1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark one) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ Commission File Number 0-22446 DECKERS OUTDOOR CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 95-3015862 - -------------------------------------------------------------------------------- (State or other jurisdiction of IRS Employer Identification incorporation or organization) 495-A South Fairview Avenue, Goleta, California 93117 - -------------------------------------------------------------------------------- (Address of principal executive offices) (zip code) Registrant's telephone number, including area code (805) 967-7611 ------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of the issuer's class of common stock, as of the latest practicable date. Outstanding at CLASS May 8, 2001 - --------------------------------------- ------------------------- Common stock, $.01 par value 9,210,319
2 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES Table of Contents <TABLE> <CAPTION> Page ---- <S> <C> Part I. Financial Information Item 1. Condensed Consolidated Financial Statements (Unaudited) Condensed Consolidated Balance Sheets as of March 31, 2001 and December 31, 2000 1 Condensed Consolidated Statements of Earnings for the Three-Month Periods Ended March 31, 2001 and 2000 2 Condensed Consolidated Statements of Cash Flows for the Three-Month Periods Ended March 31, 2001 and 2000 3 Notes to Condensed Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk 15 Part II. Other Information Item 1. Legal Proceedings 16 Item 2. Changes in Securities 16 Item 3. Defaults upon Senior Securities 16 Item 4. Submission of Matters to a Vote of Security Holders 16 Item 5. Other Information 16 Item 6. Exhibits and Reports on Form 8-K 16 Signature 17 </TABLE>
3 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES Condensed Consolidated Balance Sheets (Unaudited) <TABLE> <CAPTION> ASSETS MARCH 31, DECEMBER 31, 2001 2000 ----------- ------------ <S> <C> <C> Current assets: Cash and cash equivalents $11,940,000 9,057,000 Trade accounts receivable, less allowance for doubtful accounts of $3,204,000 and $2,144,000 as of March 31, 2001 and December 31, 2000, 27,599,000 23,143,000 respectively Inventories 15,440,000 17,146,000 Prepaid expenses and other current assets 1,606,000 1,541,000 Refundable and deferred tax assets 2,644,000 2,763,000 ----------- --------- Total current assets 59,229,000 53,650,000 Property and equipment, at cost, net 3,248,000 2,998,000 Intangible assets, less accumulated amortization 21,505,000 20,471,000 Other assets, net 1,158,000 593,000 ----------- --------- $85,140,000 77,712,000 =========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable and current installments of long-term debt $ 412,000 1,046,000 Trade accounts payable 10,999,000 8,020,000 Accrued expenses 4,528,000 4,102,000 Income taxes payable 1,981,000 -- ----------- --------- Total current liabilities 17,920,000 13,168,000 ----------- --------- Long-term debt, less current installments 342,000 449,000 Stockholders' equity: Preferred stock, $.01 par value. Authorized 5,000,000 shares; none issued -- -- Common stock, $.01 par value. Authorized 20,000,000 shares; issued 10,177,271 shares and outstanding 9,204,319 shares at March 31, 2001; issued 10,108,929 shares and outstanding 9,135,977 shares at December 31, 2000 92,000 91,000 Additional paid-in capital 25,298,000 25,003,000 Retained earnings 42,112,000 39,625,000 ----------- --------- 67,502,000 64,719,000 Less note receivable from stockholder/former officer 624,000 624,000 ----------- --------- Total stockholders' equity 66,878,000 64,095,000 ----------- --------- $85,140,000 77,712,000 =========== ========== </TABLE> See accompanying notes to condensed consolidated financial statements.
4 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Earnings (Unaudited) <TABLE> <CAPTION> THREE-MONTH PERIOD ENDED MARCH 31, -------------------------------- 2001 2000 ------------ ---------- <S> <C> <C> Net sales $ 34,911,000 41,923,000 Cost of sales 19,177,000 22,497,000 ------------ ---------- Gross profit 15,734,000 19,426,000 Selling, general and administrative expenses 11,653,000 11,362,000 ------------ ---------- Earnings from operations 4,081,000 8,064,000 Other expense (income): Interest, net (79,000) 201,000 Other (203,000) 171,000 ------------ ---------- Earnings before income tax expense 4,363,000 7,692,000 Income tax expense 1,876,000 3,308,000 ------------ ---------- Net earnings $ 2,487,000 4,384,000 ============ ========= Net earnings per share: Basic $ 0.27 0.48 Diluted 0.26 0.47 ============ ========= Weighted-average shares: Basic 9,179,000 9,071,000 Diluted 9,584,000 9,360,000 ============ ========= </TABLE> See accompanying notes to condensed consolidated financial statements. 2
5 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited) <TABLE> <CAPTION> THREE-MONTH PERIOD ENDED MARCH 31, ----------------------------- 2001 2000 ----------- ----------- <S> <C> <C> Cash flows from operating activities: Net earnings $ 2,487,000 4,384,000 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Depreciation and amortization 862,000 734,000 Provision for doubtful accounts 1,228,000 343,000 Gain on sale of Heirlooms subsidiary (185,000) -- Loss on disposal of assets 10,000 7,000 Non-cash stock compensation 163,000 78,000 Changes in assets and liabilities (net of effects of disposition of Heirlooms subsidiary): (Increase) decrease in: Trade accounts receivable (5,990,000) (12,792,000) Inventories 973,000 (280,000) Prepaid expenses and other current assets (506,000) (98,000) Refundable income taxes 34,000 1,624,000 Other assets (155,000) 2,000 Increase in: Trade accounts payable 3,035,000 1,836,000 Accrued expenses 554,000 1,676,000 Income taxes payable 1,981,000 992,000 ----------- --------- Total adjustments 2,004,000 (5,878,000) ----------- --------- Net cash provided by (used in) operating activities 4,491,000 (1,494,000) ----------- --------- Cash flows from investing activities: Cash paid for extension of Teva purchase option (1,566,000) -- Net proceeds from sale of Heirlooms subsidiary 599,000 -- Purchase of property and equipment (695,000) (505,000) Proceeds from sale of property and equipment 18,000 18,000 ----------- --------- Net cash used in investing activities (1,644,000) (487,000) ----------- --------- </TABLE> (Continued) 3
6 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows, Continued (Unaudited) <TABLE> <CAPTION> THREE-MONTH PERIOD ENDED MARCH 31, -------------------------------- 2001 2000 ------------ ---------- <S> <C> <C> Cash flows from financing activities: Net proceeds from (repayments of) long-term debt (97,000) 2,566,000 Cash received from issuances of common stock 133,000 38,000 ------------ --------- Net cash provided by financing activities 36,000 2,604,000 ------------ --------- Net increase in cash 2,883,000 623,000 Cash at beginning of period 9,057,000 1,633,000 ------------ --------- Cash at end of period $ 11,940,000 2,256,000 ============ ========= Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 32,000 251,000 Income taxes 726,000 53,000 ============ ========= </TABLE> See accompanying notes to condensed consolidated financial statements. 4
7 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (1) General The unaudited condensed consolidated financial statements have been prepared on the same basis as the annual audited consolidated financial statements and, in the opinion of management, reflect all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation for each of the periods presented. The results of operations for interim periods are not necessarily indicative of results to be achieved for full fiscal years. As contemplated by the Securities and Exchange Commission (SEC) under Rule 10-01 of Regulation S-X, the accompanying condensed consolidated financial statements and related footnotes have been condensed and do not contain certain information that will be included in the Company's annual consolidated financial statements and footnotes thereto. For further information, refer to the consolidated financial statements and related footnotes for the year ended December 31, 2000 included in the Company's Annual Report on Form 10-K. (2) Earnings per Share Basic earnings per share represents net earnings divided by the weighted-average number of common shares outstanding for the period. Diluted earnings per share represents net earnings divided by the weighted-average number of shares outstanding, inclusive of the dilutive impact of common stock equivalents. During the three-month periods ended March 31, 2001 and 2000, the difference between the weighted-average number of shares used in the basic computation compared to that used in the diluted computation was due to the dilutive impact of options to purchase common stock. The reconciliations of basic to diluted weighted-average shares are as follows for the three months ended March 31, 2001 and 2000: <TABLE> <CAPTION> THREE-MONTH PERIOD ENDED MARCH 31, --------------------------------- 2001 2000 ------------ --------- <S> <C> <C> Net earnings $ 2,487,000 4,384,000 ============ ========= Weighted-average shares used in basic computation 9,179,000 9,071,000 Dilutive stock options 405,000 289,000 ------------ ---------- Weighted-average shares used for diluted computation 9,584,000 9,360,000 ============ ========== </TABLE> 5
8 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (2) Earnings per Share (Continued) Options to purchase 282,000 shares of common stock at prices ranging from $5.25 to $9.88 were outstanding during the three months ended March 31, 2001 and options to purchase 332,000 shares of common stock at prices ranging from $3.50 to $13.75 were outstanding during the three months ended March 31, 2000, but were not included in the computation of diluted earnings per share because the options' exercise prices were greater than the average market price of the common shares during the period and, therefore, were anti-dilutive. (3) Inventories Inventories are summarized as follows: <TABLE> <CAPTION> MARCH 31, DECEMBER 31, 2001 2000 --------- ------------ <S> <C> <C> Finished goods $15,440,000 16,968,000 Work in process -- 48,000 Raw materials -- 130,000 ----------- ---------- Total inventories, net $15,440,000 17,146,000 =========== ========== </TABLE> (4) Credit Facility The Company has a credit facility ("the Facility") which provides for borrowings up to $50,000,000, subject to a borrowing base up to 85% of eligible accounts receivable and 65% of eligible inventory, as defined. Up to $15,000,000 of borrowings may be in the form of letters of credit. Borrowings bear interest at the lender's prime rate (8.00% at March 31, 2001) 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 Facility, 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. At March 31, 2001, the Company had no outstanding borrowings under the Facility and outstanding letters of credit aggregated $3,438,000. The agreement underlying the credit facility includes a tangible net worth covenant. At March 31, 2001, the Company was in compliance with such covenant and the terms of the agreement. The Company had credit availability under the Facility of $14,687,000 at March 31, 2001. 6
9 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (5) Income Taxes Income taxes for the interim periods were computed using the effective tax rate estimated to be applicable for the full fiscal year, which is subject to ongoing review and evaluation by management. For the three months ended March 31, 2001, the Company had income tax expense of $1,876,000, representing an effective income tax rate of 43.0%. For the three months ended March 31, 2000, the Company had income tax expense of $3,308,000, representing an effective income tax rate of 43.0%. (6) New Accounting Pronouncements 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 the 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 net sales. Related costs paid to third-party shippers are recorded as a cost of goods sold. Management has retroactively reclassified these amounts from selling, general and administrative expenses to net sales and cost of goods sold. Approximately $457,000 of shipping cost reimbursements have been reclassified as an addition to net sales for the three month period ended March 31, 2000 and approximately $413,000 of shipping costs incurred were reclassified as additions to cost of goods sold. (7) Business Segments The Company evaluates performance based on net revenues and earnings 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. Sales and operating income (loss) by business segment for the three months ended March 31, 2001 and 2000 is summarized as follows: <TABLE> <CAPTION> 2001 2000 ----------- ----------- <S> <C> <C> Sales to external customers: Teva $ 30,037,000 35,150,000 Simple 4,231,000 5,463,000 Ugg 592,000 526,000 Other 51,000 784,000 ----------- ----------- $ 34,911,000 41,923,000 =========== =========== </TABLE> 7
10 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (7) Business Segments (Continued) <TABLE> <CAPTION> 2001 2000 ----------- -------- <S> <C> <C> Earnings (loss) from operations: Teva $ 4,569,000 7,211,000 Simple (220,000) 902,000 Ugg (275,000) (199,000) Other 7,000 150,000 ----------- --------- $ 4,081,000 8,064,000 =========== ========= </TABLE> The earnings from operations of each segment 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. Business segment asset information as of March 31, 2001 and December 31, 2000 is summarized as follows: <TABLE> <CAPTION> MARCH 31, DECEMBER 31, 2001 2000 ------------ ------------ <S> <C> <C> Total assets for reportable segments: Teva $ 42,461,000 25,682,000 Simple 10,808,000 10,684,000 Ugg 18,024,000 25,668,000 Other -- 1,835,000 ------------ ----------- $ 71,293,000 63,869,000 ============ =========== </TABLE> Reconciliations of total assets from reportable segments to the condensed consolidated balance sheets at March 31, 2001 and December 31, 2000 are as follows: <TABLE> <CAPTION> MARCH 31, DECEMBER 31, 2001 2000 ----------- ----------- <S> <C> <C> Total assets for reportable segments $71,293,000 63,869,000 Elimination of intersegment payables 317,000 84,000 Unallocated refundable income taxes and deferred tax assets 2,452,000 2,486,000 Other unallocated corporate assets 11,078,000 11,273,000 ----------- ----------- Consolidated total assets $85,140,000 77,712,000 =========== =========== </TABLE> 8
11 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (8) Contingencies An action was brought against the Company in 1995 by Molly Strong-Butts and Yeti by Molly, Ltd. (collectively, "Molly") which alleged, among other things, that the Company violated a certain nondisclosure agreement and obtained purported trade secrets regarding a line of winter footwear which Deckers stopped producing in 1994. A jury verdict was obtained against the Company in March 1999 aggregating $1,785,000 for the two plaintiffs. The Company is appealing the verdict and continues to believe such claims are without merit. The Company intends to continue contesting this claim vigorously. The Company, based on advice from legal counsel, does not anticipate that the ultimate outcome will have a material adverse effect upon its financial condition, results of operations or cash flows. The 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
12 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto, as well as our Annual Report on Form 10-K for the year ended December 31, 2000. This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 that involve risk and uncertainty, such as forward-looking statements relating to sales and earnings per share expectations, expectations regarding the Company's liquidity, the potential impact of certain litigation 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 "Outlook" section of this Quarterly Report on Form 10-Q. Three Months Ended March 31, 2001 Compared to Three Months Ended March 31, 2000 Net sales decreased by $7,012,000, or 16.7%, to $34,911,000 from the comparable three months ended March 31, 2000 of $41,923,000. The decrease is largely attributed to the weakness in the economy, the softness in the retail environment and sales declines in the overseas markets, particularly in Europe. Sales of the Teva brand decreased 14.5% to $30,037,000 for the three months ended March 31, 2001 from $35,150,000 for the three months ended March 31, 2000 and represented 86.0% and 83.8% of net sales in the three months ended March 31, 2001 and 2000, respectively. Net sales of footwear under the Simple product line decreased 22.6% to $4,231,000 from $5,463,000 for the comparable three months ended March 31, 2000. Net sales of Ugg footwear increased 12.6% to $592,000 for the three months ended March 31, 2001, compared to net sales of $526,000 for the three months ended March 31, 2000. Due to the highly seasonal nature of Ugg's business, the first quarter is generally a low volume quarter for Ugg sales. Overall, international sales for all of the Company's products decreased 21.2% for the quarter to $13,542,000 from $17,179,000, representing 38.8% of net sales in 2001 and 41.0% in 2000. The volume of footwear sold decreased 7.0% to 1,572,000 pairs during the three months ended March 31, 2001 from 1,691,000 pairs during the three months ended March 31, 2000, for the reasons discussed above. The weighted-average wholesale price per pair sold during the three months ended March 31, 2001 for all brands combined decreased 8.0% to $21.89 from $23.80 for the three months ended March 31, 2000. The decrease was primarily due to a change in sales mix away from the higher priced styles, including the leather casuals, toward styles with lower average selling prices, including thongs and several newly introduced styles at lower price points. Cost of sales decreased by $3,320,000 or 14.8%, to $19,177,000 for the three months ended March 31, 2001, compared with $22,497,000 for the three months ended March 31, 2000 and increased as a percentage of net sales to 54.9% from 53.7%. Gross profit decreased by $3,692,000, or 19.0%, to $15,734,000 for the three months ended March 31, 2001 from $19,426,000 for the three months ended March 31, 2000 and decreased as a percentage of net sales to 45.1% from 46.3%. The decrease in gross margin was the result of a combination of factors including the introduction of certain new styles with lower gross margins and slightly increased factory costs on certain styles. 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 three months ended March 31, 2001, the Company had a net decrease to the reserve for inventory obsolescence of approximately $65,000 primarily due to the sale of domestic inventory of Teva and Simple product for which a reserve had previously been taken, as well as the elimination of approximately $36,000 of reserve in connection with the Company's 10
13 sale of its Heirlooms subsidiary during the quarter. For the three months ended March 31, 2000, the Company had a net addition to the inventory obsolescence reserve of approximately $218,000 as the Company recorded inventory write-downs for its domestic Teva footwear inventory, as well as write-downs for its Teva apparel inventory in connection with the Company's exit from the Teva apparel business in 2000. Selling, general and administrative expenses increased by $291,000, or 2.6%, to $11,653,000 for the three months ended March 31, 2001, compared with the three months ended March 31, 2000 of $11,362,000, and increased as a percentage of net sales to 33.4% in 2001 from 27.1% in 2000. The increase in selling, general and administrative expenses as a percentage of sales was primarily due to an increase in bad debt expense due to a bankruptcy filing by one of the Company's larger customers, Track 'n Trail, on April 13, 2001. As a result of the Track 'n Trail bankruptcy filing, the Company recorded approximately $1.0 million of bad debt expense for the three months ended March 31, 2001 to reserve for 100% of the net accounts receivable balance for this customer. In addition, the increase in selling, general and administrative expenses as a percentage of sales occurred as certain operating costs are fixed costs and did not decrease in proportion to the decrease in sales levels. Earnings from operations for the Teva brand were $4,569,000 for the three months ended March 31, 2001 compared to $7,211,000 for the three months ended March 31 2000. The decrease is largely due to the decrease in sales and the bad debt write-off for Track `n Trail. The Simple brand experienced a loss from operations of $220,000 for the three months ended March 31, 2001 compared to earnings from operations of $902,000 for the three months ended March 31, 2000 as a result of the decrease in sales, lower gross margins on certain newly introduced styles, increased marketing costs and the bad debt write-off for Track `n Trail. The Ugg brand experienced a loss from operations of $275,000 for the three months ended March 31, 2001 compared to a loss from operations of $199,000 for the three months ended March 31, 2000 largely due to the bad debt write-off for Track `n Trail. Additionally, the earnings from operations for all segments decreased versus that experienced in the year ago period as certain costs are fixed costs and did not decrease in proportion to the decrease in consolidated net sales. Net interest income was $79,000 for the three months ended March 31, 2001 compared with net interest expense of $201,000 for the three months ended March 31, 2000, primarily due to the Company's significantly improved cash position generated by the Company's cash flows from operations. For the three months ended March 31, 2001 the Company had income tax expense of $1,876,000, representing an effective income tax rate of 43.0%. For the three months ended March 31, 2000, the Company had income tax expense of $3,308,000, representing an effective income tax rate of 43.0%. Income taxes for interim periods are computed using the effective tax rate estimated to be applicable for the full fiscal year, which is subject to ongoing review and evaluation by the Company. The Company experienced net earnings of $2,487,000, or $0.26 per share - diluted, for the three months ended March 31, 2001 versus net earnings of $4,384,000, or $0.47 per share - diluted, for the three months ended March 31, 2000 due to the reasons discussed above. Outlook This "Outlook" section, the last paragraph under "Liquidity and Capital Resources," the discussion under "Seasonality" and other statements in this Form 10-Q contain a number of forward-looking statements including forward-looking statements relating to sales and earnings per share expectations, expectations regarding the Company's liquidity, the potential impact of certain litigation, and the impact of seasonality 11
14 on the Company's operations. These forward-looking statements are based on the Company's expectations as of today, May 14, 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 Quarterly Report on Form 10-Q. All of the forward-looking statements are based on management's current expectations and are inherently uncertain. Actual results may differ materially for a variety of reasons, including the reasons discussed below. Given these uncertainties, prospective investors are cautioned not to place undue reliance on such forward-looking statements. Sales and Earnings per Share Expectations Based on the Track `n Trail bankruptcy, a slowdown in international business, the continuing weakness in the domestic economy, and extended periods of unseasonably cold weather this Spring, the Company currently expects that net sales for the fiscal year ending December 31, 2001 will range from $95 million to $100 million and fully-diluted earnings per share will range from $0.40 to $0.45. For the second quarter ending June 30, 2001, the Company currently expects sales to range from $20 million to $21 million and fully-diluted earnings per share to range between $0.07 and $0.08. For the year ending December 31, 2001, the Company currently expects net sales of its Teva brand to range from $67 million to $69 million, sales of its Simple brand to range from $12 million to $14 million and sales of its Ugg brand to range from $16 million to $17 million. The foregoing forward-looking statements represent the Company's current analysis of trends and information. Actual results could vary as a result of numerous factors. For example, the Company's results are directly dependent on consumer preferences, which are difficult to assess and can shift rapidly. Any shift in consumer preferences away from one or more of the Company's product lines could result in lower sales as well as obsolete inventory and the necessity of selling products at significantly reduced selling prices, all of which would adversely affect the Company's results of operations, financial condition and cash flows. The Company is also dependent on its customers continuing to carry and promote its various lines. The Company's sales can be adversely impacted by the ability of the Company's suppliers to manufacture and deliver products in time for the Company to meet its customers' orders. 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. The Company's offices and distribution center are located in the state of California, which has experienced, and is expected to continue to experience, rolling electrical power outages. Depending on the timing, length and frequency of the outages, the Company may be unable to ship products in a timely manner, which could negatively impact the Company's net sales. In addition, the Company's results of operations, financial condition and cash flows are subject to risks and uncertainties with respect to the following: overall economic and market conditions; competition; demographic changes; the loss of significant customers or suppliers; the performance and reliability of the Company's products; customer service; the Company's ability to secure and maintain intellectual property rights; the Company's ability to secure and maintain adequate financing; the Company's ability to forecast and subsequently achieve those forecasts; its ability to attract and retain key employees; and the general 12
15 risks associated with doing international business including foreign exchange risks, duties, quotas and political instability. Liquidity and Capital Resources The Company's liquidity consists of cash, trade accounts receivable, inventories and a revolving credit facility (the "Facility"). At March 31, 2001, working capital was $41,309,000, including $11,940,000 of cash and cash equivalents. Cash provided by operating activities aggregated $4,491,000 for the three months ended March 31, 2001. Trade accounts receivable increased 19.3% from December 31, 2000 and inventories decreased 9.9% since December 31, 2000 primarily as a result of normal seasonality, as well as continuing efforts to reduce inventory levels in light of the Company's expectations for reduced sales levels in 2001. The Facility provides for borrowings up to $50,000,000, subject to a borrowing base up to 85% of eligible accounts receivable and 65% of eligible inventory, as defined. Up to $15,000,000 of borrowings may be in the form of letters of credit. Borrowings bear interest at the lender's prime rate (8.00% at March 31, 2001) 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 Facility includes a tangible net worth covenant. At March 31, 2001, the Company was in compliance with the terms and covenants of the agreement. On March 31, 2001, the Company had no outstanding borrowings under the Facility and outstanding letters of credit aggregated $3,438,000. The Company had credit availability under the Facility of $14,687,000 at March 31, 2001. Capital expenditures totaled $695,000 for the three months ended March 31, 2001. The Company's capital expenditures related primarily to various hardware and software purchases in conjunction with the Company's implementation of a new ERP computer system, which is expected to be placed into service later this year. The Company currently has no material future commitments for capital expenditures. The Company's Board of Directors has authorized the repurchase of 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 300,000 shares in 1996 for cash consideration of $2,390,000, 330,000 shares in 1997 for cash consideration of $2,581,000 and 343,000 shares in 1998 for cash consideration of $2,528,000. No shares were repurchased during 1999 or 2000 or the three months ended March 31, 2001. At March 31, 2001, 1,227,000 shares remained 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 now expires December 31, 2003. The Company paid Mr. Thatcher $1.6 million in March 2001 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, 13
16 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 annual average of the aggregate net sales for all Teva products for the two calendar years since January 1, 2000 with the highest aggregate 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 $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 14
17 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 (excluding the possible acquisition of Teva). 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, the Company's 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 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 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. 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. Item 3. Quantitative and Qualitative Disclosures About Market Risk Derivative Instruments The Company does not invest, and during the three months ended March 31, 2001, 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 (the "Facility") provides for interest on outstanding borrowings at prime rate, or at the Company's election at an adjusted Eurodollar rate plus 2%. At March 31, 2001, the Company had no outstanding borrowings under the Facility. 15
18 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES PART II. OTHER INFORMATION Item 1. Legal Proceedings. An action was brought against the Company in 1995 by Molly Strong-Butts and Yeti by Molly, Ltd. (collectively, "Molly") which alleged, among other things, that the Company violated a certain nondisclosure agreement and obtained purported trade secrets regarding a line of winter footwear which Deckers stopped producing in 1994. A jury verdict was obtained against the Company in March 1999 aggregating $1,785,000 for the two plaintiffs. The Company is appealing the verdict and continues to believe such claims are without merit. The Company intends to continue contesting this claim vigorously. The Company, based on advice from legal counsel, does not anticipate that the ultimate outcome will have a material adverse effect upon its financial condition, results of operations or cash flows. Item 2. Changes in Securities. Not applicable Item 3. Defaults upon Senior Securities. Not applicable Item 4. Submission of Matters to a Vote of Security Holders. Not applicable Item 5. Other Information. Not applicable Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 10.20 Employment Agreement dated February 27, 2001, between Deckers Outdoor Corporation and Peter Benjamin (b) Reports on Form 8-K. None 16
19 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES Signature Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Deckers Outdoor Corporation Date: May 14, 2001 /s/ M. Scott Ash -------------------------------------- M. Scott Ash, Chief Financial Officer (Duly Authorized Officer and Principal Financial and Accounting Officer) 17