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 June 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ Commission File Number 0-22446 DECKERS OUTDOOR CORPORATION (Exact name of registrant as specified in its charter) Delaware 95-3015862 (State or other jurisdiction of incorporation or IRS Employer Identification 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 August 4, 1999 Common stock, $.01 par value 9,019,612
2 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES Table of Contents <TABLE> <CAPTION> Page ---- <S> <C> <C> <C> Part I. Financial Information Item 1. Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheets as of June 30, 1999 and December 31, 1998 1 Condensed Consolidated Statements of Operations for the Three-Month Period Ended June 30, 1999 and 1998 2 Condensed Consolidated Statements of Operations for the Six-Month Period Ended June 30, 1999 and 1998 3 Condensed Consolidated Statements of Cash Flows for the Six-Month Period Ended June 30, 1999 and 1998 4-5 Notes to Condensed Consolidated Financial Statements 6-11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12-19 Part II. Other Information Item 1. Legal Proceedings 20 Item 2. Changes in Securities 20 Item 3. Defaults upon Senior Securities 20 Item 4. Submission of Matters to a Vote of Security Holders 20 Item 5. Other Information 20 Item 6. Exhibits and Reports on Form 8-K 20 Signature 21 </TABLE>
3 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES Condensed Consolidated Balance Sheets (Unaudited) <TABLE> <CAPTION> ASSETS JUNE 30, DECEMBER 31, 1999 1998 ---- ---- <S> <C> <C> <C> Current assets: Cash ................................................................. $ 4,819,000 263,000 Trade accounts receivable, less allowance for doubtful accounts of $1,656,000 and $1,204,000 as of June 30, 1999 and December 31, 1998, ............. 27,689,000 27,180,000 respectively Inventories, net ..................................................... 16,426,000 23,665,000 Prepaid expenses and other current assets ............................ 1,384,000 2,178,000 Refundable and deferred tax assets ................................... 1,357,000 6,023,000 ---------- ---------- Total current assets ........................................ 51,675,000 59,309,000 Property and equipment, at cost, net .......................................... 2,849,000 2,994,000 Intangible assets, less applicable amortization ............................... 22,698,000 20,702,000 Note receivable from supplier, net ............................................ 922,000 782,000 Other assets, net ............................................................. 468,000 586,000 ---------- ---------- $78,612,000 84,373,000 =========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current installments of long-term debt ............................... $ 121,000 6,236,000 Trade accounts payable ............................................... 5,399,000 7,947,000 Accrued expenses ..................................................... 2,862,000 2,991,000 Income taxes payable ................................................. 223,000 -- ---------- ---------- Total current liabilities ................................... 8,605,000 17,174,000 ---------- ---------- Long-term debt, less current installments ..................................... 12,379,000 15,199,000 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 9,985,064 shares and outstanding 9,012,112 shares at June 30, 1999; issued 9,495,631 shares and outstanding 8,522,679 shares at December 31, 1998 ............................. 90,000 85,000 Additional paid-in capital ........................................... 24,523,000 22,813,000 Retained earnings .................................................... 33,639,000 29,726,000 ---------- ---------- 58,252,000 52,624,000 Less note receivable from stockholder/former director ................ 624,000 624,000 ---------- ---------- Total stockholders' equity .................................. 57,628,000 52,000,000 ---------- ---------- $78,612,000 84,373,000 =========== ========== </TABLE> See accompanying notes to condensed consolidated financial statements.
4 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Operations (Unaudited) <TABLE> <CAPTION> THREE-MONTH PERIOD ENDED JUNE 30, ------------------------ 1999 1998 ----------- ----------- <S> <C> <C> Net sales ......................................... $31,360,000 31,142,000 Cost of sales ..................................... 17,604,000 18,220,000 ---------- ---------- Gross profit .................... 13,756,000 12,922,000 Selling, general and administrative expenses ...... 10,015,000 10,058,000 ---------- ---------- Earnings from operations ........ 3,741,000 2,864,000 Other expense (income): Interest expense, net ....................... 499,000 392,000 Miscellaneous expense (income) .............. 18,000 (4,000) ---------- ---------- Earnings before income taxes .... 3,224,000 2,476,000 Income taxes ...................................... 1,556,000 1,070,000 ---------- ---------- Net earnings .................... $1,668,000 1,406,000 ========== ========= Net earnings per share: Basic ....................................... $0.19 0.16 Diluted ..................................... 0.19 0.16 ========== ========= Weighted average shares: Basic ....................................... 8,723,000 8,704,000 Diluted ..................................... 9,004,000 8,727,000 ========== ========= </TABLE> See accompanying notes to condensed consolidated financial statements. 2
5 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Operations (Unaudited) <TABLE> <CAPTION> SIX-MONTH PERIOD ENDED JUNE 30, ---------------------- 1999 1998 ----------- ---------- <S> <C> <C> Net sales ....................................... $69,400,000 63,319,000 Cost of sales ................................... 38,421,000 36,860,000 ---------- ---------- Gross profit .................. 30,979,000 26,459,000 Selling, general and administrative expenses .... 22,684,000 20,206,000 ---------- ---------- Earnings from operations ...... 8,295,000 6,253,000 Other expense (income): Interest expense, net ..................... 1,130,000 686,000 Miscellaneous expense (income) ............ (13,000) 3,000 ---------- ---------- Earnings before income taxes .. 7,178,000 5,564,000 Income taxes .................................... 3,265,000 2,405,000 ---------- ---------- Net earnings .................. $ 3,913,000 3,159,000 ========== ========= Net earnings per share: Basic ..................................... $ 0.45 0.36 Diluted ................................... 0.44 0.36 ========== ========= Weighted average shares: Basic ..................................... 8,629,000 8,756,000 Diluted ................................... 8,866,000 8,780,000 ========== ========= </TABLE> See accompanying notes to condensed consolidated financial statements. 3
6 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited) <TABLE> <CAPTION> SIX-MONTH PERIOD ENDED JUNE 30, ---------------------- 1999 1998 ---------- --------- <S> <C> <C> <C> Cash flows from operating activities: Net earnings .......................................................... $ 3,913,000 3,159,000 ------------ ---------- Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization .................................... 1,527,000 1,308,000 Provision for doubtful accounts .................................. 780,000 333,000 Loss on disposal of assets ....................................... 38,000 24,000 Stock compensation ............................................... 34,000 84,000 Changes in assets and liabilities: (Increase) decrease in: Trade accounts receivable .................................. (1,289,000) (1,635,000) Inventories ................................................ 7,239,000 2,434,000 Prepaid expenses and other current assets .................. 794,000 (641,000) Refundable and deferred tax assets ......................... 4,666,000 (1,286,000) Note receivable from supplier .............................. (140,000) 302,000 Other assets ............................................... 68,000 (21,000) Increase (decrease) in: Accounts payable ........................................... (3,549,000) 756,000 Accrued expenses ........................................... (128,000) (1,192,000) Income taxes payable ....................................... 223,000 (22,000) ------------ ---------- Total adjustments ....................................... 10,263,000 444,000 ------------ ---------- Net cash provided by operating activities ............... 14,176,000 3,603,000 ------------ ---------- Cash flows from investing activities: Proceeds from sale of property and equipment .......................... -- 5,000 Purchase of property and equipment .................................... (758,000) (926,000) Cash paid in connection with Ugg acquisition .......................... -- (2,000,000) ------------ ---------- Net cash used in investing activities ................... (758,000) (2,921,000) ------------ ---------- </TABLE> (Continued) 4
7 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows, Continued (Unaudited) <TABLE> <CAPTION> SIX-MONTH PERIOD ENDED JUNE 30, ---------------------- 1999 1998 ---------- --------- <S> <C> <C> <C> Cash flows from financing activities: Net proceeds from (repayments of) long-term debt ...................... (8,935,000) 3,947,000 Cash paid for repurchases of common stock ............................. -- (2,159,000) Cash received from issuances of common stock .......................... 73,000 104,000 ------------ ---------- Net cash provided by (used in) financing activities .......... (8,862,000) 1,892,000 ------------ ---------- Net increase in cash ......................................... 4,556,000 2,574,000 Cash at beginning of period .................................................... 263,000 3,238,000 ------------ ---------- Cash at end of period .......................................................... $ 4,819,000 5,812,000 ============ ========== Supplemental disclosure of cash flow information: Cash paid during the period for: Interest .............................................................. $ 1,125,000 675,000 Income taxes .......................................................... 1,073,000 3,729,000 ============ ========== Supplemental disclosure of noncash investing and financing activities: In connection with the Teva License Agreement, dated June 7, 1999, the Company recorded an increase in intangible assets of $2,608,000 for the value of the Teva license paid for with indebtedness of $1,000,000 and issuance of 428,743 shares of common stock valued at approximately $1,608,000 </TABLE> See accompanying notes to condensed consolidated financial statements. 5
8 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 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, 1998 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 and six-month periods ended June 30, 1999 and 1998, 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: <TABLE> <CAPTION> THREE-MONTH PERIOD ENDED JUNE 30, ------------------------ 1999 1998 ---------- ---------- <S> <C> <C> <C> Net earnings ............................................ $1,668,000 1,406,000 ========= ========= Weighted average shares used in basic computation ....... 8,723,000 8,704,000 Dilutive stock options .................................. 281,000 23,000 ---------- --------- Weighted average shares used for diluted computation 9,004,000 8,727,000 ========= ========= </TABLE> 6
9 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (2) Earnings per Share (Continued) Options to purchase 317,000 shares of common stock at prices ranging from $5.50 to $13.75 were outstanding during the three-month period ended June 30, 1999 and options to purchase 582,000 shares of common stock at prices ranging from $7.50 to $15.00 were outstanding during the three-month period ended June 30, 1998, 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, the options were anti-dilutive. <TABLE> <CAPTION> SIX-MONTH PERIOD ENDED JUNE 30, ----------------------- 1999 1998 --------- --------- <S> <C> Net earnings ......................................................... $3,913,000 3,159,000 ========== ========= Weighted average shares used in basic computation .................... 8,629,000 8,756,000 Dilutive stock options ............................................... 237,000 24,000 ---------- --------- Weighted average shares used for diluted computation 8,866,000 8,780,000 ========== ========= </TABLE> Options to purchase 322,000 shares of common stock at prices ranging from $3.03 to $13.75 were outstanding during the six-month period ended June 30, 1999 and options to purchase 582,000 shares of common stock at prices ranging from $7.50 to $15.00 were outstanding during the six-month period ended June 30, 1998, 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, the options were anti-dilutive. (3) Inventories Inventories are summarized as follows: <TABLE> <CAPTION> JUNE 30, DECEMBER 31, 1999 1998 ----------- ----------- <S> <C> <C> Finished goods .. $15,906,000 22,396,000 Work in process . 24,000 35,000 Raw materials ... 496,000 1,234,000 ----------- ----------- Total inventories $16,426,000 23,665,000 =========== ========== </TABLE> 7
10 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (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. For the three months ended June 30, 1999, the Company had income tax expense of $1,556,000, representing an effective income tax rate of 48.3%. For the three months ended June 30, 1998, the Company had income tax expense of $1,070,000, representing an effective income tax rate of 43.2%. For the six months ended June 30, 1999, the Company had income tax expense of $3,265,000, representing an effective income tax rate of 45.5%. For the six months ended June 30, 1998, the Company had income tax expense of $2,405,000, representing an effective income tax rate of 43.2%. (5) Computer Software Costs In March 1998, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." The adoption of SOP 98-1 requires the Company to modify its method of accounting for software. The Company adopted SOP 98-1 effective January 1, 1999. The adoption of SOP 98-1 did not have a significant impact on the Company's financial position or results of operations. (6) Comprehensive Income The Company adopted Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income" on January 1, 1998. SFAS No. 130 establishes standards to measure all changes in equity that result from transactions and other economic events other than transactions with owners. Comprehensive income is the total of net earnings and all other non-owner changes in equity. Except for net earnings 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, net earnings approximated comprehensive income for each of the three and six-month periods ended June 30, 1999 and 1998. (7) Start-Up Activities The AICPA Accounting Standards Executive Committee issued Statement of Position 98-5 (SOP 98-5), "Reporting on the Costs of Start-Up Activities." SOP 98-5 requires that costs of start-up activities, including organization costs and retail store openings, be expensed as incurred. The Company adopted SOP 98-5 on January 1, 1999. The adoption of this statement did not have a material impact on the Company's financial position or results of operations. (8) Recently Issued Pronouncements The Financial Accounting Standards Board has issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 modifies the accounting for derivative and hedging activities and is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. Since the Company does not presently invest in derivatives or engage in hedging activities, SFAS No. 133 is not expected to impact the Company's financial position or results of operations. 8
11 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (9) Business Segments The Company's accounting policies of the segments and the basis for segmentation are the same as those at December 31, 1998. The Company evaluates performance based on net revenues and profit or loss from operations. The Company's reportable segments are strategic business units that offer geographic brand images. They are managed separately because each business unit requires different marketing, research and development, design, sourcing and sales strategies. The Teva-domestic operating segment includes shared costs of the consolidated group, including domestic payroll costs, facilities costs, warehouse costs and other administrative costs. The Company has allocated costs to the Simple-domestic, Ugg-domestic and other segments based on a percentage of revenues for each of these segments. Because each segment's sales volume and the resulting allocation of shared costs continually change, the allocations to individual segments may or may not be reflective of the actual costs directly attributable to each segment. In addition, virtually all shared assets, capital expenditures and the related depreciation of these assets are generally included in the Teva-domestic segment. As a result, this segment has a disproportionately high amount of these items, while the other segments have a disproportionately low amount. Business segment information for the six months ended June 30, 1999 and 1998 is summarized as follows: <TABLE> <CAPTION> 1999 1998 ------------ ------------- <S> <C> <C> Sales to external customers: Teva, domestic ........................... $ 45,080,000 40,242,000 Simple, domestic ......................... 5,471,000 7,379,000 Ugg, domestic ............................ 424,000 239,000 Other .................................... 18,425,000 15,459,000 ------------ ------------ $ 69,400,000 63,319,000 ============ ============ Intersegment sales: Teva, domestic ........................... $ 677,000 1,009,000 Simple, domestic ......................... -- 146,000 Other .................................... 123,000 4,198,000 ------------ ------------ $ 800,000 5,353,000 ============ ============ Earnings (loss) from operations: Teva, domestic ........................... $ 5,221,000 4,977,000 Simple, domestic ......................... 988,000 47,000 Ugg, domestic ............................ (1,352,000) (1,306,000) Other .................................... 3,335,000 2,454,000 ------------ ------------ $ 8,192,000 6,172,000 ============ ============ </TABLE> 9
12 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (9) Business Segments (Continued) <TABLE> <CAPTION> 1999 1998 ------------ ------------- <S> <C> <C> Total assets: Teva, domestic ... $ 64,979,000 56,161,000 Simple, domestic.. 8,469,000 12,456,000 Ugg, domestic .... 20,913,000 18,548,000 Other ............ 10,869,000 14,653,000 ------------ ------------- $105,230,000 101,818,000 ============ ============ </TABLE> The reconciliation of segment earnings from operations to consolidated earnings before income taxes is as follows: <TABLE> <CAPTION> 1999 1998 ----------- ----------- <S> <C> <C> Total earnings from operations for reportable segments ......... $ 8,192,000 6,172,000 Intersegment profit change in beginning and ending inventory... 103,000 81,000 ----------- ----------- Consolidated earnings from operations ...................... 8,295,000 6,253,000 Interest expense, net ............... 1,130,000 686,000 Other expense (income) .............. (13,000) 3,000 ----------- ----------- Consolidated earnings before income taxes .................... $ 7,178,000 5,564,000 =========== =========== </TABLE> (10) Contingencies A judgment aggregating $1,785,000 was entered against the Company in May 1999 in an action brought against the Company in 1995 in the United States District Court, District of Montana (Missoula Division). The judgment was for breach of a non-disclosure contract, among other things. The Company is appealing the judgment and continues to believe such claims are without merit. The plaintiffs have filed a motion to increase their damage award, which the Company has opposed. 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. 10
13 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (10) Contingencies (Continued) The European Commission has enacted anti-dumping duties of 49.2% on certain types of footwear imported into Europe from China and Indonesia. Dutch Customs has issued an opinion to the Company that certain popular Teva styles are covered by this anti-dumping duty legislation. The Company does not believe that these styles are covered by the legislation and is working with Customs to resolve the situation. In the event that Customs makes a final determination that such styles are covered by the anti-dumping provisions, the Company expects that it would have an exposure to prior anti-dumping duties from 1997 of up to approximately $500,000. In addition, if Customs determines that these styles are covered by the legislation, the duty amounts could cause such products to be too costly to import into Europe from China in the future. As a result, the Company may have to cease shipping such styles from China into Europe in the future or may have to begin to source these styles from countries not covered by the legislation. As a precautionary measure, the Company has obtained 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 unable to predict the outcome of this matter and the effect, if any, on the Company's results of operations, financial condition and cash flows. (11) License Agreement On June 7, 1999, the Company signed a new license agreement (the "License Agreement") for Teva, which becomes effective January 1, 2000. Under the License Agreement, the Company receives the exclusive worldwide rights for the manufacture and distribution of Teva footwear through 2004. The License Agreement is automatically renewed through 2008 and through 2011 under two renewal options, provided that minimum required sales levels are achieved. As with the previous arrangement, the new license agreement provides for a sliding scale of royalty rates, depending on sales levels. Additionally, the Company has agreed to increase the contractual marketing expenditure, depending on sales levels and varying by territory, effective June 7, 1999. As additional consideration, the Company has agreed to pay the licensor a licensing fee of $1,000,000 and has issued the licensor 428,743 shares of its previously unissued common stock at $3.75 per share, the market value on the date of the License Agreement. These shares are subject to various contractual and other holding period requirements. In addition, the Company has agreed to grant the licensor not less than 50,000 stock options on the Company's common stock annually, at the fair market value on the date of grant. The Company also received an option to buy Teva and all of its assets, including all worldwide rights to all Teva products. The option price is based on formulas tied to net sales and varies depending on when the option is exercised. The Company's option is exercisable during the period from January 1, 2000 to December 31, 2001 or during the period from January 1, 2006 to December 31, 2008. If the Company does not exercise its option to acquire Teva, the licensor has the option to acquire the Teva distribution rights from the Company for the remainder of the license term. The licensor's option is exercisable during the period from January 1, 2010 to December 31, 2011 and the option price is based on a formula tied to the Company's earnings before interest, taxes, depreciation and amortization. Apparel and other non-footwear products are not covered by the License Agreement. However, the Company intends to continue to deliver its Spring 2000 Teva apparel line under the previous apparel license agreement. Following the Spring 2000 season, the Company intends to transition out of Teva apparel and is working with the licensor in this regard. 11
14 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, 1998. 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 operating expense expectations, the potential imposition of certain customs duties, the potential impact of certain litigation, the potential impact of the Year 2000 on the Company and the impact of seasonality on the Company's operations. Actual results may vary. Some of the factors that could cause actual results to differ materially from those in the forward looking statements are identified in the accompanying "Outlook" section of this Quarterly Report on Form 10-Q. Three-months Ended June 30, 1999 Compared to Three-months Ended June 30, 1998 For the three months ended June 30, 1999, net sales increased by $218,000, or 0.7%, from the comparable three months ended June 30, 1998. Aggregate net sales of Teva increased to $26,756,000 for the three months ended June 30, 1999 from $25,706,000 for the three months ended June 30, 1998, a 4.1% increase. This increase was a result of overall strength in the sandal market and increased demand for Teva products. Aggregate net sales of Teva represented 85.3% and 82.5% of net sales in the three months ended June 30, 1999 and 1998, respectively. Aggregate net sales of footwear under the Simple product line decreased 18.7% to $3,640,000 from $4,479,000 from the comparable three months ended June 30, 1998. The decrease in Simple sales occurred due to a decline in demand for the Simple products caused by a variety of factors including competition, an abundance of similar products at retail and a general decrease in the popularity of the products. Due to the highly seasonal nature of Ugg's business, sales of Ugg are insignificant in the second quarter of the year. Overall, international sales for all of the Company's products increased 12.6% to $8,035,000 from $7,133,000, representing 25.6% of net sales in 1999 and 22.9% in 1998. The volume of footwear sold increased 6.9% to 1,250,000 pairs during the three months ended June 30, 1999 from 1,169,000 pairs during the three months ended June 30, 1998, for the reasons discussed above. The weighted average wholesale price per pair sold during the three months ended June 30, 1999 decreased 6.9% to $23.95 from $25.72 for the three months ended June 30, 1998. The decrease was primarily due to a reduction in European selling prices for several styles, a slight shift in sales mix toward several lower priced styles and the reduction of the standard wholesale price of a leading women's style in 1999 versus 1998. Cost of sales decreased by $616,000, or 3.4%, to $17,604,000 for the three months ended June 30, 1999, compared with $18,220,000 for the three months ended June 30, 1998. Gross profit increased by $834,000, or 6.5%, to $13,756,000 for the three months ended June 30, 1999 from $12,922,000 for the three months ended June 30, 1998 and increased as a percentage of net sales to 43.9% from 41.5%. The increase in gross margin during the quarter was due to several factors including improved product sourcing, a reduction in airfreight costs, a reduction in materials write-downs and the exiting of the components business which typically carried a lower gross margin. Selling, general and administrative expenses decreased slightly by $43,000, or 0.4%, for the three months ended June 30, 1999, compared with the three months ended June 30, 1998, and decreased as a percentage of net sales to 31.9% in 1999 from 32.3% in 1998. The decrease in selling, general and administrative expenses as a percentage of net sales was primarily due to decreased marketing costs during the quarter, as certain marketing costs were incurred earlier in the year in 1999 than in 1998. As a result, while the year-to-date marketing costs increased versus the same period in 1998, the marketing costs incurred in the second quarter of 1999 were lower than those incurred in the second quarter of 1998. In addition, the 12
15 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES Company experienced a reduction in payroll costs, partially offset by increases in bad debt expense, legal fees and warehouse costs. Also, selling, general and administrative costs as a percentage of sales decreased as certain selling, general and administrative expenses are fixed and did not fluctuate in proportion to the sales increase during the quarter. Net interest expense was $499,000 for the three months ended June 30, 1999 compared with $392,000 for the three months ended June 30, 1998, primarily due to increased borrowings on the Company's credit facility in the current year. For the three months ended June 30, 1999, the Company recorded income tax expense of $1,556,000, representing an effective income tax rate of 48.3%. For the three months ended June 30, 1998, the Company recorded income tax expense of $1,070,000, representing an effective income tax rate of 43.2%. 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. During the three-month period ended June 30, 1999, the Company estimated that certain non-deductible expenses, including goodwill amortization associated with the acquisitions of Simple Shoes, Inc. and Ugg Holdings, Inc., would be a greater proportion of earnings before income taxes for 1999 than the estimates for such items made in the three-month period ended June 30, 1998, which was the principal cause for the increase in the tax rate. Net earnings increased 18.6% to $1,668,000 for the three months ended June 30, 1999 versus net earnings of $1,406,000 for the three months ended June 30, 1998, for the reasons discussed above. Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998 For the six months ended June 30, 1999, net sales increased by $6,081,000, or 9.6%, from the comparable six months ended June 30, 1998. Aggregate net sales of Teva increased to $59,700,000 for the six months ended June 30, 1999 from $48,927,000 for the six months ended June 30, 1998, a 22.0% increase. This increase was a result of overall strength in the sandal market and increased demand for the Teva products. Aggregate net sales of Teva represented 86.0% and 77.3% of net sales in the six months ended June 30, 1999 and 1998, respectively. Aggregate net sales of footwear under the Simple product line decreased 31.6% to $7,582,000 from $11,091,000 from the comparable six months ended June 30, 1998. The decrease in Simple sales occurred due to a decline in demand for the Simple products caused by a variety of factors including competition, an abundance of similar products at retail, and a general decrease in the popularity of the products. Aggregate net sales of Ugg footwear were $424,000 for the six months ended June 30, 1999 and $239,000 for the six months ended June 30, 1998. Due to the highly seasonal nature of Ugg's business, the first half of the year is generally a low volume period for Ugg sales. Overall, international sales for all of the Company's products increased 18.9% to $18,624,000 from $15,665,000, representing 26.8% of net sales in 1999 and 24.7% in 1998. The volume of footwear sold increased 12.5% to 2,653,000 pairs during the six months ended June 30, 1999 from 2,358,000 pairs during the six months ended June 30, 1998, for the reasons discussed above. The weighted average wholesale price per pair sold during the six months ended June 30, 1999 decreased 2.0% to $25.05 from $25.57 for the six months ended June 30, 1998. The decrease was primarily due to a reduction in European selling prices for several styles, a slight shift in sales mix toward several lower priced styles and the reduction of the standard wholesale price of a leading women's style in 1999 versus 1998. Cost of sales increased by $1,561,000, or 4.2%, to $38,421,000 for the six months ended June 30, 1999, compared with $36,860,000 for the six months ended June 30, 1998. Gross profit increased by $4,520,000, or 17.1%, to $30,979,000 for the six months ended June 30, 1999 from $26,459,000 for the six months ended June 30, 1998 and increased as a percentage of net sales to 44.6% from 41.8%. The increase in gross margin was due to several factors, including improved product sourcing, the exiting of the components 13
16 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES business which typically carried a lower gross margin and a reduction in the impact of closeouts versus the same period last year. In addition, the Company experienced a reduction in airfreight costs and materials write-downs versus the same period last year. Selling, general and administrative expenses increased by $2,478,000, or 12.3%, for the six months ended June 30, 1999, compared with the six months ended June 30, 1998, and increased as a percentage of net sales to 32.7% in 1999 from 31.9% in 1998. The increase in selling, general and administrative expenses as a percentage of net sales was primarily due to nearly $1,000,000 of special charges incurred during the six months ended June 30, 1999. These costs include legal and other expenses associated with a lawsuit brought against the Company in 1995 in Montana, as well as severance costs in connection with a corporate restructuring. See discussion under "Legal Proceedings." In addition, the Company experienced increased bad debt expenses, warehouse costs, marketing costs and apparel-related expenses, partially offset by a reduction in payroll costs which resulted from the Company's restructuring. Net interest expense was $1,130,000 for the six months ended June 30, 1999 compared with $686,000 for the six months ended June 30, 1998, primarily due to increased borrowings on the Company's credit facility in the current year. For the six months ended June 30, 1999, the Company recorded income tax expense of $3,265,000, representing an effective income tax rate of 45.5%. For the six months ended June 30, 1998, the Company recorded income tax expense of $2,405,000, representing an effective income tax rate of 43.2%. 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. During the six-month period ended June 30, 1999, the Company estimated that certain non-deductible expenses, including goodwill amortization associated with the acquisitions of Simple Shoes, Inc. and Ugg Holdings, Inc., would be a greater proportion of earnings before income taxes for 1999 than the estimates for such items made in the six-month period ended June 30, 1998, which was the principal cause for the increase in the tax rate. Net earnings increased 23.9% to $3,913,000 for the six months ended June 30, 1999 versus net earnings of $3,159,000 for the six months ended June 30, 1998, for 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 operating expense expectations, the potential imposition of certain customs duties, the potential impact of certain litigation, the potential impact of the Year 2000 on the Company and the impact of seasonality on the Company's operations. All of the forward-looking statements are based on current expectations. Actual results may differ materially for a variety of reasons, including the reasons discussed below. Sales and Operating Expense Expectations. For the year ending December 31, 1999, the Company expects that net sales for Teva will be greater than net sales for the previous year, but the Company expects that increase to be significantly less than that experienced for the six-month period ended June 30, 1999. The Company expects net sales under the Ugg product line to increase for the year ending December 31, 1999 compared to last year and expects net sales of the Simple product line to decrease in 1999 compared to 1998. Selling, general and administrative expenses for the year ended December 31, 1998 were 38.5% of net sales. The Company expects selling, general and administrative expenses, excluding the special charges for $1,000,000 incurred in the first quarter of 1999, to decrease as a percentage of sales for the year ended 14
17 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES December 31, 1999 compared to 1998 as a result of the Company's restructuring as well as continued efforts to control operating expenses. 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. In addition, 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. Consequently, the results during these specified periods are highly dependent on results for these product lines. 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 collect its accounts receivables; the Company's ability to secure and maintain adequate financing; the Company's ability to forecast and subsequently achieve those forecasts; the Company's ability to attract and retain key employees; and the general risks associated with doing international business including foreign exchange risks, duties, quotas and political instability. 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. Potential Imposition of Duties. The European Commission has enacted anti-dumping duties of 49.2% on certain types of footwear imported into Europe from China and Indonesia. Dutch Customs has issued an opinion to the Company that certain popular Teva styles are covered by this anti-dumping legislation. The Company does not believe that these styles are covered by the legislation and is working with Dutch Customs to resolve the situation. In the event that Dutch Customs makes a final determination that such styles are covered by the anti-dumping provisions, the Company expects that it would have an exposure to prior anti-dumping duties for 1997 of up to approximately $500,000. In addition, if Dutch Customs determines that these styles are covered by the legislation, the duty amounts could cause such products to be too costly to import into Europe from China in the future. As a result, the Company could have to cease shipping such styles from China into Europe in the future or could have to begin to source these styles from countries not covered by the legislation. As a precautionary measure, the Company has obtained 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 unable to predict the outcome of this matter and the effect, if any, on the Company's results of operations, financial condition and cash flows. Year 2000 Issue. The Year 2000 issue results primarily from computer hardware or software programs written using two digits to identify the year. These computer programs and hardware were designed and developed without consideration of the impact of the upcoming change in the century. As a result, such systems may not be able to properly distinguish between years that begin with a "20" and years that begin with a "19". If not corrected, such hardware and software programs could create erroneous information by 15
18 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES or at the year 2000. Two other related issues could also lead to incorrect calculations or failures: i) some systems' programming assigns special meaning to certain dates, such as 9/9/99, and ii) the fact that the year 2000 is a leap year. Any of these failures could cause the Company, or its customers or suppliers, to become unable to process normal business transactions accurately or at all. State of Readiness. The Company's Year 2000 compliance strategy includes several overlapping phases, which the Company has defined as follows: Identification - This phase involves the identification of the hardware and software systems used by the Company which could be adversely impacted by the Year 2000 issue. It includes identification of information technology ("IT") systems and non-IT systems (including telecommunications systems and systems associated with facilities - such as utilities and security, among others), as well as identification of the impact that Year 2000 issues may have on the Company's supply chain and key third party relationships (including customers, suppliers, transport systems and financing sources, among others). Analysis - This phase involves the determination of the likelihood, impact and magnitude of potential Year 2000 non-compliance for each of the items in the areas previously identified in the Identification phase. Conversion - This phase involves the development and execution of a plan to bring the previously identified items into Year 2000 compliance. Testing - This phase involves the testing of the various systems to ascertain that the conversion procedures were successful at bringing the systems into compliance. Implementation - This phase involves putting the various Year 2000 compliant systems into use in the Company's operations. The Company is continuing to assess the readiness of its various systems for handling the Year 2000 issue. The Company determined that the version of the software that operated the Company's enterprise business systems prior to 1999 was not Year 2000 compliant. These enterprise business systems include the Company's systems for order entry and processing, allocations, inventory, accounts receivable, accounts payable and financial reporting. In late 1998, the Company received the current version of the underlying software, which the software vendor has stated is Year 2000 compliant. The Company has completed the Implementation phase of its Year 2000 strategy with respect to its enterprise business systems. While the Company has performed successful testing and implementation of this enterprise business system, the Company expects to continue to perform additional testing, including integration testing between its IT systems, through September 30, 1999. With respect to the various components of the Company's remaining IT systems, including desktops, networks and several departmental hardware and software systems, and its non-IT systems, the Company is in varying stages of the Conversion and Testing phases. The Company currently expects completion of the Conversion, Testing and Implementation phases for the majority of the Company's remaining IT systems and non-IT systems by September 30, 1999. The Company's plan for addressing the readiness of its key external business partners includes requesting information from these partners regarding their own readiness to address their Year 2000 issues, and an assessment of the potential impact that any non-compliance might have on the Company's operations. The Company has requested compliance information from key business partners and has begun to receive responses. The Company may continue to add additional business partners to its Year 2000 program as the Company's Year 2000 readiness plan progresses. The various phases for this segment are expected to continue throughout 1999. Estimated Costs. The Company currently estimates that total costs related to all phases of the Year 2000 strategy with respect to its enterprise business systems will aggregate $350,000. This estimate is for outside goods and service providers only. The estimate does not include the time and costs associated with its in- 16
19 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES house employees, the amount of which is not currently determinable. In addition, the estimated costs to bring the remaining IT and non-IT systems into compliance and to address and remedy any non-compliance issues at its key business partners are not yet determinable, but will likely exceed $200,000. These costs are expected to be funded through operating cash flows and the Company's bank facility. The Company does not currently anticipate using any independent verification or validation processes. The Company anticipates that the Year 2000 compliance efforts will ultimately result in the deferral of other IT projects. However, the deferral of such projects is not expected to have a material adverse impact on the Company's results of operations, financial condition or cash flows. The estimated Year 2000 compliance costs are based on the Company's current assessment of its Year 2000 situation and could change significantly as the Year 2000 compliance strategy progresses. As of June 30, 1999, the Company had incurred Year 2000 compliance costs of approximately $225,000. Risks and Contingency Plan. Although the Company is not aware of any material operational issues associated with preparing its internal systems for the year 2000, there can be no assurance that there will not be a delay in, or increased costs associated with, the implementation of the necessary systems and changes to address the Year 2000 issues, and the Company's inability to implement such systems and changes in a timely manner could have a material adverse effect on future results of operations, financial condition and cash flows. The potential inability of the Company's business partners to address their own Year 2000 issues sufficiently and timely remains a risk which is difficult to assess. Among other things, the Company is currently highly dependent on the combination of approximately 12 key suppliers, primarily located in the Far East, for the production of its footwear products. In addition, the Company is dependent on various parties which are involved in the transportation and delivery of the Company's products to its worldwide distribution centers. The failure of one or more of these suppliers or other parties to adequately address their own Year 2000 issues could cause them to be unable to manufacture or deliver product to the Company on a timely basis, materially adversely impacting the Company's results of operations, financial condition and cash flows. In addition, the inability of one or more of the Company's significant customers to become compliant could adversely impact the customers' operations, thus impacting the Company's sales and subsequent collections with respect to those customers. The Company's Year 2000 compliance efforts are subject to many additional risks including the following, among others: the Company's failure to adequately identify and analyze issues, convert to compliant systems, fully test converted systems, and implement compliant systems; unanticipated issues or delays in any of the phases of the Company's strategy; the inability of customers, suppliers and other business partners to become compliant; and the breakdown of local and global infrastructures resulting from the non-compliance of utilities, banking systems, transportation, government and communications systems. As the Company has not yet completed various phases of its internal readiness and has not yet determined the readiness of its key business partners, the Company cannot yet fully and accurately identify and quantify the most reasonably likely worst case Year 2000 scenario at this time. However, the Company is currently assessing scenarios and will take steps to mitigate the impact of these scenarios if they were to occur. This contingency planning has been completed for certain areas while the contingency plans for most areas are still in process. The Company expects to more fully address such contingencies by the end of the third quarter of 1999. The Company's above assessment of the risks associated with Year 2000 issues is forward-looking. Actual results may vary for a variety of reasons including those described above. Liquidity and Capital Resources 17
20 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES The Company's liquidity consists of cash, trade accounts receivable, inventories and a revolving credit facility. At June 30, 1999, working capital was $43,070,000, including $4,819,000 of cash. Cash provided by operating activities aggregated $14,176,000 for the six months ended June 30, 1999. Trade accounts receivable increased 1.9% from December 31, 1998 as a result of normal seasonality, the high volume of net sales during the quarter and an increase in the average collection periods. Inventories decreased 30.6% since December 31, 1998 primarily as a result of normal seasonality. On January 21, 1999, the Company replaced the existing credit facility with a new revolving credit facility (the "Facility") with a new lender. The Facility provides a maximum availability of $50,000,000, subject to a borrowing base of up to 85% of eligible accounts receivables, as defined, and 65% of eligible inventory, as defined. Up to $15,000,000 of borrowings may be in the form of letters of credit. The Facility bears interest at the lender's prime rate (7.75% at June 30, 1999), or at the Company's election at an adjusted Eurodollar rate plus 2%. The Facility is secured by substantially all assets of the Company. The agreement underlying the Facility includes a tangible net worth covenant. The Company was in compliance with the covenant at June 30, 1999. As a result of the Company's signing of the new Teva license agreement the expiration of the Facility has been extended through January 21, 2002. On June 30, 1999, the Company had outstanding borrowings under the Facility of $11,874,000, outstanding letters of credit aggregating $4,535,000 and borrowing availability of $3,812,000. Under the terms of the Facility, if the Company terminates the arrangement prior to the expiration date of the Facility, the Company may be required to pay the lender an early termination fee ranging between 1% and 3% of the Facility's commitment amount, depending upon when such termination occurs. The Company has an agreement with a supplier, Prosperous Dragon, to provide financing for the supplier's operations, of which $2,422,000 was outstanding at June 30, 1999 ($922,000 net of allowance). The note is secured by all assets of the supplier and bears interest at the prime rate (7.75% at June 30, 1999) plus 1%. Capital expenditures totaled $758,000 for the six months ended June 30, 1999. The Company's capital expenditures related primarily to molds purchased for use in the production process as well as various computer hardware and software purchases. The Company currently has no material future commitments for capital expenditures. The Company's Board of Directors has authorized the repurchase of up to 2,200,000 shares of common stock under a stock repurchase program. Such repurchases are authorized to be made from time to time in open market or in privately negotiated transactions, subject to price and market conditions as well as the Company's cash availability. Under this program, the Company repurchased 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 the six-month period ended June 30, 1999. At June 30, 1999, approximately 1,227,000 shares remained available for repurchase under the program. On June 7, 1999, the Company signed a new license agreement for Teva. Under the new license agreement, the Company receives the exclusive worldwide rights for the manufacture and distribution of Teva Footwear through 2004. The license agreement is automatically renewed through 2008 and through 2011 under two renewal options, provided that minimum annual sales levels are achieved. Apparel and other non-footwear products are not covered by the new license agreement. However, the Company intends to continue to deliver its Spring 2000 Teva apparel line under the previous apparel license agreement. Following the Spring 2000 season, the Company intends to transition out of Teva apparel and is working with the licensor in this regard. In connection with this license agreement, the Company has agreed to pay the licensor a licensing fee of $1,000,000 and issue the licensor 428,743 shares of previously unissued common stock, subject to various contractual and other holding period requirements. In addition, the Company entered into an agreement with the licensor which provides the Company with an option to buy Teva, including all worldwide rights. The option is exercisable during the period from January 1, 2000 to December 31, 2001 or during the period from January 1, 2006 to December 31, 2008. The option prices are based on a formula tied to sales of Teva products. The exercise of either option will require a significant amount of additional financing. There are no assurances that the additional financing will be available. 18
21 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES 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, 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 product lines have historically been higher in different seasons with the highest percentage of Teva sales occurring in the first and second quarter of each year and the highest percentage of Ugg sales occurring in the fourth quarter, while the quarter with the highest percentage of annual sales for Simple has varied from year to year. Based on the Company's historical experience, the Company would expect greater sales in the first and second quarters than in the third and fourth quarters. The actual results could differ materially depending upon consumer preferences, availability of product, competition, and the Company's customers continuing to carry and promote its various product lines, among other risks and uncertainties. See also the discussion regarding forward-looking statements under "Outlook". Other The Company believes that the relatively moderate rates of inflation in recent years have not had a significant impact on its net sales or profitability. Recently Issued Pronouncements For recently issued pronouncements, see Note 8 to the Condensed Consolidated Financial Statements. 19
22 DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES PART II. OTHER INFORMATION Item 1. Legal Proceedings. A judgment aggregating $1,785,000 was entered against the Company in May 1999 in an action brought against the Company in 1995 in the United States District Court, District of Montana (Missoula Division). The judgment was for breach of a non-disclosure contract, among other things. The Company is appealing the judgment and continues to believe such claims are without merit. The plaintiffs have filed a motion to increase their damage award, which the Company has opposed. 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. On May 17, 1999, the Company held its Annual Meeting of Stockholders. At the meeting, Douglas B. Otto and Gene E. Burleson were each re-elected as Class III directors until the Annual Meeting of Stockholders to be held in 2002, until such director's successor has been duly elected and qualified or until such director has otherwise ceased to serve as a director. For Douglas B. Otto, 7,904,911 votes were cast in favor and 141,127 votes were withheld. For Gene E. Burleson, 7,908,686 votes were cast in favor and 137,352 votes were withheld. There were no broker non-votes. The stockholders also ratified the selection of KPMG LLP as the Company's independent auditors. 8,022,726 votes were cast in favor of the ratification; 13,522 were voted against; and 9,790 abstained. There were no broker non-votes. Item 5. Other Information. Not applicable Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 10.41* Teva License Agreement, By and Between Mark Thatcher and Deckers Outdoor Corporation, dated June 7, 1999. 10.42* Intellectual Property Option Agreement, By and Between Mark Thatcher, an Individual, and Deckers Outdoor Corporation, a Delaware Corporation, dated June 7, 1999. (b) Reports on Form 8-K. None * Certain information in this Exhibit was omitted and filed separately with the Securities and Exchange Commission pursuant to a confidential treatment request as to the omitted portions of the Exhibit. 20
23 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: August 12, 1999 /s/ M. Scott Ash ---------------- M. Scott Ash, Chief Financial Officer (Duly Authorized Officer and Principal Financial and Accounting Officer) 21