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, 1997 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 022446 DECKERS OUTDOOR CORPORATION (Exact name of registrant as specified in its charter) Delaware 953015862 - -------------------------------------------------------------------------------- (State or other jurisdiction of incorporation or IRS Employer Identification organization) 495A S. 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, 1997 ---------------------------- ----------------- Common stock, $.01 par value 8,930,531
2 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES Table of Contents <TABLE> <CAPTION> Page ---- <S> <C> Part I. Financial Information Item 1. Financial Statements Condensed Consolidated Balance Sheets as of March 31, 1997 and December 31, 1996 1 Condensed Consolidated Statements of Earnings for the Three-Month Period Ended March 31, 1997 and 1996 2 Condensed Consolidated Statements of Cash Flows for the Three-Month Period Ended March 31, 1997 and 1996 3-4 Notes to Condensed Consolidated Financial Statements 5-6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7-10 Part II. Other Information Item 1. Legal Proceedings 11 Item 2. Changes in Securities 11 Item 3. Defaults upon Senior Securities 11 Item 4. Submission of Matters to a Vote of Security Holders 11 Item 5. Other Information 11 Item 6. Exhibits and Reports on Form 8-K 11 Signature 12 </TABLE>
3 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES Condensed Consolidated Balance Sheets (Unaudited) <TABLE> <CAPTION> ASSETS MARCH 31, DECEMBER 31, 1997 1996 ------------ ------------ <S> <C> <C> Current assets: Cash and cash equivalents $ 1,481,000 1,287,000 Trade accounts receivable, less allowance for doubtful accounts of $1,491,000 and $1,292,000 as of March 31, 1997 and December 31, 1996, respectively 28,975,000 17,866,000 Inventories 21,336,000 24,930,000 Prepaid expenses and other current assets 2,359,000 3,643,000 Deferred tax assets 1,622,000 1,622,000 ------------ ------------ Total current assets 55,773,000 49,348,000 Property and equipment, at cost, net 2,668,000 2,794,000 Intangible assets, less applicable amortization 20,617,000 20,805,000 Note receivable from supplier, net 1,863,000 1,838,000 Other assets, net 250,000 112,000 ------------ ------------ $81,171,000 74,897,000 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt $ 101,000 99,000 Trade accounts payable 4,418,000 5,494,000 Accrued expenses 5,276,000 3,042,000 Income taxes payable 1,773,000 983,000 ------------ ------------ Total current liabilities 11,568,000 9,618,000 ------------ ------------ Long-term debt, less current maturities 12,789,000 10,290,000 Commitments and contingencies Stockholders' equity: Preferred stock, $.01 par value. Authorized 5,000,000 -- -- shares; none issued Common stock, $.01 par value. Authorized 20,000,000 shares; issued 9,293,431 and outstanding 8,958,556 at March 31, 1997; issued 9,283,556 and outstanding 8,983,556 at December 31, 1996 90,000 90,000 Additional paid-in capital 26,625,000 26,790,000 Retained earnings 30,099,000 28,109,000 ------------ ------------ Total stockholders' equity 56,814,000 54,989,000 ------------ ------------ $81,171,000 74,897,000 ============ ============ </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, ------------------------------- 1997 1996 ------------ ---------- <S> <C> <C> Net sales $ 34,441,000 28,772,000 Cost of sales 19,491,000 16,182,000 ------------ ------------ Gross profit 14,950,000 12,590,000 Selling, general and administrative expenses 10,770,000 9,849,000 Loss on factory closure 500,000 -- ------------ ------------ Earnings from operations 3,680,000 2,741,000 Other expense (income): Interest expense 252,000 282,000 Minority interest in net loss of subsidiary (81,000) (63,000) Miscellaneous expense (income) 4,000 (148,000) ------------ ------------ Earnings before income taxes 3,505,000 2,670,000 Income taxes 1,515,000 1,191,000 ------------ ------------ Net earnings $ 1,990,000 1,479,000 ============ ============ Net earnings per common and common equivalent shares $ 0.22 0.16 ============ ============ Weighted average common and common equivalent shares outstanding 9,040,000 9,304,000 ============ ============ </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, ------------------------------- 1997 1996 ------------ --------- <S> <C> <C> Cash flows from operating activities: Net earnings $ 1,990,000 1,479,000 ------------ ---------- Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Depreciation and amortization 663,000 460,000 Provision for doubtful accounts 450,000 1,235,000 Minority interest in net loss of subsidiary (81,000) (63,000) Loss on factory closure 500,000 -- Changes in assets and liabilities: Increase in trade accounts receivable (11,309,000) (6,077,000) Decrease in inventory 3,594,000 1,991,000 Decrease in prepaid expenses and other current assets 1,284,000 1,347,000 Decrease in refundable income taxes -- 2,418,000 Increase in note receivable from supplier (275,000) (196,000) Decrease (increase) in other assets (263,000) 357,000 Decrease in accounts payable (1,076,000) (58,000) Increase in accrued expenses 2,315,000 1,480,000 Increase in income taxes payable 790,000 -- ------------ ---------- Total adjustments (3,408,000) 2,894,000 ------------ ---------- Net cash provided by (used in) operating activities (1,418,000) 4,373,000 ------------ ---------- Cash flows from investing activities: Purchase of property and equipment (724,000) (220,000) ------------ ---------- Net cash used in investing activities (724,000) (220,000) ------------ ---------- </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, --------------------------- 1997 1996 --------- ---------- <S> <C> <C> Cash flows from financing activities: Proceeds from (repayments of) notes payable and long-term debt 2,501,000 (3,800,000) Repurchase of common stock (165,000) -- Other -- 21,000 ----------- ---------- Net cash provided by (used in) financing activities 2,336,000 (3,779,000) ----------- ---------- Net increase in cash and cash equivalents 194,000 374,000 Cash and cash equivalents at beginning of period 1,287,000 3,222,000 ----------- ---------- Cash and cash equivalents at end of period $ 1,481,000 3,596,000 =========== ========== Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 245,000 269,000 Income taxes 726,000 141,000 =========== ========== </TABLE> Supplemental disclosure of noncash investing and financing activities: In connection with the repurchase of outstanding stock options of a subsidiary from the Founder of the subsidiary during the three month period ended March 31, 1996, the Company gave consideration of $2,111,000, consisting of notes payable to the Founder of $1,736,000 and the forgiveness of a $375,000 note receivable from the Founder. The Company allocated the entire purchase price to goodwill. 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 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 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, 1996 included in the Company's Annual Report on Form 10-K. (2) Earnings per Share Net earnings per share is based on the weighted average number of common and common equivalent shares outstanding. Common stock equivalents represent the number of shares which would be issued assuming the exercise of common stock options and reduced by the number of shares which could be purchased with the proceeds from the exercise of those options. Fully diluted net earnings per share are not presented since the amounts do not differ significantly from the primary net earnings per share presented. (3) Inventory Inventory at March 31, 1997 and December 31, 1996 is summarized as follows: <TABLE> <CAPTION> MARCH 31, DECEMBER 31, 1997 1996 ----------- ------------ <S> <C> <C> Raw materials $ 2,447,000 3,239,000 Work in process 974,000 1,197,000 Finished goods 17,915,000 20,494,000 ----------- ----------- Total inventory $21,336,000 24,930,000 =========== =========== </TABLE> 5
8 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements, Continued (Unaudited) (4) 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. (5) Legal Proceedings with Former Ugg Shareholders Some of the former shareholders of Ugg Holdings gave notice of a demand for arbitration regarding the periodic payments due under the acquisition agreement. These former shareholders are asserting claims that additional payments are due them. The Company does not believe these claims are meritorious. On April 23, 1997, the former shareholders filed their claims and the Company filed its counterclaims against the former shareholders. On May 7, 1997, the Company and the former shareholders had a status conference with the arbitrator. The date for arbitration is pending. (6) Recently Issued Pronouncements The Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share" ("FAS 128"), in February 1997. FAS 128 is effective for both interim and annual periods ending after December 15, 1997. The Company will adopt FAS 128 in the fourth quarter of 1997. FAS 128 requires the presentation of "Basic" earnings per share which represents income available to common shareholders divided by the weighted average number of common shares outstanding for the period. A dual presentation of "Diluted" earnings per share will also be required. The Diluted presentation is similar to the current earnings per share presentation. Management believes the adoption of FAS 128 will not have a material impact on the Company's earnings per share. 6
9 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Three Months Ended March 31, 1997 Compared to Three Months Ended March 31, 1996 Net sales increased by $5,669,000 or 19.7% between the three months ended March 31, 1997 and 1996. Sales of the Teva(R) line increased from $18,600,000 for the three months ended March 31, 1996 to $24,252,000 for the three months ended March 31, 1997, a 30.4% increase. Sales of Teva(R) products represented 64.6% and 70.4% of net sales in the three months ended March 31, 1996 and 1997, respectively. The Company experienced a continued increase in the net sales of footwear under the Simple(R) product line, which increased 15.3% from $7,983,000 to $9,206,000 between the three months ended March 31, 1996 and 1997. Overall, international sales for the Company's products increased 2.9% from $9,035,000 to $9,297,000, representing 31.4% of net sales in 1996 and 27.0% in 1997. The combination of these factors led to a net increase in the volume of footwear sold, which increased from 1,107,000 pairs during the three months ended March 31, 1996 to 1,319,000 pairs during the three months ended March 31, 1997, a 19.2% increase. The weighted average wholesale price per pair sold during these respective periods increased from $24.88 to $25.93 or by 4.2%. The increase in the average wholesale price primarily relates to the non-recurrence of the sale of certain Teva(R) sport sandals at discounted prices in the first quarter of 1996, which selling prices approximated the carrying value of the inventory. Cost of sales increased by $3,309,000 to $19,491,000 for the three months ended March 31, 1997, compared with $16,182,000 for the three months ended March 31, 1996, an increase of 20.4%. Gross profit increased by $2,360,000, or 18.7%, to $14,950,000 for the three months ended March 31, 1997 from $12,590,000 for the three months ended March 31, 1996 and decreased as a percentage of net sales to 43.4% from 43.8%. The slight decrease in gross profit margin as a percentage of net sales is primarily the result of the closure of the Company's California manufacturing facility in March 1997. The Company recorded a $500,000 charge to operations for the closure during the three month period ended March 31, 1997. Selling, general and administrative expenses increased by $921,000, or 9.4%, between the three months ended March 31, 1996 and March 31, 1997 and decreased as a percentage of net sales from 34.2% in 1996 to 31.3% in 1997. The $921,000 increase was the result of increased net sales. The decrease as a percentage of net sales was largely a result of the non-recurrence of certain Ugg operating expenses which occurred in the first quarter of 1996. These 1996 costs related to Ugg's Carlsbad facility, which was subsequently closed and integrated into Deckers' operations in the second quarter of 1996. In addition, the Company experienced lower bad debt expense in the first quarter of 1997 than in the first quarter of 1996. The decrease as a percentage of net sales also occurred as certain selling, general and administrative expenses include certain fixed costs and, therefore, total selling, general and administrative expenses do not fluctuate proportionately with changes in sales volume. Income taxes were $1,515,000 for the three months ended March 31, 1997, representing an effective income tax rate of 43.2% compared with income taxes of $1,191,000 for the three 7
10 months ended March 31, 1996, representing an effective income tax rate of 44.6%. The higher effective income tax rate in 1996 compared to 1997 is due to certain non-deductible expenses and losses being a greater proportion to earnings before income taxes in 1996 than in 1997. Such non-deductible items include the amortization of goodwill and losses at certain subsidiaries which are consolidated for financial reporting purposes but which are not consolidated for income tax reporting purposes. The Company had net earnings of $1,990,000 for the three months ended March 31, 1997 as compared with net earnings of $1,479,000 for the three months ended March 31, 1996, an increase of 34.6%, for the reasons discussed above. Outlook This outlook section contains a number of forward-looking statements, all of which are based on current expectations. Actual results may differ materially. Although net sales of the Simple(R) product line for the first quarter of 1997 increased 15.3% over net sales during the first quarter of 1996, the Company anticipates that sales of the Simple(R) line will not grow at the same rate as sales grew in 1996. The Company currently expects that sales of Simple(R) shoes in 1997 will be flat or slightly higher than sales in 1996. Sales of Ugg(R) footwear are expected to be slightly lower in 1997 than sales of Ugg(R) footwear in 1996, which were approximately $14.8 million. The Company anticipates that any decrease in the rate of sales growth or decrease in sales for the Simple(R) and Ugg(R) lines will be more than offset by sales of the Teva(R) product line. The foregoing forward-looking statements represent the Company's current analysis of trends and information. Actual results could be affected by a variety of factors. For example, the Company's results are directly dependent on consumer preferences, which are difficult to assess and can shift rapidly. Any shift in consumer preferences away from one or more of the Company's product lines could result in lower sales as well as obsolete inventory, both of which could 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. In addition, sales of each of the Company's different lines have historically been higher in different seasons, with the highest percentage of Teva(R) sales occurring in the first and second quarter of each year, the highest percentage of Simple(R) sales occurring in the third quarter and the highest percentage of Ugg(R) sales occurring in the fourth quarter. Consequently, the results for these product lines are highly dependent on results during these specified periods. The Company cautions the reader not to rely on the forward-looking statements in this section. They merely represent the Company's current assessment of trends and information and may not be indicative of actual future results. The Company disclaims any intent or obligation to update these forward-looking statements. Liquidity and Capital Resources The Company's liquidity consists of cash and cash equivalents, trade accounts receivable, inventories and a revolving credit facility. At March 31, 1997, working capital was $44,205,000 including $1,481,000 of cash and cash equivalents. Cash used in operating activities aggregated $1,418,000 for the three months ended March 31, 1997. Trade accounts receivable increased 62.2% from December 31, 1996 to March 31, 1997, largely due to increased Teva(R) sales 8
11 occurring primarily in the latter part of the first quarter of 1997. Inventories decreased 14.4% during this period for the same reason. The Company has a revolving credit facility with a bank (the "Facility"), providing a maximum borrowing availability of $25,000,000 based on certain eligible assets, as defined. The Facility can be used for working capital and general corporate purposes and expires August 1, 2000. Borrowings bear interest at the bank's prime rate (8.50% at March 31, 1997) plus up to 0.25%, depending on whether the Company satisfies certain financial ratios. Alternatively, the Company may elect to have borrowings bear interest at LIBOR plus 1.5% to 1.75%, depending on whether the Company satisfies such financial ratios. Up to $10,000,000 of borrowings may be in the form of letters of credit. The Facility is secured by substantially all assets of the Company. As of March 31, 1997, the Company had borrowed $11,525,000 under the Facility and had approximately $9,582,000 available for borrowings. The agreement underlying the Facility includes certain restrictive covenants which, among other things, require the Company to maintain certain financial tests. The Company was in compliance with all requirements as of March 31, 1997. The Company has an agreement with a supplier to provide financing for the start-up and the expansion of the supplier's operations, of which $1,863,000 (net of related allowance) was outstanding at March 31, 1997. The note is secured by all assets of the supplier and bears interest at the prime rate (8.50% at March 31, 1997) plus 1%. Capital expenditures totaled $724,000 for the three months ended March 31, 1997. The Company's capital expenditures related primarily to leasehold improvements associated with the Company's move to new facilities in Goleta, California. The Company currently has no material future commitments for capital expenditures. In connection with the acquisition of Ugg Holdings, Inc. in 1995, the Company is required to make further future payments equal to 2 1/2% of net sales of Ugg Holdings for the years ending March 31, 1996 through March 31, 2000, and an amount equal to earnings before income taxes of Ugg Holdings, as adjusted for certain items, for the year ended March 31, 1996. In May 1996, the Company made a $495,000 payment to the former shareholders related to its required payments for the year ended March 31, 1996. In 1996, the Company's Board of Directors authorized the repurchase of up to 300,000 shares from time to time in open market or in privately negotiated transactions, subject to price and market conditions. During 1996, the Company repurchased 300,000 shares of the Company's outstanding common stock for cash consideration of $2,390,000. In February 1997, the Company's Board of Directors authorized the repurchase of up to an additional 300,000 shares. During the three months ended March 31, 1997, the Company repurchased 25,000 shares for cash consideration of $166,000. From April 1, 1997 through May 8, 1997, the Company repurchased 37,900 shares for cash consideration of $259,000. The Company believes that internally generated funds, the available borrowings under its existing credit facilities and the cash on hand will provide sufficient liquidity to enable it to meet its current and foreseeable working capital requirements. 9
12 Seasonality Financial results for the outdoor and footwear industries are generally seasonal. Based on the Company's historical product mix, the Company would expect greater sales in the first and second quarters than in the third and fourth quarters. 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 The Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share" ("FAS 128"), in February 1997. FAS 128 is effective for both interim and annual periods ending after December 15, 1997. The Company will adopt FAS 128 in the fourth quarter of 1997. FAS 128 requires the presentation of "Basic" earnings per share which represents income available to common shareholders divided by the weighted average number of common shares outstanding for the period. A dual presentation of "Diluted" earnings per share will also be required. The Diluted presentation is similar to the current earnings per share presentation. Management believes the adoption of FAS 128 will not have a material impact on the Company's earnings per share. 10
13 PART II. OTHER INFORMATION Item 1. Legal Proceedings. Some of the former shareholders of Ugg Holdings gave notice of a demand for arbitration regarding the periodic payments due under the acquisition agreement. These former shareholders are asserting claims that additional payments are due them. The Company does not believe these claims are meritorious. On April 23, 1997, the former shareholders filed their claims and the Company filed its counterclaims against the former shareholders. On May 7, 1997, the Company and the former shareholders had a status conference with the arbitrator. The date for arbitration is pending. 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 Exhibit 10.37 Extension and Restatement of Employment Agreement between Diana M. Wilson and Deckers Outdoor Corporation, dated April 18, 1997. Exhibit 10.38 Limited Recourse Secured Promissory Note between Diana M. Wilson and Deckers Outdoor Corporation, dated April 18, 1997. Exhibit 10.39 Stock Pledge Agreement between Diana M. Wilson and Deckers Outdoor Corporation, dated April 18, 1997. Exhibit 11.1 Statement of Computation of Earnings per Share. (b) Reports on Form 8-K. None 11
14 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, 1997 ---------------------------------------------- M. Scott Ash, Chief Financial Officer (Duly Authorized Officer and Principal Financial and Accounting Officer) 12