e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark one)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2006
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission File
No. 0-22446
Deckers Outdoor
Corporation
(Exact name of registrant as
specified in its charter)
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Delaware
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95-3015862
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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495-A
South Fairview Avenue, Goleta, California
(Address of principal
executive offices)
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93117
(Zip Code)
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Registrants telephone number, including area code:
(805) 967-7611
Securities registered pursuant to Section 12(b) of the
Act: None
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Title of each class
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Name of each exchange on which registered
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Common Stock, Par value $0.01 per
share
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NASDAQ Global Select Market
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Securities registered pursuant to Section 12(g) of the
Act:
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15
(d) of the Exchange
Act. Yes o No þ
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 þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act.
Large accelerated
filer o Accelerated
filer þ Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The aggregate market value of the common stock held by
non-affiliates of the registrant was $432,536,813 based on the
June 30, 2006 closing price of $38.56 on the NASDAQ Global
Select Market on such date.
The number of shares of the registrants Common Stock
outstanding at February 28, 2007 was 12,592,688.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of registrants definitive proxy statement
relating to registrants 2007 annual meeting of
stockholders, which will be filed pursuant to
Regulation 14A within 120 days after the end of
registrants fiscal year ended December 31, 2006, are
incorporated by reference in Part III of this Form
10-K.
DECKERS
OUTDOOR CORPORATION
For the Fiscal Year Ended December 31, 2006
TABLE OF CONTENTS TO ANNUAL REPORT ON
FORM 10-K
3
PART I
Unless otherwise specifically indicated, all dollar amounts
herein are expressed in thousands, except for
weighted-average
wholesale prices per pair and suggested retail prices for
our footwear.
General
We are a leading designer, producer and brand manager of
innovative,
high-quality
footwear and the category creator in the sport sandal, luxury
sheepskin, and sustainable footwear segments. Our footwear is
distinctive and appeals broadly to men, women and children. We
sell our products through quality domestic retailers and
international distributors and directly to
end-user
consumers through our websites, catalogs and retail outlet
stores. Our primary objective is to build our footwear lines
into global lifestyle brands with market leadership positions.
We market our products under three proprietary brands:
Teva®. Teva
is our outdoor performance and lifestyle brand and pioneer of
the sport sandal market. The Teva brand was founded in the
1980s to serve the demanding footwear needs of the
professional river guide. This authentic heritage and commitment
to function and performance remain core elements of the Teva
brand. The Teva sport sandal line has expanded to include casual
open-toe
footwear, adventure travel shoes, outdoor cross training
shoes, trail running shoes, amphibious footwear and other rugged
outdoor footwear styles.
From 1985 until November 2002, we sold our Teva products
under a license agreement with the brands founder, Mark
Thatcher. In November 2002, we acquired all of the Teva
worldwide assets, including the Teva internet and catalog
business and all patents, trade names, trademarks and other
intellectual property associated with the acquired Teva assets,
which we refer to collectively as the Teva Rights. We
acquired the Teva Rights from Mr. Thatcher and his
wholly-owned
corporation, Teva Sport Sandals, Inc. The acquisition
enabled us to gain ownership of the Teva internet and catalog
business and allowed our brand managers to broaden the Teva
product offering. This expansion has increased the appeal of the
brand and enabled us to broaden distribution. The acquisition
also enabled us to:
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eliminate significant royalties and other license costs,
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explore license opportunities for the Teva brand, and
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enhance our ability to recruit and retain key senior management.
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UGG®. UGG
Australia is our luxury comfort brand and the category creator
for luxury sheepskin footwear. The UGG brand has enjoyed several
years of strong growth and positive consumer receptivity, driven
by consistent introductions of new styles, introductions of UGG
products in the fall and spring seasons and geographic expansion
of distribution. We carefully manage the distribution of our
in-line UGG
products within
high-end
specialty and department store retailers in order to best reach
our target consumers, preserve UGGs retail channel
positioning and maintain the UGG brands position as a
mid- to
upper-price
luxury brand.
The UGG brand gained brand recognition in the U.S. beginning in
1979 and was adopted as a favored brand by the California surf
community. We acquired the UGG brand in 1995 and have carefully
repositioned the brand as a luxury comfort collection sold
through
high-end
retailers. While our sales have grown steadily over the past
eight years, over the past few years sales of UGG products have
benefited from significant national media attention and
celebrity endorsement through our marketing programs and product
seeding activities, further raising the profile of UGG as a
luxury comfort brand. We intend to further support the UGG
brands market positioning by carefully expanding the
selection of styles available in order to build consumer
interest in our UGG collection. We also remain committed to
limiting distribution of UGG brand products through
high-end
retail channels.
Simple®. The
Simple brand is the world leader in sustainable footwear and
accessories. We feel that how we make Simple products is just as
important as why we make them. That means our goal is to find
more sustainable and innovative ways of doing business. We are
committed to making Simple products 100% sustainable; thus,
minimizing the ecological footprint left on the planet.
4
Through continued innovation, expansion of product offerings,
premium distribution and strategic marketing initiatives, we
have successfully developed three premier lifestyle brands. Our
total net sales increased by 15.0%, from $264,760 in 2005 to
$304,423 in 2006 and our income from operations decreased by
0.7% from $52,268 in 2005 to $51,910 in 2006, including a
$15,300 impairment loss on our Teva trademarks. For 2006,
wholesale shipments of
Teva®,
UGG®
and
Simple®
products aggregated $75,283, $182,369 and $10,903,
respectively, and represented 24.7%, 59.9% and 3.6% of our total
net sales, respectively. Sales of our brands through our
Consumer Direct division (which includes our internet, catalog
and retail outlets), which are in addition to our wholesale
shipments, were $35,868 representing 11.8% of total net sales in
2006.
History
We were founded by Doug Otto in 1973 as a domestic manufacturer
of sandals. We originally manufactured a single line of sandals
under the Deckers brand name in a small factory in
Carpinteria, California. Since then, we have grown through the
development and licensing of proprietary technology, targeted
marketing and selective acquisitions. In 1985, we entered into
our first license agreement for Teva sport sandals with
Tevas founder, Mark Thatcher. In 1986, we developed the
Universal Strapping System, establishing Teva as the sport
sandal category-creator and generating significant national
attention for the Teva brand.
We experienced a period of rapid growth during the late
1980s and completed our initial public offering in 1993.
As our sales grew, we terminated our manufacturing operations in
the United States, Mexico and Costa Rica, and today independent
manufacturers in China, New Zealand and Australia manufacture
all of our footwear products for us. We maintain our own offices
in China and Macau to monitor the operations of our
manufacturers in China.
In order to diversify our sales and leverage our product
development and sourcing capabilities, we completed the
acquisition of the Simple brand from its founder in a series of
transactions between 1993 and 1996. In 1995, we acquired the UGG
brand from its founders, after which we initiated a
repositioning of the line, focusing on comfort, luxury and
premium distribution channels and developing products that
appeal to consumers in a variety of climates.
Business
Strategies
We seek to differentiate our brands by offering diverse lines
that emphasize authenticity, functionality, quality and comfort
and products tailored to a variety of activities and demographic
groups. Key elements of our business strategies are:
Build Leading Global Brands. Our
mission is to build niche footwear lines into global brands with
market leadership positions. Our Teva and UGG brands began as
footwear lines appealing to a narrow core enthusiast market. We
have since built these lines into substantial global lifestyle
brands with potential for further growth and line extension.
Across our brands, our styles remain true to the brands
heritage but have been selectively extended over time to broaden
their appeal to men, women and children seeking high quality,
comfortable styles for everyday use. Furthermore, we actively
manage our brands to ensure that we reach brand appropriate
retail distribution channels. We believe that building our brand
image is best accomplished through a decentralized management
structure that empowers a single brand manager for each brand to
coordinate all aspects of brand image, from product development
to marketing and retail channel management.
Sustain Brand Authenticity. We believe
our ability to increase sales, sustain strong gross margins, and
maintain strong market share results, in part, from the appeal
of our brand heritage. We believe that Teva footwear consumers
are passionate and serious about the outdoors. Our marketing
programs focus on performance, and feature national advertising
in outdoor-oriented media as well as grass roots sponsorship of
outdoor events and professional athletes. These efforts
reinforce the Teva brands heritage and positioning as a
highly technical, performance-oriented footwear brand. Our UGG
brand marketing strategy positions our products as functional
footwear, but also as a premium, luxury collection. UGG products
are primarily marketed through national print advertising in
major magazines and through our retailers and their catalogs and
advertising. Historically, our marketing for UGG products has
been focused on women, but with the recent introduction of new
innovative mens styles, we are increasing our marketing
appeal to men through advertisements in national mens
magazines with a continued focus on lifestyle and comfort. We
promote our Simple brand by emphasizing that we are the only
shoe brand that makes fun, casual, sustainable footwear. Our
goal is to create a dialogue with the consumer through all
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communication vehicles and to show people that sustainability is
for everyone, not just environmentally conscious individuals.
Our print advertising campaigns include national publications
and alternative weekly publications in select cities around the
world. We also reach a targeted on-line consumer through
advertising on sustainability websites. In 2006, we also
sponsored environmental-themed concerts, film festivals, and
green expos to show that we are a leader in
sustainable footwear.
Drive Demand Through Innovation and Technical
Leadership. We believe our reputation for
innovation and technical leadership distinguishes our products
from those of our competitors and provides us with significant
competitive advantages. Just as our proprietary Universal
Strapping System set the performance standard for sport sandals
in the mid-1980s, more recent technical advances like our Spider
Rubber and our Teva
Wraptor®,
Wraptor-Lite®,
and Drain
Frametm
which we are introducing in 2007, all provide uncompromised
performance for the new outdoor athlete. Performance will always
be a key element of the Teva brand. We also continue to develop
innovative styles, products and product categories for our UGG
collection in order to support the UGG brands positioning
as a functional lifestyle brand, which can be worn in a variety
of climates and weather conditions. The UGG brand has benefited
from our continuing expansion into non-boot casuals,
sheepskin-trimmed footwear and styles combining sheepskin with
fine-grade suede and leathers, all designed to expand our market
share in new categories and increase our sales in both the fall
and spring selling seasons. In fact, for Spring 2006, the UGG
brand introduced its first ever line of open-toe sandals and
slides in a variety of styles and colorways that incorporated
thin layers of sheepskin for added comfort and luxury. The goal
of the Simple brand is to revolutionize the footwear industry by
being 100% sustainable. We believe there is a shift happening in
the global marketplace in regards to consumers leading a more
sustainable lifestyle. We are at the forefront of the industry
in leading with new sustainable material innovations, such as
using bamboo, organic cotton, natural latex and cork
combinations, recycled car tires, and recycled PET (old plastic
water bottles) throughout our product line. The Simple brand
will continue to innovate through working towards 100%
sustainability in design, development, and material applications.
Maintain Efficient Development and Production
Process. We believe our product development
processes enable us to produce leading edge products on a timely
and a cost effective basis. We design our products domestically.
We maintain
on-site
supervisory offices in Pan Yu City, China and Macau that serve
as local links to our independent manufacturers in China
enabling us to carefully monitor the production process, from
receipt of the design brief to production of interim and final
samples and shipment of finished product. We believe this local
presence provides greater predictability of material
availability, product flow and adherence to final design
specifications than we could otherwise achieve through an agency
arrangement.
Growth
Strategies
Our growth will depend upon our broadening of the products
offered under each brand, expanding domestic and international
distribution, licensing our brand names and developing or
acquiring new brands. Specifically, we intend to:
Introduce New Categories and Styles under Existing
Brands. We intend to increase our sales by
developing and introducing additional footwear products under
our existing brands that meet our high standards of performance,
practicality, authenticity, comfort and quality. We have
expanded the open-toe footwear category under our Teva brand by
launching new casual and performance styles, as well as several
new sandal styles that provide increased foot coverage and
protection. We have also introduced several closed-toe
performance styles and collections, including amphibious
footwear, light hikers, trail runners and outdoor cross
trainers. Further expansion into the casual outdoor footwear
market is planned, where the aggregate market is considerably
greater than the market size for the Teva brands core
sport sandals. We have expanded our UGG product collection to
incorporate additional styles and fabrications in order to
further penetrate the fall, spring and winter seasons. We have
expanded our mens and kids business and have
introduced a cold-weather series featuring sheepskin and
Vibram®
outsoles. For Spring 2006, we introduced a new line of open-toe
sandals and slides that incorporate a thin layer of sheepskin
for added luxury and comfort while our Fall 2006 line included a
variety of new categories and fabrications. For 2007, we will
continue to develop and expand these lines. As the
sustainability lifestyle movement is reaching the mainstream
market, we believe that the timing is more relevant than ever
for our brand positioning. Our goal is to lead the industry
through new product innovations and pursue new solutions to make
our business practices more sustainable. The influence of our
Green
Toe®
collection, products made from sustainable materials, will be
seen
6
throughout the entire Simple product line, especially in our
sneaker segment with the introduction of ecoSNEAKS. We will also
expand our kids collection with Green
Piggiestm.
This collection of products follows the same guidelines as Green
Toe. We round out the entire lifestyle of the Simple brand with
our bag collection, launched in the 2006 holiday season, and
plan to expand this collection in 2007. By introducing new
categories under our brands, in particular, the closed-toe
footwear under Teva and the spring product offerings under UGG,
we believe we will expand the selling seasons for our brands
which will result in increased sales and will contribute to a
more balanced year round business for each of these brands.
Grow Domestic Distribution. We believe
that we have significant opportunities to increase our sales by
expanding domestic distribution of our products. Our Teva brand
has historically been distributed through the outdoor specialty,
sporting goods and department store retail channels. We believe
we have the opportunity to expand our retail presence in each of
these channels. In addition, we see the potential for expansion
into the athletic specialty channel, as well as the running
specialty channel, with strategic and focused product and
marketing programs. The UGG brand originally realized a
substantial portion of its sales in California. Today, we have a
more balanced business, growing our business significantly in
the Midwest and North East. For our Simple line, we are focusing
distribution on specialty independent retailers, department
stores, outdoor retailers, and surf shops for our broad product
offering, as well as the introduction into the health and
wellness retail channel through our Green Toe offering of
ecologically friendly footwear. We also plan to expand through
the internet, as consumers have continued to increase reliance
on the internet for footwear and other purchases. Additionally,
we currently plan to open one or two more retail outlet stores
in select premium outlet malls in the U.S., as well as another
UGG brand concept store in a major metropolitan area by the end
of 2007.
Expand International Distribution. In
2006, our international net sales totaled $38,331, representing
approximately 12.6% of total net sales. Given the strength of
our brands domestically, we believe significant opportunities
exist for our brands and products in the international market.
During the year, and as part of our international growth
strategy, we strengthened our international team to develop our
brands and business into the future. In April of 2006 we opened
a European office in London and are in the process of setting up
a regional office in Hong Kong, where we have hired a Vice
President, Asia/Pacific. In addition, we hired a marketing
manager and other dedicated support staff to focus on the
international market.
During 2006, our product, marketing and retail distribution
objectives were clearly communicated around the world. We worked
diligently with our distributors to ensure these objectives were
supported to allow our business to be effectively positioned and
to achieve brand consistency. While there is much work to be
done to realize our full potential internationally, we believe
we made significant progress during 2006 in positioning and
preparing for future growth.
During 2007, we plan to recruit additional personnel to further
develop our brands and business internationally. This is to
ensure our global product and marketing strategies are
effectively implemented and our financial objectives are met. In
particular, we plan to strengthen our European structure with a
view to driving growth in this key region of the world.
Pursue Licensing of Brands in Complementary Product Lines.
We are actively pursuing selective licensing of our
brand names in product categories beyond footwear. Previously,
we introduced UGG licensed handbags, outerwear, and cold weather
accessories for the domestic market and initiated expansion into
select international markets, beginning with handbags. In 2006,
we launched our cold weather accessories and outerwear licenses
internationally. We also restructured our domestic Teva product
licensing program, which currently consists of mens and
womens headwear, a Canadian license for sportswear, and a
license for bags and packs for which we plan to begin deliveries
in the Spring 2007 season. We are developing additional
licensing programs carefully to ensure that licensed goods
remain consistent with our brands heritage. Because this
licensing strategy is in its early stages, and due to the lead
times required to bring the products to market, we have only
recently begun to recognize license revenues, and we do not
expect significant incremental net sales and profits from
licensing in the near future.
Build New Brands. We continue to
explore ways to expand the number of brands that we manage. We
have been successful previously in identifying entrepreneurial
concepts for innovative, fashionable footwear targeted at niche
markets and building these concepts into viable brands utilizing
our expertise in product development, production and marketing.
We intend to continue to identify and build or acquire new
brands that demonstrate potential for significant future growth.
7
Products
Our primary product lines are:
Teva Sport Sandals and
Footwear. The brand of choice for the
new outdoor athlete. We believe there has been a general
shift in consumer preferences and lifestyles to include more
outdoor recreational activities, including light hiking, trail
running, outdoor cross training, bouldering, kayaking, kite
boarding and whitewater river rafting. These consumers typically
seek footwear specifically designed with the same quality and
high performance attributes they have come to expect from
traditional athletic footwear. The first Teva sport sandal was
developed in the 1980s to meet the demanding needs of
professional river rafting guides navigating the Colorado River
and the rugged Grand Canyon terrain. As our core consumers
pursuits have evolved, we have retained our outdoor heritage
while adding new products to our line, including slides, thongs,
amphibious footwear, trail running shoes, hiking boots and
rugged closed-toe footwear. Our brand remains popular among
professional and amateur outdoorsmen seeking authentic,
performance-oriented footwear, as well as general footwear
consumers seeking high quality, durable and comfortable styles
for everyday use.
We market Teva as the brand of Go. Do. Be. This
captures the nature of the Teva lifestyle of the new outdoor
athlete. The Go, the Do, and the Be each have their own unique
properties and perspectives. Individually, they are elements of
the outdoor experience. Together, they form the fabric of the
outdoor lifestyle.
Go. The Go product collection
represents versatile, rugged, and comfortable footwear for
travel, leisure, and light activities. Teva product engineering
keeps you on your feet while laid back styling lets you blend
in. Styles range from classic Teva sandal architecture to more
compelling, contemporary designs.
Do. The Do product collection is
technical, lightweight footwear, engineered for the performance
needs of the new outdoor athlete. Many styles include one or
more of our proprietary performance technologies, such as the
Wraptor Fit System, Spider Rubber Traction Technology, or Drain
Frame Technology.
Be. The Be product collection is
inspired by the laid-back attitude of life on the beach. Designs
are simple, yet distinctive, with a premium on comfort. The
styles are young, fresh and colorful for any casual lifestyle.
Kids. Our Kids product collection
is a fun, colorful assortment of sandals, closed-toe, and
amphibious styles for a variety of outdoor and water-based
activities.
We intend to remain aggressive in the area of product innovation
and introduction. Our Spring 2007 line is 70% new, with
manufacturers suggested retail prices ranging from $22.00
to $125.00.
UGG Footwear. The premier brand
in luxury and comfort. Beginning in 1979, the UGG brand
gained recognition in the U.S. for sheepskin boots and slippers
and was later widely used by the California surf community. We
acquired the brand in 1995 and expanded the collection, offering
consumers a luxurious and distinctive look in sheepskin
fabrications.
Our UGG product line comprises eight footwear collections:
Classic Collection. We offer a complete
line of sheepskin boots built on the heritage and distinctive
look of our first product, the Classic Sheepskin boot. Our
Classic Collection products are distinctive in styling,
featuring an array of neutral and fashion colors. Our Classic
Collection includes styles for men, women and children.
Ultra Collection. The Ultra Collection
builds upon the heritage of our original Classic. These boots
are designed with our comfort system, featuring a multi-surfaced
lugged bottom with a heel-cushioning insert that offers enhanced
traction, support and comfort. Our Ultra Collection also
features a three-part insole designed to provide
all-day
comfort and support and a reflective barrier that captures body
heat to create a natural foot warming mechanism. Our sheepskin
products are naturally thermostatic, keeping feet comfortable
across a wide range of temperatures. This collection features
styles for men, women and children.
Fashion Collection. Our Fashion
Collection offers fashion forward styles for women, men, and
children without compromising comfort. Luxurious materials and
trend-influenced stylings make this collection stand out. Within
this collection is a fashion wedge group, a stacked high heel
group for women, a European influenced collection for men, and
fashionable styles for children.
8
Driving Collection. This collection
features refined, sophisticated styles for men, women, and
children. These footwear styles include suede and glove leather
uppers, lined in a shorter eight millimeters of sheepskin for
added comfort. Styles from the mens collection feature an
interchangeable leather insole that allows them to be worn
either with or without socks.
Surf Collection. This collection is
taken from the laid-back surf lifestyle that was the original
heritage of the brand. The Surf Collection features true comfort
stylings including sandals, clogs, and boots available for men,
women, and children that incorporate a thin layer of sheepskin
for luxury and comfort.
Cold Weather Collection. This
collection is designed for men, women and children seeking more
rugged styling. The Cold Weather line features
Vibram®
outsoles and waterproof
Event®
uppers designed to withstand colder, wetter climates.
Slipper Collection. Our popular Slipper
Collection builds upon the UGG brands reputation for
comfort, warmth and luxury. We offer a wide selection of styles
and colors for men, women and children.
We have expanded our UGG collection from the Classic and Ultra
Sheepskin boot to a broader footwear line for men, women and
children in a variety of styles, colors and materials designed
for wear in a variety of climates and occasions. Over the last
few years, our line expansion strategies, among other factors,
have resulted in significantly increased exposure for our UGG
collection and have contributed to the growth of the UGG
brands year round business. The manufacturers
suggested domestic retail prices for adult sizes for the Fall
2007 UGG product collection range from $60.00 to $350.00.
Simple Sustainable Footwear. Finding
the materials and processes that make our products sustainable
is a method we call the Green Toe process and we
measure our progress with a scale called Good, Better,
Best. The Best category represents our most sustainable
shoes and bags and sets the bar for the rest of the line. Only
the Best products may bear the Green Toe label. In the future,
we plan to incorporate these same innovative materials and
constructions in the Good and Better categories, raising the bar
for the Best products.
Mens & Womens Green
Toe. Part of the Best category, Green Toe
products represent our efforts to reduce the ecological
footprint left by shoes. Green Toe products are made of entirely
sustainable materials like bamboo, jute, organic cotton, linen,
coconut buttons, cork, crepe, latex, recycled car tires, and
water based adhesives. This includes sandals, loafers, boots,
and clogs.
Mens and Womens
Sneakers. The Simple brand started as an
alternative to all the over-built, overpriced, and over-hyped
products in the market. Our new line, ecoSNEAKS, is completely
sustainable and uses old car tire outsoles, recycled PET for
footbeds and shoelaces.
Mens and Womens Sandals. We
offer a range of warm weather footwear for men and women
featuring washable suede uppers, cork footbeds, water based
adhesives, and biodegradable polymer bags for packaging
(reducing waste by not using shoe boxes). We also offer a
flip-flop program that caters to the surf channel of
distribution.
Kids Product. Our Kids
product line is made up of sneakers, sandals, and Green Piggies
footwear, like Green Toe, only in smaller sizes.
Bags. We launched our bag collection in
time for the 2006 holiday season. These include messenger bags
and backpacks. Our bags fall into two categories: Good and Best.
The manufacturers suggested retail prices for our Spring
2007 Simple brand shoe collections range from $18.00 to $90.00,
and our Simple brand bags are priced from $70.00 to $100.00.
Licensing
To capitalize on the strength of our brands, we are pursuing the
licensing of our brand names for use in complementary product
categories beyond footwear.
In 2004, we introduced UGG licensed handbags and outerwear, and
in 2005 cold weather accessories for the domestic market, and we
initiated expansion into select international markets, beginning
with handbags. In 2006, we launched our cold weather accessories
and outerwear licenses internationally. We also restructured our
domestic Teva licensing program, which currently consists of
U.S. licenses for mens and womens headwear, a
Canadian license for sportswear, and bags and packs which will
begin deliveries in the Spring 2007 season domestically.
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Because our licensing program is in its early stages, and due to
the lead times required to bring the products to market, we have
only recently begun to recognize license revenues and we do not
expect significant incremental net sales and profits from
licensing in the near future.
BHPC Global Licensing, Inc. is a full service licensing agency
that we initially used to assist us in identifying licensing
candidates and coordinating our licensing business until
August 2004, when we began to do this in-house. We pay BHPC
an agency fee on royalty income that we receive related to
licensing agreements that BHPC coordinated on our behalf. In
2006, we paid BHPC approximately $79 in agency fees and the
unpaid balance at December 31, 2006 was $56. BHPC is 50%
owned by one of our directors, Daniel L. Terheggen.
Products made under license are sold primarily through the same
retail channels as our footwear product offerings. Our licensing
agreements generally give us the right to terminate the license
if specified sales targets are not achieved.
Sales and
Distribution
We distribute our products in the United States through a
dedicated network of approximately 45 independent sales
representatives. Our sales representatives are organized
geographically and visit retail stores to communicate the
features, styling and technology of our products. In addition,
we have 7 employee sales representatives who serve as territory
representatives or key account executives for several of our
largest customers.
Until mid-2005, our sales force was divided into two teams, one
for Teva product and one for UGG and Simple products, as the UGG
and Simple brands are generally sold through non-outdoor
specialty and non-sporting goods distribution channels and are
targeted toward a different consumer than our Teva brand.
Beginning in mid-2005, however, we began to split the Simple and
UGG brands sales forces into two distinct groups in order
to provide the Simple brand with its own dedicated sales
function to improve its sales efforts and resources. While there
is still some overlap between the sales teams, we have begun to
make the transition and are well on our way to having separate
dedicated sales forces for each of our three brands. Each
brands sales manager recruits and manages his or her
network of sales representatives and coordinates sales to
national accounts. We believe this approach for the U.S. market
maximizes the selling efforts to our national retail accounts on
a cost-effective basis.
Internationally, we distribute our products through 34
independent distributors. Previously, substantially all
international shipments were made directly from our independent
manufacturers to our independent distributors. The majority of
shipments to Europe were facilitated through third party
distribution in the Netherlands. During 2006, we commenced new
distributor relationships for one or more of our brands in the
UK, Germany, Italy, Israel, Japan and Australia. We also began a
new distributor relationship with a company in Panama that will
develop our business throughout much of Latin America, with an
initial focus on the Teva brand. In 2007, we plan to develop our
brands and business in the key markets of the UK and Japan which
are also influential within the Europe and Asia regions,
respectively. In addition, we will further explore distribution
opportunities in China, Russia, Taiwan, India and the
Scandinavian region.
Our principal customers include specialty retailers, selected
department stores, outdoor retailers, sporting goods retailers
and shoe stores. Our five largest customers accounted for
approximately 27.0% of our net sales for 2005, compared to 27.6%
for 2006. Nordstrom accounted for greater than 10% of our
consolidated net sales in 2005 and 2006.
Teva. We sell our Teva products
primarily through specialty outdoor sporting goods and
department store retailers such as REI, Eastern Mountain Sports,
L.L. Bean, Dicks Sporting Goods, The Sports Authority,
Nordstrom, and Dillards. We believe these retail channels
are the first choice for athletes, outdoor enthusiasts and
adventurers seeking technical and performance-oriented outdoor
footwear. Furthermore, we believe that retailers who appreciate
and can fully market the technical attributes of our products to
the consumer best sell our Teva products.
UGG. We sell our UGG products primarily
through high-end department stores such as Nordstrom, Neiman
Marcus and Saks Fifth Avenue, as well as independent specialty
retailers such as Journeys, David Z. and Sport Chalet. We
believe these retailers support the luxury positioning of our
brand and are the destination shopping choice for the consumer
who seeks out the fashion and functional elements of our UGG
products.
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Simple. Our Simple products are
targeted primarily towards select department stores, outdoor
specialty accounts, independent specialty retailers, surf shops,
and health and wellness accounts that target consumers seeking
comfortable, high quality, and sustainable footwear. Key
accounts such as Nordstrom, Dillards, REI, Whole Earth
Provision, Hobie Sports, and Whole Foods Market cater to
consumers in Simple brands
demographic men and women between the ages of
21 and 35.
We distribute products sold in the United States through our
126,000 square foot distribution center in Ventura, California
and our 300,000 square foot distribution center in
Camarillo, California. Our distribution centers feature an
inventory management system that enables us to efficiently pick
and pack products for direct shipment to retailers across the
country. For certain customers requiring special handling, each
shipment is pre-labeled and packed to the retailers
specifications, enabling the retailer to easily unpack our
product and immediately display it on the sales floor. All
incoming and outgoing shipments must meet our rigorous quality
inspection process.
Consumer
Direct
Our Consumer Direct business includes our retail outlet stores
and the retailing operations of our internet and catalog
business. We acquired the internet and catalog business as part
of the acquisition of the Teva Rights. The Consumer Direct
business enables us to reach consumers through our internet
business under the Teva.com, UGGs.com, UGGAustralia.com and
SimpleShoes.com internet addresses, through direct mailings
under our catalog business and through our five retail outlet
stores. Our mailing list includes approximately 545,000
consumers who have purchased at least once in the past
36 months. Our internet and catalog business is
headquartered in Flagstaff, Arizona and order fulfillment is
performed by our wholesale distribution centers in Ventura and
Camarillo, California in order to reduce the cost of order
cancellation, minimize out of stock positions and further
leverage our distribution center occupancy costs. In 2006, we
opened three new retail outlet stores across the U.S. in
addition to our existing store in Ventura, California, which
today sell all three of our brands. We also opened our first UGG
brand concept store in New York, New York in 2006. Our retail
stores enable us to meet the growing demand for these products.
Products sold through our Consumer Direct business are sold at
prices which approximate retail prices, enabling us to capture
the full retail margin on each direct transaction.
Marketing
and Advertising
Our brands are generally advertised and promoted through a
variety of consumer print advertising campaigns. We benefit from
highly visible editorial coverage in both consumer and trade
publications. Each brands dedicated marketing team works
closely with targeted accounts to maximize advertising and
promotional effectiveness. We incurred approximately $8,687,
$10,536, and $17,315 in advertising, marketing and promotional
expenses in 2004, 2005 and 2006, respectively.
Teva. We use the following marketing
methods to promote the Teva brand:
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targeted print advertising;
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sponsorship of a variety of festivals, events and competitions,
such as Reggae on the River and the Teva Mountain Games;
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contracted athletes and teams, such as the Teva Whitewater Team
and the Teva U.S. Mountain Running Team;
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discount programs to professional river guides, kayakers,
mountain bikers and rock climbers;
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product seeding with various athletes and trendsetters; and
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in-store promotions with key accounts.
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We market the Teva brand through the placement of print
advertisements in leading outdoor magazines such as Outside,
National Geographic Adventurer, Backpacker and Canoe and
Kayak. As we have introduced new
sub-categories
and collections, we have broadened our advertising presence to
reach new consumers. For example, we advertise our performance
trail running shoes in Runners World, Trail Runner
and Running Times, among other publications. To
support our casual lines, we advertise in more mainstream
publications such as Womens Health, Mens
Journal and, Yoga Journal.
The Teva brand is rooted in outdoor lifestyle pursuits such as
river rafting, kayaking, mountain biking, hiking and trail
running. We sponsor outdoor events in the U.S. including the
Teva Mountain Games at Vail, Colorado, the
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Teva Vail Trail Running Series, the Santa Cruz Surf Kayak
Festival in Santa Cruz, California and the Reggae on the River
event in Garberville, California, among others. Internationally,
we sponsor outdoor events in France, Switzerland and Italy in
order to increase our brand visibility to the core European
outdoor consumer. We are also the presenting sponsor of
MacGillivray Freemans new documentary IMAX film,
Grand Canyon
Adventure 3-D
to be released in IMAX theaters in March 2008, featuring natural
resource advocate, Robert Kennedy Jr., and world-renowned
explorer, Wade Davis. We believe our sponsorship activity in
these areas links the Teva brand with its outdoor heritage and
generates increased product exposure and brand awareness.
We also sponsor some of the worlds best male and female
professional and amateur outdoor athletes across several sports.
Our Teva promotional team attends events across the United
States in dedicated,
state-of-the-art
promotional vehicles prominently featuring our Teva logo. The
promotions team showcases Teva products at events and provides
consumers with the opportunity to see and sample our latest
styles. We believe by outfitting and sponsoring these highly
visible athletes and teams, we create brand and product
awareness among our targeted consumers.
UGG. We seek to build upon the success
of our UGG brands national print advertising campaign. We
currently advertise in upscale national magazines such as
Vogue, Teen Vogue, Glamour, Vanity Fair, and
O Magazine. UGG Australia also began mens
focused advertising with its 2005 campaign, including print
advertising in Outside, Mens Vogue, GQ, and
Surfer. We believe such advertising is an effective means
to target our intended consumers and to convey the comfort and
luxury of UGG products. We also benefit from editorial coverage
of the UGG collection. Numerous articles have appeared in such
magazines as Glamour, InStyle, Cosmopolitan, Marie Claire,
People, US Weekly, Maxim, Shape, Self, O Magazine and
Real Simple. In 2003, Footwear News, a leading industry
trade publication, awarded UGG Australia Brand of the
Year. In 2004, UGG was awarded Brand of the
Year by Footwear Plus, another leading trade
publication, and was recognized with the ACE Award for the
it accessory of the year by the Accessories Council.
International exposure has also expanded with features in
leading fashion publications like Vogue Japan, Elle Japan, Marie
Claire UK, and Vogue UK.
We also actively seek to place UGG products at selected events.
During the 2002 Winter Olympic Games we outfitted all of the
children in the Children of the Light performance with UGG
boots. During the Medal Ceremonies, Olympic staff presenting
medals to the Olympic athletes also wore UGG boots. In
collaboration with our Switzerland distributor, we produced a
special edition UGG cold weather boot featuring a matching
red-outsole for the entire 2006 Swiss Olympic Team. We believe
this product placement further strengthened the consumers
image of UGG products as high quality, luxurious sheepskin goods
well-suited for use in cold weather.
We also have improved visibility of the UGG brand through
placement of the product in selected television shows and
feature films. UGG products have appeared on numerous shows,
including Entourage, The Sopranos, Gilmore Girls, The Oprah
Winfrey Show, The King of Queens, Still Standing, Will and
Grace, Men in Trees, The OC, The George Lopez Show, Jeopardy
and Saturday Night Live. Our marketing efforts have
also resulted in UGG product appearances in the following recent
feature films: In Her Shoes starring Cameron Diaz,
Fever Pitch starring Drew Barrymore and Jimmy Fallon and
The Matador starring Pierce Brosnan. In addition, the UGG
brand has been embraced by Hollywood celebrities, who are often
seen and photographed wearing UGG boots. This celebrity exposure
for UGG products has been the subject of recent publicity
including articles in US Weekly, USA Today, The New York
Post, People and People.com. UGG boots have been a
featured item on the Oprah Winfrey Oprahs Favorite
Things gift show in 2000, 2003 and 2005 and her surprise
baby shower for military families in 2004. We believe our target
consumer identifies with celebrities and that greater exposure
further heightens awareness of the brand and stimulates sales.
Simple. We believe that our consumers
are looking for brands that do more than their part to ensure
that the world we all share is respected and cared for. Our
commitment to produce and market our products in a sustainable
manner is a mirror image of our consumers commitment to
purchase products made in the same fashion. We will continue to
set the brand up as the world leader in sustainable footwear
through all marketing initiatives. We have actively advertised
in Alternative Weekly newspapers throughout key markets in the
U.S. This has been a very successful initiative in terms of
building relationships with both consumers and retailers alike
in their own home towns. We will continue with this strategy
with Green Toe and ecoSNEAKS through increased impressions and
adding new markets. As part of its increased marketing efforts,
the Simple brand is also rolling out a national print
advertising campaign targeted at various demographic groups,
which will include print ads targeted at the
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ecologically-minded consumer through magazines like
RollingStone, Vanity Fair, Surfer, and Surfing. We
also reach a targeted on-line consumer through sustainability
websites like Treehugger.com. We will continue to advertise on
TheOnion.com, which compliments the Onion print campaign in key
markets. In addition, we are active on Surfer Magazines
well-populated website.
In 2006, we sponsored environmental-themed concerts, film
festivals, and green expos to show that we are truly
the world leader in sustainable footwear. Our most successful
events in 2006 were Jack Johnsons Kokua Festival in
Hawaii, the High Sierra Music Festival in Northern California,
and the Green Festivals in Washington, DC and San Francisco.
Earth Day 2006 enjoyed some of the most extensive coverage of
the brand compared to recent years; therefore, Earth Day 2007
will be a major focus for our future promotion campaigns. We
plan to be present at several local Earth Day celebrations in
2007 in key markets such as San Francisco, New York, Boulder,
and Santa Barbara. Our Earth Day promotions will be supported
with local advertising and community outreach.
SimpleShoes.com is one of the major media communicating our key
marketing initiatives. We drive traffic to the website through
virtual marketing like MySpace.com, web advertising, and on-line
cross promotions with musician, philanthropic, and environmental
action partners like Nickel Creek, Jack Johnson, and
StopGlobalWarming.org.
Product
Design and Development
The design and product development staff for each of our brands
creates and introduces new innovative footwear products that
combine our standards of high quality, comfort and
functionality. The design function for all of our brands is
performed by a combination of our internal design and
development staff plus outside design firms. By introducing
outside firms to the design process, we believe we are able to
review a variety of different design perspectives on a
cost-efficient
basis and anticipate color and style trends more quickly.
To ensure that high performance technical products continue to
satisfy the requirements of the Teva brands historical
consumer base of
performance-oriented
core enthusiasts, our design staff solicits input
from our Team Teva whitewater athletes, the Teva U.S. Mountain
Running Team and other professional outdoorsmen, as well as
several of our key retailers, including REI, Eastern Mountain
Sports, Dicks Sporting Goods and L.L. Bean. We
regularly add new innovations, components and styles to our
product line based on their input. For example, for 2007, our
proprietary Wraptor technology is incorporated into performance
running sandals, trail runners, and light hikers. In addition,
for specific traction and durability requirements, we have added
variations of our proprietary Spider Rubber compound which now
includes Original Spider Rubber a sticky,
non-slip
rubber outsole material for use across wet and dry terrain,
SSR a super sticky rubber compound for use
specifically in extreme water conditions to provide superior
grip on smooth wet surfaces, like rocks, fiberglass, and raft
rubber; and Spider XC an
off-road
hybrid that combines the
non-slip
traction of Spider Rubber with durability for use in both wet
and dry conditions.
Our UGG and Simple products are designed to appeal to consumers
seeking our distinctive and innovative styling. We strive to be
a leader in product uniqueness and appearance by regularly
updating our UGG and Simple lines, which also generates further
awareness and interest in the UGG and Simple collections. In our
UGG line, we have successfully evolved the product offering over
the last few years from its original sheepskin heritage to a
diverse collection of luxury and comfort styles suited for a
variety of climates and seasons. The evolution of our Simple
line has resulted in many new categories for the brand,
including the recent introduction of the first successful
truly sustainable footwear in our Green Toe collection. We
believe that our commitment to being 100% sustainable sets
us up as the world leader in sustainable footwear and
accessories. We believe our ability to incorporate
up-to-date
styles while remaining true to our heritage, combined with
performance-oriented
features consumers have come to expect, results in continued
enthusiasm for our brands in the marketplace.
In order to ensure quality, consistency and efficiency in our
design and product development process, we continually evaluate
the availability and cost of raw materials, the capabilities and
capacity of our independent contract manufacturers and the
target retail price of new models and lines. The design and
development staff works closely with brand management to develop
new styles of footwear for their various product lines. We
develop detailed drawings and prototypes of our new products to
aid in the conceptualization and to ensure our contemplated new
products meet the standards for innovation and performance our
consumers demand. Throughout the development process, members of
the design staff coordinate internally and with our domestic and
overseas
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product development, manufacturing and sourcing personnel toward
a common goal of developing and producing a high quality product
to be delivered on a timely basis.
Manufacturing
We do not manufacture our footwear. We outsource the
manufacturing of our Teva, Simple and UGG footwear to
independent manufacturers in China. We also outsource the
manufacturing of our UGG footwear to independent manufacturers
in New Zealand and Australia. We require our independent
contract manufacturers and designated suppliers to adopt our
Factory Charter and to comply with all local laws and
regulations governing human rights, working conditions and
environmental compliance, before we are willing to place
business with them. We require our licensees to demand the same
from their contract factories and suppliers. We have no
long-term
contracts with our manufacturers. As we grow, we expect to
continue to rely exclusively on independent manufacturers for
our sourcing needs.
The production of footwear by our independent manufacturers is
performed in accordance with our detailed specifications and is
subject to our quality control standards. To ensure the
production of high quality products, many of the materials and
components used in production of our products by these
independent manufacturers are purchased from independent
suppliers designated by us. Excluding sheepskin, we believe that
substantially all the various raw materials and components used
in the manufacture of our footwear, including rubber, leather
and nylon webbing are generally available from multiple sources
at competitive prices. We outsource our manufacturing
requirements on the basis of individual purchase orders rather
than maintaining
long-term
purchase commitments with our independent manufacturers.
At our direction, our manufacturers currently purchase the
majority of the sheepskin used in our products from two
tanneries in China, which source their skins from Australia and
New Zealand. We maintain a constant dialog with the
tanneries to monitor the supply of sufficient high quality
sheepskin available for our projected UGG footwear production.
To ensure adequate supplies for our manufacturers, we forecast
our usage of top grade sheepskin one year in advance at a
forward price. We believe supplies are sufficient to meet our
needs in the near future, but we continue to search for
alternate suppliers in order to accommodate any unexpected
future growth.
Simple Shoes continues to innovate the design, development
and production of sustainable footwear through the sourcing of
environmentally friendly materials. With the global trend of
companies embracing the sustainable green movement in materials,
sourcing and availability of these materials may be impacted in
the near future. Strong relationships are being established with
suppliers, and we are developing strategies to keep supply chain
needs fulfilled for the future.
We maintain
on-site
supervisory offices in Pan Yu City, China and Macau that serve
as local links to our independent manufacturers, enabling us to
carefully monitor the production process, from receipt of the
design brief to production of interim and final samples and
shipment of finished product. We believe this local presence
provides greater predictability of material availability,
product flow and adherence to final design specifications than
we could otherwise achieve through an agency arrangement.
We have instituted
pre-production
and
post-production
inspections to meet or exceed the high quality demanded by
consumers of our products. Our quality assurance program
includes
on-site
inspectors at our independent manufacturers who oversee the
production process and perform quality assurance inspections. We
also inspect our products upon arrival at our U.S. distribution
center.
Patents
and Trademarks
We now hold more than fifty utility and design patents and
registrations in the U.S. and abroad. Our U.S. patent for the
Teva Universal Strapping System, which is used in many of our
Teva sandals, expires in 2007. Corresponding patents in
Australia, New Zealand and Korea expire in 2008. We also
currently hold trademark registrations for TEVA, UGG and SIMPLE
in the U.S. and in many other countries, including the countries
of the European Union, Canada, Japan and Korea. We regard
our proprietary rights as valuable assets and vigorously protect
such rights against infringement by third parties. Deckers
and its predecessors have successfully enforced their
intellectual property rights in the courts and other forums,
obtaining numerous judgments, consent judgments and settlement
agreements that uphold the validity of Deckers patent,
trademark and trade dress rights.
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Seasonality
Our business is seasonal, with the highest percentage of Teva
brand net sales occurring in the first and second quarters
of each year and the highest percentage of UGG brand net sales
occurring in the third and fourth quarters of each year. To
date, the Simple brand has not had a seasonal impact on the
Company. With the dramatic growth in UGG product sales in recent
years, net sales in the last half of the year have exceeded
that for the first half of the year. Given our expectations
for each of our brands in 2007, we currently expect this trend
to continue. Nonetheless, actual results could differ materially
depending upon consumer preferences, availability of product,
competition and our customers continuing to carry and promote
our various product lines, among other risks and uncertainties.
See Risk Factors.
Backlog
Historically, we have encouraged our customers to place, and we
have received, a significant portion of orders as
pre-season
orders, generally four to eight months prior to shipment
date. We provide customers with incentives to participate in
such
pre-season
programs to enable us to better plan our production schedule,
inventory and shipping needs. Unfilled customer orders as of any
date, which we refer to as backlog, represent orders scheduled
to be shipped at a future date and do not represent firm orders.
The backlog as of a particular date is affected by a number of
factors, including seasonality, manufacturing schedule and the
timing of shipments of products as well as variations in the
quarter-to-quarter
and
year-to-year
preseason incentive programs. The mix of future and immediate
delivery orders can vary significantly from quarter to quarter
and year to year. As a result, comparisons of the backlog from
period to period may be misleading.
Competition
The casual, outdoor, athletic and fashion footwear markets are
highly competitive. We compete with numerous domestic and
foreign footwear designers, manufacturers and marketers. Teva
primarily competes with Nike,
Adidas-Salomon,
Timberland, Merrell, Chaco, Reef, Columbia Sportswear, Crocs and
Keen. Our UGG footwear line primarily competes with Emu,
Merrell, Acorn, Aussie Dogs, LB Evans and Timberland, as
well as retailers own private label footwear. In addition,
due to the popularity of our UGG products, we face increasing
competition from a significant number of competitors selling
knock-off
products. Our Simple line primarily competes with Vans,
Converse, Clarks, Merrell, Keen, Patagonia, Sanuk, and Earth.
Some of our competitors are significantly larger and have
significantly greater resources than we do.
Our three footwear lines compete primarily on the basis of
brand recognition and authenticity, product quality and design,
functionality, performance, fashion appeal and price. Our
ability to successfully compete depends on our ability to:
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shape and stimulate consumer tastes and preferences by offering
innovative, attractive and exciting products;
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anticipate and respond to changing consumer demands in a timely
manner;
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maintain brand authenticity;
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develop high quality products that appeal to consumers;
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appropriately price our products;
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provide strong and effective marketing support; and
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ensure product availability.
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We believe we are particularly well positioned to compete in the
footwear industry. Our diversified portfolio of footwear brands
and products allows us to operate a business that does not
depend on any one demographic group, merchandise preference or
product trend. We have developed a portfolio of brands that
appeals to a broad spectrum of consumers. We continually look to
acquire or develop more footwear brands to complement our
existing portfolio and grow our existing consumer base.
Employees
At December 31, 2006, we employed 276 employees in our
U.S. facilities and 43 employees located in the Far East
and the U.K., none of whom is represented by a union. We believe
our relationships with our employees are good.
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Financial
Information about Segments and Geographic Areas
Our four reportable business segments include the strategic
business units responsible for the worldwide operations of each
of our brands Teva, Simple and UGG, as well as our
Consumer Direct retailing business. The following table shows
our domestic and international revenues for each of the years
ended December 31, 2004, 2005, and 2006.
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Years Ended December 31,
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2004
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2005
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2006
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Net sales by
location:
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U.S
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$
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175,419
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$
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229,487
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$
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266,092
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International
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39,368
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35,273
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38,331
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Total
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$
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214,787
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$
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264,760
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$
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304,423
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Refer to note 8 to our accompanying consolidated financial
statements for further discussion of our business segment data
and our
long-lived
assets that are attributable to our domestic versus foreign
operations.
Available
Information
Our internet address is www.deckers.com. We post links to
our website to the following filings as soon as reasonably
practicable after they are electronically filed with or
furnished to the Securities and Exchange Commission
(SEC): annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and any amendment to those reports filed or furnished pursuant
to Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended. All such filings are available through our
website free of charge. Our filings may also be read and copied
at the SECs Public Reference Room at 450 Fifth Street, NW,
Washington, DC 20549. Information on the operation of the Public
Reference Room may be obtained by calling the SEC at
1-800-SEC-0330.
The SEC also maintains an internet site that contains reports,
proxy and information statements, and other information
regarding issuers that file electronically with the SEC. The
address of that site is www.sec.gov.
Item 1A. Risk
Factors.
Our short- and long-term success is subject to many factors
beyond our control. Stockholders and potential stockholders
should carefully consider the following risk factors in addition
to the other information contained in this report and the
information incorporated by reference in this report. If any of
the following risks occur, our business, financial condition or
results of operations could be adversely affected. In that case,
the value of our common stock could decline and stockholders and
potential stockholders may lose all or part of their
investment.
Risks
Relating To Our Business
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Our
success depends on our ability to anticipate fashion
trends.
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Our success depends largely on the continued strength of our
Teva, UGG and Simple brands and on our ability to anticipate,
understand and react to the rapidly changing fashion tastes of
footwear consumers and to provide appealing merchandise in a
timely manner. Our products must appeal to a broad range of
consumers whose preferences cannot be predicted with certainty
and are subject to rapid change. We are also dependent on
customer receptivity to our products and marketing strategy.
There can be no assurance that consumers will continue to prefer
our brands, that we will respond quickly enough to changes in
consumer preferences or that we will successfully introduce new
models and styles of footwear. Achieving market acceptance for
new products also will likely require us to exert substantial
marketing and product development efforts and expend significant
funds to create consumer demand. A failure to introduce new
products that gain market acceptance would erode our competitive
position, which would reduce our profits and could adversely
affect the image of our brands, resulting in long-term harm to
our business.
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Our
UGG brand may not continue to grow at the same rate it has
experienced in the recent past.
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Our UGG brand has experienced strong growth over the past few
years, with net wholesale sales of UGG products having increased
from $23,491 in 2002 to $182,369 in 2006, representing a
compound annual growth rate of 66.9%. We do not expect to
sustain this growth rate in the future. UGG products may be a
fashion item that could
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go out of style at any time. UGG products represent a
significant portion of our business, and if UGG product sales
were to decline or to fail to increase in the future, our
overall financial performance could be adversely affected.
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Our
Teva brand may continue to decline.
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During 2006, our Teva brand experienced a decline in revenue of
6.4% versus 2005. We conducted our annual impairment test as of
December 31, 2006 and concluded that the fair value of the
Teva trademarks was below the carrying value, and accordingly,
in the fourth quarter of 2006, we recorded an impairment loss of
$15,300, included in income from operations. If Teva product
sales continue to decline to a point that the fair value of our
Teva reporting unit does not exceed its carrying value, we may
be required to further write down the related intangible assets,
the goodwill or both, causing us to incur additional impairment
charges. Further impairment charges could materially affect our
consolidated financial position and results of operations. As of
December 31, 2006, management feels the goodwill and
intangible assets are stated appropriately under the provisions
of Statement of Financial Accounting Standards No. 142
Goodwill and Other Intangible Assets.
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We may
experience shortages of top grade sheepskin, which could
interrupt product manufacturing and increase product
costs.
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We depend on a limited number of key resources for sheepskin,
the principal raw material for our UGG products. In 2006, two
suppliers provided all of the sheepskin purchased by our
independent manufacturers. The top grade sheepskin used in UGG
footwear is in high demand and limited supply. In addition,
sheep are susceptible to hoof and mouth disease, which can
result in the extermination of an infected herd and could have a
material adverse effect on the availability of top grade
sheepskin for our products. Additionally, the supply of
sheepskin can be adversely impacted by drought conditions. Our
potential inability to obtain top grade sheepskin for UGG
products could impair our ability to meet our production
requirements for UGG products in a timely manner and could lead
to inventory shortages, which can result in lost potential
sales, delays in shipments to customers, strain on our
relationships with customers and diminished brand loyalty.
Additionally, there have been significant increases in the
prices of top grade sheepskin as the demand for this material
has increased. Any further price increases will likely raise our
costs, increase our costs of sales and decrease our
profitability unless we are able to pass higher prices on to our
customers.
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If we
do not accurately forecast consumer demand, we may have excess
inventory to liquidate or have difficulty filling our
customers orders.
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Because the footwear industry has relatively long lead times for
design and production, we must commit to production tooling and
production volumes many months before consumer tastes become
apparent. The footwear industry is subject to fashion risks and
rapid changes in consumer preferences, as well as the effects of
weather, general market conditions and other factors affecting
demand. Our large number of models, colors and sizes in our
three product lines exacerbates these risks. As a result, we may
fail to accurately forecast styles and features that will be in
demand. If we overestimate demand for any products or styles, we
may be forced to liquidate excess inventories at a discount to
customers, resulting in higher markdowns and lower gross
margins. Further, the excess inventories may prolong our cash
flow cycle, resulting in reduced cash flow and increased
liquidity risks. Conversely, if we underestimate consumer demand
for any products or styles, we could have inventory shortages,
which can result in lost potential sales, delays in shipments to
customers, strains on our relationships with customers and
diminished brand loyalty. This may be particularly true with
regard to our UGG product line, which has experienced strong
consumer demand and rapid sales growth.
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We may
not succeed in implementing our growth strategy.
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As part of our growth strategy, we seek to enhance the
positioning of our brands, extend our brands into complementary
product categories and markets through licensing, expand
geographically and improve our operational performance. We may
not be able to successfully implement any or all of these
strategies. If we fail to do so, our rate of growth may slow or
our results of operations may decline, which in turn could have
a negative effect on the value of our stock.
17
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Our
financial success is limited to the success of our
customers.
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Our financial success is directly related to the success of our
customers and the willingness of our customers to continue to
buy our products. We do not have long-term contracts with any of
our customers. Sales to our customers are generally on an
order-by-order
basis and are subject to rights of cancellation and rescheduling
by our customers. If we cannot fill our customers orders
in a timely manner, our relationships with our customers may
suffer, and this could have a material adverse effect on our
business. Furthermore, if any of our major customers experiences
a significant downturn in its business, or fails to remain
committed to our products or brands, then these customers may
reduce or discontinue purchases from us, which could have a
material adverse effect on our business, results of operations
and financial condition.
Certain
of our customers account for a significant portion of our sales
and the loss of one or more of these key customers would
significantly reduce our sales.
Our five largest customers accounted for approximately 27.0% of
net sales in 2005 and 27.6% of net sales in 2006. Nordstrom, our
single largest customer, accounted for greater than 10% of net
sales in 2005 and 2006. Any potential loss of a key customer, or
a significant reduction in sales to a key customer, could have a
material adverse effect on our business, results of operations
and financial condition.
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Establishing
and protecting our trademarks, patents and other intellectual
property is costly and difficult. If our efforts to do so are
unsuccessful, the value of our brands could
suffer.
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We believe that our trademarks and other intellectual property
rights are of value and are integral to our success and our
competitive position. Some countries laws do not protect
intellectual property rights to the same extent as do U.S. laws.
From time to time, we discover products in the marketplace that
infringe upon our trademark, patent, copyright and other
intellectual property rights. If we are unsuccessful in
challenging a third partys products on the basis of patent
and trade dress rights, continued sales of such competing
products by third parties could adversely impact our business,
financial condition and results of operations. If our brands are
associated with competitors inferior products, this could
also adversely affect the integrity of our brands. Furthermore,
our efforts to enforce our trademark and other intellectual
property rights are typically met with defenses and
counterclaims attacking the validity and enforceability of our
trademark and other intellectual property rights. Similarly,
from time to time we may be the subject of litigation
challenging our ownership of intellectual property. Loss of our
Teva, UGG or Simple trademark, patent or other intellectual
property rights could have a material adverse effect on our
business.
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We may
lose pending litigation and the rights to certain of our
intellectual property.
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We are currently involved in several disputes, including cases
pending in U.S. federal and foreign courts and in foreign
trademark offices, regarding infringement by third parties of
our trademarks, trade dress, copyrights, patents and other
intellectual property and the validity of our intellectual
property. Any decision or settlement in any of these disputes
that renders our intellectual property invalid or unenforceable,
or that allows a third party to continue to use our intellectual
property in connection with products that are similar to ours
could have an adverse effect on our sales and on our
intellectual property, which could have a material adverse
effect on our results of operations and financial condition.
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Counterfeiting
of our brands can divert sales and damage our brand
image.
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Our brands and designs are constantly at risk for counterfeiting
and infringement of our intellectual property rights, and we
frequently find counterfeit products and products that infringe
on our intellectual property rights in our markets as well as
domain names that use our trade names or trademarks without our
consent. We have not always been successful, particularly in
some foreign countries, in combating counterfeit products and
stopping infringement of our intellectual property rights.
Counterfeit and infringing products not only cause us to lose
significant sales, but also can harm the integrity of our brands
by associating our trademarks or designs with lesser quality or
defective goods.
In particular, we are experiencing more infringers of our UGG
trademark and more counterfeit products seeking to benefit from
the consumer demand for our UGG products. Enforcement of our
rights to the UGG trademark faces many challenges due in part to
the proliferation of the term UGG in third party domain names
that promote counterfeit products or otherwise use the trademark
UGG without our permission. In spite of our
18
enforcement efforts, we expect such unauthorized use to
continue, which could result in a loss of sales for authorized
UGG products and a diminution in the goodwill associated with
the UGG trademark.
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As our
patents expire, our competitors will be able to copy our
technology or incorporate it in their products without paying
royalties.
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Patents generally have a life of twenty years from filing,
and some of our patents will expire in the next few years. For
example, the patent for our Universal Strapping System used in
many of our Teva sandals will expire in September 2007. Our
Universal Strapping System is currently used in many of our Teva
sandals. Once patent protection has expired, our competitors can
copy our products or incorporate our innovations in their
products without paying royalties. To combat this, we must
continually create new designs and technology, obtain patent
protection and incorporate the new technology or design in our
footwear. We cannot provide assurance that we will be able to do
so. Sales of our Teva sandals may decline significantly if we
incorporate substitute technologies in lieu of our Universal
Strapping System for our Teva sandals.
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If our
customers cancel existing orders, we may have excess inventory;
if customers postpone delivery of existing orders to future
periods, we may not achieve sales and earnings targets for the
period, which could have a negative impact on our stock
price.
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We receive customer orders and indications of future orders,
which we use to determine which inventory items to purchase. We
also use the timing of delivery dates in our customer orders to
forecast our sales and earnings for future periods. If our
customers cancel existing orders, it may result in lower sales,
as well as excess inventories that could lead to inventory
write-downs and closeouts, resulting in lower gross margins. The
excess inventories could also have a negative impact on our cash
flow. If customers postpone delivery of their orders, we may not
achieve our expected sales and earnings forecasts for the
period, which could have a negative impact on our stock price.
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Because
we depend on independent manufacturers, we face challenges in
maintaining a continuous supply of goods that meet our quality
standards.
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We use independent manufacturers to produce all of our products,
with the majority of the production occurring among five
manufacturers in China. We depend on these manufacturers
ability to finance the production of goods ordered and to
maintain manufacturing capacity. The manufacturers in turn
depend upon their suppliers of raw materials. We do not exert
direct control over either the independent manufacturers or
their raw materials suppliers, so we may be unable to obtain
timely delivery of acceptable products.
In addition, we do not have long-term contracts with these
independent manufacturers, and any of them may unilaterally
terminate their relationship with us at any time or seek to
increase the prices they charge us. As a result, we are not
assured of an uninterrupted supply of products of an acceptable
quality from our independent manufacturers. If there is an
interruption, we may not be able to substitute suitable
alternative manufacturers because substitutes may not be
available or they may not be able to provide us with products or
services of a comparable quality, at an acceptable price or on a
timely basis. If a change in our independent manufacturers
becomes necessary, we would likely experience increased costs,
as well as substantial disruption of our business and a
resulting loss of sales.
Similarly, if we experience a significant increase in demand and
a manufacturer is unable to ship orders of our products in
accordance with our timing demands and our quality standards, we
could miss customer delivery date requirements. This in turn
could result in cancellation of orders, customer refusals of
shipments or a reduction in selling prices, any of which could
have a material adverse effect on our sales and financial
condition. We compete with other companies for the production
capacity and the import quota capacity of our manufacturers.
Accordingly, our independent manufacturers may not produce and
ship some or all of any orders placed by us.
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If raw
materials do not meet our specifications or if the prices of raw
materials increase, we could experience a high return rate, a
loss of sales or a reduction in our gross margins.
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Our independent manufacturers use various raw materials in the
manufacture of our footwear that must meet our specifications
generally and, in some cases, additional technical requirements
for performance footwear. If these raw materials and the end
product do not perform to our specifications or consumer
satisfaction, we could
19
experience a higher rate of customer returns and a diminution in
the image of our brands, which could have a material adverse
effect on our business, financial condition and results of
operations.
There may be significant increases in the prices of the raw
materials used in our footwear, which would increase the cost of
our products from our independent manufacturers. Our gross
profit margins are adversely affected to the extent that the
selling prices of our products do not increase proportionately
with increases in their costs. Any significant unanticipated
increase in the prices of raw materials could materially affect
our results of operations. No assurances can be given that we
will be protected from future changes in the prices of such raw
materials.
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The
costs of production and transportation of our products can
increase as petroleum and other energy prices
rise.
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The manufacture and transportation of our products requires the
use of petroleum-based materials and energy costs. Any future
increases in the costs of these materials and energy sources
will increase the cost of our goods which will reduce our gross
margin unless we can successfully raise our selling prices to
compensate for the increased costs.
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Our
independent manufacturers are located outside the U.S., where we
are subject to the risks of international
commerce.
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All of our current third party manufacturers are in China, New
Zealand and Australia with substantially all production
performed by five manufacturers in China. Foreign manufacturing
is subject to numerous risks, including the following:
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tariffs, import and export controls and other non-tariff
barriers such as quotas and local content rules, including the
potential threat of anti-dumping duties and quotas which may be
imposed by the European Union on the import of certain types of
footwear from China;
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increasing transportation costs due to energy prices or other
factors;
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poor infrastructure and shortages of equipment, which can delay
or interrupt transportation and utilities;
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foreign currency fluctuations;
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restrictions on the transfer of funds;
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changing economic conditions;
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changes in governmental policies;
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environmental regulations;
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labor unrest, which can lead to work stoppages and interruptions
in transportation or supply;
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shipping delays, including those resulting from labor issues,
work stoppages or other delays at the port of entry or port of
departure;
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political unrest, which can interrupt commerce and make travel
dangerous; and
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expropriation and nationalization.
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In particular, because most of our products are manufactured in
China, adverse change in trade or political relations with China
or political instability in China could severely interfere with
the manufacture of our products and could materially adversely
affect our results of operations. Uncertainty regarding the
short-term and long-term effects of the severe acute respiratory
syndrome, or SARS, and the outbreak of avian influenza in China
and elsewhere in the Far East could disrupt the manufacture and
transportation of our products, which would harm our results of
operations.
We are also subject to general risks associated with managing
foreign operations effectively and efficiently from the U.S. and
understanding and complying with local laws, regulations and
customs in foreign jurisdictions. These factors and the failure
to properly respond to them could make it difficult to obtain
adequate supplies of quality products when we need them,
resulting in reduced sales and harm to our business.
20
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Our
business could suffer if our independent manufacturers,
designated suppliers or our licensees violate labor laws or fail
to conform to our ethical standards.
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We require our independent contract manufacturers and designated
suppliers to adopt our Factory Charter and to comply with all
local laws and regulations governing human rights working
conditions and environmental protection before we are willing to
place business with them. Nevertheless we do not control the
labor practices of these factories and suppliers. If one of them
violates our labor standards by, for example, using convicted,
forced or indentured labor or child labor, fails to pay
compensation in accordance with local law or fails to operate
its factories in compliance with local safety or environmental
requirements, we likely would immediately cease dealing with
that manufacturer or supplier, and we could suffer an
interruption in our product supply chain. In addition, the
manufacturers or designated suppliers actions could
damage our reputation and the value of our brands, resulting in
negative publicity and discouraging customers and consumers from
buying our products.
Similarly, we do not control our licensees or any of their
suppliers or their respective labor practices. If one of our
licensees violates our labor standards or local laws, we would
likely immediately terminate the license agreement, which would
reduce our license revenue. In addition, the licensees
actions could damage our reputation and the value of our brands.
We also may not be able to replace the licensee.
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If our
licensing partners are unable to meet our expectations regarding
the quality of their products or the conduct of their business,
the value of our brands could suffer.
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One element of our growth strategy depends on our ability to
successfully enter into and maintain license agreements with
manufacturers and distributors of products in complementary
categories. We will be relying on our licensees to maintain our
standards with their manufacturers in the future, and any
failure to do so could harm our reputation and the value of the
licensed brand. The interruption of the business of any one of
our material licensing partners due to any of the factors
discussed immediately below could also adversely affect our
future licensing sales and net income. The risks associated with
our own products will also apply to our licensed products in
addition to any number of possible risks specific to a licensing
partners business, including, for example, risks
associated with a particular licensing partners ability to:
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obtain capital;
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manage manufacturing and product sourcing activities;
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manage labor relations;
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maintain relationships with suppliers;
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manage credit risk effectively; and
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maintain relationships with customers.
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Our licensing agreements generally do not preclude our licensing
partners from offering, under other brands, products similar to
those covered by their license agreements with us, which could
reduce the sales of our licensed products. In addition, if we
cannot replace existing licensing partners who fail to perform
adequately, our net sales, both directly from reduced licensing
revenue and indirectly from reduced sales of our other products,
will suffer.
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If our
licensing manager cannot properly manage the licensees of their
respective brands, our growth strategy could be
impaired.
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Our growth strategy and future profits depend upon our licensing
manager finding and successfully managing licensees for each of
our brands. Our licensing manager may not be able to
successfully implement the licensing aspect of our growth
strategy and develop and manage profitable license arrangements.
We compete for opportunities to license our brands with other
companies who have greater resources than we do and who may have
more valuable brands and more licensing experience than we do.
As a result, even if we do identify a suitable licensee, we may
lose the opportunity to a competitor. Our licensing
managers failure to execute our licensing strategy
successfully could negatively impact our results of operations.
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We may
be unable to successfully identify, develop or acquire, and
build new brands.
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We intend to continue to focus on identifying, developing or
acquiring and building new brands. Our search may not yield any
complementary brands, and even if we do find a suitable brand we
may not be able to obtain
21
sufficient financing to fund the development or acquisition of
the brand. We may not be able to successfully integrate the
management of a new brand into our existing operations, and we
cannot assure you that any developed or acquired brand will
achieve the results we expect. We compete with other companies
who have greater resources than we do for the opportunities to
license brands or buy other brands. As a result, even if we do
identify a suitable license or acquisition, we may lose the
opportunity to a competitor who offers a more attractive price.
In such event, we may incur significant costs in pursuing a
license or an acquisition without success.
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Our
quarterly sales and operating results may fluctuate in future
periods, and if we fail to meet expectations the price of our
common stock may decline.
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Our quarterly sales and operating results have fluctuated
significantly in the past and are likely to do so in the future
due to a number of factors, many of which are not within our
control. If our quarterly sales or operating results fall below
the expectations of investors or securities analysts, the price
of our common stock could decline substantially. Factors that
might cause quarterly fluctuations in our sales and operating
results include the following:
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variation in demand for our products, including variation due to
changing consumer tastes and seasonality;
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our ability to develop, introduce, market and gain market
acceptance of new products and product enhancements in a timely
manner;
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our ability to manage inventories, accounts receivable and cash
flows;
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our ability to control costs;
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the size, timing, rescheduling or cancellation of orders from
customers;
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the introduction of new products by competitors;
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the availability and reliability of raw materials used to
manufacture our products;
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changes in our pricing policies or those of our independent
manufacturers and competitors, as well as increased price
competition in general;
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the mix of our domestic and international sales, and the risks
and uncertainties associated with our international business;
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our ability to forecast future sales and operating results and
subsequently attain them;
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developments concerning the protection of our intellectual
property rights; and
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general global economic and political conditions, including
international conflicts and acts of terrorism.
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In addition, our expenses depend, in part, on our expectations
regarding future sales. In particular, we expect to continue
incurring substantial expenses relating to the marketing and
promotion of our products. Since many of our costs are fixed in
the short term, if we have a shortfall in sales, we may be
unable to reduce expenses quickly enough to avoid losses.
Accordingly, you should not rely on
quarter-to-quarter
comparisons of our operating results as an indication of our
future performance.
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Loss
of the services of our key personnel could adversely affect our
business.
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Our future success and growth depend on the continued services
of our Chief Executive Officer and our senior executives as well
as other key officers and employees. The loss of the services of
any of these individuals or any other key employee could
materially affect our business. Our future success depends on
our ability to identify, attract and retain additional qualified
personnel and to identify and hire suitable replacements for
departing employees in key positions on a timely basis.
Competition for employees in our industry is intense and we may
not be successful in attracting or retaining them.
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We
conduct business outside the U.S., which exposes us to foreign
currency and other risks.
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Our products are manufactured outside the U.S., and our
independent manufacturers procure most of their supplies outside
the U.S. We sell our products in the U.S. and internationally.
Although we pay for the purchase and manufacture of our products
primarily in U.S. dollars and we sell our products primarily in
U.S. dollars, we are routinely subject to currency rate
movements on
non-U.S.
denominated assets, liabilities and income since our foreign
distributors sell in local currencies, which impacts the price
to foreign customers. We currently do not use
22
currency hedges since substantially all our transactions are in
U.S. dollars. Future changes in foreign currency exchange rates
may cause changes in the dollar value of our purchases or sales
and materially affect our results of operations.
The Peoples Republic of China has recently revalued its
currency and abandoned its peg to the U.S. dollar. We currently
source substantially all production from China. While our
purchases from the Chinese factories are currently denominated
in U.S. dollars, certain operating and manufacturing costs of
the factories are denominated in the Chinese currency. As a
result, this change or any further revaluations in the Chinese
currency versus the U.S. dollar could impact our purchase prices
from the factories in the event that they adjust their selling
prices accordingly. Any increase in our footwear purchase costs
will reduce our gross margin unless we are able to raise our
selling prices to our customers in order to compensate for the
increased costs.
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Our
most popular products are seasonal, and our sales are sensitive
to weather conditions.
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Sales of our products, particularly those under the Teva and UGG
brands, are highly seasonal and are sensitive to weather
conditions. Extended periods of unusually cold weather during
the spring and summer can reduce demand for Teva footwear.
Likewise, unseasonably warm weather during the fall and winter
months may reduce demand for our UGG products. The effect of
favorable or unfavorable weather on sales can be significant
enough to affect our quarterly results, with a resulting effect
on our common stock price.
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We
depend on independent distributors to sell our products in
international markets.
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We sell our products in international markets through
independent distributors. If a distributor fails to meet annual
sales goals, it may be difficult and costly to locate an
acceptable substitute distributor. If a change in our
distributors becomes necessary, we may experience increased
costs, as well as substantial disruption and a resulting loss of
sales.
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Our
sales in international markets are subject to a variety of laws
and political and economic risks that may adversely impact our
sales and results of operations in certain
regions.
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Our ability to capitalize on growth in new international markets
and to maintain the current level of operations in our existing
international markets is subject to risks associated with
international sales operations. These include:
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changes in currency exchange rates which impact the price to
international consumers;
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the burdens of complying with a variety of foreign laws and
regulations;
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unexpected changes in regulatory requirements; and
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the difficulties associated with promoting products in
unfamiliar cultures.
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We are also subject to general political and economic risks in
connection with our international sales operations, including:
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political instability;
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changes in diplomatic and trade relationships; and
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general economic fluctuations in specific countries or markets.
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Any of the abovementioned factors could adversely affect our
sales and results of operations in international markets.
International
trade regulations may impose unexpected duty costs or other
non-tariff barriers to markets while the increasing number of
free trade agreements has the potential to stimulate increased
competition; security procedures may cause significant
delays.
Products manufactured overseas and imported into the U.S. and
other countries are subject to import duties. While we have
implemented internal measures to comply with applicable customs
regulations and to properly calculate the import duties
applicable to imported products, customs authorities may
disagree with our claimed tariff treatment for certain products,
resulting in unexpected costs that may not have been factored
into the sales price of the products.
23
We cannot predict whether future domestic laws, regulations or
trade remedy actions or international agreements may impose
additional duties or other restrictions on the importation of
products from one or more of our sourcing venues. Such changes
could increase the cost of our products, require us to withdraw
from certain restricted markets or change our business methods,
and could generally make it difficult to obtain products of our
customary quality at a desired price. Meanwhile, the continued
negotiation of bilateral and multilateral free trade agreements
by the U.S. and our other market countries with countries other
than our principal sourcing venues may stimulate competition
from manufacturers in these other sourcing venues, which now
export, or may seek to export, footwear to our market countries
at preferred rates of duty, though we are uncertain precisely
what effect these new agreements may have on our operations.
The European Union is currently considering imposing
anti-dumping duties and quotas on importations of certain types
of footwear from China. Any increase in duties or the
requirement for quotas will increase the cost of our products
and may limit the amount of China-sourced products that we are
able to sell to the European market. Because the vast majority
of our footwear is currently produced in China, the imposition
of anti-dumping duties or quotas on products manufactured in
China will have a negative impact on our sales and gross margin
in the European market.
Finally, the increased threat of terrorist activity and the law
enforcement responses to this threat have required greater
levels of inspection of imported goods and have caused delays in
bringing imported goods to market. Any tightening of security
procedures, for example, in the aftermath of a terrorist
incident, could worsen these delays.
We
depend on our computer and communications systems.
We extensively utilize computer and communications systems to
operate our internet and catalog business and manage our
internal operations. Any interruption of this service from power
loss, telecommunications failure, failure of our computer
system, failure due to weather, natural disasters or any similar
event could disrupt our operations and result in lost sales. In
addition, hackers and computer viruses have disrupted operations
at many major companies. We may be vulnerable to similar acts of
sabotage, which could have a material adverse effect on our
business and operations.
We rely on our management information systems to operate our
business and to track our operating results. Our management
information systems will require modification and refinement as
we grow and our business needs change. If we experience a
significant system failure or if we are unable to modify our
management information systems to respond to changes in our
business needs, then our ability to properly run our business
could be adversely affected.
Risks
Related to Our Industry
Because
the footwear market is sensitive to decreased consumer spending
and slow economic cycles, if general economic conditions
deteriorate many of our customers may significantly reduce their
purchases from us or may not be able to pay for our products in
a timely manner.
The footwear industry historically has been subject to cyclical
variation and decline in performance when consumer spending
decreases or softness appears in the retail market. Many factors
affect the level of consumer spending in the footwear industry,
including:
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general business conditions;
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interest rates;
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the availability of consumer credit;
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change in demographic spending;
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weather;
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taxation; and
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consumer confidence in future economic conditions.
|
Consumer purchases of discretionary items, including our
products, may decline during recessionary periods and also may
decline at other times when disposable income is lower. A
downturn in economies where our licensing partners or we sell
products, whether in the U.S. or abroad, may reduce sales.
24
In addition, we extend credit to our customers based on an
evaluation of each customers financial condition. Many
retailers, including some of our customers, have experienced
financial difficulties during the past several years, thereby
increasing the risk that such customers may not be able to pay
for our products in a timely manner. Our bad debt expense may
increase relative to net sales in the future. Any significant
increase in our bad debt expense relative to net sales would
adversely impact our net income and cash flow and could affect
our ability to pay our own obligations as they become due.
We
face intense competition, including competition from companies
with significantly greater resources than ours, and if we are
unable to compete effectively with these companies, our market
share may decline and our business could be
harmed.
The footwear industry is highly competitive, and the recent
growth in the market for sport sandals, casual footwear and
other products manufactured by our licensees has encouraged the
entry of many new competitors into the marketplace as well as
increased competition from established companies. A number of
our competitors have significantly greater financial,
technological, engineering, manufacturing, marketing and
distribution resources than we do, as well as greater brand
awareness in the footwear market. Our competitors include
athletic and footwear companies, branded apparel companies and
retailers with their own private labels. Their greater
capabilities in these areas may enable them to better withstand
periodic downturns in the footwear industry, compete more
effectively on the basis of price and production and more
quickly develop new products. In addition, access to offshore
manufacturing has made it easier for new companies to enter the
markets in which we compete, further increasing competition in
the footwear industry.
Additionally, efforts by our competitors to dispose of their
excess inventories may significantly reduce prices that we can
expect to receive for the sale of our competing products and may
cause our customers to shift their purchases away from our
products.
We believe that our ability to compete successfully depends on a
number of factors, including the quality, style and authenticity
of our products and the strength of our brands, as well as many
factors beyond our control. Maintaining our competitiveness
depends on our ability to defend our products from infringement,
our continued ability to anticipate and react to consumer tastes
and our continued ability to deliver quality products at an
acceptable price. If we fail to compete successfully in the
future, our sales and profits will decline, as will the value of
our business, financial condition and common stock.
Consolidations,
restructurings and other ownership changes in the retail
industry could affect the ability of our wholesale customers to
purchase and market our products.
In the future, retailers in the U.S. and in foreign markets may
undergo changes that could decrease the number of stores that
carry our products or increase the concentration of ownership
within the retail industry, including:
|
|
|
|
|
consolidating their operations;
|
|
|
|
undergoing restructurings;
|
|
|
|
undergoing reorganizations; or
|
|
|
|
realigning their affiliations.
|
These consolidations could result in a shift of bargaining power
to the retail industry and in fewer outlets for our products.
Further consolidations could result in price and other
competition that could reduce our margins and our net sales.
Risks
Relating to Our Common Stock
Our
common stock price has been volatile, which could result in
substantial losses for stockholders.
Our common stock is traded on the NASDAQ Global Select Market.
While our average daily trading volume for the 52-week period
ended February 28, 2007 was approximately
310,000 shares, we have experienced more limited volume in
the past and may do so in the future. The trading price of our
common stock has been and may continue to be volatile. The
closing prices of our common stock, as reported by the NASDAQ
Global Select Market,
25
have ranged from $34.18 to $66.29 for the 52-week period ended
February 28, 2007. The trading price of our common stock
could be affected by a number of factors, including, but not
limited to the following:
|
|
|
|
|
changes in expectations of our future performance;
|
|
|
|
changes in estimates by securities analysts (or failure to meet
such estimates);
|
|
|
|
quarterly fluctuations in our sales and financial results;
|
|
|
|
broad market fluctuations in volume and price; and
|
|
|
|
a variety of risk factors, including the ones described
elsewhere in this Annual Report on
Form 10-K
and in our other periodic reports.
|
Accordingly, the price of our common stock is volatile and any
investment in our securities is subject to risk of loss.
Anti-takeover
provisions or our certificate on incorporation, bylaws,
stockholder rights plan and Delaware law could prevent or delay
a change in control of our company, even if such change of
control would benefit our stockholders.
Provisions of our certificate of incorporation and bylaws, as
well as provisions of Delaware law, could discourage, delay or
prevent a merger, acquisition or other change in control of our
company, even if such a change in control might benefit our
stockholders. These provisions could also discourage proxy
contests and make it more difficult for you and other
stockholders to elect directors and take other corporate
actions. As a result, these provisions could limit the price
that investors are willing to pay in the future for shares of
our common stock. The provisions might also discourage a
potential acquisition proposal or tender offer, even if the
acquisition proposal or tender offer is at a price above the
then current market price for our common stock. These provisions
include the following:
|
|
|
|
|
authorization of blank check preferred stock, which
our board of directors could issue with provisions designed to
thwart a takeover attempt;
|
|
|
|
limitations on the ability of stockholders to call special
meetings of stockholders;
|
|
|
|
a prohibition against stockholder action by written consent and
a requirement that all stockholder actions be taken at a meeting
of our stockholders; and
|
|
|
|
advance notice requirements for nominations for election to our
board of directors or for proposing matter that can be acted
upon by stockholder meetings.
|
We adopted a stockholder rights plan in 1998 under a stockholder
rights agreement intended to protect stockholders against
unsolicited attempts to acquire control of our company that do
not offer what our board of directors believes to be an adequate
price to all stockholders or that our board of directors
otherwise opposes. As part of the plan, our board of directors
declared a dividend that resulted in the issuance of one
preferred share purchase right for each outstanding share of our
common stock. Unless extended, the preferred share purchase
rights will terminate on November 11, 2008. If a bidder
proceeds with an unsolicited attempt to purchase our stock and
acquires 20% or more (or announces its intention to acquire 20%
or more) of our outstanding common stock, and the board of
directors does not redeem the preferred stock purchase right,
the right will become exercisable at a price that significantly
dilutes the interest of the bidder in our common stock.
The effect of the stockholder rights plan is to make it more
difficult to acquire our company without negotiating with the
board of directors. However, the stockholder rights plan could
discourage offers even if made at a premium over the market
price of our common stock, and even if the stockholders might
believe the transaction would benefit them.
In addition, we are subject to Section 203 of the Delaware
General Corporation Law, which limits business combination
transactions with 15% or greater stockholders that our board of
directors has not approved. These provisions and other similar
provisions make it more difficult for a third party to acquire
us without negotiation with our board of directors. These
provisions apply even if some stockholders would consider the
transaction beneficial.
|
|
Item 1B.
|
Unresolved
Staff Comments.
|
None.
26
Our corporate headquarters is located in Goleta, California. We
have two distribution centers in California, our internet and
catalog operations in Arizona, and five retail stores in the
U.S. ranging from 3,000 to 3,500 square feet. We also have a
small office in China to oversee the quality and manufacturing
standards of our products, a small office in Macau to coordinate
logistics, and a small office in the U.K. to oversee European
operations. We have no manufacturing facilities, as all of our
products are manufactured by independent manufacturers in China,
Australia and New Zealand. We lease, rather than own, all of our
facilities from unrelated parties. Most of our facilities are
attributable to all segments of our business and are not
allocated to the segments. We believe our space is adequate for
our current needs and that suitable additional or substitute
space will be available to accommodate the foreseeable expansion
of our business and operations.
The following table reflects the location, use, segment, and
approximate size of our significant physical properties:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate
|
|
Facility Location
|
|
Description
|
|
Business Segment
|
|
|
Square Footage
|
|
|
Camarillo, California
|
|
Warehouse Facility
|
|
|
unallocated
|
|
|
|
300,000
|
|
Ventura, California
|
|
Warehouse Facility and Retail
Outlet
|
|
|
unallocated
|
|
|
|
126,000
|
|
Goleta, California
|
|
Corporate Offices
|
|
|
unallocated
|
|
|
|
30,000
|
|
Item 3. Legal
Proceedings.
We are involved in routine litigation arising in the ordinary
course of business. Such routine matters, if decided adversely
to us, would not, in the opinion of management, have a material
adverse effect on our financial condition or results of
operations. Additionally, we have many pending disputes in the
U.S. Patent and Trademark Office, foreign trademark offices and
U.S. federal and foreign courts regarding unauthorized use or
registration of our Teva, UGG and Simple trademarks. We also are
aware of many instances throughout the world in which a third
party is using our UGG trademark within its internet domain
name, and we have discovered and are investigating several
manufacturers and distributors of counterfeit Teva and UGG
products. Any decision or settlement in any of these matters
that allowed a third party to continue to use our Teva, UGG or
Simple trademarks or a domain name with our UGG trademark in
connection with the sale of products similar to our products or
to continue to manufacture or distribute counterfeit products
could have an adverse effect on our sales and on our
intellectual property, which could have a material adverse
effect on our results of operations and financial condition.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders.
|
None.
27
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities.
|
Our common stock is traded on the NASDAQ Global Select Market
under the symbol DECK. The following table shows the
range of low and high closing sale prices per share of our
common stock as reported by the NASDAQ Global Select Market for
the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
Price Per Share
|
|
|
|
Low
|
|
|
High
|
|
|
Year ended December 31,
2005:
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
34.95
|
|
|
$
|
45.43
|
|
Second Quarter
|
|
$
|
21.07
|
|
|
$
|
35.00
|
|
Third Quarter
|
|
$
|
21.75
|
|
|
$
|
28.42
|
|
Fourth Quarter
|
|
$
|
17.15
|
|
|
$
|
30.35
|
|
Year ended December 31,
2006:
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
29.16
|
|
|
$
|
40.54
|
|
Second Quarter
|
|
$
|
34.50
|
|
|
$
|
43.56
|
|
Third Quarter
|
|
$
|
34.18
|
|
|
$
|
48.09
|
|
Fourth Quarter
|
|
$
|
47.07
|
|
|
$
|
60.31
|
|
As of February 28, 2007, there were 98 record holders
of our common stock and we believe there are approximately
19,000 beneficial holders of our common stock.
STOCKHOLDER
RETURN PERFORMANCE PRESENTATION
Set forth below is a line graph comparing the
percentage change in the cumulative total stockholder
return on the Companys Common Stock against the cumulative
total return of the NASDAQ Composite Index and a peer group
index for the
five-year
period commencing December 31, 2001 and ending
December 31, 2006. The data represented below assumes $100
invested in each of the Companys Common Stock, the NASDAQ
Composite Index and the peer group index on December 31,
2001. The stock performance graph shall not be deemed
incorporated by reference by any general statement incorporating
by reference this Annual Report on
Form 10-K
into any filing under the Securities Act of 1933, as amended, or
under the Securities Exchange Act of 1934, as amended, except to
the extent that the Company specifically incorporates this
information by reference, and shall not otherwise be deemed
filed under either of such Acts.
28
Comparison
of Total Return
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Deckers Outdoor Corporation
|
|
|
100.0
|
|
|
|
78.6
|
|
|
|
482.4
|
|
|
|
1,105.7
|
|
|
|
649.9
|
|
|
|
1,410.6
|
|
Athletic Shoe Index*
|
|
|
100.0
|
|
|
|
85.4
|
|
|
|
132.7
|
|
|
|
173.8
|
|
|
|
172.3
|
|
|
|
194.5
|
|
NASDAQ Composite Index
|
|
|
100.0
|
|
|
|
69.8
|
|
|
|
104.9
|
|
|
|
113.7
|
|
|
|
116.2
|
|
|
|
128.1
|
|
|
|
|
* |
|
Athletic Shoe Index peer group consists of K-Swiss Inc., Kenneth
Cole Productions, Inc., Nike Inc., Rocky Brands, Inc., Stride
Rite Corporation, Timberland Company, and Wolverine World Wide
Inc. In previous years, this peer group index also included Fila
Holding SPA, which has been excluded from the index in all
periods presented above, as its securities are no longer
publicly-traded. Vans Inc., which was previously in our peer
group index, was acquired by VF Corp in 2005 and has also been
excluded. Reebok International Ltd. also was previously included
in our peer group index, was acquired by Adidas-Salomon AG in
2005 and has been excluded. |
DIVIDEND
POLICY
We have not declared or paid any cash dividends on our common
stock since our inception. We currently anticipate that we will
retain all of our earnings for the continued development and
expansion of our business and do not anticipate declaring or
paying any cash dividends in the foreseeable future. Moreover,
our debt facility contains covenants expressly prohibiting us
from paying cash dividends.
SECURITIES
AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION
PLANS
The following table represents securities authorized for
issuance under our equity compensation plans as of
December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
securities to be
|
|
|
|
|
|
|
|
|
|
issued upon
|
|
|
Weighted average
|
|
|
|
|
|
|
exercise of
|
|
|
exercise price of
|
|
|
Number of
|
|
|
|
outstanding
|
|
|
outstanding
|
|
|
securities
|
|
|
|
options, warrants
|
|
|
options, warrants
|
|
|
remaining available
|
|
|
|
and rights
|
|
|
and rights
|
|
|
for future issuance
|
|
|
Equity compensation plans approved
by security holders
|
|
|
466,000
|
|
|
$
|
6.59
|
|
|
|
1,913,000
|
|
Equity compensation plans not
approved by security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
466,000
|
|
|
$
|
6.59
|
|
|
|
1,913,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item 6. Selected
Financial Data
We derived the following selected consolidated financial data
from our consolidated financial statements, which have been
audited by KPMG LLP, our independent registered public
accountants. Historical results are not necessarily indicative
of the results to be expected in the future. You should read the
following consolidated
29
financial information together with our consolidated financial
statements and the related notes and Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands, except per share data)
|
|
|
Statement of Operations
Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Teva wholesale
|
|
$
|
64,849
|
|
|
$
|
72,783
|
|
|
$
|
83,477
|
|
|
$
|
80,446
|
|
|
$
|
75,283
|
|
UGG wholesale
|
|
|
23,491
|
|
|
|
34,561
|
|
|
|
101,806
|
|
|
|
150,279
|
|
|
|
182,369
|
|
Simple wholesale
|
|
|
10,159
|
|
|
|
7,210
|
|
|
|
9,633
|
|
|
|
6,980
|
|
|
|
10,903
|
|
Consumer Direct
|
|
|
608
|
|
|
|
6,501
|
|
|
|
19,871
|
|
|
|
27,055
|
|
|
|
35,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
99,107
|
|
|
|
121,055
|
|
|
|
214,787
|
|
|
|
264,760
|
|
|
|
304,423
|
|
Cost of sales
|
|
|
57,577
|
|
|
|
69,710
|
|
|
|
124,354
|
|
|
|
153,238
|
|
|
|
163,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
41,530
|
|
|
|
51,345
|
|
|
|
90,433
|
|
|
|
111,522
|
|
|
|
141,199
|
|
Selling, general and
administrative expenses
|
|
|
34,954
|
|
|
|
32,407
|
|
|
|
47,971
|
|
|
|
59,254
|
|
|
|
73,989
|
|
Litigation expense (income)(1)
|
|
|
3,228
|
|
|
|
(500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment loss(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
3,348
|
|
|
|
19,438
|
|
|
|
42,462
|
|
|
|
52,268
|
|
|
|
51,910
|
|
Other expense (income), net
|
|
|
504
|
|
|
|
4,554
|
|
|
|
2,239
|
|
|
|
25
|
|
|
|
(2,371
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and
cumulative effect of accounting change
|
|
|
2,844
|
|
|
|
14,884
|
|
|
|
40,223
|
|
|
|
52,243
|
|
|
|
54,281
|
|
Income taxes
|
|
|
1,224
|
|
|
|
5,730
|
|
|
|
14,684
|
|
|
|
20,398
|
|
|
|
22,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of
accounting change
|
|
|
1,620
|
|
|
|
9,154
|
|
|
|
25,539
|
|
|
|
31,845
|
|
|
|
31,522
|
|
Cumulative effect of accounting
change, net of $843 income tax benefit(2)
|
|
|
(8,973
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(7,353
|
)
|
|
$
|
9,154
|
|
|
$
|
25,539
|
|
|
$
|
31,845
|
|
|
$
|
31,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income before cumulative
effect of accounting change
|
|
$
|
0.17
|
|
|
$
|
0.91
|
|
|
$
|
2.32
|
|
|
$
|
2.58
|
|
|
$
|
2.52
|
|
Cumulative effect of accounting
change(2)
|
|
|
(0.96
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net (loss) income
|
|
$
|
(0.79
|
)
|
|
$
|
0.91
|
|
|
$
|
2.32
|
|
|
$
|
2.58
|
|
|
$
|
2.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income before cumulative
effect of accounting change
|
|
$
|
0.17
|
|
|
$
|
0.77
|
|
|
$
|
2.10
|
|
|
$
|
2.48
|
|
|
$
|
2.45
|
|
Cumulative effect of accounting
change(2)
|
|
|
(0.92
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net (loss) income
|
|
$
|
(0.75
|
)
|
|
$
|
0.77
|
|
|
$
|
2.10
|
|
|
$
|
2.48
|
|
|
$
|
2.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
9,328
|
|
|
|
9,610
|
|
|
|
11,005
|
|
|
|
12,349
|
|
|
|
12,519
|
|
Diluted
|
|
|
9,806
|
|
|
|
11,880
|
|
|
|
12,142
|
|
|
|
12,866
|
|
|
|
12,882
|
|
|
|
|
(1) |
|
The litigation expense (income) includes: (i) expenses of
$3,228 in 2002 related to a lawsuit filed against us in Montana
in 1995 which we settled and paid in full in 2002, and
(ii) income of $500 in 2003 related to a European
anti-dumping duties matter that was ultimately resolved in our
favor in 2003. |
|
(2) |
|
Our adoption of Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets,
on January 1, 2002 resulted in a goodwill impairment charge
of $8,973 (net of the related income tax benefit of $843), or
$0.92 per diluted share, during 2002. |
30
|
|
|
(3) |
|
The impairment loss in 2006 relates to our Teva trademarks.
During our annual assessment of goodwill and other intangible
assets, we concluded that the fair value was lower than the
carrying amount and therefore wrote down the trademarks to their
fair value. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,941
|
|
|
$
|
6,662
|
|
|
$
|
10,379
|
|
|
$
|
50,749
|
|
|
$
|
34,255
|
|
Working capital
|
|
$
|
22,453
|
|
|
$
|
22,803
|
|
|
$
|
69,854
|
|
|
$
|
107,120
|
|
|
$
|
151,688
|
|
Total assets
|
|
$
|
120,857
|
|
|
$
|
119,579
|
|
|
$
|
173,995
|
|
|
$
|
208,391
|
|
|
$
|
249,973
|
|
Long-term debt, including current
installments
|
|
$
|
39,028
|
|
|
$
|
30,287
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Total stockholders equity
|
|
$
|
65,227
|
|
|
$
|
70,524
|
|
|
$
|
140,996
|
|
|
$
|
177,555
|
|
|
$
|
214,238
|
|
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operation.
|
FORWARD-LOOKING
STATEMENTS
This report and the information incorporated by reference in
this report contain
forward-looking
statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the
Securities Act of 1934, as amended. We sometimes use words such
as anticipate, believe,
continue, estimate, expect,
intend, may, project,
will and similar expressions, as they relate to us,
our management and our industry, to identify
forward-looking
statements.
Forward-looking
statements relate to our expectations, beliefs, plans,
strategies, prospects, future performance, anticipated trends
and other future events. Specifically, this report and the
information incorporated by reference in this report contain
forward-looking
statements relating to, among other things:
|
|
|
|
|
our business, growth, operating and financing strategies;
|
|
|
|
our product mix;
|
|
|
|
the success of new products;
|
|
|
|
the impact of seasonality on our operations;
|
|
|
|
expectations regarding our net sales and earnings growth;
|
|
|
|
our development of international distribution channels; and
|
|
|
|
trends affecting our financial condition or results of
operations.
|
We have based our
forward-looking
statements largely on our current expectations and projections
about future events and financial trends affecting our business.
Actual results may differ materially. Some of the risks,
uncertainties and assumptions that may cause actual results to
differ from these
forward-looking
statements are described in Item 1A, Risk
Factors. In light of these risks, uncertainties and
assumptions, the
forward-looking
events and circumstances discussed in this report and the
information incorporated by reference in this report might not
happen.
You should completely read this report, the documents that we
filed as exhibits to this report and the documents that we
incorporate by reference in this report with the understanding
that our future results may be materially different from what we
expect. We qualify all of our
forward-looking
statements by these cautionary statements and we assume no
obligation to update such
forward-looking
statements publicly for any reason.
Overview
We are a leading designer, producer and brand manager of
innovative,
high-quality
footwear and the category creator in the sport sandal, luxury
sheepskin, and sustainable footwear segments. We market our
products under three proprietary brands:
|
|
|
|
|
Teva®:
High performance sport sandals and rugged outdoor footwear;
|
31
|
|
|
|
|
UGG®:
Authentic luxury sheepskin boots and a full line of luxury and
comfort footwear; and
|
|
|
|
Simple®:
Innovative sustainable lifestyle footwear and accessories.
|
We sell our three brands through our quality domestic
retailers and international distributors and directly to our
end-user
consumers through our Consumer Direct business. We sell our
footwear in both the domestic market and the international
markets. Independent third parties manufacture all of our
footwear.
Our business has been impacted by several important trends
affecting our end markets:
|
|
|
|
|
The markets for casual, outdoor and athletic footwear have grown
significantly during the last decade. We believe this growth is
a result of the trend toward casual dress in the workplace,
increasingly active outdoor lifestyles and a growing emphasis on
comfort.
|
|
|
|
Consumers are more often seeking footwear designed to address a
broader array of activities with the same quality, comfort and
high performance attributes they have come to expect from
traditional athletic footwear.
|
|
|
|
Our customers have narrowed their footwear product breadth,
focusing on brands with a rich heritage and authenticity as
market category creators and leaders.
|
|
|
|
Consumers have become increasingly focused on luxury and
comfort, seeking out products and brands that are fashionable
while still comfortable.
|
By emphasizing our brand image and our focus on comfort,
performance and authenticity, we believe we can better maintain
a loyal consumer following that is less susceptible to
fluctuations caused by changing fashions and changes in consumer
preferences.
Below is an overview of the various components of our business,
including some of the important factors that affect each
business and some of our strategies for growing each business.
Teva
Brand Overview
We initially produced Teva products under a license from the
inventor of the Teva Universal Strap technology, Mark Thatcher.
In November 2002, we purchased from Mr. Thatcher the
Teva worldwide assets, including the Teva internet and catalog
business and all patents, trade names, trademarks and other
intellectual property associated with the acquired Teva assets,
which we refer to collectively as the Teva Rights.
From fiscal 2002 to 2004, wholesale net sales of Teva brand
products increased at a compound annual growth rate of 13.5%.
However, for fiscal years 2005 and 2006, wholesale net
sales of Teva products decreased by approximately 3.6% and 6.4%,
respectively, compared to the year ago periods. We attribute
this decline in sales primarily to a prolonged period of weak
product innovation, coupled with a significant increase in
competitor activity. We began to address this situation in 2006
by dedicating significantly greater resources to product
planning, design, and development, and through aggressive
marketing. We also repositioned the Teva brand to a younger
target consumer. In the third and fourth quarters of 2006, we
had higher full price sales compared to the same periods in
2005. For the third and fourth quarters of 2006, the Teva
brands wholesale net sales increased by 1.0% and 15.9%,
respectively, compared to the same periods of 2005. We expect
Teva brand growth to be in the
mid-teens
year over year in 2007.
We performed our annual impairment test of goodwill and
nonamortizable intangible assets as of December 31, 2006
and determined that there was no impairment of goodwill.
However, we concluded that the fair value of our Teva brand
trademarks was lower than the carrying amount and recorded a
$15,300 impairment loss in a separate line item within income
from operations, and as a part of our Teva reportable segment.
Despite the slight decrease in sales for 2006, the Teva brand
sales increased 15.9% in the fourth quarter of 2006 over
the fourth quarter 2005. In the second half of 2005,
steps were taken to reduce our inventory of old Teva product.
Beginning in the first quarter of 2006, we significantly
increased our investment in measurable media (advertising and
in-store
display materials). We shifted the target of our advertising to
a younger,
trend-setting
consumer. We also introduced a modest collection of new styles
for both Spring and Fall 2006. As a result, 2006 closeout
sales represented a significantly smaller percentage of total
sales compared to 2005.
We see a continuing shift in consumer preferences and lifestyles
to include more outdoor recreational activities. The Teva brand
has remained popular among professional and amateur outdoor
enthusiasts, who consider the brand authentic and performance
oriented. Our Spring 2007 product line is over
70% new, and includes
32
innovative technical performance styles, as well as new colors
and fresh new casual styles, which target a new generation of
young outdoor athletes and enthusiasts.
To further capitalize on the growth of outdoor recreational
activities and the acceptance of certain outdoor footwear
products for everyday use, we will continue to explore
opportunities to broaden the Teva brands distribution with
image-enhancing
retailers beyond our core outdoor specialty and sporting goods
channels. Through effective channel management, we believe we
can continue to expand into new distribution channels without
diluting our outdoor heritage and our appeal to outdoor
enthusiasts. Through appropriate channel product line expansion,
we continue to broaden our product offerings beyond sport
sandals to new products that meet the style and functional needs
of our consumers.
UGG
Brand Overview
The UGG brand has been a
well-known
brand in California for many years and over the past few years
has become a recognized brand throughout the remainder of the
country. Over the past few years, our UGG brand has received
increased media exposure including increased print media in
national ads and co-op advertising with our customers, which
contributed to broader public awareness of the UGG brand and
significantly increased demand for the collection. We believe
that the increased media focus and demand for UGG products was
driven by the following:
|
|
|
|
|
consumer brand loyalty, due to the luxury and comfort of UGG
footwear,
|
|
|
|
increased marketing in high end magazines,
|
|
|
|
successfully targeting high end distribution,
|
|
|
|
adoption by
high-profile
film and television celebrities as a favored footwear brand,
|
|
|
|
increased media attention that has enabled us to introduce the
brand to consumers much faster than we would have normally been
able to,
|
|
|
|
continued geographic expansion across the U.S. and
internationally,
|
|
|
|
continued addition of new product categories.
|
We believe the luxury and comfort features of UGG products will
continue to drive
long-term
consumer demand. Recognizing that there is a significant fashion
element to UGG footwear and that footwear fashions fluctuate,
our strategy seeks to prolong the longevity of the brand by
offering a broader product line suitable for wear in a variety
of climates and occasions and by limiting distribution to
selected
higher-end
retailers. As part of this strategy, we have significantly
increased our product line to approximately 125 styles in
Fall 2007 from approximately 50 styles in 2002. This
product line expansion includes our significantly expanded
Spring and Fall 2006 Fashion Collection and Mens
offering, as well as new styles in our Driving Collection, our
newly introduced Surf Collection, our Cold Weather Collection
and our luxury slipper category. Nevertheless, we cannot assure
investors that UGG brand sales will continue to grow at their
recent pace or that revenue from UGG products will not at some
point decline. For the year ended December 31, 2006, the
UGG brands wholesale sales increased 21.4% compared to the
same period in 2005.
Simple
Overview
The Simple brand shoes began in 1991 as an alternative to all
the
over-built,
over-priced,
and
over-hyped
products in the marketplace. The brands foundation was
built on the Old School Sneaker and the New Original Clog. In
Fall 2005, as a response to the massive amount of waste
produced by the footwear industry, the Simple brand launched a
new collection of ecologically friendly footwear called Green
Toe, a product collection that consists of 100% sustainable
materials and that we hope will revolutionize the footwear
industry. We have repositioned the brand to be focused on
becoming the world leader in sustainable footwear and
accessories. In 2005, we also hired an
in-house
public relations manager, increased our print media campaigns,
as well as improved our distribution initiatives through the
establishment of dedicated sales representatives in key markets.
These strategies, combined with innovative products and unique
marketing, have created strong relationships with our retailers.
It is more apparent now that the brand is dedicated to creating
a cohesive and consistent message to both the retailer and
consumer. In 2006, our mens and womens products
performed well at retail, as demand continues to increase for
our Green Toe products. We increased our account base both
domestically and internationally. We also expanded
33
our presence into additional retail stores with our key
accounts. These efforts resulted in an increase of 56.2% of
wholesale net sales of Simple brand products for the year ended
December 31, 2006, compared to the same period in 2005.
Simples mission is to be the world leader in sustainable
footwear and accessories as we continue to bring fresh product
designs to the market and implement our sales strategy to expand
distribution channels.
Consumer
Direct Overview
Our Consumer Direct business includes our internet and catalog
retailing operations as well as our retail stores. We acquired
our internet and catalog retailing business in
November 2002 as part of the acquisition of the Teva
Rights. In addition, we have opened three new retail outlet
stores, one in Camarillo, California, one in Wrentham,
Massachusetts and one in Riverhead, New York along with our
existing store in Ventura, California. We also opened our first
UGG brand concept store in New York, New York in 2006.
Based on the success of the existing stores, we currently plan
to open one or two additional retail outlet stores in select
premium outlet malls in the U.S., as well as another UGG brand
concept store in in a major metropolitan area by the end of 2007.
Our Consumer Direct business, which today sells all three of our
brands, enables us to meet the growing demand for these
products, to sell the products at retail prices and to provide
us with significant incremental operating income. From the time
we initiated our Consumer Direct business through the end of
2006, we have had significant revenue growth, much of which
occurred as the UGG brand gained popularity and as consumers
have continued to increase reliance on the internet for footwear
and other purchases and as we began to open retail outlet
stores. Net sales of the Consumer Direct business increased
32.6% in the year ended December 31, 2006, compared to the
same period in 2005.
Managing our internet business requires us to focus on
generating internet traffic to our websites, to effectively
convert website visits into orders, and to maximize average
order sizes. We distribute approximately two million consumer
brochures throughout the year to drive our catalog order
business. We plan to continue to grow this business through
improved website features and performance, increased marketing
and European websites. Overall, our Consumer Direct business
benefits from the strength of our brands and, as we grow our
brands over time, we expect this business to continue to be an
important segment of our business.
Licensing
Overview
In 2004, we embarked on a strategy to license our footwear
brands to complementary products outside of footwear, generally
in the apparel and accessories categories. We currently have
nine licensing agreements with six licensees for the Teva and
UGG brands combined. We record licensing revenues and expenses
within their respective brand. The activity is very small in
relation to the consolidated operations, and we do not expect
significant incremental net sales and profits from licensing in
the near future.
Seasonality
Our business is seasonal, with the highest percentage of Teva
brand net sales occurring in the first and second quarters of
each year and the highest percentage of UGG brand net sales
occurring in the third and fourth quarters. To date, the Simple
brand has not had a seasonal impact on the Company.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Net sales
|
|
$
|
64,263
|
|
|
$
|
40,341
|
|
|
$
|
69,193
|
|
|
$
|
90,963
|
|
Income from operations
|
|
$
|
14,399
|
|
|
$
|
4,677
|
|
|
$
|
14,018
|
|
|
$
|
19,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Net sales
|
|
$
|
56,004
|
|
|
$
|
41,721
|
|
|
$
|
82,322
|
|
|
$
|
124,376
|
|
Income from operations*
|
|
$
|
8,914
|
|
|
$
|
4,008
|
|
|
$
|
17,308
|
|
|
$
|
21,680
|
|
|
|
|
* |
|
Included in income from operations in the fourth quarter of 2006
is a $15,300 impairment loss on our Teva trademark. |
34
With the dramatic growth in the UGG brand in recent years,
combined with the introduction of a Fall Teva product line, net
sales in the last half of the year have exceeded that for the
first half of the year. Given our expectations for each of our
brands in 2007, we currently expect this trend to continue.
Nonetheless, actual results could differ materially depending
upon consumer preferences, availability of product, competition
and our customers continuing to carry and promote our various
product lines, among other risks and uncertainties. See
Item 1A, Risk Factors.
Results
of Operations
The following table sets forth certain operating data for the
periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Net sales by
location:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S
|
|
$
|
175,419
|
|
|
$
|
229,487
|
|
|
$
|
266,092
|
|
International
|
|
|
39,368
|
|
|
|
35,273
|
|
|
|
38,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
214,787
|
|
|
$
|
264,760
|
|
|
$
|
304,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales by product line and
Consumer Direct business:
|
|
|
|
|
|
|
|
|
|
|
|
|
Teva:
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
$
|
83,477
|
|
|
$
|
80,446
|
|
|
$
|
75,283
|
|
Consumer Direct
|
|
|
4,759
|
|
|
|
4,792
|
|
|
|
5,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
88,236
|
|
|
|
85,238
|
|
|
|
80,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UGG:
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
|
101,806
|
|
|
|
150,279
|
|
|
|
182,369
|
|
Consumer Direct
|
|
|
14,415
|
|
|
|
21,354
|
|
|
|
29,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
116,221
|
|
|
|
171,633
|
|
|
|
211,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Simple:
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
|
9,633
|
|
|
|
6,980
|
|
|
|
10,903
|
|
Consumer Direct
|
|
|
697
|
|
|
|
909
|
|
|
|
1,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
10,330
|
|
|
|
7,889
|
|
|
|
12,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
214,787
|
|
|
$
|
264,760
|
|
|
$
|
304,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
by product line and Consumer Direct business:
|
|
|
|
|
|
|
|
|
|
|
|
|
Teva wholesale*
|
|
$
|
24,901
|
|
|
$
|
22,388
|
|
|
$
|
3,968
|
|
UGG wholesale
|
|
|
31,674
|
|
|
|
48,765
|
|
|
|
73,208
|
|
Simple wholesale
|
|
|
45
|
|
|
|
(834
|
)
|
|
|
(2,443
|
)
|
Consumer Direct
|
|
|
5,533
|
|
|
|
6,972
|
|
|
|
9,954
|
|
Unallocated overhead costs
|
|
|
(19,691
|
)
|
|
|
(25,023
|
)
|
|
|
(32,777
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
42,462
|
|
|
$
|
52,268
|
|
|
$
|
51,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Included in Teva income from operations in 2006 is an impairment
loss of $15,300 (see Impairment loss discussion below). |
35
The following table shows certain operating data as a percentage
of net sales and the increase (decrease) in each item of
operating data.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
Percent Increase (Decrease)
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2004 to 2005
|
|
|
2005 to 2006
|
|
|
Net sales
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
23.3
|
%
|
|
|
15.0
|
%
|
Cost of sales
|
|
|
57.9
|
|
|
|
57.9
|
|
|
|
53.6
|
|
|
|
23.2
|
|
|
|
6.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
42.1
|
|
|
|
42.1
|
|
|
|
46.4
|
|
|
|
23.3
|
|
|
|
26.6
|
|
Selling, general and
administrative expenses
|
|
|
22.3
|
|
|
|
22.4
|
|
|
|
24.3
|
|
|
|
23.5
|
|
|
|
24.9
|
|
Impairment loss
|
|
|
|
|
|
|
|
|
|
|
5.0
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
19.8
|
|
|
|
19.7
|
|
|
|
17.1
|
|
|
|
23.1
|
|
|
|
(0.7
|
)
|
Interest expense (income)
and other,
net
|
|
|
1.1
|
|
|
|
|
|
|
|
(0.8
|
)
|
|
|
(98.9
|
)
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
18.7
|
|
|
|
19.7
|
|
|
|
17.8
|
|
|
|
29.9
|
|
|
|
3.9
|
|
Income taxes
|
|
|
6.8
|
|
|
|
7.7
|
|
|
|
7.5
|
|
|
|
38.9
|
|
|
|
11.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
11.9
|
%
|
|
|
12.0
|
%
|
|
|
10.4
|
%
|
|
|
24.7
|
|
|
|
(1.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Calculation of percentage is not meaningful. |
Year
Ended December 31, 2005 Compared to Year Ended
December 31, 2006
Overview. In 2006, we had net sales of
$304,423 and income from operations of $51,910 compared to net
sales of $264,760 and income from operations of $52,268 in 2005.
These results were driven by increased UGG and Simple brand
sales, partially offset by a decrease in Teva brand sales. The
decrease in income from operations was the result of a $15,300
impairment loss on our Teva trademarks, partially offset by
higher sales and gross margins compared to 2005.
Net Sales. Net sales increased by
$39,663, or 15.0%, in 2006 compared to 2005. The increase was
due primarily to increases in sales for the UGG and Simple brand
sales, partially offset by lower Teva brand sales, as discussed
below. Net sales increased in 2006 due primarily to: (1) an
increase in the weighted average wholesale selling price per
pair, which increased 7.8% from $28.06 in 2005 to $30.25 in
2006, primarily from an increase in sales of UGG products, which
carry higher average selling prices, (2) a 5.5% overall
increase in the volume of footwear sold from 8.8 million
pairs in 2005 to 9.3 million pairs in 2006, and
(3) the continued expansion of our Consumer Direct
business. In addition, full price sales of UGG products
increased in 2006 compared to 2005.
Net wholesale sales of Teva products decreased by $5,163, or
6.4%, in 2006 compared to 2005. This decrease was due to
increased competition, a recent lack of meaningful product
innovation, and a decline in sales in certain international
markets. We began to address the situation by dedicating
significantly greater resources to product development,
marketing and advertising, and the development of a solid
international infrastructure. We began to see the results of
these efforts in the fourth quarter of 2006 with an increase of
15.9% over the fourth quarter of 2005. See
Overview Teva Brand Overview
above.
Net wholesale sales of UGG products increased by $32,090, or
21.4%, in 2006 compared to 2005 due primarily to increased sales
of all categories, including boots, slippers, casuals,
kids and mens footwear. The increase was partially
offset by approximately $10,000 of Fall 2004 holiday sales that
did not ship until the first quarter of 2005, which caused net
sales of UGG branded products to be slightly higher in the first
quarter of 2005 compared to the first quarter of 2006. See
Overview UGG Brand Overview
above.
Net wholesale sales of Simple products increased by $3,923, or
56.2%, in 2006 compared to 2005. The increase was largely due to
the greater demand of our sandal collection and the introduction
of our Green Toe collection, as well as an increase in sales of
our core sneaker product line. See
Overview Simple Brand Overview above.
36
Net sales of the Consumer Direct business increased by $8,813,
or 32.6%, in 2006 compared to 2005, representing 10.2% of net
sales in 2005 and 11.8% of net sales in 2006. In 2005, net sales
of the Consumer Direct business included retail sales of Teva
products of $4,792, UGG products of $21,354 and Simple products
of $909. In 2006, net sales of the Consumer Direct business
included retail sales of Teva of $5,218, UGG of $29,092 and
Simple of $1,558. The increase in net sales of the Consumer
Direct business was due to the greater demand for our products
and the additional sales of our retail outlet stores, which were
not all in place throughout 2005. See
Overview Consumer Direct
Overview above.
International sales for all of our products increased by $3,058,
or 8.7%, in 2006 compared to 2005, representing 13.3% of net
sales in 2005 and 12.6% of net sales in 2006. The increase in
international sales was driven by increases in both UGG and
Simple brand sales, partially offset by decreases in Teva brand
international sales.
Gross Profit. Gross profit increased by
$29,677, or 26.6%, in 2006 compared to 2005. As a percentage of
net sales, gross margin increased to 46.4% in 2006 compared to
42.1% in 2005. The increase was primarily due to an increase in
the UGG brands wholesale gross margin, related to higher
initial sell-in margins, lower inventory write-offs, and lower
closeout sales. Our gross margins fluctuate based on several
factors and we expect to return to a normal margin of
approximately 44.0% in 2007.
Selling, General and Administrative
Expenses. Selling, general and administrative
expenses, or SG&A, increased by $14,735, or 24.9%, in 2006
compared to 2005. As a percentage of net sales, SG&A
increased from 22.4% in 2005 to 24.3% in 2006. The increase in
SG&A was primarily due to increases in payroll, marketing
and warehouse expenses partially offset by lower bad debt
expense. Prior to January 1, 2006, we accounted for our
stock-based compensation plans under the recognition and
measurement provisions of Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees,
and other related Interpretations, as permitted by Statement of
Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation (SFAS 123). Effective
January 1, 2006, we adopted the fair value recognition
provisions of Statement of Financial Accounting Standards No.
123 (revised 2004), Share-Based Payment (SFAS
123R). SFAS 123R requires us to measure compensation cost
for all outstanding unvested share-based awards at the grant
date fair value and recognize compensation over the requisite
service period for awards expected to vest. The total
stock-based compensation expense included in SG&A for 2004,
2005, and 2006 was $339, $754, and $2,079, respectively. The
increase in 2006 was primarily due to the adoption of
SFAS 123R.
Impairment loss. We conducted our
annual impairment evaluation of goodwill and nonamortizable
intangible assets using market value approaches and valuation
techniques as of December 31, 2006 and concluded that the
fair value of our Teva brand trademarks was lower than the
carrying amount. Therefore, we recognized an impairment loss of
$15,300 on our Teva trademarks in the fourth quarter of 2006.
Income from Operations. Income from
operations decreased by $358, or 0.7%, in 2006 compared to 2005,
representing 19.7% of sales in 2005 and 17.1% in 2006. The
decrease in income from operations was primarily due to the
impairment loss and the increase in SG&A expenses, partially
offset by the increase in sales and gross profit.
Income from operations of the Teva brand at wholesale decreased
by $18,420, or 82.3%, in 2006 compared to 2005. This decrease
was largely due to the $15,300 impairment loss on our Teva
trademarks as well as the decrease in net sales and increase in
marketing expenses. The decrease was partially offset by lower
selling commissions, lower bad debt expense and lower divisional
sales expenses.
Income from operations of the UGG brand at wholesale increased
by $24,443, or 50.1%, in 2006 compared to 2005. This was largely
due to increased sales volumes and gross margins as well as
lower bad debt expense, partially offset by higher divisional
sales expenses and marketing expenses.
Loss from operations of the Simple brand at wholesale was $834
in 2005 compared to a loss from operations of $2,443 in 2006. In
spite of achieving higher net sales for 2006, the Simple brand
experienced lower gross margins from increased closeouts with
negative margins along with higher marketing and selling costs.
Income from operations of our Consumer Direct business increased
by $2,982, or 42.8%, in 2006 compared to 2005. This increase was
largely due to the increase in net sales, partially offset by
higher operating costs.
Unallocated overhead costs increased by $7,754, or 31.0%, in
2006 compared to 2005. The increase resulted primarily from
higher corporate payroll costs, warehouse expenses, and
international division costs, which are not allocated to the
brands.
37
Other Expense (Income). Other expense
(income), net was $25 in 2005 compared to $(2,432) in 2006.
Since we had outstanding borrowings under our credit facility
for a short period of time in 2005 in order to meet our seasonal
borrowing needs, the interest income received on our invested
cash was offset by the interest expense incurred on the seasonal
borrowings. In 2006, we had no outstanding borrowings during the
year, higher excess cash and cash equivalents and short-term
investments balances, and higher investment return rates than
2005. We expect to continue to have increased interest income in
2007.
Income Taxes. In 2005, income tax
expense was $20,398, representing an effective income tax rate
of 39.0%. In 2006, income tax expense was $22,759 representing
an effective income tax rate of 41.9%. The increase in the
effective tax rate in 2006 was primarily due to approximately
$5,000 of impairment loss attributable to a foreign subsidiary
that receives no tax benefit from the charge, as this subsidiary
is in a tax free jurisdiction. This increase was partially
offset by the restructure of our legal entities to benefit from
lower tax jurisdictions internationally. In 2005, we repatriated
$3,500 from our international subsidiaries under
section 965 of the American Jobs Creation Act of 2004,
resulting in approximately $331 of incremental Federal and State
income taxes. Excluding the total impairment loss of $15,300,
the effective tax rate for 2006 was 38.7%. We present our
effective tax rate excluding the impairment loss because such
loss is a non-recurring charge that is outside our normal
business operations. The numbers are presented in a manner that
is consistent with how management views our business.
Net Income. Our net income decreased
1.0% from $31,845 in 2005 to $31,522 in 2006 primarily as a
result of the impairment loss, offset by higher net sales,
higher gross profit margins, and higher interest income in 2006.
Our earnings per diluted share decreased 1.2% from $2.48 to
$2.45 primarily as a result of the decrease in net income.
Year
Ended December 31, 2004 Compared to Year Ended
December 31, 2005
Overview. In 2005, we had net sales of
$264,760 and income from operations of $52,268 compared to net
sales of $214,787 and income from operations of $42,462 in 2004.
These results were primarily due to increased sales of the UGG
product line while maintaining comparable gross margin and
operating income margin to last year.
Net Sales. Net sales increased by
$49,973, or 23.3%, in 2005 compared to 2004. Net sales increased
in 2005 due primarily to: (1) a 14.8% overall increase in
the volume of footwear sold from 7.7 million pairs in 2004
to 8.8 million pairs in 2005, and (2) the expansion of
the Consumer Direct business. In addition, the weighted average
wholesale selling price per unit increased 7.5% from $26.10 in
2004 to $28.06 in 2005, caused by an increase in sales of UGG
products, which generally carry higher average selling prices,
and a decrease in international sales, which generally carry a
lower average selling price. This was partially offset by
increased sales of Teva thongs, which generally carry a lower
average selling price than sales of our other products.
Net wholesale sales of Teva products decreased by $3,031, or
3.6%, in 2005 compared to 2004. This decrease was due to several
factors including an unseasonably cold Spring 2005 season,
increased competition, a recent lack of meaningful product
innovation and a decline in sales in the European market. We are
proactively addressing the situation going forward by dedicating
significantly greater resources to product development,
marketing and advertising, and the development of a solid
international infrastructure. See
Overview Teva Brand Overview
above.
Net wholesale sales of UGG products increased by $48,473, or
47.6%, in 2005 compared to 2004 due to several factors including
a strong initial prebook of the Fall 2005 line including broad
placement of our Metropolitan Collection. Demand for our various
product categories in our expanded product line was strong
throughout the Fall and Winter 2005 season. Our placement on
Oprahs Favorite Things gift show further
increased demand for our product. Also, our deliveries in 2005
improved dramatically and the increased availability of
inventory allowed us to fill a significantly greater amount of
customer reorders in 2005 than in 2004. In addition, in early
2005 we delivered our first UGG brand Spring product line;
whereas in 2004 we did not offer an UGG brand Spring product
line. Also during the first quarter of 2005, we were able to
deliver carryover shipments of our 2004 Fall and Holiday
product, whereas during the first quarter of 2004 there were
fewer carryover shipments from the 2003 Fall and Holiday season
as we had a limited amount of product available to ship. In the
fourth quarter of 2005, we delivered our Holiday 2005 orders on
time, rather than in the following first quarter. See
Overview UGG Brand Overview
above.
38
Net wholesale sales of Simple products decreased by $2,653, or
27.5%, in 2005 compared to 2004. This decrease was largely due
to the discontinuation of the Simple sheep product line in late
2004, partially offset by a renewed interest in the Simple
brand, including continued growth in the Sugar and other sneaker
styles as well as our clog offering. See
Overview Simple Brand
Overview above.
Net sales of the Consumer Direct business increased by $7,184,
or 36.2%, in 2005 compared to 2004, representing 9.3% of net
sales in 2004 and 10.2% of net sales in 2005. In 2004, net sales
of the Consumer Direct business included retail sales of Teva
products of $4,759, UGG products of $14,415 and Simple products
of $697. In 2005, net sales of the Consumer Direct business
included retail sales of Teva products of $4,792, UGG products
of $21,354 and Simple products of $909. The increase in net
sales of the Consumer Direct business was due to the increased
demand for the UGG brand combined with increased product
availability that allowed us to fill more Holiday orders in 2005
than in 2004 through our internet business, as well as increased
retail outlet sales resulting from our new retail outlet store
in Camarillo, California, which was opened in November 2005. The
increase was also fueled by increased awareness of the internet
site and increased consumer acceptance of online purchasing. See
Overview Consumer Direct
Overview above.
International sales for all of our products decreased by $4,095,
or 10.4%, in 2005 compared to 2004, representing 18.3% of net
sales in 2004 and 13.3% of net sales in 2005. The lower dollar
amount of international sales resulted from declines in both
Teva and UGG product lines in the European market.
Gross Profit. Gross profit increased by
$21,089, or 23.3%, in 2005 compared to 2004. As a percentage of
net sales, gross profit margin was comparable at 42.1% in both
2004 and 2005, due to several offsetting factors. Gross margin
was favorably impacted by the elimination of the airfreight
costs incurred by the UGG brand in 2004, the lower overhead
costs per pair resulting from our leverage of fixed overhead
costs over a greater production volume in 2005 and the increase
in domestic sales, which generally have a higher gross margin
than our international sales. These favorable items were offset
by an increase in inventory write-downs and closeout sales in
2005 combined with an increase in UGG brand sales, which
generally carry a lower gross margin than sales of our Teva and
Simple product lines.
Selling, General and Administrative
Expenses. Selling, general and administrative
expenses, or SG&A, increased by $11,283, or 23.5%, in 2005
compared to 2004. As a percentage of net sales, SG&A
increased slightly from 22.3% in 2004 to 22.4% in 2005. The
increase in SG&A expenses included increases related to the
higher sales volume including increased costs at our domestic
distribution facilities of $3,042, increased marketing costs of
$1,849, increased selling commissions of $1,224, increased bad
debt expense of $1,159 and increased costs of our Consumer
Direct division of $704, among others, as well as a $1,471
increase in accounting fees including costs related to our
compliance with Section 404 of the Sarbanes-Oxley Act of
2002.
Income from Operations. Income from
operations increased by $9,806, or 23.1%, in 2005 compared to
2004, representing 19.8% of sales in 2004 and 19.7% in 2005.
This was due primarily to the factors discussed above.
Income from operations of the Teva brand at wholesale decreased
by $2,513, or 10.1%, in 2005 compared to 2004. This decrease was
largely due to the $3,031, or 3.6%, decrease in net sales, an
increase in bad debt expense of $698 and an increase in
marketing costs of $396, partially offset by decreased selling
commissions on the lower sales volume.
Income from operations of the UGG brand at wholesale increased
by $17,091, or 54.0%, in 2005 compared to 2004. This was largely
due to the $48,473, or 47.6% increase in net sales, partially
offset by a $1,693 increase in sales commissions on the higher
sales volume and increased advertising and marketing costs of
$1,434.
Income from operations of the Simple brand at wholesale was $45
in 2004 compared to a loss from operations of $834 in 2005. This
was primarily due to a $2,653, or 27.5%, decrease in net sales
during the period combined with an increase in bad debt expense
of $263. This was partially offset by an increase in gross
margin resulting from a reduced impact of closeout sales in 2005
compared to 2004.
Income from operations of our Consumer Direct business increased
by $1,439, or 26.0%, in 2005 compared to 2004. This was largely
due to the $7,184, or 36.2%, increase in sales during the
period, partially offset by a corresponding increase in related
costs.
39
Unallocated overhead costs increased by $5,332, or 27.1%, in
2005 compared to 2004. These costs included increased warehouse
and distribution costs of $3,042 and a $1,471 increase in
accounting fees, including costs related to compliance with
Section 404 of the Sarbanes-Oxley Act of 2002.
Other Expense (Income). Other expense
(income), net was $2,239 in 2004 compared to $25 in 2005. The
interest expense in 2004 resulted principally from the
borrowings incurred to finance our purchase of the Teva Rights
in November 2002, which we subsequently paid off in full in the
second quarter of 2004. Since we had outstanding borrowings
under our credit facility for only a short period of time in
2005 in order to meet our seasonal borrowing needs, the interest
income received on our invested cash was offset by the interest
expense incurred on the seasonal borrowings. Other expense
(income) exclusive of net interest expense (income) was not
material in either period.
Income Taxes. In 2004, income tax
expense was $14,684, representing an effective income tax rate
of 36.5%. In 2005, income tax expense was $20,398 representing
an effective income tax rate of 39.0%. The increase in the
effective tax rate was primarily due to a higher annual pre-tax
income for our domestic operating unit, which bears a higher tax
rate than that of our international subsidiaries, resulting in a
higher blended effective tax rate for the current year. In
addition, in 2005 we repatriated $3,500 from our international
subsidiaries under section 965 of the American Jobs
Creation Act of 2004, resulting in approximately $331 of
incremental Federal and State income taxes.
Net Income. Our net income increased
24.7% from $25,539 in 2004 to $31,845 in 2005 as a result of
higher net sales and lower interest expense in 2005, as
discussed above. Our earnings per diluted share increased 18.1%
from $2.10 to $2.48 as a result of the increase in net income,
which was partially offset by the increase in weighted average
common shares outstanding due to the follow-on public offering
in May 2004.
Off-Balance
Sheet Arrangements
We have two types of off-balance sheet arrangements. See
Contractual Obligations below. We do not
believe that these arrangements are material to our current or
future financial condition, results of operations, liquidity,
capital resources or capital expenditures.
Liquidity
and Capital Resources
We finance our working capital and operating needs using a
combination of our cash and cash equivalents balances,
short-term investments, cash generated from operations and the
credit availability under our revolving credit facility.
The seasonality of our business requires us to build inventory
levels in anticipation of the sales for the coming season. The
Teva brand generally begins to build inventory levels beginning
in the fourth quarter and first quarter in anticipation of the
Spring selling season that occurs in the first and second
quarters, whereas the UGG brand generally builds its inventories
in the second quarter and third quarters to support sales for
the Fall and Winter selling seasons, which historically occur
during the third and fourth quarters. The UGG brand experienced
earlier than expected reorders in the third quarter of 2006
which, coupled with the positive sell through in the fourth
quarter of 2006, contributed to the significant decrease in UGG
brand inventory at December 31, 2006 when compared to
December 31, 2005.
Our cash flow cycle includes the purchase of these inventories,
the subsequent sale of the inventories and the eventual
collection of the resulting accounts receivable. As a result,
our working capital requirements begin when we purchase the
inventories and continue until we ultimately collect the
resulting receivables. Given the seasonality of our Teva and UGG
brands, our working capital requirements fluctuate significantly
throughout the year. The cash required to fund these working
capital fluctuations is generally provided using a combination
of our internal cash flows and borrowings under our revolving
credit facility.
Cash from Operating Activities. Net
cash provided by operating activities was $48,498 for the year
ended December 31, 2006 compared to net cash provided by
operating activities of $29,607 for the year ended
December 31, 2005. The increase in net cash provided by
operating activities in 2006 was largely due to the higher net
income excluding the impairment loss on intangible assets of
$15,300. The increase was also due to a higher increase in trade
accounts payable in 2006 versus 2005 due to the timing of
certain payments. This was partially offset by a greater
increase in accounts receivable in 2006 compared to 2005, which
resulted from
40
increased sales. Net working capital improved by $44,568 to
$151,688 as of December 31, 2006 from $107,120 as of
December 31, 2005, primarily as a result of higher
short-term investments balances and increased accounts
receivable, partially offset by a decrease in cash and cash
equivalents and an increase in trade accounts payable and
accrued payroll. These changes in working capital are primarily
due to increased sales and increased bonuses payable as well as
our normal seasonality and timing of cash receipts and cash
payments.
Cash from Investing Activities. Net
cash used in investing activities was $67,546 in 2006 which was
comprised primarily of the net purchases of short-term
investments. In addition, we used $5,543 for capital
expenditures, primarily related to the build- out of our three
new retail stores, new racking for the distribution center in
Camarillo, California and the replacement and upgrading of
certain computer equipment. For the year ended December 31,
2005, net cash provided by investing activities was $8,902,
which was comprised primarily of the proceeds from sales of
short-term investments. This was partially offset by cash used
for capital expenditures, primarily related to the opening and
expansion of an additional distribution center, the replacement
and upgrading of certain computer equipment and trade show
booths, the opening of the Camarillo outlet store and the
purchase of promotional vehicles for the Teva brand marketing
team.
Cash from Financing Activities. In
2006, net cash provided by financing activities was $2,621
consisting primarily of cash received from the exercise of stock
options as well as the excess tax benefits from stock-based
compensation. In 2005, net cash provided by financing activities
aggregated $1,784, comprised of cash received from the exercise
of employee stock options.
Our working capital consists primarily of cash and cash
equivalents, short-term investments, trade accounts receivable,
inventories and a revolving credit facility. At
December 31, 2006, working capital was $151,688 including
$34,255 of cash and cash equivalents and $64,637 of short-term
investments. Trade accounts receivable increased by 24.9% to
$49,571 at December 31, 2006 from $39,683 at
December 31, 2005 resulting from a 36.7% increase in net
sales during the fourth quarter of 2006 compared to the fourth
quarter of 2005. Accounts receivable turnover increased to 8.1
times in the twelve months ended December 31, 2006 from 7.2
times in the twelve months ended December 31, 2005,
primarily as a result of increased sales and faster collections
in 2006 compared to 2005 due to the continued increased demand
for UGG product in 2006 which encouraged retailers to pay their
receivables balances faster in efforts to receive their upcoming
deliveries more quickly.
Inventories decreased by $999, or 3.0%, at December 31,
2006 compared to December 31, 2005, reflecting a $3,816
decrease in UGG brand inventory and a $1,170 decrease in Simple
brand inventory, partially offset by a $3,987 increase in Teva
brand inventory. Overall, inventory turnover increased to 4.2
times for the year ended December 31, 2006 from 3.2 times
for the year ended December 31, 2005 largely due in part to
higher sales during the twelve months ended December 31,
2006 compared to net sales in the twelve months ended
December 31, 2005. The decrease in UGG brand inventory was
due to the high sell-through of UGG products in 2006 and the
decrease in Simple brand inventory was largely due to higher
closeout sales in 2006. The increase in Teva brand inventory
occurred largely due to the planned early delivery of Spring
2007 product in the fourth quarter of 2006 to support the higher
expected sales in the first quarter of 2007 versus 2006.
Our revolving credit facility with Comerica Bank (the
Facility) provides for a maximum availability of
$20,000. In September 2006, we amended the Facility, eliminating
the borrowing base formula requirement, extending the maturity
date, and changing certain covenant requirements. Up to $10,000
of borrowings may be in the form of letters of credit. The
Facility bears interest at the lenders prime rate (8.25%
at December 31, 2006) or, at our option, at the London
Interbank Offered Rate, or LIBOR, (5.33% at December 31,
2006) plus 1.0% to 2.5%, depending on our ratio of
liabilities to earnings before interest, taxes, depreciation and
amortization, and is secured by substantially all of our assets.
The Facility includes annual commitment fees of $60 per year and
now expires on June 1, 2008. At December 31, 2006, we
had no outstanding borrowings under the Facility, no foreign
currency reserves for outstanding forward contracts and
outstanding letters of credit aggregated $52. As a result,
$19,948 was available under the Facility at December 31,
2006.
The agreements underlying the Facility contain certain financial
covenants including a quick ratio requirement, profitability
requirements and a tangible net worth requirement, among others,
as well as a prohibition on the payment of dividends. We were in
compliance with all covenants at December 31, 2006, and
remain so as of the date of this report.
41
We currently have no material commitments for future capital
expenditures but estimate that the capital expenditures for 2007
will range from approximately $4,000 to $5,000 and may include
additional costs associated with upgrades to our computer
systems and the build-out of new retail stores. The actual
amount of capital expenditures for 2007 may differ from this
estimate, largely depending on any unforeseen needs to replace
existing assets and the timing of expenditures.
Contractual Obligations. The following
table summarizes our contractual obligations at
December 31, 2006 and the effects such obligations are
expected to have on liquidity and cash flow in future periods.
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Payments Due by Period
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Less than
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More than
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Total
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1 Year
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1-3 Years
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3-5 Years
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5 Years
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Operating lease obligations
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$
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17,567
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$
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3,918
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$
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8,183
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$
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2,234
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$
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3,232
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Purchase obligations
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1,250
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550
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500
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200
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Total
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$
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18,817
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$
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3,918
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$
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8,733
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$
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2,734
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$
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3,432
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Our operating lease obligations consist primarily of building
leases for our corporate offices, distribution centers and
retail locations. In September 2006, we entered into a purchase
obligation with a movie production company for advertising
services. Our Teva brand is the presenting sponsor of a new
documentary IMAX film that is to be released in IMAX theaters in
March 2008.
We believe that internally generated funds, the available
borrowings under our existing Facility, cash and cash
equivalents, and short-term investments will provide sufficient
liquidity to enable us to meet our current and foreseeable
working capital requirements. However, risks and uncertainties
that could impact our ability to maintain our cash position
include our growth rate, the continued strength of our brands,
our ability to respond to changes in consumer preferences, our
ability to collect our receivables in a timely manner, our
ability to effectively manage our inventories and the volume of
letters of credit used to purchase product, among others. See
Part I, Item 1A, Risk Factors for a
discussion of additional factors that may affect our working
capital position. Furthermore, we may require additional cash
resources due to changed business conditions or other future
developments, including any investments or acquisitions we may
decide to pursue. If these sources are insufficient to satisfy
our cash requirement, we may seek to sell debt securities or
additional equity securities or to obtain a new credit facility
or draw on our existing Facility. The sale of convertible debt
securities or additional equity securities could result in
additional dilution to our stockholders. The incurrence of
indebtedness would result in incurring debt service obligations
and could result in operating and financial covenants that would
restrict our operations. In addition, there can be no assurance
that any additional financing will be available on acceptable
terms, if at all. Although there are no present understandings,
commitments or agreements with respect to the acquisition of any
other businesses, we may, from time to time, evaluate
acquisitions of other businesses or brands.
Impact of
Inflation
We believe that the relatively moderate rates of inflation in
recent years have not had a significant impact on our net sales
or profitability.
Critical
Accounting Policies and Estimates
Revenue Recognition. We recognize
revenue when products are shipped and the customer takes title
and assumes risk of loss, collection of relevant receivable is
probable, persuasive evidence of an arrangement exists, and the
sales price is fixed or determinable. Allowances for estimated
returns, discounts, mark downs, and bad debts are provided for
when related revenue is recorded. Amounts billed for shipping
and handling costs are recorded as a component of net sales,
while the related costs paid to third-party shipping companies
are recorded as a cost of sales. We present revenue net of taxes
collected from customers and remitted to governmental
authorities.
Use of Estimates. The preparation of
financial statements in conformity with accounting principles
generally accepted in the U.S. requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosures about contingent liabilities
and the reported amounts of net sales and expenses during the
reporting period. Management bases these estimates and
assumptions upon historical experience, existing, known
circumstances, authoritative accounting pronouncements and other
factors that management believes to be reasonable under the
circumstances. Management reasonably could use different
42
estimates and assumptions, and changes in estimates and
assumptions could occur from period to period, with the result
in each case being a potential material change in the financial
statement presentation of our financial condition or results of
operations. We have historically been accurate in our estimates
used for the reserves and allowances below. We believe that the
estimates and assumptions below are among those most important
to an understanding of our consolidated financial statements
contained in this report.
Allowance for Doubtful Accounts. We
provide a reserve against trade accounts receivable for
estimated losses that may result from customers inability
to pay. We determine the amount of the reserve by analyzing
known uncollectible accounts, aged trade accounts receivables,
economic conditions, historical experience and the
customers credit-worthiness. Trade accounts receivable
that are subsequently determined to be uncollectible are charged
or written off against this reserve. The reserve includes
specific reserves for accounts, which are identified as
potentially uncollectible, plus a non-specific reserve for the
balance of accounts based on our historical loss experience with
bad debts. Reserves have been established for all probable
losses of this nature. The gross trade accounts receivable
balance was $55,671 and the allowance for doubtful accounts was
$735 at December 31, 2006, compared to gross trade accounts
receivable of $48,067 and allowance for doubtful accounts of
$2,574 at December 31, 2005. The decrease in the allowance
for doubtful accounts at December 31, 2006 compared to
December 31, 2005 was primarily related to the collection
of accounts for which we had previously reserved as doubtful.
Our use of different estimates and assumptions could produce
different financial results. For example, a 1.0% change in the
rate used to estimate the reserve for the accounts not
specifically identified as uncollectible would change the
allowance for doubtful accounts at December 31, 2006 by
approximately $349.
Reserve for Sales Discounts. A
significant portion of our domestic net sales and resulting
trade accounts receivable reflects a discount that the customers
may take, generally based upon meeting certain order, shipment
and payment timelines. We estimate the amount of the discounts
that are expected to be taken against the period-end trade
accounts receivable and we record a corresponding reserve for
sales discounts. We determine the amount of the reserve for
sales discounts considering the amounts of available discounts
in the period-end accounts receivable aging and historical
discount experience, among other factors. The reserve for sales
discounts was approximately $2,502 at December 31, 2006 and
$1,710 at December 31, 2005. The increase was primarily due
to the increase in gross trade accounts receivable as of
December 31, 2006 compared to December 31, 2005 in
addition to a larger volume of pre-book sales to customers that
were offered higher terms discounts in the fourth quarter of
2006. Our use of different estimates and assumptions could
produce different financial results. For example a 10.0% change
in the estimate of the percentage of accounts that will
ultimately take their discount would change the reserve for
sales discounts at December 31, 2006 by approximately $250.
Allowance for Estimated Returns. We
record an allowance for anticipated future returns of goods
shipped prior to period-end. In general, we accept returns for
damaged or defective products but discourage returns for other
reasons. We base the amount of the allowance on any approved
customer requests for returns, historical returns experience and
any recent events that could result in a change in historical
returns rates, among other factors. The allowance for returns
was $1,618 at December 31, 2006 and $2,865 at
December 31, 2005. The decrease in the allowance was a
result of lower actual return rates in the year ended
December 31, 2006 compared to the year ended
December 31, 2005. Our use of different estimates and
assumptions could produce different financial results. For
example, a 1.0% change in the rate used to estimate the
percentage of sales expected to ultimately be returned would
change the reserve for returns at December 31, 2006 by
approximately $610.
Allowance for Estimated Markdowns. When
our customers pay their invoices, they often take deductions for
markdowns against their invoices, which we seldom recover.
Therefore, we record an allowance for the balance of markdowns
that are outstanding in our accounts receivable balance as of
the end of each quarter, along with an estimated reserve for
markdowns that have not yet been taken. This estimate is based
on historical trends of the timing of markdowns taken against
invoices. The allowance for markdowns was $1,245 at
December 31, 2006 and $1,235 at December 31, 2005. The
slight increase in the allowance was a result of higher gross
trade accounts receivables as of December 31, 2006 compared
to December 31, 2005, partially offset by faster resolution
of these markdowns by our vendor compliance department.
Inventory Write-Downs. Inventories are
stated at lower of cost or market. We review the various items
in inventory on a regular basis for excess, obsolete, and
impaired inventory. In doing so, we write the inventory down to
the lower of cost or estimated future net selling prices. At
December 31, 2006, inventories were stated at $32,375,
43
net of inventory write-downs of $3,605. At December 31,
2005, inventories were stated at $33,374, net of inventory
write-downs of $3,346. The increase in inventory write-downs at
December 31, 2006 compared to December 31, 2005 was
primarily due to larger amounts of closeout inventory on hand
for Teva and Simple. Our use of different estimates and
assumptions could produce different financial results. For
example, a 10.0% change in the estimated selling prices of our
potentially obsolete inventory would change the inventory
write-down reserve at December 31, 2006 by approximately
$486.
Valuation of Goodwill, Intangible and Other Long-Lived
Assets. We periodically assess the impairment
of goodwill, intangible and other long-lived assets on a
separate asset basis based on assumptions and judgments
regarding the carrying value of these assets individually. We
test goodwill and nonamortizable intangible assets for
impairment on an annual basis based on the fair value of the
reporting unit for goodwill or the fair value of the assets for
nonamortizable intangibles compared to their respective carrying
value. We consider other long-lived assets to be impaired if we
determine that the carrying value may not be recoverable. Among
other considerations, we consider the following factors:
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the assets ability to continue to generate income from
operations and positive cash flow in future periods;
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our future plans regarding utilization of the assets;
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any changes in legal ownership of rights to the assets; and
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changes in consumer demand or acceptance of the related brand
names, products or features associated with the assets.
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If we determine the assets to be impaired, we recognize an
impairment loss equal to the amount by which the carrying value
of the assets exceeds the estimated fair value of the assets. In
addition, as it relates to long-lived assets, we base the useful
lives and related amortization or depreciation expense on the
estimate of the period that the assets will generate sales or
otherwise be used by us.
In 2002, SFAS No. 142, Goodwill and Other
Intangible Assets, became effective and as a result,
we recorded a goodwill impairment charge in the first quarter of
2002 of $8,973, net of the related income tax benefit of $843.
In 2006, we performed our annual impairment test of goodwill and
nonamortizable intangible assets using market value approaches
and valuation techniques as of December 31, 2006 and
determined that there was no impairment of goodwill. However, we
concluded that the fair value of our trademarks was less than
the carrying amount and recorded an impairment charge of
$15,300. Our use of different estimates (including estimated
royalty rates, discount rates, and future revenues) and
assumptions could produce different financial results. For
example, a 1.0% change in our estimated future revenues of Teva
would change the impairment loss for the year ended
December 31, 2006 by approximately $1,300.
Recent
Accounting Pronouncements
In July 2006, the FASB issued Interpretation No. 48
(FIN 48), Accounting for Uncertainty in
Income Taxes an interpretation of
SFAS No. 109, which prescribes a recognition
threshold and measurement process for recording in the financial
statements uncertain tax positions taken or expected to be taken
in a tax return. FIN 48 also provides guidance on the
derecognition, classification, accounting in interim periods,
and disclosure requirements for uncertain tax positions. The
provisions of FIN 48 are effective for us as of
January 1, 2007. We are currently evaluating the impact of
adopting FIN 48, and believe the adoption of this statement
will not have a material impact on our consolidated financial
statements.
In September 2006, the FASB issued Statement No. 157
(SFAS 157), Fair Value
Measurements. SFAS 157 standardizes the definition
and approaches for fair value measurements of financial
instruments for those standards which already permit or require
the use of fair value. It does not require any new fair value
measurements. SFAS 157 defines a hierarchy for valuation
techniques and also requires additional disclosures. The
provisions of SFAS 157 are effective for us as of
January 1, 2008. We do not expect the adoption of this
statement to have a material effect on our consolidated
financial statements.
In February 2007, the FASB issued Statement No. 159
(SFAS 159), The Fair Value Option for
Financial Assets and Financial Liabilities Including
an amendment of FASB Statement No. 115. SFAS 159
provides companies the option to measure many financial
instruments and certain other items at fair value. This provides
companies the opportunity to mitigate volatility in earnings
caused by measuring instruments differently without
44
complex hedge accounting provisions. SFAS 159 is effective
for us beginning January 1, 2008. We are currently
evaluating the effect this Statement will have on our
consolidated financial statements.
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Item 7A.
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Quantitative
and Qualitative Disclosures about Market Risk.
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Derivative Instruments. Although we
have used foreign currency hedges in the past, we no longer
utilize forward contracts or other derivative instruments to
mitigate exposure to fluctuations in the foreign currency
exchange rate as all of our purchases and sales for the
foreseeable future will be denominated in U.S. currency.
Although our sales and inventory purchases are denominated in
U.S. currency, our sales and inventory purchases may be impacted
by fluctuations in the exchange rates between the U.S. dollar
and the local currencies in the international markets where our
products are sold and manufactured. If the U.S. dollar
strengthens, it may result in increased pricing pressure on our
distributors, which may have a negative impact on our net sales
and gross margins. We are unable to estimate the amount of any
impact on sales and gross margins attributed to pricing
pressures caused by fluctuations in exchange rates.
Market Risk. Our market risk exposure
with respect to financial instruments is to changes in the
prime rate in the U.S. and changes in LIBOR. Our
revolving line of credit provides for interest on outstanding
borrowings at rates tied to the prime rate or at our election
tied to LIBOR. At December 31, 2006, we had no outstanding
borrowings under the revolving line of credit. A 1.0% increase
in interest rates on our current borrowings would have no impact
on income before income taxes.
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Item 8.
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Financial
Statements and Supplementary Data.
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Financial Statements and the Reports of Independent Registered
Public Accounting Firm are filed with this Annual Report on
Form 10-K
in a separate section following Part IV, as shown on the
index under Item 15 of this Annual Report.
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Item 9.
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Changes
in and Disagreements With Accountants on Accounting and
Financial Disclosure.
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None.
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Item 9A.
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Controls
and Procedures.
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The Companys Chief Executive Officer, Angel R. Martinez,
and Chief Financial Officer, Zohar Ziv, with the participation
of the Companys management, carried out an evaluation of
the effectiveness of the Companys disclosure controls and
procedures pursuant to Exchange Act
Rule 13a-15(e).
Based upon that evaluation, the Chief Executive Officer and the
Chief Financial Officer believe that, as of the end of the
period covered by this report, the Companys disclosure
controls and procedures are effective in making known to them
material information relating to the Company (including its
consolidated subsidiaries) required to be included in this
report.
Disclosure controls and procedures, no matter how well designed
and implemented, can provide only reasonable assurance of
achieving an entitys disclosure objectives. The likelihood
of achieving such objectives is affected by limitations inherent
in disclosure controls and procedures. These include the fact
that human judgment in decision-making can be faulty and that
breakdowns in internal control can occur because of human
failures such as simple errors, mistakes or intentional
circumvention of the established processes.
There have been no significant changes in the companys
internal control over financial reporting that occurred during
the fourth quarter 2006 that have materially affected the
companys internal control over financial reporting. We
have completed our efforts regarding compliance with
Section 404 of the Sarbanes-Oxley Act of 2002 for our
fiscal year ending December 31, 2006. The results of our
evaluation are discussed below in the Report of Management on
Internal Control Over Financial Reporting.
This effort included internal control documentation and review
under the direction of senior management, the internal audit
department, and the Audit Committee of the Board of Directors.
During the course of our 2006 evaluation, we identified
oversights and control issues and confirmed that appropriate
corrective actions, including process improvements, were
undertaken to remediate the deficiencies. These improvements
included formalization of policies and procedures, improved
segregation of duties, additional monitoring and data analysis
controls, development of control checklists, retraining of
personnel, increased reliance on risk assessment, and improved
security measures. Many of the components of our internal
controls are also evaluated on an ongoing basis by
45
members of our organization. The overall goals of these various
evaluation activities are to monitor our internal controls, and
to enhance them as necessary. Our intent is to maintain the
internal controls as dynamic systems that change as conditions
warrant.
REPORT OF
MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING
Management of Deckers Outdoor Corporation (the
Company) is responsible for establishing and
maintaining adequate internal control over financial reporting
as defined in
Rules 13a-15(f)
and 15d-15(f) under the Securities Exchange Act of 1934. The
Companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
accounting principles generally accepted in the United States of
America. Internal control over financial reporting includes
those written policies and procedures that:
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pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and
dispositions of the assets of the Company;
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provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with accounting principles generally accepted in the
United States of America;
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provide reasonable assurance that receipts and expenditures of
the Company are being made only in accordance with authorization
of management and directors of the Company; and
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provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of
assets that could have a material effect on the consolidated
financial statements.
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Internal control over financial reporting includes the controls
themselves, as well as the monitoring of practices and actions
taken to correct deficiencies as identified.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Companys
internal control over financial reporting as of
December 31, 2006. Management based this assessment on
criteria for effective internal control over financial reporting
described in Internal Control Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
Managements assessment included an evaluation of the
design of the Companys internal control over financial
reporting and testing of the operational effectiveness of its
internal control over financial reporting. Management reviewed
the results of its assessment with the Audit Committee of our
Board of Directors.
Based on this assessment, management determined that, as of
December 31, 2006, the Company maintained effective
internal control over financial reporting.
KPMG LLP, independent registered public accounting firm, who
audited and reported on the consolidated financial statements of
the Company included in this report, has issued an attestation
report on managements assessment of internal control over
financial reporting.
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Item 9B.
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Other
Information.
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None.
46
PART III
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Item 10.
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Directors,
Executive Officers and Corporate Governance.
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We have adopted a written code of ethics that applies to our
principal executive officer, principal financial and accounting
officer, controller and persons performing similar functions.
Our code of ethics is designed to meet the requirements of
Section 406 of the
Sarbanes-Oxley
Act of 2002 and the rules promulgated thereunder. To the extent
required by law, any amendments to, or waivers from, any
provision of the code will be promptly disclosed publicly either
on a report on
Form 8-K
or on our website at www.deckers.com.
All additional information required by this item, including
information relating to Directors and Executive Officers of the
Registrant, is set forth in the Companys definitive proxy
statement relating to the Registrants 2007 annual meeting
of stockholders, which will be filed pursuant to
Regulation 14A within 120 days after the end of the
Companys fiscal year ended December 31, 2006, and
such information is incorporated herein by reference.
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Item 11.
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Executive
Compensation.
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Information relating to Executive Compensation is set forth
under Proposal No. 1 Election of
Directors in the Companys definitive proxy statement
relating to the Registrants 2007 annual meeting of
stockholders, which will be filed pursuant to
Regulation 14A within 120 days after the end of the
Companys fiscal year ended December 31, 2006, and
such information is incorporated herein by reference.
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Item 12.
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Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
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Information relating to Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters is set
forth under Proposal No. 1 Election
of Directors in the Companys definitive proxy
statement relating to the Registrants 2007 annual meeting
of stockholders, which will be filed pursuant to
Regulation 14A within 120 days after the end of the
Companys fiscal year ended December 31, 2006, and
such information is incorporated herein by reference.
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Item 13.
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Certain
Relationships and Related Transactions, and Director
Independence.
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Information relating to Certain Relationships and Related
Transactions is set forth under
Proposal No. 1 Election of
Directors in the Companys definitive proxy statement
relating to the Registrants 2007 annual meeting of
stockholders, which will be filed pursuant to
Regulation 14A within 120 days after the end of the
Companys fiscal year ended December 31, 2006, and
such information is incorporated herein by reference.
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Item 14.
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Principal
Accounting Fees and Services.
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Information relating to Principal Accountant Fees and Services
is set forth under Proposal No. 2
Independent Registered Public Accounting Firm in the
Companys definitive proxy statement relating to the
Registrants 2007 annual meeting of stockholders, which
will be filed pursuant to Regulation 14A within
120 days after the end of the Companys fiscal year
ended December 31, 2006, and such information is
incorporated herein by reference.
47
PART IV
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Item 15.
|
Exhibits,
Financial Statement Schedules.
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Consolidated Financial Statements and Schedules required to be
filed hereunder are indexed on Page
F-1 hereof.
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Exhibit
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2.1
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Certificate of Ownership and
Merger Merging Deckers Corporation into Deckers Outdoor
Corporation. (Exhibit 2.1 to the Registrants
Registration Statement on Form
S-1, File
No. 33-67248
and incorporated by reference herein)
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3.1
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Amended and Restated Certificate
of Incorporation of Deckers Outdoor Corporation.
(Exhibit 3.1 to the Registrants Registration
Statement on
Form S-1,
File
No. 33-67248
and incorporated by reference herein)
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3.2
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Restated Bylaws of Deckers Outdoor
Corporation. (Exhibit 3.2 to the Registrants
Registration Statement on
Form S-1,
File
No. 33-67248
and incorporated by reference herein)
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#10.1
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1993 Employee Stock Incentive
Plan. (Exhibit 99 to the Registrants Registration
Statement on
Form S-8,
File
No. 33-47097
and incorporated by reference herein)
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#10.2
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Form of Incentive Stock Option
Agreement under 1993 Employee Stock Incentive Plan.
(Exhibit 10.9 to the Registrants Registration
Statement on
Form S-1,
File
No. 33-67248
and incorporated by reference herein)
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#10.3
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Form of
Non-Qualified
Stock Option Agreement under 1993 Employee Stock Incentive Plan.
(Exhibit 10.10 to the Registrants Registration
Statement on
Form S-1,
File
No. 33-67248
and incorporated by reference herein)
|
|
#10.4
|
|
|
Form of Restricted Stock
Agreement. (Exhibit 10.11 to the Registrants
Registration Statement on
Form S-1,
File
No. 33-67248
and incorporated by reference herein)
|
|
#10.5
|
|
|
Employment Agreement with Douglas
B. Otto. (Exhibit 10.13 to the Registrants
Registration Statement on
Form S-1,
File
No. 33-67248
and incorporated by reference herein)
|
|
#10.6
|
|
|
First Amendment to Employment
Agreement with Douglas B. Otto. (Exhibit 10.14 to the
Registrants Registration Statement on
Form S-1,
File
No. 33-67248
and incorporated by reference herein)
|
|
#10.7
|
|
|
Second Amendment to Employment
Agreement with Douglas B. Otto. (Exhibit 10.15 to the
Registrants Registration Statement on
Form S-1,
File
No. 33-67248
and incorporated by reference herein)
|
|
#10.8
|
|
|
Third Amendment to Employment
Agreement with Douglas B. Otto. (Exhibit 10.30 to the
Registrants Registration Statement on
Form S-1,
File
No. 33-67248
and incorporated by reference herein)
|
|
#10.9
|
|
|
Deckers Outdoor Corporation 1995
Employee Stock Purchase Plan. (Exhibit 4.4 to the
Registrants Registration Statement on
Form S-8,
File
No. 33-96850
and incorporated by reference herein)
|
|
#10.10
|
|
|
Amended Compensation Plan for
Outside Members of the Board of Directors. (Exhibit 10.42
to the Registrants
Form 10-Q
for the period ended September 30, 1996 and incorporated by
reference herein)
|
|
#10.11
|
|
|
Extension Agreement to Employment
Agreement with Douglas B. Otto. (Exhibit 10.36 to the
Registrants
Form 10-K
for the period ended December 31, 1996 and incorporated by
reference herein)
|
|
10.12
|
|
|
Shareholder Rights Agreement,
dated as of November 12, 1998. (Exhibit 10.39 to the
Registrants
Form 10-Q
for the period ended September 30, 1998 and incorporated by
reference herein)
|
|
10.13
|
|
|
Revolving Credit Agreement dated
as of February 21, 2002 among Deckers Outdoor Corporation, UGG
Holdings, Inc. and Comerica Bank
--
California. (Exhibit 10.21 to the Registrants
Form 10-K
for the year ended December 31, 2001 and incorporated by
reference herein)
|
|
#10.14
|
|
|
Employment Agreement dated March
29, 2002 between Douglas B. Otto and Deckers Outdoor
Corporation. (Exhibit 10.22 to the Registrants
Form 10-Q
for the period ended March 31, 2002 and incorporated by
reference herein)
|
|
10.15
|
|
|
Asset Purchase Agreement dated as
of October 9, 2002 by and Among Mark Thatcher, Teva Sport
Sandals, Inc. and Deckers Outdoor Corporation. (Exhibit 2.1
to the Registrants
Form 8-K/A
filed February 7, 2003 and incorporated herein by reference.)
|
|
10.16
|
|
|
Disclosure letter associated with
the Asset Purchase Agreement. (Exhibit 2.2 to the
Registrants
Form 8-K/A
filed February 7, 2003 and incorporated herein by reference.)+
|
48
|
|
|
|
|
Exhibit
|
|
|
|
|
#10.17
|
|
|
Employment Agreement dated
November 25, 2002 between John A. Kalinich and Deckers Outdoor
Corporation. (Exhibit 10.20 to the Registrants
Form 10-K
for the period ended December 31, 2002 and incorporated by
reference herein)
|
|
#10.18
|
|
|
Employment Agreement dated
November 25, 2002 between Mark Thatcher and Deckers Outdoor
Corporation. (Exhibit 10.21 to the Registrants
Form 10-K
for the period ended December 31, 2002 and incorporated by
reference herein)
|
|
10.19
|
|
|
Unsecured Subordinated Promissory
Note dated November 25, 2002 between Mark Thatcher and Deckers
Outdoor Corporation. (Exhibit 10.22 to the
Registrants
Form 10-K
for the period ended December 31, 2002 and incorporated by
reference herein)
|
|
10.20
|
|
|
Note Purchase Agreement dated as
of November 25, 2002 by and among Deckers Outdoor Corporation
and The Peninsula Fund III Limited Partnership.
(Exhibit 10.23 to the Registrants
Form 10-K
for the period ended December 31, 2002 and incorporated by
reference herein)
|
|
10.21
|
|
|
Amended and Restated Credit
Agreement, dated as of November 25, 2002, by and among Deckers
Outdoor Corporation, UGG Holdings Inc., and Comerica
Bank-California.
(Exhibit 10.24 to the Registrants
Form 10-K
for the period ended December 31, 2002 and incorporated by
reference herein)
|
|
10.22
|
|
|
Amendment Number One to
Amended and Restated Revolving Credit Agreement dated April 29,
2003. (Exhibit 10.1 to the Registrants
Form 10-Q
for the period ended June 30, 2003 and incorporated by reference
herein)
|
|
10.23
|
|
|
Amendment Number Two to
Amended and Restated Revolving Credit Agreement dated June 27,
2003. (Exhibit 10.2 to the Registrants
Form 10-Q
for the period ended June 30, 2003 and incorporated by reference
herein)
|
|
10.24
|
|
|
Amendment Number One to
Senior Subordination Agreement dated April 29, 2003.
(Exhibit 10.3 to the Registrants
Form 10-Q
for the period ended June 30, 2003 and incorporated by reference
herein)
|
|
10.25
|
|
|
Amendment Number Two to
Senior Subordination Agreement dated June 27, 2003.
(Exhibit 10.4 to the Registrants
Form 10-Q
for the period ended June 30, 2003 and incorporated by reference
herein)
|
|
10.26
|
|
|
Amendment Number Three to
Amended and Restated Revolving Credit Agreement between the
Company and Comerica Bank
- California
dated as of August 6, 2003. (Exhibit 10.1 to the
Registrants
Form 10-Q
for the period ended September 30, 2003 and incorporated by
reference herein)
|
|
10.27
|
|
|
Amendment Number Four to
Amended and Restated Revolving Credit Agreement between the
Company and Comerica
Bank-California
dated as of November 13, 2003 (Exhibit 10.27 to the
Registrants
Form 10-K
for the period ended December 31, 2003 and incorporated by
reference herein)
|
|
10.28
|
|
|
Amendment Number Three to
Senior Subordination Agreement dated November 13, 2003
(Exhibit 10.28 to the Registrants
Form 10-K
for the period ended December 31, 2003 and incorporated by
reference herein)
|
|
#10.29
|
|
|
Employment Agreement effective as
of January 1, 2004 between Douglas B. Otto and Deckers Outdoor
Corporation (Exhibit 10.29 to the Registrants
Form 10-K
for the period ended December 31, 2003 and incorporated by
reference herein)
|
|
#10.30
|
|
|
Employment Agreement effective as
of January 1, 2004 between M. Scott Ash and Deckers Outdoor
Corporation (Exhibit 10.30 to the Registrants
Form 10-K
for the period ended December 31, 2003 and incorporated by
reference herein)
|
|
#10.31
|
|
|
Employment Agreement effective as
of January 1, 2004 between Patrick C. Devaney and Deckers
Outdoor Corporation (Exhibit 10.31 to the Registrants
Form 10-K
for the period ended December 31, 2003 and incorporated by
reference herein)
|
|
#10.32
|
|
|
Employment Agreement effective as
of January 1, 2004 between Constance X. Rishwain and Deckers
Outdoor Corporation (Exhibit 10.32 to the Registrants
Form 10-K
for the period ended December 31, 2003 and incorporated by
reference herein)
|
|
#10.33
|
|
|
Employment Agreement effective as
of January 1, 2004 between Robert P. Orlando and Deckers Outdoor
Corporation (Exhibit 10.33 to the Registrants
Form 10-K
for the period ended December 31, 2003 and incorporated by
reference herein)
|
49
|
|
|
|
|
Exhibit
|
|
|
|
|
10.34
|
|
|
Lease Agreement dated November 1,
2003 between Ampersand Aviation, LLC and Deckers Outdoor
Corporation for office building at
495-A South
Fairview Avenue, Goleta, California, 93117 (Exhibit 10.34
to the Registrants
Form 10-K
for the period ended December 31, 2003 and incorporated by
reference herein)
|
|
10.35
|
|
|
Exclusive Independent Contractor
Representation Agreement between Deckers Outdoor Corporation and
BHPC Marketing, Inc. effective as of January 1, 2003 for
representation of the Teva brand (Exhibit 10.35 to the
Registrants
Form 10-K
for the period ended December 31, 2003 and incorporated by
reference herein)
|
|
10.36
|
|
|
Amendment Number Five to
Amended and Restated Credit Agreement between the Company and
Comerica
Bank-
California dated as of February 28, 2005 (Exhibit 10.36 to
the Registrants
Form 10-K
for the period ended December 31, 2004 and incorporated by
reference herein)
|
|
10.37
|
|
|
Lease Agreement dated September
15, 2004 between Mission Oaks Associates, LLC and Deckers
Outdoor Corporation for distribution center at 3001 Mission Oaks
Blvd., Camarillo, CA 93012 (Exhibit 10.37 to the
Registrants
Form 10-K
for the period ended December 31, 2004 and incorporated by
reference herein)
|
|
10.38
|
|
|
First Amendment to Lease Agreement
between Mission Oaks Associates, LLC and Deckers Outdoor
Corporation for distribution center at 3001 Mission Oaks Blvd.,
Camarillo, CA 93012, dated December 1, 2004 (Exhibit 10.38
to the Registrants
Form 10-K
for the period ended December 31, 2004 and incorporated by
reference herein)
|
|
#10.39
|
|
|
Employment Agreement between
Deckers Outdoor Corporation and Angel R. Martinez
(Exhibit 10.1 to the Registrants
Form 10-Q
for the period ended March 31, 2005 and incorporated by
reference herein)
|
|
10.40
|
|
|
Amendment Number Six to
Amended and Restated Revolving Credit Agreement between the
Company and Comerica
Bank-California
dated as of June 14, 2005 (Exhibit 10.1 to the
Registrants
Form 10-Q
for the period ended June 30, 2005 and incorporated by reference
herein)
|
|
10.41
|
|
|
Amendment Number Seven to
Amended and Restated Revolving Credit Agreement between the
Company and Comerica Bank dated as of September 6, 2005
(Exhibit 10.1 to the Registrants
Form 10-Q
for the period ended September 30, 2005 and incorporated by
reference herein)
|
|
#10.42
|
|
|
Offer of Employment Letter between
the Company and Carlo Lingiardi, President of Teva, dated August
10, 2005 (Exhibit 10.2 to the Registrants
Form 10-Q
for the period ended September 30, 2005 and incorporated by
reference herein)
|
|
#10.43
|
|
|
Offer of Employment Letter between
the Company and Colin Clark, Senior Vice
President-International,
effective September 1, 2005 (Exhibit 10.3 to the
Registrants
Form 10-Q
for the period ended September 30, 2005 and incorporated by
reference herein)
|
|
#10.44
|
|
|
Employment agreement effective as
of March 6, 2006 between Zohar Ziv and Deckers Outdoor
Corporation (Exhibit 10.1 to the Registrants
Form 10-Q
for the period ended March 31, 2006 and incorporated by
reference herein)
|
|
#10.45
|
|
|
Employment agreement effective as
of March 20, 2006 between Peter Worley and Deckers Outdoor
Corporation (Exhibit 10.2 to the Registrants
Form 10-Q
for the period ended March 31, 2006 and incorporated by
reference herein)
|
|
#10.46
|
|
|
Amendment Number one to
employment agreement effective as of April 11, 2005 between
Douglas Otto and Deckers Outdoor Corporation (Exhibit 10.3
to the Registrants
Form 10-Q
for the period ended March 31, 2006 and incorporated by
reference herein)
|
|
#10.47
|
|
|
Employment agreement effective as
of January 1, 2006 between Connie Rishwain and Deckers Outdoor
Corporation (Exhibit 10.4 to the Registrants
Form 10-Q
for the period ended March 31, 2006 and incorporated by
reference herein)
|
|
#10.48
|
|
|
Employment agreement effective as
of January 1, 2006 between Patrick Devaney and Deckers Outdoor
Corporation (Exhibit 10.5 to the Registrants
Form 10-Q
for the period ended March 31, 2006 and incorporated by
reference herein)
|
|
#10.49
|
|
|
Employment agreement effective as
of January 1, 2006 between Colin Clark and Deckers Outdoor
Corporation (Exhibit 10.6 to the Registrants
Form 10-Q
for the period ended March 31, 2006 and incorporated by
reference herein)
|
50
|
|
|
|
|
Exhibit
|
|
|
|
|
#10.50
|
|
|
Employment agreement effective as
of January 1, 2006 between Janice Howell and Deckers Outdoor
Corporation (Exhibit 10.7 to the Registrants
Form 10-Q
for the period ended March 31, 2006 and incorporated by
reference herein)
|
|
#10.51
|
|
|
Amendment Number one to
employment agreement effective as of January 1, 2006 between
John Kalinich and Deckers Outdoor Corporation (Exhibit 10.8
to the Registrants
Form 10-Q
for the period ended March 31, 2006 and incorporated by
reference herein)
|
|
10.52
|
|
|
Amendment Number Eight to
Amended and Restated Credit Agreement between Deckers Outdoor
Corporation and Comerica Bank dated as of September 5, 2006
(Exhibit 10.4 to the Registrants
Form 10-Q
for the period ending September 30, 2006 and incorporated by
reference herein)
|
|
14.1
|
|
|
Deckers Outdoor Corporations
Code of Ethics for Senior Officers, as approved by the Board of
Directors on December 5, 2003. (Exhibit 14.1 to the
Registrants
Form 10-K
for the period ended December 31, 2003 and incorporated by
reference herein)
|
|
21.1*
|
|
|
Subsidiaries of Registrant
|
|
23.1*
|
|
|
Consent of Independent Registered
Public Accounting Firm
|
|
31.1*
|
|
|
Certification of the Chief
Executive Officer pursuant to Rule
13A-14(a)
under the Exchange Act, adopted pursuant to Section 302 of the
Sarbanes-Oxley
Act of 2002
|
|
31.2*
|
|
|
Certification of the Chief
Financial Officer pursuant to Rule
13A-14(a)
under the Exchange Act, adopted pursuant to Section 302 of the
Sarbanes-Oxley
Act of 2002
|
|
32.1*
|
|
|
Certification pursuant to 18
U.S.C. Section 1350, adopted pursuant to Section 906 of the
Sarbanes-Oxley
Act of 2002
|
|
|
|
* |
|
Filed herewith. |
|
+ |
|
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. |
|
# |
|
Management contract or compensatory plan or arrangement. |
51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
DECKERS OUTDOOR CORPORATION
(Registrant)
Angel R. Martinez
Chief Executive Officer
Date: March 16, 2007
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
/s/ Douglas
B. Otto
Douglas
B. Otto
|
|
Chairman of the Board
|
|
March 16, 2007
|
|
|
|
|
|
/s/ Angel
R. Martinez
Angel
R. Martinez
|
|
President and Chief Executive
Officer (Principal Executive Officer)
|
|
March 16, 2007
|
|
|
|
|
|
/s/ Zohar
Ziv
Zohar
Ziv
|
|
Chief Financial Officer
(Principal Financial and Accounting Officer)
|
|
March 16, 2007
|
|
|
|
|
|
/s/ Gene
E. Burleson
Gene
E. Burleson
|
|
Director
|
|
March 16, 2007
|
|
|
|
|
|
/s/ Maureen
Conners
Maureen
Conners
|
|
Director
|
|
March 16, 2007
|
|
|
|
|
|
/s/ John
M. Gibbons
John
M. Gibbons
|
|
Director
|
|
March 16, 2007
|
|
|
|
|
|
/s/ Rex
A. Licklider
Rex
A. Licklider
|
|
Director
|
|
March 16, 2007
|
|
|
|
|
|
/s/ Daniel
L. Terheggen
Daniel
L. Terheggen
|
|
Director
|
|
March 16, 2007
|
|
|
|
|
|
/s/ John
G. Perenchio
John
G. Perenchio
|
|
Director
|
|
March 16, 2007
|
52
DECKERS
OUTDOOR CORPORATION AND SUBSIDIARIES
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL
STATEMENT
SCHEDULE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-2
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
|
|
|
F-8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-24
|
|
All other schedules are omitted because they are not applicable
or the required information is shown in the Companys
consolidated financial statements or the related notes thereto.
F-1
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Deckers Outdoor Corporation:
We have audited the accompanying consolidated financial
statements of Deckers Outdoor Corporation and subsidiaries as
listed in the accompanying index. In connection with our audits
of the consolidated financial statements, we also have audited
the related financial statement schedule as listed in the
accompanying index. These consolidated financial statements and
financial statement schedule are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these consolidated financial statements and financial
statement schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Deckers Outdoor Corporation and subsidiaries as of
December 31, 2005 and 2006, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2006, in conformity
with U.S. generally accepted accounting principles. Also in our
opinion, the related consolidated financial statement schedule,
when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
As discussed in notes 1 and 6 to the consolidated financial
statements, effective January 1, 2006, the Company adopted
the provisions of Statement of Financial Accounting Standards
No. 123 (revised 2004), Share-Based Payment.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of Deckers Outdoor Corporations internal
control over financial reporting as of December 31, 2006,
based on criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report
dated March 16, 2007 expressed an unqualified opinion on
managements assessment of, and the effective operation of,
internal control over financial reporting.
/s/ KPMG LLP
Los Angeles, California
March 16, 2007
F-2
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Deckers Outdoor Corporation:
We have audited managements assessment, included in the
accompanying Report of Management on Internal Control Over
Financial Reporting appearing under Item 9A, that Deckers
Outdoor Corporation maintained effective internal control over
financial reporting as of December 31, 2006, based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Deckers Outdoor
Corporations management is responsible for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting. Our responsibility is to express an opinion
on managements assessment and an opinion on the
effectiveness of the Companys internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A companys internal control over financial
reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A
companys internal control over financial reporting
includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions
of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance
with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or
disposition of the companys assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that Deckers
Outdoor Corporation maintained effective internal control over
financial reporting as of December 31, 2006, is fairly
stated, in all material respects, based on criteria established
in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Also, in our opinion, Deckers
Outdoor Corporation maintained, in all material respects,
effective internal control over financial reporting as of
December 31, 2006, based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Deckers Outdoor Corporation and
subsidiaries as of December 31, 2005 and 2006, and the
related consolidated statements of operations,
stockholders equity and comprehensive income, and cash
flows for each of the years in the three-year period ended
December 31, 2006, and the related financial statement
schedule, and our report dated March 16, 2007 expressed an
unqualified opinion on those consolidated financial statements
and financial statement schedule.
/s/ KPMG LLP
Los Angeles, California
March 16, 2007
F-3
DECKERS
OUTDOOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(amounts in thousands, except par value)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
50,749
|
|
|
$
|
34,255
|
|
Short-term investments
|
|
|
2,500
|
|
|
|
64,637
|
|
Trade accounts receivable, net of
allowances of $8,384 and $6,100 in 2005 and 2006, respectively
|
|
|
39,683
|
|
|
|
49,571
|
|
Inventories
|
|
|
33,374
|
|
|
|
32,375
|
|
Prepaid expenses and other current
assets
|
|
|
1,364
|
|
|
|
2,199
|
|
Deferred tax assets
|
|
|
5,949
|
|
|
|
4,386
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
133,619
|
|
|
|
187,423
|
|
Property and equipment, at cost,
net
|
|
|
4,711
|
|
|
|
7,770
|
|
Trademarks
|
|
|
51,152
|
|
|
|
35,852
|
|
Goodwill
|
|
|
18,030
|
|
|
|
18,030
|
|
Intangible assets, net
|
|
|
827
|
|
|
|
517
|
|
Deferred tax assets
|
|
|
|
|
|
|
327
|
|
Other assets, net
|
|
|
52
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
208,391
|
|
|
$
|
249,973
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Trade accounts payable
|
|
$
|
14,506
|
|
|
$
|
21,053
|
|
Accrued sales commissions
|
|
|
1,327
|
|
|
|
833
|
|
Accrued payroll
|
|
|
2,219
|
|
|
|
5,111
|
|
Other accrued expenses
|
|
|
1,314
|
|
|
|
1,260
|
|
Income taxes payable
|
|
|
7,133
|
|
|
|
7,478
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
26,499
|
|
|
|
35,735
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
4,337
|
|
|
|
|
|
Commitments and contingencies
(note 7)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value;
authorized 20,000 shares; issued and outstanding 12,432 and
12,588 shares for 2005 and 2006, respectively
|
|
|
124
|
|
|
|
126
|
|
Additional paid-in capital
|
|
|
76,788
|
|
|
|
81,761
|
|
Retained earnings
|
|
|
100,436
|
|
|
|
131,958
|
|
Accumulated other comprehensive
income
|
|
|
207
|
|
|
|
393
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
177,555
|
|
|
|
214,238
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
208,391
|
|
|
$
|
249,973
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-4
DECKERS
OUTDOOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(amounts in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Net sales
|
|
$
|
214,787
|
|
|
$
|
264,760
|
|
|
$
|
304,423
|
|
Cost of sales
|
|
|
124,354
|
|
|
|
153,238
|
|
|
|
163,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
90,433
|
|
|
|
111,522
|
|
|
|
141,199
|
|
Selling, general and
administrative expenses
|
|
|
47,971
|
|
|
|
59,254
|
|
|
|
73,989
|
|
Impairment loss (note 10)
|
|
|
|
|
|
|
|
|
|
|
15,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
42,462
|
|
|
|
52,268
|
|
|
|
51,910
|
|
Other expense (income), net:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
(128
|
)
|
|
|
(295
|
)
|
|
|
(2,432
|
)
|
Interest and other expense, net
|
|
|
2,367
|
|
|
|
320
|
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,239
|
|
|
|
25
|
|
|
|
(2,371
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
40,223
|
|
|
|
52,243
|
|
|
|
54,281
|
|
Income taxes
|
|
|
14,684
|
|
|
|
20,398
|
|
|
|
22,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
25,539
|
|
|
|
31,845
|
|
|
|
31,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
2.32
|
|
|
$
|
2.58
|
|
|
$
|
2.52
|
|
Diluted
|
|
$
|
2.10
|
|
|
$
|
2.48
|
|
|
$
|
2.45
|
|
Weighted average common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
11,005
|
|
|
|
12,349
|
|
|
|
12,519
|
|
Diluted
|
|
|
12,142
|
|
|
|
12,866
|
|
|
|
12,882
|
|
See accompanying notes to consolidated financial statements.
F-5
DECKERS
OUTDOOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
AND
COMPREHENSIVE INCOME
(amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, 2004, 2005 and 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Stockholders
|
|
|
Comprehensive
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Income
|
|
|
Equity
|
|
|
Income
|
|
|
Balance at December 31, 2003
|
|
|
9,731
|
|
|
$
|
97
|
|
|
$
|
27,115
|
|
|
$
|
43,052
|
|
|
$
|
260
|
|
|
$
|
70,524
|
|
|
|
|
|
Common stock issued under follow-on
offering
|
|
|
1,500
|
|
|
|
15
|
|
|
|
34,446
|
|
|
|
|
|
|
|
|
|
|
|
34,461
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
|
61
|
|
|
|
|
|
Stock issued under stock incentive
plan
|
|
|
910
|
|
|
|
10
|
|
|
|
4,083
|
|
|
|
|
|
|
|
|
|
|
|
4,093
|
|
|
|
|
|
Stock issued under the employee
stock purchase plan
|
|
|
42
|
|
|
|
|
|
|
|
224
|
|
|
|
|
|
|
|
|
|
|
|
224
|
|
|
|
|
|
Excess tax benefit attributable to
stock options
|
|
|
|
|
|
|
|
|
|
|
6,030
|
|
|
|
|
|
|
|
|
|
|
|
6,030
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,539
|
|
|
|
|
|
|
|
25,539
|
|
|
$
|
25,539
|
|
Foreign currency translation
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64
|
|
|
|
64
|
|
|
|
64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
25,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
12,183
|
|
|
|
122
|
|
|
|
71,959
|
|
|
|
68,591
|
|
|
|
324
|
|
|
|
140,996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
578
|
|
|
|
|
|
|
|
|
|
|
|
578
|
|
|
|
|
|
Stock issued under the employee
stock purchase plan
|
|
|
43
|
|
|
|
|
|
|
|
295
|
|
|
|
|
|
|
|
|
|
|
|
295
|
|
|
|
|
|
Stock issued under stock incentive
plan
|
|
|
206
|
|
|
|
2
|
|
|
|
1,663
|
|
|
|
|
|
|
|
|
|
|
|
1,665
|
|
|
|
|
|
Excess tax benefit attributable to
stock options
|
|
|
|
|
|
|
|
|
|
|
2,293
|
|
|
|
|
|
|
|
|
|
|
|
2,293
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,845
|
|
|
|
|
|
|
|
31,845
|
|
|
$
|
31,845
|
|
Foreign currency translation
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(117
|
)
|
|
|
(117
|
)
|
|
|
(117
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
31,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
12,432
|
|
|
|
124
|
|
|
|
76,788
|
|
|
|
100,436
|
|
|
|
207
|
|
|
|
177,555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
8
|
|
|
|
|
|
|
|
2,079
|
|
|
|
|
|
|
|
|
|
|
|
2,079
|
|
|
|
|
|
Stock issued under the employee
stock purchase plan
|
|
|
8
|
|
|
|
|
|
|
|
169
|
|
|
|
|
|
|
|
|
|
|
|
169
|
|
|
|
|
|
Exercise of stock options
|
|
|
140
|
|
|
|
2
|
|
|
|
1,170
|
|
|
|
|
|
|
|
|
|
|
|
1,172
|
|
|
|
|
|
Excess tax benefit attributable to
stock options
|
|
|
|
|
|
|
|
|
|
|
1,555
|
|
|
|
|
|
|
|
|
|
|
|
1,555
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,522
|
|
|
|
|
|
|
|
31,522
|
|
|
$
|
31,522
|
|
Foreign currency translation
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
94
|
|
|
|
94
|
|
|
|
94
|
|
Unrealized gain on short-term
investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92
|
|
|
|
92
|
|
|
|
92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
31,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
12,588
|
|
|
$
|
126
|
|
|
$
|
81,761
|
|
|
$
|
131,958
|
|
|
$
|
393
|
|
|
$
|
214,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-6
DECKERS
OUTDOOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
25,539
|
|
|
$
|
31,845
|
|
|
$
|
31,522
|
|
Adjustments to reconcile net
income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization of
property and equipment
|
|
|
1,534
|
|
|
|
2,187
|
|
|
|
2,772
|
|
Amortization of intangible assets
|
|
|
253
|
|
|
|
310
|
|
|
|
310
|
|
Provision for (recovery of)
doubtful accounts, net
|
|
|
580
|
|
|
|
1,740
|
|
|
|
(1,013
|
)
|
Write-down of inventory
|
|
|
1,898
|
|
|
|
4,836
|
|
|
|
3,543
|
|
(Gain) loss on disposal of
property and equipment
|
|
|
(5
|
)
|
|
|
13
|
|
|
|
(8
|
)
|
Impairment loss
|
|
|
|
|
|
|
|
|
|
|
15,300
|
|
Deferred tax provision
|
|
|
936
|
|
|
|
(979
|
)
|
|
|
(3,101
|
)
|
Stock-based compensation
|
|
|
339
|
|
|
|
754
|
|
|
|
2,079
|
|
Write-down of debt issuance costs
|
|
|
671
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
|
(22,683
|
)
|
|
|
(2,022
|
)
|
|
|
(8,875
|
)
|
Inventories
|
|
|
(14,154
|
)
|
|
|
(7,950
|
)
|
|
|
(2,544
|
)
|
Prepaid expenses and other current
assets
|
|
|
(832
|
)
|
|
|
127
|
|
|
|
(835
|
)
|
Other assets
|
|
|
15
|
|
|
|
540
|
|
|
|
(2
|
)
|
Trade accounts payable
|
|
|
5,304
|
|
|
|
(2,018
|
)
|
|
|
6,547
|
|
Accrued expenses
|
|
|
3,734
|
|
|
|
(2,477
|
)
|
|
|
2,183
|
|
Income taxes payable
|
|
|
9,287
|
|
|
|
2,701
|
|
|
|
620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
12,416
|
|
|
|
29,607
|
|
|
|
48,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of short-term investments
|
|
|
(31,250
|
)
|
|
|
(37,116
|
)
|
|
|
(146,689
|
)
|
Proceeds from sales of short-term
investments
|
|
|
15,775
|
|
|
|
50,091
|
|
|
|
84,644
|
|
Proceeds from sale of property and
equipment
|
|
|
43
|
|
|
|
31
|
|
|
|
42
|
|
Purchases of property and equipment
|
|
|
(1,441
|
)
|
|
|
(4,104
|
)
|
|
|
(5,543
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by
investing activities
|
|
|
(16,873
|
)
|
|
|
8,902
|
|
|
|
(67,546
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings under line of credit
|
|
|
|
|
|
|
25,500
|
|
|
|
|
|
Repayments under line of credit
|
|
|
|
|
|
|
(25,500
|
)
|
|
|
|
|
Repayments of long-term debt
|
|
|
(30,287
|
)
|
|
|
|
|
|
|
|
|
Excess tax benefits from
stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
1,280
|
|
Cash received from issuances of
common stock
|
|
|
38,500
|
|
|
|
1,784
|
|
|
|
1,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
8,213
|
|
|
|
1,784
|
|
|
|
2,621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rates on cash
|
|
|
(39
|
)
|
|
|
77
|
|
|
|
(67
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash
equivalents
|
|
|
3,717
|
|
|
|
40,370
|
|
|
|
(16,494
|
)
|
Cash and cash equivalents at
beginning of year
|
|
|
6,662
|
|
|
|
10,379
|
|
|
|
50,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end
of year
|
|
$
|
10,379
|
|
|
$
|
50,749
|
|
|
$
|
34,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash
flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
1,512
|
|
|
$
|
257
|
|
|
$
|
|
|
Income taxes
|
|
$
|
4,597
|
|
|
$
|
18,684
|
|
|
$
|
23,972
|
|
See accompanying notes to consolidated financial statements.
F-7
DECKERS
OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2005 and 2006
(amounts in thousands, except share quantity and per share
data)
|
|
(1)
|
The
Company and Summary of Significant Accounting Policies
|
|
|
(a)
|
The
Company and Basis of Presentation
|
The consolidated financial statements include the accounts of
Deckers Outdoor Corporation and its wholly owned subsidiaries
(collectively referred to as the Company). All
intercompany balances and transactions have been eliminated in
consolidation.
The Company builds niche products into global lifestyle brands
by designing and marketing innovative, functional and
fashion-oriented footwear, developed for both high performance
outdoor activities and everyday casual lifestyle use.
Inventories, principally finished goods, are stated at the lower
of cost (first-in, first-out) or market (net realizable value).
Market values are determined by historical experience with
discounted sales, industry trends and the retail environment.
The Company recognizes revenue when products are shipped and the
customer takes title and assumes risk of loss, collection of
relevant receivable is probable, persuasive evidence of an
arrangement exists, and the sales price is fixed or
determinable. Allowances for estimated returns, discounts, mark
downs, and bad debts are provided for when related revenue is
recorded. Amounts billed for shipping and handling costs are
recorded as a component of net sales, totaling $3,863, $3,962,
and $4,054 for the years ended December 31, 2004, 2005, and
2006, respectively. Related costs paid to third-party shipping
companies are recorded as a cost of sales, totaling $4,094,
$4,870, and $5,332 for the years ended December 31, 2004,
2005, and 2006, respectively. The Company presents revenue net
of taxes collected from customers and remitted to governmental
authorities.
|
|
(d)
|
Goodwill
and Other Intangibles Assets
|
Intangible assets consist primarily of goodwill, trademarks,
patents, and noncompete covenants arising from the application
of purchase accounting. Accordingly, goodwill and intangible
assets with indefinite useful lives are not amortized, but are
tested for impairment at least annually, as of December 31 of
each year, in accordance with Statement of Financial Accounting
Standards (SFAS) No. 142, Goodwill and
Other Intangible Assets (SFAS 142). The
test for impairment involves the use of estimates related to the
fair values of the business operations with which goodwill is
associated and the fair values of the intangible assets with
indefinite lives. The Company evaluates the fair values in
relation to the carrying values. As long as the fair value of
the reporting unit or indefinite life intangible exceeds its
carrying value, no impairment charge will be recognized. If the
fair value of the reporting unit or indefinite life intangible
is less than the carrying value, the Company will measure the
amount of the impairment loss and record an impairment charge
based on fair value, using market value measurements or
valuation techniques. Intangible assets with estimable useful
lives are amortized over their respective estimated useful lives
to their estimated residual values and reviewed for impairment
in accordance with SFAS No. 144, Accounting for
Impairment or Disposal of Long-Lived Assets
(SFAS 144).
|
|
(e)
|
Accounting
for Long-Lived Assets
|
In accordance with SFAS 144, long-lived assets, such as
property and equipment, and purchased intangibles subject to
amortization are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount
to estimated undiscounted future cash flows expected to be
generated by the asset. If the carrying amount exceeds the
estimated future cash flows, an impairment charge is recognized
for the amount by which the carrying amount exceeds the fair
value of the asset.
F-8
DECKERS
OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(amounts in thousands, except share quantity and per share
data)
|
|
(f)
|
Depreciation
and Amortization
|
Depreciation of property and equipment is computed using the
straight-line method based on estimated useful lives ranging
from one to seven years. Leasehold improvements are amortized on
the straight-line basis over their estimated economic useful
lives or the lease term, whichever is shorter.
|
|
(g)
|
Fair
Value of Financial Instruments
|
The fair values of the Companys cash equivalents, trade
accounts receivable, prepaid expenses and other current assets,
trade accounts payable, accrued expenses, and income taxes
payable approximate the carrying values due to the relatively
short maturities of these instruments.
On January 1, 2006, the Company adopted the fair value
recognition provisions of Financial Accounting Standards Board
(the FASB) Statement of Financial Accounting
Standards No. 123R (SFAS 123R),
Share-Based Payment to account for stock-based
compensation. Prior to January 1, 2006, the Company
accounted for stock-based compensation under the intrinsic value
provisions of Accounting Principles Board, Opinion No. 25
(APB 25) Accounting for Stock Issued to
Employees.
Prior to January 1, 2006, in accordance with APB 25, the
intrinsic value of the nonvested stock units (NSUs)
was recorded to compensation expense over the vesting period.
Awards with performance conditions were accounted as variable
with the intrinsic value remeasured at each reporting date. All
NSUs are recorded as equity-based awards under SFAS 123R,
whereby the fair value of the NSU is calculated based on the
closing stock price on the grant date.
As a result of our January 1, 2006 adoption of
SFAS 123R, the impact to the consolidated financial
statements for the year ended December 31, 2006 on income
before taxes and on net income were increases of $449 and $266,
respectively. There was a $0.02 impact on both basic and diluted
earnings per share for the year ended December 31, 2006. In
addition, prior to the adoption of SFAS 123R, the Company
presented the tax benefit of stock option exercises as operating
cash flows. Upon the adoption of SFAS 123R, tax benefits
resulting from tax deductions in excess of the compensation cost
recognized for those options are classified as financing cash
flows.
Pro Forma
Information for Periods Prior to the Adoption of
SFAS 123R
Pro forma information regarding the effect on net income and
basic and diluted income per share for the years ended
December 31, 2004 and 2005, had the Company applied the
fair value recognition provisions of SFAS No. 123, is
as follows:
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
Net income, as reported
|
|
$
|
25,539
|
|
|
$
|
31,845
|
|
Add stock-based employee
compensation expense included in reported net income, net of tax
|
|
|
215
|
|
|
|
460
|
|
Deduct total stock-based employee
compensation expense under fair value-based method for all
awards, net of tax
|
|
|
(1,015
|
)
|
|
|
(1,144
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$
|
24,739
|
|
|
$
|
31,161
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
Basic as reported
|
|
$
|
2.32
|
|
|
$
|
2.58
|
|
Basic pro forma
|
|
|
2.25
|
|
|
|
2.52
|
|
Diluted as reported
|
|
|
2.10
|
|
|
|
2.48
|
|
Diluted pro forma
|
|
|
2.05
|
|
|
|
2.43
|
|
F-9
DECKERS
OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(amounts in thousands, except share quantity and per share
data)
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets, liabilities,
net sales, and expenses and the disclosure of contingent assets
and liabilities to prepare these consolidated financial
statements in conformity with accounting principles generally
accepted in the U.S. Significant areas requiring the use of
management estimates relate to inventory reserves, allowances
for bad debts, returns, mark downs and discounts, impairment
assessments and charges, recoverability of deferred tax assets,
depreciation and amortization, income tax and litigation
contingency reserves, fair value of financial instruments, fair
value of acquired intangibles, assets and liabilities. Actual
results could differ from these estimates.
|
|
(j)
|
Research
and Development Costs
|
In accordance with SFAS No. 2, Accounting for
Research and Development Costs, all research and
development costs are expensed as incurred. Such costs amounted
to $1,438, $1,810, and $2,506 in 2004, 2005, and 2006,
respectively, and are included in selling, general and
administrative expenses in the statement of operations.
|
|
(k)
|
Advertising,
Marketing, and Promotion Costs
|
Advertising production costs are expensed the first time the
advertisement is run. All other costs of advertising, marketing
and promotion are expensed as incurred. These expenses charged
to operations for the years ended 2004, 2005, and 2006 were
$8,687, $10,536, and $17,315, respectively. Included in prepaid
and other current assets at December 31, 2005 and 2006 were
$922 and $1,222, respectively, related to prepaid advertising
and promotion expenses for programs to take place after
December 31, 2005 and 2006, respectively.
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect
on deferred taxes of a change in tax rates is recognized in
income in the period that includes the enactment date.
Basic net income per share represents net income divided by the
weighted-average number of common shares outstanding for the
period. Diluted net income per share represents net income
divided by the weighted-average number of shares outstanding,
including the dilutive impact of potential issuances of common
stock. For the years ended December 31, 2004, 2005, and
2006, the difference between the weighted-average number of
basic and diluted common shares resulted from the dilutive
impact of options to purchase common stock and nonvested stock
units.
The reconciliations of basic to diluted weighted-average common
shares are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Weighted average shares used in
basic computation
|
|
|
11,005,000
|
|
|
|
12,349,000
|
|
|
|
12,519,000
|
|
Dilutive effect of stock options
and nonvested stock units
|
|
|
1,137,000
|
|
|
|
517,000
|
|
|
|
363,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used for
diluted computation
|
|
|
12,142,000
|
|
|
|
12,866,000
|
|
|
|
12,882,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-10
DECKERS
OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(amounts in thousands, except share quantity and per share
data)
Options to purchase 10,000 at $33.10 during 2004 and 2005 were
not included in the computation of diluted net income per share
because the options exercise price was greater than the
average market price of the common shares during the respective
periods, and therefore their inclusion would be anti-dilutive.
All options outstanding as of December 31, 2006 were
included in the computation of diluted income per share for 2006.
The Company excluded 60,000, 111,000, and 76,000 contingently
issuable shares of common stock underlying its nonvested stock
units from the diluted income per share computations for the
years ended December 31, 2004, 2005, and 2006,
respectively. The shares were excluded because the necessary
performance conditions for the shares to be issuable had not
been satisfied.
|
|
(n)
|
Foreign
Currency Translation
|
The Company considers the U.S. dollar as the functional currency.
Comprehensive income is the total of net earnings and all other
non-owner changes in equity. Except for net income, foreign
currency translation adjustments, and unrealized gains and
losses on available for sale investments, the Company does not
have any transactions and other economic events that qualify as
comprehensive income as defined under SFAS No. 130,
Reporting Comprehensive Income.
|
|
(p)
|
Business
Segment Reporting
|
Management of the Company has determined its reportable segments
as defined under SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information are its
strategic business units. The four reportable segments are the
Teva, UGG, and Simple wholesale divisions and the Companys
Consumer Direct business (consisting of the Companys
internet, catalog, and retail outlet stores). Information
related to these segments is summarized in note 8.
The Company considers all highly liquid investments with
original maturities of three months or less to be cash
equivalents.
|
|
(r)
|
Short-term
Investments
|
Short-term investments, which primarily consist of market
auction rate notes receivable, market auction rate preferred
securities, and government and agency securities are classified
as available for sale under the provisions of
SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities. Accordingly, the short-term
investments are reported at fair value, with any unrealized
gains and losses included as a separate component of
stockholders equity. Interest and dividends are included
in interest income in the consolidated statements of operations.
Securities with original maturities of three months or less are
classified as cash equivalents. Those that mature over three
months are classified as short-term investments, as we utilize
the funds for our working capital requirements. The fair value
of the Companys short-term investments at
December 31, 2005 and 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
December 31, 2006
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
|
Gains
|
|
|
Fair Value
|
|
|
Gains
|
|
|
Fair Value
|
|
|
Certificates of deposit
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,999
|
|
Government and agency securities
|
|
|
|
|
|
|
|
|
|
|
92
|
|
|
|
28,767
|
|
Auction rate securities
|
|
|
|
|
|
|
2,500
|
|
|
|
|
|
|
|
33,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
2,500
|
|
|
$
|
92
|
|
|
$
|
64,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-11
DECKERS
OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(amounts in thousands, except share quantity and per share
data)
Certain reclassifications have been made to the 2004 and 2005
balances to conform to the 2006 presentation. The allowance for
markdowns has been reclassified from other accrued expenses to
trade accounts receivable, net in 2004 and 2005 to conform to
the 2006 presentation.
|
|
(t)
|
New
Accounting Standards
|
The Company adopted SFAS 123R on January 1, 2006. The
impact of the adoption is discussed in note 2(h) above.
In November 2004, the FASB issued SFAS No. 151
(SFAS 151), Inventory Costs
An Amendment of Accounting Research Bulletin (ARB)
No. 43, Chapter 4. SFAS 151 amends the
guidance in ARB No. 43, Chapter 4, Inventory
Pricing, to clarify the accounting for abnormal amounts of
idle facility expense, freight, handling costs, and wasted
material (spoilage). SFAS 151 is effective for fiscal years
beginning after June 15, 2005 and was adopted on
January 1, 2006. The adoption of this statement did not
have a material effect on the Companys consolidated
financial statements.
In May 2005, the FASB issued SFAS No. 154
(SFAS 154), Accounting Changes and Error
Corrections, a replacement of APB Opinion No. 20,
Accounting Changes, and FASB Statement No. 3, Reporting
Accounting Changes in Interim Financial Statements. This
statement requires retrospective application to prior
periods financial statements of a change in accounting
principle. It applies both to voluntary changes and to changes
required by an accounting pronouncement if the pronouncement
does not include specific transition provisions. APB 20
previously required that most voluntary changes in accounting
principles be recognized by recording the cumulative effect of a
change in accounting principle. SFAS 154 is effective for
fiscal years beginning after December 15, 2005. The Company
adopted this statement on January 1, 2006, and it did not
have a material effect on the consolidated financial statements
upon adoption.
In September 2006, the FASB issued Statement No. 157
(SFAS 157), Fair Value
Measurements. SFAS 157 standardizes the definition
and approaches for fair value measurements of financial
instruments for those standards which already permit or require
the use of fair value. It does not require any new fair value
measurements. SFAS 157 defines a hierarchy for valuation
techniques and also requires additional disclosures. The
provisions of SFAS 157 are effective for the Company as of
January 1, 2008. The Company does not expect the adoption
of this statement to have a material effect on its consolidated
financial statements.
In September 2006, the SEC staff issued Staff Accounting
Bulletin No. 108 (SAB 108),
Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial
Statements. SAB 108 provides interpretive guidance on
how the effects of the carryover or reversal of prior year
misstatements should be considered in quantifying a current year
misstatement. It requires companies to quantify the
misstatements using both a balance sheet and an income statement
approach. SAB 108 is effective for the Companys
fiscal year ending December 31, 2006. The adoption of
SAB 108 did not have a material impact on the
Companys consolidated financial statements.
In February 2007, the FASB issued Statement No. 159
(SFAS 159), The Fair Value Option for
Financial Assets and Financial Liabilities Including
an amendment of FASB Statement No. 115. SFAS 159
provides companies the option to measure many financial
instruments and certain other items at fair value. This provides
companies the opportunity to mitigate volatility in earnings
caused by measuring instruments differently without complex
hedge accounting provisions. SFAS 159 is effective for the
Company beginning January 1, 2008. The Company is currently
evaluating the effect this Statement will have on its
consolidated financial statements.
Effective August 1, 1992, the Company established a 401(k)
defined contribution plan. Substantially all employees are
eligible to participate in the plan through
tax-deferred
contributions. The Company matches 50% of
F-12
DECKERS
OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(amounts in thousands, except share quantity and per share
data)
an employees contribution up to $1.2 per year.
Matching contributions totaled $92, $106, and $148 during 2004,
2005 and 2006, respectively. In addition, the Company may also
make discretionary profit sharing contributions to the plan. The
Company did not make profit sharing contributions for the years
ended December 31, 2004, 2005 or 2006.
|
|
(3)
|
Property
and Equipment
|
Property and equipment is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
Machinery and equipment
|
|
$
|
7,877
|
|
|
$
|
9,104
|
|
Furniture and fixtures
|
|
|
768
|
|
|
|
1,476
|
|
Leasehold improvements
|
|
|
2,769
|
|
|
|
6,468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,414
|
|
|
|
17,048
|
|
Less accumulated depreciation and
amortization
|
|
|
6,703
|
|
|
|
9,278
|
|
|
|
|
|
|
|
|
|
|
Net property and equipment
|
|
$
|
4,711
|
|
|
$
|
7,770
|
|
|
|
|
|
|
|
|
|
|
(4) Notes Payable
and Long-Term Debt
The Companys revolving credit facility with Comerica Bank
(the Facility) provides for a maximum availability
of $20,000. In September 2006, the Company amended the
Facility, eliminating the borrowing base formula requirement,
extending the maturity date, and changing certain covenant
requirements. Up to $10,000 of borrowings may be in the form of
letters of credit. The Facility bears interest at the
lenders prime rate (8.25% at December 31,
2006) or, at the Companys option, at the London
Interbank Offered Rate, or LIBOR, (5.33% at December 31,
2006) plus 1.0% to 2.5%, depending on the ratio of
liabilities to earnings before interest, taxes, depreciation and
amortization, and is secured by substantially all assets. The
Facility includes annual commitment fees of $60 per year
and now expires on June 1, 2008. At December 31, 2006,
the Company had no outstanding borrowings under the Facility, no
foreign currency reserves for outstanding forward contracts and
outstanding letters of credit aggregated $52. As a result,
$19,948 was available under the Facility at December 31,
2006.
The agreements underlying the Facility contain certain financial
covenants including a quick ratio requirement, profitability
requirements and a tangible net worth requirement, among others,
as well as a prohibition on the payment of dividends.
F-13
DECKERS
OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(amounts in thousands, except share quantity and per share
data)
Components of income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
State
|
|
|
Foreign
|
|
|
Total
|
|
|
2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
9,930
|
|
|
$
|
2,073
|
|
|
$
|
1,745
|
|
|
$
|
13,748
|
|
Deferred
|
|
|
629
|
|
|
|
293
|
|
|
|
14
|
|
|
|
936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
10,559
|
|
|
$
|
2,366
|
|
|
$
|
1,759
|
|
|
$
|
14,684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
17,630
|
|
|
$
|
4,848
|
|
|
$
|
(1,101
|
)
|
|
$
|
21,377
|
|
Deferred
|
|
|
(1,064
|
)
|
|
|
(118
|
)
|
|
|
203
|
|
|
|
(979
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
16,566
|
|
|
$
|
4,730
|
|
|
$
|
(898
|
)
|
|
$
|
20,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
21,239
|
|
|
$
|
4,610
|
|
|
$
|
10
|
|
|
$
|
25,859
|
|
Deferred
|
|
|
(2,583
|
)
|
|
|
(524
|
)
|
|
|
7
|
|
|
|
(3,100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
18,656
|
|
|
$
|
4,086
|
|
|
$
|
17
|
|
|
$
|
22,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign income (loss) before income taxes was $7,261, $4,572,
and ($2,354) during the years ended December 31, 2004, 2005
and 2006, respectively.
Actual income taxes differed from that obtained by applying the
statutory federal income tax rate to earnings before income
taxes as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Computed expected
income taxes
|
|
$
|
14,078
|
|
|
$
|
18,285
|
|
|
$
|
18,998
|
|
State income taxes, net of federal
income tax benefit
|
|
|
1,895
|
|
|
|
2,740
|
|
|
|
3,255
|
|
Other
|
|
|
(1,289
|
)
|
|
|
(627
|
)
|
|
|
506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,684
|
|
|
$
|
20,398
|
|
|
$
|
22,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The tax effects of temporary differences that give rise to
significant portions of deferred tax assets and deferred tax
liabilities at December 31, 2005 and 2006 are presented
below:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
Deferred tax assets (liabilities),
current:
|
|
|
|
|
|
|
|
|
Uniform capitalization adjustment
to inventory
|
|
$
|
1,191
|
|
|
$
|
716
|
|
Bad debt and other reserves
|
|
|
3,783
|
|
|
|
2,825
|
|
State taxes
|
|
|
1,563
|
|
|
|
1,783
|
|
Prepaid expenses
|
|
|
(588
|
)
|
|
|
(938
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets, current
|
|
|
5,949
|
|
|
|
4,386
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets (liabilities),
noncurrent:
|
|
|
|
|
|
|
|
|
Amortization of intangible assets
|
|
|
(4,107
|
)
|
|
|
(1,192
|
)
|
Depreciation of property and
equipment
|
|
|
(230
|
)
|
|
|
373
|
|
Stock option compensation
|
|
|
|
|
|
|
949
|
|
Net operating loss carryforwards
|
|
|
|
|
|
|
197
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
(liabilities), noncurrent
|
|
|
(4,337
|
)
|
|
|
327
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
1,612
|
|
|
$
|
4,713
|
|
|
|
|
|
|
|
|
|
|
F-14
DECKERS
OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(amounts in thousands, except share quantity and per share
data)
In order to fully realize the deferred tax assets, the Company
will need to generate future taxable income of approximately
$11,500. The deferred tax assets are primarily related to the
Companys domestic operations. Domestic taxable income for
the years ended December 31, 2005 and 2006 was
approximately $41,972 and $58,854, respectively. In addition,
the deferred tax assets include foreign net operating loss
carryforwards of $656 for U.K. income tax purposes that can be
carried forward indefinitely. Based upon the level of historical
taxable income and projections for future taxable income over
the periods in which the deferred tax assets are deductible,
management believes it is more likely than not that the results
of future operations will generate sufficient taxable income to
realize the net deferred tax assets and, accordingly, no
valuation allowance has been recorded.
As of December 31, 2006, withholding and U.S. taxes have
not been provided on approximately $11,100 of unremitted
earnings of our non-U.S. subsidiaries because the Company has
currently reinvested these earnings permanently in such
operations. Such earnings would become taxable upon the sale or
liquidation of these subsidiaries or upon remittance of
dividends.
In 2005, the Company repatriated $3,500 under the terms of the
American Jobs Creations Act of 2004 (AJCA),
resulting in $331 of additional Federal and state income taxes
on repatriation. The AJCA provided for a limited time 85%
dividends received deduction on the repatriation of certain
foreign earnings to a U.S. taxpayer, provided certain criteria
were met.
The Company has established contingency reserves related to
income taxes in accordance with SFAS No. 5,
Accounting for Contingencies. These reserves
predominately relate to the transfer pricing among the domestic
and foreign taxing jurisdictions. The reserves are approximately
$1,600 and $1,500 at December 31, 2005 and 2006,
respectively, and are recorded in current income taxes payable
on the consolidated balance sheet.
In July 2006, the FASB issued Interpretation No. 48
(FIN 48), Accounting for Uncertainty in
Income Taxes an interpretation of
SFAS No. 109, which prescribes a recognition
threshold and measurement process for recording in the financial
statements uncertain tax positions taken or expected to be taken
in a tax return. FIN 48 also provides guidance on the
derecognition, classification, accounting in interim periods,
and disclosure requirements for uncertain tax positions. The
provisions of FIN 48 are effective for the Company as of
January 1, 2007. The cumulative effect of adopting
FIN 48 will be recorded in retained earnings and other
accounts as applicable. The Company is currently evaluating the
impact of adopting FIN 48 and believes the adoption of this
statement will not have a material effect on the Companys
consolidated financial statements.
The Company is authorized to issue 5,000,000 shares of
preferred stock with a par value of $0.01, of which
1,375,000 shares are designated as Series A Preferred
Stock. The 1,375,000 shares of Series A Preferred
Stock were issued to Mark Thatcher in connection with the
acquisition of Teva. In December 2003, the Company redeemed all
of the outstanding Preferred Stock.
The Companys 1993 Stock Incentive Plan (the 1993
Plan), as amended, provided for 3,000,000 shares of
common stock that were reserved for issuance to officers,
directors, employees, and consultants of the Company. Awards to
1993 Plan participants were not restricted to any specified form
and may have included stock options, securities convertible into
or redeemable for stock, stock appreciation rights, stock
purchase warrants, or other rights to acquire stock. Stock
option awards were granted with an exercise price equal to the
market price of the Companys stock at the date of grant;
those option awards generally vested on a graded basis over four
years of continuous service and had ten-year contractual terms.
The fair value of stock options is calculated using the
Black-Scholes pricing model. 26,000 stock options were granted
for the year ended December 31, 2004. No stock options were
granted during the years ended December 31, 2005 and 2006.
The 1993 Plan was terminated in May 2006 and no new awards will
be issued under this plan.
In May 2006, the Company adopted the 2006 Equity Incentive Plan
(the 2006 Plan). The primary purpose of the 2006
Plan is to encourage ownership in the Company by key personnel,
whose long-term service is considered
F-15
DECKERS
OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(amounts in thousands, except share quantity and per share
data)
essential to the Companys continued progress. The 2006
Plan provides for 2,000,000 new shares of common stock that are
reserved for issuance to employees, directors, or consultants.
The maximum aggregate number of shares that may be issued under
the 2006 Plan through the exercise of incentive stock options is
1,500,000. The 2006 Plan supersedes the 1993 Plan, which was
subsequently terminated for new grants.
Beginning December 2004, the Company replaced its annual
employee stock option grants with grants of nonvested stock
units (NSUs). The NSUs granted pursuant to the 1993
Plan and the 2006 Plan entitle the employee recipients to
receive shares of common stock in the Company, which generally
vest in quarterly increments between the third and fourth
anniversary of the grant. Many of these awards include vesting
that is also subject to achievement of certain performance
targets.
In August 1995, the Company adopted the 1995 Employee Stock
Purchase Plan (the ESPP). The ESPP is intended to
qualify as an Employee Stock Purchase Plan under
Section 423 of the Internal Revenue Code. Under the terms
of the ESPP, as amended, 300,000 shares of common stock
were reserved for issuance to employees who have been employed
by the Company for at least six months. The ESPP provided for
employees to purchase the Companys common stock at a
discount below market value, as defined by the ESPP. Under the
ESPP, 8,000 shares were issued in the year ended
December 31, 2006. The ESPP was terminated in September
2006, and no new shares will be issued under the ESPP.
Additionally, on a quarterly basis, the Company grants 400
fully-vested shares of its common stock to each of its outside
directors. The fair value of such shares is expensed on the date
of issuance.
The Company expects to issue new shares in connection with
share-based awards.
The table below summarizes certain stock compensation amounts
recognized in the years ended December 31, 2004, 2005, and
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Compensation expense recorded for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested stock units
|
|
$
|
61
|
|
|
|
564
|
|
|
|
1,195
|
|
Stock options
|
|
|
|
|
|
|
|
|
|
|
383
|
|
ESPP
|
|
|
|
|
|
|
|
|
|
|
119
|
|
Directors shares
|
|
|
278
|
|
|
|
190
|
|
|
|
382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total compensation expense
|
|
|
339
|
|
|
|
754
|
|
|
|
2,079
|
|
Income tax benefit recognized in
income statement
|
|
|
(124
|
)
|
|
|
(294
|
)
|
|
|
(867
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net compensation expense
|
|
$
|
215
|
|
|
|
460
|
|
|
|
1,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of the activity under the 1993 Plan and 2006 Plan as
of December 31, 2004, 2005, and 2006 and changes during the
period are presented below.
F-16
DECKERS
OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(amounts in thousands, except share quantity and per share
data)
Summary
Details for 1993 Plan Share Options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
of Shares
|
|
|
Price
|
|
|
Term (Years)
|
|
|
Value
|
|
|
Outstanding at December 31,
2003
|
|
|
1,775,000
|
|
|
$
|
5.62
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
26,000
|
|
|
|
29.04
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(900,000
|
)
|
|
|
4.24
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(11,000
|
)
|
|
|
11.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2004
|
|
|
890,000
|
|
|
$
|
7.62
|
|
|
|
6.6
|
|
|
$
|
35,040
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(199,000
|
)
|
|
|
7.48
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(63,000
|
)
|
|
|
12.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2005
|
|
|
628,000
|
|
|
$
|
7.16
|
|
|
|
5.4
|
|
|
$
|
12,852
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(140,000
|
)
|
|
|
8.39
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(22,000
|
)
|
|
|
11.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2006
|
|
|
466,000
|
|
|
$
|
6.59
|
|
|
|
3.9
|
|
|
$
|
24,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31,
2006
|
|
|
439,000
|
|
|
$
|
5.82
|
|
|
|
3.8
|
|
|
$
|
23,783
|
|
Expected to vest and exercisable
at December 31, 2006
|
|
|
463,000
|
|
|
$
|
6.48
|
|
|
|
3.6
|
|
|
$
|
24,731
|
|
The per share weighted average fair value of stock options
granted during 2004 was $16.83 on the date of grant using the
Black-Scholes option pricing model with the following weighted
average assumptions: expected dividend yield of 0%, stock
volatility of 52.85%, risk-free interest rate of 3.97%, and an
expected life of seven years. The Company did not issue any
stock options in 2005 and 2006. The total intrinsic value of
options exercised during the years ended December 31, 2004,
2005, and 2006, was $14,392, $5,671, and $3,875, respectively.
The tax benefit realized on options exercised for the years
ended December 31, 2005 and 2006 was $2,293 and $1,555,
respectively.
Nonvested
Stock Units Issued Under the 1993 Plan and 2006
Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant-
|
|
|
|
Number
|
|
|
Date Fair
|
|
|
|
of Shares
|
|
|
Value
|
|
|
Nonvested at January 1, 2006
|
|
|
155,800
|
|
|
$
|
30.76
|
|
Granted
|
|
|
98,200
|
|
|
|
53.18
|
|
Vested
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(14,900
|
)
|
|
|
24.57
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31, 2006
|
|
|
239,100
|
|
|
|
40.36
|
|
|
|
|
|
|
|
|
|
|
During the year ended December 31, 2006, the Company
granted 84,000 NSUs under the 2006 Plan and the remaining NSUs
under the 1993 Plan.
F-17
DECKERS
OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(amounts in thousands, except share quantity and per share
data)
As of December 31, 2006, there was $6,375 of total
unrecognized compensation cost related to stock options and NSUs
that will vest in the future, over a weighted-average vesting
period of 3.3 years.
The Company adopted a stockholder rights plan in 1998 to protect
stockholders against unsolicited attempts to acquire control of
the Company that do not offer what the Company believes to be an
adequate price to all stockholders. As part of the plan, the
board of directors of the Company declared a dividend of one
preferred share purchase right (a Right) for each
outstanding share of common stock, par value $0.01 per share
(the Common Shares), of the Company. The dividend
was payable to stockholders of record on December 1, 1998
(the Record Date). In addition, one Right shall be
issued with each Common Share that becomes outstanding
(i) between the Record Date and the earliest of the
Distribution Date, the Redemption Date, and the Final
Expiration Date (as such terms are defined in the Rights
Agreement) or (ii) following the Distribution Date and
prior to the Redemption Date or Final Expiration Date,
pursuant to the exercise of stock options or under any employee
plan or arrangement or upon the exercise, conversion, or
exchange of other securities of the Company, which options or
securities were outstanding prior to the Distribution Date, in
each case upon the issuance of the Companys common stock
in connection with any of the foregoing. Each Right entitles the
registered holder to purchase from the Company one one-hundredth
of a share of Series B Junior Participating Preferred
Stock, par value $0.01 per share, of the Company, at a price of
$50.00, subject to adjustment. The Rights have no voting power
and expire on November 11, 2008. The Company may redeem the
rights for $0.01 per right until the right becomes exercisable.
|
|
(7)
|
Commitments
and Contingencies
|
The Company leases office, distribution center and retail store
facilities under operating lease agreements, which expire
through August 2016. Many of the leases contain renewal options
for approximately 3 to 5 years. Future minimum commitments under
the lease agreements are as follows:
|
|
|
|
|
Year ending December 31:
|
|
|
|
|
2007
|
|
$
|
3,918
|
|
2008
|
|
|
4,166
|
|
2009
|
|
|
4,017
|
|
2010
|
|
|
1,257
|
|
2011
|
|
|
977
|
|
Thereafter
|
|
|
3,232
|
|
|
|
|
|
|
|
|
$
|
17,567
|
|
|
|
|
|
|
Rent expense is recorded using the straight-line method to
account for scheduled rental increases or rent holidays. Total
rent expense for the years ended December 31, 2004, 2005,
and 2006 was approximately $1,341, $2,989, and $3,776
respectively.
F-18
DECKERS
OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(amounts in thousands, except share quantity and per share
data)
In September 2006, the Company entered into a purchase
obligation with a movie production company for advertising
services. The Companys Teva brand is the presenting
sponsor of a new documentary IMAX film that is to be released in
IMAX theaters in March 2008. Future commitments under this
agreement are as follows:
|
|
|
|
|
Year ending December 31:
|
|
|
|
|
2007
|
|
$
|
|
|
2008
|
|
|
250
|
|
2009
|
|
|
300
|
|
2010
|
|
|
300
|
|
2011
|
|
|
200
|
|
Thereafter
|
|
|
200
|
|
|
|
|
|
|
|
|
$
|
1,250
|
|
|
|
|
|
|
The Company is currently involved in various 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 Companys financial position or
results of operations.
|
|
(8)
|
Business
Segments, Concentration of Business, and Credit Risk and
Significant Customers
|
The Companys accounting policies of the segments below are
the same as those described in the summary of significant
accounting policies, except that the Company does not allocate
interest, income taxes, or unusual items to segments. The
Company evaluates performance based on net sales and profit or
loss from operations. The Companys reportable segments
include the strategic business units responsible for the
worldwide operations of each of its brands and its Consumer
Direct business. They are managed separately because each
business requires different marketing, research and development,
design, sourcing and sales strategies. The earnings from
operations for each of the segments includes only those costs
which are specifically related to each segment, which consist
primarily of cost of sales, costs for research and development,
design, marketing, sales, commissions, royalties, bad debts,
depreciation, amortization and the costs of employees directly
related to each business segment. The unallocated corporate
overhead costs are the shared costs of the organization and
include the following: costs of the distribution center,
information technology, human resources, accounting and finance,
credit and collections, executive compensation, and facilities
costs. The operating income derived from the sales to third
parties of the Consumer Direct segment is separated into two
components: (i) the wholesale profit is included in the
operating
F-19
DECKERS
OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(amounts in thousands, except share quantity and per share
data)
income of each of the three brands, and (ii) the retail
profit is included in the operating income of the Consumer
Direct segment.
Business segment information is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Net sales to external customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
Teva wholesale
|
|
$
|
83,477
|
|
|
$
|
80,446
|
|
|
$
|
75,283
|
|
UGG wholesale
|
|
|
101,806
|
|
|
|
150,279
|
|
|
|
182,369
|
|
Simple wholesale
|
|
|
9,633
|
|
|
|
6,980
|
|
|
|
10,903
|
|
Consumer Direct
|
|
|
19,871
|
|
|
|
27,055
|
|
|
|
35,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
214,787
|
|
|
$
|
264,760
|
|
|
$
|
304,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Teva wholesale*
|
|
$
|
24,901
|
|
|
$
|
22,388
|
|
|
$
|
3,968
|
|
UGG wholesale
|
|
|
31,674
|
|
|
|
48,765
|
|
|
|
73,208
|
|
Simple wholesale
|
|
|
45
|
|
|
|
(834
|
)
|
|
|
(2,443
|
)
|
Consumer Direct
|
|
|
5,533
|
|
|
|
6,972
|
|
|
|
9,954
|
|
Unallocated overhead
|
|
|
(19,691
|
)
|
|
|
(25,023
|
)
|
|
|
(32,777
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
42,462
|
|
|
$
|
52,268
|
|
|
$
|
51,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
Teva wholesale
|
|
$
|
401
|
|
|
$
|
459
|
|
|
$
|
484
|
|
UGG wholesale
|
|
|
30
|
|
|
|
72
|
|
|
|
76
|
|
Simple wholesale
|
|
|
31
|
|
|
|
45
|
|
|
|
56
|
|
Consumer Direct
|
|
|
92
|
|
|
|
156
|
|
|
|
317
|
|
Unallocated overhead
|
|
|
1,233
|
|
|
|
1,765
|
|
|
|
2,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,787
|
|
|
$
|
2,497
|
|
|
$
|
3,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
|
|
|
|
|
Teva wholesale
|
|
$
|
226
|
|
|
$
|
185
|
|
|
$
|
590
|
|
UGG wholesale
|
|
|
19
|
|
|
|
263
|
|
|
|
84
|
|
Simple wholesale
|
|
|
111
|
|
|
|
29
|
|
|
|
60
|
|
Consumer Direct
|
|
|
151
|
|
|
|
486
|
|
|
|
1,940
|
|
Unallocated overhead
|
|
|
934
|
|
|
|
3,141
|
|
|
|
2,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,441
|
|
|
$
|
4,104
|
|
|
$
|
5,543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets from reportable
segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Teva wholesale
|
|
|
|
|
|
$
|
83,725
|
|
|
$
|
70,862
|
|
UGG wholesale
|
|
|
|
|
|
|
55,884
|
|
|
|
62,646
|
|
Simple wholesale
|
|
|
|
|
|
|
5,175
|
|
|
|
4,194
|
|
Consumer Direct
|
|
|
|
|
|
|
945
|
|
|
|
2,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
145,729
|
|
|
$
|
140,658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Included in Teva income from operations in 2006 is an impairment
loss if $15,300 (See note 10).
|
The assets allocable to each reporting segment generally include
accounts receivable, inventory, intangible assets and certain
other assets, that are specifically identifiable with one of the
Companys business segments. Unallocated corporate assets
are the assets not specifically related to one of the segments
and generally include the Companys cash and cash
equivalents, short-term investments, deferred tax assets, and
various other assets shared by the Companys segments.
F-20
DECKERS
OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(amounts in thousands, except share quantity and per share
data)
Reconciliations of total assets from reportable segments to the
consolidated financial statements are as follows:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
Total assets from reportable
segments
|
|
$
|
145,729
|
|
|
$
|
140,658
|
|
Unallocated deferred tax assets
|
|
|
5,949
|
|
|
|
4,713
|
|
Other unallocated corporate assets
|
|
|
56,713
|
|
|
|
104,602
|
|
|
|
|
|
|
|
|
|
|
Consolidated total assets
|
|
$
|
208,391
|
|
|
$
|
249,973
|
|
|
|
|
|
|
|
|
|
|
The Company sells its footwear products principally to customers
throughout the U.S. The Company also sells its footwear products
to foreign customers located in Europe, Canada, Australia, Asia,
and Latin America among other regions. International sales were
18.3%, 13.3%, and 12.6% of net sales for the years ended
December 31, 2004, 2005, and 2006, respectively. The
Company does not consider international operations a separate
segment, as management reviews such operations in the aggregate
with the aforementioned segments.
Management performs regular evaluations concerning the ability
of its customers to satisfy their obligations and records a
provision for doubtful accounts based upon these evaluations.
One customer accounted for 14.1%, 15.8% and 16.7% of the
Companys net sales in 2004, 2005, and 2006, respectively.
No other customer accounted for more than 10% of net sales in
the years ended December 31, 2004, 2005 or 2006. As of
December 31, 2005 and 2006 the Company had one customer
representing 27.6% and 31.5% of net trade accounts receivable,
respectively.
As of December 31, 2006, approximately $11,951 of
trademarks and $466 of goodwill are held in Bermuda by a
subsidiary of the Company. Substantially all other long-lived
assets are held in the U.S.
The Companys production and sourcing is concentrated
primarily in China, Australia and New Zealand, with the vast
majority of its production at five independent contractor
factories in China. The Companys operations are subject to
the customary risks of doing business abroad, including, but not
limited to, currency fluctuations, customs duties, and related
fees, various import controls and other nontariff barriers,
restrictions on the transfer of funds, labor unrest and strikes
and, in certain parts of the world, political instability.
|
|
(9)
|
Quarterly
Summary of Information (Unaudited)
|
Summarized unaudited quarterly financial data are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
Net sales
|
|
$
|
64,263
|
|
|
$
|
40,341
|
|
|
$
|
69,193
|
|
|
$
|
90,963
|
|
Gross profit
|
|
|
29,567
|
|
|
|
15,969
|
|
|
|
29,070
|
|
|
|
36,916
|
|
Net income
|
|
|
8,887
|
|
|
|
2,732
|
|
|
|
8,150
|
|
|
|
12,076
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.72
|
|
|
$
|
0.22
|
|
|
$
|
0.66
|
|
|
$
|
0.97
|
|
Diluted
|
|
$
|
0.69
|
|
|
$
|
0.21
|
|
|
$
|
0.63
|
|
|
$
|
0.94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
Net sales
|
|
$
|
56,004
|
|
|
$
|
41,721
|
|
|
$
|
82,322
|
|
|
$
|
124,376
|
|
Gross profit
|
|
|
24,700
|
|
|
|
19,041
|
|
|
|
37,173
|
|
|
|
60,285
|
|
Net income*
|
|
|
5,649
|
|
|
|
2,731
|
|
|
|
10,599
|
|
|
|
12,543
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.45
|
|
|
$
|
0.22
|
|
|
$
|
0.85
|
|
|
$
|
1.00
|
|
Diluted
|
|
$
|
0.44
|
|
|
$
|
0.21
|
|
|
$
|
0.83
|
|
|
$
|
0.97
|
|
|
|
|
* |
|
Included in net income in the quarter ended December 31,
2006 is an impairment loss of $15,300 (see note 10). |
F-21
DECKERS
OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(amounts in thousands, except share quantity and per share
data)
|
|
(10)
|
Goodwill
and Other Intangible Assets
|
The Companys goodwill and other intangible assets are
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Amortization
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
|
Amount
|
|
|
Period
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amortizable intangible assets
|
|
$
|
1,752
|
|
|
|
6 years
|
|
|
$
|
1,235
|
|
|
$
|
517
|
|
Nonamortizable intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
$
|
35,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
18,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
55,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In accordance with SFAS 142, the Company performed its
annual impairment test of nonamortizable intangible assets using
market value approaches and valuation techniques as of
December 31, 2006 and determined that there was no
impairment of goodwill. However, the Company concluded that the
fair value of the Teva trademarks was less than the carrying
amount and recorded an impairment charge of $15,300. The method
used to determine the fair value of the trademarks was a royalty
relief method using discounted cash flows to determine future
royalty revenue and expenses. The impairment loss is included in
a separate line item within income from operations, and as a
part of the Teva reportable segment.
Aggregate amortization expense for amortizable intangible
assets, using the
straight-line
amortization method, for the years ended December 31, 2004,
2005 and 2006 was $253, $310, and $310, respectively. Estimated
amortization expense for existing intangible assets for the next
five years is: $285 in 2007, $147 in 2008, $85 in 2009, and
$0 thereafter.
The Company selectively licenses its brand names in product
categories beyond footwear. The Company currently has several
licensing agreements for Teva brand products, including U.S.
licenses for mens and womens headwear and socks, a
Canadian sportswear license and a recently signed license for
bags and packs to be delivered for the Spring 2007 season.
The Company also has licensing arrangements for UGG brand
products, specifically for handbags and other small leather
goods, outerwear and cold weather accessories.
For several of its initial licensing arrangements, the Company
used BHPC Global Licensing, Inc. (BHPC), a full
service licensing agency, to identify candidates and coordinate
its licensing business. The Company pays BHPC an agency fee on
license income related to the licensing agreements that BHPC
coordinated on its behalf. In 2005 and 2006, the Company paid
BHPC agency fees of approximately $118 and $79, respectively.
BHPC is 50% owned by one of our directors, Daniel L. Terheggen.
The unpaid balance at December 31, 2005 and 2006 was $49
and $56, respectively.
The Company recognizes license income upon shipment of the
products by the licensees and records a corresponding fee to
BHPC for the underlying shipments. License income, net of any
fees to BHPC, is included in net sales in the accompanying
statement of operations. Management believes that the terms
entered into are at
arms-length
and that such terms are comparable to those with third parties.
|
|
(12)
|
Related
Party Transactions
|
In 1993, the Company and Douglas B. Otto, Chairman of the Board,
entered into a split dollar life insurance arrangement, whereby
the Company participated in a portion of the life insurance
premiums paid through 2001. The
F-22
DECKERS
OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(amounts in thousands, except share quantity and per share
data)
arrangement provided that Mr. Ottos estate would
reimburse the Company for all premiums previously paid. In 2005,
Mr. Otto reimbursed the Company for all premiums paid on
his behalf. The Company carried the value of the life insurance
policy at its cash surrender value, which was lower than the
amount of premiums paid on the policy. As a result, the Company
recognized a gain of $260 in 2005 upon settlement and receipt of
the reimbursement.
Refer also to the discussion of BHPC in note 11.
In January 2007, the Company entered into an Escrow
Agreement by and among Deckers Outdoor Corporation, MacGillivray
Freeman Films, Inc., and Comerica Bank. The Escrow
Agreement is in conjunction with the Companys purchase
obligation with a movie production company for advertising
services. As a result of the agreement, $1,250 of the
Companys cash and cash equivalents balance at
December 31, 2006 became restricted cash in
January 2007. The Escrow Agreement contains a disbursement
schedule according to when the funds will be disbursed to the
production company (see note 7).
F-23