 2006 to December 31, 2008, is equal to 110%
of the average of the aggregate sales for all Teva products for the two calendar
years since January 1, 2000 with the highest aggregate net sales. If the Company
does not exercise its option to acquire Teva, the licensor has the option to
acquire the Teva distribution rights from the Company for the period from
January 1, 2010 to December 31, 2011, the end of the license term, and the
option price is based on a formula tied to the Company's earnings before
interest, taxes, depreciation and amortization. The Company is currently
evaluating the possibility of exercising the option in the January 1, 2000 to
December 31, 2003 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.
Royalty expense related to Teva sales is included in selling, general and
administrative expenses in the accompanying consolidated financial statements
and was $4,307,000, $4,128,000 and $3,657,000 during the years ended December
31, 2000, 1999 and 1998, respectively. Advertising expense, which is included in
selling, general and administrative expenses in the accompanying consolidated
financial statements, related to Teva sales was $4,829,000, $3,378,000 and
$3,261,000 during the years ended December 31, 2000, 1999 and 1998,
respectively.
In the event that Deckers exercises its option to acquire Teva, Deckers
would eliminate the royalty expense it currently pays on Teva footwear sales and
would then own all Teva rights and assets worldwide.
(8) COMMITMENTS AND CONTINGENCIES
The Company leases office facilities under operating lease agreements which
expire through December 2003.
Future minimum commitments under the lease agreements are as follows:
Year ending December 31:
2001................................................... $ 930,000
2002................................................... 648,000
2003................................................... 650,000
----------
$2,228,000
==========
Total rent expense for the years ended December 31, 2000, 1999 and 1998 was
approximately $1,072,000. $1,091,000 and $1,122,000, 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
43
44
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000 AND 1999
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. During the year, the Commission
added explanatory language that more clearly identified shoe types which would
be subject to antidumping duties. The Company believes that based on the new
language it is probable that the Company will not prevail in its appeal.
Therefore, the Company has provided $400,000 which is the Company's estimate of
its exposure for antidumping levies. If Customs determines that these styles are
covered by the newly revised 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 from sources outside of China in
an effort to reduce the potential risk in the future.
The Company is currently involved in various other legal claims arising
from the ordinary course of business. Management does not believe that the
disposition of these matters will have a material effect on the Company's
financial position or results of operations.
(9) BUSINESS SEGMENTS, CONCENTRATION OF BUSINESS AND CREDIT RISK AND SIGNIFICANT
CUSTOMERS
The Company's accounting policies of the segments below are the same as
those described in the summary of significant accounting policies, except that
the Company does not allocate interest, income taxes or unusual items to
segments. The Company evaluates performance based on net revenues and profit or
loss from operations. The Company's reportable segments are strategic business
units which are responsible for the worldwide operations of each of its brands.
They are managed separately because each business requires different marketing,
research and development, design, sourcing and sales strategies. In 2000, the
Company revised the structure of its reporting for business segments to include
the worldwide operations for each of the brands, whereas the previous reporting
structure included only the domestic operations of the brands. As a
44
45
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000 AND 1999
result, all amounts for the years ended December 31, 1999 and 1998 have been
restated to conform to the 2000 presentation. Business segment information is
summarized as follows:
2000 1999 1998
------------ ----------- -----------
Sales to external customers:
Teva..................................... $ 79,732,000 80,963,000 68,870,000
Simple................................... 16,328,000 15,529,000 20,159,000
Ugg...................................... 15,310,000 12,104,000 10,873,000
Other.................................... 2,368,000 2,503,000 3,632,000
------------ ----------- -----------
$113,738,000 111,099,000 103,534,000
============ =========== ===========
Earnings (loss) from operations:
Teva..................................... $ 10,984,000 5,566,000 452,000
Simple................................... 122,000 1,134,000 (2,421,000)
Ugg...................................... 1,316,000 (116,000) (620,000)
Other.................................... 208,000 166,000 (209,000)
------------ ----------- -----------
$ 12,630,000 6,750,000 (2,798,000)
============ =========== ===========
Depreciation and amortization:
Teva..................................... $ 818,000 526,000 542,000
Simple................................... 208,000 213,000 276,000
Ugg...................................... 642,000 635,000 635,000
Other.................................... 12,000 22,000 25,000
Unallocated.............................. 1,260,000 1,730,000 1,160,000
------------ ----------- -----------
$ 2,940,000 3,126,000 2,638,000
============ =========== ===========
Capital expenditures:
Teva..................................... $ 393,000 3,000 113,000
Simple................................... 71,000 -- 18,000
Ugg...................................... 63,000 -- --
Other.................................... 1,000 15,000 5,000
Unallocated.............................. 1,795,000 929,000 1,780,000
------------ ----------- -----------
$ 2,323,000 947,000 1,916,000
============ =========== ===========
2000 1999
----------- ----------
Total assets from reportable segments:
Teva..................................................... $25,682,000 29,304,000
Simple................................................... 10,684,000 8,273,000
Ugg...................................................... 25,668,000 26,507,000
Other.................................................... 1,835,000 1,776,000
----------- ----------
$63,869,000 65,860,000
=========== ==========
The earnings (loss) from operations includes an allocation of corporate
overhead costs to the business segments, based on the ratio of each segment's
net sales to total net sales.
45
46
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000 AND 1999
Reconciliations of total assets from reportable segments to the
consolidated financial statements are as follows:
2000 1999
----------- ----------
Total assets for reportable segments....................... $63,869,000 65,860,000
Elimination of intersegment payables....................... 84,000 474,000
Unallocated refundable income taxes and deferred tax
assets................................................... 2,486,000 2,284,000
Other unallocated corporate assets......................... 11,273,000 4,864,000
----------- ----------
Consolidated total assets........................ $77,712,000 73,482,000
=========== ==========
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 27.4%, 26.0% and 23.4% of net sales
for the years ended December 31, 2000, 1999 and 1998, 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, 2000, 1999 and 1998, the Company
had no single customer exceeding 10% of consolidated net sales. As of December
31, 2000 and 1999, 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.
(10) QUARTERLY SUMMARY OF INFORMATION (UNAUDITED)
Summarized unaudited quarterly financial data are as follows:
2000
--------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------- ---------- ------------ -----------
Net sales............................... $41,923,000 28,940,000 19,190,000 23,685,000
Gross profit............................ 19,426,000 13,751,000 7,185,000 9,836,000
Net earnings (loss)..................... 4,384,000 2,232,000 (395,000) 794,000
=========== ========== ========== ==========
Net earnings (loss) per share:
Basic................................. $ .48 .25 (.04) .09
Diluted............................... .47 .24 (.04) .08
=========== ========== ========== ==========
1999
--------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------- ---------- ------------ -----------
Net sales............................... $38,532,000 31,847,000 18,440,000 22,280,000
Gross profit............................ 17,110,000 13,715,000 5,767,000 8,456,000
Net earnings (loss)..................... 2,245,000 1,668,000 (1,275,000) 246,000
=========== ========== ========== ==========
Net earnings (loss) per share:
Basic................................. $ .26 .19 (.14) .03
Diluted............................... .26 .19 (.14) .03
=========== ========== ========== ==========
46
47
SCHEDULE II
DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
THREE-YEAR PERIOD ENDED DECEMBER 31, 2000
BALANCE AT
BEGINNING OF BALANCE AT
DESCRIPTION PERIOD ADDITIONS DEDUCTIONS END OF PERIOD
----------- ------------ --------- ---------- -------------
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 --
========== ========= ========= =========
Year ended December 31, 2000:
Allowance for doubtful accounts................. $1,813,000 1,994,000 1,663,000 2,144,000
Reserve for sales discounts..................... 290,000 1,007,000 589,000 708,000
Reserve for inventory obsolescence.............. 763,000 1,807,000 1,372,000 1,198,000
========== ========= ========= =========
47
48
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 2001 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, 2000, 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 2001 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, 2000, 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 2001 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, 2000, 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 2001 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, 2000, and such information is incorporated herein by
reference.
48
49
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. None.
(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)
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)
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50
EXHIBIT
- -------
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)
10.19 First Amendment to Intellectual Property Option Agreement
between Deckers Outdoor Corporation and Mark Thatcher, dated
January 22, 2001.
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 30, 2001
/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
- --------------------------------------------------- and Chief Executive Officer
Douglas B. Otto
/s/ M. SCOTT ASH Chief Financial Officer
- --------------------------------------------------- (Principal Financial and Accounting
M. Scott Ash Officer)
/s/ GENE E. BURLESON Director
- ---------------------------------------------------
Gene E. Burleson
/s/ JOHN M. GIBBONS Director
- ---------------------------------------------------
John M. Gibbons
/s/ REX A. LICKLIDER Director
- ---------------------------------------------------
Rex A. Licklider
/s/ KARL F. LOPKER Director
- ---------------------------------------------------
Karl F. Lopker
51