diff --git a/raw/filings/0000794172/2003/0000950152-03-010438/filing.txt b/raw/filings/0000794172/2003/0000950152-03-010438/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..f76bc3c62fdb98c6401bdc6bf0e3c9ee671db644 --- /dev/null +++ b/raw/filings/0000794172/2003/0000950152-03-010438/filing.txt @@ -0,0 +1,4339 @@ +10-K +1 +l04579ae10vk.htm +MERIDIAN BIOSCIENCE, INC. 10-K/FYE 9-30-2003 +Meridian Bioscience, Inc. 10-K/FYE 9-30-2003 +Table of Contents +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +FORM 10-K +FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) +OF THE SECURITIES EXCHANGE ACT OF 1934 +x +ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2003. +o +TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +FOR THE TRANSITION PERIOD FROM TO +Commission File No. 0-14902 +MERIDIAN BIOSCIENCE, INC. +Incorporated under +3471 River Hills Drive +IRS Employer ID +the Laws of Ohio +Cincinnati, Ohio 45244 +No. 31-0888197 +Phone: (513) 271-3700 +Securities Registered Pursuant to Section 12(b) of the Act: +None +Securities Registered Pursuant to Section 12(g) of the Act: +Common Stock, No Par Value +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, and (2) has been subject to +such filing requirements for the past 90 days. +YES +NO +x +o +Indicate by check mark if disclosure of delinquent filers pursuant to +Item 405 of Regulation S–K (Section 229.405 of this Chapter) is not +contained herein, and will not be contained, to the best of registrant’s +knowledge, in definitive proxy or information statements incorporated by +reference in Part III of this Form 10–K or any amendment to this Form +10–K. o +Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). +YES +NO +x +o +The aggregate market value of Common Stock held by non-affiliates as of +March 31, 2003 was $79,598,050 based on a closing sale price of $7.85 +per share on March 31, 2003. As of December 8, 2003, 14,826,046 shares +of no par value Common Stock were issued and outstanding. +Documents Incorporated by Reference +Portions of the Registrant’s Annual Report to Shareholders for the +fiscal year ended September 30, 2003 furnished to the Commission +pursuant to Rule 14a-3(b) as specified and portions of the Registrant’s +Proxy Statement filed with the Commission for its 2004 Annual Meeting +are incorporated by reference in Parts II and III as specified. +TABLE OF CONTENTS +PART I. +ITEM 1. BUSINESS +ITEM 2. PROPERTIES +ITEM 3. LEGAL PROCEEDINGS +ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS +PART II. +ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MAT +ITEM 6. SELECTED FINANCIAL DATA +ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS +ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK +ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA +ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE +ITEM 9A. CONTROLS AND PROCEDURES +PART III +ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K +SIGNATURES +EX-10.10 +EX-10.27 +EX-10.28 +EX-10.29 +Exhibit 13 +EX-14 +EX-21 +EX-23 +EX-31.1 +EX-31.2 +EX-32 +Table of Contents +MERIDIAN BIOSCIENCE, INC. +INDEX TO ANNUAL REPORT +ON FORM 10-K +Page +Part I +Item 1 +Business +2 +Item 2 +Properties +12 +Item 3 +Legal Proceedings +12 +Item 4 +Submission of Matters to a Vote of Security Holders +13 +Part II +Item 5 +Market for Registrant’s Common Equity and Related Stockholder Matters +13 +Item 6 +Selected Financial Data +14 +Item 7 +Management’s Discussion and Analysis of Financial Condition and Results of Operations +14 +Item 7A +Quantitative and Qualitative Disclosures about Market Risk +30 +Item 8 +Financial Statements and Supplementary Data +31 +Item 9 +Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +56 +Item 9A +Controls and Procedures +56 +Part III +Item 10 +Directors and Executive Officers of the Registrant +57 +Item 11 +Executive Compensation +57 +Item 12 +Security Ownership of Certain Beneficial Owners and Management +57 +Item 13 +Certain Relationships and Related Transactions +57 +Item 14 +Principal Accountant Fees and Services +57 +Item 15 +Exhibits, Financial Statement Schedules, and Reports on Form 8-K +58 +FORWARD LOOKING STATEMENTS +The Private Securities Litigation Reform Act of 1995 provides a safe harbor +from civil litigation for forward looking statements accompanied by meaningful +cautionary statements. Except for historical information, this report contains +forward-looking statements which may be identified by words such as +“estimates”, “anticipates”, “projects”, “plans”, “expects”, “intends”, +“believes”, “should” and similar expressions or the negative versions thereof +and which also may be identified by their context. Such statements are based +upon current expectations of the Company and speak only as of the date made. +The Company assumes no obligation to publicly update any forward looking +statements. These statements are subject to various risks, uncertainties and +other factors that could cause actual results to differ, including, without +limitation, the following: Meridian’s continued growth depends, in part, on its +ability to introduce into the marketplace enhancements of existing products or +new products that incorporate technological advances, meet customer +requirements and respond to products developed by Meridian’s competition. +While Meridian has introduced a number of internally-developed products, there +can be no assurance that it will be successful in the future in introducing +such products on a timely basis. Ongoing consolidations of reference +laboratories and formation of multi-hospital alliances may cause adverse +changes to pricing and distribution. Costs and difficulties in complying with +laws and regulations administered by the United States Food and Drug +Administration can result in unanticipated expenses and delays and +interruptions to the sale of new and existing products. Changes in the +relative strength or weakness of the U.S. dollar can change expected results. +One of Meridian’s main growth strategies is the acquisition of companies and +product lines. There can be no assurance that additional acquisitions will be +consummated or that, if consummated, will be successful and the acquired +businesses successfully integrated into Meridian’s operations. +- 1 - +Table of Contents +PART I. +ITEM 1. +BUSINESS +Overview +Meridian is a fully-integrated life science company whose principal businesses +are (i) the development, manufacture, sale and distribution of diagnostic test +kits, primarily for certain respiratory, gastrointestinal, viral and parasitic +infectious diseases, (ii) the manufacture and distribution of bulk antigens and +reagents used by researchers and other diagnostic manufacturers and (iii) the +contract manufacture of proteins and other biologicals for use by +biopharmaceutical and biotechnology companies engaged in research for new drugs +and vaccines. By exploiting revenue opportunities across research, clinical +diagnostics and therapeutic areas for key biologicals, Meridian can maximize +revenues, efficiently invest in research and development and increase +profitability of manufacturing operations. +Operating Segments +As a result of changes that occurred in February 2003 in the organization and +management of Meridian’s businesses, effective with the quarter beginning +January 1, 2003, Meridian changed its reportable operating segments to US +Diagnostics (formerly referred to as Meridian Bioscience, Inc. or MBI), +European Diagnostics (formerly referred to as Meridian Bioscience Europe or +MBE) and Life Science. While the scientific foundation of these three segments +is essentially the same, the market dynamics, competitive trends, regulatory +requirements and sales and marketing approach vary substantially. The US +Diagnostics operating segment consists of research and development and +manufacturing operations in Cincinnati, Ohio, and the sale and distribution of +diagnostic test kits in the US and countries outside of Europe, Africa and the +Middle East. The European Diagnostics operating segment consists of the sale +and distribution of diagnostic test kits in Europe, Africa and the Middle East. +The Life Science operating segment consists of research and development and +manufacturing operations in Memphis, Tennessee and Saco, Maine, and the sale +and distribution of bulk antigens, antibodies and bioresearch reagents +domestically and abroad. Manufacturing operations for the Life Science +operating segment include a protein production laboratory for the contract +manufacture of proteins and other biologicals used by biopharmaceutical and +biotechnology companies in research for new drugs and vaccines. Financial +information for Meridian’s operating segments is included in Note 10 to the +consolidated financial statements contained herein. +Meridian’s primary source of revenues continues to be its core diagnostic +products. Meridian’s diagnostic products provide accuracy, simplicity and +speed, and enable early diagnosis and treatment of common, acute medical +conditions, and provide for better patient outcomes at reduced costs. Meridian +targets diagnostics for disease states that (i) are acute conditions where +rapid diagnosis impacts patient outcomes, (ii) have favorable +- 2 - +Table of Contents +demographic and disease profiles, (iii) are underserved by current diagnostic +products and (iv) have difficult sample handling requirements. This approach +has allowed Meridian to establish significant market share in its target +disease states. +Meridian expects that its Life Science operating segment will serve as a key +platform for sourcing biologicals and technologies, by acquisition or license, +for development of new products for all of Meridian’s operating segments. One +of Meridian’s specific strategies in this area is to target biologicals that +have commercial product applications across multiple markets, such as human +diagnostics, veterinary diagnostics and therapeutics. This strategy is +expected to leverage research and development resources as products can be +developed with all three markets in mind, rather than on a market-by-market +basis. +Meridian’s website is www.meridianbioscience.com. Meridian makes available its +Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on +Form 8-K and any amendments thereto, free of charge, as soon as reasonably +practicable after such material has been electronically filed with the +Securities and Exchange Commission. +US Diagnostics Operating Segment +Overview +The US Diagnostics operating segment’s business focuses on the development, +manufacture, sale and distribution of diagnostic test kits, primarily for +certain respiratory, gastrointestinal, viral and parasitic infectious diseases. +In addition to diagnostic test kits, products also include transport media +that store and preserve specimen samples from patient collection to laboratory +testing. Third-party sales for this operating segment were $39,906,000, +$34,171,000 and $32,557,000 for fiscal 2003, 2002 and 2001, respectively. As +of September 30, 2003, the US Diagnostics operating segment had 240 employees. +Meridian’s diagnostic test kits utilize immunodiagnostic technologies, which +test samples of blood, urine, stool and other body fluids or tissue for the +presence of antigens and antibodies of specific infectious diseases. Specific +immunodiagnostic technologies used in Meridian’s diagnostic test kits include +enzyme immunoassay, immunofluorescence, particle agglutination/aggregation, +immunodiffusion, complement fixation and chemical stains. The enzyme +immunoassay technology is used in multiple test formats; the Premier™ products +for large volume users and the ImmunoCard® products for single test, low volume +users. +Meridian’s diagnostic products are used principally in the detection of +respiratory diseases, such as pneumonia, valley fever, flu and RSV; +gastrointestinal diseases, such as stomach ulcers (H. pylori), antibiotic +associated diarrhea (C. difficile) and pediatric diarrhea (Rotavirus and +Adenovirus); viral diseases, such as mononucleosis, Herpes Simplex, chicken pox +and shingles (Varicella-Zoster) and Cytomegolovirus (organ transplant +infections); +- 3 - +Table of Contents +and parasitic diseases, such as Giardiasis, Cryptosporidiosis and Lyme. The +primary markets and customers for these products are reference laboratories, +hospitals and physicians’ offices. +Market Trends +The global market for infectious disease tests continues to expand as new +disease states are identified, new therapies become available and worldwide +standards of living and access to health care improve. More importantly, +within this market there is a continuing shift from conventional testing, which +requires highly trained personnel and lengthy turnaround times for test +results, to more technologically advanced testing which can be performed by +less highly trained personnel and completed in minutes or hours. These +technological advances permit accurate testing to occur outside the traditional +hospital or laboratory. +The increasing pressures to contain total health care costs have accelerated +the increased use of diagnostic testing and the market shift to alternate +sites. With rapid and accurate diagnoses of infectious diseases, physicians +can pinpoint appropriate therapies quickly, leading to faster recovery, shorter +hospital stays and less treatment expense. In addition, these pressures have +led to a major consolidation among reference laboratories and the formation of +multi-hospital alliances that have reduced the number of institutional +customers for diagnostic products and resulted in changes in buying practices. +Specifically, multi-year exclusive or primary source marketing or distribution +contracts with institutional customers have become more common, replacing less +formal distribution arrangements of shorter duration and involving lower +product volumes. +Sales and Marketing +The US Diagnostics operating segment’s sales and distribution network consists +of a direct sales force in the US and independent distributors in the US and +abroad. The direct sales force consists of three regional sales managers, one +corporate health systems manager, 21 technical sales representatives and two +inside sales representatives. Meridian utilizes two primary independent +distributors in the US, who accounted for 39% of the US Diagnostics operating +segment’s third-party sales in fiscal 2003. Meridian participates in the +selling effort for key customers where these independent distributors are +utilized. Therefore, Meridian believes that the loss of either of these +independent distributors would not have a material adverse effect on it. +Consolidation of the US healthcare industry is expected to continue and +potentially affect Meridian’s customers. Industry consolidation puts pressure +on pricing and aggregates buying power. In response, in the last four years, +Meridian has entered into, extended or renewed several exclusive multiple-year +contracts with consolidated healthcare providers and supply agreements with +major reference laboratories. +- 4 - +Table of Contents +Products and Markets +Meridian has expertise in the development and manufacture of products based on +multiple core diagnostic technologies, each of which enables the visualization +and identification of antigen/antibody reactions for specific pathogens. As a +result, Meridian is able to develop and manufacture diagnostic tests in a +variety of formats that satisfy customer needs and preferences, whether in a +hospital, commercial or reference laboratory or alternate site location. +Meridian’s product offering consists of over 200 medical diagnostic products. +Meridian’s products generally range in list price from $1 per test to $33 per +test. +Meridian’s product technologies include enzyme immunoassay, immunofluorescence, +particle agglutination/aggregation, immunodiffusion, complement fixation and +chemical stains. +Enzyme Immunoassay (EIA) – Products incorporating the EIA technology achieve +extremely high levels of accuracy in detecting disease-related antigens or +antibodies through the use of special color-based enzyme-substrate reactions. +Meridian utilizes this technology in its multiple test format, the Premier™ +product for large volume users, and in its single test formats, the +Immuno Card®, Immuno Card STAT!® and Monolert® products, for lower volume users. +Immunofluorescence – When the microscopic visualization of an antigen/antibody +reaction is necessary or desired, immunofluorescence technology is frequently +utilized. Fluorescing immunochemicals, in the presence of the target antigen +or antibody, can be viewed via a fluorescent microscope. Meridian utilizes +this technology in its Merifluor® products. +Particle Agglutination/Aggregation – This technology utilizes microparticles +(e.g., latex, red blood cells) coated with specific antigens or antibodies that +form visible aggregates in the presence of a specimen containing the +complementary antigen or antibody. This technology is rapid and economical and +is used in Meridian’s Meritec™, MeriStar® and MonoSpot® products. +Other Technologies – Meridian utilizes other technologies that include +immunodiffusion, complement fixation and chemical stains. Meridian also +manufactures and markets specimen collection, transportation, preservation and +concentration products, such as Para-Pak®, Macro-CON® and Spin-CON. +Research and Development +The US Diagnostics operating segment’s research and development organization +consists of 13 research scientists with expertise in biochemistry, immunology, +mycology, bacteriology, virology and parasitology. Research and development +expenses for the US Diagnostics operating segment for fiscal 2003, 2002 and +2001 were $2,527,000, $1,730,000 and $2,147,000, respectively. This research +and development organization focuses +- 5 - +Table of Contents +its activities on new applications for Meridian’s existing technologies, +improvements to existing products and development of new technologies. +Research and development efforts may occur in-house or with collaborative +partners. Meridian believes that internally developed products are a key +source for sustaining revenue growth. Meridian’s internally developed products +include Premier™ Platinum HpSA and Premier™ Toxins A & B, which accounted for +25% of the US Diagnostics operating segment’s third-party sales during fiscal +2003. +Manufacturing +Meridian’s immunodiagnostic products require the production of highly specific +and sensitive antigens and antibodies. Meridian produces substantially all of +its own requirements including monoclonal antibodies and polyclonal antibodies, +plus a variety of fungal, bacterial and viral antigens. Meridian believes it +has sufficient manufacturing capacity for anticipated growth. +Intellectual Property, Patents and Licenses +Meridian owns or licenses US and foreign patents for approximately 25 products +manufactured by the US Diagnostics operating segment, including Premier™ +Platinum HpSA. In the absence of patent protection, Meridian may be vulnerable +to competitors who successfully replicate Meridian’s production and +manufacturing technologies and processes. Meridian’s employees are required to +execute confidentiality and non-disclosure agreements designed to protect +Meridian’s proprietary products. Meridian believes that its products and +technologies do not infringe the proprietary rights of any third parties. +Government Regulation +Meridian’s diagnostic products are regulated by the Food & Drug Administration +as “devices” pursuant to the Federal Food, Drug and Cosmetic Act (FDCA). Under +the FDCA, medical devices are classified into one of three classes (i.e., Class +I, II or III). Class I and II devices are not expressly approved by the FDA, +but, instead, are “cleared” for marketing. Class III devices generally must +receive “pre-market approval” from the FDA as to safety and effectiveness. +A 510(k) clearance will be granted if the submitted data establishes that the +proposed device is “substantially equivalent” to an existing Class I or Class +II medical device or to a Class III medical device for which the FDA has not +required pre-market approval. The 510(k) clearance process for “substantially +equivalent” devices allows product sales to be made after the filing of an +application and upon acknowledgment by the FDA, typically within 90 to 120 days +after submission. If the FDA requests additional information, the product +cannot be sold in the US until the application has been supplemented and upon +acknowledgment by the FDA within 90 to 120 days of the supplemental +application. In practice, the FDA has been granting clearance in about 90 days +following submission of the supplemental information. If there are no existing +FDA-approved products or +- 6 - +Table of Contents +processes comparable to a diagnostic product or process, approval by the FDA +involves the more lengthy pre-market approval procedures. +Each of the diagnostic products currently marketed by Meridian in the United +States has been cleared by the FDA pursuant to the 510(k) clearance process or +is exempt from such requirements. Meridian believes that most, but not all, +products under development will be classified as Class I or II medical devices +and, in the case of Class II devices, will be eligible for 510(k) clearance. +Sales of Meridian’s diagnostic products in foreign countries are subject to +foreign government regulation, the requirements of which vary substantially +from country to country. The time required to obtain approval by a foreign +country may be longer or shorter than that required for FDA approval and the +requirements may differ. +European Diagnostics Operating Segment +The European Diagnostics operating segment’s business focuses on the sale and +distribution of diagnostic test kits, those manufactured by the US Diagnostics +operating segment and others manufactured by third-party vendors. +Approximately 65% of third-party sales for fiscal 2003 were products +manufactured by the US Diagnostics operating segment. Third-party sales for +this operating segment were $13,756,000, $11,920,000 and $12,421,000 for fiscal +2003, 2002 and 2001, respectively. As of September 30, 2003, the European +Diagnostics operating segment had 38 employees, including 13 employees in the +direct sales force. The European Diagnostics operating segment’s sales and +distribution network consists of direct sales forces in Belgium, France, +Holland and Italy, and independent distributors in other European countries, +Africa and the Middle East. The European Diagnostics operating segment +maintains distribution centers in Nivelle, Belgium and Milan, Italy. The +primary markets and customers for this operating segment are hospitals and +reference laboratories. Sales to customers in Italy are mainly to hospitals +and laboratories that are funded by the Italian government. +During the last three years, competitive factors and government reimbursement +policies have slowed growth in European markets. In response to these market +conditions, Meridian restructured its European distribution operations in +fiscal 2001 and 2000 by moving the export business from Germany to Belgium, and +moving the German in-country business to an independent distributor. This +restructuring has improved overall operating results for the European +Diagnostics operating segment by lowering its cost structure. Based on +operating results for fiscal 2003 and expectations for fiscal 2004, Meridian +believes that sales levels in local currency have stabilized, and in fact, +believes that market conditions have begun to improve and will yield modest +growth. +The European Diagnostics operating segment’s functional currency is the Euro. +The translation of Euros into US dollars is subject to exchange rate risk. +- 7 - +Table of Contents +Life Science Operating Segment +Overview +The Life Science operating segment’s business currently focuses on the +development, manufacture, sale and distribution of bulk antigens and reagents +used by researchers and other diagnostic companies, as well as the contract +manufacturing of proteins and other biologicals used by biopharmaceutical and +biotechnology companies engaged in research for new drugs and vaccines. +Third-party sales for this operating segment were $12,202,000, $13,013,000 and +$11,549,000 for fiscal 2003, 2002 and 2001, respectively. The Life Science +operating segment consists of Meridian’s Viral Antigens and BIODESIGN +subsidiaries. As of September 30, 2003, the Life Science operating segment +had 78 employees. +Revenue sources for the Life Science operating segment currently come from the +manufacture, sale and distribution of bulk antigens and reagents used by +researchers and other diagnostic companies. During fiscal 2003, 28% of +third-party sales were to one customer, a substantial portion of which is under +exclusive supply agreements that expire in fiscal 2007. Meridian has a +long-standing relationship with this customer, and although there can be no +assurances, Meridian intends to renew these supply agreements in the normal +course of business. +This customer is currently experiencing delays in taking delivery of certain +bulk antigen from Meridian. These delays are not related to the quality of +Meridian’s product. As a result of these delays, the Life Science operating +segment may generate an operating loss for the first quarter of fiscal 2004 +that would be recouped during the second quarter, upon commencement of +shipments to this customer. Although, there can be no assurances that +shipments will commence during the second quarter. This matter is not expected +to have a material adverse effect on Meridian’s consolidated results of +operations for the fiscal year ended September 30, 2004. +Growth Strategies +Growth strategies for the Life Science operating segment include (i) developing +new product applications from existing technologies and (ii) acquisition or +licensing of biologicals and technologies for development of new products. +Contract manufacturing of proteins and other biologicals for biopharmaceutical +and biotechnology companies engaged in research for new drugs and vaccines is +an example of a significant new product application built from Meridian’s +existing expertise in manufacturing bulk antigens and reagents using cell +culture techniques. This business will focus on contract manufacturing of +materials that will be used in Phase I and II clinical trials. During March +2003, Meridian opened its protein production laboratory for commercial +business. During the first quarter of fiscal 2004, Meridian began work in +manufacturing a recombinant protein that will be used by the +- 8 - +Table of Contents +National Institutes of Health in the development of a vaccine for parvovirus. +This contract is expected to be completed in the fourth quarter of fiscal 2004. +The proteins that will be produced are intended to be used as “injectibles”. +As such, they will be produced under cGMP Regulations for Biologics and Human +Drugs under the auspices of the FDA. Approval and licensing, following +clinical trials, of these products will be the responsibility of the applicant, +who owns the right to each protein. Meridian may or may not be the applicant +depending on specific circumstances with particular customers. +The protein production laboratory will provide a new class of customers, and in +some cases, have longer production cycles than historical bulk manufacturing of +antigens and reagents. Longer production cycles can affect timing of revenue +recognition, as revenue is recognized either upon shipment of product or final +lot acceptance depending on contract terms. +Meridian expects that its Life Science operating segment will serve as a key +platform for sourcing biologicals and technologies, by acquisition or license, +for development of new products for all of Meridian’s operating segments. One +of Meridian’s specific strategies in this area is to target biologicals that +have commercial product applications across multiple markets, such as human +diagnostics, veterinary diagnostics and therapeutics. This strategy is +expected to leverage research and development resources as products can be +developed with all three markets in mind, rather than on a market-by-market +basis. +Markets +The Life Science operating segment has targeted three primary market segments +for its products and services: bulk biomedical reagents, drug and vaccine +discovery, and drug and vaccine development. The customer base for bulk +biomedical reagents is large and fragmented, and includes other diagnostic +manufacturers as well as researchers in academia and the pharmaceutical and +biotechnology industries. The market segments for drug and vaccine discovery +and development are intended to be served via contract manufacturing in the +protein production laboratory discussed above. +Sales and Marketing +The Life Science operating segment applies sales and marketing efforts in two +different manners that are designed to complement one another. An internal +sales and marketing staff, as well as a website, have been built to market bulk +biomedical reagents directly to a large and fragmented customer base. The +website provides detailed technical information and capability to submit +purchase orders. For major bulk biomedical reagent customers, scientific +resources have been dedicated to establish sole-source supply arrangements. +Similarly for the protein production laboratory, scientific resources are +dedicated to each potential customer. +- 9 - +Table of Contents +Research and Development +The Life Science operating segment’s research and development organization +consists of 5 research scientists. Research and development expenses for the +Life Science operating segment for fiscal 2003, 2002 and 2001 were $1,348,000, +$1,158,000 and $1,216,000, respectively. This research and development +organization focuses its activities on the protein production laboratory, +developing new biomedical reagents, and working with the US Diagnostics +operating segment in the development of products that have commercial +application across multiple markets, such as human diagnostics, veterinary +diagnostics and therapeutics. +Manufacturing and Government Regulation +The proteins that will be produced in VAI’s cGMP protein production laboratory +are intended to be used as “injectibles”. As such they will be produced under +cGMP Regulations for Biologics and Human Drugs under the auspices of the FDA. +Approval and licensing, following clinical trials, of these products will be +the responsibility of the applicant, who owns the rights to each protein. VAI +may or may not be the applicant depending on specific circumstances with +particular customers. +Competition +Diagnostics +The market for diagnostic tests is a multi-billion dollar international +industry, which is highly competitive. Many of Meridian’s competitors are +larger with greater financial, research, manufacturing and marketing resources. +Important competitive factors of Meridian’s products include product quality, +price, ease of use, customer service, and reputation. In a broader sense, +industry competition is based upon scientific and technological capability, +proprietary know-how, access to adequate capital, the ability to develop and +market products and processes, the ability to attract and retain qualified +personnel and the availability of patent protection. To the extent that +Meridian’s product lines do not reflect technological advances, Meridian’s +ability to compete in those product lines could be adversely affected. +Companies competing in the diagnostic test industry generally focus on a +limited number of tests or limited segments of the market. As a result, the +diagnostic test industry is highly fragmented and segmented. Hundreds of +companies in the United States alone supply immunodiagnostic tests. These +companies range from multi-national health care companies, for which +immunodiagnostics is one line of business, to small start-up companies. Of +central importance in the industry are mid-sized medical diagnostic specialty +companies, like Meridian, that offer multiple, broad product lines and have the +ability to deliver new, high value products quickly to the marketplace. Among +the companies with which Meridian competes in the marketing of one or +- 10 - +Table of Contents +more of its products are Abbott Laboratories Inc., Becton, Dickinson and +Company, Diagnostic Products Corporation, Quidel Corporation and Inverness +Medical. +Life Science +The market for bulk biomedical reagents is highly competitive. Important +competitive factors include product quality, price, customer service and +reputation. Where sole-source supply arrangements do not exist, Meridian faces +competitors, many of which have greater financial, research and development, +sales and marketing, and manufacturing resources. From time to time, customers +may choose to manufacture their biomedical reagents in-house rather than +purchase from outside vendors such as Meridian. +The market for contract manufacturing in a validated cGMP facility such as the +protein production laboratory is also competitive. Important competitive +factors include reputation, customer service and price. Although the product +application for this facility was built from Meridian’s existing expertise in +manufacturing bulk antigens and reagents using cell culture techniques, +Meridian faces competitors with greater experience in contract manufacturing in +a cGMP environment. +Acquisitions +Acquisitions have played an important role in the historical growth of +Meridian’s businesses. Meridian’s acquisition objectives are to, among other +things, (i) enhance product offerings, (ii) improve product distribution +capabilities, (iii) provide access to new markets, and/or (iv) provide access +to key biologicals that lead to new products. Recent examples of this include +the acquisition of Gull Laboratories in fiscal 1999 and Viral Antigens in +fiscal 2000. The Gull acquisition enhanced product offerings, expanded sales +and distribution capabilities in Europe and provided the initial access into +the Life Science market for Meridian (through the BIODESIGN subsidiary). The +Viral Antigens acquisition, coupled with the opening of the protein production +laboratory, solidified Meridian’s entry into the Life Science market. Although +Meridian cannot provide any assurance that it will consummate any acquisitions +in the future, Meridian expects that acquisitions will continue to serve as a +source of new revenues and growth in the future. +International Markets +International markets are an important source of revenue for Meridian’s +operating segments. For all operating segments combined, international sales +were $23,220,000 or 35% of total sales, $17,993,000 or 30% of total sales and +$18,123,000 or 32% of total sales in fiscal 2003, 2002 and 2001, respectively. +Domestic exports for the US Diagnostics and Life Science operating segments +were $9,464,000, $6,073,000 and $5,702,000 in fiscal 2003, 2002 and 2001, +respectively. Meridian expects to continue to look to international markets as +a source of new revenues and growth in the future. +- 11 - +Table of Contents +Environmental +Meridian is a conditionally exempt small quantity generator of hazardous waste +and has a US EPA identification number. All hazardous material is manifested +and disposed of properly. Meridian is in compliance with applicable portions +of the federal and state hazardous waste regulations and has never been a party +to any environmental proceeding. +ITEM 2. +PROPERTIES +Meridian’s corporate offices, manufacturing facility and research and +development facility are located in three buildings totaling approximately +94,000 square feet on 6.2 acres of land in a suburb of Cincinnati. These +properties are owned by Meridian. Meridian has approximately 51,000 square +feet of manufacturing space and 9,000 square feet of warehouse space in the +Cincinnati facility. +Meridian rents approximately 6,000 square feet of space in Nivelle, Belgium for +sales, warehousing and distribution. The lease expires in 2009. Meridian also +rents office space in France and the Netherlands for small sales offices. +The distribution center in Italy conducts its operations in a two-story +building in the Milan, Italy area consisting of approximately 18,000 square +feet. This facility is owned by Meridian Bioscience Europe s.r.l. +BIODESIGN rents a 10,000 square foot facility that houses administration, +distribution and manufacturing facilities in Saco, Maine under a lease that +expires in 2006. +Viral Antigens’ executive offices and manufacturing facility are located in +Memphis, Tennessee. This facility, which is owned by Viral Antigens, is +comprised of two buildings totaling approximately 34,000 square feet, including +approximately 27,000 square feet of manufacturing space. +ITEM 3. +LEGAL PROCEEDINGS +During fiscal 2003, Meridian reached a settlement with a former employee +regarding his breach of an employment agreement, misappropriation of company +trade secrets and related legal proceedings. This settlement provided that +Meridian receive proceeds from the disposition of certain personal assets of +the former employee. The amount of such proceeds was $216,000. Legal +proceedings for these matters have been on-going since June 2000. Legal fees +related to these matters amounted to $60,000, $150,000, $440,000 and +- 12 - +Table of Contents +$450,000 in fiscal 2003, 2002, 2001 and 2000, respectively. During fiscal +2003, Meridian received insurance reimbursement in the amount of $187,000 for a +portion of these legal fees. +Meridian is a party to other litigation that it believes is in the normal +course of business. The ultimate resolution of these matters is not expected +to have a material adverse effect on Meridian’s financial position, results of +operations or cash flows. +ITEM 4. +SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS +No matters were submitted to a vote of security holders during the fourth +quarter of fiscal 2003. +PART II. +ITEM 5. +MARKET FOR REGISTRANT’S COMMON +EQUITY AND RELATED STOCKHOLDER MATTERS +“Common Stock Information” on the inside back cover of the Annual Report to +Shareholders for 2003 and “Quarterly Financial Data” in Note 12 to the +Consolidated Financial Statements are incorporated herein by reference. There +are no external restrictions on cash dividend payments. +In November 2002, Meridian’s Board of Directors adopted a new cash dividend +policy whereby the indicated annual dividend rate will be set between 75% and +85% of each fiscal years’ expected net earnings. The declaration and amount of +dividends will be determined by the Board of Directors in its discretion based +upon its evaluation of earnings, cash flow requirements and future business +developments and opportunities, including acquisitions. +Meridian paid dividends of $0.26 per share, $0.28 per share, and $0.34 per +share in fiscal 2001, fiscal 2002, and fiscal 2003, respectively. +- 13 - +Table of Contents +Equity Compensation Plan Information as of September 30, 2003 was as follows: +(c) +Number of securities +remaining available +(a) +for future issuance +Number of securities +(b) +under Equity +to be issued upon +Weighted average +Compensation Plans +exercise of +exercise price of +(excluding securities +Plan Category +outstanding options (2) +outstanding options (2) +reflection in column (a)). +Equity compensation +plans approved by +security holders +(1) +1,186,545 +$ +7.13 +150,495 +Equity compensation +plans not approved +by security holders +30,000 +7.95 +— +Total +1,216,545 +$ +7.13 +150,495 +(1) +1986 Stock Option Plan +(2 +) +No warrants or rights are authorized +1990 Director’s Stock Option Plan +for issuance. +1994 Director’s Stock Option Plan +1996 Stock Option Plan, as amended in 2001 +1999 Director’s Stock Option Plan +ITEM 6. +SELECTED FINANCIAL DATA +Incorporated by reference from inside front cover of the Annual Report to +Shareholders for 2003. +ITEM 7. +MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL +CONDITION AND RESULTS OF OPERATIONS +Refer to “Forward Looking Statements” following the Index in front of this Form +10-K. +Future Trends: +Life Science +During fiscal 2003, Meridian opened its protein production laboratory for +business, creating the opportunity to serve as an “enabler” in the development +of new drugs and vaccines. This protein production laboratory is an extension +of Meridian’s existing antigen manufacturing technologies and capabilities. It +will create a new class of customers, pharmaceutical companies, as well as the +opportunity to leverage sales and marketing resources. +Sales and marketing resources at Meridian’s Viral Antigens and BIODESIGN +subsidiaries are being aligned to +- 14 - +Table of Contents +focus on common customers and complimentary +products. As part of our overall Life Science strategy, Meridian also expects +to develop or license unique biological tools and technology. +European Diagnostics +Meridian’s European Diagnostics operating segment experienced sales growth in +FY 2003 of 15%, following two successive years of sales declines of 4% in +fiscal 2002 and 13% in fiscal 2001. Although currency translation accounts for +most of the fiscal 2003 increase, sales in local currency, the Euro, increased +1% during fiscal 2003, compared to fiscal 2002. During the last three years, +competitive factors and government reimbursement policies slowed growth in +European markets and sales in fiscal 2001 and fiscal 2002 were also negatively +affected by currency translation. In response to these market conditions, +Meridian restructured its European distribution operations in fiscal 2001 and +2000 by moving the export business from Germany to Belgium, and moving the +German in-country business to an independent distributor (this latter move also +affected sales because Meridian no longer sells to end-user customers on a +direct basis in Germany). This restructuring has improved overall operating +results for the European Diagnostics operating segment by lowering its cost +structure. Based on operating results for fiscal 2003 and expectations for +fiscal 2004, Meridian believes that sales levels in local currency have +stabilized, and in fact, believes that market conditions have begun to improve +and will yield modest growth. +US Diagnostics +Consolidation of the US healthcare industry is expected to continue and +potentially affect Meridian’s customers. Industry consolidation puts pressure +on pricing and aggregates buying power. In response, in the last four years, +Meridian has entered into, extended or renewed several exclusive multiple-year +contracts with consolidated healthcare providers and supply agreements with +major reference laboratories. +Research and Development +Meridian believes that internally-developed products will continue to be a +critical source of sales and sales growth. Research and development efforts +are expected to focus on the development of new products and product +improvements where Meridian has a dominant market position, or its intellectual +property is protected by patents or licenses. +Meridian expects its the Life Science operating segment will serve as a key +platform for sourcing biologicals and technologies, by acquisition or license, +for development of new products for all of Meridian’s operating segments. One +of Meridian’s specific strategies in this area is to target biologicals that +have commercial product applications across multiple markets, such as human +diagnostics, veterinary diagnostics and therapeutics. This +- 15 - +Table of Contents +strategy is expected to leverage research and development resources as products +can be developed with all three markets in mind, rather than on a +market-by-market basis. +Operating Segments: +As a result of changes that occurred in February 2003 in the organization and +management of Meridian’s businesses, effective with the quarter beginning +January 1, 2003 (Meridian’s second quarter), Meridian changed its reportable +operating segments to US Diagnostics (formerly referred to as Meridian +Bioscience, Inc. or MBI), European Diagnostics (formerly referred to as +Meridian Bioscience Europe or MBE) and Life Science. The US Diagnostics +operating segment consists of manufacturing operations in Cincinnati, Ohio, and +the sale and distribution of diagnostic test kits in the US and countries +outside of Europe, Africa and the Middle East. The European Diagnostics +operating segment consists of the sale and distribution of diagnostic test kits +in Europe, Africa and the Middle East. The Life Science operating segment +consists of manufacturing operations in Memphis, Tennessee and Saco, Maine, and +the sale and distribution of bulk antigens, antibodies and bioresearch reagents +domestically and abroad. The Life Science operating segment consists of the +Viral Antigens and BIODESIGN subsidiaries (formerly part of the Meridian +Bioscience, Inc. operating segment), including the protein production +laboratory. +Results of Operations: +Overview +Fourth quarter +Net earnings for the fourth quarter of fiscal 2003 were $1,849,000, or $0.12 +per diluted share. Net earnings for the fourth quarter of fiscal 2002 were +$863,000, or $0.06 per diluted share, including an after-tax charge of +$751,000, or $0.05 per diluted share, for costs related to the abandoned +Biotrin acquisition. Net sales for the fourth quarter of fiscal 2003 were +$17,155,000, an increase of $1,596,000 or 10% compared to the fourth quarter of +fiscal 2002. +In May 2002, Meridian executed a letter of intent to acquire all of the +outstanding capital stock of Biotrin Holdings plc, headquartered in Dublin, +Ireland. In November 2002, Meridian terminated negotiations and ceased further +discussions regarding its interest in acquiring Biotrin. Costs of $751,000, +after-tax, were for professional fees for attorneys and financial and tax +advisors. +Fiscal Year +Net earnings for fiscal 2003 were $7,018,000, or $0.47 per diluted share. Net +earnings for fiscal 2002 were +- 16 - +Table of Contents +$5,031,000, or $0.34 per diluted share, including the after-tax charge of $0.05 +per share for the abandoned Biotrin acquisition. Results of operations for +fiscal 2003 compared to fiscal 2002 are discussed below. +Fiscal Year Ended September 30, 2003 Compared to Fiscal Year Ended September +30, 2002 +Net sales +Overall, net sales increased $6,760,000, or 11%, to $65,864,000 for fiscal 2003 +compared to fiscal 2002. Net sales for the US Diagnostics operating segment +increased $5,735,000, or 17%, for the European Diagnostics operating segment +increased $1,836,000, or 15%, and for the Life Science operating segment +decreased $811,000, or 6%. +For the US Diagnostics operating segment, the sales increase was primarily +related to volume growth in new and existing products. For new products, +Meridian began distributing new diagnostic tests for the detection of Flu and +RSV during the first quarter of fiscal 2003. These new products contributed +sales of approximately $1.9 million and are a result of Meridian’s recent +distribution agreement with Binax, Inc. Other new products included Immunocard +STAT! HpSA, a rapid test for the detection of H. pylori . This product was +introduced into non-US markets in late fiscal 2002. Non-US markets for fiscal +2003 contributed a full year of sales of approximately $256,000. Meridian +expects to introduce this product into the US market beginning in fiscal 2004, +upon clearance from the FDA. For existing products, volume growth was strong +in C. difficile diagnostic products, led by Meridian’s internally developed +Premier™ Toxins A&B, as well as tests to detect Cryptosporidium, Giardia, +Rotavirus, Mycoplasma, H. pylori and E. coli . A substantial portion of growth +in Mycoplasma and H. pylori products occurred in export markets, including +Japan. Certain of the sales of Mycoplasma product into Japan related to the +SARS outbreak. This product was used to exclude the diagnosis of certain +respiratory ailments having similar symptoms, such as Mycoplasma, during the +diagnosis of patients potentially infected with SARS. Meridian also began +selling Premier™ Platinum HpSA into Japan during the fourth quarter of fiscal +2003, upon the Japanese government establishing the amount of insurance +reimbursement. +For the European Diagnostics operating segment, the sales increase includes +currency translation gains in the amount of approximately $1.7 million. Sales +in local currency, the Euro, increased 1%. +For the Life Science operating segment, the decrease in sales for fiscal 2003 +was primarily due to orders for make-to-order bulk antigen products with one +customer. This customer provided sales of approximately $3.4 million, $5.2 +million and $4.0 million in fiscal 2003, 2002 and 2001, respectively. For such +products, bulk quantities are manufactured pursuant to customer purchase +orders. Sales are recorded upon shipment. This customer is currently +experiencing delays in taking delivery of certain bulk antigen from Meridian. +These delays are not related to the quality of Meridian’s product. As a result +of these delays, the Life Science operating +- 17 - +Table of Contents +segment may generate an operating loss for the first quarter of fiscal 2004 +that would be recouped during the second quarter, upon commencement of +shipments to this customer. Although, there can be no assurances that +shipments will commence during the second quarter. This matter is not expected +to have a material adverse effect on Meridian’s consolidated results of +operations for the fiscal year ended September 30, 2004. Revenue for the +protein production laboratory is recognized either upon shipment of product or +final lot acceptance depending on contract terms. No revenues for the protein +production laboratory have been recognized to date. +For all operating segments combined, international sales were $23,220,000, or +35% of total sales, for fiscal 2003, compared to $17,993,000, or 30% of total +sales, in fiscal 2002. Combined domestic exports for the US Diagnostics and +Life Science operating segments were $9,464,000 for fiscal 2003, compared to +$6,073,000 in fiscal 2002. The remaining international sales were generated by +the European Diagnostics operating segment. +Gross Profit +Gross profit increased $3,690,000 or 11%, to $38,288,000 for fiscal 2003 +compared to fiscal 2002. Gross profit margins were 58% for fiscal 2003 +compared to 59% for fiscal 2002. +Meridian’s overall operations consist of the sale of diagnostic test kits for +various disease states and in alternative test formats, as well as bioresearch +reagents, bulk antigens and proficiency tests. Product sales mix shifts, in +the normal course of business, can cause the consolidated gross profit margin +to fluctuate by several points. +Operating Expenses +Operating expenses increased $895,000, to $25,499,000, for fiscal 2003 +compared to fiscal 2002. Operating expenses for fiscal 2002 included +$1,211,000 related to the abandoned acquisition of Biotrin Holdings. The +overall increase in operating expenses for fiscal 2003 is discussed below. +Research and development expenses increased $987,000, or 34%, to $3,875,000 +for fiscal 2003 compared to fiscal 2002, and as a percentage of sales, +increased from 5% in fiscal 2002, to 6% in fiscal 2003. Of this increase, +$797,000 related to the US Diagnostics operating segment and $190,000 related +to the Life Science operating segment. The increase for the US Diagnostics +operating segment is primarily attributable to additional product development +staff and material costs for new product development activities. The increase +for the Life Science operating segment is primarily attributable to activities +at the protein production laboratory prior to opening in March 2003. +Selling and marketing expenses increased $871,000, or 9%, to $10,601,000 for +fiscal 2003 compared to fiscal 2002, and as a percentage of sales, was 16% for +fiscal 2003 and fiscal 2002. Of this increase, $727,000 related +- 18 - +Table of Contents +to the US Diagnostics operating segment and $163,000 related to the European +Diagnostics operating segment. The increase for the US Diagnostics operating +segment is primarily attributable to spending on strategic sales initiatives, +including preparation and training of field sales personnel, costs related to +the new Binax products, such as samples and brochures, and sales person +incentive compensation. The increase for the European Diagnostics operating +segment is, in part, due to currency. +General and administrative expenses increased $248,000, or 2%, to $11,023,000 +for fiscal 2003 compared to fiscal 2002, and as a percentage of sales, +decreased from 18% in fiscal 2002, to 17% in fiscal 2003. General and +administrative expenses for the US Diagnostics operating segment increased +$706,000 and for the European Diagnostics operating segment decreased +$511,000. General and administrative expenses for the US Diagnostics +operating segment included the favorable effects of insurance reimbursements +for legal fees related to trade secrets litigation in the amount of $127,000, +net of $60,000 of legal fees, an adjustment to reduce the reserve for bad +debts in the amount of $104,000 based on better than anticipated write-off +history, and a sales and use tax refund in the amount of $150,000. The +overall increase in general and administrative expenses for the US Diagnostics +operating segment, after consideration of the above credits, is primarily +attributable to employee incentive compensation, normal salary and wage +increases and support costs for growth in the business. General and +administrative expenses for the European Diagnostics operating segment +included a favorable adjustment in the amount of $150,000 related to a +contract amendment that reduced certain minimum purchase commitments to align +with current market expectations, and an adjustment in the amount of $122,000 +to reduce the reserve for bad debts based on better than anticipated write-off +history in Italy. +Operating Income +Operating income increased $2,795,000, or 28%, to $12,789,000 in fiscal 2003, +as a result of the factors discussed above. +Other Income and Expense +Interest expense declined $256,000 or 13%, to $1,718,000 for fiscal 2003 +compared to fiscal 2002. This decrease is attributable to the favorable +effects of a lower interest rate environment and lower overall debt levels +outstanding. +Other income and expense, net for fiscal 2003 includes a gain on the sale of +certain distributor relationships for the European Diagnostics operating +segment in the amount of $226,000. These distributor relationships related to +blood-grouping products that no longer fit into Meridian’s long-range product +plans. Other income and expense, net for fiscal 2003 also includes $216,000 of +income received, related to the settlement of litigation with a former employee +involving his breach of an employment agreement and misappropriation of company +trade secrets. Other income and expense, net for fiscal 2002 included a net +gain of $254,000 related to the sale of shares of common stock received in the +demutualization of two insurance companies during the first quarter. +- 19 - +Table of Contents +Income Taxes +The effective rate for income taxes was 39% for both fiscal 2003 and fiscal +2002. +Fiscal Year Ended September 30, 2002 Compared to Fiscal Year Ended September +30, 2001 +Net Sales +Overall, net sales increased $2,577,000, or 5%, to $59,104,000 for fiscal 2002 +compared to fiscal 2001. Net sales for the US Diagnostics operating segment +increased $1,614,000, or 5%, for the European Diagnostics operating segment +decreased $501,000, or 4%, and for the Life Science operating segment increased +$1,464,000, or 13%. +For the US Diagnostics operating segment, the negative effects of discontinuing +the manufacturing and distribution of approximately 30 products in the second +quarter of fiscal 2001 was more than offset by strong volume growth in C. +difficile and H. pylori diagnostic products. Meridian’s Premier™ Toxins A&B +and Premier™ Platinum HpSA led the volume growth for these two disease states. +Both of these products were developed by Meridian and launched in 1999 and +1998, respectively. +For the European Diagnostics operating segment, the decline in sales during +fiscal 2002 is net of currency translation gains of $371,000. It reflects +volume declines attributable to continued deterioration in market conditions +in Germany, as well as price erosion and volume declines related to +competition for certain products in Italy and other European markets. In +addition, upon changeover to an independent distributor in Germany in the +second quarter of fiscal 2001, the new distributor placed stocking orders that +did not repeat in fiscal 2002. +For the Life Science operating segment, volume growth was particularly strong +for Rubella make-to-order bulk antigen products. +For all operating segments combined, international sales were $17,993,000, or +30% of total sales, for fiscal 2002, compared to $18,123,000, or 32% of total +sales, in fiscal 2001. Combined domestic exports for the US Diagnostics and +Life Science operating segments were $6,073,000 for fiscal 2002, compared to +$5,702,000 in fiscal 2001. The remaining international sales were generated +by the European Diagnostics operating segment. +Gross Profit +Gross profit increased $7,892,000 or 30%, to $34,598,000 for fiscal 2002 +compared to fiscal 2001. Gross profit margins increased from 47% for fiscal +2001, to 59% for fiscal 2002. Gross profit for fiscal 2001 included the +negative effects of an inventory impairment charge in the amount of $4,000,000 +related to FDA matters, as well as certain inefficiencies related to products +manufactured in Cincinnati, because during the second quarter of +-20- +Table of Contents +fiscal 2001, resources were concentrated on execution of the plan submitted to +the FDA (see FDA discussion contained herein). +Meridian’s overall operations consist of the sale of diagnostic test kits for +various disease states and in alternative test formats, as well as bioresearch +reagents, bulk antigens and proficiency tests. Product sales mix shifts, in +the normal course of business, can cause the consolidated gross profit margin +to fluctuate by several points. +Operating Expenses +Operating expenses declined $14,609,000, to $24,604,000 for fiscal 2002 +compared to fiscal 2001. Operating expenses for fiscal 2002 included +$1,211,000 related to the abandoned acquisition of Biotrin Holdings. +Operating expenses for fiscal 2001 included costs of $11,074,000, $1,510,000, +and $800,000 related to FDA matters, European restructuring and acquired +in-process research and development, respectively. This decline is primarily +attributable to closure of the German distribution operation during the first +quarter of fiscal 2001, general cost-cutting measures implemented across all +Meridian business units, tightly controlled spending and the offsetting +effects of lower legal costs related to trade secrets litigation and increased +reserves for distributor rebates. +Research and development expenses declined $475,000 or 14%, to $2,888,000 for +fiscal 2002 compared to fiscal 2001, and as a percentage of sales, declined +from 6% for fiscal 2001 to 5% for fiscal 2002. Of this decrease, $417,000 +related to the US Diagnostics operating segment and $58,000 related to the Life +Science operating segment. The decline for the US Diagnostics operating +segment is primarily attributable to lower outside contract research and +clinical trial costs based on timing of projects, as well as the favorable +effects of spending controls. +Selling and marketing expenses declined $1,241,000 or 11%, to $9,730,000 for +fiscal 2002 compared to fiscal 2001, and as a percentage of sales, declined +from 19% for fiscal 2001 to 16% for fiscal 2002. Of this decline, $688,000 +related to the US Diagnostics operating segment, $524,000 related to the +European Diagnostics operating segment and $29,000 related to the Life Science +operating segment. The decline for the US Diagnostics operating segment is +primarily attributable to spending controls and cost-cutting measures. +Spending controls and cost-cutting measures were in the areas of advertising, +promotional materials, travel and conventions. In addition, freight costs to +ship product to customers from the Cincinnati manufacturing facility have been +reduced as a result of better management of this element of operations. The +decline for the European Diagnostics operating segment is primarily +attributable to the closure of the German distribution operation during the +first quarter of fiscal 2001. +General and administrative expenses declined $720,000 or 6%, to $10,775,000 for +fiscal 2002 compared to fiscal 2001, and as a percentage of sales, declined +from 20% for fiscal 2001 to 18% for fiscal 2002. Of this decline, $665,000 +related to the US Diagnostics operating segment and $140,000 related to the +European Diagnostics +-21- +Table of Contents +operating segment. The Life Science operating segment increased $85,000. The +decline for the US Diagnostics operating segment is primarily attributable to +no longer amortizing goodwill due to the adoption of SFAS No. 142 and lower +legal costs related to trade secrets litigation. These decreases were somewhat +offset by increased reserves for distributor rebates. The decline for the +European Diagnostics operating segment is primarily attributable to the closure +of the German distribution operation during the first quarter of fiscal 2001. +Operating Income +Operating income increased $22,501,000 from a loss of $12,507,000 in fiscal +2001, to income of $9,994,000 in fiscal 2002 as a result of the factors +discussed above. +Other Income and Expense +Interest expense declined $572,000 or 22%, to $1,974,000 for fiscal 2002 +compared to fiscal 2001. This decrease is attributable to the favorable +effects of a lower interest rate environment and lower overall debt levels +outstanding. +Other income and expense, net for fiscal 2002 included a net gain of $254,000 +related to the sale of shares of common stock received in the demutualization +of two insurance companies during the first quarter. Other income and expense, +net for fiscal 2002 and 2001 included net currency losses of $14,000 and +$39,000, respectively, related to transactions that are denominated in foreign +currencies. The decrease in currency losses is attributable to the level of +Euro/US dollar exchange rates during each period as well as strategies that +were implemented in the latter part of fiscal 2001 to reduce currency exposure +on these types of transactions. +Income Taxes +The effective rate for income taxes is a provision of 39% for fiscal 2002, +compared to a credit of 31% for fiscal 2001. The effective rate for fiscal +2002 includes the favorable effects of reversing valuation allowance provisions +in Belgium that were established prior to the restructuring of European +operations, as net operating loss carryforwards in this jurisdiction are being +utilized, and certain favorable book-to-tax return adjustments related to +non-US sales activities. The effective rate for fiscal 2001 includes the +unfavorable effects of the goodwill portion of the impairment charges related +to FDA matters, a substantial portion of the European restructuring charge and +the acquired in-process research and development charge, which could not be +utilized for tax purposes. +-22- +Table of Contents +Liquidity and Capital Resources: +Comparative Cash Flow Analysis +Meridian’s operating cash flow and financing requirements are determined by +analyses of operating and capital spending budgets and consideration of +acquisition plans. Meridian has historically maintained line of credit +availability to respond to acquisition opportunities quickly. +Net cash provided by operating activities increased $938,000 or 8%, to +$12,353,000 in fiscal 2003 compared to fiscal 2002. This increase is primarily +attributable to earning levels and changes in deferred taxes, and also reflects +higher investments in receivables and inventories. +Net cash used for investing activities was $3,252,000 for fiscal 2003, +compared to $4,201,000 for fiscal 2002, and primarily related to capital +expenditures and Viral Antigens earnout payments during both periods. The +higher level of capital expenditures during fiscal 2002 reflects the +construction of Viral Antigens’ protein production laboratory. Net cash used +in investing activities for fiscal 2002 also included proceeds of $254,000 +related to the sale of common stock received in the demutualization of two +insurance companies during the first quarter. +Net cash used for financing activities was $9,827,000 for fiscal 2003, +compared to $8,999,000 for fiscal 2002. Repayments of debt obligations, +including the revolving credit facility, were $5,275,000 in fiscal 2003 and +$5,115,000 in fiscal 2002, reflecting Meridian’s intended efforts to pay down +debt. Activity on the revolving credit facility during fiscal 2002 includes +approximately $1,000,000 related to repayment of the mortgage loan for the +Viral Antigens facilities that matured in January 2002. +Net cash flows from operating activities are anticipated to fund working +capital requirements, debt service and dividends during fiscal 2004. +Capital Resources +The following table presents Meridian’s payments due on financing obligations +as of September 30, 2003 (amounts in thousands): +2004 +2005 +2006 +Total +Bank term debt +$ +797 +$ +797 +$ +640 +$ +2,234 +Other debt obligations +82 +68 +— +150 +Subordinated debentures +— +— +20,000 +20,000 +-23- +Table of Contents +Meridian has a $25,000,000 credit facility with a commercial bank that +includes $5,000,000 of term debt and capital lease capacity and a $20,000,000 +line of credit that expires in September 2004. As of November 30, 2003, there +were no borrowings outstanding on the line of credit portion of this +facility, and the availability was $20,000,000. +During November 2003, Meridian commenced an offer to exchange $16,000,000 of +its 7% convertible subordinated debentures for an equal principal amount of +new convertible subordinated debentures that mature September 1, 2013 and +bear interest at 5%. The exchange offer expires December 30, 2003. The new +debentures will be convertible into Meridian’s common stock at a price of +$14.50 per share. Subsequent to a successful exchange of $16,000,000 of its +convertible subordinated debentures, Meridian expects to redeem the remaining +$4,000,000 at par through the revolving credit facility. These measures are +expected to reduce annual interest expense by approximately $500,000. Upon +completion of the exchange offer and redemptions, the remaining carrying +value of unamortized debt issuance costs related to the 7% convertible +subordinated debentures, $382,000 at September 30, 2003, will be charged to +expense. +All of the bank term debt is denominated in the Euro currency and bears +interest at a variable rate tied to Euro LIBOR. A one-percentage point +increase in the Euro LIBOR rate would increase fiscal 2004 interest expense +by approximately $20,000 for this debt. This debt serves as a natural +currency hedge against certain Euro denominated intercompany receivables. +The Viral Antigens acquisition, completed in fiscal 2000, provides for +additional purchase consideration up to a maximum remaining amount of +$5,475,000, contingent upon Viral Antigens’ future earnings through September +30, 2006. Earnout consideration is payable each year, following the period +earned. Earnout payments, if any, may require financing under the line of +credit or other bank credit facility. Earnout consideration in the amount of +$463,000 related to fiscal 2003 is due to be paid in the second quarter of +fiscal 2004 and will be financed on Meridian’s line of credit. +Meridian’s capital expenditures are estimated to be $2,500,000 for fiscal +2004, and may be funded with operating cash flows or availability under the +$25,000,000 credit facility discussed above. Capital expenditures relate to +manufacturing and other equipment of a normal and recurring nature. +Commitments and Off-balance Sheet Arrangements: +Operating Leases +Meridian and its subsidiaries are lessees of (i) office and warehouse buildings +in Maine, Belgium, France and Holland; (ii) automobiles for use by the direct +sales forces in the US and Europe; and (iii) certain office equipment such as +facsimile machines and copier machines across all business units, under +operating lease +-24- +Table of Contents +agreements that expire at various dates. Meridian believes that commitments +under these operating lease agreements are not material to its liquidity or +capital resources. +Royalties +Meridian has entered into various license agreements that require payment of +royalties based on a specified percentage of sales of related products (1% to +8%). Meridian expects that payments under these agreements will amount to as +much as $600,000 in fiscal 2004. These royalty payments primarily relate to +the US Diagnostics operating segment. +For one of these license agreements, Meridian is engaged in a dispute with the +licensor regarding the payment of royalties. The licensor has claimed +additional royalties due from Meridian in the amount of approximately $700,000. +Meridian believes that it has satisfactorily complied with all provisions of +this license agreement, and therefore, disputes this claim. In addition, +Meridian believes that it has valid claims against the licensor under this +agreement. This matter is not expected to have a material effect on results of +operations or financial condition. +Unconditional Purchase Commitments +Meridian has entered into agreements to distribute diagnostic test kits that +are manufactured by other diagnostic manufacturing companies. One of these +agreements requires Meridian to purchase minimum quantities of diagnostic kits +during 12-month measurement periods. Aggregate minimum purchase commitments +under this agreement amount to approximately $125,000 for fiscal 2004. +For this agreement, Meridian did not meet the minimum purchase provisions +contained therein for fiscal 2002 due to the actual size of the market for this +specific product being smaller than anticipated prior to execution of the +agreement. Meridian and the other party to this agreement have subsequently +adjusted the minimum purchase provisions to align with current market +expectations. The amendment to this agreement did not result in any further +financial obligation for Meridian. +Contract Research and Development +During fiscal 2000, Meridian executed a Research and Development Agreement and +an Exclusive Supply Agreement with OraSure Technologies, Inc. to commercialize +the Up Link technology. These agreements, assuming certain milestones were met, +would require Meridian to make future payments to OraSure to fund research and +development activities for specific diagnostic products and to obtain an +exclusive license to market and sell such products on a global basis. These +agreements were terminated in November 2003. Costs to terminate these +agreements were not material. +-25- +Table of Contents +Forward Contracts +Meridian uses forward contracts from time to time to address foreign currency +risk related to certain transactions denominated in the Euro currency. These +contracts are used to fix the exchange rate in converting Euros to US dollars. +As of September 30, 2003, Meridian was a party to one such forward contract +with a notional amount of 300,000 Euro and a maturity date of December 2003. +Market Risk Exposure: +Meridian has market risk exposure related to interest rate sensitive debt and +foreign currency transactions. +Meridian has debt obligations in the aggregate amount of $22,847,000 +outstanding at September 30, 2003, of which $2,697,000 bears interest at +variable rates. Information concerning the maturities of interest rate +sensitive debt is included in the discussion of Capital Resources above. To +date, Meridian has not employed a hedging strategy with respect to interest +rate risk. +Meridian is exposed to foreign currency risk related to its European +distribution operations, including foreign currency denominated intercompany +receivables, as well as Euro denominated term debt. The Euro denominated term +debt serves as a natural hedge against a portion of the Euro denominated +intercompany receivables. +FDA Matters: +During January 2001, the FDA completed an inspection of Meridian’s compliance +with the Quality Systems Regulations that govern the manufacturing of in vitro +diagnostics. In response to this inspection, in January 2001, Meridian +submitted a comprehensive plan to the FDA outlining specific steps it committed +to undertake to improve its quality systems. In June 2001, Meridian received a +Warning Letter from the FDA which summarized and reiterated certain of the +observations made by the FDA during their inspection completed in January 2001. +In August 2002, the FDA completed an on-site follow-up inspection to its +January 2001 inspection. The FDA issued several observations, primarily aimed +at fine-tuning established quality control systems and procedures. Meridian +submitted written corrective action plans to address these refinements and +continues its periodic communications with the FDA on the progress of its +comprehensive plan submitted to the FDA in January 2001. +In accordance with the FDA’s directive in the Warning Letter, Meridian is +required to undergo three annual independent audits to evaluate Meridian’s +progress implementing its comprehensive plan. The first audit was +-26- +Table of Contents +completed in November 2001. The second audit was completed in May 2003. The +reports from these audits substantiated Meridian’s continued progress in +addressing issues raised in the prior FDA and independent audits. Meridian +responded to the latest observations and recommendations with corrective +actions designed to further improve its established quality control systems and +procedures. +At present, it is uncertain whether Meridian’s actions will be sufficient so +that no further remedial action or enforcement action by the FDA will occur. +During fiscal 2001, Meridian incurred costs and asset impairment charges in the +amount of $15,074,000 related to implementation of its comprehensive plan +submitted to the FDA and the discontinuance of manufacturing and distributing +approximately 30 products. Of this amount, $2,322,000 related to +implementation costs of the comprehensive plan, primarily consulting fees. The +remaining $12,752,000 related to asset impairment charges and product recall +costs. Impaired assets included inventory and certain intangibles. +Critical Accounting Policies: +The consolidated financial statements included in this Annual Report on Form +10-K have been prepared in accordance with accounting principles generally +accepted in the United States. Such accounting principles require management +to make judgments about estimates and assumptions that affect the reported +amounts of assets, liabilities, revenues, expenses and related disclosures. +Management believes that the following accounting policies are critical to +understanding the accompanying consolidated financial statements because the +application of such polices requires the use of significant estimates and +assumptions and the carrying values of related assets and liabilities are +material. +Revenue Recognition +Meridian’s revenues are derived primarily from product sales. Revenue is +recognized when product is shipped and title has passed to the buyer. Revenue +for the US Diagnostics operating segment is reduced at the date of sale for +estimated rebates and cash discounts that will be claimed by customers. Rebate +agreements are in place with certain independent national distributors and are +designed to reimburse such distributors for their cost in handling Meridian’s +products. Management estimates reserves for rebate agreements and cash +discounts based on historical statistics, current trends and other factors. +Changes to these reserves are recorded in the period that they become known. +Revenue for the Life Science operating segment’s protein production laboratory +is recognized either upon shipment of product or final lot acceptance depending +on contract terms. +During fiscal 2002, Meridian adopted EITF No. 01-9, Accounting for +Consideration Given by a Vendor to a Customer (Including the Reseller of a +Vendor’s Products) . EITF No. 01-9 affected the manner in which Meridian +estimates reserves for distributor rebate agreements. Rebate agreements are in +place with certain +-27- +Table of Contents +independent national distributors and are designed to reimburse such +distributors for their cost in handling Meridian’s products. Reserves for +rebate agreements include components for reported but unpaid rebates to date +and rebates not yet reported. Meridian’s reserves for rebate agreements were +increased by approximately $350,000 upon adoption of EITF No. 01-9. +Inventories +Meridian’s inventories are carried at the lower of cost or market. Cost is +determined on a first-in, first-out basis, except for inventories in the Viral +Antigens business for which cost is determined on a last-in, first-out basis. +Meridian establishes reserves against cost for excess and obsolete materials, +finished goods whose shelf life may expire before sale to customers, and other +identified exposures. Management estimates reserves based on assumptions about +future demand and market conditions. If actual market conditions are less +favorable than such estimates, additional inventory writedowns would be +required and this would negatively affect gross profit margin and overall +results of operations. Changes to inventory reserves are recorded in the +period that they become known. +For the Viral Antigens purchase business combination, Meridian elected to use +last-in, first-out accounting for inventories for financial reporting purposes. +Under last-in, first-out accounting, the stepped-up inventory value will be +charged to earnings in periods in which inventory quantities decline below +those on hand at the acquisition date. To date, inventory quantities have +remained above levels on hand at the acquisition date. +Intangible Assets +Meridian’s intangible assets include identifiable intangibles and goodwill. +Identifiable intangibles include customer lists, supply agreements, +manufacturing technologies, patents, licenses, trade names and non-compete +agreements. All of Meridian’s identifiable intangibles have finite lives. +During the first quarter of fiscal 2002, Meridian adopted Statement of +Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets . +SFAS No. 142 provides that goodwill and intangible assets with indefinite lives +are no longer amortized over their useful lives, but rather, are now subject to +an annual impairment review (or more frequently if impairment indicators arise) +by applying a fair-value based test. There have been no impairments from the +analyses required by SFAS No. 142. +Identifiable intangibles with finite lives are subject to impairment testing as +prescribed by SFAS No. 144, Accounting for the Impairment or Disposal of +Long-lived Assets . Pursuant to the provisions of SFAS No. 144, identifiable +intangibles with finite lives are reviewed for impairment when events or +circumstances indicate that such assets may not be recoverable at their current +carrying value. Whether an event or circumstance triggers an impairment is +determined by comparing an estimate of the asset’s undiscounted future cash +flows to its carrying +-28- +Table of Contents +value. If impairment has occurred, it is measured by a fair-value based test. +Meridian adopted SFAS No. 144 effective October 1, 2002. There were no +impairments from adoption. +Meridian’s ability to recover its intangible assets, both identifiable +intangibles and goodwill, is dependent upon the future cash flows of the +related acquired businesses and assets. The application of SFAS Nos. 142 and +144 requires management to make judgments and assumptions regarding future cash +flows, including sales levels, gross profit margins, operating expense levels, +working capital levels and capital expenditures. With respect to identifiable +intangibles, management also makes judgments and assumptions regarding useful +lives. +Management considers the following factors in evaluating events and +circumstances for possible impairment: (i) significant under-performance +relative to historical or projected operating results, (ii) negative industry +trends, (iii) sales levels of specific groups of products (related to specific +identifiable intangibles), (iv) changes in overall business strategies and (v) +other factors. +If actual cash flows are less favorable than projections, this could trigger +impairment of intangible assets. If impairment were to occur, this would +negatively affect overall results of operations. +Income Taxes +Pursuant to SFAS No. 109, Accounting for Income Taxes , Meridian’s provision for +income taxes includes federal, foreign, state and local income taxes currently +payable and those deferred because of temporary differences between income for +financial reporting and income for tax purposes. +Meridian’s deferred tax assets include net operating loss carryforwards in +foreign jurisdictions. The realization of tax benefits related to net +operating loss carryforwards is dependent upon the generation of future taxable +income in the applicable jurisdictions. Management assesses the level of +deferred tax asset valuation allowance by taking into consideration historical +and future projected operating results, future reversals of taxable temporary +differences, as well as tax planning strategies. The amount of net deferred +tax asset considered realizable could be reduced in future years if estimates +of future taxable income during the carryforward period are reduced. +Undistributed earnings in Meridian’s foreign subsidiaries are considered by +management to be permanently re-invested in such subsidiaries. Consequently, +US deferred tax liabilities on such earnings have not been recorded. +Management believes that such US taxes would be largely offset by foreign tax +credits for taxes paid in applicable foreign jurisdictions. +-29- +Table of Contents +New Accounting Pronouncements: +During December 2002, the Financial Accounting Standards Board issued Statement +No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure, +an Amendment of FASB Statement No. 123 . Statement No. 148 provides alternative +methods of transition for an entity that voluntarily changes to the fair value +based method of accounting for stock-based compensation. Meridian accounts +for its stock-based compensation plans under Accounting Principles Board +Opinion No. 25, in which compensation expense is determined based on intrinsic +value. Meridian continually evaluates its accounting policies, including those +governing stock-based compensation, and at this time believes it is appropriate +to continue accounting for employee stock-based compensation under APB No. 25, +consistent with historical practice. +During November 2002, the FASB issued Interpretation No. 45, Guarantor’s +Accounting and Disclosure Requirements for Guarantees, Including Direct +Guarantees of Indebtedness of Others . Interpretation No. 45 clarifies the +requirements of FASB Statement No. 5 relating to a guarantor’s accounting for, +and disclosure of, the issuance of certain types of guarantees. Meridian’s +adoption of Interpretation No. 45 has had no impact on results of operations or +financial condition. +ITEM 7A. +QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK +See Market Risk Exposure under Item 7 above. +-30- +Table of Contents +ITEM 8. +FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA +Index to Consolidated Financial Statements +Reports of Independent Auditors +32 +Consolidated Statements of Operations for the years ended September 30, 2003, 2002 and 2001 +34 +Consolidated Statements of Cash Flows for the years ended September 30, 2003, 2002 and 2001 +35 +Consolidated Balance Sheets as of September 30, 2003 and 2002 +36 +Consolidated Statements of Shareholders’ Equity for the years ended September 30, 2003, 2002 and 2001 +38 +Notes to Consolidated Financial Statements +39 +Schedule No. II – Valuation and Qualifying Accounts for the years ended September 30, 2003, 2002 and +2001 +63 +All other supplemental schedules are omitted due to the absence of conditions +under which they are required or because the information is shown in the +Consolidated Financial Statements or Notes thereto. +-31- +Table of Contents +Report of Independent Auditors +To the Board of Directors and Shareholders of Meridian Bioscience, Inc.: +In our opinion, the consolidated financial statements listed in the +accompanying index present fairly, in all material respects, the financial +position of Meridian Bioscience, Inc. and its subsidiaries at September 30, +2003 and September 30, 2002, and the results of their operations and their cash +flows for each of the two years in the period ended September 30, 2003 in +conformity with accounting principles generally accepted in the United States +of America. In addition, in our opinion, the financial statement schedule +listed in the accompanying index presents fairly, in all material respects, the +information set forth therein when read in conjunction with the related +consolidated financial statements. These financial statements and financial +statements schedule are the responsibility of the Company’s management; our +responsibility is to express an opinion on these financial statements and +financial statement schedule based on our audits. We conducted our audits of +these statements in accordance with auditing standards generally accepted in +the United States of America, which 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, +assessing the accounting principles used and significant estimates made by +management, and evaluating the overall financial statement presentation. We +believe that our audits provide a reasonable basis for our opinion. The +financial statements, prior to the revisions discussed in Notes 2 and 10, and +financial statement schedule of the Company as of September 30, 2001 and for +the year then ended were audited by independent accountants who have ceased +operations. Those independent accountants expressed an unqualified opinion on +those financial statements and financial statement schedule in their report +dated November 9, 2001. +As discussed in Note 2, on October 1, 2001, the Company adopted Statement of +Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. +As discussed above, the financial statements of the Company for the year ended +September 30, 2001, prior to the revisions described in Notes 2 and 10, were +audited by other independent accountants who have ceased operations. As +described in Notes 2 and 10, these financial statements have been revised to +include the transitional disclosures required by Statement of Financial +Accounting Standards No. 142, Goodwill and Other Intangible Assets, which was +adopted by the Company as of October 1, 2002 and to give effect to a change in +reportable segments in 2003. We audited the transitional disclosures in Note 2 +and the reclassifications described in Note 10. In our opinion, the +transitional disclosures for 2001 in Note 2 are appropriate and the +reclassifications described in Note 10 for 2002 and 2001 are appropriate and +have been properly applied. However, we were not engaged to audit, review, or +apply any procedures to the 2001 financial statements of the Company other than +with respect to such disclosures and, accordingly, we do not express an opinion +or any other form of assurance on the 2001 financial statements taken as a +whole. +/s/ PricewaterhouseCoopers LLP +November 14, 2003 +-32- +Table of Contents +THE FOLLOWING REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR +ANDERSEN LLP (ANDERSEN). THIS REPORT HAS NOT BEEN REISSUED BY ANDERSEN AND +ANDERSEN DID NOT CONSENT TO THE INCORPORATION BY REFERENCE OF THIS REPORT INTO +ANY OF THE COMPANY’S REGISTRATION STATEMENTS. +AS DISCUSSED IN NOTE 2, THE COMPANY HAS REVISED ITS FINANCIAL STATEMENTS FOR +THE YEARS ENDED SEPTEMBER 30, 2001 TO INCLUDE THE TRANSITIONAL DISCLOSURES +REQUIRED BY STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 142, GOODWILL AND +INTANGIBLE ASSETS. THE ANDERSEN REPORT DOES NOT EXTEND TO THESE CHANGES. THE +REVISIONS TO THE 2001 FINANCIAL STATEMENTS RELATED TO THESE TRANSITIONAL +DISCLOSURES WERE REPORTED ON BY PRICEWATERHOUSECOOPERS LLP, AS STATED IN THEIR +REPORT APPEARING HEREIN. +ADDITIONALLY, AS DISCUSSED IN NOTE 10, THE COMPANY HAS REVISED ITS 2001 +FINANCIAL STATEMENTS TO GIVE EFFECT TO A CHANGE IN REPORTABLE SEGMENTS. THE +ANDERSEN REPORT DOES NOT EXTEND TO THESE CHANGES TO THE 2001 FINANCIAL +STATEMENTS. THE REVISIONS TO THE 2001 FINANCIAL STATEMENTS RELATED TO THE +CHANGE IN REPORTABLE SEGMENTS WERE REPORTED ON BY PRICEWATERHOUSECOOPERS LLP, +AS STATED IN THEIR REPORT APPEARING HEREIN. +Report of Independent Public Accountants +To Meridian Bioscience, Inc.: +We have audited the accompanying consolidated balance sheets of MERIDIAN +BIOSCIENCE, INC. and subsidiaries as of September 30, 2001 and 2000, and the +related consolidated statements of operations, shareholders’ equity and cash +flows for each of the three years in the period ended September 30, 2001. +These financial statements and the schedule referred to below are the +responsibility of Meridian’s management. Our responsibility is to express an +opinion on the financial statements and schedule based on our audits. +We conducted our audits in accordance with auditing standards generally +accepted in the 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 financial statements referred to above present fairly, in +all material respects, the financial position of Meridian Bioscience, Inc. and +subsidiaries as of September 30, 2001 and 2000, and the results of their +operations and their cash flows for each of the three years in the period ended +September 30, 2001, in conformity with accounting principles generally accepted +in the United States. +Our audit was made for the purpose of forming an opinion on the basic financial +statements taken as a whole. The schedule listed in the index of the financial +statements is presented for the purposes of complying with the Securities and +Exchange Commission’s rules and is not part of the basic financial statements. +This schedule has been subjected to the auditing procedures applied in the +audit of the basic financial statements and, in our opinion, fairly states in +all material respects the financial data required to be set forth therein in +relation to the basic financial statements taken as a whole. +ARTHUR ANDERSEN LLP +Cincinnati, Ohio, +November 9, 2001 +-33- +Table of Contents +CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) +Meridian Bioscience, Inc. and Subsidiaries +For the Year Ended September 30, +2003 +2002 +2001 +Net Sales +$ +65,864 +$ +59,104 +$ +56,527 +Cost of Sales +Sale of product +27,576 +24,506 +25,821 +Inventory impairment +— +— +4,000 +Total cost of sales +27,576 +24,506 +29,821 +Gross Profit +38,288 +34,598 +26,706 +Operating Expenses: +Research and development +3,875 +2,888 +3,363 +Selling and marketing +10,601 +9,730 +10,971 +General and administrative +11,023 +10,775 +11,495 +Costs of abandoned acquisition +— +1,211 +— +Costs and asset impairment charges related to FDA matters +— +— +11,074 +European restructuring costs +— +— +1,510 +Acquired in-process research and development +— +— +800 +Total operating expenses +25,499 +24,604 +39,213 +Operating Income (Loss) +12,789 +9,994 +(12,507 +) +Other Income (Expense): +Interest income +42 +38 +166 +Interest expense +(1,718 +) +(1,974 +) +(2,546 +) +Other, net +478 +185 +(19 +) +Total other income (expense) +(1,198 +) +(1,751 +) +(2,399 +) +Earnings (Loss) Before Income Taxes +11,591 +8,243 +(14,906 +) +Income Tax Provision (Benefit) +4,573 +3,212 +(4,631 +) +Net Earnings (Loss) +$ +7,018 +$ +5,031 +$ +(10,275 +) +Earnings Per Share Data: +Basic earnings (loss) per common share +$ +0.48 +$ +0.34 +$ +(0.70 +) +Diluted earnings (loss) per common share +$ +0.47 +$ +0.34 +$ +(0.70 +) +Common shares used for basic earnings (loss) per common share +14,664 +14,621 +14,589 +Dilutive stock options +286 +139 +— +Common shares used for diluted earnings (loss) per common share +14,950 +14,760 +14,589 +Dividends declared per common share +$ +0.34 +$ +0.28 +$ +0.26 +Anti-dilutive Securities: +Common stock options +250 +737 +1,088 +Convertible debentures +1,243 +1,243 +1,243 +The accompanying notes are an integral part of these consolidated financial +statements. +-34- +Table of Contents +CONSOLIDATED STATEMENTS OF CASH +FLOWS (dollars in thousands) +Meridian Bioscience, Inc. and Subsidiaries +For the Year Ended September 30, +2003 +2002 +2001 +Cash Flows From Operating Activities +Net earnings (loss) +$ +7,018 +$ +5,031 +$ +(10,275 +) +Non-cash items +Acquired in-process research and development +— +— +800 +Depreciation of property, plant and equipment +2,390 +2,312 +2,261 +Amortization of intangible assets +1,390 +1,407 +2,485 +Asset impairment charges related to FDA matters +— +— +12,752 +European restructuring +— +— +396 +Deferred income taxes +1,044 +200 +(4,394 +) +Stock compensation expense +14 +48 +15 +Gain on sale of stock received in demutualization +— +(254 +) +— +Loss on disposition of fixed assets +26 +— +— +Change in current assets +(3,945 +) +(123 +) +4,604 +Change in current liabilities +3,571 +2,446 +(1,302 +) +Other, net +845 +348 +1,360 +Net cash provided by operating activities +12,353 +11,415 +8,702 +Cash Flows From Investing Activities +Viral Antigens earnout payments +(1,407 +) +(905 +) +— +Acquisitions of property, plant and equipment +(1,812 +) +(3,550 +) +(1,923 +) +Proceeds from sales of investments +— +254 +9 +Other intangibles +(33 +) +— +— +Net cash used in investing activities +(3,252 +) +(4,201 +) +(1,914 +) +Cash Flows From Financing Activities +Net activity on revolving credit facility +(2,482 +) +(2,940 +) +(345 +) +Proceeds from debt obligations +— +— +4,058 +Repayment of debt obligations +(2,792 +) +(2,175 +) +(7,016 +) +Dividends paid +(4,989 +) +(4,022 +) +(3,722 +) +Acquisitions of treasury stock +— +— +(32 +) +Proceeds from exercises of stock options +478 +138 +11 +Cost of shelf registration statement +(42 +) +— +— +Net cash used in financing activities +(9,827 +) +(8,999 +) +(7,046 +) +Effect of Exchange Rate Changes on Cash +349 +172 +111 +Net Decrease in Cash +(377 +) +(1,613 +) +(147 +) +Cash at Beginning of Period +3,060 +4,673 +4,820 +Cash at End of Period +$ +2,683 +$ +3,060 +$ +4,673 +The accompanying notes are an integral part of these consolidated financial +statements. +-35- +Table of Contents +CONSOLIDATED BALANCE SHEETS +(dollars in thousands) +Meridian Bioscience, Inc. and Subsidiaries +As of September 30, +2003 +2002 +Assets +Current Assets: +Cash (includes $600 that is restricted) +$ +2,683 +$ +3,060 +Accounts receivable, less allowances of $471 in 2003 and $987 in 2002 +14,894 +12,616 +Inventories +14,066 +12,735 +Prepaid expenses and other current assets +1,302 +966 +Deferred income taxes +216 +998 +Total current assets +33,161 +30,375 +Property, Plant and Equipment, at Cost: +Land +688 +666 +Buildings and improvements +15,183 +13,986 +Machinery, equipment and furniture +18,035 +15,317 +Construction in progress +838 +2,780 +Subtotal +34,744 +32,749 +Less-accumulated depreciation and amortization +17,194 +14,744 +Net property, plant and equipment +17,550 +18,005 +Other Assets: +Deferred debenture offering costs, net +382 +517 +Goodwill +4,991 +4,542 +Other intangible assets, net +10,207 +11,415 +Other assets +129 +241 +Total other assets +15,709 +16,715 +Total assets +$ +66,420 +$ +65,095 +The accompanying notes are an integral part of these consolidated balance +sheets. +-36- +Table of Contents +CONSOLIDATED BALANCE SHEETS +(dollars in thousands) +Meridian Bioscience, Inc. and Subsidiaries +As of September 30, +2003 +2002 +Liabilities and Shareholders’ Equity +Current Liabilities: +Current portion of long-term debt and capital lease obligations +$ +879 +$ +943 +Borrowings under revolving credit facility +463 +2,945 +Accounts payable +2,271 +1,914 +Accrued payroll costs +4,534 +2,428 +Purchase business combination liability +463 +1,407 +Abandoned acquisition costs +— +980 +Other accrued expenses +3,001 +2,817 +Income taxes payable +3,719 +1,815 +Total current liabilities +15,330 +15,249 +Long-term Obligations: +Bank debt and capital lease obligations +1,505 +3,626 +Convertible subordinated debentures +20,000 +20,000 +Deferred Income Taxes +2,101 +1,839 +Commitments and Contingencies +Shareholders’ Equity: +Preferred stock, no par value, 1,000,000 shares authorized, none issued +— +— +Common stock, no par value, 50,000,000 shares authorized, 14,728,590 and +14,633,215 shares issued and outstanding +2,535 +2,535 +Treasury stock, 8,300 shares +(32 +) +(32 +) +Additional paid-in capital +21,641 +21,191 +Retained earnings +3,930 +1,901 +Accumulated other comprehensive loss +(590 +) +(1,214 +) +Total shareholders’ equity +27,484 +24,381 +Total liabilities and shareholders’ equity +$ +66,420 +$ +65,095 +The accompanying notes are an integral part of these consolidated balance +sheets. +-37- +Table of Contents +CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY +(Dollars and shares in thousands except per share data) +Meridian Bioscience, Inc. and Subsidiaries +Accumulated +Common +Shares +Additional +Other +Total +Shares +Held in +Common +Treasury +Paid-in +Retained +Comprehensive +Comprehensive +Shareholders’ +Issued +Treasury +Stock +Stock +Capital +Earnings +Income (Loss) +Income (Loss) +Equity +Balance at September 30, 2000 +14,587 +— +2,530 +— +20,941 +14,889 +(1,749 +) +36,611 +Cash dividends paid - $0.26 per share +— +— +— +— +— +(3,722 +) +— +(3,722 +) +Exercise of stock options +12 +— +5 +— +6 +— +— +11 +Stock compensation expense +— +— +— +— +15 +— +— +15 +Purchase of treasury stock +— +(8 +) +— +(32 +) +— +— +— +(32 +) +Comprehensive loss: +Net loss +— +— +— +— +— +(10,275 +) +— +$ +(10,275 +) +(10,275 +) +Foreign currency translation adjustment +— +— +— +— +— +— +336 +336 +336 +Comprehensive loss +$ +(9,939 +) +Balance at September 30, 2001 +14,599 +(8 +) +2,535 +(32 +) +20,962 +892 +(1,413 +) +22,944 +Cash dividends paid - $0.275 per share +— +— +— +— +— +(4,022 +) +— +(4,022 +) +Exercise of stock options +34 +— +— +— +138 +— +— +138 +Stock compensation expense +— +— +— +— +91 +— +— +91 +Comprehensive income: +Net earnings +— +— +— +— +— +5,031 +— +$ +5,031 +5,031 +Foreign currency translation adjustment +— +— +— +— +— +— +199 +199 +199 +Comprehensive income +$ +5,230 +Balance at September 30, 2002 +14,633 +(8 +) +2,535 +(32 +) +21,191 +1,901 +(1,214 +) +24,381 +Cash dividends paid - $0.34 per share +— +— +— +— +— +(4,989 +) +— +(4,989 +) +Exercise of stock options +94 +— +— +— +478 +— +— +478 +Stock compensation expense +2 +— +— +— +14 +— +— +14 +Cost of shelf registration statement +— +— +— +— +(42 +) +— +— +(42 +) +Comprehensive income: +Net earnings +— +— +— +— +— +7,018 +— +$ +7,018 +7,018 +Foreign currency translation adjustment +— +— +— +— +— +— +624 +624 +624 +Comprehensive income +$ +7,642 +Balance at September 30, 2003 +14,729 +(8 +) +$ +2,535 +$ +(32 +) +$ +21,641 +$ +3,930 +$ +(590 +) +$ +27,484 +The accompanying notes are an integral part of these consolidated financial +statements. +-38- +Table of Contents +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Meridian Bioscience, Inc. and Subsidiaries +(1) Corporate Name Change +On January 23, 2001, Meridian’s shareholders approved a change in the corporate +name to Meridian Bioscience, Inc. Also during January 2001, Meridian changed +its Nasdaq symbol from KITS to VIVO. These changes were implemented to more +accurately reflect Meridian’s expansion of its capabilities in bioscience, +research reagent development and other services that will enable drug discovery +and realization of new pharmaceuticals, vaccines and diagnostics. +(2) Summary of Significant Accounting Policies +(a) +Nature of Business – Meridian is a fully-integrated life science company +whose principal businesses are (i) the development, manufacture and +distribution of diagnostic test kits primarily for certain respiratory, +gastrointestinal, viral and parasitic infectious diseases, (ii) the +manufacture and distribution of bulk antigens and reagents used by +researchers and other diagnostic manufacturers and (iii) the contract +manufacture of proteins and other biologicals for use by biopharmaceutical +and biotechnology companies engaged in research for new drugs and +vaccines. +(b) +Principles of Consolidation - The consolidated financial statements +include the accounts of Meridian Bioscience, Inc. and its subsidiaries +(collectively, “Meridian” or the “Company”). All significant intercompany +accounts and transactions have been eliminated. +(c) +Use of Estimates - The preparation of financial statements in conformity +with generally accepted accounting principles requires management to make +estimates and assumptions that affect the reported amounts of assets and +liabilities, disclosure of contingent assets and liabilities at the date +of the financial statements and the reported amounts of revenues and +expenses during the reporting period. Actual results could differ from +those estimates. Significant estimates are discussed in Notes 2(e), 2(g), +2(h), 2(k) and 8. +(d) +Foreign Currency Translation Adjustments - Assets and liabilities of +foreign operations are translated using year-end exchange rates with gains +or losses resulting from translation included in a separate component of +accumulated other comprehensive income (loss). Revenues and expenses are +translated using exchange rates prevailing during the year. Meridian also +recognizes foreign currency transaction gains and losses on certain assets +and liabilities that are denominated in the Euro currency. These gains +and losses are included in other income and expense in the accompanying +consolidated statements of operations. +-39- +Table of Contents +(e) +Inventories - Inventories are stated at the lower of cost or market. Cost +is determined on a first-in, first-out basis (FIFO), except for $4,779,000 +of inventory for which cost is determined on a last-in, first-out basis +(LIFO). The FIFO cost of this inventory was $3,667,000 at September 30, +2003. +Meridian establishes reserves against cost for excess and obsolete +materials, finished goods whose shelf life may expire before sale to +customers, and other identified exposures. Management estimates reserves +based on assumptions about future demand and market conditions. If actual +market conditions are less favorable than such estimates, additional +inventory writedowns would be required and this would negatively affect +gross profit margin and overall results of operations. Changes to inventory +reserves are recorded in the period that they become known. +For the Viral Antigens purchase business combination, Meridian elected to +use LIFO accounting for inventories for financial reporting purposes. +Under LIFO accounting, the stepped-up inventory value will be charged to +earnings in periods in which inventory quantities decline below those on +hand at the acquisition date. To date, inventory quantities have remained +above levels on hand at the acquisition date. +(f) +Property, Plant and Equipment - Property, plant and equipment are stated +at cost. Upon retirement or other disposition of property, plant and +equipment, the cost and related accumulated depreciation and amortization +are removed from the accounts and the resulting gain or loss is reflected +in earnings. Maintenance and repairs are expensed as incurred. +Depreciation and amortization are computed on the straight-line method in +amounts sufficient to write-off the cost over the estimated useful lives +as follows: +Buildings and improvements - 5 to 33 years +Machinery, equipment and furniture +- 3 to 10 years +(g) +Intangible Assets and Adoption +of SFAS Nos. 142 and 144: - Effective +October 1, 2001, Meridian adopted SFAS No. 142, Goodwill and other +Intangible Assets . SFAS No. 142 addresses accounting and reporting for +acquired goodwill and other intangible assets. SFAS No. 142 provides that +goodwill and other intangible assets with indefinite lives are no longer +subject to amortization over their useful lives, but rather, are now +subject to an annual impairment review (or more frequently if impairment +indicators arise) by applying a fair-value based test. Meridian has no +intangible assets with indefinite lives other than goodwill. There have +been no impairments from the analyses prepared pursuant to SFAS No. 142. +Pursuant to the provisions of SFAS No. 142, an intangible asset +representing a workforce acquired in a past acquisition was reclassified +to goodwill at September 30, 2002. The net book value of the acquired +workforce at the time of transfer was $73,000, including deferred income +taxes of $45,000. During fiscal 2003, the change in goodwill was an +increase of $449,000. This change consisted of an increase related to the +VAI earnout obligation for fiscal 2003 in the amount of $463,000, offset +by a decrease of $14,000 that was included in the net gain received for +the sale of blood-grouping products. During fiscal 2002, the change in +goodwill was an increase of $1,586,000. This change related to the VAI +earnout obligation and the transfer of the acquired workforce +-40- +Table of Contents +described above. The following table reconciles reported net earnings +(loss) to amounts adjusted to add back goodwill and workforce amortization +(in thousands, except per share amounts). +Year Ended September 30, +2003 +2002 +2001 +Reported net earnings (loss) +$ +7,018 +$ +5,031 +$ +(10,275 +) +Add back: Goodwill amortization after-tax +— +— +152 +Workforce amortization after-tax +— +— +41 +Adjusted net earnings (loss) +$ +7,018 +$ +5,031 +$ +(10,082 +) +Reported basic earnings (loss) per share +$ +0.48 +$ +0.34 +$ +(0.70 +) +Goodwill and workforce amortization after-tax +— +— +0.01 +Adjusted basic earnings (loss) per share +$ +0.48 +$ +0.34 +$ +(0.69 +) +Reported diluted earnings (loss) per share +$ +.047 +$ +0.34 +$ +(0.70 +) +Goodwill and workforce amortization after-tax +— +— +0.01 +Adjusted diluted earnings (loss) per share +$ +.047 +$ +0.34 +$ +(0.69 +) +A summary of Meridian’s acquired intangible assets subject to amortization, +as of September 30, 2003 and 2002 is as follows (in thousands). +2003 +2002 +Gross +2003 +Gross +2002 +Carrying +Accumulated +Carrying +Accumulated +As of September 30, +Value +Amortization +Value +Amortization +Covenants not to compete +$ +800 +$ +773 +$ +800 +$ +694 +Core products +3,199 +1,287 +3,199 +1,097 +Manufacturing technologies +5,747 +2,668 +5,747 +2,327 +Trademarks, licenses and patents +1,820 +1,146 +1,787 +1,007 +Customer lists and supply agreements +7,367 +2,852 +7,367 +2,360 +$ +18,933 +$ +8,726 +$ +18,900 +$ +7,485 +The actual aggregate amortization expense for these intangible assets for +fiscal 2003, fiscal 2002 and fiscal 2001 was $1,241,000, $1,272,000 and +$2,350,000, respectively. The estimated aggregate amortization expense for +these intangible assets for each of the five succeeding fiscal years is as +follows: fiscal 2004 - $1,176,000, fiscal 2005 - $1,090,000, fiscal 2006 - +$1,086,000, fiscal 2007- $1,086,000 and fiscal 2008 - $1,063,000. +Effective October 1, 2002, Meridian adopted SFAS No. 144, Accounting for +Impairment or Disposal of Long-lived Assets . SFAS No. 144 establishes a +single model for accounting for impairment or disposal of long-lived assets, +including the disposal of a segment of a business. Long-lived assets, +excluding goodwill and identifiable intangibles with indefinite lives, are +reviewed for impairment when events or circumstances +-41- +Table of Contents +indicate that such assets may not be recoverable at their carrying value. +Whether an event or circumstance triggers an impairment is determined by +comparing an estimate of the assets’ future cash flows to its carrying +value. If an impairment has occurred it is measured by a fair-value based +test. SFAS No. 144 requires that assets to be disposed of by sale are +reported at the lower of carrying value or fair value, less costs to sell. +There was no impact on results of operations or financial condition from the +adoption of SFAS No. 144. +Meridian’s ability to recover its intangible assets, both identifiable +intangibles and goodwill, is dependent upon the future cash flows of the +related acquired businesses and assets. The application of SFAS Nos. 142 +and 144 requires management to make judgments and assumptions regarding +future cash flows, including sales levels, gross profit margins, operating +expense levels, working capital levels and capital expenditures. With +respect to identifiable intangibles, management also makes judgments and +assumptions regarding useful lives. +Management considers the following factors in evaluating events and +circumstances for possible impairment: (i) significant under-performance +relative to historical or projected operating results, (ii) negative +industry trends, (iii) sales levels of specific groups of products (related +to specific identifiable intangibles), (iv) changes in overall business +strategies and (v) other factors. +If actual cash flows are less favorable than projections, this could trigger +impairment of intangible assets and other long-lived assets. If impairment +were to occur, this would negatively affect overall results of operations. +(h) +Revenue Recognition - Revenue is recognized from sales when product is +shipped and title has passed to the buyer. Revenue for the US +Diagnostics operating segment is reduced at the date of sale for estimated +rebates and cash discounts that will be claimed by customers. Management +estimates reserves for rebate agreements and cash discounts based on +historical statistics, current trends and other factors. Changes to the +reserves are recorded in the period that they become known. Revenue for +the Life Science operating segment’s protein production laboratory is +recognized either upon shipment of product or final lot acceptance +depending on contract terms. +During fiscal 2002, Meridian adopted EITF No. 01-9, Accounting for +Consideration Given by a Vendor to a Customer (Including the Reseller of a +Vendor’s Products) . EITF No. 01-9 affected the manner in which Meridian +estimates reserves for distributor rebate agreements. Rebate agreements are +in place with certain independent national distributors and are designed to +reimburse such distributors for their cost in handling Meridian’s products. +Reserves for rebate agreements include components for reported but unpaid +rebates to date and rebates not yet reported. Meridian’s reserves for rebate +agreements were increased by approximately $350,000 upon adoption of EITF +No. 01-9. +-42- +Table of Contents +(i) +Research and Development Costs - Internal research and development costs +are charged to earnings as incurred. Third-party research and development +costs are expensed when the contracted work has been performed and certain +milestone results have been achieved. +(j) +Advertising - Advertising costs are charged to earnings as incurred. +Expenditures for advertising in fiscal 2003, 2002 and 2001 were +approximately $222,000, $238,000, and $193,000 respectively. +(k) +Income Taxes – The provision for income taxes includes federal, foreign, +state and local income taxes currently payable and those deferred because +of temporary differences between income for financial reporting and income +for tax purposes. +(l) +Forward Contracts – Meridian uses forward contracts from time to time to +address foreign currency risk related to certain transactions denominated +in the Euro currency. These contracts are used to fix the exchange rate +in converting Euros to US dollars. Gains and losses on such contracts are +recorded in other income and expense in the accompanying consolidated +statements of operations. As of September 30, 2003, Meridian had one such +contract outstanding with a notional amount of 300,000 Euros and a +maturity of December 2003. +(m) +Supplemental Cash flow Information – Supplemental cash flow information +is as follows for fiscal 2003, 2002 and 2001 (amounts in thousands): +Year Ended September 30, +2003 +2002 +2001 +Cash paid (received) for - +Income taxes +$ +1,558 +$ +242 +$ +(4,242 +) +Interest +1,729 +2,113 +2,447 +Non-cash items - +Capital lease financing +— +— +214 +Viral Antigens earnout obligation +463 +1,407 +800 +(n) +New Accounting Pronouncements +– During December 2002, the Financial +Accounting Standards Board issued Statement No. 148, Accounting for +Stock-Based Compensation – Transition and Disclosure, an Amendment of FASB +Statement No. 123 . Statement No. 148 provides alternative methods of +transition for an entity that voluntarily changes to the fair value based +method of accounting for stock-based compensation. Meridian accounts for +its stock-based compensation plans under Accounting Principles Board +Opinion No. 25, in which compensation expense is determined based on +intrinsic value. Meridian continually evaluates its accounting policies, +including those governing stock-based compensation, and at this time +believes it is appropriate to continue accounting for employee stock-based +compensation under APB No. 25, consistent with historical practice. +-43- +Table of Contents +No compensation cost, to date, has been recognized for options granted to +employees. Had compensation cost for these plans been determined using the +fair-value method, Meridian’s net income and earnings per share would have +been reduced to the following pro forma amounts (amounts in thousands, +except per share data): +2003 +2002 +2001 +Net income (loss) as reported +$ +7,018 +$ +5,031 +$ +(10,275 +) +Stock-based compensation included in net income +as reported, after tax +9 +30 +9 +Pro forma fair value of stock options, after tax +(597 +) +(451 +) +(613 +) +Pro forma net income (loss) +$ +6,430 +$ +4,610 +$ +(10,879 +) +Basic EPS as reported +$ +0.48 +$ +0.34 +$ +(0.70 +) +Stock-based compensation included in net income +as reported, after tax +— +— +— +Pro forma fair value of stock options, after tax +(0.04 +) +(0.02 +) +(0.05 +) +Pro forma basic EPS +$ +0.44 +$ +0.32 +$ +(0.75 +) +Diluted EPS as reported +$ +0.47 +$ +0.34 +$ +(0.70 +) +Stock-based compensation included in net income +as reported, after tax +— +— +— +Pro forma fair value of stock options, after tax +(0.04 +) +(0.03 +) +(0.05 +) +Pro forma diluted EPS +$ +0.43 +$ +0.31 +$ +(0.75 +) +The fair value of each option grant is estimated on the date of grant using the +Black-Scholes option-pricing model with the following weighted-average +assumptions: +Year Ended September 30, +2003 +2002 +2001 +Risk-free interest rates +2.9%-3.8 +% +4.0%-5.3 +% +4.4%-6.0 +% +Dividend yield +3.6%-6.3 +% +4.1%-6.0 +% +3.0%-10.4 +% +Life of option +8.5 yrs. +8 yrs. +8 yrs. +Share price volatility +56%-57 +% +56%-57 +% +46%-57 +% +During November 2002, the FASB issued Interpretation No. 45, Guarantor’s +Accounting and Disclosure Requirements for Guarantees, Including Direct +Guarantees of Indebtedness of Others . Interpretation No. 45 clarifies the +requirements of FASB Statement No. 5 relating to a guarantor’s accounting +for, and disclosure of, the issuance of certain types of guarantees. +Meridian’s adoption of Interpretation No. 45 has had no impact on results of +operations or financial condition. +-44- +Table of Contents +(3) FDA Matters +During January 2001, the FDA completed an inspection of Meridian’s +compliance with the Quality Systems Regulations that govern the +manufacturing of in vitro diagnostics. In response to this inspection, in +January 2001, Meridian submitted a comprehensive plan to the FDA outlining +specific steps it committed to undertake to improve its quality systems. In +June 2001, Meridian received a Warning Letter from the FDA which summarized +and reiterated certain of the observations made by the FDA during their +inspection completed in January 2001. +In August 2002, the FDA completed an on-site follow-up inspection to its +January 2001 inspection. The FDA issued several observations, primarily +aimed at fine-tuning established quality control systems and procedures. +Meridian submitted written corrective action plans to address these +refinements and continues its periodic communications with the FDA on the +progress of its comprehensive plan submitted to the FDA in January 2001. +In accordance with the FDA’s directive in the Warning Letter, Meridian is +required to undergo three annual independent audits to evaluate Meridian’s +progress implementing its comprehensive plan. The first audit was +completed in November 2001. The second audit was completed in May 2003. +The reports from these audits substantiated Meridian’s continued progress in +addressing issues raised in the prior FDA and independent audits. Meridian +responded to the latest observations and recommendations with corrective +actions designed to further improve its established quality control systems +and procedures. +At present, it is uncertain whether Meridian’s actions will be sufficient so +that no further remedial action or enforcement action by the FDA will occur. +During fiscal 2001, Meridian incurred costs and asset impairment charges in +the amount of $15,074,000 related to implementation of its comprehensive +plan submitted to the FDA and the discontinuance of manufacturing and +distributing approximately 30 products. Of this amount, $2,322,000 related +to implementation costs of the comprehensive plan, primarily consulting +fees. The remaining $12,752,000 related to asset impairment charges and +product recall costs. Impaired assets included inventory ($4,000,000) and +certain intangibles ($7,569,000). Impaired intangible assets included +manufacturing technologies, core products, customer lists and goodwill +related to the discontinued products. Impairment amounts were measured by +comparing discounted future cash flow projections to the net book value of +the assets. These impairment charges related to the US Diagnostics +operating segment. +-45- +Table of Contents +(4) European Restructuring +During the fourth quarter of fiscal 2000, a plan was implemented to +restructure European distribution operations and improve operating results. +Effective October 1, 2000, the European export business was transferred from +Germany to Belgium. During the second quarter of fiscal 2001, Meridian +completed the transfer of the German in-country business to an independent +distributor. Total costs for the European restructuring plan were +$2,310,000, including $800,000 recognized in the fourth quarter of fiscal +2000. Restructuring costs included severance, future lease costs and asset +writedowns for accounts receivable, fixed assets and certain intangible +assets. The reserve for restructuring costs at September 30, 2003 was +$103,000 and related to remaining severance obligations not yet paid and +professional fees. During fiscal 2003, provisions to the reserve were +$98,000 and payments against the reserve were $94,000, both relating +primarily to severance obligations and professional fees. The restructuring +plan is complete and Meridian does not expect to incur additional +restructuring costs. +(5) Inventories +Inventories are comprised of the following (amounts in thousands): +As of September 30, +2003 +2002 +Raw materials +$ +3,896 +$ +3,578 +Work-in-process +5,329 +4,745 +Finished goods +4,841 +4,412 +$ +14,066 +$ +12,735 +(6) Bank Credit Arrangements +Meridian has a $25,000,000 credit facility with a commercial bank. This +facility includes $5,000,000 of term debt and capital lease capacity and a +$20,000,000 revolving line of credit which bears interest at a LIBOR based +rate, and expires in September 2004. This line of credit is collateralized +by Meridian’s business assets except for those of the Viral Antigens +subsidiary and non-domestic subsidiaries. Borrowings of $463,000 and +$2,945,000 were outstanding on this line of credit at September 30, 2003 and +2002, respectively, at weighted average interest rates of 2.4% and 3.1%, +respectively. Available borrowings under this line of credit were +$19,537,000 at September 30, 2003. In connection with this bank credit +arrangement, Meridian is required to comply with financial covenants that +limit the amount of debt obligations, require a minimum amount of tangible +net worth, and require a minimum amount of fixed charge coverage. Meridian +is in compliance with all covenants. Meridian is also required to maintain a +cash compensating balance with the bank in the amount of $600,000 pursuant +to this bank credit arrangement. +-46- +Table of Contents +(7) Long-Term Obligations +(a) Long-term debt obligations are comprised of the following (amounts in +thousands): +As of September 30, +2003 +2002 +Convertible subordinated debentures, unsecured, 7% +interest payable semi-annually on March 1 and +September 1, principal due September 1, 2006 +$ +20,000 +$ +20,000 +Bank term loan, denominated in Euro, interest based +on Euro LIBOR (2.92 % at September 30, 2003), +quarterly payments of $118,791, matures in June +2006 +1,306 +1,508 +Bank term loan, denominated in Euro, interest based +on Euro LIBOR (2.89% at September 30, 2003), +quarterly payments of $80,381, matures in June 2006 +928 +2,381 +Bank loan, interest at US LIBOR (3.82 % at +September 30, 2002), repaid in fiscal 2003 +— +62 +Other debt obligations +150 +618 +22,384 +24,569 +Less current portion +(879 +) +(943 +) +$ +21,505 +$ +23,626 +Maturities of long-term debt and capital lease obligations for fiscal 2004, +fiscal 2005 and fiscal 2006 are $879,000, $865,000 and $20,640,000, +respectively. +Meridian’s debentures are convertible into common stock at $16.09 per share. +These debentures were issued at par and do not have a discount feature. +Meridian believes that the carrying value of these debentures approximates fair +value. The accompanying consolidated balance sheet includes offering costs +which have been deferred and are being amortized over the life of the +debentures. The net amount of such costs was $382,000 and $517,000 at +September 30, 2003 and 2002 (net of accumulated amortization of $947,000 and +$812,000, respectively). +During November 2003, Meridian commenced an offer to exchange $16,000,000 of +its 7% convertible subordinated debentures for an equal principal amount of new +convertible subordinated debentures that mature September 1, 2013 and bear +interest at 5%. The exchange offer expires December 30, 2003. The new +debentures will be convertible into Meridian’s common stock at a price of +$14.50 per share. Subsequent to a successful exchange of $16,000,000 of its +convertible subordinated debentures, Meridian expects to redeem the remaining +$4,000,000 at par through the revolving credit facility. These measures are +expected to reduce annual interest expense by approximately $500,000. Upon +completion of the exchange offer and redemptions, the remaining carrying value +of unamortized debt issuance costs related to the 7% convertible subordinated +debentures, $382,000 at September 30, 2003, will be charged to expense. +-47- +Table of Contents +(8) Income Taxes +(a) Earnings before income taxes, and the related provision for income taxes +for the years ended September 30, 2003, 2002 and 2001 were as follows (in +thousands): +Year Ended September 30, +2003 +2002 +2001 +Earnings (loss) before income taxes - +Domestic +$ +9,055 +$ +6,979 +(15,206 +) +Foreign +2,536 +1,264 +300 +Total +$ +11,591 +$ +8,243 +$ +(14,906 +) +Provision (credit) for income taxes - +Federal – +Current provision +$ +1,319 +$ +— +$ +— +Temporary differences +Fixed asset basis differences and depreciation +(107 +) +(108 +) +39 +Intangible asset basis differences and amortization +(119 +) +(213 +) +(2,890 +) +Currently non-deductible expenses and reserves +136 +(149 +) +203 +Currency translation +17 +(31 +) +178 +Abandoned acquisition costs +412 +(412 +) +— +Net operating loss carryforwards +1,368 +3,248 +(1,853 +) +Other, net +(97 +) +(75 +) +(17 +) +Subtotal +2,929 +2,260 +(4,340 +) +State and local +581 +438 +(731 +) +Foreign +1,063 +514 +440 +Total +$ +4,573 +$ +3,212 +$ +(4,631 +) +(b) The following is a reconciliation between the statutory US income tax rate +and the effective rate derived by dividing the provision for income taxes by +earnings before income taxes (dollars in thousands): +Year Ended September 30, +2003 +2002 +2001 +Computed income taxes at statutory rate +$ +3,941 +34.0 +% +$ +2,802 +34.0 +% +$ +(5,068 +) +(34.0 +%) +Increase (decrease) in taxes resulting from - +Goodwill amortization and impairment +— +— +— +— +414 +2.8 +Acquired in-process research and +development +— +— +— +— +275 +1.8 +State and local income taxes +385 +3.3 +295 +3.6 +(472 +) +(3.2 +) +Subpart F income taxes +384 +3.3 +228 +2.8 +— +— +Foreign taxes +197 +1.7 +168 +2.0 +73 +0.5 +Extra territorial income exclusion +(197 +) +(1.7 +) +(170 +) +(2.1 +) +(85 +) +(0.6 +) +Valuation allowance +(25 +) +(0.2 +) +(52 +) +(0.6 +) +588 +4.0 +Other, net +(112 +) +(0.9 +) +(59 +) +(0.7 +) +(356 +) +(2.4 +) +$ +4,573 +39.5 +$ +3,212 +39.0 +$ +(4,631 +) +(31.1 +) +-48- +Table of Contents +(c) The components of net deferred tax liabilities were as follows (amounts in +thousands): +As of September 30, +2003 +2002 +Deferred tax assets - +Valuation reserves and non-deductible expenses +$ +568 +$ +967 +Net operating loss carryforwards – foreign +2,245 +2,151 +Abandoned acquisition costs +— +459 +Foreign tax credits +193 +173 +Fixed asset basis differences and depreciation +16 +(125 +) +Other +10 +— +Subtotal +3,032 +3,625 +Less valuation allowance +2,160 +1,706 +Deferred tax assets +872 +1,919 +Deferred tax liabilities - +Intangible asset basis differences and amortization +(2,068 +) +(2,201 +) +Inventory basis differences +(309 +) +(338 +) +Other +(380 +) +(221 +) +Deferred tax liabilities +(2,757 +) +(2,760 +) +Net deferred tax liability +$ +(1,885 +) +$ +(841 +) +For income tax purposes, Meridian has tax benefits related to operating loss +carryforwards in Belgium and France. The operating loss carryforward in Belgium +has no expiration. The operating loss carryforward in France expires between +2004 and 2008. Meridian has recorded deferred tax assets for these +carryforwards, inclusive of valuation allowances in the amount of $85,000 at +September 30, 2003. Valuation allowances for pre-acquisition net operating +loss carryforwards amount to $1,027,000, while valuation allowances for +post-acquisition net operating loss carryforwards are $1,133,000. If tax +benefits are recognized in future years for pre-acquisition operating losses, +such benefits will be allocated to reduce goodwill and acquired intangible +assets. The valuation allowance recorded against deferred tax assets at +September 30, 2002 was $1,706,000, and related solely to operating loss +carryforwards in foreign jurisdictions. +The realization of deferred tax assets in foreign jurisdictions is dependent +upon the generation of future taxable income in certain European countries. +Management has considered the levels of currently anticipated pre-tax income in +foreign jurisdictions in assessing the required level of the deferred tax asset +valuation allowance. Taking into consideration historical and current +operating results, and other factors, management believes that it is more +likely than not that the net deferred tax asset for foreign jurisdictions, +after consideration of the valuation allowance which has been established, will +be realized. The amount of the net deferred tax asset considered +-49- +Table of Contents +realizable in foreign jurisdictions, however, could be reduced in future years +if estimates of future taxable income during the carryforward period are +reduced. +Undistributed earnings re-invested indefinitely in the Italian operation were +approximately $6,765,000 at September 30, 2003. US deferred tax liabilities of +approximately $2,571,000 on such earnings have not been recorded. Management +believes that such US taxes would be largely offset by foreign tax credits for +taxes paid in applicable foreign jurisdictions. +(9) Employee Benefits +(a) +Savings and Investment Plan - Meridian has a profit sharing and +retirement savings plan covering substantially all full-time employees. +Profit sharing contributions to the plan, which are discretionary, are +determined by the Board of Directors. The plan permits participants to +contribute to the plan through salary reduction. Under terms of the plan, +Meridian will match up to 3% of an employee’s contributions. Discretionary +and matching contributions by Meridian to the plan amounted to +approximately $728,000, $665,000, and $265,000, during fiscal 2003, 2002 +and 2001, respectively. +(b) +Stock-Based Compensation Plans +– Meridian has two active stock based +compensation plans, the 1996 Stock Option Plan Amended and Restated +effective January 23, 2001 (“The 1996 Plan”), the 1999 Directors’ Stock +Option Plan (“The 1999 Plan”), and an Employee Stock Purchase Plan (“The +ESP Plan”) which became effective October 1, 1997. +Meridian may grant options for up to 1,200,000 shares under the 1996 Plan +and 50,000 shares under the 1999 Plan. Meridian has granted 1,198,467 +options under the 1996 Plan and 35,755 shares under the 1999 plan through +September 30, 2003. Options may be granted at exercise prices varying from +95% to 110% of the market value of the underlying common stock on the date +of grant and have maximum terms up to ten years. Vesting schedules are +established at the time of grant and may be set based on future service +periods, achievement of performance targets or a combination thereof. All +options contain provisions restricting their transferability and limiting +their exercise in the event of termination of employment or the disability +or death of the optionee. Meridian has granted options for 1,020,414 shares +under similar plans that have expired. +Effective October 1, 1997, Meridian may sell shares of stock to its +full-time and part-time employees under the ESP Plan up to the number of +shares equivalent to a 1% to 15% payroll deduction from an employee’s base +salary plus an additional 5% dollar match of this deduction by Meridian. +-50- +Table of Contents +A summary of the status of Meridian’s stock option plans at September 30, 2003, +2002 and 2001 and changes during the years then ended is presented in the +tables and narrative below: +Year Ended September 30, +2003 +2002 +2001 +Wtd +Wtd +Wtd +Avg Ex +Avg Ex +Avg Ex +Shares +Price +Shares +Price +Shares +Price +Outstanding beginning of period +1,251,974 +$ +7.00 +1,062,828 +$ +7.38 +837,394 +$ +8.06 +Grants +164,668 +6.71 +244,868 +4.84 +295,218 +5.42 +Exercises +(93,324 +) +5.12 +(35,649 +) +4.25 +(10,881 +) +1.45 +Expirations and forfeitures +(106,773 +) +6.07 +(20,073 +) +5.52 +(58,903 +) +7.83 +Outstanding end of period +1,216,545 +$ +7.13 +1,251,974 +$ +7.00 +1,062,828 +$ +7.38 +Exercisable end of period +685,192 +$ +8.25 +709,566 +$ +8.13 +609,033 +$ +8.08 +Weighted average fair value of grants +$ +2.60 +$ +1.67 +$ +2.14 +The range of exercise prices, the weighted average exercise price and the +weighted average remaining contractual life is summarized below for options +which are outstanding and those that are exercisable at September 30, 2003. +Options Outstanding +Options Exercisable +Wtd Avg +Options +Remaining +Wtd Avg +Options +Wtd Avg +Range of Exercise Prices +Outstanding +Life (Yrs.) +Ex Price +Outstanding +Ex Price +$1.00 - $5.00 +271,192 +7.8 +$ +4.17 +30,492 +$ +3.04 +$5.01 - $10.00 +757,877 +5.9 +6.94 +474,024 +7.05 +$10.01 - $16.00 +187,476 +4.2 +12.19 +180,676 +12.27 +1,216,545 +6.1 +$ +7.13 +685,192 +$ +8.25 +Subsequent to year-end 107,000 stock options were granted which would have had +no significant impact on the diluted EPS, if granted prior to year-end. +(10) Major Customers and Segment Data +Meridian was formed in 1976 and functions as a fully integrated research, +development, manufacturing, marketing and sales organization with primary +emphasis in the field of life science. Meridian’s principal businesses are (i) +the development, manufacture and distribution of diagnostic test kits primarily +for certain respiratory, gastrointestinal, viral and parasitic infectious +diseases, (ii) the manufacture and distribution of bulk +-51- +Table of Contents +antigens and reagents used by researchers and other diagnostic manufacturers +and (iii) the contract manufacture of proteins and other biologicals for use by +biopharmaceutical and biotechnology companies engaged in research for new +drugs and vaccines. +As a result of changes that occurred in February 2003 in the organization and +management of Meridian’s businesses, effective with the quarter beginning +January 1, 2003, Meridian changed its reportable operating segments to US +Diagnostics (formerly referred to as Meridian Bioscience, Inc. or MBI), +European Diagnostics (formerly referred to as Meridian Bioscience Europe or +MBE) and Life Science. The US Diagnostics operating segment consists of +manufacturing operations in Cincinnati, Ohio, and the sale and distribution of +diagnostic test kits in the US and countries outside of Europe, Africa and the +Middle East. The European Diagnostics operating segment consists of the sale +and distribution of diagnostic test kits in Europe, Africa and the Middle East. +The Life Science operating segment consists of manufacturing operations in +Memphis, Tennessee and Saco, Maine, and the sale and distribution of bulk +antigens, antibodies and bioresearch reagents domestically and abroad. The +Life Science operating segment consists of the Viral Antigens and BIODESIGN +subsidiaries (formerly part of the Meridian Bioscience, Inc. operating +segment), including the protein production laboratory. +Sales to individual customers constituting 10% or more of net consolidated +sales were as follows (dollars in thousands): +Year Ended September 30, +2003 +2002 +2001 +Customer A +$ +9,089 +(14 +%) +$ +8,479 +(14 +%) +$ +7,990 +(14 +%) +Customer B +6,408 +(10 +%) +6,526 +(11 +%) +$ +5,124 +(9 +%) +Combined export sales for the US Diagnostics and Life Science operating +segments were $9,464,000, $6,073,000 and $5,702,000 in fiscal years 2003, 2002 +and 2001, respectively. Two products accounted for 20% of total sales in +fiscal 2003. Accounts receivable, which are largely dependent upon funds from +the Italian government, represent approximately 34% of the accounts receivable +balance at September 30, 2003. +Significant country information for the European Diagnostics operating segment +is as follows (in thousands). Sales are attributed to the geographic area +based on the location from which the product is shipped to the customer. +Year Ended September 30, +2003 +2002 +2001 +Italy - +Sales +$ +5,354 +$ +4,694 +$ +4,864 +Identifiable assets +6,124 +5,978 +6,498 +Belgium - +Sales +$ +8,402 +$ +7,226 +$ +7,557 +Identifiable assets +4,158 +4,034 +5,150 +-52- +Table of Contents +As required by Financial Accounting Standards Board Statement No. 131, +Disclosures About Segments of an Enterprise and Related Information, prior year +operating information in the following table has been reclassified to conform +with the change in operating segments described above. Segment information for +the years ended September 30, 2003, 2002, and 2001 is as follows (in +thousands): +US +European +Life +Diagnostics +Diagnostics +Science +Elim (1) +Total +Fiscal Year 2003 - +Net sales – +Third-party +$ +39,906 +$ +13,756 +$ +12,202 +$ +— +$ +65,864 +Inter-segment +5,155 +79 +939 +(6,173 +) +— +Operating income +8,375 +2,717 +1,676 +21 +12,789 +Depreciation and amortization +2,820 +150 +810 +— +3,780 +Capital expenditures +1,324 +55 +433 +— +1,812 +Total assets +63,941 +10,489 +22,232 +(30,242 +) +66,420 +Fiscal Year 2002 - +Net sales – +Third-party +$ +34,171 +$ +11,920 +$ +13,013 +$ +— +$ +59,104 +Inter-segment +4,992 +— +735 +(5,727 +) +— +Operating income +5,514 +1,565 +2,896 +19 +9,994 +Depreciation and amortization +2,827 +171 +721 +— +3,719 +Capital expenditures +1,080 +46 +2,424 +— +3,550 +Total assets +63,708 +10,229 +21,293 +(30,135 +) +65,095 +Fiscal Year 2001 - +Net sales - +Third-party +$ +32,557 +$ +12,421 +$ +11,549 +$ +— +$ +56,527 +Inter-segment +5,380 +— +689 +(6,069 +) +— +Operating income (loss) +(13,444 +) +(725 +) +1,880 +(218 +) +(12,507 +) +Depreciation and amortization +3,939 +153 +654 +— +4,746 +Capital expenditures +1,073 +136 +714 +— +1,923 +Total assets +66,611 +11,239 +17,447 +(29,315 +) +65,982 +(1) Eliminations consist of intersegment transactions. +-53- +Table of Contents +Year Ended September 30, +2003 +2002 +2001 +Segment operating income (loss) +$ +12,789 +$ +9,994 +$ +(12,507 +) +Interest income +42 +38 +166 +Interest expense +(1,718 +) +(1,974 +) +(2,546 +) +Other, net +478 +185 +(19 +) +Consolidated earnings (loss) +before income taxes +$ +11,591 +$ +8,243 +$ +(14,906 +) +The accounting policies of the segments are the same as those described in the +summary of significant accounting policies in Note 2. Transactions between +geographic segments are accounted for at established intercompany prices for +internal and management purposes with all intercompany amounts eliminated in +consolidation. Total assets for the US Diagnostics and Life Science operating +segments include goodwill and other intangible assets of $9,526,000 and +$5,672,000, respectively at September 30, 2003, $10,555,000 and $5,402,000, +respectively at September 30, 2002, and $11,645,000 and $4,117,000, +respectively at September 30, 2001. +(11) Commitments and Contingencies +(a) +Royalty Commitments - Meridian has entered into various license agreements +that require payment of royalties based on a specified percentage of the +sales of licensed products (1% to 8%). These royalty expenses are +recognized on an as-earned basis and recorded in the year earned as a +component of cost of sales. Annual royalty expenses associated with these +agreements were approximately $766,000 $860,000, and, $699,000, +respectively, for the years ended September 30, 2003, 2002 and 2001. +For one of these license agreements, Meridian is engaged in a dispute with +the licensor regarding the payment of royalties. The licensor has claimed +additional royalties due from Meridian in the amount of approximately +$700,000. Meridian believes that it has satisfactorily complied with all +provisions of this license agreement, and therefore, disputes this claim. +In addition, Meridian believes that it has valid claims against the licensor +under this agreement. This matter is not expected to have a material effect +on results of operations or financial condition. +(b) +Litigation – During fiscal 2003, Meridian reached a settlement with a +former employee regarding his breach of an employment agreement, +misappropriation of company trade secrets and related legal proceedings. +This settlement provided that Meridian receive proceeds from the +disposition of certain personal assets of the former employee. The amount +of such proceeds was $216,000, and is included in other income in the +accompanying consolidated statement of operations for fiscal 2003. Legal +proceedings for these matters +-54- +Table of Contents +have been on-going since June 2000. Legal fees related to these matters +amounted to $60,000, $150,000, $440,000 and $450,000 in fiscal 2003, 2002, +2001 and 2000, respectively. During fiscal 2003, Meridian received +insurance reimbursement in the amount of $187,000 for a portion of these +legal fees. This insurance reimbursement is recorded in general and +administrative expenses in the accompanying consolidated statement of +operations for fiscal 2003. +Meridian is a party to other litigation that it believes is in the normal +course of business. The ultimate resolution of these matters is not +expected to have a material adverse effect on Meridian’s financial position, +results of operations or cash flows. +(c) +Viral Antigens Earnout +The purchase agreement for the Viral Antigens purchase business combination +provides for additional consideration, up to a maximum remaining amount of +$5,475,000, contingent upon Viral Antigens’ future earnings through +September 30, 2006. Earnout consideration is payable each year following +the period earned. During fiscal 2003, 2002 and 2001, additional +consideration of $463,000, $1,407,000 and $905,000, respectively, was earned +pursuant to this provision. Such amounts are included in goodwill in the +accompanying consolidated balance sheets. Future earnout consideration, if +any, will be allocated to goodwill, and will be recorded in the period in +which it is earned and becomes payable. +-55- +Table of Contents +(12) Quarterly Financial Data (Unaudited) +Amounts are in thousands except per share data. The sum of the earnings per +common share and cash dividends per share may not equal the corresponding +annual amounts due to interim quarter rounding. +For the Quarter Ended in Fiscal 2003 +December 31 +March 31 +June 30 +September 30 +Net sales +$ +16,103 +$ +16,913 +$ +15,693 +$ +17,155 +Gross profit +9,162 +10,061 +9,130 +9,935 +Net earnings +1,424 +1,923 +1,822 +1,849 +Basic earnings per common share +0.10 +0.13 +0.12 +0.13 +Diluted earnings per common share +0.10 +0.13 +0.12 +0.12 +Cash dividends per common share +0.07 +0.09 +0.09 +0.09 +For the Quarter Ended in Fiscal 2002 +December 31 +March 31 +June 30 +September 30 +Net sales +$ +13,555 +$ +15,092 +$ +14,898 +$ +15,559 +Gross profit +8,011 +8,659 +8,572 +9,356 +Net earnings +1,187 +1,425 +1,556 +863 +Basic earnings per common share +0.08 +0.10 +0.11 +0.06 +Diluted earnings per common share +0.08 +0.10 +0.11 +0.06 +Cash dividends per common share +0.07 +0.07 +0.07 +0.07 +Net earnings for the fourth quarter of fiscal 2002 include a charge of +$751,000, or $0.05 per diluted share, for costs of the abandoned Biotrin +acquisition. +ITEM 9. +CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS +ON ACCOUNTING AND FINANCIAL DISCLOSURE +There were no disagreements on accounting and financial disclosure in the +past fiscal year. The information required by Item 9 of Part II is +incorporated by reference into the Registrant’s Proxy Statement for its 2004 +Annual Shareholders Meeting to be filed with the Commission pursuant to +Regulation 14A. +ITEM 9A. +CONTROLS AND PROCEDURES +As of September 30, 2003, an evaluation was completed under the supervision and +with the participation of Meridian’s management, including Meridian’s Chief +Executive Officer and Chief Financial Officer, of the effectiveness of the +design and operation of Meridian’s disclosure controls and procedures pursuant +to Rule 13a-15(b) and 15(d)-15(b) promulgated under the Securities Exchange Act +of 1934, as amended. Based on that +-56- +Table of Contents +evaluation, Meridian’s management, including the CEO and CFO, concluded that +Meridian’s disclosure controls and procedures were effective as of September +30, 2003. There have been no changes in Meridian’s internal controls over +financial reporting identified in connection with the evaluation of internal +controls that occurred during the last fiscal quarter that has materially +affected, or is reasonably likely to affect, Meridian’s internal controls over +financial reporting, or in other factors that could significantly affect +internal controls subsequent to September 30, 2003. +PART III +The information required by Items 10., 11., 12., and 13., of Part III are +incorporated by reference from the Registrant’s Proxy Statement for its 2004 +Annual Shareholders’ Meeting to be filed with the Commission pursuant to +Regulation 14A. The equity compensation plan chart required by Regulation S-K +Item 201(d) appears in and is hereby incorporated by reference from Item 5 of +this Form 10-K. Because Meridian’s fiscal year ended prior to December 15, +2003, no disclosure is being provided with respect to Item 14. +-57- +Table of Contents +ITEM 15. +EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K +(a) +(1) and (2) FINANCIAL STATEMENTS AND SCHEDULES. +All financial statements and schedules required to be filed by Item 8 of this +Form and included in this report have been listed previously under Item 8. No +additional financial statements or schedules are being filed since the +requirements of paragraph (d) under Item 15 are not applicable to Meridian. +(a) +(3) EXHIBITS. +Exhibit Number +Description of Exhibit +Filing Status +3.1 +Articles of Incorporation, including amendments +not related to Company name change +A +3.2 +Code of Regulations +B +4.1 +Indenture between Meridian and Star Bank, National +Association, as Trustee, relating to Meridian’s 7% +Convertible Subordinated Debentures due 2006 +C +4.2 +Indenture between Meridian and LaSalle Bank +National Association, as Trustee, relating to +Meridian’s 5% Convertible Subordinated Debentures +due 2013 +D +10.3 +License Agreement dated October 6, 1983 with +Marion Laboratories, Inc. +B +10.5 +Sublicense Agreement dated June 17, 1993 among +Johnson & Johnson, the Scripps Research Institute +and Meridian Concerning certain Patent Rights +E +10.6 +Assignment dated June 17, 1993 from Ortho +Diagnostic Systems Inc. to Meridian concerning +certain Patent Rights +E +10.7 +Agreement dated January 24, 1994 between Meridian +Diagnostics, Inc. and Immulok, Inc. +F +10.8 +Asset Purchase Agreement dated June 24, 1996 +between Cambridge Biotech Corporation and Meridian +Diagnostics, Inc. +G +10.9 +Merger Agreement among Gull Laboratories, Inc., +Meridian Diagnostics, Inc. Fresenius AG and +Meridian Acquisition Co. dated as of September 15, +1998 +H +10.10* +Savings and Investment Plan Prototype Adoption +Agreement +Filed herewith +10.12* +1986 Stock Option Plan +I +10.14* +1994 Directors’ Stock Option Plan +J +10.15* +1996 Stock Option Plan +K +10.16* +Salary Continuation Agreement for John A. Kraeutler +L +10.17 +First Amendment to Merger Agreement Among Gull +Laboratories, Inc., Meridian Diagnostics, Inc. +Fresenius AG and Meridian Acquisition Co. +M +-58- +Table of Contents +Exhibit Number +Description of Exhibit +Filing Status +10.18* +1999 Directors’ Stock Option Plan +N +10.20 +Dividend Reinvestment Plan +P +10.21 +Merger Agreement dated September 13, 2000 among +Meridian and the Shareholders of Viral +Antigens, Inc. +O +10.22 +Loan and Security Agreement among Meridian, +certain of its subsidiaries and Fifth Third +Bank Dated as of September 20, 2001 +R +10.23* +Employment Agreement Dated February 15, 2001 +between Meridian and John A. Kraeutler, +including the Addendum to Employment Agreement +dated April 24, 2001 between Meridian and John +A. Kraeutler +R +10.24* +Sample Option Agreement Dated October 1, 2001 +R +10.25* +Sample Option Agreement Dated October 1, 2001 +R +10.26* +1996 Stock Option Plan as Amended and Restated +Effective January 23, 2001 +Q +10.27 +Sample Option Agreement Dated November 19, 2002 +Filed herewith +10.28 +Agreement Concerning Disability and Death dated +September 10, 2003, between Meridian and +William J. Motto +Filed herewith +10.29 +Professional Services Agreement dated October +1, 2002 between Meridian and Antonio Interno +Filed herewith +13 +2003 Annual Report to Shareholders +(1) +14 +Code of Ethics +Filed herewith +21 +Subsidiaries of the Registrant +Filed herewith +23 +Consent of Independent Accountants +Filed herewith +31.1 +Certification of Principal Executive Officer +required by Rule 13a-14(a) +Filed herewith +31.2 +Certification of Principal Financial Officer +required by Rule 13a-14(a) +Filed herewith +32 +Section 1350 Certification of Chief Executive +Officer and Chief Financial Officer +Filed herewith +(1) Only portions of the 2003 Annual Report to Shareholders specifically are +incorporated by reference in this Form 10-K as filed herewith. A supplemental +paper copy of the 2003 Annual Report to Shareholders has been provided to the +Securities and Exchange Commission for informational purposes only. +-59- +Table of Contents +*Management Compensatory Contracts +Incorporated by reference to: +A. +Registration Statement No. 333-02613 on Form S-3 filed with the +Securities and Exchange Commission on April 18, 1996. +B. +Registration Statement No. 33-6052 filed under the Securities Act of +1933. +C. +Registration Statement No. 333-11077 on Form S-3 filed with the +Securities and Exchange Commission on August 29, 1996. +D. +Meridian’s Schedule T-O filed with the Securities and Exchange Commission on +October 24, 2003. +E. +Meridian’s Form 8-K filed with the Securities and Exchange Commission on +June 17, 1993. +F. +Meridian’s Forms 8-K filed with the Securities and Exchange Commission on +February 8, 1994 and April 6, 1994. +G. +Meridian’s Form 8-K filed with the Securities and Exchange Commission on +July 2, 1996. +H. +Meridian’s Form 8-K filed with the Securities and Exchange Commission on +September 17, 1998. +I. +Registration Statement No. 33-89214 on Form S-8 filed with the Securities +and Exchange Commission on April 5, 1995. +J. +Registration Statement No. 33-78868 on Form S-8 filed with the Securities +and Exchange Commission on May 12, 1994. +K. +Meridian’s Annual Report on Form 10-K for the Fiscal Year Ended September +30, 1996. +L. +Meridian’s Annual Report on Form 10-K for the Fiscal Year Ended September +30, 1995. +M. +Company’s Report on Form 8-K filed with the Securities and Exchange +Commission filed on November 13, 1998. +N. +Meridian’s Proxy Statement filed with the Securities and Exchange +Commission on December 21, 1998. +O. +Meridian’s Current Report on Form 8-K dated September 29, 2000. +P. +Meridian’s Annual Report on Form 10-K for the Fiscal Year Ended September +30, 1999. +Q. +Registration Statement No. 333-75312 on Form S-8 filed with the +Securities and Exchange Commission on December 17, 2001 +R. +Meridian’s Annual Report on Form 10-K for the Fiscal Year Ended September +30, 2001. +(b) +REPORTS ON FORM 8-K. +Report on Form 8-K dated September 25, 2003, Item 5, reports change in +operating segments +• +Annual Report on Form 10-K for the year ended September +30, 2002, Part II, Item 8, Financial Statements and Supplementary +Data +• +Quarterly Report on Form 10-Q for the quarter ended +December 31, 2002, Part I, Item 1, Financial Statements +-60- +Table of Contents +SIGNATURES +Pursuant to the requirements of Section 13 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. +MERIDIAN BIOSCIENCE, INC. +By: +/s/ William J. Motto +Date: December 22, 2003 +William J. Motto +Chairman of the Board +and Chief Executive Officer +-61- +Table of Contents +Pursuant to the requirements of the Securities Exchange Act of 1934, this +report has been signed by the following persons on behalf of the Registrant and +in the capacities and on the dates indicated. +Signature +Capacity +Date +/s/ William J. Motto +William J. Motto +Chairman of the Board of Directors and +Chief +Executive Officer (Principal +Executive Officer) +December 22, 2003 +/s/ John A. Kraeutler +John A. Kraeutler +President and Chief Operating +Officer, Director +December 22, 2003 +/s/ Melissa Lueke +Melissa Lueke +Vice President and Chief Financial Officer +December 22, 2003 +/s/ James A. Buzard +James A. Buzard +Director +December 22, 2003 +/s/ Gary P. Kreider +Gary P. Kreider +Director +December 22, 2003 +/s/ David C. Phillips +David C. Phillips +Director +December 22, 2003 +/s/ Robert J. Ready +Robert J. Ready +Director +December 22, 2003 +-62- +Table of Contents +SCHEDULE II +Meridian Bioscience, Inc. +and Subsidiaries +Valuation and Qualifying Accounts +(Amounts in Thousands) +Years Ended September 30, 2003, 2002 and 2001 +Charged +Balance at +to Costs +Charged +Balance +Beginning +and +to Other +at End of +Description +of Period +Expenses +Accounts +Deductions +Other (a) +Period +Year Ended September 30, 2003: +Allowance for doubtful accounts +$ +987 +$ +(268 +) +$ +— +$ +(360 +) +$ +112 +$ +471 +Inventory realizability reserves +730 +289 +— +(439 +) +5 +585 +European restructuring reserves +83 +98 +— +(94 +) +16 +103 +Year Ended September 30, 2002: +Allowance for doubtful accounts +$ +889 +$ +94 +$ +— +$ +(46 +) +$ +50 +$ +987 +Inventory realizability reserves +774 +1,399 +— +(1,443 +) +— +730 +European restructuring reserves +119 +78 +— +(119 +) +5 +83 +Year Ended September 30, 2001: +Allowance for doubtful accounts +$ +438 +$ +528 +$ +— +$ +(109 +) +$ +32 +$ +889 +Inventory realizability reserves +685 +4,486 +— +(4,498 +) +101 +774 +European restructuring reserves +800 +1,321 +— +(2,002 +) +— +119 +(a) +Balances reflect the effects of currency translation (fiscal years +2001-2003) and acquired valuation accounts related to the Viral Antigens +acquisition (fiscal year 2001). +-63- \ No newline at end of file diff --git a/raw/filings/0000794172/2003/0000950152-03-010438/filing_metadata.csv b/raw/filings/0000794172/2003/0000950152-03-010438/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..ca53151a8cb5023e9ed3075c693c3b62713dc50b --- /dev/null +++ b/raw/filings/0000794172/2003/0000950152-03-010438/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000794172,VIVO,MERIDIAN BIOSCIENCE INC,10-K,2003-12-22,2003-09-30,2003-12-22T15:34:05.000Z,0000950152-03-010438,l04579ae10vk.htm,"MERIDIAN BIOSCIENCE, INC. 10-K/FYE 9-30-2003",1159786,0,0,https://www.sec.gov/Archives/edgar/data/794172/000095015203010438/l04579ae10vk.htm,https://www.sec.gov/Archives/edgar/data/794172/000095015203010438/,2003,2003,1 diff --git a/raw/filings/0000794172/2003/0000950152-03-010438/item1.txt b/raw/filings/0000794172/2003/0000950152-03-010438/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..d54355440e821c0a0160081e0b923ec7a1bcf3da --- /dev/null +++ b/raw/filings/0000794172/2003/0000950152-03-010438/item1.txt @@ -0,0 +1,445 @@ +ITEM 1. +BUSINESS +Overview +Meridian is a fully-integrated life science company whose principal businesses +are (i) the development, manufacture, sale and distribution of diagnostic test +kits, primarily for certain respiratory, gastrointestinal, viral and parasitic +infectious diseases, (ii) the manufacture and distribution of bulk antigens and +reagents used by researchers and other diagnostic manufacturers and (iii) the +contract manufacture of proteins and other biologicals for use by +biopharmaceutical and biotechnology companies engaged in research for new drugs +and vaccines. By exploiting revenue opportunities across research, clinical +diagnostics and therapeutic areas for key biologicals, Meridian can maximize +revenues, efficiently invest in research and development and increase +profitability of manufacturing operations. +Operating Segments +As a result of changes that occurred in February 2003 in the organization and +management of Meridian’s businesses, effective with the quarter beginning +January 1, 2003, Meridian changed its reportable operating segments to US +Diagnostics (formerly referred to as Meridian Bioscience, Inc. or MBI), +European Diagnostics (formerly referred to as Meridian Bioscience Europe or +MBE) and Life Science. While the scientific foundation of these three segments +is essentially the same, the market dynamics, competitive trends, regulatory +requirements and sales and marketing approach vary substantially. The US +Diagnostics operating segment consists of research and development and +manufacturing operations in Cincinnati, Ohio, and the sale and distribution of +diagnostic test kits in the US and countries outside of Europe, Africa and the +Middle East. The European Diagnostics operating segment consists of the sale +and distribution of diagnostic test kits in Europe, Africa and the Middle East. +The Life Science operating segment consists of research and development and +manufacturing operations in Memphis, Tennessee and Saco, Maine, and the sale +and distribution of bulk antigens, antibodies and bioresearch reagents +domestically and abroad. Manufacturing operations for the Life Science +operating segment include a protein production laboratory for the contract +manufacture of proteins and other biologicals used by biopharmaceutical and +biotechnology companies in research for new drugs and vaccines. Financial +information for Meridian’s operating segments is included in Note 10 to the +consolidated financial statements contained herein. +Meridian’s primary source of revenues continues to be its core diagnostic +products. Meridian’s diagnostic products provide accuracy, simplicity and +speed, and enable early diagnosis and treatment of common, acute medical +conditions, and provide for better patient outcomes at reduced costs. Meridian +targets diagnostics for disease states that (i) are acute conditions where +rapid diagnosis impacts patient outcomes, (ii) have favorable +- 2 - +Table of Contents +demographic and disease profiles, (iii) are underserved by current diagnostic +products and (iv) have difficult sample handling requirements. This approach +has allowed Meridian to establish significant market share in its target +disease states. +Meridian expects that its Life Science operating segment will serve as a key +platform for sourcing biologicals and technologies, by acquisition or license, +for development of new products for all of Meridian’s operating segments. One +of Meridian’s specific strategies in this area is to target biologicals that +have commercial product applications across multiple markets, such as human +diagnostics, veterinary diagnostics and therapeutics. This strategy is +expected to leverage research and development resources as products can be +developed with all three markets in mind, rather than on a market-by-market +basis. +Meridian’s website is www.meridianbioscience.com. Meridian makes available its +Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on +Form 8-K and any amendments thereto, free of charge, as soon as reasonably +practicable after such material has been electronically filed with the +Securities and Exchange Commission. +US Diagnostics Operating Segment +Overview +The US Diagnostics operating segment’s business focuses on the development, +manufacture, sale and distribution of diagnostic test kits, primarily for +certain respiratory, gastrointestinal, viral and parasitic infectious diseases. +In addition to diagnostic test kits, products also include transport media +that store and preserve specimen samples from patient collection to laboratory +testing. Third-party sales for this operating segment were $39,906,000, +$34,171,000 and $32,557,000 for fiscal 2003, 2002 and 2001, respectively. As +of September 30, 2003, the US Diagnostics operating segment had 240 employees. +Meridian’s diagnostic test kits utilize immunodiagnostic technologies, which +test samples of blood, urine, stool and other body fluids or tissue for the +presence of antigens and antibodies of specific infectious diseases. Specific +immunodiagnostic technologies used in Meridian’s diagnostic test kits include +enzyme immunoassay, immunofluorescence, particle agglutination/aggregation, +immunodiffusion, complement fixation and chemical stains. The enzyme +immunoassay technology is used in multiple test formats; the Premier™ products +for large volume users and the ImmunoCard® products for single test, low volume +users. +Meridian’s diagnostic products are used principally in the detection of +respiratory diseases, such as pneumonia, valley fever, flu and RSV; +gastrointestinal diseases, such as stomach ulcers (H. pylori), antibiotic +associated diarrhea (C. difficile) and pediatric diarrhea (Rotavirus and +Adenovirus); viral diseases, such as mononucleosis, Herpes Simplex, chicken pox +and shingles (Varicella-Zoster) and Cytomegolovirus (organ transplant +infections); +- 3 - +Table of Contents +and parasitic diseases, such as Giardiasis, Cryptosporidiosis and Lyme. The +primary markets and customers for these products are reference laboratories, +hospitals and physicians’ offices. +Market Trends +The global market for infectious disease tests continues to expand as new +disease states are identified, new therapies become available and worldwide +standards of living and access to health care improve. More importantly, +within this market there is a continuing shift from conventional testing, which +requires highly trained personnel and lengthy turnaround times for test +results, to more technologically advanced testing which can be performed by +less highly trained personnel and completed in minutes or hours. These +technological advances permit accurate testing to occur outside the traditional +hospital or laboratory. +The increasing pressures to contain total health care costs have accelerated +the increased use of diagnostic testing and the market shift to alternate +sites. With rapid and accurate diagnoses of infectious diseases, physicians +can pinpoint appropriate therapies quickly, leading to faster recovery, shorter +hospital stays and less treatment expense. In addition, these pressures have +led to a major consolidation among reference laboratories and the formation of +multi-hospital alliances that have reduced the number of institutional +customers for diagnostic products and resulted in changes in buying practices. +Specifically, multi-year exclusive or primary source marketing or distribution +contracts with institutional customers have become more common, replacing less +formal distribution arrangements of shorter duration and involving lower +product volumes. +Sales and Marketing +The US Diagnostics operating segment’s sales and distribution network consists +of a direct sales force in the US and independent distributors in the US and +abroad. The direct sales force consists of three regional sales managers, one +corporate health systems manager, 21 technical sales representatives and two +inside sales representatives. Meridian utilizes two primary independent +distributors in the US, who accounted for 39% of the US Diagnostics operating +segment’s third-party sales in fiscal 2003. Meridian participates in the +selling effort for key customers where these independent distributors are +utilized. Therefore, Meridian believes that the loss of either of these +independent distributors would not have a material adverse effect on it. +Consolidation of the US healthcare industry is expected to continue and +potentially affect Meridian’s customers. Industry consolidation puts pressure +on pricing and aggregates buying power. In response, in the last four years, +Meridian has entered into, extended or renewed several exclusive multiple-year +contracts with consolidated healthcare providers and supply agreements with +major reference laboratories. +- 4 - +Table of Contents +Products and Markets +Meridian has expertise in the development and manufacture of products based on +multiple core diagnostic technologies, each of which enables the visualization +and identification of antigen/antibody reactions for specific pathogens. As a +result, Meridian is able to develop and manufacture diagnostic tests in a +variety of formats that satisfy customer needs and preferences, whether in a +hospital, commercial or reference laboratory or alternate site location. +Meridian’s product offering consists of over 200 medical diagnostic products. +Meridian’s products generally range in list price from $1 per test to $33 per +test. +Meridian’s product technologies include enzyme immunoassay, immunofluorescence, +particle agglutination/aggregation, immunodiffusion, complement fixation and +chemical stains. +Enzyme Immunoassay (EIA) – Products incorporating the EIA technology achieve +extremely high levels of accuracy in detecting disease-related antigens or +antibodies through the use of special color-based enzyme-substrate reactions. +Meridian utilizes this technology in its multiple test format, the Premier™ +product for large volume users, and in its single test formats, the +Immuno Card®, Immuno Card STAT!® and Monolert® products, for lower volume users. +Immunofluorescence – When the microscopic visualization of an antigen/antibody +reaction is necessary or desired, immunofluorescence technology is frequently +utilized. Fluorescing immunochemicals, in the presence of the target antigen +or antibody, can be viewed via a fluorescent microscope. Meridian utilizes +this technology in its Merifluor® products. +Particle Agglutination/Aggregation – This technology utilizes microparticles +(e.g., latex, red blood cells) coated with specific antigens or antibodies that +form visible aggregates in the presence of a specimen containing the +complementary antigen or antibody. This technology is rapid and economical and +is used in Meridian’s Meritec™, MeriStar® and MonoSpot® products. +Other Technologies – Meridian utilizes other technologies that include +immunodiffusion, complement fixation and chemical stains. Meridian also +manufactures and markets specimen collection, transportation, preservation and +concentration products, such as Para-Pak®, Macro-CON® and Spin-CON. +Research and Development +The US Diagnostics operating segment’s research and development organization +consists of 13 research scientists with expertise in biochemistry, immunology, +mycology, bacteriology, virology and parasitology. Research and development +expenses for the US Diagnostics operating segment for fiscal 2003, 2002 and +2001 were $2,527,000, $1,730,000 and $2,147,000, respectively. This research +and development organization focuses +- 5 - +Table of Contents +its activities on new applications for Meridian’s existing technologies, +improvements to existing products and development of new technologies. +Research and development efforts may occur in-house or with collaborative +partners. Meridian believes that internally developed products are a key +source for sustaining revenue growth. Meridian’s internally developed products +include Premier™ Platinum HpSA and Premier™ Toxins A & B, which accounted for +25% of the US Diagnostics operating segment’s third-party sales during fiscal +2003. +Manufacturing +Meridian’s immunodiagnostic products require the production of highly specific +and sensitive antigens and antibodies. Meridian produces substantially all of +its own requirements including monoclonal antibodies and polyclonal antibodies, +plus a variety of fungal, bacterial and viral antigens. Meridian believes it +has sufficient manufacturing capacity for anticipated growth. +Intellectual Property, Patents and Licenses +Meridian owns or licenses US and foreign patents for approximately 25 products +manufactured by the US Diagnostics operating segment, including Premier™ +Platinum HpSA. In the absence of patent protection, Meridian may be vulnerable +to competitors who successfully replicate Meridian’s production and +manufacturing technologies and processes. Meridian’s employees are required to +execute confidentiality and non-disclosure agreements designed to protect +Meridian’s proprietary products. Meridian believes that its products and +technologies do not infringe the proprietary rights of any third parties. +Government Regulation +Meridian’s diagnostic products are regulated by the Food & Drug Administration +as “devices” pursuant to the Federal Food, Drug and Cosmetic Act (FDCA). Under +the FDCA, medical devices are classified into one of three classes (i.e., Class +I, II or III). Class I and II devices are not expressly approved by the FDA, +but, instead, are “cleared” for marketing. Class III devices generally must +receive “pre-market approval” from the FDA as to safety and effectiveness. +A 510(k) clearance will be granted if the submitted data establishes that the +proposed device is “substantially equivalent” to an existing Class I or Class +II medical device or to a Class III medical device for which the FDA has not +required pre-market approval. The 510(k) clearance process for “substantially +equivalent” devices allows product sales to be made after the filing of an +application and upon acknowledgment by the FDA, typically within 90 to 120 days +after submission. If the FDA requests additional information, the product +cannot be sold in the US until the application has been supplemented and upon +acknowledgment by the FDA within 90 to 120 days of the supplemental +application. In practice, the FDA has been granting clearance in about 90 days +following submission of the supplemental information. If there are no existing +FDA-approved products or +- 6 - +Table of Contents +processes comparable to a diagnostic product or process, approval by the FDA +involves the more lengthy pre-market approval procedures. +Each of the diagnostic products currently marketed by Meridian in the United +States has been cleared by the FDA pursuant to the 510(k) clearance process or +is exempt from such requirements. Meridian believes that most, but not all, +products under development will be classified as Class I or II medical devices +and, in the case of Class II devices, will be eligible for 510(k) clearance. +Sales of Meridian’s diagnostic products in foreign countries are subject to +foreign government regulation, the requirements of which vary substantially +from country to country. The time required to obtain approval by a foreign +country may be longer or shorter than that required for FDA approval and the +requirements may differ. +European Diagnostics Operating Segment +The European Diagnostics operating segment’s business focuses on the sale and +distribution of diagnostic test kits, those manufactured by the US Diagnostics +operating segment and others manufactured by third-party vendors. +Approximately 65% of third-party sales for fiscal 2003 were products +manufactured by the US Diagnostics operating segment. Third-party sales for +this operating segment were $13,756,000, $11,920,000 and $12,421,000 for fiscal +2003, 2002 and 2001, respectively. As of September 30, 2003, the European +Diagnostics operating segment had 38 employees, including 13 employees in the +direct sales force. The European Diagnostics operating segment’s sales and +distribution network consists of direct sales forces in Belgium, France, +Holland and Italy, and independent distributors in other European countries, +Africa and the Middle East. The European Diagnostics operating segment +maintains distribution centers in Nivelle, Belgium and Milan, Italy. The +primary markets and customers for this operating segment are hospitals and +reference laboratories. Sales to customers in Italy are mainly to hospitals +and laboratories that are funded by the Italian government. +During the last three years, competitive factors and government reimbursement +policies have slowed growth in European markets. In response to these market +conditions, Meridian restructured its European distribution operations in +fiscal 2001 and 2000 by moving the export business from Germany to Belgium, and +moving the German in-country business to an independent distributor. This +restructuring has improved overall operating results for the European +Diagnostics operating segment by lowering its cost structure. Based on +operating results for fiscal 2003 and expectations for fiscal 2004, Meridian +believes that sales levels in local currency have stabilized, and in fact, +believes that market conditions have begun to improve and will yield modest +growth. +The European Diagnostics operating segment’s functional currency is the Euro. +The translation of Euros into US dollars is subject to exchange rate risk. +- 7 - +Table of Contents +Life Science Operating Segment +Overview +The Life Science operating segment’s business currently focuses on the +development, manufacture, sale and distribution of bulk antigens and reagents +used by researchers and other diagnostic companies, as well as the contract +manufacturing of proteins and other biologicals used by biopharmaceutical and +biotechnology companies engaged in research for new drugs and vaccines. +Third-party sales for this operating segment were $12,202,000, $13,013,000 and +$11,549,000 for fiscal 2003, 2002 and 2001, respectively. The Life Science +operating segment consists of Meridian’s Viral Antigens and BIODESIGN +subsidiaries. As of September 30, 2003, the Life Science operating segment +had 78 employees. +Revenue sources for the Life Science operating segment currently come from the +manufacture, sale and distribution of bulk antigens and reagents used by +researchers and other diagnostic companies. During fiscal 2003, 28% of +third-party sales were to one customer, a substantial portion of which is under +exclusive supply agreements that expire in fiscal 2007. Meridian has a +long-standing relationship with this customer, and although there can be no +assurances, Meridian intends to renew these supply agreements in the normal +course of business. +This customer is currently experiencing delays in taking delivery of certain +bulk antigen from Meridian. These delays are not related to the quality of +Meridian’s product. As a result of these delays, the Life Science operating +segment may generate an operating loss for the first quarter of fiscal 2004 +that would be recouped during the second quarter, upon commencement of +shipments to this customer. Although, there can be no assurances that +shipments will commence during the second quarter. This matter is not expected +to have a material adverse effect on Meridian’s consolidated results of +operations for the fiscal year ended September 30, 2004. +Growth Strategies +Growth strategies for the Life Science operating segment include (i) developing +new product applications from existing technologies and (ii) acquisition or +licensing of biologicals and technologies for development of new products. +Contract manufacturing of proteins and other biologicals for biopharmaceutical +and biotechnology companies engaged in research for new drugs and vaccines is +an example of a significant new product application built from Meridian’s +existing expertise in manufacturing bulk antigens and reagents using cell +culture techniques. This business will focus on contract manufacturing of +materials that will be used in Phase I and II clinical trials. During March +2003, Meridian opened its protein production laboratory for commercial +business. During the first quarter of fiscal 2004, Meridian began work in +manufacturing a recombinant protein that will be used by the +- 8 - +Table of Contents +National Institutes of Health in the development of a vaccine for parvovirus. +This contract is expected to be completed in the fourth quarter of fiscal 2004. +The proteins that will be produced are intended to be used as “injectibles”. +As such, they will be produced under cGMP Regulations for Biologics and Human +Drugs under the auspices of the FDA. Approval and licensing, following +clinical trials, of these products will be the responsibility of the applicant, +who owns the right to each protein. Meridian may or may not be the applicant +depending on specific circumstances with particular customers. +The protein production laboratory will provide a new class of customers, and in +some cases, have longer production cycles than historical bulk manufacturing of +antigens and reagents. Longer production cycles can affect timing of revenue +recognition, as revenue is recognized either upon shipment of product or final +lot acceptance depending on contract terms. +Meridian expects that its Life Science operating segment will serve as a key +platform for sourcing biologicals and technologies, by acquisition or license, +for development of new products for all of Meridian’s operating segments. One +of Meridian’s specific strategies in this area is to target biologicals that +have commercial product applications across multiple markets, such as human +diagnostics, veterinary diagnostics and therapeutics. This strategy is +expected to leverage research and development resources as products can be +developed with all three markets in mind, rather than on a market-by-market +basis. +Markets +The Life Science operating segment has targeted three primary market segments +for its products and services: bulk biomedical reagents, drug and vaccine +discovery, and drug and vaccine development. The customer base for bulk +biomedical reagents is large and fragmented, and includes other diagnostic +manufacturers as well as researchers in academia and the pharmaceutical and +biotechnology industries. The market segments for drug and vaccine discovery +and development are intended to be served via contract manufacturing in the +protein production laboratory discussed above. +Sales and Marketing +The Life Science operating segment applies sales and marketing efforts in two +different manners that are designed to complement one another. An internal +sales and marketing staff, as well as a website, have been built to market bulk +biomedical reagents directly to a large and fragmented customer base. The +website provides detailed technical information and capability to submit +purchase orders. For major bulk biomedical reagent customers, scientific +resources have been dedicated to establish sole-source supply arrangements. +Similarly for the protein production laboratory, scientific resources are +dedicated to each potential customer. +- 9 - +Table of Contents +Research and Development +The Life Science operating segment’s research and development organization +consists of 5 research scientists. Research and development expenses for the +Life Science operating segment for fiscal 2003, 2002 and 2001 were $1,348,000, +$1,158,000 and $1,216,000, respectively. This research and development +organization focuses its activities on the protein production laboratory, +developing new biomedical reagents, and working with the US Diagnostics +operating segment in the development of products that have commercial +application across multiple markets, such as human diagnostics, veterinary +diagnostics and therapeutics. +Manufacturing and Government Regulation +The proteins that will be produced in VAI’s cGMP protein production laboratory +are intended to be used as “injectibles”. As such they will be produced under +cGMP Regulations for Biologics and Human Drugs under the auspices of the FDA. +Approval and licensing, following clinical trials, of these products will be +the responsibility of the applicant, who owns the rights to each protein. VAI +may or may not be the applicant depending on specific circumstances with +particular customers. +Competition +Diagnostics +The market for diagnostic tests is a multi-billion dollar international +industry, which is highly competitive. Many of Meridian’s competitors are +larger with greater financial, research, manufacturing and marketing resources. +Important competitive factors of Meridian’s products include product quality, +price, ease of use, customer service, and reputation. In a broader sense, +industry competition is based upon scientific and technological capability, +proprietary know-how, access to adequate capital, the ability to develop and +market products and processes, the ability to attract and retain qualified +personnel and the availability of patent protection. To the extent that +Meridian’s product lines do not reflect technological advances, Meridian’s +ability to compete in those product lines could be adversely affected. +Companies competing in the diagnostic test industry generally focus on a +limited number of tests or limited segments of the market. As a result, the +diagnostic test industry is highly fragmented and segmented. Hundreds of +companies in the United States alone supply immunodiagnostic tests. These +companies range from multi-national health care companies, for which +immunodiagnostics is one line of business, to small start-up companies. Of +central importance in the industry are mid-sized medical diagnostic specialty +companies, like Meridian, that offer multiple, broad product lines and have the +ability to deliver new, high value products quickly to the marketplace. Among +the companies with which Meridian competes in the marketing of one or +- 10 - +Table of Contents +more of its products are Abbott Laboratories Inc., Becton, Dickinson and +Company, Diagnostic Products Corporation, Quidel Corporation and Inverness +Medical. +Life Science +The market for bulk biomedical reagents is highly competitive. Important +competitive factors include product quality, price, customer service and +reputation. Where sole-source supply arrangements do not exist, Meridian faces +competitors, many of which have greater financial, research and development, +sales and marketing, and manufacturing resources. From time to time, customers +may choose to manufacture their biomedical reagents in-house rather than +purchase from outside vendors such as Meridian. +The market for contract manufacturing in a validated cGMP facility such as the +protein production laboratory is also competitive. Important competitive +factors include reputation, customer service and price. Although the product +application for this facility was built from Meridian’s existing expertise in +manufacturing bulk antigens and reagents using cell culture techniques, +Meridian faces competitors with greater experience in contract manufacturing in +a cGMP environment. +Acquisitions +Acquisitions have played an important role in the historical growth of +Meridian’s businesses. Meridian’s acquisition objectives are to, among other +things, (i) enhance product offerings, (ii) improve product distribution +capabilities, (iii) provide access to new markets, and/or (iv) provide access +to key biologicals that lead to new products. Recent examples of this include +the acquisition of Gull Laboratories in fiscal 1999 and Viral Antigens in +fiscal 2000. The Gull acquisition enhanced product offerings, expanded sales +and distribution capabilities in Europe and provided the initial access into +the Life Science market for Meridian (through the BIODESIGN subsidiary). The +Viral Antigens acquisition, coupled with the opening of the protein production +laboratory, solidified Meridian’s entry into the Life Science market. Although +Meridian cannot provide any assurance that it will consummate any acquisitions +in the future, Meridian expects that acquisitions will continue to serve as a +source of new revenues and growth in the future. +International Markets +International markets are an important source of revenue for Meridian’s +operating segments. For all operating segments combined, international sales +were $23,220,000 or 35% of total sales, $17,993,000 or 30% of total sales and +$18,123,000 or 32% of total sales in fiscal 2003, 2002 and 2001, respectively. +Domestic exports for the US Diagnostics and Life Science operating segments +were $9,464,000, $6,073,000 and $5,702,000 in fiscal 2003, 2002 and 2001, +respectively. Meridian expects to continue to look to international markets as +a source of new revenues and growth in the future. +- 11 - +Table of Contents +Environmental +Meridian is a conditionally exempt small quantity generator of hazardous waste +and has a US EPA identification number. All hazardous material is manifested +and disposed of properly. Meridian is in compliance with applicable portions +of the federal and state hazardous waste regulations and has never been a party +to any environmental proceeding. \ No newline at end of file diff --git a/raw/filings/0000794172/2003/0000950152-03-010438/item13.txt b/raw/filings/0000794172/2003/0000950152-03-010438/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..80ba35911fe2607b5c11c70add621511faadec51 --- /dev/null +++ b/raw/filings/0000794172/2003/0000950152-03-010438/item13.txt @@ -0,0 +1,3 @@ +Item 13 +Certain Relationships and Related Transactions +57 \ No newline at end of file diff --git a/raw/filings/0000794172/2003/0000950152-03-010438/item9a.txt b/raw/filings/0000794172/2003/0000950152-03-010438/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..b8682b80a36edb2dffda8037252deeaf8d86f177 --- /dev/null +++ b/raw/filings/0000794172/2003/0000950152-03-010438/item9a.txt @@ -0,0 +1,431 @@ +ITEM 9A. +CONTROLS AND PROCEDURES +As of September 30, 2003, an evaluation was completed under the supervision and +with the participation of Meridian’s management, including Meridian’s Chief +Executive Officer and Chief Financial Officer, of the effectiveness of the +design and operation of Meridian’s disclosure controls and procedures pursuant +to Rule 13a-15(b) and 15(d)-15(b) promulgated under the Securities Exchange Act +of 1934, as amended. Based on that +-56- +Table of Contents +evaluation, Meridian’s management, including the CEO and CFO, concluded that +Meridian’s disclosure controls and procedures were effective as of September +30, 2003. There have been no changes in Meridian’s internal controls over +financial reporting identified in connection with the evaluation of internal +controls that occurred during the last fiscal quarter that has materially +affected, or is reasonably likely to affect, Meridian’s internal controls over +financial reporting, or in other factors that could significantly affect +internal controls subsequent to September 30, 2003. +PART III +The information required by Items 10., 11., 12., and 13., of Part III are +incorporated by reference from the Registrant’s Proxy Statement for its 2004 +Annual Shareholders’ Meeting to be filed with the Commission pursuant to +Regulation 14A. The equity compensation plan chart required by Regulation S-K +Item 201(d) appears in and is hereby incorporated by reference from Item 5 of +this Form 10-K. Because Meridian’s fiscal year ended prior to December 15, +2003, no disclosure is being provided with respect to Item 14. +-57- +Table of Contents +ITEM 15. +EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K +(a) +(1) and (2) FINANCIAL STATEMENTS AND SCHEDULES. +All financial statements and schedules required to be filed by Item 8 of this +Form and included in this report have been listed previously under Item 8. No +additional financial statements or schedules are being filed since the +requirements of paragraph (d) under Item 15 are not applicable to Meridian. +(a) +(3) EXHIBITS. +Exhibit Number +Description of Exhibit +Filing Status +3.1 +Articles of Incorporation, including amendments +not related to Company name change +A +3.2 +Code of Regulations +B +4.1 +Indenture between Meridian and Star Bank, National +Association, as Trustee, relating to Meridian’s 7% +Convertible Subordinated Debentures due 2006 +C +4.2 +Indenture between Meridian and LaSalle Bank +National Association, as Trustee, relating to +Meridian’s 5% Convertible Subordinated Debentures +due 2013 +D +10.3 +License Agreement dated October 6, 1983 with +Marion Laboratories, Inc. +B +10.5 +Sublicense Agreement dated June 17, 1993 among +Johnson & Johnson, the Scripps Research Institute +and Meridian Concerning certain Patent Rights +E +10.6 +Assignment dated June 17, 1993 from Ortho +Diagnostic Systems Inc. to Meridian concerning +certain Patent Rights +E +10.7 +Agreement dated January 24, 1994 between Meridian +Diagnostics, Inc. and Immulok, Inc. +F +10.8 +Asset Purchase Agreement dated June 24, 1996 +between Cambridge Biotech Corporation and Meridian +Diagnostics, Inc. +G +10.9 +Merger Agreement among Gull Laboratories, Inc., +Meridian Diagnostics, Inc. Fresenius AG and +Meridian Acquisition Co. dated as of September 15, +1998 +H +10.10* +Savings and Investment Plan Prototype Adoption +Agreement +Filed herewith +10.12* +1986 Stock Option Plan +I +10.14* +1994 Directors’ Stock Option Plan +J +10.15* +1996 Stock Option Plan +K +10.16* +Salary Continuation Agreement for John A. Kraeutler +L +10.17 +First Amendment to Merger Agreement Among Gull +Laboratories, Inc., Meridian Diagnostics, Inc. +Fresenius AG and Meridian Acquisition Co. +M +-58- +Table of Contents +Exhibit Number +Description of Exhibit +Filing Status +10.18* +1999 Directors’ Stock Option Plan +N +10.20 +Dividend Reinvestment Plan +P +10.21 +Merger Agreement dated September 13, 2000 among +Meridian and the Shareholders of Viral +Antigens, Inc. +O +10.22 +Loan and Security Agreement among Meridian, +certain of its subsidiaries and Fifth Third +Bank Dated as of September 20, 2001 +R +10.23* +Employment Agreement Dated February 15, 2001 +between Meridian and John A. Kraeutler, +including the Addendum to Employment Agreement +dated April 24, 2001 between Meridian and John +A. Kraeutler +R +10.24* +Sample Option Agreement Dated October 1, 2001 +R +10.25* +Sample Option Agreement Dated October 1, 2001 +R +10.26* +1996 Stock Option Plan as Amended and Restated +Effective January 23, 2001 +Q +10.27 +Sample Option Agreement Dated November 19, 2002 +Filed herewith +10.28 +Agreement Concerning Disability and Death dated +September 10, 2003, between Meridian and +William J. Motto +Filed herewith +10.29 +Professional Services Agreement dated October +1, 2002 between Meridian and Antonio Interno +Filed herewith +13 +2003 Annual Report to Shareholders +(1) +14 +Code of Ethics +Filed herewith +21 +Subsidiaries of the Registrant +Filed herewith +23 +Consent of Independent Accountants +Filed herewith +31.1 +Certification of Principal Executive Officer +required by Rule 13a-14(a) +Filed herewith +31.2 +Certification of Principal Financial Officer +required by Rule 13a-14(a) +Filed herewith +32 +Section 1350 Certification of Chief Executive +Officer and Chief Financial Officer +Filed herewith +(1) Only portions of the 2003 Annual Report to Shareholders specifically are +incorporated by reference in this Form 10-K as filed herewith. A supplemental +paper copy of the 2003 Annual Report to Shareholders has been provided to the +Securities and Exchange Commission for informational purposes only. +-59- +Table of Contents +*Management Compensatory Contracts +Incorporated by reference to: +A. +Registration Statement No. 333-02613 on Form S-3 filed with the +Securities and Exchange Commission on April 18, 1996. +B. +Registration Statement No. 33-6052 filed under the Securities Act of +1933. +C. +Registration Statement No. 333-11077 on Form S-3 filed with the +Securities and Exchange Commission on August 29, 1996. +D. +Meridian’s Schedule T-O filed with the Securities and Exchange Commission on +October 24, 2003. +E. +Meridian’s Form 8-K filed with the Securities and Exchange Commission on +June 17, 1993. +F. +Meridian’s Forms 8-K filed with the Securities and Exchange Commission on +February 8, 1994 and April 6, 1994. +G. +Meridian’s Form 8-K filed with the Securities and Exchange Commission on +July 2, 1996. +H. +Meridian’s Form 8-K filed with the Securities and Exchange Commission on +September 17, 1998. +I. +Registration Statement No. 33-89214 on Form S-8 filed with the Securities +and Exchange Commission on April 5, 1995. +J. +Registration Statement No. 33-78868 on Form S-8 filed with the Securities +and Exchange Commission on May 12, 1994. +K. +Meridian’s Annual Report on Form 10-K for the Fiscal Year Ended September +30, 1996. +L. +Meridian’s Annual Report on Form 10-K for the Fiscal Year Ended September +30, 1995. +M. +Company’s Report on Form 8-K filed with the Securities and Exchange +Commission filed on November 13, 1998. +N. +Meridian’s Proxy Statement filed with the Securities and Exchange +Commission on December 21, 1998. +O. +Meridian’s Current Report on Form 8-K dated September 29, 2000. +P. +Meridian’s Annual Report on Form 10-K for the Fiscal Year Ended September +30, 1999. +Q. +Registration Statement No. 333-75312 on Form S-8 filed with the +Securities and Exchange Commission on December 17, 2001 +R. +Meridian’s Annual Report on Form 10-K for the Fiscal Year Ended September +30, 2001. +(b) +REPORTS ON FORM 8-K. +Report on Form 8-K dated September 25, 2003, Item 5, reports change in +operating segments +• +Annual Report on Form 10-K for the year ended September +30, 2002, Part II, Item 8, Financial Statements and Supplementary +Data +• +Quarterly Report on Form 10-Q for the quarter ended +December 31, 2002, Part I, Item 1, Financial Statements +-60- +Table of Contents +SIGNATURES +Pursuant to the requirements of Section 13 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. +MERIDIAN BIOSCIENCE, INC. +By: +/s/ William J. Motto +Date: December 22, 2003 +William J. Motto +Chairman of the Board +and Chief Executive Officer +-61- +Table of Contents +Pursuant to the requirements of the Securities Exchange Act of 1934, this +report has been signed by the following persons on behalf of the Registrant and +in the capacities and on the dates indicated. +Signature +Capacity +Date +/s/ William J. Motto +William J. Motto +Chairman of the Board of Directors and +Chief +Executive Officer (Principal +Executive Officer) +December 22, 2003 +/s/ John A. Kraeutler +John A. Kraeutler +President and Chief Operating +Officer, Director +December 22, 2003 +/s/ Melissa Lueke +Melissa Lueke +Vice President and Chief Financial Officer +December 22, 2003 +/s/ James A. Buzard +James A. Buzard +Director +December 22, 2003 +/s/ Gary P. Kreider +Gary P. Kreider +Director +December 22, 2003 +/s/ David C. Phillips +David C. Phillips +Director +December 22, 2003 +/s/ Robert J. Ready +Robert J. Ready +Director +December 22, 2003 +-62- +Table of Contents +SCHEDULE II +Meridian Bioscience, Inc. +and Subsidiaries +Valuation and Qualifying Accounts +(Amounts in Thousands) +Years Ended September 30, 2003, 2002 and 2001 +Charged +Balance at +to Costs +Charged +Balance +Beginning +and +to Other +at End of +Description +of Period +Expenses +Accounts +Deductions +Other (a) +Period +Year Ended September 30, 2003: +Allowance for doubtful accounts +$ +987 +$ +(268 +) +$ +— +$ +(360 +) +$ +112 +$ +471 +Inventory realizability reserves +730 +289 +— +(439 +) +5 +585 +European restructuring reserves +83 +98 +— +(94 +) +16 +103 +Year Ended September 30, 2002: +Allowance for doubtful accounts +$ +889 +$ +94 +$ +— +$ +(46 +) +$ +50 +$ +987 +Inventory realizability reserves +774 +1,399 +— +(1,443 +) +— +730 +European restructuring reserves +119 +78 +— +(119 +) +5 +83 +Year Ended September 30, 2001: +Allowance for doubtful accounts +$ +438 +$ +528 +$ +— +$ +(109 +) +$ +32 +$ +889 +Inventory realizability reserves +685 +4,486 +— +(4,498 +) +101 +774 +European restructuring reserves +800 +1,321 +— +(2,002 +) +— +119 +(a) +Balances reflect the effects of currency translation (fiscal years +2001-2003) and acquired valuation accounts related to the Viral Antigens +acquisition (fiscal year 2001). +-63- \ No newline at end of file diff --git a/raw/filings/0000794172/2003/0000950152-03-010438/rp_note.txt b/raw/filings/0000794172/2003/0000950152-03-010438/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000794172/2003/0000950152-03-010438/rpt_disclosure.txt b/raw/filings/0000794172/2003/0000950152-03-010438/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000794172/2004/0000950152-04-008932/filing.txt b/raw/filings/0000794172/2004/0000950152-04-008932/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..46458f1e13376d0b114a08dd93f7e2b1254e7c40 --- /dev/null +++ b/raw/filings/0000794172/2004/0000950152-04-008932/filing.txt @@ -0,0 +1,4045 @@ +10-K +1 +l10961ae10vk.htm +MERIDIAN BIOSCIENCE, INC. +MERIDIAN BIOSCIENCE, INC. +Table of Contents +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +FORM 10-K +FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) +OF THE SECURITIES EXCHANGE ACT OF 1934 +[X] +ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES +EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2004. +[ ] +TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES +EXCHANGE ACT OF 1934 +FOR THE TRANSITION PERIOD FROM ______________TO__________________ +Commission File No. 0-14902 +MERIDIAN BIOSCIENCE, INC. +Incorporated under +3471 River Hills Drive +IRS Employer ID +the Laws of Ohio +Cincinnati, Ohio 45244 +No. 31-0888197 +Phone: (513) 271-3700 +Securities Registered Pursuant to Section 12(b) of the Act: +None +Securities Registered Pursuant to Section 12(g) of the Act: +Common Stock, No Par Value +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, and (2) has been subject to +such filing requirements for the past 90 days. +YES +NO +[X] +[ ] +Indicate by check mark if disclosure of delinquent filers pursuant to +Item 405 of Regulation S-K (Section 229.405 of this Chapter) is not +contained herein, and will not be contained, to the best of registrant’s +knowledge, in definitive proxy or information statements incorporated by +reference in Part III of this Form 10-K or any amendment to this Form +10-K. [ ] +Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). +YES +NO +[X] +[ ] +The aggregate market value of Common Stock held by non-affiliates as of +March 31, 2004 was $107,496,766 based on a closing sale price of $10.19 +per share on March 31, 2004. As of December 1, 2004, 15,059,536 shares +of no par value Common Stock were issued and outstanding. +Documents Incorporated by Reference +Portions of the Registrant’s Annual Report to Shareholders for the +fiscal year ended September 30, 2004 furnished to the Commission +pursuant to Rule 14a-3(b) as specified and portions of the Registrant’s +Proxy Statement filed with the Commission for its 2005 Annual +Shareholders’ Meeting are incorporated by reference in Parts II and III +as specified. +MERIDIAN BIOSCIENCE, INC. +INDEX TO ANNUAL REPORT +ON FORM 10-K +Page +Part I +Item 1 +Business +2 +Item 2 +Properties +12 +Item 3 +Legal Proceedings +12 +Item 4 +Submission of Matters to a Vote of Security Holders +13 +Part II +Item 5 +Market for Registrant’s Common Equity and Related Stockholder Matters +and Issuer’s Purchase of Equity Securities +13 +Item 6 +Selected Financial Data +13 +Item 7 +Management’s Discussion and Analysis of Financial Condition and Results of Operations +14 +Item 7A +Quantitative and Qualitative Disclosures about Market Risk +29 +Item 8 +Financial Statements and Supplementary Data +30 +Item 9 +Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +54 +Item 9A +Controls and Procedures +54 +Item 9B +Other Information +54 +Part III +Item 10 +Directors and Executive Officers of the Registrant +54 +Item 11 +Executive Compensation +54 +Item 12 +Security Ownership of Certain Beneficial Owners and Management +54 +Item 13 +Certain Relationships and Related Transactions +54 +Item 14 +Principal Accountant Fees and Services +54 +Item 15 +Exhibits, Financial Statement Schedules, and Reports on Form 8-K +55 +Exhibit 10.30 +Exhibit 21 +Exhibit 23 +Exhibit 31.1 +Exhibit 31.2 +Exhibit 32 +FORWARD LOOKING STATEMENTS +The Private Securities Litigation Reform Act of 1995 provides a safe harbor +from civil litigation for forward-looking statements accompanied by meaningful +cautionary statements. Except for historical information, this report contains +forward-looking statements which may be identified by words such as +“estimates”, “anticipates”, “projects”, “plans”, “seeks”, “may”, “will”, +“expects”, “intends”, “believes”, “should” and similar expressions or the +negative versions thereof and which also may be identified by their context. +Such statements are based upon current expectations of the Company and speak +only as of the date made. The Company assumes no obligation to publicly update +any forward-looking statements. These statements are subject to various risks, +uncertainties and other factors that could cause actual results to differ, +including, without limitation, the following: Meridian’s continued growth +depends in part, on its ability to introduce into the marketplace enhancements +of existing products or new products that incorporate technological advances, +meet customer requirements and respond to products developed by Meridian’s +competition. While Meridian has introduced a number of internally developed +products, there can be no assurance that it will be successful in the future in +introducing such products on a timely basis. Ongoing consolidations of +reference laboratories and formation of multi-hospital alliances may cause +adverse changes to pricing and distribution. Costs and difficulties in +complying with laws and regulations administered by the United States Food and +Drug Administration and other governmental bodies can result in unanticipated +expenses, delays, and interruptions to the sale of new and existing products. +Changes in the relative strength or weakness of the U.S. dollar can change +expected results. One of Meridian’s main growth strategies is the acquisition +of companies and product lines. There can be no assurance that additional +acquisitions will be consummated or that, if consummated, will be successful +and the acquired businesses successfully integrated into Meridian’s operations. +-1- +Table of Contents +PART I. +ITEM 1. +BUSINESS +Overview +Meridian is a fully-integrated life science company whose principal businesses +are (i) the development, manufacture, sale and distribution of diagnostic test +kits, primarily for certain respiratory, gastrointestinal, viral and parasitic +infectious diseases, (ii) the manufacture and distribution of bulk antigens and +reagents used by researchers and other diagnostic manufacturers and (iii) the +contract manufacture of proteins and other biologicals for use by +biopharmaceutical and biotechnology companies engaged in research for new drugs +and vaccines. By exploiting revenue opportunities across research, clinical +diagnostics, and therapeutic areas for key biologicals, Meridian can maximize +revenues, efficiently invest in research and development, and increase +profitability of manufacturing operations. +Operating Segments +As a result of changes that occurred in February 2003 in the organization and +management of Meridian’s businesses, effective with the quarter beginning +January 1, 2003, Meridian changed its reportable operating segments to US +Diagnostics, European Diagnostics, and Life Science. While the scientific +foundation of these three segments is essentially the same, the market +dynamics, competitive trends, regulatory requirements, and sales and marketing +approach vary substantially. The US Diagnostics operating segment consists of +research and development and manufacturing operations in Cincinnati, Ohio, and +the sale and distribution of diagnostic test kits in the US and countries +outside of Europe, Africa and the Middle East. The European Diagnostics +operating segment consists of the sale and distribution of diagnostic test kits +in Europe, Africa, and the Middle East. The Life Science operating segment +consists of research and development and manufacturing operations in Memphis, +Tennessee and Saco, Maine, and the sale and distribution of bulk antigens, +antibodies and bioresearch reagents domestically and abroad. Manufacturing +operations for the Life Science operating segment include a protein production +laboratory for the contract manufacture of proteins and other biologicals used +by biopharmaceutical and biotechnology companies in research for new drugs and +vaccines. Financial information for Meridian’s operating segments is included +in Note 7 to the consolidated financial statements contained herein. +Meridian’s primary source of domestic and international revenues continues to +be its core diagnostic products. Meridian’s diagnostic products provide +accuracy, simplicity, and speed, enable early diagnosis and treatment of +common, acute medical conditions, and provide for better patient outcomes at +reduced costs. Meridian targets diagnostics for disease states that (i) are +acute conditions where rapid diagnosis impacts patient outcomes, (ii) have +favorable demographic and disease profiles, (iii) are underserved by current +diagnostic +-2- +Table of Contents +products and (iv) have difficult sample handling requirements. This approach +has allowed Meridian to establish significant market share in its target +disease states. +Meridian expects that its Life Science operating segment will serve as a key +platform for sourcing biologicals and technologies, by acquisition or license, +for development of new products for all of Meridian’s operating segments. One +of Meridian’s specific strategies in this area is to target biologicals that +have commercial product applications across multiple markets, such as human +diagnostics, veterinary diagnostics, and therapeutics. This strategy is +expected to leverage research and development resources as products can be +developed with all three markets in mind, rather than on a market-by-market +basis. +Meridian’s website is www.meridianbioscience.com. Meridian makes available its +Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on +Form 8-K and any amendments thereto, free of charge through this website, as +soon as reasonably practicable after such material has been electronically +filed with the Securities and Exchange Commission. +US Diagnostics Operating Segment +Overview +The US Diagnostics operating segment’s business focuses on the development, +manufacture, sale and distribution of diagnostic test kits, primarily for +certain respiratory, gastrointestinal, viral and parasitic infectious diseases. +In addition to diagnostic test kits, products also include transport media +that store and preserve specimen samples from patient collection to laboratory +testing. Third-party sales for this operating segment were $48,153,000, +$39,906,000 and $34,171,000 for fiscal 2004, 2003 and 2002, respectively. As +of September 30, 2004, the US Diagnostics operating segment had 246 employees. +Meridian’s diagnostic test kits utilize immunodiagnostic technologies, which +test samples of blood, urine, stool and other body fluids or tissue for the +presence of antigens and antibodies of specific infectious diseases. Specific +immunodiagnostic technologies used in Meridian’s diagnostic test kits include +enzyme immunoassay, immunofluorescence, particle agglutination/aggregation, +immunodiffusion, complement fixation, and chemical stains. The enzyme +immunoassay technology is used in multiple test formats; the Premier™ products +for large volume users and the ImmunoCard® products for single test, low volume +users. +Meridian’s diagnostic products are used principally in the detection of +respiratory diseases, such as pneumonia, valley fever, flu and RSV; +gastrointestinal diseases, such as stomach ulcers (H. pylori), antibiotic +associated diarrhea (C. difficile) and pediatric diarrhea (Rotavirus and +Adenovirus); viral diseases, such as mononucleosis, Herpes Simplex, chicken pox +and shingles (Varicella-Zoster) and Cytomegalovirus (organ +-3- +Table of Contents +transplant infections); and parasitic diseases, such as Giardiasis, +Cryptosporidiosis and Lyme. The primary markets and customers for these +products are reference laboratories, hospitals, and physicians’ offices. +Market Trends +The global market for infectious disease tests continues to expand as new +disease states are identified, new therapies become available, and worldwide +standards of living and access to health care improve. More importantly, +within this market there is a continuing shift from conventional testing, which +requires highly trained personnel and lengthy turnaround times for test +results, to more technologically advanced testing which can be performed by +less highly trained personnel and completed in minutes or hours. These +technological advances permit accurate testing to occur outside the traditional +hospital or laboratory. +The increasing pressures to contain total health care costs have accelerated +the increased use of diagnostic testing and the market shift to alternate +sites. With rapid and accurate diagnoses of infectious diseases, physicians +can pinpoint appropriate therapies quickly, leading to faster recovery, shorter +hospital stays and less treatment expense. In addition, these pressures have +led to a major consolidation among reference laboratories and the formation of +multi-hospital alliances that have reduced the number of institutional +customers for diagnostic products and resulted in changes in buying practices. +Specifically, multi-year exclusive or primary source marketing or distribution +contracts with institutional customers have become more common, replacing less +formal distribution arrangements of shorter duration and involving lower +product volumes. +Sales and Marketing +The US Diagnostics operating segment’s sales and distribution network consists +of a direct sales force in the US and independent distributors in the US and +abroad. The direct sales force consists of one director of sales, three +regional sales managers, one director of corporate health systems, 21 technical +sales representatives, two inside sales representatives, and six physician +marketing representatives. Meridian utilizes two primary independent +distributors in the US, who accounted for 42% of the US Diagnostics operating +segment’s third-party sales in fiscal 2004. Meridian participates in the +selling effort for key customers where these independent distributors are +utilized. Therefore, Meridian believes that the loss of either of these +independent distributors would not have a material adverse effect on the +Company. +Consolidation of the US healthcare industry is expected to continue and +potentially affect Meridian’s customers. Industry consolidation puts pressure +on pricing and aggregates buying power. In response, in the last five years, +Meridian has entered into, extended, or renewed several exclusive multiple-year +contracts with consolidated healthcare providers and supply agreements with +major reference laboratories. +-4- +Table of Contents +Products and Markets +Meridian has expertise in the development and manufacture of products based on +multiple core diagnostic technologies, each of which enables the visualization +and identification of antigen/antibody reactions for specific pathogens. As a +result, Meridian is able to develop and manufacture diagnostic tests in a +variety of formats that satisfy customer needs and preferences, whether in a +hospital, commercial or reference laboratory or alternate site location. +Meridian’s product offering consists of over 200 medical diagnostic products. +Meridian’s products generally range in list price from $1 per test to $33 per +test. +Meridian’s product technologies include enzyme immunoassay, immunofluorescence, +particle agglutination/aggregation, immunodiffusion, complement fixation and +chemical stains. +Enzyme Immunoassay (EIA) — Products incorporating the EIA technology achieve +extremely high levels of accuracy in detecting disease-related antigens or +antibodies through the use of special color-based enzyme-substrate reactions. +Meridian utilizes this technology in its multiple test format, the Premier™ +product for large volume users, and in its single test formats, the +Immuno Card®, Immuno Card STAT!® and Monolert® products, for lower volume users. +Immunofluorescence — When the microscopic visualization of an antigen/antibody +reaction is necessary or desired, immunofluorescence technology is frequently +utilized. Fluorescing immunochemicals, in the presence of the target antigen +or antibody, can be viewed via a fluorescent microscope. Meridian utilizes +this technology in its Merifluor® products. +Particle Agglutination/Aggregation — This technology utilizes microparticles +(e.g., latex, red blood cells) coated with specific antigens or antibodies that +form visible aggregates in the presence of a specimen containing the +complementary antigen or antibody. This technology is rapid and economical and +is used in Meridian’s Meritec™, MeriStar® and MonoSpot® products. +Other Technologies — Meridian utilizes other technologies that include +immunodiffusion, complement fixation, and chemical stains. Meridian also +manufactures and markets specimen collection, transportation, preservation and +concentration products, such as Para-Pak®, Macro-CON® and Spin-CON. +Research and Development +The US Diagnostics operating segment’s research and development organization +consists of 13 research scientists with expertise in biochemistry, immunology, +mycology, bacteriology, virology, and parasitology. Research and development +expenses for the US Diagnostics operating segment for fiscal 2004, 2003 and +2002 were $3,131,000, $2,527,000 and $1,730,000, respectively. This research +and development organization +-5- +Table of Contents +focuses its activities on new applications for Meridian’s existing +technologies, improvements to existing products and development of new +technologies. Research and development efforts may occur in-house or with +collaborative partners. Meridian believes that internally developed products +are a key source for sustaining revenue growth. Meridian’s internally +developed products include Premier™ Platinum HpSA and Premier™ Toxins A & B, +which accounted for 27% of the US Diagnostics operating segment’s third-party +sales during fiscal 2004. +Manufacturing +Meridian’s immunodiagnostic products require the production of highly specific +and sensitive antigens and antibodies. Meridian produces substantially all of +its own requirements including monoclonal antibodies and polyclonal antibodies, +plus a variety of fungal, bacterial, and viral antigens. Meridian believes it +has sufficient manufacturing capacity for anticipated growth. +Intellectual Property, Patents, and Licenses +Meridian owns or licenses US and foreign patents for approximately 25 products +manufactured by the US Diagnostics operating segment, including Premier™ +Platinum HpSA. In the absence of patent protection, Meridian may be vulnerable +to competitors who successfully replicate Meridian’s production and +manufacturing technologies and processes. Meridian’s employees are required to +execute confidentiality and non-disclosure agreements designed to protect +Meridian’s proprietary products. Meridian believes that its products and +technologies do not infringe the proprietary rights of any third parties. +Government Regulation +Meridian’s diagnostic products are regulated by the Food & Drug Administration +(FDA) as “devices” pursuant to the Federal Food, Drug, and Cosmetic Act (FDCA). +Under the FDCA, medical devices are classified into one of three classes +(i.e., Class I, II or III). Class I and II devices are not expressly approved +by the FDA, but, instead, are “cleared” for marketing. Class III devices +generally must receive “pre-market approval” from the FDA as to safety and +effectiveness. +A 510(k) clearance will be granted if the submitted data establishes that the +proposed device is “substantially equivalent” to an existing Class I or Class +II medical device or to a Class III medical device for which the FDA has not +required pre-market approval. The 510(k) clearance process for “substantially +equivalent” devices allows product sales to be made after the filing of an +application and upon acknowledgment by the FDA, typically within 90 to 120 days +after submission. If the FDA requests additional information, the product +cannot be sold in the US until the application has been supplemented and upon +acknowledgment by the FDA within 90 to 120 days of the supplemental +application. In practice, the FDA has been granting clearance in +-6- +Table of Contents +about 90 days following submission of the supplemental information. If there +are no existing FDA-approved products or processes comparable to a diagnostic +product or process, approval by the FDA involves the more lengthy pre-market +approval procedures. +Each of the diagnostic products currently marketed by Meridian in the United +States has been cleared by the FDA pursuant to the 510(k) clearance process or +is exempt from such requirements. Meridian believes that most, but not all, +products under development will be classified as Class I or II medical devices +and, in the case of Class II devices, will be eligible for 510(k) clearance. +Sales of Meridian’s diagnostic products in foreign countries are subject to +foreign government regulation, the requirements of which vary substantially +from country to country. The time required to obtain approval by a foreign +country may be longer or shorter than that required for FDA approval and the +requirements may differ. +European Diagnostics Operating Segment +The European Diagnostics operating segment’s business focuses on the sale and +distribution of diagnostic test kits, those manufactured by the US Diagnostics +operating segment and others manufactured by third-party vendors. +Approximately 71% of third-party sales for fiscal 2004 were products +manufactured by the US Diagnostics operating segment. Third-party sales for +this operating segment were $15,412,000, $13,756,000 and $11,920,000 for fiscal +2004, 2003 and 2002, respectively. As of September 30, 2004, the European +Diagnostics operating segment had 40 employees, including 16 employees in the +direct sales force. The European Diagnostics operating segment’s sales and +distribution network consists of direct sales forces in Belgium, France, +Holland, and Italy, and independent distributors in other European countries, +Africa and the Middle East. The European Diagnostics operating segment +maintains distribution centers in Nivelle, Belgium and Milan, Italy. The +primary markets and customers for this operating segment are hospitals and +reference laboratories. Sales to customers in Italy are mainly to hospitals +and laboratories that are funded by the Italian government. +During the last several years, competitive factors and government reimbursement +policies have slowed growth in European markets. Based on operating results +for fiscal 2003 and fiscal 2004, Meridian believes that sales levels in local +currency have stabilized, and in fact, believes that market conditions have +begun to improve and will yield modest growth. Sales in local currency, the +Euro, increased 7% during the last six months of fiscal 2004 compared to fiscal +2003. +The European Diagnostics operating segment’s functional currency is the Euro. +The translation of Euros into US dollars is subject to exchange rate changes. +-7- +Table of Contents +Life Science Operating Segment +Overview +The Life Science operating segment’s business focuses on the development, +manufacture, sale and distribution of bulk antigens and reagents used by +researchers and other diagnostic companies, as well as the contract +manufacturing of proteins and other biologicals used by biopharmaceutical and +biotechnology companies engaged in research for new drugs and vaccines. +Third-party sales for this operating segment were $16,041,000, $12,202,000 and +$13,013,000 for fiscal 2004, 2003 and 2002, respectively. The Life Science +operating segment consists of Meridian’s Viral Antigens and BIODESIGN +subsidiaries. As of September 30, 2004, the Life Science operating segment had +77 employees. +Most of the revenue for the Life Science operating segment currently comes from +the manufacture, sale and distribution of bulk antigens and reagents used by +researchers and other diagnostic companies. During fiscal 2004, 34% of +third-party sales were to one customer, a substantial portion of which is under +exclusive supply agreements that expire in fiscal 2007. Meridian has a +long-standing relationship with this customer, and although there can be no +assurances, Meridian intends to renew these supply agreements in the normal +course of business. +During fiscal 2004, Meridian completed its first contract manufacturing project +in its protein production facility. Meridian delivered recombinant proteins to +the National Institutes of Health to be used in a vaccine for parvovirus +(“fifth disease”) in Phase I clinical trials. Revenue related to this project +was $1,528,000. During fiscal 2005, Meridian expects to deliver additional +material for Phase II clinical trials and begin contract manufacturing for +other customers. +Growth Strategies +Growth strategies for the Life Science operating segment include (i) developing +new product applications from existing technologies and (ii) acquisition or +licensing of biologicals and technologies for development of new products. +Contract manufacturing of proteins and other biologicals for biopharmaceutical +and biotechnology companies engaged in research for new drugs and vaccines is +an example of a significant new product application built from Meridian’s +existing expertise in manufacturing bulk antigens and reagents using cell +culture techniques. This business will focus on contract manufacturing of +protein materials that will be used in Phase I and II clinical trials. +-8- +Table of Contents +The protein production laboratory provides a new class of customers that, in +some cases, have longer production cycles than historical bulk manufacturing of +antigens and reagents. Longer production cycles can affect timing of revenue +recognition, as revenue may be recognized either upon shipment of product or +final lot acceptance depending on contract terms. +Meridian expects that its Life Science operating segment will serve as a key +platform for sourcing biologicals and technologies, by acquisition or license, +for development of new products for all of Meridian’s operating segments. One +of Meridian’s specific strategies in this area is to target biologicals that +have commercial product applications across multiple markets, such as human +diagnostics, veterinary diagnostics, and therapeutics. This strategy is +expected to leverage research and development resources as products can be +developed with all three markets in mind, rather than on a market-by-market +basis. +Markets +The Life Science operating segment has targeted three primary market segments +for its products and services: bulk biomedical reagents, drug and vaccine +discovery, and drug and vaccine development. The customer base for bulk +biomedical reagents is large and fragmented, and includes other diagnostic +manufacturers as well as researchers in academia and the pharmaceutical and +biotechnology industries. The market segments for drug and vaccine discovery +and development are intended to be served via contract manufacturing in the +protein production laboratory discussed above. +Sales and Marketing +The Life Science operating segment applies sales and marketing efforts in two +different manners that are designed to complement one another. An internal +sales and marketing staff, as well as a website, have been built to market bulk +biomedical reagents directly to a large and fragmented customer base. The +website provides detailed technical information and capability to submit +purchase orders. For major bulk biomedical reagent customers, scientific +resources have been dedicated to establish sole-source supply arrangements. +Similarly, for the protein production laboratory, scientific resources are +dedicated to each potential customer. +Research and Development +The Life Science operating segment’s research and development organization +consists of six research scientists. Research and development expenses for the +Life Science operating segment for fiscal 2004, 2003 and 2002 were $1,226,000, +$1,348,000 and $1,158,000, respectively. This research and development +organization focuses its activities on the protein production laboratory, +developing new biomedical reagents, and working with the US Diagnostics +operating segment in the development of products that have commercial +application across multiple markets, such as human diagnostics, veterinary +diagnostics, and therapeutics. +-9- +Table of Contents +Manufacturing and Government Regulation +The proteins that will be produced in VAI’s cGMP protein production laboratory +are intended to be used as “injectibles”. As such, they will be produced under +cGMP Regulations for Biologics and Human Drugs under the auspices of the FDA. +Approval and licensing, following clinical trials, of these products will be +the responsibility of the applicant, who owns the rights to each protein. VAI +may or may not be the applicant depending on specific circumstances with +particular customers. +Competition +Diagnostics +The market for diagnostic tests is a multi-billion dollar international +industry, which is highly competitive. Many of Meridian’s competitors are +larger with greater financial, research, manufacturing and marketing resources. +Important competitive factors of Meridian’s products include product quality, +price, ease of use, customer service, and reputation. In a broader sense, +industry competition is based upon scientific and technological capability, +proprietary know-how, access to adequate capital, the ability to develop and +market products and processes, the ability to attract and retain qualified +personnel and the availability of patent protection. To the extent that +Meridian’s product lines do not reflect technological advances, Meridian’s +ability to compete in those product lines could be adversely affected. +Companies competing in the diagnostic test industry generally focus on a +limited number of tests or limited segments of the market. As a result, the +diagnostic test industry is highly fragmented and segmented. Hundreds of +companies in the United States alone supply immunodiagnostic tests. These +companies range from multi-national health care companies, for which +immunodiagnostics is one line of business, to small start-up companies. Of +central importance in the industry are mid-sized medical diagnostic specialty +companies, like Meridian, that offer multiple, broad product lines and have the +ability to deliver new, high value products quickly to the marketplace. Among +the companies with which Meridian competes in the marketing of one or more of +its products are Abbott Laboratories Inc., Becton, Dickinson and Company, +Diagnostic Products Corporation, Quidel Corporation, and Inverness Medical. +Life Science +The market for bulk biomedical reagents is highly competitive. Important +competitive factors include product quality, price, customer service, and +reputation. Where sole-source supply arrangements do not exist, Meridian faces +competitors, many of which have greater financial, research and development, +sales and +-10- +Table of Contents +marketing, and manufacturing resources. From time to time, customers may +choose to manufacture their biomedical reagents in-house rather than purchase +from outside vendors such as Meridian. +The market for contract manufacturing in a validated cGMP facility such as the +protein production laboratory is also competitive. Important competitive +factors include reputation, customer service, and price. Although the product +application for this facility was built from Meridian’s existing expertise in +manufacturing bulk antigens and reagents using cell culture techniques, +Meridian faces competitors with greater experience in contract manufacturing in +a cGMP environment. +Acquisitions +Acquisitions have played an important role in the historical growth of +Meridian’s businesses. Meridian’s acquisition objectives are to, among other +things, (i) enhance product offerings, (ii) improve product distribution +capabilities, (iii) provide access to new markets, and/or (iv) provide access +to key biologicals that lead to new products. +During November 2004, Meridian executed a letter of intent to purchase all the +outstanding capital stock of OEM Concepts, a manufacturer and distributor of +bulk antibodies to the diagnostic, pharmaceutical, and research markets. This +pending acquisition, which is subject to due diligence review and execution of +a definitive agreement, will add large-volume monoclonal antibody manufacturing +capabilities to Meridian’s Life Science operating segment and will complement +the Viral Antigens and BIODESIGN subsidiaries. It will also decrease +Meridian’s reliance on third parties for monoclonal and polyclonal antibodies. +Recent examples of completed acquisitions include Gull Laboratories in fiscal +1999 and Viral Antigens in fiscal 2000. The Gull acquisition enhanced product +offerings, expanded sales and distribution capabilities in Europe, and provided +the initial access into the Life Science market for Meridian (through the +BIODESIGN subsidiary). The Viral Antigens acquisition, coupled with the +opening of the protein production laboratory, solidified Meridian’s entry into +the Life Science market. +Although Meridian cannot provide any assurance that it will consummate any +acquisitions in the future, Meridian expects that acquisitions will continue to +serve as a source of new revenues and growth in the future. +International Markets +International markets are an important source of revenue for Meridian’s +operating segments. For all operating segments combined, international sales +were $24,916,000 or 31% of total sales, $23,220,000 or 35% of total sales and +$17,993,000 or 30% of total sales in fiscal 2004, 2003 and 2002, respectively. +Domestic exports for the US Diagnostics and Life Science operating segments +were $9,504,000, $9,464,000 and $6,073,000 in fiscal +-11- +Table of Contents +2004, 2003 and 2002, respectively. Meridian expects to continue to look to +international markets as a source of new revenues and growth in the future. +Environmental +Meridian is a conditionally exempt small quantity generator of hazardous waste +and has a US EPA identification number. All hazardous material is manifested +and disposed of properly. Meridian is in compliance with applicable portions +of the federal and state hazardous waste regulations and has never been a party +to any environmental proceeding. +ITEM 2. +PROPERTIES +Meridian’s corporate offices, manufacturing facility and research and +development facility are located in three buildings totaling approximately +94,000 square feet on 6.2 acres of land in a suburb of Cincinnati. These +properties are owned by Meridian. Meridian has approximately 51,000 square +feet of manufacturing space and 9,000 square feet of warehouse space in the +Cincinnati facility. +Meridian rents approximately 6,000 square feet of space in Nivelle, Belgium for +sales, warehousing and distribution. The lease expires in 2009. Meridian also +rents office space in France and the Netherlands for small sales offices. +The distribution center in Italy conducts its operations in a two-story +building in the Milan, Italy area consisting of approximately 18,000 square +feet. This facility is owned by Meridian Bioscience Europe s.r.l. +BIODESIGN rents a 10,000 square foot facility that houses administration, +distribution and manufacturing facilities in Saco, Maine under a lease that +expires in 2006. +Viral Antigens’ administrative offices and manufacturing facility are located +in Memphis, Tennessee. This facility, which is owned by Viral Antigens, is +comprised of two buildings totaling approximately 34,000 square feet, including +approximately 27,000 square feet of manufacturing space. +ITEM 3. +LEGAL PROCEEDINGS +Meridian is a party to litigation that it believes is in the normal course of +business. The ultimate resolution of these matters is not expected to have a +material adverse effect on Meridian’s financial position, results of +-12- +Table of Contents +operations or cash flows. No provision has been made in the accompanying +consolidated financial statements for these matters. +ITEM 4. +SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS +No matters were submitted to a vote of security holders during the fourth +quarter of fiscal 2004. +PART II. +ITEM 5. +MARKET FOR REGISTRANT’S COMMON +EQUITY AND RELATED STOCKHOLDER MATTERS +“Common Stock Information” on the inside back cover of the Annual Report to +Shareholders for 2004 and “Quarterly Financial Data” relating to our dividends +in Note 9 to the Consolidated Financial Statements are incorporated herein by +reference. There are no external restrictions on cash dividend payments. +In November 2002, Meridian’s Board of Directors adopted a new cash dividend +policy whereby the indicated annual dividend rate will be set between 75% and +85% of each fiscal years’ expected net earnings. The declaration and amount of +dividends will be determined by the Board of Directors in its discretion based +upon its evaluation of earnings, cash flow requirements and future business +developments and opportunities, including acquisitions. +Meridian paid dividends of $0.39 per share, $0.34 per share, and $0.28 per +share in fiscal 2004, fiscal 2003, and fiscal 2002, respectively. +The Equity Compensation Plan table included in the Proxy Materials for the 2005 +Shareholders’ Meeting is incorporated herein by reference. +ITEM 6. +SELECTED FINANCIAL DATA +Incorporated by reference from inside front cover of the Annual Report to +Shareholders for 2004. +-13- +Table of Contents +ITEM 7. +MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL +CONDITION AND RESULTS OF OPERATIONS +Refer to “Forward Looking Statements” following the Index in front of this Form +10-K. +Future Trends: +Life Science +During fiscal 2003, Meridian opened its protein production laboratory for +commercial operation, creating the opportunity to utilize its capabilities to +enable the development of new drugs and vaccines. This protein production +laboratory is an extension of Meridian’s existing antigen manufacturing +technologies and capabilities. During fiscal 2004, Meridian completed the +manufacturing and delivery of recombinant proteins for the National Institutes +of Health to be used in a vaccine for Parvovirus (“fifth disease”) in Phase I +clinical trials. Revenue for this phase of the contract, $1,528,000, was +recognized during the fourth quarter. During fiscal 2005, Meridian expects to +deliver additional protein material for Phase II clinical trials and perform +contract manufacturing for other customers. +During November 2004, Meridian executed a letter of intent to purchase all the +outstanding capital stock of OEM Concepts, a manufacturer and distributor of +bulk antibodies to the diagnostic, pharmaceutical and research markets. This +pending acquisition, which is subject to due diligence review and execution of +a definitive agreement, will add large-volume monoclonal antibody manufacturing +capabilities to Meridian’s Life Science operating segment and will complement +the Viral Antigens and BIODESIGN subsidiaries. It will also decrease +Meridian’s reliance on third parties for monoclonal and polyclonal antibodies. +Sales and marketing resources at Meridian’s Viral Antigens and BIODESIGN +subsidiaries have been aligned to focus on common customers and complementary +products. OEM Concepts will be similarly aligned shortly after acquisition. +As part of our overall Life Science strategy, Meridian also expects to develop +or license unique biological tools and technology. The pending acquisition, +OEM Concepts, has rights to (via licenses) or owns approximately 160 cell +lines. +European Diagnostics +Meridian’s European Diagnostics operating segment experienced sales growth in +fiscal 2004 and fiscal 2003 of 12% and 15%, respectively, following two +successive years of sales declines of 4% in fiscal 2002 and 13% in fiscal 2001. +Although currency translation accounts for most of the fiscal 2004 and 2003 +increases, sales in +-14- +Table of Contents +local currency, the Euro, increased 1% during both fiscal 2004 and 2003. +During the last several years, competitive factors and government reimbursement +policies slowed growth in European markets and sales in fiscal 2001 and fiscal +2002 were also negatively affected by currency translation. Based on operating +results for fiscal 2004 and fiscal 2003, Meridian believes that sales levels in +local currency have stabilized, and in fact, believes that market conditions +have begun to improve and will yield modest growth. Sales in local currency, +the Euro, increased 7% during the last six months of fiscal 2004 compared to +fiscal 2003. +US Diagnostics +Consolidation of the US healthcare industry is expected to continue and +potentially affect Meridian’s customers. Industry consolidation puts pressure +on pricing and aggregates buying power. In response, in the last several +years, Meridian has entered into, extended, or renewed several exclusive +multiple-year contracts with consolidated healthcare providers and supply +agreements with major reference laboratories. +Research and Development +Meridian believes that internally developed products will continue to be a +critical source of sales and sales growth. Research and development efforts +are expected to focus on the development of new products and product +improvements where Meridian has a dominant market position, or its intellectual +property is protected by patents or licenses. +During the second quarter of fiscal 2004, Meridian launched its Immuno Card +STAT!® HpSA rapid diagnostic test for H. pylori in domestic markets (US +Diagnostics segment), following FDA 510(k) clearance in December 2003. This +rapid detection test is intended to complement Meridian’s previously developed +Premier Platinum HpSA diagnostic test. +During the first quarter of fiscal 2005, Meridian launched its Immuno Card ® C. +difficile Toxins A & B rapid diagnostic test in domestic markets (US +Diagnostics segment). It was launched in European markets in fiscal 2004. +This rapid diagnostic test will add breadth to Meridian’s C. difficile product +offerings. +During the first quarter of fiscal 2005, Meridian also expects to launch, in +domestic and European markets, new diagnostic tests for certain respiratory +diseases. +Meridian expects its Life Science operating segment will serve as a key +platform for sourcing biologicals and technologies, by acquisition or license, +for development of new products for all of Meridian’s operating segments. One +of Meridian’s specific strategies in this area is to target biologicals that +have commercial product applications across multiple markets, such as human +diagnostics, veterinary diagnostics, and +-15- +Table of Contents +therapeutics. This strategy is expected to leverage research and development +resources as products can be developed with all three markets in mind, rather +than on a market-by-market basis. +Operating Segments: +As a result of changes that occurred in February 2003 in the organization and +management of Meridian’s businesses, effective with the quarter beginning +January 1, 2003 (Meridian’s second quarter), Meridian changed its reportable +operating segments to US Diagnostics, European Diagnostics, and Life Science. +The US Diagnostics operating segment consists of manufacturing operations in +Cincinnati, Ohio, and the sale and distribution of diagnostic test kits in the +US and countries outside of Europe, Africa and the Middle East. The European +Diagnostics operating segment consists of the sale and distribution of +diagnostic test kits in Europe, Africa, and the Middle East. The Life Science +operating segment consists of manufacturing operations in Memphis, Tennessee +and Saco, Maine, and the sale and distribution of bulk antigens, antibodies and +bioresearch reagents domestically and abroad. The Life Science operating +segment consists of the Viral Antigens and BIODESIGN subsidiaries, including +the protein production laboratory. +Results of Operations: +Overview +Fourth quarter +Net earnings for the fourth quarter of fiscal 2004 were $2,944,000, or $0.19 +per diluted share. Net earnings for the fourth quarter of fiscal 2003 were +$1,849,000, or $0.12 per diluted share. Net sales for the fourth quarter of +fiscal 2004 were $22,244,000, an increase of $5,089,000 or 30% compared to the +fourth quarter of fiscal 2003. +Fiscal Year +Net earnings for fiscal 2004 were $9,185,000, or $0.60 per diluted share. Net +earnings for fiscal 2003 were $7,018,000, or $0.47 per diluted share. Results +of operations for fiscal 2004 compared to fiscal 2003 are discussed below. +-16- +Table of Contents +Fiscal Year Ended September 30, 2004 Compared to Fiscal Year Ended September +30, 2003 +Net sales +Overall, net sales increased 21% for fiscal 2004 compared to fiscal 2003. Net +sales for the US Diagnostics operating segment increased $8,247,000, or 21%, +for the European Diagnostics operating segment increased $1,656,000, or 12%, +and for the Life Science operating segment increased $3,839,000, or 31%. +For the US Diagnostics operating segment, the sales increase was primarily +related to growth in respiratory products (increased $4,437,000), driven from +outbreaks of influenza across the US, primarily during the first quarter. +Meridian’s respiratory products include diagnostic tests for influenza, RSV, +and mycoplasma. Also contributing to the sales growth were favorable volume +increases for C. difficile products (increased $2,206,000) and Rotavirus +products (increased $487,000). H. pylori products, which include both Premier +Platinum HpSA and the recently launched Immuno Card STAT! ® HpSA rapid test, +showed favorable price and volume increases ($1,131,000). Parasitology +products also showed favorable price and volume increases ($431,000). +For the European Diagnostics operating segment, the sales increase includes +currency translation gains in the amount of approximately $1,574,000. Sales in +local currency, the Euro, increased 1%. +For the Life Science operating segment, the sales increase was attributable to +volume growth in make-to-order bulk antigens and antibodies and completion of +Phase I clinical trial materials for the National Institutes of Health +Parvovirus vaccine. Sales of made-to-order bulk antigens and antibodies to one +customer provided sales of approximately $5.4 million, $3.4 million and $5.2 +million in fiscal 2004, 2003 and 2002, respectively. +For all operating segments combined, international sales were $24,916,000, or +31% of total sales, for fiscal 2004, compared to $23,220,000, or 35% of total +sales, in fiscal 2003. Combined domestic exports for the US Diagnostics and +Life Science operating segments were $9,504,000 for fiscal 2004, compared to +$9,464,000 in fiscal 2003. The remaining international sales were generated by +the European Diagnostics operating segment. +Gross Profit +Gross profit increased 19% for fiscal 2004 compared to fiscal 2003. Gross +profit margins were 57% for fiscal 2004 compared to 58% for fiscal 2003. +Meridian’s overall operations consist of the sale of diagnostic test kits for +various disease states and in alternative test formats, as well as bioresearch +reagents, bulk antigens, proficiency tests and contract +-17- +Table of Contents +production activities in the protein production laboratory. Product sales mix +shifts, in the normal course of business, can cause the consolidated gross +profit margin to fluctuate by several points. +Operating Expenses +Operating expenses increased 22% for fiscal 2004 compared to fiscal 2003. The +overall increase in operating expenses for fiscal 2004 is discussed below. +Research and development expenses increased 12% for fiscal 2004 compared to +fiscal 2003, and as a percentage of sales, decreased from 6% in fiscal 2003, +to 5% in fiscal 2004. Of this increase, $604,000 related to the US +Diagnostics operating segment, offset by a decrease of $122,000 related to the +Life Science operating segment. The increase for the US Diagnostics operating +segment was primarily attributable to additional product development staff and +material costs for new product development activities and incentive +compensation pursuant to Meridian’s corporate incentive plan ($255,000). +Human resources were added to the research and development staff throughout +fiscal 2003. Such resources were in place for all of fiscal 2004. +Selling and marketing expenses increased 18%, for fiscal 2004 compared to +fiscal 2003, and as a percentage of sales, were 16% for fiscal 2004 and fiscal +2003. Of this increase, $1,253,000 related to the US Diagnostics operating +segment, $338,000 related to the European Diagnostics operating segment, and +$339,000 related to the Life Science operating segment. The increase for the +US Diagnostics operating segment was primarily attributable to higher sales +commissions related to sales growth ($448,000), incentive compensation pursuant +to Meridian’s corporate incentive plan ($206,000), the addition of a Vice +President of Sales and Marketing, including relocation costs ($250,000), and +one new product manager. The increase for the European Diagnostics operating +segment was primarily due to currency translation. The increase for the Life +Science operating segment was primarily attributable to the addition of two +product managers to supplement sales and marketing efforts. +General and administrative expenses increased 28%, for fiscal 2004 compared to +fiscal 2003, and as a percentage of sales, increased from 17% in fiscal 2003, +to 18% in fiscal 2004. Of this increase, $1,910,000 related to the US +Diagnostics operating segment, $593,000 related to the European Diagnostics +operating segment, and $603,000 related to the Life Science operating segment. +The increase for the US Diagnostics operating segment was primarily +attributable to higher salaries and benefits costs ($180,000), incentive +compensation pursuant to Meridian’s corporate incentive plan ($338,000), +insurance reimbursements related to trade secrets litigation received in +fiscal 2003 ($187,000), favorable adjustments to the bad debt reserve that +occurred in fiscal 2003 ($104,000), a sales and use tax refund in fiscal 2003 +($150,000) and planned recruiting and relocation costs for new employees +($204,000). The increase for the European Diagnostics operating segment was +primarily due to currency translation ($192,000), a favorable reserve +adjustment in fiscal 2003 related to a contract amendment with a vendor +($150,000), and a 2003 adjustment in the amount of $122,000 +-18- +Table of Contents +to reduce the reserve for bad debts based on better than anticipated write-off +history in Italy. The increase for the Life Science operating segment was +primarily attributable to higher salaries and benefits related to planned +investments in management personnel and incentive compensation pursuant to +Meridian’s corporate incentive plan ($264,000). +Operating Income +Operating income increased 15% in fiscal 2004, as a result of the factors +discussed above. +Other Income and Expense +Interest expense declined 9% for fiscal 2004 compared to fiscal 2003. This +decrease was attributable to lower overall debt levels outstanding for the +revolving credit facility and bank term debt and the positive effects of the +debenture exchange and redemption transactions discussed under Liquidity and +Capital Resources herein. Interest expense for fiscal 2004 includes a +write-off of deferred issuance costs in the amount of $130,000 related to the +debenture exchange and redemption transactions. +Other income declined 87% for fiscal 2004 compared to fiscal 2003. Other +income in fiscal 2003 included a gain on the sale of certain distributor +relationships for the European Diagnostics operating segment in the amount of +$226,000. Other income in fiscal 2003 also included $216,000 of income related +to the settlement of litigation with a former employee involving claims +relating to a breach of an employment agreement and misappropriation of company +trade secrets. +Income Taxes +The effective rate for income taxes was 30% for fiscal 2004 and 39% for fiscal +2003. The decline in the effective tax rate was primarily attributable to +federal and state tax credits for research and development activities, state +tax credits for various incentives in Ohio and Tennessee, and favorable +book-to-return adjustments related to non-US sales activities. Book-to-return +adjustments represent changes to prior estimates and generally are determined +upon filing Meridian’s tax returns, typically occurring in the third and fourth +quarters. These adjustments are recorded in the period known. For fiscal +2005, Meridian expects its effective tax rate to approximate 37%. +During October 2004, the President signed into law the American Jobs Creation +Act, H.R. 4520. The Act provides export and domestic production incentives, +foreign tax reform and incentives for repatriation of foreign earnings. +Meridian is currently reviewing the provisions of the Act. At this time, +Meridian believes that this Act will not have an adverse impact on its +effective tax rate. +-19- +Table of Contents +Fiscal Year Ended September 30, 2003 Compared to Fiscal Year Ended September +30, 2002 +Net sales +Overall, net sales increased 11% for fiscal 2003 compared to fiscal 2002. Net +sales for the US Diagnostics operating segment increased $5,735,000, or 17%, +for the European Diagnostics operating segment increased $1,836,000, or 15%, +and for the Life Science operating segment decreased $811,000, or 6%. +For the US Diagnostics operating segment, the sales increase was primarily +related to volume growth in new and existing products. For new products, +Meridian began distributing new diagnostic tests for the detection of Flu and +RSV during the first quarter of fiscal 2003. These new products contributed +sales of approximately $1,900,000 and are a result of Meridian’s recent +distribution agreement with Binax, Inc, a third-party vendor. Other new +products included ImmunoCard STAT! HpSA, a rapid test for the detection of H. +pylori . This product was introduced into non-US markets in late fiscal 2002. +Non-US markets for fiscal 2003 contributed a full year of sales of +approximately $256,000. Meridian introduced this product into the US market +beginning in fiscal 2004. For existing products, volume growth was strong in +C. difficile diagnostic products, led by Meridian’s internally developed +Premier™ Toxins A&B, as well as tests to detect Cryptosporidium, Giardia, +Rotavirus, Mycoplasma, H. pylori, and E. coli . A substantial portion of growth +in Mycoplasma and H. pylori products occurred in export markets, including +Japan. Certain of the sales of Mycoplasma product into Japan related to the +SARS outbreak. This product was used to exclude the diagnosis of certain +respiratory ailments having similar symptoms, such as Mycoplasma, during the +diagnosis of patients potentially infected with SARS. Meridian also began +selling Premier™ Platinum HpSA into Japan during the fourth quarter of fiscal +2003, upon the Japanese government establishing the amount of insurance +reimbursement. +For the European Diagnostics operating segment, the sales increase includes +currency translation gains in the amount of approximately $1,700,000. Sales in +local currency, the Euro, increased 1%. +For the Life Science operating segment, the decrease in sales for fiscal 2003 +was primarily due to orders for make-to-order bulk antigen products with one +customer. This customer provided sales of approximately $3.4 million, $5.2 +million and $4.0 million in fiscal 2003, 2002 and 2001, respectively. For such +products, bulk quantities are manufactured pursuant to customer purchase +orders. Sales are recorded upon shipment. +For all operating segments combined, international sales were $23,220,000, or +35% of total sales, for fiscal 2003, compared to $17,993,000, or 30% of total +sales, in fiscal 2002. Combined domestic exports for the US Diagnostics and +Life Science operating segments were $9,464,000 for fiscal 2003, compared to +$6,073,000 in fiscal 2002. The remaining international sales were generated by +the European Diagnostics operating segment. +-20- +Table of Contents +Gross Profit +Gross profit increased 11% for fiscal 2003 compared to fiscal 2002. Gross +profit margins were 58% for fiscal 2003 compared to 59% for fiscal 2002. +Meridian’s overall operations consist of the sale of diagnostic test kits for +various disease states and in alternative test formats, as well as bioresearch +reagents, bulk antigens and proficiency tests. Product sales mix shifts, in +the normal course of business, can cause the consolidated gross profit margin +to fluctuate by several points. +Operating Expenses +Operating expenses increased 4% for fiscal 2003 compared to fiscal 2002. +Operating expenses for fiscal 2002 included $1,211,000 related to the +abandoned acquisition of Biotrin Holdings. The overall increase in operating +expenses for fiscal 2003 is discussed below. +Research and development expenses increased 34% for fiscal 2003 compared to +fiscal 2002, and as a percentage of sales, increased from 5% in fiscal 2002, +to 6% in fiscal 2003. Of this increase, $797,000 related to the US +Diagnostics operating segment and $190,000 related to the Life Science +operating segment. The increase for the US Diagnostics operating segment is +primarily attributable to additional product development staff and material +costs for new product development activities. The increase for the Life +Science operating segment is primarily attributable to activities at the +protein production laboratory prior to opening in March 2003. +Selling and marketing expenses increased 9% for fiscal 2003 compared to fiscal +2002, and as a percentage of sales, was 16% for fiscal 2003 and fiscal 2002. +Of this increase, $727,000 related to the US Diagnostics operating segment and +$163,000 related to the European Diagnostics operating segment. The increase +for the US Diagnostics operating segment is primarily attributable to spending +on strategic sales initiatives, including preparation and training of field +sales personnel, costs related to the new Binax products, such as samples and +brochures, and sales person incentive compensation. The increase for the +European Diagnostics operating segment is, in part, due to currency. +General and administrative expenses increased 2% for fiscal 2003 compared to +fiscal 2002, and as a percentage of sales, decreased from 18% in fiscal 2002, +to 17% in fiscal 2003. General and administrative expenses for the US +Diagnostics operating segment increased $706,000 and for the European +Diagnostics operating segment decreased $511,000. General and administrative +expenses for the US Diagnostics operating segment included the favorable +effects of insurance reimbursements for legal fees related to trade secrets +litigation in the amount of $127,000, net of $60,000 of legal fees, an +adjustment to reduce the reserve for bad +-21- +Table of Contents +debts in the amount of $104,000 based on better than anticipated write-off +history, and a sales and use tax refund in the amount of $150,000. The +overall increase in general and administrative expenses for the US Diagnostics +operating segment, after consideration of the above credits, is primarily +attributable to employee incentive compensation, normal salary and wage +increases and support costs for growth in the business. General and +administrative expenses for the European Diagnostics operating segment +included a favorable adjustment in the amount of $150,000 related to a +contract amendment that reduced certain minimum purchase commitments to align +with current market expectations, and an adjustment in the amount of $122,000 +to reduce the reserve for bad debts based on better than anticipated write-off +history in Italy. +Operating Income +Operating income increased 28% in fiscal 2003, as a result of the factors +discussed above. +Other Income and Expense +Interest expense declined 13% for fiscal 2003 compared to fiscal 2002. This +decrease is attributable to the favorable effects of a lower interest rate +environment and lower overall debt levels outstanding. +Other income and expense, net for fiscal 2003 included a gain on the sale of +certain distributor relationships for the European Diagnostics operating +segment in the amount of $226,000. These distributor relationships related to +blood-grouping products that no longer fit into Meridian’s long-range product +plans. Other income and expense, net for fiscal 2003 also included $216,000 of +income related to the settlement of litigation with a former employee involving +his breach of an employment agreement and misappropriation of company trade +secrets. Other income and expense, net for fiscal 2002 included a net gain of +$254,000 related to the sale of shares of common stock received in the +demutualization of two insurance companies during the first quarter. +Income Taxes +The effective rate for income taxes was 39% for both fiscal 2003 and fiscal +2002. +Liquidity and Capital Resources: +Comparative Cash Flow Analysis +Meridian’s operating cash flow and financing requirements are determined by +analyses of operating and capital spending budgets and consideration of +acquisition plans. Meridian has historically maintained line of credit +availability to respond quickly to acquisition opportunities. +-22- +Table of Contents +Net cash provided by operating activities increased 2% in fiscal 2004 compared +to fiscal 2003. This increase is primarily attributable to earning levels, +somewhat offset by higher investments in accounts receivable. +Net cash used for investing activities was $3,043,000 for fiscal 2004, +compared to $3,252,000 for fiscal 2003, and primarily related to capital +expenditures and Viral Antigens earnout payments during both periods. +Net cash used for financing activities was $9,827,000 for fiscal 2004 and +fiscal 2003. Net repayments of debt obligations, including the revolving +credit facility, were $5,145,000 in fiscal 2004 and $5,274,000 in fiscal 2003, +reflecting Meridian’s intended efforts to pay down debt. +Net cash flows from operating activities are anticipated to fund working +capital requirements, debt service, and dividends during fiscal 2005. +Capital Resources +The following table presents Meridian’s payments due on financing obligations +as of September 30, 2004 (amounts in thousands): +2010 and +2005 +2006 +2007 +2008 +2009 +thereafter +Total +Bank term debt +$ +696 +$ +569 +$ +524 +$ +— +$ +— +$ +— +$ +1,789 +Subordinated +debentures +— +12,111 +— +— +3,889 +16,000 +During August 2004, Meridian completed the renewal of its credit facility +with its commercial bank. The amount of the credit facility is $25,000,000, +and includes $2,500,000 of term debt and capital lease capacity and a +$22,500,000 line of credit that expires in September 2007. As of November +30, 2004, there were no borrowings outstanding on the line of credit portion +of this facility. +During the second quarter of fiscal 2004, Meridian completed the exchange of +$3,889,000 of its 7% convertible subordinated debentures due September 2006 for +an equal principal amount of new convertible subordinated debentures that +mature September 1, 2013 and bear interest at 5%. The 7% debentures are +convertible into Meridian’s common stock at a price of $16.09 per share and the +new debentures at $14.50 per share. Costs to complete the exchange +transaction, $311,000, are being amortized to interest expense over the life of +new 5% convertible subordinated debentures. These measures are expected to +reduce annual interest expense by approximately $358,000. +During the second quarter of fiscal 2004, Meridian also redeemed $4,000,000 of +its outstanding 7% convertible subordinated debentures due 2006. This +redemption was funded from borrowings from the revolving credit facility. +Meridian may commence future redemptions of remaining outstanding 7% +convertible subordinated debentures. +-23- +Table of Contents +The carrying value of unamortized debt issuance costs related to the debenture +exchange and redemption transactions, $130,000, was charged to interest expense +during the second quarter of fiscal 2004. +All of the bank term debt is denominated in the Euro currency and bears +interest at a variable rate tied to Euro LIBOR. A one-percentage point +increase in the Euro LIBOR rate would increase fiscal 2005 interest expense +by approximately $15,000 for this debt. This debt serves as a natural +currency hedge against certain Euro denominated intercompany receivables. +The Viral Antigens acquisition, completed in fiscal 2000, provides for +additional purchase consideration up to a maximum remaining amount of +$4,804,000, contingent upon Viral Antigens’ future earnings through September +30, 2006. Earnout consideration is payable each year, following the period +earned. Earnout payments, if any, may require financing under the line of +credit or other bank credit facility. Earnout consideration in the amount of +$678,000 related to fiscal 2004 is due to be paid in the second quarter of +fiscal 2005. +The pending acquisition of OEM Concepts is expected to be completed during the +second quarter of fiscal 2005, and the purchase price is expected to be funded +with borrowings under the $25,000,000 credit facility discussed above. +Meridian’s capital expenditures are estimated to be $2,500,000 to $3,000,000 +for fiscal 2005, and may be funded with operating cash flows or availability +under the $25,000,000 credit facility discussed above. Capital expenditures +relate to manufacturing and other equipment of a normal and recurring nature. +-24- +Table of Contents +Known Contractual Obligations: +Known contractual obligations and their related due dates were as follows as of +September 30, 2004: +Total +Less than 1 Year +1-3 Years +4-5 Years +More than 5 Years +Long-term debt +$ +17,789 +$ +696 +$ +13,204 +$ +— +$ +3,889 +Interest payments +relating to long-term +debt +3,424 +1,078 +1,390 +389 +567 +Operating leases (1) +1,366 +465 +733 +168 +— +Purchase obligations (2) +5,410 +5,187 +223 +— +— +VAI Earnout +5,482 +678 +4,804 +— +— +Total +$ +33,471 +$ +8,104 +$ +20,354 +$ +557 +$ +4,456 +(1) +Meridian and its subsidiaries are lessees of (i) office and +warehouse buildings in Maine, Belgium, France and Holland; (ii) +automobiles for use by the direct sales forces in the US and Europe; +and (iii) certain office equipment such as facsimile machines and +copier machines across all business units, under operating lease +agreements that expire at various dates. +(2) +Meridian’s purchase obligations are primarily outstanding purchase +orders for inventory and service items. These contractual commitments +are not in excess of expected production requirements over the next +twelve months. +Other Commitments and Off-balance Sheet Arrangements: +Royalties +Meridian has entered into various license agreements that require payment of +royalties based on a specified percentage of sales of related products (1% to +8%). Meridian expects that payments under these agreements will amount to as +much as $742,000 in fiscal 2005. These royalty payments primarily relate to +the US Diagnostics operating segment. +For one of these license agreements, Meridian was engaged in a dispute with the +licensor regarding the payment of royalties. During April 2004, this dispute +was resolved with Meridian paying $260,000, $210,000 of which related to +purchasing certain manufacturing technology and receiving a fully paid-up, +royalty-free license. +-25- +Table of Contents +Forward Contracts +Meridian uses forward contracts from time to time to address foreign currency +risk related to certain transactions denominated in the Euro currency. These +contracts are used to fix the exchange rate in converting Euros to US dollars. +As of September 30, 2004, Meridian was a party to two such forward contracts +with a notional amount of 600,000 Euro and maturity dates ranging to December +29, 2004. +Market Risk Exposure: +Meridian has market risk exposure related to interest rate sensitive debt and +foreign currency transactions. +Meridian has debt obligations in the aggregate amount of $17,789,000 +outstanding at September 30, 2004, of which $1,789,000 bears interest at +variable rates. Information concerning the maturities of interest rate +sensitive debt is included in the discussion of Capital Resources above. To +date, Meridian has not employed a hedging strategy with respect to interest +rate risk. +Meridian is exposed to foreign currency risk related to its European +distribution operations, including foreign currency denominated intercompany +receivables, as well as Euro denominated term debt. The Euro denominated term +debt serves as a natural hedge against a portion of the Euro denominated +intercompany receivables. +Critical Accounting Policies: +The consolidated financial statements included in this Annual Report on Form +10-K have been prepared in accordance with accounting principles generally +accepted in the United States. Such accounting principles require management +to make judgments about estimates and assumptions that affect the reported +amounts of assets, liabilities, revenues, expenses and related disclosures. +Management believes that the following accounting policies are critical to +understanding the accompanying consolidated financial statements because the +application of such polices requires the use of significant estimates and +assumptions and the carrying values of related assets and liabilities are +material. +Revenue Recognition +Meridian’s revenues are derived primarily from product sales. Revenue is +generally recognized when product is shipped and title has passed to the buyer. +Revenue for the US Diagnostics operating segment is reduced at the date of +sale for estimated rebates and cash discounts that will be claimed by +customers. Rebate agreements are in place with certain independent national +distributors and are designed to reimburse such distributors for their cost in +handling Meridian’s products. Management estimates reserves for rebate +agreements and cash +-26- +Table of Contents +discounts based on historical statistics, current trends, and other factors. +Changes to these reserves are recorded in the period that they become known. +Revenue for the Life Science operating segment’s make-to-order bulk antigen and +antibody products is recognized upon shipment and acceptance by the customer. +Revenue for the Life Science operating segment’s protein production laboratory +may be recognized either upon shipment of product or final lot acceptance +depending on contract terms. +Inventories +Meridian’s inventories are carried at the lower of cost or market. Cost is +determined on a first-in, first-out basis, except for inventories in the Viral +Antigens business for which cost is determined on a last-in, first-out basis. +Meridian establishes reserves against cost for excess and obsolete materials, +finished goods whose shelf life may expire before sale to customers, and other +identified exposures. Management estimates reserves based on assumptions about +future demand and market conditions. If actual market conditions are less +favorable than such estimates, additional inventory writedowns would be +required and this would negatively affect gross profit margin and overall +results of operations. Changes to inventory reserves are recorded in the +period that they become known. +For the Viral Antigens purchase business combination, Meridian elected to use +last-in, first-out accounting for inventories for financial reporting purposes. +Under last-in, first-out accounting, the stepped-up inventory value will be +charged to earnings in periods in which inventory quantities decline below +those on hand at the acquisition date. To date, inventory quantities have +remained above levels on hand at the acquisition date. +Intangible Assets +Meridian’s intangible assets include identifiable intangibles and goodwill. +Identifiable intangibles include customer lists, supply agreements, +manufacturing technologies, patents, licenses, trade names, and non-compete +agreements. All of Meridian’s identifiable intangibles have finite lives. +During the first quarter of fiscal 2002, Meridian adopted Statement of +Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets . +SFAS No. 142 provides that goodwill and intangible assets with indefinite lives +are no longer amortized over their useful lives, but rather, are now subject to +an annual impairment review (or more frequently if impairment indicators arise) +by applying a fair-value based test. There have been no impairments from the +analyses required by SFAS No. 142. +Identifiable intangibles with finite lives are subject to impairment testing as +prescribed by SFAS No. 144, Accounting for the Impairment or Disposal of +Long-lived Assets . Pursuant to the provisions of SFAS No. 144, identifiable +intangibles with finite lives are reviewed for impairment when events or +circumstances indicate that such assets may not be recoverable at their current +carrying value. Whether an event or circumstance +-27- +Table of Contents +triggers an impairment is determined by comparing an estimate of the asset’s +undiscounted future cash flows to its carrying value. If impairment has +occurred, it is measured by a fair-value based test. Meridian adopted SFAS No. +144 effective October 1, 2002. There were no impairments from adoption and no +events or circumstances since adoption indicating that the assets may not be +recoverable. +Meridian’s ability to recover its intangible assets, both identifiable +intangibles and goodwill, is dependent upon the future cash flows of the +related acquired businesses and assets. The application of SFAS Nos. 142 and +144 requires management to make judgments and assumptions regarding future cash +flows, including sales levels, gross profit margins, operating expense levels, +working capital levels, and capital expenditures. With respect to identifiable +intangibles, management also makes judgments and assumptions regarding useful +lives. +Management considers the following factors in evaluating events and +circumstances for possible impairment: (i) significant under-performance +relative to historical or projected operating results, (ii) negative industry +trends, (iii) sales levels of specific groups of products (related to specific +identifiable intangibles), (iv) changes in overall business strategies and (v) +other factors. +If actual cash flows are less favorable than projections, this could trigger +impairment of intangible assets. If impairment were to occur, this would +negatively affect overall results of operations. +Income Taxes +Pursuant to SFAS No. 109, Accounting for Income Taxes , Meridian’s provision for +income taxes includes federal, foreign, state, and local income taxes currently +payable and those deferred because of temporary differences between income for +financial reporting and income for tax purposes. Meridian prepares estimates +of permanent and temporary differences between income for financial reporting +purposes and income for tax purposes. These differences are adjusted to actual +upon filing of Meridian’s tax returns, typically occurring in the third and +fourth quarters of the current fiscal year for the preceding fiscal year’s +estimates. +Meridian’s deferred tax assets include net operating loss carryforwards in +foreign jurisdictions. The realization of tax benefits related to net +operating loss carryforwards is dependent upon the generation of future taxable +income in the applicable jurisdictions. Management assesses the level of +deferred tax asset valuation allowance by taking into consideration historical +and future projected operating results, future reversals of taxable temporary +differences, as well as tax planning strategies. The amount of net deferred +tax asset considered realizable could be reduced in future years if estimates +of future taxable income during the carryforward period are reduced. +Undistributed earnings in Meridian’s foreign subsidiaries are considered by +management to be permanently re-invested in such subsidiaries. Consequently, +US deferred tax liabilities on such earnings have not been +-28- +Table of Contents +recorded. Management believes that such US taxes would be largely offset by +foreign tax credits for taxes paid in applicable foreign jurisdictions. +From time to time, Meridian’s tax returns in Federal, state, and foreign +jurisdictions are examined by the applicable tax authorities. Meridian’s tax +provisions take into consideration the judgmental nature of certain tax +positions. Meridian believes that it has complied with all tax laws and +regulations to which it is subject, and that the results of any tax authority +examinations will not have a significant adverse impact on its financial +condition. To the extent that tax benefits result from the completion of these +examinations or the passing of statutes of limitation, they will affect the +provision in the period known. +Recent Accounting Pronouncements: +See Note 1(n) to the Consolidated Financial Statements. +ITEM 7A. +QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK +See Market Risk Exposure under Item 7 above. +-29- +Table of Contents +ITEM 8. +FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA +Index to Consolidated Financial Statements +Report of Independent Registered Public Accounting Firm +31 +Consolidated Statements of Operations for the years ended September 30, 2004, 2003 and 2002 +32 +Consolidated Statements of Cash Flows for the years ended September 30, 2004, 2003 and 2002 +33 +Consolidated Balance Sheets as of September 30, 2004 and 2003 +34 +Consolidated Statements of Shareholders’ Equity for the years ended September 30, 2004, 2003 and 2002 +36 +Notes to Consolidated Financial Statements +37 +Schedule No. II – Valuation and Qualifying Accounts for the years ended September 30, 2004, 2003 and +2002 +60 +All other supplemental schedules are omitted due to the absence of conditions +under which they are required or because the information is shown in the +Consolidated Financial Statements or Notes thereto. +- 30 - +Table of Contents +Report of Independent Registered Public Accounting Firm +To the Board of Directors and Shareholders of Meridian Bioscience, Inc.: +In our opinion, the consolidated financial statements listed in the +accompanying index present fairly, in all material respects, the financial +position of Meridian Bioscience, Inc. and its subsidiaries at September 30, +2004 and September 30, 2003, and the results of their operations and their cash +flows for each of the three years in the period ended September 30, 2004 in +conformity with accounting principles generally accepted in the United States +of America. In addition, in our opinion, the financial statement schedule +listed in the accompanying index presents fairly, in all material respects, the +information set forth therein when read in conjunction with the related +consolidated financial statements. These financial statements and financial +statement schedule are the responsibility of the Company’s management. Our +responsibility is to express an opinion on these financial statements and +financial statement schedule based on our audits. We conducted our audits of +these statements 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, assessing the accounting principles used and +significant estimates made by management, and evaluating the overall financial +statement presentation. We believe that our audits provide a reasonable basis +for our opinion. +/s/ PricewaterhouseCoopers LLP +Cincinnati, Ohio +November 12, 2004 +- 31 - +Table of Contents +CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) +Meridian Bioscience, Inc. and Subsidiaries +For the Year Ended September 30, +2004 +2003 +2002 +Net Sales +$ +79,606 +$ +65,864 +$ +59,104 +Cost of Sales +33,931 +27,576 +24,506 +Gross Profit +45,675 +38,288 +34,598 +Operating Expenses: +Research and development +4,357 +3,875 +2,888 +Selling and marketing +12,531 +10,601 +9,730 +General and administrative +14,129 +11,023 +10,775 +Costs of abandoned acquisition +— +— +1,211 +Total operating expenses +31,017 +25,499 +24,604 +Operating Income +14,658 +12,789 +9,994 +Other Income (Expense): +Interest income +31 +42 +38 +Interest expense +(1,557 +) +(1,718 +) +(1,974 +) +Other, net +63 +478 +185 +Total other income (expense) +(1,463 +) +(1,198 +) +(1,751 +) +Earnings Before Income Taxes +13,195 +11,591 +8,243 +Income Tax Provision +4,010 +4,573 +3,212 +Net Earnings +$ +9,185 +$ +7,018 +$ +5,031 +Earnings Per Share Data: +Basic earnings per common share +$ +0.62 +$ +0.48 +$ +0.34 +Diluted earnings per common share +0.60 +$ +0.47 +$ +0.34 +Common shares used for basic earnings per common share +14,863 +14,664 +14,621 +Effect of dilutive stock options +396 +286 +139 +Common shares used for diluted earnings per common share +15,259 +14,950 +14,760 +Dividends declared per common share +$ +0.39 +$ +0.34 +$ +0.28 +Anti-dilutive Securities: +Common stock options +145 +250 +737 +Convertible debentures +1,021 +1,243 +1,243 +The accompanying notes are an integral part of these consolidated financial +statements. +- 32 - +Table of Contents +CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) +Meridian Bioscience, Inc. and Subsidiaries +For the Year Ended September 30, +2004 +2003 +2002 +Cash Flows From Operating Activities +Net earnings +$ +9,185 +$ +7,018 +$ +5,031 +Non-cash items: +Depreciation of property, plant and equipment +2,615 +2,390 +2,312 +Amortization of intangible assets and deferred issuance costs +1,462 +1,390 +1,407 +Deferred income taxes +506 +1,044 +200 +Stock compensation expense +126 +14 +48 +Gain on sale of stock received in demutualization +— +— +(254 +) +(Gain) loss on disposition of fixed assets +(37 +) +26 +— +Change in current assets +(3,370 +) +(3,945 +) +(123 +) +Change in current liabilities +1,683 +3,571 +2,446 +Other, net +483 +845 +348 +Net cash provided by operating activities +12,653 +12,353 +11,415 +Cash Flows From Investing Activities +Viral Antigens earnout payments +(456 +) +(1,407 +) +(905 +) +Acquisitions of property, plant and equipment +(2,385 +) +(1,812 +) +(3,550 +) +Proceeds from sales of property, plant and equipment +68 +— +— +Proceeds from sales of investments +— +— +254 +Other intangibles +(270 +) +(33 +) +— +Net cash used in investing activities +(3,043 +) +(3,252 +) +(4,201 +) +Cash Flows From Financing Activities +Net activity on revolving credit facility +(463 +) +(2,482 +) +(2,940 +) +Issuance of debt obligations +930 +— +— +Repayment of debt obligations +(5,612 +) +(2,792 +) +(2,175 +) +Debt issuance costs paid +(311 +) +— +— +Dividends paid +(5,793 +) +(4,989 +) +(4,022 +) +Proceeds from exercises of stock options +1,458 +478 +138 +Other +(36 +) +(42 +) +— +Net cash used in financing activities +(9,827 +) +(9,827 +) +(8,999 +) +Effect of Exchange Rate Changes on Cash +117 +349 +172 +Net Decrease in Cash +(100 +) +(377 +) +(1,613 +) +Cash at Beginning of Period +2,083 +2,460 +4,073 +Cash at End of Period +$ +1,983 +$ +2,083 +$ +2,460 +The accompanying notes are an integral part of these consolidated financial +statements. +- 33 - +Table of Contents +CONSOLIDATED BALANCE SHEETS (dollars in thousands) +Meridian Bioscience, Inc. and Subsidiaries +As of September 30, +2004 +2003 +Assets +Current Assets: +Cash +$ +1,983 +$ +2,083 +Accounts receivable, less allowances of $479 in 2004 and $471 in 2003 +17,857 +14,894 +Inventories +14,107 +14,066 +Prepaid expenses and other current assets +1,669 +1,302 +Deferred income taxes +495 +216 +Total current assets +36,111 +32,561 +Property, Plant and Equipment, at Cost: +Land +696 +688 +Buildings and improvements +15,214 +15,183 +Machinery, equipment and furniture +18,794 +18,035 +Construction in progress +525 +838 +Subtotal +35,229 +34,744 +Less-accumulated depreciation and amortization +17,887 +17,194 +Net property, plant and equipment +17,342 +17,550 +Other Assets: +Deferred debenture offering costs, net +433 +382 +Goodwill +5,423 +4,991 +Other intangible assets, net +9,275 +10,207 +Restricted cash +600 +600 +Other assets +138 +129 +Total other assets +15,869 +16,309 +Total assets +$ +69,322 +$ +66,420 +The accompanying notes are an integral part of these consolidated financial +statements. +- 34 - +Table of Contents +CONSOLIDATED BALANCE SHEETS (dollars in thousands) +Meridian Bioscience, Inc. and Subsidiaries +As of September 30, +2004 +2003 +Liabilities and Shareholders’ Equity +Current Liabilities: +Current portion of long-term debt and capital lease obligations +$ +696 +$ +879 +Borrowings under revolving credit facility +— +463 +Accounts payable +2,631 +2,271 +Accrued payroll costs +6,311 +4,534 +Purchase business combination liability +678 +463 +Other accrued expenses +3,159 +3,001 +Income taxes payable +3,175 +3,719 +Total current liabilities +16,650 +15,330 +Long-term Obligations: +Bank debt and capital lease obligations +1,093 +1,505 +Convertible subordinated debentures +16,000 +20,000 +Deferred Income Taxes +2,647 +2,101 +Commitments and Contingencies +Shareholders’ Equity: +Preferred stock, no par value, 1,000,000 shares authorized, none issued +— +— +Common stock, no par value, 50,000,000 shares authorized, 14,970,998 and +14,728,590 shares issued +2,535 +2,535 +Treasury stock, at cost, 8,300 shares +(32 +) +(32 +) +Additional paid-in capital +23,401 +21,641 +Retained earnings +7,322 +3,930 +Accumulated other comprehensive loss +(294 +) +(590 +) +Total shareholders’ equity +32,932 +27,484 +Total liabilities and shareholders’ equity +$ +69,322 +$ +66,420 +The accompanying notes are an integral part of these consolidated financial +statements. +- 35 - +Table of Contents +CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY +(Dollars and shares in thousands except per share data) +Meridian Bioscience, Inc. and Subsidiaries +Accumulated +Common +Shares +Additional +Other +Total +Shares +Held in +Common +Treasury +Paid-in +Retained +Comprehensive +Comprehensive +Shareholders’ +Issued +Treasury +Stock +Stock +Capital +Earnings +Income (Loss) +Income (Loss) +Equity +Balance at September 30, 2001 +14,599 +(8 +) +$ +2,535 +$ +(32 +) +$ +20,962 +$ +892 +$ +(1,413 +) +$ +22,944 +Cash dividends paid — $0.275 per share +— +— +— +— +— +(4,022 +) +— +(4,022 +) +Exercise of stock options +34 +— +— +— +138 +— +— +138 +Stock compensation expense +— +— +— +— +91 +— +— +91 +Comprehensive income: +Net earnings +— +— +— +— +— +5,031 +— +$ +5,031 +5,031 +Foreign currency translation adjustment +— +— +— +— +— +— +199 +199 +199 +Comprehensive income +$ +5,230 +Balance at September 30, 2002 +14,633 +(8 +) +2,535 +(32 +) +21,191 +1,901 +(1,214 +) +24,381 +Cash dividends paid — $0.34 per share +— +— +— +— +— +(4,989 +) +— +(4,989 +) +Exercise of stock options +94 +— +— +— +478 +— +— +478 +Stock compensation expense +2 +— +— +— +14 +— +— +14 +Cost of shelf registration statement +— +— +— +— +(42 +) +— +— +(42 +) +Comprehensive income: +Net earnings +— +— +— +— +— +7,018 +— +$ +7,018 +7,018 +Foreign currency translation adjustment +— +— +— +— +— +— +624 +624 +624 +Comprehensive income +$ +7,642 +Balance at September 30, 2003 +14,729 +(8 +) +2,535 +(32 +) +21,641 +3,930 +(590 +) +27,484 +Cash dividends paid — $0.39 per share +— +— +— +— +— +(5,793 +) +— +(5,793 +) +Exercise of stock options +242 +— +— +— +1,670 +— +— +1,670 +Stock compensation expense +— +— +— +— +126 +— +— +126 +Cost of shelf registration statement +— +— +— +— +(36 +) +— +— +(36 +) +Comprehensive income: +Net earnings +— +— +— +— +— +9,185 +— +$ +9,185 +9,185 +Foreign currency translation adjustment +— +— +— +— +— +— +296 +296 +296 +Comprehensive income +$ +9,481 +Balance at September 30, 2004 +14,971 +(8 +) +$ +2,535 +$ +(32 +) +$ +23,401 +$ +7,322 +$ +(294 +) +$ +32,932 +The accompanying notes are an integral part of these consolidated financial +statements. +- 36 - +Table of Contents +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Meridian Bioscience, Inc. and Subsidiaries +(1) +Summary of Significant Accounting Policies +(a) +Nature of Business – Meridian is a fully-integrated life science company +whose principal businesses are (i) the development, manufacture and +distribution of diagnostic test kits primarily for certain respiratory, +gastrointestinal, viral and parasitic infectious diseases, (ii) the +manufacture and distribution of bulk antigens, antibodies, and reagents +used by researchers and other diagnostic manufacturers and (iii) the +contract manufacture of proteins and other biologicals for use by +biopharmaceutical and biotechnology companies engaged in research for new +drugs and vaccines. +(b) +Principles of Consolidation - The consolidated financial statements +include the accounts of Meridian Bioscience, Inc. and its subsidiaries +(collectively, “Meridian” or the “Company”). All significant intercompany +accounts and transactions have been eliminated. +(c) +Use of Estimates - The preparation of financial statements in conformity +with generally accepted accounting principles requires management to make +estimates and assumptions that affect the reported amounts of assets and +liabilities, disclosure of contingent assets and liabilities at the date +of the financial statements and the reported amounts of revenues and +expenses during the reporting period. Actual results could differ from +those estimates. Significant estimates are discussed in Notes 1(e), 1(g), +1(h), 1(j), and 5. +(d) +Foreign Currency Translation - Assets and liabilities of foreign +operations are translated using year-end exchange rates with gains or +losses resulting from translation included in a separate component of +accumulated other comprehensive income (loss). Revenues and expenses are +translated using exchange rates prevailing during the year. Meridian also +recognizes foreign currency transaction gains and losses on certain assets +and liabilities that are denominated in the Euro currency. These gains +and losses are included in other income and expense in the accompanying +consolidated statements of operations. +(e) +Inventories - Inventories are stated at the lower of cost or market. +Cost is determined on a first-in, first-out basis (FIFO), except for +$4,634,000 of inventory for which cost is determined on a last-in, +first-out basis (LIFO). The FIFO cost of this inventory was $3,821,000 at +September 30, 2004. +Meridian establishes reserves against cost for excess and obsolete +materials, finished goods whose shelf life may expire before sale to +customers, and other identified exposures. Such reserves were $271,000 and +$585,000 at September 30, 2004 and 2003, respectively. Management estimates +these reserves based on assumptions about future demand and market +conditions. If actual market conditions are less favorable than such +estimates, additional inventory writedowns would be required and this would +negatively affect gross +- 37 - +Table of Contents +profit margin and overall results of operations. Changes to inventory +reserves are recorded in the period that they become known. +For the Viral Antigens purchase business combination, Meridian elected to +use LIFO accounting for inventories for financial reporting purposes. Under +LIFO accounting, the stepped-up inventory value will be charged to earnings +in periods in which inventory quantities decline below those on hand at the +acquisition date. To date, inventory quantities have remained above levels +on hand at the acquisition date. +(f) +Property, Plant and Equipment - Property, plant and equipment are stated +at cost. Upon retirement or other disposition of property, plant and +equipment, the cost and related accumulated depreciation and amortization +are removed from the accounts and the resulting gain or loss is reflected +in earnings. Maintenance and repairs are expensed as incurred. +Depreciation and amortization are computed on the straight-line method in +amounts sufficient to write-off the cost over the estimated useful lives +as follows: +Buildings and improvements - 5 to 33 years +Machinery, equipment, and furniture - 3 to 10 years +(g) +Intangible Assets and Adoption of SFAS Nos. 142 and 144 - Effective +October 1, 2001, Meridian adopted SFAS No. 142, Goodwill and other +Intangible Assets . SFAS No. 142 addresses accounting and reporting for +acquired goodwill and other intangible assets. SFAS No. 142 provides that +goodwill and other intangible assets with indefinite lives are no longer +subject to amortization over their useful lives, but rather, are now +subject to an annual impairment review (or more frequently if impairment +indicators arise) by applying a fair-value based test. Meridian performs +its annual impairment review as of its fiscal yearend. Meridian has no +intangible assets with indefinite lives other than goodwill. There have +been no impairments from the analyses prepared pursuant to SFAS No. 142. +During fiscal 2004, the change in goodwill was an increase of $432,000. +This change consisted of an increase related to the Viral Antigens earnout +obligation for fiscal 2004 in the amount of $671,000 (Life Science +operating segment), offset by a decrease of $239,000 related to +recognition of acquired tax benefits (US Diagnostics operating segment). +During fiscal 2003, the change in goodwill was an increase of $449,000. +This change consisted of an increase related to the Viral Antigens earnout +obligation for fiscal 2003 in the amount of $463,000, offset by a decrease +of $14,000 that was included in the net gain received for the sale of +blood-grouping products. +A summary of Meridian’s acquired intangible assets subject to amortization, +as of September 30, 2004 and 2003 is as follows (in thousands). +- 38 - +Table of Contents +2003 +2004 +Gross +2003 +Gross Carrying +2004 +Carrying +Accumulated +As of September 30, +Value +Accumulated Amortization +Value +Amortization +Covenants not to compete +$ +800 +$ +800 +$ +800 +$ +773 +Core products +3,199 +1,477 +3,199 +1,287 +Manufacturing technologies +5,907 +3,016 +5,747 +2,668 +Trademarks, licenses and patents +1,931 +1,303 +1,820 +1,146 +Customer lists and supply agreements +7,368 +3,334 +7,367 +2,852 +$ +19,205 +$ +9,930 +$ +18,933 +$ +8,726 +The actual aggregate amortization expense for these intangible assets for +fiscal 2004, fiscal 2003 and fiscal 2002 was $1,204,000, $1,241,000 and +$1,272,000, respectively. The estimated aggregate amortization expense for +these intangible assets for each of the five succeeding fiscal years is as +follows: fiscal 2005 - $1,148,000, fiscal 2006 - $1,110,000, fiscal 2007 - +$1,110,000, fiscal 2008- $1,087,000 and fiscal 2009 - $986,000. +Effective October 1, 2002, Meridian adopted SFAS No. 144, Accounting for +Impairment or Disposal of Long-lived Assets . SFAS No. 144 establishes a +single model for accounting for impairment or disposal of long-lived assets, +including the disposal of a segment of a business. Long-lived assets, +excluding goodwill and identifiable intangibles with indefinite lives, are +reviewed for impairment when events or circumstances indicate that such +assets may not be recoverable at their carrying value. Whether an event or +circumstance triggers an impairment is determined by comparing an estimate +of the assets’ future cash flows to its carrying value. If impairment has +occurred, it is measured by a fair-value based test. SFAS No. 144 requires +that assets to be disposed of by sale be reported at the lower of carrying +value or fair value, less costs to sell. There was no impact on results of +operations or financial condition from the adoption of SFAS No. 144 and no +events or circumstances since adoption indicating that the assets may not be +recoverable. +Meridian’s ability to recover its intangible assets, both identifiable +intangibles and goodwill, is dependent upon the future cash flows of the +related acquired businesses and assets. The application of SFAS Nos. 142 +and 144 requires management to make judgments and assumptions regarding +future cash flows, including sales levels, gross profit margins, operating +expense levels, working capital levels, and capital expenditures. With +respect to identifiable intangibles and fixed assets, management also makes +judgments and assumptions regarding useful lives. +Management considers the following factors in evaluating events and +circumstances for possible impairment: (i) significant under-performance +relative to historical or projected operating results, (ii) negative +industry trends, (iii) sales levels of specific groups of products (related +to specific identifiable intangibles), (iv) changes in overall business +strategies and (v) other factors. +- 39 - +Table of Contents +If actual cash flows are less favorable than projections, this could trigger +impairment of intangible assets and other long-lived assets. If impairment +were to occur, this would negatively affect overall results of operations. +(h) +Revenue Recognition - Revenue is generally recognized from sales when +product is shipped and title has passed to the buyer. Revenue for the US +Diagnostics operating segment is reduced at the date of sale for estimated +rebates and cash discounts that will be claimed by customers. Management +estimates reserves for rebate agreements and cash discounts based on +historical statistics, current trends, and other factors. Changes to the +reserves are recorded in the period that they become known. Revenue for +the Life Science operating segment’s make-to-order bulk antigen and +antibody products is recognized upon shipment and acceptance by the +customer. Revenue for the Life Science operating segment’s protein +production laboratory may be recognized either upon shipment of product or +final lot acceptance depending on contract terms. +Trade accounts receivable are recorded in the accompanying consolidated +balance sheet at the invoiced amount less reserves for rebates, cash +discounts, and doubtful accounts. The reserve for doubtful accounts +represents Meridian’s estimate of probable credit losses and is based on +historical write-off experience. The allowance for doubtful accounts and +related metrics, such as days sales outstanding, are reviewed monthly. Past +due balances over 90 days are reviewed individually for collectibility. +Customer invoices are charged off against the allowance when Meridian feels +it is probable the receivable will not be recovered. +(i) +Research and Development Costs - Research and development costs are +charged to expense as incurred. Research and development costs include, +among other things, salaries and wages for research scientists, materials +and supplies used in the development of new products, and costs for +facilities and equipment. +(j) +Income Taxes - The provision for income taxes includes federal, foreign, +state, and local income taxes currently payable and those deferred because +of temporary differences between income for financial reporting and income +for tax purposes. Meridian prepares estimates of permanent and temporary +differences between income for financial reporting purposes and income for +tax purposes. These differences are adjusted to actual upon filing of +Meridian’s tax returns, typically occurring in the third and fourth +quarters of the current fiscal year for the preceding fiscal year’s +estimates. See Note 5. +(k) +Stock-based Compensation – Meridian accounts for its stock based +compensation plans pursuant to the intrinsic value method in APB No. 25. +Had compensation cost for these plans been determined using the fair value +method provided in SFAS No. 123, Meridian’s net earnings and earnings per +share would have been reduced to the following pro forma amounts (amounts +in thousands, except per share data): +- 40 - +Table of Contents +2004 +2003 +2002 +Net earnings as reported +$ +9,185 +$ +7,018 +$ +5,031 +Stock-based compensation included in net income +as reported, after tax +78 +9 +30 +Pro forma fair value of stock options, after tax +(369 +) +(597 +) +(451 +) +Pro forma net earnings +$ +8,894 +$ +6,430 +$ +4,610 +Basic EPS as reported +$ +0.62 +$ +0.48 +$ +0.34 +Stock-based compensation included in net income +as reported, after tax +— +— +— +Pro forma fair value of stock options, after tax +(0.02 +) +(0.04 +) +(0.02 +) +Pro forma basic EPS +$ +0.60 +$ +0.44 +$ +0.32 +Diluted EPS as reported +$ +0.60 +$ +0.47 +$ +0.34 +Stock-based compensation included in net income +as reported, after tax +— +— +— +Pro forma fair value of stock options, after tax +(0.02 +) +(0.04 +) +(0.03 +) +Pro forma diluted EPS +$ +0.58 +$ +0.43 +$ +0.31 +The fair value of each option grant is estimated on the date of grant using +the Black-Scholes option-pricing model with the following weighted-average +assumptions: +Year Ended September 30, +2004 +2003 +2002 +Risk-free interest rates +3.3%-4.2 +% +2.9%-3.8 +% +4.0%-5.3 +% +Dividend yield +3.0%-4.1 +% +3.6%-6.3 +% +4.1%-6.0 +% +Life of option +7 yrs. +8.5 yrs. +8 yrs. +Share price volatility +54%-56 +% +56%-57 +% +56%-57 +% +(l) +Forward Contracts – Meridian uses forward contracts from time to time to +address foreign currency risk related to certain transactions denominated +in the Euro currency. These contracts are used to fix the exchange rate +in converting Euros to US dollars. Gains and losses on such contracts are +recorded in other income and expense in the accompanying consolidated +statements of operations. As of September 30, 2004, Meridian had two such +contracts outstanding with a notional amount of 600,000 Euros and +maturities ranging to December 29, 2004. +- 41 - +Table of Contents +(m) +Supplemental Cash flow Information – Supplemental cash flow information +is as follows for fiscal 2004, 2003 and 2002 (amounts in thousands): +Year Ended September 30, +2004 +2003 +2002 +Cash paid for - +Income taxes +$ +3,722 +$ +1,558 +$ +242 +Interest +1,334 +1,729 +2,113 +Non-cash items - +Viral Antigens earnout obligation +678 +463 +1,407 +(n) +Recent Accounting Pronouncements – During March 2004, the Financial +Accounting Standards Board issued an Exposure Draft of its proposed +standard on accounting for stock based compensation for awards (e.g., +stock options) issued to employees. The proposed standard requires, among +other things, that compensation cost be measured at fair value on the +grant date and charged to expense. Due to the absence of observable +market prices for employee stock options, the standard indicates that the +fair value of most stock options would be determined using an +option-pricing model. The proposed standard would be effective for public +companies for interim and annual periods beginning after June 15, 2005, +which for Meridian would be July 1, 2005. +During January 2003 and December 2003, respectively, the Financial +Accounting Standards Board issued Interpretations Nos. 46 and 46-R, +Consolidation of Variable Interest Entities, an Interpretation of ARB 51 . +FIN Nos. 46 and 46-R clarify the application of Accounting Research Bulletin +No. 51, Consolidated Financial Statements, to certain entities in which +equity investors do not have the characteristics of a controlling financial +interest or do not have sufficient equity at risk for the entity to finance +its activities without additional subordinated financial support from other +parties. FIN Nos. 46 and 46-R had no impact on Meridian because the Company +does not have ownership interests in any variable interest entities. All of +Meridian’s consolidated subsidiaries are wholly-owned by Meridian. +(o) +Reclassifications – Certain reclassifications have been made to the prior +year financial statements to conform with the current year presentation. +- 42 - +Table of Contents +(2) +Inventories +Inventories are comprised of the following (amounts in thousands): +As of September 30, +2004 +2003 +Raw materials +$ +4,110 +$ +3,896 +Work-in-process +4,083 +5,329 +Finished goods +5,914 +4,841 +$ +14,107 +$ +14,066 +(3) +Bank Credit Arrangements +Meridian has a $25,000,000 credit facility with a commercial bank. This +facility includes $2,500,000 of term debt and capital lease capacity and a +$22,500,000 revolving line of credit which bears interest at a LIBOR based +rate, and expires in September 2007. This line of credit is collateralized by +Meridian’s business assets except for those of non-domestic subsidiaries. +There were no borrowings outstanding on this line of credit at September 30, +2004. Borrowings of $463,000 were outstanding on this line of credit at +September 30, 2003, at a weighted average interest rate of 2.4%. Available +borrowings under this line of credit were $22,500,000 at September 30, 2004. +In connection with this bank credit arrangement, Meridian is required to comply +with financial covenants that limit the amount of debt obligations, require a +minimum amount of tangible net worth, and require a minimum amount of fixed +charge coverage. Meridian is in compliance with all covenants. Meridian is +also required to maintain a cash compensating balance with the bank in the +amount of $600,000 pursuant to this bank credit arrangement. +- 43 - +Table of Contents +(4) +Long-Term Debt Obligations +Long-term debt obligations are comprised of the following (amounts in +thousands): +As of September 30, +2004 +2003 +Convertible subordinated debentures, unsecured, 7% +interest payable semi-annually on March 1 and +September 1, principal due September 1, 2006 +$ +12,111 +$ +20,000 +Convertible subordinated debentures, unsecured, 5% +interest payable semi-annually on March 1 and +September 1, principal due September 1, 2013 +3,889 +— +Bank term loan, denominated in Euro, interest based +on Euro LIBOR (2.87% at September 30, 2004), +quarterly payments of $47,609, matures in September +2007 +905 +1,306 +Bank term loan, denominated in Euro, interest based +on Euro LIBOR (2.87% at September 30, 2004), +quarterly payments of $126,272, matures in June +2006 +884 +928 +Other debt obligations +— +150 +Total debt obligations +17,789 +22,384 +Less current portion +(696 +) +(879 +) +Long-term debt obligations +17,093 +$ +21,505 +Maturities of long-term debt for fiscal 2005, fiscal 2006, and fiscal 2007 are +$696,000, $12,680,000, and $524,000, respectively. +Meridian’s 7% and 5% debentures are convertible into common stock at $16.09 and +$14.50 per share, respectively. These debentures were issued at par and do not +have a discount feature. The 7% and 5% debentures are redeemable at the option +of Meridian. There is no call premium for the 7% debentures. The call premium +for the 5% debentures ranges from 101% to 103% of principal if redeemed prior +to September 1, 2007. After September 1, 2007, there is no call premium. The +aggregate fair value of the convertible subordinated debentures is estimated to +be $16,683,000 based on limited trading activity at September 30, 2004. The +accompanying consolidated balance sheet includes offering costs, which have +been deferred and are being amortized to interest expense over the life of the +debentures. The net amount of such costs was $433,000 and $382,000 at +September 30, 2004 and 2003 (net of accumulated amortization of $1,207,000 and +$947,000, respectively). +During the second quarter of fiscal 2004, Meridian completed the exchange of +$3,889,000 of its 7% convertible subordinated debentures for an equal principal +amount of new convertible subordinated debentures that mature September 1, 2013 +and bear interest at 5%. The new debentures are convertible into Meridian’s +common stock at a price of $14.50 per share. Costs to complete the +transaction, $311,000, are being amortized to interest expense over the life of +the new 5% convertible subordinated debentures. +During the second quarter of fiscal 2004, Meridian also redeemed $4,000,000 of +its outstanding 7% convertible subordinated debentures with borrowings from its +revolving credit facility. The carrying value of unamortized +- 44 - +Table of Contents +debt issuance costs related to the debenture exchange and redemption +transactions, $130,000, was charged to interest expense during the second +quarter of fiscal 2004. After the effect of the exchange and redemption +transactions, Meridian has outstanding $12,111,000 of its 7% convertible +subordinated debentures and $3,889,000 of its 5% convertible subordinated +debentures. +(5) +Income Taxes +(a) Earnings before income taxes, and the related provision for income taxes +for the years ended September 30, 2004, 2003 and 2002 were as follows (in +thousands): +Year Ended September 30, +2004 +2003 +2002 +Earnings before income taxes - +Domestic +$ +11,280 +$ +9,055 +$ +6,979 +Foreign +1,915 +2,536 +1,264 +Total +$ +13,195 +$ +11,591 +$ +8,243 +Provision (credit) for income taxes - +Federal – +Current provision +$ +2,907 +$ +1,319 +$ +— +Temporary differences +Fixed asset basis differences and depreciation +398 +(107 +) +(108 +) +Intangible asset basis differences and amortization +(97 +) +(119 +) +(213 +) +Currently non-deductible expenses and reserves +54 +136 +(149 +) +Currency translation +(36 +) +17 +(31 +) +Abandoned acquisition costs +— +412 +(412 +) +Net operating loss carryforwards +— +1,368 +3,248 +Other, net +(151 +) +(97 +) +(75 +) +Subtotal +3,075 +2,929 +2,260 +State and local +194 +581 +438 +Foreign +741 +1,063 +514 +Total +$ +4,010 +$ +4,573 +$ +3,212 +-45- +Table of Contents +(b) The following is a reconciliation between the statutory US income tax rate +and the effective rate derived by dividing the provision for income taxes by +earnings before income taxes (dollars in thousands): +Year Ended September 30, +2004 +2003 +2002 +Computed income taxes at statutory rate +$ +4,513 +34.2 +% +$ +3,941 +34.0 +% +$ +2,802 +34.0 +% +Increase (decrease) in taxes resulting from - +State and local income taxes +346 +2.6 +385 +3.3 +295 +3.6 +Federal and state tax credits +(285 +) +(2.2 +) +— +— +— +— +Subpart F income taxes +115 +0.9 +384 +3.3 +228 +2.8 +Foreign taxes +174 +1.3 +197 +1.7 +168 +2.0 +Extra territorial income exclusion +(267 +) +(2.0 +) +(197 +) +(1.7 +) +(170 +) +(2.1 +) +Valuation allowance +(85 +) +(0.6 +) +(25 +) +(0.2 +) +(52 +) +(0.6 +) +Other, net +(501 +) +(3.8 +) +(112 +) +(0.9 +) +(59 +) +(0.7 +) +$ +4,010 +30.4 +% +$ +4,573 +39.5 +$ +3,212 +39.0 +(c) The components of net deferred tax liabilities were as follows (amounts in +thousands): +As of September 30, +2004 +2003 +Deferred tax assets - +Valuation reserves and non-deductible expenses +$ +424 +$ +568 +State tax credit carryforwards +170 +— +Net operating loss carryforwards +1,513 +1,542 +Foreign tax credits +8 +193 +Other +122 +10 +Subtotal +2,237 +2,313 +Less valuation allowance +1,177 +1,457 +Deferred tax assets +1,060 +856 +Deferred tax liabilities - +Fixed asset basis differences and depreciation +(728 +) +16 +Intangible asset basis differences and amortization +(1,938 +) +(2,068 +) +Inventory basis differences +(163 +) +(309 +) +Other +(383 +) +(380 +) +Deferred tax liabilities +(3,212 +) +(2,741 +) +Net deferred tax liability +$ +(2,152 +) +$ +(1,885 +) +For income tax purposes, Meridian has tax benefits related to operating loss +carryforwards in certain states in the US and countries of Belgium and France. +The net operating loss carryforwards in certain states in the US expire between +2006 and 2021. The net operating loss carryforwards in Belgium and France have +no expiration date. Meridian has recorded deferred tax assets for these +carryforwards, inclusive of valuation allowances in the amount of $336,000 at +September 30, 2004. Valuation allowances for pre-acquisition net operating +loss +-46- +Table of Contents +carryforwards amount to $846,000, while valuation allowances for +post-acquisition net operating loss carryforwards are $331,000. All valuation +allowances relate to foreign jurisdictions. If tax benefits are recognized in +future years for pre-acquisition operating losses, such benefits will be +allocated to reduce goodwill and acquired intangible assets. The valuation +allowance recorded against deferred tax assets at September 30, 2003 was +$1,457,000 and related solely to operating loss carryforwards in foreign +jurisdictions. +The realization of deferred tax assets in foreign jurisdictions is dependent +upon the generation of future taxable income in certain European countries. +Management has considered the levels of currently anticipated pre-tax income in +foreign jurisdictions in assessing the required level of the deferred tax asset +valuation allowance. Taking into consideration historical and current +operating results, and other factors, management believes that it is more +likely than not that the net deferred tax asset for foreign jurisdictions, +after consideration of the valuation allowance, which has been established, +will be realized. The amount of the net deferred tax asset considered +realizable in foreign jurisdictions, however, could be reduced in future years +if estimates of future taxable income during the carryforward period are +reduced. +Undistributed earnings re-invested indefinitely in the Italian operation were +approximately $8,195,000 at September 30, 2004. US deferred tax liabilities of +approximately $3,114,000 on such earnings have not been recorded. Management +believes that such US taxes would be largely offset by foreign tax credits for +taxes paid in applicable foreign jurisdictions. +During October 2004, the President signed into law the American Jobs Creation +Act, H.R. 4520. The Act provides export and domestic production incentives, +foreign tax reform, and incentives for repatriation of foreign earnings. +Meridian is currently reviewing the provisions of the Act. At this time, +Meridian believes that this Act will not have an adverse impact on its +effective tax rate.. +From time to time, Meridian’s tax returns in Federal, state, and foreign +jurisdictions are examined by the applicable tax authorities. Meridian’s tax +provisions take into consideration the judgmental nature of certain tax +positions. Meridian believes that it has complied with all tax laws and +regulations to which it is subject, and that the results of any tax authority +examinations will not have a significant adverse impact on its financial +condition. To the extent that tax benefits result from the completion of these +examinations or the passing of statutes of limitation, they will affect the +provision in the period known. +(6) +Employee Benefits +(a) +Savings and Investment Plan - Meridian has a profit sharing and +retirement savings plan covering substantially all full-time employees. +Profit sharing contributions to the plan, which are discretionary, are +determined by the Board of Directors. The plan permits participants to +contribute to the plan through salary reduction. Under terms of the plan, +Meridian will match up to 3% of an employee’s contributions. +Discretionary and matching contributions by Meridian to the plan amounted +to approximately $887,000, $728,000, and $665,000, during fiscal 2004, +2003 and 2002, respectively. +-47- +Table of Contents +(b) +Stock-Based Compensation Plans - Meridian has two active stock based +compensation plans, the 1996 Stock Option Plan Amended and Restated +effective January 23, 2001 (“The 1996 Plan”), the 1999 Directors’ Stock +Option Plan (“The 1999 Plan”), and an Employee Stock Purchase Plan (“The +ESP Plan”) which became effective October 1, 1997. +Meridian may grant options for up to 1,200,000 shares under the 1996 Plan +and 50,000 shares under the 1999 Plan. Meridian has granted 1,181,700 +options under the 1996 Plan and 45,023 shares under the 1999 plan through +September 30, 2004. Options may be granted at exercise prices varying from +95% to 110% of the market value of the underlying common stock on the date +of grant and have maximum terms up to ten years. Vesting schedules are +established at the time of grant and may be set based on future service +periods, achievement of performance targets, or a combination thereof. All +options contain provisions restricting their transferability and limiting +their exercise in the event of termination of employment or the disability +or death of the optionee. Meridian has granted options for 1,020,414 shares +under similar plans that have expired. +Effective October 1, 1997, Meridian may sell shares of stock to its +full-time and part-time employees under the ESP Plan up to the number of +shares equivalent to a 1% to 15% payroll deduction from an employee’s base +salary plus an additional 5% dollar match of this deduction by Meridian. +A summary of the status of Meridian’s stock option plans at September 30, 2004, +2003 and 2002 and changes during the years then ended is presented in the +tables and narrative below: +Year Ended September 30, +2004 +2003 +2002 +Wtd Avg +Wtd Avg +Wtd Avg +Exercise +Exercise +Exercise +Shares +Price +Shares +Price +Shares +Price +Outstanding beginning of +period +1,216,545 +$ +7.13 +1,251,974 +$ +7.00 +1,062,828 +$ +7.38 +Grants +134,068 +10.41 +164,668 +6.71 +244,868 +4.84 +Exercises +(242,158 +) +6.02 +(93,324 +) +5.12 +(35,649 +) +4.25 +Expirations and forfeitures +(10,872 +) +7.67 +(106,773 +) +6.07 +(20,073 +) +5.52 +Outstanding end of period +1,097,583 +$ +7.77 +1,216,545 +$ +7.13 +1,251,974 +$ +7.00 +Exercisable end of period +684,339 +$ +8.45 +685,192 +$ +8.25 +709,566 +$ +8.13 +Weighted average fair +value of grants +$ +4.25 +$ +2.60 +$ +1.67 +-48- +Table of Contents +The range of exercise prices, the weighted average exercise price and the +weighted average remaining contractual life is summarized below for options +which are outstanding and those that are exercisable at September 30, 2004. +Options Outstanding +Options Exercisable +Wtd Avg +Options +Remaining +Wtd Avg +Options +Wtd Avg +Range of Exercise Prices +Outstanding +Life (Yrs.) +Ex Price +Outstanding +Ex Price +$ 1.00 - $ 5.00 +241,413 +6.9 +$ +4.33 +25,885 +$ +3.03 +$ 5.01 - $10.00 +538,801 +5.1 +7.15 +468,460 +7.21 +$10.01 - $16.00 +317,369 +5.7 +11.45 +189,994 +12.24 +1,097,583 +5.7 +$ +7.77 +684,339 +$ +8.45 +(7) +Major Customers and Segment Data +Meridian was formed in 1976 and functions as a fully integrated research, +development, manufacturing, marketing and sales organization with primary +emphasis in the field of life science. Meridian’s principal businesses are (i) +the development, manufacture and distribution of diagnostic test kits primarily +for certain respiratory, gastrointestinal, viral and parasitic infectious +diseases, (ii) the manufacture and distribution of bulk antigens, antibodies, +and reagents used by researchers and other diagnostic manufacturers and (iii) +the contract manufacture of proteins and other biologicals for use by +biopharmaceutical and biotechnology companies engaged in research for new drugs +and vaccines. +As a result of changes that occurred in February 2003 in the organization and +management of Meridian’s businesses, effective with the quarter beginning +January 1, 2003, Meridian changed its reportable operating segments to US +Diagnostics, European Diagnostics, and Life Science. The US Diagnostics +operating segment consists of manufacturing operations in Cincinnati, Ohio, and +the sale and distribution of diagnostic test kits in the US and countries +outside of Europe, Africa and the Middle East. The European Diagnostics +operating segment consists of the sale and distribution of diagnostic test kits +in Europe, Africa, and the Middle East. The Life Science operating segment +consists of manufacturing operations in Memphis, Tennessee and Saco, Maine, and +the sale and distribution of bulk antigens, antibodies and bioresearch reagents +domestically and abroad. The Life Science operating segment consists of the +Viral Antigens and BIODESIGN subsidiaries, including the protein production +laboratory. +-49- +Table of Contents +Sales to individual customers constituting 10% or more of net consolidated +sales were as follows (dollars in thousands): +Year Ended September 30, +2004 +2003 +2002 +Customer A (US Diagnostics) +$ +12,647 +(16 +%) +$ +9,089 +(14 +%) +$ +8,479 +(14 +%) +Customer B (US Diagnostics) +$ +7,566 +(10 +%) +$ +6,408 +(10 +%) +$ +6,526 +(11 +%) +Combined export sales for the US Diagnostics and Life Science operating +segments were $9,504,000, $9,464,000 and $6,073,000 in fiscal years 2004, 2003 +and 2002, respectively. Two products accounted for 20% of total sales in +fiscal 2004. Accounts receivable, which is largely dependent upon funds from +the Italian government, represents approximately 34% of the consolidated +accounts receivable balance at September 30, 2004. +Significant country information for the European Diagnostics operating segment +is as follows (in thousands). Sales are attributed to the geographic area +based on the location from which the product is shipped to the customer. +Year Ended September 30, +2004 +2003 +2002 +Italy - +Sales +$ +6,137 +$ +5,354 +$ +4,694 +Identifiable assets +7,133 +6,124 +5,978 +Belgium - +Sales +$ +9,275 +$ +8,402 +$ +7,226 +Identifiable assets +4,129 +4,158 +4,034 +As required by Financial Accounting Standards Board Statement No. 131, +Disclosures About Segments of an Enterprise and Related Information, prior year +operating information in the following table has been reclassified to conform +with the change in operating segments described above. Segment information for +the years ended September 30, 2004, 2003, and 2002 is as follows (in +thousands): +-50- +Table of Contents +US +European +Life +Diagnostics +Diagnostics +Science +Elim (1) +Total +Fiscal Year 2004 - +Net sales – +Third-party +48,153 +15,412 +16,041 +— +79,606 +Inter-segment +5,629 +4 +764 +(6,397 +) +— +Operating income +10,266 +2,095 +2,394 +(97 +) +14,658 +Depreciation and amortization +2,969 +186 +922 +— +4,077 +Capital expenditures +1,892 +152 +341 +— +2,385 +Total assets +63,981 +11,686 +25,329 +(31,674 +) +69,322 +Fiscal Year 2003 - +Net sales – +Third-party +$ +39,906 +$ +13,756 +$ +12,202 +$ +— +$ +65,864 +Inter-segment +5,155 +79 +939 +(6,173 +) +— +Operating income +9,029 +2,389 +1,350 +21 +12,789 +Depreciation and amortization +2,820 +150 +810 +— +3,780 +Capital expenditures +1,324 +55 +433 +— +1,812 +Total assets +63,941 +10,489 +22,232 +(30,242 +) +66,420 +Fiscal Year 2002 - +Net sales – +Third-party +$ +34,171 +$ +11,920 +$ +13,013 +$ +— +$ +59,104 +Inter-segment +4,992 +— +735 +(5,727 +) +— +Operating income +5,514 +1,565 +2,896 +19 +9,994 +Depreciation and amortization +2,827 +171 +721 +— +3,719 +Capital expenditures +1,080 +46 +2,424 +— +3,550 +Total assets +63,708 +10,229 +21,293 +(30,135 +) +65,095 +(1) Eliminations consist of intersegment transactions. +Year Ended September 30, +2004 +2003 +2002 +Segment operating income +$ +14,658 +$ +12,789 +$ +9,994 +Interest income +31 +42 +38 +Interest expense +(1,557 +) +(1,718 +) +(1,974 +) +Other, net +63 +478 +185 +Consolidated earnings +before income taxes +$ +13,195 +$ +11,591 +$ +8,243 +-51- +Table of Contents +The accounting policies of the segments are the same as those described in the +summary of significant accounting policies in Note 1. Transactions between +operating segments are accounted for at established intercompany prices for +internal and management purposes with all intercompany amounts eliminated in +consolidation. Total assets for the US Diagnostics and Life Science operating +segments include goodwill of $1,825,000 and $3,598,000, respectively at +September 30, 2004, $2,063,000 and $2,928,000, respectively at September 30, +2003, and $2,078,000 and $2,464,000, respectively at September 30, 2002. +(8) +Commitments and Contingencies +(a) +Royalty Commitments - Meridian has entered into various license agreements +that require payment of royalties based on a specified percentage of the +sales of licensed products (1% to 8%). These royalty expenses are +recognized on an as-earned basis and recorded in the year earned as a +component of cost of sales. Annual royalty expenses associated with these +agreements were approximately $593,000, $766,000, and, $860,000, +respectively, for the years ended September 30, 2004, 2003 and 2002. +For one of these license agreements, Meridian was engaged in a dispute with +the licensor regarding the payment of royalties. During April 2004, this +dispute was resolved with Meridian paying $260,000, $210,000 of which +related to purchasing certain manufacturing technology and receiving a fully +paid-up, royalty-free license. +(b) +Operating Lease Commitments - Meridian and its subsidiaries are lessees +of (i) office and warehouse buildings in Maine, Belgium, France and +Holland; (ii) automobiles for use by the direct sales forces in the US and +Europe; and (iii) certain office equipment such as facsimile machines and +copier machines across all business units, under operating lease +agreements that expire at various dates. Operating lease commitments for +each of the five succeeding fiscal years are as follows: fiscal 2005 - +$465,000, fiscal 2006 - $359,000, fiscal 2007 - $203,000, fiscal 2008 - +$172,000, and fiscal 2009 - $168,000. +(c) +Litigation – During fiscal 2003, Meridian reached a settlement with a +former employee regarding his breach of an employment agreement, +misappropriation of company trade secrets and related legal proceedings. +This settlement provided that Meridian receive proceeds from the +disposition of certain personal assets of the former employee. The amount +of such proceeds was $216,000, and is included in other income in the +accompanying consolidated statement of operations for fiscal 2003. Legal +fees related to these matters amounted to approximately $1,100,000 in +fiscal years 2000 through 2003. During fiscal 2003, Meridian received +insurance reimbursement in the amount of $187,000 for a portion of these +legal fees. This insurance reimbursement is recorded in general and +administrative expenses in the accompanying consolidated statement of +operations for fiscal 2003. +Meridian is a party to other litigation that it believes is in the normal +course of business. The ultimate resolution of these matters is not +expected to have a material adverse effect on Meridian’s financial position, +-52- +Table of Contents +results of operations or cash flows. No provision has been made in the +accompanying consolidated financial statements for these matters. +(d) +Viral Antigens Earnout +The purchase agreement for the Viral Antigens purchase business combination +provides for additional consideration, up to a maximum remaining amount of +$4,804,000, contingent upon Viral Antigens’ future earnings through September +30, 2006. Earnout consideration is payable each year following the period +earned. During fiscal 2004, 2003, 2002 and 2001, additional consideration of +$678,000, $456,000, $1,407,000 and $905,000, respectively, was earned +pursuant to this provision. Such amounts are included in goodwill in the +accompanying consolidated balance sheets. Future earnout consideration, if +any, will be allocated to goodwill, and will be recorded in the period in +which it is earned and becomes payable. +(9) +Quarterly Financial Data (Unaudited) +Amounts are in thousands except per share data. The sum of the earnings per +common share and cash dividends per share may not equal the corresponding +annual amounts due to interim quarter rounding. +For the Quarter Ended in Fiscal 2004 +December 31 +March 31 +June 30 +September 30 +Net sales +$ +18,166 +$ +20,940 +$ +18,256 +$ +22,244 +Gross profit +10,117 +12,033 +10,901 +12,624 +Net earnings +1,795 +2,289 +2,157 +2,944 +Basic earnings per common share +0.12 +0.15 +0.14 +0.21 +Diluted earnings per common share +0.12 +0.15 +0.14 +0.19 +Cash dividends per common share +0.09 +0.10 +0.10 +0.10 +For the Quarter Ended in Fiscal 2003 +December 31 +March 31 +June 30 +September 30 +Net sales +$ +16,103 +$ +16,913 +$ +15,693 +$ +17,155 +Gross profit +9,162 +10,061 +9,130 +9,935 +Net earnings +1,424 +1,923 +1,822 +1,849 +Basic earnings per common share +0.10 +0.13 +0.12 +0.13 +Diluted earnings per common share +0.10 +0.13 +0.12 +0.12 +Cash dividends per common share +0.07 +0.09 +0.09 +0.09 +(10) +Subsequent Events +During November 2004, Meridian executed a letter of intent to purchase all +the outstanding capital stock of OEM Concepts, a manufacturer and +distributor of bulk antibodies to the diagnostic, pharmaceutical, and +-53- +Table of Contents +research markets. This pending acquisition, which is subject to due +diligence review and execution of a definitive agreement, will add +large-volume monoclonal antibody manufacturing capabilities to Meridian’s +Life Science operating segment and will complement the Viral Antigens and +BIODESIGN subsidiaries. It will also decrease Meridian’s reliance on third +parties for monoclonal and polyclonal antibodies. +ITEM 9. +CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS +ON ACCOUNTING AND FINANCIAL DISCLOSURE +Nothing to report. +ITEM 9A. +CONTROLS AND PROCEDURES +As of September 30, 2004, an evaluation was completed under the supervision and +with the participation of Meridian’s management, including Meridian’s Chief +Executive Officer and Chief Financial Officer, of the effectiveness of the +design and operation of Meridian’s disclosure controls and procedures pursuant +to Rule 13a-15(b) and 15d-15(b) promulgated under the Securities Exchange Act +of 1934, as amended. Based on that evaluation, Meridian’s management, +including the CEO and CFO, concluded that Meridian’s disclosure controls and +procedures were effective as of September 30, 2004. There have been no changes +in Meridian’s internal controls over financial reporting identified in +connection with the evaluation of internal controls that occurred during the +last fiscal quarter that has materially affected, or is reasonably likely to +affect, Meridian’s internal controls over financial reporting, or in other +factors that could significantly affect internal controls subsequent to +September 30, 2004. +ITEM 9B. +OTHER INFORMATION +Nothing to report. +PART III +The information required by Items 10., 11., 12., 13., and 14., of Part III are +incorporated by reference from the Registrant’s Proxy Statement for its 2005 +Annual Shareholders’ Meeting to be filed with the Commission pursuant to +Regulation 14A. The equity compensation plan chart required by Regulation S-K +Item 201(d) appears in and is hereby incorporated by reference from the Proxy +Materials for the 2005 Shareholders’ Meeting. +-54- +Table of Contents +ITEM 15. +EXHIBITS AND FINANCIAL STATEMENT SCHEDULES +(a) (1) and (2) FINANCIAL STATEMENTS AND SCHEDULES. +All financial statements and schedules required to be filed by Item 8 of this +Form and included in this report have been listed previously under Item 8. No +additional financial statements or schedules are being filed since the +requirements of paragraph (d) under Item 15 are not applicable to Meridian. +(a) (3) EXHIBITS. +Exhibit Number +Description of Exhibit +Filing Status +3.1 +Articles of Incorporation, including amendments +not related to Company name change +A +3.2 +Code of Regulations +B +4.1 +Indenture between Meridian and Star Bank, National +Association, as Trustee, relating to Meridian’s 7% +Convertible Subordinated Debentures due 2006 +C +4.2 +Indenture between Meridian and LaSalle Bank +National Association, as Trustee, relating to +Meridian’s 5% Convertible Subordinated Debentures +due 2013 +D +10.3 +License Agreement dated October 6, 1983 with +Marion Laboratories, Inc. +B +10.5 +Sublicense Agreement dated June 17, 1993 among +Johnson & Johnson, the Scripps Research Institute +and Meridian Concerning certain Patent Rights +E +10.6 +Assignment dated June 17, 1993 from Ortho +Diagnostic Systems Inc. to Meridian concerning +certain Patent Rights +E +10.7 +Agreement dated January 24, 1994 between Meridian +Diagnostics, Inc. and Immulok, Inc. +F +10.8 +Asset Purchase Agreement dated June 24, 1996 +between Cambridge Biotech Corporation and Meridian +Diagnostics, Inc. +G +10.9 +Merger Agreement among Gull Laboratories, Inc., +Meridian Diagnostics, Inc. Fresenius AG and +Meridian Acquisition Co. dated as of September 15, +1998 +H +10.10* +Savings and Investment Plan Prototype Adoption +Agreement +S +10.12* +1986 Stock Option Plan +I +10.14* +1994 Directors’ Stock Option Plan +J +10.15* +1996 Stock Option Plan +K +10.16* +Salary Continuation Agreement for John A. Kraeutler +L +10.17 +First Amendment to Merger Agreement Among Gull +Laboratories, Inc., Meridian Diagnostics, Inc. +Fresenius AG and Meridian Acquisition Co. +M +-55- +Table of Contents +10.18* +1999 Directors’ Stock Option Plan +N +10.20 +Dividend Reinvestment Plan +P +10.21 +Merger Agreement dated September 13, 2000 among +Meridian and the Shareholders of Viral Antigens, Inc. +O +10.22 +Loan and Security Agreement among Meridian, certain of +its subsidiaries and Fifth Third Bank Dated as of +September 20, 2001 +R +10.23* +Employment Agreement Dated February 15, 2001 between +Meridian and John A. Kraeutler, including the Addendum +to Employment Agreement dated April 24, 2001 between +Meridian and John A. Kraeutler +R +10.24* +Sample Option Agreement Dated October 1, 2001 +R +10.25* +Sample Option Agreement Dated October 1, 2001 +R +10.26* +1996 Stock Option Plan as Amended and Restated +Effective January 23, 2001 +Q +10.27* +Sample Option Agreement Dated November 19, 2002 +S +10.28* +Agreement Concerning Disability and Death dated +September 10, 2003, between Meridian and William J. +Motto +S +10.29 +Professional Services Agreement dated October 1, 2002 +between Meridian and Antonio Interno +S +10.30 +Amended and Restated Revolving Note with Fifth Third +Bank dated August 5, 2004 +Filed herewith +13 +2004 Annual Report to Shareholders +(1 +) +14 +Code of Ethics +S +21 +Subsidiaries of the Registrant +Filed herewith +23 +Consent of Independent Registered Public Accounting Firm +Filed herewith +31.1 +Certification of Principal Executive Officer required +by Rule 13a-14(a) +Filed herewith +31.2 +Certification of Principal Financial Officer required +by Rule 13a-14(a) +Filed herewith +32 +Section 1350 Certification of Chief Executive Officer +and Chief Financial Officer +Filed herewith +-56- +Table of Contents +(1) Only portions of the 2004 Annual Report to Shareholders specifically are +incorporated by reference in this Form 10-K as filed herewith. A supplemental +paper copy of the 2004 Annual Report to Shareholders has been provided to the +Securities and Exchange Commission for informational purposes only. +*Management Compensatory Contracts +Incorporated by reference to: +A. +Registration Statement No. 333-02613 on Form S-3 filed with the +Securities and Exchange Commission on April 18, 1996. +B. +Registration Statement No. 33-6052 filed under the Securities Act of +1933. +C. +Registration Statement No. 333-11077 on Form S-3 filed with the +Securities and Exchange Commission on August 29, 1996. +D. +Meridian’s Schedule T-O filed with the Securities and Exchange Commission on +October 24, 2003. +E. +Meridian’s Form 8-K filed with the Securities and Exchange Commission on +June 17, 1993. +F. +Meridian’s Forms 8-K filed with the Securities and Exchange Commission on +February 8, 1994 and April 6, 1994. +G. +Meridian’s Form 8-K filed with the Securities and Exchange Commission on +July 2, 1996. +H. +Meridian’s Form 8-K filed with the Securities and Exchange Commission on +September 17, 1998. +I. +Registration Statement No. 33-89214 on Form S-8 filed with the Securities +and Exchange Commission on April 5, 1995. +J. +Registration Statement No. 33-78868 on Form S-8 filed with the Securities +and Exchange Commission on May 12, 1994. +K. +Meridian’s Annual Report on Form 10-K for the Fiscal Year Ended September +30, 1996. +L. +Meridian’s Annual Report on Form 10-K for the Fiscal Year Ended September +30, 1995. +M. +Company’s Report on Form 8-K filed with the Securities and Exchange +Commission filed on November 13, 1998. +N. +Meridian’s Proxy Statement filed with the Securities and Exchange +Commission on December 21, 1998. +O. +Meridian’s Current Report on Form 8-K dated September 29, 2000. +P. +Meridian’s Annual Report on Form 10-K for the Fiscal Year Ended September +30, 1999. +Q. +Registration Statement No. 333-75312 on Form S-8 filed with the +Securities and Exchange Commission on December 17, 2001 +R. +Meridian’s Annual Report on Form 10-K for the Fiscal Year Ended September +30, 2001. +S. +Meridian’s Annual Report on Form 10-K for the Fiscal Year Ended September +30, 2003. +-57- +Table of Contents +SIGNATURES +Pursuant to the requirements of Section 13 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. +MERIDIAN BIOSCIENCE, INC. +By: +/s/ William J. Motto +Date: December 13, 2004 +William J. Motto +Chairman of the Board +and Chief Executive Officer +-58- +Table of Contents +Pursuant to the requirements of the Securities Exchange Act of 1934, this +report has been signed by the following persons on behalf of the Registrant and +in the capacities and on the dates indicated. +Signature +Capacity +Date +/s/ William J. Motto +William J. Motto +Chairman of the Board of Directors and +Chief Executive Officer (Principal +Executive Officer) +December 13, 2004 +/s/ John A. Kraeutler +John A. Kraeutler +President and Chief Operating +Officer, Director +December 13, 2004 +/s/ Melissa Lueke +Melissa Lueke +Vice President and Chief Financial Officer +December 13, 2004 +/s/ James A. Buzard +James A. Buzard +Director +December 13, 2004 +/s/ Gary P. Kreider +Gary P. Kreider +Director +December 13, 2004 +/s/ David C. Phillips +David C. Phillips +Director +December 13, 2004 +/s/ Robert J. Ready +Robert J. Ready +Director +December 13, 2004 +-59- +Table of Contents +SCHEDULE II +Meridian Bioscience, Inc. +and Subsidiaries +Valuation and Qualifying Accounts +(Amounts in Thousands) +Years Ended September 30, 2004, 2003 and 2002 +Charged +Balance at +to Costs +Charged +Balance +Beginning +and +to Other +at End of +Description +of Period +Expenses +Accounts +Deductions +Other (a) +Period +Year Ended September 30, 2004: +Allowance for doubtful accounts +$ +471 +$ +18 +$ +— +$ +(37 +) +$ +27 +$ +479 +Inventory realizability reserves +585 +109 +— +(408 +) +(15 +) +271 +European restructuring reserves +103 +29 +— +(137 +) +5 +— +Valuation allowances – deferred taxes +1,457 +(85 +) +— +(278 +) +83 +1,177 +Year Ended September 30, 2003: +Allowance for doubtful accounts +$ +987 +$ +(268 +) +$ +— +$ +(360 +) +$ +112 +$ +471 +Inventory realizability reserves +730 +289 +— +(439 +) +5 +585 +European restructuring reserves +83 +98 +— +(94 +) +16 +103 +Valuation allowances – deferred taxes +1,706 +(25 +) +— +(478 +) +254 +1,457 +Year Ended September 30, 2002: +Allowance for doubtful accounts +$ +889 +$ +94 +$ +— +$ +(46 +) +$ +50 +$ +987 +Inventory realizability reserves +774 +1,399 +— +(1,443 +) +— +730 +European restructuring reserves +119 +78 +— +(119 +) +5 +83 +Valuation allowances – deferred taxes +1,670 +51 +— +(103 +) +88 +1,706 +(a) +Balances reflect the effects of currency translation (fiscal years +2002-2004). +-60- \ No newline at end of file diff --git a/raw/filings/0000794172/2004/0000950152-04-008932/filing_metadata.csv b/raw/filings/0000794172/2004/0000950152-04-008932/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..a3fdb53193a185f02b315b989ade387e4dbfa6db --- /dev/null +++ b/raw/filings/0000794172/2004/0000950152-04-008932/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000794172,VIVO,MERIDIAN BIOSCIENCE INC,10-K,2004-12-13,2004-09-30,2004-12-13T21:59:09.000Z,0000950152-04-008932,l10961ae10vk.htm,"MERIDIAN BIOSCIENCE, INC.",478593,0,0,https://www.sec.gov/Archives/edgar/data/794172/000095015204008932/l10961ae10vk.htm,https://www.sec.gov/Archives/edgar/data/794172/000095015204008932/,2004,2004,1 diff --git a/raw/filings/0000794172/2004/0000950152-04-008932/item1.txt b/raw/filings/0000794172/2004/0000950152-04-008932/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..030433a7f47caff04bc0dc9cb6ea96d85873f945 --- /dev/null +++ b/raw/filings/0000794172/2004/0000950152-04-008932/item1.txt @@ -0,0 +1,438 @@ +ITEM 1. +BUSINESS +Overview +Meridian is a fully-integrated life science company whose principal businesses +are (i) the development, manufacture, sale and distribution of diagnostic test +kits, primarily for certain respiratory, gastrointestinal, viral and parasitic +infectious diseases, (ii) the manufacture and distribution of bulk antigens and +reagents used by researchers and other diagnostic manufacturers and (iii) the +contract manufacture of proteins and other biologicals for use by +biopharmaceutical and biotechnology companies engaged in research for new drugs +and vaccines. By exploiting revenue opportunities across research, clinical +diagnostics, and therapeutic areas for key biologicals, Meridian can maximize +revenues, efficiently invest in research and development, and increase +profitability of manufacturing operations. +Operating Segments +As a result of changes that occurred in February 2003 in the organization and +management of Meridian’s businesses, effective with the quarter beginning +January 1, 2003, Meridian changed its reportable operating segments to US +Diagnostics, European Diagnostics, and Life Science. While the scientific +foundation of these three segments is essentially the same, the market +dynamics, competitive trends, regulatory requirements, and sales and marketing +approach vary substantially. The US Diagnostics operating segment consists of +research and development and manufacturing operations in Cincinnati, Ohio, and +the sale and distribution of diagnostic test kits in the US and countries +outside of Europe, Africa and the Middle East. The European Diagnostics +operating segment consists of the sale and distribution of diagnostic test kits +in Europe, Africa, and the Middle East. The Life Science operating segment +consists of research and development and manufacturing operations in Memphis, +Tennessee and Saco, Maine, and the sale and distribution of bulk antigens, +antibodies and bioresearch reagents domestically and abroad. Manufacturing +operations for the Life Science operating segment include a protein production +laboratory for the contract manufacture of proteins and other biologicals used +by biopharmaceutical and biotechnology companies in research for new drugs and +vaccines. Financial information for Meridian’s operating segments is included +in Note 7 to the consolidated financial statements contained herein. +Meridian’s primary source of domestic and international revenues continues to +be its core diagnostic products. Meridian’s diagnostic products provide +accuracy, simplicity, and speed, enable early diagnosis and treatment of +common, acute medical conditions, and provide for better patient outcomes at +reduced costs. Meridian targets diagnostics for disease states that (i) are +acute conditions where rapid diagnosis impacts patient outcomes, (ii) have +favorable demographic and disease profiles, (iii) are underserved by current +diagnostic +-2- +Table of Contents +products and (iv) have difficult sample handling requirements. This approach +has allowed Meridian to establish significant market share in its target +disease states. +Meridian expects that its Life Science operating segment will serve as a key +platform for sourcing biologicals and technologies, by acquisition or license, +for development of new products for all of Meridian’s operating segments. One +of Meridian’s specific strategies in this area is to target biologicals that +have commercial product applications across multiple markets, such as human +diagnostics, veterinary diagnostics, and therapeutics. This strategy is +expected to leverage research and development resources as products can be +developed with all three markets in mind, rather than on a market-by-market +basis. +Meridian’s website is www.meridianbioscience.com. Meridian makes available its +Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on +Form 8-K and any amendments thereto, free of charge through this website, as +soon as reasonably practicable after such material has been electronically +filed with the Securities and Exchange Commission. +US Diagnostics Operating Segment +Overview +The US Diagnostics operating segment’s business focuses on the development, +manufacture, sale and distribution of diagnostic test kits, primarily for +certain respiratory, gastrointestinal, viral and parasitic infectious diseases. +In addition to diagnostic test kits, products also include transport media +that store and preserve specimen samples from patient collection to laboratory +testing. Third-party sales for this operating segment were $48,153,000, +$39,906,000 and $34,171,000 for fiscal 2004, 2003 and 2002, respectively. As +of September 30, 2004, the US Diagnostics operating segment had 246 employees. +Meridian’s diagnostic test kits utilize immunodiagnostic technologies, which +test samples of blood, urine, stool and other body fluids or tissue for the +presence of antigens and antibodies of specific infectious diseases. Specific +immunodiagnostic technologies used in Meridian’s diagnostic test kits include +enzyme immunoassay, immunofluorescence, particle agglutination/aggregation, +immunodiffusion, complement fixation, and chemical stains. The enzyme +immunoassay technology is used in multiple test formats; the Premier™ products +for large volume users and the ImmunoCard® products for single test, low volume +users. +Meridian’s diagnostic products are used principally in the detection of +respiratory diseases, such as pneumonia, valley fever, flu and RSV; +gastrointestinal diseases, such as stomach ulcers (H. pylori), antibiotic +associated diarrhea (C. difficile) and pediatric diarrhea (Rotavirus and +Adenovirus); viral diseases, such as mononucleosis, Herpes Simplex, chicken pox +and shingles (Varicella-Zoster) and Cytomegalovirus (organ +-3- +Table of Contents +transplant infections); and parasitic diseases, such as Giardiasis, +Cryptosporidiosis and Lyme. The primary markets and customers for these +products are reference laboratories, hospitals, and physicians’ offices. +Market Trends +The global market for infectious disease tests continues to expand as new +disease states are identified, new therapies become available, and worldwide +standards of living and access to health care improve. More importantly, +within this market there is a continuing shift from conventional testing, which +requires highly trained personnel and lengthy turnaround times for test +results, to more technologically advanced testing which can be performed by +less highly trained personnel and completed in minutes or hours. These +technological advances permit accurate testing to occur outside the traditional +hospital or laboratory. +The increasing pressures to contain total health care costs have accelerated +the increased use of diagnostic testing and the market shift to alternate +sites. With rapid and accurate diagnoses of infectious diseases, physicians +can pinpoint appropriate therapies quickly, leading to faster recovery, shorter +hospital stays and less treatment expense. In addition, these pressures have +led to a major consolidation among reference laboratories and the formation of +multi-hospital alliances that have reduced the number of institutional +customers for diagnostic products and resulted in changes in buying practices. +Specifically, multi-year exclusive or primary source marketing or distribution +contracts with institutional customers have become more common, replacing less +formal distribution arrangements of shorter duration and involving lower +product volumes. +Sales and Marketing +The US Diagnostics operating segment’s sales and distribution network consists +of a direct sales force in the US and independent distributors in the US and +abroad. The direct sales force consists of one director of sales, three +regional sales managers, one director of corporate health systems, 21 technical +sales representatives, two inside sales representatives, and six physician +marketing representatives. Meridian utilizes two primary independent +distributors in the US, who accounted for 42% of the US Diagnostics operating +segment’s third-party sales in fiscal 2004. Meridian participates in the +selling effort for key customers where these independent distributors are +utilized. Therefore, Meridian believes that the loss of either of these +independent distributors would not have a material adverse effect on the +Company. +Consolidation of the US healthcare industry is expected to continue and +potentially affect Meridian’s customers. Industry consolidation puts pressure +on pricing and aggregates buying power. In response, in the last five years, +Meridian has entered into, extended, or renewed several exclusive multiple-year +contracts with consolidated healthcare providers and supply agreements with +major reference laboratories. +-4- +Table of Contents +Products and Markets +Meridian has expertise in the development and manufacture of products based on +multiple core diagnostic technologies, each of which enables the visualization +and identification of antigen/antibody reactions for specific pathogens. As a +result, Meridian is able to develop and manufacture diagnostic tests in a +variety of formats that satisfy customer needs and preferences, whether in a +hospital, commercial or reference laboratory or alternate site location. +Meridian’s product offering consists of over 200 medical diagnostic products. +Meridian’s products generally range in list price from $1 per test to $33 per +test. +Meridian’s product technologies include enzyme immunoassay, immunofluorescence, +particle agglutination/aggregation, immunodiffusion, complement fixation and +chemical stains. +Enzyme Immunoassay (EIA) — Products incorporating the EIA technology achieve +extremely high levels of accuracy in detecting disease-related antigens or +antibodies through the use of special color-based enzyme-substrate reactions. +Meridian utilizes this technology in its multiple test format, the Premier™ +product for large volume users, and in its single test formats, the +Immuno Card®, Immuno Card STAT!® and Monolert® products, for lower volume users. +Immunofluorescence — When the microscopic visualization of an antigen/antibody +reaction is necessary or desired, immunofluorescence technology is frequently +utilized. Fluorescing immunochemicals, in the presence of the target antigen +or antibody, can be viewed via a fluorescent microscope. Meridian utilizes +this technology in its Merifluor® products. +Particle Agglutination/Aggregation — This technology utilizes microparticles +(e.g., latex, red blood cells) coated with specific antigens or antibodies that +form visible aggregates in the presence of a specimen containing the +complementary antigen or antibody. This technology is rapid and economical and +is used in Meridian’s Meritec™, MeriStar® and MonoSpot® products. +Other Technologies — Meridian utilizes other technologies that include +immunodiffusion, complement fixation, and chemical stains. Meridian also +manufactures and markets specimen collection, transportation, preservation and +concentration products, such as Para-Pak®, Macro-CON® and Spin-CON. +Research and Development +The US Diagnostics operating segment’s research and development organization +consists of 13 research scientists with expertise in biochemistry, immunology, +mycology, bacteriology, virology, and parasitology. Research and development +expenses for the US Diagnostics operating segment for fiscal 2004, 2003 and +2002 were $3,131,000, $2,527,000 and $1,730,000, respectively. This research +and development organization +-5- +Table of Contents +focuses its activities on new applications for Meridian’s existing +technologies, improvements to existing products and development of new +technologies. Research and development efforts may occur in-house or with +collaborative partners. Meridian believes that internally developed products +are a key source for sustaining revenue growth. Meridian’s internally +developed products include Premier™ Platinum HpSA and Premier™ Toxins A & B, +which accounted for 27% of the US Diagnostics operating segment’s third-party +sales during fiscal 2004. +Manufacturing +Meridian’s immunodiagnostic products require the production of highly specific +and sensitive antigens and antibodies. Meridian produces substantially all of +its own requirements including monoclonal antibodies and polyclonal antibodies, +plus a variety of fungal, bacterial, and viral antigens. Meridian believes it +has sufficient manufacturing capacity for anticipated growth. +Intellectual Property, Patents, and Licenses +Meridian owns or licenses US and foreign patents for approximately 25 products +manufactured by the US Diagnostics operating segment, including Premier™ +Platinum HpSA. In the absence of patent protection, Meridian may be vulnerable +to competitors who successfully replicate Meridian’s production and +manufacturing technologies and processes. Meridian’s employees are required to +execute confidentiality and non-disclosure agreements designed to protect +Meridian’s proprietary products. Meridian believes that its products and +technologies do not infringe the proprietary rights of any third parties. +Government Regulation +Meridian’s diagnostic products are regulated by the Food & Drug Administration +(FDA) as “devices” pursuant to the Federal Food, Drug, and Cosmetic Act (FDCA). +Under the FDCA, medical devices are classified into one of three classes +(i.e., Class I, II or III). Class I and II devices are not expressly approved +by the FDA, but, instead, are “cleared” for marketing. Class III devices +generally must receive “pre-market approval” from the FDA as to safety and +effectiveness. +A 510(k) clearance will be granted if the submitted data establishes that the +proposed device is “substantially equivalent” to an existing Class I or Class +II medical device or to a Class III medical device for which the FDA has not +required pre-market approval. The 510(k) clearance process for “substantially +equivalent” devices allows product sales to be made after the filing of an +application and upon acknowledgment by the FDA, typically within 90 to 120 days +after submission. If the FDA requests additional information, the product +cannot be sold in the US until the application has been supplemented and upon +acknowledgment by the FDA within 90 to 120 days of the supplemental +application. In practice, the FDA has been granting clearance in +-6- +Table of Contents +about 90 days following submission of the supplemental information. If there +are no existing FDA-approved products or processes comparable to a diagnostic +product or process, approval by the FDA involves the more lengthy pre-market +approval procedures. +Each of the diagnostic products currently marketed by Meridian in the United +States has been cleared by the FDA pursuant to the 510(k) clearance process or +is exempt from such requirements. Meridian believes that most, but not all, +products under development will be classified as Class I or II medical devices +and, in the case of Class II devices, will be eligible for 510(k) clearance. +Sales of Meridian’s diagnostic products in foreign countries are subject to +foreign government regulation, the requirements of which vary substantially +from country to country. The time required to obtain approval by a foreign +country may be longer or shorter than that required for FDA approval and the +requirements may differ. +European Diagnostics Operating Segment +The European Diagnostics operating segment’s business focuses on the sale and +distribution of diagnostic test kits, those manufactured by the US Diagnostics +operating segment and others manufactured by third-party vendors. +Approximately 71% of third-party sales for fiscal 2004 were products +manufactured by the US Diagnostics operating segment. Third-party sales for +this operating segment were $15,412,000, $13,756,000 and $11,920,000 for fiscal +2004, 2003 and 2002, respectively. As of September 30, 2004, the European +Diagnostics operating segment had 40 employees, including 16 employees in the +direct sales force. The European Diagnostics operating segment’s sales and +distribution network consists of direct sales forces in Belgium, France, +Holland, and Italy, and independent distributors in other European countries, +Africa and the Middle East. The European Diagnostics operating segment +maintains distribution centers in Nivelle, Belgium and Milan, Italy. The +primary markets and customers for this operating segment are hospitals and +reference laboratories. Sales to customers in Italy are mainly to hospitals +and laboratories that are funded by the Italian government. +During the last several years, competitive factors and government reimbursement +policies have slowed growth in European markets. Based on operating results +for fiscal 2003 and fiscal 2004, Meridian believes that sales levels in local +currency have stabilized, and in fact, believes that market conditions have +begun to improve and will yield modest growth. Sales in local currency, the +Euro, increased 7% during the last six months of fiscal 2004 compared to fiscal +2003. +The European Diagnostics operating segment’s functional currency is the Euro. +The translation of Euros into US dollars is subject to exchange rate changes. +-7- +Table of Contents +Life Science Operating Segment +Overview +The Life Science operating segment’s business focuses on the development, +manufacture, sale and distribution of bulk antigens and reagents used by +researchers and other diagnostic companies, as well as the contract +manufacturing of proteins and other biologicals used by biopharmaceutical and +biotechnology companies engaged in research for new drugs and vaccines. +Third-party sales for this operating segment were $16,041,000, $12,202,000 and +$13,013,000 for fiscal 2004, 2003 and 2002, respectively. The Life Science +operating segment consists of Meridian’s Viral Antigens and BIODESIGN +subsidiaries. As of September 30, 2004, the Life Science operating segment had +77 employees. +Most of the revenue for the Life Science operating segment currently comes from +the manufacture, sale and distribution of bulk antigens and reagents used by +researchers and other diagnostic companies. During fiscal 2004, 34% of +third-party sales were to one customer, a substantial portion of which is under +exclusive supply agreements that expire in fiscal 2007. Meridian has a +long-standing relationship with this customer, and although there can be no +assurances, Meridian intends to renew these supply agreements in the normal +course of business. +During fiscal 2004, Meridian completed its first contract manufacturing project +in its protein production facility. Meridian delivered recombinant proteins to +the National Institutes of Health to be used in a vaccine for parvovirus +(“fifth disease”) in Phase I clinical trials. Revenue related to this project +was $1,528,000. During fiscal 2005, Meridian expects to deliver additional +material for Phase II clinical trials and begin contract manufacturing for +other customers. +Growth Strategies +Growth strategies for the Life Science operating segment include (i) developing +new product applications from existing technologies and (ii) acquisition or +licensing of biologicals and technologies for development of new products. +Contract manufacturing of proteins and other biologicals for biopharmaceutical +and biotechnology companies engaged in research for new drugs and vaccines is +an example of a significant new product application built from Meridian’s +existing expertise in manufacturing bulk antigens and reagents using cell +culture techniques. This business will focus on contract manufacturing of +protein materials that will be used in Phase I and II clinical trials. +-8- +Table of Contents +The protein production laboratory provides a new class of customers that, in +some cases, have longer production cycles than historical bulk manufacturing of +antigens and reagents. Longer production cycles can affect timing of revenue +recognition, as revenue may be recognized either upon shipment of product or +final lot acceptance depending on contract terms. +Meridian expects that its Life Science operating segment will serve as a key +platform for sourcing biologicals and technologies, by acquisition or license, +for development of new products for all of Meridian’s operating segments. One +of Meridian’s specific strategies in this area is to target biologicals that +have commercial product applications across multiple markets, such as human +diagnostics, veterinary diagnostics, and therapeutics. This strategy is +expected to leverage research and development resources as products can be +developed with all three markets in mind, rather than on a market-by-market +basis. +Markets +The Life Science operating segment has targeted three primary market segments +for its products and services: bulk biomedical reagents, drug and vaccine +discovery, and drug and vaccine development. The customer base for bulk +biomedical reagents is large and fragmented, and includes other diagnostic +manufacturers as well as researchers in academia and the pharmaceutical and +biotechnology industries. The market segments for drug and vaccine discovery +and development are intended to be served via contract manufacturing in the +protein production laboratory discussed above. +Sales and Marketing +The Life Science operating segment applies sales and marketing efforts in two +different manners that are designed to complement one another. An internal +sales and marketing staff, as well as a website, have been built to market bulk +biomedical reagents directly to a large and fragmented customer base. The +website provides detailed technical information and capability to submit +purchase orders. For major bulk biomedical reagent customers, scientific +resources have been dedicated to establish sole-source supply arrangements. +Similarly, for the protein production laboratory, scientific resources are +dedicated to each potential customer. +Research and Development +The Life Science operating segment’s research and development organization +consists of six research scientists. Research and development expenses for the +Life Science operating segment for fiscal 2004, 2003 and 2002 were $1,226,000, +$1,348,000 and $1,158,000, respectively. This research and development +organization focuses its activities on the protein production laboratory, +developing new biomedical reagents, and working with the US Diagnostics +operating segment in the development of products that have commercial +application across multiple markets, such as human diagnostics, veterinary +diagnostics, and therapeutics. +-9- +Table of Contents +Manufacturing and Government Regulation +The proteins that will be produced in VAI’s cGMP protein production laboratory +are intended to be used as “injectibles”. As such, they will be produced under +cGMP Regulations for Biologics and Human Drugs under the auspices of the FDA. +Approval and licensing, following clinical trials, of these products will be +the responsibility of the applicant, who owns the rights to each protein. VAI +may or may not be the applicant depending on specific circumstances with +particular customers. +Competition +Diagnostics +The market for diagnostic tests is a multi-billion dollar international +industry, which is highly competitive. Many of Meridian’s competitors are +larger with greater financial, research, manufacturing and marketing resources. +Important competitive factors of Meridian’s products include product quality, +price, ease of use, customer service, and reputation. In a broader sense, +industry competition is based upon scientific and technological capability, +proprietary know-how, access to adequate capital, the ability to develop and +market products and processes, the ability to attract and retain qualified +personnel and the availability of patent protection. To the extent that +Meridian’s product lines do not reflect technological advances, Meridian’s +ability to compete in those product lines could be adversely affected. +Companies competing in the diagnostic test industry generally focus on a +limited number of tests or limited segments of the market. As a result, the +diagnostic test industry is highly fragmented and segmented. Hundreds of +companies in the United States alone supply immunodiagnostic tests. These +companies range from multi-national health care companies, for which +immunodiagnostics is one line of business, to small start-up companies. Of +central importance in the industry are mid-sized medical diagnostic specialty +companies, like Meridian, that offer multiple, broad product lines and have the +ability to deliver new, high value products quickly to the marketplace. Among +the companies with which Meridian competes in the marketing of one or more of +its products are Abbott Laboratories Inc., Becton, Dickinson and Company, +Diagnostic Products Corporation, Quidel Corporation, and Inverness Medical. +Life Science +The market for bulk biomedical reagents is highly competitive. Important +competitive factors include product quality, price, customer service, and +reputation. Where sole-source supply arrangements do not exist, Meridian faces +competitors, many of which have greater financial, research and development, +sales and +-10- +Table of Contents +marketing, and manufacturing resources. From time to time, customers may +choose to manufacture their biomedical reagents in-house rather than purchase +from outside vendors such as Meridian. +The market for contract manufacturing in a validated cGMP facility such as the +protein production laboratory is also competitive. Important competitive +factors include reputation, customer service, and price. Although the product +application for this facility was built from Meridian’s existing expertise in +manufacturing bulk antigens and reagents using cell culture techniques, +Meridian faces competitors with greater experience in contract manufacturing in +a cGMP environment. +Acquisitions +Acquisitions have played an important role in the historical growth of +Meridian’s businesses. Meridian’s acquisition objectives are to, among other +things, (i) enhance product offerings, (ii) improve product distribution +capabilities, (iii) provide access to new markets, and/or (iv) provide access +to key biologicals that lead to new products. +During November 2004, Meridian executed a letter of intent to purchase all the +outstanding capital stock of OEM Concepts, a manufacturer and distributor of +bulk antibodies to the diagnostic, pharmaceutical, and research markets. This +pending acquisition, which is subject to due diligence review and execution of +a definitive agreement, will add large-volume monoclonal antibody manufacturing +capabilities to Meridian’s Life Science operating segment and will complement +the Viral Antigens and BIODESIGN subsidiaries. It will also decrease +Meridian’s reliance on third parties for monoclonal and polyclonal antibodies. +Recent examples of completed acquisitions include Gull Laboratories in fiscal +1999 and Viral Antigens in fiscal 2000. The Gull acquisition enhanced product +offerings, expanded sales and distribution capabilities in Europe, and provided +the initial access into the Life Science market for Meridian (through the +BIODESIGN subsidiary). The Viral Antigens acquisition, coupled with the +opening of the protein production laboratory, solidified Meridian’s entry into +the Life Science market. +Although Meridian cannot provide any assurance that it will consummate any +acquisitions in the future, Meridian expects that acquisitions will continue to +serve as a source of new revenues and growth in the future. +International Markets +International markets are an important source of revenue for Meridian’s +operating segments. For all operating segments combined, international sales +were $24,916,000 or 31% of total sales, $23,220,000 or 35% of total sales and +$17,993,000 or 30% of total sales in fiscal 2004, 2003 and 2002, respectively. +Domestic exports for the US Diagnostics and Life Science operating segments +were $9,504,000, $9,464,000 and $6,073,000 in fiscal +-11- +Table of Contents +2004, 2003 and 2002, respectively. Meridian expects to continue to look to +international markets as a source of new revenues and growth in the future. +Environmental +Meridian is a conditionally exempt small quantity generator of hazardous waste +and has a US EPA identification number. All hazardous material is manifested +and disposed of properly. Meridian is in compliance with applicable portions +of the federal and state hazardous waste regulations and has never been a party +to any environmental proceeding. \ No newline at end of file diff --git a/raw/filings/0000794172/2004/0000950152-04-008932/item13.txt b/raw/filings/0000794172/2004/0000950152-04-008932/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..6eef0a46af9f9543dcb6a00e1057e04880b968ee --- /dev/null +++ b/raw/filings/0000794172/2004/0000950152-04-008932/item13.txt @@ -0,0 +1,3 @@ +Item 13 +Certain Relationships and Related Transactions +54 \ No newline at end of file diff --git a/raw/filings/0000794172/2004/0000950152-04-008932/item9a.txt b/raw/filings/0000794172/2004/0000950152-04-008932/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..78f1f47dc030b21496fd34b3772eaea1bfb0c01b --- /dev/null +++ b/raw/filings/0000794172/2004/0000950152-04-008932/item9a.txt @@ -0,0 +1,16 @@ +ITEM 9A. +CONTROLS AND PROCEDURES +As of September 30, 2004, an evaluation was completed under the supervision and +with the participation of Meridian’s management, including Meridian’s Chief +Executive Officer and Chief Financial Officer, of the effectiveness of the +design and operation of Meridian’s disclosure controls and procedures pursuant +to Rule 13a-15(b) and 15d-15(b) promulgated under the Securities Exchange Act +of 1934, as amended. Based on that evaluation, Meridian’s management, +including the CEO and CFO, concluded that Meridian’s disclosure controls and +procedures were effective as of September 30, 2004. There have been no changes +in Meridian’s internal controls over financial reporting identified in +connection with the evaluation of internal controls that occurred during the +last fiscal quarter that has materially affected, or is reasonably likely to +affect, Meridian’s internal controls over financial reporting, or in other +factors that could significantly affect internal controls subsequent to +September 30, 2004. \ No newline at end of file diff --git a/raw/filings/0000794172/2004/0000950152-04-008932/rp_note.txt b/raw/filings/0000794172/2004/0000950152-04-008932/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000794172/2004/0000950152-04-008932/rpt_disclosure.txt b/raw/filings/0000794172/2004/0000950152-04-008932/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000794172/2005/0000950152-05-009857/filing.txt b/raw/filings/0000794172/2005/0000950152-05-009857/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..6696cdab09dadd4cf0ade68dc0bccdf16109139b --- /dev/null +++ b/raw/filings/0000794172/2005/0000950152-05-009857/filing.txt @@ -0,0 +1,4212 @@ +10-K +1 +l17079ae10vk.htm +MERIDIAN BIOSCIENCE, INC. 10-K/FYE 9-30-05 +Meridian Bioscience, Inc. 10-K +Table of Contents +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +FORM 10-K +FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) +OF THE SECURITIES EXCHANGE ACT OF 1934 +þ +ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF +1934 +FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2005. +o +TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +FOR THE TRANSITION PERIOD FROM TO +Commission File No. 0-14902 +MERIDIAN BIOSCIENCE, INC. +Incorporated under +3471 River Hills Drive +IRS Employer ID +the Laws of Ohio +Cincinnati, Ohio 45244 +No. 31-0888197 +Phone: (513) 271-3700 +Securities Registered Pursuant to Section 12(b) of the Act: +None +Securities Registered Pursuant to Section 12(g) of the Act: +Common Shares, No Par Value +Indicate +by check mark if the registrant is a well-known seasoned issuer, as +defined in Rule 405 of the Securities Act. Yes +o No +þ +If this +report is an annual or transition report, indicate by check mark if +the registrant is not required to file reports pursuant to +Section 13 or 15(d) of the Securities Exchange Act of 1934 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, 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 (Section 229.405 of this Chapter) is not contained herein, and will +not be contained, to the best of registrant’s knowledge, in definitive proxy or +information statements incorporated by reference in Part III of this Form 10 - K or +any amendment to this Form 10 - K. +YES þ NO o +Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). +YES þ NO o +Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). +YES o NO þ +Table of Contents +The aggregate market value of Common Shares held by non-affiliates as of March 31, 2005 +was $155,859,552 based on a closing sale price of $9.93 per share on March 31, 2005. As +of December 1, 2005, 26,060,150 no par value Common Shares were issued and outstanding. +Documents Incorporated by Reference +Portions of the Registrant’s Annual Report to Shareholders for the fiscal year ended +September 30, 2005 furnished to the Commission pursuant to Rule 14a-3(b) as specified and +portions of the Registrant’s Proxy Statement filed with the +Commission for its 2006 Annual +Shareholders’ Meeting are incorporated by reference in Part III as specified. +MERIDIAN BIOSCIENCE, INC. +INDEX TO ANNUAL REPORT +ON FORM 10-K +Page +Part I +Item 1 +Business +4 +Item 2 +Properties +14 +Item 3 +Legal Proceedings +15 +Item 4 +Submission of Matters to a Vote of Security Holders +15 +Part II +Item 5 +Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer +Purchases of Equity Securities +15 +Item 6 +Selected Financial Data +16 +Item 7 +Management’s Discussion and Analysis of Financial Condition and Results of Operations +16 +Item 7A +Quantitative and Qualitative Disclosures about Market Risk +32 +Item 8 +Financial Statements and Supplementary Data +33 +Item 9 +Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +65 +Item 9A +Controls and Procedures +65 +Item 9B +Other Information +65 +Part III +Item 10 +Directors and Executive Officers of the Registrant +65 +Item 11 +Executive Compensation +65 +Item 12 +Security Ownership of Certain Beneficial Owners and Management +65 +Item 13 +Certain Relationships and Related Transactions +65 +Item 14 +Principal Accountant Fees and Services +65 +Item 15 +Exhibits and Financial Statement Schedules +66 +EX-10.31 +EX-10.32 +EX-13 +EX-21 +EX-23.1 +EX-23.2 +EX-31.1 +EX-31.2 +EX-32 +FORWARD LOOKING STATEMENTS +The Private Securities Litigation Reform Act of 1995 provides a safe harbor from civil +litigation for forward-looking statements accompanied by meaningful cautionary statements. Except +for historical information, this report contains forward-looking statements which may be identified +by words such as “estimates”, “anticipates”, “projects”, “plans”, “expects”, “intends”, +“believes”, “should”, and similar expressions or the negative versions thereof, which also may be +identified by their context. Such statements are based upon current expectations of the Company and +speak only as of the date made. The Company assumes no obligation to publicly update any +forward-looking statements. These statements are subject to various risks, uncertainties and other +factors that could cause actual results to differ, including, without limitation, the following: +Meridian’s continued growth depends, in part, on its ability to introduce into the marketplace +enhancements of existing products or new products that incorporate technological advances, meet +customer requirements and respond to products developed by Meridian’s competition. While Meridian +has introduced a number of internally developed products, there can be no assurance that it will be +successful in the future in introducing such products on a timely basis. Ongoing consolidations of +reference laboratories and formation of multi-hospital alliances may cause adverse changes to +pricing and distribution. Costs and difficulties in complying with laws and regulations +administered by the United States Food and Drug Administration can result in unanticipated expenses +and delays and interruptions to the sale of new and existing products. Changes in the relative +strength or weakness of the U.S. dollar can change expected results. One of Meridian’s main growth +strategies is the acquisition of companies and product lines. There can be no assurance that +additional acquisitions will be consummated or that, if consummated, will be successful and the +acquired businesses successfully integrated into Meridian’s operations. +-3- +Table of Contents +PART I. +ITEM 1. +BUSINESS +Overview +Meridian is a fully-integrated life science company whose principal businesses are (i) the +development, manufacture, sale and distribution of diagnostic test kits, primarily for certain +respiratory, gastrointestinal, viral and parasitic infectious diseases, (ii) the manufacture and +distribution of bulk antigens, antibodies, and reagents used by researchers and other diagnostic +manufacturers and (iii) the contract manufacture of proteins and other biologicals for use by +biopharmaceutical and biotechnology companies engaged in research for new drugs and vaccines. By +exploiting revenue opportunities across research, clinical diagnostics, and therapeutic areas for +key biologicals, Meridian can maximize revenues, efficiently invest in research and development, +and increase profitability of manufacturing operations. +Operating Segments +Meridian’s reportable operating segments are US Diagnostics, European Diagnostics, and Life +Science. While the scientific foundation of these segments is essentially the same, the market +dynamics, competitive trends, regulatory requirements, and sales and marketing approach vary +substantially. The US Diagnostics operating segment consists of research and development and +manufacturing operations in Cincinnati, Ohio, and the sale and distribution of diagnostic test kits +in the US and countries outside of Europe, Africa and the Middle East. The European Diagnostics +operating segment consists of the sale and distribution of diagnostic test kits in Europe, Africa, +and the Middle East. The Life Science operating segment consists of manufacturing operations in +Memphis, Tennessee; Saco, Maine; and Boca Raton, Florida; the sale and distribution of bulk +antigens, antibodies and bioresearch reagents domestically and abroad; and contract research and +development and manufacturing services. The Life Science operating segment consists of the Viral +Antigens, BIODESIGN, and OEM Concepts businesses. Financial information for Meridian’s operating +segments is included in Note 8 to the consolidated financial statements contained herein. +Meridian’s primary source of domestic and international revenues continues to be its core +diagnostic products, which represented 77% of consolidated net sales for fiscal 2005. Meridian’s +diagnostic products provide accuracy, simplicity, and speed, enable early diagnosis and treatment +of common, acute medical conditions, and provide for better patient outcomes at reduced costs. +Meridian targets diagnostics for disease states that (i) are acute conditions where rapid diagnosis +impacts patient outcomes, (ii) have favorable demographic and disease profiles, (iii) are +underserved by current diagnostic products, and (iv) have difficult sample handling +-4- +Table of Contents +requirements. This approach has allowed Meridian to establish significant market share in its +target disease states. +Meridian expects that its Life Science operating segment will serve as a key platform for sourcing +biologicals and technologies, by acquisition or license, for development of new products for all of +Meridian’s operating segments. One of Meridian’s specific strategies in this area is to target +biologicals that have commercial product applications across multiple markets, such as human +diagnostics, veterinary diagnostics, and therapeutics. This strategy is expected to leverage +research and development resources as products can be developed with all three markets in mind, +rather than on a market-by-market basis. +Meridian’s +website is www.meridianbioscience.com. Meridian makes available its Annual Reports on +Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments thereto, +free of charge through this website, as soon as reasonably practicable after such material has been +electronically filed with or furnished to the Securities and Exchange Commission. These reports +may also be read and copied at the SEC’s public reference room at 100 F Street, N.E., Room 1580, +Washington, DC 20549, phone 1-800-732-0330. The SEC maintains an internet site containing these +filings and other information regarding Meridian at http://www.sec.gov. +US Diagnostics Operating Segment +Overview +The US Diagnostics operating segment’s business focuses on the development, manufacture, sale and +distribution of diagnostic test kits, primarily for certain respiratory, gastrointestinal, viral +and parasitic infectious diseases. In addition to diagnostic test kits, products also include +transport media that store and preserve specimen samples from patient collection to laboratory +testing. Third-party sales for this operating segment were $53,485,000, $48,153,000 and +$39,906,000 for fiscal 2005, 2004 and 2003, respectively, reflecting a compound annual growth rate +of 16%. As of September 30, 2005, the US Diagnostics operating segment had 245 employees. +Meridian’s diagnostic test kits utilize immunodiagnostic technologies, which test samples of blood, +urine, stool, and other body fluids or tissue for the presence of antigens and antibodies of +specific infectious diseases. Specific immunodiagnostic technologies used in Meridian’s diagnostic +test kits include enzyme immunoassay, immunofluorescence, particle agglutination/aggregation, +immunodiffusion, complement fixation, and chemical stains. The enzyme immunoassay technology is +used in multiple test formats; the Premier ä products for large volume users and the +ImmunoCard â products for single test, low volume users. +-5- +Table of Contents +Meridian’s diagnostic products are used principally in the detection of respiratory diseases, such +as pneumonia, valley fever, influenza, and Respiratory Syncytial Virus (RSV); gastrointestinal +diseases, such as stomach ulcers (H. pylori ), antibiotic associated diarrhea (C. difficile ) and +pediatric diarrhea (Rotavirus and Adenovirus); viral diseases, such as Mononucleosis, Herpes +Simplex, Chicken Pox and Shingles (Varicella-Zoster) and Cytomegalovirus (organ transplant +infections); and parasitic diseases, such as Giardiasis, Cryptosporidiosis and Lyme. The primary +markets and customers for these products are reference laboratories, hospitals, and physicians’ +offices. +Market Trends +The global market for infectious disease tests continues to expand as new disease states are +identified, new therapies become available, and worldwide standards of living and access to health +care improve. More importantly, within this market there is a continuing shift from conventional +testing, which requires highly trained personnel and lengthy turnaround times for test results, to +more technologically advanced testing which can be performed by less highly trained personnel and +completed in minutes or hours. These technological advances permit accurate testing to occur +outside the traditional hospital or laboratory. +The increasing pressures to contain total health care costs have accelerated the increased use of +diagnostic testing and the market shift to alternate sites. With rapid and accurate diagnoses of +infectious diseases, physicians can pinpoint appropriate therapies quickly, leading to faster +recovery, shorter hospital stays and lower treatment expense. In addition, these pressures have +led to a major consolidation among reference laboratories and the formation of multi-hospital +alliances that have reduced the number of institutional customers for diagnostic products and +resulted in changes in buying practices. Specifically, multi-year exclusive or primary source +marketing or distribution contracts with institutional customers have become more common, replacing +less formal distribution arrangements of shorter duration and involving lower product volumes. +Sales and Marketing +The US Diagnostics operating segment’s sales and distribution network consists of a direct sales +force in the US and independent distributors in the US and abroad. The direct sales force consists +of one director of sales, three regional sales managers, one director of corporate health systems, +one director of managed health care, 24 technical sales representatives, and three inside sales +representatives. Meridian utilizes two primary independent distributors in the US, who accounted +for 44% of the US Diagnostics operating segment’s third-party sales in fiscal 2005. Meridian +participates in the selling effort for key customers where these independent distributors are +utilized. Therefore, Meridian believes that the loss of either of these independent distributors +would not have a material adverse effect on the Company. +-6- +Table of Contents +Consolidation of the US healthcare industry is expected to continue and potentially affect +Meridian’s customers. Industry consolidation puts pressure on pricing and aggregates buying power. +In response, in the last five years, Meridian has entered into, extended, or renewed several +exclusive multiple-year contracts with consolidated healthcare providers and supply agreements with +major reference laboratories. +Products and Markets +Meridian has expertise in the development and manufacture of products based on multiple core +diagnostic technologies, each of which enables the visualization and identification of +antigen/antibody reactions for specific pathogens. As a result, Meridian is able to develop and +manufacture diagnostic tests in a variety of formats that satisfy customer needs and preferences, +whether in a hospital, commercial or reference laboratory or alternate site location. Meridian’s +product offering consists of over 200 medical diagnostic products. Meridian’s products generally +range in list price from $1 per test to $33 per test. +Meridian’s product technologies include enzyme immunoassay, immunofluorescence, particle +agglutination/aggregation, immunodiffusion, complement fixation and chemical stains. +Enzyme Immunoassay (EIA) - Products incorporating the EIA technology achieve extremely high +levels of accuracy in detecting disease-related antigens or antibodies through the use of special +color-based enzyme-substrate reactions. Meridian utilizes this technology in its multiple test +format, the Premier Ô product for large volume users, and in its single test formats, the +Immuno Card ® , Immuno Card STAT! ® and MONOLERT ® products, for lower +volume users. +Immunofluorescence - When the microscopic visualization of an antigen/antibody reaction is +necessary or desired, immunofluorescence technology is frequently utilized. Fluorescing +immunochemicals, in the presence of the target antigen or antibody, can be viewed via a fluorescent +microscope. Meridian utilizes this technology in its MERIFLUOR ® products. +Particle Agglutination/Aggregation - This technology utilizes microparticles (e.g., latex, +red blood cells) coated with specific antigens or antibodies that form visible aggregates in the +presence of a specimen containing the complementary antigen or antibody. This technology is rapid +and economical and is used in Meridian’s MERITEC ® , MeriStar ® and +MONOSPOT ® products. +Other Technologies - Meridian utilizes other technologies that include immunodiffusion, +complement fixation, and chemical stains. Meridian also manufactures and markets specimen +collection, transportation, preservation and concentration products, such as Para-Pak ® , +Macro-CON ® and Spin-Con ® . +Research and Development +-7- +Table of Contents +The US Diagnostics operating segment’s research and development organization consists of 11 +research scientists with expertise in biochemistry, immunology, mycology, bacteriology, virology, +and parasitology. Research and development expenses for the US Diagnostics operating segment for +fiscal 2005, 2004 and 2003 were $2,998,000, $3,131,000 and $2,527,000, respectively. This research +and development organization focuses its activities on new applications for Meridian’s existing +technologies, improvements to existing products and development of new technologies. Research and +development efforts may occur in-house or with collaborative partners. Meridian believes that +internally developed products are a key source for sustaining revenue growth. Meridian’s +internally developed products include Premier ä Platinum HpSA, Premier ä Toxins A & B, +and Immuno Card Ò C. difficile Toxins A & B, which together accounted for 30% of the US +Diagnostics operating segment’s third-party sales during fiscal 2005. +Manufacturing +Meridian’s immunodiagnostic products require the production of highly specific and sensitive +antigens and antibodies. Meridian produces substantially all of its own requirements including +monoclonal antibodies and polyclonal antibodies, plus a variety of fungal, bacterial, and viral +antigens. Meridian believes it has sufficient manufacturing capacity for anticipated growth. +Intellectual Property, Patents, and Licenses +Meridian owns or licenses US and foreign patents for approximately 25 products manufactured by the +US Diagnostics operating segment, including Premier ä Platinum HpSA. In the absence of patent +protection, Meridian may be vulnerable to competitors who successfully replicate Meridian’s +production and manufacturing technologies and processes. Meridian’s employees are required to +execute confidentiality and non-disclosure agreements designed to protect Meridian’s proprietary +products. Meridian believes that its products and technologies do not infringe the proprietary +rights of any third parties. +Government Regulation +Meridian’s diagnostic products are regulated by the Food & Drug Administration (FDA) as “devices” +pursuant to the Federal Food, Drug, and Cosmetic Act (FDCA). Under the FDCA, medical devices are +classified into one of three classes (i.e., Class I, II or III). Class I and II devices are not +expressly approved by the FDA, but, instead, are “cleared” for marketing. Class III devices +generally must receive “pre-market approval” from the FDA as to safety and effectiveness. +Each of the diagnostic products currently marketed by Meridian in the United States has been +cleared by the FDA pursuant to the 510(k) clearance process or is exempt from such requirements. +Meridian believes that +-8- +Table of Contents +most, but not all, products under development will be classified as Class I or II medical devices +and, in the case of Class II devices, will be eligible for 510(k) clearance. +A 510(k) clearance will be granted if the submitted data establishes that the proposed device is +“substantially equivalent” to an existing Class I or Class II medical device or to a Class III +medical device for which the FDA has not required pre-market approval. The 510(k) clearance +process for “substantially equivalent” devices allows product sales to be made after the filing of +an application and upon acknowledgment by the FDA, typically within 90 to 120 days after +submission. If the FDA requests additional information, the product cannot be sold in the US until +the application has been supplemented and upon acknowledgment by the FDA within 90 to 120 days of +the supplemental application. In practice, the FDA has been granting clearance in about 90 days +following submission of the supplemental information. If there are no existing FDA-approved +products or processes comparable to a diagnostic product or process, approval by the FDA involves +the more lengthy pre-market approval procedures. +Sales of Meridian’s diagnostic products in foreign countries are subject to foreign government +regulation, the requirements of which vary substantially from country to country. The time +required to obtain approval by a foreign country may be longer or shorter than that required for +FDA approval and the requirements may differ. +European Diagnostics Operating Segment +The European Diagnostics operating segment’s business focuses on the sale and distribution of +diagnostic test kits, those manufactured by the US Diagnostics operating segment and others +manufactured by third-party vendors. Approximately 67% of third-party sales for fiscal 2005 were +products purchased from the US Diagnostics operating segment. Third-party sales for this operating +segment were $17,818,000, $15,412,000 and $13,756,000 for fiscal 2005, 2004 and 2003, respectively, +reflecting a compound annual growth rate of 14%. As of September 30, 2005, the European +Diagnostics operating segment had 37 employees, including 15 employees in the direct sales force. +The European Diagnostics operating segment’s sales and distribution network consists of direct +sales forces in Belgium, France, Holland, and Italy, and independent distributors in other European +countries, Africa and the Middle East. The European Diagnostics operating segment maintains a +distribution center in Milan, Italy. The primary markets and customers for this operating segment +are hospitals and reference laboratories. +During the last two years, market conditions have begun to improve in European markets. Due to the +introduction of new products and improvements in general market conditions, sales in local +currency, the Euro, increased 11% in fiscal 2005, compared to fiscal 2004, and increased 7% during +the last six months of fiscal 2004, compared to the last six months of fiscal 2003. +-9- +Table of Contents +The European Diagnostics operating segment’s functional currency is the Euro. The translation of +Euros into US dollars is subject to exchange rate fluctuations. +Life Science Operating Segment +Overview +The Life Science operating segment’s business focuses on the development, manufacture, sale, and +distribution of bulk antigens, antibodies, and reagents used by researchers and other diagnostic +companies, as well as the contract manufacturing of proteins and other biologicals used by +biopharmaceutical and biotechnology companies engaged in research for new drugs and vaccines. +Third-party sales for this operating segment were $21,662,000, $16,041,000 and $12,202,000 for +fiscal 2005, 2004 and 2003, respectively, reflecting a compound annual growth rate of 19%, +including the OEM Concepts acquisition discussed below. The Life Science operating segment +consists of Meridian’s Viral Antigens, BIODESIGN and OEM Concepts businesses. As of September 30, +2005, the Life Science operating segment had 108 employees. +Most of the revenue for the Life Science operating segment currently comes from the manufacture, +sale and distribution of bulk antigens, antibodies, and reagents used by researchers and other +diagnostic companies. During fiscal 2005, 23% of third-party sales for this segment were to one +customer, a substantial portion of which is under exclusive supply agreements that expire in fiscal +2007. Meridian has a long-standing relationship with this customer, and although there can be no +assurances, Meridian intends to renew these supply agreements in the normal course of business. +On January 31, 2005, Meridian completed its acquisition of OEM Concepts, Inc., a large-volume +manufacturer of monoclonal antibodies that are critical components of commercial diagnostic +products used in the diagnosis of infectious diseases and in the monitoring of human protein levels +in metabolic disorders, pregnancy, and cardiac disease. OEM Concepts adds custom ascites +manufacturing capabilities and also diversifies Meridian’s customer base of major diagnostic +companies. OEM Concepts contributed revenues of $3,087,000 for eight months during fiscal 2005. +Viral Antigens’ protein production facility serves as an enabling technology for process +development and large-scale manufacturing for biologicals used in new drugs and vaccines. The size +of the facility is intended to accommodate manufacturing requirements for Phase I and Phase II +clinical trials. The customer base for this aspect of the Life Science business includes +biopharmaceutical and biotechnology companies, as well as government agencies, such as the National +Institutes of Health. Production cycles, in some cases, are longer than historical bulk +manufacturing of antigens, antibodies, and reagents. See Note 1(i) to the Consolidated Financial +Statements herein for revenue recognition policies. Meridian’s revenues for contract research and +-10- +Table of Contents +development services and contract manufacturing services increased to $3,053,000 in fiscal 2005 +from $1,528,000 in fiscal 2004. +Growth Strategies +Growth strategies for the Life Science operating segment include (i) developing new product +applications from existing technologies and (ii) acquisition or licensing of biologicals and +technologies for development of new products. +Contract manufacturing of proteins and other biologicals used in research for new drugs and +vaccines is an example of a significant new product application built from Meridian’s existing +expertise in manufacturing bulk antigens and reagents using cell culture techniques. +Meridian expects that its Life Science operating segment will serve as a key platform for sourcing +biologicals and technologies, by acquisition or license, for development of new products for all of +Meridian’s operating segments. One of Meridian’s specific strategies in this area is to target +biologicals that have commercial product applications across multiple markets, such as human +diagnostics, veterinary diagnostics, and therapeutics. This strategy is expected to leverage +research and development resources as products can be developed with all three markets in mind, +rather than on a market-by-market basis. +Markets +The Life Science operating segment has targeted three primary market segments for its products and +services: bulk biomedical reagents, drug and vaccine discovery, and drug and vaccine development. +The customer base for bulk biomedical reagents is large and fragmented, and includes other +diagnostic manufacturers as well as researchers in academia and the pharmaceutical and +biotechnology industries. The market segments for drug and vaccine discovery and development are +intended to be served via contract manufacturing in the protein production laboratory discussed +above. +Sales and Marketing +The Life Science operating segment applies sales and marketing efforts in two different manners +that are designed to complement one another. An internal sales and marketing staff, as well as a +website, have been built to market bulk biomedical reagents directly to a large and fragmented +customer base. The website provides detailed technical information and capability to submit +purchase orders. For major bulk biomedical reagent customers, scientific resources have been +dedicated to establish sole-source supply arrangements. For drug and vaccine discovery and +development, management and scientific resources are dedicated to each potential customer. +-11- +Table of Contents +Research and Development +The Life Science operating segment’s research and development organization consists of five +research scientists. Research and development expenses for the Life Science operating segment for +fiscal 2005, 2004 and 2003 were $823,000, $1,226,000 and $1,348,000, respectively. This research +and development organization focuses its activities on the protein production laboratory, +developing new biomedical reagents, and working with the US Diagnostics operating segment in the +development of products that have commercial application across multiple markets, such as human +diagnostics, veterinary diagnostics, and therapeutics. +Manufacturing and Government Regulation +The proteins that are produced in Viral Antigens’ protein production facility are intended to be +used as “injectibles”. As such, they are produced under cGMP Regulations for Biologics and Human +Drugs under the auspices of the FDA. Approval and licensing, following clinical trials, of these +products is the responsibility of the applicant, who owns the rights to each protein. Viral +Antigens may or may not be the applicant depending on specific circumstances with particular +customers. +Competition +Diagnostics +The market for diagnostic tests is a multi-billion dollar international industry, which is highly +competitive. Many of Meridian’s competitors are larger with greater financial, research, +manufacturing and marketing resources. Important competitive factors of Meridian’s products +include product quality, price, ease of use, customer service, and reputation. In a broader sense, +industry competition is based upon scientific and technological capability, proprietary know-how, +access to adequate capital, the ability to develop and market products and processes, the ability +to attract and retain qualified personnel and the availability of patent protection. To the extent +that Meridian’s product lines do not reflect technological advances, Meridian’s ability to compete +in those product lines could be adversely affected. +Companies competing in the diagnostic test industry generally focus on a limited number of tests or +limited segments of the market. As a result, the diagnostic test industry is highly fragmented and +segmented. Hundreds of companies in the United States alone supply immunodiagnostic tests. These +companies range from multi-national health care companies, for which immunodiagnostics is one line +of business, to small start-up companies. Of central importance in the industry are mid-sized +medical diagnostic specialty companies, like Meridian, that offer multiple, broad product lines and +have the ability to deliver new, high value products quickly to the marketplace. Among the +companies with which Meridian competes in the marketing of one or +-12- +Table of Contents +more of its products are Abbott Laboratories Inc., Becton, Dickinson and Company, Diagnostic +Products Corporation, Quidel Corporation, and Inverness Medical. +Life Science +The market for bulk biomedical reagents is highly competitive. Important competitive factors +include product quality, price, customer service, and reputation. Where sole-source supply +arrangements do not exist, Meridian faces competitors, many of which have greater financial, +research and development, sales and marketing, and manufacturing resources. From time to time, +customers may choose to manufacture their biomedical reagents in-house rather than purchase from +outside vendors such as Meridian. +The market for contract manufacturing in a validated cGMP facility such as Meridian’s protein +production laboratory at its Viral Antigens facility is also competitive. Important competitive +factors include reputation, customer service, and price. Although the product application for this +facility was built from Meridian’s existing expertise in cell culture manufacturing techniques, +Meridian faces competitors with greater experience in contract manufacturing in a cGMP environment. +Acquisitions +Acquisitions have played an important role in the historical growth of Meridian’s businesses. +Meridian’s acquisition objectives are to, among other things, (i) enhance product offerings, (ii) +improve product distribution capabilities, (iii) provide access to new markets, and/or (iv) provide +access to key biologicals that lead to new products. +Recent examples of completed acquisitions include Gull Laboratories in fiscal 1999, Viral Antigens +in fiscal 2000, and OEM Concepts in fiscal 2005. The Gull acquisition enhanced product offerings, +expanded sales and distribution capabilities in Europe, and provided the initial access into the +Life Science market for Meridian (through the BIODESIGN business). The Viral Antigens acquisition, +coupled with the opening of the protein production facility, solidified Meridian’s entry into the +Life Science market. The OEM Concepts acquisition strengthened Meridian’s Life Science business by +adding custom ascites manufacturing capabilities and diversifying Meridian’s customer base of major +diagnostic manufacturing companies. +During September 2005, Meridian completed an offering of 1,800,000 common shares, raising net +proceeds of $29,580,000. These proceeds are intended, in part, to fund future acquisitions. +Although Meridian cannot provide any assurance that it will consummate any acquisitions in the +future, Meridian expects that acquisitions will continue to serve as a source of new revenues and +earnings growth in the future. +-13- +Table of Contents +International Markets +International markets are an important source of revenue for Meridian’s operating segments. For +all operating segments combined, international sales were $30,232,000 or 33% of total fiscal 2005 +sales, $24,916,000 or 31% of total fiscal 2004 sales and $23,220,000 or 35% of total fiscal 2003 +sales. Domestic exports for the US Diagnostics and Life Science operating segments were +$12,414,000, $9,504,000 and $9,464,000 in fiscal 2005, 2004 and 2003, respectively. Meridian +expects to continue to look to international markets as a source of new revenues and growth in the +future. +Environmental +Meridian is a conditionally exempt small quantity generator of hazardous waste and has a US EPA +identification number. All hazardous material is manifested and disposed of properly. Meridian is +in compliance with applicable portions of the federal and state hazardous waste regulations and has +never been a party to any environmental proceeding. +ITEM 2. +PROPERTIES +Meridian’s corporate offices, diagnostics manufacturing facility and diagnostics research and +development facility are located in three buildings totaling approximately 94,000 square feet on +6.2 acres of land in a suburb of Cincinnati. These properties are owned by Meridian. Meridian has +approximately 51,000 square feet of manufacturing space and 9,000 square feet of warehouse space in +the Cincinnati facility. +The distribution center in Italy conducts its operations in a two-story building in the Milan, +Italy area consisting of approximately 18,000 square feet. This facility is owned by Meridian +Bioscience Europe s.r.l. Meridian also rents office space in France and Belgium for sales and +administration functions. +BIODESIGN rents a 10,000 square foot facility that houses administration, distribution and +manufacturing facilities in Saco, Maine under a lease that expires in 2006. +Viral Antigens’ administrative offices and manufacturing facility are located in Memphis, +Tennessee. This facility, which is owned by Viral Antigens, is comprised of two buildings totaling +approximately 34,000 square feet, including approximately 27,000 square feet of manufacturing +space. +-14- +Table of Contents +OEM Concepts rents office space in Toms River, New Jersey for sales and administration functions. +OEM Concepts also rents approximately 11,100 square feet of space in Boca Raton, Florida that +houses manufacturing operations. +ITEM 3. +LEGAL PROCEEDINGS +Meridian is a party to litigation that it believes is in the normal course of business. The +ultimate resolution of these matters is not expected to have a material adverse effect on +Meridian’s financial position, results of operations or cash flows. No provision has been made in +the accompanying consolidated financial statements for these matters. +ITEM 4. +SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS +No matters were submitted to a vote of security holders during the fourth quarter of fiscal 2005. +PART II. +ITEM 5. +MARKET FOR REGISTRANT’S COMMON +EQUITY AND RELATED STOCKHOLDER MATTERS +“Common Stock Information” on the inside back cover of the Annual Report to Shareholders for 2005 +and “Quarterly Financial Data” relating to Meridian’s dividends in Note 10 to the Consolidated +Financial Statements are incorporated herein by reference. There are no restrictions on cash +dividend payments. +Meridian’s cash dividend policy is to set the indicated annual dividend rate between 75% and 85% of +each fiscal year’s expected net earnings. The declaration and amount of dividends will be +determined by the Board of Directors in its discretion based upon its evaluation of earnings, cash +flow requirements and future business developments and opportunities, including acquisitions. +Meridian paid dividends of $0.31 per share, $0.26 per share, and $0.23 per share in fiscal 2005, +fiscal 2004, and fiscal 2003, respectively. +On August 15, 2005, Meridian announced a three-for-two stock split, with fractional shares paid in +cash. The split was effective on September 2, 2005 to shareholders of record as of August 29, +2005. All references in this Annual Report to number of shares and per share amounts reflect the +stock split. +-15- +Table of Contents +On September 21, 2005, Meridian issued 1,800,000 common shares at $17.50 per share. Total proceeds +from this stock offering were $29,925,000, after underwriting discounts. Offering costs, excluding +underwriting discounts, were $345,000. +EQUITY COMPENSATION PLAN INFORMATION +The following table presents summary information as of September 30, 2005 with respect to all the +Company’s equity compensation plans, except the Plan under which common shares issued to Directors +are not subject to forfeiture and are not appropriate for inclusion in the table. +(c) +Number of securities +(a) +remaining available +Number of +(b) +for future issuance +Securities to be +Weighted- +under equity +issued upon +average exercise +compensation plans +exercise of +price of +(excluding +outstanding +outstanding +securities +options, warrants +options, warrants +reflected in column +Plan Category +and rights +and rights +(a)) +Equity compensation +plans approved by +security +holders (1) +1,234,642 +$ +5.81 +788,096 +Equity compensation +plans not approved +by security holders +18,750 +4.77 +— +Total +1,253,392 +$ +5.80 +788,096 +(1) +1986 Stock Option Plan +1994 Director’s Stock Option Plan +1996 Stock Option Plan, as amended in 2001 +1999 Director’s Stock Option Plan +2004 Equity Compensation Plan +ITEM 6. +SELECTED FINANCIAL DATA +Incorporated by reference from inside front cover of the Annual Report to Shareholders for 2005. +ITEM 7. +MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL +CONDITION AND RESULTS OF OPERATIONS +Refer to “Forward Looking Statements” following the Index in front of this Form 10-K. +Future Trends: +US Diagnostics +Consolidation of the US healthcare industry is expected to continue and could potentially affect +Meridian’s customers. Industry consolidation puts pressure on pricing and aggregates buying power. +In response, in the +-16- +Table of Contents +last several years, Meridian has entered into, extended, or renewed several exclusive multiple-year +contracts with consolidated healthcare providers and supply agreements with major reference +laboratories. +European Diagnostics +Meridian expects market conditions in Europe to continue to improve. Through new product +introductions and improvements in general market conditions, Meridian’s European Diagnostics +operating segment experienced sales growth in fiscal 2005 of 16% (11% on a local currency basis). +Similarly, during the last six months of fiscal 2004, sales increased 7% in local currency, +compared to the last six months of fiscal 2003. +During the fourth quarter of 2005, in an effort to further streamline its cost structure and +improve operating efficiency, Meridian consolidated its Belgian distribution center into its +Italian distribution center. The Company incurred minimal costs related to this consolidation. +In October 2005, the European Patent Office confirmed as valid Meridian’s patent entitled +“Immunoassay for Helicobacter pylori in Fecal Specimens”. The validation of the patent by the +European Patent Office strengthens the position of the Company and its unique technology in its +patented rapid tests, Premier Platinum HpSA ® and ImmunoCard STAT! ® HpSA +diagnostic tests. The validation of this patent is expected to provide some relief from +competitive product pressures. +Life Science +Meridian believes that the Life Science markets in which it participates will experience +significant growth. Research for new drugs and vaccines used in biodefense and emerging infectious +diseases is expanding across the US. Meridian’s protein production facility provides enabling +technologies to capitalize on opportunities in this area. Revenues for contract services were +$3,053,000 in fiscal 2005, compared to $1,528,000 in fiscal 2004. +Meridian’s core manufacturing and supply of bulk antigens, antibodies, and reagents is also +expected to grow. The integration of the BIODESIGN and OEM Concepts businesses is expected to +leverage sales and distribution efforts by focusing on common customers and complementary products. +Meridian is currently investing in its facilities in Maine and Florida to add manufacturing +capacity +Research and Development +Meridian believes that internally developed products will continue to be a critical source of sales +and sales growth. Research and development efforts are expected to focus on the development of new +products and +-17- +Table of Contents +product improvements where Meridian has a dominant market position, or its intellectual property is +protected by patents or licenses. +During the first quarter of fiscal 2005, Meridian launched its Immuno Card Ò C. difficile +Toxins A & B rapid diagnostic test in domestic markets (US Diagnostics segment). It was launched +in European markets in fiscal 2004. This rapid diagnostic test added breadth to Meridian’s C. +difficile product offerings. +Meridian expects its Life Science operating segment will serve as a key platform for sourcing +biologicals and technologies, by acquisition or license, for development of new products for all of +Meridian’s operating segments. One of Meridian’s specific strategies in this area is to target +biologicals that have commercial product applications across multiple markets, such as human +diagnostics, veterinary diagnostics, and therapeutics. This strategy is expected to leverage +research and development resources as products can be developed with all three markets in mind, +rather than on a market-by-market basis. +Operating Segments: +Meridian’s reportable operating segments are US Diagnostics, European Diagnostics, and Life +Science. The US Diagnostics operating segment consists of manufacturing operations in Cincinnati, +Ohio, and the sale and distribution of diagnostic test kits in the US and countries outside of +Europe, Africa and the Middle East. The European Diagnostics operating segment consists of the +sale and distribution of diagnostic test kits in Europe, Africa, and the Middle East. The Life +Science operating segment consists of manufacturing operations in Memphis, Tennessee; Saco, Maine; +and Boca Raton, Florida; the sale and distribution of bulk antigens, antibodies and bioresearch +reagents domestically and abroad; and contract research and development and manufacturing services. +The Life Science operating segment consists of the Viral Antigens, BIODESIGN, and OEM Concepts +businesses. +Results of Operations: +Overview +Fourth quarter +Net earnings for the fourth quarter of fiscal 2005 increased 28% to $3,761,000, or $0.15 per +diluted share (increased 15%) from net earnings for the fourth quarter of fiscal 2004 of +$2,944,000, or $0.13 per diluted share. This increase is primarily attributable to increased sales +and continuing efforts to improve operating efficiency across all businesses. Net sales for the +fourth quarter of fiscal 2005 were $25,016,000, an increase of $2,772,000 or 12% compared to the +fourth quarter of fiscal 2004. +-18- +Table of Contents +Fiscal Year +Net earnings for fiscal 2005 increased 37% to $12,565,000, or $0.52 per diluted share (increased +30%) from net earnings for fiscal 2004 of $9,185,000, or $0.40 per diluted share. Results of +operations for fiscal 2005 compared to fiscal 2004 are discussed below. +Fiscal Year Ended September 30, 2005 Compared to Fiscal Year Ended September 30, 2004 +Net sales +Overall, net sales increased 17% for fiscal 2005 compared to fiscal 2004. Net sales for the US +Diagnostics operating segment increased $5,332,000, or 11%, for the European Diagnostics operating +segment increased $2,406,000, or 16%, and for the Life Science operating segment increased +$5,621,000, or 35%. +For the US Diagnostics operating segment, over 50% of the sales increase was related to growth in +C. difficile products (increased $2,974,000), reflecting the launch of the Company’s new product, +Immuno Card Ò C. difficile Toxins A & B. Sales of respiratory products (increased $2,419,000) +also contributed to the increase, driven by a larger customer base. Meridian’s respiratory +products include diagnostic tests for influenza, Respiratory Syncytial Virus (RSV), and mycoplasma. +For the European Diagnostics operating segment, the sales increase includes currency translation +gains in the amount of approximately $709,000. Sales in local currency, the Euro, increased 11%. +The local currency increase was driven by improvements in general market conditions and a full year +of sales from Immuno Card Ò C. difficile Toxins A & B rapid diagnostic test, launched in +European markets in fiscal 2004. +For the Life Science operating segment, the sales increase was attributable to the acquisition of +OEM Concepts ($3,087,000 for eight months), revenues from contract research and development and +contract manufacturing services (increased $1,525,000), and volume growth in make-to-order bulk +antigens and antibodies. Sales of made-to-order bulk antigens and antibodies to one customer +provided sales of approximately $5.0 million, $5.4 million and $3.4 million in fiscal 2005, 2004 +and 2003, respectively. +For all operating segments combined, international sales were $30,232,000, or 33% of total sales, +for fiscal 2005, compared to $24,916,000, or 31% of total sales, in fiscal 2004. Combined domestic +exports for the US Diagnostics and Life Science operating segments were $12,414,000 for fiscal +2005, compared to $9,504,000 in fiscal 2004. The remaining international sales were generated by +the European Diagnostics operating segment. +Gross Profit +-19- +Table of Contents +Gross profit increased 20% for fiscal 2005 compared to fiscal 2004. Gross profit margins were 59% +for fiscal 2005 compared to 57% for fiscal 2004. This increase reflects higher margins commanded +by new rapid tests, such as Immuno Card ® C. difficile Toxins A & B and operating +efficiencies. +Meridian’s overall operations consist of the sale of diagnostic test kits for various disease +states and in alternative test formats, as well as bioresearch reagents, bulk antigens and +antibodies, proficiency tests, and contract research and development and contract manufacturing +services. Product sales mix shifts, in the normal course of business, can cause the consolidated +gross profit margin to fluctuate by several points. +Operating Expenses +Operating expenses increased 12% for fiscal 2005 compared to fiscal 2004. The overall increase in +operating expenses for fiscal 2005 is discussed below. +Research and development expenses decreased 12% for fiscal 2005 compared to fiscal 2004, and as a +percentage of sales, decreased to 4% in fiscal 2005, from 5% in fiscal 2004. Of this decrease, +$132,000 related to the US Diagnostics operating segment and $404,000 related to the Life Science +operating segment. For the Life Science operating segment, during fiscal 2005, research and +development scientists were performing contract work for third-party customers, and thus, their +related costs are classified in cost of sales. During fiscal 2004, their efforts and activities +were primarily focused on internal research and development work. The decrease for the Life +Science operating segment reflects the classification of such costs. +Selling and marketing expenses increased 19%, for fiscal 2005 compared to fiscal 2004, and as a +percentage of sales, were 16% for fiscal 2005 and fiscal 2004. Of this increase, $1,118,000 +related to the US Diagnostics operating segment, $802,000 related to the European Diagnostics +operating segment, and $468,000 related to the Life Science operating segment. The increase for +the US Diagnostics operating segment was primarily attributable to higher salaries and benefits +costs for additional sales and marketing personnel ($373,000), costs of physician education and +business development for H. pylori diagnostics ($363,000), costs related to distributor incentives +($150,000), and increased advertising for corporate branding and new products ($167,000). The +increase for the European Diagnostics operating segment was primarily due to higher sales +commissions related to sales growth ($467,000) and currency translation ($143,000). The increase +for the Life Science operating segment was primarily due to the acquisition of OEM Concepts +($280,000) and additional marketing and business development resources. +General and administrative expenses increased 12%, for fiscal 2005 compared to fiscal 2004, and as +a percentage of sales, decreased from 18% in fiscal 2004, to 17% in fiscal 2005. Of this +increase, $1,414,000 related to the US Diagnostics operating segment, $517,000 related to the Life +Science operating segment, partially offset by a decrease of $196,000 related to the European +Diagnostics operating segment. The +-20- +Table of Contents +increase for the US Diagnostics operating segment was primarily attributable to incentive +compensation pursuant to Meridian’s corporate incentive plan ($324,000), increased legal and +professional fees ($417,000), primarily related to the audit of the Company’s financial +statements, and compliance with the Sarbanes-Oxley Act, and increased costs related to stock based +compensation pursuant to the Company’s stock option plans ($153,000). The increase for the Life +Science operating segment was primarily attributable to the acquisition of OEM Concepts +($885,000), including amortization of acquired intangibles, partially offset by lower incentive +compensation pursuant to Meridian’s corporate incentive plan ($139,000). +Effective July 1, 2005, Meridian early adopted the provisions of Statement of Financial Accounting +Standards No. 123R, Share-Based Payment , in accounting for its stock option plans. Meridian would +have otherwise been required to adopt SFAS No. 123R on October 1, 2005. Meridian elected to early +adopt SFAS No. 123R in order to achieve a lower cost associated with performance-based stock +options that were granted to certain employees in December 2004 than would have been recognized +under its previous accounting method, the intrinsic value method under Accounting Principles Board +Opinion No. 25. Pursuant to APB No. 25, stock compensation expense for the performance options +would have been measured at Meridian’s stock price at September 30, 2005, which was 90% higher +than at the grant date. The fair value of these stock options, determined under a Black-Scholes +model at the date of grant, was substantially lower. For this reason, Meridian believed that +early adoption of SFAS No. 123R was in the best interests of shareholders. The amount of +stock-based compensation expense reported for fiscal year 2005 was $279,000. The amount of +stock-based compensation expense that would have been reported in fiscal 2005 under a full year of +APB No. 25 was $604,000. +Operating Income +Operating income increased 38% in fiscal 2005, as a result of the factors discussed above. +Other Income and Expense +Interest expense declined 51% for fiscal 2005 compared to fiscal 2004. This decrease was +attributable to the positive effects of the fiscal 2004 debenture exchange and redemption +transactions and the fiscal 2005 debenture redemption and conversion transactions discussed under +Liquidity and Capital Resources herein. +Income Taxes +The effective rate for income taxes was 36% for fiscal 2005 and 30% for fiscal 2004. The increase +in the effective tax rate was primarily attributable to favorable book-to-return adjustments +related to non-US sales activities in fiscal 2004. Book-to-return adjustments represent changes to +prior estimates and generally are +-21- +Table of Contents +determined upon filing Meridian’s tax returns, typically occurring in the third and fourth +quarters. These adjustments are recorded in the period in which amounts previously estimated +become known. +During October 2004, the President signed into law the American Jobs Creation Act, H.R. 4520. The +Act provides export and domestic production incentives, foreign tax reform and incentives for +repatriation of foreign earnings. At this time, Meridian believes that this Act will not have an +adverse impact on its effective tax rate. +On June 30, 2005, Ohio’s governor signed Biennial Budget Bill, Am. Sub. H.B. 66. This bill +replaces Ohio’s corporate income and personal property taxes with a commercial activity tax based +on gross receipts, phased in over five years beginning July 1, 2005. Meridian has evaluated the +impact of this new legislation on its existing deferred tax balances. The carrying value of +existing deferred taxes was not materially affected by the enactment of this legislation. +Fiscal Year Ended September 30, 2004 Compared to Fiscal Year Ended September 30, 2003 +Net sales +Overall, net sales increased 21% for fiscal 2004 compared to fiscal 2003. Net sales for the US +Diagnostics operating segment increased $8,247,000, or 21%, for the European Diagnostics operating +segment increased $1,656,000, or 12%, and for the Life Science operating segment increased +$3,839,000, or 31%. +For the US Diagnostics operating segment, the sales increase was primarily related to growth in +respiratory products (increased $4,437,000), driven from outbreaks of influenza across the US, +primarily during the first quarter. Meridian’s respiratory products include diagnostic tests for +influenza, RSV, and mycoplasma. Also contributing to the sales growth were favorable volume +increases for C. difficile products (increased $2,206,000) and Rotavirus products (increased +$487,000). H. pylori products, which include both Premier Platinum HpSA ® and the +recently launched Immuno Card STAT! ® HpSA rapid test, showed favorable price and volume +increases ($1,131,000). Parasitology products also showed favorable price and volume increases +($431,000). +For the European Diagnostics operating segment, the sales increase includes currency translation +gains in the amount of approximately $1,574,000. Sales in local currency, the Euro, increased 1% +for the full fiscal year. Sales for 2004 showed an increase of 7% for sales in local currency +during the last six months of 2004 compared to the last six months of fiscal 2003. +For the Life Science operating segment, the sales increase was attributable to volume growth in +make-to-order bulk antigens and antibodies and completion of the initial Phase I clinical trial +materials for the National +-22- +Table of Contents +Institutes of Health Parvovirus vaccine. Sales of made-to-order bulk antigens and antibodies to +one customer provided sales of approximately $5.4 million, $3.4 million and $5.2 million in fiscal +2004, 2003 and 2002, respectively. +For all operating segments combined, international sales were $24,916,000, or 31% of total sales, +for fiscal 2004, compared to $23,220,000, or 35% of total sales, in fiscal 2003. Combined domestic +exports for the US Diagnostics and Life Science operating segments were $9,504,000 for fiscal 2004, +compared to $9,464,000 in fiscal 2003. The remaining international sales were generated by the +European Diagnostics operating segment. +Gross Profit +Gross profit increased 19% for fiscal 2004 compared to fiscal 2003. Gross profit margins were 57% +for fiscal 2004 compared to 58% for fiscal 2003. +Meridian’s overall operations consist of the sale of diagnostic test kits for various disease +states and in alternative test formats, as well as bioresearch reagents, bulk antigens, +proficiency tests and contract production activities in the protein production laboratory. +Product sales mix shifts, in the normal course of business, can cause the consolidated gross +profit margin to fluctuate by several points. +Operating Expenses +Operating expenses increased 22% for fiscal 2004 compared to fiscal 2003. The overall increase in +operating expenses for fiscal 2004 is discussed below. +Research and development expenses increased 12% for fiscal 2004 compared to fiscal 2003, and as a +percentage of sales, decreased from 6% in fiscal 2003, to 5% in fiscal 2004. Of this increase, +$604,000 related to the US Diagnostics operating segment, offset by a decrease of $122,000 related +to the Life Science operating segment. The increase for the US Diagnostics operating segment was +primarily attributable to additional product development staff and material costs for new product +development activities and incentive compensation pursuant to Meridian’s corporate incentive plan +($255,000). Human resources were added to the research and development staff throughout fiscal +2003. Such resources were in place for all of fiscal 2004. +Selling and marketing expenses increased 18%, for fiscal 2004 compared to fiscal 2003, and as a +percentage of sales, were 16% for fiscal 2004 and fiscal 2003. Of this increase, $1,253,000 +related to the US Diagnostics operating segment, $338,000 related to the European Diagnostics +operating segment, and $339,000 related to the Life Science operating segment. The increase for +the US Diagnostics operating segment was primarily attributable to higher sales commissions related +to sales growth ($448,000), incentive compensation pursuant to Meridian’s corporate incentive plan +($206,000), the addition of a Vice President of Sales and Marketing, +-23- +Table of Contents +including relocation costs ($250,000), and one new product manager. The increase for the European +Diagnostics operating segment was primarily due to currency translation. The increase for the Life +Science operating segment was primarily attributable to the addition of two product managers to +supplement sales and marketing efforts. +General and administrative expenses increased 28%, for fiscal 2004 compared to fiscal 2003, and as +a percentage of sales, increased from 17% in fiscal 2003, to 18% in fiscal 2004. Of this +increase, $1,910,000 related to the US Diagnostics operating segment, $593,000 related to the +European Diagnostics operating segment, and $603,000 related to the Life Science operating +segment. The increase for the US Diagnostics operating segment was primarily attributable to +higher salaries and benefits costs ($180,000), incentive compensation pursuant to Meridian’s +corporate incentive plan ($338,000), insurance reimbursements related to trade secrets litigation +received in fiscal 2003 ($187,000), favorable adjustments to the bad debt reserve that occurred in +fiscal 2003 ($104,000), a sales and use tax refund in fiscal 2003 ($150,000) and planned +recruiting and relocation costs for new employees ($204,000). The increase for the European +Diagnostics operating segment was primarily due to currency translation ($192,000), a favorable +reserve adjustment in fiscal 2003 related to a contract amendment with a vendor ($150,000), and a +2003 adjustment in the amount of $122,000 to reduce the reserve for bad debts based on better than +anticipated write-off history in Italy. The increase for the Life Science operating segment was +primarily attributable to higher salaries and benefits related to planned investments in +management personnel and incentive compensation pursuant to Meridian’s corporate incentive plan +($264,000). +Operating Income +Operating income increased 15% in fiscal 2004, as a result of the factors discussed above. +Other Income and Expense +Interest expense declined 9% for fiscal 2004 compared to fiscal 2003. This decrease was +attributable to lower overall debt levels outstanding for the revolving credit facility and bank +term debt and the positive effects of the debenture exchange and redemption transactions discussed +under Liquidity and Capital Resources herein. Interest expense for fiscal 2004 included a +write-off of deferred issuance costs in the amount of $130,000 related to the debenture exchange +and redemption transactions. +Other income declined 87% for fiscal 2004 compared to fiscal 2003. Other income in fiscal 2003 +included a gain on the sale of certain distributor relationships for the European Diagnostics +operating segment in the amount of $226,000. Other income in fiscal 2003 also included $216,000 of +income related to the settlement of litigation with a former employee involving claims relating to +a breach of an employment agreement and misappropriation of company trade secrets. +-24- +Table of Contents +Income Taxes +The effective rate for income taxes was 30% for fiscal 2004 and 39% for fiscal 2003. The decline +in the effective tax rate was primarily attributable to federal and state tax credits for research +and development activities, state tax credits for various incentives in Ohio and Tennessee, and +favorable book-to-return adjustments related to non-US sales activities. Book-to-return +adjustments represent changes to prior estimates and generally are determined upon filing +Meridian’s tax returns, typically occurring in the third and fourth quarters. These adjustments +are recorded in the period known. +Liquidity and Capital Resources: +Comparative Cash Flow Analysis +Meridian’s operating cash flow and financing requirements are determined by analyses of operating +and capital spending budgets and consideration of acquisition plans. Meridian has historically +maintained line of credit availability to respond quickly to acquisition opportunities. +On September 21, 2005, Meridian issued 1,800,000 common shares at an offering price of $17.50 per +share. The net proceeds from the offering, after underwriting discounts and expenses, were +approximately $29,580,000. +Net cash provided by operating activities increased 44% in fiscal 2005 compared to fiscal 2004. +This increase was primarily attributable to higher earnings levels and the fact that investments in +inventory during fiscal 2005 were lower when compared with investments in inventory made in fiscal +2004. +Net cash used for investing activities was $9,647,000 for fiscal 2005, compared to $3,043,000 for +fiscal 2004. This increase was primarily attributable to the acquisition of OEM Concepts +($6,383,000) in fiscal 2005. +Net cash provided by financing activities was $22,618,000 for fiscal 2005, compared to net cash +used in financing activities of $9,827,000 for fiscal 2004. This increase was primarily +attributable to net proceeds from the common share offering discussed above. Net repayments of +debt obligations, including the revolving credit facility, were $3,061,000 in fiscal 2005 and +$5,145,000 in fiscal 2004, reflecting Meridian’s intended efforts to pay down debt. Proceeds from +exercise of stock options were $3,302,000 in fiscal 2005, compared to $1,458,000 in fiscal 2004, +reflecting higher levels of exercise activities from Meridian’s increased stock price. +-25- +Table of Contents +Net cash flows from operating activities are anticipated to fund working capital requirements, +debt service, and dividends during fiscal 2006. +Capital Resources +The following table presents Meridian’s payments due on financing obligations as of September 30, +2005 (amounts in thousands): +2011 and +2006 +2007 +2008 +2009 +2010 +thereafter +Total +Bank term debt +$ +556 +$ +233 +$ +— +$ +— +$ +— +$ +— +$ +789 +Subordinated +debentures +— +— +— +— +— +2,451 +2,451 +During August 2004, Meridian completed the renewal of its credit facility with its commercial +bank. The amount of the credit facility is $25,000,000, and includes $2,500,000 of term debt +and capital lease capacity and a $22,500,000 line of credit that expires in September 2007. As +of November 30, 2005, there were no borrowings outstanding on the line of credit portion of this +facility. +As of September 30, 2003, Meridian had outstanding a total of $20,000,000 principal amount of +convertible subordinated debentures, due September 2006. These debentures were convertible, at the +option of the holder, into common shares at a price of $10.727. During the second quarter of +fiscal 2004, Meridian redeemed $4,000,000 of its outstanding 7% convertible debentures and also +completed the exchange of $3,889,000 of its outstanding 7% convertible debentures for an equal +principal amount of new convertible subordinated debentures that mature September 1, 2013 and bear +interest at 5%. The 5% debentures are convertible, at the option of the holder, into common shares +at a price of $9.67. +As of September 30, 2004, Meridian had outstanding a total of $16,000,000 principal amount of two +series of convertible subordinated debentures. Holders began converting debentures during the +first quarter of fiscal 2005, and such conversions continued throughout fiscal 2005. During +December 2004, Meridian also called for redemption $4,000,000 of its 7% debentures. This +redemption was completed on January 14, 2005. After conversions, the actual amount of this +redemption was $603,000. Subsequently, during May 2005, Meridian called for redemption $2,500,000 +of its 7% debentures. This redemption was completed on June 3, 2005. After conversions, the +actual amount of this redemption was $807,000. On June 14, 2005, the Company announced a call for +redemption on July 7, 2005, all remaining outstanding 7% convertible subordinated debentures at par +plus accrued interest. After conversions, the actual amount of this redemption was $402,000. +-26- +Table of Contents +The following table summarizes the exchange, conversion, and redemption activity for fiscal 2004 +and 2005 (amounts in thousands, except share amounts): +7% Series +5% Series +Total +Outstanding at September 30, 2003 +$ +20,000 +$ +— +$ +20,000 +Exchange +(3,889 +) +3,889 +— +Redeemed +(4,000 +) +— +(4,000 +) +Outstanding at September 30, 2004 +$ +12,111 +$ +3,889 +$ +16,000 +Converted to 1,108,494 common shares +(10,299 +) +(1,438 +) +(11,737 +) +Redeemed +(1,812 +) +— +(1,812 +) +Outstanding at September 30, 2005 +$ +— +$ +2,451 +$ +2,451 +The 2004 exchange and redemption transactions reduced annual interest expense by $358,000. The +2005 conversion and redemption transactions are expected to reduce annual interest expense by +approximately $920,000. +All of the bank term debt is denominated in the Euro currency and bears interest at a variable +rate tied to Euro LIBOR. A one-percentage point increase in the Euro LIBOR rate would increase +fiscal 2005 interest expense by approximately $6,000 for this debt. This debt serves as a +natural currency hedge against certain Euro denominated intercompany receivables. +The Viral Antigens acquisition, completed in fiscal 2000, provides for additional purchase +consideration up to a maximum remaining amount of $3,491,000, contingent upon Viral Antigens’ +future earnings through September 30, 2006. The amount of earnout consideration for fiscal +2005 was $1,313,000. The OEM Concepts acquisition, completed in fiscal 2005, provides for +additional purchase consideration up to a remaining amount of $2,270,000, contingent upon OEM +Concepts’ future calendar-year sales and gross profit through December 31, 2008. Earnout +consideration is payable each year, following the period earned. Earnout payments, if any, may +require financing under the line of credit or other bank credit facility. +Meridian’s capital expenditures are estimated to be $4,000,000 for fiscal 2006, and may be +funded with operating cash flows or availability under the $25,000,000 credit facility discussed +above. Capital expenditures relate to manufacturing and other equipment of a normal and +recurring nature as well as capacity expansions for the Maine and Florida facilities. +-27- +Table of Contents +Known Contractual Obligations: +Known contractual obligations and their related due dates were as follows as of September 30, 2005 +(amounts in thousands): +Less than +More than +Total +1 Year +1-3 Years +4-5 Years +5 Years +Long-term debt +$ +3,240 +$ +556 +$ +233 +$ +— +$ +2,451 +Interest payments +relating to long-term +debt +1,000 +138 +372 +245 +245 +Operating leases (1) +2,021 +605 +1,156 +260 +— +Purchase obligations (2) +7,632 +7,475 +157 +— +— +Viral Antigens Earnout +4,804 +1,313 +3,491 +— +— +OEM Concepts Earnout +2,270 +200 +2,070 +— +— +Total +$ +20,967 +$ +10,287 +$ +7,479 +$ +505 +$ +2,696 +(1) +Meridian and its subsidiaries are lessees of (i) office and warehouse buildings in +Maine, New Jersey, Florida, Belgium, and France; (ii) automobiles for use by the diagnostic +direct sales forces in the US and Europe; and (iii) certain office equipment such as +facsimile machines and copier machines across all business units, under operating lease +agreements that expire at various dates. +(2) +Meridian’s purchase obligations are primarily outstanding purchase orders for inventory +and service items. These contractual commitments are not in excess of expected production +requirements over the next twelve months. +Other Commitments and Off-balance Sheet Arrangements: +Royalties +Meridian has entered into various license agreements that require payment of royalties based on a +specified percentage of sales of related products (1% to 8%). Meridian expects that payments under +these agreements will amount to as much as $814,000 in fiscal 2006. These royalty payments +primarily relate to the US Diagnostics operating segment. +For one of these license agreements, Meridian was engaged in a dispute with the licensor regarding +the payment of royalties. During April 2004, this dispute was resolved with Meridian paying +$260,000, $210,000 of which related to purchasing certain manufacturing technology and receiving a +fully paid-up, royalty-free license. +-28- +Table of Contents +Forward Contracts +Meridian uses forward contracts from time to time to address foreign currency risk related to +certain transactions denominated in the Euro currency. These contracts are used to fix the +exchange rate in converting Euros to US dollars. As of September 30, 2005, Meridian was a party to +three such forward contracts with a notional amount of 900,000 Euro and maturity dates ranging to +December 30, 2005. +Market Risk Exposure: +Meridian has market risk exposure related to interest rate sensitive debt and foreign currency +transactions. +Meridian has debt obligations in the aggregate amount of $3,240,000 outstanding at September 30, +2005, of which $789,000 bears interest at variable rates. Information concerning the maturities of +interest rate sensitive debt is included in the discussion of Capital Resources above. To date, +Meridian has not employed a hedging strategy with respect to interest rate risk. +Meridian is exposed to foreign currency risk related to its European distribution operations, +including foreign currency denominated intercompany receivables, as well as Euro denominated term +debt. The Euro denominated term debt serves as a natural hedge against a portion of the Euro +denominated intercompany receivables. +Critical Accounting Policies: +The consolidated financial statements included in this Annual Report on Form 10-K have been +prepared in accordance with accounting principles generally accepted in the United States. Such +accounting principles require management to make judgments about estimates and assumptions that +affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. +Management believes that the following accounting policies are critical to understanding the +accompanying consolidated financial statements because the application of such polices requires the +use of significant estimates and assumptions and the carrying values of related assets and +liabilities are material. +Revenue Recognition +Meridian’s revenues are derived primarily from product sales. Revenue is generally recognized when +product is shipped and title has passed to the buyer. Revenue for the US Diagnostics operating +segment is reduced at the date of sale for estimated rebates that will be claimed by customers. +Rebate agreements are in place with certain independent national distributors and are designed to +reimburse such distributors for their cost in +-29- +Table of Contents +handling +Meridian’s products. Management estimates rebate accruals based on historical +statistics, current trends, and other factors. Changes to these rebate accruals are recorded in +the period that they become known. Meridian’s rebate accruals were $1,711,000 at September 30, +2005 and $1,318,000 at September 30, 2004. +Life Science revenue for contract services may come from standalone arrangements for process +development and/or optimization work (contract research and development services), or +multiple-deliverable arrangements that include process development work followed by larger-scale +manufacturing (contract manufacturing services). Revenue is recognized based on the nature of the +arrangements, using the principles in EITF 00-21, Revenue Arrangements with Multiple Deliverables . +Contract research and development services may be performed on a “time and materials” basis or +“fixed fee” basis. For “time and materials” arrangements, revenue is recognized as services are +performed and billed. For “fixed fee” arrangements, revenue is recognized upon completion and +acceptance by the customer. For contract manufacturing services, revenue is recognized upon +delivery of product and acceptance by the customer. +Inventories +Meridian’s inventories are carried at the lower of cost or market. Cost is determined on a +first-in, first-out basis, except for certain inventories in the Viral Antigens business for which +cost is determined on a last-in, first-out basis. Meridian establishes reserves against cost for +excess and obsolete materials, finished goods whose shelf life may expire before sale to customers, +and other identified exposures. Management estimates reserves based on assumptions about future +demand and market conditions. If actual market conditions are less favorable than such estimates, +additional inventory writedowns would be required and this would negatively affect gross profit +margin and overall results of operations. Changes to inventory reserves are recorded in the period +that they become known. +For the Viral Antigens purchase business combination, Meridian elected to use last-in, first-out +accounting for inventories for financial reporting purposes. Under last-in, first-out accounting, +the stepped-up inventory value will be charged to earnings in periods in which inventory quantities +decline below those on hand at the acquisition date. To date, inventory quantities have remained +above levels on hand at the acquisition date. +Intangible Assets +Meridian’s intangible assets include identifiable intangibles and goodwill. Identifiable +intangibles include customer lists, supply agreements, manufacturing technologies, patents, +licenses, and trade names. All of Meridian’s identifiable intangibles have finite lives. +SFAS No. 142, Goodwill and Other Intangible Assets provides that goodwill and intangible assets +with indefinite lives are subject to an annual impairment review (or more frequently if impairment +indicators arise) +-30- +Table of Contents +by applying a fair-value based test. There have been no impairments from the analyses required by +SFAS No. 142. +Identifiable intangibles with finite lives are subject to impairment testing as prescribed by SFAS +No. 144, Accounting for the Impairment or Disposal of Long-lived Assets . Pursuant to the +provisions of SFAS No. 144, identifiable intangibles with finite lives are reviewed for impairment +when events or circumstances indicate that such assets may not be recoverable at their current +carrying value. Whether an event or circumstance triggers impairment is determined by comparing an +estimate of the asset’s undiscounted future cash flows to its carrying value. If impairment has +occurred, it is measured by a fair-value based test. There have been no events or circumstances +indicating that the carrying value of such assets may not be recoverable. +Meridian’s ability to recover its intangible assets, both identifiable intangibles and goodwill, is +dependent upon the future cash flows of the related acquired businesses and assets. The +application of SFAS Nos. 142 and 144 requires management to make judgments and assumptions +regarding future cash flows, including sales levels, gross profit margins, operating expense +levels, working capital levels, and capital expenditures. With respect to identifiable +intangibles, management also makes judgments and assumptions regarding useful lives. +Management considers the following factors in evaluating events and circumstances for possible +impairment: (i) significant under-performance relative to historical or projected operating +results, (ii) negative industry trends, (iii) sales levels of specific groups of products (related +to specific identifiable intangibles), (iv) changes in overall business strategies and (v) other +factors. +If actual cash flows are less favorable than projections, this could trigger impairment of +intangible assets. If impairment were to occur, this would negatively affect overall results of +operations. +Income Taxes +Pursuant to SFAS No. 109, Accounting for Income Taxes , Meridian’s provision for income taxes +includes federal, foreign, state, and local income taxes currently payable and those deferred +because of temporary differences between income for financial reporting and income for tax +purposes. Meridian prepares estimates of permanent and temporary differences between income for +financial reporting purposes and income for tax purposes. These differences are adjusted to actual +upon filing of Meridian’s tax returns, typically occurring in the third and fourth quarters of the +current fiscal year for the preceding fiscal year’s estimates. +Meridian’s deferred tax assets include net operating loss carryforwards in foreign jurisdictions. +The realization of tax benefits related to net operating loss carryforwards is dependent upon the +generation of future taxable income in the applicable jurisdictions. Management assesses the level +of deferred tax asset valuation allowance by taking into consideration historical and future +projected operating results, future reversals of +-31- +Table of Contents +taxable temporary differences, as well as tax planning strategies. The amount of net deferred tax +assets considered realizable could be reduced in future years if estimates of future taxable income +during the carryforward period are reduced. +Undistributed earnings in Meridian’s foreign subsidiaries are considered by management to be +permanently re-invested in such subsidiaries. Consequently, US deferred tax liabilities on such +earnings have not been recorded. Management believes that such US taxes would be largely offset by +foreign tax credits for taxes paid in applicable foreign jurisdictions. +From time to time, Meridian’s tax returns in federal, state, and foreign jurisdictions are examined +by the applicable tax authorities. Meridian’s tax provisions take into consideration the +judgmental nature of certain tax positions through the establishment of reserves for differences +between the probable tax determinations and the “as filed” tax positions of certain assets and +liabilities. Meridian believes that it has complied with all tax laws and regulations to which it +is subject. To the extent that tax benefits result from the +completion of these examinations or the passing of statutes of limitation, they will affect the +provision in the period known. Meridian believes that the results of any tax authority +examinations would not have a significant adverse impact on financial condition, results of +operation or cash flows. +Recent Accounting Pronouncements: +See Note 1(o) to the Consolidated Financial Statements. +ITEM 7A. +QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK +See Market Risk Exposure and Capital Resources under Item 7 above. +-32- +Table of Contents +ITEM 8. +FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA +Index to Consolidated Financial Statements +Management’s Report on Internal Control over Financial Reporting +34 +Reports of Independent Registered Public Accounting Firms +35 +Consolidated Statements of Operations for the years ended September 30, 2005, 2004 and 2003 +40 +Consolidated Statements of Cash Flows for the years ended September 30, 2005, 2004 and 2003 +41 +Consolidated Balance Sheets as of September 30, 2005 and 2004 +42 +Consolidated Statements of Shareholders’ Equity for the years ended September 30, 2005, 2004 and 2003 +44 +Notes to Consolidated Financial Statements +45 +Schedule No. II – Valuation and Qualifying Accounts for the years ended September 30, 2005, 2004 and +2003 +71 +All other supplemental schedules are omitted due to the absence of conditions under which they are +required or because the information is shown in the Consolidated Financial Statements or Notes +thereto. +-33- +Table of Contents +Management’s Report on Internal Control over Financial Reporting +Management is responsible for establishing and maintaining adequate internal control over financial +reporting, as defined in Exchange Act Rule 13a-15(f). +The Company’s internal control over financial reporting includes those policies and procedures that +(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect +the transactions and dispositions of the assets of the Company; (ii) 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 (iii) provide reasonable assurance regarding prevention or timely detection of +unauthorized acquisition, use, or disposition of the Company’s assets that could have a material +effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting can only provide +reasonable assurance and 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 or compliance with the policies or +procedures may deteriorate. +Under the supervision and with the participation of our management, including the Chief Executive +Officer and the Chief Financial Officer, we conducted an evaluation of the effectiveness of our +internal control over financial reporting based on the framework and criteria in Internal Control – +Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway +Commission (COSO). Based on management’s evaluation and those criteria, the Company concluded that +its system of internal control over financial reporting was effective as of September 30, 2005. +Grant Thornton LLP, the independent registered public accounting firm that audited the consolidated +financial statements as of and for the year ended September 30, 2005 included in this Annual Report +on Form 10-K, has issued an attestation report on management’s assessment of the Company’s internal +control over financial reporting, which appears on pages 37-38. +/s/ William J. Motto +William J. Motto +Chairman of the Board and +Chief Executive Officer +December 9, 2005 +/s/ Melissa Lueke +Melissa Lueke +Vice President and +Chief Financial Officer +December 9, 2005 +-34- +Table of Contents +Report of Independent Registered Public Accounting Firm +Board of Directors and +Meridian Bioscience, Inc. +We have audited the accompanying consolidated balance sheet of Meridian Bioscience, Inc. (an Ohio +Corporation) and subsidiaries as of September 30, 2005, and the related consolidated statements of +operations, shareholders’ equity, and cash flows for the year then ended. These financial +statements are the responsibility of the Company’s management. Our responsibility is to express an +opinion on these financial statements 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 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 audit provides 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 Meridian Bioscience, Inc. and subsidiaries as of +September 30, 2005, and the results of their operations and their cash flows for the year then +ended in conformity with accounting principles generally accepted in the United States of America. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight +Board (United States), the effectiveness of Meridian Bioscience, Inc.’s internal control over +financial reporting as of September 30, 2005, based on criteria established in Internal Control – +Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission +and our report dated November 28, 2005 expressed an unqualified opinion on Management’s assessment +of the effectiveness of the Company’s internal control over financial reporting and an unqualified +opinion on the effectiveness of the Company’s internal control over financial reporting. +Our audit was conducted for the purpose of forming an opinion on the consolidated financial +statements taken as a whole. The accompanying Schedule II is presented for purposes of additional +analysis and is not a required part of the consolidated financial statements. The information for +the year ended September 30, 2005 included in this schedule has been subjected to the auditing +procedures applied in our audit of the consolidated financial statements as of and for the year +ended September 30, 2005 and, in our opinion, is fairly stated in all material respects in relation +to the consolidated financial statements taken as a whole. +-35- +Table of Contents +As noted in Note 7, the Company adopted SFAS No. 123R, Share-Based Payment, effective July 1, 2005. +/s/ Grant Thornton LLP +Cincinnati, Ohio +November 28, 2005 +-36- +Table of Contents +Report of Independent Registered Public Accounting Firm +Board of Directors and +Meridian Bioscience, Inc. +We have audited management’s assessment, included in the accompanying Report of Management on +Internal Control over Financial Reporting, that Meridian Bioscience, Inc. (an Ohio Corporation) and +subsidiaries (the Company) maintained effective internal control over financial reporting as of +September 30, 2005, based on criteria established in Internal Control – Integrated Framework issued +by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The +Company’s 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 management’s assessment and an opinion on the +effectiveness of the company’s 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 management’s 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 opinions. +A company’s 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 +company’s 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 company’s 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 +-37- +Table of Contents +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, management’s assessment that Meridian Bioscience, Inc. maintained effective +internal control over financial reporting as of September 30, 2005, is fairly stated, in all +material respects, based on the COSO criteria. Also, in our opinion, Meridian Bioscience, Inc. +maintained, in all material respects, effective internal control over financial reporting as of +September 30, 2005, based on the COSO criteria. +We have also audited, in accordance with the standards of the Public Company Accounting Oversight +Board (United States), the consolidated balance sheet of Meridian Bioscience, Inc. and subsidiaries +as of September 30, 2005 and the related consolidated statements of operations, shareholders’ +equity and cash flows for the year ended September 30, 2005, and our report dated November 28, 2005 +expressed an unqualified opinion on those financial statements. +/s/ Grant Thornton LLP +Cincinnati, Ohio +November 28, 2005 +-38- +Table of Contents +Report of Independent Registered Public Accounting Firm +To the Board of Directors and Shareholders of Meridian Bioscience, Inc.: +In our opinion, the consolidated financial statements listed in the accompanying index present +fairly, in all material respects, the financial position of Meridian Bioscience, Inc. and its +subsidiaries at September 30, 2004, and the results of their operations and their cash flows for +each of the two years in the period ended September 30, 2004 in conformity with accounting +principles generally accepted in the United States of America. In addition, in our opinion, the +financial statement schedule listed in the accompanying index presents fairly, in all +material respects, the information set forth therein when read in conjunction with the related +consolidated financial statements. These financial statements and financial statement schedule are +the responsibility of the Company’s management. Our responsibility is to express an opinion on +these financial statements and financial statement schedule based on our audits. We conducted our +audits of these statements 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, assessing the accounting principles used and significant +estimates made by management, and evaluating the overall financial statement presentation. We +believe that our audits provide a reasonable basis for our opinion. +/s/ PricewaterhouseCoopers LLP +Cincinnati, Ohio +November 12, 2004, except for Note 11, as to which the date is December 6, 2005 +-39- +Table of Contents +CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) +Meridian Bioscience, Inc. and Subsidiaries +For the Year Ended September 30, +2005 +2004 +2003 +Net Sales +$ +92,965 +$ +79,606 +$ +65,864 +Cost of Sales +38,145 +33,931 +27,576 +Gross Profit +54,820 +45,675 +38,288 +Operating Expenses: +Research and development +3,821 +4,357 +3,875 +Selling and marketing +14,919 +12,531 +10,601 +General and administrative +15,864 +14,129 +11,023 +Total operating expenses +34,604 +31,017 +25,499 +Operating +Income +20,216 +14,658 +12,789 +Other Income (Expense): +Interest income +43 +31 +42 +Interest expense +(770 +) +(1,557 +) +(1,718 +) +Other, net +107 +63 +478 +Total other income (expense) +(620 +) +(1,463 +) +(1,198 +) +Earnings Before Income Taxes +19,596 +13,195 +11,591 +Income Tax Provision +7,031 +4,010 +4,573 +Net Earnings +$ +12,565 +$ +9,185 +$ +7,018 +Earnings Per Share Data: +Basic earnings per common share +$ +0.54 +$ +0.41 +$ +0.32 +Diluted earnings per common share +0.52 +0.40 +$ +0.31 +Common shares used for basic earnings per common share +23,474 +22,294 +21,996 +Effect of dilutive stock options +630 +595 +429 +Common shares used for diluted earnings per common share +24,104 +22,889 +22,425 +Dividends declared per common share +$ +0.31 +$ +0.26 +$ +0.23 +Anti-dilutive Securities: +Common share options +1 +218 +375 +Convertible debentures +253 +1,532 +1,865 +All share and per share data has been adjusted for the three-for-two stock split. +The accompanying notes are an integral part of these consolidated financial statements. +-40- +Table of Contents +CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) +Meridian Bioscience, Inc. and Subsidiaries +For the Year Ended September 30, +2005 +2004 +2003 +Cash Flows From Operating Activities +Net earnings +$ +12,565 +$ +9,185 +$ +7,018 +Non-cash items: +Depreciation of property, plant and equipment +2,597 +2,615 +2,390 +Amortization of intangible assets and deferred issuance costs +1,655 +1,462 +1,390 +Deferred income taxes +(279 +) +506 +1,044 +Stock compensation expense +279 +126 +14 +(Gain) loss on disposition of fixed assets +(7 +) +(37 +) +26 +Change in current assets, net of acquisition +(991 +) +(3,370 +) +(3,945 +) +Change in current liabilities, net of acquisition +2,455 +1,683 +3,571 +Other, net +(87 +) +483 +845 +Net cash provided by operating activities +18,187 +12,653 +12,353 +Cash Flows From Investing Activities +Viral Antigens earnout payments +(678 +) +(456 +) +(1,407 +) +Acquisitions of property, plant and equipment +(2,590 +) +(2,385 +) +(1,812 +) +Proceeds from dispositions of property, plant and equipment +14 +68 +— +Acquisition of OEM Concepts, Inc. +(6,383 +) +— +— +Other intangibles acquired +(10 +) +(270 +) +(33 +) +Net cash used in investing activities +(9,647 +) +(3,043 +) +(3,252 +) +Cash Flows From Financing Activities +Net activity on revolving credit facility +— +(463 +) +(2,482 +) +Issuance of debt obligations +— +930 +— +Repayment of debt obligations +(3,061 +) +(5,612 +) +(2,792 +) +Debt issuance costs paid +— +(311 +) +— +Dividends paid +(7,200 +) +(5,793 +) +(4,989 +) +Proceeds from exercises of stock options +3,302 +1,458 +478 +Proceeds from issuance of common shares +29,925 +— +— +Common share issuance costs +(345 +) +— +— +Other +(3 +) +(36 +) +(42 +) +Net cash provided by (used in) financing activities +22,618 +(9,827 +) +(9,827 +) +Effect of Exchange Rate Changes on Cash and Equivalents +(56 +) +117 +349 +Net Increase (Decrease) in Cash and Equivalents +31,102 +(100 +) +(377 +) +Cash and Equivalents at Beginning of Period +1,983 +2,083 +2,460 +Cash and Equivalents at End of Period +$ +33,085 +$ +1,983 +$ +2,083 +The accompanying notes are an integral part of these consolidated financial statements. +-41- +Table of Contents +CONSOLIDATED BALANCE SHEETS (dollars in thousands) +Meridian Bioscience, Inc. and Subsidiaries +As of September 30, +2005 +2004 +Assets +Current Assets: +Cash and equivalents +$ +33,085 +$ +1,983 +Accounts receivable, less allowances of $360 in 2005 and $479 in 2004 +17,366 +17,857 +Inventories +16,785 +14,107 +Prepaid expenses and other current assets +1,666 +1,669 +Deferred income taxes +1,258 +495 +Total current assets +70,160 +36,111 +Property, Plant and Equipment, at Cost: +Land +693 +696 +Buildings and improvements +15,510 +15,214 +Machinery, equipment and furniture +21,053 +18,794 +Construction in progress +433 +525 +Subtotal +37,689 +35,229 +Less-accumulated depreciation and amortization +20,229 +17,887 +Net property, plant and equipment +17,460 +17,342 +Other Assets: +Deferred debenture offering costs, net +164 +433 +Goodwill +8,779 +5,423 +Other intangible assets, net +13,249 +9,275 +Restricted cash +600 +600 +Other assets +157 +138 +Total other assets +22,949 +15,869 +Total assets +$ +110,569 +$ +69,322 +The accompanying notes are an integral part of these consolidated financial statements. +-42- +Table of Contents +CONSOLIDATED BALANCE SHEETS (dollars in thousands) +Meridian Bioscience, Inc. and Subsidiaries +As of September 30, +2005 +2004 +Liabilities and Shareholders’ Equity +Current Liabilities: +Current portion of long-term debt +$ +556 +$ +696 +Accounts payable +2,949 +2,631 +Accrued payroll costs +7,707 +6,311 +Purchase business combination liability +1,313 +678 +Other accrued expenses +3,993 +3,159 +Income taxes payable +3,273 +3,175 +Total current liabilities +19,791 +16,650 +Long-term Obligations: +Bank debt +233 +1,093 +Convertible subordinated debentures +2,451 +16,000 +Deferred Income Taxes +4,326 +2,647 +Commitments and Contingencies +Shareholders’ Equity: +Preferred stock, no par value, 1,500,000 shares authorized, none issued +— +— +Common shares, no par value, 50,000,000 shares authorized, 25,940,080 +and 22,456,497 shares issued +— +— +Treasury stock, at cost, 12,450 shares +(32 +) +(32 +) +Additional paid-in capital +71,568 +25,936 +Retained earnings +12,687 +7,322 +Accumulated other comprehensive loss +(455 +) +(294 +) +Total shareholders’ equity +83,768 +32,932 +Total liabilities and shareholders’ equity +$ +110,569 +$ +69,322 +The accompanying notes are an integral part of these consolidated financial statements. +-43- +Table of Contents +CONSOLIDATED STATEMENTS OF SHAREHOLDERS’EQUITY (Dollars and shares in thousands except per share +data) +Meridian Bioscience, Inc. and Subsidiaries +Shares +Additional +Accumulated Other +Total +Common +Held in +Treasury +Paid-in +Retained +Comprehensive +Comprehensive +Shareholders’ +Shares Issued +Treasury +Stock +Capital +Earnings +Income (Loss) +Income (Loss) +Equity +Balance at September 30, 2002 +21,950 +(12 +) +$ +(32 +) +$ +23,726 +$ +1,901 +$ +(1,214 +) +$ +24,381 +Cash dividends paid — $0.23 per share +— +— +— +— +(4,989 +) +— +(4,989 +) +Exercise of stock options +141 +— +— +478 +— +— +478 +Stock compensation expense +3 +— +— +14 +— +— +14 +Cost of shelf registration statement +— +— +— +(42 +) +— +— +(42 +) +Comprehensive income: +Net earnings +— +— +— +— +7,018 +— +$ +7,018 +7,018 +Foreign currency translation adjustment +— +— +— +— +— +624 +624 +624 +Comprehensive income +$ +7,642 +Balance at September 30, 2003 +22,094 +(12 +) +(32 +) +24,176 +3,930 +(590 +) +27,484 +Cash dividends paid — $0.26 per share +— +— +— +— +(5,793 +) +— +(5,793 +) +Exercise of stock options, net of tax +363 +— +— +1,670 +— +— +1,670 +Stock compensation expense +— +— +— +126 +— +— +126 +Cost of shelf registration statement +— +— +— +(36 +) +— +— +(36 +) +Comprehensive income: +Net earnings +— +— +— +— +9,185 +— +$ +9,185 +9,185 +Foreign currency translation adjustment +— +— +— +— +— +296 +296 +296 +Comprehensive income +$ +9,481 +Balance at September 30, 2004 +22,457 +(12 +) +(32 +) +25,936 +7,322 +(294 +) +32,932 +Cash dividends paid — $0.31 per share +— +— +— +— +(7,200 +) +— +(7,200 +) +Exercise of stock options, net of tax +575 +— +— +3,956 +— +— +3,956 +Stock compensation expense +— +— +— +279 +— +— +279 +Debenture conversions +1,108 +— +— +11,817 +11,817 +Common share offering, net +1,800 +— +— +29,580 +— +— +29,580 +Comprehensive income: +Net earnings +— +— +— +— +12,565 +— +$ +12,565 +12,565 +Foreign currency translation adjustment +— +— +— +— +— +(161 +) +(161 +) +(161 +) +Comprehensive income +$ +12,404 +Balance at September 30, 2005 +25,940 +(12 +) +$ +(32 +) +$ +71,568 +$ +12,687 +$ +(455 +) +$ +83,768 +The accompanying notes are an integral part of these consolidated financial statements. +-44- +Table of Contents +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Meridian Bioscience, Inc. and Subsidiaries +(1) +Summary of Significant Accounting Policies +(a) +Nature of Business – Meridian is a fully-integrated life science company whose principal +businesses are (i) the development, manufacture and distribution of diagnostic test kits +primarily for certain respiratory, gastrointestinal, viral and parasitic infectious diseases, +(ii) the manufacture and distribution of bulk antigens, antibodies, and reagents used by +researchers and other diagnostic manufacturers and (iii) the contract manufacture of proteins +and other biologicals for use by biopharmaceutical and biotechnology companies engaged in +research for new drugs and vaccines. +(b) +Principles of Consolidation — The consolidated financial statements include the accounts of +Meridian Bioscience, Inc. and its subsidiaries (collectively, “Meridian” or the “Company”). +All significant intercompany accounts and transactions have been eliminated. +(c) +Use of Estimates - The preparation of financial statements in conformity with generally +accepted accounting principles requires management to make estimates and assumptions that +affect the reported amounts of assets and liabilities, disclosure of contingent assets and +liabilities at the date of the financial statements and the reported amounts of revenues and +expenses during the reporting period. Actual results could differ from those estimates. +Significant estimates are discussed in Notes 1(f), 1(h), 1(i), 1(k), 1(l), and 6. +(d) +Foreign Currency Translation - Assets and liabilities of foreign operations are translated +using year-end exchange rates with gains or losses resulting from translation included in a +separate component of accumulated other comprehensive income (loss). Revenues and expenses +are translated using exchange rates prevailing during the year. Meridian also recognizes +foreign currency transaction gains and losses on certain assets and liabilities that are +denominated in the Euro currency. These gains and losses are included in other income and +expense in the accompanying consolidated statements of operations. +(e) +Cash Equivalents – Meridian considers short-term investments with original maturities of 90 +days or less to be cash equivalents. +(f) +Inventories - Inventories are stated at the lower of cost or market. Cost is determined on a +first-in, first-out basis (FIFO), except for $5,194,000 of inventory for which cost is +determined on a last-in, first-out basis (LIFO). The FIFO cost of this inventory was +$4,490,000 at September 30, 2005. +Meridian establishes reserves against cost for excess and obsolete materials, finished goods +whose shelf life may expire before sale to customers, and other identified exposures. Such +reserves were $556,000 and +-45- +Table of Contents +$271,000 at September 30, 2005 and 2004, respectively. Management estimates these reserves +based on assumptions about future demand and market conditions. If actual market conditions are +less favorable than such estimates, additional inventory writedowns would be required and this +would negatively affect gross profit margin and overall results of operations. Changes to +inventory reserves are recorded in the period that they become known. +For the Viral Antigens purchase business combination, Meridian elected to use LIFO accounting +for inventories for financial reporting purposes. Under LIFO accounting, the stepped-up +inventory value will be charged to earnings in periods in which inventory quantities decline +below those on hand at the acquisition date. To date, inventory quantities have remained above +levels on hand at the acquisition date. +(g) +Property, Plant and Equipment — Property, plant and equipment are stated at cost. Upon +retirement or other disposition of property, plant and equipment, the cost and related +accumulated depreciation and amortization are removed from the accounts and the resulting gain +or loss is reflected in earnings. Maintenance and repairs are expensed as incurred. +Depreciation and amortization are computed on the straight-line method in amounts sufficient +to write-off the cost over the estimated useful lives as follows: +Buildings and improvements — 5 to 33 years +Machinery, equipment, and furniture — 3 to 10 years +(h) +Intangible Assets and Application of SFAS Nos. 142 and 144 — SFAS No. 142, Goodwill and Other +Intangible Assets, addresses accounting and reporting for acquired goodwill and other +intangible assets. SFAS No. 142 provides that goodwill and other intangible assets with +indefinite lives are subject to an annual impairment review (or more frequently if impairment +indicators arise) by applying a fair-value based test. Meridian performs its annual +impairment review as of June 30, the end of its third fiscal quarter. Meridian has no +intangible assets with indefinite lives other than goodwill. There have been no impairments +from the analyses prepared pursuant to SFAS No. 142. During fiscal 2005, the change in +goodwill was an increase of $3,356,000. This change consisted of an increase related to the +Viral Antigens earnout obligation for fiscal 2005 in the amount of $1,313,000 (Life Science +operating segment), goodwill recorded related to the OEM Concepts acquisition in the amount of +$2,243,000 (Life Science operating segment), offset by a decrease of $200,000 related to +recognition of acquired tax benefits (US Diagnostics operating segment). During fiscal 2004, +the change in goodwill was an increase of $432,000. This change consisted of an increase +related to the Viral Antigens earnout obligation for fiscal 2004 in the amount of $671,000 +(Life Science operating segment), offset by a decrease of $239,000 related to recognition of +acquired tax benefits (US Diagnostics operating segment). +-46- +Table of Contents +A summary of Meridian’s acquired intangible assets subject to amortization, as of September 30, +2005 and 2004 is as follows (amounts in thousands). +2005 +2004 +Gross +2005 +Gross +2004 +Carrying +Accumulated +Carrying +Accumulated +As of September 30, +Value +Amortization +Value +Amortization +Core products and cell lines +$ +4,698 +$ +1,733 +$ +3,199 +$ +1,477 +Manufacturing technologies +5,907 +3,373 +5,907 +3,016 +Trademarks, licenses and patents +1,941 +1,450 +1,931 +1,303 +Customer lists and supply agreements +11,396 +4,137 +7,368 +3,334 +$ +23,942 +$ +10,693 +$ +18,405 +$ +9,130 +The actual aggregate amortization expense for these intangible assets for fiscal 2005, fiscal +2004 and fiscal 2003 was $1,563,000, $1,204,000 and $1,241,000, respectively. The estimated +aggregate amortization expense for these intangible assets for each of the five succeeding +fiscal years is as follows: fiscal 2006 — $1,726,000, fiscal 2007 — $1,726,000, fiscal 2008 - +$1,703,000, fiscal 2009- $1,602,000 and fiscal 2010 — $1,565,000. +SFAS No. 144, Accounting for Impairment or Disposal of Long-lived Assets establishes a single +model for accounting for impairment or disposal of long-lived assets, including the disposal of +a segment of a business. Long-lived assets, excluding goodwill and identifiable intangibles +with indefinite lives, are reviewed for impairment when events or circumstances indicate that +such assets may not be recoverable at their carrying value. Whether an event or circumstance +triggers an impairment is determined by comparing an estimate of the assets’ future cash flows +to its carrying value. If impairment has occurred, it is measured by a fair-value based test. +SFAS No. 144 requires that assets to be disposed of by sale be reported at the lower of carrying +value or fair value, less costs to sell. There have been no events or circumstances indicating +that the assets may not be recoverable. +Meridian’s ability to recover its intangible assets, both identifiable intangibles and goodwill, +is dependent upon the future cash flows of the related acquired businesses and assets. The +application of SFAS Nos. 142 and 144 requires management to make judgments and assumptions +regarding future cash flows, including sales levels, gross profit margins, operating expense +levels, working capital levels, and capital expenditures. With respect to identifiable +intangibles and fixed assets, management also makes judgments and assumptions regarding useful +lives. +Management considers the following factors in evaluating events and circumstances for possible +impairment: (i) significant under-performance relative to historical or projected operating +results, (ii) negative industry trends, (iii) sales levels of specific groups of products +(related to specific identifiable intangibles), (iv) changes in overall business strategies and +(v) other factors. +-47- +Table of Contents +If actual cash flows are less favorable than projections, this could trigger impairment of +intangible assets and other long-lived assets. If impairment were to occur, this would +negatively affect overall results of operations. +(i) +Revenue Recognition — Revenue is generally recognized from sales when product is shipped and +title has passed to the buyer. Revenue for the US Diagnostics operating segment is reduced at +the date of sale for estimated rebates that will be claimed by customers. Management +estimates accruals for rebate agreements based on historical statistics, current trends, and +other factors. Changes to the accruals are recorded in the period that they become known. +Meridian’s rebate accruals were $1,711,000 at September 30, 2005 and $1,318,000 at September +30, 2004. +Life Science revenue for contract services may come from standalone arrangements for process +development and/or optimization work (contract research and development services), or +multiple-deliverable arrangements that include process development work followed by larger-scale +manufacturing (contract manufacturing services). Revenue is recognized based on the nature of +the arrangements, using the principles in EITF 00-21, Revenue Arrangements with Multiple +Deliverables . Contract research and development services may be performed on a “time and +materials” basis or “fixed fee” basis. For “time and materials” arrangements, revenue is +recognized as services are performed and billed. For “fixed fee” arrangements, revenue is +recognized upon completion and acceptance by the customer. For contract manufacturing services, +revenue is recognized upon delivery of product and acceptance by the customer. +Trade accounts receivable are recorded in the accompanying consolidated balance sheet at the +invoiced amount less provisions for rebates and doubtful accounts. The allowance for doubtful +accounts represents Meridian’s estimate of probable credit losses and is based on historical +write-off experience. The allowance for doubtful accounts and related metrics, such as days +sales outstanding, are reviewed monthly. Past due balances over 90 days are reviewed +individually for collectibility. Customer invoices are charged off against the allowance when +Meridian feels it is probable the receivable will not be recovered. +(j) +Research and Development Costs — Research and development costs are charged to expense as +incurred. Research and development costs include, among other things, salaries and wages for +research scientists, materials and supplies used in the development of new products, and costs +for facilities and equipment. +(k) +Income Taxes — The provision for income taxes includes federal, foreign, state, and local +income taxes currently payable and those deferred because of temporary differences between +income for financial reporting and income for tax purposes. Meridian prepares estimates of +permanent and temporary differences between income for financial reporting purposes and income +for tax purposes. These differences are adjusted to actual upon filing of Meridian’s tax +returns, typically occurring in the third and fourth quarters of the current fiscal year for +the preceding fiscal year’s estimates. See Note 6. +-48- +Table of Contents +(l) +Stock-based Compensation — Meridian early adopted SFAS No. 123R as of July 1, 2005. SFAS No. +123R requires recognition of compensation expense for all share-based payments made to +employees, based upon the fair value of the share-based payment on the date of the grant. +Meridian elected to adopt the provisions of SFAS No. 123R, utilizing the modified prospective +method, which requires compensation expense be measured and recognized based on grant-date +fair value for stock option awards granted after July 1, 2005 and portions of stock options +awards granted prior to July 1, 2005, but not vested as of July 1, 2005. See Note 7. +(m) +Forward Contracts — Meridian uses forward contracts from time to time to address foreign +currency risk related to certain transactions denominated in the Euro currency. These +contracts are used to fix the exchange rate in converting Euros to US dollars. Gains and +losses on such contracts are recorded in other income and expense in the accompanying +consolidated statements of operations. As of September 30, 2005, Meridian had three such +contracts outstanding with a notional amount of 900,000 Euros and maturities ranging to +December 30, 2005. +(n) +Supplemental Cash flow Information — Supplemental cash flow information is as follows for +fiscal 2005, 2004 and 2003 (amounts in thousands): +Year Ended September 30, +2005 +2004 +2003 +Cash paid +for — +Income taxes +$ +7,067 +$ +3,722 +$ +1,558 +Interest +493 +1,334 +1,729 +Non-cash +items — +Viral Antigens earnout obligation +1,313 +678 +463 +Debenture conversions +11,737 +— +— +(o) +Recent Accounting Pronouncements — During November 2004, the Financial Accounting Standards +Board issued Statement No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4”. The +standard specifies that idle facility expense, freight, handling costs, and wasted material +(spoilage) must be accounted for as current period charges. In addition, the Statement +requires that allocation of fixed production overhead be made based upon the normal capacity +of the production facilities. This standard is effective for inventory costs incurred during +fiscal years beginning after June 15, 2005, which for Meridian would be fiscal year 2006. +During December 2004, the Financial Accounting Standards Board issued Staff Position No. 109-1, +“Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on +Qualified Production Activities Provided by the American Jobs Creation Act of 2004”. This staff +position states that the qualified production activities deduction should be accounted for as a +special deduction in accordance +-49- +Table of Contents +with Statement 109. The deduction on qualified production activities will be available to +Meridian beginning in fiscal year 2006. +In addition, during December 2004, the Financial Accounting Standards Board issued Staff +Position No. 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation +Provision within the American Jobs Creation Act of 2004”. This staff provision dictates that a +practical exception exists to the Statement 109 requirement to reflect in the period of +enactment the effect of a new tax law with respect to the special one-time tax deduction of 85 +percent of foreign earnings that are repatriated (as defined in the American Jobs Creation Act +of 2004). It provides that an enterprise is allowed time after the financial reporting period +to evaluate the effect of the American Jobs Creation Act of 2004 on its plan for reinvestment or +repatriation of foreign earnings for purposes of applying Statement 109. At this time, Meridian +does not expect to repatriate any unremitted earnings from its non-US operations. +During May 2005, the Financial Accounting Standards Board issued Statement No. 154, “Accounting +Changes and Error Corrections-a replacement of APB Opinion No. 20 and FASB Statement No. 3”. +This statement requires retrospective application to prior periods’ financial statements of +voluntary changes in accounting principles and is effective for accounting changes and +corrections of errors made in fiscal years beginning after December 15, 2005, which for Meridian +would be fiscal year 2007. +Meridian does not expect the impact of adoption of these standards to have a significant effect +on its results of operations or financial condition. +(p) +Reclassifications — Certain reclassifications have been made to the prior year financial +statements to conform to the current year presentation. +(2) OEM Concepts Acquisition +On January 31, 2005, Meridian acquired all of the outstanding common shares of OEM Concepts, Inc. +for $6,590,000 in cash, including transaction costs. OEM Concepts, headquartered in Toms River, +NJ, is a leading producer and distributor of highly specialized biologicals for the diagnostic, +pharmaceutical, and research markets. The purchase agreement provides for additional +consideration, up to a maximum remaining amount of $2,270,000, contingent upon OEM Concepts’ future +calendar-year sales and gross profit through December 31, 2008. Earnout consideration, if any, is +payable each year, following the period earned. During fiscal 2005, no additional consideration was +earned pursuant to this provision. The initial $6,590,000 purchase price and transaction costs +were funded with bank debt under Meridian’s existing line of credit facility and cash on hand. +The acquisition has been accounted for as a purchase, and the results of operations of OEM Concepts +are included in Meridian’s consolidated results of operations from February 1, 2005 forward. A +summary of the purchase price allocation follows. This purchase price allocation reflects the fair +values of acquired long-lived assets, including supply agreements for $3,466,000, cell lines for +$1,499,000, and customer relationships for +-50- +Table of Contents +$562,000. The estimated fair market value of intangibles acquired was based on discounted future +cash flows. Intangible assets other than supply agreements and goodwill have an estimated useful +life of 15 years. Supply agreements have useful lives based on the terms of the agreements, +between 5 and 10 years. Future earnout payment consideration, if any, will be allocated to +goodwill, and will be recorded in the period in which it is earned and becomes payable. +Acquisition details are as follows (amounts in thousands): +Purchase price, including transaction costs +$ +6,590 +Fair value of assets acquired - +Cash +$ +207 +Accounts receivable +505 +Inventory +643 +Prepaid expenses +47 +Property, plant and equipment, net +145 +Specific intangibles +5,527 +Goodwill +2,243 +Other assets +9 +9,326 +Fair value of liabilities assumed - +Debt and capital lease obligations +233 +Deferred income tax liabilities +2,062 +Other liabilities +441 +2,736 +Fair value of net assets acquired +$ +6,590 +-51- +Table of Contents +(3) Inventories +Inventories are comprised of the following (amounts in thousands): +As of September 30, +2005 +2004 +Raw materials +$ +4,059 +$ +4,110 +Work-in-process +4,888 +4,083 +Finished goods +7,838 +5,914 +$ +16,785 +$ +14,107 +(4) Bank Credit Arrangements +Meridian has a $25,000,000 credit facility with a commercial bank. This facility includes +$2,500,000 of term debt and capital lease capacity and a $22,500,000 revolving line of credit which +bears interest at a LIBOR based rate, and expires in September 2007. This line of credit is +collateralized by Meridian’s business assets except for those of non-domestic subsidiaries. There +were no borrowings outstanding on this line of credit at September 30, 2005 and September 30, 2004. +Available borrowings under this line of credit were $22,500,000 at September 30, 2005. In +connection with this bank credit arrangement, Meridian is required to comply with financial +covenants that limit the amount of debt obligations, require a minimum amount of tangible net +worth, and require a minimum amount of fixed charge coverage. Meridian is in compliance with all +covenants. Meridian is also required to maintain a cash compensating balance with the bank in the +amount of $600,000 pursuant to this bank credit arrangement. +(5) Long-Term Debt Obligations +Long-term debt obligations are comprised of the following (amounts in thousands): +As of September 30, +2005 +2004 +Convertible subordinated debentures, unsecured, 7% +interest payable semi-annually on March 1 and +September 1, principal due September 1, 2006 +$ +— +$ +12,111 +Convertible subordinated debentures, unsecured, 5% +interest payable semi-annually on March 1 and +September 1, principal due September 1, 2013 +2,451 +3,889 +Bank term loan, denominated in Euro, interest based +on Euro LIBOR (2.89% at September 30, 2005), +quarterly payments of $47, matures in September 2007 +419 +905 +Bank term loan, denominated in Euro, interest based +on Euro LIBOR (2.89% at September 30, 2005), +quarterly payments of $123, matures in June 2006 +370 +884 +Total debt obligations +3,240 +17,789 +Less current portion +(556 +) +(696 +) +Long-term debt obligations +2,684 +17,093 +-52- +Table of Contents +Maturities of long-term debt for fiscal 2006 and fiscal 2007 are $556,000 and $233,000, +respectively. There are no other maturities of long-term debt obligations until 2013. +As of September 30, 2003, Meridian had outstanding a total of $20,000,000 principal amount of +convertible subordinated debentures, due September 2006. These debentures were convertible, at the +option of the holder, into common shares at a price of $10.727. During the second quarter of +fiscal 2004, Meridian redeemed $4,000,000 of its outstanding 7% convertible debentures and also +completed the exchange of $3,889,000 of its outstanding 7% convertible debentures for an equal +principal amount of new convertible subordinated debentures that mature September 1, 2013 and bear +interest at 5%. The 5% debentures are convertible, at the option of the holder, into common shares +at a price of $9.67. +As of September 30, 2004, Meridian had outstanding a total of $16,000,000 principal amount of two +series of convertible subordinated debentures. Holders began converting debentures during the +first quarter of fiscal 2005, and such conversions continued throughout fiscal 2005. During +December 2004, Meridian also called for redemption $4,000,000 of its 7% debentures. This +redemption was completed on January 14, 2005. After conversions, the actual amount of this +redemption was $603,000. Subsequently, during May 2005, Meridian called for redemption $2,500,000 +of its 7% debentures. This redemption was completed on June 3, 2005. After conversions, the +actual amount of this redemption was $807,000. On June 14, 2005, the Company announced a call for +redemption on July 7, 2005, all remaining outstanding 7% convertible subordinated debentures at par +plus accrued interest. After conversions, the actual amount of this redemption was $402,000. +The following table summarizes the exchange, conversion, and redemption activity for fiscal 2004 +and 2005 (amounts in thousands, except share amounts): +7% Series +5% Series +Total +Outstanding at September 30, 2003 +$ +20,000 +$ +— +$ +20,000 +Exchange +(3,889 +) +3,889 +— +Redeemed +(4,000 +) +— +(4,000 +) +Outstanding at September 30, 2004 +$ +12,111 +$ +3,889 +$ +16,000 +Converted to 1,108,494 common shares +(10,299 +) +(1,438 +) +(11,737 +) +Redeemed +(1,812 +) +— +(1,812 +) +Outstanding at September 30, 2005 +$ +— +$ +2,451 +$ +2,451 +The aggregate fair value of the 5% convertible subordinated debentures is estimated to be +$5,250,000, based on limited trading activity at September 30, 2005. The accompanying consolidated +balance sheets include offering costs, which have been deferred and are being amortized to interest +expense over the life of the debentures. The net amount of such costs was $164,000 and $433,000 at +September 30, 2005 and 2004 (net of accumulated amortization of $148,000 and $1,207,000, +respectively). +-53- +Table of Contents +(6) Income Taxes +(a) Earnings before income taxes, and the related provision for income taxes for the years ended +September 30, 2005, 2004 and 2003 were as follows (amounts in thousands): +Year Ended September 30, +2005 +2004 +2003 +Earnings before income taxes - +Domestic +$ +17,531 +$ +11,280 +$ +9,055 +Foreign +2,065 +1,915 +2,536 +Total +$ +19,596 +$ +13,195 +$ +11,591 +Provision (credit) for income taxes - +Federal – +Current provision +$ +6,550 +$ +2,907 +$ +1,319 +Temporary differences +Fixed asset basis differences and depreciation +(57 +) +398 +(107 +) +Intangible asset basis differences and amortization +(227 +) +(97 +) +(119 +) +Currently non-deductible expenses and reserves +(503 +) +54 +136 +Abandoned acquisition costs +— +— +412 +Net operating loss carryforwards +— +— +1,368 +Other, net +(228 +) +(187 +) +(80 +) +Subtotal +5,535 +3,075 +2,929 +State and local +600 +194 +581 +Foreign +896 +741 +1,063 +Total +$ +7,031 +$ +4,010 +$ +4,573 +(b) The following is a reconciliation between the statutory US income tax rate and the effective +rate derived by dividing the provision for income taxes by earnings before income taxes (dollars in +thousands): +Year Ended September 30, +2005 +2004 +2003 +Computed income taxes at statutory rate +$ +6,859 +35.0 +% +$ +4,513 +34.2 +% +$ +3,941 +34.0 +% +Increase (decrease) in taxes resulting from - +State and local income taxes +500 +2.5 +346 +2.6 +385 +3.3 +Federal and state tax credits +(166 +) +(0.8 +) +(285 +) +(2.2 +) +— +— +Subpart F income taxes +117 +0.6 +115 +0.9 +384 +3.3 +Foreign taxes +19 +0.1 +174 +1.3 +197 +1.7 +Extra territorial income exclusion +(306 +) +(1.6 +) +(267 +) +(2.0 +) +(197 +) +(1.7 +) +Valuation allowance +— +— +(85 +) +(0.6 +) +(25 +) +(0.2 +) +Other, net +8 +0.1 +(501 +) +(3.8 +) +(112 +) +(0.9 +) +$ +7,031 +35.9 +% +$ +4,010 +30.4 +% +$ +4,573 +39.5 +% +-54- +Table of Contents +(c) The components of net deferred tax liabilities were as follows (amounts in thousands): +As of September 30, +2005 +2004 +Deferred tax assets - +Valuation reserves and non-deductible expenses +$ +1,333 +$ +424 +State tax credit carryforwards +154 +170 +Net operating loss carryforwards +943 +1,513 +Foreign tax credits +162 +8 +Other +222 +122 +Subtotal +2,814 +2,237 +Less valuation allowance +927 +1,177 +Deferred tax assets +1,887 +1,060 +Deferred tax liabilities - +Fixed asset basis differences and depreciation +(600 +) +(728 +) +Intangible asset basis differences and amortization +(3,841 +) +(1,938 +) +Inventory basis differences +(93 +) +(163 +) +Other +(421 +) +(383 +) +Deferred tax liabilities +(4,955 +) +(3,212 +) +Net deferred tax liability +$ +(3,068 +) +$ +(2,152 +) +For income tax purposes, Meridian has tax benefits related to operating loss carryforwards in the +countries of Belgium and France. These net operating loss carryforwards have no expiration date. +Meridian has recorded deferred tax assets for these carryforwards, inclusive of valuation +allowances in the amount of $16,000 at September 30, 2005. Valuation allowances for +pre-acquisition net operating loss carryforwards amount to $602,000, while valuation allowances for +post-acquisition net operating loss carryforwards are $325,000. If tax benefits are recognized in +future years for pre-acquisition operating losses, such benefits will be allocated to reduce +goodwill and acquired intangible assets. The valuation allowance recorded against deferred tax +assets at September 30, 2004 was $1,177,000 and related solely to operating loss carryforwards in +foreign jurisdictions. +The realization of deferred tax assets in foreign jurisdictions is dependent upon the generation of +future taxable income in certain European countries. Management has considered the levels of +currently anticipated pre-tax income in foreign jurisdictions in assessing the required level of +the deferred tax asset valuation allowance. Taking into consideration historical and current +operating results, and other factors, management believes that it is more likely than not that the +net deferred tax asset for foreign jurisdictions, after consideration of the valuation allowance, +which has been established, will be realized. The amount of the net deferred tax asset considered +realizable in foreign jurisdictions, however, could be reduced in future years if estimates of +future taxable income during the carryforward period are reduced. +-55- +Table of Contents +Undistributed earnings re-invested indefinitely in the Italian operation were approximately +$8,900,000 at September 30, 2005. US deferred tax liabilities of approximately $3,400,000 on such +earnings have not been recorded. Management believes that such US taxes would be largely offset by +foreign tax credits for taxes paid in applicable foreign jurisdictions. +During October 2004, the President signed into law the American Jobs Creation Act, H.R. 4520. The +Act provides export and domestic production incentives, foreign tax reform, and incentives for +repatriation of foreign earnings. Meridian is currently reviewing the provisions of the Act. +Meridian believes that this Act will not have an adverse impact on its effective tax rate. +On June 30, 2005, Ohio’s governor signed Biennial Budget Bill, Am. Sub. H.B. 66. This bill +replaces Ohio’s corporate income and personal property taxes with a commercial activity tax based +on gross receipts, phased in over five years beginning July 1, 2005. Meridian has evaluated the +impact of this new legislation on its existing deferred tax balances. The carrying value of +existing deferred taxes was not materially affected by the enactment of this legislation. +From time to time, Meridian’s tax returns in Federal, state, and foreign jurisdictions are examined +by the applicable tax authorities. Meridian’s tax provisions take into consideration the +judgmental nature of certain tax positions through the establishment of reserves for differences +between the probable tax determinations and the “as filed” tax positions of certain assets and +liabilities. Meridian believes that it has complied with all tax laws and regulations to which it +is subject. To the extent that tax benefits result from the +completion of these examinations or the passing of statutes of limitation, they will affect the +provision in the period known. Meridian believes that the results of any tax authority +examinations would not have a significant adverse impact on financial condition, results of +operation or cash flows. +(7) Employee Benefits +(a) +Savings and Investment Plan - Meridian has a profit sharing and retirement savings plan +covering substantially all full-time US employees. Profit sharing contributions to the plan, +which are discretionary, are determined by the Board of Directors. The plan permits +participants to contribute to the plan through salary reduction. Under terms of the plan, +Meridian will match up to 3% of an employee’s contributions. Discretionary and matching +contributions by Meridian to the plan amounted to approximately $1,006,000, $887,000, and +$728,000, during fiscal 2005, 2004 and 2003, respectively. +(b) +Stock-Based Compensation Plans — Meridian has one active stock based compensation plan, the +2004 Equity Compensation Plan which became effective December 7, 2004 (the “2004 Plan”) and an +Employee Stock Purchase Plan (“The ESP Plan”) which became effective October 1, 1997. +-56- +Table of Contents +Meridian may grant new shares for options for up to 975,000 shares under the 2004 Plan, of which +Meridian has granted 202,654 through September 30, 2005. Options may be granted at exercise +prices not less than 100% of the market value of the underlying common shares on the date of +grant and have maximum terms up to ten years. Vesting schedules are established at the time of +grant and may be set based on future service periods, achievement of performance targets, or a +combination thereof. All options contain provisions restricting their transferability and +limiting their exercise in the event of termination of employment or the disability or death of +the optionee. Meridian has granted options for 3,605,819 shares under similar plans that have +expired. +Effective October 1, 1997, Meridian may sell shares of stock to its full-time and part-time +employees under the ESP Plan up to the number of shares equivalent to a 1% to 15% payroll +deduction from an employee’s base salary plus an additional 5% dollar match of this deduction by +Meridian. +A summary of the status of Meridian’s stock option plans at September 30, 2005, 2004 and 2003 +and changes during the years then ended is presented in the tables and narrative below (amounts +reflect a three-for-two stock split effective on September 2, 2005): +Year Ended September 30, +2005 +2004 +2003 +Wtd Avg +Wtd Avg +Wtd Avg +Exercise +Exercise +Exercise +Shares +Price +Shares +Price +Shares +Price +Outstanding beginning of +period +1,646,375 +$ +5.18 +1,824,818 +$ +4.75 +1,877,961 +$ +4.67 +Grants +212,104 +$ +10.99 +201,102 +6.94 +247,002 +4.47 +Exercises +(574,572 +) +$ +5.75 +(363,237 +) +4.01 +(139,986 +) +3.41 +Expirations and forfeitures +(30,515 +) +$ +8.25 +(16,308 +) +5.11 +(160,159 +) +4.05 +Outstanding end of period +1,253,392 +$ +5.80 +1,646,375 +$ +5.18 +1,824,818 +$ +4.75 +Exercisable end of period +593,986 +$ +5.26 +1,026,509 +$ +5.63 +1,027,788 +$ +5.50 +Weighted average fair +value of grants +$ +4.82 +$ +2.83 +$ +1.73 +-57- +Table of Contents +The range of exercise prices, the weighted average exercise price and the weighted average +remaining contractual life is summarized below for options which are outstanding and those that +are exercisable at September 30, 2005 (amounts reflect a three-for-two stock split effective on +September 2, 2005). +Options Outstanding +Options Exercisable +Wtd Avg +Range of Exercise +Options +Remaining +Wtd Avg +Options +Wtd Avg +Prices +Outstanding +Life (Yrs.) +Ex Price +Outstanding +Ex Price +$1.00 — $5.00 +668,501 +5.2 +$ +3.68 +358,887 +$ +4.10 +$5.01 — $10.00 +402,487 +5.5 +6.89 +221,195 +6.82 +$10.01 — $15.00 +177,404 +9.2 +10.93 +13,904 +10.57 +$15.01 — $25.00 +5,000 +9.9 +18.20 +— +— +1,253,392 +5.9 +$ +5.80 +593,986 +$ +5.26 +Meridian early adopted SFAS No. 123R, Share-Based Payment , as of July 1, 2005. SFAS No. 123R +requires recognition of compensation expense for all share-based payments made to employees, based +upon the fair value of the share-based payment on the date of the grant. Meridian elected to adopt +the provisions of SFAS No. 123R, pursuant to the modified prospective method, which requires +compensation expense be measured and recognized based on grant-date fair value for stock option +awards granted after July 1, 2005 and portions of stock option awards granted prior to July 1, +2005, but not vested as of July 1, 2005. The amount of stock-based compensation expense reported +for fiscal 2005 was $279,000. The amount of stock-based compensation expense that would have been +reported in fiscal 2005 under a full year of APB No. 25 was $604,000. +The Company has elected to use the Black-Scholes option pricing model to determine grant date fair +value, with the following assumptions: (1) expected volatility is based upon monthly historical +volatility of the Company’s stock price, over the expected life of the option; (2) expected term of +the option is based upon historical employee stock option exercise behavior; (3) the risk-free rate +is based upon the rate on a zero coupon U.S. Treasury bill, for the expected term of the option at +the time of the grant; and (4) dividend yield is calculated as the expected ratio of dividends paid +per common share to the stock price on the date of the grants, based upon historical data. +Year Ended September 30, +2005 +2004 +2003 +Risk-free interest rates +3.8%—4.3% +3.3%—4.2% +2.9%—3.8% +Dividend yield +2.3%—5.4% +3.0%—4.1% +3.6%—6.3% +Life of option +6.25—7.00 yrs. +7 yrs. +8.5 yrs. +Share price volatility +52%—54% +54%—56% +56%—57% +Forfeitures (by employee group) +5%—38% +— +— +-58- +Table of Contents +SFAS No. 123R requires that Meridian recognize compensation expense only for the portion of shares +that the Company expects to vest. As such, the Company applies estimated forfeiture rates to its +compensation expense calculations. These rates have been derived using historical forfeiture rates +for the last five years, stratified by several employee groups. Using these same forfeiture rates, +on July 1, 2005, the Company recorded a cumulative forfeiture adjustment of $46,000 related to +options for which expense was recorded under APB 25. Should the actual forfeiture rates differ +from these estimates, adjustments to compensation expense will be required. +Prior to July 1, 2005, Meridian accounted for its stock based compensation plans pursuant to the +intrinsic value method in APB No. 25. Had compensation cost for these plans been determined using +the fair value method provided in SFAS No. 123, Meridian’s net earnings and earnings per share +would have been reduced to the following pro forma amounts (amounts in thousands, except per share +data): +2005 +2004 +2003 +Net earnings as reported +$ +12,565 +$ +9,185 +$ +7,018 +Stock-based compensation included in net income +as reported, after tax +172 +78 +9 +Pro forma fair value of stock options, after tax +(434 +) +(369 +) +(597 +) +Pro forma net earnings +$ +12,303 +$ +8,894 +$ +6,430 +Basic EPS as reported +$ +0.54 +$ +0.41 +$ +0.32 +Stock-based compensation included in net income +as reported, after tax +0.01 +— +— +Pro forma fair value of stock options, after tax +(0.02 +) +(0.01 +) +(0.03 +) +Pro forma basic EPS +$ +0.53 +$ +0.40 +$ +0.29 +Diluted EPS as reported +$ +0.52 +$ +0.40 +$ +0.31 +Stock-based compensation included in net income +as reported, after tax +0.01 +— +— +Pro forma fair value of stock options, after tax +(0.02 +) +(0.01 +) +(0.02 +) +Pro forma diluted EPS +$ +0.51 +$ +0.39 +$ +0.29 +Meridian recorded stock compensation expense of $279,000, $126,000, and $14,000 for the fiscal +years ended September 30, 2005, September 30, 2004, and September 30, 2003, respectively. Meridian +expects stock compensation expense for nonvested options as of September 30, 2005 to be $1,087,000, +which will be recognized during fiscal years 2006 through 2011. +(8) Major Customers and Segment Data +Meridian was formed in 1976 and functions as a fully integrated research, development, +manufacturing, marketing and sales organization with primary emphasis in the field of life science. +Meridian’s principal businesses are (i) the development, manufacture and distribution of +diagnostic test kits primarily for certain respiratory, gastrointestinal, viral and parasitic +infectious diseases, (ii) the manufacture and distribution of bulk antigens, antibodies, and +reagents used by researchers and other diagnostic manufacturers and (iii) the contract +-59- +Table of Contents +manufacture of proteins and other biologicals for use by biopharmaceutical and biotechnology +companies engaged in research for new drugs and vaccines. +Meridian’s reportable operating segments are US Diagnostics, European Diagnostics, and Life +Science. The US Diagnostics operating segment consists of manufacturing operations in Cincinnati, +Ohio, and the sale and distribution of diagnostic test kits in the US and countries outside of +Europe, Africa and the Middle East. The European Diagnostics operating segment consists of the +sale and distribution of diagnostic test kits in Europe, Africa, and the Middle East. The Life +Science operating segment consists of manufacturing operations in Memphis, Tennessee, Saco, Maine, +and Boca Raton, Florida, and the sale and distribution of bulk antigens, antibodies and bioresearch +reagents domestically and abroad. The Life Science operating segment consists of the Viral +Antigens, BIODESIGN, and OEM Concepts businesses, including the contract manufacture of proteins +and other biologicals for use by biopharmaceutical and biotechnology companies engaged in research +for new drugs and vaccines. +Sales to individual customers constituting 10% or more of consolidated net sales were as follows +(dollars in thousands): +Year Ended September 30, +2005 +2004 +2003 +Customer A (US Diagnostics) +$ +15,512 +(17 +%) +$ +12,647 +(16 +%) +$ +9,089 +(14 +%) +Customer B (US Diagnostics) +$ +8,244 +(9 +%) +$ +7,566 +(10 +%) +$ +6,408 +(10 +%) +Combined export sales for the US Diagnostics and Life Science operating segments were $12,414,000, +$9,504,000 and $9,464,000 in fiscal years 2005, 2004 and 2003, respectively. Three products +accounted for 23% of consolidated net sales in fiscal 2005 and 20% of consolidated net sales in +fiscal 2004. Accounts receivable, which are largely dependent upon funds from the Italian +government, represents approximately 36% of the consolidated accounts receivable balance at +September 30, 2005. +Significant country information for the European Diagnostics operating segment is as follows (in +thousands). Sales are attributed to the geographic area based on the location from which the +product is shipped to the customer. +Year Ended September 30, +2005 +2004 +2003 +Italy - +Sales +$ +8,034 +$ +6,137 +$ +5,354 +Identifiable assets +9,430 +7,133 +6,124 +Belgium - +Sales +$ +9,785 +$ +9,275 +$ +8,402 +Identifiable assets +3,289 +4,129 +4,158 +-60- +Table of Contents +Segment information for the years ended September 30, 2005, 2004, and 2003 is as follows (amounts +in thousands): +US +European +Life +Diagnostics +Diagnostics +Science +Elim (1) +Total +Fiscal Year 2005 - +Net sales – +Third-party +$ +53,485 +$ +17,818 +$ +21,662 +$ +— +$ +92,965 +Inter-segment +6,553 +15 +804 +(7,372 +) +— +Operating income +13,655 +2,315 +4,142 +104 +20,216 +Depreciation and amortization +2,667 +147 +1,438 +— +4,252 +Capital expenditures +1,477 +89 +1,024 +— +2,590 +Total assets +99,878 +11,552 +39,382 +(40,243 +) +110,569 +Fiscal Year 2004 - +Net sales – +Third-party +$ +48,153 +$ +15,412 +$ +16,041 +$ +— +$ +79,606 +Inter-segment +5,629 +4 +764 +(6,397 +) +— +Operating income +10,266 +2,095 +2,394 +(97 +) +14,658 +Depreciation and amortization +2,969 +186 +922 +— +4,077 +Capital expenditures +1,892 +152 +341 +— +2,385 +Total assets +63,981 +11,686 +25,329 +(31,674 +) +69,322 +Fiscal Year 2003 - +Net sales – +Third-party +$ +39,906 +$ +13,756 +$ +12,202 +$ +— +$ +65,864 +Inter-segment +5,155 +79 +939 +(6,173 +) +— +Operating income +9,029 +2,389 +1,350 +21 +12,789 +Depreciation and amortization +2,820 +150 +810 +— +3,780 +Capital expenditures +1,324 +55 +433 +— +1,812 +Total assets +63,941 +10,489 +22,232 +(30,242 +) +66,420 +(1) +Eliminations consist of intersegment transactions. +-61- +Table of Contents +Year Ended September 30, +2005 +2004 +2003 +Segment operating income +$ +20,216 +$ +14,658 +$ +12,789 +Interest income +43 +31 +42 +Interest expense +(770 +) +(1,557 +) +(1,718 +) +Other, net +107 +63 +478 +Consolidated earnings before income taxes +$ +19,596 +$ +13,195 +$ +11,591 +The accounting policies of the segments are the same as those described in the summary of +significant accounting policies in Note 1. Transactions between operating segments are accounted +for at established intercompany prices for internal and management purposes with all intercompany +amounts eliminated in consolidation. Total assets for the US Diagnostics and Life Science +operating segments include goodwill of $1,612,000 and $7,167,000, respectively at September 30, +2005, $1,825,000 and $3,598,000, respectively at September 30, 2004, and $2,063,000 and $2,928,000, +respectively at September 30, 2003. +(9) Commitments and Contingencies +(a) +Royalty Commitments — Meridian has entered into various license agreements that require +payment of royalties based on a specified percentage of the sales of licensed products (1% to +8%). These royalty expenses are recognized on an as-earned basis and recorded in the year +earned as a component of cost of sales. Annual royalty expenses associated with these +agreements were approximately $743,000, $593,000, and, $766,000, respectively, for the years +ended September 30, 2005, 2004 and 2003. +For one of these license agreements, Meridian was engaged in a dispute with the licensor +regarding the payment of royalties. During April 2004, this dispute was resolved with Meridian +paying $260,000, $210,000 of which related to purchasing certain manufacturing technology and +receiving a fully paid-up, royalty-free license. +(b) +Operating Lease Commitments — Meridian and its subsidiaries are lessees of (i) office and +warehouse buildings in Florida, Maine, New Jersey, Belgium, and France; (ii) automobiles for +use by the direct sales forces in the US and Europe; and (iii) certain office equipment such +as facsimile machines and copier machines across all business units, under operating lease +agreements that expire at various dates. Operating lease commitments for each of the five +succeeding fiscal years are as follows: fiscal 2006 — $605,000, fiscal 2007 — $511,000, fiscal +2008 — $340,000, fiscal 2009 — $306,000, and fiscal 2010 — $260,000. +-62- +Table of Contents +(c) +Litigation — During fiscal 2003, Meridian reached a settlement with a former employee +regarding his breach of an employment agreement, misappropriation of company trade secrets and +related legal proceedings. This settlement provided that Meridian receive proceeds from the +disposition of certain personal assets of +the former employee. The amount of such proceeds was $216,000, and is included in other income +in the accompanying consolidated statement of operations for fiscal 2003. Legal fees related to +these matters amounted to approximately $1,100,000 in fiscal years 2000 through 2003. During +fiscal 2003, Meridian received insurance reimbursement in the amount of $187,000 for a portion +of these legal fees. This insurance reimbursement is recorded in general and administrative +expenses in the accompanying consolidated statement of operations for fiscal 2003. +Meridian is a party to other litigation that it believes is in the normal course of business. +The ultimate resolution of these matters is not expected to have a material adverse effect on +Meridian’s financial position, results of operations or cash flows. No provision has been made +in the accompanying consolidated financial statements for these matters. +(d) +Viral Antigens Earnout +The purchase agreement for the Viral Antigens purchase business combination provides for +additional consideration, up to a maximum remaining amount of $3,491,000, contingent upon Viral +Antigens’ future earnings through September 30, 2006. The amount of earnout consideration for +fiscal 2005 was $1,313,000. Earnout consideration is payable each year following the period +earned. During fiscal 2005, 2004, 2003, 2002 and 2001, additional consideration of $1,313,000, +$678,000, $456,000, $1,407,000 and $905,000, respectively, was earned pursuant to this +provision. Such amounts are included in goodwill in the accompanying consolidated balance +sheets. Future earnout consideration, if any, will be allocated to goodwill, and will be +recorded in the period in which it is earned and becomes payable. +(e) +OEM Concepts Earnout +The purchase agreement for the OEM Concepts purchase business combination provides for +additional consideration, up to a maximum remaining amount of $2,270,000, contingent upon OEM +Concepts’ future calendar year sales and gross profit through December 31, 2008. Earnout +consideration is payable each year following the period earned. Future earnout consideration, +if any, will be allocated to goodwill, and will be recorded in the period in which it is earned +and becomes payable. +-63- +Table of Contents +(10) +Quarterly Financial Data (Unaudited) +Amounts are in thousands except per share data. The sum of the earnings per common share and +cash dividends per share may not equal the corresponding annual amounts due to interim quarter +rounding. +For the Quarter Ended in Fiscal 2005 +December 31 +March 31 +June 30 +September 30 +Net sales +$ +18,842 +$ +23,686 +$ +25,421 +$ +25,016 +Gross profit +11,013 +13,577 +15,686 +14,544 +Net earnings +2,110 +3,196 +3,498 +3,761 +Basic earnings per common share +0.09 +0.14 +0.15 +0.16 +Diluted earnings per common share +0.09 +0.13 +0.14 +0.15 +Cash dividends per common share +0.07 +0.08 +0.08 +0.08 +For the Quarter Ended in Fiscal 2004 +December 31 +March 31 +June 30 +September 30 +Net sales +$ +18,166 +$ +20,940 +$ +18,256 +$ +22,244 +Gross profit +10,117 +12,033 +10,901 +12,624 +Net earnings +1,795 +2,289 +2,157 +2,944 +Basic earnings per common share +0.08 +0.10 +0.10 +0.14 +Diluted earnings per common share +0.08 +0.10 +0.09 +0.13 +Cash dividends per common share +0.06 +0.07 +0.07 +0.07 +(11) +Public Offering of Common Shares and Stock Split +On September 21, 2005, Meridian issued 1,800,000 common shares at an offering price of $17.50 +per share. The net proceeds from the offering, after underwriting discounts and offering costs +totaling $1,920,000, were approximately $29,580,000. +Underwriting discounts and offering costs incurred in connection with this offering are +reflected as a reduction of shareholders’ equity. +On August 15, 2005, Meridian announced a three-for-two stock split, with fractional shares paid +in cash. The split was effective on September 2, 2005 to shareholders of record as of August +29, 2005. All references in this Annual Report to number of shares and per share amounts +reflect the stock split. +-64- +Table of Contents +ITEM 9. +CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS +ON ACCOUNTING AND FINANCIAL DISCLOSURE +Nothing to report. +ITEM 9A. +CONTROLS AND PROCEDURES +As of September 30, 2005, an evaluation was completed under the supervision and with the +participation of Meridian’s management, including Meridian’s Chief Executive Officer and Chief +Financial Officer, of the effectiveness of the design and operation of Meridian’s disclosure +controls and procedures pursuant to Rule 13a-15(b) and 15d-15(b) promulgated under the Securities +Exchange Act of 1934, as amended. Based on that evaluation, Meridian’s management, including the +CEO and CFO, concluded that Meridian’s disclosure controls and procedures were effective as of +September 30, 2005. There have been no changes in Meridian’s internal control over financial +reporting identified in connection with the evaluation of internal control that occurred during the +fourth fiscal quarter that has materially affected, or is reasonably likely to affect, Meridian’s +internal control over financial reporting, or in other factors that could significantly affect +internal control subsequent to September 30, 2005. +The Company’s internal control report is included in this Annual Report on Form 10-K after Item 8, +under the caption “Management’s Report on Internal Control over Financial Reporting”. +ITEM 9B. +OTHER INFORMATION +Nothing to report. +PART III +The information required by Items 10., 11., 12., 13., and 14., of Part III are incorporated by +reference from the Registrant’s Proxy Statement for its 2006 Annual Shareholders’ Meeting to be +filed with the Commission pursuant to Regulation 14A. The equity compensation plan chart required +by Regulation S-K Item 201(d) appears in and is hereby incorporated by reference from Item 5 +herein. +-65- +Table of Contents +ITEM 15. +EXHIBITS AND FINANCIAL STATEMENT SCHEDULES +(a) (1) and (2) FINANCIAL STATEMENTS AND SCHEDULES. +All financial statements and schedules required to be filed by Item 8 of this Form and included in +this report have been listed previously under Item 8. No additional financial statements or +schedules are being filed since the requirements of paragraph (d) under Item 15 are not applicable +to Meridian. +(b) (3) EXHIBITS. +Exhibit Number +Description of Exhibit +Filing Status +3.1 +Articles of Incorporation, including amendments +not related to Company name change +A +3.2 +Code of Regulations +B +4.1 +Indenture between Meridian and Star Bank, National +Association, as Trustee, relating to Meridian’s 7% +Convertible Subordinated Debentures due 2006 +C +4.2 +Indenture between Meridian and LaSalle Bank +National Association, as Trustee, relating to +Meridian’s 5% Convertible Subordinated Debentures +due 2013 +D +10.5 +Sublicense Agreement dated June 17, 1993 among +Johnson & Johnson, the Scripps Research Institute +and Meridian Concerning certain Patent Rights +E +10.6 +Assignment dated June 17, 1993 from Ortho +Diagnostic Systems Inc. to Meridian concerning +certain Patent Rights +E +10.7 +Agreement dated January 24, 1994 between Meridian +Diagnostics, Inc. and Immulok, Inc. +F +10.8 +Asset Purchase Agreement dated June 24, 1996 +between Cambridge Biotech Corporation and Meridian +Diagnostics, Inc. +G +10.9 +Merger Agreement among Gull Laboratories, Inc., +Meridian Diagnostics, Inc. Fresenius AG and +Meridian Acquisition Co. dated as of September 15, +1998 +H +10.10* +Savings and Investment Plan Prototype Adoption +Agreement +S +10.12* +1986 Stock Option Plan +I +10.14* +1994 Directors’ Stock Option Plan +J +10.15* +1996 Stock Option Plan +K +10.16* +Salary Continuation Agreement for John A. Kraeutler +L +10.17 +First Amendment to Merger Agreement Among Gull +Laboratories, Inc., Meridian Diagnostics, Inc. +Fresenius AG and Meridian Acquisition Co. +M +-66- +Table of Contents +Exhibit Number +Description of Exhibit +Filing Status +10.18* +1999 Directors’ Stock Option Plan +N +10.19* +2004 Equity Compensation Plan +U +10.20 +Dividend Reinvestment Plan +P +10.21 +Merger Agreement dated September 13, 2000 among +Meridian and the Shareholders of Viral Antigens, Inc. +O +10.22 +Loan and Security Agreement among Meridian, certain of +its subsidiaries and Fifth Third Bank Dated as of +September 20, 2001 +R +10.23* +Employment Agreement Dated February 15, 2001 between +Meridian and John A. Kraeutler, including the Addendum +to Employment Agreement dated April 24, 2001 between +Meridian and John A. Kraeutler +R +10.24* +Sample Option Agreement Dated October 1, 2001 +R +10.26* +1996 Stock Option Plan as Amended and Restated +Effective January 23, 2001 +Q +10.27* +Sample Option Agreement Dated November 19, 2002 +S +10.28* +Agreement Concerning Disability and Death dated +September 10, 2003, between Meridian and William J. +Motto +S +10.29* +Professional Services Agreement dated October 1, 2002 +between Meridian and Antonio Interno +S +10.30 +Amended and Restated Revolving Note with Fifth Third +Bank dated August 5, 2004 +T +10.31 +Stock Purchase Agreement of OEM Concepts, Inc. by +Meridian Bioscience, Inc. dated January 31, 2005 +Filed herewith +10.32* +Sample Option Agreement dated November 10, 2005 +Filed herewith +10.33* +Amended and Restated 2004 Equity Compensation Plan +V +10.34* +Fiscal 2006 Officers’ Compensation Plan +V +13 +2005 Annual Report to Shareholders +(1 +) +14 +Code of Ethics +S +21 +Subsidiaries of the Registrant +Filed herewith +-67- +Table of Contents +Exhibit Number +Description of Exhibit +Filing Status +23.1 +Consent of Independent Registered Public Accounting Firm +Filed herewith +23.2 +Consent of Independent Registered Public Accounting Firm +Filed herewith +31.1 +Certification of Principal Executive Officer required +by Rule 13a-14(a) +Filed herewith +31.2 +Certification of Principal Financial Officer required +by Rule 13a-14(a) +Filed herewith +32 +Section 1350 Certification of Chief Executive Officer +and Chief Financial Officer +Filed herewith +(1) +Only portions of the 2005 Annual Report to Shareholders specifically are incorporated by +reference in this Form 10-K as filed herewith. A supplemental paper copy of the 2005 Annual Report +to Shareholders has been provided to the Securities and Exchange Commission for informational +purposes only. +* +Management Compensatory Contracts +Incorporated by reference to: +A. +Registration Statement No. 333-02613 on Form S-3 filed with the Securities and Exchange +Commission on April 18, 1996. +B. +Registration Statement No. 33-6052 filed under the Securities Act of 1933. +C. +Registration Statement No. 333-11077 on Form S-3 filed with the Securities and Exchange +Commission on August 29, 1996. +D. +Meridian’s Schedule T-O filed with the Securities and Exchange Commission on October 24, 2003. +E. +Meridian’s Form 8-K filed with the Securities and Exchange Commission on June 17, 1993. +F. +Meridian’s Forms 8-K filed with the Securities and Exchange Commission on February 8, 1994 +and April 6, 1994. +G. +Meridian’s Form 8-K filed with the Securities and Exchange Commission on July 2, 1996. +H. +Meridian’s Form 8-K filed with the Securities and Exchange Commission on September 17, 1998. +I. +Registration Statement No. 33-89214 on Form S-8 filed with the Securities and Exchange +Commission on April 5, 1995. +J. +Registration Statement No. 33-78868 on Form S-8 filed with the Securities and Exchange +Commission on May 12, 1994. +K. +Meridian’s Annual Report on Form 10-K for the Fiscal Year Ended September 30, 1996. +L. +Meridian’s Annual Report on Form 10-K for the Fiscal Year Ended September 30, 1995. +M. +Company’s Report on Form 8-K filed with the Securities and Exchange Commission filed on +November 13, 1998. +N. +Meridian’s Proxy Statement filed with the Securities and Exchange Commission on December 21, +1998. +O. +Meridian’s Current Report on Form 8-K dated September 29, 2000. +-68- +Table of Contents +P. +Meridian’s Annual Report on Form 10-K for the Fiscal Year Ended September 30, 1999. +Q. +Registration Statement No. 333-75312 on Form S-8 filed with the Securities and Exchange +Commission on December 17, 2001 +R. +Meridian’s Annual Report on Form 10-K for the Fiscal Year Ended September 30, 2001. +S. +Meridian’s Annual Report on Form 10-K for the Fiscal Year Ended September 30, 2003. +T. +Meridian’s Annual Report on Form 10-K for the Fiscal Year Ended September 30, 2004. +U. +Meridian’s Proxy Statement filed with the Securities and Exchange Commission on December 23, +2004. +V. +Meridian’s Form 8-K filed November 17, 2005. +SIGNATURES +Pursuant to the requirements of Section 13 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. +MERIDIAN BIOSCIENCE, INC. +By: +/s/ William J. Motto +Date: December 9, 2005 +William J. Motto +Chairman of the Board +and Chief Executive Officer +-69- +Table of Contents +Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by +the following persons on behalf of the Registrant and in the capacities and on the dates indicated. +Signature +Capacity +Date +/s/ William J. Motto +Chairman of the Board of Directors and +Chief Executive +December 9, 2005 +William J. Motto +Officer (Principal +Executive Officer) +/s/ John A. Kraeutler +President and Chief Operating +December 9, 2005 +John A. Kraeutler +Officer, Director +/s/ Melissa Lueke +Vice President and Chief Financial Officer +December 9, 2005 +Melissa Lueke +/s/ James A. Buzard +Director +December 9, 2005 +James A. Buzard +/s/ Gary P. Kreider +Director +December 9, 2005 +Gary P. Kreider +/s/ David C. Phillips +Director +December 9, 2005 +David C. Phillips +/s/ Robert J. Ready +Director +December 9, 2005 +Robert J. Ready +-70- +Table of Contents +SCHEDULE II +Meridian Bioscience, Inc. +and Subsidiaries +Valuation and Qualifying Accounts +(Amounts in Thousands) +Years Ended September 30, 2005, 2004 and 2003 +Charged +Balance at +to Costs +Balance +Beginning +and +at End of +Description +of Period +Expenses +Deductions +Other (a) +Period +Year Ended September 30, 2005: +Allowance for doubtful accounts +$ +479 +$ +(37 +) +$ +(88 +) +$ +6 +$ +360 +Inventory realizability reserves +271 +494 +(369 +) +160 +556 +Valuation allowances – deferred taxes +1,177 +— +(223 +) +(27 +) +927 +Year Ended September 30, 2004: +Allowance for doubtful accounts +$ +471 +$ +18 +$ +(37 +) +$ +27 +$ +479 +Inventory realizability reserves +585 +109 +(408 +) +(15 +) +271 +European restructuring reserves +103 +29 +(137 +) +5 +— +Valuation allowances – deferred taxes +1,457 +(85 +) +(278 +) +83 +1,177 +Year Ended September 30, 2003: +Allowance for doubtful accounts +$ +987 +$ +(268 +) +$ +(360 +) +$ +112 +$ +471 +Inventory realizability reserves +730 +289 +(439 +) +5 +585 +European restructuring reserves +83 +98 +(94 +) +16 +103 +Valuation allowances – deferred taxes +1,706 +(25 +) +(478 +) +254 +1,457 +(a) +Balances reflect the effects of currency translation (fiscal years 2003-2005) and the +acquisition of OEM Concepts January 31, 2005 (fiscal year 2005). +-71- \ No newline at end of file diff --git a/raw/filings/0000794172/2005/0000950152-05-009857/filing_metadata.csv b/raw/filings/0000794172/2005/0000950152-05-009857/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..ff95e460f6f0b27d8734ead29c33f66e3e8bca63 --- /dev/null +++ b/raw/filings/0000794172/2005/0000950152-05-009857/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000794172,VIVO,MERIDIAN BIOSCIENCE INC,10-K,2005-12-09,2005-09-30,2005-12-09T20:06:00.000Z,0000950152-05-009857,l17079ae10vk.htm,"MERIDIAN BIOSCIENCE, INC. 10-K/FYE 9-30-05",704975,0,0,https://www.sec.gov/Archives/edgar/data/794172/000095015205009857/l17079ae10vk.htm,https://www.sec.gov/Archives/edgar/data/794172/000095015205009857/,2005,2005,1 diff --git a/raw/filings/0000794172/2005/0000950152-05-009857/item1.txt b/raw/filings/0000794172/2005/0000950152-05-009857/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..6703c59b74e98122c733d5c09003559b45218cf7 --- /dev/null +++ b/raw/filings/0000794172/2005/0000950152-05-009857/item1.txt @@ -0,0 +1,367 @@ +ITEM 1. +BUSINESS +Overview +Meridian is a fully-integrated life science company whose principal businesses are (i) the +development, manufacture, sale and distribution of diagnostic test kits, primarily for certain +respiratory, gastrointestinal, viral and parasitic infectious diseases, (ii) the manufacture and +distribution of bulk antigens, antibodies, and reagents used by researchers and other diagnostic +manufacturers and (iii) the contract manufacture of proteins and other biologicals for use by +biopharmaceutical and biotechnology companies engaged in research for new drugs and vaccines. By +exploiting revenue opportunities across research, clinical diagnostics, and therapeutic areas for +key biologicals, Meridian can maximize revenues, efficiently invest in research and development, +and increase profitability of manufacturing operations. +Operating Segments +Meridian’s reportable operating segments are US Diagnostics, European Diagnostics, and Life +Science. While the scientific foundation of these segments is essentially the same, the market +dynamics, competitive trends, regulatory requirements, and sales and marketing approach vary +substantially. The US Diagnostics operating segment consists of research and development and +manufacturing operations in Cincinnati, Ohio, and the sale and distribution of diagnostic test kits +in the US and countries outside of Europe, Africa and the Middle East. The European Diagnostics +operating segment consists of the sale and distribution of diagnostic test kits in Europe, Africa, +and the Middle East. The Life Science operating segment consists of manufacturing operations in +Memphis, Tennessee; Saco, Maine; and Boca Raton, Florida; the sale and distribution of bulk +antigens, antibodies and bioresearch reagents domestically and abroad; and contract research and +development and manufacturing services. The Life Science operating segment consists of the Viral +Antigens, BIODESIGN, and OEM Concepts businesses. Financial information for Meridian’s operating +segments is included in Note 8 to the consolidated financial statements contained herein. +Meridian’s primary source of domestic and international revenues continues to be its core +diagnostic products, which represented 77% of consolidated net sales for fiscal 2005. Meridian’s +diagnostic products provide accuracy, simplicity, and speed, enable early diagnosis and treatment +of common, acute medical conditions, and provide for better patient outcomes at reduced costs. +Meridian targets diagnostics for disease states that (i) are acute conditions where rapid diagnosis +impacts patient outcomes, (ii) have favorable demographic and disease profiles, (iii) are +underserved by current diagnostic products, and (iv) have difficult sample handling +-4- +Table of Contents +requirements. This approach has allowed Meridian to establish significant market share in its +target disease states. +Meridian expects that its Life Science operating segment will serve as a key platform for sourcing +biologicals and technologies, by acquisition or license, for development of new products for all of +Meridian’s operating segments. One of Meridian’s specific strategies in this area is to target +biologicals that have commercial product applications across multiple markets, such as human +diagnostics, veterinary diagnostics, and therapeutics. This strategy is expected to leverage +research and development resources as products can be developed with all three markets in mind, +rather than on a market-by-market basis. +Meridian’s +website is www.meridianbioscience.com. Meridian makes available its Annual Reports on +Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments thereto, +free of charge through this website, as soon as reasonably practicable after such material has been +electronically filed with or furnished to the Securities and Exchange Commission. These reports +may also be read and copied at the SEC’s public reference room at 100 F Street, N.E., Room 1580, +Washington, DC 20549, phone 1-800-732-0330. The SEC maintains an internet site containing these +filings and other information regarding Meridian at http://www.sec.gov. +US Diagnostics Operating Segment +Overview +The US Diagnostics operating segment’s business focuses on the development, manufacture, sale and +distribution of diagnostic test kits, primarily for certain respiratory, gastrointestinal, viral +and parasitic infectious diseases. In addition to diagnostic test kits, products also include +transport media that store and preserve specimen samples from patient collection to laboratory +testing. Third-party sales for this operating segment were $53,485,000, $48,153,000 and +$39,906,000 for fiscal 2005, 2004 and 2003, respectively, reflecting a compound annual growth rate +of 16%. As of September 30, 2005, the US Diagnostics operating segment had 245 employees. +Meridian’s diagnostic test kits utilize immunodiagnostic technologies, which test samples of blood, +urine, stool, and other body fluids or tissue for the presence of antigens and antibodies of +specific infectious diseases. Specific immunodiagnostic technologies used in Meridian’s diagnostic +test kits include enzyme immunoassay, immunofluorescence, particle agglutination/aggregation, +immunodiffusion, complement fixation, and chemical stains. The enzyme immunoassay technology is +used in multiple test formats; the Premier ä products for large volume users and the +ImmunoCard â products for single test, low volume users. +-5- +Table of Contents +Meridian’s diagnostic products are used principally in the detection of respiratory diseases, such +as pneumonia, valley fever, influenza, and Respiratory Syncytial Virus (RSV); gastrointestinal +diseases, such as stomach ulcers (H. pylori ), antibiotic associated diarrhea (C. difficile ) and +pediatric diarrhea (Rotavirus and Adenovirus); viral diseases, such as Mononucleosis, Herpes +Simplex, Chicken Pox and Shingles (Varicella-Zoster) and Cytomegalovirus (organ transplant +infections); and parasitic diseases, such as Giardiasis, Cryptosporidiosis and Lyme. The primary +markets and customers for these products are reference laboratories, hospitals, and physicians’ +offices. +Market Trends +The global market for infectious disease tests continues to expand as new disease states are +identified, new therapies become available, and worldwide standards of living and access to health +care improve. More importantly, within this market there is a continuing shift from conventional +testing, which requires highly trained personnel and lengthy turnaround times for test results, to +more technologically advanced testing which can be performed by less highly trained personnel and +completed in minutes or hours. These technological advances permit accurate testing to occur +outside the traditional hospital or laboratory. +The increasing pressures to contain total health care costs have accelerated the increased use of +diagnostic testing and the market shift to alternate sites. With rapid and accurate diagnoses of +infectious diseases, physicians can pinpoint appropriate therapies quickly, leading to faster +recovery, shorter hospital stays and lower treatment expense. In addition, these pressures have +led to a major consolidation among reference laboratories and the formation of multi-hospital +alliances that have reduced the number of institutional customers for diagnostic products and +resulted in changes in buying practices. Specifically, multi-year exclusive or primary source +marketing or distribution contracts with institutional customers have become more common, replacing +less formal distribution arrangements of shorter duration and involving lower product volumes. +Sales and Marketing +The US Diagnostics operating segment’s sales and distribution network consists of a direct sales +force in the US and independent distributors in the US and abroad. The direct sales force consists +of one director of sales, three regional sales managers, one director of corporate health systems, +one director of managed health care, 24 technical sales representatives, and three inside sales +representatives. Meridian utilizes two primary independent distributors in the US, who accounted +for 44% of the US Diagnostics operating segment’s third-party sales in fiscal 2005. Meridian +participates in the selling effort for key customers where these independent distributors are +utilized. Therefore, Meridian believes that the loss of either of these independent distributors +would not have a material adverse effect on the Company. +-6- +Table of Contents +Consolidation of the US healthcare industry is expected to continue and potentially affect +Meridian’s customers. Industry consolidation puts pressure on pricing and aggregates buying power. +In response, in the last five years, Meridian has entered into, extended, or renewed several +exclusive multiple-year contracts with consolidated healthcare providers and supply agreements with +major reference laboratories. +Products and Markets +Meridian has expertise in the development and manufacture of products based on multiple core +diagnostic technologies, each of which enables the visualization and identification of +antigen/antibody reactions for specific pathogens. As a result, Meridian is able to develop and +manufacture diagnostic tests in a variety of formats that satisfy customer needs and preferences, +whether in a hospital, commercial or reference laboratory or alternate site location. Meridian’s +product offering consists of over 200 medical diagnostic products. Meridian’s products generally +range in list price from $1 per test to $33 per test. +Meridian’s product technologies include enzyme immunoassay, immunofluorescence, particle +agglutination/aggregation, immunodiffusion, complement fixation and chemical stains. +Enzyme Immunoassay (EIA) - Products incorporating the EIA technology achieve extremely high +levels of accuracy in detecting disease-related antigens or antibodies through the use of special +color-based enzyme-substrate reactions. Meridian utilizes this technology in its multiple test +format, the Premier Ô product for large volume users, and in its single test formats, the +Immuno Card ® , Immuno Card STAT! ® and MONOLERT ® products, for lower +volume users. +Immunofluorescence - When the microscopic visualization of an antigen/antibody reaction is +necessary or desired, immunofluorescence technology is frequently utilized. Fluorescing +immunochemicals, in the presence of the target antigen or antibody, can be viewed via a fluorescent +microscope. Meridian utilizes this technology in its MERIFLUOR ® products. +Particle Agglutination/Aggregation - This technology utilizes microparticles (e.g., latex, +red blood cells) coated with specific antigens or antibodies that form visible aggregates in the +presence of a specimen containing the complementary antigen or antibody. This technology is rapid +and economical and is used in Meridian’s MERITEC ® , MeriStar ® and +MONOSPOT ® products. +Other Technologies - Meridian utilizes other technologies that include immunodiffusion, +complement fixation, and chemical stains. Meridian also manufactures and markets specimen +collection, transportation, preservation and concentration products, such as Para-Pak ® , +Macro-CON ® and Spin-Con ® . +Research and Development +-7- +Table of Contents +The US Diagnostics operating segment’s research and development organization consists of 11 +research scientists with expertise in biochemistry, immunology, mycology, bacteriology, virology, +and parasitology. Research and development expenses for the US Diagnostics operating segment for +fiscal 2005, 2004 and 2003 were $2,998,000, $3,131,000 and $2,527,000, respectively. This research +and development organization focuses its activities on new applications for Meridian’s existing +technologies, improvements to existing products and development of new technologies. Research and +development efforts may occur in-house or with collaborative partners. Meridian believes that +internally developed products are a key source for sustaining revenue growth. Meridian’s +internally developed products include Premier ä Platinum HpSA, Premier ä Toxins A & B, +and Immuno Card Ò C. difficile Toxins A & B, which together accounted for 30% of the US +Diagnostics operating segment’s third-party sales during fiscal 2005. +Manufacturing +Meridian’s immunodiagnostic products require the production of highly specific and sensitive +antigens and antibodies. Meridian produces substantially all of its own requirements including +monoclonal antibodies and polyclonal antibodies, plus a variety of fungal, bacterial, and viral +antigens. Meridian believes it has sufficient manufacturing capacity for anticipated growth. +Intellectual Property, Patents, and Licenses +Meridian owns or licenses US and foreign patents for approximately 25 products manufactured by the +US Diagnostics operating segment, including Premier ä Platinum HpSA. In the absence of patent +protection, Meridian may be vulnerable to competitors who successfully replicate Meridian’s +production and manufacturing technologies and processes. Meridian’s employees are required to +execute confidentiality and non-disclosure agreements designed to protect Meridian’s proprietary +products. Meridian believes that its products and technologies do not infringe the proprietary +rights of any third parties. +Government Regulation +Meridian’s diagnostic products are regulated by the Food & Drug Administration (FDA) as “devices” +pursuant to the Federal Food, Drug, and Cosmetic Act (FDCA). Under the FDCA, medical devices are +classified into one of three classes (i.e., Class I, II or III). Class I and II devices are not +expressly approved by the FDA, but, instead, are “cleared” for marketing. Class III devices +generally must receive “pre-market approval” from the FDA as to safety and effectiveness. +Each of the diagnostic products currently marketed by Meridian in the United States has been +cleared by the FDA pursuant to the 510(k) clearance process or is exempt from such requirements. +Meridian believes that +-8- +Table of Contents +most, but not all, products under development will be classified as Class I or II medical devices +and, in the case of Class II devices, will be eligible for 510(k) clearance. +A 510(k) clearance will be granted if the submitted data establishes that the proposed device is +“substantially equivalent” to an existing Class I or Class II medical device or to a Class III +medical device for which the FDA has not required pre-market approval. The 510(k) clearance +process for “substantially equivalent” devices allows product sales to be made after the filing of +an application and upon acknowledgment by the FDA, typically within 90 to 120 days after +submission. If the FDA requests additional information, the product cannot be sold in the US until +the application has been supplemented and upon acknowledgment by the FDA within 90 to 120 days of +the supplemental application. In practice, the FDA has been granting clearance in about 90 days +following submission of the supplemental information. If there are no existing FDA-approved +products or processes comparable to a diagnostic product or process, approval by the FDA involves +the more lengthy pre-market approval procedures. +Sales of Meridian’s diagnostic products in foreign countries are subject to foreign government +regulation, the requirements of which vary substantially from country to country. The time +required to obtain approval by a foreign country may be longer or shorter than that required for +FDA approval and the requirements may differ. +European Diagnostics Operating Segment +The European Diagnostics operating segment’s business focuses on the sale and distribution of +diagnostic test kits, those manufactured by the US Diagnostics operating segment and others +manufactured by third-party vendors. Approximately 67% of third-party sales for fiscal 2005 were +products purchased from the US Diagnostics operating segment. Third-party sales for this operating +segment were $17,818,000, $15,412,000 and $13,756,000 for fiscal 2005, 2004 and 2003, respectively, +reflecting a compound annual growth rate of 14%. As of September 30, 2005, the European +Diagnostics operating segment had 37 employees, including 15 employees in the direct sales force. +The European Diagnostics operating segment’s sales and distribution network consists of direct +sales forces in Belgium, France, Holland, and Italy, and independent distributors in other European +countries, Africa and the Middle East. The European Diagnostics operating segment maintains a +distribution center in Milan, Italy. The primary markets and customers for this operating segment +are hospitals and reference laboratories. +During the last two years, market conditions have begun to improve in European markets. Due to the +introduction of new products and improvements in general market conditions, sales in local +currency, the Euro, increased 11% in fiscal 2005, compared to fiscal 2004, and increased 7% during +the last six months of fiscal 2004, compared to the last six months of fiscal 2003. +-9- +Table of Contents +The European Diagnostics operating segment’s functional currency is the Euro. The translation of +Euros into US dollars is subject to exchange rate fluctuations. +Life Science Operating Segment +Overview +The Life Science operating segment’s business focuses on the development, manufacture, sale, and +distribution of bulk antigens, antibodies, and reagents used by researchers and other diagnostic +companies, as well as the contract manufacturing of proteins and other biologicals used by +biopharmaceutical and biotechnology companies engaged in research for new drugs and vaccines. +Third-party sales for this operating segment were $21,662,000, $16,041,000 and $12,202,000 for +fiscal 2005, 2004 and 2003, respectively, reflecting a compound annual growth rate of 19%, +including the OEM Concepts acquisition discussed below. The Life Science operating segment +consists of Meridian’s Viral Antigens, BIODESIGN and OEM Concepts businesses. As of September 30, +2005, the Life Science operating segment had 108 employees. +Most of the revenue for the Life Science operating segment currently comes from the manufacture, +sale and distribution of bulk antigens, antibodies, and reagents used by researchers and other +diagnostic companies. During fiscal 2005, 23% of third-party sales for this segment were to one +customer, a substantial portion of which is under exclusive supply agreements that expire in fiscal +2007. Meridian has a long-standing relationship with this customer, and although there can be no +assurances, Meridian intends to renew these supply agreements in the normal course of business. +On January 31, 2005, Meridian completed its acquisition of OEM Concepts, Inc., a large-volume +manufacturer of monoclonal antibodies that are critical components of commercial diagnostic +products used in the diagnosis of infectious diseases and in the monitoring of human protein levels +in metabolic disorders, pregnancy, and cardiac disease. OEM Concepts adds custom ascites +manufacturing capabilities and also diversifies Meridian’s customer base of major diagnostic +companies. OEM Concepts contributed revenues of $3,087,000 for eight months during fiscal 2005. +Viral Antigens’ protein production facility serves as an enabling technology for process +development and large-scale manufacturing for biologicals used in new drugs and vaccines. The size +of the facility is intended to accommodate manufacturing requirements for Phase I and Phase II +clinical trials. The customer base for this aspect of the Life Science business includes +biopharmaceutical and biotechnology companies, as well as government agencies, such as the National +Institutes of Health. Production cycles, in some cases, are longer than historical bulk +manufacturing of antigens, antibodies, and reagents. See Note 1(i) to the Consolidated Financial +Statements herein for revenue recognition policies. Meridian’s revenues for contract research and +-10- +Table of Contents +development services and contract manufacturing services increased to $3,053,000 in fiscal 2005 +from $1,528,000 in fiscal 2004. +Growth Strategies +Growth strategies for the Life Science operating segment include (i) developing new product +applications from existing technologies and (ii) acquisition or licensing of biologicals and +technologies for development of new products. +Contract manufacturing of proteins and other biologicals used in research for new drugs and +vaccines is an example of a significant new product application built from Meridian’s existing +expertise in manufacturing bulk antigens and reagents using cell culture techniques. +Meridian expects that its Life Science operating segment will serve as a key platform for sourcing +biologicals and technologies, by acquisition or license, for development of new products for all of +Meridian’s operating segments. One of Meridian’s specific strategies in this area is to target +biologicals that have commercial product applications across multiple markets, such as human +diagnostics, veterinary diagnostics, and therapeutics. This strategy is expected to leverage +research and development resources as products can be developed with all three markets in mind, +rather than on a market-by-market basis. +Markets +The Life Science operating segment has targeted three primary market segments for its products and +services: bulk biomedical reagents, drug and vaccine discovery, and drug and vaccine development. +The customer base for bulk biomedical reagents is large and fragmented, and includes other +diagnostic manufacturers as well as researchers in academia and the pharmaceutical and +biotechnology industries. The market segments for drug and vaccine discovery and development are +intended to be served via contract manufacturing in the protein production laboratory discussed +above. +Sales and Marketing +The Life Science operating segment applies sales and marketing efforts in two different manners +that are designed to complement one another. An internal sales and marketing staff, as well as a +website, have been built to market bulk biomedical reagents directly to a large and fragmented +customer base. The website provides detailed technical information and capability to submit +purchase orders. For major bulk biomedical reagent customers, scientific resources have been +dedicated to establish sole-source supply arrangements. For drug and vaccine discovery and +development, management and scientific resources are dedicated to each potential customer. +-11- +Table of Contents +Research and Development +The Life Science operating segment’s research and development organization consists of five +research scientists. Research and development expenses for the Life Science operating segment for +fiscal 2005, 2004 and 2003 were $823,000, $1,226,000 and $1,348,000, respectively. This research +and development organization focuses its activities on the protein production laboratory, +developing new biomedical reagents, and working with the US Diagnostics operating segment in the +development of products that have commercial application across multiple markets, such as human +diagnostics, veterinary diagnostics, and therapeutics. +Manufacturing and Government Regulation +The proteins that are produced in Viral Antigens’ protein production facility are intended to be +used as “injectibles”. As such, they are produced under cGMP Regulations for Biologics and Human +Drugs under the auspices of the FDA. Approval and licensing, following clinical trials, of these +products is the responsibility of the applicant, who owns the rights to each protein. Viral +Antigens may or may not be the applicant depending on specific circumstances with particular +customers. +Competition +Diagnostics +The market for diagnostic tests is a multi-billion dollar international industry, which is highly +competitive. Many of Meridian’s competitors are larger with greater financial, research, +manufacturing and marketing resources. Important competitive factors of Meridian’s products +include product quality, price, ease of use, customer service, and reputation. In a broader sense, +industry competition is based upon scientific and technological capability, proprietary know-how, +access to adequate capital, the ability to develop and market products and processes, the ability +to attract and retain qualified personnel and the availability of patent protection. To the extent +that Meridian’s product lines do not reflect technological advances, Meridian’s ability to compete +in those product lines could be adversely affected. +Companies competing in the diagnostic test industry generally focus on a limited number of tests or +limited segments of the market. As a result, the diagnostic test industry is highly fragmented and +segmented. Hundreds of companies in the United States alone supply immunodiagnostic tests. These +companies range from multi-national health care companies, for which immunodiagnostics is one line +of business, to small start-up companies. Of central importance in the industry are mid-sized +medical diagnostic specialty companies, like Meridian, that offer multiple, broad product lines and +have the ability to deliver new, high value products quickly to the marketplace. Among the +companies with which Meridian competes in the marketing of one or +-12- +Table of Contents +more of its products are Abbott Laboratories Inc., Becton, Dickinson and Company, Diagnostic +Products Corporation, Quidel Corporation, and Inverness Medical. +Life Science +The market for bulk biomedical reagents is highly competitive. Important competitive factors +include product quality, price, customer service, and reputation. Where sole-source supply +arrangements do not exist, Meridian faces competitors, many of which have greater financial, +research and development, sales and marketing, and manufacturing resources. From time to time, +customers may choose to manufacture their biomedical reagents in-house rather than purchase from +outside vendors such as Meridian. +The market for contract manufacturing in a validated cGMP facility such as Meridian’s protein +production laboratory at its Viral Antigens facility is also competitive. Important competitive +factors include reputation, customer service, and price. Although the product application for this +facility was built from Meridian’s existing expertise in cell culture manufacturing techniques, +Meridian faces competitors with greater experience in contract manufacturing in a cGMP environment. +Acquisitions +Acquisitions have played an important role in the historical growth of Meridian’s businesses. +Meridian’s acquisition objectives are to, among other things, (i) enhance product offerings, (ii) +improve product distribution capabilities, (iii) provide access to new markets, and/or (iv) provide +access to key biologicals that lead to new products. +Recent examples of completed acquisitions include Gull Laboratories in fiscal 1999, Viral Antigens +in fiscal 2000, and OEM Concepts in fiscal 2005. The Gull acquisition enhanced product offerings, +expanded sales and distribution capabilities in Europe, and provided the initial access into the +Life Science market for Meridian (through the BIODESIGN business). The Viral Antigens acquisition, +coupled with the opening of the protein production facility, solidified Meridian’s entry into the +Life Science market. The OEM Concepts acquisition strengthened Meridian’s Life Science business by +adding custom ascites manufacturing capabilities and diversifying Meridian’s customer base of major +diagnostic manufacturing companies. +During September 2005, Meridian completed an offering of 1,800,000 common shares, raising net +proceeds of $29,580,000. These proceeds are intended, in part, to fund future acquisitions. +Although Meridian cannot provide any assurance that it will consummate any acquisitions in the +future, Meridian expects that acquisitions will continue to serve as a source of new revenues and +earnings growth in the future. +-13- +Table of Contents +International Markets +International markets are an important source of revenue for Meridian’s operating segments. For +all operating segments combined, international sales were $30,232,000 or 33% of total fiscal 2005 +sales, $24,916,000 or 31% of total fiscal 2004 sales and $23,220,000 or 35% of total fiscal 2003 +sales. Domestic exports for the US Diagnostics and Life Science operating segments were +$12,414,000, $9,504,000 and $9,464,000 in fiscal 2005, 2004 and 2003, respectively. Meridian +expects to continue to look to international markets as a source of new revenues and growth in the +future. +Environmental +Meridian is a conditionally exempt small quantity generator of hazardous waste and has a US EPA +identification number. All hazardous material is manifested and disposed of properly. Meridian is +in compliance with applicable portions of the federal and state hazardous waste regulations and has +never been a party to any environmental proceeding. \ No newline at end of file diff --git a/raw/filings/0000794172/2005/0000950152-05-009857/item13.txt b/raw/filings/0000794172/2005/0000950152-05-009857/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..79f5ef9c191bdc7925c117aeb8601810f45027d5 --- /dev/null +++ b/raw/filings/0000794172/2005/0000950152-05-009857/item13.txt @@ -0,0 +1,3 @@ +Item 13 +Certain Relationships and Related Transactions +65 \ No newline at end of file diff --git a/raw/filings/0000794172/2005/0000950152-05-009857/item9a.txt b/raw/filings/0000794172/2005/0000950152-05-009857/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..7ba1ab05144a12b54be978baca150f54f1b304eb --- /dev/null +++ b/raw/filings/0000794172/2005/0000950152-05-009857/item9a.txt @@ -0,0 +1,15 @@ +ITEM 9A. +CONTROLS AND PROCEDURES +As of September 30, 2005, an evaluation was completed under the supervision and with the +participation of Meridian’s management, including Meridian’s Chief Executive Officer and Chief +Financial Officer, of the effectiveness of the design and operation of Meridian’s disclosure +controls and procedures pursuant to Rule 13a-15(b) and 15d-15(b) promulgated under the Securities +Exchange Act of 1934, as amended. Based on that evaluation, Meridian’s management, including the +CEO and CFO, concluded that Meridian’s disclosure controls and procedures were effective as of +September 30, 2005. There have been no changes in Meridian’s internal control over financial +reporting identified in connection with the evaluation of internal control that occurred during the +fourth fiscal quarter that has materially affected, or is reasonably likely to affect, Meridian’s +internal control over financial reporting, or in other factors that could significantly affect +internal control subsequent to September 30, 2005. +The Company’s internal control report is included in this Annual Report on Form 10-K after Item 8, +under the caption “Management’s Report on Internal Control over Financial Reporting”. \ No newline at end of file diff --git a/raw/filings/0000794172/2005/0000950152-05-009857/rp_note.txt b/raw/filings/0000794172/2005/0000950152-05-009857/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000794172/2005/0000950152-05-009857/rpt_disclosure.txt b/raw/filings/0000794172/2005/0000950152-05-009857/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000794172/2007/0000950152-07-009366/filing.txt b/raw/filings/0000794172/2007/0000950152-07-009366/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..94a0af4d7f7871144d67d0445e7db009cb48712f --- /dev/null +++ b/raw/filings/0000794172/2007/0000950152-07-009366/filing.txt @@ -0,0 +1,4731 @@ +10-K +1 +l28988ae10vk.htm +MERIDIAN BIOSCIENCE, INC. 10-K +MERIDEIAN BIOSCIENCE, INC. 10-K +Table of Contents +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +FORM 10-K +FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) +OF THE SECURITIES EXCHANGE ACT OF 1934 +þ +ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF +1934 +FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2007. +o +TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +FOR THE TRANSITION PERIOD FROM TO +Commission File No. 0-14902 +MERIDIAN BIOSCIENCE, INC. +Incorporated under +the Laws of Ohio +Phone: (513) 271-3700 +3471 River Hills Drive +Cincinnati, Ohio 45244 +IRS Employer ID +No. 31-0888197 +Securities Registered Pursuant to Section 12(b) of the Act: +Common Shares, No Par Value +Securities Registered Pursuant to Section 12(g) of the Act: +None +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in +Rule 405 of the Securities Act. YES o NO þ +If this report is an annual or transition report, indicate by check mark if the registrant +is not required to file reports pursuant to Section 13 or 15(d) of the Securities 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, 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 (Section 229.405 of this Chapter) is not contained herein, and will +not be contained, to the best of registrant’s knowledge, in definitive proxy or +information statements incorporated by reference in Part III of this Form 10 - K or +any amendment to this Form 10 - K. YES þ NO 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 Exchange Act Rule 12b-2). +YES o NO þ +The aggregate market value of Common Shares held by non-affiliates as of March 31, 2007 +was $699,747,338 based on a closing sale price of $18.51 per share on March 30, 2007. As +of October 31, 2007, 39,877,672 no par value Common Shares were issued and outstanding. +Documents Incorporated by Reference +Portions of the Registrant’s Annual Report to Shareholders for the fiscal year ended +September 30, 2007 furnished to the Commission pursuant to Rule 14a-3(b) as specified and +portions of the Registrant’s Proxy Statement filed with the Commission for its 2008 Annual +Shareholders’ Meeting are incorporated by reference in Part III as specified. +MERIDIAN BIOSCIENCE, INC. +INDEX TO ANNUAL REPORT +ON FORM 10-K +Page +Part I +Item 1 Business +3 +Item 1A Risk Factors +12 +Item 1B Unresolved SEC Staff Comments +18 +Item 2 Properties +18 +Item 3 Legal Proceedings +18 +Item 4 Submission of Matters to a Vote of Security Holders +19 +Part II +Item 5 Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities +19 +Item 6 Selected Financial Data +19 +Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations +20 +Item 7A Quantitative and Qualitative Disclosures about Market Risk +36 +Item 8 Financial Statements and Supplementary Data +37 +Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +72 +Item 9A Controls and Procedures +72 +Item 9B Other Information +73 +Part III +Item 10 Directors and Executive Officers of the Registrant +73 +Item 11 Executive Compensation +73 +Item 12 Security Ownership of Certain Beneficial Owners and Management +73 +Item 13 Certain Relationships and Related Transactions +73 +Item 14 Principal Accountant Fees and Services +73 +Item 15 Exhibits and Financial Statement Schedules +74 +EX-10.35 +EX-10.37 +EX-13 +EX-18 +EX-21 +EX-23 +EX-31.1 +EX-31.2 +EX-32 +FORWARD LOOKING STATEMENTS +The Private Securities Litigation Reform Act of 1995 provides a safe harbor from civil litigation +for forward-looking statements accompanied by meaningful cautionary statements. Except for +historical information, this report contains forward-looking statements which may be identified by +words such as “estimates”, “anticipates”, “projects”, “plans”, “seeks”, “may”, “will”, “expects”, +“intends”, “believes”, “should” and similar expressions or the negative versions thereof and which +also may be identified by their context. Such statements, whether expressed or implied, are based +upon current expectations of the Company and speak only as of the date made. The Company assumes no +obligation to publicly update any forward-looking statements. These statements are subject to +various risks, uncertainties and other factors that could cause actual results to differ +materially, including, without limitation, the following: Meridian’s continued growth depends, in +part, on its ability to introduce into the marketplace enhancements of existing products or new +products that incorporate technological advances, meet customer requirements and respond to +products developed by Meridian’s competition. While Meridian has introduced a number of internally +developed products, there can be no assurance that it will be successful in the future in +introducing such products on a timely basis. Ongoing consolidations of reference laboratories and +formation of multi-hospital alliances may cause adverse changes to pricing and distribution. Costs +and difficulties in complying with laws and regulations administered by the United States Food and +Drug Administration can result in unanticipated expenses and delays and interruptions to the sale +of new and existing products. Changes in the relative strength or weakness of the US dollar can +change expected results. One of Meridian’s main growth strategies is the acquisition of companies +and product lines. There can be no assurance that additional acquisitions will be consummated or +that, if consummated, will be successful and the acquired businesses successfully integrated into +Meridian’s operations. In addition to the factors described in this paragraph, Part I, Item 1A Risk +Factors contains a list of uncertainties and risks that may affect the financial performance of the +Company. +-2- +Table of Contents +PART I. +This Annual Report on Form 10-K includes forward-looking statements about our business and results +of operations that are subject to risks and uncertainties. See “Forward-Looking Statements” above. +Factors that could cause or contribute to such differences include those discussed in Item 1A. In +addition to the risk factors discussed herein, we are also subject to additional risks and +uncertainties not presently known to us or that we currently deem immaterial. If any of these +risks and uncertainties develops into actual events, our business, financial condition or results +of operations could be adversely affected. +Unless the context requires otherwise, references in this Annual Report on Form 10-K to “we,” “us,” +“our,” or “our company” refer to Meridian Bioscience, Inc. and its subsidiaries. +ITEM 1. +BUSINESS +Overview +Meridian is a fully-integrated life science company whose principal businesses are (i) the +development, manufacture, sale and distribution of diagnostic test kits, primarily for certain +respiratory, gastrointestinal, viral and parasitic infectious diseases, (ii) the manufacture and +distribution of bulk antigens, antibodies, and reagents used by researchers and other diagnostic +manufacturers and (iii) the contract development and manufacture of proteins and other biologicals +for use by biopharmaceutical and biotechnology companies engaged in research for new drugs and +vaccines. By exploiting revenue opportunities across research, clinical diagnostics, and +therapeutics, we strive to maximize revenues, efficiently invest in research and development, and +increase profitability of our manufacturing operations. +Operating Segments +Our reportable operating segments are US Diagnostics, European Diagnostics, and Life Science. The +US Diagnostics operating segment consists of manufacturing operations in Cincinnati, Ohio, and the +sale and distribution of diagnostics test kits in the US and countries outside of Europe, Africa +and the Middle East. The European Diagnostics operating segment consists of the sale and +distribution of diagnostics test kits in Europe, Africa and the Middle East. The Life Science +operating segment consists of manufacturing operations in Memphis, Tennessee, Saco, Maine, and Boca +Raton, Florida, and the sale and distribution of bulk antigens, antibodies, and bioresearch +reagents domestically and abroad. The Life Science operating segment also includes the contract +development and manufacture of proteins and other biologicals for use by biopharmaceutical and +biotechnology companies engaged in research for new drugs and vaccines. Financial +-3- +Table of Contents +information for Meridian’s operating segments is included in Note 9 to the consolidated financial +statements contained herein. +Our primary source of domestic and international revenues continues to be core diagnostic products, +which represented 80% of consolidated net sales for fiscal 2007. Our diagnostic products provide +accuracy, simplicity, and speed, enable early diagnosis and treatment of common, acute medical +conditions, and provide for better patient outcomes at reduced costs. We target diagnostics for +disease states that (i) are acute conditions where rapid diagnosis impacts patient outcomes, (ii) +have opportunistic demographic and disease profiles, (iii) are underserved by current diagnostic +products, and (iv) have difficult sample handling requirements. This approach has allowed us to +establish significant market share in our target disease states. +Our website is www.meridianbioscience.com . We make available our Annual Reports on Form 10-K, +Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments thereto, free of +charge through this website, as soon as reasonably practicable after such material has been +electronically filed with or furnished to the Securities and Exchange Commission. These reports +may also be read and copied at the SEC’s public reference room at 100 F Street, N.E., Room 1580, +Washington, DC 20549, phone 1-800-732-0330. The SEC maintains an internet site containing these +filings and other information regarding Meridian at http://www.sec.gov . +US Diagnostics Operating Segment +Overview +Our US Diagnostics operating segment’s business focuses on the development, manufacture, sale and +distribution of diagnostic test kits, primarily for certain respiratory, gastrointestinal, viral +and parasitic infectious diseases. In addition to diagnostic test kits, products also include +transport media that store and preserve specimen samples from patient collection to laboratory +testing. Third-party sales for this operating segment were $74,845,000, $65,721,000 and +$53,485,000 for fiscal 2007, 2006 and 2005, respectively, reflecting a three-year compound annual +growth rate of 16%. As of September 30, 2007, our US Diagnostics operating segment had 250 +employees. +Our diagnostic test kits utilize immunodiagnostic technologies, which test samples of blood, urine, +stool, and other body fluids or tissue for the presence of antigens and antibodies of specific +infectious diseases. Specific immunodiagnostic technologies used in our diagnostic test kits +include enzyme immunoassay, immunofluorescence, particle agglutination/aggregation, +immunodiffusion, complement fixation, and chemical stains. +-4- +Table of Contents +Our diagnostic products are used principally in the detection of respiratory diseases, such as +pneumonia, valley fever, influenza, and Respiratory Syncytial Virus (RSV); gastrointestinal +diseases, such as stomach ulcers ( H. pylori ), antibiotic-associated diarrhea (C. difficile ) and +pediatric diarrhea (Rotavirus and Adenovirus); viral diseases, such as Mononucleosis, Herpes +Simplex, Chicken Pox and Shingles (Varicella-Zoster) and Cytomegalovirus (organ transplant +infections); and parasitic diseases, such as Giardiasis, Cryptosporidiosis and Lyme. The primary +markets and customers for these products are reference laboratories, hospitals, and physicians’ +offices. +Market Trends +The global market for infectious disease tests continues to expand as new disease states are +identified, new therapies become available, and worldwide standards of living and access to health +care improve. More importantly, within this market there is a continuing shift from conventional +testing, which requires highly trained personnel and lengthy turnaround times for test results, to +more technologically advanced testing which can be performed by less highly trained personnel and +completed in minutes or hours. +The increasing pressures to contain total health care costs have accelerated the increased use of +diagnostic testing. With rapid and accurate diagnoses of infectious diseases, physicians can +pinpoint appropriate therapies quickly, leading to faster recovery, shorter hospital stays and +lower treatment expense. In addition, these pressures have led to a major consolidation among +reference laboratories and the formation of multi-hospital alliances that have reduced the number +of institutional customers for diagnostic products and resulted in changes in buying practices. +Specifically, multi-year exclusive or primary source marketing or distribution contracts with +institutional customers have become more common, replacing less formal distribution arrangements of +shorter duration and involving lower product volumes. +Sales and Marketing +Our US Diagnostics operating segment’s sales and distribution network consists of a direct sales +force in the US and independent distributors in the US and abroad. The direct sales force consists +of one senior director of sales, three regional sales managers, one director of corporate health +systems, one manager of corporate health systems, one director of health plan and payer markets, +one international distribution manager, 25 technical sales representatives, and three inside sales +representatives. We utilize two primary independent distributors in the US, who accounted for 51% +of the US Diagnostics operating segment’s third-party sales in fiscal 2007. We manage the selling +effort for key customers where these independent distributors are utilized. +Consolidation of the US healthcare industry is expected to continue and potentially affect our +customers. Industry consolidation puts pressure on pricing and aggregates buying power. In +response, we have looked to +-5- +Table of Contents +multi-year supply agreements with consolidated healthcare providers and major reference +laboratories to stabilize pricing. +Products and Markets +We have expertise in the development and manufacture of products based on multiple core diagnostic +technologies, each of which enables the visualization and identification of antigen/antibody +reactions for specific pathogens. Our product technologies include enzyme immunoassay, +immunofluorescence, particle agglutination/aggregation, immunodiffusion, complement fixation and +chemical stains. As a result, we are able to develop and manufacture diagnostic tests in a variety +of formats that satisfy customer needs and preferences, whether in a hospital, commercial or +reference laboratory or alternate site location. Our product offering consists of approximately +140 medical diagnostic products. Our products generally range in list price from $1 per test to +$33 per test. +Research and Development +Our US Diagnostics operating segment’s research and development organization consists of 14 +research scientists with expertise in biochemistry, immunology, mycology, bacteriology, virology, +and parasitology. Research and development expenses for the US Diagnostics operating segment for +fiscal 2007, 2006 and 2005 were $4,571,000, $3,342,000 and $3,043,000, respectively. This research +and development organization focuses its activities on new applications for our existing +technologies, improvements to existing products and development of new technologies. Research and +development efforts may occur in-house or with collaborative partners. We believe that new product +development is a key source for sustaining revenue growth. Our internally developed products +include Premier ä Platinum HpSA PLUS, Premier ä Toxins A & B, and +Immuno Card Ò Toxins A & B, which together accounted for 39% of our US Diagnostics +operating segment’s third-party sales during fiscal 2007. +We believe that the use of collaborative partners in the development of new products will +complement our internal research and development staff in a manner that allows us to bring products +to market more quickly than if development were to occur solely on an internal basis. During +August 2006, we entered into a partnership agreement with the Performance & Life Science Chemicals +Division of Merck KGaA, Darmstadt, Germany for the development of new clinical assays. Our first +product under this agreement, Immuno Card STAT! ® EHEC, was launched during the second +quarter of fiscal 2007. +Over the last 15 months, we have begun exploring and developing a molecular-based diagnostic +testing technology to complement our existing antigen/antibody-based testing technologies. This +first look at molecular-based testing started in October 2006, when we executed a license agreement +with Eiken Chemical Co., Ltd. that provides rights to Eiken’s loop-mediated isothermal +amplification technology. This license +-6- +Table of Contents +provides us with rights for infectious disease testing in the United States and 18 other geographic +markets. We currently have one product in active development using this molecular technology. +Several other infectious diseases have been identified for future development using this +technology. +Manufacturing +Our immunodiagnostic products require the production of highly specific and sensitive antigens and +antibodies. Meridian produces substantially all of its own requirements including monoclonal +antibodies and polyclonal antibodies, plus a variety of fungal, bacterial, and viral antigens. We +believe that we have sufficient manufacturing capacity for anticipated growth in the near term. +Intellectual Property, Patents, and Licenses +We own or license US and foreign patents for approximately 25 products manufactured by our US +Diagnostics operating segment, including Premier ä Platinum HpSA and Premier ä Platinum +HpSA Plus. In the absence of patent protection, we may be vulnerable to competitors who +successfully replicate our production and manufacturing technologies and processes. Our employees +are required to execute confidentiality and non-disclosure agreements designed to protect our +proprietary products. +Government Regulation +Our diagnostic products are regulated by the Food & Drug Administration (FDA) as “devices” pursuant +to the Federal Food, Drug, and Cosmetic Act (FDCA). Under the FDCA, medical devices are classified +into one of three classes (i.e., Class I, II or III). Class I and II devices are not expressly +approved by the FDA, but, instead, are “cleared” for marketing. Class III devices generally must +receive “pre-market approval” from the FDA as to safety and effectiveness. +Each of the diagnostic products currently marketed by us in the United States has been cleared by +the FDA pursuant to the 510(k) clearance process or is exempt from such requirements. We believe +that most, but not all, products under development will be classified as Class I or II medical +devices and, in the case of Class II devices, will be eligible for 510(k) clearance. +Sales of our diagnostic products in foreign countries are subject to foreign government regulation, +the requirements of which vary substantially from country to country. The time required to obtain +approval by a foreign country may be longer or shorter than that required for FDA approval and the +requirements may differ. +-7- +Table of Contents +European Diagnostics Operating Segment +Our European Diagnostics operating segment’s business focuses on the sale and distribution of +diagnostic test kits, manufactured both by our US Diagnostics operating segment and by third-party +vendors. Approximately 70% of third-party sales for fiscal 2007 for this operating segment were +products purchased from our US Diagnostics operating segment. Third-party sales for this operating +segment were $23,563,000, $19,828,000 and $17,818,000 for fiscal 2007, 2006 and 2005, respectively, +reflecting a three-year compound annual growth rate of 15%. As of September 30, 2007, the European +Diagnostics operating segment had 40 employees, including 17 employees in the direct sales force. +Our European Diagnostics operating segment’s sales and distribution network consists of direct +sales forces in Belgium, France, Holland, and Italy, and independent distributors in other European +countries, Africa and the Middle East. The European Diagnostics operating segment maintains a +distribution center in Milan, Italy. The primary markets and customers for this operating segment +are hospitals and reference laboratories. +The European Diagnostics operating segment’s functional currency is the Euro. The translation of +Euros into US dollars is subject to exchange rate fluctuations. +Life Science Operating Segment +Overview +Our Life Science operating segment’s business focuses on the development, manufacture, sale, and +distribution of bulk antigens, antibodies, and reagents used by researchers and other diagnostic +companies, as well as contract development and manufacturing services under clinical cGMP +conditions. Third-party sales for this operating segment were $24,555,000, $22,864,000 and +$21,662,000 for fiscal 2007, 2006 and 2005, respectively, reflecting a three-year compound annual +growth rate of 15%. As of September 30, 2007, our Life Science operating segment had 106 +employees. +Most of the revenue for our Life Science operating segment currently comes from the manufacture, +sale and distribution of bulk antigens, antibodies, and reagents used by researchers and other +diagnostic companies. During fiscal 2007, 27% of third-party sales for this segment were to one +customer, a substantial portion of which is under exclusive supply agreements that have annual +automatic renewal provisions. We have a long-standing relationship with this customer, and +although there can be no assurances, we intend to renew these supply agreements in the normal +course of business. +Our clinical cGMP protein production facility in Memphis, Tennessee serves as an enabling +technology for process development and large-scale manufacturing for biologicals used in new drugs +and vaccines. The size of the facility is intended to accommodate manufacturing requirements for +Phase I and Phase II clinical trials. +-8- +Table of Contents +The customer base for this aspect of our Life Science business includes biopharmaceutical and +biotechnology companies, as well as government agencies, such as the National Institutes of Health. +Revenues for our Life Science operating segment, in the normal course of business, may be affected +from quarter to quarter by the timing and nature of arrangements for contract services work, which +may have longer production cycles than bioresearch reagents and bulk antigens and antibodies, as +well as buying patterns of major customers. See Note 1(j) to the Consolidated Financial Statements +herein for revenue recognition policies. Our revenues for contract services were $765,000, +$2,537,000, and $3,053,000 in fiscal 2007, 2006, and 2005, respectively. +Products, Markets and Growth Strategies +Our Life Science operating segment’s businesses have been assembled via acquisitions (BIODESIGN +International in fiscal 1999, Viral Antigens in fiscal 2000, and most recently, OEM Concepts in +fiscal 2005). Historically, these businesses were run autonomously. Over the last 18 months, +growth strategies have been developed around sales and marketing integration, new product +development integration, and four product brands. Our Life Science operating segment’s four +product brands can be described as follows: +• +BIODESIGN – Antibodies, antigens and assay development reagents +• +Viral Antigens – Custom infectious disease antigens +• +OEM Concepts – Custom antibody development and manufacturing, in vivo or in vitro +• +Meridian Biologics – Development and manufacturing of cGMP clinical grade biologicals +We believe that the business and growth prospects for all four product brands are favorable. +Products from the BIODESIGN, OEM Concepts, and Viral Antigens brands are marketed primarily to +diagnostic manufacturing customers as a source of raw materials for their products, or as an +outsourced step in their manufacturing processes. These markets are highly fragmented; however, we +believe we can be successful through product and marketing integration and customer penetration +across these three brands. These three brand names were aligned with the predecessor company +names, prior to acquisition, as we believe that there is value in the names of these long-standing +businesses. Sales efforts are focused on multi-year supply agreements in order to provide +stability in volumes and pricing. We believe this benefits both us and our customers. +With respect to our Meridian Biologics brand and contract services, we believe that the business +prospects are also favorable despite our recent revenue trends for this brand. In August 2007, we +were awarded a five-year contract (base year plus four option years) having a sales value of up to +$12,200,000 for the manufacturing of experimental clinical vaccines for the National Institutes of +Allergy and Infectious Diseases of the National Institutes of Health. This contract provides an +opportunity for steady production work over a five-year period. +-9- +Table of Contents +Research and Development +Our Life Science operating segment’s research and development organization consists of 5 research +scientists. Research and development expenses for our Life Science operating segment for fiscal +2007, 2006 and 2005 were $1,514,000, $1,457,000 and $823,000, respectively. This research and +development organization has integrated its activities around the four product brands previously +discussed. +Manufacturing and Government Regulation +The cGMP clinical grade proteins that are produced in our Memphis facility are intended to be used +as “injectables”. As such, they are produced under cGMP Regulations for Biologics and Human Drugs +under the auspices of the FDA. Approval and licensing, following clinical trials, of these +products is the responsibility of the applicant, who owns the rights to each protein. Typically, +the customer is the applicant, not Meridian Life Science. +All of the Meridian Life Science facilities are ISO 9001:2000 certified and EC 1774:2002 approved. +Competition +Diagnostics +The market for diagnostic tests is a multi-billion dollar international industry, which is highly +competitive. Many of our competitors are larger with greater financial, research, manufacturing +and marketing resources. Important competitive factors of Meridian’s products include product +quality, price, ease of use, customer service, and reputation. In a broader sense, industry +competition is based upon scientific and technological capability, proprietary know-how, access to +adequate capital, the ability to develop and market products and processes, the ability to attract +and retain qualified personnel and the availability of patent protection. To the extent that our +product lines do not reflect technological advances, our ability to compete in those product lines +could be adversely affected. +The diagnostic test industry is highly fragmented and segmented. Of importance in the industry are +mid-sized medical diagnostic specialty companies, like Meridian, that offer multiple, broad product +lines and have the ability to deliver new, high value products quickly to the marketplace. Among +the companies with which we compete in the marketing of one or more of our products are Abbott +Laboratories Inc., Becton, Dickinson and Company, Diagnostic Products Corporation (acquired by +Siemens in 2006), Quidel Corporation, Inverness Medical, and Remel (owned by Thermo Fisher). +-10- +Table of Contents +Life Science +The market for bulk biomedical reagents is highly competitive. Important competitive factors +include product quality, price, customer service, and reputation. We face competitors, many of +which have greater financial, research and development, sales and marketing, and manufacturing +resources where sole-source supply arrangements do not exist. From time to time, customers may +choose to manufacture their biomedical reagents in-house rather than purchase from outside vendors +such as Meridian. +The market for contract manufacturing in a validated cGMP facility such as our Memphis facility is +also competitive. Important competitive factors include reputation, customer service, and price. +Although the product application for this facility was built from our existing expertise in cell +culture manufacturing techniques, we face competitors with greater experience in contract +manufacturing in a clinical cGMP environment. +Acquisitions +Acquisitions have played an important role in the historical growth of our businesses. Our +acquisition objectives include, among other things, (i) enhancing product offerings, (ii) improving +product distribution capabilities, (iii) providing access to new markets, and/or (iv) providing +access to key biologicals or new technologies that lead to new products. Although we cannot +provide any assurance that we will consummate any acquisitions in the future, we expect that the +potential for acquisitions will continue to serve as an opportunity for new revenues and earnings +growth in the future. +International Markets +International markets are an important source of revenue and future growth opportunities for all of +our operating segments. For all operating segments combined, international sales were $38,691,000 +or 31% of total fiscal 2007 sales, $34,557,000 or 32% of total fiscal 2006 sales and $30,232,000 or +33% of total fiscal 2005 sales. Domestic exports for our US Diagnostics and Life Science operating +segments were $15,128,000, $14,728,000 and $12,414,000 in fiscal 2007, 2006 and 2005, respectively. +We expect to continue to look to international markets as a source of new revenues and growth in +the future. +Environmental +We are a conditionally exempt small quantity generator of hazardous waste and have a US EPA +identification number. All hazardous material is manifested and disposed of properly. We are in +compliance with applicable portions of the federal and state hazardous waste regulations and have +never been a party to any environmental proceeding. +-11- +Table of Contents +ITEM 1A. +RISK FACTORS +In addition to the other information set forth in this report, you should carefully consider the +following factors which could materially affect our business, financial condition, cash flows or +future results. Any one of these factors could cause our actual results to vary materially from +recent results or from anticipated future results. The risks described below are not the only +risks facing our Company. Additional risks and uncertainties not currently known to us or that we +currently deem to be immaterial also may materially adversely affect our business, financial +condition and/or operating results. +Risks Affecting Growth and Profitability of our Business +We may be unable to develop new products and services or acquire products and services on favorable +terms. +The medical diagnostic and life science industries are characterized by ongoing technological +developments and changing customer requirements. As such, our results of operations and continued +growth depend, in part, on our ability in a timely manner to develop or acquire rights to, and +successfully introduce into the marketplace, enhancements of existing products and services or new +products and services that incorporate technological advances, meet customer requirements, and +respond to products developed by our competition. We cannot provide any assurance that we will be +successful in developing or acquiring such rights to products and services on a timely basis, or +that such products and services will adequately address the changing needs of the marketplace, +either of which could adversely affect our results of operations. +In addition, we must regularly allocate considerable resources to research and development of new +products, services, and technologies. The research and development process generally takes a +significant amount of time from design stage to product launch. This process is conducted in +various stages. During each stage, there is a risk that we will not achieve our goals on a timely +basis, or at all, and we may have to abandon a product in which we have invested substantial +resources. +During 2007, 2006, and 2005, we incurred $6,085,000, $4,799,000, and $3,866,000, respectively, in +research and development expenses. We expect to continue to invest in our research and development +activities. +We may be unable to successfully integrate operations or to achieve expected cost savings from +acquisitions we make. +One of our main growth strategies is the acquisition of companies and/or products. Although +additional acquisitions of companies and products may enhance the opportunity to increase net +earnings over time, such acquisitions could result in greater administrative burdens, increased +exposure to the uncertainties inherent in marketing new products, and financial risks of additional +operating costs. The principal benefits expected to result from any acquisitions we make will not +be achieved fully unless we are able to successfully integrate the +-12- +Table of Contents +operations of the acquired entities with our operations and realize the anticipated synergies, cost +savings, and growth opportunities from integrating these businesses into our existing businesses. +We cannot provide any assurance that we will be able to identify and complete additional +acquisitions on terms we consider favorable or that, if completed, will be successfully integrated +into our operations. +Revenues for our diagnostic operating segments may be impacted by our reliance upon two key +distributors, seasonal factors and sporadic outbreaks, and changing diagnostic market conditions. +Key Distributors +Our US Diagnostic operating segment’s sales through two distributors were 51% and 47%, +respectively, of the US Diagnostics operating segment’s total sales for fiscal 2007 and fiscal +2006, or 31% and 29%, respectively, of consolidated total sales for fiscal 2007 and fiscal 2006. +These parties distribute our products and other laboratory products to end-user customers. The loss +of either of these distributors could negatively impact our sales and results of operations unless +suitable alternatives were timely found or lost sales to one distributor were absorbed by another +distributor. Finding a suitable alternative on satisfactory terms may pose challenges in our +industry’s competitive environment. +As an alternative, we could expand our efforts to distribute and market our products directly. +This alternative, however, would require substantial investment in additional sales, marketing, and +logistics resources, including hiring additional sales and customer service personnel, which would +significantly increase our future selling, general, and administrative expenses. +Seasonal Factors and Sporadic Outbreaks +Our principal business is the sale of a broad range of diagnostic test kits for common respiratory, +gastrointestinal, viral, and parasitic infectious diseases. Certain infectious diseases may be +seasonal in nature, while others may be associated with sporadic outbreaks, such as food-borne +illnesses. While we believe that the breadth of our diagnostic product lines reduces the risk that +infections subject to seasonality and sporadic outbreaks will cause variability in diagnostic +revenues, we can make no assurance that revenues will not be negatively impacted period over period +by such factors. +Changing Diagnostic Market Conditions +Changes in the healthcare delivery system have resulted in major consolidation among reference +laboratories and in the formation of multi-hospital alliances, reducing the number of institutional +customers for diagnostic test products. Due to such consolidation, we may not be able to enter +into and/or sustain contractual or other marketing or distribution arrangements on a satisfactory +commercial basis with institutional customers, which could adversely affect our results of +operations. +Third party payers for medical products and services, including state and federal governments, are +increasingly concerned about escalating health care costs and can indirectly affect the pricing or +the relative attractiveness +-13- +Table of Contents +of our products by regulating the maximum amount of reimbursement they will provide for diagnostic +testing services. If reimbursement amounts for diagnostic testing services are decreased in the +future, such decreases may reduce the amount that will be reimbursed to hospitals or physicians for +such services and consequently could place constraints on the levels of overall pricing, which +could have a material effect on our sales and/or profit margins. +Revenues for our Life Science operating segment may be impacted by customer concentrations and +buying patterns. +Our Life Science operating segment’s sales of purified antigens and reagents to one customer were +27% and 18%, respectively, of the Life Science operating segment’s total sales for fiscal 2007 and +fiscal 2006, or 5% and 4%, respectively, of our consolidated total sales for fiscal 2007 and fiscal +2006. A substantial portion of these sales are under exclusive supply agreements that have annual +automatic renewal provisions. Although we have a long-standing relationship with this customer, we +cannot provide any assurance that we will be able to renew these supply agreements, which could +adversely affect our sales and results of operations. +Our Life Science operating segment has five other significant customers who purchase antigens, +antibodies and reagents, which together comprised 19% and 20%, respectively, of the operating +segment’s total sales for fiscal 2007 and fiscal 2006. Any significant alteration of buying +patterns from these customers could adversely affect our period over period sales and results of +operations. +Revenues relating to research, development and manufacturing services for our Life Science +operating segment are generated on a contract by contract basis. The nature of this business is +such that each contract provides a unique product and/or service and corresponding revenue stream. +Although we believe that future prospects for this business will generate targeted growth rates, +there can be no assurance that future contracts will be secured, and if secured, will be +profitable. +Intense competition could adversely affect our profitability. +The markets for our products and services are characterized by substantial competition and rapid +change. Hundreds of companies in the United States supply immunodiagnostic tests and purified +reagents. These companies range from multinational healthcare entities, for which +immunodiagnostics is one line of business, to small start-up companies. Many of our competitors +have significantly greater financial, technical, manufacturing, and marketing resources than we do. +We cannot provide any assurance that our products and services will be able to compete +successfully with the products and services of our competitors. +-14- +Table of Contents +We are dependent on international sales, and our financial results may be adversely impacted by +foreign currency, regulatory or other developments affecting international markets. +We sell products and services into approximately 60 countries. Approximately 31% of our net sales +for fiscal 2007 and approximately 32% of our net sales for fiscal 2006 were attributable to +international markets. For fiscal 2007, 52% of our international sales were made in Euros, with the +remaining 48% made in U.S. dollars. We are subject to the risks associated with fluctuations in +the U.S. dollar-Euro exchange rates. We are also subject to other risks associated with +international operations, including longer customer payment cycles, tariff regulations, +requirements for export licenses, stability of foreign governments, and governmental requirements +with respect to the importation and distribution of medical devices and antigens, antibodies and +reagents, all of which may vary by country. +Risks Affecting our Manufacturing Operations +We are subject to comprehensive regulation, and our ability to earn profits may be restricted by +these regulations. +Medical device diagnostics and the manufacture, sale, and distribution of bulk antigens, +antibodies, and reagents are highly regulated industries. We cannot provide any assurance that we +will be able to obtain necessary governmental clearances or approvals or timely clearances or +approvals to market future products in the United States and other countries. Costs and +difficulties in complying with laws and regulations administered by the U.S. Food and Drug +Administration, the U.S. Department of Agriculture, the U.S. Department of Commerce, the U.S. Drug +Enforcement Agency, or the Centers for Disease Control can result in unanticipated expenses and +delays and interruptions to the sale of new and existing products. Contract manufacturing of +proteins and other biologicals is regulated by the U.S. Food and Drug Administration. +Regulatory approval can be a lengthy, expensive, and uncertain process, making the timing and costs +of approvals difficult to predict. The failure to comply with these regulations can result in +delay in obtaining authorization to sell products, seizure or recall of products, suspension or +revocation of authority to manufacture or sell products, and other civil or criminal sanctions. +Significant interruptions in production at our principal manufacturing facilities and/or +third-party manufacturing facilities would adversely affect our business and operating results. +Products and services manufactured at our Cincinnati, Ohio, Boca Raton, Florida, Memphis, +Tennessee, and Saco, Maine facilities comprise 81% of our diagnostics revenues and 78% of our Life +Science revenues. Our global supply of these products and services is dependent on the +uninterrupted and efficient operation of these facilities. In addition, we currently rely on a +small number of third-party manufacturers to produce certain of our diagnostic products. The +operations of our facilities or these third-party manufacturing facilities could be adversely +affected by power failures, natural or other disasters, such as earthquakes, floods, or terrorist +threats. +-15- +Table of Contents +Although we carry insurance to protect against certain business interruptions at our facilities, +there can be no assurance that such coverage will be adequate or that such coverage will continue +to remain available on acceptable terms, if at all. Any significant interruption in the Company’s +or third-party manufacturing capabilities could materially and adversely affect our operating +results. +We are dependent on sole-source suppliers for certain critical components and products. A supply +interruption could adversely affect our business. +Our products are made from a wide variety of raw materials that are generally available from +alternate sources of supply. However, certain critical raw materials and supplies required for the +production of some of our principal products are available only from a single supplier. In +addition, certain finished products, for which we act as a distributor, are available only from a +single supplier. If these suppliers become unable or unwilling to supply the required raw +materials or products, we would need to find another source, and perform additional development +work and obtain regulatory approvals for the use of the alternative raw materials for our products. +Completing that development and obtaining such approvals could require significant time and +resources, and may not occur at all. Any disruption in the supply of these raw materials or +finished products could have a material adverse affect on us. +Risks Related to Intellectual Property and Product Liability +We may be unable to protect or obtain proprietary rights that we utilize or intend to utilize. +In developing and manufacturing our products, we employ a variety of proprietary and patented +technologies. In addition, we have licensed, and expect to continue to license, various +complementary technologies and methods from academic institutions and public and private companies. +We cannot provide any assurance that the technologies that we own or license provide protection +from competitive threats or from challenges to our intellectual property. In addition, we cannot +provide any assurances that we will be successful in obtaining licenses or proprietary or patented +technologies in the future. +Product infringement claims by other companies could result in costly disputes and could limit our +ability to sell our products. +Litigation over intellectual property rights is prevalent in the diagnostic industry. As the +market for diagnostics continues to grow and the number of participants in the market increases, we +may increasingly be subject to patent infringement claims. It is possible that a third-party may +claim infringement against us. If found to infringe, we may attempt to obtain a license to such +intellectual property, however, we may be unable to do so on favorable terms, or at all. +Additionally, if our products are found to infringe on a third party’s intellectual property, we +may be required to pay damages for past infringement and lose the ability to sell certain products, +causing our revenues to decrease. +-16- +Table of Contents +If product liability lawsuits are successfully brought against us, we may incur substantial +liabilities and may have to limit or cease sales of our products. +The testing, manufacturing, and marketing of medical diagnostic products involves an inherent risk +of product liability claims. If we cannot successfully defend ourselves against product liability +claims, we may incur substantial liabilities or be required to limit or cease sales of our +products. We currently carry product liability insurance at a level we believe is commercially +reasonable, although there is no assurance that it will be adequate to cover claims that may arise. +In certain customer contracts, we indemnify third parties for certain product liability claims +related to our products. These indemnification obligations may cause us to pay significant sums of +money for claims that are covered by these indemnifications. In addition, a defect in the design +or manufacture of our products could have a material adverse affect on our reputation in the +industry and subject us to claims of liability for injury and otherwise. Any substantial +underinsured loss resulting from such a claim could have a material adverse affect on our +profitability and the damage to our reputation in the industry could have a material adverse affect +on our business. +Other Risks Affecting Our Business +Our business could be negatively affected if we are unable to attract, hire, and retain key +personnel. +Our future success depends on our continued ability to attract, hire, and retain highly qualified +personnel, including our executive officers and scientific, technical, sales, and marketing +employees, and their ability to manage growth successfully. If such key employees were to leave +and we were unable to obtain adequate replacements, our operating results could be adversely +affected. +Our bank credit agreement imposes restrictions with respect to our operations. +Our bank credit agreement contains a number of financial covenants that require us to meet certain +financial ratios and tests. If we fail to comply with the obligations in the credit agreement, we +would be in default under the credit agreement. If an event of default is not cured or waived, it +could result in acceleration of any indebtedness under our credit agreement, which could have a +material adverse effect on our business. At the present time, no borrowings are outstanding under +our bank credit agreement. +Risks Related to Our Common Stock +Our board of directors has the authority to issue up to 1,000,000 shares of undesignated preferred +stock and to determine the rights, preferences, privileges and restrictions, including voting +rights, of such shares without any future vote or action by the shareholders. The issuance of +preferred stock under certain circumstances could have the effect of delaying or preventing a +change in control of our company. Ohio corporation law contains provisions that may discourage +takeover bids for our company that have not been negotiated with the board of directors. Such +provisions could limit the price that investors might be willing to pay in the future for shares of +our common stock. In addition, sales of substantial amounts of such shares in the public market +could +-17- +Table of Contents +adversely affect the market price of our common stock and our ability to raise additional capital +at a price favorable to us. +ITEM 1B. +UNRESOLVED SEC STAFF COMMENTS +None. +ITEM 2. +PROPERTIES +Our corporate offices, US Diagnostics manufacturing facility and US Diagnostics research and +development facility are located in three buildings totaling approximately 94,000 square feet on +6.2 acres of land in a suburb of Cincinnati, Ohio. These properties are owned by us. We have +approximately 51,000 square feet of manufacturing space and 9,000 square feet of warehouse space in +these facilities. +Our European Diagnostics distribution center in Italy conducts its operations in a two-story +building in Milan, consisting of approximately 18,000 square feet. This facility is owned by our +wholly-owned Italian subsidiary, Meridian Bioscience Europe s.r.l. We also rent office space in +France and Belgium for sales and administrative functions. +Our Life Science operations are conducted in several facilities in Saco, Maine, Memphis, Tennessee, +and Boca Raton, Florida. Our facility in Saco, Maine presently contains approximately 10,000 +square feet for manufacturing, sales, distribution and administrative functions, and is owned by +us. We have recently begun an expansion that will add approximately 14,000 square feet to +accommodate future growth. Our facility in Memphis, Tennessee consists of two buildings totaling +approximately 34,000 square feet, including approximately 27,000 square feet of manufacturing +space, and is owned by us. Our leased facility in Boca Raton, Florida contains approximately +11,000 square feet of manufacturing space. +ITEM 3. +LEGAL PROCEEDINGS +We are a party to litigation that we believe is in the normal course of business. The ultimate +resolution of these matters is not expected to have a material adverse effect on our financial +position, results of operations or cash flows. No provision has been made in the accompanying +consolidated financial statements for these matters. +-18- +Table of Contents +ITEM 4. +SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS +No matters were submitted to a vote of security holders during the fourth quarter of fiscal 2007. +PART II. +ITEM 5. +MARKET FOR REGISTRANT’S COMMON +EQUITY AND RELATED STOCKHOLDER MATTERS +“Common Stock Information” on the inside back cover of the Annual Report to Shareholders for 2007 +and “Quarterly Financial Data” relating to our dividends in Note 11 to the Consolidated Financial +Statements are incorporated herein by reference. There are no restrictions on cash dividend +payments. +Our cash dividend policy is to set the indicated annual dividend rate between 75% and 85% of each +fiscal year’s expected net earnings. The declaration and amount of dividends will be determined by +the Board of Directors in its discretion based upon its evaluation of earnings, cash flow +requirements and future business developments and opportunities, including acquisitions. +We paid dividends of $0.40 per share, $0.28 per share, and $0.21 per share in fiscal 2007, fiscal +2006, and fiscal 2005, respectively. +On May 11, 2007, we affected a three-for-two stock split for shareholders of record on May 4, 2007. +On September 2, 2005, we affected a three-for-two stock split to shareholders of record on August +29, 2005. All references in this Annual Report to number of shares and per share amounts reflect +the effects of these stock splits. +As of September 30, 2007, Meridian believes there were approximately 900 holders of record and +approximately 27,000 beneficial owners of its common shares. +ITEM 6. +SELECTED FINANCIAL DATA +Incorporated by reference from inside front cover of the Annual Report to Shareholders for 2007. +-19- +Table of Contents +ITEM 7. +MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL +CONDITION AND RESULTS OF OPERATIONS +Refer to “Forward Looking Statements” following the Index in front of this Form 10-K and Item 1A +“Risk Factors on pages 12 through 19 of this Annual Report. +Overview: +For fiscal 2007, we delivered our fifth consecutive year of double-digit sales and earnings growth. +Our diagnostics operating segments continue to provide the largest share of consolidated revenues, +80%, for fiscal 2007 compared to 79% for fiscal 2006. Our Life Science operating segment’s sales +performance improved quarter-by-quarter throughout fiscal 2007, with double-digit increases in the +third and fourth quarters. We are encouraged by this momentum as we enter fiscal 2008. +Our sales growth in fiscal 2007 was organic and driven by new diagnostic products launched in the +past three years, market expansions, increased market share in targeted disease states, and volume +increases for antibodies, antigens and reagents supplied to large diagnostic manufacturing +companies. Our newest diagnostic product contributing to growth is Immuno Card STAT! ® +EHEC, a rapid test developed in collaboration with Merck for detection of toxin-producing E. coli +in patients that may have ingested contaminated produce or meat products. We continue to see +growth in the C . difficile testing market where we hold a market leadership position. This market +has expanded as testing increases due to more virulent strains of this toxin and heightened focus +by hospitals on this dangerous pathogen. We have been well positioned with our broad line of C. +difficile products, including our newest in the portfolio, Immuno Card ® Toxins A&B. Our +upper respiratory line of products also saw growth, as did our H. pylori line of products. New AGA +guidelines are creating increased focus on direct antigen testing for this infection that causes +ulcers. Our line of patented H. pylori products includes both rapid and batch method +noninvasive direct testing formats. We are seeing growth as more laboratories switch from serology +based antibody testing to direct antigen testing. Finally, our Life Science operating segment has +seen volume demand for antibodies, antigens, and other reagents increase with large diagnostic +manufacturing companies. +Financial discipline is also one of our fundamental principles in running the day-to-day business. +The following table illustrates key income and expense elements as a percentage of sales. We look +for continued improvement in each of these measures each year. +2007 +2006 +2005 +Gross profit +61 +% +60 +% +59 +% +Operating expenses +32 +% +35 +% +37 +% +Operating income +28 +% +25 +% +22 +% +-20- +Table of Contents +Operating Segments: +Meridian’s reportable operating segments are US Diagnostics, European Diagnostics, and Life +Science. The US Diagnostics operating segment consists of manufacturing operations in Cincinnati, +Ohio, and the sale and distribution of diagnostic test kits in the US and countries outside of +Europe, Africa and the Middle East. The European Diagnostics operating segment consists of the +sale and distribution of diagnostic test kits in Europe, Africa and the Middle East. The Life +Science operating segment consists of manufacturing operations in Memphis, Tennessee, Saco, Maine, +and Boca Raton, Florida, and the sale and distribution of bulk antigens, antibodies, and +bioresearch reagents domestically and abroad. The Life Science operating segment also includes the +contract development and manufacture of proteins and other biologicals for use by biopharmaceutical +and biotechnology companies engaged in research for new drugs and vaccines. +Revenues for the Diagnostics operating segments, in the normal course of business, may be affected +from quarter to quarter by buying patterns of major distributors, seasonality and strength of +certain diseases and foreign currency exchange rates. Revenues for the Life Science operating +segment, in the normal course of business, may be affected from quarter to quarter by the timing +and nature of arrangements for contract services work, which may have longer production cycles than +bioresearch reagents and bulk antigens and antibodies, as well as buying patterns of major +customers. Meridian believes that the overall breadth of its product lines serves to reduce the +variability in consolidated sales from quarter to quarter. +Results of Operations: +Overview +Fourth quarter +Net earnings for the fourth quarter of fiscal 2007 increased 36% to $6,444,000, or $0.16 per +diluted share (increased 33%) from net earnings for the fourth quarter of fiscal 2006 of +$4,730,000, or $0.12 per diluted share. This increase is primarily attributable to increased sales +and continuing efforts to improve operating efficiency across all businesses. Net sales for the +fourth quarter of fiscal 2007 were $32,386,000, an increase of $3,736,000 or 13% compared to the +fourth quarter of fiscal 2006. +During the fourth quarter of fiscal 2006, Meridian determined that the carrying value of a supply +contract with the United States Department of Defense related to the Life Science operating segment +had become impaired and recorded such impairment to general and administrative expenses in the +amount of $826,000. The contract provided for the supply of biological materials during a base +period and also contained four optional 12-month renewal periods through March 31, 2009. Changes +in the Department’s Critical Reagents Program lowered the amount of materials to be supplied under +the contract. During March 2007, the Department informed Meridian +-21- +Table of Contents +that it would not be exercising the optional renewal period from April 1, 2007 through March 31, +2008. Meridian does not expect to supply any more materials under this contract, and as of +September 30, 2007, this contract had no carrying value. +Prior to July 1, 2007, the cost of certain inventories within the Life Science operating segment +was determined by the last-in, first-out (“LIFO”) method. Effective July 1, 2007, we changed our +method of accounting for this inventory from the LIFO method to the FIFO method, and now +substantially all of our inventories are reflected at the lower of cost or market with cost +determined by the FIFO method. We changed to the FIFO method for these inventories because it +conforms substantially all of our worldwide inventories to a consistent basis of accounting; and it +provides better comparability to our industry peers, many of whom use the FIFO method of accounting +for inventories. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 154, +Accounting Changes and Error Corrections , the change in accounting has been retrospectively applied +to all prior periods presented herein. See Note 1(g) to the consolidated financial statements +contained herein. +Fiscal Year +Net earnings for fiscal 2007 increased 46% to $26,721,000, or $0.66 per diluted share (increased +43%) from net earnings for fiscal 2006 of $18,333,000, or $0.46 per diluted share. Results of +operations for fiscal 2007 compared to fiscal 2006 are discussed below. +Net earnings and earnings per share for fiscal 2007 include the effects of a tax benefit in the +amount of $2,425,000, or $0.06 per basic and diluted share, related to a discrete adjustment to tax +reserves that was recorded in the third quarter upon the expiration of the statute of limitations +on certain income tax returns (see Note 7 to the consolidated financial statements herein). The +tables below provide information on net earnings, basic earnings per share, and diluted earnings +per share, excluding this tax benefit, as well as reconciliations to amounts reported under US +Generally Accepted Accounting Principles. We believe that this information is useful to those who +read our financial statements and evaluate our operating results because: +1. These measures help to appropriately evaluate and compare the results of operations from period +to period by removing the favorable impact of a discrete material item that is not expected to +recur in the future; and +2. These measures are used by our management for various purposes, including evaluating performance +against incentive bonus achievement targets, comparing performance from period to period in +presentations to our Board of Directors, and as a basis for strategic planning and forecasting. +-22- +Table of Contents +2007 +2006 +Change +Net Earnings - +US GAAP basis +$ +26,721 +$ +18,333 +46 +% +Tax benefit not expected to recur in the future +(2,425 +) +— +(100 +)% +Excluding tax benefit +$ +24,296 +$ +18,333 +33 +% +2007 +2006 +Change +Net Earnings per Basic Common Share - +US GAAP basis +$ +0.67 +$ +0.47 +43 +% +Tax benefit not expected to recur in the future +(0.06 +) +— +(100 +)% +Excluding tax benefit +$ +0.61 +$ +0.47 +30 +% +2007 +2006 +Change +Net Earnings per Diluted Common Share - +US GAAP basis +$ +0.66 +$ +0.46 +43 +% +Tax benefit not expected to recur in the future +(0.06 +) +— +(100 +)% +Excluding tax benefit +$ +0.60 +$ +0.46 +30 +% +Fiscal Year Ended September 30, 2007 Compared to Fiscal Year Ended September 30, 2006 +Net sales +Overall, net sales increased 13% for fiscal 2007 compared to fiscal 2006. Net sales for the US +Diagnostics operating segment increased $9,124,000, or 14%, for the European Diagnostics operating +segment increased $3,735,000, or 19%, and for the Life Science operating segment increased +$1,691,000, or 7%. +For the US Diagnostics operating segment, 45% of the sales increase was related to growth in C. +difficile products (increased $4,099,000), reflecting volume increases for Immuno Card ® +Toxins A & B and Premier TM Toxins A & B. Sales of respiratory products (increased +$1,432,000) also contributed to the increase, driven by increased market share and increased +purchases by one national distributor. Meridian’s respiratory products include diagnostic tests +for influenza, Respiratory Syncytial Virus (RSV), and Mycoplasma. H. pylori sales (increased +$1,625,000) contributed to the increase due to increased managed care efforts, issuance of AGA +guidelines recommending direct testing, and increased marketing of Premier TM Platinum +HpSA PLUS. Volume increases for parasitology products (increased $1,063,000) related to the exit +of a competitor from the marketplace, food borne products (increased $1,603,000) related to the +2007 launch of Immuno Card STAT! ® EHEC, and volume increases in specimen transport +products ($501,000) also contributed to favorable variances to fiscal 2006. These favorable +variances more than offset an unfavorable variance of $809,000 for microbiology products related to +reduced purchases of one product by one international customer. Two national distributors +accounted for 51% and 47% of total sales for the US Diagnostics operating segment for fiscal 2007 +and 2006, respectively. +For the European Diagnostics operating segment, the sales increase includes currency translation +gains in the amount of $1,769,000. Sales in local currency, the Euro, increased 10%. The local +currency increase was driven by C. difficile products ($1,559,000), including +Immuno Card Ò Toxins A & B. +-23- +Table of Contents +For the Life Science operating segment, the sales increase was primarily attributable to buying +patterns and volume growth in make-to-order bulk antigens and antibodies, offset by lower sales +activity from contract research and development and contract manufacturing services. Sales of +made-to-order bulk antigens and antibodies to one customer accounted for 27% and 18% of total sales +for the Life Science Operating segment for fiscal 2007 and 2006, respectively. +For all operating segments combined, international sales were $38,691,000, or 31% of total sales, +for fiscal 2007, compared to $34,557,000, or 32% of total sales, in fiscal 2006. Combined domestic +exports for the US Diagnostics and Life Science operating segments were $15,128,000 for fiscal +2007, compared to $14,728,000 in fiscal 2006. The remaining international sales were generated by +the European Diagnostics operating segment. +Gross Profit +Gross profit increased 16% for fiscal 2007 compared to fiscal 2006. Gross profit margins were 61% +for fiscal 2007 compared to 60% for fiscal 2006. This increase reflects higher margins commanded +by volume increases in rapid tests, such as Immuno Card ® Toxins A & B and operating +efficiencies. We have also seen improvements in gross profit margins related to automation +initiatives and related efficiencies in diagnostic production areas. +Our overall operations consist of the sale of diagnostic test kits for various disease states and +in alternative test formats, as well as bioresearch reagents, bulk antigens and antibodies, +proficiency panels, and contract research and development and contract manufacturing services. +Product sales mix shifts, in the normal course of business, can cause the consolidated gross +profit margin to fluctuate by several points. +Operating Expenses +Operating expenses increased 6% for fiscal 2007 compared to fiscal 2006. The overall increase in +operating expenses for fiscal 2007 is discussed below. +Research and development expenses increased 27% for fiscal 2007 compared to fiscal 2006, and as a +percentage of sales, were 5% in fiscal 2007 compared to 4% in fiscal 2006. Of this increase, +$1,229,000 related to the US Diagnostics operating segment and $57,000 related to the Life Science +operating segment. The increase for the US Diagnostics operating segment was primarily +attributable to clinical trial and other costs associated with new product development, including +planned headcount additions, as well as increased stock compensation expense. +-24- +Table of Contents +Selling and marketing expenses increased 3%, for fiscal 2007 compared to fiscal 2006, and as a +percentage of sales, decreased to 14% for fiscal 2007 from 15% for fiscal 2006. Of this increase, +$469,000 related to the European Diagnostics operating segment, offset by decreases of $34,000 +related to the Life Science operating segment and $9,000 for the US Diagnostics operating segment. +The increase for the European Diagnostics operating segment was primarily attributable to +fluctuations in the Euro currency and one planned headcount addition. The decrease for the US +Diagnostics operating segment was primarily attributable to lower costs for sales promotions, +advertising and distributor incentives, offset by increased salaries and benefits related to +headcount additions and stock based compensation costs. +General and administrative expenses increased 3%, for fiscal 2007 compared to fiscal 2006, and as +a percentage of sales, decreased from 15% in fiscal 2006 to 14% in fiscal 2007. Of this increase, +$1,523,000 related to the US Diagnostics operating segment, offset by decreases of $806,000 +related to the Life Science operating segment and $309,000 related to the European Diagnostics +operating segment. The increase for the US Diagnostics operating segment was primarily +attributable to higher costs for stock-based compensation, an insurance recovery in fiscal 2006, +and increased salaries and benefits, including the effects of planned headcount additions. The +decrease for the Life Science operating segment was primarily attributable to the 2006 impairment +of the supply contract with the United States Department of Defense. See Note 1(i) to the +consolidated financial statements contained herein. The decrease for the European Diagnostics +operating segment was primarily attributable to expenses connected with an employee matter in +fiscal 2006, which were covered by the aforementioned insurance recovery. +Effective July 1, 2005, Meridian adopted the provisions of SFAS No. 123(R), Share-Based Payment , in +accounting for its stock option plans. The amount of stock-based compensation expense reported for +fiscal 2007, fiscal 2006, and fiscal 2005 was $2,632,000, $1,082,000, and $279,000, respectively. +During November 2006, Meridian granted to certain employees, 293,250 stock options that were +contingent upon Meridian achieving a specified income level for fiscal 2007. Meridian’s fiscal +2007 net income surpassed the minimum level, and thus, these stock options were earned and are now +exercisable over a vesting period. Fiscal 2007 stock-based compensation cost for these stock +options, in accordance with SFAS No. 123(R), was approximately $973,000 and was recorded in the +fourth quarter. +Operating Income +Operating income increased 30% in fiscal 2007, as a result of the factors discussed above. +Other Income and Expense +Interest income was $1,642,000 for fiscal 2007, compared to $1,123,000 for fiscal 2006. This +increase was driven +-25- +Table of Contents +by higher interest yields and higher investment balances in fiscal 2007. +Interest expense declined 70% for fiscal 2007 compared to fiscal 2006. This decrease was +attributable to the positive effects of the debenture conversion and redemption transactions +discussed under Liquidity and Capital Resources herein. As of September 30, 2007, there were no +debentures outstanding. +Income Taxes +The effective rate for income taxes was 27% for fiscal 2007 and 35% for fiscal 2006. The decrease +in the effective tax rate was primarily attributable to a discrete adjustment to tax reserves in +the third quarter in the amount of $2,425,000. This discrete adjustment reduced the effective tax +rate by 7 points. See Note 7 to the consolidated financial statements included herein for a +complete discussion of this matter. +Fiscal Year Ended September 30, 2006 Compared to Fiscal Year Ended September 30, 2005 +Net sales +Overall, net sales increased 17% for fiscal 2006 compared to fiscal 2005. Net sales for the US +Diagnostics operating segment increased $12,236,000, or 23%, for the European Diagnostics operating +segment increased $2,010,000, or 11%, and for the Life Science operating segment increased +$1,202,000, or 6%. +For the US Diagnostics operating segment, 46% of the sales increase was related to growth in C. +difficile products (increased $5,682,000), reflecting the market expansion and gains in market +share related to the 2005 launch of Immuno Card Ò Toxins A & B. Sales of +respiratory products (increased $1,819,000) also contributed to the increase, driven by growth in +international markets and favorable changes in insurance reimbursement policies. Meridian’s +respiratory products include diagnostic tests for influenza, Respiratory Syncytial Virus (RSV), and +mycoplasma. H. pylori sales (increased $996,000) contributed to the increase due to increased +testing and positive results from focused marketing efforts on the managed care sector. Sales +increases for parasitology products (increased $1,019,000), fungal products (increased $860,000), +food borne products (increased $632,000), rotavirus products (increased $565,000) and microbiology +products ($480,000) also contributed to favorable variances to fiscal 2005. +For the European Diagnostics operating segment, the sales increase offsets currency translation +losses in the amount of approximately $662,000. Sales in local currency, the Euro, increased 15%. +The local currency increase was driven by market increases in sales of H. pylori products +($1,182,000). Increases in sales of C. difficile products ($901,000), including +Immuno Card Ò Toxins A & B, also contributed to the increase. +For the Life Science operating segment, the sales increase was primarily attributable to the +inclusion of OEM Concepts for a full year in fiscal 2006, compared to eight months in fiscal 2005. +This was partially offset by +-26- +Table of Contents +shifts in buying patterns by one large diagnostic manufacturing customer and one large defense +customer, as well as the timing and number of contract services arrangements. Sales of +made-to-order bulk antigens and antibodies to one customer accounted for 18% and 23% of total sales +for the Life Science Operating segment for fiscal 2006 and 2005, respectively. +For all operating segments combined, international sales were $34,557,000, or 32% of total sales, +for fiscal 2006, compared to $30,232,000, or 33% of total sales, in fiscal 2005. Combined domestic +exports for the US Diagnostics and Life Science operating segments were $14,728,000 for fiscal +2006, compared to $12,414,000 in fiscal 2005. The remaining international sales were generated by +the European Diagnostics operating segment. +Gross Profit +Gross profit increased 18% for fiscal 2006 compared to fiscal 2005. Gross profit margins were 60% +for fiscal 2006 compared to 59% for fiscal 2005. This increase reflects higher margins commanded +by new rapid tests, such as Immuno Card ® Toxins A & B and operating efficiencies. +Meridian’s overall operations consist of the sale of diagnostic test kits for various disease +states and in alternative test formats, as well as bioresearch reagents, bulk antigens and +antibodies, proficiency panels, and contract research and development and contract manufacturing +services. Product sales mix shifts, in the normal course of business, can cause the consolidated +gross profit margin to fluctuate by several points. +Operating Expenses +Operating expenses increased 9% for fiscal 2006 compared to fiscal 2005. The overall increase in +operating expenses for fiscal 2006 is discussed below. +Research and development expenses increased 24% for fiscal 2006 compared to fiscal 2005, and as a +percentage of sales, were 4% in fiscal 2006 and fiscal 2005. Of this increase, $299,000 related +to the US Diagnostics operating segment and $634,000 related to the Life Science operating +segment. The US Diagnostics operating segment increase was primarily attributable to increased +stock compensation expense. For the Life Science operating segment, during fiscal 2005, research +and development scientists were performing contract work for third-party customers, and thus, +their related costs were classified in cost of sales. During fiscal 2006, their efforts and +activities were primarily focused on internal research and development work, and therefore charged +to research and development expense, rather than being classified in cost of sales or inventory. +The increase for the Life Science operating segment reflects the classification of such costs. +-27- +Table of Contents +Selling and marketing expenses increased 10%, for fiscal 2006 compared to fiscal 2005, and as a +percentage of sales, decreased from 16% for fiscal 2005 to 15% for fiscal 2006. Of this increase, +$1,195,000 related to the US Diagnostics operating segment and $475,000 related to the Life Science +operating segment, partially offset by a decrease of $180,000 for the European Diagnostics +operating segment. The increase for the US Diagnostics operating segment was primarily +attributable to sales administration fees to group purchasing organizations and incentive +compensation associated with higher sales levels, as well as higher salaries and benefits costs. +The increase for the Life Science operating segment was primarily due to business development costs +and a full year of costs for the OEM Concepts business, acquired during the second quarter of +fiscal 2005. The decrease for the European Diagnostics operating segment was primarily +attributable to fluctuations in the Euro currency. +General and administrative expenses increased 5%, for fiscal 2006 compared to fiscal 2005, and as +a percentage of sales, decreased from 17% in fiscal 2005 to 15% in fiscal 2006. Of this increase, +$18,000 related to the US Diagnostics operating segment, $679,000 related to the Life Science +operating segment and $105,000 related to the European Diagnostics operating segment. The +increase for the US Diagnostics operating segment was primarily attributable to increased salaries +and benefits costs and increased stock compensation expense, offset by an insurance recovery +received and decreased legal and professional fees related to efficiencies in reporting under the +Sarbanes-Oxley Act. The increase for the Life Science operating segment was primarily +attributable to the impairment of a supply contract related to the acquisition of OEM Concepts. +See Note 1(i) to the consolidated financial statements contained herein. +Operating Income +Operating income increased 32% in fiscal 2006, as a result of the factors discussed above. +Other Income and Expense +Interest income was $1,123,000 for fiscal 2006, and related primarily to interest earned on +proceeds from the September 2005 common share offering that have been primarily invested in +tax-exempt securities. +Interest expense declined 83% for fiscal 2006 compared to fiscal 2005. This decrease was +attributable to the positive effects of the debenture conversion and redemption transactions +discussed under Liquidity and Capital Resources herein. +Income Taxes +The effective rate for income taxes was 35% for fiscal 2006 and 36% for fiscal 2005. The decrease +in the effective tax rate was primarily attributable to the favorable effects of tax-exempt +interest and domestic production incentives under the American Jobs Creation Act. +-28- +Table of Contents +Liquidity and Capital Resources: +Comparative Cash Flow Analysis +Our operating cash flow and financing requirements are determined by analyses of operating and +capital spending budgets and consideration of acquisition plans. We have historically maintained +revolving line of credit availability to respond quickly to acquisition opportunities. This +revolving line of credit is supplemented by the proceeds from a September 2005 common share +offering, which are invested in tax-exempt, cash-equivalent securities and institutional +money-market funds. +Net cash provided by operating activities increased 20% to $26,602,000 in fiscal 2007. This +increase was primarily attributable to higher earnings levels. The discrete tax reserve adjustment +in the amount of $2,425,000 was non-cash in nature. +Net cash used in investing activities was $443,000 for fiscal 2007, compared to $8,689,000 for +fiscal 2006. This decrease was primarily attributable to lower acquisition earnout payments in +fiscal 2007 and proceeds from sales of short-term auction rate securities in fiscal 2007 that were +purchased in fiscal 2006. +Net cash used in financing activities was $13,291,000 for fiscal 2007, compared to $10,225,000 for +fiscal 2006. This increase was primarily attributable to a 43% increase in dividend payments, +offset by $914,000 in additional proceeds and tax benefits from the exercise of stock options. +Dividend payments in fiscal 2007 reflect increased dividend rates and common shares outstanding +related to stock option exercises and bond conversions. +Net cash flows from operating activities are anticipated to fund working capital requirements and +dividends during fiscal 2008. +Capital Resources +During August 2007, Meridian completed the renewal of its credit facility with its commercial +bank. The amount of the credit facility is $30,000,000, which expires September 15, 2012. As +of November 28, 2007, there were no borrowings outstanding under this facility. +As of September 30, 2006, Meridian had outstanding $1,803,000 principal amount of 5% debentures, +convertible, at the option of the holder, into common shares at a price of $6.45. During fiscal +2007, these debentures were either converted into common shares at the direction of the holders, or +redeemed by Meridian. +-29- +Table of Contents +The Viral Antigens acquisition, completed in fiscal 2000, provided for additional purchase +consideration, contingent upon Viral Antigens’ future earnings through September 30, 2006. +Final earnout consideration in the amount of $853,000 relating to fiscal 2006 was paid from +operating cash flows during the second quarter of fiscal 2007. +The OEM Concepts acquisition, completed in fiscal 2005, provides for additional purchase +consideration up to a maximum remaining amount of $1,819,000, contingent upon future +calendar-year sales and gross profit of OEM Concepts products through December 31, 2008. +Earnout consideration is payable each year, following the period earned. Earnout consideration +in the amount of $118,000 related to calendar 2006 was paid from operating cash flows during the +second quarter of fiscal 2007. Earnout consideration in the amount of $152,000 for the first +nine months of calendar 2007 is accrued in the accompanying consolidated balance sheet. +Meridian’s capital expenditures are estimated to be approximately $5,000,000 to $6,000,000 for +fiscal 2008, and may be funded with cash and equivalents on hand, operating cash flows, and/or +availability under the $30,000,000 credit facility discussed above. Capital expenditures relate +to manufacturing and other equipment of a normal and recurring nature as well as capacity +expansion for the Maine facility. +-30- +Table of Contents +Known Contractual Obligations: +Known contractual obligations and their related due dates were as follows as of September 30, 2007 +(dollars in thousands): +Less than +More than +Total +1 Year +1-3 Years +4-5 Years +5 Years +Operating leases (1) +$ +1,516 +$ +599 +$ +822 +$ +95 +$ +— +Purchase obligations (2) +9,690 +9,305 +385 +— +— +OEM Concepts earnout (3) +1,971 +152 +1,819 +— +— +Total +$ +13,177 +$ +10,056 +$ +3,026 +$ +95 +$ +— +(1) +Meridian and its subsidiaries are lessees of (i) office and warehouse buildings in +Florida, Belgium, and France; (ii) automobiles for use by the diagnostic direct sales +forces in the US and Europe; and (iii) certain office equipment such as facsimile machines +and copier machines across all business units, under operating lease agreements that expire +at various dates. +(2) +Meridian’s purchase obligations are primarily outstanding purchase orders for inventory +and service items. These contractual commitments are not in excess of expected production +requirements over the next twelve months. +(3) +OEM Concepts earnout obligation is contingent upon future calendar-year sales and gross +profit of OEM Concepts products through December 31, 2008. +Other Commitments and Off-balance Sheet Arrangements: +License Agreements +Meridian has entered into various license agreements that require payment of royalties based on a +specified percentage of sales of related products (1% to 8%). Meridian expects that payments under +these agreements will amount to as much as $447,000 in fiscal 2008. These royalty payments +primarily relate to the US Diagnostics operating segment. +During October 2006, Meridian entered into a license agreement with Eiken Chemical Co., Ltd., that +provides rights to Eiken’s loop-mediated isothermal amplification technology for infectious disease +testing in the United States and 18 other geographic markets. The agreement calls for payments of +up to 200,000,000 Japanese Yen (approximately $1,740,000) based on the achievement of certain +milestones and on-going royalties once products are available for commercial sale. Payments made +during product development are expected to occur +-31- +Table of Contents +over a five-year period, which began in fiscal +2007. A payment equal to 20,000,000 Japanese Yen was made during fiscal 2007. +During the fourth quarter of fiscal 2007, we began seeking recovery of approximately $1,400,000 of +past royalties paid and interest under a license agreement around certain rapid diagnostic testing +technology. This license agreement covered patent rights that were narrowed in scope via other +litigation with the licensor that did not involve Meridian. We strongly believe that the licensed +patent, as reissued, does not cover any of our products. We also ceased further royalty payments +under this license agreement. The licensor to this agreement disputes our position that the +patent, as reissued, does not cover our products. Although we believe that our position is very +strong, we are unable to predict the outcome of this matter. No provision has been made in the +accompanying financial statements for on-going royalties, if any, nor has any accrual or income +been recorded for recovery of past royalties paid. +Derivative financial instruments +Meridian accounts for its derivative financial instruments in accordance with SFAS No. 133, +Accounting for Derivative Instruments and Hedging Activities , as amended. These instruments are +designated as cash flow hedges, and therefore, the effective portion of the net gain or loss on the +derivative instrument is reported as a component of accumulated other comprehensive income (loss) +and reclassified into earnings in the same period or periods during which the hedged transaction +affects earnings. For the ineffective portion of the hedge, gains or losses are charged to +earnings in the current period. All derivative instruments are recognized as either assets or +liabilities at fair value in the consolidated balance sheets. See Note 6 to the consolidated +financial statements contained herein. +Other +Meridian does not utilize any special-purpose financing vehicles or have any undisclosed off +balance sheet arrangements. Similarly, the Company holds no fair-value contracts for which a lack +of marketplace quotations would necessitate the use of fair value techniques. +Market Risk Exposure: +Foreign Currency Risk +We have market risk exposure related to foreign currency transactions. Meridian is exposed to +foreign currency risk related to its European distribution operations, including foreign currency +denominated intercompany sales and receivables. We enter into contractual forward exchange +contracts to hedge cash flows from intercompany sales between our US parent company and its Italian +affiliate. The counterparties to these +-32- +Table of Contents +contracts are major financial institutions. Hedging +activities are further discussed in Note 6 to the consolidated financial statements. +Concentration of Customers/Products Risk +Our US Diagnostic operating segment’s sales through two distributors were 51% of the US Diagnostics +operating segment’s total sales for fiscal 2007 or 31% of consolidated total sales for fiscal 2007. +Three internally developed products, Premier ä Platinum HpSA PLUS, Premier ä Toxins A & +B, and Immuno Card Ò Toxins A & B, accounted for 39% of our US Diagnostics operating +segment’s third-party sales during fiscal 2007. These same three products accounted for 27% of our +European Diagnostics operating segment’s third party sales and 31% of our total consolidated sales +for fiscal 2007. +Our Life Science operating segment’s sales of purified antigens and reagents to one customer were +27% of the Life Science operating segment’s total sales for fiscal 2007 or 5% of our consolidated +total sales for fiscal 2007. Our Life Science operating segment has five other significant +customers who purchase antigens, antibodies and reagents, which together comprised 19% of the +operating segment’s total sales for fiscal 2007. +Critical Accounting Policies: +The consolidated financial statements included in this Annual Report on Form 10-K have been +prepared in accordance with accounting principles generally accepted in the United States. Such +accounting principles require management to make judgments about estimates and assumptions that +affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. +Management believes that the following accounting policies are critical to understanding the +accompanying consolidated financial statements because the application of such polices requires the +use of significant estimates and assumptions and the carrying values of related assets and +liabilities are material. +Revenue Recognition +Our revenues are derived primarily from product sales. Revenue is generally recognized when +product is shipped and title has passed to the buyer. Revenue for the US Diagnostics operating +segment is reduced at the date of sale for estimated rebates that will be claimed by customers. +Rebate agreements are in place with certain independent national distributors and are designed to +reimburse such distributors for their cost in handling Meridian’s products. Management estimates +rebate accruals based on historical statistics, current trends, and other factors. Changes to +these rebate accruals are recorded in the period that they become known. +Life Science revenue for contract services may come from standalone arrangements for process +development and/or optimization work (contract research and development services) or custom +manufacturing, or multiple- +-33- +Table of Contents +deliverable arrangements that include process development work followed +by larger-scale manufacturing (both contract research and development services and contract +manufacturing services). Revenue is recognized +based on the nature of the arrangements, using the principles in EITF 00-21, Revenue Arrangements +with Multiple Deliverables . The framework in EITF 00-21 is based on each of the multiple +deliverables in a given arrangement having distinct and separate fair values. Fair values are +determined via consistent pricing between standalone arrangements and multiple deliverable +arrangements, as well as a competitive bidding process. Contract research and development services +may be performed on a “time and materials” basis or “fixed fee” basis. For “time and materials” +arrangements, revenue is recognized as services are performed and billed. For “fixed fee” +arrangements, revenue is recognized upon completion and acceptance by the customer. For contract +manufacturing services, revenue is recognized upon delivery of product and acceptance by the +customer. +Inventories +Our inventories are carried at the lower of cost or market. Cost is determined on a first-in, +first-out basis. We establish reserves against cost for excess and obsolete materials, finished +goods whose shelf life may expire before sale to customers, and other identified exposures. Such +reserves were $1,162,000 and $1,158,000 at September 30, 2007 and 2006, respectively. Management +estimates these reserves based on assumptions about future demand and market conditions. If actual +demand and market conditions were to be less favorable than such estimates, additional inventory +write-downs would be required and recorded in the period known. Such adjustments would negatively +affect gross profit margin and overall results of operations. +Intangible Assets +Our intangible assets include identifiable intangibles and goodwill. Identifiable intangibles +include customer lists, supply agreements, manufacturing technologies, patents, licenses, and trade +names. All of Meridian’s identifiable intangibles have finite lives. +SFAS No. 142, Goodwill and Other Intangible Assets provides that goodwill and intangible assets +with indefinite lives are subject to an annual impairment review (or more frequently if impairment +indicators arise) by applying a fair-value based test. There have been no impairments from the +analyses required by SFAS No. 142. +Identifiable intangibles with finite lives are subject to impairment testing as prescribed by SFAS +No. 144, Accounting for the Impairment or Disposal of Long-lived Assets . Pursuant to the +provisions of SFAS No. 144, identifiable intangibles with finite lives are reviewed for impairment +when events or circumstances indicate that such assets may not be recoverable at their current +carrying value. Whether an event or circumstance triggers impairment is determined by comparing an +estimate of the asset’s undiscounted future cash flows to its +-34- +Table of Contents +carrying value. If impairment has +occurred, it is measured by a fair-value based test. During fiscal 2006, Meridian determined that +the carrying value of a supply contract related to the Life Science operating segment +had become impaired and recorded such impairment in the amount of $826,000 to general and +administrative expenses. The contract provided for the supply of biological materials to the +United States Department of Defense. Changes in the Department’s Critical Reagents Program lowered +the amount of materials to be supplied under the contract and ultimately led to the contract having +a shorter life than originally expected. There have been no events or circumstances in fiscal 2007 +indicating that the carrying value of other such assets may not be recoverable. +Our ability to recover intangible assets, both identifiable intangibles and goodwill, is dependent +upon the future cash flows of the related acquired businesses and assets. The application of SFAS +Nos. 142 and 144 requires management to make judgments and assumptions regarding future cash flows, +including sales levels, gross profit margins, operating expense levels, working capital levels, and +capital expenditures. With respect to identifiable intangibles, management also makes judgments +and assumptions regarding useful lives. +Management considers the following factors in evaluating events and circumstances for possible +impairment: (i) significant under-performance relative to historical or projected operating +results, (ii) negative industry trends, (iii) sales levels of specific groups of products (related +to specific identifiable intangibles), (iv) changes in overall business strategies and (v) other +factors. +If actual cash flows are less favorable than projections, impairment of intangible assets could +take place. If impairment were to occur, this would negatively affect overall results of +operations. +Income Taxes +Pursuant to SFAS No. 109, Accounting for Income Taxes , our provision for income taxes includes +federal, foreign, state, and local income taxes currently payable and those deferred because of +temporary differences between income for financial reporting and income for tax purposes. We +prepare estimates of permanent and temporary differences between income for financial reporting +purposes and income for tax purposes. These differences are adjusted to actual upon filing of our +tax returns, typically occurring in the third and fourth quarters of the current fiscal year for +the preceding fiscal year’s estimates. +Our deferred tax assets include net operating loss carryforwards in foreign jurisdictions. The +realization of tax benefits related to net operating loss carryforwards is dependent upon the +generation of future taxable income in the applicable jurisdictions. Management assesses the level +of deferred tax asset valuation allowance by taking into consideration historical and future +projected operating results, future reversals of taxable temporary differences, as well as tax +planning strategies. The amount of net deferred tax assets considered realizable +-35- +Table of Contents +could be reduced +in future years if estimates of future taxable income during the carryforward period are reduced. +Undistributed earnings in our Italian subsidiary are considered by management to be permanently +re-invested in such subsidiary. Consequently, US deferred tax liabilities on such earnings have +not been recorded. Management believes that such US taxes would be largely offset by foreign tax +credits for taxes paid locally in Italy. +From time to time, our tax returns in federal, state, and foreign jurisdictions are examined by the +applicable tax authorities. Our tax provisions take into consideration the judgmental nature of +certain tax positions through the establishment of reserves for differences between the probable +tax determinations and the “as filed” tax positions of certain assets and liabilities. To the +extent that adjustments result from the completion of these examinations or the passing of statutes +of limitation, they will affect tax liabilities in the period known. We believe that the results +of any tax authority examinations would not have a significant adverse impact on financial +condition or results of operation. +Recent Accounting Pronouncements: +See Note 1(q) to the Consolidated Financial Statements. +ITEM 7A. +QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK +See Market Risk Exposure and Capital Resources under Item 7 above. +-36- +Table of Contents +ITEM 8. +FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA +Index to Consolidated Financial Statements +Management’s Report on Internal Control over Financial Reporting +38 +Report of Independent Registered Public Accounting Firm +39 +Consolidated Statements of Operations for the years ended September 30, 2007, 2006 and 2005 +41 +Consolidated Statements of Cash Flows for the years ended September 30, 2007, 2006 and 2005 +42 +Consolidated Balance Sheets as of September 30, 2007 and 2006 +43 +Consolidated Statements of Shareholders’ Equity for the years ended September 30, 2007, 2006 and 2005 +45 +Notes to Consolidated Financial Statements +46 +Schedule No. II – Valuation and Qualifying Accounts for the years ended September 30, 2007, 2006 and 2005 +79 +All other supplemental schedules are omitted due to the absence of conditions under which they are +required or because the information is shown in the Consolidated Financial Statements or Notes +thereto. +-37- +Table of Contents +Management’s Report on Internal Control over Financial Reporting +Management is responsible for establishing and maintaining adequate internal control over financial +reporting, as defined in Exchange Act Rule 13a-15(f). +The Company’s internal control over financial reporting includes those policies and procedures that +(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect +the transactions and dispositions of the assets of the Company; (ii) 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 (iii) provide reasonable assurance regarding prevention or timely detection of +unauthorized acquisition, use, or disposition of the Company’s assets that could have a material +effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting can only provide +reasonable assurance and 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 or compliance with the policies or +procedures may deteriorate. +Under the supervision and with the participation of our management, including the Chief Executive +Officer and the Chief Financial Officer, we conducted an evaluation of the effectiveness of our +internal control over financial reporting based on the framework and criteria in Internal Control – +Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway +Commission (COSO). Based on management’s evaluation and those criteria, the Company concluded that +its system of internal control over financial reporting was effective as of September 30, 2007. +/s/ William J. Motto +William J. Motto +Chairman of the Board and +Chief Executive Officer +November 30, 2007 +/s/ Melissa Lueke +Melissa Lueke +Vice President and +Chief Financial Officer +November 30, 2007 +-38- +Table of Contents +Report of Independent Registered Public Accounting Firm +Board of Directors and Shareholders of +Meridian Bioscience, Inc. +We have audited the accompanying consolidated balance sheets of Meridian Bioscience, Inc. (an Ohio +Corporation) and subsidiaries as of September 30, 2007 and 2006, and the related consolidated +statements of operations, shareholders’ equity, and cash flows for each of the three years in the +period ended September 30, 2007. We also have audited Meridian Bioscience, Inc.’s internal control +over financial reporting as of September 30, 2007, based on criteria established in Internal +Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway +Commission (COSO). Meridian Bioscience, Inc.’s management is responsible for these financial +statements, for maintaining effective internal control over financial reporting, and for its +assessment of the effectiveness of internal control over financial reporting, included in the +accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express +an opinion on these financial statements and an opinion on Meridian Bioscience, Inc.’s internal +control over financial reporting 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 audits to obtain +reasonable assurance about whether the financial statements are free of material misstatement and +whether effective internal control over financial reporting was maintained in all material +respects. Our audits of the financial statements included examining, on a test basis, evidence +supporting the amounts and disclosures in the financial statements, assessing the accounting +principles used and significant estimates made by management, and evaluating the overall financial +statement presentation. Our audit of internal control over financial reporting included obtaining +an understanding of internal control over financial reporting, assessing the risk that a material +weakness exists, and testing and evaluating the design and operating effectiveness of internal +control based on the assessed risk. Our audits also included performing such other procedures as we +considered necessary in the circumstances. We believe that our audits provide a reasonable basis +for our opinions. +A company’s 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 +company’s 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 company’s assets that could have a material effect on the +financial statements. +-39- +Table of Contents +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, the financial statements referred to above present fairly, in all material +respects, the financial position of Meridian Bioscience, Inc. and subsidiaries as of September 30, +2007 and 2006, and the results of their operations and their cash flows for each of the three years +in the period ended September 30, 2007 in conformity with accounting principles generally accepted +in the United States of America. Also in our opinion, Meridian Bioscience, Inc. and subsidiaries +maintained, in all material respects, effective internal control over financial reporting as of +September 30, 2007, based on criteria established in Internal Control—Integrated Framework issued +by COSO . +We do not express an opinion or any other form of assurance on Management’s Report on Internal +Control over Financial Reporting. +Our audit was conducted for the purpose of forming an opinion on the consolidated financial +statements taken as a whole. The accompanying Schedule II is presented for purposes of additional +analysis and is not a required part of the basic financial statements. The information for each of +the three years in the period ended September 30, 2007 included in this schedule has been subjected +to the auditing procedures applied in our audits of the basic financial statements as of +September 30, 2007 and 2006 and for each of the three years in the period ended September 30, 2007 +and, in our opinion, is fairly stated in all material respects in relation to the basic financial +statements taken as a whole. +/s/ GRANT THORNTON LLP +Cincinnati, Ohio +November 30, 2007 +-40- +Table of Contents +CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) +Meridian Bioscience, Inc. and Subsidiaries +For the Year Ended September 30, +2007 +2006 +2005 +Net Sales +$ +122,963 +$ +108,413 +$ +92,965 +Cost of Sales +48,023 +43,729 +38,075 +Gross Profit +74,940 +64,684 +54,890 +Operating Expenses: +Research and development +6,085 +4,799 +3,866 +Selling and marketing +17,124 +16,698 +15,208 +General and administrative +16,701 +16,293 +15,491 +Total operating expenses +39,910 +37,790 +34,565 +Operating Income +35,030 +26,894 +20,325 +Other Income (Expense): +Interest income +1,642 +1,123 +43 +Interest expense +(38 +) +(128 +) +(770 +) +Other, net +48 +177 +107 +Total other income (expense) +1,652 +1,172 +(620 +) +Earnings Before Income Taxes +36,682 +28,066 +19,705 +Income Tax Provision +9,961 +9,733 +7,067 +Net Earnings +$ +26,721 +$ +18,333 +$ +12,638 +Earnings Per Share Data: +Basic earnings per common share +$ +0.67 +$ +0.47 +$ +0.36 +Diluted earnings per common share +0.66 +0.46 +0.35 +Common shares used for basic earnings per common share +39,584 +39,132 +35,211 +Effect of dilutive stock options +1,154 +1,032 +945 +Common shares used for diluted earnings per common share +40,738 +40,164 +36,156 +Dividends declared per common share +$ +0.40 +$ +0.28 +$ +0.21 +Anti-dilutive Securities: +Common share options +— +32 +2 +Convertible debentures +— +279 +380 +All share and per share data has been adjusted for the three-for-two stock splits that occurred on +May 11, 2007 and September 2, 2005. +The accompanying notes are an integral part of these consolidated financial statements. +-41- +Table of Contents +CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) +Meridian Bioscience, Inc. and Subsidiaries +For the Year Ended September 30, +2007 +2006 +2005 +Cash Flows From Operating Activities +Net earnings +$ +26,721 +$ +18,333 +$ +12,638 +Non-cash items: +Depreciation of property, plant and equipment +2,764 +2,717 +2,597 +Amortization of intangible assets and deferred issuance costs +1,635 +2,572 +1,655 +Deferred income taxes +800 +47 +(243 +) +Stock compensation expense +2,632 +1,082 +279 +Tax reserve adjustment +(2,425 +) +— +— +(Gain) loss on disposition of fixed assets +5 +38 +(7 +) +Change in current assets, net of acquisition +(3,011 +) +(3,146 +) +(1,100 +) +Change in current liabilities, net of acquisition +(2,145 +) +920 +2,455 +Other, net +(374 +) +(408 +) +(87 +) +Net cash provided by operating activities +26,602 +22,155 +18,187 +Cash Flows From Investing Activities +Acquisition earnout payments +(971 +) +(1,494 +) +(678 +) +Purchases of property, plant and equipment +(3,211 +) +(3,120 +) +(2,590 +) +Proceeds from dispositions of property, plant and equipment +4 +47 +14 +Acquisition of OEM Concepts, Inc. +— +— +(6,383 +) +Purchases of short-term investments +— +(6,000 +) +— +Proceeds from sales of short-term investments +4,000 +2,000 +— +Other intangibles acquired +(265 +) +(122 +) +(10 +) +Net cash used in investing activities +(443 +) +(8,689 +) +(9,647 +) +Cash Flows From Financing Activities +Repayment of debt obligations +(29 +) +(790 +) +(3,061 +) +Dividends paid +(15,836 +) +(11,095 +) +(7,200 +) +Proceeds and tax benefits from exercises of stock options +2,574 +1,660 +3,302 +Proceeds from issuance of common shares +— +— +29,925 +Common share issuance costs +— +— +(345 +) +Other +— +— +(3 +) +Net cash provided by (used in) financing activities +(13,291 +) +(10,225 +) +22,618 +Effect of Exchange Rate Changes on Cash and Equivalents +184 +22 +(56 +) +Net Increase in Cash and Equivalents +13,052 +3,263 +31,102 +Cash and Equivalents at Beginning of Period +36,348 +33,085 +1,983 +Cash and Equivalents at End of Period +$ +49,400 +$ +36,348 +$ +33,085 +The accompanying notes are an integral part of these consolidated financial statements. +-42- +Table of Contents +CONSOLIDATED BALANCE SHEETS (dollars in thousands) +Meridian Bioscience, Inc. and Subsidiaries +As of September 30, +2007 +2006 +Assets +Current Assets: +Cash and equivalents +$ +49,400 +$ +36,348 +Short term investments +— +4,000 +Accounts receivable, less allowances of $258 in 2007 and $408 in 2006 +22,651 +19,645 +Inventories +18,171 +16,989 +Prepaid expenses and other current assets +2,147 +2,109 +Deferred income taxes +1,376 +1,651 +Total current assets +93,745 +80,742 +Property, Plant and Equipment, at Cost: +Land +890 +701 +Buildings and improvements +16,907 +15,963 +Machinery, equipment and furniture +24,619 +22,902 +Construction in progress +1,290 +870 +Subtotal +43,706 +40,436 +Less-accumulated depreciation and amortization +25,395 +22,629 +Net property, plant and equipment +18,311 +17,807 +Other Assets: +Deferred debenture offering costs, net +— +106 +Goodwill +9,964 +9,864 +Other intangible assets, net +9,457 +10,816 +Restricted cash +1,000 +1,000 +Other assets +221 +193 +Total other assets +20,642 +21,979 +Total assets +$ +132,698 +$ +120,528 +The accompanying notes are an integral part of these consolidated financial statements. +-43- +Table of Contents +CONSOLIDATED BALANCE SHEETS (dollars in thousands) +Meridian Bioscience, Inc. and Subsidiaries +As of September 30, +2007 +2006 +Liabilities and Shareholders’ Equity +Current Liabilities: +Accounts payable +$ +4,704 +$ +3,671 +Accrued payroll costs +7,541 +7,896 +Purchase business combination liability +152 +937 +Other accrued expenses +4,008 +3,955 +Income taxes payable +662 +4,158 +Total current liabilities +17,067 +20,617 +Convertible Subordinated Debentures +— +1,803 +Deferred Income Taxes +2,683 +3,758 +Commitments and Contingencies +Shareholders’ Equity: +Preferred stock, no par value, 1,000,000 shares authorized, none issued +— +— +Common shares, no par value, 71,000,000 shares authorized, 39,847,391 and +39,235,777 shares issued +— +— +Additional paid-in capital +82,209 +74,950 +Retained earnings +30,375 +19,490 +Accumulated other comprehensive income (loss) +364 +(90 +) +Total shareholders’ equity +112,948 +94,350 +Total liabilities and shareholders’ equity +$ +132,698 +$ +120,528 +The accompanying notes are an integral part of these consolidated financial statements. +-44- +Table of Contents +CONSOLIDATED STATEMENTS OF SHAREHOLDERS’EQUITY (Dollars and shares in thousands except per share data) +Meridian Bioscience, Inc. and Subsidiaries +Additional +Accumulated Other +Common +Shares Held +Treasury +Paid-in +Retained +Comprehensive +Comprehensive +Shares Issued +in Treasury +Stock +Capital +Earnings +Income (Loss) +Income (Loss) +Total +Balance at September 30, 2004 +33,685 +(18 +) +(32 +) +25,936 +6,814 +(294 +) +32,424 +Cash dividends paid — $0.21 per share +— +— +— +— +(7,200 +) +— +(7,200 +) +Exercise of stock options, net of tax +863 +— +— +3,956 +— +— +3,956 +Stock compensation expense +— +— +— +279 +— +— +279 +Debenture conversions +1,662 +— +— +11,817 +— +— +11,817 +Common share offering, net +2,700 +— +— +29,580 +— +— +29,580 +Comprehensive income: +Net earnings +— +— +— +— +12,638 +— +$ +12,638 +12,638 +Foreign currency translation adjustment +— +— +— +— +— +(161 +) +(161 +) +(161 +) +Comprehensive income +$ +12,477 +Balance at September 30, 2005 +38,910 +(18 +) +(32 +) +71,568 +12,252 +(455 +) +83,333 +Cash dividends paid — $0.28 per share +— +— +— +— +(11,095 +) +— +(11,095 +) +Exercise of stock options, net of tax +245 +— +— +1,722 +— +— +1,722 +Stock compensation expense +— +— +— +1,082 +— +— +1,082 +Debenture conversions +99 +— +— +610 +— +— +610 +Retirement of treasury shares +(18 +) +18 +32 +(32 +) +— +— +— +Comprehensive income: +Net earnings +— +— +— +— +18,333 +— +$ +18,333 +18,333 +Hedging activity +— +— +— +— +— +13 +13 +13 +Other comprehensive income tax benefits +— +— +— +— +— +50 +50 +50 +Foreign currency translation adjustment +— +— +— +— +— +302 +302 +302 +Comprehensive income +$ +18,698 +Balance at September 30, 2006 +39,236 +— +— +74,950 +19,490 +(90 +) +94,350 +Cash dividends paid — $0.40 per share +— +— +— +— +(15,836 +) +— +(15,836 +) +Exercise of stock options, net of tax +336 +— +— +2,950 +— +— +2,950 +Stock compensation expense +— +— +— +2,632 +— +— +2,632 +Debenture conversions +275 +— +— +1,677 +— +— +1,677 +Comprehensive income: +Net earnings +26,721 +— +$ +26,721 +26,721 +Hedging activity +(283 +) +(283 +) +(283 +) +Other comprehensive income tax benefits +(244 +) +(244 +) +(244 +) +Foreign currency translation adjustment +981 +981 +981 +Comprehensive income +$ +27,175 +Balance at September 30, 2007 +39,847 +— +$ +— +$ +82,209 +$ +30,375 +$ +364 +$ +112,948 +-45- +Table of Contents +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Meridian Bioscience, Inc. and Subsidiaries +(1) Summary of Significant Accounting Policies +(a) +Nature of Business — Meridian is a fully-integrated life science company whose principal +businesses are (i) the development, manufacture and distribution of diagnostic test kits +primarily for certain respiratory, gastrointestinal, viral and parasitic infectious diseases, +(ii) the manufacture and distribution of bulk antigens, antibodies, and reagents used by +researchers and other diagnostic manufacturers and (iii) the contract development and +manufacture of proteins and other biologicals for use by biopharmaceutical and biotechnology +companies engaged in research for new drugs and vaccines. +(b) +Principles of Consolidation — The consolidated financial statements include the accounts of +Meridian Bioscience, Inc. and its subsidiaries. All significant intercompany accounts and +transactions have been eliminated. Unless the context requires otherwise, references to +“Meridian,” “we,” “us,” “our,” or “our company” refer to Meridian Bioscience, Inc. and its +subsidiaries. +(c) +Use of Estimates - The preparation of financial statements in conformity with generally +accepted accounting principles requires management to make estimates and assumptions that +affect the reported amounts of assets and liabilities, disclosure of contingent assets and +liabilities at the date of the financial statements and the reported amounts of revenues and +expenses during the reporting period. Actual results could differ from those estimates. +Significant estimates are discussed in Notes 1(g), 1(h), 1(i), 1(j), 1(l), 1(m), 7 and 8(b). +(d) +Foreign Currency Translation - Assets and liabilities of foreign operations are translated +using year-end exchange rates with gains or losses resulting from translation included in a +separate component of accumulated other comprehensive income (loss). Revenues and expenses +are translated using exchange rates prevailing during the year. We also recognize foreign +currency transaction gains and losses on certain assets and liabilities that are denominated +in the Euro currency. These gains and losses are included in other income and expense in the +accompanying consolidated statements of operations. +(e) +Cash Equivalents — We consider short-term investments with original maturities of 90 days or +less to be cash equivalents, including overnight repurchase agreements, investments in +municipal variable rate demand notes that have a seven-day put feature and institutional money +market funds. +(f) +Short-term Investments — Auction-rate securities are separately classified as short-term +investments in the consolidated financial statements and are accounted for as +available-for-sale securities under SFAS No. 115, Accounting for Certain Investments in Debt +and Equity Securities . As such, unrealized holding gains and losses are reported as a +component of other comprehensive income until realized. The carrying value of +-46- +Table of Contents +these securities was equal to their fair value as of September 30, 2006. We did not hold any +auction-rate securities at September 30, 2007. There were no realized gains or losses from the +sales of these securities during fiscal 2007. +(g) +Inventories - Inventories are stated at the lower of cost or market. Cost is determined on a +first-in, first-out basis (FIFO). +We establish reserves against cost for excess and obsolete materials, finished goods whose shelf +life may expire before sale to customers, and other identified exposures. Such reserves were +$1,162,000 and $1,158,000 at September 30, 2007 and 2006, respectively. Management estimates +these reserves based on assumptions about future demand and market conditions. If actual demand +and market conditions were to be less favorable than such estimates, additional inventory +write-downs would be required and recorded in the period known. Such adjustments would +negatively affect gross profit margin and overall results of operations. +Prior to July 1, 2007, the cost of certain inventories within the Life Science operating segment +was determined by the last-in, first-out (“LIFO”) method. Effective July 1, 2007, we changed +our method of accounting for this inventory from the LIFO method to the FIFO method, and now +substantially all of our inventories are reflected at the lower of cost or market with cost +determined by the FIFO method. We changed to the FIFO method for these inventories because: it +conforms substantially all of our worldwide inventories to a consistent basis of accounting; and +it provides better comparability to our industry peers, many of whom use the FIFO method of +accounting for inventories. In accordance with Statement of Financial Accounting Standards +(“SFAS”) No. 154, Accounting Changes and Error Corrections , the change in accounting has been +retrospectively applied to all prior periods presented herein. The effects of the change as it +relates to our consolidated financial statements for the periods presented are as follows: +-47- +Table of Contents +Statement of Operations (dollars in thousands) +Nine Months Ended June 30, 2007 +Effect of +LIFO Method +FIFO Method +Change +Net Sales +$ +90,577 +$ +90,577 +$ +— +Cost of Sales +34,871 +34,826 +(45 +) +Gross Profit +55,706 +55,751 +45 +Operating Expenses +29,356 +29,356 +— +Operating Income +26,350 +26,395 +45 +Other Income (Expense) +1,169 +1,169 +— +Earnings Before Income Taxes +27,519 +27,564 +45 +Income Tax Provision +7,270 +7,287 +17 +Net Earnings +$ +20,249 +$ +20,277 +$ +28 +Earnings Per Share Data: +Basic earnings per common share +$ +0.51 +$ +0.51 +$ +— +Diluted earnings per common share +$ +0.50 +$ +0.50 +$ +— +-48- +Table of Contents +Statement of Operations (dollars in thousands) +Year Ended September 30, 2006 +Effect of +LIFO Method +FIFO Method +Change +Net Sales +$ +108,413 +$ +108,413 +$ +— +Cost of Sales +43,742 +43,729 +(13 +) +Gross Profit +64,671 +64,684 +13 +Operating Expenses +37,790 +37,790 +— +Operating Income +26,881 +26,894 +13 +Other Income (Expense) +1,172 +1,172 +— +Earnings Before Income Taxes +28,053 +28,066 +13 +Income Tax Provision +9,728 +9,733 +5 +Net Earnings +$ +18,325 +$ +18,333 +$ +8 +Earnings Per Share Data: +Basic earnings per common share +$ +0.47 +$ +0.47 +$ +— +Diluted earnings per common share +$ +0.46 +$ +0.46 +$ +— +-49- +Table of Contents +Statement of Operations (dollars in thousands) +Year Ended September 30, 2005 +Effect of +LIFO Method +FIFO Method +Change +Net Sales +$ +92,965 +$ +92,965 +$ +— +Cost of Sales +38,184 +38,075 +(109 +) +Gross Profit +54,781 +54,890 +109 +Operating Expenses +34,565 +34,565 +— +Operating Income +20,216 +20,325 +109 +Other Income (Expense) +(620 +) +(620 +) +— +Earnings Before Income Taxes +19,596 +19,705 +109 +Income Tax Provision +7,031 +7,067 +36 +Net Earnings +$ +12,565 +$ +12,638 +$ +73 +Earnings Per Share Data: +Basic earnings per common share +$ +0.36 +$ +0.36 +$ +— +Diluted earnings per common share +$ +0.35 +$ +0.35 +$ +— +-50- +Table of Contents +Balance Sheet (dollars in thousands) +June 30, 2007 +Effect of +LIFO Method +FIFO Method +Change +Current assets: +Inventories +$ +18,825 +$ +18,179 +$ +(646 +) +Deferred income taxes +1,141 +1,358 +217 +Aggregated other current assets +66,821 +66,821 +— +Total current assets +86,787 +86,358 +(429 +) +Aggregated other assets, net +38,881 +38,881 +— +Total assets +$ +125,668 +$ +125,239 +$ +(429 +) +Total liabilities +$ +16,855 +$ +16,855 +$ +— +Retained earnings +28,705 +28,276 +(429 +) +Other shareholders’ equity +80,108 +80,108 +— +Total shareholders’ equity +108,813 +108,384 +(429 +) +Total liabilities and shareholders’ equity +$ +125,668 +$ +125,239 +$ +(429 +) +-51- +Table of Contents +Balance Sheet (dollars in thousands) +September 30, 2006 +Effect of +LIFO Method +FIFO Method +Change +Current assets: +Inventories +$ +17,680 +$ +16,989 +$ +(691 +) +Deferred income taxes +1,387 +1,651 +264 +Aggregated other current assets +62,102 +62,102 +— +Total current assets +81,169 +80,742 +(427 +) +Aggregated other assets, net +39,786 +39,786 +— +Total assets +$ +120,955 +$ +120,528 +$ +(427 +) +Total liabilities +$ +26,178 +$ +26,178 +$ +— +Retained earnings +19,917 +19,490 +(427 +) +Other shareholders’ equity +74,860 +74,860 +— +Total shareholders’ equity +94,777 +94,350 +(427 +) +Total liabilities and shareholders’ equity +$ +120,955 +$ +120,528 +$ +(427 +) +-52- +Table of Contents +Balance Sheet (dollars in thousands) +September 30, 2005 +Effect of +LIFO Method +FIFO Method +Change +Current assets: +Inventories +$ +16,785 +$ +16,081 +$ +(704 +) +Deferred income taxes +1,258 +1,527 +269 +Aggregated other current assets +52,117 +52,117 +— +Total current assets +70,160 +69,725 +(435 +) +Aggregated other assets, net +40,409 +40,409 +— +Total assets +$ +110,569 +$ +110,134 +$ +(435 +) +Total liabilities +$ +26,801 +$ +26,801 +$ +— +Retained earnings +12,687 +12,252 +(435 +) +Other shareholders’ equity +71,081 +71,081 +— +Total shareholders’ equity +83,768 +83,333 +(435 +) +Total liabilities and shareholders’ equity +$ +110,569 +$ +110,134 +$ +(435 +) +(h) +Property, Plant and Equipment - Property, plant and equipment are stated at cost. Upon +retirement or other disposition of property, plant and equipment, the cost and related +accumulated depreciation and amortization are removed from the accounts and the resulting gain +or loss is reflected in earnings. Maintenance and repairs are expensed as incurred. +Depreciation and amortization are computed on the straight-line method in amounts sufficient +to write-off the cost over the estimated useful lives as follows: +Buildings and improvements — 5 to 33 years +Machinery, equipment, and furniture — 3 to 10 years +(i) +Intangible Assets and Application of SFAS Nos. 142 and 144 — SFAS No. 142, Goodwill and Other +Intangible Assets, addresses accounting and reporting for acquired goodwill and other +intangible assets. SFAS No. 142 provides that goodwill and other intangible assets with +indefinite lives are subject to an annual impairment review (or more frequently if impairment +indicators arise) by applying a fair-value based test. We perform our annual impairment +review as of June 30, the end of our +third fiscal quarter. We have no intangible assets with indefinite lives other than goodwill. +There have been no impairments from the analyses prepared pursuant to SFAS No. 142. During +fiscal 2007, the change in goodwill was an increase of $100,000. This change consisted of an +increase related to the OEM Concepts earnout obligations for calendar 2006 and the first nine +months of calendar 2007 in the amount of $186,000 (Life Science operating segment), offset by a +decrease of $86,000 related to recognition of acquired tax benefits (US Diagnostics operating +segment). During fiscal 2006, the change in goodwill was an increase of $1,085,000. This +change +-53- +Table of Contents +consisted of an increase related to the Viral Antigens earnout obligation for fiscal +2006 in the amount of $853,000 (Life Science operating segment), an increase related to the OEM +Concepts earnout obligations for calendar 2005 and the first nine months of calendar 2006 in +the amount of $265,000 (Life Science operating segment), offset by a decrease of $33,000 +related to recognition of acquired tax benefits (US Diagnostics operating segment). +A summary of Meridian’s acquired intangible assets subject to amortization, as of September 30, +2007 and 2006 is as follows (dollars in thousands). +Wtd Avg +2007 +2006 +Amort +Gross +2007 +Gross +2006 +Period +Carrying +Accumulated +Carrying +Accumulated +As of September 30, +(Yrs) +Value +Amortization +Value +Amortization +Core products and cell lines +15 +$ +4,698 +$ +2,313 +$ +4,698 +$ +2,023 +Manufacturing technologies +15 +5,907 +4,089 +5,907 +3,743 +Trademarks, licenses and patents +12 +2,270 +1,694 +2,005 +1,545 +Customer lists and supply +agreements +13 +10,641 +5,963 +10,633 +5,116 +$ +23,516 +$ +14,059 +$ +23,243 +$ +12,427 +The actual aggregate amortization expense for these intangible assets for fiscal 2007 was +$1,632,000. The aggregate amortization expense for these intangible assets for fiscal 2006 and +fiscal 2005 was $2,560,000 and $1,563,000, respectively. The amortization expense for fiscal +2006 included an impairment charge of $826,000 on a supply agreement discussed below. The +estimated aggregate amortization expense for these intangible assets for each of the five +succeeding fiscal years is as follows: fiscal 2008 — $1,478,000, fiscal 2009 — $1,377,000, +fiscal 2010 — $1,339,000, fiscal 2011- $1,266,000 and fiscal 2012 — $1,121,000. +SFAS No. 144, Accounting for Impairment or Disposal of Long-lived Assets establishes a single +model for accounting for impairment or disposal of long-lived assets. Long-lived assets, +excluding goodwill +and identifiable intangibles with indefinite lives, are reviewed for impairment when events or +circumstances indicate that such assets may not be recoverable at their carrying value. +Whether an event or circumstance triggers an impairment is determined by comparing an estimate +of the asset’s future cash flows to its carrying value. If impairment has occurred, it is +measured by a fair-value based test. During fiscal 2006, we determined that the carrying value +of a supply contract with the US Department of Defense related to the Life Science operating +segment had become impaired and recorded such impairment in the amount of $826,000 to general +and administrative expenses. The impairment was measured by comparing the present value of +expected future cash flows to the carrying value of the contract. The contract provided for +the supply of biological materials during a base period and also contained four optional +12-month renewal periods through March 31, 2009. Changes in the Department’s Critical Reagents +Program lowered the amount of materials to be supplied under the contract. During March 2007, +the Department informed Meridian that it would not be exercising the optional renewal period +from April 1, 2007 through March 31, 2008. Meridian does not expect to supply any more +materials under this contract, and as of September 30, +-54- +Table of Contents +2007, the carrying value of this +contract was zero. There have been no events or circumstances indicating that the carrying +value of other such assets may not be recoverable. +Meridian’s ability to recover its intangible assets, both identifiable intangibles and +goodwill, is dependent upon the future cash flows of the related acquired businesses and +assets. The application of SFAS Nos. 142 and 144 requires management to make judgments and +assumptions regarding future cash flows, including sales levels, gross profit margins, +operating expense levels, working capital levels, and capital expenditures. With respect to +identifiable intangibles and fixed assets, management also makes judgments and assumptions +regarding useful lives. +Management considers the following factors in evaluating events and circumstances for possible +impairment: (i) significant under-performance relative to historical or projected operating +results, (ii) negative industry trends, (iii) sales levels of specific groups of products +(related to specific identifiable intangibles), (iv) changes in overall business strategies and +(v) other factors. +If actual cash flows are less favorable than projections, this could trigger impairment of +intangible assets and other long-lived assets. If impairment were to occur, this would +negatively affect overall results of operations. +(j) +Revenue Recognition — Revenue is generally recognized from sales when product is shipped and +title has passed to the buyer. Revenue for the US Diagnostics operating segment is reduced at +the date of sale for estimated rebates that will be claimed by +customers. Management estimates accruals for rebate agreements based on historical statistics, +current trends, and other factors. Changes to the accruals are recorded in the period that +they become known. Our rebate accruals were $2,415,000 at September 30, 2007 and $2,181,000 at +September 30, 2006. +Life Science revenue for contract services may come from standalone arrangements for process +development and/or optimization work (contract research and development services) or custom +manufacturing, or multiple-deliverable arrangements that include process development work +followed by larger-scale manufacturing (both contract research and development services and +contract manufacturing services). Revenue is recognized based on the nature of the +arrangements, using the principles in EITF 00-21, Revenue Arrangements with Multiple +Deliverables . The framework in EITF 00-21 is based on each of the multiple deliverables in a +given arrangement having distinct and separate fair values. Fair values are determined via +consistent pricing between standalone arrangements and multiple deliverable arrangements, as +well as a competitive bidding process. Contract research and development services may be +performed on a “time and materials” basis or “fixed fee” basis. For “time and materials” +arrangements, revenue is recognized as services are performed and billed. For “fixed fee” +arrangements, revenue is recognized upon completion and acceptance by the customer. For +contract manufacturing services, revenue is recognized upon delivery of product and acceptance +by the customer. +-55- +Table of Contents +Trade accounts receivable are recorded in the accompanying consolidated balance sheet at +invoiced amounts less provisions for rebates and doubtful accounts. The allowance for doubtful +accounts represents our estimate of probable credit losses and is based on historical write-off +experience. The allowance for doubtful accounts and related metrics, such as days sales +outstanding, are reviewed monthly. Accounts with past due balances over 90 days are reviewed +individually for collectibility. Customer invoices are charged off against the allowance when +we believe it is probable the invoices will not be paid. +(k) +Research and Development Costs - Research and development costs are charged to expense as +incurred. Research and development costs include, among other things, salaries and wages for +research scientists, materials and supplies used in the development of new products, and costs +for facilities and equipment. +(l) +Income Taxes — The provision for income taxes includes federal, foreign, state, and local +income taxes currently payable and those deferred because of temporary +differences between income for financial reporting and income for tax purposes. We prepare +estimates of permanent and temporary differences between income for financial reporting +purposes and income for tax purposes. These differences are adjusted to actual upon filing of +our tax returns, typically occurring in the third and fourth quarters of the current fiscal +year for the preceding fiscal year’s estimates. See Note 7. +(m) +Stock-based Compensation – We account for stock-based compensation pursuant to SFAS No. 123R, +Share-Based Payment , which was adopted as of July 1, 2005. SFAS No. 123R requires recognition +of compensation expense for all share-based awards made to employees, based upon the fair +value of the share-based award on the date of the grant. Meridian elected to adopt the +provisions of SFAS No. 123R, utilizing the modified prospective method, which required +compensation expense be measured and recognized based on grant-date fair value for stock +option awards granted after July 1, 2005 and the non-vested portions of stock options awards +granted prior to July 1, 2005. See Note 8(b). +(n) +Derivative Financial Instruments – We account for our derivative financial instruments in +accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities , as +amended. These instruments are designated as cash flow hedges, and therefore, the effective +portion of the net gain or loss on the derivative instrument is reported as a component of +accumulated other comprehensive income (loss) and reclassified into earnings in the same +period or periods during which the hedged transaction affects earnings. For the ineffective +portion of the hedge, gains or losses are charged to earnings in the current period. All +derivative instruments are recognized as either assets or liabilities at fair value in the +consolidated balance sheets. Cash flows from our hedging instruments are classified in +Operating Activities, consistent with cash flows from the related items being hedged. See +Note 6. +(o) +Comprehensive Income (Loss) – Comprehensive income represents the net change in shareholders’ +equity during a period from sources other than transactions with shareholders. Meridian’s +comprehensive income +-56- +Table of Contents +is comprised of net earnings, foreign currency translation, and changes +in the fair value of forward exchange contracts accounted for as cash flow hedges. +Components of beginning and ending accumulated other comprehensive income (loss), and related +activity, are shown in the following table (in thousands): +Accumulated +Currency +Other +Translation +Cash Flow +Tax +Comprehensive +Adjustment +Hedges +Benefits +Income (Loss) +Balance at September 30, 2006 +$ +(153 +) +$ +13 +$ +50 +$ +(90 +) +Currency translation +981 +— +— +981 +Reclassifications to earnings of hedging activity +— +94 +94 +Net unrealized losses on hedging instruments +(377 +) +(377 +) +Tax benefits +(244 +) +(244 +) +Balance at September 30, 2007 +$ +828 +$ +(270 +) +$ +(194 +) +$ +364 +(p) +Supplemental Cash flow Information – Supplemental cash flow information is as follows for +fiscal 2007 , 2006 and 2005 (dollars in thousands): +Year Ended September 30, +2007 +2006 +2005 +Cash paid for - +Income taxes +$ +12,412 +$ +6,734 +$ +7,067 +Interest +37 +106 +493 +Non-cash items - +Debenture conversions +1,775 +648 +11,737 +(q) +Recent Accounting Pronouncements – During July 2006, the Financial Accounting Standards Board +issued Interpretation 48, Accounting for Uncertainty in Income Taxes: An Interpretation of +FASB Statement No. 109 . Interpretation 48 establishes criteria that an individual tax +position would have to meet for some or all of the benefit of that position to be recognized +in an entity’s financial statements. Interpretation 48 also establishes disclosure criteria +for tax contingency reserves. We will be required to adopt Interpretation 48 during the first +quarter of fiscal 2008. At this time, we are unable to determine the impact that adoption of +this pronouncement will have on our financial condition. +During September 2006, the FASB issued SFAS No. 157, Fair Value Measurements . SFAS 157 defines +fair value and provides a framework for measuring fair value, +including a hierarchy that prioritizes the inputs to valuation techniques into three broad +levels. This fair value hierarchy gives the highest priority to quoted prices in active +markets for identical assets and liabilities and the lowest priority to unobservable inputs. +We are required to adopt SFAS 157 in fiscal 2009. We are currently in the process of +evaluating the impact of SFAS 157 on our financial statements. +-57- +Table of Contents +During February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and +Financial Liabilities – Including an Amendment of FASB Statement No. 115 . SFAS 159 permits an +entity to choose to measure certain financial instruments and other items at fair value where +such financial instruments and other items are not currently required to be measured at fair +value. For financial instruments and other items where the fair value option is elected, +unrealized gains and losses are reported in earnings. We are required to adopt SFAS 159 in +fiscal 2009. We are currently in the process of evaluating the impact of SFAS 157 on our +financial statements. +(r) +Shipping and Handling costs – Shipping and handling costs invoiced to customers are included +in net sales. Costs to distribute products to customers, including inbound freight costs, +warehousing costs, and other shipping and handling activities are included in cost of goods +sold. +(s) +Non-income Government-Assessed Taxes – We classify all non-income government-assessed taxes +(sales, use, and value-added) collected from customers and remitted by us to appropriate +revenue authorities, on a net basis (excluded from net sales) in the accompanying consolidated +statements of operations. +(t) +Reclassifications – Certain reclassifications have been made to the prior year financial +statements to conform to the current year presentation. +(2) +OEM Concepts Acquisition +On January 31, 2005, we acquired all of the outstanding common shares of OEM Concepts, Inc. for +$6,590,000 in cash, including transaction costs. OEM Concepts is a leading producer and +distributor of highly specialized biologicals for the diagnostic, pharmaceutical, and research +markets. The purchase agreement provides for additional consideration, up to a maximum remaining +amount of $1,819,000, contingent upon future calendar-year sales and gross profit of OEM Concepts’ +products through December 31, 2008. Earnout consideration, if any, is payable each year, following +the period earned. Earnout consideration in the amount of $118,000 related to calendar 2006 was +paid during fiscal 2007. Earnout consideration in the amount of $152,000 related to the nine-month +period ended September 30, 2007 has been accrued in the accompanying consolidated balance sheet. +The initial $6,590,000 purchase price and transaction costs were funded with bank debt under our +bank credit facility and cash on hand. +The acquisition was accounted for as a purchase, and the results of operations of OEM Concepts are +included in our consolidated results of operations from February 1, 2005 forward. A summary of the +purchase price allocation follows. This purchase price allocation reflects the fair values of +acquired long-lived assets, including supply agreements for $3,466,000 (see Note 1(i) regarding +impairment of one of these supply agreements), cell lines for $1,499,000, and customer +relationships for $562,000. The estimated fair market value of intangibles acquired was based on +discounted future cash flows. Intangible assets other than supply agreements and goodwill have an +estimated useful life of 15 years. Supply agreements have useful lives based on the terms of +-58- +Table of Contents +the agreements, between 3 and 10 years. Future earnout payment consideration, if any, will be +allocated to goodwill, and will be recorded in the period in which it is earned and becomes +payable. +Acquisition details are as follows (dollars in thousands): +Purchase price, including transaction costs and +earnout payments made +$ +7,056 +Fair value of assets acquired - +Cash +$ +207 +Accounts receivable +505 +Inventory +643 +Prepaid expenses +47 +Property, plant and equipment, net +145 +Specific intangibles +5,527 +Goodwill +2,709 +Other assets +9 +9,792 +Fair value of liabilities assumed - +Debt and capital lease obligations +233 +Deferred income tax liabilities +2,062 +Other liabilities +441 +2,736 +Fair value of net assets acquired +$ +7,056 +(3) Inventories +Inventories are comprised of the following (dollars in thousands): +As of September 30, +2007 +2006 +Raw materials +$ +4,816 +$ +4,024 +Work-in-process +5,141 +4,578 +Finished goods +8,214 +8,387 +$ +18,171 +$ +16,989 +-59- +Table of Contents +(4) Bank Credit Arrangements +We have a $30,000,000 credit facility with a commercial bank, which expires in September 2012. +This credit facility is collateralized by our business assets except for those of non-domestic +subsidiaries. There were no borrowings outstanding on this credit facility at September 30, 2007 +or September 30, 2006. Available borrowings under this credit facility were $30,000,000 at +September 30, 2007. In connection with this bank credit arrangement, we are required to comply +with financial covenants that limit the amount of debt obligations, require a minimum amount of +tangible net worth, and require a minimum amount of fixed charge coverage. We are in compliance +with all covenants. We are also required to maintain a cash compensating balance with the bank in +the amount of $1,000,000, pursuant to this bank credit arrangement. +(5) Long-Term Debt Obligations +As of September 30, 2007, we have no debt obligations outstanding. As of September 30, 2006, we +had outstanding $1,803,000 principal of 5% debentures, convertible, at the option of the holder, +into common shares at a price of $6.45. During the first two quarters of fiscal 2007, $1,775,000 +principal amount of these debentures were converted by the holders into 274,315 common shares. +During the second quarter of fiscal 2007, we redeemed the remaining $28,000 principal amount of +these debentures at a 1% premium. Deferred debenture issuance costs +of $101,000 were recorded to +additional paid-in capital in the accompanying consolidated balance sheet in connection with the +conversion transactions. +(6) Hedging Transactions +We have historically entered into forward exchange contracts to hedge cash flows from intercompany +sales between our US parent company and its Italian affiliate. These forward exchange contracts +are designated as cash flow hedges under SFAS No. 133. The following table presents our hedging +portfolio as of September 30, 2007 (amounts in thousands). +Notional +Contract +Estimated Fair +Average +Amount +Value +Value +Exchange Rate +Maturity +€ +4,200 +$ +5,756 +$ +6,003 +1.3703 +FY 2008 +€ +300 +$ +421 +$ +429 +1.4021 +FY 2009 +At September 30, 2007, unrealized losses of $270,000 were included in accumulated other +comprehensive income in the consolidated balance sheet. This amount is expected to be reclassified +into net earnings within the next 15 months. The estimated fair value of forward contracts +outstanding at September 30, 2007 is based on quoted amounts provided by the counterparty to these +contracts. +-60- +Table of Contents +(7) Income Taxes +(a) Earnings before income taxes, and the related provision for income taxes for the years ended +September 30, 2007, 2006 and 2005 were as follows (dollars in thousands): +Year Ended September 30, +2007 +2006 +2005 +Earnings before income taxes - +Domestic +$ +33,324 +$ +25,365 +$ +17,640 +Foreign +3,358 +2,701 +2,065 +Total +$ +36,682 +$ +28,066 +$ +19,705 +Provision (credit) for income taxes - +Federal – +Current provision +$ +11,179 +$ +8,902 +$ +6,550 +Temporary differences +Fixed asset basis differences and depreciation +(105 +) +(65 +) +(57 +) +Intangible asset basis differences and amortization +(249 +) +(588 +) +(227 +) +Currently non-deductible expenses and reserves +238 +(88 +) +(467 +) +Stock based compensation +(678 +) +(339 +) +(65 +) +Other, net +(258 +) +2 +(163 +) +Tax contingency reserve adjustment +(2,425 +) +— +— +Subtotal +7,702 +7,824 +5,571 +State and local +1,250 +814 +600 +Foreign +1,009 +1,095 +896 +Total +$ +9,961 +$ +9,733 +$ +7,067 +(b) The following is a reconciliation between the statutory US income tax rate and the effective +rate derived by dividing the provision for income taxes by earnings before income taxes (dollars in +thousands): +Year Ended September 30, +2007 +2006 +2005 +Computed income taxes at statutory rate +$ +12,839 +35.0 +% +$ +9,824 +35.0 +% +$ +6,895 +35.0 +% +Increase (decrease) in taxes resulting from - +State and local income taxes +835 +2.3 +685 +2.4 +500 +2.5 +Federal and state tax credits +(213 +) +(0.6 +) +(88 +) +(0.3 +) +(166 +) +(0.8 +) +Subpart F income taxes +— +— +— +— +117 +0.6 +Foreign tax rate differences +170 +0.5 +145 +0.5 +19 +0.1 +Valuation allowance reversal — France +(309 +) +(0.8 +) +— +— +— +— +Extra territorial income exclusion +(56 +) +(0.2 +) +(275 +) +(1.0 +) +(306 +) +(1.6 +) +Qualified domestic production incentives +(290 +) +(0.8 +) +(236 +) +(0.8 +) +— +— +Tax exempt interest +(418 +) +(1.1 +) +(281 +) +(1.0 +) +— +— +Tax contingency reserve adjustment +(2,425 +) +(6.6 +) +— +— +— +— +Other, net +(172 +) +(0.5 +) +(41 +) +(0.1 +) +8 +0.1 +$ +9,961 +27.2 +% +$ +9,733 +34.7 +% +$ +7,067 +35.9 +% +-61- +Table of Contents +(c) The components of net deferred tax liabilities were as follows (dollars in thousands): +As of September 30, +2007 +2006 +Deferred tax assets - +Valuation reserves and non-deductible expenses +$ +922 +$ +1,465 +Stock compensation expense not deductible +1,237 +503 +Net operating loss carryforwards +920 +890 +Inventory basis differences +472 +176 +Other +90 +225 +Subtotal +3,641 +3,259 +Less valuation allowance +(569 +) +(888 +) +Deferred tax assets +3,072 +2,371 +Deferred tax liabilities - +Fixed asset basis differences and depreciation +(711 +) +(830 +) +Intangible asset basis differences and amortization +(2,918 +) +(3,190 +) +Other +(750 +) +(458 +) +Deferred tax liabilities +(4,379 +) +(4,478 +) +Net deferred tax liabilities +$ +(1,307 +) +$ +(2,107 +) +For income tax purposes, we have tax benefits related to operating loss carryforwards in the +countries of Belgium and France. These net operating loss carryforwards have no expiration date. +We have recorded deferred tax assets for these carryforwards, inclusive of valuation allowances in +the amount of $569,000 for the country of Belgium at September 30, 2007. These valuation +allowances are for pre-acquisition net operating loss carryforwards. If tax benefits are +recognized in future years for these pre-acquisition net operating loss carryforwards, such +benefits will be allocated to reduce goodwill and acquired intangible assets. The valuation +allowance recorded against deferred tax assets at September 30, 2006 was $888,000 and related +solely to net operating loss carryforwards in Belgium and France. +The realization of deferred tax assets in foreign jurisdictions is dependent upon the generation of +future taxable income in certain European countries. Management has considered the levels of +currently anticipated pre-tax income in foreign jurisdictions in assessing the required level of +the deferred tax asset valuation allowance. Taking into consideration historical and current +operating results, and other factors, management believes that it is more likely than not that the +net deferred tax asset for foreign jurisdictions, after consideration of the valuation allowance, +which has been established, will be realized. The amount of the net deferred tax asset considered +realizable in foreign jurisdictions, however, could be reduced in future years if estimates of +future taxable income during the carryforward period are reduced. +-62- +Table of Contents +Undistributed earnings re-invested indefinitely in the Italian operation were approximately +$13,900,000 at September 30, 2007. US deferred tax liabilities of approximately $5,300,000 on such +earnings have not been +recorded. Management believes that such US taxes would be largely offset by foreign tax credits +for taxes paid in Italy. +On June 30, 2005, Ohio’s governor signed Biennial Budget Bill, Am. Sub. H.B. 66. This bill +replaced Ohio’s corporate income and personal property taxes with a commercial activity tax based +on gross receipts, phased in over five years beginning July 1, 2005. We have evaluated the impact +of this legislation on our deferred tax balances. The carrying value of deferred taxes was not +materially affected by the enactment of this legislation. +From time to time, our tax returns in Federal, state, and foreign jurisdictions are examined by the +applicable tax authorities. Our tax provisions take into consideration the judgmental nature of +certain tax positions through the establishment of reserves for differences between the probable +tax determinations and the “as filed” tax positions of certain assets and liabilities. To the +extent that adjustments result from the completion of these examinations or the passing of statutes +of limitation, they will affect tax liabilities in the period known. We believe that the results +of any tax authority examinations would not have a significant adverse impact on financial +condition or results of operation. +In fiscal 2000, we recorded a tax benefit related to the insolvency of a foreign subsidiary that +has since been liquidated and dissolved. At that time, a reserve was also provided for future +resolution of uncertainties related to this matter. During June 2007, the statute of limitations +expired on the tax returns affected by this matter, and consequently, the adjustment to tax +reserves resulted in a tax benefit of $2,425,000. +(8) Employee Benefits +(a) +Savings and Investment Plan - We have a profit sharing and retirement savings plan covering +substantially all full-time US employees. Profit sharing contributions to the plan, which are +discretionary, are approved by the Board of Directors. The plan permits participants to +contribute to the plan through salary reduction. Under terms of the plan, we match 50% of an +employee’s contributions, up to maximum match of 3% of compensation. Our discretionary and +matching contributions to the plan amounted to approximately $1,132,000, $1,066,000, and +$1,006,000, during fiscal 2007, 2006 and 2005, respectively. +(b) +Stock-Based Compensation Plans – We have one active stock based compensation plan, the 2004 +Equity Compensation plan, which became effective December 7, 2004, as amended (the “2004 +Plan”) and an Employee Stock Purchase Plan (“The ESP Plan”), which became effective October 1, +1997. Effective October 1, 1997, we began selling shares of stock to our full-time and +part-time employees under the ESP Plan up to the number of shares equivalent to a 1% to 15% +payroll deduction from an employee’s base salary plus an additional 5% dollar match of this +deduction by Meridian. +-63- +Table of Contents +We may grant new shares for options for up to 1,462,500 shares under the 2004 Plan, of which we +have granted 976,000 through September 30, 2007. Options may be granted at exercise prices not +less than 100% +of the closing market value of the underlying common shares on the date of grant and have +maximum terms up to ten years. Vesting schedules are established at the time of grant and may +be set based on future service periods, achievement of performance targets, or a combination +thereof. All options contain provisions restricting their transferability and limiting their +exercise in the event of termination of employment or the disability or death of the optionee. +We have granted options for 5,407,000 shares under similar plans that have expired. +We adopted SFAS No. 123(R), Share-Based Payment , as of July 1, 2005. SFAS No. 123(R) requires +recognition of compensation expense for all share-based payments made to employees, based upon +the fair value of the share-based payment on the date of the grant. We elected to adopt the +provisions of SFAS No. 123(R), pursuant to the modified prospective method, which requires +compensation expense be measured and recognized based on grant-date fair value for stock option +awards granted after July 1, 2005 and the non-vested portions of stock option awards granted +prior to July 1, 2005. +Prior to July 1, 2005, we accounted for our stock based compensation plans pursuant to the +intrinsic value method in APB No. 25. Had compensation cost for these plans been determined +using the fair value method provided in SFAS No. 123(R), our net earnings for fiscal 2005 would +have been $12,376,000, compared to a reported amount of $12,638,000. Basic earnings per share +for fiscal 2005 would have been $0.35, compared to a reported amount of $0.36. Diluted earnings +per share for fiscal 2005 would have been $0.34, compared to a reported amount of $0.35. +The amount of stock-based compensation expense reported was $2,632,000, $1,082,000 and $279,000 +in fiscal 2007, fiscal 2006, and fiscal 2005, respectively. The total income tax benefit +recognized in the income statement for these stock-based compensation arrangements was $668,000, +$339,000, and $65,000, for fiscal 2007, fiscal 2006, and fiscal 2005, respectively. We expect +stock compensation expense for unvested options as of September 30, 2007 to be $1,565,000, which +will be recognized during fiscal years 2008 through 2011. +SFAS No. 123(R) requires that we recognize compensation expense only for the portion of shares +that we expect to vest. As such, we apply estimated forfeiture rates to our compensation +expense calculations. These rates have been derived using historical forfeiture data, +stratified by several employee groups. During fiscal 2007, we recorded $210,000 in stock +compensation expense to adjust estimated forfeiture rates to actual. +We have elected to use the Black-Scholes option pricing model to determine grant-date fair +value, with the following assumptions for fiscal 2007 and 2006: (i) expected share price +volatility based on implied volatility calculations using options for Meridian and a peer-group +of companies; (ii) expected life of +-64- +Table of Contents +options based on contractual lives, employees’ historical +exercise behavior and employees’ historical post-vesting employment termination behavior; (iii) +risk-free interest rates based on treasury rates that +correspond to the expected lives of the options; and (iv) dividend yield based on the expected +yield on underlying Meridian common stock. +Year Ended September 30, +2007 +2006 +2005 +Risk-free interest rates +4.64 +% +4.3%-4.4 +% +3.8%-4.3 +% +Dividend yield +1.96 +% +1.55 +% +2.3%-5.4 +% +Life of option +5.80-7.50 yrs. +5.70-7.50 yrs. +6.25-7.00 yrs. +Share price volatility +44 +% +46 +% +52%-54 +% +Forfeitures (by employee group) +0%-20 +% +0%-20 +% +5%-38 +% +A summary of the status of our stock option plans at September 30, 2007 and changes during the +year is presented in the table and narrative below: +Wtd Avg +Wtd Avg +Exercise +Remaining +Aggregate +Shares +Price +Life (Yrs) +Intrinsic Value +Outstanding beginning of period +1,919,696 +$ +5.48 +Grants +358,925 +16.65 +Exercises +(336,433 +) +3.91 +Forfeitures +(9,256 +) +13.14 +Cancellations +(1,048 +) +6.11 +Outstanding end of period +1,931,884 +$ +7.79 +5.9 +$ +43,524,000 +Exercisable end of period +647,520 +$ +4.80 +4.1 +$ +16,524,000 +A summary of the status of our nonvested shares as of September 30, 2007, and changes during the +year ended September 30, 2007, is presented below: +Weighted- +Average Grant +Date Fair +Shares +Value +Nonvested beginning of period +1,151,595 +$ +2.93 +Granted +358,925 +7.10 +Vested +(216,900 +) +3.34 +Forfeited +(9,256 +) +5.74 +Nonvested end of period +1,284,364 +$ +4.03 +-65- +Table of Contents +The weighted average grant-date fair value of options granted was $7.10, $6.54, and $3.21 for +fiscal 2007, 2006, and 2005, respectively. The total intrinsic value of options exercised was +$5,526,000, $2,648,000 and +$3,659,000, for fiscal 2007, fiscal 2006, and 2005, respectively. The total grant-date fair +value of options that vested during fiscal 2007, 2006, and 2005 was $721,000, $296,000 and +$235,000, respectively. +Cash received from options exercised was $1,315,000, $990,000, and $3,302,000 for fiscal 2007, +2006, and 2005, respectively. Tax benefits realized and recorded to additional paid-in capital +from option exercises totaled $1,632,000, $732,000, and $654,000 for fiscal 2007, 2006, and 2005 +respectively. +(9) Major Customers and Segment Data +Meridian was formed in 1976 and functions as a fully integrated research, development, +manufacturing, marketing and sales organization with primary emphasis in the field of life science. +Our principal businesses are (i) the development, manufacture and distribution of diagnostic test +kits primarily for certain respiratory, gastrointestinal, viral and parasitic infectious diseases, +(ii) the manufacture and distribution of bulk antigens, antibodies, and reagents used by +researchers and other diagnostic manufacturers and (iii) the contract manufacture of proteins and +other biologicals under clinical cGMP conditions for use by biopharmaceutical and biotechnology +companies engaged in research for new drugs and vaccines. +Our reportable operating segments are US Diagnostics, European Diagnostics, and Life Science. The +US Diagnostics operating segment consists of manufacturing operations in Cincinnati, Ohio, and the +sale and distribution of diagnostic test kits in the US and countries outside of Europe, Africa and +the Middle East. The European Diagnostics operating segment consists of the sale and distribution +of diagnostic test kits in Europe, Africa, and the Middle East. The Life Science operating segment +consists of manufacturing operations in Memphis, Tennessee, Saco, Maine, and Boca Raton, Florida, +and the sale and distribution of bulk antigens, antibodies and bioresearch reagents domestically +and abroad. The Life Science operating segment also includes the contract development and +manufacture of cGMP clinical grade proteins and other biologicals for use by biopharmaceutical and +biotechnology companies engaged in research for new drugs and vaccines. +Sales to individual customers constituting 10% or more of consolidated net sales were as follows +(dollars in thousands): +Year Ended September 30, +2007 +2006 +2005 +Customer A (US Diagnostics) +$ +24,678 +(20 +%) +$ +20,014 +(18 +%) +$ +15,512 +(17 +%) +Customer B (US Diagnostics) +$ +13,340 +(11 +%) +$ +10,989 +(10 +%) +$ +8,244 +(9 +%) +Combined export sales for the US Diagnostics and Life Science operating segments were $15,128,000, +$14,728,000 and $12,414,000 in fiscal years 2007, 2006 and 2005, respectively. Three products +accounted for 31%, 28%, and 23% of consolidated net sales in fiscal 2007, fiscal 2006, and fiscal +2005, respectively. +-66- +Table of Contents +Approximately 30% of the consolidated accounts receivable balance at September +30, 2007 is largely dependent upon funds from the Italian government. +Significant country information for the European Diagnostics operating segment is as follows +(dollars in thousands). Sales are attributed to the geographic area based on the location to which +the product is shipped. +Year Ended September 30, +2007 +2006 +2005 +Italy +$ +7,838 +$ +6,840 +$ +6,221 +France +3,070 +2,387 +2,365 +United Kingdom +1,987 +1,571 +1,454 +Holland +1,610 +1,372 +1,125 +Belgium +1,558 +1,504 +1,303 +Other +7,500 +6,154 +5,350 +Total European Operating Segment +$ +23,563 +$ +19,828 +$ +17,818 +Identifiable assets for our Italian distribution organization were $12,811,000, $11,397,000, and +$9,430,000 at September 30, 2007, 2006 and 2005, respectively. +-67- +Table of Contents +Segment information for the years ended September 30, 2007, 2006, and 2005 is as follows (dollars +in thousands): +US +European +Life +Diagnostics +Diagnostics +Science +Elim (1) +Total +Fiscal Year 2007 - +Net sales – +Third-party +$ +74,845 +$ +23,563 +$ +24,555 +$ +— +$ +122,963 +Inter-segment +8,872 +— +532 +(9,404 +) +— +Operating income +26,825 +4,559 +3,795 +(149 +) +35,030 +Depreciation and amortization +2,641 +110 +1,648 +— +4,399 +Capital expenditures +1,645 +52 +1,514 +— +3,211 +Total assets +115,297 +13,600 +45,410 +(41,609 +) +132,698 +Fiscal Year 2006 - +Net sales – +Third-party +$ +65,721 +$ +19,828 +$ +22,864 +$ +— +$ +108,413 +Inter-segment +7,171 +— +712 +(7,883 +) +— +Operating income +20,169 +3,540 +3,144 +41 +26,894 +Depreciation and amortization +2,586 +129 +2,574 +— +5,289 +Capital expenditures +2,040 +37 +1,043 +— +3,120 +Total assets +109,678 +12,716 +41,751 +(43,617 +) +120,528 +Fiscal Year 2005 - +Net sales – +Third-party +$ +53,485 +$ +17,818 +$ +21,662 +$ +— +$ +92,965 +Inter-segment +6,553 +15 +804 +(7,372 +) +— +Operating income +13,655 +2,315 +4,251 +104 +20,325 +Depreciation and amortization +2,667 +147 +1,438 +— +4,252 +Capital expenditures +1,477 +89 +1,024 +— +2,590 +Total assets +99,878 +11,552 +38,947 +(40,243 +) +110,134 +(1) +Eliminations consist of intersegment transactions. +-68- +Table of Contents +Year Ended September 30, +2007 +2006 +2005 +Segment operating income +$ +35,030 +$ +26,894 +$ +20,325 +Interest income +1,642 +1,123 +43 +Interest expense +(38 +) +(128 +) +(770 +) +Other, net +48 +177 +107 +Consolidated earnings before income taxes +$ +36,682 +$ +28,066 +$ +19,705 +The accounting policies of the segments are the same as those described in the summary of +significant accounting policies in Note 1. Transactions between operating segments are accounted +for at established intercompany prices for internal and management purposes with all intercompany +amounts eliminated in consolidation. Total assets for the US Diagnostics and Life Science +operating segments include goodwill of $1,492,000 and $8,472,000, respectively at September 30, +2007, $1,578,000 and $8,286,000, respectively at September 30, 2006, and $1,612,000 and $7,167,000, +respectively at September 30, 2005. +(10) Commitments and Contingencies +(a) +Royalty Commitments — We have entered into various license agreements that require payment of +royalties based on a specified percentage of the sales of licensed products (1% to 8%). These +royalty expenses are recognized on an as-earned basis and recorded in the year earned as a +component of cost of sales. Annual royalty expenses associated with these agreements were +approximately $739,000, $866,000, and $743,000, respectively, for the fiscal years ended +September 30, 2007, 2006 and 2005. +During October 2006, we entered into a license agreement with Eiken Chemical Co., Ltd., that +provides rights to Eiken’s loop-mediated isothermal amplification technology for infectious +disease testing in the United States and 18 other geographic markets. The agreement calls for +payments of up to 200,000,000 Japanese Yen (approximately $1,740,000) based on the achievement +of certain milestones and on-going royalties once products are available for commercial sale. +Payments made during product development are expected to occur over a five-year period and began +in fiscal 2007 with a payment equal to 20,000,000 Japanese Yen or $169,000. +During the fourth quarter of fiscal 2007, we began seeking recovery of approximately $1,400,000 +of past royalties paid and interest under a license agreement around certain rapid diagnostic +testing technology. This license agreement covered patent rights that were narrowed in scope +via other litigation with the licensor that did not involve Meridian. We strongly believe that +the licensed patent, as reissued, does not cover any of our products. We also ceased further +royalty payments under this license agreement. The licensor to this agreement disputes our +position that the patent, as reissued, does not cover our products. +-69- +Table of Contents +Although we believe that +our position is very strong, we are unable to predict the outcome of this matter. +No provision has been made in the accompanying financial statements for on-going royalties, if +any, nor has any accrual or income been recorded for recovery of past royalties paid. +(b) +Purchase Commitments – We have purchase commitments primarily for inventory and service items +as part of the normal course of business. Commitments made under these obligations are +$9,305,000 and $385,000 for fiscal 2008 and fiscal 2009, respectively. No commitments have +been made for fiscal 2010, 2011, or 2012. +(c) +Operating Lease Commitments - Meridian and its subsidiaries are lessees of (i) office and +warehouse buildings in Florida, Belgium, and France; (ii) automobiles for use by the direct +sales forces in the US and Europe; and (iii) certain office equipment such as facsimile +machines and copier machines across all business units, under operating lease agreements that +expire at various dates. Amounts charged to expense under operating leases were $696,000, +$686,000 and $621,000 for fiscal 2007, 2006 and 2005, respectively. Operating lease +commitments for each of the five succeeding fiscal years are as follows: fiscal 2008 - +$599,000, fiscal 2009 — $464,000, fiscal 2010 — $260,000, fiscal 2011 — $98,000, and fiscal +2012 — $95,000. +(d) +Litigation – We are a party to litigation that we believe is in the normal course of +business. The ultimate resolution of these matters is not expected to have a material adverse +effect on our financial position, results of operations or cash flows. No provision has been +made in the accompanying consolidated financial statements for these matters. +(e) +Indemnifications – In conjunction with certain contracts and agreements, we may provide +routine indemnifications whose terms range in duration and in some circumstances are not +explicitly defined. The maximum obligation under some such indemnifications is not explicitly +stated and, as a result, cannot be reasonably estimated. We have not made any payments for +these indemnifications and no liability is recorded at September 30, 2007 and September 30, +2006. We believe that if we were to incur a loss on any of these matters, the loss would not +have a material effect on our financial condition. +(f) +Viral Antigens Earnout +The purchase agreement for the Viral Antigens purchase acquisition provided for additional +consideration, contingent upon Viral Antigens’ earnings through September 30, 2006. Final +earnout consideration in the amount of $853,000 for fiscal 2006 was paid during the second +quarter of fiscal 2007. This amount is included in goodwill in the accompanying consolidated +balance sheets. +-70- +Table of Contents +(g) +OEM Concepts Earnout +The purchase agreement for the OEM Concepts acquisition provides for additional consideration, +up to a maximum remaining amount of $1,819,000 at September 30, 2007, contingent upon future +calendar year sales and gross profit of OEM Concepts’ products through December 31, 2008. +Earnout consideration in the amount of $118,000 related to calendar 2006 was paid during fiscal +2007. Earnout consideration in the amount of $152,000 related to the nine-month period ended +September 30, 2007 has been accrued in the accompanying consolidated balance sheet. Future +earnout consideration, if any, will be allocated to goodwill, and will be recorded in the period +in which it is earned and payable. +(11) Quarterly Financial Data (Unaudited) +All quarters of fiscal 2007 and fiscal 2006 have been adjusted to reflect the change in +accounting for certain inventories within the Life Science operating segment from the LIFO +method to the FIFO method. See further detail regarding this change in Note 1(g). +Amounts are in thousands except per share data. The sum of the earnings per common share and +cash dividends per share may not equal the corresponding annual amounts due to interim quarter +rounding. +For the Quarter Ended in Fiscal +September +2007 +December 31 +March 31 +June 30 +30 +As +As +As +Previously +As +Previously +As +Previously +As +Reported +Adjusted +Reported +Adjusted +Reported +Adjusted +Net sales +$ +28,720 +$ +28,720 +$ +32,094 +$ +32,094 +$ +29,763 +$ +29,763 +$ +32,386 +Gross profit +17,597 +17,612 +18,823 +18,838 +19,286 +19,301 +19,189 +Net earnings +5,564 +5,573 +5,881 +5,890 +8,804 +8,814 +6,444 +Basic earnings per common share +0.14 +0.14 +0.15 +0.15 +0.22 +0.22 +0.16 +Diluted earnings per common +share +0.14 +0.14 +0.15 +0.15 +0.22 +0.22 +0.16 +Cash dividends per common share +0.08 +0.08 +0.11 +0.11 +0.11 +0.11 +0.11 +For the Quarter Ended in Fiscal +2006 +December 31 +March 31 +June 30 +September 30 +As +As +As +As +Previously +As +Previously +As +Previously +As +Previously +As +Reported +Adjusted +Reported +Adjusted +Reported +Adjusted +Reported +Adjusted +Net sales +$ +24,908 +$ +24,908 +$ +28,272 +$ +28,272 +$ +26,583 +$ +26,583 +$ +28,650 +$ +28,650 +Gross profit +15,150 +15,150 +16,580 +16,640 +16,355 +16,385 +16,586 +16,509 +Net earnings +3,962 +3,962 +4,723 +4,760 +4,862 +4,881 +4,778 +4,730 +Basic earnings per common share +0.10 +0.10 +0.12 +0.12 +0.12 +0.12 +0.12 +0.12 +Diluted earnings per common +share +0.10 +0.10 +0.12 +0.12 +0.12 +0.12 +0.12 +0.12 +Cash dividends per common share +0.05 +0.05 +0.08 +0.08 +0.08 +0.08 +0.08 +0.08 +-71- +Table of Contents +(12) Public Offering of Common Shares and Stock Split +On September 21, 2005, we issued 2,700,000 common shares at an offering price of $11.67 per +share. The number of shares issued and the offering price per share have been adjusted to +reflect the May 2007 stock split discussed below. The net proceeds from the offering, after +underwriting discounts and offering costs totaling $1,920,000, were approximately $29,580,000. +Underwriting discounts and offering costs incurred in connection with this offering are +reflected as a reduction of shareholders’ equity. +On August 15, 2005, we announced a three-for-two stock split, with fractional shares paid in +cash. This split was effective on September 2, 2005 to shareholders of record as of August 29, +2005. On April 19, 2007, we announced a three-for-two stock split, with fractional shares paid +in cash. This split was effective on May 11, 2007, for shareholders of record on May 4, 2007. +All references in this Annual Report on Form 10-K to number of shares and per share amounts +reflect these stock splits. +ITEM 9. +CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS +ON ACCOUNTING AND FINANCIAL DISCLOSURE +Nothing to report. +ITEM 9A. +CONTROLS AND PROCEDURES +As of September 30, 2007, an evaluation was completed under the supervision and with the +participation of our management, including our Chief Executive Officer and Chief Financial Officer, +of the effectiveness of the design and operation of our disclosure controls and procedures pursuant +to Rule 13a-15(b) and 15d-15(b) promulgated under the Securities Exchange Act of 1934, as amended. +Based on that evaluation, our management, including the CEO and CFO, concluded that our disclosure +controls and procedures were effective as of September 30, 2007. There have been no changes in our +internal control over financial reporting identified in connection with the evaluation of internal +control that occurred during the fourth fiscal quarter that has materially affected, or is +reasonably likely to affect, our internal control over financial reporting, or in other factors +that could significantly affect internal control subsequent to September 30, 2007, other than we +implemented, as planned, new enterprise resource planning and general ledger and financial +reporting systems for our Life Science facilities during the first quarter of fiscal 2008. These +new system implementations provide the appropriate foundation to support future growth in our Life +Science operating segment. +Our internal control report is included in this Annual Report on Form 10-K after Item 8, under the +caption “Management’s Report on Internal Control over Financial Reporting”. +-72- +Table of Contents +ITEM 9B. +OTHER INFORMATION +Nothing to report. +PART III +The information required by Items 10., 11., 12., 13., and 14., of Part III are incorporated by +reference from the Registrant’s Proxy Statement for its 2008 Annual Shareholders’ Meeting to be +filed with the Commission pursuant to Regulation 14A. +-73- +Table of Contents +ITEM 15. +EXHIBITS AND FINANCIAL STATEMENT SCHEDULES +(a) (1) and (2) FINANCIAL STATEMENTS AND SCHEDULES. +All financial statements and schedules required to be filed by Item 8 of this Form and included in +this report have been listed previously under Item 8. No additional financial statements or +schedules are being filed since the requirements of paragraph (c) under Item 15 are not applicable +to Meridian. +(b) (3) EXHIBITS. +Exhibit Number +Description of Exhibit +Filing Status +3.1 +Articles of Incorporation, including amendments +not related to Company name change +A +3.2 +Code of Regulations +B +10.5 +Sublicense Agreement dated June 17, 1993 among +Johnson & Johnson, the Scripps Research Institute +and Meridian Concerning certain Patent Rights +E +10.6 +Assignment dated June 17, 1993 from Ortho +Diagnostic Systems Inc. to Meridian concerning +certain Patent Rights +E +10.7 +Agreement dated January 24, 1994 between Meridian +Diagnostics, Inc. and Immulok, Inc. +F +10.8 +Asset Purchase Agreement dated June 24, 1996 +between Cambridge Biotech Corporation and Meridian +Diagnostics, Inc. +G +10.9 +Merger Agreement among Gull Laboratories, Inc., +Meridian Diagnostics, Inc. Fresenius AG and +Meridian Acquisition Co. dated as of September 15, +1998 +H +10.10* +Savings and Investment Plan Prototype Adoption +Agreement +S +10.14* +1994 Directors’ Stock Option Plan +J +10.15* +1996 Stock Option Plan +K +10.16* +Salary Continuation Agreement for John A. Kraeutler +L +10.17 +First Amendment to Merger Agreement Among Gull +Laboratories, Inc., Meridian Diagnostics, Inc. +Fresenius AG and Meridian Acquisition Co. +M +-74- +Table of Contents +Exhibit Number +Description of Exhibit +Filing Status +10.18* +1999 Directors’ Stock Option Plan +N +10.20 +Dividend Reinvestment Plan +P +10.21 +Merger Agreement dated September 13, 2000 among +Meridian and the Shareholders of Viral Antigens, Inc. +O +10.23* +Employment Agreement Dated February 15, 2001 between +Meridian and John A. Kraeutler, including the Addendum +to Employment Agreement dated April 24, 2001 between +Meridian and John A. Kraeutler +R +10.24* +Sample Option Agreement Dated October 1, 2001 +R +10.26* +1996 Stock Option Plan as Amended and Restated +Effective January 23, 2001 +Q +10.27* +Sample Option Agreement Dated November 19, 2002 +S +10.28* +Agreement Concerning Disability and Death dated +September 10, 2003, between Meridian and William J. +Motto +S +10.29* +Professional Services Agreement dated October 1, 2002 +between Meridian and Antonio Interno +S +10.31 +Stock Purchase Agreement of OEM Concepts, Inc. by +Meridian Bioscience, Inc. dated January 31, 2005 +W +10.32* +Sample Option Agreement dated November 10, 2005 +W +10.33* +2004 Equity Compensation Plan, Amended and Restated +through January 19, 2006 +V +10.34* +Fiscal 2006 Officers’ Compensation Plan, Amended and +Restated through January 19, 2006 +V +10.35* +Sample Option Agreement dated November 14, 2007 +Filed herewith +10.36* +Fiscal 2007 Officers’ Performance Compensation Plan +X +10.37 +Amended and Restated Revolving Note with Fifth Third +Bank dated August 1, 2007 +Filed herewith +13 +2008 Annual Report to Shareholders +(1 +) +14 +Code of Ethics +S +18 +Grant Thornton Preferability Letter +Filed herewith +-75- +Table of Contents +Exhibit Number +Description of Exhibit +Filing Status +21 +Subsidiaries of the Registrant +Filed herewith +23 +Consent of Independent Registered Public Accounting Firm +Filed herewith +31.1 +Certification of Principal Executive Officer required +by Rule 13a-14(a) +Filed herewith +31.2 +Certification of Principal Financial Officer required +by Rule 13a-14(a) +Filed herewith +32 +Section 1350 Certification of Chief Executive Officer +and Chief Financial Officer +Filed herewith +(1) +Only portions of the 2007 Annual Report to Shareholders specifically are incorporated by +reference in this Form 10-K as filed herewith. A supplemental paper copy of the 2007 Annual Report +to Shareholders has been provided to the Securities and Exchange Commission for informational +purposes only. +* +Management Compensatory Contracts +Incorporated by reference to: +A. +Registration Statement No. 333-02613 on Form S-3 filed with the Securities and Exchange +Commission on April 18, 1996. +B. +Registration Statement No. 33-6052 filed under the Securities Act of 1933. +C. +Registration Statement No. 333-11077 on Form S-3 filed with the Securities and Exchange +Commission on August 29, 1996. +D. +Meridian’s Schedule T-O filed with the Securities and Exchange Commission on October 24, 2003. +E. +Meridian’s Form 8-K filed with the Securities and Exchange Commission on June 17, 1993. +F. +Meridian’s Forms 8-K filed with the Securities and Exchange Commission on February 8, 1994 +and April 6, 1994. +G. +Meridian’s Form 8-K filed with the Securities and Exchange Commission on July 2, 1996. +H. +Meridian’s Form 8-K filed with the Securities and Exchange Commission on September 17, 1998. +I. +Not used. +J. +Registration Statement No. 33-78868 on Form S-8 filed with the Securities and Exchange +Commission on May 12, 1994. +K. +Meridian’s Annual Report on Form 10-K for the Fiscal Year Ended September 30, 1996. +L. +Meridian’s Annual Report on Form 10-K for the Fiscal Year Ended September 30, 1995. +M. +Company’s Report on Form 8-K filed with the Securities and Exchange Commission filed on +November 13, 1998. +N. +Meridian’s Proxy Statement filed with the Securities and Exchange Commission on December 21, +1998. +O. +Meridian’s Current Report on Form 8-K dated September 29, 2000. +-76- +Table of Contents +P. +Meridian’s Annual Report on Form 10-K for the Fiscal Year Ended September 30, 1999. +Q. +Registration Statement No. 333-75312 on Form S-8 filed with the Securities and Exchange +Commission on December 17, 2001 +R. +Meridian’s Annual Report on Form 10-K for the Fiscal Year Ended September 30, 2001. +S. +Meridian’s Annual Report on Form 10-K for the Fiscal Year Ended September 30, 2003. +T. +Meridian’s Annual Report on Form 10-K for the Fiscal Year Ended September 30, 2004. +U. +Meridian’s Proxy Statement filed with the Securities and Exchange Commission on December 23, +2004. +V. +Meridian’s Form 8-K dated January 19, 2006. +W. +Meridian’s Annual Report on Form 10-K for the Fiscal Year Ended September 30, 2005. +X. +Meridian’s Form 8-K filed November 21, 2006 +SIGNATURES +Pursuant to the requirements of Sections 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. +MERIDIAN BIOSCIENCE, INC. +By: +/s/ William J. Motto +Date: November 30, 2007 +William J. Motto +Chairman of the Board +and Chief Executive Officer +-77- +Table of Contents +Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by +the following persons on behalf of the Registrant and in the capacities and on the dates indicated. +Signature +Capacity +Date +/s/ William J. Motto +William J. Motto +Chairman of the Board of +Directors and Chief Executive +Officer (Principal Executive +Officer) +November 30, 2007 +/s/ John A. Kraeutler +John A. Kraeutler +President and Chief Operating +Officer, Director +November 30, 2007 +/s/ Melissa Lueke +Melissa Lueke +Vice President and Chief +Financial Officer +November 30, 2007 +/s/ James A. Buzard +James A. Buzard +Director +November 30, 2007 +/s/ Gary P. Kreider +Gary P. Kreider +Director +November 30, 2007 +/s/ David C. Phillips +David C. Phillips +Director +November 30, 2007 +/s/ Robert J. Ready +Robert J. Ready +Director +November 30, 2007 +-78- +Table of Contents +SCHEDULE II +Meridian Bioscience, Inc. +and Subsidiaries +Valuation and Qualifying Accounts +(Dollars in thousands) +Years Ended September 30, 2007, 2006 and 2005 +Charged +Balance at +to Costs +Balance +Beginning +and +at End of +Description +of Period +Expenses +Deductions +Other (a) +Period +Year Ended September 30, 2007: +Allowance for doubtful accounts +$ +408 +19 +(200 +) +31 +$ +258 +Inventory realizability reserves +1,158 +259 +(258 +) +3 +1,162 +Valuation allowances – deferred taxes +888 +— +(390 +) +71 +569 +Year Ended September 30, 2006: +Allowance for doubtful accounts +$ +360 +$ +132 +$ +(102 +) +$ +18 +$ +408 +Inventory realizability reserves +556 +822 +(221 +) +1 +1,158 +Valuation allowances – deferred taxes +927 +— +(32 +) +(7 +) +888 +Year Ended September 30, 2005: +Allowance for doubtful accounts +$ +479 +$ +(37 +) +$ +(88 +) +$ +6 +$ +360 +Inventory realizability reserves +271 +494 +(369 +) +160 +556 +Valuation allowances – deferred taxes +1,177 +— +(223 +) +(27 +) +927 +(a) +Balances reflect the effects of currency translation (fiscal years 2005-2007) and the +acquisition of OEM Concepts January 31, 2005 (fiscal year 2005). +-79- \ No newline at end of file diff --git a/raw/filings/0000794172/2007/0000950152-07-009366/filing_metadata.csv b/raw/filings/0000794172/2007/0000950152-07-009366/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..46ee58bc2ed7b71f1e022d24bee84d499c370b1c --- /dev/null +++ b/raw/filings/0000794172/2007/0000950152-07-009366/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000794172,VIVO,MERIDIAN BIOSCIENCE INC,10-K,2007-11-30,2007-09-30,2007-11-30T19:37:02.000Z,0000950152-07-009366,l28988ae10vk.htm,"MERIDIAN BIOSCIENCE, INC. 10-K",903996,0,0,https://www.sec.gov/Archives/edgar/data/794172/000095015207009366/l28988ae10vk.htm,https://www.sec.gov/Archives/edgar/data/794172/000095015207009366/,2007,2007,1 diff --git a/raw/filings/0000794172/2007/0000950152-07-009366/item1.txt b/raw/filings/0000794172/2007/0000950152-07-009366/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..b403e1feded41c15c4b1856ee68d5a82afe68036 --- /dev/null +++ b/raw/filings/0000794172/2007/0000950152-07-009366/item1.txt @@ -0,0 +1,311 @@ +ITEM 1. +BUSINESS +Overview +Meridian is a fully-integrated life science company whose principal businesses are (i) the +development, manufacture, sale and distribution of diagnostic test kits, primarily for certain +respiratory, gastrointestinal, viral and parasitic infectious diseases, (ii) the manufacture and +distribution of bulk antigens, antibodies, and reagents used by researchers and other diagnostic +manufacturers and (iii) the contract development and manufacture of proteins and other biologicals +for use by biopharmaceutical and biotechnology companies engaged in research for new drugs and +vaccines. By exploiting revenue opportunities across research, clinical diagnostics, and +therapeutics, we strive to maximize revenues, efficiently invest in research and development, and +increase profitability of our manufacturing operations. +Operating Segments +Our reportable operating segments are US Diagnostics, European Diagnostics, and Life Science. The +US Diagnostics operating segment consists of manufacturing operations in Cincinnati, Ohio, and the +sale and distribution of diagnostics test kits in the US and countries outside of Europe, Africa +and the Middle East. The European Diagnostics operating segment consists of the sale and +distribution of diagnostics test kits in Europe, Africa and the Middle East. The Life Science +operating segment consists of manufacturing operations in Memphis, Tennessee, Saco, Maine, and Boca +Raton, Florida, and the sale and distribution of bulk antigens, antibodies, and bioresearch +reagents domestically and abroad. The Life Science operating segment also includes the contract +development and manufacture of proteins and other biologicals for use by biopharmaceutical and +biotechnology companies engaged in research for new drugs and vaccines. Financial +-3- +Table of Contents +information for Meridian’s operating segments is included in Note 9 to the consolidated financial +statements contained herein. +Our primary source of domestic and international revenues continues to be core diagnostic products, +which represented 80% of consolidated net sales for fiscal 2007. Our diagnostic products provide +accuracy, simplicity, and speed, enable early diagnosis and treatment of common, acute medical +conditions, and provide for better patient outcomes at reduced costs. We target diagnostics for +disease states that (i) are acute conditions where rapid diagnosis impacts patient outcomes, (ii) +have opportunistic demographic and disease profiles, (iii) are underserved by current diagnostic +products, and (iv) have difficult sample handling requirements. This approach has allowed us to +establish significant market share in our target disease states. +Our website is www.meridianbioscience.com . We make available our Annual Reports on Form 10-K, +Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments thereto, free of +charge through this website, as soon as reasonably practicable after such material has been +electronically filed with or furnished to the Securities and Exchange Commission. These reports +may also be read and copied at the SEC’s public reference room at 100 F Street, N.E., Room 1580, +Washington, DC 20549, phone 1-800-732-0330. The SEC maintains an internet site containing these +filings and other information regarding Meridian at http://www.sec.gov . +US Diagnostics Operating Segment +Overview +Our US Diagnostics operating segment’s business focuses on the development, manufacture, sale and +distribution of diagnostic test kits, primarily for certain respiratory, gastrointestinal, viral +and parasitic infectious diseases. In addition to diagnostic test kits, products also include +transport media that store and preserve specimen samples from patient collection to laboratory +testing. Third-party sales for this operating segment were $74,845,000, $65,721,000 and +$53,485,000 for fiscal 2007, 2006 and 2005, respectively, reflecting a three-year compound annual +growth rate of 16%. As of September 30, 2007, our US Diagnostics operating segment had 250 +employees. +Our diagnostic test kits utilize immunodiagnostic technologies, which test samples of blood, urine, +stool, and other body fluids or tissue for the presence of antigens and antibodies of specific +infectious diseases. Specific immunodiagnostic technologies used in our diagnostic test kits +include enzyme immunoassay, immunofluorescence, particle agglutination/aggregation, +immunodiffusion, complement fixation, and chemical stains. +-4- +Table of Contents +Our diagnostic products are used principally in the detection of respiratory diseases, such as +pneumonia, valley fever, influenza, and Respiratory Syncytial Virus (RSV); gastrointestinal +diseases, such as stomach ulcers ( H. pylori ), antibiotic-associated diarrhea (C. difficile ) and +pediatric diarrhea (Rotavirus and Adenovirus); viral diseases, such as Mononucleosis, Herpes +Simplex, Chicken Pox and Shingles (Varicella-Zoster) and Cytomegalovirus (organ transplant +infections); and parasitic diseases, such as Giardiasis, Cryptosporidiosis and Lyme. The primary +markets and customers for these products are reference laboratories, hospitals, and physicians’ +offices. +Market Trends +The global market for infectious disease tests continues to expand as new disease states are +identified, new therapies become available, and worldwide standards of living and access to health +care improve. More importantly, within this market there is a continuing shift from conventional +testing, which requires highly trained personnel and lengthy turnaround times for test results, to +more technologically advanced testing which can be performed by less highly trained personnel and +completed in minutes or hours. +The increasing pressures to contain total health care costs have accelerated the increased use of +diagnostic testing. With rapid and accurate diagnoses of infectious diseases, physicians can +pinpoint appropriate therapies quickly, leading to faster recovery, shorter hospital stays and +lower treatment expense. In addition, these pressures have led to a major consolidation among +reference laboratories and the formation of multi-hospital alliances that have reduced the number +of institutional customers for diagnostic products and resulted in changes in buying practices. +Specifically, multi-year exclusive or primary source marketing or distribution contracts with +institutional customers have become more common, replacing less formal distribution arrangements of +shorter duration and involving lower product volumes. +Sales and Marketing +Our US Diagnostics operating segment’s sales and distribution network consists of a direct sales +force in the US and independent distributors in the US and abroad. The direct sales force consists +of one senior director of sales, three regional sales managers, one director of corporate health +systems, one manager of corporate health systems, one director of health plan and payer markets, +one international distribution manager, 25 technical sales representatives, and three inside sales +representatives. We utilize two primary independent distributors in the US, who accounted for 51% +of the US Diagnostics operating segment’s third-party sales in fiscal 2007. We manage the selling +effort for key customers where these independent distributors are utilized. +Consolidation of the US healthcare industry is expected to continue and potentially affect our +customers. Industry consolidation puts pressure on pricing and aggregates buying power. In +response, we have looked to +-5- +Table of Contents +multi-year supply agreements with consolidated healthcare providers and major reference +laboratories to stabilize pricing. +Products and Markets +We have expertise in the development and manufacture of products based on multiple core diagnostic +technologies, each of which enables the visualization and identification of antigen/antibody +reactions for specific pathogens. Our product technologies include enzyme immunoassay, +immunofluorescence, particle agglutination/aggregation, immunodiffusion, complement fixation and +chemical stains. As a result, we are able to develop and manufacture diagnostic tests in a variety +of formats that satisfy customer needs and preferences, whether in a hospital, commercial or +reference laboratory or alternate site location. Our product offering consists of approximately +140 medical diagnostic products. Our products generally range in list price from $1 per test to +$33 per test. +Research and Development +Our US Diagnostics operating segment’s research and development organization consists of 14 +research scientists with expertise in biochemistry, immunology, mycology, bacteriology, virology, +and parasitology. Research and development expenses for the US Diagnostics operating segment for +fiscal 2007, 2006 and 2005 were $4,571,000, $3,342,000 and $3,043,000, respectively. This research +and development organization focuses its activities on new applications for our existing +technologies, improvements to existing products and development of new technologies. Research and +development efforts may occur in-house or with collaborative partners. We believe that new product +development is a key source for sustaining revenue growth. Our internally developed products +include Premier ä Platinum HpSA PLUS, Premier ä Toxins A & B, and +Immuno Card Ò Toxins A & B, which together accounted for 39% of our US Diagnostics +operating segment’s third-party sales during fiscal 2007. +We believe that the use of collaborative partners in the development of new products will +complement our internal research and development staff in a manner that allows us to bring products +to market more quickly than if development were to occur solely on an internal basis. During +August 2006, we entered into a partnership agreement with the Performance & Life Science Chemicals +Division of Merck KGaA, Darmstadt, Germany for the development of new clinical assays. Our first +product under this agreement, Immuno Card STAT! ® EHEC, was launched during the second +quarter of fiscal 2007. +Over the last 15 months, we have begun exploring and developing a molecular-based diagnostic +testing technology to complement our existing antigen/antibody-based testing technologies. This +first look at molecular-based testing started in October 2006, when we executed a license agreement +with Eiken Chemical Co., Ltd. that provides rights to Eiken’s loop-mediated isothermal +amplification technology. This license +-6- +Table of Contents +provides us with rights for infectious disease testing in the United States and 18 other geographic +markets. We currently have one product in active development using this molecular technology. +Several other infectious diseases have been identified for future development using this +technology. +Manufacturing +Our immunodiagnostic products require the production of highly specific and sensitive antigens and +antibodies. Meridian produces substantially all of its own requirements including monoclonal +antibodies and polyclonal antibodies, plus a variety of fungal, bacterial, and viral antigens. We +believe that we have sufficient manufacturing capacity for anticipated growth in the near term. +Intellectual Property, Patents, and Licenses +We own or license US and foreign patents for approximately 25 products manufactured by our US +Diagnostics operating segment, including Premier ä Platinum HpSA and Premier ä Platinum +HpSA Plus. In the absence of patent protection, we may be vulnerable to competitors who +successfully replicate our production and manufacturing technologies and processes. Our employees +are required to execute confidentiality and non-disclosure agreements designed to protect our +proprietary products. +Government Regulation +Our diagnostic products are regulated by the Food & Drug Administration (FDA) as “devices” pursuant +to the Federal Food, Drug, and Cosmetic Act (FDCA). Under the FDCA, medical devices are classified +into one of three classes (i.e., Class I, II or III). Class I and II devices are not expressly +approved by the FDA, but, instead, are “cleared” for marketing. Class III devices generally must +receive “pre-market approval” from the FDA as to safety and effectiveness. +Each of the diagnostic products currently marketed by us in the United States has been cleared by +the FDA pursuant to the 510(k) clearance process or is exempt from such requirements. We believe +that most, but not all, products under development will be classified as Class I or II medical +devices and, in the case of Class II devices, will be eligible for 510(k) clearance. +Sales of our diagnostic products in foreign countries are subject to foreign government regulation, +the requirements of which vary substantially from country to country. The time required to obtain +approval by a foreign country may be longer or shorter than that required for FDA approval and the +requirements may differ. +-7- +Table of Contents +European Diagnostics Operating Segment +Our European Diagnostics operating segment’s business focuses on the sale and distribution of +diagnostic test kits, manufactured both by our US Diagnostics operating segment and by third-party +vendors. Approximately 70% of third-party sales for fiscal 2007 for this operating segment were +products purchased from our US Diagnostics operating segment. Third-party sales for this operating +segment were $23,563,000, $19,828,000 and $17,818,000 for fiscal 2007, 2006 and 2005, respectively, +reflecting a three-year compound annual growth rate of 15%. As of September 30, 2007, the European +Diagnostics operating segment had 40 employees, including 17 employees in the direct sales force. +Our European Diagnostics operating segment’s sales and distribution network consists of direct +sales forces in Belgium, France, Holland, and Italy, and independent distributors in other European +countries, Africa and the Middle East. The European Diagnostics operating segment maintains a +distribution center in Milan, Italy. The primary markets and customers for this operating segment +are hospitals and reference laboratories. +The European Diagnostics operating segment’s functional currency is the Euro. The translation of +Euros into US dollars is subject to exchange rate fluctuations. +Life Science Operating Segment +Overview +Our Life Science operating segment’s business focuses on the development, manufacture, sale, and +distribution of bulk antigens, antibodies, and reagents used by researchers and other diagnostic +companies, as well as contract development and manufacturing services under clinical cGMP +conditions. Third-party sales for this operating segment were $24,555,000, $22,864,000 and +$21,662,000 for fiscal 2007, 2006 and 2005, respectively, reflecting a three-year compound annual +growth rate of 15%. As of September 30, 2007, our Life Science operating segment had 106 +employees. +Most of the revenue for our Life Science operating segment currently comes from the manufacture, +sale and distribution of bulk antigens, antibodies, and reagents used by researchers and other +diagnostic companies. During fiscal 2007, 27% of third-party sales for this segment were to one +customer, a substantial portion of which is under exclusive supply agreements that have annual +automatic renewal provisions. We have a long-standing relationship with this customer, and +although there can be no assurances, we intend to renew these supply agreements in the normal +course of business. +Our clinical cGMP protein production facility in Memphis, Tennessee serves as an enabling +technology for process development and large-scale manufacturing for biologicals used in new drugs +and vaccines. The size of the facility is intended to accommodate manufacturing requirements for +Phase I and Phase II clinical trials. +-8- +Table of Contents +The customer base for this aspect of our Life Science business includes biopharmaceutical and +biotechnology companies, as well as government agencies, such as the National Institutes of Health. +Revenues for our Life Science operating segment, in the normal course of business, may be affected +from quarter to quarter by the timing and nature of arrangements for contract services work, which +may have longer production cycles than bioresearch reagents and bulk antigens and antibodies, as +well as buying patterns of major customers. See Note 1(j) to the Consolidated Financial Statements +herein for revenue recognition policies. Our revenues for contract services were $765,000, +$2,537,000, and $3,053,000 in fiscal 2007, 2006, and 2005, respectively. +Products, Markets and Growth Strategies +Our Life Science operating segment’s businesses have been assembled via acquisitions (BIODESIGN +International in fiscal 1999, Viral Antigens in fiscal 2000, and most recently, OEM Concepts in +fiscal 2005). Historically, these businesses were run autonomously. Over the last 18 months, +growth strategies have been developed around sales and marketing integration, new product +development integration, and four product brands. Our Life Science operating segment’s four +product brands can be described as follows: +• +BIODESIGN – Antibodies, antigens and assay development reagents +• +Viral Antigens – Custom infectious disease antigens +• +OEM Concepts – Custom antibody development and manufacturing, in vivo or in vitro +• +Meridian Biologics – Development and manufacturing of cGMP clinical grade biologicals +We believe that the business and growth prospects for all four product brands are favorable. +Products from the BIODESIGN, OEM Concepts, and Viral Antigens brands are marketed primarily to +diagnostic manufacturing customers as a source of raw materials for their products, or as an +outsourced step in their manufacturing processes. These markets are highly fragmented; however, we +believe we can be successful through product and marketing integration and customer penetration +across these three brands. These three brand names were aligned with the predecessor company +names, prior to acquisition, as we believe that there is value in the names of these long-standing +businesses. Sales efforts are focused on multi-year supply agreements in order to provide +stability in volumes and pricing. We believe this benefits both us and our customers. +With respect to our Meridian Biologics brand and contract services, we believe that the business +prospects are also favorable despite our recent revenue trends for this brand. In August 2007, we +were awarded a five-year contract (base year plus four option years) having a sales value of up to +$12,200,000 for the manufacturing of experimental clinical vaccines for the National Institutes of +Allergy and Infectious Diseases of the National Institutes of Health. This contract provides an +opportunity for steady production work over a five-year period. +-9- +Table of Contents +Research and Development +Our Life Science operating segment’s research and development organization consists of 5 research +scientists. Research and development expenses for our Life Science operating segment for fiscal +2007, 2006 and 2005 were $1,514,000, $1,457,000 and $823,000, respectively. This research and +development organization has integrated its activities around the four product brands previously +discussed. +Manufacturing and Government Regulation +The cGMP clinical grade proteins that are produced in our Memphis facility are intended to be used +as “injectables”. As such, they are produced under cGMP Regulations for Biologics and Human Drugs +under the auspices of the FDA. Approval and licensing, following clinical trials, of these +products is the responsibility of the applicant, who owns the rights to each protein. Typically, +the customer is the applicant, not Meridian Life Science. +All of the Meridian Life Science facilities are ISO 9001:2000 certified and EC 1774:2002 approved. +Competition +Diagnostics +The market for diagnostic tests is a multi-billion dollar international industry, which is highly +competitive. Many of our competitors are larger with greater financial, research, manufacturing +and marketing resources. Important competitive factors of Meridian’s products include product +quality, price, ease of use, customer service, and reputation. In a broader sense, industry +competition is based upon scientific and technological capability, proprietary know-how, access to +adequate capital, the ability to develop and market products and processes, the ability to attract +and retain qualified personnel and the availability of patent protection. To the extent that our +product lines do not reflect technological advances, our ability to compete in those product lines +could be adversely affected. +The diagnostic test industry is highly fragmented and segmented. Of importance in the industry are +mid-sized medical diagnostic specialty companies, like Meridian, that offer multiple, broad product +lines and have the ability to deliver new, high value products quickly to the marketplace. Among +the companies with which we compete in the marketing of one or more of our products are Abbott +Laboratories Inc., Becton, Dickinson and Company, Diagnostic Products Corporation (acquired by +Siemens in 2006), Quidel Corporation, Inverness Medical, and Remel (owned by Thermo Fisher). +-10- +Table of Contents +Life Science +The market for bulk biomedical reagents is highly competitive. Important competitive factors +include product quality, price, customer service, and reputation. We face competitors, many of +which have greater financial, research and development, sales and marketing, and manufacturing +resources where sole-source supply arrangements do not exist. From time to time, customers may +choose to manufacture their biomedical reagents in-house rather than purchase from outside vendors +such as Meridian. +The market for contract manufacturing in a validated cGMP facility such as our Memphis facility is +also competitive. Important competitive factors include reputation, customer service, and price. +Although the product application for this facility was built from our existing expertise in cell +culture manufacturing techniques, we face competitors with greater experience in contract +manufacturing in a clinical cGMP environment. +Acquisitions +Acquisitions have played an important role in the historical growth of our businesses. Our +acquisition objectives include, among other things, (i) enhancing product offerings, (ii) improving +product distribution capabilities, (iii) providing access to new markets, and/or (iv) providing +access to key biologicals or new technologies that lead to new products. Although we cannot +provide any assurance that we will consummate any acquisitions in the future, we expect that the +potential for acquisitions will continue to serve as an opportunity for new revenues and earnings +growth in the future. +International Markets +International markets are an important source of revenue and future growth opportunities for all of +our operating segments. For all operating segments combined, international sales were $38,691,000 +or 31% of total fiscal 2007 sales, $34,557,000 or 32% of total fiscal 2006 sales and $30,232,000 or +33% of total fiscal 2005 sales. Domestic exports for our US Diagnostics and Life Science operating +segments were $15,128,000, $14,728,000 and $12,414,000 in fiscal 2007, 2006 and 2005, respectively. +We expect to continue to look to international markets as a source of new revenues and growth in +the future. +Environmental +We are a conditionally exempt small quantity generator of hazardous waste and have a US EPA +identification number. All hazardous material is manifested and disposed of properly. We are in +compliance with applicable portions of the federal and state hazardous waste regulations and have +never been a party to any environmental proceeding. +-11- +Table of Contents \ No newline at end of file diff --git a/raw/filings/0000794172/2007/0000950152-07-009366/item13.txt b/raw/filings/0000794172/2007/0000950152-07-009366/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..f485016afbcaf9db2ed8f05aab78335fe3843625 --- /dev/null +++ b/raw/filings/0000794172/2007/0000950152-07-009366/item13.txt @@ -0,0 +1,2 @@ +Item 13 Certain Relationships and Related Transactions +73 \ No newline at end of file diff --git a/raw/filings/0000794172/2007/0000950152-07-009366/item9a.txt b/raw/filings/0000794172/2007/0000950152-07-009366/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..3da821bc3d782e5237d772f3e1fe9e35a0e05f73 --- /dev/null +++ b/raw/filings/0000794172/2007/0000950152-07-009366/item9a.txt @@ -0,0 +1,20 @@ +ITEM 9A. +CONTROLS AND PROCEDURES +As of September 30, 2007, an evaluation was completed under the supervision and with the +participation of our management, including our Chief Executive Officer and Chief Financial Officer, +of the effectiveness of the design and operation of our disclosure controls and procedures pursuant +to Rule 13a-15(b) and 15d-15(b) promulgated under the Securities Exchange Act of 1934, as amended. +Based on that evaluation, our management, including the CEO and CFO, concluded that our disclosure +controls and procedures were effective as of September 30, 2007. There have been no changes in our +internal control over financial reporting identified in connection with the evaluation of internal +control that occurred during the fourth fiscal quarter that has materially affected, or is +reasonably likely to affect, our internal control over financial reporting, or in other factors +that could significantly affect internal control subsequent to September 30, 2007, other than we +implemented, as planned, new enterprise resource planning and general ledger and financial +reporting systems for our Life Science facilities during the first quarter of fiscal 2008. These +new system implementations provide the appropriate foundation to support future growth in our Life +Science operating segment. +Our internal control report is included in this Annual Report on Form 10-K after Item 8, under the +caption “Management’s Report on Internal Control over Financial Reporting”. +-72- +Table of Contents \ No newline at end of file diff --git a/raw/filings/0000794172/2007/0000950152-07-009366/rp_note.txt b/raw/filings/0000794172/2007/0000950152-07-009366/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000794172/2007/0000950152-07-009366/rpt_disclosure.txt b/raw/filings/0000794172/2007/0000950152-07-009366/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..42bcb95a2233b932282074143502f135fc1aaff1 --- /dev/null +++ b/raw/filings/0000794172/2007/0000950152-07-009366/rpt_disclosure.txt @@ -0,0 +1,7 @@ +CERTAIN RELATED PERSON TRANSACTIONS +Todd Motto, the adult son of William J. Motto, is Vice President, Sales and Marketing. Todd Motto received $343,311 in compensation for fiscal 2007. This compensation consisted of base salary of $168,273, bonus of $131,254 under the Officers’ Performance Compensation +21 +Plan, $8,834 of auto and professional allowances, $11,972 of retirement plan contributions, and $22,978 related to stock option awards. +Nasdaq rules require the Company to conduct an appropriate review of related party transactions required to be disclosed by the Company pursuant to SEC Regulation S-K Item 404 for potential conflict of interest situations on an ongoing basis and that all such transactions must be approved by the Audit Committee or another committee comprised of independent directors. As a result, the Audit Committee annually reviews all such related party transactions and approves each related party transaction if it determines that it is in the best interests of the Company. Additionally, the Audit Committee’s Charter provides it the authority to review, approve and monitor transactions involving the Company and “related persons” (directors and executive officers or their immediate family members, or shareholders owning five percent or greater of the Company’s outstanding stock). This also covers +any related person transaction that meets the minimum threshold for disclosure in the proxy statement under the relevant SEC rules (generally, transactions involving amounts exceeding $120,000 in which a related person has a direct or indirect material interest). In considering the transaction, the Audit Committee may consider all relevant factors, including, as applicable, (i) the Company’s business rationale for entering into the transaction; (ii) the alternatives to entering into a related person transaction; (iii) whether the transaction is on terms comparable to those available to third parties, or in the case of employment relationships, to employees generally; (iv) the potential for the transaction to lead to an actual or apparent conflict of interest and any safeguards imposed to prevent such actual or apparent conflicts; and (vi) the overall fairness of the transaction to the Company. While the Company adheres to this policy for potential related person transactions, the +policy, except as described above, is not in written form and approval of such related person transactions are evidenced by internal Company resolutions where applicable and/or our practice of approving transactions in this manner. \ No newline at end of file diff --git a/raw/filings/0000794172/2012/0001193125-12-485192/filing.txt b/raw/filings/0000794172/2012/0001193125-12-485192/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..286b6a90e6ee1ffef79233cab3406a542217340c --- /dev/null +++ b/raw/filings/0000794172/2012/0001193125-12-485192/filing.txt @@ -0,0 +1,3853 @@ +10-K +1 +d413125d10k.htm +FORM 10-K +FORM 10-K +Table of Contents +SECURITIES AND EXCHANGE +COMMISSION +Washington, D.C. 20549 +FORM 10-K +FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +x +ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2012. +¨ +TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +FOR THE TRANSITION PERIOD FROM +TO +Commission File No. 0-14902 +MERIDIAN +BIOSCIENCE, INC. +3471 River Hills Drive +Cincinnati, Ohio 45244 +IRS Employer ID No. 31-0888197 +Incorporated under the Laws of Ohio +Phone: (513) 271-3700 +Securities Registered Pursuant to +Section 12(b) of the Act: +Title of each class +Name of each exchange of which registered +Common Shares, No Par Value +The NASDAQ Stock Market LLC +(NASDAQ Global Select Market) +Securities Registered Pursuant to Section 12(g) of the Act: +None +Indicate by check mark if the +registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities +Act. YES x NO ¨ +If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange +Act. YES ¨ NO x +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, and +(2) has been subject to such filing requirements for the past 90 days. YES x +NO ¨ +Indicate by check mark whether the registrant has submitted electronically +and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to +submit and post such files). YES x NO ¨ +Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this Chapter) is not contained +herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. +YES ¨ NO x +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated +filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. +Large accelerated filer +x +Accelerated filer +¨ +Non-accelerated filer +¨ (Do not check if a smaller reporting company) +Smaller reporting company +¨ +Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). +YES ¨ NO x +The aggregate market value of Common Shares held by non-affiliates as of March 31, 2012 was $776,516,425 based on a closing sale price of $19.38 per share on March 31, 2012. As of +October 31, 2012, 41,287,417 no par value Common Shares were issued and outstanding. +Documents +Incorporated by Reference +Portions of the Registrant’s Annual Report to Shareholders for the fiscal year ended September 30, +2012 furnished to the Commission pursuant to Rule 14a-3(b) are incorporated by reference in Part II as specified and portions of the Registrant’s Proxy Statement to be filed with the Commission for its 2013 Annual Shareholders’ Meeting are +incorporated by reference in Part III as specified. +Table of Contents +MERIDIAN BIOSCIENCE, INC. +INDEX TO ANNUAL REPORT +ON FORM 10-K +Page +Part I +Item 1 Business +3 +Item 1A Risk Factors +16 +Item 1B Unresolved Staff Comments +23 +Item 2 Properties +24 +Item 3 Legal Proceedings +25 +Item 4 Mine Safety Disclosures +25 +Part II +Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity +Securities +25 +Item 6 Selected Financial Data +26 +Item 7 Management’s Discussion and Analysis of Financial Condition and Results of +Operations +26 +Item 7A Quantitative and Qualitative Disclosures about Market Risk +44 +Item 8 Financial Statements and Supplementary Data +45 +Item 9 Changes in and Disagreements with Accountants on Accounting and Financial +Disclosure +73 +Item 9A Controls and Procedures +74 +Item 9B Other Information +74 +Part III +Item 10 Directors, Executive Officers and Corporate Governance +75 +Item 11 Executive Compensation +75 +Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder +Matters +75 +Item 13 Certain Relationships and Related Transactions, and Director Independence +75 +Item 14 Principal Accounting Fees and Services +75 +Item 15 Exhibits and Financial Statement Schedules +76 +FORWARD LOOKING STATEMENTS +This Annual Report on Form 10-K contains forward-looking statements. The Private Securities Litigation Reform Act of 1995 provides a safe harbor from civil litigation for forward-looking statements +accompanied by meaningful cautionary statements. Except for historical information, this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the +Securities Exchange Act of 1934, which may be identified by words such as “estimates”, “anticipates”, “projects”, “plans”, “seeks”, “may”, “will”, “expects”, +“intends”, “believes”, “should” and similar expressions or the negative versions thereof and which also may be identified by their context. Such statements, whether expressed or implied, are based upon current +expectations of the Company and speak only as of the date made. The Company assumes no obligation to publicly update or revise any forward-looking statements even if experience or future changes make it clear that any projected results expressed or +implied therein will not be realized. These statements are subject to various risks, uncertainties and other factors that could cause actual results to differ materially, including, without limitation, the following: Meridian’s continued growth +depends, in part, on its ability to introduce into the marketplace enhancements of existing products or new products that incorporate technological advances, meet customer requirements and respond to products developed by Meridian’s +competition. While Meridian has introduced a number of internally developed products, there can be no assurance that it will be successful in the future in introducing such products on a timely basis. Meridian relies on proprietary, patented and +licensed technologies, and the Company’s ability to protect its intellectual property rights, as well as the potential for intellectual property litigation, would impact its results. Ongoing consolidations of reference laboratories and +formation of multi-hospital alliances may cause adverse changes to pricing and distribution. Recessionary pressures on the economy and the markets in which our customers operate, as well as adverse trends in buying patterns from customers can change +expected results. Costs and difficulties in complying with laws and regulations, including those administered by the United States Food and Drug Administration, can result in unanticipated expenses and delays and interruptions to the sale of new and +existing products. The international scope of Meridian’s operations, including changes in the relative strength or weakness of the U.S. dollar and general economic conditions in foreign countries, can make results difficult to predict. One of +Meridian’s growth strategies is the acquisition of companies and product lines. There can be no assurance that additional acquisitions will be consummated or that, if consummated, will be successful and the acquired businesses will be +successfully integrated into Meridian’s operations. There may be risks that acquisitions may disrupt operations and may pose potential difficulties in employee retention and there may be additional risks with respect to Meridian’s ability +to recognize the benefits of acquisitions, including potential synergies and cost savings or the failure of acquisitions to achieve their plans and objectives. The Company cannot predict the possible impact of recently-enacted United States +healthcare legislation and any similar initiatives in other countries on its results of operations. In addition to the factors described in this paragraph, Part I, Item 1A Risk Factors contains a list and description of uncertainties, risks and +other matters that may affect the Company. +Table of Contents +PART I. +This Annual Report on Form 10-K includes forward-looking statements about our business and results of operations that are subject to risks and uncertainties. See “Forward Looking Statements” +above. Factors that could cause or contribute to such differences include those discussed in Item 1A. Risk Factors. In addition to the risk factors discussed herein, we are also subject to additional risks and uncertainties not presently known +to us or that we currently deem immaterial. If any of these risks and uncertainties develop into actual events, our business, financial condition or results of operations could be adversely affected. +Unless the context requires otherwise, references in this Annual Report on Form 10-K to “Meridian,” “we,” “us,” +“our,” or “our company” refer to Meridian Bioscience, Inc. and its subsidiaries. +In the discussion that follows, all +dollars and shares are in thousands (both tables and text), except per share data. +ITEM 1. +BUSINESS +Overview +Meridian is a fully-integrated +life science company with principal businesses in (i) the development, manufacture, sale and distribution of clinical diagnostic test kits, primarily for certain gastrointestinal, viral, respiratory and parasitic infectious diseases; +(ii) the manufacture and distribution of bulk antigens, antibodies, PCR/qPCR reagents, nucleotides, competent cells and bioresearch reagents used by researchers and other diagnostic manufacturers; and (iii) the contract development and +manufacture of proteins and other biologicals under cGMP conditions for use by biopharmaceutical and biotechnology companies engaged in research for new drugs and vaccines. The company was incorporated in Ohio in 1976. Our principal corporate +offices are located in Cincinnati, Ohio, USA. +Our website is www.meridianbioscience.com . We make available our Annual Reports on Form +10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments thereto, free of charge through this website, as soon as reasonably practicable after such material has been electronically filed with or furnished to the +Securities and Exchange Commission (SEC). These reports may also be read and copied at the SEC’s public reference room at 100 F Street, N.E., Washington, DC 20549, phone number 1-800-732-0330. The SEC maintains an internet site containing these +filings and other information regarding Meridian at www.sec.gov . The information on our website is not and should not be considered part of this Annual Report on Form 10-K. +- 3 - +Table of Contents +Reportable Segments +Our reportable segments are U.S. Diagnostics, European Diagnostics and Life Science. The U.S. Diagnostics segment consists of manufacturing operations in Cincinnati, Ohio, and the sale and distribution of +diagnostic test kits in the U.S. and countries outside of Australia, Europe, Africa and the Middle East. The European Diagnostics segment consists of the sale and distribution of diagnostic test kits in Australia, Europe, Africa and the Middle East. +The Life Science segment consists of manufacturing operations in Memphis, Tennessee; Boca Raton, Florida; London, England; Luckenwalde, Germany; and Sydney, Australia, and the sale and distribution of bulk antigens, antibodies, PCR/qPCR reagents, +nucleotides, competent cells and bioresearch reagents domestically and abroad. The Life Science segment also includes the contract development and manufacture of cGMP clinical grade proteins and other biologicals for use by biopharmaceutical and +biotechnology companies engaged in research for new drugs and vaccines. Financial information for Meridian’s segments is included in Note 8 to the consolidated financial statements. +Our primary source of revenues continues to be diagnostic products, with our Diagnostics segments providing 75% of consolidated net sales for fiscal 2012. Our diagnostic products provide accuracy, +simplicity and speed, enable early diagnosis and treatment of common, acute medical conditions, and provide for better patient outcomes at reduced costs. We target diagnostics for disease states that (i) are acute conditions where rapid +diagnosis impacts patient outcomes; (ii) have opportunistic demographic and disease profiles; (iii) are underserved by current diagnostic products; and (iv) have difficult sample handling requirements. This approach has allowed us to +establish significant market share in our target disease states. The acquisition of the Bioline group of companies (collectively the “Bioline Group”) in July 2010 dramatically increased the revenue base for our Life Science segment; +revenues for our Life Science segment represented 25% of consolidated net sales for fiscal 2012. +Products and Markets +We have expertise in the development and manufacture of products based on multiple core diagnostic technologies. Our product technologies include DNA +amplification, enzyme immunoassay, immunofluorescence, particle agglutination/aggregation, immunodiffusion, complement fixation and chemical stains. As a result, we are able to develop and manufacture diagnostic tests in a variety of formats that +satisfy customer needs and preferences, whether in a hospital, commercial or reference laboratory, or alternate site location. Our product offering consists of approximately 140 clinical diagnostic products. +Sales within our focus product families – C. difficile, foodborne and H. pylori – accounted for 62%, 58% and 51% of our U.S. +Diagnostics segment’s third-party sales during fiscal 2012, 2011 and 2010, respectively. These same product families accounted for 47%, 44% and 43% of consolidated net sales in fiscal 2012, 2011 and 2010, respectively. +- 4 - +Table of Contents +U.S. Diagnostics Segment +Overview +Our U.S. Diagnostics segment’s business focuses on the development, +manufacture, sale and distribution of diagnostic test kits, primarily for certain gastrointestinal, viral, respiratory and parasitic infectious diseases. In addition to diagnostic test kits, products also include transport media that store and +preserve specimen samples from patient collection to laboratory testing. Third-party sales for this segment were $108,000, $97,000 and $92,000 for fiscal 2012, 2011 and 2010, respectively, reflecting a three-year compound annual growth rate of 3%. +Excluding influenza-related sales, the three-year compound annual growth rate was 8%. The higher rate reflects the impact of influenza-related sales in 2009 in connection with the H1N1 influenza pandemic. As of September 30, 2012, our U.S. +Diagnostics segment had approximately 290 employees. +Our diagnostic test kits utilize immunodiagnostic and molecular +technologies, which test samples of stool, blood, urine and other body fluids or tissue for the presence of specific infectious diseases. Specific immunodiagnostic technologies used in our diagnostic test kits include enzyme immunoassay, +immunofluorescence, particle agglutination/aggregation, immunodiffusion, complement fixation and chemical stains. During fiscal 2010 we commercialized our molecular amplification diagnostic testing platform, illumi gene ® , and introduced our first assay, C. difficile . The illumi gene ® C. difficile assay detects the presence of the toxin producing region from the C. difficile DNA, and +provides highly accurate results in under an hour. Throughout fiscal 2011 and fiscal 2012, we continued with the development of additional tests for the illumi gene ® molecular platform, receiving FDA clearance for our second and third molecular tests for the platform – illumi gene ® Group B Streptococcus (Group B Strep or GBS) in December 2011 and illumi gene ® Group A Streptococcus (Group A Strep) in September 2012. A test for Mycoplasma pneumoniae (Walking +Pneumonia) was recently submitted to the FDA for marketing clearance and is expected to be available for sale in the U.S. during the second quarter of fiscal 2013. Our fifth test on the illumi gene ® platform is for Bordetella pertussis (Whooping Cough), which is expected to be available for sale +in the U.S. during the third or fourth quarter of fiscal 2013. Our development pipeline for +illumi gene ® also includes two sexually-transmitted disease assays, expected to be available +for sale in the U.S. during the first half of fiscal 2014. +Our diagnostic products are used principally in the detection of gastrointestinal +diseases, such as antibiotic-associated diarrhea ( C. difficile ), pediatric diarrhea (Rotavirus and Adenovirus) and stomach ulcers ( H. pylori ); foodborne diseases such as Enterohemorrhagic E. coli infection (EHEC) and +Campylobacter jejuni (Campy); Streptococcus bacterial infections (both Group A and Group B Strep); viral diseases, such as Mononucleosis, Herpes Simplex, Chicken Pox and Shingles (Varicella-Zoster) and Cytomegalovirus (organ transplant +infections); parasitic diseases, such as Giardiasis, Cryptosporidiosis and Lyme; and respiratory diseases, such as Pneumonia, Valley Fever, Influenza and Respiratory Syncytial Virus (RSV). The primary markets and customers for these products are +reference laboratories and hospitals. +- 5 - +Table of Contents +In particular, the three tests we currently offer on our illumi gene ® platform – C. difficile , Group A Strep and Group B Strep – are expected to drive the majority +of growth in fiscal 2013. +C. difficile +Clostridium difficile ( C. difficile ) is a bacteria found in the gut that can cause serious damage to the colon +and even death, primarily in hospital patients using antibiotics. It is the most common infection acquired by patients while they are in the hospital. Annually in the U.S., an estimated 8 million C. difficile tests are performed. This +hospital acquired infection occurs when antibiotics disrupt other bacteria that normally prevent the colonization of C. difficile . Rapid, accurate diagnosis, followed by appropriate treatment is essential to improving patient outcomes +and reducing the overall cost of care. Our strong line of C. difficile tests, including our illumi gene ® C. difficile molecular test, provide the most comprehensive and accurate testing options for this serious and life threatening infection. +Group A Strep +Group A Streptococcus is the bacterium commonly found in the throat which causes strep throat (acute pharyngitis). Pharyngitis is diagnosed in approximately 11 million patients in the U.S. +each year. Our illumi gene ® Group A Strep test, the only FDA-cleared molecular Strep A test +in the U.S. market, provides results in less than one hour, detects more positives than culture methods and is ideal for early diagnosis and proper patient management of the common, sometimes serious disease. In addition to front line testing in +hospital and clinical settings, rapid strep throat tests performed in physician offices in the U.S. that are negative are routinely sent on to hospital and reference labs for confirmation testing, usually by culture methods that take up to 48 hours +to run. With results in less than one hour and a 53% increase in the detection of positives, +illumi gene ® Group A Strep provides improved patient care over culture methods. +Group B Strep +Each year in the U.S. there are over 4 million babies born. Appropriately testing women in the late stages of pregnancy for the presence of Group B Streptococcus is critical to the health of +the baby. Without proper treatment during labor, GBS infection can lead to sepsis, pneumonia and even meningitis, and lead to hearing and vision loss. Testing with our illumi gene ® GBS improves accuracy by up to 29% over traditional culture methods, increasing the likelihood of improved outcomes and a healthy baby. +Market Trends +The global market +for infectious disease tests continues to expand as new disease states are identified, new therapies become available, and worldwide standards of living and access to health care improve. More importantly, within this market there is a continuing +shift from conventional testing, which requires highly trained personnel and lengthy turnaround times for test results, to more technologically advanced testing, which can be performed by less highly trained personnel and completed in minutes or +hours. +- 6 - +Table of Contents +The increasing pressures to contain total health care costs have accelerated the increased use of diagnostic +testing. With rapid and accurate diagnoses of infectious diseases, physicians can pinpoint appropriate therapies quickly, leading to faster recovery, shorter hospital stays and lower overall treatment expense. In addition, these pressures have led +to a major consolidation among reference laboratories and the formation of multi-hospital group purchasing organizations and integrated delivery networks that have reduced the number of institutional customers for diagnostic products and resulted in +changes in buying practices. Specifically, multi-year exclusive or primary source marketing or distribution contracts with institutional customers have become more common, replacing less formal distribution arrangements. +Sales and Marketing +Our U.S. +Diagnostics segment’s sales and distribution network in the U.S. consists of a direct sales force complemented by independent distributors. The use of independent distributors in the U.S. allows our products to reach any bed-size healthcare +facility and also provides our customers the option to purchase our products direct or through distribution along with other supplies. For our export markets in Asia, Canada and South America, we use independent distributors. Two independent +distributors in the U.S. accounted for 10% or more of consolidated net sales in fiscal 2012, 2011 and 2010: Cardinal Healthcare Corporation and Fisher Scientific. Our sales to Cardinal were approximately $33,000, $30,000 and $34,000 during fiscal +2012, 2011 and 2010, respectively. Our sales to Fisher were approximately $20,000, $18,000 and $18,000 during fiscal 2012, 2011 and 2010, respectively. +Consolidation of the U.S. healthcare industry is expected to continue and potentially affect our customers. Industry consolidation puts pressure on pricing and aggregates buying power. In response, we +have looked to multi-year supply agreements with group purchasing organizations, integrated delivery networks and major reference laboratories to stabilize pricing. +Clostridium difficile +C. difficile , a serious hospital +acquired bacterial infection, is our largest product family, generating approximately $36,000 in global sales for fiscal 2012, or 21% growth from fiscal 2011. This product family has experienced significant competition over the last three years from +new technologies, including molecular testing platforms. Our illumi gene ® molecular C. +difficile product has now been available in markets around the world for over two years. Sales of this product were approximately $22,000, $9,000 and $500 in fiscal 2012, 2011 and 2010, respectively. Approximately 950 clinical laboratories are +current customers using our illumi gene ® platform, which now includes three tests (see below +for a discussion of our second and third tests for Group B and Group A Strep). While the majority of these customers have adopted the C. difficile assay, a growing number of customers are purchasing multiple assays for the platform. Our +illumi gene ® molecular C. difficile product has restored the C. difficile +product family to positive sales growth, 21% and 10% during each of the last two fiscal years. +- 7 - +Table of Contents +Our major competitors in this product family are Cepheid and Becton Dickinson (molecular) and Alere +(immunoassay). We believe that we have two principal advantages versus our competition. First, our molecular instrumentation package has a smaller footprint and significantly lower cost than either Cepheid or Becton Dickinson. We believe that this +advantage allows our product to fit into virtually any size hospital or reference laboratory. We believe that our second principal advantage is the breadth of our C. difficile product offerings. With the launch of our molecular product and +FDA clearance of our common antigen C. difficile products – Premier C. difficile GDH received FDA clearance in May 2011, and Immuno Card C. difficile GDH received FDA clearance in December 2011 – we believe we are in a +unique position to offer a full line of testing solutions to our clinical laboratory customers around the world to counter the competitive pressures surrounding this market. Additionally, we hold the only FDA-approved claim for C. difficile +testing in the pediatric population. These advantages, along with the performance features of the products in our C. difficile portfolio, give us a compelling product offering for any hospital testing method preference. +During fiscal 2012, we received FDA clearance for our second and third molecular tests for the illumi gene ® molecular platform – illumi gene ® GBS (Group B Streptococcus ) in December 2011 and illumi gene ® Group A Strep (Group A Streptococcus ) in September 2012. As alluded to above, over 100 customers are now purchasing two assays for the +illumi gene ® platform – the majority being C. difficile and GBS – with +revenue generated by our GBS test approximating $1,100 during fiscal 2012. In addition, with the recent introduction of the Group A Strep test, there are a growing number of customers adopting all three of our molecular-platform assays. A test for +Mycoplasma pneumoniae was recently submitted to the FDA for marketing clearance and is expected to be available for sale in the U.S. during the second quarter of fiscal 2013. Our fifth test on the illumi gene ® platform is for Bordetella pertussis , which is expected to be available for sale in the U.S. during the +third or fourth quarter of fiscal 2013. Our development pipeline for illumi gene ® also +includes two sexually-transmitted disease assays, expected to be available for sale in the U.S. during the first half of fiscal 2014. +In +addition to Cepheid, Becton Dickinson and Alere, other competitors have begun to enter the C. difficile market. During fiscal 2012, Quest Diagnostics and Great Basin received FDA clearance for a molecular C. difficile test and Quidel +received CE marking approval for a molecular C. difficile test for sale within the European Union. Although we believe that the breadth of our C. difficile product offerings and our low cost molecular platform provide key advantages to +the offerings of our competitors, selling prices may come under pressure as more competitors enter the market. +- 8 - +Table of Contents +Foodborne +Our foodborne product family achieved approximately $21,000 in global sales for fiscal 2012, or growth of 13%, with over 95% of such sales occurring in the U.S. Our foodborne products include tests for +Enterohemorrhagic E. coli (EHEC) and Campylobacter jejuni (Campy). In the U.S. market, we believe that there are potentially 20 million annual stool cultures that are tested for foodborne illnesses. At present, we believe that we +have less than a 20% market share for EHEC and less than a 5% market share for Campy. +While historically the primary competition for our +foodborne products has been laboratory culture methods, one of our competitors, Alere, has recently cleared through the FDA a shiga toxin test that will compete with our EHEC test. We believe that our products have two principal advantages versus +culture methods. The first principal advantage is test accuracy. Independent evaluations have shown our products to have higher sensitivity than culture methods. The second principal advantage is improved work flow of the testing process, resulting +in significantly shortened time to test result. Our single-use rapid products provide a test result in approximately 20 minutes, whereas culture results can take up to 24-48 hours. Time to test result can be a critical factor in the physician’s +choice of therapies, as the mortality rate for EHEC is estimated to be 5% to 10%. +Helicobacter pylori +H. pylori , a bacterium found in the stomach, is a major cause of peptic ulcers and is linked to duodenal ulcers and stomach cancer. H. +pylori represents our second largest product family, generating approximately $24,000 in global sales for 2012, or 7% growth. We offer both antibody and direct antigen tests in alternative formats (single-use and high volume batch). Our major +competition in this product family are test-method alternatives, serology and urea breath, and the prescription of symptom-relieving medications. In the U.S., our strategy has been to partner with managed care companies to promote the health and +economic benefits of a test and treat strategy, and to move physician behavior away from serology-based testing toward direct antigen testing. In the U.S. market, we believe that there are potentially 30 million people suffering from peptic +ulcers and we believe that we currently have a 5% market share. +In European markets, we face a greater number of competitive products for +this product family. As a result, pricing pressures have led to 3% sales growth for fiscal 2012 for our European Diagnostics segment, excluding the effect of currency translation. +- 9 - +Table of Contents +Research and Development +Our U.S. Diagnostics segment’s research and development organization has expertise in biochemistry, immunology, mycology, bacteriology, virology, parasitology and molecular biology. Research and +development expenses for the U.S. Diagnostics segment for fiscal 2012, 2011 and 2010 were approximately $8,000, $7,000 and $6,000, respectively. This research and development organization focuses its activities on new applications for our existing +technologies, improvements to existing products and development of new technologies. Research and development efforts may occur in-house or with collaborative partners. We believe that new product development is a key source for sustaining revenue +growth. The products within our C. difficile , foodborne, and H. pylori product families were either developed solely in-house, or via collaboration with outside partners. +The introduction of our molecular amplification diagnostic testing platform, illumi gene ® , introduced in markets around the world over two years ago, followed nearly four years of exploration and +development of a molecular-based diagnostic testing technology to complement our existing antigen/antibody-based testing technologies. Our illumi gene ® C. difficile assay, the initial assay introduced for the illumi gene ® platform, detects the presence of a key toxin producing region from the C. difficile DNA, and provides highly accurate results in under an hour. We believe +this molecular assay uniquely positions us in the market to provide a full line of testing solutions that will meet the needs of both our domestic and international customers and, as a result, throughout fiscal 2011 and fiscal 2012, we continued +with the development of additional tests for the illumi gene ® molecular platform, receiving +FDA clearance for our second and third molecular tests for the platform – illumi gene ® +GBS (Group B Streptococcus ) in December 2011 and illumi gene ® Group A Strep (Group A +Streptococcus ) in September 2012. A test for Mycoplasma pneumoniae (Walking Pneumonia) was recently submitted to the FDA for marketing clearance and is expected to be available for sale in the U.S. during the second quarter of fiscal +2013. Our fifth test on the illumi gene ® platform is for Bordetella pertussis +(Whooping Cough), which is expected to be available for sale in the U.S. during the third or fourth quarter of fiscal 2013. Our development pipeline for illumi gene ® also includes two sexually-transmitted disease assays, expected to be available for sale in the U.S. during the first half of fiscal 2014. We currently hold +registrations to sell illumi gene ® in 37 countries, including the U.S., with registrations +pending in 5 additional countries. +During fiscal 2008, we launched our first products under our patented TRU rapid test +technology. The design of this technology enhances laboratory safety by containing the specimen in a closed system during testing as recommended by CDC guidelines. TRU tests also use less space than other immunoassay technologies, which is an +advantage in space-constrained clinical laboratories. Products using this technology include TRU FLU ® , TRU RSV ® , TRU EBV-M ® and TRU EBV-G ® . TRU +LEGIONELLA TM and TRU HSV 1 and 2 IgG TM the latest additions to the TRU line of products. Legionella was +launched in foreign markets during the fourth quarter of fiscal 2011, and became available in the U.S. market during the second quarter of fiscal 2012, while TRU HSV 1 and 2 IgG TM were registered for sale in Europe during September 2012. +- 10 - +Table of Contents +Manufacturing +Our immunodiagnostic and molecular products require the production of highly specific and sensitive antigens, antibodies, primers and enzymes. While we produce substantially all of our own requirements +including monoclonal antibodies and polyclonal antibodies, plus a variety of fungal, bacterial and viral antigens, currently a number of the raw materials used in our products, including our illumi gene ® molecular products, are purchased from outside vendors. We believe that we have sufficient manufacturing and +sourcing capacity for anticipated growth in the near term. +Intellectual Property, Patents and Licenses +We own or license U.S. and foreign patents, most of which are for products manufactured by our U.S. Diagnostics segment. Sales of these products are as +follows: +Product/Technology Family +Number of +products +% of consolidated sales +2012 +2011 +illumigene ® +3 +13 +% +6 +% +H. pylori +2 +13 +% +13 +% +Respiratory +3 +2 +% +2 +% +Other +6 +1 +% +1 +% +Total patented products +14 +29 +% +22 +% +The patents for the illumi gene ® products expire between 2020 and 2022; the patents for the two H. pylori products expire between 2016 and 2017; and the patents for the three respiratory +products expire in 2022 (two products) and 2027. The remaining six patented products for which we own or license patents are spread over three product families. +In the absence of patent protection, we may be vulnerable to competitors who successfully replicate our production and manufacturing technologies and processes. Our employees are required to execute +confidentiality and non-disclosure agreements designed to protect our proprietary products. +Government Regulation +Our diagnostic products are regulated by the Food & Drug Administration (FDA) as “devices” pursuant to the Federal Food, Drug, and +Cosmetic Act (FDCA). Under the FDCA, medical devices are classified into one of three classes (i.e., Class I, II or III). Class I and II devices are not expressly approved by the FDA, but, instead, are “cleared” for marketing. Class III +devices generally must receive “pre-market approval” from the FDA as to safety and effectiveness. +- 11 - +Table of Contents +Each of the diagnostic products currently marketed by us in the United States has been cleared by the FDA +pursuant to the 510(k) clearance process or is exempt from such requirements. We believe that most, but not all, products under development will be classified as Class I or II medical devices and, in the case of Class II devices, will be eligible +for 510(k) clearance; however, we can make no assurances in this regard. +Sales of our diagnostic products in foreign countries are subject to +foreign government regulation, the requirements of which vary substantially from country to country. The time required to obtain approval by a foreign country may be longer or shorter than that required for FDA approval and the requirements may +differ. +Meridian’s Cincinnati manufacturing facility is certified to ISO 13485:2003. +Medical Device Tax +Included +within the U.S. government’s comprehensive healthcare reform legislation, enacted during 2010, was the establishment of a 2.3% excise tax on the sales of medical devices beginning in calendar 2013. We currently anticipate that this legislation +will result in an excise tax for our company of approximately $2,000 in fiscal 2013. At the present time it is believed that little, if any, of this cost can be passed on to customers. +Seasonal Factors and Sporadic Outbreaks +Our principal business is the sale of a +broad range of diagnostic test kits for common gastrointestinal, viral, upper respiratory and parasitic infectious diseases. Certain infectious diseases may be seasonal in nature, while others may be associated with sporadic outbreaks, such as +foodborne illnesses, or pandemics such as the H1N1 influenza outbreak during fiscal 2009. While we believe that the breadth of our diagnostic product lines reduces the risk that infections subject to seasonality and sporadic outbreaks will cause +significant variability in diagnostic revenues, we can make no assurance that revenues will not be impacted period over period by such factors. +European Diagnostics Segment +Our +European Diagnostics segment’s business focuses on the sale and distribution of diagnostic test kits, manufactured both by our U.S. Diagnostics segment and by third-party vendors. Approximately 85% of third-party sales for fiscal 2012 for this +segment were products purchased from our U.S. Diagnostics segment. Third-party sales for this segment were approximately $23,000, $24,000 and $24,000 for fiscal 2012, 2011 and 2010, respectively. As of September 30, 2012, the European +Diagnostics segment had approximately 40 employees. Our European Diagnostics segment’s sales and distribution network consists of direct sales forces in Australia, Belgium, France, Holland and Italy, and independent distributors in other +European countries, Africa and the Middle East. The European Diagnostics segment maintains a distribution center near Milan, Italy. The primary markets and customers for this segment are hospitals and reference laboratories. +- 12 - +Table of Contents +The European Diagnostics segment’s functional currency is the Euro. The translation of Euros into U.S. +dollars is subject to exchange rate fluctuations. +Life Science Segment +Overview +Our Life Science segment’s business focuses on the development, +manufacture, sale and distribution of bulk antigens, antibodies, PCR/qPCR reagents, nucleotides, competent cells and bioresearch reagents used by researchers and other diagnostic companies, as well as contract development and manufacturing services +under clinical cGMP conditions. Third-party sales for this segment were approximately $43,000, $38,000 and $27,000 for fiscal 2012, 2011 and 2010, respectively. As of September 30, 2012, our Life Science segment had approximately 180 employees. +Most of the revenue for our Life Science segment currently comes from the manufacture, sale and distribution of bulk antigens, antibodies, +PCR/qPCR reagents, nucleotides, competent cells and bioresearch reagents used by researchers and other diagnostic companies. During fiscal 2012, 19% of third-party sales for this segment were to two diagnostic manufacturing customers. For one of +these two customers, we have exclusive supply agreements that have annual, automatic renewal provisions. We have a long-standing relationship with this customer; and although there can be no assurances, we intend to renew these supply agreements in +the normal course of business. +In July 2010, we acquired the Bioline Group and in so doing added important technologies and capabilities to +our Life Science business and complemented our expanding life science product lines sold into the research, pharmaceutical and commercial diagnostic markets. In addition to technological capabilities, Bioline also added proprietary know-how in the +production of high-volume nucleotides and PCR enzymes, as well as a growing portfolio of intellectual property in the form of patents and licenses. The Bioline Group contributed approximately $17,000 and $15,000 in sales for fiscal 2012 and 2011, +respectively. +Our clinical cGMP protein production facility in Memphis, Tennessee serves as an enabling technology for process development +and large-scale manufacturing for biologicals used in new drugs and vaccines. The size of the facility is intended to accommodate manufacturing requirements for Phase I and Phase II clinical trials. The customer base for this aspect of our Life +Science business includes biopharmaceutical and biotechnology companies, as well as government agencies. Revenues for our Life Science segment, in the normal course of business, may be affected from quarter to quarter by the timing and nature of +arrangements for contract services work, which may have longer production cycles than our immunodiagnostic and molecular biology products, as well as buying patterns of major customers. See Note 1 (i) to the Consolidated Financial Statements +herein for revenue recognition policies. Our revenues for contract services were approximately $2,000, $3,000 and $2,000 in fiscal 2012, 2011 and 2010, respectively. +- 13 - +Table of Contents +As a result of the order volume trends in bulk antigens, antibodies and reagents, during the fourth quarter +of fiscal 2011, we announced the closure of our Saco, Maine facility, and completed the consolidation of manufacturing operations into our Memphis, Tennessee facility during the third fiscal quarter of 2012. Total costs to complete the consolidation +of facilities approximated $2,100, consisting of fixed asset impairments, inventory impairments, stay bonuses and moving costs, among other similar items. During the fourth quarter of 2011, we recognized approximately $1,100 of these costs, and +recognized the remaining $1,000 during the first three quarters of fiscal 2012. +Products, Markets and Growth Strategies +Our Life Science segment’s businesses have been assembled via acquisitions (BIODESIGN International in fiscal 1999, Viral +Antigens in fiscal 2000, OEM Concepts in fiscal 2005, and the Bioline Group in July 2010). Historically, these businesses were run autonomously. In recent years, growth strategies have been developed around sales and marketing integration, new +product development integration, and the acquisition of complementary product lines. +Immunodiagnostic products such as antibodies, antigens +and reagents are marketed primarily to diagnostic manufacturing customers as a source of raw materials for their products, or as an outsourced step in their manufacturing processes. These products are typically sold in bulk quantities, and may also +be custom-designed for a particular manufacturer’s requirements. Sales efforts are focused on multi-year supply agreements in order to provide stability in volumes and pricing. We believe this benefits both us and our customers. +Molecular biology products such as PCR/qPCR reagents, nucleotides and competent cells are marketed primarily to research customers. These products are +typically sold in small quantities. +Research and Development +Research and development expenses for our Life Science segment for fiscal 2012, 2011 and 2010 were approximately $2,000, $3,000 and $2,000, respectively. This research and development organization is +heavily involved in vaccine development and production activities for our cGMP facility and development of new molecular components. +Manufacturing and Government Regulation +The cGMP clinical grade proteins that are produced in our Memphis facility are intended to be used as “injectibles,” and, as such, they are produced under cGMP Regulations for Biologics and +Human Drugs under the auspices of the FDA. Approval and licensing, following clinical trials, of these products is the responsibility of the applicant, who owns the rights to each protein. Typically, the customer is the applicant, not Meridian Life +Science. +- 14 - +Table of Contents +The Meridian Life Science facilities are ISO 9001:2000 certified and EC 1069:2009 approved, where +appropriate and as required. +Competition +Diagnostics +The market for diagnostic tests is a multi-billion dollar international +industry, which is highly competitive. Many of our competitors are larger than we are with greater financial, research, manufacturing and marketing resources. Important competitive factors for Meridian’s products include product quality, price, +ease of use, customer service and reputation. In a broader sense, industry competition is based upon scientific and technological capability, proprietary know-how, access to adequate capital, the ability to develop and market products and processes, +the ability to attract and retain qualified personnel, and the availability of patent protection. To the extent that our product lines do not reflect technological advances, our ability to compete in those product lines could be adversely affected. +The diagnostic test industry is highly fragmented and segmented. Of importance in the industry are mid-sized medical diagnostic specialty +companies, like Meridian, that offer multiple, broad product lines and have the ability to deliver new, high value products quickly to the marketplace. Among the companies with which we compete in the marketing of one or more of our products are the +diagnostic product divisions of Abbott Laboratories Inc., Becton, Dickinson and Company, Thermo Fisher and Siemens. We also compete with smaller companies such as Cepheid, Quidel Corporation and Alere, Inc. +Life Science +The market for bulk +biomedical reagents is highly competitive. Important competitive factors include product quality, price, customer service, and reputation. We face competitors, many of which have greater financial, research and development, sales and marketing, and +manufacturing resources, and where sole-source supply arrangements do not exist. From time to time, customers may choose to manufacture their biomedical reagents in-house rather than purchase from outside vendors such as Meridian. +The market for contract manufacturing in a validated cGMP facility, such as our Memphis facility, is also competitive. Important competitive factors +include reputation, customer service and price. Although the product application for this facility was built from our existing expertise in cell culture manufacturing techniques, we face competitors with greater experience in contract manufacturing +in a clinical cGMP environment. +Acquisitions +Acquisitions have played an important role in the growth of our businesses. Our acquisition objectives include, among other things, (i) enhancing product offerings; (ii) improving product +distribution capabilities; (iii) providing access to new markets; and/or (iv) providing access to key biologicals or new technologies that lead to new products. Although we cannot provide any assurance that we will consummate any +additional acquisitions in the future, nor can we provide any assurance that any acquisitions will accomplish these objectives, we expect that the potential for acquisitions will continue to provide opportunities for revenues and earnings growth in +the future. +- 15 - +Table of Contents +International Markets +International markets are an important source of revenue and future growth opportunities for all of our segments. For all segments combined, international sales were approximately $54,000 or 31% of +consolidated fiscal 2012 sales, $53,000 or 33% of consolidated fiscal 2011 sales and $43,000 or 30% of consolidated fiscal 2010 sales. We expect to continue to look to international markets as a source of new revenues and growth in the future. See +Notes 6 and 8 to the Consolidated Financial Statements for information concerning sales, long-lived assets and deferred tax assets by country. +Environmental +We are a conditionally +exempt, small quantity generator of hazardous waste and have a U.S. EPA identification number. We are in compliance with applicable portions of the federal and state hazardous waste regulations and have never been a party to any environmental +proceeding. +ITEM 1A. +RISK FACTORS +In addition to the other information set forth in this report, you should +carefully consider the following factors, which could materially affect our business, financial condition, cash flows or future results. Any one of these factors could cause our actual results to vary materially from recent results or from +anticipated future results. The risks described below are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our +business, financial condition and/or operating results. +Risks Affecting Growth and Profitability of our Business +We may be unable to develop new products and services or acquire products and services on favorable terms. +The medical diagnostic and life science industries are characterized by ongoing technological developments and changing customer requirements. As such, +our results of operations and continued growth depend, in part, on our ability in a timely manner to develop or acquire rights to, and successfully introduce into the marketplace, enhancements of existing products and services or new products and +services that incorporate technological advances, meet customer requirements and respond to products developed by our competition. We cannot provide any assurance that we will be successful in developing or acquiring such rights to products and +services on a timely basis, or that such products and services will adequately address the changing needs of the marketplace, either of which could adversely affect our results of operations. +- 16 - +Table of Contents +In addition, we must regularly allocate considerable resources to research and development of new products, +services and technologies. The research and development process generally takes a significant amount of time from design stage to product launch. This process is conducted in various stages. During each stage, there is a risk that we will not +achieve our goals on a timely basis, or at all, and we may have to abandon a product in which we have invested substantial resources. +We may be unable to successfully integrate operations or to achieve expected cost savings from acquisitions we make. +One of our growth strategies is the acquisition of companies and/or products. Although additional acquisitions of companies and products may enhance the +opportunity to increase net earnings over time, such acquisitions could result in greater administrative burdens, increased exposure to the uncertainties inherent in marketing new products and financial risks of additional operating costs. The +principal benefits expected to result from any acquisitions we make will not be achieved fully unless we are able to successfully integrate the operations of the acquired entities with our operations and realize the anticipated synergies, cost +savings and growth opportunities from integrating these businesses into our existing businesses. We cannot provide any assurance that we will be able to identify and complete additional acquisitions on terms we consider favorable or that, if +completed, will be successfully integrated into our operations. +Revenues for our diagnostic segments may be impacted by our reliance +upon two key distributors, seasonal factors and sporadic outbreaks, and changing diagnostic market conditions. +Key Distributors +Our U.S. Diagnostic segment’s sales through two national distributors were 49% of the U.S. Diagnostics segment’s total sales for +both fiscal 2012 and 2011, or 30% of our consolidated sales for both fiscal 2012 and 2011. These parties distribute our products and other laboratory products to end-user customers. The loss of either of these distributors could negatively impact +our sales and results of operations unless suitable alternatives were timely found or lost sales to one distributor were absorbed by another distributor. Finding a suitable alternative on satisfactory terms may pose challenges in our industry’s +competitive environment. As an alternative, we could expand our efforts to distribute and market our products directly. This alternative, however, would require substantial investment in additional sales, marketing and logistics resources, including +hiring additional sales and customer service personnel, which would significantly increase our future selling, general and administrative expenses. +In addition, buying patterns of these two distributors may fluctuate from quarter to quarter, potentially leading to uneven concentration levels on a quarterly basis. +- 17 - +Table of Contents +Seasonal Factors and Sporadic Outbreaks +Our principal business is the sale of a broad range of diagnostic test kits for common gastrointestinal, viral, upper respiratory and parasitic infectious diseases. Certain infectious diseases may be +seasonal in nature, while others may be associated with sporadic outbreaks, such as foodborne illnesses, or pandemics such as H1N1 influenza. While we believe that the breadth of our diagnostic product lines reduces the risk that infections subject +to seasonality and sporadic outbreaks will cause significant variability in diagnostic revenues, we can make no assurance that revenues will not be negatively impacted period over period by such factors. +Changing Diagnostic Market Conditions +Changes in the healthcare delivery system have resulted in major consolidation among reference laboratories and in the formation of multi-hospital +alliances, reducing the number of institutional customers for diagnostic test products. Consolidation in the U.S. healthcare industry has also led to the creation of group purchasing organizations (GPOs) and integrated delivery networks (IDNs) that +aggregate buying power for hospital groups and put pressure on our selling prices. Due to such consolidation, we may not be able to enter into and/or sustain contractual or other marketing or distribution arrangements on a satisfactory commercial +basis with institutional customers, GPOs and IDNs, which could adversely affect our results of operations. +We could be adversely +affected by healthcare reform legislation. +Third-party payers for medical products and services, including state and federal +governments, are increasingly concerned about escalating health care costs and can indirectly affect the pricing or the relative attractiveness of our products by regulating the maximum amount of reimbursement they will provide for diagnostic +testing services. Following years of increasing pressure, during 2010 the U.S. government enacted comprehensive healthcare reform. At present, given the infancy of the enacted reform, we are unable to predict what effect the legislation might +ultimately have on reimbursement rates for our products. If reimbursement amounts for diagnostic testing services are decreased in the future, such decreases may reduce the amount that will be reimbursed to hospitals or physicians for such services +and consequently could place constraints on the levels of overall pricing, which could have a material effect on our sales and/or results of operations. +In addition, this legislation established a 2.3% excise tax on the sales of medical devices beginning in calendar 2013. We currently anticipate that this legislation will result in an excise tax for our +company of approximately $2,000 in fiscal 2013. At the present time it is believed that little, if any, of this cost can be passed on to customers. +Revenues for our Life Science segment may be impacted by customer concentrations and buying patterns. +Our Life Science segment’s sales of purified antigens and reagents to two diagnostics manufacturing customers were 19% and 15%, respectively, of the Life Science segment’s total sales for fiscal +2012 and fiscal 2011, or 5% and 4%, respectively, of our consolidated sales for fiscal 2012 and fiscal 2011. For one of these two customers, we have exclusive supply agreements that have annual, automatic renewal provisions. Although we have a +long-standing relationship with this customer, we cannot provide any assurance that we will be able to renew these supply agreements, which could adversely affect our sales and results of operations. +- 18 - +Table of Contents +Our Life Science segment has four other significant customers who purchase antigens, antibodies and +reagents, which together comprised 9% and 10%, respectively, of the segment’s total sales for fiscal 2012 and fiscal 2011. Any significant alteration of buying patterns from these customers could adversely affect our period over period sales +and results of operations. +Revenues relating to research, development and manufacturing services for our Life Science segment are generated +on a contract by contract basis. The nature of this business is such that each contract provides a unique product and/or service and corresponding revenue stream. While this business has historically generated annual revenue of approximately $2,000 +to $4,000, there can be no assurance that future contracts will be secured, and if secured, will be profitable. +Intense competition +could adversely affect our profitability. +The markets for our products and services are characterized by substantial competition and +rapid change. Hundreds of companies in the United States supply immunodiagnostic tests and purified reagents. These companies range from multinational healthcare entities, for which immunodiagnostics is one line of business, to small start-up +companies. Many of our competitors have significantly greater financial, technical, manufacturing and marketing resources than we do. We cannot provide any assurance that our products and services will be able to compete successfully with the +products and services of our competitors. +In recent years, molecular tests have been introduced for the first time into +the C. difficile market, which is a significant source of revenues for us. Our ability to continue to successfully compete in the C. difficile market is partly dependent upon the success and market acceptance of our own molecular-based +product, illumi gene ® C. difficile . +We depend on international sales, and our financial results may be adversely impacted by foreign currency, regulatory or other developments +affecting international markets. +We sell products and services into approximately 60 countries. Approximately 31% of our net sales for +fiscal 2012 and approximately 33% of our net sales for fiscal 2011 were attributable to international markets. For fiscal 2012, approximately 40% of our international sales were made in Euros and 40% were made in U.S. dollars, with the remaining 20% +being a combination of the British pound and the Australian dollar. We are subject to the risks associated with fluctuations in the exchange rates for the Australian dollar, British pound and Euro to the U.S. dollar. We are also subject to other +risks associated with international operations, including longer customer payment cycles, tariff regulations, requirements for export licenses, instability of foreign governments, and governmental requirements with respect to the importation and +distribution of medical devices and immunodiagnostic and molecular biology reagents, all of which may vary by country. +- 19 - +Table of Contents +In addition, in recent months there have been a number of media reports that have called into question the +longevity of the Euro currency, and whether certain countries might exit the Euro currency. We have no opinion on the longevity of the Euro currency, or if any countries ultimately will exit the Euro currency. In the event that the Euro currency +would completely dissolve, or in the event certain countries exited the Euro currency, the carrying value of our assets and liabilities in European countries where we have a direct presence could be materially affected as legacy currencies are +re-implemented. We continue to monitor this situation and have begun to prepare contingency plans. +Risks Affecting our Manufacturing +Operations +We are subject to comprehensive regulation, and our ability to earn profits may be restricted by these regulations. +Medical device diagnostics and the manufacture, sale and distribution of bulk antigens, antibodies and reagents are highly regulated +industries. We cannot provide any assurance that we will be able to obtain necessary governmental clearances or approvals or timely clearances or approvals to market future products in the United States and other countries. Costs and difficulties in +complying with laws and regulations administered by the U.S. Food and Drug Administration, the U.S. Department of Agriculture, the U.S. Department of Commerce, the U.S. Drug Enforcement Agency, the Centers for Disease Control or other regulators can +result in unanticipated expenses and delays and interruptions to the sale of new and existing products. Contract manufacturing of proteins and other biologicals is regulated by the U.S. Food and Drug Administration. +Regulatory approval can be a lengthy, expensive and uncertain process, making the timing and costs of approvals difficult to predict. The failure to +comply with these regulations can result in delay in obtaining authorization to sell products, seizure or recall of products, suspension or revocation of authority to manufacture or sell products, and other civil or criminal sanctions. +Significant interruptions in production at our principal manufacturing facilities and/or third-party manufacturing facilities would adversely +affect our business and operating results. +Products and services manufactured at our Cincinnati, Ohio; Boca Raton, Florida; Memphis, +Tennessee; London, England; Luckenwalde, Germany; and Sydney, Australia facilities comprised 77% of our Diagnostics revenues and 83% of our Life Science revenues. Our global supply of these products and services is dependent on the uninterrupted and +efficient operation of these facilities. In addition, we currently rely on a small number of third-party manufacturers to produce certain of our diagnostic products and product components. The operations of our facilities or these third-party +manufacturing facilities could be adversely affected by power failures, natural or other disasters, such as earthquakes, floods, tornadoes or terrorist threats. Although we carry insurance to protect against certain business interruptions at our +facilities, there can be no assurance that such coverage will be adequate or that such coverage will continue to remain available on acceptable terms, if at all. Any significant interruption in the Company’s or third-party manufacturing +capabilities could materially and adversely affect our operating results. +- 20 - +Table of Contents +We depend on sole-source suppliers for certain critical components and products. A supply interruption +could adversely affect our business. +Our products are made from a wide variety of raw materials that are generally available from +multiple sources of supply. However, certain critical raw materials and supplies required for the production of some of our principal products are available only from a single supplier. In addition, certain finished products, for which we act as a +distributor, are available only from a single supplier. If these suppliers become unable or unwilling to supply the required raw materials or products, we would need to find another source, and perform additional development work and obtain +regulatory approvals for the use of the alternative raw materials for our products. Completing that development and obtaining such approvals could require significant time and resources, and may not occur at all. Any disruption in the supply of +these raw materials or finished products could have a material adverse affect on us. +We currently sole-source from a U.S. +manufacturer the illumi pro -10 ® instrument on which our illumi gene ® molecular testing platform operates. Additionally, two of our foodborne products sourced from another vendor +accounted for 15%, 14% and 11% of third-party sales for our U.S. Diagnostics segment in fiscal 2012, 2011 and 2010, respectively. +Risks +Related to Intellectual Property and Product Liability +We may be unable to protect or obtain proprietary rights that we utilize or +intend to utilize. +In developing and manufacturing our products, we employ a variety of proprietary and patented technologies. In +addition, we have licensed, and expect to continue to license, various complementary technologies and methods from academic institutions and public and private companies. We cannot provide any assurance that the technologies that we own or license +provide protection from competitive threats or from challenges to our intellectual property. In addition, we cannot provide any assurances that we will be successful in obtaining and retaining licenses or proprietary or patented technologies in the +future. +Product infringement claims by other companies could result in costly disputes and could limit our ability to sell our +products. +Litigation over intellectual property rights is prevalent in the diagnostic industry. As the market for diagnostics +continues to grow and the number of participants in the market increases, we may increasingly be subject to patent infringement claims. It is possible that a third-party may claim infringement against us. If found to infringe, we may attempt to +obtain a license to such intellectual property; however, we may be unable to do so on favorable terms, or at all. Additionally, if our products are found to infringe on third-party intellectual property, we may be required to pay damages for past +infringement and lose the ability to sell certain products, causing our revenues to decrease. We currently carry intellectual property insurance that covers damages and defense costs from our potential infringement on other third-party patents at +levels that we believe are commercially reasonable, although there is no assurance that it will be adequate to cover claims that may arise. Any substantial underinsured loss resulting from such a claim could have a material adverse affect on our +profitability and the damage to our reputation in the industry could have a material adverse affect on our business. +- 21 - +Table of Contents +If product liability lawsuits are successfully brought against us, we may incur substantial +liabilities and may have to limit or cease sales of our products. +The testing, manufacturing and marketing of medical diagnostic +products involves an inherent risk of product liability claims. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit or cease sales of our products. We currently +carry product liability insurance at a level we believe is commercially reasonable, although there is no assurance that it will be adequate to cover claims that may arise. In certain customer contracts, we indemnify third parties for certain product +liability claims related to our products. These indemnification obligations may cause us to pay significant sums of money for claims that are covered by these indemnifications. In addition, a defect in the design or manufacture of our products could +have a material adverse affect on our reputation in the industry and subject us to claims of liability for injury and otherwise. Any substantial underinsured loss resulting from such a claim could have a material adverse affect on our profitability +and the damage to our reputation in the industry could have a material adverse affect on our business. +Other Risks Affecting Our Business +Our business could be negatively affected if we are unable to attract, hire and retain key personnel. +Our future success depends on our continued ability to attract, hire and retain highly qualified personnel, including our executive officers and +scientific, technical, sales and marketing employees, and their ability to manage growth successfully. If such key employees were to leave and we were unable to obtain adequate replacements, our operating results could be adversely affected. +Our bank credit agreement imposes restrictions with respect to our operations. +Our bank credit agreement contains a number of financial covenants that require us to meet certain financial ratios and tests. If we fail to comply with +the obligations in the credit agreement, we would be in default under the credit agreement. If an event of default is not cured or waived, it could result in acceleration of any indebtedness under our credit agreement, which could have a material +adverse effect on our business. At the present time, no borrowings are outstanding under our bank credit agreement. +- 22 - +Table of Contents +We face risks related to global economic conditions. +We currently generate significant operating cash flows, which combined with access to the credit markets provides us with discretionary funding capacity +for research and development and other strategic activities. However, as an enterprise with global operations and markets, our operations and financial performance are in part dependent upon global economic conditions, and we could be negatively +impacted by a global, regional or national economic crisis, including sovereign risk in the event of deterioration in the credit worthiness of or a default by local governments. We are particularly susceptible to the economic conditions in countries +where government-sponsored healthcare systems are the primary payers for healthcare, including those countries within the European Union that are reducing their public expenditures in an effort to achieve cost savings. The uncertainty in global +economic conditions poses a risk to the overall economy that could impact demand for our products, as well as our ability to manage normal commercial relationships with our customers, suppliers and creditors, including financial institutions. As +such, if global economic conditions deteriorate significantly, our business could be negatively impacted, including such areas as reduced demand for our products from a slow-down in the general economy, supplier or customer disruptions resulting +from tighter credit markets and/or temporary interruptions in our ability to conduct day-to-day transactions through our financial intermediaries involving the payment to or collection of funds from our customers, vendors and suppliers. While +to-date such factors have not had a significant negative impact on our results or operations, we continue to monitor and plan for the potential impact of these global economic factors. See a discussion of Euro currency risk in the above risk factor +related to international market activities. +Approximately $4,600 of our accounts receivable at September 30, 2012 is due from Italian +hospital customers whose funding ultimately comes from the Italian government. During the fourth quarter of fiscal 2011 and first quarter of fiscal 2012, we experienced a deterioration in the aging of our Italian accounts receivable. While such +aging appeared to stabilize during fiscal 2012, we continue to monitor such accounts closely. +Risks Related to Our Common Stock +Our board of directors has the authority to issue up to 1,000 shares of undesignated preferred stock and to determine the rights, +preferences, privileges and restrictions, including voting rights, of such shares without any future vote or action by the shareholders. The issuance of preferred stock under certain circumstances could have the effect of delaying or preventing a +change in control of our company. Ohio corporation law contains provisions that may discourage takeover bids for our company that have not been negotiated with the board of directors. Such provisions could limit the price that investors might be +willing to pay in the future for shares of our common stock. In addition, sales of substantial amounts of such shares in the public market could adversely affect the market price of our common stock and our ability to raise additional capital at a +price favorable to us. +ITEM 1B. +UNRESOLVED STAFF COMMENTS +None. +- 23 - +Table of Contents +ITEM 2. +PROPERTIES +Our +corporate offices, U.S. Diagnostics manufacturing facility and U.S. Diagnostics research and development facility are located in four buildings totaling approximately 114,000 square feet on 10 acres of land in the Village of Newtown, a suburb of +Cincinnati, Ohio. These properties are owned by us. We have approximately 39,000 square feet of manufacturing space and 14,000 square feet of warehouse space in these facilities. Included within these properties is an approximately 21,000 square +foot building located on 3.5 acres of land within one mile of our primary headquarters facility. Since purchasing this property in September 2009, we have transformed the property into a state-of-the-art facility, which since July 2011 has housed +our research and development operations and our sales and marketing departments. The facility is called the Meridian Innovation Center and was designed to stimulate our product development and marketing efforts. +Our European Diagnostics distribution center in Italy conducts its operations in a two-story building near Milan, consisting of approximately 18,000 +square feet. This facility is owned by our wholly-owned Italian subsidiary, Meridian Bioscience Europe s.r.l. We also rent office space in Paris, France; and Nivelles, Belgium for sales and administrative functions. +Our Life Science operations are conducted in several facilities in Memphis, Tennessee; and Boca Raton, Florida, as well as the Bioline Group facilities +located in Taunton, Massachusetts; London, England; Luckenwalde, Germany; and Sydney, Australia. Our facility in Memphis, Tennessee consists of two buildings totaling approximately 44,000 square feet, including approximately 27,000 square feet of +manufacturing space, and is owned by us. Our leased facility in Boca Raton, Florida contains approximately 7,500 square feet of manufacturing space. In addition, we continue to own an approximate 23,000 square foot facility in Saco, Maine, which we +have been marketing for sale or lease since consolidation of the Maine operations with the Tennessee location in early fiscal 2012. Following are details of the Bioline Group facilities, all of which are leased: Taunton – approximately 10,000 +square feet of sales and warehouse space; London – approximately 17,000 square feet of sales, warehouse, distribution, research and development, manufacturing and administrative office space; Luckenwalde – approximately 10,000 square feet +of sales, warehouse and manufacturing space; Sydney – approximately 4,000 square feet of sales, warehouse, research and development and manufacturing space. +- 24 - +Table of Contents +ITEM 3. +LEGAL PROCEEDINGS +We +are a party to various litigation matters that we believe are in the normal course of business. The ultimate resolution of these matters is not expected to have a material adverse effect on our financial position, results of operations or cash +flows. No material provision has been made in the accompanying consolidated financial statements for these matters. +ITEM 4. +MINE SAFETY DISCLOSURES +Not applicable. +PART II. +ITEM 5. +MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES +Refer to “Forward Looking Statements” following the Index in front of the Form 10-K and Item 1A “Risk Factors” on Pages 16 through 23 of this Annual Report . +“Common Stock Information” on the inside back cover of the Annual Report to Shareholders for 2012 and “Quarterly Financial Data +(Unaudited)” relating to our dividends in Note 10 to the Consolidated Financial Statements are incorporated herein by reference. Except as may otherwise be prohibited by applicable law, there are no restrictions on cash dividend payments. +During fiscal 2012, our indicated annual dividend rate of $0.76 per share approximated 95% of full year diluted earnings per share, nearly in +line with our long-standing policy of setting a cash dividend payout ratio of between 75% and 85% of each fiscal year’s expected net earnings. This 2012 payout ratio reflects an improvement over the course of the fiscal year – from 118% in +the first quarter to 90% in the third and fourth quarters – and follows two fiscal years in which our cash dividend payout ratio approximated 115% of diluted earnings per share. We believe that this positive dividend payout relationship will +continue, although no assurances can be made in this regard. The declaration and amount of dividends will be determined by the Board of Directors in its discretion based upon its evaluation of earnings, cash flow requirements and future business +developments and opportunities, including acquisitions. +We paid dividends of $0.76 per share in each of fiscal 2012 and fiscal 2011, and +$0.74 per share in fiscal 2010. +As of September 30, 2012, there were approximately 950 holders of record and approximately 17,600 +beneficial owners of our common shares. +- 25 - +Table of Contents +ITEM 6. +SELECTED FINANCIAL DATA +Incorporated by reference from inside front cover of the Annual Report to Shareholders for 2012. +ITEM 7. +MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL +CONDITION AND +RESULTS OF OPERATIONS +Refer to “Forward Looking Statements” following the Index in front of this Form 10-K and Item 1A +“Risk Factors” on pages 16 through 23 of this Annual Report. +In the discussion that follows, all amounts are in thousands (both +tables and text), except per share data . +Results of Operations : +Fourth Quarter +Net earnings for the fourth quarter of fiscal 2012 increased 28% to +$8,573, or $0.21 per diluted share, from net earnings for the fourth quarter of fiscal 2011 of $6,710, or $0.16 per diluted share. This increase reflects the combined effects of both increased sales and increased operating expenses. Additionally, +the fiscal 2011 fourth quarter included $1,057 of costs associated with the consolidation of the Saco, Maine operations into the Memphis, Tennessee facility (impact on net earnings of $691, or $0.02 per diluted share – see Non-GAAP Information +below). Sales for the fourth quarter of fiscal 2012 were $43,694, an increase of $2,345, or 6%, compared to the fourth quarter of fiscal 2011, reflecting increased sales across all of our diagnostic focus product families: C. difficile , +Foodborne and H. pylori . +Sales for the U.S. Diagnostics segment for the fourth quarter of fiscal 2012 increased 11% compared to the +fourth quarter of fiscal 2011, reflecting growth across all of our focus product families – ranging from 9% growth in H. pylori products to 20% growth in our C. difficile product family. Fourth quarter 2012 sales for our European +Diagnostics segment decreased 11% compared to the fourth quarter of fiscal 2011 due primarily to a negative currency effect. On an organic basis, which excludes the effects of currency translation, sales for our European Diagnostics segment were +flat during the fourth quarter, reflecting growth in H. pylori product sales being offset by a decline in sales of our C. difficile and foodborne product families. Reflecting growth in its molecular reagent business being partially +offset by a decline in its core bulk reagent business, sales of our Life Science segment increased by 1% during the fourth quarter of fiscal 2012 compared to the fourth quarter of fiscal 2011. +- 26 - +Table of Contents +Fiscal Year +Net earnings for fiscal 2012 increased 24% to $33,371, or $0.80 per diluted share from net earnings for fiscal 2011 of $26,831, or $0.65 per diluted share. Fiscal 2012 results includes $1,013 of costs +associated with the consolidation of the Saco, Maine operations into the Memphis, Tennessee facility (impact on earnings of $659 or $0.02 per diluted share – see Non-GAAP Information below), while fiscal 2011 included $1,057 of costs related to +the Maine facility consolidation and $1,240 of costs incurred in connection with the reorganization of our sales and marketing leadership during the second quarter of fiscal 2011 (combined impact on fiscal 2011 net earnings of $1,563 or $0.04 per +diluted share). Results of operations for fiscal 2012 compared to fiscal 2011 are discussed below. +Non-GAAP Information +The tables below provide information on net earnings, basic earnings per share and diluted earnings per share, excluding the effect of +costs associated with the consolidation of our Saco, Maine operations into our Memphis, Tennessee facility (fiscal 2012 and fiscal 2011), costs of reorganizing our sales and marketing leadership (fiscal 2011) and transaction costs associated with +the acquisition of the Bioline Group (fiscal 2010), each of which is a non-GAAP financial measure, as well as reconciliations to amounts reported under U.S. Generally Accepted Accounting Principles. We believe that this information is useful to +those who read our financial statements and evaluate our operating results because: +1. +These measures help to appropriately evaluate and compare the results of operations from period to period by removing the impact of non-routine costs related to +consolidating the Maine operations (fiscal 2012 and fiscal 2011) and reorganizing our sales and marketing leadership (fiscal 2011), and the one-time transaction costs related to the acquisition of the Bioline Group (fiscal 2010); and +2. +These measures are used by our management for various purposes, including evaluating performance against incentive bonus achievement targets, comparing performance from +period to period in presentations to our Board of Directors, and as a basis for strategic planning and forecasting. +- 27 - +Table of Contents +2012 +2011 +2010 +Net Earnings— +U.S. GAAP basis +$ +33,371 +$ +26,831 +$ +26,647 +Facility consolidation costs (1) +659 +691 +— +Sales & Marketing Leadership Reorganization (2) +— +872 +— +Transaction costs for Bioline Group acquisition (3) +— +— +1,240 +Adjusted earnings +$ +34,030 +$ +28,394 +$ +27,887 +Net Earnings per Basic Common Share— +U.S. GAAP basis +$ +0.81 +$ +0.66 +$ +0.66 +Facility consolidation costs (1) +0.02 +0.02 +— +Sales & Marketing Leadership Reorganization (2) +— +0.02 +— +Transaction costs for Bioline Group acquisition (3) +— +— +0.03 +Adjusted Basic EPS +$ +0.83 +$ +0.70 +$ +0.69 +Net Earnings per Diluted Common Share— +U.S. GAAP basis +$ +0.80 +$ +0.65 +$ +0.65 +Facility consolidation costs (1) +0.02 +0.02 +— +Sales & Marketing Leadership Reorganization (2) +— +0.02 +— +Transaction costs for Bioline Group acquisition (3) +— +— +0.03 +Adjusted Diluted EPS +$ +0.82 +$ +0.69 +$ +0.68 +(1) +These facility consolidation costs are net of income tax effects of $354 and $366 for fiscal 2012 and fiscal 2011, respectively, which were calculated using the +effective tax rates of the jurisdictions in which the costs were incurred. +(2) +These leadership reorganization costs are net of the $368 income tax effect for fiscal 2011, which were calculated using the effective tax rates of the jurisdictions in +which the costs were incurred. +(3) +Since the Bioline Group transaction costs were not deductible, there are no income tax effects. +Revenue Overview : +Our Diagnostics segments provide the largest share of our +consolidated revenues, 75%, 76% and 81% for fiscal 2012, 2011 and 2010, respectively. The percentage decline from fiscal 2010 to fiscal 2011 results primarily from the addition of the Bioline Group to our Life Science segment in July 2010. Sales +from our focus families ( C. difficile , Foodborne and H. pylori ) comprised 62% of our Diagnostics segments’ revenues during fiscal 2012. +The overall revenue change for our Diagnostics segments during fiscal 2012 was an increase of 8%, reflecting growth in all of our focus product families – 7% growth in our H. pylori products, +13% growth in our foodborne products and 21% growth in our C. difficile products. Excluding the effects of currency translation, sales of our European Diagnostics segment increased by 2% in fiscal 2012, reflecting the combined effects of +increases in our C. difficile and H. pylori product families, partially offset by a decline in the sales of our foodborne and respiratory products. +- 28 - +Table of Contents +C. difficile Products +Our illumi gene ® molecular C. difficile product has now been available in markets around the world for over two years. Sales of this product were approximately $22,000 and +$9,000 in fiscal 2012 and fiscal 2011, respectively. Approximately 950 clinical laboratories are current customers using our illumi gene ® platform, which now includes three tests (see below for a discussion of our second and third tests for Group B and Group A Strep). While the majority of these +customers have adopted the C. difficile assay, a growing number of customers are purchasing multiple assays for the platform. Our illumi gene ® molecular C. difficile product has restored the C. difficile product family to positive sales growth, 21% and 10% in fiscal 2012 and fiscal 2011, +respectively. +Our major competitors in this product family are Cepheid and Becton Dickinson (molecular) and Alere (immunoassay). We believe +that we have two principal advantages versus our competition. First, our molecular instrumentation package has a smaller footprint and significantly lower cost than either Cepheid or Becton Dickinson. We believe that this advantage allows our +product to fit into virtually any size hospital or reference laboratory. We believe that our second principal advantage is the breadth of our C. difficile product offerings. With the launch of our molecular product and FDA clearance of our +common antigen C. difficile products – Premier C. difficile GDH received FDA clearance in May 2011, and Immuno Card C. difficile GDH received FDA clearance in December 2011 – we believe we are in a unique position to +offer a full line of testing solutions to our clinical laboratory customers around the world to counter the competitive pressures surrounding this market. Additionally, we hold the only FDA-approved claim for C. difficile testing in the +pediatric population. These advantages, along with the performance features of the products in our C. difficile portfolio, give us a compelling product offering for any hospital testing method preference. +During fiscal 2012, we received FDA clearance for our second and third molecular tests for the illumi gene ® molecular platform – illumi gene ® GBS (Group B Streptococcus ) in December 2011 and illumi gene ® Group A Strep (Group A Streptococcus ) in September 2012. As alluded to above, over 100 customers are now purchasing two assays for the +illumi gene ® platform – the majority being C. difficile and GBS – with +revenue generated by our GBS test approximating $1,100 during fiscal 2012. In addition, with the recent introduction of our Group A Strep test, there are a growing number of customers adopting all three of our molecular-platform assays. A test for +Mycoplasma pneumoniae (Walking Pneumonia) was recently submitted to the FDA for marketing clearance and is expected to be available for sale in the U.S. during the second quarter of fiscal 2013. Our fifth test on the +illumi gene ® platform is for Bordetella pertussis (Whooping Cough), which is +expected to be available for sale in the U.S. during the third or fourth quarter of fiscal 2013. Our development pipeline for illumi gene ® also includes two sexually-transmitted disease assays, expected to be available for sale in the U.S. during the first half of fiscal 2014. +In addition to Cepheid, Becton Dickinson and Alere, other competitors are beginning to enter the C. difficile market. Quest Diagnostics and Great +Basin recently received FDA clearance for a molecular C. difficile test and Quidel received CE marking approval for a molecular C. difficile test for sale within the European Union. Although we believe that the breadth of our C. +difficile product offerings and our low cost molecular platform provide key advantages to the offerings of our competitors, selling prices may come under pressure as more competitors enter the market. +- 29 - +Table of Contents +Foodborne Products +Although our foodborne products are marketed and sold on a global basis, most of our sales volume is within the U.S. Diagnostics segment. We continue to see demand increases in the United States, as +laboratories realize the benefits of increased sensitivity and faster turnaround time with our tests for Enterohemorrhagic E. coli (EHEC) and Campylobacter , compared to traditional culture methods. Sales increases for these products +within the U.S. Diagnostics segment were 15% and 35% during fiscal 2012 and fiscal 2011, respectively. The market acceptance and volume growth of these products has resulted in annual global revenues for this disease family surpassing the $20,000 +mark. +We believe that the primary competition for our foodborne products is laboratory culture methods. We believe that our products have two +principal advantages versus culture methods. The first principal advantage is test accuracy. Independent evaluations have shown our products to have higher sensitivity than culture methods. The second principal advantage is improved work flow of the +testing process, resulting in a significantly shortened time to test result. Our single-use rapid products provide a test result in approximately 20 minutes, whereas culture results can take up to 24-48 hours. Time to test result can be a critical +factor in the physician’s choice of therapies. +H. pylori Products +During fiscal 2012, sales of our H. pylori products grew 11% for our U.S. Diagnostics segment and increased 3% for our European Diagnostics segment on an organic basis, compared to the +year-over-year sales activity these segments experienced in 2011 of 14% growth and 3% decline, respectively. The increase for our U.S. Diagnostics segment continues to reflect the benefits of our partnerships with managed care companies in promoting +the health and economic benefits of a test and treat strategy, and the ongoing effects of such strategy moving physician behavior away from serology-based testing toward direct antigen testing. We continue to expect that our efforts with managed +care companies in the U.S. will provide low to mid-teens growth opportunities for the next several years. The sales results for our European Diagnostics segment reflect the ongoing impact of pricing pressures from competitive products in European +markets. +Respiratory Products +During fiscal 2012, respiratory sales for our Diagnostics segments decreased 3% compared to fiscal 2011, following a 26% year-over-year decrease from fiscal 2010 to fiscal 2011. The dramatic sales +fluctuation for this family in recent years is a direct result of the end of the novel A (H1N1) outbreak late in the fiscal 2010 first quarter. Total non-influenza respiratory product sales remained relatively flat compared to fiscal 2011, with +sales of such products increasing 4% for our U.S. Diagnostics segment and decreasing 18% for our European Diagnostics segment on an organic basis. At present, we do not expect significant revenue increases from influenza products in fiscal 2013 and +expect annual influenza product revenues to be approximately $2,500 to $3,000, consistent with the last two fiscal years. +- 30 - +Table of Contents +Group Purchasing Organizations and Integrated Delivery Networks +In our U.S. Diagnostics segment, consolidation of the U.S. healthcare industry over the last several years has led to the creation of group purchasing +organizations (GPOs) and integrated delivery networks (IDNs) that aggregate buying power for hospital groups and put pressure on our selling prices. We have multi-year supply agreements with several GPOs and IDNs. +Life Science Segment +Sales for +our Life Science segment increased 11% in fiscal 2012, reflecting increases in both our core bulk reagent business (8%) and our molecular reagent business (15%). The year-over-year increase in the core bulk reagent business largely results from +increased orders for Rubella and Hepatitis A proteins. Our molecular reagent business, operated through our Bioline Group, continues to benefit from its new product launches and advancements during recent months – most notably its new +SensiFAST™ and MyTaq™ PCR components. Revenues for our Life Science segment are inherently dependent upon customer order patterns and timing of contract manufacturing work. For fiscal 2013, we expect overall revenue growth of our Life +Science segment to be in the range of 5% to 6%, led by the Bioline Group, which we expect to generate double-digit increases in sales of its molecular reagent products. We expect sales of our bulk antigen, antibody and reagent products to decline +slightly in fiscal 2013 due to a slowing immunoassay demand profile. While we are seeing opportunities in China for our bulk antigen, antibody and reagent products, it will likely take the next year to generate actual revenue. +As a result of the order volume trends in bulk antigens, antibodies and reagents, during the fourth quarter of fiscal 2011, we announced the closure of +our Saco, Maine facility, and completed the consolidation of manufacturing operations into our Memphis, Tennessee facility during the second fiscal quarter of 2012. Total costs to complete the consolidation of facilities approximated $2,100, +consisting of fixed asset impairments, inventory impairments, stay bonuses and moving costs, among other similar items. During the fourth quarter of 2011, we recognized approximately $1,100 of these costs, and recognized the remaining $1,000 during +the first three quarters of fiscal 2012. +Foreign Currency +During fiscal 2012, currency exchange rates had an approximate $1,700 unfavorable impact on revenue; $1,450 within the European Diagnostics segment and $250 in the Life Science segment. This compares to +currency exchange having an approximate $600 favorable impact on revenue in fiscal 2011. +- 31 - +Table of Contents +The volatility in the Euro-USD exchange rate increased significantly during the last half of the fiscal +year, and this may continue into the foreseeable future until such time as the sovereign debt crisis situation in Europe is resolved. Each one-point decline in the Euro-USD exchange rate (e.g., 1.30 to 1.29) negatively affects the revenues of our +European Diagnostics segment by approximately $160. However, we would not expect such exchange rate fluctuations to have a significant impact on operating income. This results from the fact that we are also exposed to foreign currency risk related +to the supply of certain European-manufactured diagnostic test kits, which serves to provide a natural hedge against the impact on European Diagnostics revenue. +Significant Customers +Our U.S. Diagnostic segment’s sales through two national +distributors were 49% of the U.S. Diagnostics segment’s total sales for both fiscal 2012 and fiscal 2011, or 30% of consolidated sales, for both fiscal 2012 and fiscal 2011. +Our Life Science segment’s sales of purified antigens and reagents to two diagnostic manufacturing customers were 19% of the Life Science segment’s total sales for fiscal 2012 or 5% of our +consolidated sales for fiscal 2012, compared to 15% and 4% of fiscal 2011 Life Science segment and consolidated sales, respectively. +Segment Revenues : +Our reportable +segments are U.S. Diagnostics, European Diagnostics and Life Science. The U.S. Diagnostics segment consists of manufacturing operations in Cincinnati, Ohio, and the sale and distribution of diagnostic test kits in the U.S. and countries outside of +Australia, Europe, Africa and the Middle East. The European Diagnostics segment consists of the sale and distribution of diagnostic test kits in Australia, Europe, Africa and the Middle East. The Life Science segment consists of manufacturing +operations in Memphis, Tennessee; Boca Raton, Florida; London, England; Luckenwalde, Germany; and Sydney, Australia, and the sale and distribution of bulk antigens, antibodies, PCR/qPCR reagents, nucleotides, competent cells and bioresearch reagents +domestically and abroad. The Life Science segment also includes the contract development and manufacture of proteins and other biologicals for use by biopharmaceutical and biotechnology companies engaged in research for new drugs and vaccines. +Revenues for the Diagnostics segments, in the normal course of business, may be affected by buying patterns of major distributors, +seasonality and strength of certain diseases, and foreign currency exchange rates. Revenues for the Life Science segment, in the normal course of business, may be affected by the timing and nature of arrangements for contract services work, which +may have longer production cycles than bioresearch reagents and bulk antigens and antibodies, as well as buying patterns of major customers. We believe that the overall breadth of our product lines serves to reduce the variability in consolidated +revenues. +- 32 - +Table of Contents +Revenues for each of our segments are shown below. +2012 +2011 +2010 +2012 vs. +2011 +Inc (Dec) +2011 vs. +2010 +Inc (Dec) +U.S. Diagnostics +$ +108,010 +$ +97,133 +$ +92,020 +11 +% +6 +% +European Diagnostics +23,000 +24,187 +24,041 +(5 +)% +1 +% +Life Science +42,532 +38,403 +26,939 +11 +% +43 +% +Consolidated +$ +173,542 +$ +159,723 +$ +143,000 +9 +% +12 +% +International— +U.S. Diagnostics +$ +6,553 +$ +6,692 +$ +6,268 +(2 +)% +7 +% +European Diagnostics +23,000 +24,187 +24,041 +(5 +)% +1 +% +Life Science +24,866 +22,283 +13,082 +12 +% +70 +% +Total +$ +54,419 +$ +53,162 +$ +43,391 +2 +% +23 +% +% of total sales +31 +% +33 +% +30 +% +Gross Profit : +2012 +2011 +2010 +2012 vs. +2011 +Inc (Dec) +2011 vs. +2010 +Inc (Dec) +Gross Profit +$ +109,878 +$ +99,298 +$ +88,696 +11 +% +12 +% +Gross Profit Margin +63 +% +62 +% +62 +% ++1 point +NONE +The improvement in our overall gross profit margins from 2010 to 2012 reflects the combined effects of 1) the margin +contribution of Bioline Group products; 2) continued operating efficiencies in our Cincinnati, Ohio diagnostic test manufacturing facility; 3) consolidation of our Maine facility into our Tennessee facility; and 4) the year-over-year declines in +respiratory product sales. Our respiratory product family generally has a lower gross profit margin than our focus product families ( C. difficile , H. pylori and foodborne). Sales of respiratory products during fiscal 2012, 2011 and +2010 were approximately 9%, 10% and 15%, respectively, of our consolidated sales. Specifically, sales of the Company’s influenza products during fiscal 2012, 2011 and 2010 represented approximately 1%, 2% and 6%, respectively, of consolidated +sales. +Our overall operations consist of the sale of diagnostic test kits for various disease states and in alternative test formats, as well +as bioresearch reagents, bulk antigens and antibodies, proficiency panels, and contract research and development and contract manufacturing services. Product sales mix shifts, in the normal course of business, can cause the consolidated gross profit +margin to fluctuate by several points. +- 33 - +Table of Contents +Operating Expenses : +Research & +Development +Selling & +Marketing +General & +Administrative +Other +Total +Operating +Expenses +2010 Expenses +$ +8,396 +$ +18,250 +$ +19,672 +$ +1,240 +$ +47,558 +% of Sales +6 +% +13 +% +14 +% +1 +% +33 +% +Fiscal 2011 Increases (Decreases): +U.S. Diagnostics +844 +1,236 +183 +365 +2,628 +European Diagnostics +— +143 +156 +875 +1,174 +Life Science +—Bioline Group +636 +3,293 +5,235 +— +9,164 +—Core +(54 +) +(150 +) +(363 +) +548 +(19 +) +—Transaction Costs +— +— +— +(1,240 +) +(1,240 +) +2011 Expenses +$ +9,822 +$ +22,772 +$ +24,883 +$ +1,788 +$ +59,265 +% of Sales +6 +% +14 +% +16 +% +1 +% +37 +% +% Increase (Decrease) +17 +% +25 +% +26 +% +44 +% +25 +% +Fiscal 2012 Increases (Decreases): +U.S. Diagnostics +644 +(1,068 +) +2,439 +(365 +) +1,650 +European Diagnostics +— +(69 +) +674 +(875 +) +(270 +) +Life Science +—Bioline Group +25 +1,337 +(874 +) +— +488 +—Core +(216 +) +(50 +) +(750 +) +465 +(551 +) +2012 Expenses +$ +10,275 +$ +22,922 +$ +26,372 +$ +1,013 +$ +60,582 +% of Sales +6 +% +13 +% +15 +% +1 +% +35 +% +% Increase (Decrease) +5 +% +1 +% +6 +% +(43 +%) +2 +% +Overall, the relative stability in total operating expense during fiscal 2012 and the increase in fiscal 2011 result in +large part from the combined effects of our (i) fiscal 2012 efforts to control spending in each of our segments while investing the necessary resources in our strategic areas of growth; (ii) beginning to realize cost savings during 2012 +from the consolidation of our Core Life Science operations into one facility; (iii) incurring costs in connection with the consolidation of our Saco, Maine operations into our Memphis, Tennessee location of approximately $1,013 during fiscal +2012, and approximately $1,057 during fiscal 2011 ($548 of an Operating Expense nature); (iv) incurring during the second quarter of fiscal 2011 approximately $1,240 of costs in connection with the reorganization of our European and Global +Sales and Marketing Leadership; and (v) realizing the impact on all three operating expense categories (i.e., Research & Development, Selling & Marketing, and General & Administrative) during fiscal 2011 of adding the +Bioline Group’s full-year operating expenses. +Operating expenses for the U.S. Diagnostics segment increased $1,650 for fiscal 2012 +compared to fiscal 2011, and increased $2,628 for fiscal 2011 compared to fiscal 2010. These overall increases result largely from the combined effects of the following: +- 34 - +Table of Contents +Fiscal 2012 +Research & Development +Overall increase in +spending on new product development activities, related primarily to our illumi gene ® +platform-based test for Group A Streptococcus , including an approximate $350 increase in personnel-related costs. +Selling & Marketing +Field sales force realignment activities during the year resulting in decreased sales commission expenses of approximately $1,050. +General & Administrative +Improved corporate-wide operating +results resulting in increased bonus, profit sharing and deferred compensation expenses of approximately $2,800, partially offset by an approximate $650 decrease in stock-based compensation during fiscal 2012. +Fiscal 2011 +Research & Development +Overall increase in +spending on new product development activities related to products submitted to the FDA during the year and planned for submission during fiscal 2012, as well as spending on increased illumi gene ® component qualification activities. Costs include increased personnel-related and quality control costs of +approximately $450 and $150, respectively. +Selling & Marketing +The launch of illumi gene ® resulting in increased sales commissions expenses and increased travel and trade show expenses of approximately $750 and $300, respectively. +General & Administrative +The positive effects of overall cost containment and reduction efforts being offset by an approximate $750 increase in stock-based compensation during fiscal 2011. +Operating expenses for the European Diagnostics segment decreased $270 for fiscal 2012 compared to fiscal 2011, and increased $1,174 for fiscal 2011 +compared to fiscal 2010. The 2012 decrease primarily reflects the effect of the aforementioned reorganization of our sales and marketing leadership during the fiscal 2011 second quarter being partially offset by increased costs of additional +management personnel. The fiscal 2011 increase was primarily attributable to costs associated with the sales and marketing leadership reorganization during the fiscal 2011 second quarter. +- 35 - +Table of Contents +Operating expenses for the Life Science segment decreased $63 for fiscal 2012 compared to fiscal 2011, and +increased $9,145 for fiscal 2011 compared to fiscal 2010, excluding the effect of one-time transaction costs of $1,240 in fiscal 2010. The decrease in 2012 primarily results from (1) realizing cost savings from the Maine-Tennessee facility +consolidation, and (2) an increased investment in Bioline Group sales resources. The increase in 2011 resulted from the addition of the Bioline Group’s full-year operating expenses and the costs related to consolidating the Maine and +Tennessee facilities. +The amount of stock-based compensation expense reported for fiscal 2012, 2011 and 2010 was $1,987, $2,614 and $1,866, +respectively. In November 2009, we granted restricted shares and restricted share units to certain employees, with half of each employee’s grant being time-vested restricted shares or restricted share units vesting in total in four years, and +the remaining half being subject to attainment of a specified earnings target for fiscal 2010. Dividend equivalents were paid on these shares and units throughout fiscal 2010. While the fiscal 2010 earnings target was not met, on September 30, +2010, the Compensation Committee of the Board of Directors chose to convert the performance-based restricted shares to time-vested restricted shares vesting in total after four years in recognition of the achievement in fiscal 2010 of several +strategic initiatives. Expense totaling $472 was recorded in fiscal 2010 as a result of this conversion, and is included in the total amount of stock-based compensation set forth above. +During November 2010, we granted restricted shares and restricted share units to certain employees, with half of each employee’s grant being time-vested restricted shares or restricted share units +vesting in full in four years, and the remaining half being subject to attainment of a specified earnings target for fiscal 2011. Although dividend equivalents were paid on these shares and units throughout fiscal 2011, because Meridian’s +fiscal net earnings did not reach the minimum level in 2011, the performance-based awards were not earned and no stock-based compensation has been recorded for these performance-based awards. +Similar to previous years, during fiscal 2012, we granted restricted share units to certain employees, with half of each employee’s grant being time-vested restricted share units vesting in total on +the fourth anniversary of the grant date, and the remaining half being subject to attainment of a specified earnings target for fiscal 2012. While dividend equivalents were paid on these units throughout fiscal 2012, the target for fiscal 2012 was +not met and the performance-based portion of the restricted share units granted during fiscal 2012 has been cancelled. Additionally, during fiscal 2012, we granted restricted share units and options to certain executive management employees to +reward them for meeting Company revenue targets in advance of planned expectations. These awards can only be earned if specified cumulative revenue thresholds are met one fiscal quarter in advance of planned revenue expectations through fiscal 2015, +with the three measurement dates for ratably earning one-third of the grant being (i) the 21-month period ending June 30, 2013, (ii) the 33-month period ending June 30, 2014 and (iii) the 45-month period ending June 30, +2015. To date, no expense has been recognized for these restricted share units and options. +- 36 - +Table of Contents +Operating Income +Operating income increased 23% and decreased 3% in fiscal 2012 and fiscal 2011, respectively, as a result of the factors discussed above. +Other Income and Expense +Interest income was $42, $115 and $124, for +fiscal 2012, 2011 and 2010, respectively. The decreases during the periods reflect (i) lower interest yields in the current interest rate environment, (ii) the use of cash early in the fiscal 2010 fourth quarter to acquire the Bioline +Group, and (iii) the use of cash in fiscal 2011 to fund facility expansions in Cincinnati and Memphis, and to build illumi gene ® inventory. The increased level of other income during fiscal 2012 reflects an approximate $160 increase in net currency gains, partially offset by an approximate +$100 decrease in the Bioline Group’s grant income from a foreign government. During fiscal 2011, the higher level of other income, net, can primarily be attributed to the addition of the Bioline Group, as it contributed grant income from a +foreign government agency of approximately $200. As noted, the level of grant income significantly decreased in fiscal 2012 and is not expected to continue at a significant level, if at all, in fiscal 2013 due to the local country’s rules +regarding ownership by a U.S. parent. +Income Taxes +The effective rate for income taxes was 33%, 34% and 36% for fiscal 2012, 2011 and 2010, respectively. The decrease in the effective tax rate for fiscal 2012 primarily resulted from the net tax benefit on +dividends from a foreign-based subsidiary, while the decrease in the effective tax rate for fiscal 2011 was primarily attributable to the release of certain reserves for uncertain tax positions due to the passage of the relevant statutes of +limitations and the nondeductible nature of Bioline acquisition costs. +Impact of Inflation +To the extent feasible, we have consistently followed the practice of adjusting our prices to reflect the impact of inflation on salaries and fringe +benefits for employees and the cost of purchased materials and services. Inflation and changing prices did not have a material adverse impact on our gross margin, revenue or operating income in fiscal 2012, 2011 and 2010. +Liquidity and Capital Resources : +Comparative Cash Flow Analysis +Our cash flow and financing requirements are determined by analyses of operating and capital spending budgets, consideration of acquisition plans, and +consideration of common share dividends. We have historically maintained a credit facility to augment working capital requirements and to respond quickly to acquisition opportunities. Our investment portfolio presently consists of overnight +repurchase agreements. +- 37 - +Table of Contents +We have an investment policy that guides the holdings of our investment portfolio. Our objectives in +managing the investment portfolio are to (i) preserve capital, (ii) provide sufficient liquidity to meet working capital requirements and fund strategic objectives such as acquisitions, and (iii) capture a market rate of return +commensurate with market conditions and our policy’s investment eligibility criteria. As we look forward, we will continue to manage the holdings of our investment portfolio with preservation of capital being the primary objective. +At the present time, we do not expect current conditions in the financial markets, or overall economic conditions to have a significant impact on our +liquidity needs, financial condition, or results of operations, although no assurances can be made in this regard. We intend to continue to fund our working capital requirements and dividends from current cash flows from operating activities and +cash on hand. If needed, we also have an additional source of liquidity through our $30,000 bank credit facility. Approximately, $4,600 of our accounts receivable at September 30, 2012 is due from Italian hospital customers whose funding +ultimately comes from the Italian government. During the fourth quarter of fiscal 2011 and first quarter of fiscal 2012, we experienced a deterioration in the aging of our Italian accounts receivable. While such aging appeared to stabilize during +fiscal 2012, we continue to monitor such accounts closely. Our liquidity needs may change if overall economic conditions worsen and/or liquidity and credit within the financial markets remains tight for an extended period of time, and such +conditions impact the collectibility of our customer accounts receivable or impact credit terms with our vendors, or disrupt the supply of raw materials and services. +Fluctuations in overall stock market valuations may raise questions as to the potential impairment of goodwill and other long-lived assets. Our annual goodwill impairment review takes place as of +June 30 th each year. There have been no impairments +from these annual reviews. As of October 31, 2012, our stock price was $19.75 per share, compared to our book value per share of $3.46 as of September 30, 2012. This relationship, stock price trading at a 5.7x multiple of book value, is an +indicator that the fluctuation in overall stock market valuations and its impact on our stock price has not been a triggering event for impairment of our goodwill and other long-lived assets. +Net cash provided by operating activities increased 89% to $42,446 in fiscal 2012 reflecting the 24% increase in net earnings and +the effects of net working capital changes related to our investments in illumi gene ® inventory, including readers, and the timing of payments from +customers and payments to suppliers. +Net cash used for investing activities was $4,435 for fiscal 2012 compared to $9,151 for fiscal 2011. +This decrease in cash used primarily results from an approximate $5,600 decrease in expenditures for property, plant and equipment compared to fiscal 2011, which included significant facility expansions in both Cincinnati and Memphis. +- 38 - +Table of Contents +Net cash used for financing activities was $30,674 for fiscal 2012 compared to $27,520 for fiscal 2011. This +increase was attributable to the combined effects of a 1% increase in dividend payments and an approximate $2,900 decrease in proceeds and tax benefits from the exercise of stock options. +Net cash flows from operating activities and cash on hand are anticipated to be adequate to fund working capital requirements, capital expenditures and dividends during the next twelve months. During the +last two quarters of fiscal 2012, as well as for the full fiscal year, the per share amount of our cash dividend was lower than our diluted earnings per share, nearly in line with our long-standing policy of establishing a dividend payout ratio +between 75% and 85% of diluted earnings per share. During fiscal 2013, we believe that this positive dividend payout relationship will continue, although no assurances can be made in this regard. During fiscal 2012, cash generated from the +Company’s operating activities exceeded the quarterly dividend by 36%. +Capital Resources +We have a $30,000 credit facility with a commercial bank which expires September 15, 2015. As of November 23, 2012, there were no borrowings +outstanding on this facility and we had 100% borrowing capacity available to us. We have had no borrowings outstanding under this facility during fiscal 2012 or fiscal 2011. +Our capital expenditures are estimated to range between approximately $3,500 to $5,000 for fiscal 2013, with the actual amount depending upon actual operating results and the phasing of certain projects. +Such expenditures may be funded with cash and equivalents on hand, operating cash flows, and/or availability under the $30,000 credit facility discussed above. +Medical Device Tax +Included within the U.S. government’s comprehensive +healthcare reform legislation, enacted during 2010, was the establishment of a 2.3% excise tax on the sales of medical devices beginning in calendar 2013. We currently anticipate that this legislation will result in an excise tax for our company of +approximately $2,000 in fiscal 2013. At the present time it is believed that little, if any, of this cost can be passed on to customers. +Known Contractual Obligations : +Known contractual obligations and their related due dates were as follows as of September 30, 2012: +Total +Less than 1 +Year +1-3 Years +4-5 Years +More than +5 Years +Operating leases (1) +$ +3,970 +$ +1,890 +$ +1,918 +$ +124 +$ +38 +Purchase obligations (2) +9,214 +8,452 +762 +— +— +Uncertain income tax positions liability and interest (3) +471 +471 +— +— +— +Total +$ +13,655 +$ +10,813 +$ +2,680 +$ +124 +$ +38 +- 39 - +Table of Contents +(1) +Meridian and its subsidiaries are lessees of (i) office and warehouse buildings in Ohio, Massachusetts, Florida, Australia, Belgium, France, Holland, Germany and the +U.K.; (ii) automobiles for use by the diagnostic direct sales forces in the U.S. and Europe; and (iii) certain office equipment such as facsimile machines and copier machines across all business units, under operating lease agreements that expire at +various dates. +(2) +Meridian’s purchase obligations are primarily outstanding purchase orders for inventory and service items. These contractual commitments are not in excess of +expected production requirements over the next twelve months. +(3) +As of September 30, 2012, our liabilities for uncertain tax positions and related interest and penalties were $369 and $102, respectively. Due to inherent +uncertainties in the timing of settlement of tax positions, we are unable to estimate the timing of the effective settlement of these obligations. +Other Commitments and Off-balance Sheet Arrangements : +License Agreements +Meridian has entered into various license agreements that require payment of royalties based on a specified percentage of sales of +related products (1% to 14%). Meridian expects that payments under these agreements will amount to approximately $3,500 in fiscal 2013. These royalty payments primarily relate to the U.S. Diagnostics segment. +Meridian entered into a license agreement in October 2006 with a third party that provides rights to a molecular technology for infectious disease +testing in the United States, Europe and other geographic markets. The agreement, as amended, calls for remaining payments of up to approximately $2,050, based on the achievement of certain product development milestones and on-going royalties once +products are available for commercial sale. +Off-balance sheet arrangements +Except for the operating lease arrangements noted above, we have no off-balance sheet arrangements. +Market Risk Exposure : +Foreign Currency Risk +We have +market risk exposure related to foreign currency transactions. We are exposed to foreign currency risk related to our European distribution operations where the billing currency is the Euro for most of our customers in these markets. We also are +exposed to foreign currency risk related to the supply of certain diagnostic test kits by manufacturers located in Germany and Spain. These foreign currency risks are opposite one another, providing a natural hedge with respect to consolidated gross +profit and operating income. Additionally, as a result of the July 2010 Bioline Group acquisition, we are exposed to foreign currency risks related to the Bioline Group’s operations in Australia (Australian dollar), Germany (Euro), and the U.K. +(British pound). Assessing foreign currency exposures is a component of our overall ongoing risk management process, with such currency risks managed as we believe appropriate. +- 40 - +Table of Contents +Concentration of Customers/Products Risk +Our U.S. Diagnostic segment’s sales through two national distributors were 49% of the U.S. Diagnostics segment’s total sales or 30% of +consolidated sales for fiscal 2012. Our C. difficile, foodborne and H. pylori product families accounted for 62% of our U.S. Diagnostics segment’s third-party sales during fiscal 2012. These same products accounted for 59% of our +European Diagnostics segment’s third-party sales and 47% of our consolidated sales for fiscal 2012. +Our Life Science segment’s +sales of purified antigens and reagents to two diagnostics manufacturing customers were 19% of the Life Science segment’s total sales for fiscal 2012 or 5% of our consolidated sales for fiscal 2012. Our Life Science segment has four other +significant customers who purchase antigens, antibodies and reagents, which together comprise 9% of the segment’s total sales for fiscal 2012. +Critical Accounting Policies : +The consolidated financial statements included in +this Annual Report on Form 10-K have been prepared in accordance with accounting principles generally accepted in the United States. Such accounting principles require management to make judgments about estimates and assumptions that affect the +reported amounts of assets, liabilities, revenues, expenses and related disclosures. Management believes that the following accounting policies are critical to understanding the accompanying consolidated financial statements because the application +of such polices requires the use of significant estimates and assumptions and the carrying values of related assets and liabilities are material. +Revenue Recognition +Our revenues are derived primarily from product sales. Revenue +is generally recognized from sales when product is shipped and title has passed to the buyer. Revenue for the U.S. Diagnostics segment is reduced at the date of sale for product price adjustments due certain distributors under local contracts +designed to reimburse such distributors for their cost in handling our products. Management estimates accruals for distributor price adjustments based on local contract terms, sales data provided by distributors, estimates of inventories of our +products held by distributors, historical statistics, current trends, and other factors. Changes to the accruals are recorded in the period that they become known. +Revenue for our Diagnostics segments includes bundled product revenue for our illumi gene ® molecular test system. The bundled product includes an instrument, instrument accessories and test kits. If not sold outright, amounts invoiced for the +illumi gene ® test kits cover the instrument, accessories and test kits. Revenue is +recognized based on test kit sales. If not sold outright, costs for the instruments are recognized in cost of sales over the expected instrument utilization period, generally three years. +- 41 - +Table of Contents +Life Science revenue for contract services may come from research and development services or manufacturing +services, including process development work, or a combination of both. Revenue is recognized based on each of the deliverables in a given arrangement having distinct and separate customer pricing. Pricing is often subject to a competitive bidding +process. Contract research and development services may be performed on a “time and materials” basis or “fixed fee” basis. For “time and materials” arrangements, revenue is recognized as services are performed and +billed. For “fixed fee” arrangements, revenue is recognized upon completion and acceptance by the customer. For contract manufacturing services, revenue is generally recognized upon delivery of product and acceptance by the customer. In +some cases, customers may request that we store on their behalf, clinical grade biologicals that we produce under contract manufacturing agreements. These cases arise when customers do not have clinical grade storage facilities or do not want to +risk contamination during transport. For such cases, revenue may be recognized on a bill-and-hold basis. No such bill-and-hold arrangements existed at September 30, 2012 or September 30, 2011. +Inventories +Our inventories are +carried at the lower of cost or market. Cost is determined on a first-in, first-out (FIFO) basis for substantially all of our inventories. We establish reserves against cost for excess and obsolete materials, finished goods whose shelf life may +expire before sale to customers, and other identified exposures. Management estimates these reserves based on assumptions about future demand and market conditions. If actual demand and market conditions were to be less favorable than such +estimates, additional inventory write-downs would be required and recorded in the period known. Such adjustments would negatively affect gross profit margin and overall results of operations. +Intangible Assets +Our intangible assets include identifiable intangibles and +goodwill. Identifiable intangibles include customer lists, supply agreements, manufacturing technologies, patents, licenses and trade names. All of Meridian’s identifiable intangibles have finite lives. +Goodwill is subject to an annual impairment review (or more frequently if impairment indicators arise) by applying a fair-value based test. There have +been no impairments from these analyses. +Identifiable intangibles with finite lives are subject to impairment testing. Identifiable +intangibles with finite lives are reviewed for impairment when events or circumstances indicate that such assets may not be recoverable at their current carrying value. Whether an event or circumstance triggers impairment is determined by comparing +an estimate of the asset’s undiscounted future cash flows to its carrying value. If impairment has occurred, it is measured by a fair-value based test. There were no events or circumstances in fiscal 2012, 2011 or 2010 indicating that the +carrying value of such assets may not be recoverable. +- 42 - +Table of Contents +Our ability to recover intangible assets, both identifiable intangibles and goodwill, is dependent upon the +future cash flows of the related acquired businesses and assets. Management is required to make judgments and assumptions regarding future cash flows, including sales levels, gross profit margins, operating expense levels, working capital levels, +and capital expenditures. With respect to identifiable intangibles, management also makes judgments and assumptions regarding useful lives. +Management considers the following factors in evaluating events and circumstances for possible impairment: (i) significant under-performance +relative to historical or projected operating results; (ii) negative industry trends; (iii) sales levels of specific groups of products (related to specific identifiable intangibles); (iv) changes in overall business strategies; and +(v) other factors. +If actual cash flows are less favorable than projections, this could trigger impairment of intangible assets and +other long-lived assets. If impairment were to occur, this would negatively affect overall results of operations. +Income Taxes +Our provision for income taxes includes federal, foreign, state and local income taxes currently payable and those deferred because of +temporary differences between income for financial reporting purposes and income for tax purposes. We prepare estimates of permanent and temporary differences between income for financial reporting purposes and income for tax purposes. These +differences are adjusted to actual upon filing of our tax returns, typically occurring in the third and fourth quarters of the current fiscal year for the preceding fiscal year’s estimates. +Our deferred tax assets include net operating loss carryforwards in foreign jurisdictions. The realization of tax benefits related to net operating loss +carryforwards is dependent upon the generation of future taxable income in the applicable jurisdictions. Management assesses the level of deferred tax asset valuation allowance by taking into consideration historical and future projected operating +results, future reversals of taxable temporary differences, as well as tax planning strategies. The amount of net deferred tax assets considered realizable could be reduced in future years if estimates of future taxable income during the +carryforward period are reduced. +Undistributed earnings in our non-U.S. subsidiaries are considered by management to be permanently +re-invested in such subsidiaries. Consequently, U.S. deferred tax liabilities on such earnings have not been recorded. We believe that such U.S. taxes would be largely offset by foreign tax credits for taxes paid locally. +From time to time, our tax returns in federal, state and foreign jurisdictions are examined by the applicable tax authorities. To the extent that +adjustments result from the completion of these examinations or the lapsing of statutes of limitation, they will affect tax liabilities in the period known. We believe that the results of any tax authority examinations would not have a significant +adverse impact on financial condition or results of operations. +- 43 - +Table of Contents +Recent Accounting Pronouncements : +In May 2011, FASB issued Accounting Standards Update (ASU) No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. FASB ASU +No. 2011-04 amends and clarifies the measurement and disclosure requirements of FASB ASC 820, resulting in common requirements for measuring fair value and for disclosing information about fair value measurements, clarification of how to apply +existing fair value measurement and disclosure requirements, and changes to certain principles and requirements for measuring fair value and disclosing information about fair value measurements. The new requirements were effective for fiscal years +beginning after December 15, 2011. The Company’s adoption of this amended guidance on October 1, 2012 had no material impact on the Company’s consolidated results of operations, cash flows or financial position. +In June 2011, FASB issued ASU No. 2011-05, Presentation of Comprehensive Income , which amends the disclosure and presentation requirements of +Comprehensive Income. Specifically, FASB ASU No. 2011-05 requires that all nonowner changes in shareholders’ equity be presented either in 1) a single continuous statement of comprehensive income or 2) two separate but consecutive +statements, in which the first statement presents total net income and its components, and the second statement presents total other comprehensive income and its components. These new presentation requirements, as currently set forth, are effective +for the Company as of October 1, 2012 and will impact financial statement presentation, but will not impact the Company’s consolidated results of operations, cash flows or financial position. +In September 2011, FASB issued ASU No. 2011-08, Testing Goodwill for Impairment , which amended goodwill impairment guidance to provide an +option for entities to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. +After assessing the totality of events and circumstances, if an entity determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, performance of the two-step impairment test is no longer +required. This guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. Adoption of this guidance in fiscal 2013 is not expected to have +any impact on the Company’s consolidated results of operations, cash flow or financial position. +ITEM 7A. +QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK +See Market Risk Exposure and +Capital Resources under Item 7 above. +- 44 - +Table of Contents +ITEM 8. +FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA +Index to Consolidated Financial Statements +Management’s Report on Internal Control over Financial Reporting +46 +Report of Independent Registered Public Accounting Firm +47 +Consolidated Statements of Operations for the years ended September 30, 2012, 2011 and +2010 +49 +Consolidated Statements of Cash Flows for the years ended September 30, 2012, 2011 and +2010 +50 +Consolidated Balance Sheets as of September 30, 2012 and 2011 +51 +Consolidated Statements of Shareholders’ Equity for the years ended September +30, 2012, 2011 and 2010 +53 +Notes to Consolidated Financial Statements +54 +Schedule No. II – Valuation and Qualifying Accounts for the years ended September +30, 2012, 2011 and 2010 +79 +All other supplemental schedules are omitted due to the absence of conditions under which they are required or because +the information is shown in the Consolidated Financial Statements or Notes thereto. +- 45 - +Table of Contents +Management’s Report on Internal Control over Financial +Reporting +Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in +Exchange Act Rule 13a-15(f). +The Company’s internal control over financial reporting includes those policies and procedures that +(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) 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 (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements. +Because of its inherent limitations, internal control over financial reporting can only provide reasonable assurance and 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. +Under the supervision and with the participation of our management, including the Chief Executive Officer and the +Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework and criteria in Internal Control – Integrated Framework, issued by the Committee of +Sponsoring Organizations of the Treadway Commission (COSO). Based on management’s evaluation and those criteria, the Company concluded that its system of internal control over financial reporting was effective as of September 30, 2012. +The company’s independent registered public accounting firm has issued an attestation report on the registrant’s internal control +over financial reporting. +/s/ John A. Kraeutler +/s/ Melissa A. Lueke +John A. Kraeutler +Melissa A. Lueke +Chief Executive Officer +Executive Vice President and Chief Financial Officer +November 29, 2012 +November 29, 2012 +- 46 - +Table of Contents +REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM +Board of Directors and Shareholders +Meridian +Bioscience, Inc. +We have audited the accompanying consolidated balance sheets of Meridian Bioscience, Inc. (an Ohio corporation) and +subsidiaries as of September 30, 2012 and 2011, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended September 30, 2012. Our audits of the basic +financial statements included the financial statement schedule listed in the index appearing under Schedule No. II. We also have audited Meridian Bioscience, Inc.’s internal control over financial reporting as of September 30, 2012, based +on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Meridian Bioscience, Inc.’s management is responsible for these financial +statements and financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying +Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these financial statements and financial statement schedule and an opinion on Meridian Bioscience, Inc.’s internal control +over financial reporting 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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over +financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles +used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, +assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered +necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. +A company’s 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 company’s 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 company’s assets that could have a material effect on the financial statements. +- 47 - +Table of Contents +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, the consolidated financial statements referred to above present fairly, in all material respects, the financial +position of Meridian Bioscience, Inc. and Subsidiaries as of September 30, 2012 and 2011, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2012 in conformity with +accounting principles generally accepted in the United States of America. Also in our opinion, the related 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. +In our opinion, Meridian Bioscience, Inc. and subsidiaries, maintained, in all +material respects, effective internal control over financial reporting as of September 30, 2012, based on criteria established in Internal Control—Integrated Framework issued by COSO. +/s/ GRANT THORNTON LLP +Cincinnati, Ohio +November 29, 2012 +- 48 - +Table of Contents +CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) +Meridian Bioscience, Inc. and Subsidiaries +For the Year Ended September 30, +2012 +2011 +2010 +Net Sales +$ +173,542 +$ +159,723 +$ +143,000 +Cost of Sales +63,664 +59,916 +54,304 +Cost of Sales—Plant consolidation +— +509 +— +Gross Profit +109,878 +99,298 +88,696 +Operating Expenses: +Research and development +10,275 +9,822 +8,396 +Selling and marketing +22,922 +22,772 +18,250 +General and administrative +26,372 +24,883 +19,672 +Plant consolidation costs +1,013 +548 +— +Sales and marketing leadership reorganization +— +1,240 +— +Bioline Group transaction costs +— +— +1,240 +Total operating expenses +60,582 +59,265 +47,558 +Operating Income +49,296 +40,033 +41,138 +Other Income: +Interest income +42 +115 +124 +Other, net +378 +352 +138 +Total other income +420 +467 +262 +Earnings Before Income Taxes +49,716 +40,500 +41,400 +Income Tax Provision +16,345 +13,669 +14,753 +Net Earnings +$ +33,371 +$ +26,831 +$ +26,647 +Earnings Per Share Data: +Basic earnings per common share +$ +0.81 +$ +0.66 +$ +0.66 +Diluted earnings per common share +$ +0.80 +$ +0.65 +$ +0.65 +Common shares used for basic earnings per common share +41,080 +40,715 +40,515 +Effect of dilutive stock options and restricted shares and units +528 +643 +634 +Common shares used for diluted earnings per common share +41,608 +41,358 +41,149 +Dividends declared per common share +$ +0.76 +$ +0.76 +$ +0.74 +Anti-dilutive Securities: +Common share options and restricted shares and units +320 +191 +217 +The accompanying notes are an integral part of these consolidated financial statements. +- 49 - +Table of Contents +CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) +Meridian Bioscience, Inc. and Subsidiaries +For the Year Ended September 30, +2012 +2011 +2010 +Cash Flows From Operating Activities +Net earnings +$ +33,371 +$ +26,831 +$ +26,647 +Non-cash items included in net earnings: +Depreciation of property, plant and equipment +3,490 +3,380 +3,104 +Amortization of intangible assets +2,165 +2,321 +1,581 +Amortization of deferred illumigene instrument costs +942 +172 +— +Stock-based compensation +1,987 +2,504 +1,866 +Deferred income taxes +(1,448 +) +(1,218 +) +12 +Loss on disposition and write-down of fixed assets and other assets +359 +446 +26 +Change in current assets, net of acquisition +1,234 +(10,762 +) +2,429 +Change in current liabilities, net of acquisition +3,216 +(570 +) +(5,775 +) +Other, net +(2,870 +) +(648 +) +(157 +) +Net cash provided by operating activities +42,446 +22,456 +29,733 +Cash Flows From Investing Activities +Purchases of property, plant and equipment +(3,530 +) +(9,139 +) +(3,083 +) +Proceeds from sale of assets +400 +— +— +Proceeds from sales and calls of short-term investments +— +— +7,275 +Acquisition of Bioline Group, net of cash received +— +— +(20,404 +) +Purchases of intangibles and other assets +(1,305 +) +(12 +) +(120 +) +Net cash used for investing activities +(4,435 +) +(9,151 +) +(16,332 +) +Cash Flows From Financing Activities +Dividends paid +(31,226 +) +(30,943 +) +(29,985 +) +Proceeds and tax benefits from exercises of stock options +552 +3,423 +795 +Net cash used for financing activities +(30,674 +) +(27,520 +) +(29,190 +) +Effect of Exchange Rate Changes on Cash and Equivalents +630 +(38 +) +(362 +) +Net Increase (Decrease) in Cash and Equivalents +7,967 +(14,253 +) +(16,151 +) +Cash and Equivalents at Beginning of Period +23,626 +37,879 +54,030 +Cash and Equivalents at End of Period +$ +31,593 +$ +23,626 +$ +37,879 +Supplemental Cash Flow Information +Cash paid for income taxes +$ +16,010 +$ +17,991 +$ +16,036 +The accompanying notes are an integral part of these consolidated financial statements. +- 50 - +Table of Contents +CONSOLIDATED BALANCE SHEETS (dollars in thousands) +Meridian Bioscience, Inc. and Subsidiaries +As of September 30, +2012 +2011 +Assets +Current Assets: +Cash and equivalents +$ +31,593 +$ +23,626 +Accounts receivable, less allowances of $574 in 2012 and $310 in 2011 +24,183 +24,844 +Inventories +31,682 +32,689 +Prepaid expenses and other current assets +6,203 +6,343 +Deferred income taxes +2,929 +2,852 +Total current assets +96,590 +90,354 +Property, Plant and Equipment, at Cost: +Land +1,175 +1,184 +Buildings and improvements +25,983 +23,033 +Machinery, equipment and furniture +34,917 +32,408 +Construction in progress +1,149 +3,887 +Subtotal +63,224 +60,512 +Less: accumulated depreciation and amortization +37,069 +33,973 +Net property, plant and equipment +26,155 +26,539 +Other Assets: +Goodwill +23,146 +23,124 +Other intangible assets, net +10,264 +10,947 +Restricted cash +1,000 +1,000 +Deferred illumigene instrument costs, net +3,958 +3,304 +Other assets +268 +225 +Total other assets +38,636 +38,600 +Total assets +$ +161,381 +$ +155,493 +The accompanying notes are an integral part of these consolidated financial statements. +- 51 - +Table of Contents +CONSOLIDATED BALANCE SHEETS (dollars in thousands) +Meridian Bioscience, Inc. and Subsidiaries +As of September 30, +2012 +2011 +Liabilities and Shareholders’ Equity +Current Liabilities: +Accounts payable +$ +5,794 +$ +5,548 +Accrued employee compensation costs +5,827 +4,235 +Other accrued expenses +5,247 +4,692 +Income taxes payable +1,594 +789 +Total current liabilities +18,462 +15,264 +Deferred Income Taxes +171 +1,705 +Commitments and Contingencies +Shareholders’ Equity: +Preferred stock, no par value, 1,000,000 shares authorized, none issued +— +— +Common shares, no par value, 71,000,000 shares authorized, 41,284,485 and 41,237,120 issued +— +— +Additional paid-in capital +102,443 +100,010 +Retained earnings +40,210 +38,065 +Accumulated other comprehensive income +95 +449 +Total shareholders’ equity +142,748 +138,524 +Total liabilities and shareholders’ equity +$ +161,381 +$ +155,493 +The accompanying notes are an integral part of these consolidated financial statements. +- 52 - +Table of Contents +CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (dollars and shares in thousands, except per share +data) +Meridian Bioscience, Inc. and Subsidiaries +Common +Shares +Issued +Additional +Paid-in +Capital +Retained +Earnings +Accum Other +Comp +Income +(Loss) +Comp +Income +(Loss) +Total +Balance at September 30, 2009 +40,493 +$ +91,668 +$ +45,515 +$ +722 +$ +137,905 +Cash dividends paid—$0.74 per share +— +— +(29,985 +) +— +(29,985 +) +Exercise of stock options +67 +995 +— +— +995 +Issuance of restricted shares, net of forfeitures +94 +— +— +— +— +Stock compensation expense +— +1,866 +— +— +1,866 +Comprehensive income: +Net earnings +— +— +26,647 +— +$ +26,647 +26,647 +Other comprehensive income taxes +— +— +— +36 +36 +36 +Foreign currency translation adjustment +— +— +— +(103 +) +(103 +) +(103 +) +Comprehensive income +$ +26,580 +Balance at September 30, 2010 +40,654 +94,529 +42,177 +655 +137,361 +Cash dividends paid—$0.76 per share +— +— +(30,943 +) +— +(30,943 +) +Exercise of stock options +485 +2,977 +— +— +2,977 +Issuance of restricted shares, net of forfeitures +165 +— +— +— +— +Cancellation of restricted shares +(85 +) +— +— +— +— +Conversion of restricted stock units +18 +— +— +— +— +Stock compensation expense +— +2,504 +— +— +2,504 +Comprehensive income: +Net earnings +— +— +26,831 +— +$ +26,831 +26,831 +Other comprehensive income taxes +— +— +— +114 +114 +114 +Foreign currency translation adjustment +— +— +— +(320 +) +(320 +) +(320 +) +Comprehensive income +$ +26,625 +Balance at September 30, 2011 +41,237 +100,010 +38,065 +449 +138,524 +Cash dividends paid—$0.76 per share +— +— +(31,226 +) +— +(31,226 +) +Exercise of stock options +47 +446 +— +— +446 +Issuance of restricted shares, net of forfeitures +(5 +) +— +— +— +— +Conversion of restricted stock units +5 +— +— +— +— +Stock compensation expense +— +1,987 +— +— +1,987 +Comprehensive income: +Net earnings +— +— +33,371 +— +$ +33,371 +33,371 +Other comprehensive income taxes +— +— +— +148 +148 +148 +Foreign currency translation adjustment +— +— +— +(502 +) +(502 +) +(502 +) +Comprehensive income +$ +33,017 +Balance at September 30, 2012 +41,284 +$ +102,443 +$ +40,210 +$ +95 +$ +142,748 +The accompanying notes are an integral part of these consolidated financial statements. +- 53 - +Table of Contents +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +Meridian Bioscience, Inc. and Subsidiaries +(dollars and shares in thousands, except per +share data) +(1) Summary of Significant Accounting Policies +(a) +Nature of Business —Meridian is a fully-integrated life science company whose principal businesses are (i) the development, manufacture and +distribution of clinical diagnostic test kits primarily for certain gastrointestinal, viral, respiratory and parasitic infectious diseases, (ii) the manufacture and distribution of bulk antigens, antibodies, PCR/qPCR reagents, nucleotides, +competent cells and bioresearch reagents used by researchers and other diagnostic manufacturers and (iii) the contract development and manufacture of proteins and other biologicals for use by biopharmaceutical and biotechnology companies +engaged in research for new drugs and vaccines. +(b) +Principles of Consolidation —The consolidated financial statements include the accounts of Meridian Bioscience, Inc. and its subsidiaries. All intercompany +accounts and transactions have been eliminated. Unless the context requires otherwise, references to “Meridian,” “we,” “us, “ “our “ or “our company” refer to Meridian Bioscience, Inc. and its +subsidiaries. +(c) +Use of Estimates —The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates +and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual +results could differ from those estimates. +(d) +Foreign Currency Translation —Assets and liabilities of foreign operations are translated using year-end exchange rates with gains or losses resulting from +translation included as a separate component of accumulated other comprehensive income or loss. Revenues and expenses are translated using exchange rates prevailing during the year. We also recognize foreign currency transaction gains and losses on +certain assets and liabilities that are denominated in the Australian dollar, British pound and Euro currencies. These gains and losses are included in other income and expense in the accompanying consolidated statements of operations. +(e) +Cash, Cash Equivalents and Investments— The primary objectives of our investment activities are to preserve capital and provide sufficient liquidity to meet +operating requirements and fund strategic initiatives such as acquisitions. We maintain a written investment policy that governs the management of our investments in fixed income securities. This policy, among other things, provides that we may +purchase only high credit-quality securities, that have short-term ratings of at least A-2, P-2 and F-1 or better, and long-term ratings of at least A, Baa1 and A or better, by Standard & Poor’s, Moody’s and Fitch, respectively, +at the time of purchase. We consider short-term investments with original maturities of 90 days or less to be cash equivalents, including overnight repurchase agreements and institutional money market funds. At times our investments of cash and +equivalents with various high credit quality financial institutions may be in excess of the Federal Deposit Insurance (FDIC) insurance limit. +- 54 - +Table of Contents +Our investment portfolio includes the following components: +September 30, 2012 +September 30, 2011 +Cash and +Equivalents +Other +Cash and +Equivalents +Other +Overnight repurchase agreements +$ +13,492 +$ +— +$ +11,784 +$ +— +Cash on hand – +Restricted +— +1,000 +— +1,000 +Unrestricted +18,101 +— +11,842 +— +Total +$ +31,593 +$ +1,000 +$ +23,626 +$ +1,000 +(f) +Inventories —Inventories are stated at the lower of cost or market. Cost is determined on a first-in, first-out basis (FIFO) for +substantially all of our inventories. illumi gene ® instruments are carried in inventory +until customer placement, at which time they are transferred to deferred illumigene instrument costs, unless sold outright. +We establish reserves against cost for excess and obsolete materials, finished goods whose shelf life may expire before sale to customers, and other identified exposures. Such reserves were $2,271 and +$3,175 at September 30, 2012 and 2011, respectively. We estimate these reserves based on assumptions about future demand and market conditions. If actual demand and market conditions were to be less favorable than such estimates, additional +inventory write-downs would be required and recorded in the period known. Such adjustments would negatively affect gross profit margin and overall results of operations. +During the fourth quarter of fiscal 2011, we announced the closure of our Saco, Maine facility, and began the consolidation of manufacturing operations from this facility with our Memphis, Tennessee +facility. In connection with this consolidation, inventory write-downs totaling $509 have been recorded as Cost of Sales – Plant consolidation during the fiscal year ended September 30, 2011 in the accompanying Consolidation Statements of +Operations. +(g) +Property, Plant and Equipment —Property, plant and equipment are stated at cost. Upon retirement or other disposition of property, plant and equipment, the +cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss is reflected in earnings. Maintenance and repairs are expensed as incurred. Depreciation is computed on the straight-line method in amounts +sufficient to write-off the cost over the estimated useful lives as follows: +- 55 - +Table of Contents +Buildings and improvements—18 to 40 years +Machinery, equipment and furniture—3 to 10 years +Computer equipment and software—3 to 5 years +In connection with the +consolidation of our Maine facility noted in Note 1 (f) above, the carrying value of certain property, plant and equipment, including the building, was determined to be impaired and a write-down of approximately $210 and $425 has been recorded +as a component of Plant consolidation costs during the fiscal year ended September 30, 2012 and 2011, respectively, in the accompanying Consolidation Statements of Operations. The building and the property on which it sits have been written +down to current value, less selling costs, as determined by an independent outside appraisal. +(h) +Intangible Assets —Goodwill and other intangible assets with indefinite lives are subject to an annual impairment review (or more frequently if impairment +indicators arise) by applying a fair-value based test. Fair value is determined via a market approach from three perspectives. These three perspectives are (i) an allocation of our actual enterprise value (defined as market capitalization plus +debt less cash and cash equivalents) to each of the reporting units based on revenue and EBITDA contributions to consolidated results; (ii) an allocation of implied enterprise values to each of our reporting units based on average and median +EBITDA multiples from a comparable group of companies; and (iii) a review of enterprise value to EBITDA multiples from recent industry merger and acquisition transactions. We perform our annual impairment review as of June 30, the end of +our third fiscal quarter. We have no intangible assets with indefinite lives other than goodwill. There have been no impairments from these analyses for fiscal 2012, 2011 or 2010. +The change in goodwill was an increase of $22 in fiscal 2012 and a decrease of $178 in fiscal 2011. Both years reflect the effect of the +Life Science segment’s Bioline Group and the currency translation adjustments thereon. See Note 2. +A summary of +Meridian’s acquired intangible assets subject to amortization, as of September 30, 2012 and 2011 is as follows. +2012 +2011 +As of September 30, +Gross +Carrying +Value +Accum. +Amort. +Gross +Carrying +Value +Accum. +Amort. +Manufacturing technologies, core products and cell lines +$ +11,678 +$ +9,327 +$ +11,626 +$ +8,545 +Trademarks, licenses and patents +4,704 +1,616 +3,538 +1,337 +Customer lists and supply agreements +12,360 +7,535 +12,222 +6,557 +$ +28,742 +$ +18,478 +$ +27,386 +$ +16,439 +- 56 - +Table of Contents +The actual aggregate amortization expense for these intangible assets for fiscal 2012, 2011 +and 2010 was $2,165, $2,321 and $1,581, respectively. The estimated aggregate amortization expense for these intangible assets for each of the five succeeding fiscal years is as follows: fiscal 2013—$2,196, fiscal 2014—$1,771, fiscal +2015—$1,523, fiscal 2016—$1,179 and fiscal 2017—$930. +Long-lived assets, excluding goodwill and identifiable +intangibles with indefinite lives, are reviewed for impairment when events or circumstances indicate that such assets may not be recoverable at their carrying value. Whether an event or circumstance triggers an impairment is determined by comparing +an estimate of the asset’s future undiscounted cash flows to its carrying value. If impairment has occurred, it is measured by a fair-value based test. +Our ability to recover our intangible assets, both identifiable intangibles and goodwill, is dependent upon the future cash flows of the related acquired businesses and assets. We make judgments and +assumptions regarding future cash flows, including sales levels, gross profit margins, operating expense levels, working capital levels, and capital expenditures. With respect to identifiable intangibles and fixed assets, we also make judgments and +assumptions regarding useful lives. See Note 1 (g) regarding impairment write-downs related to the consolidation of our Maine operations. +We consider the following factors in evaluating events and circumstances for possible impairment: (i) significant under-performance relative to historical or projected operating results; +(ii) negative industry trends; (iii) sales levels of specific groups of products (related to specific identifiable intangibles); (iv) changes in overall business strategies; and (v) other factors. +If actual cash flows are less favorable than projections, this could trigger impairment of intangible assets and other long-lived assets. +If impairment were to occur, this would negatively affect overall results of operations. +(i) +Revenue Recognition —Revenue is generally recognized from sales when product is shipped and title has passed to the buyer. Revenue for the U.S. Diagnostics +segment is reduced at the date of sale for product price adjustments due certain distributors under local contracts. Management estimates accruals for distributor price adjustments based on local contract terms, sales data provided by distributors, +estimates of inventories of our products held by distributors, historical statistics, current trends, and other factors. Changes to the accruals are recorded in the period that they become known. Such accruals were $3,877 at September 30, 2012 +and $4,176 at September 30, 2011, and have been netted against accounts receivable. +Revenue for our Diagnostics segments includes bundled product revenue for our illumi gene ® molecular test system. The bundled product includes an instrument, instrument accessories and test +kits. If not sold outright, amounts invoiced for the illumi gene ® test kits cover the +instrument, accessories and test kits. Revenue is recognized based on test kit sales. If not sold outright, costs for the instruments are recognized in cost of sales over the expected instrument utilization period, generally three years. +- 57 - +Table of Contents +Life Science revenue for contract services may come from research and development services +or manufacturing services, including process development work, or a combination of both. Revenue is recognized based on each of the deliverables in a given arrangement having distinct and separate customer pricing. Pricing is often subject to a +competitive bidding process. Contract research and development services may be performed on a “time and materials” basis or “fixed fee” basis. For “time and materials” arrangements, revenue is recognized as services are +performed and billed. For “fixed fee” arrangements, revenue is recognized upon completion and acceptance by the customer. For contract manufacturing services, revenue is generally recognized upon delivery of product and acceptance by the +customer. In some cases, customers may request that we store on their behalf, clinical grade biologicals that we produce under contract manufacturing agreements. These cases arise when customers do not have clinical grade storage facilities or do +not want to risk contamination during transport. For such cases, revenue may be recognized on a bill-and-hold basis. No such bill-and-hold arrangements existed at September 30, 2012 or September 30, 2011. +Trade accounts receivable are recorded in the accompanying consolidated balance sheets at invoiced amounts less provisions for distributor +price adjustments under local contracts and doubtful accounts. The allowance for doubtful accounts represents our estimate of probable credit losses and is based on historical write-off experience. The allowance for doubtful accounts and related +metrics, such as days’ sales outstanding, are reviewed monthly. Accounts with past due balances over 90 days are reviewed individually for collectibility. Customer invoices are charged off against the allowance when we believe it is probable +that the invoices will not be paid. +(j) +Research and Development Costs —Research and development costs are charged to expense as incurred. Research and development costs include, among other +things, salaries and wages for research scientists, materials and supplies used in the development of new products, costs for development of instrumentation equipment, costs for clinical trials, and costs for facilities and equipment. +(k) +Income Taxes —The provision for income taxes includes federal, foreign, state and local income taxes currently payable and those deferred because of +temporary differences between income for financial reporting and income for tax purposes. We prepare estimates of permanent and temporary differences between income for financial reporting purposes and income for tax purposes. These differences are +adjusted to actual upon filing of our tax returns, typically occurring in the third and fourth quarters of the current fiscal year for the preceding fiscal year’s estimates. +- 58 - +Table of Contents +We account for uncertain tax positions using a benefit recognition model with a two-step +approach: (i) a more-likely-than-not recognition criterion; and (ii) a measurement attribute that measures the position as the largest amount of tax benefit that is greater than 50% likely of being ultimately realized upon ultimate +settlement. If it is not more likely than not that the benefit will be sustained on its technical merits, no benefit is recorded. We recognize accrued interest related to unrecognized tax benefits as a portion of our income tax provision in the +consolidated statements of operations. See Note 6. +(l) +Stock-based Compensation —We recognize compensation expense for all share-based awards made to employees, based upon the fair value of the share-based award +on the date of the grant. See Note 7(b). +(m) +Comprehensive Income (Loss) —Comprehensive income (loss) represents the net change in shareholders’ equity during a period from sources other than +transactions with shareholders. Our comprehensive income or loss is comprised of net earnings, foreign currency translation, and the related income tax effects. Components of beginning and ending accumulated other comprehensive income or loss, and +related activity, are shown in the following table: +Foreign +Currency +Translation +Adjustment +Income +Taxes +Total +Balance at September 30, 2011 +$ +687 +$ +(238 +) +$ +449 +Currency translation +(502 +) +— +(502 +) +Income taxes +— +148 +148 +Balance at September 30, 2012 +$ +185 +$ +(90 +) +$ +95 +(n) +Shipping and Handling costs —Shipping and handling costs invoiced to customers are included in net sales. Costs to distribute products to customers, +including freight costs, warehousing costs, and other shipping and handling activities are included in cost of sales. +(o) +Non-income Government-Assessed Taxes —We classify all non-income, government-assessed taxes (sales, use, and value-added) collected from customers and +remitted by us to appropriate revenue authorities, on a net basis (excluded from net sales) in the accompanying consolidated statements of operations. +(2) Acquisition of Bioline Group +On July 20, 2010, we acquired all of the outstanding common stock of the Bioline group of companies (collectively the +“Bioline Group”). We paid $23,849 from cash and equivalents on hand to acquire the Bioline Group. Headquartered in London, the Bioline Group is a leading manufacturer and distributor of molecular biology reagents with additional operations +in Germany, Australia and the United States. The highly specialized molecular biology reagents it supplies to the life science research, biotech, pharmaceutical and commercial diagnostics markets are the critical components used in PCR testing for +DNA, RNA and other genomic testing. +- 59 - +Table of Contents +As a result of the consideration paid exceeding the fair value of the net assets being acquired, goodwill in +the amount of $12,992 was recorded in connection with this acquisition, none of which will be deductible for tax purposes. This goodwill resulted largely from the addition of key global operations and direct sales capabilities, management talent and +a research-oriented customer base, to complement our existing Life Science operations. In addition to the Bioline Group’s results of operations since the acquisition date, which are included in our fiscal 2012, 2011 and 2010 Consolidated +Statements of Operations and reported as part of the Life Science segment, the consolidated results for fiscal 2012, 2011 and 2010 also include: +i) +$587 and $230 of Cost of Sales for fiscal 2011 and fiscal 2010, respectively, related to the roll-out of fair value inventory adjustments for sales of products that +were in the Bioline Group’s inventory on the date of acquisition and, therefore, were valued at fair value, rather than manufactured cost, in the opening balance sheet; and +ii) +$879, $1,003 and $166 of General and Administrative Expenses for fiscal 2012, 2011 and 2010, respectively, related to the amortization of specific identifiable +intangible assets recorded on the opening balance sheet, including customer relationships, license agreements, non-compete agreements, manufacturing processes and trade names. +The results of the Bioline Group included in the consolidated results of the Company for fiscal 2012, 2011 and 2010 are as follows, reflecting the items noted above: +2012 +2011 +2010 +Net Sales +$ +17,078 +$ +14,869 +$ +2,084 +Operating Income (Loss) +$ +1,881 +$ +26 +$ +(126 +) +Net Earnings (Loss) +$ +1,649 +$ +240 +$ +(1,262 +) +- 60 - +Table of Contents +The recognized amounts of identifiable assets acquired and liabilities assumed in the acquisition of the +Bioline Group, reflecting finalization of the of the purchase price allocation during fiscal 2011, were as follows: +July 20, +2010 +Fair value of assets acquired - +Cash and equivalents +$ +3,445 +Accounts receivable +1,897 +Inventories +2,807 +Other current assets +350 +Property, plant and equipment, net +816 +Goodwill +12,992 +Other intangible assets (estimated useful life) +Customer relationships (10 years) +3,898 +Manufacturing processes (6 years) +1,467 +License agreements (approximate 8 year wtd. avg.) +718 +Non-compete agreements (1 year) +122 +Trade names (10 years) +995 +29,507 +Fair value of liabilities assumed - +Accounts payable and accrued expenses +3,181 +Deferred income tax liabilities +2,477 +Total consideration paid +$ +23,849 +The consolidated pro forma results of the combined entities of Meridian and the Bioline Group, had the acquisition date been +October 1, 2009, are as follows for the periods indicated: +(UNAUDITED) +Fiscal Year Ended September 30, +2012 +2011 +2010 +Net Sales +$ +173,542 +$ +159,723 +$ +153,635 +Net Earnings +$ +33,371 +$ +27,282 +$ +25,980 +Diluted Earnings Per Common Share +$ +0.80 +$ +0.66 +$ +0.63 +These pro forma amounts have been calculated after adjusting the results of the Bioline Group to reflect the transaction costs incurred +by the Company and the additional amortization that would have been charged assuming the previously-discussed fair value adjustments to inventory and identifiable intangible assets had been applied on October 1, 2009, together with the +consequential tax effects. Although this results in no pro forma adjustments to fiscal 2012 results, fiscal 2011 pro forma earnings exclude $694 related to amortization of the fair value adjustments to inventory and certain of the identifiable +intangible assets, and the related tax effects, as these amounts have been included in the fiscal 2010 pro forma earnings. Fiscal 2010 pro forma earnings include an additional $1,443 of amortization ($587 related to fair value adjustments to +inventory and $856 related to identifiable intangible assets), and the related tax effects, that would have resulted from applying the previously-discussed fair value adjustments as of October 1, 2009. +- 61 - +Table of Contents +(3) Inventories +Inventories are comprised of the following: +As of September 30, +2012 +2011 +Raw materials +$ +6,916 +$ +7,272 +Work-in-process +9,540 +7,016 +Finished goods—illumigene instruments +2,326 +4,179 +Finished goods—kits and reagents +12,900 +14,222 +Total +$ +31,682 +$ +32,689 +(4) Bank Credit Arrangements +We have a $30,000 credit facility with a commercial bank, which expires in September 2015. This credit facility is collateralized by +our business assets, except for those of non-U.S. subsidiaries, which totaled approximately $134,000 at September 30, 2012. There were no borrowings outstanding on this credit facility at September 30, 2012 or September 30, 2011. +Available borrowings under this credit facility were $30,000 at September 30, 2012 and September 30, 2011. In connection with this bank credit facility, we are required to comply with financial covenants that limit the amount of debt +obligations and require a minimum amount of tangible net worth. We are in compliance with all covenants. We are also required to maintain a cash compensating balance with the bank in the amount of $1,000, pursuant to this bank credit facility and +are in compliance with this requirement. +(5) Fair Value Measurements +We use a fair value measurement to value our financial assets and liabilities. Fair value is the price that would be received to sell +an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value hierarchy prioritizes inputs to valuation techniques used to measure fair value into three broad levels, which are +described below: +Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that are accessible at the +measurement date for assets and liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs. +Level 2: Inputs other +than quoted prices included within Level 1 that are observable for the assets or liabilities, either directly or indirectly. These include quoted prices for identical or similar assets or liabilities in markets that are not active, that is, markets +in which there are few transactions for the asset or liability, the prices are not current, or price quotations vary substantially either over time or among market makers, or in which little information is released publicly and inputs that are +derived principally from or corroborated by observable market data by correlation or other means. +- 62 - +Table of Contents +Level 3: Unobservable inputs, developed using our estimates and assumptions, which reflect those that the +market participants would use. Such inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs. +Determining where an asset or liability falls within the hierarchy depends on the lowest level input that is significant to the fair value measurement as a whole. In determining fair value, we utilize +valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible and considers counterparty credit risk in the assessment of fair value. +We had no financial assets or liabilities carried at fair value at September 30, 2012 or 2011 to be classified as Level 1, 2 or 3. +(6) Income Taxes +(a) +Earnings before income taxes, and the related provision for income taxes for the years ended September 30, 2012, 2011 and 2010 were as follows: +Year Ended September 30, +2012 +2011 +2010 +Domestic +$ +44,774 +$ +37,955 +$ +38,329 +Foreign +4,942 +2,545 +3,071 +Total earnings before income taxes +$ +49,716 +$ +40,500 +$ +41,400 +Provision (credit) for income taxes— +Federal— +Current +$ +15,077 +$ +13,336 +$ +13,626 +Temporary differences +Fixed asset basis differences and depreciation +2 +(155 +) +58 +Intangible asset basis differences and amortization +(354 +) +(312 +) +(335 +) +Currently non-deductible expenses and reserves +(397 +) +(627 +) +(29 +) +Stock-based compensation +(599 +) +(706 +) +(618 +) +Other, net +74 +35 +(75 +) +Subtotal +13,803 +11,571 +12,627 +State and local +1,521 +1,213 +1,186 +Foreign +1,021 +885 +940 +Total income tax provision +$ +16,345 +$ +13,669 +$ +14,753 +- 63 - +Table of Contents +(b) +The following is a reconciliation between the statutory U.S. income tax rate and the effective rate derived by dividing the provision for income taxes by earnings +before income taxes: +Year Ended September 30, +2012 +2011 +2010 +Computed income taxes at statutory rate +$ +17,398 +35.0 +% +$ +14,175 +35.0 +% +$ +14,490 +35.0 +% +Increase (decrease) in taxes resulting from— +State and local income taxes +994 +2.0 +834 +2.1 +777 +1.9 +Net benefit on foreign dividend +(373 +) +(0.8 +) +— +— +— +— +Foreign tax rate differences +(114 +) +(0.2 +) +58 +0.1 +(87 +) +(0.2 +) +Qualified domestic production incentives +(1,226 +) +(2.5 +) +(1,025 +) +(2.5 +) +(786 +) +(1.9 +) +Bioline Group transaction costs +— +— +— +— +434 +1.0 +U.S. book-to-return and uncertain tax position activity +(421 +) +(0.8 +) +(422 +) +(1.0 +) +8 +— +Other, net +87 +0.2 +49 +0.1 +(83 +) +(0.2 +) +$ +16,345 +32.9 +% +$ +13,669 +33.8 +% +$ +14,753 +35.6 +% +(c) +The components of net deferred tax assets were as follows: +As of September 30, +2012 +2011 +Deferred tax assets— +Valuation reserves and non-deductible expenses +$ +1,575 +$ +1,529 +Stock compensation expense not deductible +3,067 +2,562 +Net operating loss carryforwards +598 +767 +Inventory basis differences +1,376 +1,322 +Subtotal +6,616 +6,180 +Less valuation allowance +(283 +) +(439 +) +Deferred tax assets +6,333 +5,741 +Deferred tax liabilities— +Fixed asset basis differences and depreciation +(761 +) +(731 +) +Intangible asset basis differences and amortization +(2,508 +) +(3,421 +) +Other +(306 +) +(442 +) +Deferred tax liabilities +(3,575 +) +(4,594 +) +Net deferred tax assets +$ +2,758 +$ +1,147 +For income tax purposes, we have tax benefits related to operating loss carryforwards in the countries of Australia, Belgium and the +Netherlands. These net operating loss carryforwards have no expiration date. We have recorded deferred tax assets for these carryforwards totaling $598 and $767 at September 30, 2012 and September 30, 2011, respectively, excluding +valuation allowances for the country of Belgium. +The realization of deferred tax assets in foreign jurisdictions is dependent upon the +generation of future taxable income in these countries. We have considered the levels of currently anticipated pre-tax income in foreign jurisdictions in assessing the required level of the deferred tax asset valuation allowance. Taking into +consideration historical and current operating results, and other factors, we believe that it is more likely than not that the net deferred tax asset for foreign jurisdictions, after consideration of the valuation allowance, which has been +established, will be realized. The amount of the net deferred tax asset considered realizable in foreign jurisdictions, however, could be reduced in future years if estimates of future taxable income during the carryforward period are reduced. +- 64 - +Table of Contents +Undistributed earnings reinvested indefinitely in our non-U.S. operations were approximately $14,000 at +September 30, 2012. U.S. deferred tax liabilities of approximately $5,000 on such earnings have not been recorded. We believe that such U.S. taxes would be largely offset by foreign tax credits for taxes paid in non-U.S. jurisdictions. +As described in Note 1, we utilize a comprehensive model for the recognition, measurement, presentation and disclosure of uncertain tax +positions, assuming full knowledge of all relevant facts by the applicable tax authorities. The total amount of unrecognized tax benefits at September 30, 2012 and September 30, 2011 related to such positions was $471 and $542, +respectively, of which the full amounts would favorably affect the effective tax rate if recognized. We recognize interest and penalties related to uncertain tax positions as a component of our income tax provision. During fiscal 2012 and fiscal +2011, we decreased our tax provision by approximately $18 and $109, respectively, for such interest and penalties. We had approximately $102 accrued for the payment of interest and penalties at September 30, 2012 compared to $120 accrued at +September 30, 2011. The amount of our liability for uncertain tax positions expected to be paid or settled in the next 12 months is uncertain. +A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows: +2012 +2011 +Unrecognized income tax benefits beginning of year +$ +542 +$ +725 +Additions for tax positions of prior years +159 +333 +Reductions for tax positions of prior years +— +(269 +) +Tax examination settlements +— +(4 +) +Expirations of statute of limitations +(230 +) +(243 +) +Unrecognized income tax benefits at end of year +$ +471 +$ +542 +We are subject to examination by the tax authorities in the U.S. (both federal and state) and the countries of Australia, Belgium, +England, France, Germany, Holland and Italy. In the U.S., open tax years are for fiscal 2010 and forward, with an examination of fiscal 2011 currently underway. The IRS has completed its examination of our federal returns for fiscal 2008 and fiscal +2009. In countries outside the U.S., open tax years generally range from fiscal 2006 and forward. However, in Belgium, the utilization of local net operating loss carryforwards extends the statute of limitations for examination well into the +foreseeable future. +- 65 - +Table of Contents +(7) Employee Benefits +(a) +Savings and Investment Plan —We have a profit sharing and retirement savings plan covering substantially all full-time U.S. employees. Profit sharing +contributions to the plan, which are discretionary, are approved by the Board of Directors. The plan permits participants to contribute to the plan through salary reduction. Under terms of the plan, we match 50% of an employee’s contributions, +up to maximum match of 3% of eligible compensation. Our discretionary and matching contributions to the plan amounted to approximately $2,033, $637 and $1,282, during fiscal 2012, 2011 and 2010, respectively. +(b) +Stock-Based Compensation Plans —During fiscal 2012, we had two active stock-based compensation plans, the 2004 Equity Compensation Plan, which became +effective December 7, 2004, as amended (the “2004 Plan”) and the 2012 Stock Incentive Plan, which became effective January 25, 2012 (the “2012 Plan”). In addition, we have an Employee Stock Purchase Plan (the “ESP +Plan”), which became effective October 1, 1997. Under the ESP Plan, we sell shares of stock to our full-time and part-time employees up to the number of shares equivalent to a 1% to 15% payroll deduction from an employee’s base salary +plus an additional 5% dollar match of this deduction by Meridian. +Each of the 2004 Plan and 2012 Plan authorized +the granting of new shares for options, restricted shares or restricted share units for up to 3,000 shares, with the non-granted portion of the 2004 Plan permitted to be carried forward and added to the 2012 Plan authorized limit. As of +September 30, 2012, we have granted 2,638 and 30 shares under the 2004 Plan and 2012 Plan, respectively, thereby resulting in a remaining authorized limit of 3,332 shares. Options may be granted at exercise prices not less than 100% of the +closing market value of the underlying common shares on the date of grant and have maximum terms up to ten years. Vesting schedules for options, restricted shares and restricted share units are established at the time of grant and may be set based +on future service periods, achievement of performance targets, or a combination thereof. All options contain provisions restricting their transferability and limiting their exercise in the event of termination of employment or the disability or +death of the optionee. We have granted options for 4,479 shares under similar plans that have expired. We recognize compensation expense for all share-based payments made to employees, based upon the fair value of the share-based payment on the date +of the grant. +On November 12, 2009, we granted approximately 105 restricted shares and restricted share units (with a +weighted-average grant date fair value of $22.18 per share) to certain employees, with half of each employee’s grant being time-vested restricted shares or restricted share units vesting in total on November 12, 2013, and the remaining +half being subject to attainment of a specified earnings target for fiscal 2010. Dividend equivalents were paid on these shares and units throughout fiscal 2010. While the fiscal 2010 earnings target was not met, on September 30, 2010, the +Compensation Committee of the Board of Directors chose to convert the performance-based restricted shares to time-vested restricted shares vesting in total on November 12, 2013. This conversion impacted approximately fifty employees and +resulted in expense totaling $472, which was recorded in fiscal 2010 and is included in the total amount of stock-based compensation set forth below. +- 66 - +Table of Contents +During fiscal 2011, we granted approximately 214 restricted shares and restricted share +units (with a weighted-average grant date fair value of $22.93 per share) to certain employees, with half of each employee’s grant being time-vested restricted shares or restricted share units vesting in total on the fourth anniversary of the +grant date, and the remaining half being subject to attainment of a specified earnings target for fiscal 2011. While dividend equivalents were paid on these shares and units throughout fiscal 2011, the target for fiscal 2011 was not met and the +performance-based portion of the restricted shares and restricted share units granted during fiscal 2011 were cancelled. +Similar to previous years, during fiscal 2012, we granted approximately 210 restricted share units (with a weighted-average grant date +fair value of $17.99 per share) to certain employees, generally with half of each employee’s grant being time-vested restricted share units vesting in total on the fourth anniversary of the grant date, and the remaining half being subject to +attainment of a specified earnings target for fiscal 2012. While dividend equivalents were paid on these units throughout fiscal 2012, the target for fiscal 2012 was not met and the performance-based portion of the restricted share units granted +during fiscal 2012 have been cancelled. Additionally, during fiscal 2012, we granted approximately 110 restricted share units (with a grant date fair value of $17.57 per share) and 1,035 options (with a weighted-average grant date fair value of +$4.66 per option, as included in the options table below) to certain executive management employees to reward them for meeting Company revenue targets in advance of planned expectations. These awards can only be earned if specified cumulative +revenue thresholds are met one fiscal quarter in advance of planned revenue expectations through fiscal 2015, with the three measurement dates for ratably earning one-third of the grant being (i) the 21-month period ending June 30, 2013, +(ii) the 33-month period ending June 30, 2014 and (iii) the 45-month period ending June 30, 2015. +Giving +effect to these grants, cancellations and certain other activities for restricted shares and restricted share units throughout the years, including conversions to common shares, forfeitures, and new hire and employee promotion grants, approximately +400 restricted shares and restricted share units remain outstanding as of September 30, 2012, with a weighted-average grant date fair value of $19.89 per share, a weighted-average remaining vesting period of 2.31 years and an aggregate +intrinsic value of $7,696. The weighted-average grant date fair value of the approximate 5 restricted share units that vested during fiscal 2012 was $24.28 per share. +The amount of stock-based compensation expense reported was $1,987, $2,614 and $1,866 in fiscal 2012, 2011 and 2010, respectively. The fiscal 2012 expense is comprised of $426 related to stock options and +$1,561 related to restricted shares and units; the fiscal 2011 expense is comprised of $495 related to stock options, $2,009 related to restricted shares and units, and $110 related to the granting of unrestricted common shares to a retiring +director; and the fiscal 2010 expense is comprised of $908 related to stock options and $958 related to restricted shares and units. The total income tax benefit recognized in the income statement for these stock-based compensation arrangements was +$588, $865 and $665, for fiscal 2012, 2011 and 2010, respectively. As of September 30, 2012, we expect future stock compensation expense for unvested options and unvested restricted stock and units to total $242 and $2,018, respectively, which +will be recognized during fiscal years 2013 through 2016. +- 67 - +Table of Contents +We recognize compensation expense only for the portion of shares that we expect to vest. As +such, we apply estimated forfeiture rates to our compensation expense calculations. These rates have been derived using historical forfeiture data, stratified by several employee groups. During fiscal 2012, 2011 and 2010, we recorded $73, $39 and +$17, respectively, in stock compensation expense to adjust estimated forfeiture rates to actual. +We have elected to use the +Black-Scholes option pricing model to determine grant-date fair value for stock options, with the following assumptions: (i) expected share price volatility based on average of Meridian’s historical volatility over the options’ +expected lives and implied volatility based on the value of tradable call options; (ii) expected life of options based on contractual lives, employees’ historical exercise behavior and employees’ historical post-vesting employment +termination behavior; (iii) risk-free interest rates based on treasury rates that correspond to the expected lives of the options; and (iv) dividend yield based on the expected yield on underlying Meridian common stock. +Year ended September 30, +2012 +2011 +2010 +Risk-free interest rates +1.24 % +1.91 % +2.93 % +Dividend yield +3.42 % +3.74 % +3.12 % +Life of option +6.22 +yrs. +5.93 +yrs. +5.90 +yrs. +Share price volatility +39 % +34 % +42 % +Forfeitures (by employee group) +0%-10% +0%-10% +0%-10% +A summary of the status of our stock option plans at September 30, 2012 and changes during the year is presented +in the table and narrative below: +Options +Wtd Avg +Exercise +Price +Wtd Avg +Remaining +Life (Yrs) +Aggregate +Intrinsic +Value +Outstanding beginning of period +988 +$ +15.86 +Grants +1,101 +17.61 +Exercises +(47 +) +9.22 +Forfeitures +(10 +) +20.48 +Cancellations +(6 +) +20.90 +Outstanding end of period +2,026 +$ +16.93 +6.8301 +$ +6,420 +Exercisable end of period +864 +$ +15.31 +3.9314 +$ +4,694 +- 68 - +Table of Contents +A summary of the status of our nonvested options as of September 30, 2012, and changes +during the year ended September 30, 2012, is presented below: +Options +Weighted- +Average +Grant Date +Fair Value +Nonvested beginning of period +129 +$ +7.91 +Granted +1,101 +4.68 +Vested +(58 +) +6.18 +Forfeited +(10 +) +5.52 +Nonvested end of period +1,162 +$ +4.95 +The weighted average grant-date fair value of options granted was $4.68, $4.97 and $6.70 for fiscal 2012, 2011 and 2010, +respectively. The total intrinsic value of options exercised was $452, $8,038 and $813, for fiscal 2012, 2011 and 2010, respectively. The total grant-date fair value of options that vested during fiscal 2012, 2011 and 2010 was $361, $1,594 and +$1,558, respectively. +Cash received from options exercised was $431, $1,721 and $592 for fiscal 2012, 2011 and 2010, +respectively. Tax benefits realized and recorded to additional paid-in capital from option exercises totaled $15, $1,256 and $403 for fiscal 2012, 2011 and 2010, respectively. +(8) Major Customers and Segment Data +Our reportable segments are U.S. Diagnostics, European Diagnostics and Life Science. Initial segmentation between Diagnostics and Life +Science has been determined based upon products and customers, with further segmentation of Diagnostics between U.S. and European being based upon geographic regions served and management responsibility. The U.S. Diagnostics segment consists of +manufacturing operations in Cincinnati, Ohio, and the sale and distribution of diagnostic test kits in the U.S. and countries outside of Australia, Europe, Africa and the Middle East. The European Diagnostics segment consists of the sale and +distribution of diagnostic test kits in Australia, Europe, Africa and the Middle East. The Life Science segment consists of manufacturing operations in Memphis, Tennessee; Boca Raton, Florida; London, England; Luckenwalde, Germany; and Sydney, +Australia, and the sale and distribution of bulk antigens, antibodies, PCR/qPCR reagents, nucleotides, competent cells and bioresearch reagents domestically and abroad. The Life Science segment also includes the contract development and manufacture +of cGMP clinical grade proteins and other biologicals for use by biopharmaceutical and biotechnology companies engaged in research for new drugs and vaccines. +During the fourth quarter of fiscal 2011, we announced our plans to consolidate the Saco, Maine operations into the Memphis, Tennessee facility. This consolidation of facilities is now complete. During +fiscal 2012, the Company incurred $1,013 of costs associated with the facility consolidation, primarily related to employee retention and an additional $210 write-down of the Maine building facility based on a third-party appraisal. During fiscal +2011, such costs totaled $1,057 ($509 in Cost of Sales related to inventory writedowns, and $548 in Operating Expenses related primarily to employee retention and asset write-downs). +- 69 - +Table of Contents +Sales to individual customers constituting 10% or more of consolidated net sales are as follows: +Year Ended September 30, +2012 +2011 +2010 +Customer A +$ +32,771 +(19 +)% +$ +29,632 +(19 +)% +$ +33,821 +(24 +)% +Customer B +$ +19,903 +(11 +)% +$ +18,308 +(11 +)% +$ +18,204 +(13 +)% +Combined international sales for the U.S. Diagnostics and Life Science segments were $31,419, $28,975, and $19,350 +in fiscal years 2012, 2011 and 2010, respectively. Our focus product families – C. difficile, foodborne and H. pylori – accounted for 47%, 44% and 43% of consolidated net sales in fiscal 2012, 2011 and 2010, respectively. +Approximately 22% of the consolidated accounts receivable balance at September 30, 2012 is largely dependent upon funds from the Italian government. We currently sole-source from a U.S. manufacturer the illumi pro -10 ® instrument on which our illumi gene ® molecular testing platform operates. Additionally, two of our foodborne products sourced from another vendor accounted for 15%, 14% and 11% of third-party sales for +our U.S. Diagnostics segment in fiscal 2012, 2011 and 2010, respectively. +Significant sales information by country for the European +Diagnostics and Life Science segments is as follows. Sales are attributed to the geographic area based on the location to which the product is shipped. +Year Ended September 30, +2012 +2011 +2010 +Italy +$ +7,473 +$ +8,544 +$ +8,183 +United Kingdom +2,441 +2,373 +2,646 +France +2,149 +2,537 +2,590 +Holland +1,818 +2,142 +2,045 +Belgium +1,271 +1,289 +1,291 +Other countries +7,848 +7,302 +7,286 +Total European Diagnostics +$ +23,000 +$ +24,187 +$ +24,041 +Year Ended September 30, +2012 +2011 +2010 +United States +$ +17,805 +$ +15,711 +$ +13,907 +United Kingdom +5,251 +4,890 +2,575 +Germany +4,872 +4,922 +3,376 +Australia +3,423 +3,105 +1,289 +France +1,282 +1,111 +1,318 +Other countries +9,899 +8,664 +4,474 +Total Life Science +$ +42,532 +$ +38,403 +$ +26,939 +Identifiable assets for our Italian distribution organization were $12,537 and $17,192 at September 30, 2012 and 2011, +respectively. At September 30, 2012, identifiable assets for the Bioline Group’s operations in the U.K., Germany and Australia totaled approximately $13,464, $6,684 and $4,568, respectively; and totaled $12,825, $5,550 and $2,675, +respectively, at September 30, 2011. +- 70 - +Table of Contents +Segment information for the years ended September 30, 2012, 2011 and 2010 is as follows: +U.S. +Diagnostics +European +Diagnostics +Life Science +Elim (1) +Total +Fiscal Year 2012— +Net sales— +Third-party +$ +108,010 +$ +23,000 +$ +42,532 +$ +— +$ +173,542 +Inter-segment +9,421 +9 +1,097 +(10,527 +) +— +Operating income (2) +38,234 +2,428 +8,473 +161 +49,296 +Depreciation and amortization +3,477 +255 +2,865 +— +6,597 +Capital expenditures +2,214 +127 +1,189 +— +3,530 +Goodwill +1,250 +— +21,896 +— +23,146 +Other intangible assets +2,239 +— +8,025 +— +10,264 +Total assets +82,654 +15,443 +101,706 +(38,422 +) +161,381 +Fiscal Year 2011— +Net sales— +Third-party +$ +97,133 +$ +24,187 +$ +38,403 +$ +— +$ +159,723 +Inter-segment +10,322 +27 +756 +(11,105 +) +— +Operating income (3) +35,191 +2,199 +2,595 +48 +40,033 +Depreciation and amortization +2,854 +116 +2,903 +— +5,873 +Capital expenditures +4,964 +77 +4,098 +— +9,139 +Goodwill +1,381 +— +21,743 +— +23,124 +Other intangible assets +1,604 +— +9,343 +— +10,947 +Total assets +73,850 +19,390 +92,467 +(30,214 +) +155,493 +Fiscal Year 2010— +Net sales— +Third-party +$ +92,020 +$ +24,041 +$ +26,939 +$ +— +$ +143,000 +Inter-segment +10,285 +20 +561 +(10,866 +) +— +Operating income (4) +33,432 +3,367 +3,615 +724 +41,138 +Depreciation and amortization +2,722 +86 +1,877 +— +4,685 +Capital expenditures +1,869 +213 +1,001 +— +3,083 +Goodwill +1,381 +— +21,921 +— +23,302 +Other intangible assets +2,283 +9 +11,035 +— +13,327 +Total assets +72,030 +18,044 +90,388 +(25,821 +) +154,641 +(1) +Eliminations consist of intersegment transactions. +(2) +Life Science includes $1,013 related to consolidation of the Maine operations into the Tennessee facility. +(3) +U.S. Diagnostics and European Diagnostics include $365 and $875, respectively, related to sales and marketing leadership reorganization costs; and Life Science includes +$1,057 related to consolidation of the Maine operations into the Tennessee facility. +(4) +Life Science includes $1,240 of Bioline transaction costs. +Year Ended September 30, +2012 +2011 +2010 +Segment operating income +$ +49,296 +$ +40,033 +$ +41,138 +Interest income +42 +115 +124 +Other, net +378 +352 +138 +Consolidated earnings before income taxes +$ +49,716 +$ +40,500 +$ +41,400 +- 71 - +Table of Contents +The accounting policies of the segments are the same as those described in the summary of significant +accounting policies in Note 1. Transactions between segments are accounted for at established intercompany prices for internal and management purposes with all intercompany amounts eliminated in consolidation. +(9) Commitments and Contingencies +(a) +Royalty Commitments— We have entered into various license agreements that require payment of royalties based on a specified percentage of the sales of +licensed products (1% to 14%). These royalty expenses are recognized on an as-earned basis and recorded in the year earned as a component of cost of sales. Annual royalty expenses associated with these agreements were approximately $3,040, $1,853 +and $734, respectively, for the fiscal years ended September 30, 2012, 2011 and 2010. +Meridian entered into +a license agreement in October 2006 with a third party that provides rights to a molecular technology for infectious disease testing in the United States, Europe and other geographic markets. The agreement, as amended, calls for remaining payments +of up to approximately $2,050, based on the achievement of certain product development milestones and on-going royalties once products are available for commercial sale. +(b) +Purchase Commitments —Excluding the operating lease commitments reflected in Note 9 (c) below, we have purchase commitments primarily for inventory and +service items as part of the normal course of business. Commitments made under these obligations are $8,452, $698 and $64 for fiscal 2013, 2014 and 2015, respectively. No purchase commitments have been made beyond fiscal 2015. +(c) +Operating Lease Commitments —Meridian and its subsidiaries are lessees of (i) certain office and warehouse buildings in the U.S., Europe and Australia; +(ii) automobiles for use by the direct sales forces in the U.S. and Europe; and (iii) certain office equipment such as facsimile and copier machines across all business units, under operating lease agreements that expire at various dates. +Amounts charged to expense under operating leases were $1,524, $1,391 and $759 for fiscal 2012, 2011 and 2010, respectively. Operating lease commitments for each of the five succeeding fiscal years are as follows: fiscal 2013—$1,890, fiscal +2014—$1,178, fiscal 2015—$457, fiscal 2016—$283, and fiscal 2017—$124. +(d) +Litigation —We are a party to various litigation matters from time to time that we believe are in the normal course of business. The ultimate resolution of +these matters is not expected to have a material adverse effect on our financial position, results of operations or cash flows. +(e) +Indemnifications —In conjunction with certain contracts and agreements, we provide routine indemnifications whose terms range in duration and in some +circumstances are not explicitly defined. The maximum obligation under some such indemnifications is not explicitly stated and, as a result of our having no history of paying such indemnifications, cannot be reasonably estimated. We have not made +any payments for these indemnifications and no liability is recorded at September 30, 2012 or September 30, 2011. We believe that if we were to incur a loss on any of these matters, the loss would not have a material effect on our +financial condition. +- 72 - +Table of Contents +(10) Quarterly Financial Data +(10) Quarterly Financial Data (Unaudited) +The sum of the earnings per common share and cash dividends per share may not equal the corresponding annual amounts due to interim quarter rounding. +For the Quarter Ended in Fiscal 2012 +December 31 +March 31 +June 30 +September 30 +Net sales +$ +40,266 +$ +47,441 +$ +42,141 +$ +43,694 +Gross profit +24,733 +29,750 +27,643 +27,752 +Net earnings +6,578 +9,626 +8,594 +8,573 +Basic earnings per common share +0.16 +0.23 +0.21 +0.21 +Diluted earnings per common share +0.16 +0.23 +0.21 +0.21 +Cash dividends per common share +0.19 +0.19 +0.19 +0.19 +For the Quarter Ended in Fiscal 2011 +December 31 +March 31 +June 30 +September 30 +Net sales +$ +37,263 +$ +41,059 +$ +40,052 +$ +41,349 +Gross profit +23,502 +25,957 +25,351 +24,488 +Net earnings +6,025 +7,260 +6,836 +6,710 +Basic earnings per common share +0.15 +0.18 +0.17 +0.16 +Diluted earnings per common share +0.15 +0.18 +0.17 +0.16 +Cash dividends per common share +0.19 +0.19 +0.19 +0.19 +(11) Subsequent Events +We evaluated subsequent events after the balance sheet date of September 30, 2012 and there were no material subsequent events +that required recognition or additional disclosure in these financial statements. +ITEM 9. +CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS +ON ACCOUNTING AND +FINANCIAL DISCLOSURE +Not applicable. +- 73 - +Table of Contents +ITEM 9A. +CONTROLS AND PROCEDURES +As of September 30, 2012, an evaluation was completed under the supervision and with the participation of our management, including our Chief +Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) and 15d-15(b) promulgated under the Securities Exchange Act of 1934, as amended. +Based on that evaluation, our management, including the CEO and CFO, concluded that our disclosure controls and procedures were effective as of September 30, 2012. There have been no changes in our internal control over financial reporting +identified in connection with the evaluation of internal control that occurred during the fourth fiscal quarter that has materially affected, or is reasonably likely to affect, our internal control over financial reporting, or in other factors that +could significantly affect internal control subsequent to September 30, 2012. +Our internal control report is included in this Annual +Report on Form 10-K after Item 8, under the caption “Management’s Report on Internal Control over Financial Reporting.” +ITEM 9B. +OTHER INFORMATION +Not applicable. +- 74 - +Table of Contents +PART III +The information required by Items 10., 11., 12. (other than that portion set forth below), 13. and 14., of Part III are incorporated by reference from the Registrant’s Proxy +Statement for its 2013 Annual Shareholders’ Meeting to be filed with the Commission pursuant to Regulation 14A. +ITEM 12. +EQUITY COMPENSATION INFORMATION +The following table presents summary information as of September 30, 2012 with respect to all of our equity compensation plans (number of securities information in thousands). +Plan Category +(a) Number of +Securities to be +issued upon +exercise +of +outstanding +options, warrants +and rights +(b) Weighted- +average exercise +price of +outstanding +options, +warrants +and +rights +(c) +Number of securities +remaining available +for future issuance +under +equity +compensation plans +(excluding securities +reflected in column +(a)) +Equity compensation plans approved by security holders (1) +2,020 +$ +16.921 +3,332 +Equity compensation plans not approved by security holders +6 +19.285 +— +Total (2) +2,026 +$ +16.928 +3,332 +(1) +1996 Stock Option Plan, as amended in 2001 +1999 Director’s Stock Option Plan +2004 Equity Compensation Plan, as amended +2012 Stock Incentive Plan +(2) +Weighted-average remaining term of 6.8301 years +- 75 - +Table of Contents +ITEM 15. +EXHIBITS AND FINANCIAL STATEMENT SCHEDULES +(a) (1) and (2) FINANCIAL STATEMENTS AND SCHEDULES. +All financial statements and schedules +required to be filed by Item 8 of this Form and included in this report have been so identified under Item 8. No additional financial statements or schedules are being filed since the requirements of paragraph (c) under Item 15 +are not applicable to Meridian. +(b) (3) EXHIBITS. +Exhibit Number +Description of Exhibit +3.1 +Articles of Incorporation, including amendments not related to Company name change (Incorporated by reference to Registration Statement No. 333-02613 on Form S-3 filed with the +Securities and Exchange Commission on April 18, 1996 and Meridian’s Form 8-K filed with the Securities and Exchange Commission on May 16, 2007) +3.2 +Amended Code of Regulations (Incorporated by reference to Meridian’s Form 8-K filed with the Securities and Exchange Commission on November 13, 2012) +10.1* +Savings and Investment Plan Prototype Adoption Agreement (Incorporated by reference to Meridian’s Annual Report on Form 10-K for the Fiscal Year Ended September 30, +2003) +10.2* +Supplemental Benefit Agreement between Meridian and John A. Kraeutler, as amended April 24, 2001, December 29, 2008, August 3, 2011 and June 12, 2012 (referred to as the Salary +Continuation Agreement prior to June 12, 2012) (Incorporated by reference to Meridian’s Form 8-K filed with the Securities and Exchange Commission on June 14, 2012) +10.3 +Dividend Reinvestment Plan (Incorporated by reference to Meridian’s Annual Report on Form 10-K for the Fiscal Year Ended September 30, 1999) +10.4* +Amended and Restated Employment Agreement Dated June 12, 2012 between Meridian and John A. Kraeutler (Incorporated by reference to Meridian’s Form 8-K filed with the Securities +and Exchange Commission on June 14, 2012) +10.5* +Agreement Concerning Disability and Death dated September 10, 2003, between Meridian and William J. Motto (Incorporated by reference to Meridian’s Annual Report on Form 10-K +for the Fiscal Year Ended September 30, 2003) +10.6* +10.7* +2004 Equity Compensation Plan, amended and restated effective January 25, 2012 (Incorporated by reference to Meridian’s Quarterly +Report on Form 10-Q for the Quarterly Period Ended December 31, 2011) +2012 +Stock Incentive Plan, effective January 25, 2012 (Incorporated by reference to Meridian’s Quarterly Report on Form 10-Q for the Quarterly Period Ended December 31, 2011) +10.8* +Fiscal 2012 Officers’ Performance Compensation Plan (Filed herewith) +10.9 +Loan and Security Agreement among Meridian Bioscience, Inc., Meridian Bioscience Corporation, Omega Technologies, Inc. Meridian Life Science, Inc. and Fifth Third Bank dated August +1, 2007 (Incorporated by reference to Meridian’s Annual Report on Form 10-K for the Fiscal Year Ended September 30, 2007) +- 76 - +Table of Contents +10.9.1 +Amended and Restated Revolving Note with Fifth Third Bank dated September 15, 2012 (Filed herewith) +10.9.2 +First Amendment to Loan and Security Agreement among Meridian Bioscience, Inc., Meridian Bioscience Corporation, Omega Technologies, Inc., Meridian Life Science, Inc. and Fifth +Third Bank dated September 2, 2010 (Incorporated by reference to Meridian’s Annual Report on Form 10-K for the Fiscal Year Ended September 30, 2010) +10.9.3 +Second Amendment to Loan and Security Agreement among Meridian Bioscience, Inc., Meridian Bioscience Corporation, Omega Technologies, Inc., Meridian Life Science, Inc. and Fifth +Third Bank dated December 1, 2010 (Incorporated by reference to Meridian’s Annual Report on Form 10-K for the Fiscal Year Ended September 30, 2010) +10.9.4 +Third Amendment to Loan and Security Agreement among Meridian Bioscience, Inc., Meridian Bioscience Corporation, Omega Technologies, Inc., Meridian Life Science, Inc. and Fifth +Third Bank dated September 15, 2012 (Filed herewith) +10.10* +Sample Time-Based Restricted Stock Unit Award Agreement dated November 9, 2011 (Filed herewith) +10.11* +Sample Performance Award Restricted Stock Unit Award Agreement dated November 9, 2011 (Filed herewith) +10.12* +Meridian Bioscience, Inc. Change in Control Severance Compensation Policy dated March 18, 2011 (Incorporated by reference to Meridian’s Form 8-K filed with the Securities +and Exchange Commission on March 24, 2011) +10.13* +Antonio Interno Retirement-Related Agreements related to retirement as of March 31, 2011 (Incorporated by reference to Meridian’s Quarterly Report on Form 10-Q for the +Quarterly Period Ended March 31, 2011) +13 +2012 Annual Report to Shareholders (1) +14 +Code of Ethics (Incorporated by reference to Meridian’s Annual Report on Form 10-K for the Fiscal Year Ended September 30, 2003) +21 +Subsidiaries of the Registrant (Filed herewith) +23 +Consent of Independent Registered Public Accounting Firm (Filed herewith) +31.1 +Certification of Principal Executive Officer required by Rule 13a-14(a) (Filed herewith) +31.2 +Certification of Principal Financial Officer required by Rule 13a-14(a) (Filed herewith) +32 +Section 1350 Certification of Chief Executive Officer and Chief Financial Officer (Filed herewith) +101 +The following financial information from Meridian Bioscience Inc.’s Annual Report on Form 10-K for the year ended September 30, 2012 filed with the SEC on November 29, 2012, +formatted in XBRL includes: (i) Consolidated Statements of Operations for the years ended September 30, 2012, 2011 and 2010; (ii) Consolidated Statements of Cash Flows for the years ended September 30, 2012, 2011 and 2010; (iii) Consolidated Balance +Sheets as of September 30, 2012 and 2011; (iv) Consolidated Statements of Shareholders’ Equity for the years ended September 30, 2012, 2011 and 2010; (v) the Notes to Consolidated Financial Statements; and (vi) Schedule No. II - Valuation and +Qualifying Accounts for the years ended September 30, 2012, 2011 and 2010. +* +Management Compensatory Contracts +(1) +Only specific portions of the 2012 Annual Report to Shareholders are incorporated by reference in this Form 10-K as filed herewith. A supplemental paper copy of the +2012 Annual Report to Shareholders has been furnished to the Securities and Exchange Commission for informational purposes only. +Meridian will provide shareholders with any exhibit upon the payment of a specified reasonable fee, which fee shall be limited to Meridian’s +reasonable expenses in furnishing such exhibit. +- 77 - +Table of Contents +SIGNATURES +Pursuant to the requirements of Sections 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. +MERIDIAN BIOSCIENCE, INC. +By: +/s/ John A. Kraeutler +Date: November 29, 2012 +John A. Kraeutler +Chief Executive Officer +Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following +persons on behalf of the Registrant and in the capacities and on the dates indicated. +Signature +Capacity +Date +/s/ William J. Motto +William J. Motto +Executive Chairman of the Board of Directors +November 29, 2012 +/s/ John A. Kraeutler +John A. Kraeutler +Chief Executive Officer, Director +November 29, 2012 +/s/ Melissa A. Lueke +Melissa A. Lueke +Executive Vice President, Chief Financial Officer, and Secretary +November 29, 2012 +/s/ James M. Anderson +James M. Anderson +Director +November 29, 2012 +/s/ David C. Phillips +David C. Phillips +Director +November 29, 2012 +/s/ Robert J. Ready +Robert J. Ready +Director +November 29, 2012 +- 78 - +Table of Contents +SCHEDULE +SCHEDULE II +Meridian Bioscience, Inc. +and Subsidiaries +Valuation and Qualifying Accounts +(Dollars in thousands) +Years Ended September 30, 2012, 2011 and 2010 +Description +Balance at +Beginning +of Period +Charged to +Costs and +Expenses +Deductions +Other (a) +Balance at +End of +Period +Year Ended September 30, 2012: +Allowance for doubtful accounts +$ +310 +$ +370 +$ +(89 +) +$ +(17 +) +$ +574 +Inventory realizability reserves +3,175 +198 +(1,024 +) +(78 +) +2,271 +Valuation allowances—deferred taxes +439 +— +(131 +) +(25 +) +283 +Year Ended September 30, 2011: +Allowance for doubtful accounts +$ +241 +$ +68 +$ +— +$ +1 +$ +310 +Inventory realizability reserves +2,670 +1,056 +(550 +) +(1 +) +3,175 +Valuation allowances—deferred taxes +439 +— +— +— +439 +Year Ended September 30, 2010: +Allowance for doubtful accounts +$ +247 +$ +82 +$ +(56 +) +$ +(32 +) +$ +241 +Inventory realizability reserves +1,025 +606 +(610 +) +1,649 +2,670 +Valuation allowances—deferred taxes +470 +— +— +(31 +) +439 +(a) +Balances reflect the effects of currency translation and, in fiscal 2010, the effect of acquiring the Bioline Group. +- 79 - \ No newline at end of file diff --git a/raw/filings/0000794172/2012/0001193125-12-485192/filing_metadata.csv b/raw/filings/0000794172/2012/0001193125-12-485192/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..c2cb1a519dd8ab437f49d4315fa37590fc813d1b --- /dev/null +++ b/raw/filings/0000794172/2012/0001193125-12-485192/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000794172,VIVO,MERIDIAN BIOSCIENCE INC,10-K,2012-11-29,2012-09-30,2012-11-29T17:45:13.000Z,0001193125-12-485192,d413125d10k.htm,FORM 10-K,8130018,1,0,https://www.sec.gov/Archives/edgar/data/794172/000119312512485192/d413125d10k.htm,https://www.sec.gov/Archives/edgar/data/794172/000119312512485192/,2012,2012,1 diff --git a/raw/filings/0000794172/2012/0001193125-12-485192/item1.txt b/raw/filings/0000794172/2012/0001193125-12-485192/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..3b78ac32e6caf5633ff267bdb29c55f535572630 --- /dev/null +++ b/raw/filings/0000794172/2012/0001193125-12-485192/item1.txt @@ -0,0 +1,316 @@ +ITEM 1. +BUSINESS +Overview +Meridian is a fully-integrated +life science company with principal businesses in (i) the development, manufacture, sale and distribution of clinical diagnostic test kits, primarily for certain gastrointestinal, viral, respiratory and parasitic infectious diseases; +(ii) the manufacture and distribution of bulk antigens, antibodies, PCR/qPCR reagents, nucleotides, competent cells and bioresearch reagents used by researchers and other diagnostic manufacturers; and (iii) the contract development and +manufacture of proteins and other biologicals under cGMP conditions for use by biopharmaceutical and biotechnology companies engaged in research for new drugs and vaccines. The company was incorporated in Ohio in 1976. Our principal corporate +offices are located in Cincinnati, Ohio, USA. +Our website is www.meridianbioscience.com . We make available our Annual Reports on Form +10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments thereto, free of charge through this website, as soon as reasonably practicable after such material has been electronically filed with or furnished to the +Securities and Exchange Commission (SEC). These reports may also be read and copied at the SEC’s public reference room at 100 F Street, N.E., Washington, DC 20549, phone number 1-800-732-0330. The SEC maintains an internet site containing these +filings and other information regarding Meridian at www.sec.gov . The information on our website is not and should not be considered part of this Annual Report on Form 10-K. +- 3 - +Table of Contents +Reportable Segments +Our reportable segments are U.S. Diagnostics, European Diagnostics and Life Science. The U.S. Diagnostics segment consists of manufacturing operations in Cincinnati, Ohio, and the sale and distribution of +diagnostic test kits in the U.S. and countries outside of Australia, Europe, Africa and the Middle East. The European Diagnostics segment consists of the sale and distribution of diagnostic test kits in Australia, Europe, Africa and the Middle East. +The Life Science segment consists of manufacturing operations in Memphis, Tennessee; Boca Raton, Florida; London, England; Luckenwalde, Germany; and Sydney, Australia, and the sale and distribution of bulk antigens, antibodies, PCR/qPCR reagents, +nucleotides, competent cells and bioresearch reagents domestically and abroad. The Life Science segment also includes the contract development and manufacture of cGMP clinical grade proteins and other biologicals for use by biopharmaceutical and +biotechnology companies engaged in research for new drugs and vaccines. Financial information for Meridian’s segments is included in Note 8 to the consolidated financial statements. +Our primary source of revenues continues to be diagnostic products, with our Diagnostics segments providing 75% of consolidated net sales for fiscal 2012. Our diagnostic products provide accuracy, +simplicity and speed, enable early diagnosis and treatment of common, acute medical conditions, and provide for better patient outcomes at reduced costs. We target diagnostics for disease states that (i) are acute conditions where rapid +diagnosis impacts patient outcomes; (ii) have opportunistic demographic and disease profiles; (iii) are underserved by current diagnostic products; and (iv) have difficult sample handling requirements. This approach has allowed us to +establish significant market share in our target disease states. The acquisition of the Bioline group of companies (collectively the “Bioline Group”) in July 2010 dramatically increased the revenue base for our Life Science segment; +revenues for our Life Science segment represented 25% of consolidated net sales for fiscal 2012. +Products and Markets +We have expertise in the development and manufacture of products based on multiple core diagnostic technologies. Our product technologies include DNA +amplification, enzyme immunoassay, immunofluorescence, particle agglutination/aggregation, immunodiffusion, complement fixation and chemical stains. As a result, we are able to develop and manufacture diagnostic tests in a variety of formats that +satisfy customer needs and preferences, whether in a hospital, commercial or reference laboratory, or alternate site location. Our product offering consists of approximately 140 clinical diagnostic products. +Sales within our focus product families – C. difficile, foodborne and H. pylori – accounted for 62%, 58% and 51% of our U.S. +Diagnostics segment’s third-party sales during fiscal 2012, 2011 and 2010, respectively. These same product families accounted for 47%, 44% and 43% of consolidated net sales in fiscal 2012, 2011 and 2010, respectively. +- 4 - +Table of Contents +U.S. Diagnostics Segment +Overview +Our U.S. Diagnostics segment’s business focuses on the development, +manufacture, sale and distribution of diagnostic test kits, primarily for certain gastrointestinal, viral, respiratory and parasitic infectious diseases. In addition to diagnostic test kits, products also include transport media that store and +preserve specimen samples from patient collection to laboratory testing. Third-party sales for this segment were $108,000, $97,000 and $92,000 for fiscal 2012, 2011 and 2010, respectively, reflecting a three-year compound annual growth rate of 3%. +Excluding influenza-related sales, the three-year compound annual growth rate was 8%. The higher rate reflects the impact of influenza-related sales in 2009 in connection with the H1N1 influenza pandemic. As of September 30, 2012, our U.S. +Diagnostics segment had approximately 290 employees. +Our diagnostic test kits utilize immunodiagnostic and molecular +technologies, which test samples of stool, blood, urine and other body fluids or tissue for the presence of specific infectious diseases. Specific immunodiagnostic technologies used in our diagnostic test kits include enzyme immunoassay, +immunofluorescence, particle agglutination/aggregation, immunodiffusion, complement fixation and chemical stains. During fiscal 2010 we commercialized our molecular amplification diagnostic testing platform, illumi gene ® , and introduced our first assay, C. difficile . The illumi gene ® C. difficile assay detects the presence of the toxin producing region from the C. difficile DNA, and +provides highly accurate results in under an hour. Throughout fiscal 2011 and fiscal 2012, we continued with the development of additional tests for the illumi gene ® molecular platform, receiving FDA clearance for our second and third molecular tests for the platform – illumi gene ® Group B Streptococcus (Group B Strep or GBS) in December 2011 and illumi gene ® Group A Streptococcus (Group A Strep) in September 2012. A test for Mycoplasma pneumoniae (Walking +Pneumonia) was recently submitted to the FDA for marketing clearance and is expected to be available for sale in the U.S. during the second quarter of fiscal 2013. Our fifth test on the illumi gene ® platform is for Bordetella pertussis (Whooping Cough), which is expected to be available for sale +in the U.S. during the third or fourth quarter of fiscal 2013. Our development pipeline for +illumi gene ® also includes two sexually-transmitted disease assays, expected to be available +for sale in the U.S. during the first half of fiscal 2014. +Our diagnostic products are used principally in the detection of gastrointestinal +diseases, such as antibiotic-associated diarrhea ( C. difficile ), pediatric diarrhea (Rotavirus and Adenovirus) and stomach ulcers ( H. pylori ); foodborne diseases such as Enterohemorrhagic E. coli infection (EHEC) and +Campylobacter jejuni (Campy); Streptococcus bacterial infections (both Group A and Group B Strep); viral diseases, such as Mononucleosis, Herpes Simplex, Chicken Pox and Shingles (Varicella-Zoster) and Cytomegalovirus (organ transplant +infections); parasitic diseases, such as Giardiasis, Cryptosporidiosis and Lyme; and respiratory diseases, such as Pneumonia, Valley Fever, Influenza and Respiratory Syncytial Virus (RSV). The primary markets and customers for these products are +reference laboratories and hospitals. +- 5 - +Table of Contents +In particular, the three tests we currently offer on our illumi gene ® platform – C. difficile , Group A Strep and Group B Strep – are expected to drive the majority +of growth in fiscal 2013. +C. difficile +Clostridium difficile ( C. difficile ) is a bacteria found in the gut that can cause serious damage to the colon +and even death, primarily in hospital patients using antibiotics. It is the most common infection acquired by patients while they are in the hospital. Annually in the U.S., an estimated 8 million C. difficile tests are performed. This +hospital acquired infection occurs when antibiotics disrupt other bacteria that normally prevent the colonization of C. difficile . Rapid, accurate diagnosis, followed by appropriate treatment is essential to improving patient outcomes +and reducing the overall cost of care. Our strong line of C. difficile tests, including our illumi gene ® C. difficile molecular test, provide the most comprehensive and accurate testing options for this serious and life threatening infection. +Group A Strep +Group A Streptococcus is the bacterium commonly found in the throat which causes strep throat (acute pharyngitis). Pharyngitis is diagnosed in approximately 11 million patients in the U.S. +each year. Our illumi gene ® Group A Strep test, the only FDA-cleared molecular Strep A test +in the U.S. market, provides results in less than one hour, detects more positives than culture methods and is ideal for early diagnosis and proper patient management of the common, sometimes serious disease. In addition to front line testing in +hospital and clinical settings, rapid strep throat tests performed in physician offices in the U.S. that are negative are routinely sent on to hospital and reference labs for confirmation testing, usually by culture methods that take up to 48 hours +to run. With results in less than one hour and a 53% increase in the detection of positives, +illumi gene ® Group A Strep provides improved patient care over culture methods. +Group B Strep +Each year in the U.S. there are over 4 million babies born. Appropriately testing women in the late stages of pregnancy for the presence of Group B Streptococcus is critical to the health of +the baby. Without proper treatment during labor, GBS infection can lead to sepsis, pneumonia and even meningitis, and lead to hearing and vision loss. Testing with our illumi gene ® GBS improves accuracy by up to 29% over traditional culture methods, increasing the likelihood of improved outcomes and a healthy baby. +Market Trends +The global market +for infectious disease tests continues to expand as new disease states are identified, new therapies become available, and worldwide standards of living and access to health care improve. More importantly, within this market there is a continuing +shift from conventional testing, which requires highly trained personnel and lengthy turnaround times for test results, to more technologically advanced testing, which can be performed by less highly trained personnel and completed in minutes or +hours. +- 6 - +Table of Contents +The increasing pressures to contain total health care costs have accelerated the increased use of diagnostic +testing. With rapid and accurate diagnoses of infectious diseases, physicians can pinpoint appropriate therapies quickly, leading to faster recovery, shorter hospital stays and lower overall treatment expense. In addition, these pressures have led +to a major consolidation among reference laboratories and the formation of multi-hospital group purchasing organizations and integrated delivery networks that have reduced the number of institutional customers for diagnostic products and resulted in +changes in buying practices. Specifically, multi-year exclusive or primary source marketing or distribution contracts with institutional customers have become more common, replacing less formal distribution arrangements. +Sales and Marketing +Our U.S. +Diagnostics segment’s sales and distribution network in the U.S. consists of a direct sales force complemented by independent distributors. The use of independent distributors in the U.S. allows our products to reach any bed-size healthcare +facility and also provides our customers the option to purchase our products direct or through distribution along with other supplies. For our export markets in Asia, Canada and South America, we use independent distributors. Two independent +distributors in the U.S. accounted for 10% or more of consolidated net sales in fiscal 2012, 2011 and 2010: Cardinal Healthcare Corporation and Fisher Scientific. Our sales to Cardinal were approximately $33,000, $30,000 and $34,000 during fiscal +2012, 2011 and 2010, respectively. Our sales to Fisher were approximately $20,000, $18,000 and $18,000 during fiscal 2012, 2011 and 2010, respectively. +Consolidation of the U.S. healthcare industry is expected to continue and potentially affect our customers. Industry consolidation puts pressure on pricing and aggregates buying power. In response, we +have looked to multi-year supply agreements with group purchasing organizations, integrated delivery networks and major reference laboratories to stabilize pricing. +Clostridium difficile +C. difficile , a serious hospital +acquired bacterial infection, is our largest product family, generating approximately $36,000 in global sales for fiscal 2012, or 21% growth from fiscal 2011. This product family has experienced significant competition over the last three years from +new technologies, including molecular testing platforms. Our illumi gene ® molecular C. +difficile product has now been available in markets around the world for over two years. Sales of this product were approximately $22,000, $9,000 and $500 in fiscal 2012, 2011 and 2010, respectively. Approximately 950 clinical laboratories are +current customers using our illumi gene ® platform, which now includes three tests (see below +for a discussion of our second and third tests for Group B and Group A Strep). While the majority of these customers have adopted the C. difficile assay, a growing number of customers are purchasing multiple assays for the platform. Our +illumi gene ® molecular C. difficile product has restored the C. difficile +product family to positive sales growth, 21% and 10% during each of the last two fiscal years. +- 7 - +Table of Contents +Our major competitors in this product family are Cepheid and Becton Dickinson (molecular) and Alere +(immunoassay). We believe that we have two principal advantages versus our competition. First, our molecular instrumentation package has a smaller footprint and significantly lower cost than either Cepheid or Becton Dickinson. We believe that this +advantage allows our product to fit into virtually any size hospital or reference laboratory. We believe that our second principal advantage is the breadth of our C. difficile product offerings. With the launch of our molecular product and +FDA clearance of our common antigen C. difficile products – Premier C. difficile GDH received FDA clearance in May 2011, and Immuno Card C. difficile GDH received FDA clearance in December 2011 – we believe we are in a +unique position to offer a full line of testing solutions to our clinical laboratory customers around the world to counter the competitive pressures surrounding this market. Additionally, we hold the only FDA-approved claim for C. difficile +testing in the pediatric population. These advantages, along with the performance features of the products in our C. difficile portfolio, give us a compelling product offering for any hospital testing method preference. +During fiscal 2012, we received FDA clearance for our second and third molecular tests for the illumi gene ® molecular platform – illumi gene ® GBS (Group B Streptococcus ) in December 2011 and illumi gene ® Group A Strep (Group A Streptococcus ) in September 2012. As alluded to above, over 100 customers are now purchasing two assays for the +illumi gene ® platform – the majority being C. difficile and GBS – with +revenue generated by our GBS test approximating $1,100 during fiscal 2012. In addition, with the recent introduction of the Group A Strep test, there are a growing number of customers adopting all three of our molecular-platform assays. A test for +Mycoplasma pneumoniae was recently submitted to the FDA for marketing clearance and is expected to be available for sale in the U.S. during the second quarter of fiscal 2013. Our fifth test on the illumi gene ® platform is for Bordetella pertussis , which is expected to be available for sale in the U.S. during the +third or fourth quarter of fiscal 2013. Our development pipeline for illumi gene ® also +includes two sexually-transmitted disease assays, expected to be available for sale in the U.S. during the first half of fiscal 2014. +In +addition to Cepheid, Becton Dickinson and Alere, other competitors have begun to enter the C. difficile market. During fiscal 2012, Quest Diagnostics and Great Basin received FDA clearance for a molecular C. difficile test and Quidel +received CE marking approval for a molecular C. difficile test for sale within the European Union. Although we believe that the breadth of our C. difficile product offerings and our low cost molecular platform provide key advantages to +the offerings of our competitors, selling prices may come under pressure as more competitors enter the market. +- 8 - +Table of Contents +Foodborne +Our foodborne product family achieved approximately $21,000 in global sales for fiscal 2012, or growth of 13%, with over 95% of such sales occurring in the U.S. Our foodborne products include tests for +Enterohemorrhagic E. coli (EHEC) and Campylobacter jejuni (Campy). In the U.S. market, we believe that there are potentially 20 million annual stool cultures that are tested for foodborne illnesses. At present, we believe that we +have less than a 20% market share for EHEC and less than a 5% market share for Campy. +While historically the primary competition for our +foodborne products has been laboratory culture methods, one of our competitors, Alere, has recently cleared through the FDA a shiga toxin test that will compete with our EHEC test. We believe that our products have two principal advantages versus +culture methods. The first principal advantage is test accuracy. Independent evaluations have shown our products to have higher sensitivity than culture methods. The second principal advantage is improved work flow of the testing process, resulting +in significantly shortened time to test result. Our single-use rapid products provide a test result in approximately 20 minutes, whereas culture results can take up to 24-48 hours. Time to test result can be a critical factor in the physician’s +choice of therapies, as the mortality rate for EHEC is estimated to be 5% to 10%. +Helicobacter pylori +H. pylori , a bacterium found in the stomach, is a major cause of peptic ulcers and is linked to duodenal ulcers and stomach cancer. H. +pylori represents our second largest product family, generating approximately $24,000 in global sales for 2012, or 7% growth. We offer both antibody and direct antigen tests in alternative formats (single-use and high volume batch). Our major +competition in this product family are test-method alternatives, serology and urea breath, and the prescription of symptom-relieving medications. In the U.S., our strategy has been to partner with managed care companies to promote the health and +economic benefits of a test and treat strategy, and to move physician behavior away from serology-based testing toward direct antigen testing. In the U.S. market, we believe that there are potentially 30 million people suffering from peptic +ulcers and we believe that we currently have a 5% market share. +In European markets, we face a greater number of competitive products for +this product family. As a result, pricing pressures have led to 3% sales growth for fiscal 2012 for our European Diagnostics segment, excluding the effect of currency translation. +- 9 - +Table of Contents +Research and Development +Our U.S. Diagnostics segment’s research and development organization has expertise in biochemistry, immunology, mycology, bacteriology, virology, parasitology and molecular biology. Research and +development expenses for the U.S. Diagnostics segment for fiscal 2012, 2011 and 2010 were approximately $8,000, $7,000 and $6,000, respectively. This research and development organization focuses its activities on new applications for our existing +technologies, improvements to existing products and development of new technologies. Research and development efforts may occur in-house or with collaborative partners. We believe that new product development is a key source for sustaining revenue +growth. The products within our C. difficile , foodborne, and H. pylori product families were either developed solely in-house, or via collaboration with outside partners. +The introduction of our molecular amplification diagnostic testing platform, illumi gene ® , introduced in markets around the world over two years ago, followed nearly four years of exploration and +development of a molecular-based diagnostic testing technology to complement our existing antigen/antibody-based testing technologies. Our illumi gene ® C. difficile assay, the initial assay introduced for the illumi gene ® platform, detects the presence of a key toxin producing region from the C. difficile DNA, and provides highly accurate results in under an hour. We believe +this molecular assay uniquely positions us in the market to provide a full line of testing solutions that will meet the needs of both our domestic and international customers and, as a result, throughout fiscal 2011 and fiscal 2012, we continued +with the development of additional tests for the illumi gene ® molecular platform, receiving +FDA clearance for our second and third molecular tests for the platform – illumi gene ® +GBS (Group B Streptococcus ) in December 2011 and illumi gene ® Group A Strep (Group A +Streptococcus ) in September 2012. A test for Mycoplasma pneumoniae (Walking Pneumonia) was recently submitted to the FDA for marketing clearance and is expected to be available for sale in the U.S. during the second quarter of fiscal +2013. Our fifth test on the illumi gene ® platform is for Bordetella pertussis +(Whooping Cough), which is expected to be available for sale in the U.S. during the third or fourth quarter of fiscal 2013. Our development pipeline for illumi gene ® also includes two sexually-transmitted disease assays, expected to be available for sale in the U.S. during the first half of fiscal 2014. We currently hold +registrations to sell illumi gene ® in 37 countries, including the U.S., with registrations +pending in 5 additional countries. +During fiscal 2008, we launched our first products under our patented TRU rapid test +technology. The design of this technology enhances laboratory safety by containing the specimen in a closed system during testing as recommended by CDC guidelines. TRU tests also use less space than other immunoassay technologies, which is an +advantage in space-constrained clinical laboratories. Products using this technology include TRU FLU ® , TRU RSV ® , TRU EBV-M ® and TRU EBV-G ® . TRU +LEGIONELLA TM and TRU HSV 1 and 2 IgG TM the latest additions to the TRU line of products. Legionella was +launched in foreign markets during the fourth quarter of fiscal 2011, and became available in the U.S. market during the second quarter of fiscal 2012, while TRU HSV 1 and 2 IgG TM were registered for sale in Europe during September 2012. +- 10 - +Table of Contents +Manufacturing +Our immunodiagnostic and molecular products require the production of highly specific and sensitive antigens, antibodies, primers and enzymes. While we produce substantially all of our own requirements +including monoclonal antibodies and polyclonal antibodies, plus a variety of fungal, bacterial and viral antigens, currently a number of the raw materials used in our products, including our illumi gene ® molecular products, are purchased from outside vendors. We believe that we have sufficient manufacturing and +sourcing capacity for anticipated growth in the near term. +Intellectual Property, Patents and Licenses +We own or license U.S. and foreign patents, most of which are for products manufactured by our U.S. Diagnostics segment. Sales of these products are as +follows: +Product/Technology Family +Number of +products +% of consolidated sales +2012 +2011 +illumigene ® +3 +13 +% +6 +% +H. pylori +2 +13 +% +13 +% +Respiratory +3 +2 +% +2 +% +Other +6 +1 +% +1 +% +Total patented products +14 +29 +% +22 +% +The patents for the illumi gene ® products expire between 2020 and 2022; the patents for the two H. pylori products expire between 2016 and 2017; and the patents for the three respiratory +products expire in 2022 (two products) and 2027. The remaining six patented products for which we own or license patents are spread over three product families. +In the absence of patent protection, we may be vulnerable to competitors who successfully replicate our production and manufacturing technologies and processes. Our employees are required to execute +confidentiality and non-disclosure agreements designed to protect our proprietary products. +Government Regulation +Our diagnostic products are regulated by the Food & Drug Administration (FDA) as “devices” pursuant to the Federal Food, Drug, and +Cosmetic Act (FDCA). Under the FDCA, medical devices are classified into one of three classes (i.e., Class I, II or III). Class I and II devices are not expressly approved by the FDA, but, instead, are “cleared” for marketing. Class III +devices generally must receive “pre-market approval” from the FDA as to safety and effectiveness. +- 11 - +Table of Contents +Each of the diagnostic products currently marketed by us in the United States has been cleared by the FDA +pursuant to the 510(k) clearance process or is exempt from such requirements. We believe that most, but not all, products under development will be classified as Class I or II medical devices and, in the case of Class II devices, will be eligible +for 510(k) clearance; however, we can make no assurances in this regard. +Sales of our diagnostic products in foreign countries are subject to +foreign government regulation, the requirements of which vary substantially from country to country. The time required to obtain approval by a foreign country may be longer or shorter than that required for FDA approval and the requirements may +differ. +Meridian’s Cincinnati manufacturing facility is certified to ISO 13485:2003. +Medical Device Tax +Included +within the U.S. government’s comprehensive healthcare reform legislation, enacted during 2010, was the establishment of a 2.3% excise tax on the sales of medical devices beginning in calendar 2013. We currently anticipate that this legislation +will result in an excise tax for our company of approximately $2,000 in fiscal 2013. At the present time it is believed that little, if any, of this cost can be passed on to customers. +Seasonal Factors and Sporadic Outbreaks +Our principal business is the sale of a +broad range of diagnostic test kits for common gastrointestinal, viral, upper respiratory and parasitic infectious diseases. Certain infectious diseases may be seasonal in nature, while others may be associated with sporadic outbreaks, such as +foodborne illnesses, or pandemics such as the H1N1 influenza outbreak during fiscal 2009. While we believe that the breadth of our diagnostic product lines reduces the risk that infections subject to seasonality and sporadic outbreaks will cause +significant variability in diagnostic revenues, we can make no assurance that revenues will not be impacted period over period by such factors. +European Diagnostics Segment +Our +European Diagnostics segment’s business focuses on the sale and distribution of diagnostic test kits, manufactured both by our U.S. Diagnostics segment and by third-party vendors. Approximately 85% of third-party sales for fiscal 2012 for this +segment were products purchased from our U.S. Diagnostics segment. Third-party sales for this segment were approximately $23,000, $24,000 and $24,000 for fiscal 2012, 2011 and 2010, respectively. As of September 30, 2012, the European +Diagnostics segment had approximately 40 employees. Our European Diagnostics segment’s sales and distribution network consists of direct sales forces in Australia, Belgium, France, Holland and Italy, and independent distributors in other +European countries, Africa and the Middle East. The European Diagnostics segment maintains a distribution center near Milan, Italy. The primary markets and customers for this segment are hospitals and reference laboratories. +- 12 - +Table of Contents +The European Diagnostics segment’s functional currency is the Euro. The translation of Euros into U.S. +dollars is subject to exchange rate fluctuations. +Life Science Segment +Overview +Our Life Science segment’s business focuses on the development, +manufacture, sale and distribution of bulk antigens, antibodies, PCR/qPCR reagents, nucleotides, competent cells and bioresearch reagents used by researchers and other diagnostic companies, as well as contract development and manufacturing services +under clinical cGMP conditions. Third-party sales for this segment were approximately $43,000, $38,000 and $27,000 for fiscal 2012, 2011 and 2010, respectively. As of September 30, 2012, our Life Science segment had approximately 180 employees. +Most of the revenue for our Life Science segment currently comes from the manufacture, sale and distribution of bulk antigens, antibodies, +PCR/qPCR reagents, nucleotides, competent cells and bioresearch reagents used by researchers and other diagnostic companies. During fiscal 2012, 19% of third-party sales for this segment were to two diagnostic manufacturing customers. For one of +these two customers, we have exclusive supply agreements that have annual, automatic renewal provisions. We have a long-standing relationship with this customer; and although there can be no assurances, we intend to renew these supply agreements in +the normal course of business. +In July 2010, we acquired the Bioline Group and in so doing added important technologies and capabilities to +our Life Science business and complemented our expanding life science product lines sold into the research, pharmaceutical and commercial diagnostic markets. In addition to technological capabilities, Bioline also added proprietary know-how in the +production of high-volume nucleotides and PCR enzymes, as well as a growing portfolio of intellectual property in the form of patents and licenses. The Bioline Group contributed approximately $17,000 and $15,000 in sales for fiscal 2012 and 2011, +respectively. +Our clinical cGMP protein production facility in Memphis, Tennessee serves as an enabling technology for process development +and large-scale manufacturing for biologicals used in new drugs and vaccines. The size of the facility is intended to accommodate manufacturing requirements for Phase I and Phase II clinical trials. The customer base for this aspect of our Life +Science business includes biopharmaceutical and biotechnology companies, as well as government agencies. Revenues for our Life Science segment, in the normal course of business, may be affected from quarter to quarter by the timing and nature of +arrangements for contract services work, which may have longer production cycles than our immunodiagnostic and molecular biology products, as well as buying patterns of major customers. See Note 1 (i) to the Consolidated Financial Statements +herein for revenue recognition policies. Our revenues for contract services were approximately $2,000, $3,000 and $2,000 in fiscal 2012, 2011 and 2010, respectively. +- 13 - +Table of Contents +As a result of the order volume trends in bulk antigens, antibodies and reagents, during the fourth quarter +of fiscal 2011, we announced the closure of our Saco, Maine facility, and completed the consolidation of manufacturing operations into our Memphis, Tennessee facility during the third fiscal quarter of 2012. Total costs to complete the consolidation +of facilities approximated $2,100, consisting of fixed asset impairments, inventory impairments, stay bonuses and moving costs, among other similar items. During the fourth quarter of 2011, we recognized approximately $1,100 of these costs, and +recognized the remaining $1,000 during the first three quarters of fiscal 2012. +Products, Markets and Growth Strategies +Our Life Science segment’s businesses have been assembled via acquisitions (BIODESIGN International in fiscal 1999, Viral +Antigens in fiscal 2000, OEM Concepts in fiscal 2005, and the Bioline Group in July 2010). Historically, these businesses were run autonomously. In recent years, growth strategies have been developed around sales and marketing integration, new +product development integration, and the acquisition of complementary product lines. +Immunodiagnostic products such as antibodies, antigens +and reagents are marketed primarily to diagnostic manufacturing customers as a source of raw materials for their products, or as an outsourced step in their manufacturing processes. These products are typically sold in bulk quantities, and may also +be custom-designed for a particular manufacturer’s requirements. Sales efforts are focused on multi-year supply agreements in order to provide stability in volumes and pricing. We believe this benefits both us and our customers. +Molecular biology products such as PCR/qPCR reagents, nucleotides and competent cells are marketed primarily to research customers. These products are +typically sold in small quantities. +Research and Development +Research and development expenses for our Life Science segment for fiscal 2012, 2011 and 2010 were approximately $2,000, $3,000 and $2,000, respectively. This research and development organization is +heavily involved in vaccine development and production activities for our cGMP facility and development of new molecular components. +Manufacturing and Government Regulation +The cGMP clinical grade proteins that are produced in our Memphis facility are intended to be used as “injectibles,” and, as such, they are produced under cGMP Regulations for Biologics and +Human Drugs under the auspices of the FDA. Approval and licensing, following clinical trials, of these products is the responsibility of the applicant, who owns the rights to each protein. Typically, the customer is the applicant, not Meridian Life +Science. +- 14 - +Table of Contents +The Meridian Life Science facilities are ISO 9001:2000 certified and EC 1069:2009 approved, where +appropriate and as required. +Competition +Diagnostics +The market for diagnostic tests is a multi-billion dollar international +industry, which is highly competitive. Many of our competitors are larger than we are with greater financial, research, manufacturing and marketing resources. Important competitive factors for Meridian’s products include product quality, price, +ease of use, customer service and reputation. In a broader sense, industry competition is based upon scientific and technological capability, proprietary know-how, access to adequate capital, the ability to develop and market products and processes, +the ability to attract and retain qualified personnel, and the availability of patent protection. To the extent that our product lines do not reflect technological advances, our ability to compete in those product lines could be adversely affected. +The diagnostic test industry is highly fragmented and segmented. Of importance in the industry are mid-sized medical diagnostic specialty +companies, like Meridian, that offer multiple, broad product lines and have the ability to deliver new, high value products quickly to the marketplace. Among the companies with which we compete in the marketing of one or more of our products are the +diagnostic product divisions of Abbott Laboratories Inc., Becton, Dickinson and Company, Thermo Fisher and Siemens. We also compete with smaller companies such as Cepheid, Quidel Corporation and Alere, Inc. +Life Science +The market for bulk +biomedical reagents is highly competitive. Important competitive factors include product quality, price, customer service, and reputation. We face competitors, many of which have greater financial, research and development, sales and marketing, and +manufacturing resources, and where sole-source supply arrangements do not exist. From time to time, customers may choose to manufacture their biomedical reagents in-house rather than purchase from outside vendors such as Meridian. +The market for contract manufacturing in a validated cGMP facility, such as our Memphis facility, is also competitive. Important competitive factors +include reputation, customer service and price. Although the product application for this facility was built from our existing expertise in cell culture manufacturing techniques, we face competitors with greater experience in contract manufacturing +in a clinical cGMP environment. +Acquisitions +Acquisitions have played an important role in the growth of our businesses. Our acquisition objectives include, among other things, (i) enhancing product offerings; (ii) improving product +distribution capabilities; (iii) providing access to new markets; and/or (iv) providing access to key biologicals or new technologies that lead to new products. Although we cannot provide any assurance that we will consummate any +additional acquisitions in the future, nor can we provide any assurance that any acquisitions will accomplish these objectives, we expect that the potential for acquisitions will continue to provide opportunities for revenues and earnings growth in +the future. +- 15 - +Table of Contents +International Markets +International markets are an important source of revenue and future growth opportunities for all of our segments. For all segments combined, international sales were approximately $54,000 or 31% of +consolidated fiscal 2012 sales, $53,000 or 33% of consolidated fiscal 2011 sales and $43,000 or 30% of consolidated fiscal 2010 sales. We expect to continue to look to international markets as a source of new revenues and growth in the future. See +Notes 6 and 8 to the Consolidated Financial Statements for information concerning sales, long-lived assets and deferred tax assets by country. +Environmental +We are a conditionally +exempt, small quantity generator of hazardous waste and have a U.S. EPA identification number. We are in compliance with applicable portions of the federal and state hazardous waste regulations and have never been a party to any environmental +proceeding. \ No newline at end of file diff --git a/raw/filings/0000794172/2012/0001193125-12-485192/item13.txt b/raw/filings/0000794172/2012/0001193125-12-485192/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..1e97c1e72da908c010f761689f710bd32bc1fb21 --- /dev/null +++ b/raw/filings/0000794172/2012/0001193125-12-485192/item13.txt @@ -0,0 +1,2 @@ +Item 13 Certain Relationships and Related Transactions, and Director Independence +75 \ No newline at end of file diff --git a/raw/filings/0000794172/2012/0001193125-12-485192/item9a.txt b/raw/filings/0000794172/2012/0001193125-12-485192/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..4b1f8ab51d49ccb27e7bca3128651711d41abcfd --- /dev/null +++ b/raw/filings/0000794172/2012/0001193125-12-485192/item9a.txt @@ -0,0 +1,9 @@ +ITEM 9A. +CONTROLS AND PROCEDURES +As of September 30, 2012, an evaluation was completed under the supervision and with the participation of our management, including our Chief +Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) and 15d-15(b) promulgated under the Securities Exchange Act of 1934, as amended. +Based on that evaluation, our management, including the CEO and CFO, concluded that our disclosure controls and procedures were effective as of September 30, 2012. There have been no changes in our internal control over financial reporting +identified in connection with the evaluation of internal control that occurred during the fourth fiscal quarter that has materially affected, or is reasonably likely to affect, our internal control over financial reporting, or in other factors that +could significantly affect internal control subsequent to September 30, 2012. +Our internal control report is included in this Annual +Report on Form 10-K after Item 8, under the caption “Management’s Report on Internal Control over Financial Reporting.” \ No newline at end of file diff --git a/raw/filings/0000794172/2012/0001193125-12-485192/rp_note.txt b/raw/filings/0000794172/2012/0001193125-12-485192/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000794172/2012/0001193125-12-485192/rpt_disclosure.txt b/raw/filings/0000794172/2012/0001193125-12-485192/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..f11debd3c8dcca7483f26e4bc3c699525e5b8fc9 --- /dev/null +++ b/raw/filings/0000794172/2012/0001193125-12-485192/rpt_disclosure.txt @@ -0,0 +1,13 @@ +TRANSACTIONS WITH RELATED PERSONS +During fiscal 2012, the Company leased certain office space from an entity controlled by Marco G. Calzavara, President and Managing Director, Meridian +Bioscience Europe. Payments made under such arrangements during fiscal 2012 totaled approximately $190,000. +Nasdaq rules require the +Company to conduct an appropriate review of related party transactions required to be disclosed by the Company pursuant to SEC Regulation S-K Item 404 for potential conflict of interest situations on an ongoing basis and that all such +transactions must be approved by the Audit Committee or another Committee comprised of independent Directors. As a result, the Audit Committee annually reviews all such related party transactions and approves each related party transaction if it +determines that it is in the best interests of the Company. Additionally, the Audit Committee’s Charter provides it the authority to review, approve and monitor transactions involving the Company and “related persons” (Directors and +Executive Officers or their immediate family members, or shareholders owning five percent or greater of the Company’s outstanding stock). This also covers any related person transaction that meets the minimum threshold for disclosure in the +proxy statement under the relevant SEC rules (generally, transactions involving amounts exceeding $120,000 in which a related person has a direct or indirect material interest). In considering the transaction, the Audit Committee may consider all +relevant factors, including, as applicable, (i) the Company’s business rationale for entering into the transaction; (ii) the alternatives to entering into a related person transaction; (iii) whether the transaction is on terms +comparable to those available to third parties, or in the case of employment relationships, to employees generally; (iv) the potential for the transaction to lead to an actual or apparent conflict of interest and any safeguards imposed to +prevent such actual or apparent conflicts; and (v) the overall fairness of the transaction to the Company. This policy is included in the Company’s Employee Handbook. The approval of such related person transactions are evidenced by +internal Company resolutions or memoranda. \ No newline at end of file diff --git a/raw/filings/0000910521/2000/0000950148-01-000493/filing.txt b/raw/filings/0000910521/2000/0000950148-01-000493/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..0e4312cb54872f5109ce6c99130cea4ab4f3e469 --- /dev/null +++ b/raw/filings/0000910521/2000/0000950148-01-000493/filing.txt @@ -0,0 +1,2825 @@ +10-K +1 +v71055e10-k.txt +FORM 10-K +1 +-------------------------------------------------------------------------------- +-------------------------------------------------------------------------------- +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +WASHINGTON, D.C. 20549 +------------------------ +FORM 10-K +------------------------ +(MARK ONE) +[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE +SECURITIES EXCHANGE ACT OF 1934 +FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 +OR +[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE +SECURITIES EXCHANGE ACT OF 1934 +FOR THE TRANSITION PERIOD FROM __________ TO __________ . +COMMISSION FILE NO. 0-22446 +DECKERS OUTDOOR CORPORATION +(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) +DELAWARE 95-3015862 +(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER +INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) +495-A SOUTH FAIRVIEW AVENUE, GOLETA, 93117 +CALIFORNIA (ZIP CODE) +(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) +REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (805) 967-7611 +SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: +TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED +------------------- ----------------------------------------- +NONE NONE +SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: +COMMON STOCK, $.01 PAR VALUE +(TITLE OF CLASS) +Indicate by check mark whether the registrant: (1) has filed all reports +required to be filed by Section 13 or 15(d) of the Securities Exchange Act of +1934 during the preceding 12 months (or for such shorter period that the +registrant was required to file such reports) and (2) has been subject to such +filing requirements for the past 90 days. Yes [X] No [ ] +Indicate by check mark if disclosure of delinquent filers pursuant to Item +405 of Regulation S-K (sec.229.405 of this chapter) is not contained herein, and +will not be contained to the best of registrant's knowledge, in definitive proxy +or information statements incorporated by reference in Part III of this Form +10-K or any amendment to this Form 10-K. [ ] +Aggregate market value of the Common Stock of the registrant held by +nonaffiliates of the registrant on February 28, 2001 based on the closing price +of the Common Stock on the NASDAQ National Market System on such date was +$20,451,232. +The number of shares of the registrant's Common Stock outstanding at +February 28, 2001 was 9,168,477. +Portions of registrant's definitive proxy statement relating to +registrant's 2001 annual meeting of shareholders, which will be filed pursuant +to Regulation 14A within 120 days after the end of registrant's fiscal year +ended December 31, 2000, are incorporated by reference in Part III of this Form +10-K. +-------------------------------------------------------------------------------- +-------------------------------------------------------------------------------- +2 +DECKERS OUTDOOR CORPORATION +FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 +INDEX TO ANNUAL REPORT ON FORM 10-K +PAGE +---- +PART I +Item 1. Business.................................................... 3 +Item 2. Properties.................................................. 18 +Item 3. Legal Proceedings........................................... 18 +Item 4. Submission of Matters to a Vote of Security Holders......... 18 +PART II +Item 5. Market for Registrant's Common Equity and Related +Stockholder Matters......................................... 19 +Item 6. Selected Financial Data..................................... 20 +Item 7. Management's Discussion and Analysis of Financial Condition +and Results of Operations................................... 21 +Item 7A. Quantitative and Qualitative Disclosures about Market +Risk........................................................ 27 +Item 8. Financial Statements and Supplementary Data................. 27 +Item 9. Changes in and Disagreements with Accountants on Accounting +and Financial Disclosure.................................... 27 +PART III +Item 10. Directors and Executive Officers of the Registrant.......... 48 +Item 11. Executive Compensation...................................... 48 +Item 12. Security Ownership of Certain Beneficial Owners and +Management.................................................. 48 +Item 13. Security Relationships and Related Transactions............. 48 +PART IV +Item 14. Exhibits, Financial Statement Schedules and Reports on Form +8-K......................................................... 49 +2 +3 +PART I +ITEM 1. BUSINESS +GENERAL +The Company builds niche products into global lifestyle brands by designing +and marketing innovative, functional and fashion-oriented footwear, developed +for both high performance outdoor activities and everyday casual lifestyle use. +Currently, the Company offers three primary product lines under the following +recognized brand names: Teva(R) -- high-performance sports sandals and rugged +outdoor and casual footwear; Simple(R) -- innovative shoes that combine the +comfort elements of athletic footwear with casual styling; and Ugg(R) -- +authentic sheepskin boots and other footwear. Teva is a registered trademark of +Mark Thatcher, the inventor and licensor of Teva Sport Sandals. Simple and Ugg +are registered trademarks of the Company and its subsidiaries. All of the +Company's footwear possess the common features of high quality with a primary +focus on functionality and comfort. In 2000, the Company sold approximately +4,265,000 pairs of footwear. Revenues from sales (domestic and international) of +Teva products have been $79,732,000, $80,963,000 and $68,870,000 during 2000, +1999 and 1998, representing 70.1%, 72.9% and 66.5% of net sales, respectively. +For financial information regarding the Company's industry segments, see note 9 +to the accompanying consolidated financial statements. +MARKET OVERVIEW +The casual, outdoor and athletic footwear market is comprised of footwear +worn for casual everyday use and for outdoor and athletic activities such as +hiking, boating, basketball, tennis, fitness and jogging. The market for such +footwear has grown significantly during the last decade. The Company believes +that the principal reasons for the growth in sales of such footwear have been +the growing acceptance of athletic footwear as casual wear and the growing +acceptance of casual wear, in general, including the increasing casualization of +the workplace, increasingly active consumer lifestyles and the growing emphasis +on comfort. +Over the last few years the overall footwear market has seen significant +growth of the outdoor segment as well as the growing emphasis on comfort. +Outdoor footwear includes shoes, boots and sandals for outdoor recreational +activities such as hiking, river rafting, camping and casual wear. Companies +engaged in the outdoor footwear market include Nike, Adidas, Timberland, +Columbia and Salomon. The Company believes that the growth in outdoor footwear +is driven by several factors including a general shift in consumer preferences +and lifestyles to include more outdoor, sports and recreational activities such +as hiking and camping. In addition, the increasing popularity of extreme sports, +including skateboarding, snowboarding, kayaking and river rafting, among others, +has created an additional emphasis and awareness of outdoor activities and +lifestyles. As consumers engage in outdoor activities, they typically desire +footwear specifically designed for these purposes, yet they demand the same +level of quality and high performance that they have come to expect from +traditional athletic footwear. In addition, more consumers are turning to an +emphasis on casual and comfortable footwear and apparel, including the trend +toward casual workplaces. The Company believes that its products have benefited +from this growing trend and that its footwear addresses consumers' demands for +highly functional footwear that is durable as well as comfortable and +fashionable. +The casual, outdoor and athletic footwear markets are generally +characterized by a high level of recognition of brand names, logos and +trademarks. Unique and identifying features create brand awareness among +consumers and allow a favorable reputation to be transferred to new products. +The manufacture of casual, outdoor and athletic footwear is typically conducted +overseas through independent manufacturers. Casual and athletic footwear is +distributed through athletic footwear stores, department stores and specialty +retailers. Outdoor footwear is generally distributed through these channels as +well but is to a large extent distributed through outdoor specialty retailers. +Retailers may purchase footwear on a "futures" basis (orders placed at a +discount in advance of a season) or an "at once" basis (orders placed and filled +immediately). Futures orders allow the Company to more accurately predict its +manufacturing and sourcing needs. By placing futures orders, retailers are also +able to reduce the risk that the Company will be unable to meet their +3 +4 +delivery requirements. Retailers are generally encouraged to purchase goods on a +futures basis by receiving discounts or special payment terms not otherwise +available. +RISK FACTORS +This Annual Report on Form 10-K contains a variety of forward-looking +statements within the meaning of the Private Securities Litigation Reform Act of +1995 including forward-looking statements in this "Risk Factors" section, the +"Outlook" section, the last paragraph under "Liquidity and Capital Resources", +the discussion under "Seasonality" and other statements in this Annual Report. +These forward-looking statements relate to expectations regarding sales and +earnings per share, expectations regarding the Company's liquidity, the +potential impact of a non-renewal of the Teva license due to the Company's +potential failure to meet required sales minimums in 2004 or 2008, the potential +impact of certain litigation, the potential impact of economic factors and +conditions, the potential impact of the Company's dependence on foreign +manufacturers, the potential impact of competition, the potential impact of the +Company's dependence upon key personnel, the potential impact of weather +conditions, the potential impact of the possible acquisition of Teva and the +impact of seasonality on the Company's operations. These forward-looking +statements are based on the Company's expectations as of March 2001. No one +should assume that any forward-looking statement made by the Company will remain +consistent with the Company's expectations after the date the forward-looking +statement is made. The Company disclaims any obligation to update any such +factors or to publicly announce the results of any revisions to any of the +forward-looking statements contained in this Annual Report on Form 10-K. These +forward-looking statements involve known and unknown risks, uncertainties and +other factors which may cause the actual results, performance or achievement of +the Company, or industry results, to differ materially from any future results, +performance or achievements expressed or implied by such forward-looking +statements. The factors listed below represent certain important factors the +Company believes could cause such results to differ. These factors are not +intended to represent a complete list of the general or specific risks that may +affect the Company. Other risks may be significant, presently or in the future, +and the risks set forth below may affect the Company to a greater extent than +indicated. +Teva License Agreement +The Company has been selling its Teva line of sport sandals and other +footwear since 1985 pursuant to various exclusive licensing arrangements with +Mark Thatcher, the inventor of the Teva sport sandal and owner of the Teva +patents and trademark. In June 1999, the Company signed a new exclusive footwear +license agreement with Mr. Thatcher. The agreement became effective January 1, +2000 and continues through December 31, 2004. If minimum annual sales levels are +achieved in 2004, the license automatically renews for an additional four years, +through December 31, 2008. If minimum annual sales levels are achieved in 2008, +the license automatically renews again through December 31, 2011. However, if +the minimum annual sales levels are not achieved in 2004 or 2008, the license +expires and the Company will no longer be able to sell Teva footwear. These +required minimum annual sales levels exceed the annual sales levels achieved by +the Company to date. Also, Mr. Thatcher may terminate the licensing agreement if +the Company breaches its obligations under the agreement. Sales of Teva footwear +and apparel accounted for approximately 70.1%, 72.9% and 66.5% of the Company's +net sales for fiscal years 2000, 1999 and 1998, respectively. The termination of +the license would have a material adverse effect on the Company's results of +operations. +Brand Strength; Changes in Fashion Trends +The Company's success is largely dependent on the continued strength of the +Teva, Simple and Ugg brands (collectively, "Deckers Brands") and on its ability +to anticipate the rapidly changing fashion tastes of footwear customers and to +provide merchandise that appeals to their preferences in a timely manner. There +can be no assurance that consumers will continue to prefer the Deckers Brands or +that the Company will respond in a timely manner to changes in consumer +preferences or that the Company will successfully introduce new models and +styles of footwear. Achieving market acceptance for new products will also +likely require substantial marketing and product development efforts and the +expenditure of significant funds to +4 +5 +create consumer demand. Decisions with respect to product designs often need to +be made many months in advance of the time when consumer acceptance can be +determined. As a result, the Company's failure to anticipate, identify or react +appropriately to changes in styles and features could lead to, among other +things, excess inventories and higher markdowns and lower gross margins due to +the necessity of providing discounts to retailers. Conversely, failure by the +Company to anticipate consumer demand could result in inventory shortages, which +can adversely affect the timing of shipments to customers, negatively impacting +retailer and distributor relationships and diminishing brand loyalty. The +failure to introduce new products that gain market acceptance would have a +material adverse effect on the Company's business, financial condition and +results of operations, and could adversely affect the image of the Deckers +Brands. +Inventory Risk +The footwear industry has relatively long lead times for design and +production of product and, thus, the Company must commit to production tooling +and to production in advance of orders. In addition, the industry is highly +subject to fashion risks and changes in consumer preferences. If the Company +fails to accurately forecast consumer demand, or if there are changes in +consumer preference or market demand after the Company has made such production +commitments, the Company may encounter difficulty in filling customer orders or +in liquidating excess inventory, which may have an adverse effect on the +Company's sales, margins and brand image. +Quality and Performance +In response to consumer demand, the Company also uses certain specialized +materials in its footwear. The failure of products using such materials to +perform to the Company's specifications or customer satisfaction could result in +a higher rate of customer returns and could adversely affect the image of the +Deckers Brands, which could have a material adverse effect on the Company's +business, financial condition and results of operations. +Economic Cyclicality and Footwear Retailing +The footwear industry historically has been subject to cyclical variation +and can be negatively impacted by decreased consumer spending or softness in the +retail market. This cyclicality could adversely affect the Company's business. +In addition, various retailers, including some of the Company's customers, have +experienced financial difficulties during the past several years, thereby +increasing the risk that such retailers may not pay for the Company's products +in a timely manner. No assurance can be given that the Company's bad debt +expense will not increase relative to net sales in the future. Any significant +increase in the Company's bad debt expense relative to net sales would adversely +impact the Company's net earnings and cash flow and could affect the Company's +ability to pay its obligations as they become due. +Dependence on Foreign Manufacturers +Virtually all of the Deckers footwear products are manufactured by third +party suppliers in the Far East, Australia and New Zealand, with the vast +majority of production occurring in China. There can be no assurance that the +Company will not experience difficulties with such manufacturers, including +reduction in the availability of production capacity, errors in complying with +product specifications, inability to obtain sufficient raw materials, +insufficient quality control, failure to meet production and delivery deadlines +or increases in manufacturing costs. In addition, if the Company's relationship +with any of its manufacturers were to be interrupted or terminated, alternative +manufacturing sources will have to be located. The establishment of new +manufacturing relationships involves numerous uncertainties, and there can be no +assurance that the Company would be able to obtain alternative manufacturing +sources on terms satisfactory to it. If a change in its suppliers becomes +necessary, the Company would likely experience increased costs, as well as +substantial disruption and a resulting loss of sales. +Foreign manufacturing is subject to a number of risks, including work +stoppage, transportation delays and interruptions, political instability, +foreign currency fluctuations, changing economic conditions, expropriation, +5 +6 +nationalization, imposition of tariffs, import and export controls and other +non-tariff barriers (including quotas), restrictions on the transfer of funds, +environmental regulation and other changes in governmental policies. The Company +may also experience general risks associated with managing operations +effectively and efficiently from a far distance and understanding and complying +with local laws, regulations and customs. There can be no assurance that such +factors will not materially adversely affect the Company's business, financial +condition and results of operations. +Products manufactured overseas and imported into the United States and +other countries are subject to duties collected by the Customs Service in the +applicable country. Customs information submitted by the Company is subject to +review by the Customs Service. The Company is unable to predict whether +additional customs duties, quotas or restrictions may be imposed on the +importation of its products in the future. The enactment of any such duties, +quotas or restrictions could result in increases in the cost of such products +generally and might adversely affect the sales or profitability of the Company. +In 1997, the European Commission enacted anti-dumping duties of 49.2% on +certain types of footwear imported into Europe from China and Indonesia. Dutch +Customs has issued an opinion to the Company that certain popular Teva styles +are covered by this anti-dumping duty legislation. The Company has been +contesting the opinion and is working with Dutch Customs to resolve the +situation. The Company has since obtained, and is using, alternative sourcing +for the potentially impacted products from sources outside of China in an effort +to reduce the potential risk in the future. In the event that Dutch Customs +makes a final determination that the anti-dumping provisions are applicable, the +Company would have an exposure for prior unpaid anti-dumping duties during 1997 +of approximately $400,000. Recently, the European Commission added an +explanatory note to the anti-dumping legislation which effectively strengthened +its position. As a result of this recent development, the Company recorded a +$400,000 charge to selling, general and administration expenses to accrue for +the potential loss on this matter during the year ended December 31, 2000. +Competition and Infringing Products +The outdoor and footwear industries are both highly competitive, and the +recent growth in the markets for sports sandals and casual footwear has +encouraged the entry of many new competitors into the marketplace as well as +increased competition from established companies. Many of the Company's +competitors have substantially greater financial, distribution and marketing +resources, as well as greater brand awareness in the footwear market, than the +Company. In addition, the general availability of offshore manufacturing +capacity allows rapid expansion by competitors and new market entrants. The +Company believes that it has been able to compete successfully because of the +brand recognition, quality and selective distribution of its products. From time +to time, the Company also discovers products in the marketplace that infringe +upon patent and trademark rights held by or licensed to the Company. Under the +Company's licensing arrangement with the licensor of the Teva products, Mark +Thatcher, Mr. Thatcher initially may bring proceedings to halt infringement of +the Teva patents and trademark. If Mr. Thatcher elects not to bring such +proceedings, the Company may initiate such proceedings, with the prior written +consent of Mr. Thatcher. To date, Mr. Thatcher has vigorously pursued +infringements following discovery. To the extent permitted in its agreement with +Mr. Thatcher, the Company will vigorously pursue infringements in the event Mr. +Thatcher elects not to do so. However, if Mr. Thatcher or the Company is +unsuccessful in challenging a third party's products on the basis of patent and +trademark infringement, continued sales of such competing products by third +parties could adversely impact the Company's business, financial condition and +results of operations. See "Business -- Competition" and "Business -- Legal +Proceedings." +Dependence on Key Personnel +The Company's continued success will depend upon its ability to retain +Douglas B. Otto, its Chairman of the Board and Chief Executive Officer, Peter +Benjamin, its President and Chief Operating Officer and a core group of key +executive officers and employees. Mr. Otto and Mr. Benjamin have employment +agreements with the Company through 2001 and 2002, respectively. Mr. Otto's +agreement prohibits him from competing with the Company for one year following +termination. However, none of the other executive officers is subject to +6 +7 +agreements that restrict his or her ability to compete with the Company +following termination of employment. The Company believes that its future +success will depend in large part on its ability to attract and retain highly +skilled personnel. Competition for such personnel is intense, and there can be +no assurance that the Company will be successful in attracting and retaining +such personnel. The loss of certain key employees or the Company's inability to +attract and retain other qualified employees could have an adverse impact on the +Company's business. +Intellectual Property +The Company believes that its trademarks, technologies and designs are of +great value. From time to time, the Company may be the subject of litigation +challenging its ownership of certain intellectual property. Loss of the +Company's Simple or Ugg trademark rights or the ability to use the licensed Teva +trademarks could have a serious impact on the Company's business. Because of the +importance of such intellectual property rights, the Company's business is +subject to the risk of counterfeiting, parallel trade or intellectual property +infringement. +Economic Factors +The Company's business is subject to economic conditions in the Company's +major markets, including, without limitation, recession, inflation, general +weakness in retail markets and changes in consumer purchasing power and +preferences. Adverse changes in such economic factors could have a negative +effect on the Company's business. +Weather Conditions +Sales of the Company's products, particularly those under the Teva and Ugg +lines, are very sensitive to weather conditions. Extended periods of unusually +cold weather during the spring and summer could adversely impact demand for the +Company's Teva line. Likewise, unseasonably warm weather during the fall and +winter months could adversely impact demand for the Company's Ugg product line. +Substantial Ownership of the Company +At December 31, 2000, Douglas B. Otto and all executive officers and +directors of the Company, as a group, owned approximately 35.9% and 46.7%, +respectively, of the outstanding shares of the Company's Common Stock. Due to +such ownership position, Mr. Otto, whether acting alone or together with one or +more of the other executive officers of the Company, would likely be able to +control the affairs and policies of the Company and would likely be able to +elect a sufficient number of directors to control the Company's Board of +Directors and to approve or disapprove any matter submitted to a vote of the +stockholders. The ownership positions of Mr. Otto and the executive officers of +the Company, as a group, together with the anti-takeover effects of certain +provisions in the Delaware General Corporation Law (the "DGCL"), in the +Company's Certificate of Incorporation and Bylaws, and in the Company's +shareholder rights plan would likely have the effect of delaying, deferring or +preventing a change in control of the Company. Such factors could have a +negative effect on the market price of the Company's Common Stock. +The Company adopted a shareholder rights plan in 1998 pursuant to a +shareholder rights agreement (the Rights Agreement) to protect stockholders +against unsolicited attempts to acquire control of the Company that do not offer +what the Company believes to be an adequate price to all stockholders. As part +of the plan, the Board of Directors of the Company declared a dividend of one +preferred share purchase right (a Right) for each outstanding share of common +stock of the Company (the Common Shares). +The dividend was payable to stockholders of record on December 1, 1998 (the +Record Date). In addition, one Right shall be issued with each Common Share that +becomes outstanding (i) between the Record Date and the earliest of the +Distribution Date, the Redemption Date and the Final Expiration Date (as such +terms are defined in the Rights Agreement) or (ii) following the Distribution +Date and prior to the Redemption Date or Final Expiration Date, pursuant to the +exercise of stock options or under any employee plan or arrangement or upon the +exercise, conversion or exchange of other securities of the Company, which +options +7 +8 +or securities were outstanding prior to the Distribution Date, in each case upon +the issuance of the Company's common stock in connection with any of the +foregoing. Each Right entitles the registered holder to purchase from the +Company one one-hundredth of a share of Series B Junior Participating Preferred +Stock, par value $0.01 per share (the Preferred Shares), of the Company, at a +price of $50.00, subject to adjustment. +The rights have no voting power and expire on November 11, 2008. The rights +may be redeemed by the Company for $.01 per right until the right becomes +exercisable. +BUSINESS STRATEGY +Management's mission is to build niche products into global brands and its +business strategy is to offer diverse lines of footwear that emphasize +functionality, quality, comfort and technical performance tailored to a variety +of activities and demographic groups. Specifically, the Company's business +strategy emphasizes the following elements: +Introduce New Products under Existing Brands. The Company intends to +leverage consumer recognition of its existing brands by developing and +introducing additional innovative footwear products that satisfy the Company's +high standards of practicality, comfort and quality. The Company believes the +introduction of additional products at a variety of price points, such as the +range of new models in its Teva, Simple and Ugg lines which were offered in the +Company's 2000 product offerings, have broadened the Company's customer base, +further diversified the Company's product lines, and helped reduce the effects +of seasonality on the Company's sales. See "Management's Discussion and Analysis +of Financial Condition and Results of Operations -- Seasonality." In Spring +2000, the Company successfully launched the Trail Wraptor and Wraptor Technology +into the running market and then in the fall of 2000 entered the hiking market +with the Summit series consisting of the Challenger, North Rim, and Quest models +which utilize the new Teva Wraptor Technology. The Quest quickly gained momentum +in the hiking market at key retail points for the Company. Expanding on the +acceptance of the Trail Wraptor running sandal and the Quest, the Company +launched the Road Wraptor, Women's Wraptor (runner) and Women's Quest hiker in +2001. The Company will also make a commitment to the women's market by expanding +its line of women's fitness walking sandals with the Kinetic Circuit, the +improved Pretty Rugged Nylon and expanded Leather Casual category. Also, the +Company is expanding its offering of water sport specific products in the XPD +Hydro category with the newly organized Team Teva, an elite squad of the world's +best male and female whitewater athletes. The Company will use Team Teva's +knowledge to expand its technical offerings in this category. As the Company +moves to the future, the Company plans to strengthen existing categories and +expand into new channels of distribution. The 2000 and 2001 Simple product lines +target consumers in the sixteen to twenty-five year old youth market. The line +focuses on lifestyle comfort based products such as clogs, sandals, casuals and +non-performance sneakers that are priced affordably. In 2000, the Company +expanded its Ugg product line beyond its heritage boots and slippers by adding a +variety of new, more streetwise and fashion-oriented products including clogs, +chukka boots, and apres ski boots, as well as cold weather-resistant boots with +water resistant leathers. +Pursue Additional Market Opportunities. Management intends to continue to +consider new markets for its existing line of products. For the years ended +December 31, 2000, 1999 and 1998 international net sales totaled $31,135,000, +$28,859,000 and $24,254,000, representing 27.4%, 26.0% and 23.4% of net sales, +respectively. Management believes that significant opportunities exist to market +its products abroad and intends to selectively expand its distribution +worldwide. To bolster these efforts, the Company has opened a Netherlands office +to service the European market and an office in Japan to service the Asian +market. +Acquire or Develop New Brands. The Company intends to continue to focus on +identifying and building new brands for growth. The Company has been successful +in the past in taking the concepts of entrepreneurs for innovative, fashionable +footwear targeted at niche markets and building the products into viable brands +and intends to continue to identify concepts for potential future niche products +which have the potential of developing into successful brands or product lines. +8 +9 +PRODUCTS +The Company currently offers three primary product lines: (1) Teva sport +sandals and footwear; (2) Simple casual footwear; and (3) Ugg sheepskin +footwear. Each of these lines, as well as individual models within these lines, +is designed to appeal to various demographic groups. The Company's footwear +products emphasize function, comfort and technical performance, and are suitable +for a variety of demanding outdoor and athletic activities, as well as casual +and everyday use. The Company's products are designed and marketed to promote a +high level of brand name recognition and consumer appeal by combining functional +and creative designs with quality materials and construction. The Teva footwear +and the Simple footwear lines are generally previewed twice per year, once in +the summer for deliveries that commence in the fall and once in the winter for +the following back to school and fall season. The Ugg line of sheepskin footwear +is generally previewed in the winter with most deliveries occurring in the +following fall and winter. The following sets forth a summary description of +each of the Company's primary product lines: +Teva Sport Sandals and Footwear. The Teva sport sandal is one of the first +sport sandals to be developed and is popular among outdoor enthusiasts and the +general public. The Company licenses the Teva patents and trademark from Mark +Thatcher, a professional river guide who invented the Teva sport sandal. The +terms of such licenses run through 2011, subject to achieving certain minimum +sales levels beginning in 2004. Certain styles of the Teva sport sandal +incorporate a proprietary strapping configuration ideally suited for outdoor +activities such as hiking, boating and river rafting. This strapping system +consists of high-quality nylon webbing or leather, is fully adjustable, and +holds the foot firmly to the sandal's durable, cellular rubber, molded EVA, +polyurethane or leather footbed. Teva sport sandals are extremely durable and +many of the styles are water resistant. The Spring 2001 line includes more than +100 different models designed for a variety of uses. The Wilderness Series, a +category of sandals built for high performance and rugged outdoor use, includes +16 models of men's and women's sandals. The Utility Series which includes +several of the most popular styles, has 11 styles that combine elements of sport +performance with casual everyday comfort. The Surf Series includes 11 styles of +slides and thongs offered in a variety of materials including leather, nylon, +suede and airmesh. The Spring 2001 line includes an expanded variety of +Precision sport sandals and footwear, including the newly-introduced Trail +Wraptor and Road Wraptor performance running sandals, a collection of Circuit +walking sandals, the Marine collection of boating and deck footwear, the Hydro +collection of water shoes and booties, and the newly introduced Summit +collection of hikers incorporating the Wraptor technology. Continuing on the +success of recent years, the Spring 2001 line includes 25 styles of men's and +women's leather casuals, including a variety of sandals, slides and clogs. The +Spring 2001 Children's category has been expanded to include 15 different styles +of nylon and leather sandals. The domestic manufacturer's suggested retail +prices for adult sizes of Spring 2001 Teva footwear products range from $19.95 +to $129.95. +Simple Casual Footwear. The Simple line consists of casual shoes that +combine the comfort and function of athletic footwear construction with the +simple, understated styling of "back-to-basics," casual lifestyle footwear. The +Simple product line includes a variety of comfortable, fashionable, basic shoes +for men and women including sneakers, sandals, slides, clogs and leather +casuals. The Spring 2001 collection reflects the Company's emphasis on a younger +target consumer in the sixteen to twenty-four year old age group. For Spring +2001, Simple is offering a total of 69 models including 32 styles for men and 37 +for women. The Spring 2001 line includes 21 styles of sneakers with leather and +suede uppers, 20 styles of sandals and thongs and 28 styles of leather casual +and clogs in a variety of colors. The domestic manufacturer's suggested retail +prices for adult sizes for the Spring 2001 line range from $29.99 to $99.99. +Ugg Sheepskin Footwear. Ugg is a line of authentic sheepskin footwear, +popularized in Australia in the 1960's and 1970's. These sheepskin boots, +slippers and other footwear styles have high-grade fleece linings which act as a +natural insulator, keeping feet warm and comfortable. The 2001 Ugg line offers a +range of 52 models of casual, fashionable and streetwise styles in various +colors, including several new styles of shoes and boots for men and women. The +2001 line includes several styles with new innovative fashionable uppers and +several styles with water resistant leather treatments to address more inclement +and cold weather conditions. The 2001 line also includes products designed for +more fashionable and functional everyday use in both warm and cold climates, +including several new styles in its successful Ultra, Birch, Solvang, +Adirondack, +9 +10 +Fluff and Slipper collections. The domestic manufacturer's suggested retail +prices for adult sizes for the Ugg line range from $50.00 to $275.00. +MARKETING AND DISTRIBUTION +The Company's products are currently distributed throughout the United +States by a network of approximately 41 independent sales representatives, +organized geographically, who make sales, visit retail stores to train personnel +and review sales of the Company's footwear on a periodic basis. Beginning in +2000, the Company added a separate dedicated independent sales force for the +Simple and Ugg brands as these products are sold through different distribution +channels and are targeted toward a different consumer than the Company's Teva +brand. The Company's sales managers for each brand manage their networks of +representatives, recruit experienced sales representatives in the industry and +coordinate sales to national accounts. The Company currently sells its products +internationally through independent distributors. The Company's goal is to +promote retail sales of its products at attractive profit margins for its +accounts through selective distribution and marketing, targeted toward distinct +groups of consumers. As a result of this approach, the Company's accounts have a +strong incentive to devote greater selling space to the Company's products, and +the Company is better able to assess consumer preferences, the future ordering +needs of its customers and inventory requirements. +The Company's principal domestic customers include specialty retailers, +upscale department stores, outdoor retailers and athletic footwear stores which +market products consistent with the Company's standards and, in the case of +Teva, have been approved by the Company's licensor. The Company's five largest +customers accounted for approximately 20.4% of the Company's net sales for the +year ended December 31, 2000, compared to 18.1% for the year ended December 31, +1999. No single customer accounted for more than 10% of the Company's net sales +for the years ended December 31, 2000 or 1999. +In order to encourage accounts to place orders early in the season the +Company has continued with a preseason discount program under which accounts are +offered discounts on preseason orders placed. The Company's strategy is to +emphasize this "futures" program, as compared to "at once" sales, in order to +stabilize its supply arrangements, reduce the risk of customer cancellations and +to benefit from the significant positive impact of the program on the Company's +inventory costs, sourcing schedule and allocation of marketing resources. +Consistent with prior years, the Company offered an early delivery program for +the spring 2001 season to be delivered the fourth quarter of 2000. This early +delivery program allows the Company to reduce the impact of peak warehouse +inventory levels during the spring and provides retailers the opportunity to +have earlier sell through, lengthening the retail selling season and increasing +the potential for inventory turns at retail. +Domestic deliveries generally originate from the Company's 126,000 square +foot warehouse facility in Ventura County, California. European deliveries +originate from a distribution center in the Netherlands, while all other +international deliveries originate from offshore factories. +ADVERTISING AND PROMOTION +The Company attempts to maximize the impact of its advertising, public +relations and promotional expenditures by utilizing media that provide high +visibility within targeted market segments. The Company's brand names are +generally advertised and promoted through a variety of consumer print +advertising campaigns in addition to highly visible editorial coverage in both +consumer and trade publications. Retail presence and "point of purchase" +materials along with production packaging provide additional visible brand +support. The Company's in-house marketing departments for each brand work +closely with targeted accounts in many aspects of these activities. +The Company continues to advertise its Teva brand through a national print +advertising campaign targeted at various different demographic groups. For its +core outdoor market, Teva advertises in several outdoor-related magazines, +including Backpacker, Outside, Kayak, Elevation, Paddler, and Climbing, among +others. In addition, to promote its newly introduced Wraptor running sandal, +Teva is advertising in Runner's World, Sports Network, and Walking Magazine, +among other publications. With the broadened appeal of the +10 +11 +Teva offerings, including the leather casual models, the Company has also +focused its print advertising toward more mainstream print publications, +including Shape, Maxim and Sailing, among others. +In order to maintain the Company's historically high visibility among core +outdoor enthusiasts such as professional river rafters, kayakers, mountain +bikers and rock climbers, Teva products are given or sold at professional +discounts to members of this group. In order to further bolster the loyalty of +these individuals, the Company offers a category called the "Wilderness Series," +incorporating the latest technological developments and highest quality +materials. The Company actively sponsors several of the world's best male and +female whitewater athletes. By outfitting and sponsoring these highly visible +athletes, the Company creates awareness among targeted consumers at relatively +low cost. In addition, the Company has traveling promotional and technical +representatives who represent the Teva brand at a wide variety of festivals, +outdoor sporting events and competitions. Teva is sponsoring over twenty events +in 2001, including the Teva Whitewater Series, a series of whitewater rafting +and kayaking events held between April and August at locations in California, +Oregon, Washington and Colorado, as well as France and Switzerland. Teva +sponsors and promotes these events in order to increase the Company's visibility +for its core outdoor consumer, in addition to the significant marketing +available to the more mainstream public with the increasing popularity of +viewing these extreme sports. In addition to the Teva Whitewater Series, the +Teva promotional team attends and sponsors other events including the Santa Cruz +Surf Kayak Festival in Santa Cruz, California, Grandma's Marathon in Duluth, +Minnesota, The Telluride Bluegrass Festival in Telluride, Colorado, and Reggae +on the River in Garberville, California, among others. +The Teva mobile promotions team attends the events in dedicated promotional +vehicles where they showcase Teva products and provide consumers with the +opportunity to see and try on the latest styles. +With respect to the Simple product line, the Company has continued its +national print advertising campaign. Simple print advertisements will appear in +alternative and youth focused consumer magazines such as Jane, Nylon and Lucky. +In addition, the marketing effort focuses around grass roots advertising +including advertising on billboards, website advertising and "Go Cards". A +rigorous public relations campaign will focus on obtaining magazine editorial +placement in addition to newspaper and television coverage. Recent public +relations coverage has appeared in Footwear News, Teen People, Nylon Magazine, +YM Magazine, Footwear Plus, Shape Magazine, Code Magazine and Surfing Girl. +These public relations efforts have also resulted in Simple products appearing +on television shows such as Friends, Ally McBeal, Dawson's Creek, Tucker and +MTV. +Simple's marketing efforts are performed internally by an in-house Simple +marketing team which works to promote the Simple brand positioning of being +"simple" and "down to earth". +In 2001, the Company plans to continue to build on the success of the Ugg +1999 and 2000 national print advertising campaigns. The Company continues to +target a luxury consumer who seeks high quality, luxurious and fashionable +products for cold weather. The Company expects to advertise Fall 2001 Ugg +products in upscale publications such as Vogue and O Magazine. +In November 2000, Ugg's were featured on the Oprah Winfrey Show as her +choice of one of ten gift-giving ideas for the holiday season and each member of +the studio audience received a free pair of Ugg boots on the air. The show aired +several times from the week before Thanksgiving through Christmas, providing the +Ugg brand with nationwide exposure. +In addition to this national advertising campaign, the Ugg brand is being +supported by national public relations and product placement efforts. In-house +marketing personnel work closely with a public relations firm and a product +placement agency to gain brand visibility in popular magazines, television shows +and feature films. Recent editorial coverage includes articles in magazines such +as Harper's Bazaar, In Style, Cosmopolitan, Marie Claire, Maxim, Jane, YM +Magazine, Shape, Self, O Magazine and Real Simple. Television coverage of Ugg +product includes shows such as Dharma and Greg, Once and Again, Dawson's Creek, +E.R., King of Queens, Will and Grace, Ally McBeal, 7th Heaven, Everybody Loves +Raymond, Two Guys and a Girl and Providence. These public relations efforts have +also resulted in Ugg product appearances in the following feature films: Hanging +Up, starring Meg Ryan, Lisa Kudrow and Diane Keaton; The Kid, +11 +12 +starring Bruce Willis and Lily Tomlin; Mission Impossible II, starring Tom +Cruise and Thandie Newton; Panic, starring William H. Macy and Neve Campbell; +Snow Day, starring Chevy Chase; and Dragonfly, starring Kevin Costner and Kathy +Bates. +In 2000, 1999 and 1998, the Company incurred $7,108,000, $5,602,000 and +$5,847,000 respectively, for advertising, marketing and promotional expenses. In +addition to these expenditures, the Company's 31 international distributors +spend additional amounts for marketing the Company's brands within their +respective territories. The Company is required under its Teva License Agreement +to spend a minimum amount for advertising and promoting Teva products, based on +a percentage of sales. In addition to the minimum contractual marketing +expenditures, the Company and the licensor have agreed to each contribute +annually a certain percentage of sales toward the promotion of the Teva brand +and trademark, with or without particular reference to individual Teva styles. +DESIGN AND PRODUCT DEVELOPMENT +The design and product development staff for each of the Company's brands +creates and introduces new innovative footwear products that are consistent with +the Company's standards of high quality, combined with comfort and +functionality. The Company was restructured in 1999 from a company organized by +functions to a company aligned by brand, with each brand as a separate profit +center. As part of this reorganization, the previously existing design +department was disbanded and reassigned to the Company's various brands. In +addition, much of the design is currently provided by independent design firms +which perform the design function on an outsourced basis. In doing so, the +Company was able to eliminate certain positions, obtain efficiencies and reduce +design and development costs considerably. As a result, research and development +costs aggregated $1,076,000, $1,607,000 and $2,393,000 in 2000, 1999 and 1998, +respectively, reflecting the operational efficiencies gained under this new +approach. +With respect to Teva, in order to ensure that the Company's high +performance technical products continue to satisfy the requirements of its +historical customer base of performance-oriented "core enthusiasts," the +Company's design staff solicits comments and feedback from its licensor and +professional outdoorsmen, as well as several of its retailers, including REI and +L.L. Bean. Certain models are modified and technical innovations are developed +in response to such comments and feedback. The Company adds new innovations, +components and styles to its product line continually. For example, the Company +recently designed and introduced its new Wraptor technology, a two-part system +with a continuous strap which travels under the arch and then crosses over the +instep to provide a snug, solid fit. This technology has been incorporated in +these Trail Wraptor and Road Wraptor running sandals, as well as the newly +introduced line of hikers. In addition, for added traction and durability, the +Company has incorporated Spider Rubber(TM) into several styles, including its +high performance Wilderness Series. +While Teva continues to develop high performance sport sandals by +continually updating and designing new styles for this category, the Company +also continues to increase its focus on the casual footwear market through its +Teva, Simple and Ugg brands. The Company continues to introduce and offer new +styles of leather and other casual footwear for men and women and has expanded +its offerings under its collection of Teva children's sandals for Spring 2001. +The Company has also added several new styles of clogs, sandals, sneakers and +leather casuals to its offerings under the Simple line for 2001. By monitoring +changes in consumer lifestyles and preferences and then focusing first on +function and practicality, the Company develops footwear designed to appeal to +quality-minded consumers seeking comfortable casual footwear. +In recent years, the Company has taken steps to update the Ugg products in +order to make them more functional for use in cold and wet climates. For +example, the popular Ultra styles of men's and women's boots have been updated +with new lug outsoles to improve traction. In addition, the 2001 Ugg line +includes several styles of its rugged Adirondack collection of foul weather +boots. New Ugg additions for 2001 include several new styles in its popular +Ultra collection and high-end Fluff collection, as well as new slippers and +shoes for everyday casual use. More fashionable and unique upper styles help to +differentiate Ugg from the low cost imitation brands. +12 +13 +Integral factors in the design and product development process include an +evaluation of the availability and cost of raw materials, the capabilities of +the factories that will manufacture products and the target retail cost of new +models and lines. The design and development staff works closely with brand +management to develop new styles of footwear and components for their various +product lines. Drawings and prototypes are utilized to produce samples of +proposed new concepts. Throughout the development process, members of the design +staff coordinate closely with each other and with the Company's product +development, manufacturing and sourcing personnel toward a common goal of +developing and sourcing a high-quality product that will be delivered on a +timely basis. The Company endeavors to minimize the risk of changing fashion +trends by offering a diverse line of functional products and closely monitoring +sales to its accounts after introduction. +PRODUCT SOURCING +The Company currently sources all of its Teva and Simple footwear and a +portion of its Ugg footwear from independent contract manufacturers in the Far +East. The Company imports the remainder of its Ugg footwear from independent +contract manufacturers in Australia and New Zealand. +In 1997 and 1998, the Company closed its California and Mexican +manufacturing facilities. As a result of the closure of these facilities, the +Company is no longer involved in the direct manufacture of footwear, but rather +sources completed footwear entirely from independent contractors. As the Company +continues to grow, it expects to continue to rely heavily on its independent +contractors for its sourcing needs. +The manufacturing of footwear by the Company's independent contractors is +performed in accordance with detailed specifications provided by the Company and +is subject to quality control standards. In efforts to ensure the production of +high quality products, many of the materials and components used in production +are purchased from independent suppliers designated by the Company. The Company +believes that its completed footwear as well as the various raw materials and +components used in the manufacture of the footwear, including rubber, leather, +nylon webbing and sheepskin, are generally available from multiple sources at +competitive prices. +The Company generally does not have any long-term agreements with the +manufacturers or suppliers of its products, but does business based on +individual purchase orders. +QUALITY CONTROL +The Company has instituted inspections and other procedures to satisfy the +high quality demanded by users of the Company's products. The Company's quality +assurance program includes inspection procedures at the factory level as well as +a final inspection upon arrival of product at the Company's distribution center. +The Company uses on-site inspectors at its independent suppliers who oversee the +production process and perform quality assurance inspections. In addition, the +products undergo further inspection procedures prior to being accepted at the +Company's distribution center. +LICENSES +Teva License. The Company has been selling its Teva line of sport sandals +and other footwear since 1985 pursuant to various license arrangements with Mark +Thatcher, the inventor of the Teva sport sandal and the owner of the Teva +patents and trademark. Mr. Thatcher owns seven United States patents on designs +used in Teva sport sandals and has a United States trademark registration for +the Teva mark. +On June 7, 1999, the Company signed a new license agreement (the "License +Agreement") for Teva, which became effective January 1, 2000. Under the License +Agreement, the Company has the exclusive worldwide rights for the manufacture +and distribution of Teva footwear through 2004. Apparel and other non-footwear +products are not covered by the License Agreement. The License Agreement is +automatically renewable through 2008 and through 2011 under two renewal options, +provided that minimum required sales levels are achieved. These minimum annual +sales levels are established at amounts which are in excess of the annual sales +levels which have been achieved to date. +13 +14 +As with the previous arrangement, the License Agreement provides for a +sliding scale of royalty rates, depending on sales levels, and includes +guaranteed minimum annual royalty amounts. Additionally, the License Agreement +provides for an increase in the required amount of marketing expenditures, +depending on sales levels and varying by territory. In addition to the minimum +contractual marketing expenditures, the Company and the licensor have agreed to +each contribute annually a certain percentage of sales toward the promotion of +the Teva brand and trademark, with or without particular reference to individual +Teva styles. +As additional consideration, the Company paid the licensor a licensing fee +of $1,000,000 and issued the licensor 428,743 shares of its previously unissued +common stock valued at $1,608,000. The Company has recorded the license as an +intangible asset equal to the cash and market value of the stock issued on the +date of the License Agreement. These shares are subject to various contractual +and other holding period requirements. In addition, the Company has agreed to +grant the licensor not less than 50,000 stock options on the Company's common +stock annually, at the market value on the date of grant. +The licensor retains the rights to approve the quality of the licensed +products produced, all marketing, advertising and promotional plans and +materials, and the distribution channels and customers to whom the Company can +sell the licensed products. In addition, the License Agreement provides for +minimum annual research and development spending levels for the Company with +respect to the Teva products and restricts the volume of closeouts and seconds +which the Company is able to sell each year. +The License Agreement provides that the licensor, in his sole discretion, +may take any action against parties believed to be infringing upon the +licensor's trademark, patents and other intellectual property. The licensor is +fully responsible for any legal and other costs incurred in such actions and is +entitled to any recovery resulting from the actions. The Company may not +participate in any such action or in any other action regarding the infringement +of the Teva intellectual property without the licensor's prior written consent. +In the event that the license term is automatically renewed beyond 2004, +the Company must achieve minimum annual sales levels for the years 2005 through +2011. These minimum annual sales levels are based upon certain percentages of +net sales in the preceding calendar year. If the Company is not able to achieve +the minimum annual sales levels for two years during a renewal term, the License +Agreement can be terminated at the option of the licensor. +During the term of the License Agreement, including the renewal terms, the +Company is prohibited from manufacturing, marketing, selling and distributing +any sandals other than Teva sandals. In addition, for the two years following +the termination of the License Agreement, the Company is prohibited from +manufacturing, marketing, selling and distributing sandals, in general. However, +the Company may continue to manufacture, market, sell and distribute all styles +and models of sandals offered under its Simple product line which existed as of +the date of the License Agreement as well as all styles subsequently approved by +the licensor. +The License Agreement can be terminated under several circumstances, if +they remain uncured for specific periods of time. These circumstances include +the following, among others: if either party becomes insolvent or bankrupt; if +the Company offers sandals which compete with the Teva products or otherwise +engages in activities which compete with the Teva products; if the Company +transfers substantially all of its property or stock to other parties; if the +Company sells unapproved merchandise in violation of the License Agreement; or +if the Company or the licensor otherwise violate or breach the terms of the +License Agreement. +In connection with the execution of the License Agreement in 1999, the +Company received an option to buy Teva and virtually all of its assets, +including all worldwide rights to all Teva products. The Company's original +option was exercisable during the period from January 1, 2000 to December 31, +2001 or during the period from January 1, 2006 to December 31, 2008. On January +22, 2001, the option agreement was amended, extending the first option window +for two additional years. As a result, the first option window is January 1, +2000 through December 31, 2003. The Company paid Mr. Thatcher $1.6 million as +consideration for this extension. The option price is based on formulas tied to +net sales of Teva products and varies depending on when the option is exercised. +For the first option period, the option price is for an amount equal to the +greater of (i) $61.6 million or (ii) 75% of the largest calendar year revenues +since January 1, 2000 for the Teva brand, +14 +15 +plus $1.6 million. In addition, the Company would issue to Mr. Thatcher 100,000 +shares of common stock and options to purchase 100,000 shares of common stock. +The purchase price for the second option period, January 1, 2006 to December 31, +2008, is equal to 110% of the average of the aggregate sales for all Teva +products for the two calendar years since January 1, 2000 with the highest +aggregate net sales. If the Company does not exercise its option to acquire +Teva, the licensor has the option to acquire the Teva distribution rights from +the Company for the period from January 1, 2010 to December 31, 2011, the end of +the license term, and the option price is based on a formula tied to the +Company's earnings before interest, taxes, depreciation and amortization. The +Company is currently evaluating the possibility of exercising the option in the +January 1, 2000 to December 31, 2003 period. The payment of the purchase price +must be completed within 90 days of the exercise of the purchase option. If the +Company exercises its purchase option, but subsequently fails to complete the +purchase within the 90 day payment period, the purchase option and the Option +Agreement will automatically be terminated. +HEIRLOOMS, INC. AGREEMENT +Since 1993, the Company and Bob Eason, the designer and founder of Picante +clothing, were parties to an agreement pursuant to which the Company owned 50% +of Heirlooms, Inc. ("Heirlooms"), the manufacturer and distributor of Picante +clothing. In January 2001, the Company sold its 50% interest in Heirlooms back +to Mr. Eason for cash of approximately $1,200,000 and a note receivable of +approximately $420,000, which is secured by a secondary security interest in the +assets of Heirlooms. The selling price was for an amount that approximated the +net carrying value of the underlying assets and, accordingly, the resulting gain +on the sale is not expected to be significant. +PATENTS AND TRADEMARKS +Mr. Thatcher holds seven United States patents and one patent in each of +Australia, New Zealand, Korea, Germany, France, China, Japan and the United +Kingdom for Teva footwear. As a result of the expiration of the applicable +period during which foreign patent applications were required to have been +filed, Mr. Thatcher does not and cannot hold such patent rights in other +countries. Mr. Thatcher also currently holds Teva trademark rights in the United +States and in several other countries, including, among others, France, Germany, +the United Kingdom, Japan and Australia. Mr. Thatcher's patent and trademark +rights are licensed to the Company under the License Agreement discussed +previously. Both the Company and Mr. Thatcher regard such proprietary rights as +valuable assets, and the Company cooperates with Mr. Thatcher in vigorously +protecting such rights against infringement by third parties. To date, Mr. +Thatcher has successfully enforced his patent and trademark rights in all 20 +concluded lawsuits brought against such third parties. Under certain +circumstances, if Mr. Thatcher declines to challenge a potential infringement, +the Company may bring an infringement action at its own cost, with Mr. +Thatcher's prior written consent. See "Licenses -- Teva License." +The Company owns the Simple and Ugg trademarks and has applied for or +received registrations for them in the United States and in many foreign +countries. The Company has selectively registered style category names and +marketing slogans. In addition, the Company holds two design patents for its +footwear products. +The Company has acquired the patent and trademarks for Alp(R)sport sandals +and has registered the Deckers trademark. +BACKLOG +Historically, the Company has encouraged and has received a significant +portion of its orders as preseason orders, which are generally placed by +customers approximately four to eight months prior to shipment date. The Company +has emphasized this "futures" business, as compared to "at once" sales, as it +allows the Company to better forecast its inventory requirements and assists +with the Company's sourcing schedule. As a result, the Company provides its +customers with incentives to participate in such preseason programs. Unfilled +customer orders ("backlog"), as of any date, represent orders scheduled to be +shipped at a future date and do +15 +16 +not represent firm sales. The mix of future and immediate delivery orders can +vary significantly from quarter to quarter and year to year. The backlog as of a +particular date is affected by a number of factors, including seasonality and +the scheduling of manufacture and shipment of products as well as variations in +the quarter to quarter and year to year preseason incentive programs. As a +result, comparisons of backlog from period to period are not meaningful and the +Company's backlog at any given time is generally not indicative of sales levels +expected to be achieved in the future. +COMPETITION +The casual, outdoor and athletic footwear markets are highly competitive. +The Company believes that currently its largest competitors of the Teva line are +Nike, Adidas, Timberland, Columbia and Salomon. The principal competitors of +Simple's casual line include Steve Madden, Nine West, Doc Marten, Camper, and +Kenneth Cole and of Simple's sneaker/sandal line include Skechers, Diesel, Steve +Madden and Guess. Ugg's competitors include Acorn, Aussie Dogs, LB Evans and +Timberland, as well as retailers' private label footwear. +Competition in the Company's footwear is primarily based on brand +awareness, product quality, design, price points, fashion appeal, marketing, +distribution, performance and brand positioning. The Company's Teva line of +footwear competes primarily on the basis of its authenticity as a recognized +brand in the outdoor market, its consumer brand recognition as one of the first +sandals of its kind, as well as its high performance nature and its diversity of +styles offered. In addition, several of the most popular styles employ a +distinctive patented strapping system, which contributes to performance and the +brand's consumer recognition. The Company competes through its Simple line as an +alternative brand offering a diversity of simple, back-to-basics styles designed +for a variety of recreational and leisure activities. Ugg competes primarily on +the basis of its authenticity as well as its brand name recognition, +identifiable with the United States sheepskin footwear market. The Company +believes its business strategy has resulted in increased awareness for its +brands. However, no assurance can be given that in the future the Company will +be able to maintain or further increase its brand awareness, maintain or +increase its market share or respond to changing consumer preferences. +RISKS OF FOREIGN OPERATIONS/RESTRICTIONS ON IMPORTS +The Company's operations are subject to the customary risks of doing +business abroad, including, but not limited to, currency fluctuations, customs +duties and related fees, various import controls and other non-tariff barriers +(e.g., quotas), the cost of transportation, restrictions on the transfer of +funds, labor unrest and strikes, and in certain parts of the world, political +instability. Countries where the Company's products are manufactured and sold +may, from time to time, seek to increase customs duties or impose other +non-tariff barriers (e.g., quotas), all of which have the potential to affect +the Company's operations and its ability to maintain or increase the current +level of importation of the Company's products. The Company is unable to predict +the likelihood or frequency of the occurrence of any of these events. +The products imported by the Company into the United States are subject to +various duty rates which are established by law. At the present time these +duties range between 8.5% and 12.5% of the entered value of footwear with uppers +made principally of leather or sheepskin, and 6.0% and 37.5%, plus $.90 per +pair, of the entered value of footwear with uppers made principally of synthetic +textiles or plastic. Certain products imported by the Company are exempt from +duties pursuant to laws pertaining to products manufactured in certain +beneficiary countries. "Entered value" means the value taken into account for +purposes of determining the amount of any customs duties or any other duties +which may be imposed on the importation of any property. In general, the entered +value is normally based on the price paid or payable by the Company to the +seller of the imported merchandise. +From time to time, the Company may be subject to claims for additional +duties arising as a result of the United States Customs Service, or similar +agencies of foreign countries, disagreeing with the classification and/or +valuation used by the Company to enter various styles of footwear. +16 +17 +The United States Trade Representative ("USTR") is required by the Trade +Act of 1974, as amended by the Trade and Tariff Act of 1984, the Omnibus Trade +and Competitiveness Act of 1988 and the 1994 Uruguay Round Agreements Act to +submit an annual National Trade Estimates Report on Foreign Trade Barriers (the +"NTE Report") identifying significant restrictions or barriers on United States +access to foreign markets. In January 1999, the President reinstated, by +Executive Order, the "Super 301" Provisions of the Trade Act. Relying on the NTE +Report, the USTR is required to report to Congress any trade barriers, trade +distorting practices and particular countries identified as priorities for trade +liberalization. +On April 30, 1997, the USTR designated China for monitoring under Section +306 of the 1974 Trade Act. This provision focuses on compliance with bilateral +trade agreements and allows the U.S. government to impose a variety of sanctions +if a party fails to comply with the terms of a bilateral agreement. On April 28, +2000, USTR again designated Paraguay and China for "Section 306 monitoring" to +ensure both countries comply with the commitments made to the United States +under bilateral intellectual property agreements. This means that USTR will be +in a position to move directly to trade sanctions if there is slippage in either +country's enforcement of bilateral IPR agreements. +In June 2000, President Clinton extended non-discriminating "normal trade +relations" ("NTR," formerly "most favored nation") trading status with China +through June 2001. While NTR status has been extended for another year, this +topic has traditionally been the subject of vigorous debate, and the Company is +unable to predict if the United States will revoke China's NTR status at some +point in the future. If a revocation of NTR status were to occur, it would +result in significantly higher duties on imports from China. It is noted that +bilateral agreements negotiated with China concerning that country's accession +to the World Trade Organization require that the United States grant permanent +NTR to China and in its report of May 1, 2000, USTR announced that the granting +of permanent NTR was its top trade expansion priority. +On April 28, 2000, the USTR announced that 39 countries had been placed on +the "special 301" watch list and 16 countries on the priority watch list because +of intellectual property protection concerns. Watch list countries include among +others: Australia, Canada, Denmark, Costa Rica, and Korea. The Company is unable +to predict whether or not additional countries will be added to the priority +watch list, or if any other actions will be imposed by the United States and if +such actions were taken, whether such actions would include footwear imports or +otherwise result in increased costs for the Company's products or restrict the +supply of footwear, generally, or of the Company's footwear in particular. +In 1997, the European Commission enacted anti-dumping duties of 49.2% on +certain types of footwear imported into Europe from China and Indonesia. Dutch +Customs has issued an opinion to the Company that certain popular Teva styles +are covered by this anti-dumping duty legislation. The Company has been +contesting the opinion and is working with Dutch Customs to resolve the +situation. The Company has since obtained, and is using, alternative sourcing +for the potentially impacted products from sources outside of China in an effort +to reduce the potential risk in the future. In the event that Dutch Customs +makes a final determination that the anti-dumping provisions are applicable, the +Company would have an exposure for prior unpaid anti-dumping duties during 1997 +of approximately $400,000. Recently, the European Commission added an +explanatory note to the anti-dumping legislation which effectively strengthened +its position. As a result of this recent development, the Company recorded a +$400,000 charge to selling, general and administration expenses during the year +ended December 31, 2000 to accrue for the potential loss on this matter. +The European communities also impose quantitative limits on imports from +China of certain leather upper and textile upper footwear. The Company is unable +to predict how long the anti-dumping duty and import quota restrictions will +remain in effect or changes in the scope or severity of such restrictions. +EMPLOYEES +At December 31, 2000, the Company employed approximately 105 full-time +employees in its U.S. facilities, 7 at its European subsidiary and 28 at its +Hong Kong subsidiaries, none of whom is represented by a union. The Company +believes its relationship with its employees is good. +17 +18 +ITEM 2. PROPERTIES +The Company leases approximately 30,000 square feet for its corporate +offices in Goleta, California and approximately 126,000 square feet for its +warehouse facility in Ventura County, California. The Company also leases +approximately 1,000 square feet of office space in the Netherlands for its +European sales and marketing efforts, approximately 2,000 square feet of office +space in Macau and 2,600 square feet in China for its Far East staff and less +than 1,000 square feet of office space in Japan to support the Asian sales +efforts. The Company paid approximately $1,072,000 in rent for all of its +facilities in 2000. The terms of the lease for the Company's European facilities +call for "at-will" termination. The term of the lease for the Company's +corporate office expires on October 31, 2001 and the Company is currently in +discussions with the lessor regarding extending the lease term beyond October +31, 2001. The lease for the Company's Ventura County warehouse expires in +December 2003 and the lease for the Company's Macau office space expires in +August 2003. The lease for the Company's China office expires in June 2001. The +Japanese office is rented on a month-to-month basis. The Company believes that +its existing corporate, manufacturing and warehousing space will be adequate to +meet its current and foreseeable requirements, or that suitable additional or +alternative space for the Company's corporate office will be available as needed +on commercially reasonable terms. +ITEM 3. LEGAL PROCEEDINGS +An action was brought against the Company in 1995 in the United States +District Court, District of Montana (Missoula Division), by Molly Strong-Butts +and Yetti by Molly, Ltd. (collectively, "Molly") which alleged, among other +things, that the Company violated a non-disclosure agreement and obtained +purported trade secrets regarding a line of winter footwear which Deckers +stopped producing in 1994. A jury verdict was obtained against the Company in +March 1999 aggregating $1,785,000 for the two plaintiffs. The Company is +appealing the verdict and continues to believe such claims are without merit. +The Company intends to continue contesting this claim vigorously. +The Company is also involved in routine litigation arising in the ordinary +course of business. Such routine matters, if decided adversely to the Company, +would not, in the opinion of management, have a material adverse effect on the +financial condition or results of operations of the Company. From time to time, +Mr. Thatcher and the Company are also involved in other legal proceedings to +protect the Teva patents and trademarks from infringement by third parties. Any +decision or settlement in any such infringement proceeding which allowed a third +party to continue to manufacture and sell the products at issue could have an +adverse effect on the Company's sales to the extent such other products are +purchased in lieu of the Company's products. +ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS +None. +18 +19 +PART II +ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS +The Company's Common Stock is traded in the National Market System of the +NASDAQ stock market (the "NMS") under the symbol "DECK." +As of February 28, 2001, the number of holders of record of the Common +Stock was 152, and the number of beneficial owners was approximately 1,712. +2000 1999 +-------------- -------------- +HIGH LOW HIGH LOW +----- ----- ----- ----- +First Quarter....................................... $4.13 $2.50 $3.56 $1.75 +Second Quarter...................................... 4.13 2.94 5.25 1.88 +Third Quarter....................................... 6.50 3.00 4.13 2.75 +Fourth Quarter...................................... 5.86 4.13 3.63 2.56 +The Company has never declared or paid cash dividends on its capital stock. +The Company currently intends to retain any earnings for use in its business and +does not anticipate paying any cash dividends in the foreseeable future. Payment +of dividends is within the discretion of the Company's Board of Directors and +will depend upon, among other factors, the Company's earnings, financial +condition and capital requirements. See "Management's Discussion and Analysis of +Financial Condition and Results of Operations -- Liquidity and Capital +Resources." +In June 1999, the Company issued 428,743 shares of Common Stock to Mark +Thatcher, the licensor of the Teva patents and trademark. The shares were issued +in connection with the execution of the new Teva License Agreement. The issuance +of the shares to Mr. Thatcher was exempt from registration requirements of the +Securities Act of 1933 pursuant to Section 4(2) of such act. +19 +20 +ITEM 6. SELECTED FINANCIAL DATA +The following tables set forth selected consolidated financial data of the +Company as of and for each of the years in the five-year period ended December +31, 2000. +YEARS ENDED DECEMBER 31, +------------------------------------------------ +2000 1999 1998 1997 1996 +-------- ------- ------- ------- ------- +(IN THOUSANDS, EXCEPT PER SHARE DATA) +INCOME STATEMENT DATA +Net sales....................................... $113,738 111,099 103,534 108,135 103,196 +Cost of sales................................... 63,540 66,051 67,268 64,049 62,569 +-------- ------- ------- ------- ------- +Gross profit.......................... 50,198 45,048 36,266 44,086 40,627 +Selling, general and administrative expenses.... 37,568 38,298 39,064 35,474 32,787 +Loss on factory closure......................... -- -- -- 500 -- +-------- ------- ------- ------- ------- +Earnings (loss) from operations....... 12,630 6,750 (2,798) 8,112 7,840 +Other expense................................... 295 1,508 1,320 143 1,241 +-------- ------- ------- ------- ------- +Earnings (loss) before income taxes +(benefit)........................... 12,335 5,242 (4,118) 7,969 6,599 +Income taxes (benefit).......................... 5,320 2,358 (1,211) 3,445 2,943 +-------- ------- ------- ------- ------- +Net earnings (loss)................... $ 7,015 2,884 (2,907) 4,524 3,656 +======== ======= ======= ======= ======= +Net earnings (loss) per common share: +Basic......................................... $ .77 .33 (.34) .50 .40 +Diluted....................................... .74 .32 (.34) .50 .39 +======== ======= ======= ======= ======= +Weighted-average common shares outstanding: +Basic......................................... 9,093 8,834 8,632 8,961 9,248 +Diluted....................................... 9,476 8,981 8,632 9,012 9,292 +======== ======= ======= ======= ======= +AT DECEMBER 31, +------------------------------------------------ +2000 1999 1998 1997 1996 +-------- ------- ------- ------- ------- +(IN THOUSANDS, EXCEPT PER SHARE DATA) +BALANCE SHEET DATA +Current assets.................................. $ 53,650 49,044 59,309 48,801 49,348 +Current liabilities............................. 13,168 10,386 17,174 9,579 9,618 +Total assets.................................... 77,712 73,482 84,373 74,693 74,897 +Long-term debt, less current installments....... 449 6,276 15,199 7,983 10,290 +Total stockholders' equity...................... 64,095 56,820 52,000 57,131 54,989 +======== ======= ======= ======= ======= +20 +21 +ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS +OF OPERATIONS +The following discussion should be read in conjunction with the +consolidated financial statements and notes thereto. This Annual Report on Form +10-K includes forward-looking statements within the meaning of Section 21E of +the Securities Exchange Act of 1934 that involve risk and uncertainty, such as +forward-looking statements relating to expectations regarding sales and earnings +per share, expectations regarding the Company's liquidity, the potential impact +of certain litigation, the potential impact of the possible acquisition of Teva +and the impact of seasonality on the Company's operations. Actual results may +vary. Some of the factors that could cause actual results to differ materially +from those in the forward-looking statements are identified in the accompanying +"Risk Factors" section, the last paragraph under "Liquidity and Capital +Resources", the discussion under "Seasonality" and other sections of this Annual +Report on Form 10-K. These forward-looking statements are based on the Company's +expectations as of March 2001. No one should assume that any forward-looking +statement made by the Company will remain consistent with the Company's +expectations after the date the forward-looking statement is made. The Company +disclaims any obligation to update any such factors or to publicly announce the +results of any revisions to any of the forward-looking statements contained in +this Annual Report on Form 10-K. +RESULTS OF OPERATIONS +The following table is derived from the Company's statement of operations +and sets forth, for the periods indicated, certain operating data as a +percentage of net sales. +YEARS ENDED DECEMBER 31, +-------------------------- +2000 1999 1998 +------ ------ ------ +Net sales................................................... 100.0% 100.0% 100.0% +Cost of sales............................................... 55.9 59.5 65.0 +----- ----- ----- +Gross profit...................................... 44.1 40.5 35.0 +Selling, general and administrative expenses................ 33.0 34.5 37.7 +----- ----- ----- +Earnings (loss) from operations................... 11.1 6.0 (2.7) +Other expense............................................... 0.2 1.3 1.3 +----- ----- ----- +Earnings (loss) before income taxes (benefit)..... 10.9 4.7 (4.0) +Income taxes (benefit)...................................... 4.7 2.1 (1.2) +----- ----- ----- +Net earnings (loss)......................................... 6.2 2.6 (2.8) +===== ===== ===== +YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999 +Net sales increased by $2,639,000, or 2.4%, between the years ended +December 31, 2000 and 1999. Aggregate net sales of Teva decreased to $79,732,000 +for the year ended December 31, 2000 from $80,963,000 for the year ended +December 31, 1999, a 1.5% decrease. This decrease occurred as the Company sold +significantly fewer products to the athletic retail channels as the Company did +not target this distribution channel in 2000. This decrease was partially offset +by an increase in sales in international markets and the introduction of hikers +and other closed Teva footwear in the Fall of 2000. Net sales of Teva +represented 70.1% and 72.9% of net sales in the years ended December 31, 2000 +and 1999, respectively. Net sales of footwear under the Simple product line +increased 5.1% to $16,328,000 from $15,529,000 from the year ended December 31, +1999. The increase in Simple sales was driven primarily by increased sales in +the United States on strength in its clog and sandal categories, partially +offset by weakness in the brand's international markets. Net sales of Ugg +increased 26.5% to $15,310,000 for the year ended December 31, 2000 from +$12,104,000 for the year ended December 31, 1999. This increase was fueled by +early cold weather and the introduction of new models in 2000, as well as +endorsement on Oprah Winfrey's television program and magazine. In addition, the +Company was successful in its continued efforts to expand its Ugg business +beyond its historically strong California business. Overall, international sales +for all of the Company's products increased 7.9% to $31,135,000 from +$28,859,000, representing 27.4% of net sales in 2000 and 26.0% in 1999, +reflecting Teva's expansion in the European and Asian markets. The volume of +footwear sold increased 2.9% to 4,265,000 pairs +21 +22 +during the year ended December 31, 2000 from 4,143,000 pairs during the year +ended December 31, 1999, for the reasons discussed above. +The weighted-average wholesale price per pair sold during the year ended +December 31, 2000 increased 0.2% to $25.51 from $25.46 for the year ended +December 31, 1999. The slight increase was primarily due to fewer discounted +sales in 2000 and a higher volume of Ugg sales in 2000, which carry a much +higher average selling price than Teva and Simple. This was partially offset by +the impact of a shift in sales mix toward international sales, which generally +have a lower average selling price than sales in the domestic market, as well as +the Company sold a higher proportion of lower priced footwear such as children's +styles and thongs. +Cost of sales decreased by $2,511,000, or 3.8%, to $63,540,000 for the year +ended December 31, 2000, compared with $66,051,000 for the year ended December +31, 1999. Gross profit increased by $5,150,000, or 11.4%, to $50,198,000 for the +year ended December 31, 2000 from $45,048,000 for the year ended December 31, +1999 and increased as a percentage of net sales to 44.1% from 40.5%. The +increase was primarily the result of improved inventory management, the reduced +impact of sales returns and discounted sales and improved pricing and sourcing. +The Company carries its inventories at the lower of cost or market, using a +reserve for inventory obsolescence to adjust the carrying values to market where +necessary based on ongoing reviews of estimated net realizable values of its +inventories. For the year ended December 31, 2000, the Company had net additions +to the reserve for inventory obsolescence of approximately $435,000, reflecting +inventory write-downs to estimated market values for Teva and Simple in the +United States and write-downs of Canadian Teva and Simple inventory in +connection with the shift to a distributor for that territory. For the year +ended December 31, 1999, the Company had a net decrease in the reserve for +inventory obsolescence of approximately $2,127,000 as the Company sold the +underlying inventory for which a write-down had previously been recorded. A +substantial portion of the reduction of the inventory reserve was related to +Simple finished goods that were reserved in 1998 and were subsequently sold at +discounted prices in 1999. +Selling, general and administrative expenses decreased by $730,000, or +1.9%, for the year ended December 31, 2000, compared with the year ended +December 31, 1999, and decreased as a percentage of net sales to 33.0% in 2000 +from 34.5% in 1999. The decrease in selling, general and administrative expenses +as a percentage of sales was primarily due to the non-recurrence of the special +charges incurred in the first half of 1999 related to severance costs and +litigation, as well as reductions in apparel operating costs, warehouse costs +and European operating costs. These reductions were partially offset by +increased marketing and promotional spending in 2000 compared to 1999 and the +increase in the reserve for exposure to European anti-dumping duties in 2000. +Net interest expense decreased to $67,000 for the year ended December 31, +2000 from $1,404,000 for the year ended December 31, 1999, primarily due to +significantly decreased average borrowings on the Company's credit facility in +2000, partially offset by higher average interest rates. +For the year ended December 31, 2000, income tax expense was $5,320,000, +representing an effective income tax rate of 43.1%. For the year ended December +31, 1999, income tax expense was $2,358,000, representing an effective income +tax rate of 45.0%. The decrease in the effective income tax rate in 2000 is +largely attributed to the reduced impact of the non-deductible goodwill +amortization. +For the year ended December 31, 2000, the Company's net earnings increased +143.2%, to $7,015,000 from $2,884,000 for the year ended December 31, 1999, for +the reasons discussed above. +YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998 +Net sales increased by $7,565,000, or 7.3%, between the years ended +December 31, 1999 and 1998. Aggregate net sales of Teva increased to $80,963,000 +for the year ended December 31, 1999 from $68,870,000 for the year ended +December 31, 1998, a 17.6% increase. This increase was a result of an expansion +of the overall sandal market, strength in international markets and a general +increase in the popularity of the Teva brand. Net sales of Teva represented +72.9% and 66.5% of net sales in the years ended December 31, 1999 and 1998, +respectively. Net sales of footwear under the Simple product line decreased +23.0% to $15,529,000 from +22 +23 +$20,159,000 from the year ended December 31, 1998. The decrease in Simple sales +resulted from an unsuccessful attempt at positioning the brand to appeal to +older customers. The brand has since been refocused to appeal to the teen and +twenty-something market, where the brand had been successful in prior years. Net +sales of Ugg increased 11.3% to $12,104,000 for the year ended December 31, 1999 +from $10,873,000 for the year ended December 31, 1998. This increase was +primarily due to a successful third quarter early delivery program, which caused +retailers to carry the goods at retail earlier in the season, resulting in +additional sales. Also, the Company successfully launched several new styles +under the Birch series of casual Ugg footwear in 1999, appealing to a broader +customer base. Overall, international sales for all of the Company's products +increased 19.0% to $28,859,000 from $24,254,000, representing 26.0% of net sales +in 1999 and 23.4% in 1998, reflecting expansion in the European and Asian +markets. The volume of footwear sold increased 5.1% to 4,143,000 pairs during +the year ended December 31, 1999 from 3,941,000 pairs during the year ended +December 31, 1998, for the reasons discussed above. +The weighted-average wholesale price per pair sold during the year ended +December 31, 1999 increased 2.5% to $25.46 from $24.84 for the year ended +December 31, 1998. The increase was primarily due to a reduced impact of +closeouts and discounts in 1999, partially offset by the impact of a shift in +sales mix toward international sales, which generally have a lower average +selling price than sales in the domestic market. +Cost of sales decreased by $1,217,000, or 1.8%, to $66,051,000 for the year +ended December 31, 1999, compared with $67,268,000 for the year ended December +31, 1998. Gross profit increased by $8,782,000, or 24.2%, to $45,048,000 for the +year ended December 31, 1999 from $36,266,000 for the year ended December 31, +1998 and increased as a percentage of net sales to 40.5% from 35.0%. The +increase was primarily due to the non-recurrence of the significant charges +incurred in 1998. These charges included raw materials write-downs, partially as +a result of the closure of the Company's Mexican manufacturing facility in the +third quarter of 1998, significant finished goods inventory write-downs, +primarily related to the Simple brand, and a product recall on the Teva nylon +infant sandals due to a defect in production by a contract manufacturer. In +addition, the increase in gross margin was due to improved product sourcing and +pricing and a reduction in materials and finished goods write-downs. The gross +margin increase was also attributed to the Company's exit from the footwear +components business in the latter half of 1998, which business typically carried +a low gross margin. +For the year ended December 31, 1999, the Company had a net decrease in the +reserve for inventory obsolescence of approximately $2,127,000 as the Company +sold the underlying inventory for which a reserve had previously been recorded. +A substantial portion of the reduction of the inventory reserve was related to +Simple finished goods that were reserved in 1998 and were subsequently sold at +discounted prices in 1999. For the year ended December 31, 1998, the Company +recorded net additions to the reserve for inventory obsolescence of +approximately $1,322,000 to reflect finished goods inventory write-downs, +primarily on the Simple brand, as a result of weaker than expected Simple sales +and to reflect write-downs on Teva raw materials inventories in connection with +the Company's exit from the footwear manufacturing business. +Selling, general and administrative expenses decreased by $766,000, or +2.0%, for the year ended December 31, 1999, compared with the year ended +December 31, 1998, and decreased as a percentage of net sales to 34.5% in 1999 +from 37.7% in 1998. The decrease in selling, general and administrative expenses +was primarily due to lower payroll and related costs resulting from the 1999 +reorganization, reduced costs at the Company's overseas locations, and lower +marketing and advertising expenditures. In addition, the Company greatly +improved its cost control efforts in general in 1999. These improvements were +partially offset by increased bad debt expenses, legal and other costs +associated with the Company's Molly litigation, and employee severance costs +related to the Company's reorganization in 1999. +Net interest expense increased to $1,404,000 for the year ended December +31, 1999 from $1,171,000 for the year ended December 31, 1998, primarily due to +an increase in the average outstanding borrowings under the Company's credit +facility during the first six months of 1999 versus the same period of 1998. +This was partially offset by the impact of lower average outstanding borrowings +in the last half of the year and lower average borrowing rates in 1999 than in +1998. +23 +24 +For the year ended December 31, 1999, income tax expense was $2,358,000, +representing an effective income tax rate of 45.0%. For the year ended December +31, 1998, the Company experienced an income tax benefit of $1,211,000, as a +result of the Company's loss for the period, reflecting the Company's ability to +recover income taxes previously paid. This represented an effective income tax +rate of 29.4% in 1998. The difference in the effective income tax rate as +compared to the expected rate is largely attributed to the impact of +non-deductible expense items, primarily goodwill amortization and state income +tax expenses. +For the year ended December 31, 1999, the Company's net earnings increased +to $2,884,000 compared to a net loss of $2,907,000 for the year ended December +31, 1998, for the reasons discussed above. +OUTLOOK +Sales and Earnings per Share Expectations. Due, in part, to a softening +economy, a more cautious retail environment and an apparent trend toward +retailers buying closer to season, the Company currently expects net sales for +the fiscal year ending December 31, 2001 to range from $100 million to $105 +million and expects fully-diluted earnings per share to range from $0.65 to +$0.70. The Company currently expects sales and earnings to be down during the +first half of 2001 versus the same period last year. The Company also expects +third quarter revenues to be flat to down slightly compared to the third quarter +of 2000 and expects year over year gains beginning in the fourth quarter on the +strength of the Ugg brand and the introduction of new Teva and Simple product +for Spring 2002, including a line of more progressive Teva sandals, hikers and +trailrunners. For the calendar year 2001, the Company currently expects sales of +its Teva product line to range from $71 million to $73 million; Simple to range +from $13 million to $15 million; and Ugg to range from $16 million to $17 +million. +LIQUIDITY AND CAPITAL RESOURCES +The Company's liquidity consists primarily of cash, trade accounts +receivable, inventories and a revolving credit facility. At December 31, 2000, +working capital was $40,482,000 including $9,057,000 of cash. Cash provided by +operating activities aggregated $14,651,000 for the year ended December 31, +2000. Trade accounts receivable decreased 5.1% since December 31, 1999, despite +a 6.3% increase in sales during the fourth quarter of 2000 compared to the +fourth quarter of 1999. The decrease is due to the reduction in receivables from +European retailers since December 31, 1999, as a result of the Company's shift +to selling only to distributors in late 1999, whereas the Company previously +sold to a combination of distributors and retailers in 1999. Inventories +decreased 5.3% since December 31, 1999 as a result of a decrease in Canadian +inventory with the closure of that warehouse as the Company transitioned to +using a distributor in that territory, a decrease in Ugg inventory resulting +from the increase in Ugg shipments in the fourth quarter, partially offset by an +increase in Simple domestic inventories. In addition, the decrease in both +accounts receivable and inventories resulted from the Company's continuing +efforts to strengthen the balance sheet and maximize cash flows. +The Company has a credit facility ("the Facility") which provides a maximum +availability of $50,000,000, subject to a borrowing base of up to 85% of +eligible accounts receivables, as defined, and 65% of eligible inventory, as +defined. Up to $15,000,000 of borrowings may be in the form of letters of +credit. The Facility bears interest at the lender's prime rate (9.50% at +December 31, 2000), or at the Company's election at an adjusted Eurodollar rate +plus 2%. The Facility is secured by substantially all assets of the Company and +expires January 21, 2002. The agreement underlying the Facility includes a +tangible net worth covenant, requiring the Company to maintain tangible net +worth, as defined, of $30,000,000. The Company was in compliance with this +covenant at December 31, 2000. At December 31, 2000, the Company had no +outstanding borrowings under the Facility and had outstanding letters of credit +aggregating $2,214,000. The Company had credit availability under the Facility +of $10,530,000 at December 31, 2000. +Under the terms of the Facility, if the Company terminates the arrangement +prior to the expiration date of the Facility, the Company may be required to pay +the lender an early termination fee ranging between 1% and 3% of the Facility's +commitment amount, depending upon when such termination occurs. +Capital expenditures totaled $2,323,000 for the year ended December 31, +2000. The Company's capital expenditures related primarily to various computer +hardware and software purchases, molds purchased for use +24 +25 +in the production process, trade show booths and promotional vehicles. The +Company currently has no material future commitments for capital expenditures. +The Company's Board of Directors has authorized the repurchase of up to +2,200,000 shares of common stock under a stock repurchase program. Such +repurchases are authorized to be made from time to time in open market or in +privately negotiated transactions, subject to price and market conditions as +well as the Company's cash availability. Under this program, the Company +repurchased approximately 973,000 shares for aggregate cash consideration of +approximately $7,499,000 prior to 1999. No shares were repurchased during the +years ended December 31, 1999 and 2000. At December 31, 2000, approximately +1,227,000 shares remain available for repurchase under the program. +In 1999, the Company received an option to buy Teva and virtually all of +its assets, including all worldwide rights to all Teva products. The Company's +original option was exercisable during the period from January 1, 2000 to +December 31, 2001 or during the period from January 1, 2006 to December 31, +2008. On January 22, 2001, the Company amended its option agreement, extending +the first option window for two additional years. As a result, the first option +window is January 1, 2000 through December 31, 2003. The Company agreed to pay +Mr. Thatcher $1.6 million as consideration for this extension. The option price +is based on formulas tied to net sales of Teva products and varies depending on +when the option is exercised. For the first option period, the option price is +for an amount equal to the greater of (i) $61.6 million or (ii) 75% of the +largest calendar year revenues since January 1, 2000 for the Teva brand, plus +$1.6 million. In addition, the Company would issue to Mr. Thatcher 100,000 +shares of common stock and options to purchase 100,000 shares of common stock. +The purchase price for the second option period, January 1, 2006 to December 31, +2008, is equal to 110% of the average of the aggregate net sales for all Teva +products for the two calendar years since January 1, 2000 with the highest +aggregate net sales. If the Company does not exercise its option to acquire +Teva, the licensor has the option to acquire the Teva distribution rights from +the Company for the period from January 1, 2010 to December 31, 2011, the end of +the license term, and the option price is based on a formula tied to the +Company's earnings before interest, taxes, depreciation and amortization. The +exercise of either option will require a significant amount of additional +financing. There are no assurances that the additional financing will be +available. +In the event that the Company exercises its option to acquire the Teva +brand, the Company would acquire virtually all assets including all Teva +patents, tradenames, trademarks and all other intellectual property. The Company +currently has the worldwide license for Teva footwear and pays the licensor a +royalty ranging from 6.5% to 5.0% of net sales of Teva products. By acquiring +Teva, the Company would eliminate the payment of royalties to the licensor. In +addition, the Company would own the Teva name and be able to pursue extension of +the brand into other areas including apparel, outdoor gear and similar items, +either through licensing to others or otherwise. The Company believes there are +significant opportunities in this area given the strength of the Teva brand in +the outdoor market. In conjunction with the Company, the licensor has already +developed licensing arrangements for Teva apparel in the United States and +Japanese markets and is currently pursuing apparel licensees for additional +territories. By acquiring Teva, the Company would receive these existing royalty +income streams, as well as any royalties from additional future licensees. Also, +upon exercise of the option, the Company would own the licensor's rapidly +growing and profitable Teva catalog and internet retailing business. +The Company believes that by exercising its option to acquire Teva, it will +be able to significantly improve its earnings before interest, taxes, +depreciation and amortization ("EBITDA"). In 2000, the Company sold +approximately $80 million of Teva products, paying a royalty of approximately +$4.3 million and incurring approximately $0.8 million of additional costs that +the Company believes could have been eliminated had the Company owned Teva +outright. In addition, the licensor's catalog/internet business yielded earnings +before income taxes of approximately $0.5 million in 2000. Accordingly, had the +Company owned Teva in 2000, it would have been able to improve its EBITDA by +approximately $5.6 million. +For 2004, the first year following the end of the first option window, the +Company currently expects that its net sales of Teva products will be in excess +of $108 million. Based on this sales level, the acquisition of Teva would +eliminate royalty expense of at least $6.1 million and achieve other savings of +approximately +25 +26 +$1.1 million. In addition, the earnings before income taxes provided from the +licensor's catalog/internet business is expected to yield approximately $0.9 +million in 2004 and the royalty income from apparel licensees in the United +States and Japan alone, based on minimums in the existing apparel license +agreements, would be approximately $0.3 million. As a result, the combined +savings and additional operating income generated from the acquisition of Teva +would increase the Company's EBITDA by approximately $8.4 million in 2004. +The Company continues to evaluate various alternatives for financing the +potential acquisition of Teva. While no assurances can be given, the Company +believes it will be able to obtain the necessary financing. Given the wide range +of financing possibilities, the EBITDA amounts above for 2000 and 2004 do not +consider the impact on interest expense resulting from the potential issuance of +additional debt or any potential dilution impact on earnings per share resulting +from any potential issuance of additional capital stock for the potential +acquisition. The amounts above also do not consider any increase in depreciation +or amortization resulting from the acquisition. +The Company believes that internally generated funds, the available +borrowings under its existing credit facility, and the cash on hand will provide +sufficient liquidity to enable it to meet its current and foreseeable working +capital requirements. However, risks and uncertainties which could impact the +Company's ability to maintain its cash position include the Company's growth +rate, its ability to collect its receivables in a timely manner, its ability to +effectively manage its inventory, and the volume of letters of credit used to +purchase product, among others. +SEASONALITY +Financial results for the outdoor and footwear industries are generally +seasonal. Sales of each of the Company's different product lines have +historically been higher in different seasons with the highest percentage of +Teva sales occurring in the first and second quarter of each year and the +highest percentage of Ugg sales occurring in the fourth quarter, while the +quarter with the highest percentage of annual sales for Simple has varied from +year to year. +Historically, the Company's sales have been greater in the first and second +quarters, Teva's strong selling season, than in the third and fourth quarters. +However, given the Company's current expectations for a decrease in Teva sales +for the first half of 2001 compared to 2000 combined with the anticipated +continuing increase in Ugg sales in the Fall of 2001, the Company currently +expects sales in the fourth quarter to equal or exceed the sales levels for the +second quarter of 2001. The actual results could differ materially depending +upon consumer preferences, availability of product, competition, and the +Company's customers continuing to carry and promote its various product lines, +among other risks and uncertainties. See also the discussion regarding +forward-looking statements under "Risk Factors". +OTHER +The Company believes that the relatively moderate rates of inflation in +recent years have not had a significant impact on its net sales or +profitability. +RECENTLY ISSUED PRONOUNCEMENTS +In June 1998, the Financial Accounting Standards Board issued Statement of +Financial Accounting Standards No. 133, "Accounting for Derivative Instruments +and Hedging Activities" (FASB No. 133). FASB No. 133 establishes accounting and +reporting standards for derivative instruments, including certain derivative +instruments embedded in other contracts and for other hedging activities. It +requires that an entity recognize all derivatives as either assets or +liabilities in the statement of financial position and measure those instruments +at fair value. As issued, FASB No. 133 is effective for all fiscal quarters of +all fiscal years beginning after June 15, 1999. In June 1999, the Board issued +Statement of Financial Accounting Standards No. 137 "Accounting for Derivative +Instruments and Hedging Activities-Deferral of the Effective Date of FASB No. +133" (FASB No. 137). FASB No. 137 delays the effective date of FASB No. 133 to +all fiscal quarters of all fiscal years beginning after June 15, 2000, with +earlier application encouraged. The implementation of FASB No. 133 will not have +a material impact on the financial statements. +26 +27 +In March 2000, the Financial Accounting Standards Board issued FASB +Interpretation No. 44, "Accounting for Certain Transactions Involving Stock +Compensation" (FIN 44). FIN 44 provides guidance for issues arising in applying +APB Opinion No. 25, "Accounting for Stock Issued to Employees". FIN 44 applies +specifically to new awards, exchanges of awards in a business combination, +modification to outstanding awards, and changes in grantee status that occur on +or after July 1, 2000, except for the provisions related to repricings and the +definition of an employee which apply to awards issued after December 15, 1998. +Application of FIN 44 did not have an effect on the Company's financial +reporting. +In July 2000, the Emerging Issues Task Force reached a consensus on EITF +Issue 00-10, Accounting for Shipping and Handling Fees and Costs, which +clarified the financial statement classification for shipping costs reimbursed +by customers. Issue 00-10 becomes effective during the fourth quarter of fiscal +years beginning after December 15, 1999. The Company adopted this Issue on +October 1, 2000. In accordance with this Issue, approximately $1.4 million of +shipping cost reimbursements have been reclassified as an addition to net sales +for each of the years ended December 31, 2000, 1999 and 1998, and approximately +$1.2 million, $1.5 million and $1.7 million, respectively, of shipping costs +incurred were reclassified as additions to cost of goods sold. In the past these +amounts had been reported on a net basis within operating expenses. The +implementation of this Issue had no effect on the Company's net earnings or +earnings per share. +ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK +Derivative Instruments. The Company does not invest, and during the year +ended December 31, 2000 did not invest, in market risk sensitive instruments. +Market Risk. The Company's market risk exposure with respect to financial +instruments is to changes in the "prime rate" in the United States and changes +in the Eurodollar rate. The Company's credit facility provides for interest on +outstanding borrowings at prime rate, or at the Company's election at an +adjusted Eurodollar rate plus 2%. At December 31, 2000, the Company had no +outstanding borrowings under this credit facility. +ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA +See Item 14(a) and page 28 for an index to the consolidated financial +statements and supplementary information included herein. +ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND +FINANCIAL DISCLOSURE +Not applicable. +27 +28 +DECKERS OUTDOOR CORPORATION +AND SUBSIDIARIES +INDEX TO CONSOLIDATED FINANCIAL STATEMENTS +AND FINANCIAL STATEMENT SCHEDULE +PAGE +---- +Independent Auditors' Report................................ 29 +Consolidated Balance Sheets as of December 31, 2000 and +1999...................................................... 30 +Consolidated Statements of Operations for each of the years +in the three-year period ended December 31, 2000.......... 31 +Consolidated Statements of Stockholders' Equity for each of +the years in the three-year period ended December 31, +2000...................................................... 32 +Consolidated Statements of Cash Flows for each of the years +in the three-year period ended December 31, 2000.......... 33 +Notes to Consolidated Financial Statements.................. 34 +Consolidated Financial Statement Schedule +Valuation and Qualifying Accounts......................... 47 +All other schedules are omitted because they are not applicable or the +required information is shown in the Company's consolidated financial statements +or the related notes thereto. +28 +29 +INDEPENDENT AUDITORS' REPORT +The Board of Directors and Stockholders +Deckers Outdoor Corporation: +We have audited the accompanying consolidated financial statements of +Deckers Outdoor Corporation and subsidiaries as listed in the accompanying +index. In connection with our audits of the consolidated financial statements, +we also have audited the financial statement schedule as listed in the +accompanying index. These consolidated financial statements and financial +statement schedule are the responsibility of the Company's management. Our +responsibility is to express an opinion on these consolidated financial +statements and financial statement schedule based on our audits. +We conducted our audits in accordance with auditing standards generally +accepted in the United States of America. Those standards require that we plan +and perform the audit to obtain reasonable assurance about whether the financial +statements are free of material misstatement. An audit includes examining, on a +test basis, evidence supporting the amounts and disclosures in the financial +statements. An audit also includes assessing the accounting principles used and +significant estimates made by management, as well as evaluating the overall +financial statement presentation. We believe that our audits provide a +reasonable basis for our opinion. +In our opinion, the consolidated financial statements referred to above +present fairly, in all material respects, the financial position of Deckers +Outdoor Corporation and subsidiaries as of December 31, 2000 and 1999 and the +results of their operations and their cash flows for each of the years in the +three-year period ended December 31, 2000 in conformity with accounting +principles generally accepted in the United States of America. Also in our +opinion, the related consolidated financial statement schedule, when considered +in relation to the basic consolidated financial statements taken as a whole, +presents fairly, in all material respects, the information set forth therein. +KPMG LLP +Los Angeles, California +February 14, 2001 +29 +30 +DECKERS OUTDOOR CORPORATION +AND SUBSIDIARIES +CONSOLIDATED BALANCE SHEETS +DECEMBER 31, 2000 AND 1999 +ASSETS (Note 4) +2000 1999 +----------- ----------- +Current assets: +Cash and cash equivalents................................. $ 9,057,000 $ 1,633,000 +Trade accounts receivable, less allowance for doubtful +accounts of $2,144,000 and $1,813,000 as of December +31, 2000 and 1999, respectively........................ 23,143,000 24,396,000 +Inventories (note 2)...................................... 17,146,000 18,103,000 +Prepaid expenses and other current assets................. 1,541,000 2,235,000 +Refundable income taxes (note 5).......................... 119,000 1,624,000 +Deferred tax assets (note 5).............................. 2,644,000 1,053,000 +----------- ----------- +Total current assets.............................. 53,650,000 49,044,000 +Property and equipment, at cost, net (note 3)............... 2,998,000 2,125,000 +Intangible assets, less applicable amortization............. 20,471,000 22,037,000 +Other assets, net........................................... 593,000 276,000 +----------- ----------- +$77,712,000 $73,482,000 +=========== =========== +LIABILITIES AND STOCKHOLDERS' EQUITY +Current liabilities: +Notes payable and current installments of long-term debt +(note 4)............................................... $ 1,046,000 $ 125,000 +Trade accounts payable.................................... 8,020,000 7,261,000 +Accrued payroll........................................... 1,646,000 1,023,000 +Other accrued expenses.................................... 2,456,000 1,977,000 +----------- ----------- +Total current liabilities......................... 13,168,000 10,386,000 +----------- ----------- +Long-term debt, less current installments (note 4).......... 449,000 6,276,000 +Commitments and contingencies (note 8) +Stockholders' equity (note 6): +Preferred stock, $.01 par value. Authorized 5,000,000 +shares; none issued.................................... -- -- +Common stock, $.01 par value. Authorized 20,000,000 +shares; issued 10,108,929 and outstanding 9,135,977 at +December 31, 2000; issued 10,037,957 and outstanding +9,065,005 at December 31, 1999......................... 91,000 91,000 +Additional paid-in capital................................ 25,003,000 24,743,000 +Retained earnings......................................... 39,625,000 32,610,000 +----------- ----------- +64,719,000 57,444,000 +Less note receivable from stockholder/former officer...... 624,000 624,000 +----------- ----------- +Total stockholders' equity........................ 64,095,000 56,820,000 +----------- ----------- +$77,712,000 $73,482,000 +=========== =========== +See accompanying notes to consolidated financial statements. +30 +31 +DECKERS OUTDOOR CORPORATION +AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF OPERATIONS +THREE-YEAR PERIOD ENDED DECEMBER 31, 2000 +2000 1999 1998 +------------ ------------ ------------ +Net sales (note 9)............................... $113,738,000 $111,099,000 $103,534,000 +Cost of sales.................................... 63,540,000 66,051,000 67,268,000 +------------ ------------ ------------ +Gross profit........................... 50,198,000 45,048,000 36,266,000 +Selling, general and administrative expenses +(note 7)....................................... 37,568,000 38,298,000 39,064,000 +------------ ------------ ------------ +Earnings (loss) from operations........ 12,630,000 6,750,000 (2,798,000) +------------ ------------ ------------ +Other expense: +Interest expense, net.......................... 67,000 1,404,000 1,171,000 +Loss on disposal of assets..................... 57,000 3,000 13,000 +Other.......................................... 171,000 101,000 136,000 +------------ ------------ ------------ +295,000 1,508,000 1,320,000 +------------ ------------ ------------ +Earnings (loss) before income tax +expense (benefit).................... 12,335,000 5,242,000 (4,118,000) +Income tax expense (benefit) (note 5)............ 5,320,000 2,358,000 (1,211,000) +------------ ------------ ------------ +Net earnings (loss).................... $ 7,015,000 $ 2,884,000 $ (2,907,000) +============ ============ ============ +Net earnings (loss) per share: +Basic.......................................... $ .77 $ .33 $ (.34) +Diluted........................................ .74 $ .32 $ (.34) +============ ============ ============ +Weighted-average shares: +Basic.......................................... 9,093,000 8,834,000 8,632,000 +Diluted........................................ 9,476,000 8,981,000 8,632,000 +============ ============ ============ +See accompanying notes to consolidated financial statements. +31 +32 +DECKERS OUTDOOR CORPORATION +AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY +THREE-YEAR PERIOD ENDED DECEMBER 31, 2000 +STOCKHOLDER/ +COMMON STOCK ADDITIONAL FORMER NET +------------------- PAID-IN RETAINED OFFICER NOTE STOCKHOLDERS' +SHARES AMOUNT CAPITAL EARNINGS RECEIVABLE EQUITY +--------- ------- ---------- ---------- ------------ ------------- +Balance at December 31, +1997....................... 8,789,431 $88,000 25,034,000 32,633,000 (624,000) 57,131,000 +Common stock repurchased..... (342,952) (3,000) (2,525,000) -- -- (2,528,000) +Common stock issued under +stock incentive plan....... 57,572 -- 213,000 -- -- 213,000 +Common stock issued under the +employee stock purchase +plan....................... 18,628 -- 91,000 -- -- 91,000 +Net loss..................... -- -- -- (2,907,000) -- (2,907,000) +--------- ------- ---------- ---------- -------- ---------- +Balance at December 31, +1998....................... 8,522,679 85,000 22,813,000 29,726,000 (624,000) 52,000,000 +Common stock issued under +Teva license agreement +(note 7)................... 428,743 4,000 1,604,000 -- -- 1,608,000 +Common stock issued under +stock incentive plan....... 91,352 1,000 284,000 -- -- 285,000 +Common stock issued under the +employee stock purchase +plan....................... 22,231 1,000 42,000 -- -- 43,000 +Net earnings................. -- -- -- 2,884,000 -- 2,884,000 +--------- ------- ---------- ---------- -------- ---------- +Balance at December 31, +1999....................... 9,065,005 91,000 24,743,000 32,610,000 (624,000) 56,820,000 +Fair value of options issued +under Teva license +agreement (note 7)......... -- -- 78,000 -- -- 78,000 +Common stock issued under +stock incentive plan....... 40,671 -- 118,000 -- -- 118,000 +Common stock issued under the +employee stock purchase +plan....................... 30,301 -- 64,000 -- -- 64,000 +Net earnings................. -- -- -- 7,015,000 -- 7,015,000 +--------- ------- ---------- ---------- -------- ---------- +Balance at December 31, +2000....................... 9,135,977 $91,000 25,003,000 39,625,000 (624,000) 64,095,000 +========= ======= ========== ========== ======== ========== +See accompanying notes to consolidated financial statements. +32 +33 +DECKERS OUTDOOR CORPORATION +AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF CASH FLOWS +THREE-YEAR PERIOD ENDED DECEMBER 31, 2000 +2000 1999 1998 +----------- ----------- ----------- +CASH FLOWS FROM OPERATING ACTIVITIES: +Net earnings (loss)......................................... $ 7,015,000 2,884,000 (2,907,000) +Adjustments to reconcile net earnings (loss) to net cash +provided by (used in) operating activities: +Depreciation and amortization of property and equipment... 1,374,000 1,804,000 1,276,000 +Amortization of intangible assets......................... 1,566,000 1,322,000 1,362,000 +Provision for doubtful accounts........................... 1,994,000 1,820,000 589,000 +Loss on disposal of assets................................ 57,000 3,000 13,000 +Change in deferred tax assets............................. (1,591,000) 812,000 (399,000) +Stock compensation........................................ 130,000 87,000 166,000 +Changes in assets and liabilities: +(Increase) decrease in: +Trade accounts receivable............................. (741,000) 964,000 (4,732,000) +Inventories........................................... 957,000 5,562,000 (4,686,000) +Prepaid expenses and other current assets............. 841,000 (57,000) 12,000 +Refundable income taxes............................... 1,505,000 2,643,000 (4,267,000) +Note receivable from supplier......................... -- 782,000 184,000 +Other assets.......................................... (317,000) 260,000 (233,000) +Increase (decrease) in: +Trade accounts payable................................ 759,000 (686,000) 4,318,000 +Accrued expenses...................................... 1,102,000 9,000 (830,000) +Income taxes payable.................................. -- -- (22,000) +----------- ----------- ----------- +Net cash provided by (used in) operating +activities....................................... 14,651,000 18,209,000 (10,156,000) +----------- ----------- ----------- +CASH FLOWS FROM INVESTING ACTIVITIES: +Proceeds from sale of property and equipment.............. 19,000 10,000 142,000 +Purchase of property and equipment........................ (1,755,000) (947,000) (1,916,000) +Cash paid for acquisitions, net of cash received.......... -- -- (2,000,000) +Cash paid for intangible assets........................... -- (1,000,000) -- +----------- ----------- ----------- +Net cash used in investing activities.............. (1,736,000) (1,937,000) (3,774,000) +----------- ----------- ----------- +CASH FLOWS FROM FINANCING ACTIVITIES: +Net borrowings (repayments) under line of credit.......... (5,834,000) (14,917,000) 13,451,000 +Proceeds from notes payable............................... 644,000 -- -- +Repayments of long-term debt.............................. (431,000) (117,000) (106,000) +Cash received from issuances of common stock.............. 130,000 132,000 138,000 +Cash paid for repurchases of common stock................. -- -- (2,528,000) +----------- ----------- ----------- +Net cash provided by (used in) financing +activities....................................... (5,491,000) (14,902,000) 10,955,000 +----------- ----------- ----------- +Net increase (decrease) in cash and cash +equivalents...................................... 7,424,000 1,370,000 (2,975,000) +Cash and cash equivalents at beginning of year.............. 1,633,000 263,000 3,238,000 +----------- ----------- ----------- +Cash and cash equivalents at end of year.................... $ 9,057,000 1,633,000 263,000 +=========== =========== =========== +Supplemental disclosure of cash flow information: +Cash paid during the year for: +Interest................................................ $ 352,000 1,380,000 1,092,000 +Income taxes............................................ 5,971,000 2,492,000 3,800,000 +=========== =========== =========== +Supplemental disclosure of noncash investing and financing activities: +In connection with the Teva license renewal in 1999, the Company issued +428,743 shares of common stock valued at $1,608,000. +In connection with the exercise of nonqualified stock options, additional +paid-in capital increased by $17,000 and $109,000 in 2000 and 1999, +respectively. +In 2000, the Company incurred $715,000 of long-term debt in connection with +the acquisition of $568,000 of property and equipment and $147,000 of +prepaid expenses. +See accompanying notes to consolidated financial statements. +33 +34 +DECKERS OUTDOOR CORPORATION +AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS +DECEMBER 31, 2000 AND 1999 +(1) THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES +(a) The Company and Basis of Presentation +The consolidated financial statements include the accounts of Deckers +Outdoor Corporation and its subsidiaries (collectively referred to as the +Company). All significant intercompany balances and transactions have been +eliminated in consolidation. +The Company builds niche products into global lifestyle brands by designing +and marketing innovative, functional and fashion-oriented footwear, developed +for both high performance outdoor activities and everyday casual lifestyle use. +(b) Inventories +Inventories are stated at the lower of cost (first-in, first-out) or market +(net realizable value). +(c) Revenue Recognition +Revenue is recognized upon shipment of the merchandise. Allowances for +estimated returns and discounts are provided for when related revenue is +recorded. +(d) Long-Lived Assets +It is the Company's policy to account for long-lived assets, including +intangibles, at amortized cost. As part of an ongoing review of the valuation +and amortization of long-lived assets, management assesses the carrying value of +such assets if facts and circumstances suggest that it may be impaired. If this +review indicates that the long-lived assets will not be recoverable, as +determined by a nondiscounted cash flow analysis over the remaining amortization +period, the carrying value of the Company's long-lived assets would be reduced +to its estimated fair value based on discounted cash flows. +(e) Depreciation and Amortization +Depreciation of property and equipment is computed using the straight-line +method based on estimated useful lives ranging from three to ten years. +Leasehold improvements are amortized on the straight-line basis over their +estimated economic useful lives or the lease term, whichever is shorter. +Goodwill and other intangibles are amortized on the straight-line basis +over periods of 20 to 30 years, and 5 to 15 years, respectively. Accumulated +amortization at December 31, 2000 and 1999 was $6,680,000 and $5,114,000, +respectively. +(f) Fair Value of Financial Instruments +The fair values of the Company's cash equivalents, trade accounts +receivable, prepaid expenses and other current assets, refundable income taxes, +trade accounts payable and accrued expenses approximate the carrying values due +to the relatively short maturities of these instruments. +The fair value of the Company's revolving credit line approximates the +carrying value due to variable interest rates associated with the credit line. +The fair values of the Company's other notes payable are estimated by +discounting future cash flows of each instrument at rates currently available to +the Company for similar debt instruments of comparable maturities by the +Company's bankers. The fair values of these notes approximate the carrying +value. +34 +35 +DECKERS OUTDOOR CORPORATION +AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) +DECEMBER 31, 2000 AND 1999 +(g) Stock Compensation +The Company accounts for stock-based compensation under the provisions of +Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based +Compensation (SFAS 123). Under the provisions of SFAS 123, the Company has +elected to continue to measure compensation cost for employees and nonemployee +directors of the Company under APB No. 25 and comply with the pro forma +disclosure requirements. The Company applies the fair value techniques of SFAS +123 to measure compensation cost for options/warrants granted to nonemployees. +(h) Use of Estimates +Management of the Company has made a number of estimates and assumptions +relating to the reporting of assets, liabilities, revenues and expenses and the +disclosure of contingent assets and liabilities to prepare these consolidated +financial statements in conformity with generally accepted accounting +principles. Actual results could differ from these estimates. +(i) Research and Development Costs +Research and development costs are charged to expense as incurred. Such +costs amounted to $1,076,000, $1,607,000 and $2,393,000 in 2000, 1999 and 1998, +respectively. +(j) Advertising, Marketing and Promotion Costs +Advertising production costs are expensed the first time the advertisement +is run. All other costs of advertising, marketing and promotion are expensed as +incurred. These expenses charged to operations for the years ended 2000, 1999 +and 1998 were $7,108,000, $5,602,000 and $5,847,000, respectively. Included in +prepaid and other current assets at December 31, 2000 and 1999 were $414,000 and +$726,000, respectively, related to prepaid advertising and promotion expenses +for programs that take place after December 31, 2000 and 1999, respectively. +(k) Income Taxes +Income taxes are accounted for under the asset and liability method. +Deferred tax assets and liabilities are recognized for the future tax +consequences attributable to differences between the financial statement +carrying amounts of existing assets and liabilities and their respective tax +bases. Deferred tax assets and liabilities are measured using enacted tax rates +expected to apply to taxable income in the years in which those temporary +differences are expected to be recovered or settled. +The effect on deferred taxes of a change in tax rates is recognized in +income in the period that includes the enactment date. +(l) Earnings per Share +Basic earnings (loss) per share (EPS) is computed by dividing net earnings +(loss) available to common stockholders by the weighted-average number of common +shares outstanding for the period. Diluted EPS reflects the potential dilution +from securities that could share in the earnings of the Company. Antidilutive +securities are excluded from diluted EPS. +35 +36 +DECKERS OUTDOOR CORPORATION +AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) +DECEMBER 31, 2000 AND 1999 +The reconciliations of basic to diluted weighted-average shares are as +follows: +2000 1999 1998 +---------- --------- ---------- +Net earnings (loss) used for basic and diluted +earnings (loss) per share..................... $7,015,000 2,884,000 (2,907,000) +========== ========= ========== +Weighted-average shares used in basic +computation................................ 9,093,000 8,834,000 8,632,000 +Dilutive effect of stock options.............. 383,000 147,000 -- +---------- --------- ---------- +Weighted-average shares used for +diluted +computation......................... 9,476,000 8,981,000 8,632,000 +========== ========= ========== +Options to purchase 267,000, 596,000 and 698,000 shares of common stock at +prices ranging from $5.50 to $13.75, $3.00 to $13.75 and $5.50 to $13.75 were +outstanding during 2000, 1999 and 1998, respectively, but were not included in +the computation of diluted earnings (loss) per share because the options' +exercise price was greater than the average market price of the common shares +during the respective periods. Options to purchase 811,000 shares of common +stock at a price of $1.56 per share were outstanding and considered dilutive +during 1998, but were not included in the computation of diluted loss per share +because the options were antidilutive, as the Company incurred a net loss for +the year. +(m) Foreign Currency Translation +The Company considers the U.S. dollar as the functional currency for all of +its domestic and foreign operations. Assets and liabilities of the foreign +operations denominated in local currencies are translated at the rate of +exchange at the balance sheet date. Expenses have been translated at the +weighted-average rate of exchange during the period of existence. Foreign +currency translation adjustments were immaterial to the accompanying +consolidated financial statements. +(n) Comprehensive Income +Comprehensive income is the total of net earnings (loss) and all other +nonowner changes in equity. Except for net earnings (loss) and foreign currency +translation adjustments, the Company does not have any transactions and other +economic events that qualify as comprehensive income as defined under SFAS No. +130. As foreign currency translation adjustments were immaterial to the +Company's consolidated financial statements, the Company's net income was the +same as comprehensive income for all periods presented. +(o) Business Segment Reporting +Management of the Company has determined its reportable segments are +strategic business units. Significant reportable business segments are the Teva, +Simple and Ugg brands. Information related to these segments is summarized in +note 9. +(p) Reclassifications +Certain reclassifications have been made to the 1999 and 1998 balances, +specifically related to shipping and handling fees to conform to the 2000 +presentation. +(q) Shipping and Handling Fees +The Company adopted Emerging Issues Task Force Issue 00-10 (EITF 00-10), +Accounting for Shipping and Handling Fees and Costs, effective October 1, 2000. +EITF 00-10 established new guidelines for +36 +37 +DECKERS OUTDOOR CORPORATION +AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) +DECEMBER 31, 2000 AND 1999 +classification of shipping and handling costs billed to and collected from +customers. Pursuant to EITF 00-10, amounts billed for shipping and handling +costs are recorded as a component of revenue. Related costs paid to third-party +shippers are recorded as a cost of revenues. Management has retroactively +reclassified these amounts from selling, general and administrative expenses to +revenues and cost of revenues. Approximately $1.4 million of shipping cost +reimbursements have been reclassified as an addition to net sales for each of +the years ended December 31, 1999 and 1998 and approximately $1.5 million and +$1.7 million, respectively, of shipping costs incurred were reclassified as +additions to cost of goods sold. +(2) INVENTORIES +Inventories are summarized as follows: +2000 1999 +----------- ---------- +Finished goods..................................... $16,968,000 17,841,000 +Work in process.................................... 48,000 119,000 +Raw materials...................................... 130,000 143,000 +----------- ---------- +Total inventories........................ $17,146,000 18,103,000 +=========== ========== +(3) PROPERTY AND EQUIPMENT +Property and equipment is summarized as follows: +2000 1999 +---------- --------- +Machinery and equipment.............................. $7,758,000 5,897,000 +Furniture and fixtures............................... 1,012,000 650,000 +Leasehold improvements............................... 567,000 547,000 +---------- --------- +9,337,000 7,094,000 +Less accumulated depreciation and amortization....... 6,339,000 4,969,000 +---------- --------- +Net property and equipment................. $2,998,000 2,125,000 +========== ========= +37 +38 +DECKERS OUTDOOR CORPORATION +AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) +DECEMBER 31, 2000 AND 1999 +(4) NOTES PAYABLE AND LONG-TERM DEBT +Notes payable and long-term debt consists of the following: +2000 1999 +---------- --------- +Revolving line of credit, secured by substantially +all the assets of the Company...................... $ -- 5,834,000 +Note payable for purchase of computer equipment, +secured by underlying equipment, payable in +quarterly installments of $74,200, including +interest at a rate of 9.51% through May 2002....... 410,000 -- +Note payable to the minority shareholder of the +Company's Heirlooms subsidiary in connection with +the minority shareholder's pending acquisition of +the Company's interest in the subsidiary, payable +on demand, including interest at a rate of 9.5%.... 644,000 -- +Unsecured note payable in quarterly installments of +$41,700, including interest at a rate of 7.93%, due +December 2003...................................... 441,000 567,000 +---------- --------- +1,495,000 6,401,000 +Less current installments............................ 1,046,000 125,000 +---------- --------- +$ 449,000 6,276,000 +========== ========= +The aggregate maturities of long-term debt as of December 31, 2000 are as +follows: +2001..................................................... $1,046,000 +2002..................................................... 290,000 +2003..................................................... 159,000 +---------- +$1,495,000 +========== +On January 21, 1999, the Company replaced its existing credit facility with +a revolving credit agreement with a new financial institution. Under the +agreement, the Company is permitted borrowings up to $50,000,000, subject to a +borrowing base up to 85% of eligible accounts receivable and 65% of eligible +inventory, as defined. At December 31, 2000, $10,530,000 was available under +such credit facility. Up to $15,000,000 of borrowings may be in the form of +letters of credit. The agreement bears interest at the lenders' prime rate (9.5% +at December 31, 2000) or, at the Company's election, an adjusted Eurodollar rate +plus 2%. The facility is secured by substantially all assets of the Company and +expires January 21, 2002. Additionally, under the terms of the agreement, should +the Company terminate the arrangement prior to the expiration date, the Company +may be required to pay the lender an early termination fee ranging between 1% +and 3% of the commitment amount, depending upon when such termination occurs. +The agreement underlying the credit facility includes a tangible net worth +covenant. At December 31, 2000, the Company was in compliance with the terms of +the agreement. +38 +39 +DECKERS OUTDOOR CORPORATION +AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) +DECEMBER 31, 2000 AND 1999 +(5) INCOME TAXES +Components of income tax expense (benefit) are as follows: +FEDERAL STATE TOTAL +----------- --------- ---------- +1998: +Current...................................... $ (866,000) 54,000 (812,000) +Deferred..................................... (105,000) (294,000) (399,000) +----------- --------- ---------- +$ (971,000) (240,000) (1,211,000) +=========== ========= ========== +1999: +Current...................................... $ 1,702,000 (48,000) 1,654,000 +Deferred..................................... 420,000 284,000 704,000 +----------- --------- ---------- +$ 2,122,000 236,000 2,358,000 +=========== ========= ========== +2000: +Current...................................... $ 5,492,000 1,419,000 6,911,000 +Deferred..................................... (1,286,000) (305,000) (1,591,000) +----------- --------- ---------- +$ 4,206,000 1,114,000 5,320,000 +=========== ========= ========== +Actual income tax expense (benefit) differs from that obtained by applying +the statutory federal income tax rate to earnings (loss) before income taxes as +follows: +2000 1999 1998 +---------- ---------- ----------- +Computed "expected" income tax expense +(benefit)................................... $4,194,000 $1,782,000 $(1,400,000) +State income taxes, net of federal income tax +benefit..................................... 688,000 259,000 (288,000) +Losses of subsidiary not deductible........... -- -- 241,000 +Other......................................... 438,000 317,000 236,000 +---------- ---------- ----------- +$5,320,000 $2,358,000 $(1,211,000) +========== ========== =========== +39 +40 +DECKERS OUTDOOR CORPORATION +AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) +DECEMBER 31, 2000 AND 1999 +The tax effects of temporary differences that give rise to significant +portions of deferred tax assets and deferred tax liabilities at December 31, +2000 and 1999 are presented below: +2000 1999 +---------- ---------- +Deferred tax assets: +Uniform capitalization adjustment to inventory............ $ 455,000 $ 175,000 +Inventory obsolescence reserve............................ 15,000 20,000 +Bad debt and other reserves............................... 1,656,000 896,000 +Amortization of intangible assets......................... 705,000 415,000 +Net operating loss carryforwards.......................... 114,000 228,000 +State taxes............................................... 247,000 21,000 +---------- ---------- +Total gross deferred tax assets................... 3,192,000 1,755,000 +Less valuation allowance.................................. (228,000) (228,000) +---------- ---------- +Deferred tax assets, net of allowance....................... 2,964,000 1,527,000 +---------- ---------- +Deferred tax liabilities: +Depreciation of property and equipment.................... 39,000 193,000 +Other..................................................... 281,000 281,000 +---------- ---------- +Total deferred tax liabilities.................... 320,000 474,000 +---------- ---------- +Net deferred tax assets........................... $2,644,000 $1,053,000 +========== ========== +Management believes it is more likely than not that the results of future +operations will generate sufficient taxable income to realize the net deferred +tax assets. Certain federal and state tax laws reduce the availability of net +operating losses generated outside the group which is not consolidated for tax +return purposes. Accordingly, management has provided a full valuation allowance +against such losses. +Refundable income taxes as of December 31, 2000 and 1999 arise primarily +from the overpayment of estimated taxes. +(6) STOCKHOLDERS' EQUITY +In February 2001, the Company amended the 1993 Stock Incentive Plan (1993 +Plan), subject to stockholder approval. Under the terms of the amended 1993 +Plan, 3,000,000 shares of common stock are reserved for issuance to officers, +directors, employees and consultants of the Company. Awards to 1993 Plan +participants are not restricted to any specified form and may include stock +options, securities convertible into or redeemable for stock, stock appreciation +rights, stock purchase warrants or other rights to acquire stock. Under the 1993 +Plan, 40,671, 91,352 and 57,572 shares of common stock were issued in 2000, 1999 +and 1998, respectively, including 100,000 shares issued in 1997 to an officer of +the Company, which was financed through the issuance of a note receivable of +$624,000 to such officer (bearing interest at 6.39%, secured by the underlying +Company stock, with principal and interest due April 18, 2002) and common stock +options exercised as noted below. +40 +41 +DECKERS OUTDOOR CORPORATION +AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) +DECEMBER 31, 2000 AND 1999 +Common stock option activity under the 1993 Plan for the years ended +December 31, 2000, 1999 and 1998 is as follows: +WEIGHTED-AVERAGE +SHARES EXERCISE PRICE +--------- ---------------- +Outstanding at December 31, 1997........................ 717,250 $8.42 +Granted............................................... 925,000 2.23 +Exercised............................................. (34,250) 1.40 +Canceled.............................................. (99,000) 9.17 +--------- +Outstanding at December 31, 1998........................ 1,509,000 4.73 +Granted............................................... 533,100 2.68 +Exercised............................................. (57,500) 1.56 +Canceled.............................................. (843,000) 5.08 +--------- +Outstanding at December 31, 1999........................ 1,141,600 3.68 +Granted............................................... 215,500 3.28 +Exercised............................................. (21,800) 2.23 +Canceled.............................................. (56,400) 3.37 +--------- +Outstanding at December 31, 2000........................ 1,278,900 3.66 +========= ===== +Options exercisable at December 31, 2000................ 636,400 $4.28 +========= ===== +The per share weighted-average fair value of stock options granted during +2000, 1999 and 1998 was $1.95, $1.54 and $1.25, respectively, on the date of +grant using the Black-Scholes option pricing model with the following +weighted-average assumptions: 2000 -- expected dividend yield of 0%, stock +volatility of 50.47%, risk-free interest rate of 5.8% and an expected life of +seven years; 1999 -- expected dividend yield of 0%, stock volatility of 48.5%, +risk-free interest rate of 5.3% and an expected life of seven years; +1998 -- expected dividend yield of 0%, stock volatility of 48.5%, risk-free +interest rate of 4.7% and an expected life of seven years. +The Company applies APB Opinion No. 25 in accounting for its stock option +plans. Had the Company determined compensation cost based on the fair value of +the options at the grant date under SFAS No. 123, the Company's net earnings +(loss) would have been changed to the pro forma amounts below: +2000 1999 1998 +---------- ---------- ----------- +Pro forma net earnings (loss)................. $6,686,960 $2,714,000 $(3,400,000) +========== ========== =========== +Pro forma net earnings (loss) per share: +Basic....................................... $ .74 $ .31 $ (.39) +Diluted..................................... $ .71 $ .30 $ (.39) +========== ========== =========== +In August 1995, the Company adopted the 1995 Employee Stock Purchase Plan +(1995 Plan). The 1995 Plan is intended to qualify as an Employee Stock Purchase +Plan under Section 423 of the Internal Revenue Code. Under the terms of the 1995 +Plan as amended, 300,000 shares of common stock are reserved for issuance to +employees who have been employed by the Company for at least six months. The +1995 Plan provides for employees to purchase the Company's common stock at a +discount below market value, as defined by the 1995 Plan. Under the 1995 Plan, +30,301, 22,231 and 18,628 shares were issued in 2000, 1999 and 1998, +respectively. Consistent with the application of APB Opinion No. 25, no +compensation has been recorded for stock purchases. +41 +42 +DECKERS OUTDOOR CORPORATION +AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) +DECEMBER 31, 2000 AND 1999 +The Company adopted a stockholder rights plan in 1998 to protect +stockholders against unsolicited attempts to acquire control of the Company that +do not offer what the Company believes to be an adequate price to all +stockholders. As part of the plan, the Board of Directors of the Company +declared a dividend of one preferred share purchase right (a Right) for each +outstanding share of common stock, par value $.01 per share (the Common Shares), +of the Company. +The dividend was payable to stockholders of record on December 1, 1998 (the +Record Date). In addition, one Right shall be issued with each Common Share that +becomes outstanding (i) between the Record Date and the earliest of the +Distribution Date, the Redemption Date and the Final Expiration Date (as such +terms are defined in the Rights Agreement) or (ii) following the Distribution +Date and prior to the Redemption Date or Final Expiration Date, pursuant to the +exercise of stock options or under any employee plan or arrangement or upon the +exercise, conversion or exchange of other securities of the Company, which +options or securities were outstanding prior to the Distribution Date, in each +case upon the issuance of the Company's common stock in connection with any of +the foregoing. Each right entitles the registered holder to purchase from the +Company one one-hundredth of a share of Series B Junior Participating Preferred +Stock, par value $.01 per share (the Preferred Shares), of the Company, at a +price of $50.00, subject to adjustment. +The rights have no voting power and expire on November 11, 2008. The rights +may be redeemed by the Company for $.01 per right until the right becomes +exercisable. +The Company's Board of Directors has authorized the repurchase of up to +2,200,000 shares of common stock under a stock repurchase program. Under this +program, the Company repurchased 342,952 shares in 1998 for cash consideration +of $2,528,000 and no shares in 1999 or 2000 were repurchased. At December 31, +2000, 1,227,048 shares remained available for repurchase under the program. +(7) LICENSING AGREEMENT +The Company has been selling its Teva line of sport sandals and other +footwear since 1985, pursuant to various license arrangements with Mark +Thatcher, the inventor of the Teva sports sandal and owner of the Teva patents +and trademark. +On June 7, 1999, the Company signed a new license agreement (the License +Agreement) for Teva, which was effective January 1, 2000. Under the License +Agreement, the Company received the exclusive worldwide rights for the +manufacture and distribution of Teva footwear through 2004. The License +Agreement is automatically renewable through 2008 and through 2011 under two +renewal options, provided that minimum required sales levels are achieved. As +with the previous arrangement, the new license agreement provides for a sliding +scale of royalty rates, depending on sales levels. Additionally, the License +Agreement provides for an increase in the required amount of marketing +expenditures, depending on sales levels and varying by territory. As additional +consideration, the Company paid the licensor a licensing fee of $1,000,000 and +issued the licensor 428,743 shares of its previously unissued common stock with +a fair value of $1,608,000. The Company has recorded the license as an +intangible asset for the value of the cash and common stock issued pursuant to +the License Agreement and is amortizing this over the remaining term of the +license. The shares are subject to various contractual and other holding period +requirements. In addition, the Company has agreed to grant the licensor not less +than 50,000 stock options on the Company's common stock annually, with an +exercise price at the market value on the date of grant. +In 1999, the Company received an option to buy Teva and virtually all of +its assets, including all worldwide rights to all Teva products. The Company's +original option was exercisable during the period from January 1, 2000 to +December 31, 2001 or during the period from January 1, 2006 to December 31, +2008. On January 22, 2001, the Company amended its option agreement, extending +the first option window for two +42 +43 +DECKERS OUTDOOR CORPORATION +AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) +DECEMBER 31, 2000 AND 1999 +additional years. As a result, the first option window is January 1, 2000 +through December 31, 2003. The Company agreed to pay Mr. Thatcher $1.6 million +as consideration for this extension. The option price is based on formulas tied +to net sales of Teva products and varies depending on when the option is +exercised. For the first option period, the option price is for an amount equal +to the greater of (i) $61.6 million or (ii) 75% of the largest calendar year +revenues since January 1, 2000 for the Teva brand, plus $1.6 million. In +addition, the Company would issue to Mr. Thatcher 100,000 shares of common stock +and options to purchase 100,000 shares of common stock. The purchase price for +the second option period, January 1, 2006 to December 31, 2008, is equal to 110% +of the average of the aggregate sales for all Teva products for the two calendar +years since January 1, 2000 with the highest aggregate net sales. If the Company +does not exercise its option to acquire Teva, the licensor has the option to +acquire the Teva distribution rights from the Company for the period from +January 1, 2010 to December 31, 2011, the end of the license term, and the +option price is based on a formula tied to the Company's earnings before +interest, taxes, depreciation and amortization. The Company is currently +evaluating the possibility of exercising the option in the January 1, 2000 to +December 31, 2003 period. The payment of the purchase price must be completed +within 90 days of the exercise of the purchase option. If the Company exercises +its purchase option, but subsequently fails to complete the purchase within the +90-day payment period, the purchase option and the option agreement will +automatically be terminated. +Royalty expense related to Teva sales is included in selling, general and +administrative expenses in the accompanying consolidated financial statements +and was $4,307,000, $4,128,000 and $3,657,000 during the years ended December +31, 2000, 1999 and 1998, respectively. Advertising expense, which is included in +selling, general and administrative expenses in the accompanying consolidated +financial statements, related to Teva sales was $4,829,000, $3,378,000 and +$3,261,000 during the years ended December 31, 2000, 1999 and 1998, +respectively. +In the event that Deckers exercises its option to acquire Teva, Deckers +would eliminate the royalty expense it currently pays on Teva footwear sales and +would then own all Teva rights and assets worldwide. +(8) COMMITMENTS AND CONTINGENCIES +The Company leases office facilities under operating lease agreements which +expire through December 2003. +Future minimum commitments under the lease agreements are as follows: +Year ending December 31: +2001................................................... $ 930,000 +2002................................................... 648,000 +2003................................................... 650,000 +---------- +$2,228,000 +========== +Total rent expense for the years ended December 31, 2000, 1999 and 1998 was +approximately $1,072,000. $1,091,000 and $1,122,000, respectively. +An action was brought against the Company in 1995 by Molly Strong-Butts and +Yetti by Molly, Ltd. (collectively, Molly) which alleged, among other things, +that the Company violated a certain nondisclosure agreement and obtained +purported trade secrets regarding a line of winter footwear which Deckers +stopped producing in 1994. A jury verdict was obtained against the Company in +March 1999 aggregating $1,785,000 for the two plaintiffs. The Company is +appealing the verdict and continues to believe such claims are without merit. +The Company intends to continue contesting this claim vigorously. The Company, +based on advice +43 +44 +DECKERS OUTDOOR CORPORATION +AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) +DECEMBER 31, 2000 AND 1999 +from legal counsel, does not anticipate that the ultimate outcome will have a +material adverse effect upon its financial condition, results of operations or +cash flows. +The European Commission has enacted antidumping duties of 49.2% on certain +types of footwear imported into Europe from China and Indonesia. Dutch Customs +has issued an opinion to the Company that certain popular Teva styles are +covered by this antidumping duty legislation. During the year, the Commission +added explanatory language that more clearly identified shoe types which would +be subject to antidumping duties. The Company believes that based on the new +language it is probable that the Company will not prevail in its appeal. +Therefore, the Company has provided $400,000 which is the Company's estimate of +its exposure for antidumping levies. If Customs determines that these styles are +covered by the newly revised legislation, the duty amounts could cause such +products to be too costly to import into Europe from China in the future. As a +precautionary measure, the Company has obtained, and is using, alternative +sourcing for the potentially impacted products from sources outside of China in +an effort to reduce the potential risk in the future. +The Company is currently involved in various other legal claims arising +from the ordinary course of business. Management does not believe that the +disposition of these matters will have a material effect on the Company's +financial position or results of operations. +(9) BUSINESS SEGMENTS, CONCENTRATION OF BUSINESS AND CREDIT RISK AND SIGNIFICANT +CUSTOMERS +The Company's accounting policies of the segments below are the same as +those described in the summary of significant accounting policies, except that +the Company does not allocate interest, income taxes or unusual items to +segments. The Company evaluates performance based on net revenues and profit or +loss from operations. The Company's reportable segments are strategic business +units which are responsible for the worldwide operations of each of its brands. +They are managed separately because each business requires different marketing, +research and development, design, sourcing and sales strategies. In 2000, the +Company revised the structure of its reporting for business segments to include +the worldwide operations for each of the brands, whereas the previous reporting +structure included only the domestic operations of the brands. As a +44 +45 +DECKERS OUTDOOR CORPORATION +AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) +DECEMBER 31, 2000 AND 1999 +result, all amounts for the years ended December 31, 1999 and 1998 have been +restated to conform to the 2000 presentation. Business segment information is +summarized as follows: +2000 1999 1998 +------------ ----------- ----------- +Sales to external customers: +Teva..................................... $ 79,732,000 80,963,000 68,870,000 +Simple................................... 16,328,000 15,529,000 20,159,000 +Ugg...................................... 15,310,000 12,104,000 10,873,000 +Other.................................... 2,368,000 2,503,000 3,632,000 +------------ ----------- ----------- +$113,738,000 111,099,000 103,534,000 +============ =========== =========== +Earnings (loss) from operations: +Teva..................................... $ 10,984,000 5,566,000 452,000 +Simple................................... 122,000 1,134,000 (2,421,000) +Ugg...................................... 1,316,000 (116,000) (620,000) +Other.................................... 208,000 166,000 (209,000) +------------ ----------- ----------- +$ 12,630,000 6,750,000 (2,798,000) +============ =========== =========== +Depreciation and amortization: +Teva..................................... $ 818,000 526,000 542,000 +Simple................................... 208,000 213,000 276,000 +Ugg...................................... 642,000 635,000 635,000 +Other.................................... 12,000 22,000 25,000 +Unallocated.............................. 1,260,000 1,730,000 1,160,000 +------------ ----------- ----------- +$ 2,940,000 3,126,000 2,638,000 +============ =========== =========== +Capital expenditures: +Teva..................................... $ 393,000 3,000 113,000 +Simple................................... 71,000 -- 18,000 +Ugg...................................... 63,000 -- -- +Other.................................... 1,000 15,000 5,000 +Unallocated.............................. 1,795,000 929,000 1,780,000 +------------ ----------- ----------- +$ 2,323,000 947,000 1,916,000 +============ =========== =========== +2000 1999 +----------- ---------- +Total assets from reportable segments: +Teva..................................................... $25,682,000 29,304,000 +Simple................................................... 10,684,000 8,273,000 +Ugg...................................................... 25,668,000 26,507,000 +Other.................................................... 1,835,000 1,776,000 +----------- ---------- +$63,869,000 65,860,000 +=========== ========== +The earnings (loss) from operations includes an allocation of corporate +overhead costs to the business segments, based on the ratio of each segment's +net sales to total net sales. +45 +46 +DECKERS OUTDOOR CORPORATION +AND SUBSIDIARIES +NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) +DECEMBER 31, 2000 AND 1999 +Reconciliations of total assets from reportable segments to the +consolidated financial statements are as follows: +2000 1999 +----------- ---------- +Total assets for reportable segments....................... $63,869,000 65,860,000 +Elimination of intersegment payables....................... 84,000 474,000 +Unallocated refundable income taxes and deferred tax +assets................................................... 2,486,000 2,284,000 +Other unallocated corporate assets......................... 11,273,000 4,864,000 +----------- ---------- +Consolidated total assets........................ $77,712,000 73,482,000 +=========== ========== +The Company sells its footwear products principally to customers throughout +the United States. The Company also sells its footwear products to foreign +customers located in Europe, Canada, Australia and Asia, among other regions. +Export sales to unaffiliated customers were 27.4%, 26.0% and 23.4% of net sales +for the years ended December 31, 2000, 1999 and 1998, respectively. Management +performs regular evaluations concerning the ability of its customers to satisfy +their obligations and records a provision for doubtful accounts based upon these +evaluations. For the years ended December 31, 2000, 1999 and 1998, the Company +had no single customer exceeding 10% of consolidated net sales. As of December +31, 2000 and 1999, the Company had no single customer exceeding 10% of trade +accounts receivable. +The Company's production and sourcing is concentrated primarily in the Far +East, with the vast majority being produced at several independent contractor +factories in China. The Company's operations are subject to the customary risks +of doing business abroad, including, but not limited to, currency fluctuations, +customs duties and related fees, various import controls and other nontariff +barriers, restrictions on the transfer of funds, labor unrest and strikes and, +in certain parts of the world, political instability. +(10) QUARTERLY SUMMARY OF INFORMATION (UNAUDITED) +Summarized unaudited quarterly financial data are as follows: +2000 +-------------------------------------------------------- +MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 +----------- ---------- ------------ ----------- +Net sales............................... $41,923,000 28,940,000 19,190,000 23,685,000 +Gross profit............................ 19,426,000 13,751,000 7,185,000 9,836,000 +Net earnings (loss)..................... 4,384,000 2,232,000 (395,000) 794,000 +=========== ========== ========== ========== +Net earnings (loss) per share: +Basic................................. $ .48 .25 (.04) .09 +Diluted............................... .47 .24 (.04) .08 +=========== ========== ========== ========== +1999 +-------------------------------------------------------- +MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 +----------- ---------- ------------ ----------- +Net sales............................... $38,532,000 31,847,000 18,440,000 22,280,000 +Gross profit............................ 17,110,000 13,715,000 5,767,000 8,456,000 +Net earnings (loss)..................... 2,245,000 1,668,000 (1,275,000) 246,000 +=========== ========== ========== ========== +Net earnings (loss) per share: +Basic................................. $ .26 .19 (.14) .03 +Diluted............................... .26 .19 (.14) .03 +=========== ========== ========== ========== +46 +47 +SCHEDULE II +DECKERS OUTDOOR CORPORATION +AND SUBSIDIARIES +VALUATION AND QUALIFYING ACCOUNTS +THREE-YEAR PERIOD ENDED DECEMBER 31, 2000 +BALANCE AT +BEGINNING OF BALANCE AT +DESCRIPTION PERIOD ADDITIONS DEDUCTIONS END OF PERIOD +----------- ------------ --------- ---------- ------------- +Year ended December 31, 1998: +Allowance for doubtful accounts................. $1,092,000 589,000 477,000 1,204,000 +Reserve for sales discounts..................... 256,000 1,053,000 655,000 654,000 +Reserve for inventory obsolescence.............. 1,568,000 2,543,000 1,221,000 2,890,000 +Allowance for doubtful note receivable.......... 1,500,000 -- -- 1,500,000 +========== ========= ========= ========= +Year ended December 31, 1999: +Allowance for doubtful accounts................. $1,204,000 1,820,000 1,211,000 1,813,000 +Reserve for sales discounts..................... 654,000 734,000 1,098,000 290,000 +Reserve for inventory obsolescence.............. 2,890,000 1,165,000 3,292,000 763,000 +Allowance for doubtful note receivable.......... 1,500,000 -- 1,500,000 -- +========== ========= ========= ========= +Year ended December 31, 2000: +Allowance for doubtful accounts................. $1,813,000 1,994,000 1,663,000 2,144,000 +Reserve for sales discounts..................... 290,000 1,007,000 589,000 708,000 +Reserve for inventory obsolescence.............. 763,000 1,807,000 1,372,000 1,198,000 +========== ========= ========= ========= +47 +48 +PART III +ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT +Information relating to Directors and Executive Officers of the Registrant +is set forth in the Company's definitive proxy statement relating to the +Registrant's 2001 annual meeting of shareholders, which will be filed pursuant +to Regulation 14A within 120 days after the end of the Company's fiscal year +ended December 31, 2000, and such information is incorporated herein by +reference. +ITEM 11. EXECUTIVE COMPENSATION +Information relating to Executive Compensation is set forth in the +Company's definitive proxy statement relating to the Registrant's 2001 annual +meeting of shareholders, which will be filed pursuant to Regulation 14A within +120 days after the end of the Company's fiscal year ended December 31, 2000, and +such information is incorporated herein by reference. +ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT +Information relating to Security Ownership of Certain Beneficial Owners and +Management is set forth in the Company's definitive proxy statement relating to +the Registrant's 2001 annual meeting of shareholders, which will be filed +pursuant to Regulation 14A within 120 days after the end of the Company's fiscal +year ended December 31, 2000, and such information is incorporated herein by +reference. +ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS +Information relating to Certain Relationships and Related Transactions is +set forth in the Company's definitive proxy statement relating to the +Registrant's 2001 annual meeting of shareholders, which will be filed pursuant +to Regulation 14A within 120 days after the end of the Company's fiscal year +ended December 31, 2000, and such information is incorporated herein by +reference. +48 +49 +PART IV +ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K +(a) Consolidated Financial Statements and Schedules required to be filed +hereunder are indexed on page 28 hereof. +(b) Reports on Form 8-K. None. +(c) Consolidated Financial Statements and Schedules required to be filed +hereunder are indexed on page 28 hereof. +(d) Exhibits +EXHIBIT +------- +2.1 Certificate of Ownership and Merger Merging Deckers +Corporation into Deckers Outdoor Corporation. (Exhibit 2.1 +to the Registrant's Registration Statement on Form S-1, File +No. 33-67248 and incorporated by reference herein) +3.1 Amended and Restated Certificate of Incorporation of Deckers +Outdoor Corporation. (Exhibit 3.1 to the Registrant's +Registration Statement on Form S-1, File No. 33-67248 and +incorporated by reference herein) +3.2 Restated Bylaws of Deckers Outdoor Corporation. (Exhibit 3.2 +to the Registrant's Registration Statement on Form S-1, File +No. 33-67248 and incorporated by reference herein) +10.1 1993 Employee Stock Incentive Plan. (Exhibit 99 to the +Registrant's Registration Statement on Form S-8, File No. +33-47097 and incorporated by reference herein) +10.2 Form of Incentive Stock Option Agreement under 1993 Employee +Stock Incentive Plan. (Exhibit 10.9 to the Registrant's +Registration Statement on Form S-1, File No. 33-67248 and +incorporated by reference herein) +10.3 Form of Non-Qualified Stock Option Agreement under 1993 +Employee Stock Incentive Plan. (Exhibit 10.10 to the +Registrant's Registration Statement on Form S-1, File No. +33-67248 and incorporated by reference herein) +10.4 Form of Restricted Stock Agreement. (Exhibit 10.11 to the +Registrant's Registration Statement on Form S-1, File No. +33-67248 and incorporated by reference herein) +10.5 Employment Agreement with Douglas B. Otto. (Exhibit 10.13 to +the Registrant's Registration Statement on Form S-1, File +No. 33-67248 and incorporated by reference herein) +10.6 First Amendment to Employment Agreement with Douglas B. +Otto. (Exhibit 10.14 to the Registrant's Registration +Statement on Form S-1, File No. 33-67248 and incorporated by +reference herein) +10.7 Second Amendment to Employment Agreement with Douglas B. +Otto. (Exhibit 10.15 to the Registrant's Registration +Statement on Form S-1, File No. 33-67248 and incorporated by +reference herein) +10.8 Third Amendment to Employment Agreement with Douglas B. +Otto. (Exhibit 10.30 to the Registrant's Registration +Statement on Form S-1, File No. 33-67248 and incorporated by +reference herein) +10.9 Agreement for Sales of Assets, dated January 26, 1995, +between Ken and Nancy Young and Deckers Acquisition +Corporation. (Exhibit 10.36 to the Registrant's Form 10-K +for the period ended December 31, 1994 and incorporated by +reference herein) +10.10 Deckers Outdoor Corporation 1995 Employee Stock Purchase +Plan. (Exhibit 4.4 to the Registrant's Registration +Statement on Form S-8, File No. 33-96850 and incorporated by +reference herein) +10.11 Amended Compensation Plan for Outside Members of the Board +of Directors. (Exhibit 10.42 to the Registrant's Form 10-Q +for the period ended September 30, 1996 and incorporated by +reference herein) +49 +50 +EXHIBIT +------- +10.12 Extension Agreement to Employment Agreement with Douglas B. +Otto. (Exhibit 10.36 to the Registrant's Form 10-K for the +period ended December 31, 1996 and incorporated by reference +herein) +10.13 Limited Recourse Secured Promissory Note between Diana M. +Wilson and Deckers Outdoor Corporation, dated April 18, +1997. (Exhibit 10.38 to the Registrant's Form 10-Q for the +period ended March 31, 1997 and incorporated by reference +herein) +10.14 Stock Pledge Agreement between Diana M. Wilson and Deckers +Outdoor Corporation, dated April 18, 1997. (Exhibit 10.39 to +the Registrant's Form 10-Q for the period ended March 31, +1997 and incorporated by reference herein) +10.15 Shareholder Rights Agreement, dated as of November 12, 1998. +(Exhibit 10.39 to the Registrant's Form 10-Q for the period +ended September 30, 1998 and incorporated by reference +herein) +10.16 Loan and Security Agreement by and among Congress Financial +Corporation (Western) and Deckers Outdoor Corporation, +Deckers Outdoor Corporation International, Simple Shoes, +Inc., Ugg Holdings, Inc. and Heirlooms, Inc., dated January +21, 1999. (Exhibit 10.40 to the Registrant's Form 10-K for +the period ended December 31, 1998 and incorporated by +reference herein) +10.17 *Teva License Agreement, By and Between Mark Thatcher and +Deckers Outdoor Corporation, dated June 7, 1999. (Exhibit +10.41 to the Registrant's Form 10-Q for the period ended +June 30, 1999 and incorporated by reference herein) +10.18 *Intellectual Property Option Agreement, By and Between Mark +Thatcher, an Individual, and Deckers Outdoor Corporation, a +Delaware Corporation, dated June 7, 1999. (Exhibit 10.42 to +the Registrant's Form 10-Q for the period ended June 30, +1999 and incorporated by reference herein) +10.19 First Amendment to Intellectual Property Option Agreement +between Deckers Outdoor Corporation and Mark Thatcher, dated +January 22, 2001. +21.1 Subsidiaries of Registrant. +23.1 Independent Auditors' Consent. +--------------- +* Certain information in this Exhibit was omitted and filed separately with the +Securities and Exchange Commission pursuant to a granted confidential +treatment request as to the omitted portions of the Exhibit. +50 +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) +Date: March 30, 2001 +/s/ DOUGLAS B. OTTO +-------------------------------------- +Douglas B. Otto +Chief Executive Officer +Pursuant to the requirements of the Securities Exchange Act of 1934, this +report has been signed below by the following persons on behalf of the +Registrant and in the capacities and on the dates indicated. +/s/ DOUGLAS B. OTTO Chairman of the Board +--------------------------------------------------- and Chief Executive Officer +Douglas B. Otto +/s/ M. SCOTT ASH Chief Financial Officer +--------------------------------------------------- (Principal Financial and Accounting +M. Scott Ash Officer) +/s/ GENE E. BURLESON Director +--------------------------------------------------- +Gene E. Burleson +/s/ JOHN M. GIBBONS Director +--------------------------------------------------- +John M. Gibbons +/s/ REX A. LICKLIDER Director +--------------------------------------------------- +Rex A. Licklider +/s/ KARL F. LOPKER Director +--------------------------------------------------- +Karl F. Lopker +51 \ No newline at end of file diff --git a/raw/filings/0000910521/2000/0000950148-01-000493/filing_metadata.csv b/raw/filings/0000910521/2000/0000950148-01-000493/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..05fff6e0ff056417b130bc1aca70a19e0f7c28b0 --- /dev/null +++ b/raw/filings/0000910521/2000/0000950148-01-000493/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000910521,DECK,DECKERS OUTDOOR CORP,10-K,2001-03-30,2000-12-31,2001-03-30T05:00:00.000Z,0000950148-01-000493,v71055e10-k.txt,FORM 10-K,210038,0,0,https://www.sec.gov/Archives/edgar/data/910521/000095014801000493/v71055e10-k.txt,https://www.sec.gov/Archives/edgar/data/910521/000095014801000493/,2000,2000,1 diff --git a/raw/filings/0000910521/2000/0000950148-01-000493/item1.txt b/raw/filings/0000910521/2000/0000950148-01-000493/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..e5c12454619f016f1d144be64fce2875fa51ac4f --- /dev/null +++ b/raw/filings/0000910521/2000/0000950148-01-000493/item1.txt @@ -0,0 +1,984 @@ +ITEM 1. BUSINESS +GENERAL +The Company builds niche products into global lifestyle brands by designing +and marketing innovative, functional and fashion-oriented footwear, developed +for both high performance outdoor activities and everyday casual lifestyle use. +Currently, the Company offers three primary product lines under the following +recognized brand names: Teva(R) -- high-performance sports sandals and rugged +outdoor and casual footwear; Simple(R) -- innovative shoes that combine the +comfort elements of athletic footwear with casual styling; and Ugg(R) -- +authentic sheepskin boots and other footwear. Teva is a registered trademark of +Mark Thatcher, the inventor and licensor of Teva Sport Sandals. Simple and Ugg +are registered trademarks of the Company and its subsidiaries. All of the +Company's footwear possess the common features of high quality with a primary +focus on functionality and comfort. In 2000, the Company sold approximately +4,265,000 pairs of footwear. Revenues from sales (domestic and international) of +Teva products have been $79,732,000, $80,963,000 and $68,870,000 during 2000, +1999 and 1998, representing 70.1%, 72.9% and 66.5% of net sales, respectively. +For financial information regarding the Company's industry segments, see note 9 +to the accompanying consolidated financial statements. +MARKET OVERVIEW +The casual, outdoor and athletic footwear market is comprised of footwear +worn for casual everyday use and for outdoor and athletic activities such as +hiking, boating, basketball, tennis, fitness and jogging. The market for such +footwear has grown significantly during the last decade. The Company believes +that the principal reasons for the growth in sales of such footwear have been +the growing acceptance of athletic footwear as casual wear and the growing +acceptance of casual wear, in general, including the increasing casualization of +the workplace, increasingly active consumer lifestyles and the growing emphasis +on comfort. +Over the last few years the overall footwear market has seen significant +growth of the outdoor segment as well as the growing emphasis on comfort. +Outdoor footwear includes shoes, boots and sandals for outdoor recreational +activities such as hiking, river rafting, camping and casual wear. Companies +engaged in the outdoor footwear market include Nike, Adidas, Timberland, +Columbia and Salomon. The Company believes that the growth in outdoor footwear +is driven by several factors including a general shift in consumer preferences +and lifestyles to include more outdoor, sports and recreational activities such +as hiking and camping. In addition, the increasing popularity of extreme sports, +including skateboarding, snowboarding, kayaking and river rafting, among others, +has created an additional emphasis and awareness of outdoor activities and +lifestyles. As consumers engage in outdoor activities, they typically desire +footwear specifically designed for these purposes, yet they demand the same +level of quality and high performance that they have come to expect from +traditional athletic footwear. In addition, more consumers are turning to an +emphasis on casual and comfortable footwear and apparel, including the trend +toward casual workplaces. The Company believes that its products have benefited +from this growing trend and that its footwear addresses consumers' demands for +highly functional footwear that is durable as well as comfortable and +fashionable. +The casual, outdoor and athletic footwear markets are generally +characterized by a high level of recognition of brand names, logos and +trademarks. Unique and identifying features create brand awareness among +consumers and allow a favorable reputation to be transferred to new products. +The manufacture of casual, outdoor and athletic footwear is typically conducted +overseas through independent manufacturers. Casual and athletic footwear is +distributed through athletic footwear stores, department stores and specialty +retailers. Outdoor footwear is generally distributed through these channels as +well but is to a large extent distributed through outdoor specialty retailers. +Retailers may purchase footwear on a "futures" basis (orders placed at a +discount in advance of a season) or an "at once" basis (orders placed and filled +immediately). Futures orders allow the Company to more accurately predict its +manufacturing and sourcing needs. By placing futures orders, retailers are also +able to reduce the risk that the Company will be unable to meet their +3 +4 +delivery requirements. Retailers are generally encouraged to purchase goods on a +futures basis by receiving discounts or special payment terms not otherwise +available. +RISK FACTORS +This Annual Report on Form 10-K contains a variety of forward-looking +statements within the meaning of the Private Securities Litigation Reform Act of +1995 including forward-looking statements in this "Risk Factors" section, the +"Outlook" section, the last paragraph under "Liquidity and Capital Resources", +the discussion under "Seasonality" and other statements in this Annual Report. +These forward-looking statements relate to expectations regarding sales and +earnings per share, expectations regarding the Company's liquidity, the +potential impact of a non-renewal of the Teva license due to the Company's +potential failure to meet required sales minimums in 2004 or 2008, the potential +impact of certain litigation, the potential impact of economic factors and +conditions, the potential impact of the Company's dependence on foreign +manufacturers, the potential impact of competition, the potential impact of the +Company's dependence upon key personnel, the potential impact of weather +conditions, the potential impact of the possible acquisition of Teva and the +impact of seasonality on the Company's operations. These forward-looking +statements are based on the Company's expectations as of March 2001. No one +should assume that any forward-looking statement made by the Company will remain +consistent with the Company's expectations after the date the forward-looking +statement is made. The Company disclaims any obligation to update any such +factors or to publicly announce the results of any revisions to any of the +forward-looking statements contained in this Annual Report on Form 10-K. These +forward-looking statements involve known and unknown risks, uncertainties and +other factors which may cause the actual results, performance or achievement of +the Company, or industry results, to differ materially from any future results, +performance or achievements expressed or implied by such forward-looking +statements. The factors listed below represent certain important factors the +Company believes could cause such results to differ. These factors are not +intended to represent a complete list of the general or specific risks that may +affect the Company. Other risks may be significant, presently or in the future, +and the risks set forth below may affect the Company to a greater extent than +indicated. +Teva License Agreement +The Company has been selling its Teva line of sport sandals and other +footwear since 1985 pursuant to various exclusive licensing arrangements with +Mark Thatcher, the inventor of the Teva sport sandal and owner of the Teva +patents and trademark. In June 1999, the Company signed a new exclusive footwear +license agreement with Mr. Thatcher. The agreement became effective January 1, +2000 and continues through December 31, 2004. If minimum annual sales levels are +achieved in 2004, the license automatically renews for an additional four years, +through December 31, 2008. If minimum annual sales levels are achieved in 2008, +the license automatically renews again through December 31, 2011. However, if +the minimum annual sales levels are not achieved in 2004 or 2008, the license +expires and the Company will no longer be able to sell Teva footwear. These +required minimum annual sales levels exceed the annual sales levels achieved by +the Company to date. Also, Mr. Thatcher may terminate the licensing agreement if +the Company breaches its obligations under the agreement. Sales of Teva footwear +and apparel accounted for approximately 70.1%, 72.9% and 66.5% of the Company's +net sales for fiscal years 2000, 1999 and 1998, respectively. The termination of +the license would have a material adverse effect on the Company's results of +operations. +Brand Strength; Changes in Fashion Trends +The Company's success is largely dependent on the continued strength of the +Teva, Simple and Ugg brands (collectively, "Deckers Brands") and on its ability +to anticipate the rapidly changing fashion tastes of footwear customers and to +provide merchandise that appeals to their preferences in a timely manner. There +can be no assurance that consumers will continue to prefer the Deckers Brands or +that the Company will respond in a timely manner to changes in consumer +preferences or that the Company will successfully introduce new models and +styles of footwear. Achieving market acceptance for new products will also +likely require substantial marketing and product development efforts and the +expenditure of significant funds to +4 +5 +create consumer demand. Decisions with respect to product designs often need to +be made many months in advance of the time when consumer acceptance can be +determined. As a result, the Company's failure to anticipate, identify or react +appropriately to changes in styles and features could lead to, among other +things, excess inventories and higher markdowns and lower gross margins due to +the necessity of providing discounts to retailers. Conversely, failure by the +Company to anticipate consumer demand could result in inventory shortages, which +can adversely affect the timing of shipments to customers, negatively impacting +retailer and distributor relationships and diminishing brand loyalty. The +failure to introduce new products that gain market acceptance would have a +material adverse effect on the Company's business, financial condition and +results of operations, and could adversely affect the image of the Deckers +Brands. +Inventory Risk +The footwear industry has relatively long lead times for design and +production of product and, thus, the Company must commit to production tooling +and to production in advance of orders. In addition, the industry is highly +subject to fashion risks and changes in consumer preferences. If the Company +fails to accurately forecast consumer demand, or if there are changes in +consumer preference or market demand after the Company has made such production +commitments, the Company may encounter difficulty in filling customer orders or +in liquidating excess inventory, which may have an adverse effect on the +Company's sales, margins and brand image. +Quality and Performance +In response to consumer demand, the Company also uses certain specialized +materials in its footwear. The failure of products using such materials to +perform to the Company's specifications or customer satisfaction could result in +a higher rate of customer returns and could adversely affect the image of the +Deckers Brands, which could have a material adverse effect on the Company's +business, financial condition and results of operations. +Economic Cyclicality and Footwear Retailing +The footwear industry historically has been subject to cyclical variation +and can be negatively impacted by decreased consumer spending or softness in the +retail market. This cyclicality could adversely affect the Company's business. +In addition, various retailers, including some of the Company's customers, have +experienced financial difficulties during the past several years, thereby +increasing the risk that such retailers may not pay for the Company's products +in a timely manner. No assurance can be given that the Company's bad debt +expense will not increase relative to net sales in the future. Any significant +increase in the Company's bad debt expense relative to net sales would adversely +impact the Company's net earnings and cash flow and could affect the Company's +ability to pay its obligations as they become due. +Dependence on Foreign Manufacturers +Virtually all of the Deckers footwear products are manufactured by third +party suppliers in the Far East, Australia and New Zealand, with the vast +majority of production occurring in China. There can be no assurance that the +Company will not experience difficulties with such manufacturers, including +reduction in the availability of production capacity, errors in complying with +product specifications, inability to obtain sufficient raw materials, +insufficient quality control, failure to meet production and delivery deadlines +or increases in manufacturing costs. In addition, if the Company's relationship +with any of its manufacturers were to be interrupted or terminated, alternative +manufacturing sources will have to be located. The establishment of new +manufacturing relationships involves numerous uncertainties, and there can be no +assurance that the Company would be able to obtain alternative manufacturing +sources on terms satisfactory to it. If a change in its suppliers becomes +necessary, the Company would likely experience increased costs, as well as +substantial disruption and a resulting loss of sales. +Foreign manufacturing is subject to a number of risks, including work +stoppage, transportation delays and interruptions, political instability, +foreign currency fluctuations, changing economic conditions, expropriation, +5 +6 +nationalization, imposition of tariffs, import and export controls and other +non-tariff barriers (including quotas), restrictions on the transfer of funds, +environmental regulation and other changes in governmental policies. The Company +may also experience general risks associated with managing operations +effectively and efficiently from a far distance and understanding and complying +with local laws, regulations and customs. There can be no assurance that such +factors will not materially adversely affect the Company's business, financial +condition and results of operations. +Products manufactured overseas and imported into the United States and +other countries are subject to duties collected by the Customs Service in the +applicable country. Customs information submitted by the Company is subject to +review by the Customs Service. The Company is unable to predict whether +additional customs duties, quotas or restrictions may be imposed on the +importation of its products in the future. The enactment of any such duties, +quotas or restrictions could result in increases in the cost of such products +generally and might adversely affect the sales or profitability of the Company. +In 1997, the European Commission enacted anti-dumping duties of 49.2% on +certain types of footwear imported into Europe from China and Indonesia. Dutch +Customs has issued an opinion to the Company that certain popular Teva styles +are covered by this anti-dumping duty legislation. The Company has been +contesting the opinion and is working with Dutch Customs to resolve the +situation. The Company has since obtained, and is using, alternative sourcing +for the potentially impacted products from sources outside of China in an effort +to reduce the potential risk in the future. In the event that Dutch Customs +makes a final determination that the anti-dumping provisions are applicable, the +Company would have an exposure for prior unpaid anti-dumping duties during 1997 +of approximately $400,000. Recently, the European Commission added an +explanatory note to the anti-dumping legislation which effectively strengthened +its position. As a result of this recent development, the Company recorded a +$400,000 charge to selling, general and administration expenses to accrue for +the potential loss on this matter during the year ended December 31, 2000. +Competition and Infringing Products +The outdoor and footwear industries are both highly competitive, and the +recent growth in the markets for sports sandals and casual footwear has +encouraged the entry of many new competitors into the marketplace as well as +increased competition from established companies. Many of the Company's +competitors have substantially greater financial, distribution and marketing +resources, as well as greater brand awareness in the footwear market, than the +Company. In addition, the general availability of offshore manufacturing +capacity allows rapid expansion by competitors and new market entrants. The +Company believes that it has been able to compete successfully because of the +brand recognition, quality and selective distribution of its products. From time +to time, the Company also discovers products in the marketplace that infringe +upon patent and trademark rights held by or licensed to the Company. Under the +Company's licensing arrangement with the licensor of the Teva products, Mark +Thatcher, Mr. Thatcher initially may bring proceedings to halt infringement of +the Teva patents and trademark. If Mr. Thatcher elects not to bring such +proceedings, the Company may initiate such proceedings, with the prior written +consent of Mr. Thatcher. To date, Mr. Thatcher has vigorously pursued +infringements following discovery. To the extent permitted in its agreement with +Mr. Thatcher, the Company will vigorously pursue infringements in the event Mr. +Thatcher elects not to do so. However, if Mr. Thatcher or the Company is +unsuccessful in challenging a third party's products on the basis of patent and +trademark infringement, continued sales of such competing products by third +parties could adversely impact the Company's business, financial condition and +results of operations. See "Business -- Competition" and "Business -- Legal +Proceedings." +Dependence on Key Personnel +The Company's continued success will depend upon its ability to retain +Douglas B. Otto, its Chairman of the Board and Chief Executive Officer, Peter +Benjamin, its President and Chief Operating Officer and a core group of key +executive officers and employees. Mr. Otto and Mr. Benjamin have employment +agreements with the Company through 2001 and 2002, respectively. Mr. Otto's +agreement prohibits him from competing with the Company for one year following +termination. However, none of the other executive officers is subject to +6 +7 +agreements that restrict his or her ability to compete with the Company +following termination of employment. The Company believes that its future +success will depend in large part on its ability to attract and retain highly +skilled personnel. Competition for such personnel is intense, and there can be +no assurance that the Company will be successful in attracting and retaining +such personnel. The loss of certain key employees or the Company's inability to +attract and retain other qualified employees could have an adverse impact on the +Company's business. +Intellectual Property +The Company believes that its trademarks, technologies and designs are of +great value. From time to time, the Company may be the subject of litigation +challenging its ownership of certain intellectual property. Loss of the +Company's Simple or Ugg trademark rights or the ability to use the licensed Teva +trademarks could have a serious impact on the Company's business. Because of the +importance of such intellectual property rights, the Company's business is +subject to the risk of counterfeiting, parallel trade or intellectual property +infringement. +Economic Factors +The Company's business is subject to economic conditions in the Company's +major markets, including, without limitation, recession, inflation, general +weakness in retail markets and changes in consumer purchasing power and +preferences. Adverse changes in such economic factors could have a negative +effect on the Company's business. +Weather Conditions +Sales of the Company's products, particularly those under the Teva and Ugg +lines, are very sensitive to weather conditions. Extended periods of unusually +cold weather during the spring and summer could adversely impact demand for the +Company's Teva line. Likewise, unseasonably warm weather during the fall and +winter months could adversely impact demand for the Company's Ugg product line. +Substantial Ownership of the Company +At December 31, 2000, Douglas B. Otto and all executive officers and +directors of the Company, as a group, owned approximately 35.9% and 46.7%, +respectively, of the outstanding shares of the Company's Common Stock. Due to +such ownership position, Mr. Otto, whether acting alone or together with one or +more of the other executive officers of the Company, would likely be able to +control the affairs and policies of the Company and would likely be able to +elect a sufficient number of directors to control the Company's Board of +Directors and to approve or disapprove any matter submitted to a vote of the +stockholders. The ownership positions of Mr. Otto and the executive officers of +the Company, as a group, together with the anti-takeover effects of certain +provisions in the Delaware General Corporation Law (the "DGCL"), in the +Company's Certificate of Incorporation and Bylaws, and in the Company's +shareholder rights plan would likely have the effect of delaying, deferring or +preventing a change in control of the Company. Such factors could have a +negative effect on the market price of the Company's Common Stock. +The Company adopted a shareholder rights plan in 1998 pursuant to a +shareholder rights agreement (the Rights Agreement) to protect stockholders +against unsolicited attempts to acquire control of the Company that do not offer +what the Company believes to be an adequate price to all stockholders. As part +of the plan, the Board of Directors of the Company declared a dividend of one +preferred share purchase right (a Right) for each outstanding share of common +stock of the Company (the Common Shares). +The dividend was payable to stockholders of record on December 1, 1998 (the +Record Date). In addition, one Right shall be issued with each Common Share that +becomes outstanding (i) between the Record Date and the earliest of the +Distribution Date, the Redemption Date and the Final Expiration Date (as such +terms are defined in the Rights Agreement) or (ii) following the Distribution +Date and prior to the Redemption Date or Final Expiration Date, pursuant to the +exercise of stock options or under any employee plan or arrangement or upon the +exercise, conversion or exchange of other securities of the Company, which +options +7 +8 +or securities were outstanding prior to the Distribution Date, in each case upon +the issuance of the Company's common stock in connection with any of the +foregoing. Each Right entitles the registered holder to purchase from the +Company one one-hundredth of a share of Series B Junior Participating Preferred +Stock, par value $0.01 per share (the Preferred Shares), of the Company, at a +price of $50.00, subject to adjustment. +The rights have no voting power and expire on November 11, 2008. The rights +may be redeemed by the Company for $.01 per right until the right becomes +exercisable. +BUSINESS STRATEGY +Management's mission is to build niche products into global brands and its +business strategy is to offer diverse lines of footwear that emphasize +functionality, quality, comfort and technical performance tailored to a variety +of activities and demographic groups. Specifically, the Company's business +strategy emphasizes the following elements: +Introduce New Products under Existing Brands. The Company intends to +leverage consumer recognition of its existing brands by developing and +introducing additional innovative footwear products that satisfy the Company's +high standards of practicality, comfort and quality. The Company believes the +introduction of additional products at a variety of price points, such as the +range of new models in its Teva, Simple and Ugg lines which were offered in the +Company's 2000 product offerings, have broadened the Company's customer base, +further diversified the Company's product lines, and helped reduce the effects +of seasonality on the Company's sales. See "Management's Discussion and Analysis +of Financial Condition and Results of Operations -- Seasonality." In Spring +2000, the Company successfully launched the Trail Wraptor and Wraptor Technology +into the running market and then in the fall of 2000 entered the hiking market +with the Summit series consisting of the Challenger, North Rim, and Quest models +which utilize the new Teva Wraptor Technology. The Quest quickly gained momentum +in the hiking market at key retail points for the Company. Expanding on the +acceptance of the Trail Wraptor running sandal and the Quest, the Company +launched the Road Wraptor, Women's Wraptor (runner) and Women's Quest hiker in +2001. The Company will also make a commitment to the women's market by expanding +its line of women's fitness walking sandals with the Kinetic Circuit, the +improved Pretty Rugged Nylon and expanded Leather Casual category. Also, the +Company is expanding its offering of water sport specific products in the XPD +Hydro category with the newly organized Team Teva, an elite squad of the world's +best male and female whitewater athletes. The Company will use Team Teva's +knowledge to expand its technical offerings in this category. As the Company +moves to the future, the Company plans to strengthen existing categories and +expand into new channels of distribution. The 2000 and 2001 Simple product lines +target consumers in the sixteen to twenty-five year old youth market. The line +focuses on lifestyle comfort based products such as clogs, sandals, casuals and +non-performance sneakers that are priced affordably. In 2000, the Company +expanded its Ugg product line beyond its heritage boots and slippers by adding a +variety of new, more streetwise and fashion-oriented products including clogs, +chukka boots, and apres ski boots, as well as cold weather-resistant boots with +water resistant leathers. +Pursue Additional Market Opportunities. Management intends to continue to +consider new markets for its existing line of products. For the years ended +December 31, 2000, 1999 and 1998 international net sales totaled $31,135,000, +$28,859,000 and $24,254,000, representing 27.4%, 26.0% and 23.4% of net sales, +respectively. Management believes that significant opportunities exist to market +its products abroad and intends to selectively expand its distribution +worldwide. To bolster these efforts, the Company has opened a Netherlands office +to service the European market and an office in Japan to service the Asian +market. +Acquire or Develop New Brands. The Company intends to continue to focus on +identifying and building new brands for growth. The Company has been successful +in the past in taking the concepts of entrepreneurs for innovative, fashionable +footwear targeted at niche markets and building the products into viable brands +and intends to continue to identify concepts for potential future niche products +which have the potential of developing into successful brands or product lines. +8 +9 +PRODUCTS +The Company currently offers three primary product lines: (1) Teva sport +sandals and footwear; (2) Simple casual footwear; and (3) Ugg sheepskin +footwear. Each of these lines, as well as individual models within these lines, +is designed to appeal to various demographic groups. The Company's footwear +products emphasize function, comfort and technical performance, and are suitable +for a variety of demanding outdoor and athletic activities, as well as casual +and everyday use. The Company's products are designed and marketed to promote a +high level of brand name recognition and consumer appeal by combining functional +and creative designs with quality materials and construction. The Teva footwear +and the Simple footwear lines are generally previewed twice per year, once in +the summer for deliveries that commence in the fall and once in the winter for +the following back to school and fall season. The Ugg line of sheepskin footwear +is generally previewed in the winter with most deliveries occurring in the +following fall and winter. The following sets forth a summary description of +each of the Company's primary product lines: +Teva Sport Sandals and Footwear. The Teva sport sandal is one of the first +sport sandals to be developed and is popular among outdoor enthusiasts and the +general public. The Company licenses the Teva patents and trademark from Mark +Thatcher, a professional river guide who invented the Teva sport sandal. The +terms of such licenses run through 2011, subject to achieving certain minimum +sales levels beginning in 2004. Certain styles of the Teva sport sandal +incorporate a proprietary strapping configuration ideally suited for outdoor +activities such as hiking, boating and river rafting. This strapping system +consists of high-quality nylon webbing or leather, is fully adjustable, and +holds the foot firmly to the sandal's durable, cellular rubber, molded EVA, +polyurethane or leather footbed. Teva sport sandals are extremely durable and +many of the styles are water resistant. The Spring 2001 line includes more than +100 different models designed for a variety of uses. The Wilderness Series, a +category of sandals built for high performance and rugged outdoor use, includes +16 models of men's and women's sandals. The Utility Series which includes +several of the most popular styles, has 11 styles that combine elements of sport +performance with casual everyday comfort. The Surf Series includes 11 styles of +slides and thongs offered in a variety of materials including leather, nylon, +suede and airmesh. The Spring 2001 line includes an expanded variety of +Precision sport sandals and footwear, including the newly-introduced Trail +Wraptor and Road Wraptor performance running sandals, a collection of Circuit +walking sandals, the Marine collection of boating and deck footwear, the Hydro +collection of water shoes and booties, and the newly introduced Summit +collection of hikers incorporating the Wraptor technology. Continuing on the +success of recent years, the Spring 2001 line includes 25 styles of men's and +women's leather casuals, including a variety of sandals, slides and clogs. The +Spring 2001 Children's category has been expanded to include 15 different styles +of nylon and leather sandals. The domestic manufacturer's suggested retail +prices for adult sizes of Spring 2001 Teva footwear products range from $19.95 +to $129.95. +Simple Casual Footwear. The Simple line consists of casual shoes that +combine the comfort and function of athletic footwear construction with the +simple, understated styling of "back-to-basics," casual lifestyle footwear. The +Simple product line includes a variety of comfortable, fashionable, basic shoes +for men and women including sneakers, sandals, slides, clogs and leather +casuals. The Spring 2001 collection reflects the Company's emphasis on a younger +target consumer in the sixteen to twenty-four year old age group. For Spring +2001, Simple is offering a total of 69 models including 32 styles for men and 37 +for women. The Spring 2001 line includes 21 styles of sneakers with leather and +suede uppers, 20 styles of sandals and thongs and 28 styles of leather casual +and clogs in a variety of colors. The domestic manufacturer's suggested retail +prices for adult sizes for the Spring 2001 line range from $29.99 to $99.99. +Ugg Sheepskin Footwear. Ugg is a line of authentic sheepskin footwear, +popularized in Australia in the 1960's and 1970's. These sheepskin boots, +slippers and other footwear styles have high-grade fleece linings which act as a +natural insulator, keeping feet warm and comfortable. The 2001 Ugg line offers a +range of 52 models of casual, fashionable and streetwise styles in various +colors, including several new styles of shoes and boots for men and women. The +2001 line includes several styles with new innovative fashionable uppers and +several styles with water resistant leather treatments to address more inclement +and cold weather conditions. The 2001 line also includes products designed for +more fashionable and functional everyday use in both warm and cold climates, +including several new styles in its successful Ultra, Birch, Solvang, +Adirondack, +9 +10 +Fluff and Slipper collections. The domestic manufacturer's suggested retail +prices for adult sizes for the Ugg line range from $50.00 to $275.00. +MARKETING AND DISTRIBUTION +The Company's products are currently distributed throughout the United +States by a network of approximately 41 independent sales representatives, +organized geographically, who make sales, visit retail stores to train personnel +and review sales of the Company's footwear on a periodic basis. Beginning in +2000, the Company added a separate dedicated independent sales force for the +Simple and Ugg brands as these products are sold through different distribution +channels and are targeted toward a different consumer than the Company's Teva +brand. The Company's sales managers for each brand manage their networks of +representatives, recruit experienced sales representatives in the industry and +coordinate sales to national accounts. The Company currently sells its products +internationally through independent distributors. The Company's goal is to +promote retail sales of its products at attractive profit margins for its +accounts through selective distribution and marketing, targeted toward distinct +groups of consumers. As a result of this approach, the Company's accounts have a +strong incentive to devote greater selling space to the Company's products, and +the Company is better able to assess consumer preferences, the future ordering +needs of its customers and inventory requirements. +The Company's principal domestic customers include specialty retailers, +upscale department stores, outdoor retailers and athletic footwear stores which +market products consistent with the Company's standards and, in the case of +Teva, have been approved by the Company's licensor. The Company's five largest +customers accounted for approximately 20.4% of the Company's net sales for the +year ended December 31, 2000, compared to 18.1% for the year ended December 31, +1999. No single customer accounted for more than 10% of the Company's net sales +for the years ended December 31, 2000 or 1999. +In order to encourage accounts to place orders early in the season the +Company has continued with a preseason discount program under which accounts are +offered discounts on preseason orders placed. The Company's strategy is to +emphasize this "futures" program, as compared to "at once" sales, in order to +stabilize its supply arrangements, reduce the risk of customer cancellations and +to benefit from the significant positive impact of the program on the Company's +inventory costs, sourcing schedule and allocation of marketing resources. +Consistent with prior years, the Company offered an early delivery program for +the spring 2001 season to be delivered the fourth quarter of 2000. This early +delivery program allows the Company to reduce the impact of peak warehouse +inventory levels during the spring and provides retailers the opportunity to +have earlier sell through, lengthening the retail selling season and increasing +the potential for inventory turns at retail. +Domestic deliveries generally originate from the Company's 126,000 square +foot warehouse facility in Ventura County, California. European deliveries +originate from a distribution center in the Netherlands, while all other +international deliveries originate from offshore factories. +ADVERTISING AND PROMOTION +The Company attempts to maximize the impact of its advertising, public +relations and promotional expenditures by utilizing media that provide high +visibility within targeted market segments. The Company's brand names are +generally advertised and promoted through a variety of consumer print +advertising campaigns in addition to highly visible editorial coverage in both +consumer and trade publications. Retail presence and "point of purchase" +materials along with production packaging provide additional visible brand +support. The Company's in-house marketing departments for each brand work +closely with targeted accounts in many aspects of these activities. +The Company continues to advertise its Teva brand through a national print +advertising campaign targeted at various different demographic groups. For its +core outdoor market, Teva advertises in several outdoor-related magazines, +including Backpacker, Outside, Kayak, Elevation, Paddler, and Climbing, among +others. In addition, to promote its newly introduced Wraptor running sandal, +Teva is advertising in Runner's World, Sports Network, and Walking Magazine, +among other publications. With the broadened appeal of the +10 +11 +Teva offerings, including the leather casual models, the Company has also +focused its print advertising toward more mainstream print publications, +including Shape, Maxim and Sailing, among others. +In order to maintain the Company's historically high visibility among core +outdoor enthusiasts such as professional river rafters, kayakers, mountain +bikers and rock climbers, Teva products are given or sold at professional +discounts to members of this group. In order to further bolster the loyalty of +these individuals, the Company offers a category called the "Wilderness Series," +incorporating the latest technological developments and highest quality +materials. The Company actively sponsors several of the world's best male and +female whitewater athletes. By outfitting and sponsoring these highly visible +athletes, the Company creates awareness among targeted consumers at relatively +low cost. In addition, the Company has traveling promotional and technical +representatives who represent the Teva brand at a wide variety of festivals, +outdoor sporting events and competitions. Teva is sponsoring over twenty events +in 2001, including the Teva Whitewater Series, a series of whitewater rafting +and kayaking events held between April and August at locations in California, +Oregon, Washington and Colorado, as well as France and Switzerland. Teva +sponsors and promotes these events in order to increase the Company's visibility +for its core outdoor consumer, in addition to the significant marketing +available to the more mainstream public with the increasing popularity of +viewing these extreme sports. In addition to the Teva Whitewater Series, the +Teva promotional team attends and sponsors other events including the Santa Cruz +Surf Kayak Festival in Santa Cruz, California, Grandma's Marathon in Duluth, +Minnesota, The Telluride Bluegrass Festival in Telluride, Colorado, and Reggae +on the River in Garberville, California, among others. +The Teva mobile promotions team attends the events in dedicated promotional +vehicles where they showcase Teva products and provide consumers with the +opportunity to see and try on the latest styles. +With respect to the Simple product line, the Company has continued its +national print advertising campaign. Simple print advertisements will appear in +alternative and youth focused consumer magazines such as Jane, Nylon and Lucky. +In addition, the marketing effort focuses around grass roots advertising +including advertising on billboards, website advertising and "Go Cards". A +rigorous public relations campaign will focus on obtaining magazine editorial +placement in addition to newspaper and television coverage. Recent public +relations coverage has appeared in Footwear News, Teen People, Nylon Magazine, +YM Magazine, Footwear Plus, Shape Magazine, Code Magazine and Surfing Girl. +These public relations efforts have also resulted in Simple products appearing +on television shows such as Friends, Ally McBeal, Dawson's Creek, Tucker and +MTV. +Simple's marketing efforts are performed internally by an in-house Simple +marketing team which works to promote the Simple brand positioning of being +"simple" and "down to earth". +In 2001, the Company plans to continue to build on the success of the Ugg +1999 and 2000 national print advertising campaigns. The Company continues to +target a luxury consumer who seeks high quality, luxurious and fashionable +products for cold weather. The Company expects to advertise Fall 2001 Ugg +products in upscale publications such as Vogue and O Magazine. +In November 2000, Ugg's were featured on the Oprah Winfrey Show as her +choice of one of ten gift-giving ideas for the holiday season and each member of +the studio audience received a free pair of Ugg boots on the air. The show aired +several times from the week before Thanksgiving through Christmas, providing the +Ugg brand with nationwide exposure. +In addition to this national advertising campaign, the Ugg brand is being +supported by national public relations and product placement efforts. In-house +marketing personnel work closely with a public relations firm and a product +placement agency to gain brand visibility in popular magazines, television shows +and feature films. Recent editorial coverage includes articles in magazines such +as Harper's Bazaar, In Style, Cosmopolitan, Marie Claire, Maxim, Jane, YM +Magazine, Shape, Self, O Magazine and Real Simple. Television coverage of Ugg +product includes shows such as Dharma and Greg, Once and Again, Dawson's Creek, +E.R., King of Queens, Will and Grace, Ally McBeal, 7th Heaven, Everybody Loves +Raymond, Two Guys and a Girl and Providence. These public relations efforts have +also resulted in Ugg product appearances in the following feature films: Hanging +Up, starring Meg Ryan, Lisa Kudrow and Diane Keaton; The Kid, +11 +12 +starring Bruce Willis and Lily Tomlin; Mission Impossible II, starring Tom +Cruise and Thandie Newton; Panic, starring William H. Macy and Neve Campbell; +Snow Day, starring Chevy Chase; and Dragonfly, starring Kevin Costner and Kathy +Bates. +In 2000, 1999 and 1998, the Company incurred $7,108,000, $5,602,000 and +$5,847,000 respectively, for advertising, marketing and promotional expenses. In +addition to these expenditures, the Company's 31 international distributors +spend additional amounts for marketing the Company's brands within their +respective territories. The Company is required under its Teva License Agreement +to spend a minimum amount for advertising and promoting Teva products, based on +a percentage of sales. In addition to the minimum contractual marketing +expenditures, the Company and the licensor have agreed to each contribute +annually a certain percentage of sales toward the promotion of the Teva brand +and trademark, with or without particular reference to individual Teva styles. +DESIGN AND PRODUCT DEVELOPMENT +The design and product development staff for each of the Company's brands +creates and introduces new innovative footwear products that are consistent with +the Company's standards of high quality, combined with comfort and +functionality. The Company was restructured in 1999 from a company organized by +functions to a company aligned by brand, with each brand as a separate profit +center. As part of this reorganization, the previously existing design +department was disbanded and reassigned to the Company's various brands. In +addition, much of the design is currently provided by independent design firms +which perform the design function on an outsourced basis. In doing so, the +Company was able to eliminate certain positions, obtain efficiencies and reduce +design and development costs considerably. As a result, research and development +costs aggregated $1,076,000, $1,607,000 and $2,393,000 in 2000, 1999 and 1998, +respectively, reflecting the operational efficiencies gained under this new +approach. +With respect to Teva, in order to ensure that the Company's high +performance technical products continue to satisfy the requirements of its +historical customer base of performance-oriented "core enthusiasts," the +Company's design staff solicits comments and feedback from its licensor and +professional outdoorsmen, as well as several of its retailers, including REI and +L.L. Bean. Certain models are modified and technical innovations are developed +in response to such comments and feedback. The Company adds new innovations, +components and styles to its product line continually. For example, the Company +recently designed and introduced its new Wraptor technology, a two-part system +with a continuous strap which travels under the arch and then crosses over the +instep to provide a snug, solid fit. This technology has been incorporated in +these Trail Wraptor and Road Wraptor running sandals, as well as the newly +introduced line of hikers. In addition, for added traction and durability, the +Company has incorporated Spider Rubber(TM) into several styles, including its +high performance Wilderness Series. +While Teva continues to develop high performance sport sandals by +continually updating and designing new styles for this category, the Company +also continues to increase its focus on the casual footwear market through its +Teva, Simple and Ugg brands. The Company continues to introduce and offer new +styles of leather and other casual footwear for men and women and has expanded +its offerings under its collection of Teva children's sandals for Spring 2001. +The Company has also added several new styles of clogs, sandals, sneakers and +leather casuals to its offerings under the Simple line for 2001. By monitoring +changes in consumer lifestyles and preferences and then focusing first on +function and practicality, the Company develops footwear designed to appeal to +quality-minded consumers seeking comfortable casual footwear. +In recent years, the Company has taken steps to update the Ugg products in +order to make them more functional for use in cold and wet climates. For +example, the popular Ultra styles of men's and women's boots have been updated +with new lug outsoles to improve traction. In addition, the 2001 Ugg line +includes several styles of its rugged Adirondack collection of foul weather +boots. New Ugg additions for 2001 include several new styles in its popular +Ultra collection and high-end Fluff collection, as well as new slippers and +shoes for everyday casual use. More fashionable and unique upper styles help to +differentiate Ugg from the low cost imitation brands. +12 +13 +Integral factors in the design and product development process include an +evaluation of the availability and cost of raw materials, the capabilities of +the factories that will manufacture products and the target retail cost of new +models and lines. The design and development staff works closely with brand +management to develop new styles of footwear and components for their various +product lines. Drawings and prototypes are utilized to produce samples of +proposed new concepts. Throughout the development process, members of the design +staff coordinate closely with each other and with the Company's product +development, manufacturing and sourcing personnel toward a common goal of +developing and sourcing a high-quality product that will be delivered on a +timely basis. The Company endeavors to minimize the risk of changing fashion +trends by offering a diverse line of functional products and closely monitoring +sales to its accounts after introduction. +PRODUCT SOURCING +The Company currently sources all of its Teva and Simple footwear and a +portion of its Ugg footwear from independent contract manufacturers in the Far +East. The Company imports the remainder of its Ugg footwear from independent +contract manufacturers in Australia and New Zealand. +In 1997 and 1998, the Company closed its California and Mexican +manufacturing facilities. As a result of the closure of these facilities, the +Company is no longer involved in the direct manufacture of footwear, but rather +sources completed footwear entirely from independent contractors. As the Company +continues to grow, it expects to continue to rely heavily on its independent +contractors for its sourcing needs. +The manufacturing of footwear by the Company's independent contractors is +performed in accordance with detailed specifications provided by the Company and +is subject to quality control standards. In efforts to ensure the production of +high quality products, many of the materials and components used in production +are purchased from independent suppliers designated by the Company. The Company +believes that its completed footwear as well as the various raw materials and +components used in the manufacture of the footwear, including rubber, leather, +nylon webbing and sheepskin, are generally available from multiple sources at +competitive prices. +The Company generally does not have any long-term agreements with the +manufacturers or suppliers of its products, but does business based on +individual purchase orders. +QUALITY CONTROL +The Company has instituted inspections and other procedures to satisfy the +high quality demanded by users of the Company's products. The Company's quality +assurance program includes inspection procedures at the factory level as well as +a final inspection upon arrival of product at the Company's distribution center. +The Company uses on-site inspectors at its independent suppliers who oversee the +production process and perform quality assurance inspections. In addition, the +products undergo further inspection procedures prior to being accepted at the +Company's distribution center. +LICENSES +Teva License. The Company has been selling its Teva line of sport sandals +and other footwear since 1985 pursuant to various license arrangements with Mark +Thatcher, the inventor of the Teva sport sandal and the owner of the Teva +patents and trademark. Mr. Thatcher owns seven United States patents on designs +used in Teva sport sandals and has a United States trademark registration for +the Teva mark. +On June 7, 1999, the Company signed a new license agreement (the "License +Agreement") for Teva, which became effective January 1, 2000. Under the License +Agreement, the Company has the exclusive worldwide rights for the manufacture +and distribution of Teva footwear through 2004. Apparel and other non-footwear +products are not covered by the License Agreement. The License Agreement is +automatically renewable through 2008 and through 2011 under two renewal options, +provided that minimum required sales levels are achieved. These minimum annual +sales levels are established at amounts which are in excess of the annual sales +levels which have been achieved to date. +13 +14 +As with the previous arrangement, the License Agreement provides for a +sliding scale of royalty rates, depending on sales levels, and includes +guaranteed minimum annual royalty amounts. Additionally, the License Agreement +provides for an increase in the required amount of marketing expenditures, +depending on sales levels and varying by territory. In addition to the minimum +contractual marketing expenditures, the Company and the licensor have agreed to +each contribute annually a certain percentage of sales toward the promotion of +the Teva brand and trademark, with or without particular reference to individual +Teva styles. +As additional consideration, the Company paid the licensor a licensing fee +of $1,000,000 and issued the licensor 428,743 shares of its previously unissued +common stock valued at $1,608,000. The Company has recorded the license as an +intangible asset equal to the cash and market value of the stock issued on the +date of the License Agreement. These shares are subject to various contractual +and other holding period requirements. In addition, the Company has agreed to +grant the licensor not less than 50,000 stock options on the Company's common +stock annually, at the market value on the date of grant. +The licensor retains the rights to approve the quality of the licensed +products produced, all marketing, advertising and promotional plans and +materials, and the distribution channels and customers to whom the Company can +sell the licensed products. In addition, the License Agreement provides for +minimum annual research and development spending levels for the Company with +respect to the Teva products and restricts the volume of closeouts and seconds +which the Company is able to sell each year. +The License Agreement provides that the licensor, in his sole discretion, +may take any action against parties believed to be infringing upon the +licensor's trademark, patents and other intellectual property. The licensor is +fully responsible for any legal and other costs incurred in such actions and is +entitled to any recovery resulting from the actions. The Company may not +participate in any such action or in any other action regarding the infringement +of the Teva intellectual property without the licensor's prior written consent. +In the event that the license term is automatically renewed beyond 2004, +the Company must achieve minimum annual sales levels for the years 2005 through +2011. These minimum annual sales levels are based upon certain percentages of +net sales in the preceding calendar year. If the Company is not able to achieve +the minimum annual sales levels for two years during a renewal term, the License +Agreement can be terminated at the option of the licensor. +During the term of the License Agreement, including the renewal terms, the +Company is prohibited from manufacturing, marketing, selling and distributing +any sandals other than Teva sandals. In addition, for the two years following +the termination of the License Agreement, the Company is prohibited from +manufacturing, marketing, selling and distributing sandals, in general. However, +the Company may continue to manufacture, market, sell and distribute all styles +and models of sandals offered under its Simple product line which existed as of +the date of the License Agreement as well as all styles subsequently approved by +the licensor. +The License Agreement can be terminated under several circumstances, if +they remain uncured for specific periods of time. These circumstances include +the following, among others: if either party becomes insolvent or bankrupt; if +the Company offers sandals which compete with the Teva products or otherwise +engages in activities which compete with the Teva products; if the Company +transfers substantially all of its property or stock to other parties; if the +Company sells unapproved merchandise in violation of the License Agreement; or +if the Company or the licensor otherwise violate or breach the terms of the +License Agreement. +In connection with the execution of the License Agreement in 1999, the +Company received an option to buy Teva and virtually all of its assets, +including all worldwide rights to all Teva products. The Company's original +option was exercisable during the period from January 1, 2000 to December 31, +2001 or during the period from January 1, 2006 to December 31, 2008. On January +22, 2001, the option agreement was amended, extending the first option window +for two additional years. As a result, the first option window is January 1, +2000 through December 31, 2003. The Company paid Mr. Thatcher $1.6 million as +consideration for this extension. The option price is based on formulas tied to +net sales of Teva products and varies depending on when the option is exercised. +For the first option period, the option price is for an amount equal to the +greater of (i) $61.6 million or (ii) 75% of the largest calendar year revenues +since January 1, 2000 for the Teva brand, +14 +15 +plus $1.6 million. In addition, the Company would issue to Mr. Thatcher 100,000 +shares of common stock and options to purchase 100,000 shares of common stock. +The purchase price for the second option period, January 1, 2006 to December 31, +2008, is equal to 110% of the average of the aggregate sales for all Teva +products for the two calendar years since January 1, 2000 with the highest +aggregate net sales. If the Company does not exercise its option to acquire +Teva, the licensor has the option to acquire the Teva distribution rights from +the Company for the period from January 1, 2010 to December 31, 2011, the end of +the license term, and the option price is based on a formula tied to the +Company's earnings before interest, taxes, depreciation and amortization. The +Company is currently evaluating the possibility of exercising the option in the +January 1, 2000 to December 31, 2003 period. The payment of the purchase price +must be completed within 90 days of the exercise of the purchase option. If the +Company exercises its purchase option, but subsequently fails to complete the +purchase within the 90 day payment period, the purchase option and the Option +Agreement will automatically be terminated. +HEIRLOOMS, INC. AGREEMENT +Since 1993, the Company and Bob Eason, the designer and founder of Picante +clothing, were parties to an agreement pursuant to which the Company owned 50% +of Heirlooms, Inc. ("Heirlooms"), the manufacturer and distributor of Picante +clothing. In January 2001, the Company sold its 50% interest in Heirlooms back +to Mr. Eason for cash of approximately $1,200,000 and a note receivable of +approximately $420,000, which is secured by a secondary security interest in the +assets of Heirlooms. The selling price was for an amount that approximated the +net carrying value of the underlying assets and, accordingly, the resulting gain +on the sale is not expected to be significant. +PATENTS AND TRADEMARKS +Mr. Thatcher holds seven United States patents and one patent in each of +Australia, New Zealand, Korea, Germany, France, China, Japan and the United +Kingdom for Teva footwear. As a result of the expiration of the applicable +period during which foreign patent applications were required to have been +filed, Mr. Thatcher does not and cannot hold such patent rights in other +countries. Mr. Thatcher also currently holds Teva trademark rights in the United +States and in several other countries, including, among others, France, Germany, +the United Kingdom, Japan and Australia. Mr. Thatcher's patent and trademark +rights are licensed to the Company under the License Agreement discussed +previously. Both the Company and Mr. Thatcher regard such proprietary rights as +valuable assets, and the Company cooperates with Mr. Thatcher in vigorously +protecting such rights against infringement by third parties. To date, Mr. +Thatcher has successfully enforced his patent and trademark rights in all 20 +concluded lawsuits brought against such third parties. Under certain +circumstances, if Mr. Thatcher declines to challenge a potential infringement, +the Company may bring an infringement action at its own cost, with Mr. +Thatcher's prior written consent. See "Licenses -- Teva License." +The Company owns the Simple and Ugg trademarks and has applied for or +received registrations for them in the United States and in many foreign +countries. The Company has selectively registered style category names and +marketing slogans. In addition, the Company holds two design patents for its +footwear products. +The Company has acquired the patent and trademarks for Alp(R)sport sandals +and has registered the Deckers trademark. +BACKLOG +Historically, the Company has encouraged and has received a significant +portion of its orders as preseason orders, which are generally placed by +customers approximately four to eight months prior to shipment date. The Company +has emphasized this "futures" business, as compared to "at once" sales, as it +allows the Company to better forecast its inventory requirements and assists +with the Company's sourcing schedule. As a result, the Company provides its +customers with incentives to participate in such preseason programs. Unfilled +customer orders ("backlog"), as of any date, represent orders scheduled to be +shipped at a future date and do +15 +16 +not represent firm sales. The mix of future and immediate delivery orders can +vary significantly from quarter to quarter and year to year. The backlog as of a +particular date is affected by a number of factors, including seasonality and +the scheduling of manufacture and shipment of products as well as variations in +the quarter to quarter and year to year preseason incentive programs. As a +result, comparisons of backlog from period to period are not meaningful and the +Company's backlog at any given time is generally not indicative of sales levels +expected to be achieved in the future. +COMPETITION +The casual, outdoor and athletic footwear markets are highly competitive. +The Company believes that currently its largest competitors of the Teva line are +Nike, Adidas, Timberland, Columbia and Salomon. The principal competitors of +Simple's casual line include Steve Madden, Nine West, Doc Marten, Camper, and +Kenneth Cole and of Simple's sneaker/sandal line include Skechers, Diesel, Steve +Madden and Guess. Ugg's competitors include Acorn, Aussie Dogs, LB Evans and +Timberland, as well as retailers' private label footwear. +Competition in the Company's footwear is primarily based on brand +awareness, product quality, design, price points, fashion appeal, marketing, +distribution, performance and brand positioning. The Company's Teva line of +footwear competes primarily on the basis of its authenticity as a recognized +brand in the outdoor market, its consumer brand recognition as one of the first +sandals of its kind, as well as its high performance nature and its diversity of +styles offered. In addition, several of the most popular styles employ a +distinctive patented strapping system, which contributes to performance and the +brand's consumer recognition. The Company competes through its Simple line as an +alternative brand offering a diversity of simple, back-to-basics styles designed +for a variety of recreational and leisure activities. Ugg competes primarily on +the basis of its authenticity as well as its brand name recognition, +identifiable with the United States sheepskin footwear market. The Company +believes its business strategy has resulted in increased awareness for its +brands. However, no assurance can be given that in the future the Company will +be able to maintain or further increase its brand awareness, maintain or +increase its market share or respond to changing consumer preferences. +RISKS OF FOREIGN OPERATIONS/RESTRICTIONS ON IMPORTS +The Company's operations are subject to the customary risks of doing +business abroad, including, but not limited to, currency fluctuations, customs +duties and related fees, various import controls and other non-tariff barriers +(e.g., quotas), the cost of transportation, restrictions on the transfer of +funds, labor unrest and strikes, and in certain parts of the world, political +instability. Countries where the Company's products are manufactured and sold +may, from time to time, seek to increase customs duties or impose other +non-tariff barriers (e.g., quotas), all of which have the potential to affect +the Company's operations and its ability to maintain or increase the current +level of importation of the Company's products. The Company is unable to predict +the likelihood or frequency of the occurrence of any of these events. +The products imported by the Company into the United States are subject to +various duty rates which are established by law. At the present time these +duties range between 8.5% and 12.5% of the entered value of footwear with uppers +made principally of leather or sheepskin, and 6.0% and 37.5%, plus $.90 per +pair, of the entered value of footwear with uppers made principally of synthetic +textiles or plastic. Certain products imported by the Company are exempt from +duties pursuant to laws pertaining to products manufactured in certain +beneficiary countries. "Entered value" means the value taken into account for +purposes of determining the amount of any customs duties or any other duties +which may be imposed on the importation of any property. In general, the entered +value is normally based on the price paid or payable by the Company to the +seller of the imported merchandise. +From time to time, the Company may be subject to claims for additional +duties arising as a result of the United States Customs Service, or similar +agencies of foreign countries, disagreeing with the classification and/or +valuation used by the Company to enter various styles of footwear. +16 +17 +The United States Trade Representative ("USTR") is required by the Trade +Act of 1974, as amended by the Trade and Tariff Act of 1984, the Omnibus Trade +and Competitiveness Act of 1988 and the 1994 Uruguay Round Agreements Act to +submit an annual National Trade Estimates Report on Foreign Trade Barriers (the +"NTE Report") identifying significant restrictions or barriers on United States +access to foreign markets. In January 1999, the President reinstated, by +Executive Order, the "Super 301" Provisions of the Trade Act. Relying on the NTE +Report, the USTR is required to report to Congress any trade barriers, trade +distorting practices and particular countries identified as priorities for trade +liberalization. +On April 30, 1997, the USTR designated China for monitoring under Section +306 of the 1974 Trade Act. This provision focuses on compliance with bilateral +trade agreements and allows the U.S. government to impose a variety of sanctions +if a party fails to comply with the terms of a bilateral agreement. On April 28, +2000, USTR again designated Paraguay and China for "Section 306 monitoring" to +ensure both countries comply with the commitments made to the United States +under bilateral intellectual property agreements. This means that USTR will be +in a position to move directly to trade sanctions if there is slippage in either +country's enforcement of bilateral IPR agreements. +In June 2000, President Clinton extended non-discriminating "normal trade +relations" ("NTR," formerly "most favored nation") trading status with China +through June 2001. While NTR status has been extended for another year, this +topic has traditionally been the subject of vigorous debate, and the Company is +unable to predict if the United States will revoke China's NTR status at some +point in the future. If a revocation of NTR status were to occur, it would +result in significantly higher duties on imports from China. It is noted that +bilateral agreements negotiated with China concerning that country's accession +to the World Trade Organization require that the United States grant permanent +NTR to China and in its report of May 1, 2000, USTR announced that the granting +of permanent NTR was its top trade expansion priority. +On April 28, 2000, the USTR announced that 39 countries had been placed on +the "special 301" watch list and 16 countries on the priority watch list because +of intellectual property protection concerns. Watch list countries include among +others: Australia, Canada, Denmark, Costa Rica, and Korea. The Company is unable +to predict whether or not additional countries will be added to the priority +watch list, or if any other actions will be imposed by the United States and if +such actions were taken, whether such actions would include footwear imports or +otherwise result in increased costs for the Company's products or restrict the +supply of footwear, generally, or of the Company's footwear in particular. +In 1997, the European Commission enacted anti-dumping duties of 49.2% on +certain types of footwear imported into Europe from China and Indonesia. Dutch +Customs has issued an opinion to the Company that certain popular Teva styles +are covered by this anti-dumping duty legislation. The Company has been +contesting the opinion and is working with Dutch Customs to resolve the +situation. The Company has since obtained, and is using, alternative sourcing +for the potentially impacted products from sources outside of China in an effort +to reduce the potential risk in the future. In the event that Dutch Customs +makes a final determination that the anti-dumping provisions are applicable, the +Company would have an exposure for prior unpaid anti-dumping duties during 1997 +of approximately $400,000. Recently, the European Commission added an +explanatory note to the anti-dumping legislation which effectively strengthened +its position. As a result of this recent development, the Company recorded a +$400,000 charge to selling, general and administration expenses during the year +ended December 31, 2000 to accrue for the potential loss on this matter. +The European communities also impose quantitative limits on imports from +China of certain leather upper and textile upper footwear. The Company is unable +to predict how long the anti-dumping duty and import quota restrictions will +remain in effect or changes in the scope or severity of such restrictions. +EMPLOYEES +At December 31, 2000, the Company employed approximately 105 full-time +employees in its U.S. facilities, 7 at its European subsidiary and 28 at its +Hong Kong subsidiaries, none of whom is represented by a union. The Company +believes its relationship with its employees is good. +17 +18 \ No newline at end of file diff --git a/raw/filings/0000910521/2000/0000950148-01-000493/item13.txt b/raw/filings/0000910521/2000/0000950148-01-000493/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..f8223673ed1eb76f0e3a84c4089d0b4ccb02ecce --- /dev/null +++ b/raw/filings/0000910521/2000/0000950148-01-000493/item13.txt @@ -0,0 +1,9 @@ +ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS +Information relating to Certain Relationships and Related Transactions is +set forth in the Company's definitive proxy statement relating to the +Registrant's 2001 annual meeting of shareholders, which will be filed pursuant +to Regulation 14A within 120 days after the end of the Company's fiscal year +ended December 31, 2000, and such information is incorporated herein by +reference. +48 +49 \ No newline at end of file diff --git a/raw/filings/0000910521/2000/0000950148-01-000493/item9a.txt b/raw/filings/0000910521/2000/0000950148-01-000493/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000910521/2000/0000950148-01-000493/rp_note.txt b/raw/filings/0000910521/2000/0000950148-01-000493/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000910521/2000/0000950148-01-000493/rpt_disclosure.txt b/raw/filings/0000910521/2000/0000950148-01-000493/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000910521/2001/0000950148-02-000814/filing.txt b/raw/filings/0000910521/2001/0000950148-02-000814/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..fecf5da29568c1e1528612d0f68608d1ffd82be6 --- /dev/null +++ b/raw/filings/0000910521/2001/0000950148-02-000814/filing.txt @@ -0,0 +1,4985 @@ +10-K +1 +v79832e10-k.htm +DECKERS FORM 10-K FOR DECEMBER 31, 2001 +DECKERS FORM 10-K FOR DECEMBER 31, 2001 +Table of Contents +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +FORM 10-K +(Mark one) +x +ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE +SECURITIES EXCHANGE ACT OF 1934 +For the fiscal year ended December 31, +2001 +OR +o +TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE +SECURITIES EXCHANGE ACT OF 1934 +For the transition period from +to +. +Commission File No. 0-22446 +DECKERS OUTDOOR CORPORATION +(Exact name of registrant as specified in its +charter) +Delaware +(State or other jurisdiction of +incorporation or organization) +95-3015862 +(I.R.S. Employer +Identification No.) +495-A South Fairview Avenue, Goleta, +California +(Address of principal executive offices) +93117 +(Zip Code) +Registrant’s telephone number, including +area code: (805) 967-7611 +Securities registered pursuant to +Section 12(b) of the Act: +Title of each class +Name of each exchange on which registered +None +None +Securities registered pursuant to +Section 12(g) of the Act: +Common Stock, $.01 par value +(Title of Class) +Indicate by check mark whether the registrant: +(1) has filed all reports required to be filed by +Section 13 or 15(d) of the Securities Exchange Act of 1934 +during the preceding 12 months (or for such shorter period +that the registrant was required to file such reports) and +(2) has been subject to such filing requirements for the +past +90 days. Yes x No o +Indicate by check mark if disclosure of +delinquent filers pursuant to Item 405 of +Regulation S-K (§ 229.405 of this chapter) is not +contained herein, and will not be contained to the best of +registrant’s knowledge, in definitive proxy or information +statements incorporated by reference in Part III of this +Form 10-K or any amendment to this +Form 10-K. o +Aggregate market value of the Common Stock of the +registrant held by nonaffiliates of the registrant on +February 28, 2002 based on the closing price of the Common +Stock on the NASDAQ National Market System on such date was +$27,050,345. The number of shares of the registrant’s +Common Stock outstanding at February 28, 2002 was 9,340,357. +Portions of registrant’s definitive proxy +statement relating to registrant’s 2002 annual meeting of +shareholders, which will be filed pursuant to +Regulation 14A within 120 days after the end of +registrant’s fiscal year ended December 31, 2001, are +incorporated by reference in Part III of this +Form 10-K. +TABLE OF CONTENTS +PART I +Item 1.Business +Item 2.Properties +Item 3.Legal Proceedings +Item 4.Submission of Matters to a Vote of Security Holders +PART II +Item 5.Market for Registrant’s Common Equity and Related Stockholder Matters +Item 6.Selected Financial Data +Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations +Item 7A.Quantitative and Qualitative Disclosures About Market Risk +Item 8.Financial Statements and Supplementary Data +Item 9.Changes in and Disagreements With Accountants on Accounting and Financial Disclosure +Consolidated Balance Sheets +PART III +Item 10.Directors and Executive Officers of the Registrant +Item 11.Executive Compensation +Item 12.Security Ownership of Certain Beneficial Owners and Management +Item 13.Certain Relationships and Related Transactions +PART IV +Item 14.Exhibits, Financial Statement Schedules and Reports on Form 8-K +SIGNATURES +EXHIBIT 10.21 +EXHIBIT 21.1 +EXHIBIT 23.1 +Table of Contents +DECKERS OUTDOOR CORPORATION +For the Fiscal Year Ended December 31, +2001 +Index to Annual Report on +Form 10-K +Page +PART I +Item 1. +Business +3 +Item 2. +Properties +18 +Item 3. +Legal Proceedings +19 +Item 4. +Submission of Matters to a Vote of Security +Holders +19 +PART II +Item 5. +Market for Registrant’s Common Equity and +Related Stockholder Matters +20 +Item 6. +Selected Financial Data +21 +Item 7. +Management’s Discussion and Analysis of +Financial Condition and Results of Operations +22 +Item 7A. +Quantitative and Qualitative Disclosures about +Market Risk +31 +Item 8. +Financial Statements and Supplementary Data +31 +Item 9. +Changes in and Disagreements with Accountants on +Accounting and Financial Disclosure +31 +PART III +Item 10. +Directors and Executive Officers of the Registrant +53 +Item 11. +Executive Compensation +53 +Item 12. +Security Ownership of Certain Beneficial Owners +and Management +53 +Item 13. +Certain Relationships and Related Transactions +53 +PART IV +Item 14. +Exhibits, Financial Statement Schedules and +Reports on Form 8-K +54 +2 +Table of Contents +PART I +Item 1. Business +General +The Company builds niche products into global +lifestyle brands by designing and marketing innovative, +functional and fashion-oriented footwear, developed for both +high performance outdoor activities and everyday casual +lifestyle use. Currently, the Company offers three primary +product lines under the following recognized brand names: +Teva® — high-performance sports sandals and +rugged outdoor footwear; Simple® — innovative +shoes that combine the comfort elements of athletic footwear +with casual styling; and Ugg® — authentic +sheepskin boots and other footwear. Teva is a registered +trademark of Mark Thatcher, the inventor and licensor of Teva +Sport Sandals. Simple and Ugg are registered trademarks of the +Company and its subsidiaries. All of the Company’s footwear +possess the common features of high quality with a primary focus +on functionality and comfort. In 2001, the Company sold +approximately 3,705,000 pairs of footwear. Revenues from sales +(domestic and international) of Teva products have been +$61,221,000, $79,732,000 and $80,963,000 during 2001, 2000 and +1999, representing 66.9%, 70.1% and 72.9% of net sales, +respectively. For financial information regarding the +Company’s industry segments, see note 10 to the +accompanying consolidated financial statements. +Market Overview +The casual, outdoor and athletic footwear market +is comprised of footwear worn for casual everyday use and for +outdoor and athletic activities such as hiking, boating, +basketball, tennis, fitness and jogging. The market for such +footwear has grown significantly during the last decade. The +Company believes that the principal reasons for the growth in +sales of such footwear have been the growing acceptance of +athletic footwear as casual wear and the growing acceptance of +casual wear, in general, including the trend toward casual dress +in the workplace, increasingly active consumer lifestyles and +the growing emphasis on comfort. +Over the last few years the overall footwear +market has seen significant growth of the outdoor segment as +well as the growing emphasis on comfort. Outdoor footwear +includes shoes, boots and sandals for outdoor recreational +activities such as hiking, river rafting, camping and casual +wear. Companies engaged in the outdoor footwear market include +Nike, Adidas, Timberland, Columbia and Salomon. The Company +believes that the growth in outdoor footwear is driven by +several factors including a general shift in consumer +preferences and lifestyles to include more outdoor, sports and +recreational activities such as hiking and camping. In addition, +the increasing popularity of extreme sports, including +skateboarding, snowboarding, kayaking and river rafting, among +others, has created an additional emphasis and awareness of +outdoor activities and lifestyles. As consumers engage in +outdoor activities, they typically desire footwear specifically +designed for these purposes, yet they demand the same level of +quality and high performance that they have come to expect from +traditional athletic footwear. In addition, more consumers are +turning to an emphasis on casual and comfortable footwear and +apparel, as evidenced by the trend toward casual workplaces in +recent years. The Company believes that its products have +benefited from this growing trend and that its footwear +addresses consumers’ demands for highly functional footwear +that is durable as well as comfortable and fashionable. +The casual, outdoor and athletic footwear markets +are generally characterized by a high level of recognition of +brand names, logos and trademarks. Unique and identifying +features create brand awareness among consumers and allow a +favorable reputation to be transferred to new products. The +manufacture of casual, outdoor and athletic footwear is +typically conducted overseas through independent manufacturers. +Casual and athletic footwear is distributed through athletic +footwear stores, department stores and specialty retailers. +Outdoor footwear is generally distributed through these channels +as well but is to a large extent distributed through outdoor +specialty retailers. Retailers may purchase footwear on a +“futures” basis (orders placed at a discount in +advance of a season) or an “at once” basis (orders +placed and filled immediately). Futures orders allow the Company +to more accurately predict its manufacturing and sourcing needs. +By placing futures orders, retailers are also able to reduce the +risk that the Company will be unable to meet their +3 +Table of Contents +delivery requirements. Retailers are generally +encouraged to purchase goods on a futures basis by receiving +discounts or special payment terms not otherwise available. +Risk Factors +This Annual Report on Form 10-K contains a +variety of forward-looking statements within the meaning of the +Private Securities Litigation Reform Act of 1995 including +forward-looking statements in this “Risk Factors” +section, the “Outlook” section, the last paragraph +under “Liquidity and Capital Resources”, the +discussion under “Seasonality” and other statements in +this Annual Report. Forward-looking statements relating to +sales, earnings per share, and the Company’s liquidity may +be significantly impacted by future developments such as the +possible non-renewal of the Teva license due to the +Company’s potential failure to meet required sales minimums +in 2004 or 2008, certain litigation, economic factors and world +events, the Company’s dependence on foreign manufacturers, +competition, the Company’s dependence upon key personnel, +weather conditions, the possible acquisition of Teva and the +impact of seasonality on the Company’s operations, among +others. These forward-looking statements are based on the +Company’s expectations as of March 2002. No one should +assume that any forward-looking statement made by the Company +will remain consistent with the Company’s expectations +after the date the forward-looking statement is made. The +Company disclaims any obligation to update any such factors or +to publicly announce the results of any revisions to any of the +forward-looking statements contained in this Annual Report on +Form 10-K. These forward-looking statements involve known and +unknown risks, uncertainties and other factors which may cause +the actual results, performance or achievement of the Company, +or industry results, to differ materially from any future +results, performance or achievements expressed or implied by +such forward-looking statements. The factors listed below +represent certain important factors the Company believes could +cause such results to differ. These factors are not intended to +represent a complete list of the general or specific risks that +may affect the Company. Other risks may be significant, +presently or in the future, and the risks set forth below may +affect the Company to a greater extent than indicated. +Teva License Agreement +The Company has been selling its Teva line of +sports sandals and other footwear since 1985 pursuant to various +exclusive licensing arrangements with Mark Thatcher, the +inventor of the Teva sport sandal and owner of the Teva patents +and trademark. In June 1999, the Company signed a new exclusive +footwear license agreement with Mr. Thatcher. The agreement +became effective January 1, 2000 and continues through +December 31, 2004. If minimum annual sales levels are +achieved in 2004, the license automatically renews for an +additional four years, through December 31, 2008. If +minimum annual sales levels are achieved in 2008, the license +automatically renews again through December 31, 2011. +However, if the minimum annual sales levels are not achieved in +2004 or 2008, the license expires and the Company will no longer +be able to sell Teva footwear. These required minimum annual +sales levels are $107.9 million in 2004 and +$137.3 million in 2008, both of which are significantly +greater than the annual sales of $61.2 million achieved by +the Company in 2001. Also, Mr. Thatcher may terminate the +licensing agreement if the Company breaches certain of its other +obligations under the agreement. The Company believes it is +unlikely to achieve the contractual minimum for 2004 and has +begun discussions with the licensor to address this issue. +However, the Company can provide no assurances that it will be +successful in its efforts to reach an acceptable resolution. +Sales of Teva footwear and apparel accounted for approximately +66.9%, 70.1% and 72.9% of the Company’s net sales for +fiscal years 2001, 2000 and 1999, respectively. The termination +of the license would have a material adverse effect on the +Company’s results of operations. +Brand Strength; Changes in Fashion +Trends +The Company’s success is largely dependent +on the continued strength of the Teva, Simple and Ugg brands +(collectively, “Deckers Brands”) and on its ability to +anticipate the rapidly changing fashion tastes of footwear +customers and to provide merchandise that appeals to their +preferences in a timely manner. There can be no assurance that +consumers will continue to prefer the Deckers Brands or that the +Company will respond in a timely manner to changes in consumer +preferences or that the Company will successfully +4 +Table of Contents +introduce new models and styles of footwear. +Achieving market acceptance for new products will also likely +require substantial marketing and product development efforts +and the expenditure of significant funds to create consumer +demand. Decisions with respect to product designs often need to +be made many months in advance of the time when consumer +acceptance can be determined. As a result, the Company’s +failure to anticipate, identify or react appropriately to +changes in styles and features could lead to, among other +things, excess inventories and higher markdowns and lower gross +margins due to the necessity of providing discounts to +retailers. Conversely, failure by the Company to anticipate +consumer demand could result in inventory shortages, which can +adversely affect the timing of shipments to customers, +negatively impacting retailer and distributor relationships and +diminishing brand loyalty. The failure to introduce new products +that gain market acceptance would have a material adverse effect +on the Company’s business, financial condition and results +of operations, and could adversely affect the image of the +Deckers Brands. +Inventory Risk +The footwear industry has relatively long lead +times for design and production of product and, thus, the +Company must commit to production tooling and to production in +advance of orders. In addition, the industry is highly subject +to fashion risks and changes in consumer preferences. This risk +is exacerbated by the large number of models, colors and sizes +in the Company’s three product lines. If the Company fails +to accurately forecast consumer demand, or if there are changes +in consumer preference or market demand after the Company has +made such production commitments, the Company may encounter +difficulty in filling customer orders or in liquidating excess +inventory, which may have an adverse effect on the +Company’s sales, margins and brand image. +Quality and Performance +In response to consumer demand, the Company also +uses certain specialized materials in its footwear. The failure +of products using such materials to perform to the +Company’s specifications or customer satisfaction could +result in a higher rate of customer returns and could adversely +affect the image of the Deckers Brands, which could have a +material adverse effect on the Company’s business, +financial condition and results of operations. +Economic Cyclicality and Footwear +Retailing +The footwear industry historically has been +subject to cyclical variation and can be negatively impacted by +decreased consumer spending or softness in the retail market. +This cyclicality could adversely affect the Company’s +business. In addition, various retailers, including some of the +Company’s customers, have experienced financial +difficulties during the past several years, thereby increasing +the risk that such retailers may not be able to pay for the +Company’s products in a timely manner. No assurance can be +given that the Company’s bad debt expense will not increase +relative to net sales in the future. Any significant increase in +the Company’s bad debt expense relative to net sales would +adversely impact the Company’s net earnings and cash flow +and could affect the Company’s ability to pay its +obligations as they become due. +Dependence on Foreign +Manufacturers +Virtually all of the Deckers footwear products +are manufactured by third party suppliers in the Far East, +Australia and New Zealand, with the vast majority of production +occurring in China. There can be no assurance that the Company +will not experience difficulties with such manufacturers, +including reduction in the availability of production capacity, +errors in complying with product specifications, inability to +obtain sufficient raw materials, insufficient quality control, +failure to meet production and delivery deadlines or increases +in manufacturing costs. In addition, if the Company’s +relationship with any of its manufacturers were to be +interrupted or terminated, alternative manufacturing sources +will have to be located. The establishment of new manufacturing +relationships involves numerous uncertainties, and there can be +no assurance that the Company would be able to obtain +alternative manufacturing sources on terms satisfactory to it. +If a change in its suppliers becomes necessary, the Company +would likely experience increased costs, as well as substantial +disruption and a resulting loss of sales. +5 +Table of Contents +Foreign manufacturing is subject to a number of +risks, including work stoppage, transportation delays and +interruptions, political instability, foreign currency +fluctuations, changing economic conditions, expropriation, +nationalization, imposition of tariffs, import and export +controls and other non-tariff barriers (including quotas), +restrictions on the transfer of funds, environmental regulation +and other changes in governmental policies. The Company may also +experience general risks associated with managing operations +effectively and efficiently from a far distance and +understanding and complying with local laws, regulations and +customs. There can be no assurance that such factors will not +materially adversely affect the Company’s business, +financial condition and results of operations. +Products manufactured overseas and imported into +the United States and other countries are subject to duties +collected by the Customs Service in the applicable country. +Customs information submitted by the Company is subject to +review by the Customs Service. The Company is unable to predict +whether additional customs duties, quotas or restrictions may be +imposed on the importation of its products in the future. The +enactment of any such duties, quotas or restrictions could +result in increases in the cost of such products generally and +might adversely affect the sales or profitability of the Company. +In 1997, the European Commission enacted +anti-dumping duties of 49.2% on certain types of footwear +imported into Europe from China and Indonesia. Dutch Customs has +issued an opinion to the Company that certain popular Teva +styles are covered by this anti-dumping duty legislation. The +Company has been contesting the opinion and is working with +Dutch Customs to resolve the situation. The Company has since +obtained, and is using, alternative sourcing for the potentially +impacted products from sources outside of China in an effort to +reduce the potential risk in the future. In the event that Dutch +Customs makes a final determination that the anti-dumping +provisions are applicable, the Company would have an exposure +for prior unpaid anti-dumping duties during 1997 of +approximately $500,000, which has been fully accrued as of +December 31, 2001. +Competition and Infringing +Products +The outdoor and footwear industries are both +highly competitive, and the recent growth in the markets for +sports sandals and casual footwear has encouraged the entry of +many new competitors into the marketplace as well as increased +competition from established companies. Many of the +Company’s competitors have substantially greater financial, +distribution and marketing resources, as well as greater brand +awareness in the footwear market, than the Company. In addition, +the general availability of offshore manufacturing capacity +allows rapid expansion by competitors and new market entrants. +The Company believes that it has been able to compete +successfully because of the brand recognition, quality and +selective distribution of its products. From time to time, the +Company also discovers products in the marketplace that infringe +upon patent and trademark rights held by or licensed to the +Company. Under the Company’s licensing arrangement with the +licensor of the Teva products, Mark Thatcher, Mr. Thatcher +initially may bring proceedings to halt infringement of the Teva +patents and trademark. If Mr. Thatcher elects not to bring +such proceedings, the Company may initiate such proceedings, +with the prior written consent of Mr. Thatcher. To date, +Mr. Thatcher has vigorously pursued infringements following +discovery. To the extent permitted in its agreement with +Mr. Thatcher and to the extent considered necessary, the +Company will vigorously pursue infringements in the event +Mr. Thatcher elects not to do so. However, if +Mr. Thatcher or the Company is unsuccessful in challenging +a third party’s products on the basis of patent and +trademark infringement, continued sales of such competing +products by third parties could adversely impact the +Company’s business, financial condition and results of +operations. See “Business — Competition” and +“Business — Legal Proceedings.” +Dependence on Key +Personnel +The Company’s continued success will depend +substantially upon its ability to retain Douglas B. Otto, its +Chairman of the Board and Chief Executive Officer, Peter +Benjamin, its President and Chief Operating Officer and a core +group of key executive officers and employees. The Company +believes that its future success will depend in large part on +its ability to attract and retain highly skilled personnel. +Competition for such personnel is intense, and there can be no +assurance that the Company will be successful in attracting and +6 +Table of Contents +retaining such personnel. The loss of certain key +employees or the Company’s inability to attract and retain +other qualified employees could have an adverse impact on the +Company’s business. +Intellectual Property +The Company believes that its trademarks, +technologies and designs are of great value. From time to time, +the Company may be the subject of litigation challenging its +ownership of certain intellectual property. Loss of the +Company’s Simple or Ugg trademark rights or the ability to +use the licensed Teva trademarks could have a serious impact on +the Company’s business. Because of the importance of such +intellectual property rights, the Company’s business is +subject to the risk of counterfeiting, parallel trade or +intellectual property infringement. +Economic Factors and World +Events +The Company’s business is subject to +economic conditions in its major markets, including, without +limitation, recession, inflation, general weakness in retail +markets and changes in consumer purchasing power and +preferences. Adverse changes in such economic factors could have +a negative effect on the Company’s business. +In addition, the Company’s results, and the +domestic and international economies in general, may be further +negatively impacted by the terrorist activities of +September 11, 2001 and any subsequent terrorist acts, as +well as the impact of the United States’ war efforts. The +overall negative impact of these activities, including the +effect on the economy and commerce in general, cannot currently +be determined. +Weather Conditions +Sales of the Company’s products, +particularly those under the Teva and Ugg lines, are very +sensitive to weather conditions. Extended periods of unusually +cold weather during the spring and summer could adversely impact +demand for the Company’s Teva line. Likewise, unseasonably +warm weather during the fall and winter months could adversely +impact demand for the Company’s Ugg product line. +Substantial Ownership of the +Company and Shareholder Rights Agreement +At December 31, 2001, Douglas B. Otto +and all executive officers and directors of the Company, as a +group, owned approximately 33.7% and 42.2%, respectively, of the +outstanding shares of the Company’s Common Stock. Due to +such ownership position, Mr. Otto, whether acting alone or +together with one or more of the other executive officers of the +Company, would likely be able to control the affairs and +policies of the Company and would likely be able to elect a +sufficient number of directors to control the Company’s +Board of Directors and to approve or disapprove any matter +submitted to a vote of the stockholders. +The Company adopted a shareholder rights plan in +1998 pursuant to a shareholder rights agreement (the +“Rights Agreement”) to protect stockholders against +unsolicited attempts to acquire control of the Company that do +not offer what the Board of Directors of 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 so +that one preferred share purchase right was and will be issued +for each outstanding share of Common Stock of the Company until +the expiration date of the Rights Agreement. +The ownership positions of Mr. Otto and the +executive officers of the Company, as a group, together with the +anti-takeover effects of certain provisions in the Delaware +General Corporation Law (the “DGCL”), in the +Company’s Certificate of Incorporation and Bylaws and in +the Company’s shareholder rights plan would likely have the +effect of delaying, deferring or preventing a change in control +of the Company and could have a negative effect on the market +price of the Company’s Common Stock. +Other Factors +The Company’s offices and distribution +center are located in the state of California, which has +experienced rolling electrical power outages in 2001. Depending +on the occurrence, timing, length and +7 +Table of Contents +frequency of the any future outages, the Company +may be unable to ship products in a timely manner, which could +negatively impact the Company’s net sales. +Also, during the year ended December 31, +2001, the Company implemented a new Enterprise Resource Planning +(“ERP”) computer system to replace its legacy system. +In connection with this conversion, the Company initially +encountered various difficulties. The effectiveness of the +system’s operation can impact the Company’s ability to +receive and accept orders, monitor its inventory levels, and +coordinate the shipment of products to customers, among other +activities. In the event that significant difficulties are +encountered in the future, the Company may experience lower +sales and increased expenses, which would negatively impact the +Company’s results of operations and cash flows. +The Company’s results of operations, +financial condition and cash flows are also subject to risks and +uncertainties with respect to the Company’s ability to +secure and maintain adequate financing, to forecast its future +sales, inventory needs and cash flows and to subsequently +achieve those forecasts. +Business Strategy +Management’s mission is to build niche +products into global brands and its business strategy is to +offer diverse lines of footwear that emphasize functionality, +quality, comfort and technical performance tailored to a variety +of activities and demographic groups. Specifically, the +Company’s business strategy emphasizes the following +elements: +Introduce New Categories and Styles under +Existing Brands. The Company intends +to leverage consumer recognition of its existing brands by +developing and introducing additional innovative footwear +products that satisfy the Company’s high standards of +practicality, comfort and quality. The Company believes the +introduction of additional products at a variety of price +points, such as the range of new models in its Teva, Simple and +Ugg lines being offered in the Company’s 2002 product +offerings, have broadened the Company’s customer base, +further diversified the Company’s product lines, and helped +reduce the effects of seasonality on the Company’s sales. +See “Management’s Discussion and Analysis of Financial +Condition and Results of Operations — +Seasonality.” Over the last several years, the Teva product +offering has been greatly expanded to include a variety of new +sport sandal styles at a variety of price points and +incorporating a range of new uppers and technologies. In +addition, the Company has begun to leverage the success of the +Teva brand in the outdoor markets by launching into several new +categories of footwear, including amphibious footwear, hikers, +trailrunners, cold-weather boots, and other rugged outdoor +footwear. The Spring 2002 and Fall 2002 Teva product lines +include a significant redesign and the introduction of several +new styles and categories. One of the features prevalent in the +Spring 2002 line is the use of the Wraptor technology, a +patent-pending 360 degree continuous strapping system that +simultaneously secures the instep and arch shank to the foot. +Following on the success of this feature in the Company’s +running sandals, the Company has also designed a line of hikers +around this technology and has added it to certain styles of the +Company’s high performance Guide offering for professional +paddlers and adventurers. In addition, the Company continues to +expand into the hiking, trailrunning and rugged outdoor arenas, +where the aggregate market size is considerably greater than the +market for sport sandals, the area in which the Teva brand was +initially founded. By launching into these new areas of closed +footwear, the Company hopes to increase sales while at the same +time reducing the impact of seasonality on the Company’s +business. In addition to its historically strong outdoor +orientation, the 2002 line also includes athletically inspired +styles aimed directly at the athletic distribution channels, +another significant area where the Company hopes to gain +distribution. In addition to these new categories for the brand, +Teva has also re-designed its core sport sandal offering by +adding many new features and styles, incorporating the latest +technologies and innovations. The Company continues to use the +knowledge and experience of Team Teva, an elite group of the +world’s best male and female whitewater athletes, to +enhance the development of future technical offerings in this +category. As the Company moves to the future, it plans to +strengthen existing categories and further expand into new +channels of distribution. +The 2002 Simple product line includes a +re-emphasis on the men’s footwear business, an area where +the brand had been very successful several years ago, as well as +a focus on athletically inspired designs. The 2002 Simple line +also includes a collection of women’s casual styles +featuring low profiles and sleek outsoles. The +8 +Table of Contents +Simple line continues to target consumers in the +sixteen to twenty-five year old youth market. The line focuses +on lifestyle comfort based products such as clogs, sandals, +casuals and non-performance sneakers that are priced affordably. +In 2002, the Company’s Ugg product offering continued to +include its heritage boots and slippers, as well as an improved +women’s Town Collection of casual, fashionable boots and +clogs and a new Aspen Collection of rugged cold-weather footwear +featuring seam sealed lugged outsoles and waterproof leathers +combined with sheepskin linings. +Pursue Licensing of Brands. +Given the strength of the +Company’s brands, the Company is also pursuing the +licensing of its brand names to other ancillary products, beyond +the Company’s existing core footwear products. Through this +type of brand extension, the Company hopes to generate +additional revenues in the form of royalty income; to further +increase awareness for the Company’s brands and their +related products, and thereby increase sales of its footwear; +and to build the long-term value of the brands. The +Company’s business strategy currently includes the pursuit +of brand extension through licensing for both the Ugg and Simple +brands. The sublicensing of the Teva brand is not currently +available under the existing Teva license agreement; however, in +the event that the Company subsequently exercises its purchase +option to acquire Teva, the licensing of the Teva trademarks to +other products would be considered as part of the long-term +strategy for the brand (See “Management’s Discussion +and Analysis of Financial Condition and Results of +Operations — Liquidity and Capital Resources”). +As part of this approach, the Company has recently signed agency +agreements with BHPC Marketing, Inc. to assist in +identifying candidates and coordinating the efforts for the +licensing of the Ugg and Simple trademarks on various products +ranging from sportswear and outerwear to housewares and +accessories. Because the Company is currently in the early +stages of pursuing licensing opportunities for its brands it +cannot yet provide any assurances regarding how successful its +efforts will be or how significant the market size will be. +Pursue Additional Market +Opportunities. Management intends to +continue to consider new markets for its existing line of +products. For the years ended December 31, 2001, 2000 and +1999 international net sales totaled $21,096,000, $31,135,000 +and $28,859,000, representing 23.1%, 27.4% and 26.0% of net +sales, respectively. Management believes that significant +opportunities exist to market its products abroad and intends to +selectively expand its distribution worldwide. To bolster these +efforts, the Company has entered into an agency arrangement, +effective January 1, 2002, with a firm in the United +Kingdom for the coordination of the sales, distribution, +marketing and advertising efforts in the European markets. In +addition, the Company has an office in Japan that facilitates +the servicing of the Asian market. +The Company believes significant opportunities +exist to expand distribution domestically too. For example, the +Company’s Teva brand has had its roots in the outdoor +market where it has successfully distributed its products for +many years. The Company sees the potential for expansion into +the athletic retail distribution channel as a significant +opportunity for the Teva brand in future years. The Company +intends to pursue this channel of distribution going forward and +has recently designed product targeted at this market and has +added sales personnel with significant experience in this +market. In addition, the Ugg brand has historically been popular +in California for many years. The Company believes that +significant opportunities exist to expand distribution for this +brand throughout the United States, especially in light of its +suitability to a variety of climates. In recent years, the +Company has been successful in expanding outside of California +and expects to continue to pursue this expansion in the future. +Acquire or Develop New +Brands. The Company intends to +continue to focus on identifying and building new brands for +growth. The Company has been successful in the past in taking +the concepts of entrepreneurs for innovative, fashionable +footwear targeted at niche markets and building the products +into viable brands and intends to continue to identify concepts +for potential future niche products which have the potential of +developing into successful brands or product lines. +Products +The Company currently offers three primary +product lines: (1) Teva sport sandals and footwear; +(2) Simple casual footwear; and (3) Ugg sheepskin +footwear. Each of these lines, as well as individual models +within these lines, is designed to appeal to various demographic +groups. The Company’s footwear products +9 +Table of Contents +emphasize function, comfort and technical +performance and are suitable for a variety of demanding outdoor +and athletic activities, as well as casual and everyday use. The +Company’s products are designed and marketed to promote a +high level of brand name recognition and consumer appeal by +combining functional and creative designs with quality materials +and construction. The Teva footwear and the Simple footwear +lines are generally previewed twice per year, once in the summer +for deliveries that commence in the fall and once in the winter +for the following back to school and fall season. The Ugg line +of sheepskin footwear is generally previewed in the winter with +most deliveries occurring in the following fall and winter. The +following sets forth a summary description of each of the +Company’s primary product lines: +Teva Sport Sandals and Footwear. +The Teva sport sandal was one of the +first sport sandals to be developed and remains popular among +outdoor enthusiasts and the general public. The Company licenses +the Teva patents and trademark from Mark Thatcher, a +professional river guide who invented the Teva sport sandal. The +terms of such licenses run through 2011, subject to achieving +certain minimum sales levels beginning in 2004. Certain styles +of the Teva sport sandal incorporate a variety of proprietary +strapping configurations ideally suited for outdoor activities +such as hiking, boating and river rafting. These strapping +systems generally consist of high-quality nylon webbing or +leather, are fully adjustable, and hold the foot firmly to the +sandal’s durable, cellular rubber, molded EVA, polyurethane +or leather footbed. Teva sport sandals are extremely durable, +with many styles designed specifically for performance in and +around the water. In addition, the Company has recently +leveraged the brand’s success in the outdoor markets by +launching into various natural progressions for the brand +including hiking boots, trailrunning shoes, amphibious footwear +and other rugged outdoor footwear styles. For Spring 2002, the +Teva line has been redesigned to include numerous new styles, +categories and features and now includes 86 different models +spread across various categories and designed for a variety of +uses. The Hydro Series, a category of sandals and other +amphibious footwear built for high performance and rugged +outdoor use, includes 14 models of men’s and +women’s styles of sport sandals, neoprene and quick +draining monofilament mesh watershoes and other outdoor footwear +ideal for professional outdoorsmen and adventurers. The Terra +Series, a line of 17 styles of sandals and hiking boots +primarily designed for use on land, includes performance walking +sandals and convertible sandals with removable heel straps that +allow the sandal to be worn as a slide, as well as hiking boots +and running sandals incorporating the patent-pending Wraptor +technology, an upper which encircles the instep and continually +adjusts to the movement of the foot to provide a consistently +secure fit. The Originals Series has 16 styles of sandals +and thongs that combine the elements of performance with casual +everyday use and includes several of the most popular styles as +well as new models with retro-1970’s inspired colors and +stylings. Continuing on the success of recent years, the Spring +2002 line includes 15 styles of men’s and women’s +leather casuals under the Nomad Series, including a variety of +sandals, slides and clogs. The Sun and Moon Series includes +11 styles of slides and thongs offered in a variety of +materials including waterproof leather, nylon, suede and +airmesh. The Spring 2002 Children’s category is a +collection of 13 styles at various price points and +includes an assortment of sandals incorporating a variety of +materials including leather, waterproof suede, nylon, neoprene +and mesh as well as slip-on watershoes, hikers and other styles +of amphibious footwear. In addition, for the Fall 2002 +season, the Company has significantly expanded its Fall product +offering with a variety of different types of closed footwear, +including hiking boots, cold weather boots, trailrunners and an +assortment of other rugged outdoor styles. The domestic +manufacturer’s suggested retail prices for adult sizes of +Spring 2002 Teva footwear products range from $20.00 +to $130.00. +Simple Casual +Footwear. The Simple line consists of +casual shoes that combine the comfort and function of athletic +footwear construction with the simple, understated styling of +“back-to-basics,” casual lifestyle footwear. The +Simple product line includes a variety of comfortable, +fashionable, basic shoes for men and women including sneakers, +sandals, slides, clogs and leather casuals. The Spring 2002 +collection reflects the Company’s emphasis on a target +consumer in the sixteen to twenty-five year old age group. For +the 2002 line, the Company has added several new styles of +clogs, sandals, sneakers and leather casuals to its offerings +including several athletically inspired styles for men and women +as well as a re-emphasis on the men’s footwear business, an +area where the Company had considerable success in the past. The +2002 Simple line also includes a series of new, innovative +styles of women’s footwear featuring models with low +profiles and sleek lines. For Spring 2002, Simple is +offering a total of 86 models including 46 styles for men +and 40 for women. The Spring 2002 line includes +32 styles of sneakers with leather and suede uppers, +29 styles of sandals +10 +Table of Contents +and thongs and 25 styles of leather casuals +and clogs in a variety of colors. The domestic +manufacturer’s suggested retail prices for adult sizes for +the Spring 2002 line range from $40.00 to $95.00. +Ugg Sheepskin +Footwear. Ugg is a line of authentic +sheepskin footwear, popularized in Australia in the 1960’s +and 1970’s. These sheepskin boots, slippers and other +footwear styles have high-grade fleece linings which act as a +natural insulator, keeping feet warm and comfortable. The +2002 Ugg line offers a range of 52 models of casual, +fashionable and streetwise styles in various colors, including +several new styles of shoes and boots for men and women. The +2002 line includes several styles with new innovative +fashionable uppers and several styles with water resistant +leather treatments to address more inclement and cold weather +conditions. The 2002 line continues the tradition of the +highly successful Classic and Ultra boots, as well as the Home/ +Spa Collection of slippers and other comfort footwear. In +addition, for 2002, the line includes an expanded Town +collection of men’s and women’s casual footwear, +including the men’s Birch styles, the women’s Solvang +styles, and the women’s Brooks styles featuring lug bottoms +for traction combined with sleek profiles. The 2002 line +also includes a new Aspen Collection of rugged cold-weather +footwear featuring seam sealed lugged outsoles and waterproof +leathers combined with sheepskin linings to prevent water from +coming in and to prevent warmth from escaping. The domestic +manufacturer’s suggested retail prices for adult sizes for +the Ugg line range from $50.00 to $275.00. +Marketing and Distribution +The Company’s products are currently +distributed throughout the United States by a network of +approximately 32 independent sales representatives, +organized geographically, who make sales, visit retail stores to +train personnel and review sales of the Company’s footwear +on a periodic basis. Beginning in 2000, the Company added a +separate dedicated independent sales force for the Simple and +Ugg brands as these products are sold through different +distribution channels and are targeted toward a different +consumer than the Company’s Teva brand. The Company’s +sales managers for each brand manage their networks of +representatives, recruit experienced sales representatives in +the industry and coordinate sales to national accounts. The +Company currently sells its products internationally through +independent distributors. The Company’s goal is to promote +retail sales of its products at attractive profit margins for +its accounts through selective distribution and marketing, +targeted toward distinct groups of consumers. As a result of +this approach, the Company’s accounts have a strong +incentive to devote greater selling space to the Company’s +products, and the Company is better able to assess consumer +preferences, the future ordering needs of its customers and +inventory requirements. +The Company’s principal domestic customers +include specialty retailers, upscale department stores, outdoor +retailers and athletic footwear stores which market products +consistent with the Company’s standards and, in the case of +Teva, have been approved by the Company’s licensor. The +Company’s five largest customers accounted for +approximately 20.6% of the Company’s net sales for the year +ended December 31, 2001, compared to 20.4% for the year +ended December 31, 2000. No single customer accounted for +more than 10% of the Company’s net sales for the years +ended December 31, 2001 or 2000. +In order to encourage accounts to place orders +early in the season the Company has continued with a preseason +discount program under which accounts are offered discounts on +preseason orders placed. The Company’s strategy is to +emphasize this “futures” program, as compared to +“at once” sales, in order to stabilize its supply +arrangements, reduce the risk of customer cancellations and to +benefit from the significant positive impact of the program on +the Company’s inventory costs, sourcing schedule and +allocation of marketing resources. Consistent with prior years, +the Company offered an early delivery program for the +spring 2002 season which was delivered the fourth quarter +of 2001. This early delivery program allows the Company to +reduce the impact of peak warehouse inventory levels during the +spring and provides retailers the opportunity to have earlier +sell through, lengthening the retail selling season and +increasing the potential for inventory turns at retail. +Domestic deliveries generally originate from the +Company’s 126,000 square foot warehouse facility in +Ventura County, California. European deliveries originate from a +distribution center in the Netherlands, while all other +international deliveries originate from offshore factories. +11 +Table of Contents +Advertising and Promotion +The Company attempts to maximize the impact of +its advertising, public relations and promotional expenditures +by utilizing media that provide high visibility within targeted +market segments. The Company’s brand names are generally +advertised and promoted through a variety of consumer print +advertising campaigns in addition to highly visible editorial +coverage in both consumer and trade publications. Retail +presence and “point of purchase” materials along with +production packaging provide additional visible brand support. +The Company’s in-house marketing departments for each brand +work closely with targeted accounts in many aspects of these +activities. +The Company continues to advertise its Teva brand +through a national print advertising campaign targeted at +various different demographic groups. For its core outdoor +market, Teva advertises in several outdoor-related magazines, +including Backpacker, Outside, National Geographic +Adventurer, Paddler, and Sports Illustrated Women, +among others. In addition, to promote its newly introduced Elden +Trail trailrunner, Teva is advertising in Trail Runner +and The Running Network, among other publications. With +the broadened appeal of the Teva offerings, including the +leather casual models, the Company has also focused its print +advertising toward more mainstream print publications, including +Shape and National Geographic Traveler. Teva will +also target the alternative, youth market with advertisements in +Stuff and Adrenaline. In addition, with the +introduction of Teva’s first full Fall line in 2002, Teva +will increase its advertising in the fall and winter months. +In order to maintain the Company’s +historically high visibility among core outdoor enthusiasts such +as professional river rafters, kayakers, mountain bikers and +rock climbers, Teva products are given or sold at professional +discounts to members of this group. In order to further bolster +the loyalty of these individuals, the Company offers categories +called “Hydro” and “Terra,” incorporating +the latest technological developments and highest quality +materials. The Company actively sponsors a group of the +world’s best male and female whitewater athletes called +Team Teva. Teva also sponsors teams from other outdoor +disciplines including the Teva US Mountain Running Team and +the SOBE Headshok Mountain Bike Team. By outfitting and +sponsoring these highly visible athletes and teams, the Company +creates awareness among targeted consumers at relatively low +cost. In addition, the Company has traveling promotional and +technical representatives who represent the Teva brand at a wide +variety of festivals, outdoor sporting events and competitions. +Teva is sponsoring over fifty events in 2002, including the Teva +Tour, a series of whitewater rafting and kayaking events held +between April and October at fourteen rivers across America. +Internationally, the Company is also the title sponsor for +events in Japan, Canada, Switzerland and Italy. Teva sponsors +and promotes these events in order to increase the +Company’s visibility for its core outdoor consumer, in +addition to the significant marketing available to the more +mainstream public with the increasing popularity of viewing +these extreme sports. In addition to the Teva Tour, the Teva +promotional team attends and sponsors other events including the +Teva Mountain Games at Vail, Teva Mountain Running Series, Teva +Liquid Lifestyles Film US Tour, Santa Cruz Surf Kayak +Festival in Santa Cruz, California, Grandma’s Marathon in +Duluth, Minnesota, The Telluride Bluegrass Festival in +Telluride, Colorado, and Reggae on the River in Garberville, +California, among others. +The Teva mobile promotions team attends the +events in dedicated state of the art promotional vehicles where +they showcase Teva products and provide consumers with the +opportunity to see and try on the latest styles. The Teva brand +has also recently initiated a partnership with Land Rover. Land +Rover is now the official vehicle of Team Teva, outfitting the +Team Teva athletes and the Teva Technical Representatives in +Teva branded Land Rovers throughout the United States. +With respect to the Simple product line, the +Company has continued its national print advertising campaign. +Simple print advertisements will appear in niche art, music and +style-related youth-focused consumer magazines such as Paper, +URB, Surfer and FHM . In addition, the marketing +effort focuses around grass roots advertising including wild +postering, flyering, and “Go Cards.” As an extension +of its grass roots efforts, Simple will launch a national road +tour in March 2002 as part of its grass roots marketing +campaign, The Stream of Consciousness. A Simple journalist will +drive an Airstream trailer across America, visit and sponsor +art-related events at universities and create a film documentary +of his experiences on the road. A +12 +Table of Contents +rigorous public relations campaign will focus on +obtaining magazine editorial placement in addition to newspaper +and television coverage. Recent public relations coverage has +appeared in Footwear News, Teen People, Nylon, YM, Footwear +Plus, W Magazine, Lucky, Shuz, Shape, and Surfing +Girl. These public relations efforts have also resulted in +Simple products appearing on television shows such as +Friends, Ally McBeal, Dawson’s Creek, and MTV. +Simple’s marketing efforts are performed +internally by an in-house Simple marketing team which works to +promote the Simple brand positioning of being “simple” +and “down to earth”. +In 2002, the Company plans to continue to build +on the success of the Ugg 2000 and 2001 national print +advertising campaigns. The Company continues to target its Ugg +products toward luxury consumers who seek high quality, +luxurious and fashionable products for cold weather. The Company +expects to advertise Fall 2002 Ugg products in upscale +publications such as Vogue, In Style and +O Magazine. In February 2002, Ugg’s were +featured in the Opening and Closing Ceremonies of the 2002 +Winter Olympic Games. 1,000 Ugg boots were used to outfit +both the children in the Children of Light performances and the +individuals presenting medals to athletes at all the events. +Both the children and adults were outfitted in Ultra Short Ugg +boots. Ugg also received Olympic exposure on the Today Show with +Katie Couric the day after the opening ceremonies. +In addition to this national advertising +campaign, the Ugg brand is being supported by national public +relations and product placement efforts. In-house marketing +personnel work closely with a public relations firm and a +product placement agency to gain brand visibility in popular +magazines, television shows and feature films. Recent editorial +coverage includes articles in magazines such as Glamour, In +Style, Cosmopolitan, Marie Claire, Maxim, Shape, Self, +O Magazine and Real Simple. Television coverage +of Ugg product includes shows such as Friends, Once and +Again, Dawson’s Creek, E.R., Will and Grace, Ally McBeal, +My Wife and Kids, Judging Amy, Alias, 7th Heaven and +Everybody Loves Raymond. These public relations efforts +have also resulted in Ugg product appearances in the following +recent feature films: America’s Sweethearts, +starring Julia Roberts, Snow Dogs, starring Cuba Gooding +Jr., American Pie II, starring Sean William +Scott, Dinner with Friends, starring Andie McDowell, +Josie and the Pussycats, starring Tara Reid and Life +as a House, starring Kevin Kline. +In 2001, 2000 and 1999, the Company incurred +$6,087,000, $7,108,000 and $5,602,000 respectively, for +advertising, marketing and promotional expenses. In addition to +these expenditures, the Company’s 29 international +distributors spend additional amounts for marketing the +Company’s brands within their respective territories. The +Company is required under its Teva License Agreement to spend a +minimum amount for advertising and promoting Teva products, +based on a percentage of sales. In addition to the minimum +contractual marketing expenditures, the Company and the licensor +have agreed to each contribute annually a certain percentage of +sales toward the promotion of the Teva brand and trademark, with +or without particular reference to individual Teva styles. +Design and Product Development +The design and product development staff for each +of the Company’s brands creates and introduces new +innovative footwear products that are consistent with the +Company’s standards of high quality, combined with comfort +and functionality. In addition to its internal design and +development staff, the Company has begun to rely more heavily in +recent years on outside design firms for a significant portion +of the design function. By transitioning much of the design +function to independent design firms, the Company has been able +to eliminate certain positions, obtain efficiencies and reduce +design and development costs considerably in recent years. As a +result, research and development costs aggregated $1,034,000, +$1,076,000 and $1,607,000 in 2001, 2000 and 1999, respectively, +reflecting the operational efficiencies gained under this new +approach. +With respect to Teva, in order to ensure that the +Company’s high performance technical products continue to +satisfy the requirements of its historical customer base of +performance-oriented “core enthusiasts,” the +Company’s design staff solicits comments and feedback from +its licensor, its Team Teva whitewater athletes and other +professional outdoorsmen, as well as several of its retailers, +including REI, EMS, Galyans and L.L. Bean. Certain models +are modified and technical innovations are developed in response +to such comments and feedback. The Company adds new innovations, +components and styles to its product line +13 +Table of Contents +continually. For example, the Company recently +designed and introduced a new line of trailrunners incorporating +the patented Liquid Frame technology and has incorporated its +newly developed Wraptor technology into performance running +sandals, an assortment of hikers and certain styles of its high +performance Guide sport sandals specifically targeted at +professional outdoorsmen and adventurers. In addition, for added +traction and durability, the Company has recently incorporated +various materials in its sandals, including Spider +Rubber®— a sticky, non-slip rubber outsole material +for use across wet and dry terrain, Traction +Rubber TM — a highly durable and abrasion +resistant material designed specifically for the extra rigors of +land use, and River Rubber® — a non-slip material +designed to offer superior grip on smooth wet surfaces such as +rocks, fiberglass and raft rubber. +While Teva continues to develop high performance +sport sandals and other rugged outdoor footwear by continually +updating and designing new styles for these categories, the +Company also continues to increase its focus on the casual +footwear market through its Teva, Simple and Ugg brands. The +Company continues to introduce and offer new styles of leather +and other casual footwear for men and women and has added +several new styles of hikers, sport sandals, slip-ons and other +shoes to its Teva children’s offering for Spring 2002. The +Company has also added several new styles of clogs, sandals, +sneakers and leather casuals to its offerings under the Simple +line for 2002 including several athletically inspired styles for +men and women as well as a re-emphasis on the men’s +footwear business, an area where the Company had considerable +success in the past. The 2002 Simple line also includes a series +of new, innovative styles of womens’ footwear featuring +models with low profiles and sleek lines. By monitoring changes +in consumer lifestyles and preferences and then focusing first +on function and practicality, the Company develops footwear +designed to appeal to quality-minded consumers seeking +comfortable casual footwear. +In recent years, the Company has taken steps to +take Ugg’s longtime success in the Southern California +market and duplicate that success across the United States. In +support of this effort, the Company has taken steps in recent +years to update the Ugg products in order to make them more +functional for use in cold and wet climates. For example, the +2002 line includes a new Aspen Collection of cold weather +boots, shoes and clogs featuring seam sealed lugged outsoles and +waterproof leathers combined with sheepskin linings for high +functionality and comfort. In addition, the Company has added a +new Brooks Series to its women’s Town Collection, featuring +styles with a new lugged outsole, contemporary styling and wool +fleece linings which are designed to keep feet dry and +comfortable in both warm and cold climates. The Ugg brand +continues to design and offer more fashionable and unique upper +styles to help differentiate Ugg from the low cost imitation +brands. +Integral factors in the design and product +development process include an evaluation of the availability +and cost of raw materials, the capabilities of the factories +that will manufacture products and the target retail price of +new models and lines. The design and development staff works +closely with brand management to develop new styles of footwear +and components for their various product lines. Drawings and +prototypes are utilized to produce samples of proposed new +concepts. Throughout the development process, members of the +design staff coordinate closely with each other and with the +Company’s product development, manufacturing and sourcing +personnel toward a common goal of developing and sourcing a +high-quality product that will be delivered on a timely basis. +The Company endeavors to minimize the risk of changing fashion +trends by offering a diverse line of functional products and +closely monitoring sales to its accounts after introduction. +Product Sourcing +The Company currently sources all of its Teva and +Simple footwear and a portion of its Ugg footwear from +independent contract manufacturers in the Far East. The Company +imports the remainder of its Ugg footwear from independent +contract manufacturers in Australia and New Zealand. The Company +is not involved in the direct manufacture of footwear, but +rather sources completed footwear, produced to required +specifications, directly from these independent contractors. As +the Company continues to grow, it expects to continue to rely +heavily on its independent contractors for its sourcing needs. +The manufacturing of footwear by the +Company’s independent contractors is performed in +accordance with detailed specifications provided by the Company +and is subject to quality control standards. In efforts to +14 +Table of Contents +ensure the production of high quality products, +many of the materials and components used in production are +purchased from independent suppliers designated by the Company. +The Company believes that its completed footwear as well as the +various raw materials and components used in the manufacture of +the footwear, including rubber, leather, nylon webbing and +sheepskin, are generally available from multiple sources at +competitive prices. +The Company generally does not have any long-term +agreements with the manufacturers or suppliers of its products, +but does business based on individual purchase orders. +Quality Control +The Company has instituted inspections and other +procedures to satisfy the high quality demanded by users of the +Company’s products. The Company’s quality assurance +program includes inspection procedures at the factory level as +well as a final inspection upon arrival of product at the +Company’s distribution center. The Company uses on-site +inspectors at its independent suppliers who oversee the +production process and perform quality assurance inspections. In +addition, the products undergo further inspection procedures +prior to being accepted at the Company’s domestic +distribution center. +Licenses +Teva License. The +Company has been selling its Teva line of sport sandals and +other footwear since 1985 pursuant to various license +arrangements with Mark Thatcher, the inventor of the Teva sport +sandal and the owner of the Teva patents and trademark. +Mr. Thatcher owns seven United States patents on designs +used in Teva footwear and has a United States trademark +registration for the Teva mark. +On June 7, 1999, the Company signed a new +license agreement (the “License Agreement”) for Teva, +which became effective January 1, 2000. Under the License +Agreement, the Company has the exclusive worldwide rights for +the manufacture and distribution of Teva footwear through 2004. +Apparel and other non-footwear products are not covered by the +License Agreement. The License Agreement is automatically +renewable through 2008 and through 2011 under two renewal +options, provided that minimum required sales levels are +achieved. These required minimum annual sales levels are +$107.9 million in 2004 and $137.3 million in 2008, +both of which are significantly greater than the annual sales of +$61.2 million achieved by the Company in 2001. The Company +believes it is unlikely to achieve the contractual minimum for +2004 and has begun discussions with the licensor to address this +issue. However, the Company can provide no assurances that it +will be successful in its efforts to reach an acceptable +resolution. +As with the previous arrangement, the License +Agreement provides for a sliding scale of royalty rates, +depending on sales levels, and includes guaranteed minimum +annual royalty amounts. Additionally, the License Agreement +provides for an increase in the required amount of marketing +expenditures, depending on sales levels and varying by +territory. In addition to the minimum contractual marketing +expenditures, the Company and the licensor have agreed to each +contribute annually a certain percentage of sales toward the +promotion of the Teva brand and trademark, with or without +particular reference to individual Teva styles. +As additional consideration, the Company paid the +licensor a licensing fee of $1,000,000 in 1999 and issued the +licensor 428,743 shares of its previously unissued common stock +valued at $1,608,000. The Company has recorded the license as an +intangible asset equal to the cash and market value of the stock +issued on the date of the License Agreement. These shares are +subject to various contractual and other holding period +requirements. In addition, the Company has agreed to grant the +licensor not less than 50,000 stock options on the +Company’s common stock annually, at an exercise price equal +to the market value on the date of grant. +The licensor retains the rights to approve the +quality of the licensed products produced, all marketing, +advertising and promotional plans and materials, and the +distribution channels and customers to whom the Company can sell +the licensed products. In addition, the License Agreement +provides for minimum annual research and development spending +levels for the Company with respect to the Teva products and +restricts the volume of closeouts and seconds which the Company +is able to sell each year. +15 +Table of Contents +The License Agreement provides that the licensor, +in his sole discretion, may take any action against parties +believed to be infringing upon the licensor’s trademark, +patents and other intellectual property. The licensor is fully +responsible for any legal and other costs incurred in such +actions and is entitled to any recovery resulting from the +actions. The Company may not participate in any such action or +in any other action regarding the infringement of the Teva +intellectual property without the licensor’s prior written +consent. +In the event that the license term is +automatically renewed beyond 2004, the Company must achieve +minimum annual sales levels for the years 2005 through 2011. +These minimum annual sales levels are based upon certain +percentages of net sales in the preceding calendar year. If the +Company is not able to achieve the minimum annual sales levels +for two years during a renewal term, the License Agreement can +be terminated at the option of the licensor. Currently, annual +sales of Teva products are substantially below the required +minimums. +During the term of the License Agreement, +including the renewal terms, the Company is prohibited from +manufacturing, marketing, selling and distributing any sandals +other than Teva sandals. In addition, for the two years +following the termination of the License Agreement, the Company +is prohibited from manufacturing, marketing, selling and +distributing sandals, in general. However, the Company may +continue to manufacture, market, sell and distribute all styles +and models of sandals offered under its Simple product line +which existed as of the date of the License Agreement as well as +all styles subsequently approved by the licensor. +The License Agreement can be terminated under +several circumstances, if they remain uncured for specific +periods of time. These circumstances include the following, +among others: if either party becomes insolvent or bankrupt; if +the Company offers sandals which compete with the Teva products +or otherwise engages in activities which compete with the Teva +products; if the Company transfers substantially all of its +property or stock to other parties; if the Company sells +unapproved merchandise in violation of the License Agreement; or +if the Company or the licensor otherwise violate or breach the +terms of the License Agreement. +In connection with the execution of the most +recent license agreement with Mark Thatcher, the Company +received an option to buy Teva and virtually all of its assets, +including all worldwide rights to Teva. The option price is +based on formulas tied to net sales of Teva products and varies +depending on when the option is exercised. For the first option +period, January 1, 2000 through December 31, 2003, the +option price is for an amount equal to the greater of +(i) $61.6 million or (ii) 75% of the largest +calendar year revenues since January 1, 2000 for the Teva +brand, plus $1.6 million. In addition, the Company would +issue to Mr. Thatcher 100,000 shares of common stock and +options to purchase 100,000 shares of common stock. The purchase +price for the second option period, January 1, 2006 to +December 31, 2008, is equal to 110% of the average of the +aggregate sales for all Teva products for the two calendar years +since January 1, 2000 with the highest aggregate net sales. +If the Company does not exercise its option to acquire Teva, the +licensor has the option to acquire the Teva distribution rights +from the Company for the period from January 1, 2010 to +December 31, 2011, the end of the license term, and the +option price is based on a formula tied to the Company’s +earnings before interest, taxes, depreciation and amortization. +The Company is currently evaluating the possibility of +exercising the option in the January 1, 2000 to +December 31, 2003 option period. The payment of the +purchase price must be completed within 90 days of the +exercise of the purchase option. If the Company exercises its +purchase option, but subsequently fails to complete the purchase +within the 90 day payment period, the purchase option and the +Option Agreement will automatically be terminated. +Sale of Heirlooms, Inc. +The Company and Bob Eason, the designer and +founder of Picante clothing, were parties to an agreement +pursuant to which the Company owned 50% of Heirlooms, Inc. +(“Heirlooms”), the manufacturer and distributor of +Picante clothing. In January 2001, the Company sold its 50% +interest in Heirlooms back to Mr. Eason for cash of +approximately $1,200,000 and a note receivable of approximately +$420,000, which was secured by a secondary security interest in +the assets of Heirlooms. The selling price was for an amount +that approximated the net carrying value of the underlying +assets and, accordingly, the resulting gain on the sale was not +significant. +16 +Table of Contents +Patents and Trademarks +Mr. Thatcher holds seven United States +patents and one patent in each of Australia, New Zealand, Korea, +Germany, France, China, Japan and the United Kingdom for Teva +footwear. As a result of the expiration of the applicable period +during which foreign patent applications were required to have +been filed, Mr. Thatcher does not and cannot hold such +patent rights in other countries. Mr. Thatcher also +currently holds Teva trademark rights in the United States and +in several other countries, including, among others, France, +Germany, the United Kingdom, Japan and Australia. +Mr. Thatcher’s patent and trademark rights are +licensed to the Company under the License Agreement discussed +previously. Both the Company and Mr. Thatcher regard such +proprietary rights as valuable assets, and the Company +cooperates with Mr. Thatcher in vigorously protecting such +rights against infringement by third parties. To date, +Mr. Thatcher has successfully enforced his patent and +trademark rights in all 20 concluded lawsuits brought +against such third parties. Under certain circumstances, if +Mr. Thatcher declines to challenge a potential +infringement, the Company may bring an infringement action at +its own cost, with Mr. Thatcher’s prior written +consent. See “Licenses — Teva License.” +The Company owns the Simple and Ugg trademarks +and has applied for or received registrations for them in the +United States and in many foreign countries. The Company has +selectively registered style category names and marketing +slogans. In addition, the Company holds two design patents for +its footwear products. +The Company has acquired the patent and +trademarks for Alp®sport sandals and has registered the +Deckers trademark. +Backlog +Historically, the Company has encouraged and has +received a significant portion of its orders as preseason +orders, which are generally placed by customers approximately +four to eight months prior to shipment date. As discussed above, +the Company has emphasized this “futures” business, as +compared to “at once” sales, as it allows the Company +to better forecast its inventory requirements and assists with +the Company’s sourcing schedule. As a result, the Company +provides its customers with incentives to participate in such +preseason programs. Unfilled customer orders +(“backlog”), as of any date, represent orders +scheduled to be shipped at a future date and do not represent +firm sales. The mix of future and immediate delivery orders can +vary significantly from quarter to quarter and year to year. The +backlog as of a particular date is affected by a number of +factors, including seasonality and the scheduling of manufacture +and shipment of products as well as variations in the quarter to +quarter and year to year preseason incentive programs. As a +result, comparisons of backlog from period to period are not +meaningful and the Company’s backlog at any given time is +generally not indicative of sales levels expected to be achieved +in the future. +Competition +The casual, outdoor and athletic footwear markets +are highly competitive. The Company believes that currently its +largest competitors of the Teva line are Nike, Adidas, +Timberland, Merrell, Columbia and Salomon. The principal +competitors of Simple’s casual line include Steve Madden, +Dr. Marten, Camper, and Kenneth Cole and of Simple’s +sneaker/sandal line include Skechers, Diesel, Steve Madden, +Puma, NM70 and Guess. Ugg’s competitors include Merrell, +Rocket Dog, Acorn, Aussie Dogs, LB Evans and Timberland, as well +as retailers’ private label footwear. +Competition in the Company’s footwear is +primarily based on brand awareness, product quality, design, +price points, fashion appeal, marketing, distribution, +performance and brand positioning. The Company’s Teva line +of footwear competes primarily on the basis of its authenticity +as a recognized brand in the outdoor market, its consumer brand +recognition as one of the first sandals of its kind, as well as +its high performance nature and its diversity of styles offered. +In addition, several of the most popular styles employ a +distinctive patented strapping system, which contributes to +performance and the brand’s consumer recognition. The +Company competes through its Simple line as an alternative brand +offering a diversity of simple, back-to-basics styles designed +for a variety of recreational and leisure activities. Ugg +competes primarily on the basis of +17 +Table of Contents +its authenticity as well as its brand name +recognition as a high quality premium luxury brand, identifiable +with the United States sheepskin footwear market. The Company +believes its business strategy has resulted in increased +awareness for its brands. However, no assurance can be given +that in the future the Company will be able to maintain or +further increase its brand awareness, maintain or increase its +market share or respond to changing consumer preferences. +Risks of Foreign Operations/ Restrictions on +Imports +The Company’s operations are subject to the +customary risks of doing business abroad, including, but not +limited to, currency fluctuations, customs duties and related +fees, various import controls and other non-tariff barriers +(e.g., quotas), the cost of transportation, restrictions on the +transfer of funds, labor unrest and strikes, and in certain +parts of the world, political instability. Countries where the +Company’s products are manufactured and sold may, from time +to time, seek to increase customs duties or impose quotas, all +of which have the potential to affect the Company’s +operations and its ability to maintain or increase the current +level of importation of the Company’s products. The Company +is unable to predict the likelihood or frequency of the +occurrence of any of these events. +The products imported by the Company into the +United States are subject to various duty rates which are +established by law. At the present time these duties range +between 8.5% and 12.5% of the entered value of footwear with +uppers made principally of leather or sheepskin, and 6.0% and +37.5%, plus $.90 per pair, of the entered value of footwear with +uppers made principally of synthetic textiles or plastic. +Certain products imported by the Company are exempt from duties +pursuant to laws pertaining to products manufactured in certain +beneficiary countries. “Entered value” means the value +taken into account for purposes of determining the amount of any +customs duties or any other duties which may be imposed on the +importation of any property. In general, the entered value is +normally based on the price paid or payable by the Company to +the seller of the imported merchandise. +From time to time, the Company may be subject to +claims for additional duties arising as a result of the United +States Customs Service, or similar agencies of foreign +countries, disagreeing with the classification and/or valuation +used by the Company to enter various styles of footwear. +In 1997, the European Commission enacted +anti-dumping duties of 49.2% on certain types of footwear +imported into Europe from China and Indonesia. Dutch Customs has +issued an opinion to the Company that certain popular Teva +styles are covered by this anti-dumping duty legislation. The +Company has been contesting the opinion and is working with +Dutch Customs to resolve the situation. The Company has since +obtained, and is using, alternative sourcing for the potentially +impacted products from sources outside of China in an effort to +reduce the potential risk in the future. In the event that Dutch +Customs makes a final determination that the anti-dumping +provisions are applicable, the Company would have an exposure +for prior unpaid anti-dumping duties during 1997 of +approximately $500,000, which has been fully accrued as of +December 31, 2001. +The European communities also impose quantitative +limits on imports from China of certain leather upper and +textile upper footwear. The Company is unable to predict how +long the anti-dumping duty and import quota restrictions will +remain in effect or changes in the scope or severity of such +restrictions. +Employees +At December 31, 2001, the Company employed +approximately 98 full-time employees in its U.S. +facilities, 4 at its European subsidiary and 28 at its Hong Kong +subsidiaries, none of whom is represented by a union. The +Company believes its relationship with its employees is good. +Item 2. Properties +The Company leases approximately +30,000 square feet for its corporate offices in Goleta, +California and approximately 126,000 square feet for its +warehouse facility in Ventura County, California. The Company +also leases approximately 1,000 square feet of office space in +the Netherlands for its European sales and marketing +18 +Table of Contents +efforts, approximately 2,000 square feet of +office space in Macau and 2,600 square feet in China for its Far +East staff and less than 1,000 square feet of office space in +Japan to support the Asian sales efforts. The Company paid +approximately $1,074,000 in rent for all of its facilities in +2001. The terms of the lease for the Company’s European +facilities call for “at-will” termination and the +Company expects to terminate the lease in April 2002. The term +of the lease for the Company’s corporate office is +currently on a month to month basis with a six month termination +notice required. The lease for the Company’s Ventura County +warehouse expires in December 2003 and the lease for the +Company’s Macau office space expires in August 2003. The +lease for the Company’s China office expires in June 2002. +The Japanese office is rented on a month-to-month basis. The +Company believes that its existing corporate, manufacturing and +warehousing space will be adequate to meet its current and +foreseeable requirements, or that suitable additional or +alternative space for the Company’s corporate office will +be available as needed on commercially reasonable terms. +Item 3. Legal +Proceedings +An action was brought against the Company in 1995 +by Molly Strong-Butts and Yetti by Molly, Ltd. (collectively, +Molly) which alleged, among other things, that the Company +violated a nondisclosure agreement and obtained trade secrets +regarding a line of winter footwear which Deckers stopped +producing in 1994. A jury verdict was obtained against the +Company in district court in March 1999 aggregating $1,785,000 +for the two plaintiffs. In August 2001 the United States Court +of Appeals for the Ninth Circuit affirmed the district +court’s decision for a judgment against the Company, +resulting in a settlement of approximately $2.0 million, +including interest, which the Company paid in November 2001. In +addition, the court of appeals reversed the district +court’s refusal to consider an award of exemplary damages +or attorney fees and remanded to the district court for further +proceedings. In the event that further legal fees and exemplary +damages are subsequently awarded, the Company would have an +exposure beyond the amounts provided for in the financial +statements of up to an additional $2.5 million. +The Company is a party to litigation in the +Netherlands with a former European distributor (the +“Distributor”), alleging breach of contract related to +the Company’s termination of the previous distributor +arrangement. The Company denies the allegations and has filed a +countersuit against the Distributor for breach of contract. In +the event that the Company is not successful in this matter, the +Company believes it would have a potential exposure beyond the +amounts provided for in the financial statements of up to an +additional $500,000. +The Company is also involved in routine +litigation arising in the ordinary course of business. Such +routine matters, if decided adversely to the Company, would not, +in the opinion of management, have a material adverse effect on +the financial condition or results of operations of the Company. +From time to time, Mr. Thatcher and the Company are also +involved in other legal proceedings to protect the Teva patents +and trademarks from infringement by third parties. Any decision +or settlement in any such infringement proceeding which allowed +a third party to continue to manufacture and sell the products +at issue could have an adverse effect on the Company’s +sales to the extent such other similar competing products are +purchased in lieu of the Company’s products. +Item 4. Submission of Matters to a +Vote of Security Holders +None. +19 +Table of Contents +PART II +Item 5. Market for Registrant’s +Common Equity and Related Stockholder Matters +The Company’s Common Stock is traded in the +National Market System of the NASDAQ stock market (the +“NMS”) under the symbol “DECK.” +As of February 28, 2002, the number of +holders of record of the Common Stock was 156 and the number of +beneficial owners was approximately 2,100. +2001 +2000 +High +Low +High +Low +First Quarter +$ +5.13 +$ +3.38 +$ +4.13 +$ +2.50 +Second Quarter +4.80 +3.41 +4.13 +2.94 +Third Quarter +4.90 +3.23 +6.50 +3.00 +Fourth Quarter +4.75 +3.41 +5.86 +4.13 +The Company has never declared or paid cash +dividends on its Common Stock and currently intends to retain +any earnings for use in its business and does not anticipate +paying any cash dividends in the foreseeable future. Payment of +dividends is within the discretion of the Company’s Board +of Directors and will depend upon, among other factors, dividend +restrictions within the Company’s credit facilities, the +Company’s earnings, financial condition and capital +requirements. The Company’s credit facility currently +prohibits the issuance of dividends. See “Management’s +Discussion and Analysis of Financial Condition and Results of +Operations — Liquidity and Capital Resources.” +20 +Table of Contents +Item 6. Selected Financial +Data +The following tables set forth selected +consolidated financial data of the Company as of and for each of +the years in the five-year period ended December 31, 2001. +Years ended December 31 +2001 +2000 +1999 +1998 +1997 +(In thousands, except per share data) +Income Statement Data +Net sales +$ +91,461 +113,738 +111,099 +103,534 +108,135 +Cost of sales +52,903 +63,540 +66,051 +67,268 +64,049 +Gross profit +38,558 +50,198 +45,048 +36,266 +44,086 +Selling, general and administrative expenses +34,040 +37,568 +38,298 +39,064 +35,474 +Litigation Costs +2,180 +— +— +— +— +Loss on factory closure +— +— +— +— +500 +Earnings (loss) from operations +2,338 +12,630 +6,750 +(2,798 +) +8,112 +Other expense (income) +(473 +) +295 +1,508 +1,320 +143 +Earnings (loss) before income taxes (benefit) +2,811 +12,335 +5,242 +(4,118 +) +7,969 +Income taxes (benefit) +1,185 +5,320 +2,358 +(1,211 +) +3,445 +Net earnings (loss) +$ +1,626 +7,015 +2,884 +(2,907 +) +4,524 +Net earnings (loss) per common share: +Basic +$ +.18 +.77 +.33 +(.34 +) +.50 +Diluted +.17 +.74 +.32 +(.34 +) +.50 +Weighted-average common shares outstanding: +Basic +9,247 +9,093 +8,834 +8,632 +8,961 +Diluted +9,661 +9,476 +8,981 +8,632 +9,012 +At December 31 +2001 +2000 +1999 +1998 +1997 +(In thousands) +Balance Sheet Data +Current assets +$ +61,358 +53,650 +49,044 +59,309 +48,801 +Current liabilities +19,193 +13,168 +10,386 +17,174 +9,579 +Total assets +85,884 +77,712 +73,482 +84,373 +74,693 +Long-term debt, less current Installments +159 +449 +6,276 +15,199 +7,983 +Total stockholders’ equity +66,532 +64,095 +56,820 +52,000 +57,131 +21 +Table of Contents +Item 7. +Management’s Discussion and Analysis +of Financial Condition and Results of Operations +The following discussion should be read in +conjunction with the consolidated financial statements and notes +thereto. This Annual Report on Form 10-K includes +forward-looking statements within the meaning of +Section 21E of the Securities Exchange Act of 1934 that +involve risk and uncertainty, such as forward-looking statements +relating to expectations regarding sales and earnings per share, +expectations regarding the Company’s liquidity, the +potential impact of certain litigation, the potential impact of +the possible acquisition of Teva and the impact of seasonality +on the Company’s operations. Actual results may vary. Some +of the factors that could cause actual results to differ +materially from those in the forward-looking statements are +identified in the accompanying “Risk Factors” section, +the last paragraph under “Liquidity and Capital +Resources”, the discussion under “Seasonality” +and other sections of this Annual Report on Form 10-K. +These forward-looking statements are based on the Company’s +expectations as of March 2002. No one should assume that any +forward-looking statement made by the Company will remain +consistent with the Company’s expectations after the date +the forward-looking statement is made. The Company disclaims any +obligation to update any such factors or to publicly announce +the results of any revisions to any of the forward-looking +statements contained in this Annual Report on Form 10-K. +Results of Operations +The following table is derived from the +Company’s statement of earnings and sets forth, for the +periods indicated, certain operating data as a percentage of net +sales. +Years ended December 31 +2001 +2000 +1999 +Net sales +100.0 +% +100.0 +% +100.0 +% +Cost of sales +57.8 +55.9 +59.5 +Gross profit +42.2 +44.1 +40.5 +Selling, general and administrative expenses +37.2 +33.0 +34.5 +Litigation costs +2.4 +— +— +Earnings from operations +2.6 +11.1 +6.0 +Other expense (income) +(0.5 +) +0.2 +1.3 +Earnings before income taxes +3.1 +10.9 +4.7 +Income taxes +1.3 +4.7 +2.1 +Net earnings +1.8 +6.2 +2.6 +Year Ended December 31, 2001 +Compared to Year Ended December 31, 2000 +Net sales decreased by $22,277,000, or 19.6%, +between the years ended December 31, 2001 and 2000. The +decrease is largely attributable to the weakness in the domestic +economy, the softness in the retail environment, the reduction +in international sales, an overall decrease in demand for +sandals in 2001, delays in new product introductions for Teva, +the colder weather during Spring 2001 in the Company’s key +markets for Teva sandals and the reduction in sales to Track +‘n Trail, one of the Company’s largest customers, +which filed for bankruptcy in April 2001. In addition, in +January 2001, the Company sold its interest in Heirlooms, Inc., +the distributor of Picante brand apparel, and approximately +$2,316,000 of the decrease in sales is due to the exclusion of +sales resulting from the Company’s sale of this brand. +Aggregate net sales of Teva decreased to $61,221,000 for the +year ended December 31, 2001 from $79,732,000 for the year +ended December 31, 2000, a 23.2% decrease. Net sales of +Teva represented 66.9% and 70.1% of net sales in the years ended +December 31, 2001 and 2000, respectively. Net sales of +footwear under the Simple product line decreased 33.5% to +$10,853,000 from $16,328,000 from the year ended +December 31, 2000. Net sales of Ugg increased 25.3% to a +record $19,185,000 for the year ended December 31, 2001 +from $15,310,000 for the year ended December 31, 2000 +resulting from continued strength in the brand’s +historically strong California market, a continuing expansion +outside California, an overall increase in the popularity of the +Ugg brand and the introduction of several new Ugg styles in +2001. Overall, international sales for all of the Company’s +products decreased 32.2% +22 +Table of Contents +to $21,096,000 from $31,135,000, representing +23.1% of net sales in 2001 and 27.4% in 2000. The volume of +footwear sold decreased 13.1% to 3,705,000 pairs during the year +ended December 31, 2001 from 4,265,000 pairs during the +year ended December 31, 2000, for the reasons discussed +above. +The weighted-average wholesale price per pair +sold during the year ended December 31, 2001 decreased 4.9% +to $24.26 from $25.51 for the year ended December 31, 2000. +The decrease was primarily due to an increase in the volume of +closeout sales during 2001 compared to 2000. In addition, the +Company experienced a change in sales mix away from certain +higher priced styles, including the leather casuals, and toward +styles with lower average selling prices, including thongs and +several styles introduced in 2001 at lower price points. This +was partially offset by the impact of a shift in sales mix +toward domestic sales, which generally have a higher average +selling price than sales in the international markets, and the +Company sold a higher volume of Ugg products in 2001 at a much +higher average selling price than Teva and Simple styles. +Cost of sales decreased by $10,637,000, or 16.7%, +to $52,903,000 for the year ended December 31, 2001, +compared with $63,540,000 for the year ended December 31, +2000. Gross profit decreased by $11,640,000, or 23.2%, to +$38,558,000 for the year ended December 31, 2001 from +$50,198,000 for the year ended December 31, 2000 and gross +margin decreased to 42.2% from 44.1%. The decrease in gross +margin was primarily due to an increased impact of closeout +sales, as well as lower margins in the pricing of the 2001 +product line compared to the 2000 line in response to +competitive pressures, partially offset by a reduction in +inventory write-downs. +The Company carries its inventories at the lower +of cost or market, using a reserve for inventory obsolescence to +adjust the carrying values to market where necessary based on +ongoing reviews of estimated net realizable values of its +inventories. For the year ended December 31, 2001, the +Company had a net decrease in the reserve for inventory +obsolescence of approximately $321,000, primarily due to the +sale of domestic inventory for Teva and Simple product for which +a write-down had previously been recorded, as well as the sale +of the Company’s remaining Canadian inventory, for which a +write-down had also previously been recorded in connection with +the Company’s transition to a distributor in the Canadian +market. For the year ended December 31, 2000, the Company +had net additions to the reserve for inventory obsolescence of +approximately $435,000, reflecting inventory write-downs to +estimated market values for Teva and Simple in the United States +and write-downs of Canadian Teva and Simple inventory in +connection with the shift to a distributor for that territory. +Selling, general and administrative expenses +decreased by $3,528,000, or 9.4%, to $34,040,000 for the year +ended December 31, 2001, compared with $37,568,000 the year +ended December 31, 2000, and increased as a percentage of +net sales to 37.2% in 2001 from 33.0% in 2000. The decrease in +selling, general and administrative expenses was primarily due +to lower commissions and royalties on the lower sales levels, +reductions in marketing costs, payroll costs and bad debt +expense, as well as the elimination of selling, general and +administrative expenses associated with the Company’s +former Heirlooms subsidiary. In addition, during 2000 the +Company had a non-recurring charge of approximately $400,000 for +European anti-dumping duties dating back to 1997. These +reductions were partially offset by additional amortization +expense in 2001 resulting from the Company’s +$1.6 million payment for an extension of the option term +for the Company’s option to acquire Teva, which is being +amortized over the three-year period ending December 31, +2003. Despite the overall decrease in dollar amounts, the +selling, general and administrative expenses as a percentage of +net sales increased for the year ended December 31, 2001 +compared to the year ended December 31, 2000 as certain +operating costs are fixed and did not decrease in proportion to +the decrease in consolidated net sales. +During the year ended December 31, 2001, the +United States Court of Appeals affirmed the March 17, 1999 +judgment against the Company in connection with a case brought +in Montana. As a result, the Company recorded a charge of +approximately $2.2 million related to this litigation in +2001. +Earnings from operations for the Teva brand were +$12,407,000 for the year ended December 31, 2001 compared +to $19,953,000 for year ended December 31, 2000. The +decrease is largely due to the decrease in sales in both the +domestic and international markets, an increased impact of +closeout sales, lower gross margins in the pricing of the 2001 +line compared to the 2000 line, and increased amortization costs +related to +23 +Table of Contents +the $1.6 million extension of the Teva +purchase option, partially offset by a reduced impact of +inventory write-downs and lower marketing costs. The Simple +brand experienced earnings from operations of $241,000 for the +year ended December 31, 2001 compared to $2,501,000 for the +year ended December 31, 2000 as a result of the decrease in +sales, the increased impact of closeout sales during the period, +lower gross margins on certain newly introduced styles and the +bad debt write-off for Track ‘n Trail. Earnings from +operations for the Ugg brand were $3,674,000 for the year ended +December 31, 2001 compared to earnings from operations of +$2,863,000 for the year ended December 31, 2000 largely due +to the increase in sales, partially offset by the bad debt +write-off for Track ‘n Trail. Additionally, the +earnings from operations for the Teva and Simple segments +decreased versus that experienced in the year ago period as +certain costs are fixed and did not decrease in proportion to +the decrease in consolidated net sales. +Net interest income was $308,000 for the year +ended December 31, 2001 compared with net interest expense +of $67,000 for the year ended December 31, 2000, primarily +due to the Company’s significantly improved cash position +in 2001. +For the year ended December 31, 2001, income +tax expense was $1,185,000, representing an effective income tax +rate of 42.2%. For the year ended December 31, 2000, income +tax expense was $5,320,000, representing an effective income tax +rate of 43.1%. The decrease in the effective income tax rate in +2001 is largely attributed to the elimination of a previously +existing valuation allowance against deferred tax assets in 2001 +related to net operating loss and other income tax credit +carryforwards being fully utilized, partially offset by the +increased impact of non-deductible goodwill amortization in 2001. +For the year ended December 31, 2001, the +Company’s net earnings decreased 76.8%, to $1,626,000 from +$7,015,000 for the year ended December 31, 2000, for the +reasons discussed above. +Year Ended December 31, 2000 +Compared to Year Ended December 31, 1999 +Net sales increased by $2,639,000, or 2.4%, +between the years ended December 31, 2000 and 1999. +Aggregate net sales of Teva decreased to $79,732,000 for the +year ended December 31, 2000 from $80,963,000 for the year +ended December 31, 1999, a 1.5% decrease. This decrease +occurred as the Company sold significantly fewer products to the +athletic retail channels as the Company did not target this +distribution channel in 2000. However, given the renewed +strength in the athletic market since that time, the Company has +subsequently taken steps to return to this segment of the market +for 2002 and beyond. This decrease in sales in the athletic +retail channels was partially offset by an increase in sales in +international markets and the introduction of hikers and other +closed Teva footwear in the Fall of 2000. Net sales of Teva +represented 70.1% and 72.9% of net sales in the years ended +December 31, 2000 and 1999, respectively. Net sales of +footwear under the Simple product line increased 5.1% to +$16,328,000 from $15,529,000 from the year ended +December 31, 1999. The increase in Simple sales was driven +primarily by increased sales in the United States on strength in +its clog and sandal categories, partially offset by weakness in +the brand’s international markets. Net sales of Ugg +increased 26.5% to $15,310,000 for the year ended +December 31, 2000 from $12,104,000 for the year ended +December 31, 1999. This increase was fueled by early cold +weather and the introduction of new models in 2000, as well as +endorsement on Oprah Winfrey’s television program and +magazine. In addition, the Company was successful in its +continued efforts to expand its Ugg business beyond its +historically strong California business. Overall, international +sales for all of the Company’s products increased 7.9% to +$31,135,000 from $28,859,000, representing 27.4% of net sales in +2000 and 26.0% in 1999, reflecting Teva’s expansion in the +European and Asian markets. The volume of footwear sold +increased 2.9% to 4,265,000 pairs during the year ended +December 31, 2000 from 4,143,000 pairs during the year +ended December 31, 1999, for the reasons discussed above. +The weighted-average wholesale price per pair +sold during the year ended December 31, 2000 increased 0.2% +to $25.51 from $25.46 for the year ended December 31, 1999. +The slight increase was primarily due to fewer discounted sales +in 2000 and a higher volume of Ugg sales in 2000, which carry a +much higher average selling price than Teva and Simple. This was +partially offset by the impact of a shift in sales mix toward +international sales, which generally have a lower average +selling price than sales in the domestic market, as well as the +Company sold a higher proportion of lower priced footwear such +as children’s styles and thongs. +24 +Table of Contents +Cost of sales decreased by $2,511,000, or 3.8%, +to $63,540,000 for the year ended December 31, 2000, +compared with $66,051,000 for the year ended December 31, +1999. Gross profit increased by $5,150,000, or 11.4%, to +$50,198,000 for the year ended December 31, 2000 from +$45,048,000 for the year ended December 31, 1999 and gross +margin increased to 44.1% from 40.5%. The increase was primarily +the result of improved inventory management, the reduced impact +of sales returns and discounted sales and improved pricing and +sourcing. +The Company carries its inventories at the lower +of cost or market, using a reserve for inventory obsolescence to +adjust the carrying values to market where necessary based on +ongoing reviews of estimated net realizable values of its +inventories. For the year ended December 31, 2000, the +Company had net additions to the reserve for inventory +obsolescence of approximately $435,000, reflecting inventory +write-downs to estimated market values for Teva and Simple in +the United States and write-downs of Canadian Teva and Simple +inventory in connection with the shift to a distributor for that +territory. For the year ended December 31, 1999, the +Company had a net decrease in the reserve for inventory +obsolescence of approximately $2,127,000 as the Company sold the +underlying inventory for which a write-down had previously been +recorded. A substantial portion of the reduction of the +inventory reserve was related to Simple finished goods that were +reserved in 1998 and were subsequently sold at discounted prices +in 1999. +Selling, general and administrative expenses +decreased by $730,000, or 1.9%, to $37,568,000 for the year +ended December 31, 2000, compared with $38,298,000 for the +year ended December 31, 1999, and decreased as a percentage +of net sales to 33.0% in 2000 from 34.5% in 1999. The decrease +in selling, general and administrative expenses as a percentage +of sales was primarily due to the non-recurrence of the special +charges incurred in the first half of 1999 related to severance +costs and litigation, as well as reductions in apparel operating +costs, warehouse costs and European operating costs. These +reductions were partially offset by increased marketing and +promotional spending in 2000 compared to 1999 and the increase +in the reserve for exposure to European anti-dumping duties in +2000. +Earnings from operations for the Teva brand were +$19,953,000 for the year ended December 31, 2000 compared +to $16,775,000 for year ended December 31, 1999. The +increase is largely due to higher gross margins due to +improvements in the pricing and sourcing of the 2000 line, fewer +inventory write-downs in 2000 and lower apparel costs with the +closing of the apparel business, partially offset by an increase +in marketing expenses. The Simple brand experienced earnings +from operations of $2,501,000 for the year ended +December 31, 2000 compared to earnings from operations of +$3,701,000 for the year ended December 31, 1999 as a result +of increased inventory write-downs, increased marketing, bad +debts and payroll costs. Earnings from operations for the Ugg +brand were $2,863,000 for the year ended December 31, 2000 +compared to earnings from operations of $1,189,000 for the year +ended December 31, 1999 largely due to the increase in +sales and fewer inventory write-downs. +Net interest expense decreased to $67,000 for the +year ended December 31, 2000 from $1,404,000 for the year +ended December 31, 1999, primarily due to significantly +decreased average borrowings on the Company’s credit +facility in 2000, partially offset by higher average interest +rates. +For the year ended December 31, 2000, income +tax expense was $5,320,000, representing an effective income tax +rate of 43.1%. For the year ended December 31, 1999, income +tax expense was $2,358,000, representing an effective income tax +rate of 45.0%. The decrease in the effective income tax rate in +2000 is largely attributed to the reduced impact of the +non-deductible goodwill amortization. +For the year ended December 31, 2000, the +Company’s net earnings increased 143.2%, to $7,015,000 from +$2,884,000 for the year ended December 31, 1999, for the +reasons discussed above. +Outlook +Sales and Earnings per Share Expectations. +The Company currently expects its +sales and earnings to be lower during the first half of 2002 in +comparison to the same period last year due to weakness in the +domestic and global economies compared to last year, coupled +with the difficult retail environment and the uncertainties +related to world events. However, given the continuing strength +of the Ugg brand, which historically sells well +25 +Table of Contents +in the latter half of the year, the introduction +of a new Teva fall line of hikers, trailrunners and rugged +outdoor footwear styles, as well as some recent signs of +improvement in the economy, the Company expects year over year +gains in the third and fourth quarters of 2002. Overall, the +Company currently expects net sales for the fiscal year ending +December 31, 2002 to range from $88 million to +$91 million. For the calendar year 2002, the Company +currently expects sales of its Teva product line to range from +$58 million to $60 million; Simple to be approximately +$10 million; and Ugg to range from $20 million to +$21 million. In addition, excluding the effects of the +implementation of SFAS 142 (see discussion under +“Recently Issued Pronouncements”), the Company +currently expects its diluted earnings per share for the year +ending December 31, 2002 to range from $0.17 to $0.20. +Including the cumulative effect of the change in accounting +principle for the goodwill impairment charge resulting from the +implementation of SFAS 142, the Company expects its 2002 +net loss per share to range from approximately $0.75 to $0.78. +Liquidity and Capital Resources +The Company’s liquidity consists primarily +of cash, trade accounts receivable, inventories and a revolving +credit facility. At December 31, 2001, working capital was +$42,165,000 including $16,689,000 of cash. Cash provided by +operating activities aggregated $11,049,000 for the year ended +December 31, 2001. Trade accounts receivable decreased +11.9% since December 31, 2000 due to the reduction in sales +during the period. Inventories increased 7.5% since +December 31, 2000 primarily due to an increase in Teva +international inventories in transit from factories to +distributors at year end resulting from logistical delays in +shipping and customs clearance at December 31, 2001. +At December 31, 2001, the Company had a +credit facility (“the Facility”) providing for a +maximum availability of $50,000,000, subject to a borrowing base +of up to 85% of eligible accounts receivables, as defined, and +65% of eligible inventory, as defined. The Facility was secured +by substantially all assets of the Company and included a +tangible net worth covenant, requiring the Company to maintain +tangible net worth, as defined, of $30,000,000. The Company was +in compliance with this covenant at December 31, 2001. At +December 31, 2001, the Company had no outstanding +borrowings under the Facility and had outstanding letters of +credit aggregating $3,002,000. The Company had credit +availability under the Facility of $8,699,000 at +December 31, 2001. +On February 22, 2002, the Facility expired +and was replaced with a new revolving credit facility with a new +bank (the “New Facility”) which expires June 1, +2004. The New Facility provides for a maximum availability of +$20,000,000, subject to a borrowing base only when outstanding +borrowings, including outstanding letters of credit and foreign +currency forward contracts, exceed $10 million. In general, +the borrowing base is currently equal to 75% of eligible +accounts receivable, as defined, and 50% of eligible inventory, +as defined. The accounts receivable advance rate can increase or +decrease depending on the Company’s accounts receivable +dilution, which is calculated periodically. Up to +$10 million of borrowings may be in the form of letters of +credit. The New Facility bears interest at the bank’s prime +rate minus 0.5%, or at the Company’s option, at LIBOR plus +1.375% to 1.625%, depending on the Company’s ratio of +liabilities to effective tangible net worth, and is secured by +substantially all assets of the Company’s domestic +operations. The New Facility includes an annual commitment fee +equal to 0.125% of the average unused line amount. The agreement +underlying the New Facility includes several financial covenants +including a quick ratio requirement, a requirement for +liabilities to effective tangible net worth ratio, profitability +requirements and, when borrowings exceed $10 million, a +minimum inventory turnover requirement. The Company is in +compliance will all covenants of the New Facility. +Capital expenditures totaled $2,455,000 for the +year ended December 31, 2001. The Company’s capital +expenditures related primarily to the Company’s +implementation of a new computer system that was placed into +service in 2001. The Company currently has no material future +commitments for capital expenditures. +The Company’s Board of Directors has +authorized the repurchase of up to 2,200,000 shares of common +stock under a stock repurchase program. Such repurchases are +authorized to be made from time to time in open market or in +privately negotiated transactions, subject to price and market +conditions, the Company’s cash availability and the terms +of the Company’s new revolving credit facility. Under this +program, the +26 +Table of Contents +Company repurchased approximately 973,000 shares +for aggregate cash consideration of approximately $7,499,000 +prior to 1999. No shares were repurchased during the years ended +December 31, 1999, 2000 and 2001. At December 31, +2001, approximately 1,227,000 shares remain available for +repurchase under the program. +The Company sells its Teva line of footwear +pursuant to an exclusive licensing agreement. The agreement +became effective January 1, 2000 and continues through +December 31, 2004. If minimum annual sales levels are +achieved in 2004, the license automatically renews for an +additional four years, through December 31, 2008. If +minimum annual sales levels are achieved in 2008, the license +automatically renews again through December 31, 2011. +However, if the minimum annual sales levels are not achieved in +2004 or 2008, the license expires and the Company will no longer +be able to sell Teva footwear. These required minimum annual +sales levels are $107.9 million in 2004 and +$137.3 million in 2008, both of which are significantly +greater than the annual sales of $61.2 million achieved by +the Company in 2001. Also, Mr. Thatcher may terminate the +licensing agreement if the Company breaches certain of its other +obligations under the agreement. The Company believes it is +unlikely to achieve the contractual minimum for 2004 and has +begun discussions with the licensor to address this issue. +However, the Company can provide no assurances that it will be +successful in its efforts to reach an acceptable resolution. +Sales of Teva footwear and apparel accounted for approximately +66.9%, 70.1% and 72.9% of the Company’s net sales for +fiscal years 2001, 2000 and 1999, respectively. The termination +of the license would have a material adverse effect on the +Company’s results of operations. +The license agreement provides for royalties +using a sliding scale ranging from 5.0% to 6.5% of annual sales, +depending upon sales levels, and includes minimum annual +royalties ranging from $4.4 million in 2002 to +$7.6 million in 2011. The agreement also requires minimum +advertising and promotional expenditures of 5.0% of annual sales +for domestic sales and 6.5% for international sales. In addition +to the minimum advertising and promotional costs, the Company +and the licensor have agreed to each contribute annually 0.5% of +annual sales toward the promotion of the Teva brand and +trademark, with or without particular reference to individual +styles. +In connection with the execution of the most +recent license agreement with Mark Thatcher, the Company +received an option to buy Teva and virtually all of its assets, +including all worldwide rights to Teva. The option price is +based on formulas tied to net sales of Teva products and varies +depending on when the option is exercised. For the first option +period, January 1, 2000 to December 31, 2003, the +option price is for an amount equal to the greater of +(i) $61.6 million or (ii) 75% of the largest +calendar year revenues since January 1, 2000 for the Teva +brand, plus $1.6 million. In addition, the Company would +issue to Mr. Thatcher 100,000 shares of common stock and +options to purchase 100,000 shares of common stock. The purchase +price for the second option period, January 1, 2006 to +December 31, 2008, is equal to 110% of the average of the +aggregate net sales for all Teva products for the two calendar +years since January 1, 2000 with the highest aggregate net +sales. If the Company does not exercise its option to acquire +Teva, the licensor has the option to acquire the Teva +distribution rights from the Company for the period from +January 1, 2010 to December 31, 2011, the end of the +license term, and the option price is based on a formula tied to +the Company’s earnings before interest, taxes, depreciation +and amortization. The exercise of either option will require a +significant amount of additional financing. There are no +assurances that the additional financing will be available. +In the event that the Company exercises its +option to acquire the Teva brand, the Company would acquire +virtually all assets including all Teva patents, tradenames, +trademarks and all other intellectual property. The Company +currently has the worldwide license for Teva footwear and pays +the licensor a royalty ranging from 6.5% to 5.0% of net sales of +Teva products. By acquiring Teva, the Company would eliminate +the payment of royalties to the licensor. In addition, the +Company would own the Teva name and be able to pursue extension +of the brand into other areas including apparel, outdoor gear +and similar items, either through licensing to others or +otherwise. The Company believes there are significant +opportunities in this area given the strength of the Teva brand +in the outdoor market. In conjunction with the Company, the +licensor has already developed licensing arrangements for Teva +apparel in certain markets. By acquiring Teva, the Company would +receive these existing royalty income streams, as well as any +royalties from additional future licensees. Also, upon exercise +of the option, the Company would own the licensor’s growing +and profitable catalog and internet retailing business. +27 +Table of Contents +The Company believes that by exercising its +option to acquire Teva, it will be able to significantly improve +its earnings before interest, taxes, depreciation and +amortization (“EBITDA”). In 2001, the Company sold +approximately $62 million of Teva products, paying a +royalty of approximately $4.2 million and incurring +approximately $0.3 million of additional costs that the +Company believes could have been eliminated had the Company +owned Teva outright. In addition, the licensor’s +catalog/internet business yielded EBITDA of approximately +$0.7 million in 2001. Accordingly, had the Company owned +Teva in 2001, it would have been able to improve its EBITDA by +approximately $5.2 million. +The Company believes that internally generated +funds, the available borrowings under its existing credit +facility, and the cash on hand will provide sufficient liquidity +to enable it to meet its current and foreseeable working capital +requirements (excluding the possible acquisition of Teva). +However, risks and uncertainties which could impact the +Company’s ability to maintain its cash position include the +Company’s growth rate, its ability to collect its +receivables in a timely manner, its ability to effectively +manage its inventory, and the volume of letters of credit used +to purchase product, among others. +Seasonality +Financial results for the outdoor and footwear +industries are generally seasonal. Sales of each of the +Company’s different product lines have historically been +higher in different seasons with the highest percentage of Teva +sales occurring in the first and second quarter of each year and +the highest percentage of Ugg sales occurring in the fourth +quarter, while the quarter with the highest percentage of annual +sales for Simple has varied from year to year. +Historically, the Company’s sales have been +greater in the first and second quarters, Teva’s strong +selling season, than in the third and fourth quarters. However, +given the Company’s current expectations for a decrease in +Teva sales for the first half of 2002 compared to 2001 combined +with the anticipated continuing increase in Ugg sales in the +Fall of 2002 and the launch of the new Fall 2002 Teva and Simple +product lines, the Company currently expects sales in the fourth +quarter to equal or exceed the sales levels for the second +quarter of 2002. The actual results could differ materially +depending upon consumer preferences, availability of product, +competition, and the Company’s customers continuing to +carry and promote its various product lines, among other risks +and uncertainties. See also the discussion regarding +forward-looking statements under “Risk Factors”. +Other +The Company believes that the relatively moderate +rates of inflation in recent years have not had a significant +impact on its net sales or profitability. +Critical Accounting Policies +Principles of Consolidation. +The consolidated financial statements +include the accounts of Deckers Outdoor Corporation and its +wholly-owned subsidiaries. All significant intercompany balances +and transactions have been eliminated in consolidation. +Revenue Recognition. +The Company derives its revenue from +the sale of its products. In general, revenue is recognized upon +shipment of the merchandise. Domestically, goods are shipped +directly from the Company’s domestic distribution center in +California, and revenue is recognized upon shipment from the +distribution center (FOB shipping point). For certain European +accounts, product is shipped from the independent factories on a +delivered duty paid basis (“DDP”) whereby the goods +are delivered from the independent factories to a third party +warehouse in the Netherlands where the goods are custom cleared +and transferred to the distributors. In accordance with the +DDP terms, the related revenue is recognized upon customs +clearance. For virtually all other international accounts, the +goods are delivered directly from the independent factories to +the distributors on an FOB shipping point basis and revenue is +recognized upon shipment from the factory. +28 +Table of Contents +Use of Estimates. +The preparation of financial +statements in conformity with accounting principles generally +accepted in the United States 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 revenues and expenses during the +reporting period. The Company bases these estimates and +assumptions upon historical experience and existing, known +circumstances. Actual results could differ from those estimates. +Specifically, management must make estimates in +the following areas: +Allowance for doubtful +accounts. The Company provides a +reserve against receivables for estimated losses that may result +from its customers’ inability to pay. The Company +determines the amount of the reserve by analyzing known +uncollectible accounts, aged receivables, economic conditions, +historical experience and the customers’ credit-worthiness. +Receivables which are subsequently determined to be +uncollectible are charged or written off against this reserve. +Reserves have been fully established for all expected or +probable losses of this nature. The gross trade accounts +receivable balance was $22.4 million and the allowance for +doubtful accounts was $2.0 million at December 31, +2001. +Reserve for sales +discounts. A significant portion of +the Company’s domestic net sales and resulting accounts +receivable have an associated discount which the customers may +take, generally based upon meeting certain order, shipment and +payment timelines. The Company estimates the amount of discounts +which are expected to be taken against the period end accounts +receivable, and records a corresponding reserve for sales +discounts. The Company determines 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. At December 31, +2001 the reserve for sales discounts was approximately +$0.8 million. +Allowance for estimated +returns. The Company records an +allowance for anticipated future returns of goods shipped prior +to period-end. In general, the Company accepts returns for +damaged or defective products, but discourages returns for other +reasons. The amount of the allowance is determined based upon +any approved customer requests for returns, historical returns +experience, and any recent events which could result in a change +in historical returns rates, among other factors. The allowance +for returns at December 31, 2001 was $1.2 million. +Inventory +write-downs. Inventories are stated at +lower of cost or market. The Company reviews the various items +in inventory on a regular basis for excess, obsolete and +impaired inventory. In doing so, the Company writes the +inventory down to estimated future net selling prices. +Inventories were stated at $18.4 million, net of a reserve +for inventory write-downs of $0.9 million at +December 31, 2001. +Valuation of goodwill, intangible and other +long-lived assets. The Company +periodically assesses the impairment of goodwill, intangible and +other long-lived assets based on assumptions and judgments +regarding the carrying value of these assets. The assets are +considered to be impaired if the Company determines that the +carrying value may not be recoverable. Among other +considerations, the following factors are considered: +• +the asset’s ability to continue to generate +income from operations and positive cash flow in future periods; +• +the Company’s future plans regarding +utilization of the asset; +• +any changes in legal ownership of rights to the +asset; and +• +changes in customer demand or acceptance of the +related brand names, products or features associated with the +assets. +If the assets are considered to be impaired, an +impairment loss is recognized equal to the amount by which the +carrying value of the assets exceeds the fair value of the +assets. In addition, the Company bases the useful lives and +related amortization or depreciation expense on the estimate of +the period that the assets will generate revenues or otherwise +be used by the Company. +29 +Table of Contents +In 2002, Statement of Financial Accounting +Standards No. 142, “Goodwill and Other Intangible +Assets,” will become effective and as a result, the Company +expects to record a goodwill impairment charge in the first +quarter of 2002. See full discussion under “Recently Issued +Pronouncements”. +Litigation reserves. +Estimated amounts for claims that are probable and that can be +reasonably estimated are recorded as liabilities in the +consolidated balance sheets. The likelihood of a material change +in these estimated reserves would be dependent on new claims as +they may arise and the favorable or unfavorable outcome of the +particular litigation. +Valuation of deferred income +taxes. Valuation allowances are +established, when necessary, to reduce deferred tax assets to +the amount expected to be realized. The likelihood of a material +change in the expected realization of these assets depends on +future taxable income, the ability to deduct tax loss +carryforwards against future taxable income, and the +effectiveness of the Company’s tax planning. +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. In 2001, approximately $6.1 million of +advertising, marketing and promotion costs were charged to +operations and approximately $0.7 million of prepaid +advertising and promotion expenses were included in prepaid and +other assets at December 31, 2001. +Derivatives. The +Company may enter into foreign currency forward contracts in the +ordinary course of business to mitigate the risk associated with +foreign exchange rate fluctuations related to sales of goods in +Eurodollars. Derivative financial instruments are not used for +speculative purposes. At December 31, 2001, the Company had +foreign currency forward contracts to purchase $4.8 million +U.S. dollars for approximately 5.4 million Eurodollars. +In accordance with Statement of Financial +Accounting Standards No. 133, Accounting for Derivative +Instruments and Hedging Activities, these foreign currency +cash flow hedges are recorded at fair value in the accompanying +balance sheet with unrealized gains and losses on outstanding +foreign currency forward contracts recorded in the financial +statements as a component of other comprehensive income net of +deferred taxes, to the extent they are effective hedges. +Recently Issued Pronouncements +Effective January 1, 2001, the Company +adopted Statement of Financial Accounting Standards No. 133 +(“SFAS 133”), Accounting for Derivative +Instruments and Hedging Activities. As a result, the Company +recognizes financial instruments, such as foreign currency +forward contracts, at fair value regardless of the purpose or +intent for holding the instrument. Changes in the fair value of +derivative financial instruments are either recognized +periodically through the statement of earnings or through +stockholders’ equity as a component of accumulated other +comprehensive income or loss. The classification depends on +whether the derivative financial instrument qualifies for hedge +accounting, and if so, whether it qualifies as a fair value +hedge or cash flow hedge. Generally, changes in fair values of +derivatives designated as fair value hedges are matched in the +statement of earnings against the respective gain or loss +relating to the hedged items. Changes in fair values of +derivatives accounted for as cash flow hedges, to the extent +they are effective as hedges, are recorded in accumulated other +comprehensive income net of deferred taxes. Changes in fair +values of derivatives not qualifying as hedges are currently +reported in earnings. The implementation of this standard did +not have a significant impact on the Company’s financial +statements. +In July 2001, the FASB issued Statement of +Financial Accounting Standards No. 141 (“SFAS +141”), Business Combinations, and Statement of +Financial Accounting Standards No. 142 +(“SFAS 142”), Goodwill and Other Intangible +Assets. SFAS 141 requires that the purchase method be +used for all business combinations initiated after June 30, +2001. SFAS 142 requires that goodwill and intangible assets +with indefinite useful lives no longer be amortized to earnings, +but instead be reviewed for impairment in accordance with the +provisions of SFAS 142. The amortization of goodwill and +intangible assets with indefinite useful lives ceases upon +adoption of SFAS 142 which is effective for fiscal years +starting after December 15, 2001. Amortization of goodwill +and intangible assets with indefinite useful lives was +30 +Table of Contents +approximately $809,000, $811,000 and $811,000 for +fiscal years ended December 31, 2001, 2000 and 1999, +respectively. The Company has evaluated the impact of +SFAS 142 as of January 1, 2002 and currently expects +an impairment charge of approximately $9.8 million +($9.0 million after tax benefit), or approximately $1.03 +per share ($0.95 after tax benefit), will result from the +Company’s implementation of this new standard, including +approximately $7.8 million for impairment of Ugg’s +intangible assets and approximately $2.0 million for +impairment of Simple’s intangible assets. This preliminary +information is unaudited and subject to final review by +management. This charge will be recorded as a cumulative effect +of an accounting change, net of the related tax impact, in the +Company’s financial statements for the three months ending +March 31, 2002. +In October 2001, the Financial Accounting +Standards Board (“FASB”) issued Statement of Financial +Accounting Standards No. 144 (“SFAS 144”), +Accounting for the Impairment or Disposal of Long-Lived +Assets, which addresses financial accounting and reporting +for the impairment or disposal of long-lived assets. While +SFAS 144 supersedes Statement of Financial Accounting +Standards No. 121, Accounting for the Impairment of +Long-Lived Assets and for Long-Lived Assets to Be Disposed +Of, it retains many of the fundamental provisions of that +statement. The standard is effective for fiscal years beginning +after December 15, 2001. The Company expects that the +adoption of SFAS 144 will not have a material impact on its +financial position or results from operations. +Item 7A. Quantitative and Qualitative +Disclosures About Market Risk +Derivative +Instruments. Beginning in the fourth +quarter of 2001 and continuing at least through the fall 2002 +season, a substantial portion of the Company’s European +sales will be denominated in Euros. In order to mitigate the +Company’s exposure to fluctuations in the foreign currency +exchange rate, the Company has entered into forward contracts +for approximately 5.4 million Euros. See Note 9 to the +accompanying consolidated financial statements. +Market Risk. The +Company’s market risk exposure with respect to financial +instruments is to changes in the “prime rate” in the +United States and changes in the Eurodollar rate. The +Company’s credit facility provides for interest on +outstanding borrowings at rates tied to prime rate, or at the +Company’s election tied to the Eurodollar rate. At +December 31, 2001, the Company had no outstanding +borrowings under its credit facility. +Item 8. Financial Statements and +Supplementary Data +See Item 14(a) and page 32 for an index +to the consolidated financial statements and supplementary +information included herein. +Item 9. Changes in and Disagreements +With Accountants on Accounting and Financial +Disclosure +Not applicable. +31 +Table of Contents +DECKERS OUTDOOR CORPORATION +AND SUBSIDIARIES +INDEX TO CONSOLIDATED FINANCIAL +STATEMENTS +AND FINANCIAL STATEMENT SCHEDULE +Page +Independent Auditors’ Report +33 +Consolidated Balance Sheets as of +December 31, 2001 and 2000 +34 +Consolidated Statements of Earnings for each of +the years in the three-year period ended December 31, 2001 +35 +Consolidated Statements of Stockholders’ +Equity and Other Comprehensive Income for each of the years in +the three-year period ended December 31, 2001 +36 +Consolidated Statements of Cash Flows for each of +the years in the three-year period ended December 31, 2001 +37 +Notes to Consolidated Financial Statements +38 +Consolidated Financial Statement Schedule +Valuation and Qualifying Accounts +52 +All other schedules are omitted because they are +not applicable or the required information is shown in the +Company’s consolidated financial statements or the related +notes thereto. +32 +Table of Contents +INDEPENDENT AUDITORS’ REPORT +The Board of Directors and Stockholders +Deckers Outdoor Corporation: +We have audited the accompanying consolidated +financial statements of Deckers Outdoor Corporation and +subsidiaries as listed in the accompanying index. In connection +with our audits of the consolidated financial statements, we +also have audited the financial statement schedule as listed in +the accompanying index. These consolidated financial statements +and financial statement schedule are the responsibility of the +Company’s management. Our responsibility is to express an +opinion on these consolidated financial statements and financial +statement schedule based on our audits. +We conducted our audits in accordance with +auditing standards generally accepted in the United States of +America. Those standards require that we plan and perform the +audit to obtain reasonable assurance about whether the financial +statements are free of material misstatement. An audit includes +examining, on a test basis, evidence supporting the amounts and +disclosures in the financial statements. An audit also includes +assessing the accounting principles used and significant +estimates made by management, as well as evaluating the overall +financial statement presentation. We believe that our audits +provide a reasonable basis for our opinion. +In our opinion, the consolidated financial +statements referred to above present fairly, in all material +respects, the financial position of Deckers Outdoor Corporation +and subsidiaries as of December 31, 2001 and 2000, and the +results of their operations, and their cash flows for each of +the years in the three-year period ended December 31, 2001 +in conformity with accounting principles generally accepted in +the United States of America. Also in our opinion, the related +consolidated financial statement schedule, when considered in +relation to the basic consolidated financial statements taken as +a whole, presents fairly, in all material respects, the +information set forth therein. +As discussed in note(1)(r) to the consolidated +financial statements, the Company changed its method of +accounting for derivative instruments and hedging activities in +2001. +KPMG LLP +Los Angeles, California +February 16, 2002, except as to the last +paragraph of Note 4, which is +as of February 22, 2002 +33 +Table of Contents +DECKERS OUTDOOR CORPORATION +AND SUBSIDIARIES +Consolidated Balance Sheets +December 31, 2001 and 2000 +ASSETS +2001 +2000 +Current assets: +Cash and cash equivalents +$ +16,689,000 +9,057,000 +Trade accounts receivable, less allowance for +doubtful accounts of $2,014,000 and $2,144,000 as of +December 31, 2001 and 2000, respectively +20,395,000 +23,143,000 +Inventories (note 2) +18,425,000 +17,146,000 +Prepaid expenses and other current assets +1,694,000 +1,541,000 +Refundable income taxes (note 5) +995,000 +119,000 +Deferred tax assets (note 5) +3,160,000 +2,644,000 +Total current assets +61,358,000 +53,650,000 +Property and equipment, at cost, net (note 3) +3,857,000 +2,998,000 +Intangible assets, less applicable amortization +19,941,000 +20,471,000 +Other assets, net +728,000 +593,000 +$ +85,884,000 +77,712,000 +LIABILITIES AND STOCKHOLDERS’ EQUITY +Current liabilities: +Notes payable and current installments of +long-term debt (note 4) +$ +290,000 +1,046,000 +Trade accounts payable +13,915,000 +8,020,000 +Reserve for returns +1,235,000 +1,080,000 +Accrued sales commissions +1,215,000 +451,000 +Accrued payroll +982,000 +1,646,000 +Other accrued expenses +1,556,000 +925,000 +Total current liabilities +19,193,000 +13,168,000 +Long-term debt, less current installments +(note 4) +159,000 +449,000 +Commitments and contingencies (note 8) +Stockholders’ equity (note 6): +Preferred stock, $0.01 par value. Authorized +5,000,000 shares; none issued +— +— +Common stock, $0.01 par value. Authorized +20,000,000 shares; issued 10,297,309 and outstanding +9,324,357 at December 31, 2001; issued 10,108,929 and +outstanding 9,135,977 at December 31, 2000 +93,000 +91,000 +Additional paid-in capital +25,689,000 +25,003,000 +Retained earnings +41,251,000 +39,625,000 +Accumulated other comprehensive income +(note 9) +123,000 +— +67,156,000 +64,719,000 +Less note receivable from stockholder/ former +officer +624,000 +624,000 +Total stockholders’ equity +66,532,000 +64,095,000 +$ +85,884,000 +77,712,000 +See accompanying notes to consolidated financial +statements. +34 +Table of Contents +DECKERS OUTDOOR CORPORATION +AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF EARNINGS +Three-year period ended December 31, +2001 +2001 +2000 +1999 +Net sales (note 10) +$ +91,461,000 +113,738,000 +111,099,000 +Cost of sales +52,903,000 +63,540,000 +66,051,000 +Gross profit +38,558,000 +50,198,000 +45,048,000 +Selling, general, and administrative expenses +(note 7) +34,040,000 +37,568,000 +38,298,000 +Litigation costs (note 8) +2,180,000 +— +— +Earnings from operations +2,338,000 +12,630,000 +6,750,000 +Other expense (income): +Interest expense (income), net +(308,000 +) +67,000 +1,404,000 +Loss on disposal of assets +10,000 +57,000 +3,000 +Other expense (income) +(175,000 +) +171,000 +101,000 +(473,000 +) +295,000 +1,508,000 +Earnings before income taxes +2,811,000 +12,335,000 +5,242,000 +Income taxes (note 5) +1,185,000 +5,320,000 +2,358,000 +Net earnings +$ +1,626,000 +7,015,000 +2,884,000 +Net earnings per share: +Basic +$ +0.18 +0.77 +0.33 +Diluted +0.17 +0.74 +0.32 +Weighted average shares: +Basic +9,247,000 +9,093,000 +8,834,000 +Diluted +9,661,000 +9,476,000 +8,981,000 +See accompanying notes to consolidated financial +statements. +35 +Table of Contents +DECKERS OUTDOOR CORPORATION +AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ +EQUITY +AND OTHER COMPREHENSIVE INCOME +Three-year period ended December 31, +2001 +Accumulated +Note receivable +Common stock +Additional +other +from +Total +paid-in +Retained +comprehensive +stockholder/ +stockholders’ +Comprehensive +Shares +Amount +capital +earnings +income +former officer +equity +income +Balance at December 31, 1998 +8,522,679 +$ +85,000 +22,813,000 +29,726,000 +— +(624,000 +) +52,000,000 +— +Common stock issued under Teva license agreement +(note 7) +428,743 +4,000 +1,604,000 +— +— +— +1,608,000 +— +Common stock issued under stock incentive plan +91,352 +1,000 +284,000 +— +— +— +285,000 +— +Common stock issued under the employee stock +purchase plan +22,231 +1,000 +42,000 +— +— +— +43,000 +— +Net earnings +— +— +— +2,884,000 +— +— +2,884,000 +2,884,000 +Total comprehensive income +2,884,000 +Balance at December 31, 1999 +9,065,005 +91,000 +24,743,000 +32,610,000 +— +(624,000 +) +56,820,000 +— +Fair value of options issued under Teva license +agreement (note 7) +— +— +78,000 +— +— +— +78,000 +— +Common stock issued under stock incentive plan +40,671 +— +118,000 +— +— +— +118,000 +— +Common stock issued under the employee stock +purchase plan +30,301 +— +64,000 +— +— +— +64,000 +— +Net earnings +— +— +— +7,015,000 +— +— +7,015,000 +7,015,000 +Total comprehensive income +7,015,000 +Balance at December 31, 2000 +9,135,977 +91,000 +25,003,000 +39,625,000 +— +(624,000 +) +64,095,000 +— +Fair value of options issued under Teva license +agreement (note 7) +— +— +152,000 +— +— +— +152,000 +— +Common stock issued under stock incentive plan +162,344 +2,000 +475,000 +— +— +— +477,000 +— +Common stock issued under the employee stock +purchase plan +26,036 +— +59,000 +— +— +— +59,000 +— +Net earnings +— +— +— +1,626,000 +— +— +1,626,000 +1,626,000 +Unrealized gains on hedging derivatives +— +— +— +— +123,000 +— +123,000 +123,000 +Total comprehensive income +1,749,000 +Balance at December 31, 2001 +9,324,357 +$ +93,000 +25,689,000 +41,251,000 +123,000 +(624,000 +) +66,532,000 +See accompanying notes to consolidated financial +statements. +36 +Table of Contents +DECKERS OUTDOOR CORPORATION +AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF CASH +FLOWS +Three-year period ended December 31, +2001 +2001 +2000 +1999 +Cash flows from operating +activities: +Net earnings +$ +1,626,000 +7,015,000 +2,884,000 +Adjustments to reconcile net earnings to net cash +provided by operating activities: +Depreciation and amortization of property and +equipment +1,492,000 +1,374,000 +1,804,000 +Amortization of intangible assets +2,085,000 +1,566,000 +1,322,000 +Provision for doubtful accounts +1,658,000 +1,994,000 +1,820,000 +Gain on sale of Heirlooms +(185,000 +) +— +— +Loss on disposal of assets +10,000 +57,000 +3,000 +Change in deferred tax assets +(444,000 +) +(1,591,000 +) +812,000 +Stock compensation +227,000 +130,000 +87,000 +Changes in assets and liabilities: +(Increase) decrease in: +Trade accounts receivable +784,000 +(741,000 +) +964,000 +Inventories +(2,012,000 +) +957,000 +5,562,000 +Prepaid expenses and other current assets +(594,000 +) +841,000 +(57,000 +) +Refundable income taxes +(961,000 +) +1,505,000 +2,643,000 +Note receivable from supplier +— +— +782,000 +Other assets +275,000 +(317,000 +) +260,000 +Increase (decrease) in: +Trade accounts payable +5,951,000 +759,000 +(686,000 +) +Accrued expenses +1,137,000 +1,102,000 +9,000 +Net cash provided by operating activities +11,049,000 +14,651,000 +18,209,000 +Cash flows from investing +activities: +Proceeds from sale of property and equipment +18,000 +19,000 +10,000 +Purchase of property and equipment +(2,455,000 +) +(1,755,000 +) +(947,000 +) +Proceeds from the sale of Heirlooms +599,000 +— +— +Cash paid for intangible assets +(1,566,000 +) +— +(1,000,000 +) +Net cash used in investing activities +(3,404,000 +) +(1,736,000 +) +(1,937,000 +) +Cash flows from financing +activities: +Net borrowings (repayments) under line of +credit +— +(5,834,000 +) +(14,917,000 +) +Proceeds from notes payable +— +644,000 +— +Repayments of long-term debt +(402,000 +) +(431,000 +) +(117,000 +) +Cash received from issuances of common stock +389,000 +130,000 +132,000 +Net cash used in financing activities +(13,000 +) +(5,491,000 +) +(14,902,000 +) +Net increase in cash and cash equivalents +7,632,000 +7,424,000 +1,370,000 +Cash and cash equivalents at beginning of year +9,057,000 +1,633,000 +263,000 +Cash and cash equivalents at end of year +$ +16,689,000 +9,057,000 +1,633,000 +Supplemental disclosure of cash flow information: +Cash paid during the year for: +Interest +$ +112,000 +352,000 +1,380,000 +Income taxes +3,308,000 +5,971,000 +2,492,000 +Supplemental disclosure of noncash investing and +financing activities: +In connection with the Teva license renewal in +1999, the Company issued 428,743 shares of common stock +valued at $1,608,000. +In connection with the exercise of nonqualified +stock options, additional paid-in capital increased by $72,000, +$17,000 and $109,000 in 2001, 2000 and 1999, respectively. +In 2000, the Company incurred $715,000 of +long-term debt in connection with the acquisition of $568,000 of +property and equipment and $147,000 of prepaid expenses. +In 2001, the Company had unrealized gains on +hedging derivatives of $123,000. +See accompanying notes to consolidated financial +statements. +37 +Table of Contents +DECKERS OUTDOOR CORPORATION +AND SUBSIDIARIES +Notes to Consolidated Financial +Statements +December 31, 2001 and 2000 +(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 +significant intercompany balances and transactions have been +eliminated in consolidation. +The Company builds niche products into global +lifestyle brands by designing and marketing innovative, +functional, and fashion-oriented footwear, developed for both +high performance outdoor activities and everyday casual +lifestyle use. +(b) Inventories +Inventories are stated at the lower of cost +(first-in, first-out) or market (net realizable value). +(c) Revenue +Recognition +Revenue is recognized upon shipment of the +merchandise. Allowances for estimated returns, discounts and bad +debts are provided for when related revenue is recorded. +(d) Long-Lived +Assets +It is the Company’s policy to account for +long-lived assets, including intangibles, at amortized cost. +When circumstances or events trigger a review of the valuation +and amortization of long-lived assets, management assesses the +carrying value of such assets if facts and circumstances suggest +that it may be impaired. If this review indicates that the +long-lived assets will not be recoverable, as determined by a +nondiscounted cash flow analysis over the remaining amortization +period, the carrying value of the Company’s long-lived +assets would be reduced to its estimated fair value based on +discounted cash flows. As described in note (1)(r), the +Company adopted SFAS No. 142, “Goodwill and Other +Intangibles” , on January 1, 2002. +(e) Depreciation +and Amortization +Depreciation of property and equipment is +computed using the straight-line method based on estimated +useful lives ranging from three to ten years. Leasehold +improvements are amortized on the straight-line basis over their +estimated economic useful lives or the lease term, whichever is +shorter. +Goodwill and other intangibles are amortized on +the straight-line basis over periods of 20 to 30 years, and +5 to 15 years, respectively. Accumulated amortization at +December 31, 2001 and 2000 was $8,756,000 and $6,680,000, +respectively. As described in note (1)(r), the Company +adopted SFAS No. 142, “Goodwill and Other +Intangibles” , on January 1, 2002. +(f) Fair +Value of Financial Instruments +The fair values of the Company’s cash +equivalents, trade accounts receivable, prepaid expenses and +other current assets, refundable income taxes, trade accounts +payable, and accrued expenses approximate the carrying values +due to the relatively short maturities of these instruments. +The fair value of the Company’s revolving +credit line approximates the carrying value due to variable +interest rates associated with the credit line. +38 +Table of Contents +DECKERS OUTDOOR CORPORATION +AND SUBSIDIARIES +Notes to Consolidated Financial Statements +(Continued) +The fair values of the Company’s other notes +payable are estimated by discounting future cash flows of each +instrument at rates currently available to the Company for +similar debt instruments of comparable maturities by the +Company’s bankers. The fair values of these notes +approximate the carrying value. +(g) Stock +Compensation +The Company accounts for stock-based compensation +under the provisions of Statement of Financial Accounting +Standards No. 123, Accounting for Stock-Based +Compensation (“SFAS 123”). Under the +provisions of SFAS 123, the Company has elected to continue +to measure compensation cost for employees and nonemployee +directors of the Company under APB No. 25 and comply with +the pro forma disclosure requirements under SFAS 123. The +Company applies the fair value techniques of SFAS 123 to +measure compensation cost for options/warrants granted to +nonemployees. +(h) Use of +Estimates +Management of the Company has made a number of +estimates and assumptions relating to the reporting of assets, +liabilities, revenues, and expenses and the disclosure of +contingent assets and liabilities to prepare these consolidated +financial statements in conformity with accounting principles +generally accepted in the United States of America. Significant +areas requiring the use of management estimates relate to +inventory reserves, allowances for bad debts, returns and +discounts, impairment reserves, deferred taxes, depreciation and +amortization, litigation reserves, and hedging activities. +Actual results could differ from these estimates. +(i) Research +and Development Costs +Research and development costs are charged to +expense as incurred. Such costs amounted to $1,034,000, +$1,076,000 and $1,607,000 in 2001, 2000, and 1999, respectively. +(j) Advertising, +Marketing, and Promotion Costs +Advertising production costs are expensed the +first time the advertisement is run. All other costs of +advertising, marketing and promotion are expensed as incurred. +These expenses charged to operations for the years ended 2001, +2000, and 1999 were $6,087,000, $7,108,000, and $5,602,000, +respectively. Included in prepaid and other current assets at +December 31, 2001 and 2000 were $714,000 and $414,000, +respectively, related to prepaid advertising and promotion +expenses for programs that take place after December 31, +2001 and 2000, respectively. +(k) Income +Taxes +Income taxes are accounted for under the asset +and liability method. Deferred tax assets and liabilities are +recognized for the future tax consequences attributable to +differences between the financial statement carrying amounts of +existing assets and liabilities and their respective tax bases. +Deferred tax assets and liabilities are measured using enacted +tax rates expected to apply to taxable income in the years in +which those temporary differences are expected to be recovered +or settled. +The effect on deferred taxes of a change in tax +rates is recognized in income in the period that includes the +enactment date. +(l) Earnings +per Share +Basic earnings per share (EPS) is computed +by dividing net earnings available to common stockholders by the +weighted average number of common shares outstanding for the +period. Diluted EPS reflects the +39 +Table of Contents +DECKERS OUTDOOR CORPORATION +AND SUBSIDIARIES +Notes to Consolidated Financial Statements +(Continued) +potential dilution from securities that could +share in the earnings of the Company. Antidilutive securities +are excluded from diluted EPS. +The reconciliations of basic to diluted weighted +average shares are as follows: +2001 +2000 +1999 +Net earnings used for basic and diluted earnings +per share +$ +1,626,000 +7,015,000 +2,884,000 +Weighted average shares used in basic computation +9,247,000 +9,093,000 +8,834,000 +Dilutive effect of stock options +414,000 +383,000 +147,000 +Weighted average shares used for diluted +computation +9,661,000 +9,476,000 +8,981,000 +Options to purchase 282,000, 267,000, and 596,000 +shares of common stock at prices ranging from $5.25 to $9.88, +$5.50 to $13.75, and $3.00 to $13.75 were outstanding during +2001, 2000, and 1999, respectively, but were not included in the +computation of diluted earnings 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 antidilutive. +(m) Foreign +Currency Translation +The Company considers the U.S. dollar as the +functional currency for all of its domestic and foreign +operations. Assets and liabilities of the foreign operations +denominated in local currencies are translated at the rate of +exchange at the balance sheet date. Revenues and expenses are +translated at the weighted average rate of exchange during the +period. Foreign currency translation adjustments were immaterial +to the accompanying consolidated financial statements. +(n) Hedging +Activities +The Company may enter into foreign currency +forward contracts in the ordinary course of business to mitigate +the risk associated with foreign exchange rate fluctuations +related to sales of goods in Eurodollars. Derivative financial +instruments are not used for speculative purposes. At +December 31, 2001, the Company had foreign currency forward +contracts to purchase $4.8 million U.S. dollars for +approximately 5.4 million Eurodollars. +In accordance with Statement of Financial +Accounting Standards No. 133, Accounting for Derivative +Instruments and Hedging Activities, these foreign currency +cash flow hedges are recorded at fair value in the accompanying +balance sheet with unrealized gains and losses on outstanding +foreign currency forward contracts recorded in the financial +statements as a component of other comprehensive income net of +deferred taxes, to the extent they are effective hedges. +(o) Comprehensive +Income +Comprehensive income is the total of net earnings +and all other nonowner changes in equity. Except for net +earnings, foreign currency translation adjustments, and +unrealized gains and losses as a result of hedging activities, +the Company does not have any transactions and other economic +events that qualify as comprehensive income as defined under +SFAS No. 130. +40 +Table of Contents +DECKERS OUTDOOR CORPORATION +AND SUBSIDIARIES +Notes to Consolidated Financial Statements +(Continued) +(p) Business +Segment Reporting +Management of the Company has determined its +reportable segments are strategic business units. Significant +reportable business segments are the Teva, Simple, and Ugg +brands. Information related to these segments is summarized in +note 10. +(q) Reclassifications +Certain reclassifications have been made to the +1999 balances, specifically related to shipping and handling +fees to conform to the 2000 and 2001 presentation. See +note (1)(s). +(r) New +Accounting Standards +Effective January 1, 2001, the Company +adopted Statement of Financial Accounting Standards No. 133 +(“SFAS 133”), Accounting for Derivative +Instruments and Hedging Activities . As a result, the Company +recognizes financial instruments, such as foreign currency +forward contracts, at fair value regardless of the purpose or +intent for holding the instrument. Changes in the fair value of +derivative financial instruments are either recognized +periodically through the statement of earnings or through +stockholders’ equity as a component of accumulated other +comprehensive income or loss. The classification depends on +whether the derivative financial instrument qualifies for hedge +accounting, and if so, whether it qualifies as a fair value +hedge or cash flow hedge. Generally, changes in fair values of +derivatives designated as fair value hedges are matched in the +statement of earnings against the respective gain or loss +relating to the hedged items. Changes in fair values of +derivatives accounted for as cash flow hedges, to the extent +they are effective as hedges, are recorded in accumulated other +comprehensive income net of deferred taxes. Changes in fair +values of derivatives not qualifying as hedges are currently +reported in earnings. The implementation of this standard did +not have a significant impact on the Company’s financial +statements. +In July 2001, the FASB issued Statement of +Financial Accounting Standards No. 141 +(“SFAS 141”), Business Combinations, and +Statement of Financial Accounting Standards No. 142 +(“SFAS 142”), Goodwill and Other Intangible +Assets . SFAS 141 requires that the purchase method be +used for all business combinations initiated after June 30, +2001. SFAS 142 requires that goodwill and intangible assets +with indefinite useful lives no longer be amortized to earnings, +but instead be reviewed for impairment in accordance with the +provisions of SFAS 142. The amortization of goodwill and +intangible assets with indefinite useful lives ceases upon +adoption of SFAS 142 which is effective for fiscal years +starting after December 15, 2001. Amortization of goodwill +and intangible assets with indefinite useful lives was +approximately $809,000, $811,000 and $811,000 for fiscal years +ended December 31, 2001, 2000 and 1999, respectively. The +Company has evaluated the impact of SFAS 142 as of +January 1, 2002 and anticipates recording an impairment +charge from the Company’s implementation of this new +standard. This charge will be recorded as a cumulative effect of +an accounting change, net of the related tax impact, in the +Company’s financial statements for the three months ending +March 31, 2002. +In October 2001, the Financial Accounting +Standards Board (“FASB”) issued Statement of Financial +Accounting Standards No. 144 (“SFAS 144”), +Accounting for the Impairment or Disposal of Long-Lived +Assets, which addresses financial accounting and reporting +for the impairment or disposal of long-lived assets. While +SFAS 144 supersedes Statement of Financial Accounting +Standards No. 121, Accounting for the Impairment of +Long-Lived Assets and for Long-Lived Assets to Be Disposed +Of, it retains many of the fundamental provisions of that +statement. The standard is effective for fiscal years beginning +after December 15, 2001. The Company expects that the +adoption of SFAS 144 will not have a material impact on its +financial position or results from operations. +41 +Table of Contents +DECKERS OUTDOOR CORPORATION +AND SUBSIDIARIES +Notes to Consolidated Financial Statements +(Continued) +(s) Shipping +and Handling Fees +The Company adopted Emerging Issues Task Force +Issue 00-10 (EITF 00-10), Accounting for Shipping +and Handling Fees and Costs, effective October 1, 2000. +EITF 00-10 established new guidelines for classification of +shipping and handling costs billed to and collected from +customers. Pursuant to EITF 00-10, amounts billed for +shipping and handling costs are recorded as a component of +revenue. Related costs paid to third-party shippers are recorded +as a cost of sales. +(2) Inventories +Inventories are summarized as follows: +2001 +2000 +Finished goods +$ +18,425,000 +16,968,000 +Work in process +— +48,000 +Raw materials +— +130,000 +Total inventories +$ +18,425,000 +17,146,000 +(3) Property and +Equipment +Property and equipment is summarized as follows: +2001 +2000 +Machinery and equipment +$ +6,913,000 +6,697,000 +Furniture and fixtures +981,000 +1,012,000 +Computer information systems +3,000,000 +1,061,000 +Leasehold improvements +561,000 +567,000 +11,455,000 +9,337,000 +Less accumulated depreciation and amortization +7,598,000 +6,339,000 +Net property and equipment +$ +3,857,000 +2,998,000 +(4) Notes Payable and +Long-Term Debt +Notes payable and long-term debt consists of the +following: +2001 +2000 +Note payable for purchase of computer equipment, +secured by underlying equipment, payable in quarterly +installments of $74,200, including interest at a rate of 9.51% +through May 2002 +$ +143,000 +410,000 +Note payable to the minority shareholder of the +Company’s former Heirlooms subsidiary, payable on demand, +including interest at a rate of 9.5% +— +644,000 +Unsecured note payable in quarterly installments +of $41,700, including interest at a rate of 7.93%, due December +2003 +306,000 +441,000 +449,000 +1,495,000 +Less current installments +290,000 +1,046,000 +$ +159,000 +449,000 +42 +Table of Contents +DECKERS OUTDOOR CORPORATION +AND SUBSIDIARIES +Notes to Consolidated Financial Statements +(Continued) +The aggregate maturities of long-term debt as of +December 31, 2001 are as follows: +2002 +$ +290,000 +2003 +159,000 +$ +449,000 +At December 31, 2001, the Company had a +credit facility (“the Facility”) providing for a +maximum availability of $50,000,000, subject to a borrowing base +of up to 85% of eligible accounts receivable, as defined, and +65% of eligible inventory, as defined. The Facility bore +interest at the lenders’ prime rate or, at the +Company’s election, an adjusted Eurodollar rate plus 2%, +was secured by substantially all assets of the Company, and +included a tangible net worth covenant, requiring the Company to +maintain tangible net worth, as defined, of $30,000,000. The +Company was in compliance with this covenant at +December 31, 2001. At December 31, 2001, the Company +had no outstanding borrowings under the Facility and had +outstanding letters of credit aggregating $3,002,000. At +December 31, 2001, $8,699,000 was available under the +Facility. +On February 22, 2002, the Facility expired +and was replaced with a new revolving credit facility with a new +bank (the “New Facility”) which expires June 1, +2004. The New Facility provides for a maximum availability of +$20,000,000, subject to a borrowing base only when outstanding +borrowings, including outstanding letters of credit and foreign +currency forward contracts, exceed $10 million. In general, +the borrowing base is currently equal to 75% of eligible +accounts receivable, as defined, and 50% of eligible inventory, +as defined. The accounts receivable advance rate can increase or +decrease depending on the Company’s accounts receivable +dilution, which is calculated periodically. Up to +$10 million of borrowings may be in the form of letters of +credit. The New Facility bears interest at the bank’s prime +rate minus 0.5%, or at the Company’s option, at LIBOR plus +1.375% to 1.625%, depending on the Company’s ratio of +liabilities to effective tangible net worth, and is secured by +substantially all assets of the Company’s domestic +operations. The New Facility includes an annual commitment fee +equal to 0.125% of the average unused line amount. The agreement +underlying the New Facility includes several financial covenants +including a quick ratio requirement, a requirement for +liabilities to effective tangible net worth ratio, profitability +requirements and, when borrowings exceed $10 million, a +minimum inventory turnover requirement. At inception of the New +Facility, the Company was in compliance with all covenants. +(5) Income +Taxes +Components of income taxes are as follows: +Federal +State +Total +2001: +Current +$ +1,392,000 +394,000 +1,786,000 +Deferred +(465,000 +) +(136,000 +) +(601,000 +) +$ +927,000 +258,000 +1,185,000 +2000: +Current +$ +5,492,000 +1,419,000 +6,911,000 +Deferred +(1,286,000 +) +(305,000 +) +(1,591,000 +) +$ +4,206,000 +1,114,000 +5,320,000 +1999: +Current +$ +1,702,000 +(48,000 +) +1,654,000 +Deferred +420,000 +284,000 +704,000 +$ +2,122,000 +236,000 +2,358,000 +43 +Table of Contents +DECKERS OUTDOOR CORPORATION +AND SUBSIDIARIES +Notes to Consolidated Financial Statements +(Continued) +Actual income taxes differs from that obtained by +applying the statutory federal income tax rate to earnings +before income taxes as follows: +2001 +2000 +1999 +Computed “expected” income taxes +$ +956,000 +4,194,000 +1,782,000 +State income taxes, net of federal income tax +benefit +164,000 +688,000 +259,000 +Other +65,000 +438,000 +317,000 +$ +1,185,000 +5,320,000 +2,358,000 +The tax effects of temporary differences that +give rise to significant portions of deferred tax assets and +deferred tax liabilities at December 31, 2001 and 2000 are +presented below: +2001 +2000 +Deferred tax assets: +Uniform capitalization adjustment to inventory +$ +789,000 +455,000 +Inventory obsolescence reserve +— +15,000 +Bad debt and other reserves +1,685,000 +1,656,000 +Amortization of intangible assets +580,000 +705,000 +Net operating loss carryforwards +— +114,000 +Depreciation of property and equipment +198,000 +— +State taxes +— +247,000 +Total gross deferred tax assets +3,252,000 +3,192,000 +Less valuation allowance +— +(228,000 +) +Deferred tax assets, net of allowance +3,252,000 +2,964,000 +Deferred tax liabilities: +Depreciation of property and equipment +— +39,000 +State taxes +84,000 +— +Other +8,000 +281,000 +Total deferred tax liabilities +92,000 +320,000 +Net deferred tax assets +$ +3,160,000 +2,644,000 +Management believes it is more likely than not +that the results of future operations will generate sufficient +taxable income to realize the net deferred tax assets. During +2001, management reversed a valuation allowance of $228,000 as +the net operating loss and other credit carryforwards were fully +utilized. +Refundable income taxes as of December 31, +2001 and 2000 arise primarily from the overpayment of estimated +taxes. +(6) Stockholders’ +Equity +In February 2001, the Company amended the 1993 +Stock Incentive Plan (1993 Plan). Under the terms of the amended +1993 Plan, 3,000,000 shares of common stock are reserved +for issuance to officers, directors, employees, and consultants +of the Company. Awards to 1993 Plan participants are not +restricted to any specified form and may include stock options, +securities convertible into or redeemable for stock, stock +appreciation rights, stock purchase warrants, or other rights to +acquire stock. Under the 1993 Plan, 162,344, 40,671, and +91,352 shares of common stock were issued to employees in +2001, 2000, and 1999, respectively. In 1997, 100,000 shares were +issued under the 1993 plan to an officer of the Company, which +was financed through the issuance of a note receivable of +$624,000 to such officer (bearing interest at 6.39%, secured by +the underlying Company stock, with principal and interest due +April 18, 2002). +44 +Table of Contents +DECKERS OUTDOOR CORPORATION +AND SUBSIDIARIES +Notes to Consolidated Financial Statements +(Continued) +Common stock option activity under the 1993 Plan +for the years ended December 31, 2001, 2000, and 1999 is as +follows: +Weighted average +Shares +exercise price +Outstanding at December 31, 1998 +1,509,000 +$ +4.73 +Granted +533,100 +2.68 +Exercised +(57,500 +) +1.56 +Canceled +(843,000 +) +5.08 +Outstanding at December 31, 1999 +1,141,600 +3.68 +Granted +215,500 +3.28 +Exercised +(21,800 +) +2.23 +Canceled +(56,400 +) +3.37 +Outstanding at December 31, 2000 +1,278,900 +3.66 +Granted +584,800 +3.90 +Exercised +(147,500 +) +2.24 +Canceled +(135,400 +) +4.61 +Outstanding at December 31, 2001 +1,580,800 +3.80 +Options exercisable at December 31, 2001 +854,000 +$ +4.17 +The per share weighted average fair value of +stock options granted during 2001, 2000, and 1999 was $2.13, +$1.95, and $1.54, respectively, on the date of grant using the +Black-Scholes option pricing model with the following weighted +average assumptions: 2001 — expected dividend yield of +0%, stock volatility of 49.56%, risk-free interest rate of 3.3%, +and an expected life of seven years; 2000 — expected +dividend yield of 0%, stock volatility of 50.47%, risk-free +interest rate of 5.8%, and an expected life of seven years; +1999 — expected dividend yield of 0%, stock volatility +of 48.5%, risk-free interest rate of 5.3%, and an expected life +of seven years. +The Company applies APB Opinion No. 25 in +accounting for its stock option plans. Had the Company +determined compensation cost based on the fair value of the +options at the grant date under SFAS No. 123, the +Company’s net earnings would have been changed to the pro +forma amounts below: +2001 +2000 +1999 +Pro forma net earnings +$ +1,160,000 +6,687,000 +2,714,000 +Pro forma net earnings per share: +Basic +$ +.13 +0.74 +0.31 +Diluted +.12 +0.71 +0.30 +In August 1995, the Company adopted the 1995 +Employee Stock Purchase Plan (1995 Plan). The 1995 Plan is +intended to qualify as an Employee Stock Purchase Plan under +Section 423 of the Internal Revenue Code. Under the terms +of the 1995 Plan as amended, 300,000 shares of common stock +are reserved for issuance to employees who have been employed by +the Company for at least six months. The 1995 Plan provides for +employees to purchase the Company’s common stock at a +discount below market value, as defined by the 1995 Plan. Under +the 1995 Plan, 26,036, 30,301, and 22,231 shares were +issued in 2001, 2000, and 1999, respectively. Consistent with +the application of APB Opinion No. 25, no compensation has +been recorded for stock purchases. +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 +45 +Table of Contents +DECKERS OUTDOOR CORPORATION +AND SUBSIDIARIES +Notes to Consolidated Financial Statements +(Continued) +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 Company’s common stock in +connection with any of the foregoing. Each right entitles the +registered holder to purchase from the Company one one-hundredth +of a share of Series B Junior Participating Preferred +Stock, par value $0.01 per share (the Preferred Shares), of the +Company, at a price of $50.00, subject to adjustment. +The rights have no voting power and expire on +November 11, 2008. The rights may be redeemed by the +Company for $0.01 per right until the right becomes exercisable. +The Company’s board of directors has +authorized the repurchase of up to 2,200,000 shares of common +stock under a stock repurchase program. There were no shares +repurchased under this program in 2001, 2000 or 1999. At +December 31, 2001, 1,227,048 shares remained available for +repurchase under the program. +(7) Licensing +Agreement +The Company has been selling its Teva line of +sport sandals and other footwear since 1985, pursuant to various +license arrangements with Mark Thatcher, the inventor of the +Teva sports sandal and owner of the Teva patents and trademark. +On June 7, 1999, the Company signed a new +license agreement (the License Agreement) for Teva, which was +effective January 1, 2000. Under the License Agreement, the +Company received the exclusive worldwide rights for the +manufacture and distribution of Teva footwear through 2004. The +License Agreement is automatically renewable through 2008 and +through 2011 under two renewal options, provided that minimum +required sales levels are achieved. The Company is projecting +that they may not attain the required sales levels under the +agreement in 2004 which would impact future renewals of the +agreement. As with the previous arrangement, the new license +agreement provides for a sliding scale of royalty rates, +depending on sales levels. Additionally, the License Agreement +provides for an increase in the required amount of marketing +expenditures, depending on sales levels and varying by +territory. As additional consideration, the Company paid the +licensor a licensing fee of $1,000,000 and issued the licensor +428,743 shares of its previously unissued common stock with a +fair value of $1,608,000. The Company has recorded the license +as an intangible asset for the value of the cash and common +stock issued pursuant to the License Agreement and is amortizing +this over the remaining term of the license. The shares are +subject to various contractual and other holding period +requirements. In addition, the Company has agreed to grant the +licensor not less than 50,000 stock options on the +Company’s common stock annually, with an exercise price at +the market value on the date of grant. The fair value of options +granted under the License Agreement aggregated $152,000 and +$78,000 in 2001 and 2000, respectively. +In 1999, the Company received an option to buy +Teva and virtually all of its assets, including all worldwide +rights to Teva. The Company’s original option was +exercisable during the period from January 1, 2000 to +December 31, 2001 or during the period from January 1, +2006 to December 31, 2008. On January 22, 2001, the +Company amended its option agreement, extending the first option +window for two additional years. As a result, the first option +window is January 1, 2000 through December 31, 2003. +The Company agreed to pay Mr. Thatcher $1.6 million as +consideration for this extension. The option price is based on +formulas tied to net sales of Teva products and varies depending +on when the option is exercised. For the first option period, the +46 +Table of Contents +DECKERS OUTDOOR CORPORATION +AND SUBSIDIARIES +Notes to Consolidated Financial Statements +(Continued) +option price is for an amount equal to the +greater of (i) $61.6 million or (ii) 75% of the +largest calendar year revenues since January 1, 2000 for +the Teva brand, plus $1.6 million. In addition, the Company +would issue to Mr. Thatcher 100,000 shares of common stock +and options to purchase 100,000 shares of common stock. The +purchase price for the second option period, January 1, +2006 to December 31, 2008, is equal to 110% of the average +of the aggregate sales for all Teva products for the two +calendar years since January 1, 2000 with the highest +aggregate net sales. If the Company does not exercise its option +to acquire Teva, the licensor has the option to acquire the Teva +distribution rights from the Company for the period from +January 1, 2010 to December 31, 2011, the end of the +license term, and the option price is based on a formula tied to +the Company’s earnings before interest, taxes, +depreciation, and amortization. The Company is currently +evaluating the possibility of exercising the option in the +January 1, 2000 to December 31, 2003 period. The +payment of the purchase price must be completed within +90 days of the exercise of the purchase option. If the +Company exercises its purchase option, but subsequently fails to +complete the purchase within the 90-day payment period, the +purchase option and the option agreement will automatically be +terminated. +The license agreement provides for royalties +using a sliding scale ranging from 5.0% to 6.5% of annual sales, +depending upon sales levels, and includes minimum annual +royalties ranging from $4.4 million in 2002 to +$7.6 million in 2011. The agreement also requires minimum +advertising and promotional expenditures of 5.0% of annual sales +for domestic sales and 6.5% for international sales. In addition +to the minimum advertising and promotional costs, the Company +and the licensor have agreed to each contribute annually 0.5% of +annual sales toward the promotion of the Teva brand and +trademark, with or without particular reference to individual +styles. +Royalty expense related to Teva sales is included +in selling, general, and administrative expenses in the +accompanying consolidated financial statements and was +$4,194,000, $4,307,000, and $4,128,000 during the years ended +December 31, 2001, 2000, and 1999, respectively. +Advertising expense, which is included in selling, general, and +administrative expenses in the accompanying consolidated +financial statements, related to Teva sales was $4,313,000, +$4,829,000, and $3,378,000 during the years ended +December 31, 2001, 2000, and 1999, respectively. +In the event that Deckers exercises its option to +acquire Teva, Deckers would eliminate the royalty expense it +currently pays on Teva footwear sales and would then own all +Teva rights and assets worldwide. +(8) Commitments and +Contingencies +The Company leases office facilities under +operating lease agreements which expire through December 2003. +Future minimum commitments under the lease +agreements are as follows: +Year ending December 31: +2002 +$ +694,000 +2003 +677,000 +$ +1,371,000 +Total rent expense for the years ended +December 31, 2001, 2000, and 1999 was approximately +$1,074,000, $1,072,000, and $1,091,000, respectively. +An action was brought against the Company in 1995 +by Molly Strong-Butts and Yetti by Molly, Ltd. (collectively, +Molly) which alleged, among other things, that the Company +violated a certain nondisclosure agreement and obtained +purported trade secrets regarding a line of winter footwear +which Deckers stopped producing in 1994. A jury verdict was +obtained against the Company in district court in March 1999 +aggregating $1,785,000 for the two plaintiffs. In August 2001 +the United States Court of Appeals for the +47 +Table of Contents +DECKERS OUTDOOR CORPORATION +AND SUBSIDIARIES +Notes to Consolidated Financial Statements +(Continued) +Ninth Circuit affirmed the district court’s +decision for a judgment against the Company, resulting in a +settlement of approximately $2.0 million, including +interest, which the Company paid in November 2001. In addition, +the court of appeals reversed the district court’s refusal +to consider an award of exemplary damages or attorney fees and +remanded to the district court for further proceedings. In the +event that further legal fees and exemplary damages are +subsequently awarded, the Company would have an exposure beyond +the amounts provided for in the financial statements of up to an +additional $2.5 million. +The Company is a party to litigation in the +Netherlands with a former European distributor (the +“Distributor”), alleging breach of contract related to +the Company’s termination of the previous distributor +arrangement. The Company denies the allegations and has filed a +countersuit against the Distributor for breach of contract. In +the event that the Company is not successful in this matter, the +Company believes it would have a potential exposure beyond the +amounts provided for in the financial statements of up to +$500,000, based on advice from legal counsel. +The European Commission has enacted antidumping +duties of 49.2% on certain types of footwear imported into +Europe from China and Indonesia. Dutch Customs has issued an +opinion to the Company that certain popular Teva styles are +covered by this antidumping duty legislation. The Commission +added explanatory language that more clearly identified shoe +types which would be subject to antidumping duties. The Company +believes that based on the new language it is probable that the +Company will not prevail in its appeal. Therefore, the Company +accrued $400,000 in 2000 and an additional $100,000 in 2001, +which is the Company’s estimate of its exposure for +antidumping levies. If Customs determines that these styles are +covered by the revised legislation, the duty amounts could cause +such products to be too costly to import into Europe from China +in the future. As a precautionary measure, the Company has +obtained, and is using, alternative sourcing for the potentially +impacted products from sources outside of China in an effort to +reduce the potential risk in the future. +The Company is currently involved in various +other legal claims arising from the ordinary course of business. +Management does not believe that the disposition of these +matters will have a material effect on the Company’s +financial position or results of operations. +(9) Foreign Currency Forward +Contracts +The Company uses foreign currency forward +contracts to hedge the foreign currency exposure associated with +a portion of its forecasted transactions in foreign currency. +These forward contracts are designated as foreign currency cash +flow hedges and are recorded at fair value in the accompanying +balance sheet. The effective portion of gains and losses +resulting from recording forward contracts at fair value are +deferred in accumulated other comprehensive income in the +accompanying balance sheet until the underlying forecasted +foreign currency transaction occurs. When the transaction +occurs, the effective portion of the gain or loss from the +derivative designated as a hedge of the transaction is +reclassified from accumulated other comprehensive income to the +same statement of earnings line item affected by the hedged +forecasted transaction due to foreign currency fluctuations. +Because the amounts and the maturities of the +derivatives approximate those of the forecasted transactions, +changes in the fair value of the derivatives are expected to be +highly effective in offsetting changes in the cash flows of the +hedged items. Any ineffective portion of gains and losses +resulting from changes in the fair value of the derivatives is +recognized in current earnings. The ineffective portion of these +gains and losses, which results primarily from the time value +component of gains and losses on forward contracts, was +immaterial for all periods presented. +At December 31, 2001, the Company had +foreign currency forward contracts to purchase $4.8 million +U.S. dollars for approximately 5.4 million Eurodollars, +expiring through March 2002. An unrealized gain of +48 +Table of Contents +DECKERS OUTDOOR CORPORATION +AND SUBSIDIARIES +Notes to Consolidated Financial Statements +(Continued) +$123,000 has been recorded as of +December 31, 2001 as a component of accumulated other +comprehensive income. +(10) Business Segments, Concentration of +Business, and Credit Risk and Significant Customers +The Company’s accounting policies of the +segments below are the same as those described in the summary of +significant accounting policies, except that the Company does +not allocate interest, income taxes, or unusual items to +segments. The Company evaluates performance based on net sales +and profit or loss from operations. The Company’s +reportable segments are strategic business units responsible for +the worldwide operations of each of its brands. They are managed +separately because each business requires different marketing, +research and development, design, sourcing, and sales +strategies. In 2001, the Company revised the structure for +reporting the earnings from operations for each of the segments, +removing the allocations of corporate overhead from each of the +brands. The earnings from operations for each of the segments +now includes only those costs which are specifically related to +each brand, 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 the brands. Previously, +corporate overhead costs were allocated to each segment based on +each segment’s sales in relation to total net sales of all +segments. The unallocated corporate overhead costs are the +shared costs of the organization and include, among others, the +following costs: costs of the distribution center, information +technology, human resources, accounting and finance, credit and +collections, executive compensation, facilities costs and the +2001 litigation costs. The segment data has been revised to +reflect how the chief operating decision maker reviews the data. +Management does not review information relating to the +allocation of corporate overhead. All amounts for the +49 +Table of Contents +DECKERS OUTDOOR CORPORATION +AND SUBSIDIARIES +Notes to Consolidated Financial Statements +(Continued) +years ended December 31, 2000 and 1999 have +been restated to conform to the 2001 presentation. Business +segment information is summarized as follows: +2001 +2000 +1999 +Sales to external customers: +Teva +$ +61,221,000 +79,732,000 +80,963,000 +Simple +10,853,000 +16,328,000 +15,529,000 +Ugg +19,185,000 +15,310,000 +12,104,000 +Other +202,000 +2,368,000 +2,503,000 +$ +91,461,000 +113,738,000 +111,099,000 +Earnings from operations: +Teva +$ +12,407,000 +19,953,000 +16,775,000 +Simple +241,000 +2,501,000 +3,701,000 +Ugg +3,674,000 +2,863,000 +1,189,000 +Other (primarily unallocated overhead) +(13,984,000 +) +(12,687,000 +) +(14,915,000 +) +$ +2,338,000 +12,630,000 +6,750,000 +Depreciation and amortization: +Teva +$ +1,386,000 +818,000 +526,000 +Simple +206,000 +208,000 +213,000 +Ugg +648,000 +642,000 +635,000 +Other +1,000 +12,000 +22,000 +Unallocated +1,336,000 +1,260,000 +1,730,000 +$ +3,577,000 +2,940,000 +3,126,000 +Capital expenditures: +Teva +$ +144,000 +393,000 +3,000 +Simple +10,000 +71,000 +— +Ugg +— +63,000 +— +Other +— +1,000 +15,000 +Unallocated +2,301,000 +1,795,000 +929,000 +$ +2,455,000 +2,323,000 +947,000 +Total assets from reportable segments: +Teva +$ +24,051,000 +25,682,000 +29,304,000 +Simple +8,173,000 +10,684,000 +8,273,000 +Ugg +27,204,000 +25,668,000 +26,507,000 +Other +— +1,835,000 +1,776,000 +$ +59,428,000 +63,869,000 +65,860,000 +The assets allocable to each reporting segment +generally include accounts receivable, inventory, intangible +assets and certain other assets which are specifically +identifiable with one of the Company’s three +brands — Teva, Simple and Ugg. Unallocated corporate +assets are the assets not specifically related to one of the +brands and generally include the Company’s cash, refundable +and deferred tax assets and various other assets shared by the +Company’s brands. +50 +Table of Contents +DECKERS OUTDOOR CORPORATION +AND SUBSIDIARIES +Notes to Consolidated Financial Statements +(Continued) +Reconciliations of total assets from reportable +segments to the consolidated financial statements are as follows: +2001 +2000 +Total assets for reportable segments +$ +59,428,000 +63,869,000 +Elimination of intersegment payables +10,000 +84,000 +Unallocated refundable income taxes and deferred +tax assets +3,946,000 +2,486,000 +Other unallocated corporate assets +22,500,000 +11,273,000 +Consolidated total assets +$ +85,884,000 +77,712,000 +The Company sells its footwear products +principally to customers throughout the United States. The +Company also sells its footwear products to foreign customers +located in Europe, Canada, Australia, and Asia, among other +regions. International sales to unaffiliated customers were +23.1%, 27.4%, and 26.0% of net sales for the years ended +December 31, 2001, 2000, and 1999, respectively. Management +performs regular evaluations concerning the ability of its +customers to satisfy their obligations and records a provision +for doubtful accounts based upon these evaluations. For the +years ended December 31, 2001, 2000, and 1999, the Company +had no single customer exceeding 10% of consolidated net sales. +As of December 31, 2001, the Company had one customer +representing 16.4% of net trade accounts receivable. As of +December 31, 2000, no single customer exceeded 10% of trade +accounts receivable. +The Company’s production and sourcing is +concentrated primarily in the Far East, with the vast majority +being produced at several independent contractor factories in +China. The Company’s operations are subject to the +customary risks of doing business abroad, including, but not +limited to, currency fluctuations, customs duties, and related +fees, various import controls and other nontariff barriers, +restrictions on the transfer of funds, labor unrest, and strikes +and, in certain parts of the world, political instability. +(11) Quarterly Summary of +Information (Unaudited) +Summarized unaudited quarterly financial data are +as follows: +2001 +March 31 +June 30 +September 30 +December 31 +Net sales +$ +34,911,000 +21,586,000 +14,023,000 +20,941,000 +Gross profit +15,734,000 +9,597,000 +4,748,000 +8,479,000 +Net earnings (loss) +2,487,000 +731,000 +(2,098,000 +)(1) +506,000 +Net earnings (loss) per share: +Basic +$ +0.27 +0.08 +(0.23 +) +0.05 +Diluted +0.26 +0.08 +(0.23 +) +0.05 +2000 +March 31 +June 30 +September 30 +December 31 +Net sales +$ +41,923,000 +28,940,000 +19,190,000 +23,685,000 +Gross profit +19,426,000 +13,751,000 +7,185,000 +9,836,000 +Net earnings (loss) +4,384,000 +2,232,000 +(395,000 +) +794,000 +Net earnings (loss) per share: +Basic +$ +0.48 +0.25 +(0.04 +) +0.09 +Diluted +0.47 +0.24 +(0.04 +) +0.08 +(1) +The loss in the quarter reflects litigation costs +of $2,180,000 related to the Molly litigation. +51 +Table of Contents +SCHEDULE II +DECKERS OUTDOOR CORPORATION +AND SUBSIDIARIES +Valuation and Qualifying Accounts +Three-year period ended December 31, +2001 +Balance at +beginning of +Balance at +Description +period +Additions +Deductions +end of period +Year ended December 31, 1999: +Allowance for doubtful accounts +$ +1,204,000 +1,820,000 +1,211,000 +1,813,000 +Reserve for sales discounts +654,000 +734,000 +1,098,000 +290,000 +Reserve for inventory write-downs +2,890,000 +1,165,000 +3,292,000 +763,000 +Allowance for doubtful note receivable +1,500,000 +— +1,500,000 +— +Year ended December 31, 2000: +Allowance for doubtful accounts +1,813,000 +1,994,000 +1,663,000 +2,144,000 +Reserve for sales discounts +290,000 +1,007,000 +589,000 +708,000 +Reserve for inventory write-downs +763,000 +1,807,000 +1,372,000 +1,198,000 +Year ended December 31, 2001: +Allowance for doubtful accounts +2,144,000 +1,658,000 +1,788,000 +2,014,000 +Reserve for sales discounts +708,000 +946,000 +848,000 +806,000 +Reserve for inventory write-downs +1,198,000 +1,361,000 +1,682,000 +877,000 +52 +Table of Contents +PART III +Item 10. Directors and Executive +Officers of the Registrant +Information relating to Directors and Executive +Officers of the Registrant is set forth in the Company’s +definitive proxy statement relating to the Registrant’s +2002 annual meeting of shareholders, which will be filed +pursuant to Regulation 14A within 120 days after the +end of the Company’s fiscal year ended December 31, +2001, and such information is incorporated herein by reference. +Item 11. Executive +Compensation +Information relating to Executive Compensation is +set forth in the Company’s definitive proxy statement +relating to the Registrant’s 2002 annual meeting of +shareholders, which will be filed pursuant to +Regulation 14A within 120 days after the end of the +Company’s fiscal year ended December 31, 2001, and +such information is incorporated herein by reference. +Item 12. Security Ownership of Certain +Beneficial Owners and Management +Information relating to Security Ownership of +Certain Beneficial Owners and Management is set forth in the +Company’s definitive proxy statement relating to the +Registrant’s 2002 annual meeting of shareholders, which +will be filed pursuant to Regulation 14A within +120 days after the end of the Company’s fiscal year +ended December 31, 2001, and such information is +incorporated herein by reference. +Item 13. Certain Relationships and +Related Transactions +Information relating to Certain Relationships and +Related Transactions is set forth in the Company’s +definitive proxy statement relating to the Registrant’s +2002 annual meeting of shareholders, which will be filed +pursuant to Regulation 14A within 120 days after the +end of the Company’s fiscal year ended December 31, +2001, and such information is incorporated herein by reference. +53 +Table of Contents +PART IV +Item 14. Exhibits, Financial Statement +Schedules and Reports on Form 8-K +(a) Consolidated Financial Statements and +Schedules required to be filed hereunder are indexed on +page 32 hereof. +(b) Reports on Form 8-K. None. +(c) Consolidated Financial Statements and +Schedules required to be filed hereunder are indexed on +page 32 hereof. +(d) Exhibits +Exhibit +2.1 +Certificate of Ownership and Merger Merging +Deckers Corporation into Deckers Outdoor Corporation. +(Exhibit 2.1 to the Registrant’s Registration +Statement on Form S-1, File No. 33-67248 and +incorporated by reference herein) +3.1 +Amended and Restated Certificate of Incorporation +of Deckers Outdoor Corporation. (Exhibit 3.1 to the +Registrant’s Registration Statement on Form S-1, File +No. 33-67248 and incorporated by reference herein) +3.2 +Restated Bylaws of Deckers Outdoor Corporation. +(Exhibit 3.2 to the Registrant’s Registration +Statement on Form S-1, File No. 33-67248 and +incorporated by reference herein) +10.1 +1993 Employee Stock Incentive Plan. +(Exhibit 99 to the Registrant’s Registration Statement +on Form S-8, File No. 33-47097 and incorporated by +reference herein) +10.2 +Form of Incentive Stock Option Agreement under +1993 Employee Stock Incentive Plan. (Exhibit 10.9 to the +Registrant’s Registration Statement on Form S-1, File +No. 33-67248 and incorporated by reference herein) +10.3 +Form of Non-Qualified Stock Option Agreement +under 1993 Employee Stock Incentive Plan. (Exhibit 10.10 to +the Registrant’s Registration Statement on Form S-1, +File No. 33-67248 and incorporated by reference herein) +10.4 +Form of Restricted Stock Agreement. +(Exhibit 10.11 to the Registrant’s Registration +Statement on Form S-1, File No. 33-67248 and +incorporated by reference herein) +10.5 +Employment Agreement with Douglas B. Otto. +(Exhibit 10.13 to the Registrant’s Registration +Statement on Form S-1, File No. 33-67248 and +incorporated by reference herein) +10.6 +First Amendment to Employment Agreement with +Douglas B. Otto. (Exhibit 10.14 to the Registrant’s +Registration Statement on Form S-1, File No. 33-67248 +and incorporated by reference herein) +10.7 +Second Amendment to Employment Agreement with +Douglas B. Otto. (Exhibit 10.15 to the Registrant’s +Registration Statement on Form S-1, File No. 33-67248 +and incorporated by reference herein) +10.8 +Third Amendment to Employment Agreement with +Douglas B. Otto. (Exhibit 10.30 to the Registrant’s +Registration Statement on Form S-1, File No. 33-67248 +and incorporated by reference herein) +10.9 +Agreement for Sales of Assets, dated +January 26, 1995, between Ken and Nancy Young and Deckers +Acquisition Corporation. (Exhibit 10.36 to the +Registrant’s Form 10-K for the period ended +December 31, 1994 and incorporated by reference herein) +10.10 +Deckers Outdoor Corporation 1995 Employee Stock +Purchase Plan. (Exhibit 4.4 to the Registrant’s +Registration Statement on Form S-8, File No. 33-96850 +and incorporated by reference herein) +10.11 +Amended Compensation Plan for Outside Members of +the Board of Directors. (Exhibit 10.42 to the +Registrant’s Form 10-Q for the period ended +September 30, 1996 and incorporated by reference herein) +10.12 +Extension Agreement to Employment Agreement with +Douglas B. Otto. (Exhibit 10.36 to the Registrant’s +Form 10-K for the period ended December 31, 1996 and +incorporated by reference herein) +54 +Table of Contents +10.13 +Limited Recourse Secured Promissory Note between +Diana M. Wilson and Deckers Outdoor Corporation, dated +April 18, 1997. (Exhibit 10.38 to the +Registrant’s Form 10-Q for the period ended +March 31, 1997 and incorporated by reference herein) +10.14 +Stock Pledge Agreement between Diana M. Wilson +and Deckers Outdoor Corporation, dated April 18, 1997. +(Exhibit 10.39 to the Registrant’s Form 10-Q for +the period ended March 31, 1997 and incorporated by +reference herein) +10.15 +Shareholder Rights Agreement, dated as of +November 12, 1998. (Exhibit 10.39 to the +Registrant’s Form 10-Q for the period ended +September 30, 1998 and incorporated by reference herein) +10.16 +Loan and Security Agreement by and among Congress +Financial Corporation (Western) and Deckers Outdoor Corporation, +Deckers Outdoor Corporation International, Simple Shoes, Inc., +Ugg Holdings, Inc. and Heirlooms, Inc., dated +January 21, 1999. (Exhibit 10.40 to the +Registrant’s Form 10-K for the period ended +December 31, 1998 and incorporated by reference herein) +10.17 +*Teva License Agreement, By and Between Mark +Thatcher and Deckers Outdoor Corporation, dated June 7, +1999. (Exhibit 10.41 to the Registrant’s +Form 10-Q for the period ended June 30, 1999 and +incorporated by reference herein) +10.18 +*Intellectual Property Option Agreement, By and +Between Mark Thatcher, an Individual, and Deckers Outdoor +Corporation, a Delaware Corporation, dated June 7, 1999. +(Exhibit 10.42 to the Registrant’s Form 10-Q for +the period ended June 30, 1999 and incorporated by +reference herein) +10.19 +First Amendment to Intellectual Property Option +Agreement between Deckers Outdoor Corporation and Mark Thatcher, +dated January 22, 2001. (Exhibit 10.19 to the +Registrant’s Form 10-K for the period ended +December 31, 2000 and incorporated by reference herein) +10.20 +Employment Agreement dated February 27, 2001 +between Deckers Outdoor Corporation and Peter Benjamin. +(Exhibit 10.20 to the Registrant’s Form 10-Q for +the period ended June 30, 2001 and incorporated by +reference herein) +10.21 +Revolving Credit Agreement dated as of +February 21, 2002 among Deckers Outdoor Corporation, +UGG Holdings, Inc. and Comerica Bank — California +21.1 +Subsidiaries of Registrant +23.1 +Independent Auditors’ Consent +* +Certain information in this Exhibit was omitted +and filed separately with the Securities and Exchange Commission +pursuant to a granted confidential treatment request as to the +omitted portions of the Exhibit. +55 +Table of Contents +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. +Date: March 29, 2002 +DECKERS OUTDOOR CORPORATION +(Registrant) +/s/ DOUGLAS B. OTTO +Douglas B. Otto +Chief Executive Officer +Pursuant to the requirements of the Securities +Exchange Act of 1934, this report has been signed below by the +following persons on behalf of the Registrant and in the +capacities and on the dates indicated. +/s/ DOUGLAS B. OTTO +Douglas B. Otto +Chairman of the Board +and Chief Executive Officer +/s/ M. SCOTT ASH +M. Scott Ash +Chief Financial Officer +(Principal Financial and Accounting Officer) +/s/ GENE E. BURLESON +Gene E. Burleson +Director +/s/ JOHN M. GIBBONS +John M. Gibbons +Director +/s/ REX A. LICKLIDER +Rex A. 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Business +General +The Company builds niche products into global +lifestyle brands by designing and marketing innovative, +functional and fashion-oriented footwear, developed for both +high performance outdoor activities and everyday casual +lifestyle use. Currently, the Company offers three primary +product lines under the following recognized brand names: +Teva® — high-performance sports sandals and +rugged outdoor footwear; Simple® — innovative +shoes that combine the comfort elements of athletic footwear +with casual styling; and Ugg® — authentic +sheepskin boots and other footwear. Teva is a registered +trademark of Mark Thatcher, the inventor and licensor of Teva +Sport Sandals. Simple and Ugg are registered trademarks of the +Company and its subsidiaries. All of the Company’s footwear +possess the common features of high quality with a primary focus +on functionality and comfort. In 2001, the Company sold +approximately 3,705,000 pairs of footwear. Revenues from sales +(domestic and international) of Teva products have been +$61,221,000, $79,732,000 and $80,963,000 during 2001, 2000 and +1999, representing 66.9%, 70.1% and 72.9% of net sales, +respectively. For financial information regarding the +Company’s industry segments, see note 10 to the +accompanying consolidated financial statements. +Market Overview +The casual, outdoor and athletic footwear market +is comprised of footwear worn for casual everyday use and for +outdoor and athletic activities such as hiking, boating, +basketball, tennis, fitness and jogging. The market for such +footwear has grown significantly during the last decade. The +Company believes that the principal reasons for the growth in +sales of such footwear have been the growing acceptance of +athletic footwear as casual wear and the growing acceptance of +casual wear, in general, including the trend toward casual dress +in the workplace, increasingly active consumer lifestyles and +the growing emphasis on comfort. +Over the last few years the overall footwear +market has seen significant growth of the outdoor segment as +well as the growing emphasis on comfort. Outdoor footwear +includes shoes, boots and sandals for outdoor recreational +activities such as hiking, river rafting, camping and casual +wear. Companies engaged in the outdoor footwear market include +Nike, Adidas, Timberland, Columbia and Salomon. The Company +believes that the growth in outdoor footwear is driven by +several factors including a general shift in consumer +preferences and lifestyles to include more outdoor, sports and +recreational activities such as hiking and camping. In addition, +the increasing popularity of extreme sports, including +skateboarding, snowboarding, kayaking and river rafting, among +others, has created an additional emphasis and awareness of +outdoor activities and lifestyles. As consumers engage in +outdoor activities, they typically desire footwear specifically +designed for these purposes, yet they demand the same level of +quality and high performance that they have come to expect from +traditional athletic footwear. In addition, more consumers are +turning to an emphasis on casual and comfortable footwear and +apparel, as evidenced by the trend toward casual workplaces in +recent years. The Company believes that its products have +benefited from this growing trend and that its footwear +addresses consumers’ demands for highly functional footwear +that is durable as well as comfortable and fashionable. +The casual, outdoor and athletic footwear markets +are generally characterized by a high level of recognition of +brand names, logos and trademarks. Unique and identifying +features create brand awareness among consumers and allow a +favorable reputation to be transferred to new products. The +manufacture of casual, outdoor and athletic footwear is +typically conducted overseas through independent manufacturers. +Casual and athletic footwear is distributed through athletic +footwear stores, department stores and specialty retailers. +Outdoor footwear is generally distributed through these channels +as well but is to a large extent distributed through outdoor +specialty retailers. Retailers may purchase footwear on a +“futures” basis (orders placed at a discount in +advance of a season) or an “at once” basis (orders +placed and filled immediately). Futures orders allow the Company +to more accurately predict its manufacturing and sourcing needs. +By placing futures orders, retailers are also able to reduce the +risk that the Company will be unable to meet their +3 +Table of Contents +delivery requirements. Retailers are generally +encouraged to purchase goods on a futures basis by receiving +discounts or special payment terms not otherwise available. +Risk Factors +This Annual Report on Form 10-K contains a +variety of forward-looking statements within the meaning of the +Private Securities Litigation Reform Act of 1995 including +forward-looking statements in this “Risk Factors” +section, the “Outlook” section, the last paragraph +under “Liquidity and Capital Resources”, the +discussion under “Seasonality” and other statements in +this Annual Report. Forward-looking statements relating to +sales, earnings per share, and the Company’s liquidity may +be significantly impacted by future developments such as the +possible non-renewal of the Teva license due to the +Company’s potential failure to meet required sales minimums +in 2004 or 2008, certain litigation, economic factors and world +events, the Company’s dependence on foreign manufacturers, +competition, the Company’s dependence upon key personnel, +weather conditions, the possible acquisition of Teva and the +impact of seasonality on the Company’s operations, among +others. These forward-looking statements are based on the +Company’s expectations as of March 2002. No one should +assume that any forward-looking statement made by the Company +will remain consistent with the Company’s expectations +after the date the forward-looking statement is made. The +Company disclaims any obligation to update any such factors or +to publicly announce the results of any revisions to any of the +forward-looking statements contained in this Annual Report on +Form 10-K. These forward-looking statements involve known and +unknown risks, uncertainties and other factors which may cause +the actual results, performance or achievement of the Company, +or industry results, to differ materially from any future +results, performance or achievements expressed or implied by +such forward-looking statements. The factors listed below +represent certain important factors the Company believes could +cause such results to differ. These factors are not intended to +represent a complete list of the general or specific risks that +may affect the Company. Other risks may be significant, +presently or in the future, and the risks set forth below may +affect the Company to a greater extent than indicated. +Teva License Agreement +The Company has been selling its Teva line of +sports sandals and other footwear since 1985 pursuant to various +exclusive licensing arrangements with Mark Thatcher, the +inventor of the Teva sport sandal and owner of the Teva patents +and trademark. In June 1999, the Company signed a new exclusive +footwear license agreement with Mr. Thatcher. The agreement +became effective January 1, 2000 and continues through +December 31, 2004. If minimum annual sales levels are +achieved in 2004, the license automatically renews for an +additional four years, through December 31, 2008. If +minimum annual sales levels are achieved in 2008, the license +automatically renews again through December 31, 2011. +However, if the minimum annual sales levels are not achieved in +2004 or 2008, the license expires and the Company will no longer +be able to sell Teva footwear. These required minimum annual +sales levels are $107.9 million in 2004 and +$137.3 million in 2008, both of which are significantly +greater than the annual sales of $61.2 million achieved by +the Company in 2001. Also, Mr. Thatcher may terminate the +licensing agreement if the Company breaches certain of its other +obligations under the agreement. The Company believes it is +unlikely to achieve the contractual minimum for 2004 and has +begun discussions with the licensor to address this issue. +However, the Company can provide no assurances that it will be +successful in its efforts to reach an acceptable resolution. +Sales of Teva footwear and apparel accounted for approximately +66.9%, 70.1% and 72.9% of the Company’s net sales for +fiscal years 2001, 2000 and 1999, respectively. The termination +of the license would have a material adverse effect on the +Company’s results of operations. +Brand Strength; Changes in Fashion +Trends +The Company’s success is largely dependent +on the continued strength of the Teva, Simple and Ugg brands +(collectively, “Deckers Brands”) and on its ability to +anticipate the rapidly changing fashion tastes of footwear +customers and to provide merchandise that appeals to their +preferences in a timely manner. There can be no assurance that +consumers will continue to prefer the Deckers Brands or that the +Company will respond in a timely manner to changes in consumer +preferences or that the Company will successfully +4 +Table of Contents +introduce new models and styles of footwear. +Achieving market acceptance for new products will also likely +require substantial marketing and product development efforts +and the expenditure of significant funds to create consumer +demand. Decisions with respect to product designs often need to +be made many months in advance of the time when consumer +acceptance can be determined. As a result, the Company’s +failure to anticipate, identify or react appropriately to +changes in styles and features could lead to, among other +things, excess inventories and higher markdowns and lower gross +margins due to the necessity of providing discounts to +retailers. Conversely, failure by the Company to anticipate +consumer demand could result in inventory shortages, which can +adversely affect the timing of shipments to customers, +negatively impacting retailer and distributor relationships and +diminishing brand loyalty. The failure to introduce new products +that gain market acceptance would have a material adverse effect +on the Company’s business, financial condition and results +of operations, and could adversely affect the image of the +Deckers Brands. +Inventory Risk +The footwear industry has relatively long lead +times for design and production of product and, thus, the +Company must commit to production tooling and to production in +advance of orders. In addition, the industry is highly subject +to fashion risks and changes in consumer preferences. This risk +is exacerbated by the large number of models, colors and sizes +in the Company’s three product lines. If the Company fails +to accurately forecast consumer demand, or if there are changes +in consumer preference or market demand after the Company has +made such production commitments, the Company may encounter +difficulty in filling customer orders or in liquidating excess +inventory, which may have an adverse effect on the +Company’s sales, margins and brand image. +Quality and Performance +In response to consumer demand, the Company also +uses certain specialized materials in its footwear. The failure +of products using such materials to perform to the +Company’s specifications or customer satisfaction could +result in a higher rate of customer returns and could adversely +affect the image of the Deckers Brands, which could have a +material adverse effect on the Company’s business, +financial condition and results of operations. +Economic Cyclicality and Footwear +Retailing +The footwear industry historically has been +subject to cyclical variation and can be negatively impacted by +decreased consumer spending or softness in the retail market. +This cyclicality could adversely affect the Company’s +business. In addition, various retailers, including some of the +Company’s customers, have experienced financial +difficulties during the past several years, thereby increasing +the risk that such retailers may not be able to pay for the +Company’s products in a timely manner. No assurance can be +given that the Company’s bad debt expense will not increase +relative to net sales in the future. Any significant increase in +the Company’s bad debt expense relative to net sales would +adversely impact the Company’s net earnings and cash flow +and could affect the Company’s ability to pay its +obligations as they become due. +Dependence on Foreign +Manufacturers +Virtually all of the Deckers footwear products +are manufactured by third party suppliers in the Far East, +Australia and New Zealand, with the vast majority of production +occurring in China. There can be no assurance that the Company +will not experience difficulties with such manufacturers, +including reduction in the availability of production capacity, +errors in complying with product specifications, inability to +obtain sufficient raw materials, insufficient quality control, +failure to meet production and delivery deadlines or increases +in manufacturing costs. In addition, if the Company’s +relationship with any of its manufacturers were to be +interrupted or terminated, alternative manufacturing sources +will have to be located. The establishment of new manufacturing +relationships involves numerous uncertainties, and there can be +no assurance that the Company would be able to obtain +alternative manufacturing sources on terms satisfactory to it. +If a change in its suppliers becomes necessary, the Company +would likely experience increased costs, as well as substantial +disruption and a resulting loss of sales. +5 +Table of Contents +Foreign manufacturing is subject to a number of +risks, including work stoppage, transportation delays and +interruptions, political instability, foreign currency +fluctuations, changing economic conditions, expropriation, +nationalization, imposition of tariffs, import and export +controls and other non-tariff barriers (including quotas), +restrictions on the transfer of funds, environmental regulation +and other changes in governmental policies. The Company may also +experience general risks associated with managing operations +effectively and efficiently from a far distance and +understanding and complying with local laws, regulations and +customs. There can be no assurance that such factors will not +materially adversely affect the Company’s business, +financial condition and results of operations. +Products manufactured overseas and imported into +the United States and other countries are subject to duties +collected by the Customs Service in the applicable country. +Customs information submitted by the Company is subject to +review by the Customs Service. The Company is unable to predict +whether additional customs duties, quotas or restrictions may be +imposed on the importation of its products in the future. The +enactment of any such duties, quotas or restrictions could +result in increases in the cost of such products generally and +might adversely affect the sales or profitability of the Company. +In 1997, the European Commission enacted +anti-dumping duties of 49.2% on certain types of footwear +imported into Europe from China and Indonesia. Dutch Customs has +issued an opinion to the Company that certain popular Teva +styles are covered by this anti-dumping duty legislation. The +Company has been contesting the opinion and is working with +Dutch Customs to resolve the situation. The Company has since +obtained, and is using, alternative sourcing for the potentially +impacted products from sources outside of China in an effort to +reduce the potential risk in the future. In the event that Dutch +Customs makes a final determination that the anti-dumping +provisions are applicable, the Company would have an exposure +for prior unpaid anti-dumping duties during 1997 of +approximately $500,000, which has been fully accrued as of +December 31, 2001. +Competition and Infringing +Products +The outdoor and footwear industries are both +highly competitive, and the recent growth in the markets for +sports sandals and casual footwear has encouraged the entry of +many new competitors into the marketplace as well as increased +competition from established companies. Many of the +Company’s competitors have substantially greater financial, +distribution and marketing resources, as well as greater brand +awareness in the footwear market, than the Company. In addition, +the general availability of offshore manufacturing capacity +allows rapid expansion by competitors and new market entrants. +The Company believes that it has been able to compete +successfully because of the brand recognition, quality and +selective distribution of its products. From time to time, the +Company also discovers products in the marketplace that infringe +upon patent and trademark rights held by or licensed to the +Company. Under the Company’s licensing arrangement with the +licensor of the Teva products, Mark Thatcher, Mr. Thatcher +initially may bring proceedings to halt infringement of the Teva +patents and trademark. If Mr. Thatcher elects not to bring +such proceedings, the Company may initiate such proceedings, +with the prior written consent of Mr. Thatcher. To date, +Mr. Thatcher has vigorously pursued infringements following +discovery. To the extent permitted in its agreement with +Mr. Thatcher and to the extent considered necessary, the +Company will vigorously pursue infringements in the event +Mr. Thatcher elects not to do so. However, if +Mr. Thatcher or the Company is unsuccessful in challenging +a third party’s products on the basis of patent and +trademark infringement, continued sales of such competing +products by third parties could adversely impact the +Company’s business, financial condition and results of +operations. See “Business — Competition” and +“Business — Legal Proceedings.” +Dependence on Key +Personnel +The Company’s continued success will depend +substantially upon its ability to retain Douglas B. Otto, its +Chairman of the Board and Chief Executive Officer, Peter +Benjamin, its President and Chief Operating Officer and a core +group of key executive officers and employees. The Company +believes that its future success will depend in large part on +its ability to attract and retain highly skilled personnel. +Competition for such personnel is intense, and there can be no +assurance that the Company will be successful in attracting and +6 +Table of Contents +retaining such personnel. The loss of certain key +employees or the Company’s inability to attract and retain +other qualified employees could have an adverse impact on the +Company’s business. +Intellectual Property +The Company believes that its trademarks, +technologies and designs are of great value. From time to time, +the Company may be the subject of litigation challenging its +ownership of certain intellectual property. Loss of the +Company’s Simple or Ugg trademark rights or the ability to +use the licensed Teva trademarks could have a serious impact on +the Company’s business. Because of the importance of such +intellectual property rights, the Company’s business is +subject to the risk of counterfeiting, parallel trade or +intellectual property infringement. +Economic Factors and World +Events +The Company’s business is subject to +economic conditions in its major markets, including, without +limitation, recession, inflation, general weakness in retail +markets and changes in consumer purchasing power and +preferences. Adverse changes in such economic factors could have +a negative effect on the Company’s business. +In addition, the Company’s results, and the +domestic and international economies in general, may be further +negatively impacted by the terrorist activities of +September 11, 2001 and any subsequent terrorist acts, as +well as the impact of the United States’ war efforts. The +overall negative impact of these activities, including the +effect on the economy and commerce in general, cannot currently +be determined. +Weather Conditions +Sales of the Company’s products, +particularly those under the Teva and Ugg lines, are very +sensitive to weather conditions. Extended periods of unusually +cold weather during the spring and summer could adversely impact +demand for the Company’s Teva line. Likewise, unseasonably +warm weather during the fall and winter months could adversely +impact demand for the Company’s Ugg product line. +Substantial Ownership of the +Company and Shareholder Rights Agreement +At December 31, 2001, Douglas B. Otto +and all executive officers and directors of the Company, as a +group, owned approximately 33.7% and 42.2%, respectively, of the +outstanding shares of the Company’s Common Stock. Due to +such ownership position, Mr. Otto, whether acting alone or +together with one or more of the other executive officers of the +Company, would likely be able to control the affairs and +policies of the Company and would likely be able to elect a +sufficient number of directors to control the Company’s +Board of Directors and to approve or disapprove any matter +submitted to a vote of the stockholders. +The Company adopted a shareholder rights plan in +1998 pursuant to a shareholder rights agreement (the +“Rights Agreement”) to protect stockholders against +unsolicited attempts to acquire control of the Company that do +not offer what the Board of Directors of 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 so +that one preferred share purchase right was and will be issued +for each outstanding share of Common Stock of the Company until +the expiration date of the Rights Agreement. +The ownership positions of Mr. Otto and the +executive officers of the Company, as a group, together with the +anti-takeover effects of certain provisions in the Delaware +General Corporation Law (the “DGCL”), in the +Company’s Certificate of Incorporation and Bylaws and in +the Company’s shareholder rights plan would likely have the +effect of delaying, deferring or preventing a change in control +of the Company and could have a negative effect on the market +price of the Company’s Common Stock. +Other Factors +The Company’s offices and distribution +center are located in the state of California, which has +experienced rolling electrical power outages in 2001. Depending +on the occurrence, timing, length and +7 +Table of Contents +frequency of the any future outages, the Company +may be unable to ship products in a timely manner, which could +negatively impact the Company’s net sales. +Also, during the year ended December 31, +2001, the Company implemented a new Enterprise Resource Planning +(“ERP”) computer system to replace its legacy system. +In connection with this conversion, the Company initially +encountered various difficulties. The effectiveness of the +system’s operation can impact the Company’s ability to +receive and accept orders, monitor its inventory levels, and +coordinate the shipment of products to customers, among other +activities. In the event that significant difficulties are +encountered in the future, the Company may experience lower +sales and increased expenses, which would negatively impact the +Company’s results of operations and cash flows. +The Company’s results of operations, +financial condition and cash flows are also subject to risks and +uncertainties with respect to the Company’s ability to +secure and maintain adequate financing, to forecast its future +sales, inventory needs and cash flows and to subsequently +achieve those forecasts. +Business Strategy +Management’s mission is to build niche +products into global brands and its business strategy is to +offer diverse lines of footwear that emphasize functionality, +quality, comfort and technical performance tailored to a variety +of activities and demographic groups. Specifically, the +Company’s business strategy emphasizes the following +elements: +Introduce New Categories and Styles under +Existing Brands. The Company intends +to leverage consumer recognition of its existing brands by +developing and introducing additional innovative footwear +products that satisfy the Company’s high standards of +practicality, comfort and quality. The Company believes the +introduction of additional products at a variety of price +points, such as the range of new models in its Teva, Simple and +Ugg lines being offered in the Company’s 2002 product +offerings, have broadened the Company’s customer base, +further diversified the Company’s product lines, and helped +reduce the effects of seasonality on the Company’s sales. +See “Management’s Discussion and Analysis of Financial +Condition and Results of Operations — +Seasonality.” Over the last several years, the Teva product +offering has been greatly expanded to include a variety of new +sport sandal styles at a variety of price points and +incorporating a range of new uppers and technologies. In +addition, the Company has begun to leverage the success of the +Teva brand in the outdoor markets by launching into several new +categories of footwear, including amphibious footwear, hikers, +trailrunners, cold-weather boots, and other rugged outdoor +footwear. The Spring 2002 and Fall 2002 Teva product lines +include a significant redesign and the introduction of several +new styles and categories. One of the features prevalent in the +Spring 2002 line is the use of the Wraptor technology, a +patent-pending 360 degree continuous strapping system that +simultaneously secures the instep and arch shank to the foot. +Following on the success of this feature in the Company’s +running sandals, the Company has also designed a line of hikers +around this technology and has added it to certain styles of the +Company’s high performance Guide offering for professional +paddlers and adventurers. In addition, the Company continues to +expand into the hiking, trailrunning and rugged outdoor arenas, +where the aggregate market size is considerably greater than the +market for sport sandals, the area in which the Teva brand was +initially founded. By launching into these new areas of closed +footwear, the Company hopes to increase sales while at the same +time reducing the impact of seasonality on the Company’s +business. In addition to its historically strong outdoor +orientation, the 2002 line also includes athletically inspired +styles aimed directly at the athletic distribution channels, +another significant area where the Company hopes to gain +distribution. In addition to these new categories for the brand, +Teva has also re-designed its core sport sandal offering by +adding many new features and styles, incorporating the latest +technologies and innovations. The Company continues to use the +knowledge and experience of Team Teva, an elite group of the +world’s best male and female whitewater athletes, to +enhance the development of future technical offerings in this +category. As the Company moves to the future, it plans to +strengthen existing categories and further expand into new +channels of distribution. +The 2002 Simple product line includes a +re-emphasis on the men’s footwear business, an area where +the brand had been very successful several years ago, as well as +a focus on athletically inspired designs. The 2002 Simple line +also includes a collection of women’s casual styles +featuring low profiles and sleek outsoles. The +8 +Table of Contents +Simple line continues to target consumers in the +sixteen to twenty-five year old youth market. The line focuses +on lifestyle comfort based products such as clogs, sandals, +casuals and non-performance sneakers that are priced affordably. +In 2002, the Company’s Ugg product offering continued to +include its heritage boots and slippers, as well as an improved +women’s Town Collection of casual, fashionable boots and +clogs and a new Aspen Collection of rugged cold-weather footwear +featuring seam sealed lugged outsoles and waterproof leathers +combined with sheepskin linings. +Pursue Licensing of Brands. +Given the strength of the +Company’s brands, the Company is also pursuing the +licensing of its brand names to other ancillary products, beyond +the Company’s existing core footwear products. Through this +type of brand extension, the Company hopes to generate +additional revenues in the form of royalty income; to further +increase awareness for the Company’s brands and their +related products, and thereby increase sales of its footwear; +and to build the long-term value of the brands. The +Company’s business strategy currently includes the pursuit +of brand extension through licensing for both the Ugg and Simple +brands. The sublicensing of the Teva brand is not currently +available under the existing Teva license agreement; however, in +the event that the Company subsequently exercises its purchase +option to acquire Teva, the licensing of the Teva trademarks to +other products would be considered as part of the long-term +strategy for the brand (See “Management’s Discussion +and Analysis of Financial Condition and Results of +Operations — Liquidity and Capital Resources”). +As part of this approach, the Company has recently signed agency +agreements with BHPC Marketing, Inc. to assist in +identifying candidates and coordinating the efforts for the +licensing of the Ugg and Simple trademarks on various products +ranging from sportswear and outerwear to housewares and +accessories. Because the Company is currently in the early +stages of pursuing licensing opportunities for its brands it +cannot yet provide any assurances regarding how successful its +efforts will be or how significant the market size will be. +Pursue Additional Market +Opportunities. Management intends to +continue to consider new markets for its existing line of +products. For the years ended December 31, 2001, 2000 and +1999 international net sales totaled $21,096,000, $31,135,000 +and $28,859,000, representing 23.1%, 27.4% and 26.0% of net +sales, respectively. Management believes that significant +opportunities exist to market its products abroad and intends to +selectively expand its distribution worldwide. To bolster these +efforts, the Company has entered into an agency arrangement, +effective January 1, 2002, with a firm in the United +Kingdom for the coordination of the sales, distribution, +marketing and advertising efforts in the European markets. In +addition, the Company has an office in Japan that facilitates +the servicing of the Asian market. +The Company believes significant opportunities +exist to expand distribution domestically too. For example, the +Company’s Teva brand has had its roots in the outdoor +market where it has successfully distributed its products for +many years. The Company sees the potential for expansion into +the athletic retail distribution channel as a significant +opportunity for the Teva brand in future years. The Company +intends to pursue this channel of distribution going forward and +has recently designed product targeted at this market and has +added sales personnel with significant experience in this +market. In addition, the Ugg brand has historically been popular +in California for many years. The Company believes that +significant opportunities exist to expand distribution for this +brand throughout the United States, especially in light of its +suitability to a variety of climates. In recent years, the +Company has been successful in expanding outside of California +and expects to continue to pursue this expansion in the future. +Acquire or Develop New +Brands. The Company intends to +continue to focus on identifying and building new brands for +growth. The Company has been successful in the past in taking +the concepts of entrepreneurs for innovative, fashionable +footwear targeted at niche markets and building the products +into viable brands and intends to continue to identify concepts +for potential future niche products which have the potential of +developing into successful brands or product lines. +Products +The Company currently offers three primary +product lines: (1) Teva sport sandals and footwear; +(2) Simple casual footwear; and (3) Ugg sheepskin +footwear. Each of these lines, as well as individual models +within these lines, is designed to appeal to various demographic +groups. The Company’s footwear products +9 +Table of Contents +emphasize function, comfort and technical +performance and are suitable for a variety of demanding outdoor +and athletic activities, as well as casual and everyday use. The +Company’s products are designed and marketed to promote a +high level of brand name recognition and consumer appeal by +combining functional and creative designs with quality materials +and construction. The Teva footwear and the Simple footwear +lines are generally previewed twice per year, once in the summer +for deliveries that commence in the fall and once in the winter +for the following back to school and fall season. The Ugg line +of sheepskin footwear is generally previewed in the winter with +most deliveries occurring in the following fall and winter. The +following sets forth a summary description of each of the +Company’s primary product lines: +Teva Sport Sandals and Footwear. +The Teva sport sandal was one of the +first sport sandals to be developed and remains popular among +outdoor enthusiasts and the general public. The Company licenses +the Teva patents and trademark from Mark Thatcher, a +professional river guide who invented the Teva sport sandal. The +terms of such licenses run through 2011, subject to achieving +certain minimum sales levels beginning in 2004. Certain styles +of the Teva sport sandal incorporate a variety of proprietary +strapping configurations ideally suited for outdoor activities +such as hiking, boating and river rafting. These strapping +systems generally consist of high-quality nylon webbing or +leather, are fully adjustable, and hold the foot firmly to the +sandal’s durable, cellular rubber, molded EVA, polyurethane +or leather footbed. Teva sport sandals are extremely durable, +with many styles designed specifically for performance in and +around the water. In addition, the Company has recently +leveraged the brand’s success in the outdoor markets by +launching into various natural progressions for the brand +including hiking boots, trailrunning shoes, amphibious footwear +and other rugged outdoor footwear styles. For Spring 2002, the +Teva line has been redesigned to include numerous new styles, +categories and features and now includes 86 different models +spread across various categories and designed for a variety of +uses. The Hydro Series, a category of sandals and other +amphibious footwear built for high performance and rugged +outdoor use, includes 14 models of men’s and +women’s styles of sport sandals, neoprene and quick +draining monofilament mesh watershoes and other outdoor footwear +ideal for professional outdoorsmen and adventurers. The Terra +Series, a line of 17 styles of sandals and hiking boots +primarily designed for use on land, includes performance walking +sandals and convertible sandals with removable heel straps that +allow the sandal to be worn as a slide, as well as hiking boots +and running sandals incorporating the patent-pending Wraptor +technology, an upper which encircles the instep and continually +adjusts to the movement of the foot to provide a consistently +secure fit. The Originals Series has 16 styles of sandals +and thongs that combine the elements of performance with casual +everyday use and includes several of the most popular styles as +well as new models with retro-1970’s inspired colors and +stylings. Continuing on the success of recent years, the Spring +2002 line includes 15 styles of men’s and women’s +leather casuals under the Nomad Series, including a variety of +sandals, slides and clogs. The Sun and Moon Series includes +11 styles of slides and thongs offered in a variety of +materials including waterproof leather, nylon, suede and +airmesh. The Spring 2002 Children’s category is a +collection of 13 styles at various price points and +includes an assortment of sandals incorporating a variety of +materials including leather, waterproof suede, nylon, neoprene +and mesh as well as slip-on watershoes, hikers and other styles +of amphibious footwear. In addition, for the Fall 2002 +season, the Company has significantly expanded its Fall product +offering with a variety of different types of closed footwear, +including hiking boots, cold weather boots, trailrunners and an +assortment of other rugged outdoor styles. The domestic +manufacturer’s suggested retail prices for adult sizes of +Spring 2002 Teva footwear products range from $20.00 +to $130.00. +Simple Casual +Footwear. The Simple line consists of +casual shoes that combine the comfort and function of athletic +footwear construction with the simple, understated styling of +“back-to-basics,” casual lifestyle footwear. The +Simple product line includes a variety of comfortable, +fashionable, basic shoes for men and women including sneakers, +sandals, slides, clogs and leather casuals. The Spring 2002 +collection reflects the Company’s emphasis on a target +consumer in the sixteen to twenty-five year old age group. For +the 2002 line, the Company has added several new styles of +clogs, sandals, sneakers and leather casuals to its offerings +including several athletically inspired styles for men and women +as well as a re-emphasis on the men’s footwear business, an +area where the Company had considerable success in the past. The +2002 Simple line also includes a series of new, innovative +styles of women’s footwear featuring models with low +profiles and sleek lines. For Spring 2002, Simple is +offering a total of 86 models including 46 styles for men +and 40 for women. The Spring 2002 line includes +32 styles of sneakers with leather and suede uppers, +29 styles of sandals +10 +Table of Contents +and thongs and 25 styles of leather casuals +and clogs in a variety of colors. The domestic +manufacturer’s suggested retail prices for adult sizes for +the Spring 2002 line range from $40.00 to $95.00. +Ugg Sheepskin +Footwear. Ugg is a line of authentic +sheepskin footwear, popularized in Australia in the 1960’s +and 1970’s. These sheepskin boots, slippers and other +footwear styles have high-grade fleece linings which act as a +natural insulator, keeping feet warm and comfortable. The +2002 Ugg line offers a range of 52 models of casual, +fashionable and streetwise styles in various colors, including +several new styles of shoes and boots for men and women. The +2002 line includes several styles with new innovative +fashionable uppers and several styles with water resistant +leather treatments to address more inclement and cold weather +conditions. The 2002 line continues the tradition of the +highly successful Classic and Ultra boots, as well as the Home/ +Spa Collection of slippers and other comfort footwear. In +addition, for 2002, the line includes an expanded Town +collection of men’s and women’s casual footwear, +including the men’s Birch styles, the women’s Solvang +styles, and the women’s Brooks styles featuring lug bottoms +for traction combined with sleek profiles. The 2002 line +also includes a new Aspen Collection of rugged cold-weather +footwear featuring seam sealed lugged outsoles and waterproof +leathers combined with sheepskin linings to prevent water from +coming in and to prevent warmth from escaping. The domestic +manufacturer’s suggested retail prices for adult sizes for +the Ugg line range from $50.00 to $275.00. +Marketing and Distribution +The Company’s products are currently +distributed throughout the United States by a network of +approximately 32 independent sales representatives, +organized geographically, who make sales, visit retail stores to +train personnel and review sales of the Company’s footwear +on a periodic basis. Beginning in 2000, the Company added a +separate dedicated independent sales force for the Simple and +Ugg brands as these products are sold through different +distribution channels and are targeted toward a different +consumer than the Company’s Teva brand. The Company’s +sales managers for each brand manage their networks of +representatives, recruit experienced sales representatives in +the industry and coordinate sales to national accounts. The +Company currently sells its products internationally through +independent distributors. The Company’s goal is to promote +retail sales of its products at attractive profit margins for +its accounts through selective distribution and marketing, +targeted toward distinct groups of consumers. As a result of +this approach, the Company’s accounts have a strong +incentive to devote greater selling space to the Company’s +products, and the Company is better able to assess consumer +preferences, the future ordering needs of its customers and +inventory requirements. +The Company’s principal domestic customers +include specialty retailers, upscale department stores, outdoor +retailers and athletic footwear stores which market products +consistent with the Company’s standards and, in the case of +Teva, have been approved by the Company’s licensor. The +Company’s five largest customers accounted for +approximately 20.6% of the Company’s net sales for the year +ended December 31, 2001, compared to 20.4% for the year +ended December 31, 2000. No single customer accounted for +more than 10% of the Company’s net sales for the years +ended December 31, 2001 or 2000. +In order to encourage accounts to place orders +early in the season the Company has continued with a preseason +discount program under which accounts are offered discounts on +preseason orders placed. The Company’s strategy is to +emphasize this “futures” program, as compared to +“at once” sales, in order to stabilize its supply +arrangements, reduce the risk of customer cancellations and to +benefit from the significant positive impact of the program on +the Company’s inventory costs, sourcing schedule and +allocation of marketing resources. Consistent with prior years, +the Company offered an early delivery program for the +spring 2002 season which was delivered the fourth quarter +of 2001. This early delivery program allows the Company to +reduce the impact of peak warehouse inventory levels during the +spring and provides retailers the opportunity to have earlier +sell through, lengthening the retail selling season and +increasing the potential for inventory turns at retail. +Domestic deliveries generally originate from the +Company’s 126,000 square foot warehouse facility in +Ventura County, California. European deliveries originate from a +distribution center in the Netherlands, while all other +international deliveries originate from offshore factories. +11 +Table of Contents +Advertising and Promotion +The Company attempts to maximize the impact of +its advertising, public relations and promotional expenditures +by utilizing media that provide high visibility within targeted +market segments. The Company’s brand names are generally +advertised and promoted through a variety of consumer print +advertising campaigns in addition to highly visible editorial +coverage in both consumer and trade publications. Retail +presence and “point of purchase” materials along with +production packaging provide additional visible brand support. +The Company’s in-house marketing departments for each brand +work closely with targeted accounts in many aspects of these +activities. +The Company continues to advertise its Teva brand +through a national print advertising campaign targeted at +various different demographic groups. For its core outdoor +market, Teva advertises in several outdoor-related magazines, +including Backpacker, Outside, National Geographic +Adventurer, Paddler, and Sports Illustrated Women, +among others. In addition, to promote its newly introduced Elden +Trail trailrunner, Teva is advertising in Trail Runner +and The Running Network, among other publications. With +the broadened appeal of the Teva offerings, including the +leather casual models, the Company has also focused its print +advertising toward more mainstream print publications, including +Shape and National Geographic Traveler. Teva will +also target the alternative, youth market with advertisements in +Stuff and Adrenaline. In addition, with the +introduction of Teva’s first full Fall line in 2002, Teva +will increase its advertising in the fall and winter months. +In order to maintain the Company’s +historically high visibility among core outdoor enthusiasts such +as professional river rafters, kayakers, mountain bikers and +rock climbers, Teva products are given or sold at professional +discounts to members of this group. In order to further bolster +the loyalty of these individuals, the Company offers categories +called “Hydro” and “Terra,” incorporating +the latest technological developments and highest quality +materials. The Company actively sponsors a group of the +world’s best male and female whitewater athletes called +Team Teva. Teva also sponsors teams from other outdoor +disciplines including the Teva US Mountain Running Team and +the SOBE Headshok Mountain Bike Team. By outfitting and +sponsoring these highly visible athletes and teams, the Company +creates awareness among targeted consumers at relatively low +cost. In addition, the Company has traveling promotional and +technical representatives who represent the Teva brand at a wide +variety of festivals, outdoor sporting events and competitions. +Teva is sponsoring over fifty events in 2002, including the Teva +Tour, a series of whitewater rafting and kayaking events held +between April and October at fourteen rivers across America. +Internationally, the Company is also the title sponsor for +events in Japan, Canada, Switzerland and Italy. Teva sponsors +and promotes these events in order to increase the +Company’s visibility for its core outdoor consumer, in +addition to the significant marketing available to the more +mainstream public with the increasing popularity of viewing +these extreme sports. In addition to the Teva Tour, the Teva +promotional team attends and sponsors other events including the +Teva Mountain Games at Vail, Teva Mountain Running Series, Teva +Liquid Lifestyles Film US Tour, Santa Cruz Surf Kayak +Festival in Santa Cruz, California, Grandma’s Marathon in +Duluth, Minnesota, The Telluride Bluegrass Festival in +Telluride, Colorado, and Reggae on the River in Garberville, +California, among others. +The Teva mobile promotions team attends the +events in dedicated state of the art promotional vehicles where +they showcase Teva products and provide consumers with the +opportunity to see and try on the latest styles. The Teva brand +has also recently initiated a partnership with Land Rover. Land +Rover is now the official vehicle of Team Teva, outfitting the +Team Teva athletes and the Teva Technical Representatives in +Teva branded Land Rovers throughout the United States. +With respect to the Simple product line, the +Company has continued its national print advertising campaign. +Simple print advertisements will appear in niche art, music and +style-related youth-focused consumer magazines such as Paper, +URB, Surfer and FHM . In addition, the marketing +effort focuses around grass roots advertising including wild +postering, flyering, and “Go Cards.” As an extension +of its grass roots efforts, Simple will launch a national road +tour in March 2002 as part of its grass roots marketing +campaign, The Stream of Consciousness. A Simple journalist will +drive an Airstream trailer across America, visit and sponsor +art-related events at universities and create a film documentary +of his experiences on the road. A +12 +Table of Contents +rigorous public relations campaign will focus on +obtaining magazine editorial placement in addition to newspaper +and television coverage. Recent public relations coverage has +appeared in Footwear News, Teen People, Nylon, YM, Footwear +Plus, W Magazine, Lucky, Shuz, Shape, and Surfing +Girl. These public relations efforts have also resulted in +Simple products appearing on television shows such as +Friends, Ally McBeal, Dawson’s Creek, and MTV. +Simple’s marketing efforts are performed +internally by an in-house Simple marketing team which works to +promote the Simple brand positioning of being “simple” +and “down to earth”. +In 2002, the Company plans to continue to build +on the success of the Ugg 2000 and 2001 national print +advertising campaigns. The Company continues to target its Ugg +products toward luxury consumers who seek high quality, +luxurious and fashionable products for cold weather. The Company +expects to advertise Fall 2002 Ugg products in upscale +publications such as Vogue, In Style and +O Magazine. In February 2002, Ugg’s were +featured in the Opening and Closing Ceremonies of the 2002 +Winter Olympic Games. 1,000 Ugg boots were used to outfit +both the children in the Children of Light performances and the +individuals presenting medals to athletes at all the events. +Both the children and adults were outfitted in Ultra Short Ugg +boots. Ugg also received Olympic exposure on the Today Show with +Katie Couric the day after the opening ceremonies. +In addition to this national advertising +campaign, the Ugg brand is being supported by national public +relations and product placement efforts. In-house marketing +personnel work closely with a public relations firm and a +product placement agency to gain brand visibility in popular +magazines, television shows and feature films. Recent editorial +coverage includes articles in magazines such as Glamour, In +Style, Cosmopolitan, Marie Claire, Maxim, Shape, Self, +O Magazine and Real Simple. Television coverage +of Ugg product includes shows such as Friends, Once and +Again, Dawson’s Creek, E.R., Will and Grace, Ally McBeal, +My Wife and Kids, Judging Amy, Alias, 7th Heaven and +Everybody Loves Raymond. These public relations efforts +have also resulted in Ugg product appearances in the following +recent feature films: America’s Sweethearts, +starring Julia Roberts, Snow Dogs, starring Cuba Gooding +Jr., American Pie II, starring Sean William +Scott, Dinner with Friends, starring Andie McDowell, +Josie and the Pussycats, starring Tara Reid and Life +as a House, starring Kevin Kline. +In 2001, 2000 and 1999, the Company incurred +$6,087,000, $7,108,000 and $5,602,000 respectively, for +advertising, marketing and promotional expenses. In addition to +these expenditures, the Company’s 29 international +distributors spend additional amounts for marketing the +Company’s brands within their respective territories. The +Company is required under its Teva License Agreement to spend a +minimum amount for advertising and promoting Teva products, +based on a percentage of sales. In addition to the minimum +contractual marketing expenditures, the Company and the licensor +have agreed to each contribute annually a certain percentage of +sales toward the promotion of the Teva brand and trademark, with +or without particular reference to individual Teva styles. +Design and Product Development +The design and product development staff for each +of the Company’s brands creates and introduces new +innovative footwear products that are consistent with the +Company’s standards of high quality, combined with comfort +and functionality. In addition to its internal design and +development staff, the Company has begun to rely more heavily in +recent years on outside design firms for a significant portion +of the design function. By transitioning much of the design +function to independent design firms, the Company has been able +to eliminate certain positions, obtain efficiencies and reduce +design and development costs considerably in recent years. As a +result, research and development costs aggregated $1,034,000, +$1,076,000 and $1,607,000 in 2001, 2000 and 1999, respectively, +reflecting the operational efficiencies gained under this new +approach. +With respect to Teva, in order to ensure that the +Company’s high performance technical products continue to +satisfy the requirements of its historical customer base of +performance-oriented “core enthusiasts,” the +Company’s design staff solicits comments and feedback from +its licensor, its Team Teva whitewater athletes and other +professional outdoorsmen, as well as several of its retailers, +including REI, EMS, Galyans and L.L. Bean. Certain models +are modified and technical innovations are developed in response +to such comments and feedback. The Company adds new innovations, +components and styles to its product line +13 +Table of Contents +continually. For example, the Company recently +designed and introduced a new line of trailrunners incorporating +the patented Liquid Frame technology and has incorporated its +newly developed Wraptor technology into performance running +sandals, an assortment of hikers and certain styles of its high +performance Guide sport sandals specifically targeted at +professional outdoorsmen and adventurers. In addition, for added +traction and durability, the Company has recently incorporated +various materials in its sandals, including Spider +Rubber®— a sticky, non-slip rubber outsole material +for use across wet and dry terrain, Traction +Rubber TM — a highly durable and abrasion +resistant material designed specifically for the extra rigors of +land use, and River Rubber® — a non-slip material +designed to offer superior grip on smooth wet surfaces such as +rocks, fiberglass and raft rubber. +While Teva continues to develop high performance +sport sandals and other rugged outdoor footwear by continually +updating and designing new styles for these categories, the +Company also continues to increase its focus on the casual +footwear market through its Teva, Simple and Ugg brands. The +Company continues to introduce and offer new styles of leather +and other casual footwear for men and women and has added +several new styles of hikers, sport sandals, slip-ons and other +shoes to its Teva children’s offering for Spring 2002. The +Company has also added several new styles of clogs, sandals, +sneakers and leather casuals to its offerings under the Simple +line for 2002 including several athletically inspired styles for +men and women as well as a re-emphasis on the men’s +footwear business, an area where the Company had considerable +success in the past. The 2002 Simple line also includes a series +of new, innovative styles of womens’ footwear featuring +models with low profiles and sleek lines. By monitoring changes +in consumer lifestyles and preferences and then focusing first +on function and practicality, the Company develops footwear +designed to appeal to quality-minded consumers seeking +comfortable casual footwear. +In recent years, the Company has taken steps to +take Ugg’s longtime success in the Southern California +market and duplicate that success across the United States. In +support of this effort, the Company has taken steps in recent +years to update the Ugg products in order to make them more +functional for use in cold and wet climates. For example, the +2002 line includes a new Aspen Collection of cold weather +boots, shoes and clogs featuring seam sealed lugged outsoles and +waterproof leathers combined with sheepskin linings for high +functionality and comfort. In addition, the Company has added a +new Brooks Series to its women’s Town Collection, featuring +styles with a new lugged outsole, contemporary styling and wool +fleece linings which are designed to keep feet dry and +comfortable in both warm and cold climates. The Ugg brand +continues to design and offer more fashionable and unique upper +styles to help differentiate Ugg from the low cost imitation +brands. +Integral factors in the design and product +development process include an evaluation of the availability +and cost of raw materials, the capabilities of the factories +that will manufacture products and the target retail price of +new models and lines. The design and development staff works +closely with brand management to develop new styles of footwear +and components for their various product lines. Drawings and +prototypes are utilized to produce samples of proposed new +concepts. Throughout the development process, members of the +design staff coordinate closely with each other and with the +Company’s product development, manufacturing and sourcing +personnel toward a common goal of developing and sourcing a +high-quality product that will be delivered on a timely basis. +The Company endeavors to minimize the risk of changing fashion +trends by offering a diverse line of functional products and +closely monitoring sales to its accounts after introduction. +Product Sourcing +The Company currently sources all of its Teva and +Simple footwear and a portion of its Ugg footwear from +independent contract manufacturers in the Far East. The Company +imports the remainder of its Ugg footwear from independent +contract manufacturers in Australia and New Zealand. The Company +is not involved in the direct manufacture of footwear, but +rather sources completed footwear, produced to required +specifications, directly from these independent contractors. As +the Company continues to grow, it expects to continue to rely +heavily on its independent contractors for its sourcing needs. +The manufacturing of footwear by the +Company’s independent contractors is performed in +accordance with detailed specifications provided by the Company +and is subject to quality control standards. In efforts to +14 +Table of Contents +ensure the production of high quality products, +many of the materials and components used in production are +purchased from independent suppliers designated by the Company. +The Company believes that its completed footwear as well as the +various raw materials and components used in the manufacture of +the footwear, including rubber, leather, nylon webbing and +sheepskin, are generally available from multiple sources at +competitive prices. +The Company generally does not have any long-term +agreements with the manufacturers or suppliers of its products, +but does business based on individual purchase orders. +Quality Control +The Company has instituted inspections and other +procedures to satisfy the high quality demanded by users of the +Company’s products. The Company’s quality assurance +program includes inspection procedures at the factory level as +well as a final inspection upon arrival of product at the +Company’s distribution center. The Company uses on-site +inspectors at its independent suppliers who oversee the +production process and perform quality assurance inspections. In +addition, the products undergo further inspection procedures +prior to being accepted at the Company’s domestic +distribution center. +Licenses +Teva License. The +Company has been selling its Teva line of sport sandals and +other footwear since 1985 pursuant to various license +arrangements with Mark Thatcher, the inventor of the Teva sport +sandal and the owner of the Teva patents and trademark. +Mr. Thatcher owns seven United States patents on designs +used in Teva footwear and has a United States trademark +registration for the Teva mark. +On June 7, 1999, the Company signed a new +license agreement (the “License Agreement”) for Teva, +which became effective January 1, 2000. Under the License +Agreement, the Company has the exclusive worldwide rights for +the manufacture and distribution of Teva footwear through 2004. +Apparel and other non-footwear products are not covered by the +License Agreement. The License Agreement is automatically +renewable through 2008 and through 2011 under two renewal +options, provided that minimum required sales levels are +achieved. These required minimum annual sales levels are +$107.9 million in 2004 and $137.3 million in 2008, +both of which are significantly greater than the annual sales of +$61.2 million achieved by the Company in 2001. The Company +believes it is unlikely to achieve the contractual minimum for +2004 and has begun discussions with the licensor to address this +issue. However, the Company can provide no assurances that it +will be successful in its efforts to reach an acceptable +resolution. +As with the previous arrangement, the License +Agreement provides for a sliding scale of royalty rates, +depending on sales levels, and includes guaranteed minimum +annual royalty amounts. Additionally, the License Agreement +provides for an increase in the required amount of marketing +expenditures, depending on sales levels and varying by +territory. In addition to the minimum contractual marketing +expenditures, the Company and the licensor have agreed to each +contribute annually a certain percentage of sales toward the +promotion of the Teva brand and trademark, with or without +particular reference to individual Teva styles. +As additional consideration, the Company paid the +licensor a licensing fee of $1,000,000 in 1999 and issued the +licensor 428,743 shares of its previously unissued common stock +valued at $1,608,000. The Company has recorded the license as an +intangible asset equal to the cash and market value of the stock +issued on the date of the License Agreement. These shares are +subject to various contractual and other holding period +requirements. In addition, the Company has agreed to grant the +licensor not less than 50,000 stock options on the +Company’s common stock annually, at an exercise price equal +to the market value on the date of grant. +The licensor retains the rights to approve the +quality of the licensed products produced, all marketing, +advertising and promotional plans and materials, and the +distribution channels and customers to whom the Company can sell +the licensed products. In addition, the License Agreement +provides for minimum annual research and development spending +levels for the Company with respect to the Teva products and +restricts the volume of closeouts and seconds which the Company +is able to sell each year. +15 +Table of Contents +The License Agreement provides that the licensor, +in his sole discretion, may take any action against parties +believed to be infringing upon the licensor’s trademark, +patents and other intellectual property. The licensor is fully +responsible for any legal and other costs incurred in such +actions and is entitled to any recovery resulting from the +actions. The Company may not participate in any such action or +in any other action regarding the infringement of the Teva +intellectual property without the licensor’s prior written +consent. +In the event that the license term is +automatically renewed beyond 2004, the Company must achieve +minimum annual sales levels for the years 2005 through 2011. +These minimum annual sales levels are based upon certain +percentages of net sales in the preceding calendar year. If the +Company is not able to achieve the minimum annual sales levels +for two years during a renewal term, the License Agreement can +be terminated at the option of the licensor. Currently, annual +sales of Teva products are substantially below the required +minimums. +During the term of the License Agreement, +including the renewal terms, the Company is prohibited from +manufacturing, marketing, selling and distributing any sandals +other than Teva sandals. In addition, for the two years +following the termination of the License Agreement, the Company +is prohibited from manufacturing, marketing, selling and +distributing sandals, in general. However, the Company may +continue to manufacture, market, sell and distribute all styles +and models of sandals offered under its Simple product line +which existed as of the date of the License Agreement as well as +all styles subsequently approved by the licensor. +The License Agreement can be terminated under +several circumstances, if they remain uncured for specific +periods of time. These circumstances include the following, +among others: if either party becomes insolvent or bankrupt; if +the Company offers sandals which compete with the Teva products +or otherwise engages in activities which compete with the Teva +products; if the Company transfers substantially all of its +property or stock to other parties; if the Company sells +unapproved merchandise in violation of the License Agreement; or +if the Company or the licensor otherwise violate or breach the +terms of the License Agreement. +In connection with the execution of the most +recent license agreement with Mark Thatcher, the Company +received an option to buy Teva and virtually all of its assets, +including all worldwide rights to Teva. The option price is +based on formulas tied to net sales of Teva products and varies +depending on when the option is exercised. For the first option +period, January 1, 2000 through December 31, 2003, the +option price is for an amount equal to the greater of +(i) $61.6 million or (ii) 75% of the largest +calendar year revenues since January 1, 2000 for the Teva +brand, plus $1.6 million. In addition, the Company would +issue to Mr. Thatcher 100,000 shares of common stock and +options to purchase 100,000 shares of common stock. The purchase +price for the second option period, January 1, 2006 to +December 31, 2008, is equal to 110% of the average of the +aggregate sales for all Teva products for the two calendar years +since January 1, 2000 with the highest aggregate net sales. +If the Company does not exercise its option to acquire Teva, the +licensor has the option to acquire the Teva distribution rights +from the Company for the period from January 1, 2010 to +December 31, 2011, the end of the license term, and the +option price is based on a formula tied to the Company’s +earnings before interest, taxes, depreciation and amortization. +The Company is currently evaluating the possibility of +exercising the option in the January 1, 2000 to +December 31, 2003 option period. The payment of the +purchase price must be completed within 90 days of the +exercise of the purchase option. If the Company exercises its +purchase option, but subsequently fails to complete the purchase +within the 90 day payment period, the purchase option and the +Option Agreement will automatically be terminated. +Sale of Heirlooms, Inc. +The Company and Bob Eason, the designer and +founder of Picante clothing, were parties to an agreement +pursuant to which the Company owned 50% of Heirlooms, Inc. +(“Heirlooms”), the manufacturer and distributor of +Picante clothing. In January 2001, the Company sold its 50% +interest in Heirlooms back to Mr. Eason for cash of +approximately $1,200,000 and a note receivable of approximately +$420,000, which was secured by a secondary security interest in +the assets of Heirlooms. The selling price was for an amount +that approximated the net carrying value of the underlying +assets and, accordingly, the resulting gain on the sale was not +significant. +16 +Table of Contents +Patents and Trademarks +Mr. Thatcher holds seven United States +patents and one patent in each of Australia, New Zealand, Korea, +Germany, France, China, Japan and the United Kingdom for Teva +footwear. As a result of the expiration of the applicable period +during which foreign patent applications were required to have +been filed, Mr. Thatcher does not and cannot hold such +patent rights in other countries. Mr. Thatcher also +currently holds Teva trademark rights in the United States and +in several other countries, including, among others, France, +Germany, the United Kingdom, Japan and Australia. +Mr. Thatcher’s patent and trademark rights are +licensed to the Company under the License Agreement discussed +previously. Both the Company and Mr. Thatcher regard such +proprietary rights as valuable assets, and the Company +cooperates with Mr. Thatcher in vigorously protecting such +rights against infringement by third parties. To date, +Mr. Thatcher has successfully enforced his patent and +trademark rights in all 20 concluded lawsuits brought +against such third parties. Under certain circumstances, if +Mr. Thatcher declines to challenge a potential +infringement, the Company may bring an infringement action at +its own cost, with Mr. Thatcher’s prior written +consent. See “Licenses — Teva License.” +The Company owns the Simple and Ugg trademarks +and has applied for or received registrations for them in the +United States and in many foreign countries. The Company has +selectively registered style category names and marketing +slogans. In addition, the Company holds two design patents for +its footwear products. +The Company has acquired the patent and +trademarks for Alp®sport sandals and has registered the +Deckers trademark. +Backlog +Historically, the Company has encouraged and has +received a significant portion of its orders as preseason +orders, which are generally placed by customers approximately +four to eight months prior to shipment date. As discussed above, +the Company has emphasized this “futures” business, as +compared to “at once” sales, as it allows the Company +to better forecast its inventory requirements and assists with +the Company’s sourcing schedule. As a result, the Company +provides its customers with incentives to participate in such +preseason programs. Unfilled customer orders +(“backlog”), as of any date, represent orders +scheduled to be shipped at a future date and do not represent +firm sales. The mix of future and immediate delivery orders can +vary significantly from quarter to quarter and year to year. The +backlog as of a particular date is affected by a number of +factors, including seasonality and the scheduling of manufacture +and shipment of products as well as variations in the quarter to +quarter and year to year preseason incentive programs. As a +result, comparisons of backlog from period to period are not +meaningful and the Company’s backlog at any given time is +generally not indicative of sales levels expected to be achieved +in the future. +Competition +The casual, outdoor and athletic footwear markets +are highly competitive. The Company believes that currently its +largest competitors of the Teva line are Nike, Adidas, +Timberland, Merrell, Columbia and Salomon. The principal +competitors of Simple’s casual line include Steve Madden, +Dr. Marten, Camper, and Kenneth Cole and of Simple’s +sneaker/sandal line include Skechers, Diesel, Steve Madden, +Puma, NM70 and Guess. Ugg’s competitors include Merrell, +Rocket Dog, Acorn, Aussie Dogs, LB Evans and Timberland, as well +as retailers’ private label footwear. +Competition in the Company’s footwear is +primarily based on brand awareness, product quality, design, +price points, fashion appeal, marketing, distribution, +performance and brand positioning. The Company’s Teva line +of footwear competes primarily on the basis of its authenticity +as a recognized brand in the outdoor market, its consumer brand +recognition as one of the first sandals of its kind, as well as +its high performance nature and its diversity of styles offered. +In addition, several of the most popular styles employ a +distinctive patented strapping system, which contributes to +performance and the brand’s consumer recognition. The +Company competes through its Simple line as an alternative brand +offering a diversity of simple, back-to-basics styles designed +for a variety of recreational and leisure activities. Ugg +competes primarily on the basis of +17 +Table of Contents +its authenticity as well as its brand name +recognition as a high quality premium luxury brand, identifiable +with the United States sheepskin footwear market. The Company +believes its business strategy has resulted in increased +awareness for its brands. However, no assurance can be given +that in the future the Company will be able to maintain or +further increase its brand awareness, maintain or increase its +market share or respond to changing consumer preferences. +Risks of Foreign Operations/ Restrictions on +Imports +The Company’s operations are subject to the +customary risks of doing business abroad, including, but not +limited to, currency fluctuations, customs duties and related +fees, various import controls and other non-tariff barriers +(e.g., quotas), the cost of transportation, restrictions on the +transfer of funds, labor unrest and strikes, and in certain +parts of the world, political instability. Countries where the +Company’s products are manufactured and sold may, from time +to time, seek to increase customs duties or impose quotas, all +of which have the potential to affect the Company’s +operations and its ability to maintain or increase the current +level of importation of the Company’s products. The Company +is unable to predict the likelihood or frequency of the +occurrence of any of these events. +The products imported by the Company into the +United States are subject to various duty rates which are +established by law. At the present time these duties range +between 8.5% and 12.5% of the entered value of footwear with +uppers made principally of leather or sheepskin, and 6.0% and +37.5%, plus $.90 per pair, of the entered value of footwear with +uppers made principally of synthetic textiles or plastic. +Certain products imported by the Company are exempt from duties +pursuant to laws pertaining to products manufactured in certain +beneficiary countries. “Entered value” means the value +taken into account for purposes of determining the amount of any +customs duties or any other duties which may be imposed on the +importation of any property. In general, the entered value is +normally based on the price paid or payable by the Company to +the seller of the imported merchandise. +From time to time, the Company may be subject to +claims for additional duties arising as a result of the United +States Customs Service, or similar agencies of foreign +countries, disagreeing with the classification and/or valuation +used by the Company to enter various styles of footwear. +In 1997, the European Commission enacted +anti-dumping duties of 49.2% on certain types of footwear +imported into Europe from China and Indonesia. Dutch Customs has +issued an opinion to the Company that certain popular Teva +styles are covered by this anti-dumping duty legislation. The +Company has been contesting the opinion and is working with +Dutch Customs to resolve the situation. The Company has since +obtained, and is using, alternative sourcing for the potentially +impacted products from sources outside of China in an effort to +reduce the potential risk in the future. In the event that Dutch +Customs makes a final determination that the anti-dumping +provisions are applicable, the Company would have an exposure +for prior unpaid anti-dumping duties during 1997 of +approximately $500,000, which has been fully accrued as of +December 31, 2001. +The European communities also impose quantitative +limits on imports from China of certain leather upper and +textile upper footwear. The Company is unable to predict how +long the anti-dumping duty and import quota restrictions will +remain in effect or changes in the scope or severity of such +restrictions. +Employees +At December 31, 2001, the Company employed +approximately 98 full-time employees in its U.S. +facilities, 4 at its European subsidiary and 28 at its Hong Kong +subsidiaries, none of whom is represented by a union. The +Company believes its relationship with its employees is good. \ No newline at end of file diff --git a/raw/filings/0000910521/2001/0000950148-02-000814/item13.txt b/raw/filings/0000910521/2001/0000950148-02-000814/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..2b5ffadaa24ae320701abdcee77fd31377e3b25f --- /dev/null +++ b/raw/filings/0000910521/2001/0000950148-02-000814/item13.txt @@ -0,0 +1,11 @@ +Item 13. Certain Relationships and +Related Transactions +Information relating to Certain Relationships and +Related Transactions is set forth in the Company’s +definitive proxy statement relating to the Registrant’s +2002 annual meeting of shareholders, which will be filed +pursuant to Regulation 14A within 120 days after the +end of the Company’s fiscal year ended December 31, +2001, and such information is incorporated herein by reference. +53 +Table of Contents \ No newline at end of file diff --git a/raw/filings/0000910521/2001/0000950148-02-000814/item9a.txt b/raw/filings/0000910521/2001/0000950148-02-000814/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000910521/2001/0000950148-02-000814/rp_note.txt b/raw/filings/0000910521/2001/0000950148-02-000814/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000910521/2001/0000950148-02-000814/rpt_disclosure.txt b/raw/filings/0000910521/2001/0000950148-02-000814/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000910521/2006/0000950124-07-001573/filing.txt b/raw/filings/0000910521/2006/0000950124-07-001573/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..f9a619cb7195f8038a76f48c11c2d84298837280 --- /dev/null +++ b/raw/filings/0000910521/2006/0000950124-07-001573/filing.txt @@ -0,0 +1,7761 @@ +10-K +1 +v28346e10vk.htm +FORM 10-K +e10vk +Table of Contents +UNITED STATES SECURITIES AND +EXCHANGE COMMISSION +Washington, D.C. +20549 +Form 10-K +(Mark one) +þ +ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE +SECURITIES EXCHANGE ACT OF 1934 +For the fiscal year ended +December 31, 2006 +or +o +TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE +SECURITIES EXCHANGE ACT OF 1934 +For the transition period +from to +Commission File +No. 0-22446 +Deckers Outdoor +Corporation +(Exact name of registrant as +specified in its charter) +Delaware +95-3015862 +(State or other jurisdiction +of +incorporation or organization) +(I.R.S. Employer +Identification No.) +495-A +South Fairview Avenue, Goleta, California +(Address of principal +executive offices) +93117 +(Zip Code) +Registrant’s telephone number, including area code: +(805) 967-7611 +Securities registered pursuant to Section 12(b) of the +Act: None +Title of each class +Name of each exchange on which registered +Common Stock, Par value $0.01 per +share +NASDAQ Global Select Market +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 registrant’s knowledge, in definitive proxy or +information statements incorporated by reference in +Part III of this +Form 10-K +or any amendment to this +Form 10-K. 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 registrant’s Common Stock +outstanding at February 28, 2007 was 12,592,688. +DOCUMENTS +INCORPORATED BY REFERENCE +Portions of registrant’s definitive proxy statement +relating to registrant’s 2007 annual meeting of +stockholders, which will be filed pursuant to +Regulation 14A within 120 days after the end of +registrant’s 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 +Page +PART +I +Item 1. +Business +4 +Item 1A. +Risk +Factors +16 +Item 1B. +Unresolved Staff +Comments +26 +Item 2. +Properties +27 +Item 3. +Legal +Proceedings +27 +Item 4. +Submission of +Matters to a Vote of Security Holders +27 +PART +II +Item 5. +Market for +Registrant’s Common Equity, Related Stockholder Matters and +Issuer Purchases of Equity Securities +28 +Item 6. +Selected Financial +Data +29 +Item 7. +Management’s +Discussion and Analysis of Financial Condition and Results of +Operation +31 +Item 7A. +Quantitative and +Qualitative Disclosures about Market Risk +45 +Item 8. +Financial +Statements and Supplementary Data +45 +Item 9. +Changes in and +Disagreements With Accountants on Accounting and Financial +Disclosure +45 +Item 9A. +Controls and +Procedures +45 +Item 9B. +Other +Information +46 +PART +III +Item 10. +Directors, +Executive Officers and Corporate Governance +47 +Item 11. +Executive +Compensation +47 +Item 12. +Security Ownership +of Certain Beneficial Owners and Management and Related +Stockholder Matters +47 +Item 13. +Certain +Relationships and Related Transactions, and Director +Independence +47 +Item 14. +Principal +Accounting Fees and Services +47 +PART +IV +Item 15. +Exhibits, Financial +Statement Schedules +48 +Signatures +52 +EXHIBIT 21.1 +EXHIBIT 23.1 +EXHIBIT 31.1 +EXHIBIT 31.2 +EXHIBIT 32.1 +3 +Table of Contents +PART I +Item 1. +Business. +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 +1980’s 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 brand’s 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: +• +eliminate significant royalties and other license costs, +• +explore license opportunities for the Teva brand, and +• +enhance our ability to recruit and retain key senior management. +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 UGG’s retail channel +positioning and maintain the UGG brand’s 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 +brand’s 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 +Table of Contents +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 +Teva’s 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 +1980’s 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 brand’s 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 men’s styles, we are increasing our marketing +appeal to men through advertisements in national men’s +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 +5 +Table of Contents +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 +Frame tm +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 brand’s 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 brand’s 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 men’s 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 +Table of Contents +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 +Piggies tm . +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 men’s and +women’s 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 +Table of Contents +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 1980’s 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 +manufacturer’s 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 +Table of Contents +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 men’s 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 brand’s 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 +brand’s year round business. The manufacturer’s +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. +Men’s & Women’s 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. +Men’s and Women’s +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. +Men’s and Women’s 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 manufacturer’s 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 men’s and women’s headwear, a +Canadian license for sportswear, and bags and packs which will +begin deliveries in the Spring 2007 season domestically. +9 +Table of Contents +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 brand’s 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 +brand’s 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, Dick’s Sporting Goods, The Sports Authority, +Nordstrom, and Dillard’s. 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 Journey’s, 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. +10 +Table of Contents +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, Dillard’s, REI, Whole Earth +Provision, Hobie Sports, and Whole Foods Market cater to +consumers in Simple brand’s +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 retailer’s +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 brand’s 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: +• +targeted print advertising; +• +sponsorship of a variety of festivals, events and competitions, +such as Reggae on the River and the Teva Mountain Games; +• +contracted athletes and teams, such as the Teva Whitewater Team +and the Teva U.S. Mountain Running Team; +• +discount programs to professional river guides, kayakers, +mountain bikers and rock climbers; +• +product seeding with various athletes and trendsetters; and +• +in-store promotions with key accounts. +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 Runner’s World, Trail Runner +and Running Times, among other publications. To +support our casual lines, we advertise in more mainstream +publications such as Women’s Health , Men’s +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 +11 +Table of Contents +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 Freeman’s 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 world’s 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 brand’s 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 men’s +focused advertising with its 2005 campaign, including print +advertising in Outside, Men’s 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 consumer’s +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 “Oprah’s 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 +12 +Table of Contents +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 Magazine’s +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 Johnson’s 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 brand’s 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, Dick’s 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 +13 +Table of Contents +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. +14 +Table of Contents +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: +• +shape and stimulate consumer tastes and preferences by offering +innovative, attractive and exciting products; +• +anticipate and respond to changing consumer demands in a timely +manner; +• +maintain brand authenticity; +• +develop high quality products that appeal to consumers; +• +appropriately price our products; +• +provide strong and effective marketing support; and +• +ensure product availability. +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. +15 +Table of Contents +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. +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 +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 SEC’s 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 +Our +success depends on our ability to anticipate fashion +trends. +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. +Our +UGG brand may not continue to grow at the same rate it has +experienced in the recent past. +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 +16 +Table of Contents +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. +Our +Teva brand may continue to decline. +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.” +We may +experience shortages of top grade sheepskin, which could +interrupt product manufacturing and increase product +costs. +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. +If we +do not accurately forecast consumer demand, we may have excess +inventory to liquidate or have difficulty filling our +customers’ orders. +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. +We may +not succeed in implementing our growth strategy. +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 +Table of Contents +Our +financial success is limited to the success of our +customers. +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. +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. +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 party’s 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. +We may +lose pending litigation and the rights to certain of our +intellectual property. +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. +Counterfeiting +of our brands can divert sales and damage our brand +image. +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 +Table of Contents +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. +As our +patents expire, our competitors will be able to copy our +technology or incorporate it in their products without paying +royalties. +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. +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. +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. +Because +we depend on independent manufacturers, we face challenges in +maintaining a continuous supply of goods that meet our quality +standards. +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. +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. +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 +Table of Contents +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. +The +costs of production and transportation of our products can +increase as petroleum and other energy prices +rise. +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. +Our +independent manufacturers are located outside the U.S., where we +are subject to the risks of international +commerce. +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: +• +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; +• +increasing transportation costs due to energy prices or other +factors; +• +poor infrastructure and shortages of equipment, which can delay +or interrupt transportation and utilities; +• +foreign currency fluctuations; +• +restrictions on the transfer of funds; +• +changing economic conditions; +• +changes in governmental policies; +• +environmental regulations; +• +labor unrest, which can lead to work stoppages and interruptions +in transportation or supply; +• +shipping delays, including those resulting from labor issues, +work stoppages or other delays at the port of entry or port of +departure; +• +political unrest, which can interrupt commerce and make travel +dangerous; and +• +expropriation and nationalization. +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 +Table of Contents +Our +business could suffer if our independent manufacturers, +designated suppliers or our licensees violate labor laws or fail +to conform to our ethical standards. +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 licensee’s +actions could damage our reputation and the value of our brands. +We also may not be able to replace the licensee. +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. +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 +partner’s business, including, for example, risks +associated with a particular licensing partner’s ability to: +• +obtain capital; +• +manage manufacturing and product sourcing activities; +• +manage labor relations; +• +maintain relationships with suppliers; +• +manage credit risk effectively; and +• +maintain relationships with customers. +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. +If our +licensing manager cannot properly manage the licensees of their +respective brands, our growth strategy could be +impaired. +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. +We may +be unable to successfully identify, develop or acquire, and +build new brands. +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 +Table of Contents +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. +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. +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: +• +variation in demand for our products, including variation due to +changing consumer tastes and seasonality; +• +our ability to develop, introduce, market and gain market +acceptance of new products and product enhancements in a timely +manner; +• +our ability to manage inventories, accounts receivable and cash +flows; +• +our ability to control costs; +• +the size, timing, rescheduling or cancellation of orders from +customers; +• +the introduction of new products by competitors; +• +the availability and reliability of raw materials used to +manufacture our products; +• +changes in our pricing policies or those of our independent +manufacturers and competitors, as well as increased price +competition in general; +• +the mix of our domestic and international sales, and the risks +and uncertainties associated with our international business; +• +our ability to forecast future sales and operating results and +subsequently attain them; +• +developments concerning the protection of our intellectual +property rights; and +• +general global economic and political conditions, including +international conflicts and acts of terrorism. +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. +Loss +of the services of our key personnel could adversely affect our +business. +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. +We +conduct business outside the U.S., which exposes us to foreign +currency and other risks. +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 +Table of Contents +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 People’s 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. +Our +most popular products are seasonal, and our sales are sensitive +to weather conditions. +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. +We +depend on independent distributors to sell our products in +international markets. +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. +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. +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: +• +changes in currency exchange rates which impact the price to +international consumers; +• +the burdens of complying with a variety of foreign laws and +regulations; +• +unexpected changes in regulatory requirements; and +• +the difficulties associated with promoting products in +unfamiliar cultures. +We are also subject to general political and economic risks in +connection with our international sales operations, including: +• +political instability; +• +changes in diplomatic and trade relationships; and +• +general economic fluctuations in specific countries or markets. +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 +Table of Contents +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: +• +general business conditions; +• +interest rates; +• +the availability of consumer credit; +• +change in demographic spending; +• +weather; +• +taxation; and +• +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 +Table of Contents +In addition, we extend credit to our customers based on an +evaluation of each customer’s 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 +Table of Contents +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 +Table of Contents +Item 2. +Properties. +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 +Table of Contents +PART II +Item 5. +Market +for Registrant’s 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 Company’s 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 Company’s 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 +Table of Contents +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 +Table of Contents +financial information together with our consolidated financial +statements and the related notes and “Management’s +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 +$0.92 per diluted share, during 2002. +30 +Table of Contents +(3) +The impairment loss in 2006 relates to our Teva trademarks. +During our annual assessment of goodwill and other intangible +assets, we concluded that the fair value was lower than the +carrying amount and therefore wrote down the trademarks to their +fair value. +As of December 31, +2002 +2003 +2004 +2005 +2006 +(In thousands) +Balance Sheet Data +Cash and cash equivalents +$ +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. +Management’s +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 +Table of Contents +• +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 +brand’s 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 +Table of Contents +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 brand’s 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 Men’s +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 brand’s 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 brand’s 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 men’s and women’s 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 +Table of Contents +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. +Simple’s 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 $15,300 impairment loss on our Teva trademark. +34 +Table of Contents +With the dramatic growth in the UGG brand in recent years, +combined with the introduction of a Fall Teva product line, net +sales in the last half of the year have exceeded that for the +first half of the year. Given our expectations for each of our +brands in 2007, we currently expect this trend to continue. +Nonetheless, actual results could differ materially depending +upon consumer preferences, availability of product, competition +and our customers continuing to carry and promote our various +product lines, among other risks and uncertainties. See +Item 1A, “Risk Factors.” +Results +of Operations +The following table sets forth certain operating data for the +periods indicated. +Years Ended December 31, +2004 +2005 +2006 +Net sales by +location: +U.S +$ +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 +Table of Contents +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 men’s 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 +Table of Contents +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 brand’s 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 +Table of Contents +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 +“Oprah’s 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 +Table of Contents +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 +Table of Contents +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 +Table of Contents +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 lender’s 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 +Table of Contents +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 $5,000 and may include +additional costs associated with upgrades to our computer +systems and the build-out of new retail stores. The actual +amount of capital expenditures for 2007 may differ from this +estimate, largely depending on any unforeseen needs to replace +existing assets and the timing of expenditures. +Contractual Obligations. The following +table summarizes our contractual obligations at +December 31, 2006 and the effects such obligations are +expected to have on liquidity and cash flow in future periods. +Payments Due by Period +Less than +More than +Total +1 Year +1-3 Years +3-5 Years +5 Years +Operating lease obligations +$ +17,567 +$ +3,918 +$ +8,183 +$ +2,234 +$ +3,232 +Purchase obligations +1,250 +— +550 +500 +200 +Total +$ +18,817 +$ +3,918 +$ +8,733 +$ +2,734 +$ +3,432 +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 +Table of Contents +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 +Table of Contents +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: +• +the assets’ ability to continue to generate income from +operations and positive cash flow in future periods; +• +our future plans regarding utilization of the assets; +• +any changes in legal ownership of rights to the assets; and +• +changes in consumer demand or acceptance of the related brand +names, products or features associated with the assets. +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 +Table of Contents +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. +Item 7A. +Quantitative +and Qualitative Disclosures about Market Risk. +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. +Item 8. +Financial +Statements and Supplementary Data. +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. +Item 9. +Changes +in and Disagreements With Accountants on Accounting and +Financial Disclosure. +None. +Item 9A. +Controls +and Procedures. +The Company’s Chief Executive Officer, Angel R. Martinez, +and Chief Financial Officer, Zohar Ziv, with the participation +of the Company’s management, carried out an evaluation of +the effectiveness of the Company’s 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 Company’s 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 entity’s 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 company’s +internal control over financial reporting that occurred during +the fourth quarter 2006 that have materially affected the +company’s 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 +Table of Contents +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 +Company’s 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: +• +pertain to the maintenance of records that, in reasonable +detail, accurately and fairly reflect the transactions and +dispositions of the assets of the Company; +• +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; +• +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 +• +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. +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 Company’s +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). +Management’s assessment included an evaluation of the +design of the Company’s 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 management’s assessment of internal control over +financial reporting. +Item 9B. +Other +Information. +None. +46 +Table of Contents +PART III +Item 10. +Directors, +Executive Officers and Corporate Governance. +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 Company’s definitive proxy +statement relating to the Registrant’s 2007 annual meeting +of stockholders, which will be filed pursuant to +Regulation 14A within 120 days after the end of the +Company’s fiscal year ended December 31, 2006, and +such information is incorporated herein by reference. +Item 11. +Executive +Compensation. +Information relating to Executive Compensation is set forth +under “Proposal No. 1 — Election of +Directors” in the Company’s definitive proxy statement +relating to the Registrant’s 2007 annual meeting of +stockholders, which will be filed pursuant to +Regulation 14A within 120 days after the end of the +Company’s fiscal year ended December 31, 2006, and +such information is incorporated herein by reference. +Item 12. +Security +Ownership of Certain Beneficial Owners and Management and +Related Stockholder Matters. +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 Company’s definitive proxy +statement relating to the Registrant’s 2007 annual meeting +of stockholders, which will be filed pursuant to +Regulation 14A within 120 days after the end of the +Company’s fiscal year ended December 31, 2006, and +such information is incorporated herein by reference. +Item 13. +Certain +Relationships and Related Transactions, and Director +Independence. +Information relating to Certain Relationships and Related +Transactions is set forth under +“Proposal No. 1 — Election of +Directors” in the Company’s definitive proxy statement +relating to the Registrant’s 2007 annual meeting of +stockholders, which will be filed pursuant to +Regulation 14A within 120 days after the end of the +Company’s fiscal year ended December 31, 2006, and +such information is incorporated herein by reference. +Item 14. +Principal +Accounting Fees and Services. +Information relating to Principal Accountant Fees and Services +is set forth under “Proposal No. 2 — +Independent Registered Public Accounting Firm” in the +Company’s definitive proxy statement relating to the +Registrant’s 2007 annual meeting of stockholders, which +will be filed pursuant to Regulation 14A within +120 days after the end of the Company’s fiscal year +ended December 31, 2006, and such information is +incorporated herein by reference. +47 +Table of Contents +PART IV +Item 15. +Exhibits, +Financial Statement Schedules. +Consolidated Financial Statements and Schedules required to be +filed hereunder are indexed on Page +F-1 hereof. +Exhibit +2.1 +Certificate of Ownership and +Merger Merging Deckers Corporation into Deckers Outdoor +Corporation. (Exhibit 2.1 to the Registrant’s +Registration Statement on Form +S-1, File +No. 33-67248 +and incorporated by reference herein) +3.1 +Amended and Restated Certificate +of Incorporation of Deckers Outdoor Corporation. +(Exhibit 3.1 to the Registrant’s Registration +Statement on +Form S-1, +File +No. 33-67248 +and incorporated by reference herein) +3.2 +Restated Bylaws of Deckers Outdoor +Corporation. (Exhibit 3.2 to the Registrant’s +Registration Statement on +Form S-1, +File +No. 33-67248 +and incorporated by reference herein) +#10.1 +1993 Employee Stock Incentive +Plan. (Exhibit 99 to the Registrant’s Registration +Statement on +Form S-8, +File +No. 33-47097 +and incorporated by reference herein) +#10.2 +Form of Incentive Stock Option +Agreement under 1993 Employee Stock Incentive Plan. +(Exhibit 10.9 to the Registrant’s Registration +Statement on +Form S-1, +File +No. 33-67248 +and incorporated by reference herein) +#10.3 +Form of +Non-Qualified +Stock Option Agreement under 1993 Employee Stock Incentive Plan. +(Exhibit 10.10 to the Registrant’s Registration +Statement on +Form S-1, +File +No. 33-67248 +and incorporated by reference herein) +#10.4 +Form of Restricted Stock +Agreement. (Exhibit 10.11 to the Registrant’s +Registration Statement on +Form S-1, +File +No. 33-67248 +and incorporated by reference herein) +#10.5 +Employment Agreement with Douglas +B. Otto. (Exhibit 10.13 to the Registrant’s +Registration Statement on +Form S-1, +File +No. 33-67248 +and incorporated by reference herein) +#10.6 +First Amendment to Employment +Agreement with Douglas B. Otto. (Exhibit 10.14 to the +Registrant’s Registration Statement on +Form S-1, +File +No. 33-67248 +and incorporated by reference herein) +#10.7 +Second Amendment to Employment +Agreement with Douglas B. Otto. (Exhibit 10.15 to the +Registrant’s Registration Statement on +Form S-1, +File +No. 33-67248 +and incorporated by reference herein) +#10.8 +Third Amendment to Employment +Agreement with Douglas B. Otto. (Exhibit 10.30 to the +Registrant’s Registration Statement on +Form S-1, +File +No. 33-67248 +and incorporated by reference herein) +#10.9 +Deckers Outdoor Corporation 1995 +Employee Stock Purchase Plan. (Exhibit 4.4 to the +Registrant’s Registration Statement on +Form S-8, +File +No. 33-96850 +and incorporated by reference herein) +#10.10 +Amended Compensation Plan for +Outside Members of the Board of Directors. (Exhibit 10.42 +to the Registrant’s +Form 10-Q +for the period ended September 30, 1996 and incorporated by +reference herein) +#10.11 +Extension Agreement to Employment +Agreement with Douglas B. Otto. (Exhibit 10.36 to the +Registrant’s +Form 10-K +for the period ended December 31, 1996 and incorporated by +reference herein) +10.12 +Shareholder Rights Agreement, +dated as of November 12, 1998. (Exhibit 10.39 to the +Registrant’s +Form 10-Q +for the period ended September 30, 1998 and incorporated by +reference herein) +10.13 +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 Registrant’s +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 Registrant’s +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 Registrant’s +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 +Registrant’s +Form 8-K/A +filed February 7, 2003 and incorporated herein by reference.)+ +48 +Table of Contents +Exhibit +#10.17 +Employment Agreement dated +November 25, 2002 between John A. Kalinich and Deckers Outdoor +Corporation. (Exhibit 10.20 to the Registrant’s +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 Registrant’s +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 +Registrant’s +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 Registrant’s +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 Registrant’s +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 Registrant’s +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 Registrant’s +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 Registrant’s +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 Registrant’s +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 +Registrant’s +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 +Registrant’s +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 Registrant’s +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 Registrant’s +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 Registrant’s +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 Registrant’s +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 Registrant’s +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 Registrant’s +Form 10-K +for the period ended December 31, 2003 and incorporated by +reference herein) +49 +Table of Contents +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 Registrant’s +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 +Registrant’s +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 Registrant’s +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 +Registrant’s +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 Registrant’s +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 Registrant’s +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 +Registrant’s +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 Registrant’s +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 Registrant’s +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 +Registrant’s +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 Registrant’s +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 Registrant’s +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 Registrant’s +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 Registrant’s +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 Registrant’s +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 Registrant’s +Form 10-Q +for the period ended March 31, 2006 and incorporated by +reference herein) +50 +Table of Contents +Exhibit +#10.50 +Employment agreement effective as +of January 1, 2006 between Janice Howell and Deckers Outdoor +Corporation (Exhibit 10.7 to the Registrant’s +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 Registrant’s +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 Registrant’s +Form 10-Q +for the period ending September 30, 2006 and incorporated by +reference herein) +14.1 +Deckers Outdoor Corporation’s +Code of Ethics for Senior Officers, as approved by the Board of +Directors on December 5, 2003. (Exhibit 14.1 to the +Registrant’s +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 +Table of Contents +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) +/s/ ANGEL +R. MARTINEZ +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 +Table of Contents +DECKERS +OUTDOOR CORPORATION AND SUBSIDIARIES +INDEX TO +CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL +STATEMENT +SCHEDULE +Consolidated +Financial +Statements +Reports of +Independent Registered Public Accounting Firm +F-2 +Consolidated +Balance Sheets as of December 31, 2005 and 2006 +F-4 +Consolidated +Statements of Operations for each of the years in the three-year +period ended December 31, 2006 +F-5 +Consolidated +Statements of Stockholders’ Equity and Comprehensive Income +for each of the years in the three-year period ended +December 31, 2006 +F-6 +Consolidated +Statements of Cash Flows for each of the years in the three-year +period ended December 31, 2006 +F-7 +Notes to +Consolidated Financial Statements +F-8 +Consolidated +Financial Statement +Schedule +Valuation and +Qualifying Accounts for each of the years in the three-year +period ended December 31, 2006 +F-24 +All other schedules are omitted because they are not applicable +or the required information is shown in the Company’s +consolidated financial statements or the related notes thereto. +F-1 +Table of Contents +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 +Company’s management. Our responsibility is to express an +opinion on these consolidated financial statements and financial +statement schedule based on our audits. +We conducted our audits in accordance with 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 Corporation’s 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 +management’s assessment of, and the effective operation of, +internal control over financial reporting. +/s/ KPMG LLP +Los Angeles, California +March 16, 2007 +F-2 +Table of Contents +REPORT OF +INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM +The Board of Directors and Stockholders +Deckers Outdoor Corporation: +We have audited management’s 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 +Corporation’s 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 management’s assessment and an opinion on the +effectiveness of the Company’s 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 +management’s 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 company ’ s 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 +company ’ s 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 company’s 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, management’s 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 +Table of Contents +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 +Table of Contents +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 +Table of Contents +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 +Table of Contents +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 +Table of Contents +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. +(b) +Inventories +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. +(c) +Revenue +Recognition +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 +Table of Contents +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 Company’s 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. +(h) +Stock +Compensation +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 +Table of Contents +DECKERS +OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO +CONSOLIDATED FINANCIAL +STATEMENTS — (Continued) +(amounts in thousands, except share quantity and per share +data) +(i) +Use of +Estimates +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. +(l) +Income +Taxes +Income taxes are accounted for under the asset and liability +method. Deferred tax assets and liabilities are recognized for +the future tax consequences attributable to differences between +the financial statement carrying amounts of existing assets and +liabilities and their respective tax bases. Deferred tax assets +and liabilities are measured using enacted tax rates expected to +apply to taxable income in the years in which those temporary +differences are expected to be recovered or settled. The effect +on deferred taxes of a change in tax rates is recognized in +income in the period that includes the enactment date. +(m) +Net +Income per Share +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 +Table of Contents +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. +(o) +Comprehensive +Income +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 Company’s +Consumer Direct business (consisting of the Company’s +internet, catalog, and retail outlet stores). Information +related to these segments is summarized in note 8. +(q) +Cash +Equivalents +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 Company’s 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 +Table of Contents +DECKERS +OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO +CONSOLIDATED FINANCIAL +STATEMENTS — (Continued) +(amounts in thousands, except share quantity and per share +data) +(s) +Reclassifications +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 Company’s 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 Company’s +fiscal year ending December 31, 2006. The adoption of +SAB 108 did not have a material impact on the +Company’s 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. +(2) +Retirement +Plan +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 +Table of Contents +DECKERS +OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO +CONSOLIDATED FINANCIAL +STATEMENTS — (Continued) +(amounts in thousands, except share quantity and per share +data) +an employee’s 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 Company’s 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 +lender’s prime rate (8.25% at December 31, +2006) or, at the Company’s 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, +$19,948 was available under the Facility at December 31, +2006. +The agreements underlying the Facility contain certain financial +covenants including a quick ratio requirement, profitability +requirements and a tangible net worth requirement, among others, +as well as a prohibition on the payment of dividends. +F-13 +Table of Contents +DECKERS +OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO +CONSOLIDATED FINANCIAL +STATEMENTS — (Continued) +(amounts in thousands, except share quantity and per share +data) +(5) +Income +Taxes +Components of income taxes are as follows: +Federal +State +Foreign +Total +2004: +Current +$ +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 +Table of Contents +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 +Company’s 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 Company’s +consolidated financial statements. +(6) +Stockholders’ +Equity +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 Company’s 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 Company’s 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 +Table of Contents +DECKERS +OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO +CONSOLIDATED FINANCIAL +STATEMENTS — (Continued) +(amounts in thousands, except share quantity and per share +data) +essential to the Company’s 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 Company’s 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 +Table of Contents +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 +Table of Contents +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 Company’s common stock +in connection with any of the foregoing. Each Right entitles the +registered holder to purchase from the Company one one-hundredth +of a share of Series B Junior Participating Preferred +Stock, par value $0.01 per share, 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 $3,776 +respectively. +F-18 +Table of Contents +DECKERS +OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO +CONSOLIDATED FINANCIAL +STATEMENTS — (Continued) +(amounts in thousands, except share quantity and per share +data) +In September 2006, the Company entered into a purchase +obligation with a movie production company for advertising +services. The Company’s Teva brand is the presenting +sponsor of a new documentary IMAX film that is to be released in +IMAX theaters in March 2008. Future commitments under this +agreement are as follows: +Year ending December 31: +2007 +$ +— +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 Company’s financial position or +results of operations. +(8) +Business +Segments, Concentration of Business, and Credit Risk and +Significant Customers +The Company’s accounting policies of the segments below are +the same as those described in the summary of significant +accounting policies, except that the Company does not allocate +interest, income taxes, or unusual items to segments. The +Company evaluates performance based on net sales and profit or +loss from operations. The Company’s 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 +Table of Contents +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 $15,300 (See note 10). +The assets allocable to each reporting segment generally include +accounts receivable, inventory, intangible assets and certain +other assets, that are specifically identifiable with one of the +Company’s business segments. Unallocated corporate assets +are the assets not specifically related to one of the segments +and generally include the Company’s cash and cash +equivalents, short-term investments, deferred tax assets, and +various other assets shared by the Company’s segments. +F-20 +Table of Contents +DECKERS +OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO +CONSOLIDATED FINANCIAL +STATEMENTS — (Continued) +(amounts in thousands, except share quantity and per share +data) +Reconciliations of total assets from reportable segments to the +consolidated financial statements are as follows: +2005 +2006 +Total assets from reportable +segments +$ +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 +Company’s 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 $466 of goodwill are held in Bermuda by a +subsidiary of the Company. Substantially all other long-lived +assets are held in the U.S. +The Company’s production and sourcing is concentrated +primarily in China, Australia and New Zealand, with the vast +majority of its production at five independent contractor +factories in China. The Company’s operations are subject to +the customary risks of doing business abroad, including, but not +limited to, currency fluctuations, customs duties, and related +fees, various import controls and other nontariff barriers, +restrictions on the transfer of funds, labor unrest and strikes +and, in certain parts of the world, political instability. +(9) +Quarterly +Summary of Information (Unaudited) +Summarized unaudited quarterly financial data are as follows: +2005 +March 31 +June 30 +September 30 +December 31 +Net sales +$ +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 $15,300 (see note 10). +F-21 +Table of Contents +DECKERS +OUTDOOR CORPORATION AND SUBSIDIARIES +NOTES TO +CONSOLIDATED FINANCIAL +STATEMENTS — (Continued) +(amounts in thousands, except share quantity and per share +data) +(10) +Goodwill +and Other Intangible Assets +The Company’s goodwill and other intangible assets are +summarized as follows: +As of December 31, 2006 +Weighted +Gross +Average +Carrying +Amortization +Accumulated +Net Carrying +Amount +Period +Amortization +Amount +Amortizable intangible assets +$ +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. +(11) +Licensing +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 men’s and women’s 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 +Table of Contents +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. Otto’s 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. +(13) +Subsequent +Events +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 Company’s purchase +obligation with a movie production company for advertising +services. As a result of the agreement, $1,250 of the +Company’s cash and cash equivalents balance at +December 31, 2006 became restricted cash in +January 2007. The Escrow Agreement contains a disbursement +schedule according to when the funds will be disbursed to the +production company (see note 7). +F-23 +Table of Contents +Schedule II +DECKERS +OUTDOOR CORPORATION AND SUBSIDIARIES +VALUATION AND QUALIFYING ACCOUNTS +Three Years Ended December 31, 2004, 2005 and +2006 +Balance at +Balance at +Beginning of +End of +Year +Additions +Deductions +Year +Year ended December 31, 2004: +Allowance for doubtful accounts(1) +$ +1,581 +$ +580 +$ +365 +$ +1,796 +Allowance for sales discounts(2) +545 +1,508 +568 +1,485 +Allowance for sales returns(3) +1,245 +7,104 +6,618 +1,731 +Markdown allowance(4) +202 +871 +248 +825 +Year ended December 31, 2005: +Allowance for doubtful accounts(1) +$ +1,796 +$ +1,740 +$ +962 +$ +2,574 +Allowance for sales discounts(2) +1,485 +1,714 +1,489 +1,710 +Allowance for sales returns(3) +1,731 +5,603 +4,469 +2,865 +Markdown allowance(4) +825 +1,044 +634 +1,235 +Year ended December 31, 2006: +Allowance for doubtful accounts(1) +$ +2,574 +$ +(1,013 +) +$ +826 +$ +735 +Allowance for sales discounts(2) +1,710 +2,430 +1,638 +2,502 +Allowance for sales returns(3) +2,865 +2,704 +3,951 +1,618 +Markdown allowance(4) +1,235 +564 +554 +1,245 +(1) +The additions to the allowance for doubtful accounts represent +the estimates of our bad debt expense based upon the factors for +which we evaluate the collectibility of our accounts receivable. +Deductions are the actual write offs of the receivables. In +2006, additions were negative because the Company collected on +accounts that were deemed to be potentially uncollectible as of +December 31, 2005. +(2) +The additions to the reserve for sales discounts represent +estimates of discounts to be taken by our customers based upon +our historical discounts experience. Deductions are the actual +discounts taken by our customers. +(3) +The additions to the allowance for returns represent estimates +of returns based upon our historical returns experience. +Deductions are the actual returns of products. +(4) +The additions to the markdown allowance represent estimates of +mark downs required to sell older products. Deductions are the +actual mark downs on the sale of older products. +See accompanying report of independent registered public +accounting firm. +F-24 \ No newline at end of file diff --git a/raw/filings/0000910521/2006/0000950124-07-001573/filing_metadata.csv b/raw/filings/0000910521/2006/0000950124-07-001573/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..74e96fa4d45b7f462042acfa3be8b10f0aa9ba01 --- /dev/null +++ b/raw/filings/0000910521/2006/0000950124-07-001573/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000910521,DECK,DECKERS OUTDOOR CORP,10-K,2007-03-16,2006-12-31,2007-03-16T20:38:38.000Z,0000950124-07-001573,v28346e10vk.htm,FORM 10-K,1101609,0,0,https://www.sec.gov/Archives/edgar/data/910521/000095012407001573/v28346e10vk.htm,https://www.sec.gov/Archives/edgar/data/910521/000095012407001573/,2006,2006,1 diff --git a/raw/filings/0000910521/2006/0000950124-07-001573/item1.txt b/raw/filings/0000910521/2006/0000950124-07-001573/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..1044433ac8dbc331a5186bd9f6838d96f1638452 --- /dev/null +++ b/raw/filings/0000910521/2006/0000950124-07-001573/item1.txt @@ -0,0 +1,1186 @@ +Item 1. +Business. +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 +1980’s 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 brand’s 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: +• +eliminate significant royalties and other license costs, +• +explore license opportunities for the Teva brand, and +• +enhance our ability to recruit and retain key senior management. +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 UGG’s retail channel +positioning and maintain the UGG brand’s 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 +brand’s 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 +Table of Contents +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 +Teva’s 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 +1980’s 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 brand’s 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 men’s styles, we are increasing our marketing +appeal to men through advertisements in national men’s +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 +5 +Table of Contents +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 +Frame tm +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 brand’s 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 brand’s 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 men’s 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 +Table of Contents +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 +Piggies tm . +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 men’s and +women’s 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 +Table of Contents +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 1980’s 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 +manufacturer’s 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 +Table of Contents +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 men’s 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 brand’s 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 +brand’s year round business. The manufacturer’s +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. +Men’s & Women’s 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. +Men’s and Women’s +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. +Men’s and Women’s 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 manufacturer’s 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 men’s and women’s headwear, a +Canadian license for sportswear, and bags and packs which will +begin deliveries in the Spring 2007 season domestically. +9 +Table of Contents +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 brand’s 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 +brand’s 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, Dick’s Sporting Goods, The Sports Authority, +Nordstrom, and Dillard’s. 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 Journey’s, 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. +10 +Table of Contents +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, Dillard’s, REI, Whole Earth +Provision, Hobie Sports, and Whole Foods Market cater to +consumers in Simple brand’s +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 retailer’s +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 brand’s 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: +• +targeted print advertising; +• +sponsorship of a variety of festivals, events and competitions, +such as Reggae on the River and the Teva Mountain Games; +• +contracted athletes and teams, such as the Teva Whitewater Team +and the Teva U.S. Mountain Running Team; +• +discount programs to professional river guides, kayakers, +mountain bikers and rock climbers; +• +product seeding with various athletes and trendsetters; and +• +in-store promotions with key accounts. +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 Runner’s World, Trail Runner +and Running Times, among other publications. To +support our casual lines, we advertise in more mainstream +publications such as Women’s Health , Men’s +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 +11 +Table of Contents +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 Freeman’s 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 world’s 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 brand’s 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 men’s +focused advertising with its 2005 campaign, including print +advertising in Outside, Men’s 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 consumer’s +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 “Oprah’s 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 +12 +Table of Contents +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 Magazine’s +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 Johnson’s 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 brand’s 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, Dick’s 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 +13 +Table of Contents +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. +14 +Table of Contents +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: +• +shape and stimulate consumer tastes and preferences by offering +innovative, attractive and exciting products; +• +anticipate and respond to changing consumer demands in a timely +manner; +• +maintain brand authenticity; +• +develop high quality products that appeal to consumers; +• +appropriately price our products; +• +provide strong and effective marketing support; and +• +ensure product availability. +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. +15 +Table of Contents +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. +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 +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 SEC’s 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 . \ No newline at end of file diff --git a/raw/filings/0000910521/2006/0000950124-07-001573/item13.txt b/raw/filings/0000910521/2006/0000950124-07-001573/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..4ec0ffbd00296221547c38ee639eab7a4653584d --- /dev/null +++ b/raw/filings/0000910521/2006/0000950124-07-001573/item13.txt @@ -0,0 +1,13 @@ +Item 13. +Certain +Relationships and Related Transactions, and Director +Independence. +Information relating to Certain Relationships and Related +Transactions is set forth under +“Proposal No. 1 — Election of +Directors” in the Company’s definitive proxy statement +relating to the Registrant’s 2007 annual meeting of +stockholders, which will be filed pursuant to +Regulation 14A within 120 days after the end of the +Company’s fiscal year ended December 31, 2006, and +such information is incorporated herein by reference. \ No newline at end of file diff --git a/raw/filings/0000910521/2006/0000950124-07-001573/item9a.txt b/raw/filings/0000910521/2006/0000950124-07-001573/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..cf619f4313f7d59673ffb3d54addcef611acd175 --- /dev/null +++ b/raw/filings/0000910521/2006/0000950124-07-001573/item9a.txt @@ -0,0 +1,118 @@ +Item 9A. +Controls +and Procedures. +The Company’s Chief Executive Officer, Angel R. Martinez, +and Chief Financial Officer, Zohar Ziv, with the participation +of the Company’s management, carried out an evaluation of +the effectiveness of the Company’s 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 Company’s 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 entity’s 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 company’s +internal control over financial reporting that occurred during +the fourth quarter 2006 that have materially affected the +company’s 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 +Table of Contents +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 +Company’s 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: +• +pertain to the maintenance of records that, in reasonable +detail, accurately and fairly reflect the transactions and +dispositions of the assets of the Company; +• +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; +• +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 +• +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. +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 Company’s +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). +Management’s assessment included an evaluation of the +design of the Company’s 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 management’s assessment of internal control over +financial reporting. \ No newline at end of file diff --git a/raw/filings/0000910521/2006/0000950124-07-001573/rp_note.txt b/raw/filings/0000910521/2006/0000950124-07-001573/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000910521/2006/0000950124-07-001573/rpt_disclosure.txt b/raw/filings/0000910521/2006/0000950124-07-001573/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000910521/2008/0001047469-09-002106/filing.txt b/raw/filings/0000910521/2008/0001047469-09-002106/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..bb60148541b850a75dd63b500c1779dbec60fa93 --- /dev/null +++ b/raw/filings/0000910521/2008/0001047469-09-002106/filing.txt @@ -0,0 +1,5509 @@ +10-K +1 +a2190215z10-k.htm +10-K +QuickLinks +-- Click here to rapidly navigate through this document +Table of Contents +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +FORM 10-K +(Mark one) +ý +ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the fiscal year ended December 31, 2008 +OR +o +TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the transition period +from to +Commission File No. 0-22446 +DECKERS OUTDOOR CORPORATION +(Exact name of registrant as specified in its charter) +Delaware +(State or other jurisdiction of +incorporation or organization) +95-3015862 +(I.R.S. Employer +Identification No.) +495-A South Fairview Avenue, Goleta, California +(Address of principal executive offices) +93117 +(Zip Code) +Registrant's telephone number, including area code: (805) 967-7611 +Securities registered pursuant to Section 12(b) of the Act: None +Title of each class +Name of each exchange on which registered +Common Stock, Par value $0.01 per share +NASDAQ Global Select Market +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 o No ý +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 ý +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 ý 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 registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this +Form 10-K. 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 ý +Accelerated filer o +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 ý +The aggregate market value of the common stock held by non-affiliates of the registrant was $1,758,978,389 based on the June 30, 2008 closing price of $139.20 +on the NASDAQ Global Select Market on such date. +The +number of shares of the registrant's Common Stock outstanding at February 13, 2009 was 13,089,638. +DOCUMENTS INCORPORATED BY REFERENCE +Portions +of the registrant's definitive proxy statement relating to the registrant's 2009 annual meeting of stockholders, which will be filed pursuant to Regulation 14A within 120 days +after the end of the registrant's fiscal year ended December 31, 2008, are incorporated by reference in Part III of this Annual Report on Form 10-K. +DECKERS OUTDOOR CORPORATION +For the Fiscal Year Ended December 31, 2008 +Table of Contents to Annual Report on Form 10-K +Page +PART I +Item 1. +Business +3 +Item 1A. +Risk Factors +20 +Item 1B. +Unresolved Staff Comments +33 +Item 2. +Properties +33 +Item 3. +Legal Proceedings +34 +Item 4. +Submission of Matters to a Vote of Security Holders +34 +PART II +Item 5. +Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +35 +Item 6. +Selected Financial Data +37 +Item 7. +Management's Discussion and Analysis of Financial Condition and Results of Operations +38 +Item 7A. +Quantitative and Qualitative Disclosures about Market Risk +57 +Item 8. +Financial Statements and Supplementary Data +58 +Item 9. +Changes in and Disagreements With Accountants on Accounting and Financial Disclosure +58 +Item 9A. +Controls and Procedures +58 +Item 9B. +Other Information +59 +PART III +Item 10. +Directors, Executive Officers and Corporate Governance +60 +Item 11. +Executive Compensation +60 +Item 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +60 +Item 13. +Certain Relationships and Related Transactions, and Director Independence +60 +Item 14. +Principal Accounting Fees and Services +60 +PART IV +Item 15. +Exhibits, Financial Statement Schedules +61 +Signatures +66 +2 +Table of Contents +PART I +References in this Annual Report on Form 10-K to "Deckers", "we", "our", "us", or the "Company" refer to Deckers +Outdoor Corporation. This Annual Report on Form 10-K contains forward-looking statements based on expectations, estimates and projections as of the date of this filing. Actual +results may differ materially from those expressed in forward-looking statements. See Item 7 of Part II — "Management's Discussion and Analysis of Financial Condition +and Results of Operations — Forward-Looking Statements." Deckers®, Drain Frame™, ecoSNEAKS®, GO.DO.BE®, Green Piggies™, +Planet Walkers®, Simple®, Spider Rubber®, Teva®, TSUBO®, UGG®, Wraptor®, and Wraptor-Lite™ +are some of our trademarks. Other trademarks or trade names appearing elsewhere in this report are the property of their respective owners. +Item 1. Business. +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 and accessories. +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, including accessories such as +handbags, headwear, packs and outerwear, through quality domestic retailers and international distributors and directly to end-user consumers, both domestically and internationally, +through our websites, call centers, retail concept stores 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 four proprietary brands: +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 reception, driven by consistent introductions of new styles, introductions of UGG products in the fall and spring seasons and geographic distribution expansion. We +carefully manage the distribution of our UGG products within high-end specialty and department store retailers in order to best reach our target consumers, preserve the UGG brand's retail +channel positioning and maintain the UGG brand's 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. In recent years, sales of UGG products have benefited from significant national media +attention and celebrity endorsement through our marketing programs and product placement activities, raising the profile of our UGG brand as a luxury comfort brand. We have further supported the UGG +brand's market positioning by expanding the selection of styles available in order to build consumer interest in +our UGG brand collection. We also remain committed to limiting distribution of UGG products to high-end retail channels. +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 product line has since +expanded to include casual open-toe and closed-toe footwear, including adventure travel shoes, outdoor multi-sport shoes, trail +3 +Table of Contents +running +shoes, amphibious footwear, light hikers and other rugged outdoor footwear styles and accessories. +From +1985 until November 2002, we sold our Teva products under a license agreement with the brand's founder. In November 2002, we acquired all of the Teva worldwide assets, including the +Teva eCommerce 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. +In +recent seasons, we have focused on regaining the leadership position in the performance sandal market, while broadening our performance platform to include other outdoor activities +such as multi-sport, trail running and light hiking to lessen our overall reliance on sandal sales. In 2008, we introduced a modest assortment of fall and winter footwear. We are following that up in +fall 2009 with a more complete collection of seasonally appropriate performance and lifestyle products for men, women and children. This includes light hikers with eVent waterproof membranes and +Vibram rubber outsoles, as well as women's lifestyle boots in both leather and suede with warm, faux fur linings. In the future, we intend to selectively expand our activity in the outdoor performance +and lifestyle arenas. +Simple®. Simple Shoes began in 1991 as an alternative to all the over-built, over-priced, and over-hyped products in the +marketplace. The brand's legacy was built on its original sneaker design, the Old School Sneaker, and grew to include successful sandal and casual products. In 2005, as a response to the massive +amount of waste produced by the footwear industry, the Simple brand launched a new collection of sustainable footwear called Green Toe®. Green Toe represents a revolutionary shift in +thinking about footwear by building a shoe from the inside out using sustainable materials and processes. The Simple brand's mission is to be 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 as well as making products. We +are committed to our +goal of making Simple products 100% sustainable; thus, minimizing the ecological footprint left on the planet. +TSUBO®. In May 2008, we acquired 100% of the ownership interests of TSUBO, LLC ("TSUBO"). TSUBO, meaning pressure point +in Japanese, was a company +co-founded by a British designer in 1998. The TSUBO brand was marketed as a high-end casual footwear company with products for men and women. The brand is the synthesis of +ergonomics and style, with a full line of sport and dress casuals, boots, sandals and heels constructed to provide consumers with contemporary footwear that incorporates style, function and maximum +comfort. TSUBO products are sold throughout the United States primarily at department stores and independent shoe stores, as well as several countries worldwide, including Canada, France, Australia, +and Japan. +We +believe that the TSUBO brand represents an ideal complement to our existing portfolio of lifestyle brands. The TSUBO brand's target consumer, product selection, industry niche and +relative under-penetration in the marketplace make it a good fit for our business model. In addition, the TSUBO brand's commitment to quality distribution and its unique performance comfort platform +allow us to develop a compelling brand story for the global marketplace. We intend to leverage our design, marketing and distribution capabilities to grow the TSUBO brand into a meaningful business +over the next few years, consistent with our mission to build niche brands into global market leaders. +In +July 2008, we entered into a joint venture agreement with an affiliate of Stella International Holdings Limited ("Stella International") for the opening of retail stores and wholesale +distribution for the UGG brand in China. Under this agreement, we opened our first UGG Australia concept store in Beijing in November. The joint venture is owned 51% by Deckers and 49% by Stella +International. The total initial investment in the joint venture was $1 million contributed by both parties in proportion to their respective ownership in the joint venture. The estimated total +investment by Deckers and Stella International, +4 +Table of Contents +including +contributed capital and loans, for the joint venture is expected to be approximately $5 million. Stella International is also one of our major manufacturers in China. +Also +in 2008, Deckers was named one of Outside magazine's Best Places to Work 2008. This first time program was created by the magazine in +partnership with the Outdoor Industry Association and Best Companies Group. This survey and awards program was designed to identify, recognize and honor the best employers in the country that not only +create a great work environment but also promote an environmentally friendly business process and create a work-outdoor life balance for employees. +Through +continued innovation, expansion of product offerings, premium distribution and strategic marketing initiatives, we have successfully developed three premier lifestyle brands and +acquired one additional brand in 2008. Our total net sales increased by 53.6% from $448,929 in 2007 to $689,445 in 2008, and our income from operations increased by 10.8% from $105,553 in 2007 to +$116,919 in 2008. For 2008, wholesale shipments of UGG, Teva, Simple and TSUBO products aggregated $483,781, $80,882, $13,909 and $3,649, respectively, and represented 70.2%, 11.7%, 2.0% and 0.5% of +our total net sales, respectively. Sales of our brands through our eCommerce division and our retail store division, which are in addition to our wholesale shipments, were $68,769 and $38,455, +respectively, representing 10.0% and 5.6%, respectively, of total net sales in 2008. +History +Deckers was 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 Teva's founder. 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. +Deckers +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 +U.S., Mexico and Costa Rica, and today independent manufacturers in China and New Zealand manufacture all of our footwear products for us. We maintain our own offices in China and Macau to oversee and +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. In 2008, we bought TSUBO from its founders. The TSUBO brand markets high-end casual and dress footwear +with products for men and women. +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, seasons and demographic groups. Key elements of our business strategies are: +Building Leading Global Brands. Our mission is to build niche footwear lines into global brands with market leadership +positions. Our UGG, Teva, and +Simple brands began as footwear lines appealing to a narrow core enthusiast market. We have since built these lines into considerable global lifestyle brands with potential for further growth and line +extensions. 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 distribution strategy to ensure that we reach brand appropriate retail distribution channels. We believe that +5 +Table of Contents +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. +Sustaining Brand Authenticity. We believe our ability to increase sales, maintain strong gross margins, and grow market share +results in part from +the appeal of brand heritage. Our UGG brand marketing strategy positions our products as a premium, luxury collection but also as functional footwear. UGG products are primarily marketed through +national print advertising in major magazines and through our retailers and their catalogs and other advertising. Historically, our marketing for UGG products has been focused on women, but with the +recent introduction of innovative men's styles, we are increasing our marketing appeal to men through advertisements in national men's magazines with a continued focus on lifestyle and comfort. We +believe that Teva footwear consumers are passionate and serious about the outdoors. Our Teva brand marketing programs primarily focus on performance and feature national advertising in +outdoor-oriented media as well as sponsorship of outdoor events and professional athletes. These efforts reinforce the Teva brand's heritage and positioning as a highly technical, performance-oriented +outdoor footwear brand. We promote our Simple brand by emphasizing that we make fun, casual, and comfortable footwear, while also striving for our products to be 100% sustainable. Our goal for the +Simple brand is to create a dialogue with the consumer through all communication vehicles and to show people that sustainability is an emerging lifestyle for everyone, not just environmentally +conscious individuals. Our print advertising campaigns for our Simple brand include national publications and alternative weekly publications in select cities around the world. We also have an +extensive online advertising campaign that reaches consumers through websites that focus on sustainability as well as popular culture. We also sponsor environmental-themed concerts, film +festivals, and green expos to showcase and tell the sustainable lifestyle brand story. TSUBO is a brand inspired by and built for the city. Our mission is to be the premier footwear solution for +people in the city, providing all day comfort, style and quality. Our product incorporates unique design, premium materials and innovative cushioning technologies to meet the all-day needs +of the TSUBO target consumer. We will market TSUBO, focusing on consumers in key influential cities through regional and national print advertising, outdoor and out-of-home +advertising, grass roots marketing, product placement and public relations. +Driving 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 Frame which we introduced in 2007, and the Encapsulated Shoc +Pad™ included in all of our fall 2008 light hikers, all provide uncompromised performance for today's outdoor athlete. We also continue to develop innovative styles, products and product +categories for our UGG collection in order to support the UGG brand's 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. The goal of the Simple brand is to revolutionize the footwear industry by producing 100% +sustainable products. We believe that consumers are increasingly interested in living an environmentally friendly lifestyle and seeking out sustainable products. We are at the forefront of the +industry in using new sustainable materials, such as bamboo, certified organic cotton, natural latex and cork combinations, recycled car tires, silk and recycled carpet padding throughout our product +line. The Simple brand will continue to innovate with the goal of achieving 100% sustainability in design, development, and material applications. Our goal with the TSUBO brand is to continue to +identify and create premium materials and offer innovative cushioning technologies to deliver on our product promise of all-day style, comfort and quality in our footwear. With that as our +focus, we offer a broad line of footwear for men and women ranging from sport-influenced casuals to formal-influenced dress shoes. +6 +Table of Contents +Maintaining Efficient Development and Production Processes. We believe our product development processes enable us to produce +leading edge products +on a timely and a cost effective basis. We design most of 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. This enables us to carefully monitor the product creation and production process, from receipt of the design brief to production of interim and final samples to +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, +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 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 men's and kids' product lines and have introduced a cold-weather series featuring +sheepskin, waterproof eVent uppers and Vibram outsoles. Our UGG brand enhanced its spring 2008 collection by introducing new fashion comfort categories for men, women and children. We have expanded +the open-toe footwear category for our Teva brand by launching new performance and lifestyle products and collections that provide varying levels of foot coverage and protection. We have +also introduced new closed-toe performance and lifestyle products including multi-sport, light hikers and trail runners, many of which incorporate eVent waterproof uppers and durable +Vibram rubber outsoles. We are actively pursuing further expansion into the outdoor lifestyle footwear market, which, in the aggregate, is considerably larger than the market for the Teva brand's core +sport sandals. +As +the sustainability lifestyle movement is reaching the mainstream market, our goal for the Simple brand is to lead the industry through new product innovations and pursue new solutions +to make our business practices and products more sustainable. The influence of our Green Toe collection, products made primarily from sustainable materials, is seen throughout the entire Simple +product line, especially in our sneaker segment with the introduction of ecoSNEAKS in 2007. We also expanded our kids' and infants' collection with Green Piggies and ecoSNEAKS. In 2008, we introduced +a new line of premium, comfort, leather casuals with our Planet Walkers collection. 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, which we launched in 2006 and has since expanded. By introducing new categories under our brands, in particular, the closed-toe footwear under our +Teva brand and the spring product offerings under our UGG brand, we believe we will continue to expand the selling seasons for our brands with the goal of increasing sales and creating a more balanced +year round business for each of these brands. +We +have significantly expanded the TSUBO product line for 2009. We will launch new product offerings for both men and women across four categories: City Active (sports influenced +casuals), City +Weekend (leisure influenced casuals), City Workday (business influenced dress shoes), and City Occasion (formal influenced dress shoes). +Expand Domestic Distribution. We believe that we have significant opportunities to increase our sales by expanding domestic +distribution of our +products. The UGG brand originally realized a substantial portion of its sales in California. Today, we have a more balanced business, increasing our business significantly in the Midwest and +Northeast. For our Simple line, we are focusing distribution on specialty independent retailers, department stores, outdoor retailers, internet retailers and the health and wellness retail channel. +Our Teva brand has historically been distributed primarily through the outdoor specialty +7 +Table of Contents +and +sporting goods retail channels. In addition to these retail channels, we see the potential for expansion into the better footwear, athletic specialty and running specialty channels, as well as +increased penetration in the department store channel, with strategic and focused product and marketing programs. Our TSUBO domestic distribution strategy is to focus on better department stores, +specialty independent retailers and online retailers. We feel that the brand is underpenetrated across these three distribution channels and believe there is a significant opportunity for growth in +the TSUBO business domestically. We also plan to expand internet sales, by creating and managing online marketing campaigns and programs that include paid and natural search engine marketing, +comparison shopping sites, online advertising and emerging online marketing opportunities as they become available. In addition, we continue to gradually grow our retail stores segment, having ten +retail stores domestically as of the end of 2008. We plan to open two to three new retail stores domestically in 2009. +Expand International Distribution. In 2008, our international net sales totaled $107,933, representing approximately 15.7% of +total net sales, an +increase of 73.1% compared to 2007. The largest share of our international sales occurred in Europe, with the remainder in the Asia Pacific, Canada and Latin America regions. In addition to the +overall increased level of business internationally in 2008, many developments occurred in conjunction with our short and long-term international strategic growth plans. In Europe, we +further strengthened our organizational structure, including the appointment of specific brand managers for our UGG Australia, Teva and Simple brands, respectively. We designed our retail structure to +ensure a successful introduction of our first two UGG Australia retail stores in Europe, both located in the London area. We also increased headcount in finance and operations to ensure the support +aspects of our international business are effectively managed and developed on an ongoing basis. +In +the Asia Pacific region, we entered into a joint venture agreement to introduce and sell the UGG Australia brand in China. In December 2008, we opened our first UGG Australia retail +store in Beijing with our joint venture partner. In 2009, we plan to further strengthen our structure in the Asia Pacific regional office in Hong Kong by recruiting finance and business development +personnel. Additionally, +we plan to open another new store in 2009 with our joint venture partner, as well as open several shop-in-shops in department stores. +During +2008, we commenced the integration of the TSUBO brand into our international business structure. For 2009, our primary objectives for the TSUBO brand internationally will be +ensuring appropriate brand positioning, generating brand awareness and increasing retail distribution. +During +2009, we intend to further strengthen our international infrastructure to ensure optimum results with both short and long-term goals in mind. We will continue to work +closely with our distributors on the effective management of our business objectives and brand strategies. In addition to our existing retail distribution, we will commence a phased introduction of +internet sales direct to consumers via our individual brand websites. We plan to open two to five new stores internationally in key metropolitan markets in Europe and Asia. We will also consider the +opening of additional stand-alone brand retail stores as appropriate opportunities arise, particularly in the case of our UGG Australia brand. We plan to further expand internationally in Japan where +we will assume ownership of the UGG Australia concept store in Omotesando Hills in Tokyo. With the assistance of local logistics and sales expertise, we will also assume direct responsibility for our +wholesale operations in this market. Under our direction, we believe we can increase exposure and drive demand in Japan by selectively increasing distribution and implementing a cohesive and +comprehensive marketing and advertising strategy. +Acquire and Build New Brands. We are continually exploring 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. An example of this strategy is our May 2008 +acquisition of the TSUBO brand. +8 +Table of Contents +Products +Our primary product lines are: +UGG Footwear. 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 have since expanded the collection, offering consumers many footwear categories including casuals, fashion heels, and cold weather footwear +and accessories in luxurious materials including sheepskin, leather, suede and fabrics. +Our +UGG product line comprises seven footwear collections, each of which includes styles for men, women and children: +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 basic and fashion colors. +Ultra/Ultimate Collection. The Ultra/Ultimate Collection builds upon the heritage of the original Ultra boot. These boots are +designed with our comfort system, featuring a +multi-surfaced rugged 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 mylar lining 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. +Fashion Collection. Our Fashion Collection offers fashion forward styles for women, men, and children without compromising +comfort. Luxurious materials and +trend-influenced styles make this collection stand out. Within this collection is a fashion wedge group, a leather stacked heel group for women, a European influenced collection for men, and +fashionable styles for children. +Casual Collection. This collection features refined, sophisticated styles for men, women, and children. These footwear styles +include suede and glove leather uppers, +lined in a thinner insole of sheepskin for added comfort. Styles from the men's 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 style including sandals, clogs, and boots that incorporate a thin layer of sheepskin for luxury and comfort. +Cold Weather Collection. This collection is designed with more rugged styling and features Vibram outsoles and waterproof eVent +uppers designed to withstand colder, wetter +climates. +Slipper Collection. Our Slipper Collection builds upon the UGG brand's reputation for comfort, warmth and luxury and is offered +in a wide selection of styles and colors. +We +have expanded our UGG brand collections from the Classic and Ultra sheepskin boots and slippers 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. Our outerwear collection for fall 2008 was a small offering of men's and women's luxurious sheepskin and leather jackets, and we +are expanding this collection for fall 2009. Over the last few years, our line expansion, distribution and high-end marketing strategies, among other factors, have resulted in significantly increased +exposure for our UGG products and have contributed to the growth of the UGG brand's year round business. The manufacturer's suggested domestic retail prices for the spring 2009 UGG product collections +range from $35.00 to $230.00. +9 +Table of Contents +Teva Performance Outdoor Footwear. We believe there will be a continuing shift in consumer preferences and lifestyles to include +more outdoor +recreational activities, including light hiking, trail running, mountain biking, camping, kayaking 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' active pursuits have evolved, we have retained our outdoor heritage and +product integrity, while adding new products to our line, including amphibious footwear, trail running shoes, light hiking shoes and boots, multi-sport shoes and other rugged closed-toe +footwear. Our brand remains popular among professional and amateur outdoor athletes seeking authentic, performance-oriented footwear, as well as among general footwear consumers seeking high quality, +durable and comfortable styles for everyday use. +We +market the Teva brand as the brand of GO.DO.BE. This captures the attitude and lifestyle of today's 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. We have two main categories of products: performance and lifestyle. +Our +performance products are technical, lightweight and engineered for the performance needs of today's 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. +Our +lifestyle products are versatile, rugged and comfortable for travel, leisure and light outdoor activities. Collections include styles which are inspired by classic Teva sandal +architecture, as well as fresh, contemporary designs inspired by the laid-back attitude of life in the outdoors. +We +plan to inject each new seasonal offering with innovative styles for men, women and children. Our kids' product collection is now a fun, colorful assortment of sandals, +closed-toe, and amphibious styles for a variety of outdoor and water-based activities. The manufacturer's suggested domestic retail prices for the spring 2009 Teva product collections +range from $15.00 to $140.00. +Simple Sustainable Footwear. Our goal is to continue to be a leader in the footwear industry through new, sustainable product +innovations as +demonstrated by our use of sustainable materials such as certified organic cotton and recycled car tires. In addition, our Simple brand won the Footwear +Plus Award for Design Excellence in the Green Category in both 2008 and 2007. +Men's and Women's Green Toe. Green Toe products represent our best efforts to reduce the ecological footprint left by shoes. +This collection uses the newest and most innovative +materials and processes each season. Green Toe products are primarily made of sustainable materials like bamboo, jute, organic cotton, linen, coconut buttons, cork, crepe, latex, recycled car tires, +and water based adhesives. This line includes sandals, loafers, mary janes, oxfords and boots. +Men's and Women's ecoSNEAKS. ecoSNEAKS are vulcanized sneakers that use recycled car tires for the soles, recycled polyethylene +terephthalate, commonly known as PET (from plastic +bottles), for the shoelaces, certified organic cotton and hemp for the uppers, thus leaving a better ecological footprint than ordinary sneakers. +Men's and Women's Planet Walkers. Planet Walkers is our newly introduced line of premium, comfort, leather casuals. They use +materials such as eco-certified premium +leathers, molded Ortholite® and recycled rubber insoles, cork and recycled ethyl vinyl acetate ("EVA") midsoles, and recycled car tire and latex soles. +Kids' Product. Our Kids' product line is made up of ecoSNEAKS and Green Piggies. Green Piggies is a kids' and infants' product +collection that represents the +brand's best ecological efforts +10 +Table of Contents +through +material and construction innovation. It uses materials such as certified organic cotton, hemp, and wool felt. +Bags. Our sustainable bag collection includes messenger bags, backpacks and totes. These are made from materials such as +certified organic cotton, jute, +hemp, coconuts and PET. +Our +target consumers are the committed consumer and the positive choosers. The committed consumers are concerned, active, and aware about environmental issues and take action to purchase +products from companies that are making a difference when it comes to protecting the planet. The positive choosers seek a good choice lifestyle and are motivated by positive messaging. They are highly +aware of environmental and social issues and, if made easy, will take affirmative actions. The manufacturer's suggested domestic retail prices for our spring 2009 Simple footwear collections range +from $24.00 to $140.00 and our Simple bags are priced from $20.00 to $100.00. +TSUBO Footwear. The TSUBO brand markets high-end casual and dress footwear for men and women. TSUBO is the synthesis of +ergonomics and +style, with a full line of sport and dress casuals, boots, sandals and heels constructed to provide consumers with innovative style, function and maximum comfort. We address the lifestyle footwear +needs of our consumers, creating product in four categories for women and men: City Active (sports influenced casuals), City Weekend (leisure influenced casuals), City Workday (business influenced +dress shoes and boots), and City Occasion (formal influenced dress shoes and boots). +Our +TSUBO brand's core consumers live in the city or are metropolitan-minded. They are creative personally or professionally and live an active, 24 hours a day, 7 days a +week lifestyle. They are style +conscious and design savvy and, while they appreciate and seek great design, they will not compromise comfort. Our product incorporates premium materials and cushioning technologies to achieve a +distinct look and feel. The manufacturer's suggested domestic retail prices for our spring/summer 2009 TSUBO product collections range from $75.00 to $170.00. +Sales and Distribution +At the wholesale level, we distribute our products in the U.S. through a dedicated network of approximately 50 independent sales +representatives. Our sales representatives are organized geographically and by brand and visit retail stores to communicate the features, styling and technology of our products. In addition, we have +approximately 10 employee sales representatives who serve as territory representatives or key account executives for several of our largest customers. We also sell products directly to the consumers +through our websites and retail stores. +Until +mid-2005, our sales force was divided into two teams, one for UGG and Simple products and one for Teva 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 UGG and Simple brands' sales forces into two distinct groups to provide the Simple brand with its own dedicated sales function to improve its sales efforts and resources. We have +realigned the TSUBO sales force to position it for the future of the brand. While there is still some overlap between the sales teams, we have now established separate dedicated sales forces for each +of our brands. Each brand's respective 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. +We +distribute products sold in the U.S. through our distribution centers in Ventura, California and in Camarillo, California. Our distribution centers feature a warehouse management +system that enables us to efficiently pick and pack products for direct shipment to retailers and distributors across the world. For certain customers requiring special handling, each shipment is +pre-labeled and packed to the retailer's 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 quality inspection process. +11 +Table of Contents +Internationally, +we distribute our products at the wholesale level through approximately 50 independent distributors in over 60 countries. During 2008, we commenced new distributor +relationships for one or more of our brands in the Asian and European markets. Additionally, we commenced relationships with existing TSUBO distributors, who currently represent the TSUBO brand in +approximately 10 countries, included in the total countries previously noted. In 2009, we plan to enter the Russian market with our UGG Australia brand for the first time. We will continue to focus on +key markets within Europe and Asia, as well as Canada. We will also continue to analyze opportunities in the developing market economies such as India and certain countries in Latin America. +Our +principal customers include specialty retailers, selected department stores, outdoor retailers, sporting goods retailers, shoe stores and online retailers. Our five largest customers +accounted for approximately 30.4% of our net sales for 2007, compared to 30.6% for 2008. One customer, Nordstrom, accounted for greater than 10% of our consolidated net sales in 2007 and 2008, with +the majority of those being related to our UGG segment. +UGG. We sell our UGG products primarily through high-end department stores such as Nordstrom, Neiman Marcus and Bloomingdale's, +as well +as independent specialty retailers such as Journey's, 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. +Teva. We sell our Teva products primarily through specialty outdoor and sporting goods retailers such as REI, L.L. Bean, Dick's +Sporting Goods and +The Sports Authority. 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 performance products to the consumer best sell our Teva products. +Simple. Our Simple products are targeted primarily towards select department stores, outdoor specialty accounts, independent +specialty retailers, +internet retailers, and health and wellness retailers that target consumers seeking comfortable, high quality, and sustainable footwear. These include key accounts such as Nordstrom, Dillard's, REI, +Whole Earth Provision, Zappos.com and Whole Foods Market. +TSUBO. TSUBO products are sold throughout the United States primarily at better department stores, independent specialty +retailers and with online +retailers that support our brand ideals of comfort, style and quality. Key accounts include Nordstrom, Hanigs, and Zappos. +eCommerce. Our eCommerce business enables us to interact and reinforce our relationships with the consumer. We operate our +eCommerce business through +UGGAustralia.com, Teva.com, SimpleShoes.com, and TSUBO.com websites. Our websites support the brands' marketing goals and also drive offline sales by providing information to consumers about the +brands' products and where to find retailers that carry our brands. We plan to expand our websites' international capabilities by creating sites translated into foreign languages and listing products +in local currencies, making our products available to international consumers through our websites. In 2009, we plan to open and operate call centers internationally to accommodate these website +sales. Our domestic eCommerce business is headquartered in Flagstaff, Arizona and order fulfillment is performed by our 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. Products sold through our eCommerce business are sold at prices which +approximate retail prices, enabling us to capture the full retail margin on each direct to consumer transaction. +Retail Stores. Our retail store business allows us to directly reach our customers and meet the growing demand for our products. +In addition, our UGG +Australia concept stores allow us to showcase the entire lines for spring and fall; whereas, most retailers do not carry the full line. In 2008, we opened one new +12 +Table of Contents +retail +outlet store in Jersey Shore, New Jersey as well as two new UGG brand concept stores, one in San Francisco, California in August and one in New York City, New York near Lincoln Square in +November. As of December 31, 2008, we had a total of four UGG Australia concept stores and six retail outlet stores in the U.S. Products sold through our concept stores are sold at prices which +approximate department store prices, enabling us to capture the full retail margin on each direct to consumer transaction. The outlet stores carry a combination of UGG Australia, Teva, and Simple +products that are discontinued or overstocked that are offered at a discount to the customer. Internationally, we opened two UGG Australia concept stores in the London area and, along with our China +joint venture partner, one in Beijing. We utilize a third party logistics and distribution company in the UK for importation and distribution to our retail stores in the UK. +For +2009, we intend to invest in our retail store business both in the U.S. and internationally, primarily building upon the success of the UGG brand. We plan to open two to three retail +stores domestically, plus two to five retail stores internationally, focusing on key metropolitan cities in the European and Asian markets. +Marketing and Advertising +Our brands are generally advertised and promoted through a variety of consumer media campaigns. We benefit from editorial coverage in +both consumer and trade publications. Each brand's dedicated marketing team works closely with targeted accounts to maximize advertising and promotional effectiveness. We incurred approximately +$17,315, $17,035, and $24,866 in advertising, marketing and promotional expenses in 2006, 2007 and 2008, respectively. The increase in 2008 was primarily due to advertising and promotion costs related +to our UGG brand domestically. +UGG. We seek to build upon the success of our UGG brand's national print advertising campaign. Currently, we advertise in +upscale national magazines +such as Vogue, Teen Vogue, Glamour, Vanity Fair, and O Magazine. UGG Australia also advertises men's +focused advertising, including print advertising in Outside, Men's 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. Also, we benefit from editorial coverage of the UGG brand collection +through numerous articles that have appeared in such magazines as Glamour, InStyle, Cosmopolitan, Marie Claire, People, US Weekly, Maxim, Shape, Self, O +Magazine and Real Simple. In 2004, the UGG brand was awarded "Brand of the Year" by Footwear +Plus, a leading trade publication, and was recognized with the ACE Award for the "it" accessory of the year by the Accessories Council. In 2008, our UGG brand was again awarded +"Brand of the Year" and also won the "Plus Award for Design Excellence in Boots" both by Footwear Plus. International exposure has also expanded with +features in leading fashion publications like Vogue Japan, Elle Japan, Marie Claire UK, and Vogue UK. +Internationally, +the UGG Australia brand significantly increased in popularity in 2008, particularly in the markets of the UK, Canada, the Netherlands and Italy. The women's boots in +particular have been very successful at retail including Classics, Ultimate styles, and Cardy boots. We also increased our spending on international marketing in high-end publications and +billboards, as well as improved retail visibility. We believe these factors have increased consumer awareness leading to the increased popularity. +We +also actively seek to place UGG products at selected events. In collaboration with our distributor in Switzerland, we produced a special edition UGG brand cold weather boot featuring +a matching red outsole for the entire 2006 Swiss Olympic Team. We believe this product placement further strengthened the consumer's image of UGG products as high quality, luxurious sheepskin goods +well-suited for use in cold weather. +We +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 television shows, +including Entourage, The Sopranos, Gilmore Girls, The Oprah Winfrey Show, The King of Queens, Still Standing, Will +13 +Table of Contents +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 several recent feature films. In addition, the UGG brand has been embraced by Hollywood celebrities, who are often seen and photographed wearing UGG brand boots. +We believe our target consumer identifies with celebrities and that greater exposure further heightens awareness of the brand and stimulates sales. In 2009, we will continue to market our UGG brand in +high-end magazines and outdoor media as well as seed product to celebrities and editors. We also plan to expand our shop-in-shop program in the U.S. and abroad. +We +also market the UGG brand through our dedicated website, UGGAustralia.com. The UGG Australia website supports the brand's marketing goals and drives offline sales by providing +information to consumers about the brand's products and where to find retailers that carry the brand. Our UGGAustralia.com website won BizRate's Circle of Excellence Platinum Award in both 2007 and +2008. This award recognizes the online retailers with top customer satisfaction ratings. +Teva. We use the following marketing methods to promote the Teva brand: +• targeted print billboard and online advertising; +• sponsorship of the annual Teva Mountain Games in Vail, Colorado and a variety of smaller regional events and competitions; +• sponsorship of world-class outdoor athletes and teams, including the Teva Whitewater Rafting Team and the Teva U.S. +Mountain Running Team; +• preferred buyer programs to professional river guides, kayakers, mountain bikers, rock climbers, and other outdoor +athletes; +• product seeding with various athletes and trendsetters; +• in-store promotions with key accounts; and +• our Teva.com website, which won BizRate's Circle of Excellence Platinum Award in both 2007 and 2008. +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 Runner's World, Trail Runner and Running Times, among other publications. To support our casual lines, we advertise in more mainstream publications such as Women's Health , Men's Journal and Rolling Stone . +The +Teva brand is rooted in outdoor lifestyle pursuits such as river rafting, kayaking, bouldering, mountain biking, kite boarding, hiking and trail running. We sponsor relevant outdoor +athletes and events around the world. For example, our international distributors sponsor outdoor events in many countries, including the UK, France, the Netherlands, Germany, Switzerland, Italy, Hong +Kong, Australia and New Zealand in order to increase our brand visibility to the outdoor consumer on a global scale. +In +2008, the Teva brand was the presenting sponsor of MacGillivray Freeman's new three dimensional documentary IMAX film, " Grand Canyon Adventure, River at +Risk, " which was released to IMAX theaters in March 2008. 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 world's best male and female professional and amateur athletes across several outdoor sports. Our Teva promotional team attends events across the U.S., +Europe, Asia and Latin America. 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. +14 +Table of Contents +Key +elements of our 2009 Teva marketing campaign include print and online advertising, an enhanced presence within social on-line media, in-store point of +purchase materials, and focused promotional programs and events. These are designed to increase brand exposure and drive sales at retail. The advertising theme is replicated in our +in-store materials and depicts key product introductions in action. Our primary promotional event for 2009 is the 8th Annual Teva Mountain Games in early June. +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 reflects our consumers' commitment to purchase products made in the same fashion. In 2008, the Simple brand won the Footwear +Plus "Plus Award for Design Excellence in Green." We will continue to establish the brand as a leader in sustainable footwear through our +marketing initiatives. In 2008, the Simple brand continued with a national print advertising campaign targeted at various demographic groups, which included print ads targeted at the +ecologically-minded consumer through magazines like RollingStone, Teen Vogue, Lucky, Details, Wired, Surfer, and Surfing. We also benefit from print and +television editorial coverage of the Simple brand collection. In addition, we target online consumers through +sustainability websites like Treehugger.com. We will continue to advertise on TheOnion.com, which complements our Onion print campaign in key markets. We are also active on popular culture websites +such as Pitchforkmedia.com, a popular independent-focused online music site and Facebook.com, the number one social networking site. In 2009, we will launch a new Simple brand marketing campaign +called "less>more" through national print publications, regional print, college campus newspapers, the internet, outdoor advertising, and events. +In +2008, we sponsored environmental-themed concerts, film festivals, and green expos around Earth Day to support our leadership position in sustainable footwear. We were present at +several Earth Day celebrations in key cities such as San Francisco, New York, Boulder, Austin, Seattle, Chicago and Santa Barbara. Our Earth Day promotions were supported with local advertising, +community outreach and extensive press coverage. +We +also market the Simple brand through our dedicated website, SimpleShoes.com. The Simple website supports the brand's marketing goals and drives offline sales by providing information +to consumers about the brand's products and where to find retailers that carry the Simple brand. We will continue to use the Simple website as a vehicle that creates the ultimate brand experience for +the consumer. We experienced a substantial increase in traffic on our website in 2008, demonstrating that our marketing is resonating positively with the consumer. +TSUBO. Our marketing strategy for our 2009 campaign will focus on developing a deep brand presence in influential retail +corridors in five major +cities in the US: New York, Miami, Chicago, Los Angeles and San Francisco. We believe that these cities represent the most important style, design, architecture, art and fashion centers in the US. The +same city focus strategy will be employed internationally in key cities globally, including London, Tokyo, and Paris. We expect this concentrated brand penetration to increase brand awareness, engage +consumers, and establish TSUBO in the city. +Specific +to the city focus strategy are the following elements: +• print advertising in influential regional media to engage local consumers (including publications like Gotham, Village Voice, Angeleno, LA Confidential, San Francisco Bay +Guardian, Chicago Reader, Michigan Avenue, Miami Magazine, and Ocean Drive); +• outdoor and out-of-home advertising in retail sectors with TSUBO retail partners, using transit, +unconventional real estate spaces and traditional outdoor advertising to drive consumers to TSUBO retailers; +• consumer engagement programs and events in each city tying the TSUBO brand to the cities' creative consumer communities; +15 +Table of Contents +• product placement to create influential brand ambassadors in each city; +• public relations to extend our message through editorial, product reviews, product placement and other media opportunities +that are not advertising-based. +Underlying +the initiatives in each city will be national media in key fashion and culture publications, which may include InStyle, Vogue, Wallpaper, Wired, +Blender and Details . Similar online advertising will give us access to the online world of shopping and social media to extend +our advertising value, drive sales and support vendor programs. Online media sites may include DailyBeast.com, InStyle.com, Gawker.com, Jezebel.com, Facebook.com, +DailyCandy.com and related fashion, culture and creative community ad networks. Additionally, as with our other brands, our TSUBO.com website supports the brand's marketing +goals and drives offline sales by providing information to consumers about the brand's products and where to find retailers that carry the brand. +Product Design and Development +The design and product development staff for each of our brands creates 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. +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 these 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 new categories +for the brand, including the introduction of the first sustainable sneakers in our ecoSNEAKS collection and our new premium, comfort, leather collection, Planet Walkers. We believe that our commitment +to become 100% sustainable makes Simple a leader in sustainable footwear and accessories. We also believe that our ability to incorporate up-to-date styles while remaining true +to our heritage, combined with the performance-oriented features that consumers have come to expect, will result in continued enthusiasm for our brands in the marketplace. +To +ensure that high performance technical products continue to satisfy the requirements of the Teva brand's historical consumer base of performance-oriented "core enthusiasts," our +design staff solicits input from our Teva Whitewater Team athletes, our Teva U.S. Mountain Running Team and other professional outdoor athletes, as well as several of our key retailers. We regularly +add new innovations, components and styles to our product line in response to their input. For example, in 2007, our proprietary Wraptor technology was incorporated into performance water sport and +trail running shoes, 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 +rubber compound that combines the non-slip traction of Spider Rubber with durability for use in both wet and dry conditions. +Our +TSUBO brand continues to carry on its heritage with the same dedicated design team, working in conjunction with product development to create footwear that delivers on our promise of +all-day comfort, style and quality. Careful consideration is taken in design, material selection, construction, and cushioning technologies during the design and development process. We +have multiple design and development reviews throughout the product creation process to ensure that we are addressing the footwear needs of our consumers. +16 +Table of Contents +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 our various product lines. We develop detailed drawings and prototypes of our new products to aid in 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 with our domestic and overseas 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 products; we outsource the production of our brand footwear to independent manufacturers in China. We also +outsource the production of a portion of our UGG brand footwear to independent manufacturers in New Zealand. We require our independent contract manufacturers and designated suppliers to adopt our +Factory Charter, which specifies that they comply with all local laws and regulations governing human rights, working conditions and environmental compliance before we are willing to conduct business +with them. We require our manufacturing partners to comply with our Ethical Supply Chain guidelines as a condition of doing business with our company. 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. 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. To ensure the production of high quality products, the majority 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, Europe and +the U.S. We maintain constant communication with the tanneries to monitor the supply of sufficient high quality sheepskin available for our projected UGG brand 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. Refer to Item 7 of Part II "Management's Discussion and Analysis of +Financial Condition and Results of Operations — Contractual Obligations" for further discussion on our sheepskin purchase commitment. We believe current 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. +17 +Table of Contents +Our Simple brand 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, the 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 +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 our own employee 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 distribution centers. +Patents and Trademarks +We now hold more than 150 utility and design patents and registrations in the U.S. and abroad and have filed for more than 60 new +patents which are currently pending. These patents expire at various times, and patents issued for applications filed this year will generally have a remaining duration from now to 2023 for design +patents and from now to 2029 for utility patents. We also currently hold trademark registrations for UGG, Teva, Simple, TSUBO and other marks 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. +Seasonality +Our business is seasonal, with the highest percentage of UGG brand net sales occurring in the third and fourth quarters of each year, +and the highest percentage of Teva brand net sales occurring in the first and second quarters of each year. To date, the Simple brand has not had a seasonal impact on the Company. Similarly, we do not +anticipate the TSUBO brand to have 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 2009, 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 Part I, Item 1A, +"Risk Factors." For further discussion on our working capital and inventory management, see Item 7 of Part II, "Management's Discussion and Analysis of Financial Condition and Results of +Operations — Liquidity and Capital Resources." +Backlog +Historically, we have encouraged our customers to place, and we have received, a significant portion of orders as preseason orders, +generally four to eight months prior to shipment date. We provide customers with price incentives, and in certain cases extended payment terms, to participate in such preseason 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 which can be cancelled prior to shipment. The backlog as of a particular date is affected by a number of factors, including seasonality, manufacturing schedule and the timing of product shipments +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. +At +December 31, 2008, our backlog of orders from our wholesale customers and distributors was approximately $240,000 compared to approximately $170,000 at December 31, +2007. While all orders in the backlog are subject to cancellation by customers, we expect that the majority of such orders will be filled in 2009. We believe that backlog at year-end is an +imprecise indicator of total revenue that may be +18 +Table of Contents +achieved +for the full year because backlog only relates to wholesale orders for the next season and current season fill-in orders, is affected by the timing of customers' orders and +product availability, and excludes potential sales in our eCommerce business and retail stores during the year. The increase in backlog is primarily due to increased demand for UGG product. +Competition +The casual, outdoor, athletic, fashion and formal footwear markets are highly competitive. We compete with numerous domestic and +foreign footwear designers, manufacturers and marketers. Our UGG brand 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 Teva +brand primarily competes with Nike, Adidas-Salomon, The North Face, Merrell, Patagonia, Chaco, Reef, Columbia Sportswear, Hi-Tech, and Keen. Our Simple line primarily competes with Vans, +Converse, Keds, Sanuk, Merrell, Keen, Patagonia, and Earth. Our TSUBO brand competes with many footwear brands of similar price point, primarily Clarks, Ecco, Palladium, Lacoste and Cole Haan. +Our +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: +• shape and stimulate consumer tastes and preferences by offering innovative, attractive and exciting products; +• anticipate and respond to changing consumer demands in a timely manner; +• maintain brand authenticity; +• develop high quality products that appeal to consumers; +• appropriately price our products; +• provide strong and effective marketing support; and +• ensure product availability. +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, 2008, we employed approximately 640 employees in our U.S. facilities including retail stores and approximately +140 employees located in Asia and the U.K., none of whom were represented by a union. The large increase in employees during the year was primarily related to the expansion of our retail stores, which +includes part-time employees. We believe our relationships with our employees are good. +Financial Information about Segments and Geographic Areas +Our six reportable business segments include the strategic business units responsible for the worldwide wholesale operations of each of +our brands' (UGG, Teva, Simple and TSUBO) wholesale +19 +Table of Contents +divisions, +as well as our eCommerce and retail store businesses. The following table shows our domestic and international revenues for each of the years ended December 31, 2006, 2007 and 2008. +Years Ended December 31, +2006 +2007 +2008 +Net sales by location: +U.S. +$ +266,092 +$ +386,593 +$ +581,512 +International +38,331 +62,336 +107,933 +Total +$ +304,423 +$ +448,929 +$ +689,445 +Refer +to Note 9 to our accompanying consolidated financial statements for further discussion of our business segment data. As of December 31, 2006, 2007, and 2008, +substantially all of our long-lived assets were held in the U.S. Refer to Note 1 to our accompanying consolidated financial statements for a discussion of our research and +development costs for the last three years. +Compliance +with federal, state and local environmental regulations has not had, nor is it expected to have, any material effect on our capital expenditures, earnings or competitive +position based on information and circumstances known to us at this time. +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 (the "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 SEC's Public Reference Room at 100 F Street, NE, +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 related to our company as well as general investor risks, 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. Please also see Item 7 of Part II — +"Management's Discussion and Analysis of Financial Condition and Results of Operations — Forward-Looking Statements." +Risks Relating To Our Business +The recent financial crisis and general economic conditions that are largely out of our control may adversely +affect our financial condition and results of operations. +Uncertainty +about current and future global economic conditions may cause consumers to defer purchases or customers to cancel purchase orders of our products in response to tighter +credit, decreased cash availability and declining consumer confidence. Recessionary economic cycles or other economic factors that may affect consumer spending or buying habits could adversely affect +the demand for our products. In addition, the recent turmoil in the financial markets has had an adverse effect on the U.S. and +20 +Table of Contents +world +economy, which has negatively impacted consumer spending patterns. Also, a number of our third-party retailers may be impacted by the significant decrease in available credit that has resulted +from the current financial crisis. If credit pressures or other financial difficulties result in insolvency for these third parties it could adversely impact our estimated allowances and reserves and +financial results. Changes in governmental banking, monetary and fiscal policies to restore liquidity and increase the availability of credit may not be effective and could have a material impact on +our customers and markets. There can be no assurances that responses to the disruptions in the financial markets will restore consumer confidence. +Furthermore, +reduced traffic in retail stores or limitations on the prices we can charge for our products could reduce our sales and profit margins and have a material adverse affect on +our financial condition and results of operations. Also, economic factors such as increased transportation costs, inflation, higher costs of labor, insurance and healthcare, and changes in other laws +and regulations may increase +our cost of sales and our operating expenses, and otherwise adversely affect our financial condition, results of operations, and cash flows. +Our +financial success is sensitive to changes in general economic conditions, both in the U.S. and internationally. The government has taken a number of actions to stabilize and provide +liquidity to U.S. financial markets. There can be no assurance as to the actual impact of these acts or any other governmental program, on the financial markets. Our business, financial condition, +results of operations, access to credit, and trading price of common stock could be materially and adversely affected if the financial markets fail to stabilize, or if current financial market +conditions worsen. +The costs of production and transportation of our products can increase as petroleum and other energy prices rise. +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 could increase the cost of our goods which would reduce our gross margin unless we can successfully raise our selling prices to compensate for the increased costs. +Our success depends on our ability to anticipate fashion trends. +Our success depends largely on the continued strength of our brands, 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 and cost effective 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 acceptable new models and styles of footwear or accessories to our target +consumer. Achieving market acceptance for new products also will likely require us to exert substantial product development and marketing efforts and expend significant funds to create consumer +demand. A failure to introduce new products that gain market acceptance or maintain market share 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. +Our UGG brand may not continue to grow at the same rate it has experienced in the recent past. +Our UGG brand has experienced strong growth over the past several years, with net wholesale sales of UGG products having increased from $23,491 in 2002 to +$483,781 in 2008, representing a compound annual growth rate of 65.6%. We do not expect to sustain this growth rate in the future. UGG products include fashion items that could go out of style at any +time. UGG products represent a significant +portion of our business, and if UGG product sales were to decline or to fail to increase in the future, our overall financial performance could be adversely affected. +21 +Table of Contents +We may be unable to successfully identify, develop, acquire or build new brands. +We intend to continue to focus on identifying, developing, acquiring and building new brands. Our search may not yield any complementary brands, and even if we do +find a suitable brand we may not be able to finance the development or acquisition of the brand. We may not be able to successfully integrate the management or operations of an acquired brand into our +existing operations, and we cannot ensure that any developed or acquired brand will achieve the results we expect. We compete with other companies who have greater resources than we do for the +opportunities to buy other brands. As a result, even if we identify a suitable acquisition, we may lose the opportunity to a competitor who offers a more attractive price or package. In such event, we +may incur significant costs in pursuing an acquisition without success, which could negatively impact our results of operations. +Our brands may have further impairment losses. +We conducted our annual impairment tests of goodwill and other intangible assets as of December 31, 2006, 2007, and 2008. In addition, we conducted interim +impairment evaluations when impairment indicators arose. We recognized the following impairment charges in our income from operations: +Years Ended December 31, +2006 +2007 +2008 +Teva trademarks +$ +15,300 +$ +— +$ +20,400 +Teva goodwill +— +— +11,929 +TSUBO goodwill +— +— +3,496 +Total impairment loss +$ +15,300 +$ +— +$ +35,825 +If +any brand's product sales or operating margins decline to a point that the fair value does not exceed its carrying value, we may be required to further write down the related +intangible assets. These or other related declines could cause us to incur additional impairment losses, which could materially affect our consolidated financial position and results of operations. +The recoverability of our trademark values is highly dependent on forecasted revenues for our brands, as well as discount and royalty rates, and we cannot predict with absolute assurance the +recoverability of any of our trademark values. The ongoing uncertainty in general economic and market conditions could increase the likelihood of additional intangible asset impairment losses being +recorded in future periods. In addition, the valuation of intangible assets is subject to a high degree of judgment and complexity. After the impairment charges recorded during 2008, the remaining +balances of goodwill and nonamortizable intangibles by brand are as follows: +As of December 31, 2008 +UGG +Teva +TSUBO +Total +Trademarks +$ +152 +$ +15,300 +$ +1,970 +$ +17,422 +Goodwill +6,101 +— +— +6,101 +Total nonamortizable intangibles +$ +6,253 +$ +15,300 +$ +1,970 +$ +23,523 +If raw materials do not meet our specifications, prices increase, or shortages occur, we could experience interruptions in manufacturing, increased costs, higher +product return rates, a loss of sales, or a reduction in our gross margins. +Our independent manufacturers use various raw materials in the production of our footwear and accessories that must meet our specifications 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 experience a higher rate +of customer returns and deterioration in the image of our brands, which could have a material adverse effect on our business, results of operations, and financial condition. +22 +Table of Contents +There +may be significant increases in the prices of the raw materials used in our products, which would likely 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. +We +depend on a limited number of key sources for sheepskin, the principal raw material for most of our UGG products. In 2008, 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. 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 weather +conditions and +harvesting decisions that are completely outside our control. 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 sales, delays in shipments to customers, strain on our relationships with customers and diminished brand +loyalty. There have also 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 the higher prices on to our customers. +If we do not accurately forecast consumer demand, we may have excess inventory to liquidate or have difficulty filling our customers' orders. +Because the footwear industry has relatively long lead times for design and production, we must plan our production tooling and projected 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. A large number of models, colors and sizes in our product lines increase these risks. As a result, we may fail to accurately forecast styles, colors 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, or +negative, 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 or have factory delays on a substantial amount of product, we could have inventory shortages. This could 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. +We may not succeed in implementing our growth strategies. +As part of our growth strategy, we seek to enhance the positioning of our brands, extend our brands into complementary product categories and markets, expand +geographically and improve our operational performance. We continue to significantly expand the nature and scope of our operations, including significantly increasing the number of employees +worldwide. We anticipate that substantial further expansion will be required to realize our growth potential and new market opportunities. The failure to develop and launch successful new products +could hinder the growth of our business. Also, any delay in the development or launch of a new product could result in our not being the first to market, which could compromise our competitive +position. +23 +Table of Contents +We are rapidly growing domestically and internationally, through retail, eCommerce, wholesale, and through our distributors. We may not be able to successfully +execute any or all of our strategies. If we fail to do so, this could: +• increase our working capital needs beyond our capacity; +• create off-site management issues, which would adversely affect our internal control environment; +• have significant legal or compliance implications; +• make it difficult to attract, retain, and manage adequate human resources in remote locations; +• cause additional inventory manufacturing, distribution, and management costs; +• diminish product quality; +• cause us to experience greater difficulty in filling customer orders; +• increase costs; or +• create other production, distribution, and operating difficulties. +If +we do not succeed in implementing our growth strategies, 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 common stock. +The growth of our retail store locations may not result in returns on our investments. +We compete with other retailers and businesses for suitable locations for our retail stores which may impact our ability to find suitable locations. New store +openings involve certain risks, including constructing, furnishing, and supplying a store in a timely and cost-effective manner. Our sales at our retail stores may not meet our +projections, which could adversely impact our return on +investment. In addition, since many of our costs for our retail stores 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. +We also have entered into significant long-term leases for certain of our retail locations. Our inability to execute our retail store growth strategy in a manner that generates appropriate +returns on investment could have an adverse impact on our future growth. We could incur write-downs on inventory, impairment losses on long-lived assets, or loss of our working capital, +which could adversely impact our financial position, results of operations, or cash flows. +Our financial success is influenced by the success of our customers. +Our financial success is directly related to the success of our wholesalers, distributors, eCommerce business, and retail stores to market and sell our brands +through to the consumer. We sell our products in international markets, primarily through independent distributors. If a distributor fails to meet annual sales goals, it may be difficult and costly to +either locate an acceptable substitute distributor or convert to a wholesale direct model. If a change becomes necessary, we may experience increased costs, loss of customers, as well as substantial +disruption and a resulting loss of sales. We currently 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. We use the timing of delivery dates in our customer orders to forecast our +sales and earnings for future periods. If any of our major customers including independent distributors experience a significant downturn in its business, or fail to remain committed to our products +or brands, then these customers could postpone, reduce, or discontinue purchases from us. Also, challenging economic conditions may impair the ability of our customers to pay for products and any of +our major customers may realize a financial collapse or bankruptcy. As a result, we could experience a decline in sales or gross margins, write downs of excess inventory, increased discounts or +extended credit terms to our customers, or an increase in bad debt expense, which could have a material adverse effect on our business, results of operations, financial condition, cash flows, and our +stock price. +24 +Table of Contents +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 30.4% of worldwide net sales in 2007 and 30.6% of worldwide net sales in 2008. Nordstrom, our largest +customer, accounted for greater than 10% of net sales in 2007 and 2008. Any potential loss of a key customer, or a significant reduction in purchases from a key customer, could have a material adverse +effect on our business, results of operations and financial condition. +Failure to establish and protect our trademarks, patents and other intellectual property could diminish the value of our brands. +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 intellectual property rights. If +we are unsuccessful in challenging a third party's 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 intellectual property rights are typically met with defenses and counterclaims attacking the validity and enforceability of our intellectual property rights. Similarly, from +time to time we may be the subject of litigation challenging our ownership of intellectual property. Any decision or settlement in any of these matters that allowed a third party to continue to use +our brand trademarks or a domain name with our brand trademarks 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. +We may lose pending litigation and the rights to certain of our intellectual property. +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. +Counterfeiting of our brands can divert sales and damage our brand image. +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 and online as well as internet 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 trademarks and more counterfeit products seeking to benefit from the consumer demand for our UGG products. Enforcement of +our rights to the UGG trademarks 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 UGG +trademarks without our permission. In spite of our enforcement efforts, we expect such unauthorized use to continue, which could result in a loss of sales for authorized UGG products and diminish the +value of our UGG trademark. +25 +Table of Contents +As our patents expire, our competitors will be able to copy our technology or incorporate it in their products without paying royalties. +Patents generally have a life of twenty years from filing, and some of our patents have recently expired or will expire in the next few years. For example, the +patent for our Universal Strapping System used in many of our Teva sandals expired 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 obtaining our permission or paying royalties, which could also cause us to lose +significant sales. To combat this, we must continually create new designs and technology, obtain patent protection and incorporate the new technology or design in our footwear; however, we cannot +provide assurance that we will be able to do so. +Because we depend on independent manufacturers, we face challenges in maintaining a continuous supply of goods that meet our quality standards. +We use independent manufacturers in China and New Zealand to produce all of our products, with substantially all of the production occurring by six independent +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, while we do have long standing relationships with most of our factories, we currently 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, which could result in a loss +of sales and earnings. +Interruptions +in supply can also result from issues such as natural disasters and other events to our manufacturers in south China. Also, we face regulatory risks resulting from +legislation and potential trade barriers introduced by governments in China, the United States, and other key trading territories. We also face potential disruptions to supply as several of our +manufacturing partners seek to move their factories away from the Pearl River Delta region of China to benefit from unit cost advantages and preferable regulatory environments. Such interruptions in +supply could result in inventory shortages, which could result in lost potential sales, which could have a material adverse effect on our results of operations or financial condition. We also keep +proprietary materials involved in the production process, such as shoe molds, knives, and raw materials, under the custody of our independent manufacturers. If these independent manufacturers were to +experience loss or damage to our proprietary materials involved in the production process, we cannot be assured that such independent manufacturers would have adequate insurance to cover such loss or +damage and, in any event, the replacement of such materials would likely result in significant delays in the production of our products and could result in a loss of sales and earnings. +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, results of operations, 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. +26 +Table of Contents +Our independent manufacturers are located outside the U.S., where we are subject to the risks of international commerce. +All of our current third party manufacturers are in China and New Zealand with substantially all production performed by six manufacturers in China. Foreign +manufacturing is subject to numerous risks, including the following: +• tariffs, import and export controls and other non-tariff barriers such as quotas and local content rules on +raw materials and finished products, including the potential threat of anti-dumping duties and quotas such as those which have been imposed by the European Union on the import of certain +types of footwear from China; +• increasing transportation costs; +• poor infrastructure and shortages of equipment, which can delay or interrupt transportation and utilities; +• restrictions on the transfer of funds; +• changing economic conditions; +• changes in governmental policies and regulations including environmental regulations in China, the U.S. and elsewhere; +• customary business traditions in China, such as local holidays which are traditionally accompanied by high levels of +turnover in the factories; +• labor unrest, which can lead to work stoppages and interruptions in transportation or supply; +• shipping delays, including those resulting from labor issues, work stoppages or other delays at the port of entry or port +of departure; +• political instability, which can interrupt commerce and make travel dangerous; +• expropriation and nationalization; and +• adverse changes in consumer perception of goods from China, trade or political relations with China +These +factors could severely interfere with the manufacture or shipment of our products which could make it difficult to obtain adequate supplies of quality products when we need them, +thus materially affecting our sales and results of operations. +Our business could suffer if our independent manufacturers, designated suppliers or our licensees violate labor laws or fail to conform to our ethical standards. +We require our independent contract manufacturers and designated suppliers to adopt our Factory Charter and Ethical Supply Chain guidelines 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 +27 +Table of Contents +license +agreement, which would reduce our license revenue. In addition, the licensee's actions could damage our reputation and the value of our brands. We also may not be able to replace the licensee. +We conduct business outside the U.S., which exposes us to foreign currency and other risks. +As we move toward more global operations, our sales and expenditures in foreign currencies will become more material and subject to currency fluctuations. Our +foreign distributors sell in local currencies, which impacts the price to foreign customers. We currently do not use currency hedges since substantially all our transactions are in U.S. dollars, +however, as we expand global operations, we anticipate we will use currency hedges to minimize income statement volatility. Our hedging strategies will depend on our cash flow projections, which are +inherently subject to inaccuracies. Therefore, our hedging strategies may be ineffective. 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. +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 +currencies. As a result, fluctuations in the Chinese currencies versus the U.S. dollar could impact our purchase prices from the factories in the event that they adjust their selling prices +accordingly. +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. +We rely 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 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 partner's business, including, +for example, risks associated with a particular licensing partner's ability to maintain relationships with suppliers and customers. 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. +Key business processes could be interrupted and adversely affect our business. +Our future success and growth depend on the continued operation of our key business processes and key personnel. Hackers and computer viruses have disrupted +operations at many major companies. We may be vulnerable to similar acts of sabotage. Key processes could also be interrupted by a failure due to weather, natural disaster, power loss, +telecommunications failure, failure of our computer systems, sabotage, terrorism, or similar event such that: +• critical business systems become inoperable; +• key personnel are unable to perform their duties, communicate, or access information systems; +• significant quantities of merchandise are destroyed; +• key customers cannot place or receive orders; or +• carriers cannot ship or unload shipments. +These +interruptions to key business processes could have a material adverse effect on our business and operations and result in lost sales and earnings. +We +rely on our information management systems to operate our business and to track our operating results. Our information management 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 information management systems to respond to changes in our business needs, then +our ability to properly run our business could be adversely affected. +28 +Table of Contents +The +loss of the services of any key employee could also harm our business. Our future success depends on our ability to identify, attract and retain qualified personnel on a timely +basis. +We could be adversely affected by the loss of one of our warehouses or one of our manufacturer's facilities. +Both the warehousing of our inventory and the manufacturing of our products are located at a small number of facilities, the loss of any of which could adversely +impact our sales, business performance and operating results. In addition, we could face a disruption in distribution center operations if our newly implemented automated pick module does not perform +as anticipated. +Many of our products are seasonal, and our sales are sensitive to weather conditions. +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. +Even though we are creating more off-season styles for our Teva and UGG brands, 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. +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, such as the recent changes in labor laws in the People's Republic of China, which could increase our costs and adversely impact our operating results. +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: +• changes in currency exchange rates which impact the price to international consumers; +• the burdens of complying with a variety of foreign laws and regulations; +• unexpected changes in regulatory requirements; and +• the difficulties associated with promoting products in unfamiliar cultures. +We +are also subject to general political and economic risks in connection with our international sales operations, including: +• political instability; +• changes in diplomatic and trade relationships; and +• general economic fluctuations in specific countries or markets. +Any +of the above mentioned 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. +Current +and future products may not comply with U.S. Consumer Product Safety regulations. If this occurs, we may need to recall specific models to comply with regulations. +29 +Table of Contents +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, which may have an effect on our operations. +On +October 7, 2006, the European Commission imposed definitive duties on leather upper footwear originating from China and imported into European Member states. These duties were +effective for a two-year period with a final 16.5% rate for China-sourced footwear. On October 3, 2008, the European Commission initiated an expiry review of the duties to determine +whether they should be extended for a period beyond the original expiration date. While the expiry review investigation is ongoing, the duties remain in place and payable. 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. The extension of +anti-dumping duties or quotas on products manufactured in China may impact our sales and gross margins 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 and increase our costs. +The investment of our substantial cash and cash equivalents and short-term investments are subject to risks which may cause losses and affect the +liquidity of these investments. +At December 31, 2008 we had cash and cash equivalents and short-term investments of $194,780. A portion of these are held as cash in operating +accounts that are with third party financial institutions. These balances, at times, exceed the Federal Deposit Insurance Corporation ("FDIC") insurance limits. While we regularly monitor the cash +balances in our operating accounts and adjust the balances as appropriate, these cash balances could be impacted if the underlying financial institutions fail or are subject to other adverse +conditions in the financial markets. To date we have experienced no loss or lack of access to cash in our operating accounts. +The +remainder of our cash and cash equivalents and short-term investments are invested in interest bearing funds managed by third party investment management institutions. +These investments include U.S. treasuries and government agencies, money market funds, and municipal bonds, among other investments. Certain of these investments are subject to general credit, +liquidity, market, and interest rate risks. While we do not hold any investments whose value is directly correlated to mortgage debt, investment risk has been and may further be exacerbated by U.S. +mortgage defaults and credit and liquidity issues, which have affected various sectors of the financial markets. To date we have experienced no material loss or lack of access to our cash and cash +equivalents and short-term investments. However, we can provide no assurance that access to our cash and cash equivalents and short-term investments will not be impacted by +adverse conditions in the financial markets. These market risks associated with our investment portfolio may have an adverse effect on our results of operations, liquidity and financial condition. +We could be subject to additional income tax liabilities. +We are subject to income taxes in the United States and foreign jurisdictions. Significant judgment is required in evaluating our worldwide provision for income +taxes. We are subject to audits in various jurisdictions, and such jurisdictions may assess additional income taxes against us. Although we believe our tax estimates are reasonable, the final +determination of tax audits and any related litigation could be +30 +Table of Contents +materially +different from our historical income tax provisions and accruals. The results of an audit or litigation could have a material effect on our operating results or cash flows in the periods +for which that determination is made. +Risks Related to Our Industry +Because the footwear market is sensitive to decreased consumer spending and 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: +• general business conditions; +• interest rates; +• financial market conditions; +• the availability of consumer credit; +• change in demographic spending; +• weather; +• taxation; and +• 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 we or our distribution partners sell products, whether in the U.S. or abroad, may reduce sales. +In +addition, we extend credit to our customers based on an evaluation of each customer's credit-worthiness. 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 casual footwear and other products 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. +31 +Table of Contents +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 earnings 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 13, +2009 was approximately 697,000 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, have ranged from $48.25 to $143.51 for the 52-week period ended February 13, 2009. 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, whether realized or perceived; +• changes in estimates by securities analysts or failure to meet such estimates; +• quarterly fluctuations in our sales, expenses, and financial results; +• general equity market conditions and investor sentiment; +• economic conditions; +• broad market fluctuations in volume and price; +• increasing short sales of our stock; 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 stock is subject to risk of loss. In addition, the stock market in general has experienced extreme price +and volume fluctuations that have often been unrelated or disproportionate to the operating performance of individual companies. These broad market and industry factors and other general macroeconomic +conditions unrelated to our financial performance may also affect our stock price. +32 +Table of Contents +Anti-takeover provisions in our certificate of incorporation, bylaws, 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; +• advance notice requirements for nominations for election to our board of directors or for proposing matters that can be +acted upon by stockholder meetings; and +• a requirement that 66 and two-thirds percent of shares entitled to vote to amend certain provisions in the +bylaws and certificate of incorporation. +Our +stockholder rights plan expired pursuant to its terms on November 11, 2008. We may not be able to, or choose to, implement a similar stockholder rights plan, which could put +us at risk for a take-over, distract our management and adversely affect our business. +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. +Item 2. Properties. +Our corporate headquarters is located in Goleta, California. We have two US distribution centers, both in California, our eCommerce +operations in Arizona, and ten retail stores in the U.S. ranging from approximately 3,000 to 7,000 square feet. We also have an office in China to oversee the quality and manufacturing standards of +our products, an office in Macau to coordinate logistics, an office in Hong Kong to coordinate sales and marketing efforts and offices in the U.K. for design and to oversee European operations. +Internationally, we have two Company-owned retail stores in the UK and one jointly-owned retail store in China. We have no manufacturing facilities, as all of our products are manufactured by +independent manufacturers in China and New Zealand. We lease, rather than own, all of our facilities from unrelated parties. With the exception of our eCommerce and retail store facilities, 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. +33 +Table of Contents +The following table reflects the location, use, segment, and approximate size of our significant physical properties: +Facility Location +Description +Business Segment +Approximate Square Footage +Camarillo, California +Warehouse Facility +unallocated +723,000 +Ventura, California +Warehouse Facility and Retail Outlet +unallocated +126,000 +Goleta, California +Corporate Offices +unallocated +52,000 +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 brand trademarks. We also are aware of many instances throughout the +world in which a third party is using our UGG trademarks within its internet domain name, and we have discovered and are investigating several manufacturers and distributors of counterfeit Teva and +UGG products. +Item 4. Submission of Matters to a Vote of Security Holders. +No matter was submitted during the fourth quarter of the fiscal year covered by this Annual Report to a vote of our security holders, +through the solicitation of proxies or otherwise. +34 +Table of Contents +PART II +Item 5. Market for Registrant's 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, 2007: +First Quarter +$ +57.16 +$ +73.51 +Second Quarter +$ +69.13 +$ +100.90 +Third Quarter +$ +87.84 +$ +111.20 +Fourth Quarter +$ +108.01 +$ +164.91 +Year ended December 31, 2008: +First Quarter +$ +91.50 +$ +153.96 +Second Quarter +$ +106.79 +$ +143.51 +Third Quarter +$ +99.28 +$ +137.56 +Fourth Quarter +$ +48.25 +$ +102.68 +As +of February 13, 2009, there were 91 record holders of our common stock and we believe there are approximately 30,000 beneficial holders of our common stock. +We +did not sell any equity securities during the year ended December 31, 2008 that were not registered under the Securities Act of 1933. +35 +Table of Contents +STOCKHOLDER RETURN PERFORMANCE PRESENTATION +Set forth below is a line graph comparing the percentage change in the cumulative total stockholder return on the Company's common +stock against the cumulative total return of the NASDAQ Market Index and a peer group index for the five-year period commencing December 31, 2003 and ending December 31, +2008. The data represented below assumes one hundred dollars invested in each of the Company's Common Stock, the NASDAQ Market Index and the peer group index on January 1, 2004. 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. Total return assumes reinvestment of dividends; we have paid no dividends on our common stock and have not done so since our inception. +December 31, +2003 +2004 +2005 +2006 +2007 +2008 +Deckers Outdoor Corporation +$ +100.0 +$ +229.2 +$ +134.7 +$ +292.4 +$ +756.4 +$ +389.6 +Prior Peer Group Index* +100.0 +132.9 +130.7 +151.4 +183.5 +137.0 +NASDAQ Market Index# +100.0 +108.4 +110.8 +122.2 +134.3 +79.3 +Current Peer Group Index* +100.0 +128.5 +134.4 +155.8 +136.3 +61.4 +* The +Prior Peer Group Index included each of the companies in our Current Peer Group Index and Nike, Inc., which was removed as the Company does not +consider it a comparable company due to its size and extent of product offering. The Current Peer Group Index consists of K-Swiss Inc.; Kenneth Cole Productions, Inc.; Rocky +Brands, Inc.; The Timberland Company; Wolverine World Wide, Inc.; Crocs, Inc.; and Skechers U.S.A., Inc. +# The +NASDAQ Market Index is the same NASDAQ Index used in our 2007 Form 10-K. +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 credit facility +currently contains covenants expressly prohibiting us from paying dividends. +36 +Table of Contents +Item 6. Selected Financial Data +We derived the following selected consolidated financial data from our consolidated financial statements. Historical results are not +necessarily indicative of the results to be expected in the future. You should read the following consolidated financial information together with our consolidated financial statements and the related +notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in Part II. +Years ended December 31, +2004 +2005 +2006 +2007 +2008 +(In thousands, except per share data) +Statement of Operations Data +Net sales: +UGG wholesale +$ +101,806 +$ +150,279 +$ +182,369 +$ +291,908 +$ +483,781 +Teva wholesale +83,477 +80,446 +75,283 +82,003 +80,882 +Simple wholesale +9,633 +6,980 +10,903 +11,163 +13,909 +TSUBO wholesale +— +— +— +— +3,649 +eCommerce +19,871 +25,912 +28,886 +45,473 +68,769 +Retail stores +— +1,143 +6,982 +18,382 +38,455 +214,787 +264,760 +304,423 +448,929 +689,445 +Cost of sales +124,659 +153,598 +163,692 +241,458 +384,127 +Gross profit +90,128 +111,162 +140,731 +207,471 +305,318 +Selling, general and administrative expenses +47,971 +59,254 +73,989 +101,918 +152,574 +Impairment loss(1) +— +— +15,300 +— +35,825 +Income from operations +42,157 +51,908 +51,442 +105,553 +116,919 +Other expense (income), net +2,517 +374 +(1,910 +) +(4,486 +) +(3,583 +) +Income before income taxes and minority interest +39,640 +51,534 +53,352 +110,039 +120,502 +Income taxes +14,713 +20,387 +22,743 +43,602 +46,631 +Minority interest +— +— +— +— +(77 +) +Net income +$ +24,927 +$ +31,147 +$ +30,609 +$ +66,437 +$ +73,948 +Net income per share: +Basic +$ +2.27 +$ +2.52 +$ +2.45 +$ +5.18 +$ +5.67 +Diluted +$ +2.05 +$ +2.42 +$ +2.38 +$ +5.06 +$ +5.60 +Weighted average common shares outstanding: +Basic +11,005 +12,349 +12,519 +12,835 +13,042 +Diluted +12,142 +12,866 +12,882 +13,129 +13,195 +(1) The +impairment loss in 2006 relates to our Teva trademarks. The impairment loss in 2008 relates to our Teva trademarks, Teva goodwill, and TSUBO goodwill. +During our annual and interim assessments of goodwill and other intangible assets, we concluded that the fair values were lower than the carrying amounts and therefore wrote down the trademarks and +goodwill to their fair values. +As of December 31, +2004 +2005 +2006 +2007 +2008 +(In thousands) +Balance Sheet Data +Cash and cash equivalents +$ +10,379 +$ +50,749 +$ +34,255 +$ +54,525 +$ +176,804 +Working capital +67,426 +104,205 +147,860 +230,173 +317,755 +Total assets +174,206 +208,665 +249,973 +370,032 +483,721 +Long-term liabilities +— +— +— +— +3,847 +Total stockholders' equity +138,779 +174,640 +210,410 +298,638 +384,252 +37 +Table of Contents +Item 7. Management's 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 Exchange 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 and other financial metrics; +• 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 Part I, 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 read this report in its entirety, together with the documents that we file 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 accessories and the category +creator in the luxury sheepskin, sport sandal and sustainable footwear segments. We market our products primarily under four proprietary brands: +• UGG® Australia: Authentic luxury sheepskin boots and a full line of luxury and comfort footwear and +accessories; +• Teva®: High performance sport shoes and rugged outdoor footwear and accessories; +• Simple®: Innovative sustainable-lifestyle footwear and accessories; and +• TSUBO®: High-end casual footwear that incorporates style, function and maximum comfort. +We +sell our brands through our quality domestic retailers and international distributors and directly to our end-user consumers through our eCommerce business and our retail +stores. We sell our footwear in +38 +Table of Contents +both +the domestic market and in international markets. Independent third parties manufacture all of our products. +Our +business has been impacted by several important trends: +• Recent changes in U.S. and global economic conditions have adversely impacted businesses generally; some of our customers +may be adversely affected, which in turn may adversely impact our financial results. +• 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. +• There is an emerging sustainable lifestyle movement happening all around the world. Consumers are demanding that brands +and companies take a more responsible approach when it comes to protecting the environment. +By +emphasizing our brands' images and our focus on comfort, performance and authenticity, we believe we can 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. +UGG Brand Overview +The UGG brand has become a well-known brand throughout the country as well as internationally. Over the past several years, +our UGG brand has received increased media exposure including increased print media in national ads and cooperative advertising with our customers, which has 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 were driven by the following: +• consumer brand loyalty, due to the luxury and comfort of UGG footwear, +• increased marketing in high-end magazines, +• successful targeting of 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 otherwise +been able to, +• increased exposure to the brand driven by our concept stores which showcase all of our product offerings, +• continued geographic expansion across the U.S. and internationally, and +• continued innovation of new product categories and styles. +39 +Table of Contents +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 increased our product offering, including a growing spring line, an expanded men's line, as well +as a fall line that consists of a range of luxurious collections for both genders. These collections include: new fashion collections, a variety of casual comfort collections, and cold weather +offerings, as well as our Classic, Ultra, Ultimate and Slippers collections. +For +the year ended December 31, 2008, the UGG brand's wholesale net sales increased 65.7%, and the UGG brand's net sales including wholesale, eCommerce and retail store sales +increased by approximately 67.5%, compared to the same period in 2007. 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. +Teva Brand Overview +We continue to see a significant shift in consumer preferences and lifestyles to include more outdoor recreational activities. Because +of our long history with outdoor footwear, as well as our continued commitment to performance and lifestyle product innovation, the Teva brand has remained popular with outdoor athletes and +enthusiasts, and is poised to capture new outdoor consumers entering the market. Our spring and fall 2009 product lines include a mix of core performance product evolutions and new lifestyle product +introductions. Beginning with the introduction of our first fully complete closed-toe footwear collection in fall 2008, we have begun to reduce our reliance on sandal sales and optimal +spring weather. +We +intend to continue to explore opportunities to broaden the Teva brand's distribution with quality, image-enhancing retailers both within and beyond the core outdoor specialty and +sporting goods channels. Through effective channel management and product line segmentation, we plan to expand into new distribution channels without diluting our outdoor heritage and our appeal to +outdoor enthusiasts. Through appropriate channel product line expansion, we plan to broaden our product offerings to meet the performance and lifestyle needs of today's outdoor consumer. However, we +cannot assure investors that these efforts will be successful. +Because +impairment indicators arose, we conducted an interim impairment evaluation of the Teva goodwill and trademarks as of June 30, 2008 and concluded that the Teva goodwill was +not impaired, but the fair value of the Teva trademarks was lower than the carrying amount. Therefore, we recognized an impairment loss of $14,900 on the Teva trademarks during the three months ended +June 30, 2008. In addition, we conducted our annual impairment test as of December 31, 2008 and concluded that the fair values of both the Teva trademarks and goodwill were lower than +their respective carrying amounts. Therefore, we recognized an additional impairment loss of $5,500 on the Teva trademarks and $11,929 on the Teva goodwill, which was the entire balance of our Teva +goodwill, in the fourth quarter of 2008. The total impairment loss for 2008 is included as a separate line item in our consolidated statement of operations for the year ended December 31, 2008. +For further discussion on the impairment evaluation, see "Results of Operations — Impairment loss" and "— Critical Accounting Policies and Estimates" below. +Simple Brand Overview +The Simple brand is committed to innovation and bringing sustainable products to the market, growing the brand's business while at the +same time bringing environmental awareness and creating meaningful, environmentally friendly products for a global market. The Simple brand is a leader in sustainable footwear and accessories. We feel +that how we make Simple products is just as important as +40 +Table of Contents +why +we make them. That means our goal is to find more sustainable and innovative ways of doing business. We are committed to our goal of making Simple products 100% sustainable, thus minimizing the +ecological footprint left on the planet. Green Toe®, a collection of sustainable footwear, represents a revolutionary shift in thinking about footwear by building a shoe from the inside +out using sustainable materials and processes. +The +progress in Green Toe has influenced the rest of the Simple product line, which has led to the development of additional product platforms, including ecoSNEAKS® and +Planet Walkers®. These product collections also use sustainable materials such as water-based cements, organic cotton, British Leather Consortium (BLC) and International Standards +Organization (ISO) 14001 leathers, hemp, and outsoles made from recycled car tires. We promote our Simple brand by emphasizing that we make fun, casual, comfortable and sustainable footwear. Our goal +is to create a dialogue with the consumer through all communication vehicles and to show people that sustainability is an emerging lifestyle for everyone, not just environmentally conscious +individuals. Our print advertising campaigns include national publications and alternative weekly publications in select cities around the world. Our online advertising campaign reaches consumers +through websites that focus on sustainability as well as popular culture. Additionally, we sponsor environmental-themed concerts, film festivals and green expos to showcase and tell the sustainable +lifestyle brand story. +For +the year ended December 31, 2008, wholesale net sales of Simple products increased by approximately 24.6%, and net sales of Simple products including wholesale, eCommerce and +retail store sales increased by approximately 27.4%, compared to the same period in 2007. We expect Simple brand growth including wholesale, eCommerce and retail store sales, to be higher year over +year in 2009 compared to 2008. +TSUBO Brand Overview +In May 2008, we acquired 100% of the ownership interest of TSUBO, LLC ("TSUBO"). TSUBO, meaning pressure point in Japanese, was +a company co-founded by a British designer in 1998. The TSUBO brand was marketed as a high-end casual footwear company with products for men and women. The brand is the +synthesis of ergonomics and style, with a full line of sport and dress casuals, boots, sandals and heels constructed to provide consumers with contemporary footwear that incorporates style, function +and maximum comfort. +TSUBO +has a rich heritage with consumers in major cities around the world. TSUBO consumers appreciate design, pay attention to detail, and will not sacrifice comfort. We intend to build +on this heritage, positioning TSUBO as the premium footwear solution for people in the city, providing all day comfort, style and quality. TSUBO strives to become well known in the most important +style, design, architecture, art and fashion centers around the world. We will continue to create product addressing consumers unique needs, all-day comfort, innovative style and superior +quality. At the same time, we will market to TSUBO consumers where they live, emphasizing regional advertising and in-market grass roots, product placement and public relations efforts. +We +believe that the TSUBO brand represents an ideal complement to our portfolio of lifestyle brands. The TSUBO brand's target consumer, product selection, industry niche and relative +under-penetration in the marketplace make it a good fit for our business model. In addition, the TSUBO brand's commitment to quality distribution and its unique performance comfort platform allow us +to develop a compelling brand story for the global marketplace. We intend to leverage our existing design, marketing and distribution capabilities to grow the TSUBO brand into a meaningful business +over the next few years, consistent with our mission to build niche brands into global market leaders. Nevertheless, we cannot assure investors that our efforts will be successful. +We +conducted our annual impairment evaluation of the TSUBO goodwill and other intangible assets using market value approaches and valuation techniques as of December 31, 2008. We +concluded that the +41 +Table of Contents +fair +value of the TSUBO trademarks was not impaired, but due to the decline in our market capitalization, as discussed above, we concluded that the fair value of our TSUBO reporting unit was below its +carrying amount. Therefore, we recognized an impairment loss in the fourth quarter of 2008 of $3,496 on the TSUBO goodwill, which was the entire balance of our TSUBO goodwill. The total impairment +loss for 2008 is included as a separate line item in our consolidated statement of operations for the year ended December 31, 2008. See Note 11, "Goodwill and Other Intangible Assets," +to the consolidated financial statements. +eCommerce Overview +Our eCommerce business, which sells all 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. The eCommerce business enables us to interact and reinforce our relationships with the consumer. Our Teva and UGG +Australia websites both won BizRate's Circle of Excellence Platinum Awards for both 2007 and 2008. The award recognizes online retailers with top customer satisfaction ratings. In recent years, our +eCommerce business has had significant revenue growth, much of which occurred as the UGG brand gained popularity and as consumers have continued to increase usage of the internet for footwear and +other purchases. Net sales of the eCommerce business increased 51.2% in the year ended December 31, 2008, compared to the same period in 2007. As our annual baseline of eCommerce sales +increases, we do not expect this growth rate to continue. +Managing +our eCommerce business requires us to focus on the latest trends and techniques for web design, to generating internet traffic to our websites, to effectively convert website +visits into orders, and to maximize average order sizes. We plan to continue to grow our internet business through improved website features and performance, increased marketing and international +websites. Overall, our eCommerce business benefits from the strength of our brands and, as we grow our brands over time, we expect this division to continue to be an important segment of our business. +Nevertheless, we cannot assure investors that eCommerce sales will continue to grow at their recent pace or that revenue from our eCommerce business will not at some point decline. +Retail Stores Overview +Based upon the success of our existing UGG Australia concept stores in Chicago and the SoHo area of New York City, we opened our first +West Coast UGG Australia concept store in August 2008 in San Francisco near Union Square. In November 2008, we opened our second New York City UGG Australia concept store near Lincoln Square as well +as our sixth retail outlet store in New Jersey. +During +2008, we opened our first Company-owned stores internationally. In the United Kingdom, we opened two UGG Australia concept stores, the first in the new Westfield Mall in White +City in October and the second in Covent Garden in London in November. +In +July 2008, we entered into a joint venture agreement with an affiliate of Stella International Holdings Limited ("Stella International") for the opening of retail stores and wholesale +distribution for +the UGG brand in China. Under this agreement, we opened our first UGG Australia concept store in Beijing in December. The joint venture is owned 51% by Deckers and 49% by Stella International. The +total initial investment in the joint venture was $1,000 contributed by both parties in proportion to their respective ownership in the joint venture. The estimated total investment by Deckers and +Stella International, including contributed capital and loans, for the joint venture is expected to be approximately $5,000. +Our +retail stores enable us to directly impact our customers' experience, meet the growing demand for these products, sell the products at retail prices and provide us with incremental +annual operating income. In addition, our UGG Australia concept stores allow us to showcase our entire line, where a retailer may not carry the whole line. Net sales of the retail store business +increased 109.2% in the year ended December 31, 2008, compared to the same period in 2007. We do not expect this growth rate to continue +42 +Table of Contents +because +as we increase the number of our stores, each new store will have less proportional impact on our growth rate. For those stores that were open during the full year of 2007 and 2008, same store +sales grew by 32.7%. Nevertheless, we cannot assure investors that retail store sales will continue to grow at their recent pace or that revenue from our retail store business will not at some point +decline. +Seasonality +Our business is seasonal, with the highest percentage of UGG brand net sales occurring in the third and fourth quarters, and the +highest percentage of Teva brand net sales occurring in the first and second quarters of each year. To date, the Simple brand has not had a seasonal impact on the Company. Similarly, we do not expect +the TSUBO brand to have a seasonal impact. +2007 +First +Quarter +Second +Quarter +Third +Quarter +Fourth +Quarter +Net sales +$ +72,575 +$ +52,730 +$ +129,381 +$ +194,243 +Income from operations +$ +15,072 +$ +2,864 +$ +30,660 +$ +56,957 +2008 +First +Quarter +Second +Quarter +Third +Quarter +Fourth +Quarter +Net sales +$ +97,535 +$ +91,116 +$ +197,288 +$ +303,506 +Income (loss) from operations* +$ +17,060 +$ +(6,944 +) +$ +43,081 +$ +63,722 +* Included +in income (loss) from operations in the second quarter of 2008 is a $14,900 impairment loss on our Teva trademarks. Included in the fourth quarter of +2008 is a $20,925 impairment loss on our Teva trademarks, Teva goodwill, and TSUBO goodwill. +With +the dramatic growth in the UGG brand in recent years, combined with the introduction of a fall Teva product line, net sales in the last half of the year have exceeded that for the +first half of the year. Given our expectations for each of our brands in 2008, we currently expect this trend to continue. Nonetheless, actual results could differ materially depending upon consumer +preferences, availability of product, competition and our customers continuing to carry and promote our various product lines, among other risks and uncertainties. See Part I, Item 1A, +"Risk Factors." +43 +Table of Contents +Results of Operations +The following table sets forth certain operating data for the periods indicated. +Years Ended December 31, +2006 +2007 +2008 +Net sales by location: +U.S. +$ +266,092 +$ +386,593 +$ +581,512 +International +38,331 +62,336 +107,933 +Total +$ +304,423 +$ +448,929 +$ +689,445 +Net sales by product line and eCommerce and +retail store business: +UGG: +Wholesale +$ +182,369 +$ +291,908 +$ +483,781 +eCommerce +22,640 +37,880 +60,642 +Retail store +6,452 +17,766 +37,558 +Total +211,461 +347,554 +581,981 +Teva: +Wholesale +75,283 +82,003 +80,882 +eCommerce +5,070 +5,630 +5,219 +Retail store +148 +260 +417 +Total +80,501 +87,893 +86,518 +Simple: +Wholesale +10,903 +11,163 +13,909 +eCommerce +1,176 +1,963 +2,786 +Retail store +382 +356 +480 +Total +12,461 +13,482 +17,175 +TSUBO: +Wholesale +— +— +3,649 +eCommerce +— +— +122 +Total +— +— +3,771 +Total +$ +304,423 +$ +448,929 +$ +689,445 +Income (loss) from operations by product line and eCommerce and retail store business: +UGG wholesale +$ +72,908 +$ +119,193 +$ +187,824 +Teva wholesale(1) +3,829 +21,121 +(18,688 +) +Simple wholesale +(2,472 +) +(2,077 +) +(2,262 +) +TSUBO wholesale(2) +— +— +(4,842 +) +eCommerce +8,774 +14,502 +22,364 +Retail store +1,180 +3,194 +6,649 +Unallocated overhead costs +(32,777 +) +(50,380 +) +(74,126 +) +Total +$ +51,442 +$ +105,553 +$ +116,919 +(1) Included +in Teva income from operations in 2006 is an impairment loss of $15,300. Included in Teva loss from operations in 2008 is an impairment loss +totaling $32,329 (see Impairment loss discussion below). +(2) Included +in TSUBO loss from operations in 2008 is an impairment loss of $3,496 (see Impairment loss +discussion below). +44 +Table of Contents +The +following table shows certain operating data as a percentage of net sales and the increase (decrease) in each item of operating data. +Percent Increase (Decrease) +Years Ended +December 31, +2006 to 2007 +2007 to 2008 +2006 +2007 +2008 +Net sales +100.0 +% +100.0 +% +100.0 +% +47.5 +% +53.6 +% +Cost of sales +53.8 +53.8 +55.7 +47.5 +59.1 +Gross profit +46.2 +46.2 +44.3 +47.4 +47.2 +Selling, general and administrative expenses +24.3 +22.7 +22.1 +37.7 +49.7 +Impairment loss +5.0 +— +5.2 +* +* +Income from operations +16.9 +23.5 +17.0 +105.2 +10.8 +Interest (income) expense and other, net +(0.6 +) +(1.0 +) +(0.5 +) +134.9 +(20.1 +) +Income before income taxes and minority interest +17.5 +24.5 +17.5 +106.3 +9.5 +Income taxes +7.5 +9.7 +6.8 +91.7 +6.9 +Minority interest +— +— +— +— +* +Net income +10.1 +% +14.8 +% +10.7 +% +117.1 +11.3 +* Calculation +of percentage is not meaningful. +Year Ended December 31, 2007 Compared to Year Ended December 31, 2008 +Overview. In 2008, we had net sales of $689,445 and income from operations of $116,919 compared to net sales of $448,929 and +income from operations +of $105,553 in 2007. The increase in net sales was primarily due to higher UGG brand net sales. Income from operations increased primarily as a result of the increase in net sales, partially offset by +a lower gross margin and higher selling, general and administrative expenses as well as impairment losses recognized during the second and fourth quarters of 2008. Also in May 2008, we acquired the +ownership interests of TSUBO, LLC which had a loss from operations as discussed below. +Net Sales. Net sales increased by $240,516, or 53.6%, in 2008 compared to 2007 due primarily to: +• increases in UGG brand sales worldwide, +• an increase in the weighted-average wholesale selling price per pair, which increased 22.8% from $34.55 in 2007 to $42.41 +in 2008, primarily from an increase in sales of UGG products, which carry higher average selling prices, +• a 24.6% overall increase in the volume of footwear sold from 11.8 million pairs in 2007 to 14.7 million +pairs in 2008, +• the continued growth of our eCommerce business and expansion of our retail store business, and +• an increase in full price sales, as we had fewer closeout sales as a percent of total sales, in 2008 compared to 2007. +Net +wholesale sales of UGG products increased by $191,873, or 65.7%, in 2008 compared to 2007 primarily due to an increase in the number of pairs sold as well as an increased +weighted-average wholesale selling price per pair. +Net +wholesale sales of Teva products decreased by $1,121, or 1.4%, in 2008 compared to 2007. This decrease was primarily due to a decrease in the number of pairs sold, partially offset +by an increase in the weighted-average wholesale selling price per pair. +45 +Table of Contents +Net +wholesale sales of Simple products increased by $2,746, or 24.6%, in 2008 compared to 2007. Simple's performance was driven primarily by an increase in the weighted-average wholesale +selling price per pair as well as an increase in the number of pairs sold. +Net +wholesale sales of our TSUBO brand, which we acquired in May 2008, were $3,649 in 2008. +Net +sales of the eCommerce business increased by $23,296, or 51.2%, in 2008 compared to 2007, representing 10.1% of net sales in 2007 and 10.0% of net sales in 2008. In 2007, net sales +of the eCommerce business included retail sales of UGG products of $37,880, Teva products of $5,630, and Simple products of $1,963. In 2008, net sales of the eCommerce business included retail sales +of UGG products of $60,642, Teva products of $5,219, Simple products of $2,786, and TSUBO products of $122. The increase in net sales of the eCommerce business was driven by greater demand for our UGG +products. +Net +sales of the retail store business increased by $20,073, or 109.2%, in 2008 compared to 2007, representing 4.1% of net sales in 2007 and 5.6% of net sales in 2008. In 2007, net sales +of the retail store business included sales of UGG products of $17,766, Teva products of $260, and Simple products of $356. In 2008, net sales of the retail store business included sales of UGG +products of $37,558, Teva products of $417, and Simple products of $480. The large increase in UGG brand sales is partially attributable to our five new UGG brand concept stores opened in 2008 and the +additional stores that were not open for the full year of 2007. However, we cannot assure investors that retail store sales will continue to grow at their recent pace. +International +sales for all of our products increased by $45,597, or 73.1%, in 2008 compared to 2007, representing 13.9% of net sales in 2007 and 15.7% of net sales in 2008. The majority +of the international sales growth was due to increases in UGG and Simple brand sales, as well as our retail stores that opened in 2008. The largest increase in international sales comes from our UGG +brand sales, led by the European region. +Gross Profit. Gross profit increased by $97,847, or 47.2%, in 2008 compared to 2007. As a percentage of net sales, gross margin +was 44.3% in 2008 +versus 46.2% in 2007. The decline in our gross margin was primarily due to increased factory costs associated with our UGG brand, an increased percentage of international sales, which carry lower +gross margins, and increased inventory write-offs. +Selling, General and Administrative Expenses. Selling, general and administrative expenses, or SG&A, increased by $50,656, +or 49.7%, in 2008 compared +to 2007. As a percentage of net sales, SG&A decreased from 22.7% in 2007 to 22.1% in 2008. The increase in SG&A in absolute dollars resulted from: +• an increase in personnel costs, including additional stock compensation related to our long-term incentive +plan, +• additional costs related to our expanded distribution center, +• higher sales and marketing variable costs related to the increase in sales and six new retail stores that were not open +during the full year last year, +• higher fixed selling costs related to new retail stores, including rent expenses, +• increased legal costs due primarily to increased efforts to defend and protect our intellectual property, +• an increase in our bad debt reserve due to higher credit risk in the current economic environment, and +• our portion of the production costs for the documentary IMAX film, " Grand Canyon Adventure, River +at Risk ," which was sponsored by Teva and was released in IMAX theaters in March 2008. +In +2009, we plan to invest in new marketing campaigns for our brands domestically and internationally, and therefore we expect SG&A to be higher as a percentage of sales compared to +2008. +46 +Table of Contents +Impairment Loss. We conducted our annual impairment evaluation of goodwill and nonamortizable intangible assets as of +December 31, 2008 and +2007. We concluded that the fair value of our Teva trademarks and goodwill were below their respective carrying amounts. In addition, we concluded that the fair value of our TSUBO goodwill was also +below its carrying amount. Therefore, we recognized an impairment loss in the fourth quarter of $5,500 on our Teva trademarks and $15,425 on our Teva and TSUBO goodwill. In addition to our annual +impairment test, as of June 30, 2008, impairment indicators arose that the Teva goodwill and other intangible assets were possibly impaired. As a result, we conducted an interim impairment +evaluation of the Teva goodwill and Teva trademarks. As of June 30, 2008, we concluded that the Teva goodwill was not impaired, but the fair value of the Teva trademarks was lower than the +carrying amount. Therefore, we recognized an impairment loss of $14,900 on the Teva trademarks during the three months ended June 30, 2008. As of December 31, 2007, we concluded there +was no impairment of any of our goodwill and nonamortizable intangible assets. For further discussion of our impairment evaluations, refer to "Critical Accounting Policies and Estimates" below. +Income from Operations. Income from operations increased by $11,366, or 10.8%, in 2008 compared to 2007, representing 23.5% of +sales in 2007 and +17.0% in 2008. This decrease in percent of sales was due primarily to the lower gross margin, higher selling, general and administrative expenses and the impairment loss during 2008, partially offset +by the increase in net sales. +Income +from operations of the UGG brand at wholesale increased by $68,631, or 57.6%, in 2008 compared to 2007. The increase was primarily the result of the higher sales volumes, +partially offset by lower gross margins and increased divisional sales expenses, marketing expenses, commissions, bad debt reserves, and research and development expenses. +We +had a loss from operations of the Teva brand at wholesale in 2008 compared to income from operations in 2007, a decline of $39,809, or 188.5%. This decline in performance was largely +due to the impairment loss and was also caused by lower sales and gross margins as well as higher divisional expenses. +Loss +from operations of the Simple brand at wholesale increased by $185, or 8.9%, in 2008 compared to 2007. This slight decline in performance was primarily due to higher marketing, +product design, and divisional sales expenses, partially offset by higher sales and gross margins due to an increase in the weighted-average wholesale selling price per pair. +Loss +from operations of the TSUBO brand was $4,842 for 2008. This includes an impairment loss of $3,496. +Income +from operations of our eCommerce business increased by $7,862, or 54.2%, in 2008 compared to 2007. This was primarily due to the increase in net sales, partially offset by lower +gross margins and increased operating costs. +Income +from operations of our retail store business increased by $3,455, or 108.2%, in 2008 compared to 2007. This was primarily due to higher retail sales, partially offset by the +higher operating costs associated with our new retail stores that were not open during the full year last year. +Unallocated +overhead costs increased by $23,746, or 47.1%, in 2008 compared to 2007. The increase resulted primarily from higher corporate payroll costs, including share-based +compensation, additional costs related to our expanded distribution center, and increased legal costs related to defense and protection of our intellectual property. +Other (Income) Expense. Other (income) expense, net was $(3,583) in 2008 compared to $(4,486) in 2007. Interest income decreased +by $1,665, or 34.3%, +in 2008, compared to 2007. The decrease resulted primarily from a significant shift in the mix of our cash and cash equivalents and investment balances in 2008 versus 2007 to safer, more liquid, and +lower yielding investments as well as lower market interest rates. Interest expense decreased by $910 primarily due to the reversal of interest expense related to +47 +Table of Contents +income +tax uncertainties due to settlements during 2008 that were previously accrued, and in 2007, we incurred interest expense related to certain tax matters in the Far East. +Income Taxes. In 2007, our effective income tax rate was 39.6% versus an effective income tax rate of 38.7% in 2008. The +decrease in the effective +tax rate was primarily due to an increase in the Company's international sales as a percentage of total worldwide sales. The Company's average international tax rate is significantly less than the +Company's U.S. rate, and therefore a higher ratio of international sales and international pre-tax income decreases the Company's overall effective tax rate. This decrease was partially +offset by approximately $6,531 of impairment losses in 2008 attributable to a foreign subsidiary that receives no tax benefit from the charge, as this subsidiary is in a tax free jurisdiction. For +2009, we expect a further reduction in our effective tax rate as a result of the completion of buy-in payments for our intellectual property rights, which were taxable in the U.S. at the +higher tax rate. In 2007 and 2008, these buy-in payments resulted in an increase in the Company's U.S. pre-tax income and a decrease in the Company's international +pre-tax income. The effective tax rate is subject to ongoing review and evaluation by management and can vary from year to year. +Minority Interest. Minority interest in our joint venture with Stella International, which was formed in July 2008, was $77 for +2008. +Net Income. Our net income increased $7,511, or 11.3%, primarily as a result of higher net sales and higher gross profit dollars +in 2008, partially +offset by higher SG&A and the impairment loss. Our earnings per diluted share increased 10.7% from $5.06 in 2007 to $5.60 in 2008 primarily as a result of the increase in net income. We do not expect +these growth rates to continue. +Year Ended December 31, 2006 Compared to Year Ended December 31, 2007 +Overview. In 2007, we had net sales of $448,929 and income from operations of $105,553 compared to net sales of $304,423 and +income from operations +of $51,442 in 2006. These results were driven primarily by increased UGG sales, as well as by increased Teva and Simple sales. The increase in income from operations was primarily due to higher sales +and gross profit compared to 2006, and also due to a $15,300 impairment loss on our Teva trademarks in 2006. +Net Sales. Net sales increased by $144,506, or 47.5%, in 2007 compared to 2006. The increase was due primarily to increases in +UGG brand sales, and +also from increases in Teva and Simple brand sales. Net sales increased in 2007 due primarily to: +• an increase in the weighted-average wholesale selling price per pair, which increased 14.1% from $30.29 in 2006 to $34.55 +in 2007, primarily from an increase in sales of UGG products, which carry higher average selling prices, +• a 26.9% overall increase in the volume of footwear sold from 9.3 million pairs in 2006 to 11.8 million pairs +in 2007, +• the continued expansion of our eCommerce business and our retail store business, and +• full price sales of UGG products increased in 2007 compared to 2006. +Net +wholesale sales of UGG products increased by $109,539, or 60.1%, in 2007 compared to 2006 due to increased sales of all categories, including boots, fashion, casuals, kids', +slippers, sandals and cold weather footwear. The increased sales were due primarily to an increase in the volume of footwear sold. +Net +wholesale sales of Teva products increased by $6,720, or 8.9%, in 2007 compared to 2006. This increase was primarily due to an increase in the volume of footwear sold in all +categories, including sandals, closed toe and thongs, and was partially offset by a slight decrease in the weighted-average wholesale selling price per pair. +48 +Table of Contents +Net wholesale sales of Simple products increased by $260, or 2.4%, in 2007 compared to 2006. The increase was largely due to increased sales of our Green Toe +collection and an increase in the weighted-average wholesale selling price per pair and was partially offset by a decrease in the volume of sandals, sneakers and clogs sold. +Net +sales of the eCommerce business increased by $16,587, or 57.4%, in 2007 compared to 2006, representing 9.5% of net sales in 2006 and 10.1% of net sales in 2007. In 2006, net sales of +the eCommerce business included retail sales of UGG products of $22,640 , Teva products of $5,070 and Simple products of $1,176. In 2007, net sales of the eCommerce business included retail sales of +UGG brand of $37,880, Teva of $5,630 and Simple of $1,963. The increase in net sales of the eCommerce business was due to the greater demand for our products. +Net +sales of the retail store business increased by $11,400, or 163.3%, in 2007 compared to 2006, representing 2.3% of net sales in 2006 and 4.1% of net sales in 2007. In 2006, net sales +of the retail store business included sales of UGG products of $6,452, Teva products of $148, and Simple products of $382. In 2007, net sales of the retail store business included sales of UGG +products of $17,766, Teva +products of $260, and Simple products of $356. The increase in net sales of the retail store business was due to the greater demand for our products as well as the two additional stores that we opened +in 2007 and the additional stores that we opened in the second half of 2006. +International +sales for all of our products increased by $24,005, or 62.6%, in 2007 compared to 2006, representing 12.6% of net sales in 2006 and 13.9% of net sales in 2007. The increase +in international sales was driven by increases in sales of all brands, led by our UGG brand. +Gross Profit. Gross profit increased by $66,740, or 47.4%, in 2007 compared to 2006. As a percentage of net sales, gross margin +was 46.2% in both +2007 and 2006. +Selling, General and Administrative Expenses. Selling, general and administrative expenses, or SG&A, increased by $27,929, +or 37.7%, in 2007 compared +to 2006. As a percentage of net sales, SG&A decreased from 24.3% in 2006 to 22.7% in 2007. The increase in SG&A in absolute dollars was primarily due to increases in payroll, commissions, retail store +and eCommerce expenses and warehouse expenses, as well as approximately $2,600 of expenses in 2007 related to the investigation and restatement of certain of our historical consolidated financial +statements as disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2007. +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, 2007 and 2006, and concluded that as of December 31, 2007, we had no impairment loss since the fair values of our reporting units and +nonamortizable intangible assets were higher than the carrying amounts. However, as of December 31, 2006, 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 increased by $54,111, or 105.2%, in 2007 compared to 2006, representing 16.9% of +sales in 2006 and +23.5% in 2007. The increase in income from operations was primarily due to the increase in sales and gross profit in 2007, and also due to the impairment loss in 2006. +Income +from operations of the UGG brand at wholesale increased by $46,285, or 63.5%, in 2007 compared to 2006. This was largely due to increased sales volumes and was partially offset by +higher sales commissions and marketing expenses due to the growth of the brand. +Income +from operations of the Teva brand at wholesale increased by $17,292, or 451.6%, in 2007 compared to 2006. This increase was largely due to the $15,300 impairment loss on our Teva +trademarks in 2006 as well as the increase in net sales in 2007, partially offset by higher divisional sales expenses and design expenses in 2007. +49 +Table of Contents +Loss +from operations of the Simple brand at wholesale decreased by $395, or 16.0%, in 2007 compared to 2006. This was primarily due to the increase in net sales as well as higher gross +margins and was partially offset by increased divisional sales expenses. +Income +from operations of our eCommerce business increased by $5,728, or 65.3%, in 2007 compared to 2006. This increase was largely due to the increase in net sales, partially offset by +higher operating costs and marketing expenses. +Income +from operations of our retail store business increased by $2,014, or 170.7%, in 2007 compared to 2006. This increase was largely due to the increase in net sales, partially offset +by higher operating costs. +Unallocated +overhead costs increased by $17,603, or 53.7%, in 2007 compared to 2006. The increase resulted primarily from higher corporate payroll costs, warehouse expenses, and +international division costs, none of which are allocated to the brands. +Other Expense (Income). Other expense (income), net was $(1,910) in 2006 compared to $(4,486) in 2007. In 2007, we had higher +interest income from +higher cash and cash equivalents and short-term investments balances and higher investment return rates than 2006. In addition, we had $461 and $(19) of interest and penalties in 2006 and +2007, respectively, related to underreporting of employee payroll expense and underpayment of certain tax obligations to authorities in China for one of the Company's foreign subsidiaries. During +2007, we accrued $578 of interest and penalties related to this matter; however, in the fourth quarter of 2007, we reversed $597 of penalties +from 2007 and prior years that had previously been accrued, because authorities in China did not assess the related estimated penalties when a portion of the tax obligations were paid. +Income Taxes. In 2006, income tax expense was $22,743, representing an effective income tax rate of 42.6%. In 2007, income tax +expense was $43,602 +representing an effective income tax rate of 39.6%. The decrease in the effective tax rate in 2007 was primarily due to approximately $5,000 of impairment loss in 2006 attributable to a foreign +subsidiary that receives no tax benefit from the charge, as this subsidiary is in a tax free jurisdiction. +Net Income. Our net income increased $35,828, or 117.1%, primarily as a result of higher net sales, higher gross profit, and +higher interest income +in 2007, and also from the impairment loss in 2006. Our earnings per diluted share increased 112.6% from $2.38 in 2006 to $5.06 in 2007 primarily as a result of the increase in net income. +Off-Balance Sheet Arrangements +We have several types of off-balance sheet arrangements. Most of these are contractual obligations and firm commitments and +one is unrecognized tax benefits related to uncertain tax positions taken in our income tax return that would, if recognized, impact the effective tax rate. For a discussion of other +off-balance sheet arrangements, see "Contractual Obligations" below. +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 as needed, the credit availability under our revolving credit facility. In an economic recession or under other adverse economic +conditions, we may be unable to realize a return on our cash equivalents and short-term investments or to secure additional credit on favorable terms. Such failures may impact our working +capital reserves and have a material adverse effect on our business. See Part I, Item 1A, "Risk Factors" for more discussion of this issue. +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, +50 +Table of Contents +whereas +the UGG brand generally builds its inventories in the second and third quarters to support sales for the fall and winter selling seasons, which historically occur during the third and fourth +quarters. +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 our internal cash flows. If necessary, we may +borrow funds under our revolving credit facility. During 2006, 2007, and 2008, we did not borrow funds under our revolving credit facility. +Cash from Operating Activities. Net cash provided by operating activities was $53,276 for the year ended December 31, 2008 +compared to net +cash provided by operating activities of $61,054 for the year ended December 31, 2007. The decrease in net cash provided by operating activities was primarily due to a greater increase in +inventory and accounts receivable as well as a lower increase in accounts payable in 2008 compared to 2007. The lower increase in inventory was primarily due to higher anticipated UGG sales in the +first quarter of 2009 compared to the first quarter of 2008. The larger increase in accounts receivable was primarily due to higher sales in the fourth quarter of 2008 compared to the same period in +2007. The lower increase in trade accounts payable was primarily due to timing of cash payments near the end of 2008 compared to 2007. These changes were partially offset by the higher net income +excluding the impairment loss on intangible assets of $35,825 and the increase in long-term liabilities. The long-term liabilities are primarily attributable to deferred rent. +Net working capital improved by $87,582 to $317,755 as of December 31, 2008 from $230,173 as of December 31, 2007, primarily as a result of the higher inventory and accounts receivable +balances. The increase in working capital was partially offset by higher other accrued expenses, income taxes payable, and trade accounts payable. The changes in working capital are due to our normal +seasonality and timing of cash receipts and cash payments. +Cash from Investing Activities. Net cash provided by investing activities was $66,716 in 2008 which was comprised primarily of +net sales of +short-term investments, partially offset by purchases of property and equipment and our acquisition of TSUBO, LLC. Our capital expenditures were primarily related to a new inventory +pick module in our distribution center, leasehold improvements for new retail stores, and computer hardware and software. For the year ended December 31, 2007, net +cash used in investing activities was $55,567, which was comprised primarily of the net purchases of short-term investments. In addition, we used $6,385 for capital expenditures, primarily +related to the build-out of our new retail stores, the replacement and upgrading of certain computer equipment and additional warehouse equipment. +Cash from Financing Activities. In 2008, net cash provided by financing activities was $2,267, consisting of the excess tax +benefits from +shared-based compensation as well as the contribution from our new joint venture partner and cash received from the exercise of stock options, partially offset by cash paid for shares withheld for +taxes. In 2007, net cash provided by financing activities was $14,840 consisting of the excess tax benefits from share-based compensation as well as cash received from the exercise of stock options. +The amount of excess tax benefits decreased significantly from 2007 due to the exercise of fewer stock options during 2008. +Our +working capital consists primarily of cash and cash equivalents, short-term investments, trade accounts receivable, inventories and trade accounts payable. At +December 31, 2008, working capital was $317,755 including $176,804 of cash and cash equivalents and $17,976 of short-term investments. Trade accounts receivable increased by 49.7% +to $108,129 at December 31, 2008 from $72,209 at December 31, 2007 primarily due to higher net sales in the latter part of 2008 compared to the latter part of 2007. Accounts receivable +turnover increased to 8.9 times in the twelve months ended December 31, 2008 from 8.5 times in the twelve months ended December 31, 2007, primarily as a result of increased sales and +faster collections in 2008 compared to 2007 due to the continued increased demand for UGG product in 2008, +51 +Table of Contents +which +encouraged retailers to pay their receivables balances faster in efforts to receive their upcoming deliveries more quickly. +Inventories +increased by $40,964, or 79.1%, at December 31, 2008 compared to December 31, 2007, reflecting a $40,425, $1,146 and $1,916 increase in UGG, Simple, and TSUBO +brand inventory, respectively, and a $2,523 decrease in Teva brand inventory. Overall, inventory turnover decreased to 4.1 times for the year ended December 31, 2008 from 4.4 times for the year +ended December 31, 2007, largely due to the slightly higher rate of increase on our average inventory than our sales during the twelve months ended December 31, 2008 compared to the +twelve months ended December 31, 2007. This was due to the expansion of our warehouse and our ability to hold more inventory for the coming seasons, as well as the increase in our landed costs +compared to last year. +Our +revolving credit facility with Comerica Bank (the "Facility") provides for a maximum availability of $20,000. Up to $10,000 of borrowings may be in the form of letters of credit. The +Facility bears interest at the lender's prime rate (3.25% at December 31, 2008) or, at our option, at the London Interbank Offered Rate, or LIBOR, (0.44% at December 31, 2008) 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 expires on June 1, 2010. At December 31, 2008, we had no outstanding borrowings under +the Facility and outstanding letters of credit of $154. As a result, $19,846 was available under the Facility at December 31, 2008. +The +agreements underlying the Facility contain certain financial covenants, currently including a limitation on aggregate annual lease payments of $15,000, a quick ratio requirement of +at least 0.90:1.00, a minimum profitability requirement of $1,000 per fiscal quarter, a limitation on annual consolidated capital expenditures of $28,000, a minimum tangible net worth requirement of +$37,000 commencing with the fiscal year ended December 31, 2004, plus 75% of consolidated net profit on a cumulative basis, and a requirement that our consolidated total liabilities to +consolidated effective tangible net worth ratio be greater than 1.50:1.00. The agreements also contain a prohibition on the payment of dividends. Due to the impairment loss and resulting loss from +operations in the second quarter, we were in default because we had less than $1,000 of net income for the three months ended June 30, 2008. We agreed with Comerica Bank to execute a waiver +through June 30, 2008 of this technical default. At December 31, 2008, we were in compliance with all covenants and remain so as of the date of this report. +As +of December 31, 2008, we had no material commitments for future capital expenditures, but we estimate that the capital expenditures for 2009 will range from approximately +$19,000 to $21,000 and anticipate those will include the build-out of international and corporate offices, miscellaneous computer hardware and software, and the build-out of +new retail stores. The actual amount of capital expenditures for 2009 may differ from this estimate, largely depending on any unforeseen needs to replace existing assets and the timing of +expenditures. +Contractual Obligations. The following table summarizes our contractual obligations at December 31, 2008 and the effects +such obligations are +expected to have on liquidity and cash flow in future periods. +Payments Due by Period +Total +Less than 1 Year +1-3 Years +3-5 Years +More than 5 Years +Operating lease obligations +$ +69,098 +$ +11,094 +$ +22,437 +$ +15,643 +$ +19,924 +Purchase obligations +99,852 +98,668 +859 +325 +— +Other long-term liabilities reflected on our balance sheet under GAAP +4,214 +367 +747 +492 +2,608 +Unrecognized tax benefits +2,085 +— +2,085 +— +— +Total +$ +175,249 +$ +110,129 +$ +26,128 +$ +16,460 +$ +22,532 +Our +operating lease obligations consist primarily of building leases for our corporate and regional offices, distribution centers, and retail locations. Our purchase obligations consist +largely of purchase +52 +Table of Contents +orders, +as well as promotional expenses and service contracts. Outstanding purchase orders are primarily with our third party manufacturers and are expected to be paid within one year. These are +outstanding open orders and not minimum obligations; we had no minimum purchase requirement with any of our factories as of December 31, 2008. Our promotional expenditures and service contracts +are due periodically through 2012. Total other long-term liabilities is $3,847 and the +short-term portion of these long-term liabilities is $367, which consists primarily of deferred rents. The unrecognized tax benefits are related to uncertain tax positions +taken in our income tax return that would impact the effective tax rate, if recognized. +In +addition to the amounts in the table above, we have entered into other off-balance sheet arrangements. We agreed to make loans to our joint venture with Stella +International, should the need arise. The estimated total loans by Deckers and Stella International is expected to be approximately $4,000 contributed by both parties in proportion to their respective +ownership in the joint venture. We also have potential future earn-out payments relating to our May 2008 acquisition of TSUBO, LLC. The potential earn-out is based on +the amount, if any, that sales of TSUBO products exceed certain base revenue levels for each year from 2008 to 2012. See Note 12 to the consolidated financial statements for further discussion. +These amounts were excluded from the table above as the total payments were not known at the time of the acquisition since they are based on future revenue. At December 31, 2008, we did not +accrue any earn-out payments for 2008. +Subsequent +to December 31, 2008, we entered into a contract requiring minimum purchase commitments of sheepskin of approximately $64,000 that Deckers' affiliates, manufacturers, +factories and other agents (each or collectively, a "Buyer") must make on or before December 31, 2010. This contract may result in an unconditional purchase obligation, if a Buyer does not meet +the minimum purchase requirements. In the event that a Buyer does not purchase such minimum commitments on or before December 31, 2010, Deckers is required to purchase any remaining amounts on +or before December 31, 2010. Our sheepskin purchases by third party factories supplying UGG product to us during 2007 and 2008 exceeded this minimum purchase commitment, and we expect such +purchases will exceed these levels in 2009 and 2010. Therefore, we do not anticipate having to make any payments under this contractual arrangement, however we are not able to reasonably estimate when +or if cash payments will occur. We believe this will not materially affect our liquidity or results of operations, as it is in the normal course of our business. +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, the availability of short-term credit, and market volatility, 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 other material present understandings, commitments or agreements with respect to the acquisition of any +other businesses, we may evaluate acquisitions of other businesses or brands. +See +Note 8, "Commitments and Contingencies," to the consolidated financial statements for a discussion of certain tax obligations to authorities in China for one of the Company's +foreign subsidiaries. +53 +Table of Contents +Impact of Inflation +We believe that the rates of inflation in the three most recent fiscal 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, chargebacks, 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. Management reasonably could use different 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 materially 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 $118,835 and the allowance for doubtful accounts was $2,482 at December 31, 2008, compared to +gross trade accounts receivable of $80,564 and allowance for doubtful accounts of $379 at December 31, 2007. The increase in the allowance for doubtful accounts at December 31, 2008 +compared to December 31, 2007 was primarily due to downgrading the collectability of several accounts due to current economic conditions, which increased the reserve percentage applied to those +accounts. 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 we consider to +have credit risk and are not specifically identified as uncollectible would change the allowance for doubtful accounts at December 31, 2008 by approximately $670. +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 available to be taken against the +period-end trade accounts receivable, and we record a corresponding reserve for sales discounts. The reserve for sales discounts was approximately $4,241, or 3.6% of gross accounts +receivable, at December 31, 2008 and $3,218, or 4.0% of gross accounts receivable, at December 31, 2007. The slight decrease in the reserve as a percentage of gross accounts receivable +was primarily due to a lower percentage of total outstanding customer balances being eligible for terms discounts. Our use of different +54 +Table of Contents +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, 2008 by approximately $400. +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 from historical returns rates, among other factors. The allowance for returns was $2,335, or 2.0% of gross accounts receivable, at +December 31, 2008 and $3,687, or 4.6% of gross accounts receivable, at December 31, 2007. The decrease in the allowance was primarily due to a change in classification of the reserve for +consumer direct returns. At December 31, 2007, we included these reserves in net accounts receivable, but in 2008, we reclassified the consumer direct returns to other accrued expenses within +current liabilities, as the related businesses do not carry accounts receivable. In addition, the decrease in our wholesale reserve for returns was due to a reduction in the timing estimate for +damaged product returns. 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, 2008 by approximately $2,700. +Allowance for Estimated Chargebacks. When our customers pay their invoices, they often take deductions for chargebacks against +their invoices, which +we seldom recover. Therefore, we record an allowance for the balance of chargebacks that are outstanding in our accounts receivable balance as of the end of each quarter, along with an estimated +reserve for chargebacks that have not yet been taken against outstanding accounts receivable balances. This estimate is based on historical trends of the timing of chargebacks taken against invoices. +The allowance for chargebacks was $1,648 at December 31, 2008 and $1,071 at December 31, 2007. The increase in the allowance was primarily due to the increase of trade accounts +receivable at December 31, 2008 compared to December 31, 2007. +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, 2008, inventories were stated at $92,740, +net of inventory write-downs of $3,680. At December 31, 2007, inventories were stated at $51,776, net of inventory write-downs of $2,029. The slight increase in inventory write-downs at +December 31, 2008 compared to December 31, 2007 was primarily due to new inventory write-downs during 2008, primarily in our Teva and Simple brand inventories. This was partially offset +by the sale of inventory that had been previously written down at December 31, 2007. 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, 2008 by approximately $440. +Valuation of Goodwill, Intangible and Other Long-Lived Assets. Annually or whenever events or changes in circumstances indicate +that the +carrying amount of an asset may not be recoverable, we assess the impairment of goodwill, intangible and other long-lived assets on a separate asset basis based on assumptions and +judgments regarding the carrying amount 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 and 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: +• the assets' ability to continue to generate income from operations and positive cash flow in future periods; +• any changes in legal ownership of rights to the assets; and +55 +Table of Contents +• changes in consumer demand or acceptance of the related brand names, products or features associated with the assets. +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. +On +December 31, 2007, we performed our annual impairment test of goodwill and nonamortizable intangible assets using market value approaches and valuation techniques and +determined that there was no impairment of goodwill or intangible assets as of December 31, 2007. As of June 30, 2008, our inability to reach our 2008 Teva brand period to date sales +targets along with a reduced long-term forecast for Teva brand sales growth were indicators that the Teva goodwill and other intangible assets were possibly impaired. As a result, we +conducted an interim impairment evaluation of the Teva goodwill and other intangible assets as of June 30, 2008 and concluded that the Teva goodwill was not impaired, but the fair value of the +Teva trademarks was lower than the carrying amount. Therefore, we recognized an impairment loss of $14,900 in the second quarter on the Teva trademarks. As of December 31, 2008, due in part to +the continued decline in the economy in the second half of 2008, we reduced our long-term Teva brand sales forecast. In addition, as of December 31, 2008, we experienced a +significant decline in our market capitalization due to declines in market multiples. As a result of the reduced sales forecast and the decline in market capitalization, +we concluded that the fair value of our Teva trademarks and Teva goodwill were below their respective carrying amounts. Further, due to the decline in our market capitalization, we concluded that the +fair value of our TSUBO goodwill was also below its carrying amount. Therefore, we recognized an impairment loss in the fourth quarter of $5,500 on our Teva trademarks and $15,425 on our goodwill, +which was the entire balance of both our Teva and TSUBO goodwill. The impairment loss is reflected in our consolidated statement of operations for the year ended December 31, 2008. +The +annual impairment testing date is still December 31 of each year; however, management will perform an interim test of recoverability should facts and circumstances warrant. +Such facts and circumstances could include further deterioration of general economic conditions or the retail environment, customers reducing orders in response to such conditions and increased +competition. These or other factors could result in impairment of our remaining goodwill and other intangible assets. Our use of different estimates (including estimated royalty rates, discount rates, +market multiples, and future revenues, among others) and assumptions could produce different financial results. After all impairment charges recorded during 2008, the remaining balances of goodwill +and nonamortizable intangibles by brand are as follows: +As of December 31, 2008 +UGG +Teva +TSUBO +Total +Trademarks +$ +152 +$ +15,300 +$ +1,970 +$ +17,422 +Goodwill +6,101 +— +— +6,101 +Total nonamortizable intangibles +$ +6,253 +$ +15,300 +$ +1,970 +$ +23,523 +Share-based Compensation Expense. Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards +("SFAS") No. 123 +(revised 2004), "Share-Based Payment" (SFAS 123R) requires that share-based payment transactions with employees be accounted for using the fair value method and expensed ratably over the +vesting period of the award. Share-based compensation expense is based on the fair values of all share-based awards as of the grant date. Determining the expense of share-based awards at the grant +date requires judgment, including estimating the percentage of awards that will be forfeited, probabilities of meeting criteria for performance-based awards, stock volatility, the expected life of the +award, and other inputs. If actual forfeitures differ significantly from the estimates, share-based compensation expense and our results of operations could be materially impacted. +56 +Table of Contents +Recent Accounting Pronouncements +On January 1, 2008, we adopted the provisions of SFAS No. 157, "Fair Value Measurements," (SFAS 157) for fair +value measurements of financial assets and financial liabilities and for fair value measurements of nonfinancial items that are recognized or disclosed at fair value in the financial statements on a +recurring basis. 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 adoption of this Statement did +not have a material effect on our consolidated financial statements. FASB Staff Position ("FSP") FAS 157-2, "Effective Date of FASB Statement No. 157" delays the effective date of +SFAS 157 only as it relates to fair value measurement requirements for nonfinancial assets and liabilities that are not measured at fair value on a recurring basis to fiscal years beginning +after November 15, 2008. In accordance with FSP FAS 157-2, we have not applied SFAS 157 to our nonfinancial assets and liabilities, mainly intangible assets and property and +equipment. On January 1, 2009, we will be required to apply the provisions of SFAS 157 to fair value measurements of nonfinancial assets and nonfinancial +liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. We are in the process of evaluating the impact, if any, of applying these provisions on +our financial statements. +In +December 2007, the FASB issued Statement No. 141 (revised 2007) ("SFAS 141R"), "Business Combinations." The objective of SFAS 141R is to improve the relevance, +representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a business combination and its effects. SFAS 141R requires +that all business combinations be accounted for by applying the acquisition method (previously referred to as the purchase method), and most identifiable assets, liabilities, noncontrolling interests, +and goodwill acquired in business combinations to be recorded at full fair value. SFAS 141R also broadens the definition of a business and changes the treatment of direct acquisition-related +costs from being included in the purchase price to instead being generally expensed if they are not costs associated with issuing debt or equity securities. SFAS 141R is effective for us +beginning January 1, 2009, and will be applied prospectively to any new business combinations. +In +December 2007, the FASB issued Statement No. 160 ("SFAS 160"), "Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB +No. 51." The objective of SFAS 160 is to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated +financial statements by establishing accounting and reporting standards for noncontrolling interests in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 specifies that +noncontrolling interests (referred to as minority interests prior to SFAS 160) be reported as a separate component of equity, not as a liability or other item outside of equity, which changes +the accounting for transactions with noncontrolling interest holders. SFAS 160 is effective for us beginning January 1, 2009, and will be applied prospectively to all noncontrolling +interests, including our current minority interest and any others that arose before that date. +In +March 2008, the FASB issued Statement No. 161 ("SFAS 161"), "Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB +Statement No. 133." The objective of SFAS 161 is to improve the transparency of financial reporting by requiring additional disclosures about an entity's derivative and hedging +activities. This Statement is effective for us beginning January 1, 2009, with early application encouraged. This Statement encourages, but does not require, comparative disclosures for earlier +periods at initial adoption. We will apply this Statement prospectively to any derivative and hedging activities entered into on or after the effective date. +Item 7A. Quantitative and Qualitative Disclosures about Market Risk. +Derivative Instruments. Although we have used foreign currency hedges in the past, we currently do not utilize forward contracts +or other derivative +instruments to mitigate exposure to fluctuations in the foreign +57 +Table of Contents +currency +exchange rate, as the majority of our purchases and sales for the foreseeable future will be denominated in U.S. currency. As our international operations grow and we increase purchases and +sales in foreign currencies, we will evaluate and utilize derivative instruments, as needed, to hedge our foreign currency exposures. +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, 2008, 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. +We +face market risk to the extent that changes in foreign currency exchange rates affect our foreign assets and liabilities. We manage these risks by attempting to denominate contractual +and other foreign arrangements in U.S. dollars and by maintaining a significant percentage of our liabilities in U.S. dollars. We do not believe that there has been a material change in the nature of +our primary market risk exposures, including the categories of market risk to which we are exposed and the particular markets that present the primary risk of loss. As of the date of this Annual +Report on Form 10-K, we do not know of or expect there to be any material change in the general nature of our primary market risk exposure in the near term. +Item 8. Financial Statements and Supplementary Data. +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. +Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. +None. +Item 9A. Controls and Procedures. +(a) Disclosure Controls and Procedures. +Disclosure controls and procedures are the controls and other procedures that are designed to ensure that information required to be disclosed in the reports that +the Company files or submits under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized and reported within the time periods specified in the SEC's +rules and forms. Disclosure controls and procedures include, among other processes, controls and procedures designed to ensure that information required to be disclosed in the reports that the Company +files or submits under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions +regarding required disclosure. +The +Company carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the +effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2008 pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, +the Chief Executive Officer and Chief Financial Officer believe that as of the end of the period covered by this report, the Company's disclosure controls +58 +Table of Contents +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. +(b) Management's Report on Internal Control over Financial Reporting +Management is responsible for establishing and maintaining adequate internal control over financial reporting at the Company. Our internal control over financial +reporting is a process designed under the supervision of the Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and +the preparation of the Company's financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles (GAAP). A company's internal control over +financial reporting includes those policies and procedures that: +• pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and +dispositions of the assets of the company; +• provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in +accordance with GAAP, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and the directors of the company; and +• provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of +the company's assets that could have a material effect on the financial statements. +Because +of 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 Company's internal control over financial reporting as of December 31, 2008. 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"). Management's assessment included an evaluation of the design of the Company's 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, 2008, the Company maintained effective internal control over financial reporting. The registered public +accounting firm that audited the consolidated financial statements included in this Annual Report has issued an attestation report on the Company's internal control over financial reporting. 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. +(c) Changes in Internal Control over Financial Reporting +There was no change in our internal control over financial reporting that occurred during the quarter ended December 31, 2008 that has materially affected, +or is reasonably likely to materially affect, our internal control over financial reporting. +Item 9B. Other Information. +None. +59 +Table of Contents +PART III +Item 10. Directors, Executive Officers and Corporate Governance. +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 and is posted on our website at www.deckers.com. 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 Company's definitive proxy +statement relating to the Registrant's 2009 annual meeting of stockholders, which will be filed pursuant to Regulation 14A within 120 days after the end of the Company's fiscal year +ended December 31, 2008, and such information is incorporated herein by reference. +Item 11. Executive Compensation. +Information relating to Executive Compensation is set forth under "Proposal No. 1-Election of Directors" in the +Company's definitive proxy statement relating to the Registrant's 2009 annual meeting of stockholders, which will be filed pursuant to Regulation 14A within 120 days after the end of the +Company's fiscal year ended December 31, 2008, and such information is incorporated herein by reference. +Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. +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 Company's definitive proxy statement relating to the Registrant's 2009 annual meeting of stockholders, which will be filed +pursuant to Regulation 14A within 120 days after the end of the Company's fiscal year ended December 31, 2008, and such information is incorporated herein by reference. +Item 13. Certain Relationships and Related Transactions, and Director Independence. +Information relating to Certain Relationships and Related Transactions is set forth under "Proposal No. 1 — Election +of Directors" in the Company's definitive proxy statement relating to the Registrant's 2009 annual meeting of stockholders, which will be filed pursuant to Regulation 14A within 120 days +after the end of the Company's fiscal year ended December 31, 2008, and such information is incorporated herein by reference. +Item 14. Principal Accounting Fees and Services. +Information relating to Principal Accountant Fees and Services is set forth under "Proposal No. 2 — Independent +Registered Public Accounting Firm" in the Company's definitive proxy statement relating to the Registrant's 2009 annual meeting of stockholders, which will be filed pursuant to Regulation 14A +within 120 days after the end of the Company's fiscal year ended December 31, 2008, and such information is incorporated herein by reference. +60 +Table of Contents +PART IV +Item 15. Exhibits, Financial Statement Schedules. +Consolidated Financial Statements and Schedules required to be filed hereunder are indexed on Page F-1 hereof. +Exhibit +2.1 +Certificate of Ownership and Merger Merging Deckers Corporation into Deckers Outdoor Corporation. (Exhibit 2.1 to the Registrant's Registration Statement on Form S-1, File No. 33-67248 and incorporated by +reference herein) +2.2 +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 Registrant's Form 8-K/A filed +February 7, 2003 and incorporated herein by reference.) ++2.3 +Disclosure letter associated with the Asset Purchase Agreement. (Exhibit 2.2 to the Registrant's Form 8-K/A filed February 7, 2003 and incorporated herein by reference.) +3.1 +Amended and Restated Certificate of Incorporation of Deckers Outdoor Corporation. (Exhibit 3.1 to the Registrant's Registration Statement on Form S-1, File No. 33-67248 and incorporated by reference +herein) +3.2 +Restated Bylaws of Deckers Outdoor Corporation. (Exhibit 3.2 to the Registrant's Registration Statement on Form S-1, File No. 33-67248 and incorporated by reference herein) +3.3 +Certificate of Amendment of Amended and Restated Certificate of Incorporation of Deckers Outdoor Corporation (incorporated herein by reference to Appendix B to the Registrant's Definitive Proxy Statement dated +April 21, 2006 in connection with its 2006 Annual Meeting of Stockholders) +4.1 +Shareholder Rights Agreement, dated as of November 12, 1998. (Exhibit 10.39 to the Registrant's Form 10-Q for the period ended September 30, 1998 and incorporated by reference herein) +#10.1 +1993 Employee Stock Incentive Plan. (Exhibit 99 to the Registrant's Registration Statement on Form S-8, File No. 33-47097 and incorporated by reference herein) +#10.2 +Form of Incentive Stock Option Agreement under 1993 Employee Stock Incentive Plan. (Exhibit 10.9 to the Registrant's Registration Statement on Form S-1, File No. 33-67248 and incorporated by reference +herein) +#10.3 +Form of Non-Qualified Stock Option Agreement under 1993 Employee Stock Incentive Plan. (Exhibit 10.10 to the Registrant's Registration Statement on Form S-1, File No. 33-67248 and incorporated by +reference herein) +#10.4 +Form of Restricted Stock Agreement under 1993 Employee Stock Incentive Plan. (Exhibit 10.11 to the Registrant's Registration Statement on Form S-1, File No. 33-67248 and incorporated by reference +herein) +#10.5 +Deckers Outdoor Corporation 1995 Employee Stock Purchase Plan. (Exhibit 4.4 to the Registrant's Registration Statement on Form S-8, File No. 33-96850 and incorporated by reference herein) +10.6 +Amended Compensation Plan for Outside Members of the Board of Directors. (Exhibit 10.42 to the Registrant's Form 10-Q for the period ended September 30, 1996 and incorporated by reference +herein) +61 +Table of Contents +Exhibit +10.7 +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 Registrant's Form 10-K for +the year ended December 31, 2001 and incorporated by reference herein.) +10.8 +Unsecured Subordinated Promissory Note dated November 25, 2002 between Mark Thatcher and Deckers Outdoor Corporation. (Exhibit 10.22 to the Registrant's Form 10-K for the period ended December 31, +2002 and incorporated by reference herein) +10.9 +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 Registrant's Form 10-K for the period +ended December 31, 2002 and incorporated by reference herein) +10.10 +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 Registrant's +Form 10-K for the period ended December 31, 2002 and incorporated by reference herein) +10.11 +Amendment Number One to Amended and Restated Revolving Credit Agreement dated April 29, 2003. (Exhibit 10.1 to the Registrant's Form 10-Q for the period ended June 30, 2003 and incorporated by +reference herein) +10.12 +Amendment Number Two to Amended and Restated Revolving Credit Agreement dated June 27, 2003. (Exhibit 10.2 to the Registrant's Form 10-Q for the period ended June 30, 2003 and incorporated by +reference herein) +10.13 +Amendment Number One to Senior Subordination Agreement dated April 29, 2003. (Exhibit 10.3 to the Registrant's Form 10-Q for the period ended June 30, 2003 and incorporated by reference +herein). +10.14 +Amendment Number Two to Senior Subordination Agreement dated June 27, 2003. (Exhibit 10.4 to the Registrant's Form 10-Q for the period ended June 30, 2003 and incorporated by reference +herein) +10.15 +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 Registrant's +Form 10-Q for the period ended September 30, 2003 and incorporated by reference herein) +10.16 +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 Registrant's Form 10-K for +the period ended December 31, 2003 and incorporated by reference herein) +10.17 +Amendment Number Three to Senior Subordination Agreement dated November 13, 2003 (Exhibit 10.28 to the Registrant's Form 10-K for the period ended December 31, 2003 and incorporated by reference +herein) +10.18 +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 +Registrant's Form 10-K for the period ended December 31, 2003 and incorporated by reference herein) +62 +Table of Contents +Exhibit +10.19 +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 Registrant's Form 10-K for the period ended December 31, 2003 and incorporated by reference herein) +10.20 +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 Registrant's Form 10-K for the period +ended December 31, 2004 and incorporated by reference herein) +10.21 +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 Registrant's Form 10-K for the period ended December 31, 2004 and incorporated by reference herein) +10.22 +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 Registrant's Form 10-K for the period ended December 31, 2004 and incorporated by reference herein) +#10.23 +Employment Agreement between Deckers Outdoor Corporation and Angel R. Martinez (Exhibit 10.1 to the Registrant's Form 8-K filed on March 17, 2005 and incorporated by reference herein) +10.24 +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 Registrant's Form 10-Q for the +period ended June 30, 2005 and incorporated by reference herein) +10.25 +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 Registrant's Form 10-Q for the period +ended September 30, 2005 and incorporated by reference herein) +#10.26 +Employment agreement effective as of March 6, 2006 between Zohar Ziv and Deckers Outdoor Corporation (Exhibit 10.1 to the Registrant's Form 8-K filed on March 10, 2006 and incorporated by reference +herein) +#10.27 +Employment agreement effective as of March 20, 2006 between Peter Worley and Deckers Outdoor Corporation (Exhibit 10.1 to the Registrant's Form 8-K filed on March 20, 2006 and incorporated by +reference herein) +#10.28 +Employment agreement effective as of January 1, 2006 between Constance X. Rishwain and Deckers Outdoor Corporation (Exhibit 10.2 to the Registrant's Form 8-K filed April 7, 2006 and incorporated by +reference herein) +#10.29 +Employment agreement effective as of January 1, 2006 between Colin Clark and Deckers Outdoor Corporation (Exhibit 10.1 to the Registrant's Form 8-K filed on April 18, 2006 and incorporated by +reference herein) +10.30 +Deckers Outdoor Corporation 2006 Equity Incentive Plan (incorporated herein by reference to Appendix A to the Registrant's Definitive Proxy Statement dated April 21, 2006 in connection with its 2006 Annual +Meeting of Stockholders) +10.31 +Rule 10b5-1 Selling Plan dated August 2, 2006, between Douglas B. Otto Trust and RBC Dain Rauscher Inc. (Exhibit 10.1 to the Registrant's Form 8-K filed on August 8, 2006 and incorporated +by reference herein) +63 +Table of Contents +Exhibit +10.32 +Rule 10b5-1 Selling Plan dated August 2, 2006, between The Ty Dylan Bard Otto Trust and RBC Dain Rauscher Inc. (Exhibit 10.2 to the Registrant's Form 8-K filed on August 8, 2006 and +incorporated by reference herein) +10.33 +Rule 10b5-1 Selling Plan dated August 2, 2006, between The Tiffany Jade Otto Trust and RBC Dain Rauscher Inc. (Exhibit 10.3 to the Registrant's Form 8-K filed on August 8, 2006 and +incorporated by reference herein) +10.34 +Amendment Number Eight to Amended and Restated Credit Agreement between Deckers Outdoor Corporation and Comerica Bank dated as of September 5, 2006 (Exhibit 10.1 to the Registrant's Form 8-K filed on +September 6, 2006 and incorporated by reference herein) +10.35 +First Amendment to Deckers Outdoor Corporation 2006 Equity Incentive Plan (incorporated herein by reference to Appendix A to the Registrant's Definitive Proxy Statement dated April 9, 2007 in connection with +its 2007 Annual Meeting of Stockholders) +#10.36 +Form of Restricted Stock Unit Award Agreement (Level 1) Under 2006 Equity Incentive Plan (Exhibit 10.2 to the Registrant's Form 8-K filed on May 11, 2007 and incorporated by reference +herein) +#10.37 +Form of Restricted Stock Unit Award Agreement (Level 2) Under 2006 Equity Incentive Plan (Exhibit 10.3 to the Registrant's Form 8-K filed on May 11, 2007 and incorporated by reference +herein) +#10.38 +Form of Stock Appreciation Rights Award Agreement (Level 1) Under 2006 Equity Incentive Plan (Exhibit 10.4 to the Registrant's Form 8-K filed on May 11, 2007 and incorporated by reference +herein) +#10.39 +Form of Stock Appreciation Rights Award Agreement (Level 2) Under 2006 Equity Incentive Plan (Exhibit 10.5 to the Registrant's Form 8-K filed on May 11, 2007 and incorporated by reference +herein) +10.40 +Amendment Number Nine to Amended and Restated Credit Agreement, dated as of June 4, 2007, among Deckers Outdoor Corporation and Comerica Bank (Exhibit 10.1 to the Registrant's Form 8-K filed on +June 4, 2007 and incorporated by reference herein) +#10.41 +Amendment dated December 19, 2007 to Senior Executive Employment Agreement between Deckers Outdoor Corporation and Zohar Ziv (Exhibit 10.1 to the Registrant's Form 8-K filed on December 19, 2007 +and incorporated by reference herein) +#10.42 +Form of Amendment dated February 28, 2008 to Senior Executive Employment Agreement with Deckers Outdoor Corporation (Exhibit 10.1 to the Registrant's Form 8-K filed on March 4, 2008 and +incorporated by reference herein) +#10.43 +Senior Executive Employment Agreement dated April 24, 2008 between Deckers Outdoor Corporation and Thomas R. Hillebrandt (Exhibit 10.1 to the Registrant's Form 8-K filed on April 24, 2008 and +incorporated by reference herein) +#10.44 +Form of Indemnification Agreement (Exhibit 10.1 to the Registrant's Form 8-K filed on June 2, 2008 and incorporated by reference herein) +10.45 +Waiver and Amendment No. 10 dated June 30, 2008 to Amended and Restated Credit Agreement between Deckers Outdoor Corporation and Comerica Bank (Exhibit 10.1 to the Registrant's Form 8-K filed on +July 3, 2008 and incorporated by reference herein) +64 +Table of Contents +Exhibit +#10.46 +Form of Amendment dated August 6, 2008 to Senior Executive Employment Agreement with Deckers Outdoor Corporation for Constance Rishwain, Colin Clark, Peter Worley and Thomas Hillebrandt (Exhibit 10.1 to the +Registrant's Form 8-K filed on August 11, 2008 and incorporated by reference herein) +#10.47 +Amendment dated August 6, 2008 to Senior Executive Employment Agreement with Deckers Outdoor Corporation for Angel Martinez (Exhibit 10.2 to the Registrant's Form 8-K filed on August 11, 2008 and +incorporated by reference herein) +#10.48 +Amendment dated August 6, 2008 to Senior Executive Employment Agreement with Deckers Outdoor Corporation for Zohar Ziv (Exhibit 10.3 to the Registrant's Form 8-K filed on August 11, 2008 and +incorporated by reference herein) +*#10.49 +Deckers Outdoor Corporation Deferred Stock Unit Compensation Plan, a Sub Plan under the Deckers Outdoor Corporation 2006 Equity Incentive Plan, adopted by the Board of Directors on December 12, 2008 +14.1 +Deckers Outdoor Corporation's Code of Ethics for Senior Officers, as approved by the Board of Directors on December 5, 2003. (Exhibit 14.1 to the Registrant's 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. +65 +Table of Contents +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) +/s/ ANGEL R. MARTINEZ +Angel R. Martinez +Chief Executive Officer +Date: +March 2, 2009 +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/ ANGEL R. MARTINEZ +Angel R. Martinez +Chairman of the Board, +President and Chief Executive Officer (Principal Executive Officer) +March 2, 2009 +/s/ THOMAS R. HILLEBRANDT +Thomas R. Hillebrandt +Chief Financial Officer +(Principal Financial and Accounting Officer) +March 2, 2009 +/s/ KARYN O. BARSA +Karyn O. Barsa +Director +March 2, 2009 +/s/ MAUREEN CONNERS +Maureen Conners +Director +March 2, 2009 +/s/ JOHN M. GIBBONS +John M. Gibbons +Director +March 2, 2009 +/s/ REX A. LICKLIDER +Rex A. Licklider +Director +March 2, 2009 +/s/ RUTH M. OWADES +Ruth M. Owades +Director +March 2, 2009 +66 +Table of Contents +/s/ JOHN G. PERENCHIO +John G. Perenchio +Director +March 2, 2009 +/s/ TORE STEEN +Tore Steen +Director +March 2, 2009 +67 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +INDEX TO CONSOLIDATED FINANCIAL STATEMENTS +AND FINANCIAL STATEMENT SCHEDULE +Page +Consolidated Financial Statements +Reports of Independent Registered Public Accounting Firm +F-2 +Consolidated Balance Sheets as of December 31, 2007 and 2008 +F-4 +Consolidated Statements of Operations for each of the years in the three-year period ended December 31, 2008 +F-5 +Consolidated Statements of Stockholders' Equity and Comprehensive Income for each of the years in the three-year period ended +December 31, 2008 +F-6 +Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2008 +F-7 +Notes to Consolidated Financial Statements +F-8 +Consolidated Financial Statement Schedule +Valuation and Qualifying Accounts for each of the years in the three-year period ended December 31, 2008 +F-33 +All +other schedules are omitted because they are not applicable or the required information is shown in the Company's consolidated financial statements or the related notes thereto. +F-1 +Table of Contents +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 (the Company) as listed in the accompanying index. In connection with +our audits of the consolidated financial statements, we also have audited the related consolidated financial statement schedule as listed in the accompanying index. These consolidated financial +statements and consolidated +financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and the consolidated 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 the Company as of December 31, 2007 and +2008, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2008, 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 +described in notes 1 and 6 to the consolidated financial statements, effective January 1, 2007, the Company adopted the provisions of Financial Accounting Standards +Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of SFAS No. 109 . As +described in note 1 to the consolidated financial statements, effective January 1, 2008, the Company adopted the provisions of FASB Statement of Financial Accounting Standards No.157, Fair Value Measurements, +for fair value measurements of all financial assets and financial liabilities and for fair value measurements of +non-financial items that are recognized or disclosed at fair value in the financial statements on a recurring basis. +We +also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of +December 31, 2008, 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 2, 2009 expressed an unqualified opinion on the effectiveness of the Company's internal control over +financial reporting. +/s/ KPMG LLP +Los +Angeles, California +March 2, 2009 +F-2 +Table of Contents +Report of Independent Registered Public Accounting Firm +The +Board of Directors and Stockholders +Deckers Outdoor Corporation: +We +have audited Deckers Outdoor Corporation and subsidiaries' (the Company) internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control — Integrated +Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The +Company's management is responsible for maintaining +effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on +Internal Control over Financial Reporting in Item 9A. Our responsibility is to express an opinion on the Company's 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, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our +audit also includes performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +A +company's 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 company's 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 company's 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, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, 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, 2007 and 2008, 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, 2008, and the related consolidated financial statement schedule, and our report dated March 2, 2009 expressed an unqualified opinion +on those consolidated financial statements and consolidated financial statement schedule. +/s/ KPMG LLP +Los +Angeles, California +March 2, 2009 +F-3 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +CONSOLIDATED BALANCE SHEETS +(amounts in thousands, except par value) +December 31, +2007 +2008 +ASSETS +Current assets: +Cash and cash equivalents +$ +54,525 +$ +176,804 +Restricted cash +250 +300 +Short-term investments +113,567 +17,976 +Trade accounts receivable, net of allowances of $8,355 and $10,706 in 2007 and 2008, respectively +72,209 +108,129 +Inventories +51,776 +92,740 +Prepaid expenses and other current assets +3,276 +3,691 +Deferred tax assets +5,964 +13,324 +Total current assets +301,567 +412,964 +Restricted cash +1,000 +700 +Property and equipment, at cost, net +10,579 +28,318 +Trademarks +35,852 +17,422 +Goodwill +18,030 +6,101 +Other intangible assets, net +249 +511 +Deferred tax assets +2,682 +17,447 +Other assets +73 +258 +Total assets +$ +370,032 +$ +483,721 +LIABILITIES AND STOCKHOLDERS' EQUITY +Current liabilities: +Trade accounts payable +$ +36,221 +$ +42,960 +Accrued payroll +12,170 +14,996 +Other accrued expenses +5,459 +12,676 +Income taxes payable +17,544 +24,577 +Total current liabilities +71,394 +95,209 +Long-term liabilities +— +3,847 +Commitments and contingencies (note 8) +Minority interest +— +413 +Stockholders' equity: +Common stock, $0.01 par value; authorized 20,000 shares; issued and outstanding 13,004 and 13,089 shares for 2007 and 2008, respectively +130 +131 +Additional paid-in capital +103,659 +115,214 +Retained earnings +194,567 +268,515 +Accumulated other comprehensive income +282 +392 +Total stockholders' equity +298,638 +384,252 +Total liabilities and stockholders' equity +$ +370,032 +$ +483,721 +See +accompanying notes to consolidated financial statements. +F-4 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF OPERATIONS +(amounts in thousands, except per share data) +Years Ended December 31, +2006 +2007 +2008 +Net sales +$ +304,423 +$ +448,929 +$ +689,445 +Cost of sales +163,692 +241,458 +384,127 +Gross profit +140,731 +207,471 +305,318 +Selling, general and administrative expenses +73,989 +101,918 +152,574 +Impairment loss +15,300 +— +35,825 +Income from operations +51,442 +105,553 +116,919 +Other (income) expense, net: +Interest income +(2,432 +) +(4,855 +) +(3,190 +) +Interest expense +350 +768 +(142 +) +Other, net +172 +(399 +) +(251 +) +(1,910 +) +(4,486 +) +(3,583 +) +Income before income taxes and minority interest +53,352 +110,039 +120,502 +Income taxes +22,743 +43,602 +46,631 +Minority interest +— +— +(77 +) +Net income +$ +30,609 +$ +66,437 +$ +73,948 +Net income per share: +Basic +$ +2.45 +$ +5.18 +$ +5.67 +Diluted +$ +2.38 +$ +5.06 +$ +5.60 +Weighted-average common shares: +Basic +12,519 +12,835 +13,042 +Diluted +12,882 +13,129 +13,195 +See +accompanying notes to consolidated financial statements. +F-5 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY +AND COMPREHENSIVE INCOME +(amounts in thousands) +Years Ended December 31, 2006, 2007 and 2008 +Common Stock +Accumulated +Other +Comprehensive +Income +Additional +Paid-in +Capital +Retained +Earnings +Total +Stockholders' +Equity +Comprehensive +Income +Shares +Amount +Balance at December 31, 2005 +12,432 +$ +124 +$ +76,788 +$ +97,521 +$ +207 +$ +174,640 +Share-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 +— +— +— +30,609 +— +30,609 +$ +30,609 +Foreign currency translation +adjustment +— +— +— +— +94 +94 +94 +Unrealized gain on short-term investments +— +— +— +— +92 +92 +92 +Total comprehensive income +— +$ +30,795 +Balance at December 31, 2006 +12,588 +126 +81,761 +128,130 +393 +210,410 +Share-based compensation expense +10 +— +6,554 +— +— +6,554 +Exercise of stock options +406 +4 +2,274 +— +— +2,278 +Excess tax benefit attributable to stock options +— +— +13,070 +— +— +13,070 +Net income +— +— +— +66,437 +— +66,437 +$ +66,437 +Foreign currency translation +adjustment +— +— +— +— +92 +92 +92 +Unrealized loss on short-term investments +— +— +— +— +(203 +) +(203 +) +(203 +) +Total comprehensive income +$ +66,326 +Balance at December 31, 2007 +13,004 +130 +103,659 +194,567 +282 +298,638 +Share-based compensation expense +11 +1 +10,192 +— +— +10,193 +Exercise of stock options +36 +— +404 +— +— +404 +Shares issued upon vesting +38 +— +— +— +— +— +Excess tax benefit attributable to stock options +— +— +2,989 +— +— +2,989 +Shares withheld for taxes +— +— +(2,030 +) +— +— +(2,030 +) +Net income +— +— +— +73,948 +— +73,948 +$ +73,948 +Foreign currency translation +adjustment +— +— +— +— +(47 +) +(47 +) +(47 +) +Unrealized gain on short-term investments +— +— +— +— +157 +157 +157 +Total comprehensive income +$ +74,058 +Balance at December 31, 2008 +13,089 +$ +131 +$ +115,214 +$ +268,515 +$ +392 +$ +384,252 +See accompanying notes to consolidated financial statements. +F-6 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF CASH FLOWS +(amounts in thousands) +Years Ended December 31, +2006 +2007 +2008 +Cash flows from operating activities: +Net income +$ +30,609 +$ +66,437 +$ +73,948 +Adjustments to reconcile net income to net cash provided by operating activities: +Depreciation, amortization and accretion +3,082 +3,516 +6,008 +(Recovery of) provision for doubtful accounts, net +(1,013 +) +(113 +) +2,233 +Write-down of inventory +3,543 +3,367 +4,785 +Gain on sale of short-term investments +— +— +(4 +) +Gain on disposal of property and equipment +(8 +) +(14 +) +(13 +) +Impairment loss +15,300 +— +35,825 +Deferred tax provision +(2,827 +) +(3,933 +) +(22,125 +) +Share-based compensation +2,079 +6,554 +10,193 +Minority interest +— +— +(77 +) +Changes in operating assets and liabilities: +Restricted cash +— +(1,250 +) +250 +Trade accounts receivable +(8,875 +) +(22,525 +) +(38,153 +) +Inventories +(2,544 +) +(22,768 +) +(45,749 +) +Prepaid expenses and other current assets +(835 +) +(674 +) +(415 +) +Other assets +(2 +) +(19 +) +(185 +) +Trade accounts payable +6,547 +15,168 +6,739 +Accrued expenses +3,112 +6,817 +9,049 +Income taxes payable +330 +10,491 +7,120 +Long-term liabilities +— +— +3,847 +Net cash provided by operating activities +48,498 +61,054 +53,276 +Cash flows from investing activities: +Purchases of short-term investments +(146,689 +) +(225,371 +) +(204,179 +) +Proceeds from sales of short-term investments +84,644 +176,135 +299,049 +Purchases of property and equipment +(5,543 +) +(6,385 +) +(22,337 +) +Proceeds from sales of property and equipment +42 +54 +119 +Acquisition of TSUBO, LLC +— +— +(5,936 +) +Net cash (used in) provided by investing activities +(67,546 +) +(55,567 +) +66,716 +Cash flows from financing activities: +Excess tax benefits from share-based compensation +1,280 +12,562 +2,900 +Cash received from issuances of common stock +1,341 +2,278 +404 +Cash paid for shares withheld for taxes +— +— +(1,527 +) +Contribution from minority interest holder of consolidated entity +— +— +490 +Net cash provided by financing activities +2,621 +14,840 +2,267 +Effect of exchange rates on cash +(67 +) +(57 +) +20 +Net change in cash and cash equivalents +(16,494 +) +20,270 +122,279 +Cash and cash equivalents at beginning of year +50,749 +34,255 +54,525 +Cash and cash equivalents at end of year +$ +34,255 +$ +54,525 +$ +176,804 +Supplemental disclosure of cash flow information: +Cash paid during the year for: +Income taxes +$ +23,972 +$ +24,293 +$ +58,741 +Interest +$ +— +$ +9 +$ +563 +Non-cash investing activity: +Accruals for purchases of property and equipment +$ +— +$ +— +$ +186 +Non-cash financing activity: +Accruals for shares withheld for taxes +$ +— +$ +— +$ +503 +See accompanying notes to consolidated financial statements. +F-7 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements +(1) The Company and Summary of Significant Accounting Policies +The Company and Basis of Presentation +The consolidated financial statements include the accounts of Deckers Outdoor Corporation and its wholly-owned subsidiaries and +majority-owned subsidiary (collectively referred to as the "Company"). Accordingly, all references herein to "Deckers Outdoor Corporation" or "Deckers" include the consolidated results of the Company +and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. +In +July 2008, the Company entered into a joint venture agreement with an affiliate of Stella International Holdings Limited ("Stella International") for the opening of retail +stores and wholesale +distribution for the UGG brand in China. Under this agreement, the Company opened its first UGG Australia concept store in Beijing in November. The joint venture is owned 51% by Deckers +and 49% by Stella International. The total initial investment in the joint venture was $1 million contributed by both parties in proportion to their respective ownership in the joint venture. +The estimated total investment by Deckers and Stella International, including contributed capital and loans, for the joint venture is expected to be approximately $5 million. Stella +International is also one of the Company's major manufacturers in China. +The +Company builds niche products into global lifestyle brands by designing and marketing innovative, functional and fashion-oriented footwear and accessories, developed for both high +performance outdoor activities and everyday casual lifestyle use. +Inventories +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. +Revenue Recognition +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, chargebacks, and bad debts are provided +for when related revenue is recorded. The Company presents revenue net of taxes collected from customers and remitted to governmental authorities. +Accounting for Long-Lived Assets +In accordance with Financial Accounting Standards Board (the "FASB") Statement of Financial Accounting Standards ("SFAS") +No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets" ("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. Intangible assets subject to amortization are amortized over their +respective estimated useful lives to their estimated residual values. The Company uses the straight-line method for depreciation and amortization +F-8 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +of +long-lived assets, because the Company cannot reliably determine the pattern in which the economic benefits of the assets will be consumed. +Goodwill and Other Intangible Assets +Intangible assets consist primarily of goodwill, trademarks, and distributor relationships arising from the application of purchase +accounting. Intangible assets with estimable useful lives are amortized and reviewed for impairment in accordance with SFAS 144. 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 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 +assessment of goodwill impairment involves valuing the Company's reporting units that carry goodwill. Currently, the Company's reporting units are the same as the Company's operating +segments. The first step is a comparison of the fair value of the reporting unit with its carrying amount. If the fair value exceeds the carrying amount, the goodwill is not impaired. If the fair +value of the reporting unit is below the carrying amount, then a second step is performed to measure the amount of the impairment, if any. +The +Company also evaluates the fair values of other intangible assets with indefinite useful lives in relation to the carrying values. If the fair value of the indefinite life intangible +exceeds its carrying amount, no impairment charge will be recognized. If the fair value of the indefinite life intangible is less than the carrying amount, the Company will record an impairment charge +to write-down the intangible asset to its fair value. +Determining +fair value of goodwill and other intangible assets is highly subjective and requires the use of estimates and assumptions. The Company uses estimates including estimated +future revenues, royalty rates, discount rates, and market multiples, among others. The Company also considers the following factors: +• the assets' ability to continue to generate income from operations and positive cash flow in future periods; +• any changes in legal ownership of rights to the assets; +• changes in consumer demand or acceptance of the related brand names, products or features associated with the assets; and +• other considerations that could affect fair value or otherwise indicate potential impairment. +In +addition, facts and circumstances could change, including further deterioration of general economic conditions or the retail environment, customers reducing orders in response to such +conditions and increased competition. These or other factors could result in changes to the calculation of fair value which could result in further impairment of the Company's remaining goodwill and +other intangible assets. Changes in any one or more of these estimates and assumptions could produce different financial results. +Depreciation and Amortization +Depreciation of property and equipment is calculated using the straight-line method based on estimated useful lives ranging +from two 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. +F-9 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +Fair Value of Financial Instruments +The fair values of the Company's cash and cash equivalents, restricted cash, 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. The fair values of the +Company's long-term liabilities, if recalculated based on current interest rates, would not significantly differ from the recorded amounts. +Stock Compensation +The Company accounts for share-based compensation in accordance with SFAS 123 (revised 2004), "Share-Based Payment" +(SFAS 123R). Under the fair value recognition provisions of SFAS 123R, share-based compensation cost is measured at the grant date based on the value of the award and is expensed ratably +over the vesting period. Determining the fair value of share-based awards at the grant date requires judgment, including estimating the percentage of awards that will be forfeited, stock volatility, +the expected life of the award, and other inputs. If actual forfeitures differ significantly from the estimates, share-based compensation expense and the Company's results of operations could be +materially impacted. +Use of Estimates +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, chargebacks and discounts, share-based compensation, impairment assessments +and charges, recoverability of deferred tax assets, depreciation and amortization, asset retirement obligations, income tax and litigation contingency reserves, fair value of financial instruments, +fair value of acquired intangibles, assets and liabilities. Actual results could differ materially from these estimates. +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 $2,506, $2,916 and $5,619 in 2006, 2007 and 2008, respectively, and are included in selling, general and administrative expenses in the consolidated statements of +operations. +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 2006, 2007 and 2008 were $17,315, $17,035 and $24,866, respectively. Included in prepaid and other current +assets at December 31, 2007 and 2008 were $1,005 and $1,475, respectively, related to prepaid advertising, marketing, and promotion expenses for programs to take place after December 31, +2007 and 2008, respectively. +Income Taxes +Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future +tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax +F-10 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +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. +Beginning +with the adoption of FASB Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes — an interpretation of SFAS +No. 109," as of January 1, 2007, the Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax +positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment +occurs. Prior to the adoption of FIN 48, the Company recognized the effect of income tax positions only if such positions were probable of being sustained. +Net Income per Share +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, 2006, 2007, and 2008, 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 ("NSUs"). +The +reconciliations of basic to diluted weighted-average common shares are as follows: +Year Ended December 31, +2006 +2007 +2008 +Weighted-average shares used in basic computation +12,519,000 +12,835,000 +13,042,000 +Dilutive effect of stock options and NSUs +363,000 +294,000 +153,000 +Weighted-average shares used for diluted computation +12,882,000 +13,129,000 +13,195,000 +All +options outstanding as of December 31, 2006, 2007, and 2008 were included in the computation of diluted income per share for 2006, 2007, and 2008, respectively. +The +Company excluded 76,000, zero, and 5,000 contingently issuable shares of common stock underlying its NSUs from the diluted income per share computation for the years ended +December 31, 2006, 2007, and 2008, respectively. The Company excluded all of its stock appreciation rights ("SARs") and restricted stock units ("RSUs") from the diluted income per share +computations for the years ended December 31, 2006, 2007 and 2008. The shares were excluded because the necessary conditions had not been satisfied for the shares to be issuable based on the +Company's performance through December 31, 2006, 2007 and 2008, respectively. +Foreign Currency Translation +The Company considers the U.S. dollar as its functional currency. Gains and losses that arise from exchange rate fluctuations on sales +and purchase transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. +F-11 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +Comprehensive Income +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." +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 six reportable segments are the UGG®, Teva®, Simple® and TSUBO® wholesale +divisions, the eCommerce business and the retail store business. The Company performs an annual analysis of its reportable segments under SFAS No. 131. Information related to the Company's +business segments is summarized in note 9. +Cash Equivalents +The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. +Short-term Investments +Short-term investments 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 from their original date and in less than one year are classified as +short-term investments, as the funds are used for working capital requirements. The fair values of the Company's short-term investments are shown in the table below. The +Company adopted SFAS No. 157 ("SFAS 157"), "Fair Value Measurements" effective January 1, 2008. The fair value for each of the assets in the table below, as of December 31, +2008, was determined based on quoted prices in active markets for identical assets, categorized as Level 1 inputs under SFAS 157. The Company has determined that the decline in fair +values are temporary, and therefore the unrealized losses have not been included in the consolidated statements of operations. +December 31, 2007 +December 31, 2008 +Cost +Unrealized +(Losses) +Gains +Fair +Value +Cost +Unrealized +Gains +Fair +Value +Certificates of deposit +$ +6,998 +$ +(21 +) +$ +6,977 +$ +— +$ +— +$ +— +Government and agency securities +3,992 +8 +4,000 +17,930 +46 +17,976 +Corporate bonds +33,558 +(98 +) +33,460 +— +— +— +Variable rate demand notes +47,830 +— +47,830 +— +— +— +Auction rate securities/DRDs +21,300 +— +21,300 +— +— +— +Total +$ +113,678 +$ +(111 +) +$ +113,567 +$ +17,930 +$ +46 +$ +17,976 +F-12 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +Reclassifications +Certain reclassifications have been made to the 2006 and 2007 amounts to conform to the 2008 presentation. +New Accounting Standards +On January 1, 2008, the Company adopted the provisions of SFAS 157 for fair value measurements of financial assets and +financial liabilities and for fair value measurements of nonfinancial items that are recognized or disclosed at fair value in the financial statements on a recurring basis. 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 adoption of this Statement did not have a material effect on the +Company's consolidated financial statements. FASB Staff Position ("FSP") FAS 157-2, "Effective Date of FASB Statement No. 157" delays the effective date of SFAS 157 only as it relates to +fair value measurement requirements for nonfinancial assets and liabilities that are not measured at fair value on a recurring basis to fiscal years beginning after November 15, 2008. In +accordance with FSP FAS 157-2, the Company has not applied SFAS 157 to its nonfinancial assets and liabilities, mainly intangible assets and property and equipment. On January 1, +2009, the Company will be required to apply the provisions of SFAS 157 to fair value measurements of nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair +value in the financial statements on a nonrecurring basis. The Company is in the process of evaluating the impact, if any, of applying these provisions on its 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 was effective for the Company beginning +January 1, 2008. The adoption of this statement did not have a material effect on the Company's consolidated financial statements. +In +December 2007, the FASB issued Statement No. 141 (revised 2007) ("SFAS 141R"), "Business Combinations." The objective of SFAS 141R is to improve the relevance, +representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a business combination and its effects. SFAS 141R requires +that all business combinations be accounted for by applying the acquisition method (previously referred to as the purchase method), and most identifiable assets, liabilities, noncontrolling interests, +and goodwill acquired in business combinations to be recorded at "full fair value." SFAS 141R also broadens the definition of a business and changes the treatment of direct acquisition-related +costs from being included in the purchase price to instead being generally expensed if they are not costs associated with issuing debt or equity securities. SFAS 141R is effective for the +Company beginning January 1, 2009, and will be applied prospectively to any new business combinations. +In +December 2007, the FASB issued Statement No. 160 ("SFAS 160"), "Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB +No. 51." The objective of SFAS 160 is to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated +financial statements by establishing accounting and reporting standards for noncontrolling interests in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 specifies that +noncontrolling interests (referred to as minority interests prior to SFAS 160) be reported as a separate +F-13 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +component +of equity, not as a liability or other item outside of equity, which changes the accounting for transactions with noncontrolling interest holders. SFAS 160 is effective for the +Company beginning January 1, 2009, and will be applied prospectively to all noncontrolling interests, including the Company's current minority interest and any others that arise before that +date. +In +March 2008, the FASB issued Statement No. 161 ("SFAS 161"), "Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB +Statement No. 133." The objective of SFAS 161 is to improve the transparency of financial reporting by requiring additional disclosures about an entity's derivative and hedging +activities. This Statement is effective for the Company beginning January 1, 2009, with early application encouraged. This Statement encourages, but does not require, comparative disclosures +for earlier periods at initial adoption. The Company will apply this Statement prospectively to any new derivative and hedging activities entered into on or after the effective date. +In +May 2008, the FASB issued Statement No. 162 ("SFAS 162"), "The Hierarchy of Generally Accepted Accounting Principles." The objective of SFAS 162 is to identify +the sources of generally accepted accounting principles ("GAAP") and provide a framework, or hierarchy, for selecting the principles to be used in preparing U.S. GAAP financial statements for +nongovernmental entities. This Statement was effective November 15, 2008. The adoption of this Statement did not have a material impact on the Company's consolidated financial statements. +In +October 2008, the FASB issued FASB Staff Position ("FSP") No. FAS 157-3, "Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not +Active." This FSP clarifies the application of SFAS 157 in an inactive market and illustrates how an entity would determine fair value when the market for a financial asset is not active. The +FSP was effective immediately and applies to prior periods for which financial statements have not been issued, including interim or annual periods ending on or before September 30, 2008. The +adoption of this FSP did not have a material effect on the Company's consolidated financial statements. +(2) Restricted Cash +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 was initiated in conjunction with the Company's purchase obligation with a movie production company for advertising services. As a result of +the agreement, during the year ended December 31, 2008, the Company paid $250 of the purchase obligation and the Company had $1,000 of restricted cash related to this obligation remaining as of +December 31, 2008. Film production was completed and the movie was released in March 2008. Accordingly, the Company recorded the full $1,250 obligation as advertising expense during the first +quarter of 2008. Of the total restricted cash related to this purchase obligation, $300 is short-term and is included as a current asset, and the remaining $700 is long-term +and is included as a noncurrent asset in the Company's consolidated balance sheet at December 31, 2008. The escrow agreement contains a disbursement schedule according to when the remaining +funds will be disbursed to the production company, which is as follows: +January 2009 +$ +300 +January 2010 +300 +January 2011 +200 +January 2012 +200 +$ +1,000 +F-14 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(3) Retirement Plan +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. Effective January 1, 2007, the Company matches 50% of an employee's contribution up to the greater of $2.4 or 6% of +their eligible compensation per year. Prior to January 1, 2007, the Company matched 50% of an employee's contribution up to $2.4 per year. Matching contributions totaled $148, $368, and $517 +during 2006, 2007, and 2008, respectively. In addition, the Company may also make discretionary profit sharing contributions to the plan. However, the Company did not make any profit sharing +contributions for the years ended December 31, 2006, 2007 or 2008. +(4) Property and Equipment +Property and equipment is summarized as follows: +December 31, +2007 +2008 +Machinery and equipment +$ +11,789 +$ +23,760 +Furniture and fixtures +2,465 +4,552 +Leasehold improvements +7,042 +16,705 +Construction in progress +1,000 +— +22,296 +45,017 +Less accumulated depreciation and amortization +11,717 +16,699 +Net property and equipment +$ +10,579 +$ +28,318 +(5) Notes Payable and Long-Term Debt +The Company's revolving credit facility with Comerica Bank (the "Facility") provides for a maximum availability of $20,000. Up to +$10,000 of borrowings may be in the form of letters of credit. The Facility bears interest at the lender's prime rate (3.25% at December 31, 2008) or, at the Company's option, at the London +Interbank Offered Rate, or LIBOR, (0.44% at December 31, 2008) 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 expires on June 1, 2010. At December 31, 2008, the Company had no outstanding +borrowings under the Facility and outstanding letters of credit aggregated $154. As a result, $19,846 was available under the Facility at December 31, 2008. +The +agreements underlying the Facility contain certain financial covenants, currently including a limitation on aggregate annual lease payments of $15,000, a quick ratio requirement of +at least 0.90:1.00, a minimum profitability requirement of $1,000 per fiscal quarter, a limitation on annual consolidated capital expenditures of $28,000, a minimum tangible net worth requirement of +$37,000 commencing with the fiscal year ended December 31, 2004 plus 75% of consolidated net profit on a cumulative basis, and a requirement that the Company's consolidated total liabilities to +consolidated effective tangible net worth ratio be greater than 1.50:1.00. The agreements also contain a prohibition on the payment of dividends. Due to the Teva impairment and resulting loss from +operations in the second quarter of 2008 (see note 11, Goodwill and Other Intangible Assets), the Company was in default because it had less than $1,000 of net income for the three months ended +June 30, 2008. The Company and Comerica Bank agreed to execute a +F-15 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +waiver +through June 30, 2008 of this technical default. At December 31, 2008, the Company was in compliance with all covenants. +(6) Income Taxes +Components of income taxes are as follows: +Federal +State +Foreign +Total +2006: +Current +$ +21,239 +$ +4,610 +$ +(279 +) +$ +25,570 +Deferred +(2,583 +) +(524 +) +280 +(2,827 +) +$ +18,656 +$ +4,086 +$ +1 +$ +22,743 +2007: +Current +$ +36,493 +$ +9,207 +$ +1,835 +$ +47,535 +Deferred +(2,695 +) +(630 +) +(608 +) +(3,933 +) +$ +33,798 +$ +8,577 +$ +1,227 +$ +43,602 +2008: +Current +$ +55,505 +$ +12,426 +$ +825 +$ +68,756 +Deferred +(18,129 +) +(3,768 +) +(228 +) +(22,125 +) +$ +37,376 +$ +8,658 +$ +597 +$ +46,631 +Foreign +(loss) income before income taxes was ($3,283), $7,248 and $7,155 during the years ended December 31, 2006, 2007 and 2008, respectively. +F-16 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +Actual income taxes differed from that obtained by applying the statutory federal income tax rate to income before income taxes as follows: +Years Ended December 31 +2006 +2007 +2008 +Computed "expected" income taxes +$ +18,835 +$ +38,526 +$ +42,212 +State income taxes, net of federal income tax benefit +3,255 +5,908 +5,904 +Other +653 +(832 +) +(1,485 +) +$ +22,743 +$ +43,602 +$ +46,631 +The +tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities at December 31, 2007 and 2008 are presented +below: +2007 +2008 +Deferred tax assets (liabilities), current: +Uniform capitalization adjustment to inventory +$ +1,848 +$ +3,937 +Bad debt and other reserves +3,916 +7,879 +State taxes +1,911 +2,641 +Prepaid expenses +(1,711 +) +(1,133 +) +Total deferred tax assets, current +5,964 +13,324 +Deferred tax assets (liabilities), noncurrent: +Amortization and impairment of intangible assets +(1,718 +) +9,340 +Depreciation of property and equipment +1,152 +1,463 +Share-based compensation +3,248 +6,453 +Net operating loss carryforwards +— +191 +Total deferred tax assets, noncurrent +2,682 +17,447 +Net deferred tax assets +$ +8,646 +$ +30,771 +In +order to fully realize the deferred tax assets, the Company will need to generate future taxable income of approximately $79,116. The deferred tax assets are primarily related to the +Company's domestic operations. Domestic taxable income for the years ended December 31, 2007 and 2008 was approximately $72,121 and $151,041, respectively. 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 in 2007 or 2008. +As +of December 31, 2008, withholding and U.S. taxes have not been provided on approximately $19,826 of unremitted earnings of 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 +July 2006, the FASB issued FIN 48, 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. When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject +to uncertainty about the merits of the +F-17 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +position +taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all +available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax +positions taken are not offset or aggregated with other positions. Tax positions that meet the more likely than not recognition threshold are measured as the largest amount of tax benefit that is more +than 50% likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described +above is reflected as a liability for unrecognized tax benefits in the accompanying consolidated balance sheets along with any associated interest and penalties that would be payable to the taxing +authorities upon examination. +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 were effective for the Company as of January 1, 2007, and there was no cumulative effect of adopting FIN 48. A reconciliation of the beginning and ending amount of total +unrecognized tax benefits is as follows: +Balance at December 31, 2007 +$ +3,588 +Gross increase related to current year tax positions +532 +Lapse of statute of limitations +(316 +) +Settlements +(1,535 +) +Balance at December 31, 2008 +$ +2,269 +The +amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate as of December 31, 2007 and 2008 was $1,869 and $2,085, respectively. Also, +included in the balance of unrecognized tax benefits at December 31, 2008 is $184 that, if recognized, would be recorded as an adjustment to deferred income taxes. Since the adoption of +FIN 48, the Company has accounted for interest and penalties generated by income tax contingencies as interest expense in the consolidated statements of operations. For the years ended +December 31, 2007 and 2008, $256 and $236, respectively, of interest generated by income tax contingencies has been recognized in the consolidated statements of operations. As of +December 31, 2007 and 2008, $449 and $234, respectively, of interest has been accrued in the consolidated balance sheets. +The +Company files income tax returns in the U.S. federal jurisdiction and various state, local and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. +federal, state, local or non-U.S. income tax examinations by tax authorities for years before 2004. The Internal Revenue Service ("IRS") commenced an examination of the Company's U.S. +income tax return for the year 2004 in the first quarter of 2007 and completed the audit during the second quarter of 2008. The IRS proposed an immaterial adjustment that did not result in a change to +the Company's effective tax rate. The adjustment was limited to the particular tax position taken in 2004. However, that same position was taken in subsequent years. Accordingly, as of +December 31, 2008, the Company has accounted for such subsequent positions under FIN 48. Subsequent to December 31, 2008, the IRS selected the Company's U.S. federal income tax +return for the year ended December 31, 2007 for examination. The Company does not know the timing of completion of the examination and if the examination will result in a material affect to the +Company's financial statements. It is reasonably possible that the Company's unrecognized tax benefit could change, however, the Company does not expect any change to be material. +F-18 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(7) Stockholders' Equity +In August 1995, the Company adopted the 1995 Employee Stock Purchase Plan (the "ESPP"). The ESPP was 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 had been employed by the Company +for at least six months. The ESPP provided for employees to purchase the Company's common stock at a discount below market value, as defined by the ESPP. The ESPP was terminated in September 2006, and +no new shares have been issued under the ESPP after that date. +In +May 2006, the Company adopted the 2006 Equity Incentive Plan, which was amended by Amendment No. 1 dated May 9, 2007 (as amended, 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 essential to the Company's continued progress. The 2006 Plan provides for +2,000,000 shares of the Company's 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 Company's 1993 Stock Incentive Plan, as amended (the "1993 Plan"), which was subsequently terminated for new +grants. +The +Company generally grants NSUs annually to key personnel. 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 +May 2007, the Company's Board of Directors, upon recommendation of its Compensation Committee, adopted two new types of long-term incentive award agreements under the 2006 +Plan for issuance to the Company's current and future executive officers. The new award types consist of SAR awards and RSU awards. These awards vest subject to certain long-term +performance objectives and certain long-term service conditions. Provided that these conditions are met, one-half of the SAR and RSU awards vest 80% on December 31, 2010 +and 20% on December 31, 2011, and one-half of the SAR and RSU awards vest 80% on December 31, 2015 and 20% on December 31, 2016. In accordance with SFAS 123R, +the Company recognizes expense only for those awards that management deems probable of achieving the performance and service objectives. Prior to the beginning of the three month period ended +September 30, 2008, the Company did not believe that the achievement of the performance objectives for the SAR and RSU awards with final vesting dates of December 31, 2016 was probable, +and therefore the Company had not recognized compensation expense for those awards. However, as of September 30, 2008, the Company determined that the achievement of the performance objectives +for those awards was probable based on updated projections of future sales and diluted earnings per share. As a result, the Company began recording compensation expense for those awards during the +three months ended September 30, 2008 with an adjustment of $1,531 recorded to recognize the cumulative to date compensation expense for those awards. +On +a quarterly basis, the Company generally grants fully-vested shares of its common stock to each of its outside directors. The fair value of such shares is expensed on the date of +issuance. +F-19 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +The +table below summarizes stock compensation amounts recognized in the consolidated statements of operations: +Year Ended December 31, +2006 +2007 +2008 +Compensation expense recorded for: +ESPP +$ +119 +$ +— +$ +— +Stock options +383 +512 +— +NSUs +1,195 +3,482 +4,344 +SARs +— +1,375 +3,856 +RSUs +— +290 +723 +Directors' shares +382 +895 +1,270 +Total compensation expense +2,079 +6,554 +10,193 +Income tax benefit recognized +(867 +) +(2,677 +) +(4,154 +) +Net compensation expense +$ +1,212 +$ +3,877 +$ +6,039 +In +the fourth quarter of 2007, one employee's status changed to nonemployee causing a modification of the awards resulting in recognition of the compensation expense equal to the fair +value of the award at the date of the modification for 3,000 unvested stock options and 10,000 nonvested stock units. Accordingly, the Company recognized $235 and $1,184 of compensation expense in +2007 for these stock options and NSUs, respectively. Under the terms of the agreement, the vesting provisions remained unchanged. +The +table below summarizes the total remaining unrecognized compensation cost related to nonvested awards and the weighted-average period over which the cost is expected to be recognized +as of December 31, 2008: +Unrecognized +Compensation +Cost +Weighted-Average +Remaining Vesting Period (Years) +NSUs +$ +8,349 +1.5 +SARs +11,541 +4.3 +RSUs +2,048 +4.3 +Total +$ +21,938 +A +summary of the activity under the 1993 Plan and 2006 Plan as of December 31, 2006, 2007 and 2008 and changes during the period are presented below. +F-20 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +Summary Details for 1993 Plan Share Options +Number of +Shares +Weighted- +Average Exercise Price +Weighted- +Average Remaining Contractual +Term (Years) +Aggregate +Intrinsic +Value +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 +Granted +— +— +Exercised +(406,000 +) +5.62 +Forfeited or expired +— +— +Outstanding at December 31, 2007 +60,000 +$ +12.97 +5.2 +$ +8,490 +Granted +— +— +Exercised +(36,000 +) +11.14 +Forfeited or expired +— +— +Outstanding at December 31, 2008 +24,000 +$ +15.81 +4.2 +$ +1,503 +Exercisable at December 31, 2008 +24,000 +$ +15.81 +4.2 +$ +1,503 +As +of December 31, 2007, all options were vested. The Company did not grant any stock options in 2006, 2007 or 2008. The total intrinsic value of options exercised during the +years ended December 31, 2006, 2007 and 2008, was $3,875, $33,300 and $3,731, respectively. +Nonvested Stock Units Issued Under the 2006 Plan +Number of +Shares +Weighted- +Average +Grant-Date +Fair Value +Nonvested at January 1, 2006 +156,000 +$ +30.76 +Granted +98,000 +53.18 +Vested +— +— +Forfeited +(15,000 +) +24.57 +Nonvested at December 31, 2006 +239,000 +$ +40.36 +Granted +3,000 +63.06 +Vested +— +— +Forfeited +(3,000 +) +40.30 +Nonvested at December 31, 2007 +239,000 +$ +40.64 +Granted +86,000 +127.77 +Vested +(57,000 +) +37.79 +Forfeited +(20,000 +) +52.32 +Nonvested at December 31, 2008 +248,000 +$ +70.55 +F-21 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +Stock Appreciation Rights Issued Under the 2006 Plan +Number of +Shares +Weighted- +Average Exercise Price +Weighted- +Average Remaining Contractual +Term (Years) +Aggregate +Intrinsic Value +Outstanding at January 1, 2007 +— +$ +— +— +$ +— +Granted +450,000 +80.20 +Exercised +— +— +Forfeited +(50,000 +) +80.20 +Outstanding at December 31, 2007 +400,000 +$ +80.20 +11.8 +$ +29,944 +Granted +— +— +Exercised +— +— +Forfeited +— +— +Outstanding at December 31, 2008 +400,000 +$ +80.20 +10.8 +$ +— +Exercisable at December 31, 2008 +— +$ +— +— +$ +— +Expected to vest and exercisable at December 31, 2008 +288,000 +$ +80.20 +10.4 +$ +— +The +maximum contractual term is 10 and 15 years from the date of grant for those SARs with final vesting dates of December 31, 2011 and December 31, 2016, +respectively. The number of SARs expected to vest is based on the probability of achieving certain performance conditions and is also reduced by estimated forfeitures. Approximately 34,000 and 78,000 +of the SAR awards with final vesting dates of December 31, 2011 and December 31, 2016, respectively, were estimated to be forfeited due to failure to meet the long-term +service conditions and were consequently excluded from the expected to vest number above. +F-22 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +For the SARs that are expected to vest on December 31, 2010 and December 31, 2011, the per share fair value of SARs granted was $50.40 on the date +of grant using the Black-Scholes pricing model with the following weighted-average assumptions: expected dividend yield of 0%, expected stock volatility of 59.0%, risk-free interest rate +of 4.6%, and an expected life of 6.9 years. For the SARs that are expected to vest on December 31, 2015 and December 31, 2016, the per share fair value of SARs granted was $68.90 +on the date of grant using the Black-Scholes pricing model with the following weighted-average assumptions: expected dividend yield of 0.0%, expected stock volatility of 76.4%, risk-free +interest rate of 4.6%, and an expected life of 11.9 years. +Restricted Stock Units Issued Under the 2006 Plan +Number of +Shares +Weighted- +Average +Grant-Date +Fair Value +Nonvested at January 1, 2007 +— +$ +— +Granted +60,000 +80.20 +Vested +— +— +Forfeited +(7,000 +) +80.20 +Nonvested at December 31, 2007 +53,000 +$ +80.20 +Granted +— +— +Vested +— +— +Forfeited +— +— +Nonvested at December 31, 2008 +53,000 +$ +80.20 +Expected to vest at December 31, 2008 +38,000 +$ +80.20 +The +number of RSUs expected to vest is based on the probability of achieving certain performance conditions and is also reduced by estimated forfeitures. Approximately 5,000 and 10,000 +of the RSUs awards with final vesting dates of December 31, 2011 and December 31, 2016, respectively, were estimated to be forfeited due to expected failure to meet the +long-term service conditions. +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. This stockholder rights plan expired pursuant to its terms on November 11, 2008. +F-23 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(8) Commitments and Contingencies +The Company leases office, distribution and retail facilities under operating lease agreements, which expire through January 2024. 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: +2009 +$ +11,094 +2010 +11,156 +2011 +11,281 +2012 +10,982 +2013 +4,661 +Thereafter +19,924 +$ +69,098 +Rent +expense is recorded using the straight-line method to account for scheduled rental increases or rent holidays. Lease incentives for tenant improvement allowances are +recorded as reductions of rent expense over the lease term. Total rent expense for the years ended December 31, 2006, 2007 and 2008 was approximately $3,776, $5,509 and $11,096, respectively. +The +Company has $98,115 of outstanding purchase orders with its manufacturers as of December 31, 2008. In addition, the Company has entered into agreements of $1,737 for +promotional activities and other services. Future commitments under these purchase orders and other agreements are as follows: +Year ending December 31: +2009 +$ +98,668 +2010 +534 +2011 +325 +2012 +325 +Thereafter +— +$ +99,852 +In +addition to the amounts in the tables above, the Company has entered into other off-balance sheet arrangements. The Company agreed to make loans to its joint venture with +Stella International, should the need arise. The estimated total loans by Deckers and Stella International is expected to be approximately $4,000 contributed by both parties in proportion to their +respective ownership in the joint venture. The Company also entered an agreement to make potential future earn-out payments relating to its May 2008 acquisition of TSUBO, LLC +("TSUBO"). The potential earn-out is based on the amount, if any, that sales of TSUBO products exceed certain base revenue levels for each year from 2008 to 2012. See note 12 for +further discussion on the TSUBO acquisition. These amounts were excluded from the tables above as the total payments were not known at the time of the acquisition since they are based on future +revenue. At December 31, 2008, the Company did not accrue any earn-out payments for 2008. +The +Company has certain tax obligations to authorities in China for one of the Company's foreign subsidiaries. The Company has paid certain amounts against these obligations and has also +negotiated certain reductions of previously accrued amounts. In accordance with SFAS No. 5, "Accounting for Contingencies," as of December 31, 2008, management has determined the +remaining liability for such matters to be approximately $1,600, and has accrued this amount in other accrued expenses. The remaining liability may continue to change in future periods as a result of +negotiations with the taxing +F-24 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +authorities +and the accrual of interest charges that may continue to be incurred through settlement. Because these matters relate in part to employment related tax matters, there is a level of +subjectivity utilized in the interpretation of the application of tax and employment related laws and regulations. Accordingly, the amounts as ultimately negotiated and settled may differ from the +Company's estimates. +In +September 2008, the Company entered into a pilot services agreement whereby a third party is providing the Company with selling services. In connection with this agreement, the +Company has guaranteed the third party's obligations to a merchant services provider. The Company may terminate this guarantee upon thirty days written notice to the merchant services provider. The +agreement does not provide for a maximum payout; however, management believes the likelihood of any payments under this guarantee is remote and would have an immaterial effect on the consolidated +financial statements. The Company determined this based upon an analysis of the third party's historical financial data and sales and returns projections. +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 Company's financial position or results of operations. The Company indemnifies its licensees, distributors and certain promotional partners in connection with claims alleging +use of the Company's licensed intellectual property. The terms of the agreements range up to five years initially and do not provide for a limitation on the maximum potential future payments. +Management believes the likelihood of any payments is remote and would be immaterial. The Company determined the risk was low based on a prior history of no claims. The Company is not currently +involved in any indemnification matters in regards to its intellectual property. +Subsequent +to December 31, 2008, the Company entered into a contract requiring minimum purchase commitments of sheepskin of approximately $64,000 that Deckers' affiliates, +manufacturers, factories and other agents (each or collectively, a "Buyer") must make on or before December 31, 2010. This contract may result in an unconditional purchase obligation, if a +Buyer does not meet the minimum purchase requirements. In the event that a Buyer does not purchase such minimum commitments on or before December 31, 2010, the Company is required to purchase +any remaining amounts on or before December 31, 2010. The contract does not permit net settlement. The Company's sheepskin purchases by third party factories supplying UGG product to the +Company during 2007 and 2008 exceeded this minimum purchase commitment, and the Company expects such purchases will exceed these levels in 2009 and 2010. Therefore, management believes the likelihood +of any payments under this contractual arrangement is remote and would have an immaterial effect on the consolidated financial statements. The Company determined this based upon its historical and +projected sales and inventory purchases. +(9) Business Segments, Concentration of Business, and Credit Risk and Significant Customers +The Company's accounting policies of the segments below are the same as those described in the summary of significant accounting +policies, except that the Company does not allocate interest, income taxes, non-operating income and expenses or certain unusual items to segments. The Company evaluates segment +performance based on net sales and income or loss from operations. The Company's reportable segments include the strategic business units responsible for the worldwide wholesale operations of each of +its brands, its eCommerce business and its retail store business. The wholesale operations of each brand are managed separately because each requires different marketing, research and development, +design, sourcing and sales strategies. The eCommerce and retail store segments are managed separately because they are direct to consumer sales, while the brand segments are wholesale sales. The +income or loss 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, +F-25 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +sales, +commissions, bad debts, depreciation, amortization and the costs of employees and their respective expenses that are 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 centers, certain executive compensation, accounting and finance, legal, information +technology, credit and collections, human resources and facilities costs, among others. The gross profit derived from the sales to third parties of the eCommerce segment and the retail store segment +is separated into two components: (i) the wholesale profit is included in the operating income or loss of each of the brands' wholesale segments, and (ii) the retail profit is included +in the operating income or loss of the eCommerce segment and the retail store segment. +In +May 2008, the Company acquired 100% of the ownership interest of TSUBO, LLC. The wholesale operations of the TSUBO brand is a reportable segment presented in the figures below. +F-26 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +Business +segment information is summarized as follows: +2006 +2007 +2008 +Net sales to external customers: +UGG wholesale +$ +182,369 +$ +291,908 +$ +483,781 +Teva wholesale +75,283 +82,003 +80,882 +Simple wholesale +10,903 +11,163 +13,909 +TSUBO wholesale +— +— +3,649 +eCommerce +28,886 +45,473 +68,769 +Retail stores +6,982 +18,382 +38,455 +$ +304,423 +$ +448,929 +$ +689,445 +Income (loss) from operations: +UGG wholesale +$ +72,908 +$ +119,193 +$ +187,824 +Teva wholesale(1) +3,829 +21,121 +(18,688 +) +Simple wholesale +(2,472 +) +(2,077 +) +(2,262 +) +TSUBO wholesale(2) +— +— +(4,842 +) +eCommerce +8,774 +14,502 +22,364 +Retail stores +1,180 +3,194 +6,649 +Unallocated overhead +(32,777 +) +(50,380 +) +(74,126 +) +$ +51,442 +$ +105,553 +$ +116,919 +Depreciation and amortization: +UGG wholesale +$ +76 +$ +221 +$ +243 +Teva wholesale +484 +527 +346 +Simple wholesale +56 +127 +161 +TSUBO wholesale +— +— +80 +eCommerce +149 +142 +178 +Retail stores +168 +369 +790 +Unallocated overhead +2,149 +2,130 +3,484 +$ +3,082 +$ +3,516 +$ +5,282 +Capital expenditures: +UGG wholesale +$ +84 +$ +473 +$ +88 +Teva wholesale +590 +56 +25 +Simple wholesale +60 +305 +184 +TSUBO wholesale +— +— +84 +eCommerce +110 +172 +542 +Retail stores +1,830 +1,861 +7,323 +Unallocated overhead +2,869 +3,518 +14,091 +$ +5,543 +$ +6,385 +$ +22,337 +Total assets from reportable segments: +UGG wholesale +$ +93,554 +$ +158,726 +Teva wholesale +78,612 +43,999 +Simple wholesale +5,648 +7,693 +TSUBO wholesale +— +5,211 +eCommerce +491 +2,726 +Retail stores +5,413 +18,482 +$ +183,718 +$ +236,837 +(1) Included +in Teva income (loss) from operations in 2006 and 2008 are impairment losses of $15,300 and $32,329, repectively (see note 11). +(2) Included +in TSUBO loss from operations in 2008 is an impairment loss of $3,496 (see note 11). +F-27 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +The assets allocable to each reporting segment generally include accounts receivable, inventory, intangible assets and certain other assets that are specifically +identifiable with one of the Company's business segments. Unallocated corporate assets are the assets not specifically related to one of the segments and generally include the Company's cash and cash +equivalents, short-term investments, deferred tax assets, and various other assets shared by the Company's segments. +Reconciliations +of total assets from reportable segments to the consolidated financial statements are as follows: +2007 +2008 +Total assets from reportable segments +$ +183,718 +$ +236,837 +Unallocated deferred tax assets +8,646 +30,771 +Other unallocated corporate assets +177,668 +216,113 +Consolidated total assets +$ +370,032 +$ +483,721 +At +December 31, 2008 the Company had cash and cash equivalents and short-term investments of $194,780. A portion of these are held as cash in operating accounts that +are with third party financial institutions. These balances, at times, exceed the Federal Deposit Insurance Corporation ("FDIC") insurance limits. While the Company regularly monitors the cash +balances in its operating accounts and adjusts the balances as appropriate, these cash balances could be impacted if the underlying financial institutions fail or are subject to other adverse +conditions in the financial markets. As of December 31, 2008, the Company has experienced no loss or lack of access to cash in its operating accounts. +The +remainder of the Company's cash equivalents and short-term investments are invested in interest bearing funds managed by third party investment management institutions. +These investments include U.S. treasuries and government agencies, money market funds, and municipal bonds, among other investments. Certain of these investments are subject to general credit, +liquidity, market, and interest rate risks. While the Company does not hold any investments whose value is directly correlated to mortgage debt, investment risk has been and may further be exacerbated +by U.S. mortgage defaults and credit and liquidity issues, which have affected various sectors of the financial markets. As of December 31, 2008, the Company has experienced no material loss or +lack of access to its cash and cash equivalents and short-term investments. +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 12.6%, 13.9%, and 15.7% of the Company's total net sales for the years ended December 31, 2006, 2007 and 2008, +respectively. As of December 31, 2007 and 2008, substantially all long-lived assets were held in the U.S. 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 16.7%, 17.0%, and 15.0% of the Company's net sales in 2006, 2007 and 2008, respectively. This customer's revenues are generated from the UGG, Teva, Simple, and TSUBO +wholesale segments. No other customer accounted for more than 10% of net sales in the years ended December 31, 2006, 2007 or 2008. As of December 31, 2007 and 2008, the Company had one +customer representing 34.2% and 34.1% of net trade accounts receivable, respectively. +F-28 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +The +Company's production and sourcing is concentrated in China, New Zealand and Australia, with the vast majority of its production at six independent contractor factories in China. The +Company's operations are subject to the customary risks of doing business abroad, including, but not limited to, currency fluctuations, customs duties, and related fees, various import controls and +other nontariff barriers, restrictions on the transfer of funds, labor unrest and strikes and, in certain parts of the world, political instability. +(10) Quarterly Summary of Information (Unaudited) +Summarized unaudited quarterly financial data are as follows: +2007 +March 31 +June 30 +September 30 +December 31 +Net sales +$ +72,575 +$ +52,730 +$ +129,381 +$ +194,243 +Gross profit +33,417 +21,689 +58,715 +93,650 +Net income +9,451 +2,267 +19,330 +35,389 +Net income per share: +Basic +$ +0.75 +$ +0.18 +$ +1.49 +$ +2.72 +Diluted +$ +0.73 +$ +0.17 +$ +1.47 +$ +2.69 +2008 +March 31 +June 30 +September 30 +December 31 +Net sales +$ +97,535 +$ +91,116 +$ +197,288 +$ +303,506 +Gross profit +46,148 +36,340 +85,340 +137,490 +Net income (loss)* +11,294 +(3,820 +) +26,014 +40,460 +Net income (loss) per share: +Basic +$ +0.87 +$ +(0.29 +) +$ +1.99 +$ +3.10 +Diluted +$ +0.86 +$ +(0.29 +) +$ +1.97 +$ +3.07 +* Included +in net income (loss) in the quarters ended June 30, 2008 and December 31, 2008 are impairment losses of $14,900 and $20,925, +respectively (see note 11). +F-29 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(11) Goodwill and Other Intangible Assets +The Company's goodwill and other intangible assets are summarized as follows: +Gross +Carrying +Amount +Weighted- +Average +Amortization +Period +Accumulated +Amortization +Net +Carrying +Amount +As of December 31, 2007 +Amortizable intangible assets +$ +1,752 +6 years +$ +1,503 +$ +249 +Nonamortizable intangible assets: +Trademarks +35,852 +Goodwill +18,030 +$ +55,634 +As of December 31, 2008 +Amortizable intangible assets +$ +2,222 +6 years +$ +1,711 +$ +511 +Nonamortizable intangible assets: +Trademarks +17,422 +Goodwill +6,101 +$ +25,745 +Changes +in the Company's trademarks, goodwill, and other intangible assets are summarized as follows: +Trademarks +Goodwill +Amortiziable +Intangible +Assets +Balance at December 31, 2007, gross +$ +35,852 +$ +18,030 +$ +1,752 +Additions through current year acquisition +1,970 +3,496 +470 +Impairment loss +(20,400 +) +(15,425 +) +— +Balance at December 31, 2008, gross +17,422 +6,101 +2,222 +Accumulated amortization +— +— +(1,711 +) +Balance at December 31, 2008, net +$ +17,422 +$ +6,101 +$ +511 +In +May 2008, the Company acquired 100% of the ownership interest of TSUBO, LLC (see note 12). The preliminary purchase price allocation, subject to a one year adjustment +period, as of December 31, 2008 resulted in the recognition of goodwill of $3,496, nonamortizable intangible assets of $1,970 related to the TSUBO trademarks and trade name, as well as $470 of +amortizable intangible assets related to TSUBO brand distributor relationships. As discussed below, all of the TSUBO goodwill was written off as of December 31, 2008. The amortizable intangible +assets are being amortized over four years, and the remaining balance, net of accumulated amortization, was $392 as of December 31, 2008. +In +accordance with SFAS 142, the Company performed its annual impairment test of nonamortizable intangible assets as of December 31, 2007 and 2008, and determined that +there was no impairment as of December 31, 2007. However, as of June 30, 2008, the Company did not reach its 2008 Teva brand period to date sales targets and reduced its +long-term forecast for Teva brand sales. These factors were indicators that the Teva goodwill and intangible assets were possibly impaired. As a result, the Company conducted an interim +impairment evaluation of the Teva goodwill and intangible assets as of June 30, 2008 and +F-30 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +concluded +that the Teva goodwill was not impaired, but the fair value of the Teva trademarks was lower than the carrying amount. Therefore, the Company recognized an impairment loss of $14,900 on the +Teva trademarks during the three months ended June 30, 2008. At the time of its annual impairment testing, due in part to the continued decline in the economy in the second half of 2008, the +Company +reduced its long-term forecast for Teva brand sales. In addition, as of December 31, 2008, the Company experienced a significant decline in its market capitalization due to declines +in market multiples. As a result of the reduced sales forecast and the decline in the Company's market capitalization, the Company concluded that the fair value of its Teva trademarks and goodwill +were below their respective carrying amounts. Further, due to the decline in the Company's market capitalization, the Company concluded that the fair value of its TSUBO goodwill was also below its +carrying amount. Therefore, the Company recognized an impairment loss in the fourth quarter of $5,500 on the Teva trademarks and $15,425 on goodwill, which was the entire balance of both Teva and +TSUBO goodwill. The impairment loss is included in a separate line item within income from operations, and as a part of the Teva and TSUBO reportable segments, respectively. +As +of December 31, 2007 and June 30, 2008, the Company evaluated its Teva goodwill utilizing a combination of a market approach and an income approach. The market approach +used a market multiples methodology and a comparable transactions methodology. The income approach used a discounted cash flow methodology which involved EBITDA exit multiple and Gordon Growth +approaches. The Teva trademarks were evaluated using a relief from royalty method, primarily based on management's forecasted sales, a royalty rate, and discount rates. +As +of December 31, 2008, the Company evaluated the Teva goodwill utilizing the same approach that was used as of June 30, 2008 except comparable transactions were not used. +Management determined there were insufficient comparable transactions in the marketplace at that time due to significant increased uncertainty in the market during the six months ended +December 31, 2008. For the TSUBO goodwill, the Company used the same method as the Teva goodwill evaluation as of December 31, 2008, except that management deemed a revenue exit multiple +approach was a more reliable indicator of fair value than the EBITDA exit multiple approach for the TSUBO brand based on the projected growth, size, and profitability of TSUBO relative to the +comparable companies. The Teva and TSUBO trademarks were evaluated under the same method used for the Teva trademarks as of June 30, 2008. +As +of December 31, 2007 and 2008, the Company also evaluated its UGG goodwill and trademarks. Based on the carrying amounts of the UGG goodwill, trademarks, and net assets, the +brand's 2007 and 2008 sales and operating results, and the brand's long-term forecasts of sales and operating results as of December 31, 2007 and 2008, the Company concluded that +the carrying amounts of the UGG goodwill and trademarks were not impaired. +Aggregate +amortization expense for amortizable intangible assets using the straight-line amortization method for the years ended December 31, 2006, 2007 and 2008 was +$310, $268 and $208 respectively. Estimated amortization expense for existing intangible assets for future periods is: $237 in 2009, $118 in 2010, $117 in 2011, $39 in 2012, and $0 thereafter. +(12) Business Combinations +In May 2008, the Company acquired 100% of the ownership interests of TSUBO, LLC. The purchase price was $5,936 in cash plus a +potential future earn-out, subject to customary working capital adjustments. The potential earn-out is based on the amount, if any, that revenue from sales of TSUBO products +exceed certain base revenue levels for each year from 2008 to 2012. There is no maximum to this potential earn-out. The earn-out for each year, if any, will be payable within +sixty days after the end of each year. +F-31 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +The +substance of this earn-out is to provide compensation for services, and therefore will be recognized as expense in the appropriate periods. The results of operations of TSUBO from +May 6, 2008 through December 31, 2008 are included in the Company's consolidated financial statements. +The +Company made this acquisition because it believes that the TSUBO brand complements its existing portfolio of lifestyle brands, and that the TSUBO brand's target consumer, product +selection, industry niche and relative under-penetration in the marketplace make it a good fit for the Company. The preliminary purchase price allocation, subject to a one year adjustment period, +resulted in the recognition of $3,496 of goodwill as of December 31, 2008, and was determined, in part, based on the Company's expectation that it can leverage its design, marketing and +distribution capabilities to grow the TSUBO brand into a meaningful business over the next few years, consistent with the Company's mission to build niche brands into global market leaders. As of +December 31, 2008, all of this goodwill was impaired and consequently written-off (see note 11). The entire amount of goodwill written-off is expected to be +deductible for tax purposes over 15 years. +F-32 +Schedule II +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +VALUATION AND QUALIFYING ACCOUNTS +Three Years Ended December 31, 2006, 2007 and 2008 +Balance at +Beginning +of Year +Additions +Deductions +Balance at +End of Year +Year ended December 31, 2006: +Allowance for doubtful accounts(1) +$ +2,574 +$ +(1,054 +) +$ +785 +$ +735 +Allowance for sales discounts(2) +1,710 +8,600 +7,808 +2,502 +Allowance for sales returns(3) +2,865 +6,419 +7,666 +1,618 +Chargeback allowance(4) +1,235 +220 +210 +1,245 +Year ended December 31, 2007: +Allowance for doubtful accounts(1) +$ +735 +$ +(113 +) +$ +243 +$ +379 +Allowance for sales discounts(2) +2,502 +15,126 +14,410 +3,218 +Allowance for sales returns(3) +1,618 +12,730 +10,661 +3,687 +Chargeback allowance(4) +1,245 +(130 +) +44 +1,071 +Year ended December 31, 2008: +Allowance for doubtful accounts(1) +$ +379 +$ +2,233 +$ +130 +$ +2,482 +Allowance for sales discounts(2) +3,218 +19,193 +18,170 +4,241 +Allowance for sales returns(3) +3,687 +5,506 +6,858 +2,335 +Chargeback allowance(4) +1,071 +635 +58 +1,648 +(1) The +additions to the allowance for doubtful accounts represent the estimates of our bad debt expense based upon the factors for which we evaluate the +collectability of our accounts receivable. Deductions are the actual write offs of the receivables. In 2006 and 2007, additions were negative because the Company collected on accounts that were deemed +to be potentially uncollectible as of December 31, 2006 and 2007, respectively. +(2) The +additions to the reserve for sales discounts represent estimates of discounts to be taken by our customers based upon the amount of available +outstanding terms discounts in the year-end aging. Deductions are the actual discounts taken by our customers. +(3) The +additions to the allowance for returns represent estimates of returns based upon our historical returns experience. Deductions are the actual returns of +products. +(4) The +additions to the chargeback allowance represent chargebacks taken in the respective year as well as an estimate of chargebacks related to sales in the +respective reporting period that will be taken subsequent to the respective reporting period. Deductions are the actual chargebacks written off against outstanding accounts receivable. +See +accompanying report of independent registered public accounting firm. +F-33 +QuickLinks +Item 1. Business. +Item 1A. Risk Factors. +Item 1B. Unresolved Staff Comments. +Item 2. Properties. +Item 3. Legal Proceedings. +Item 4. Submission of Matters to a Vote of Security Holders. +Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. +Item 6. Selected Financial Data +Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation. +Item 7A. Quantitative and Qualitative Disclosures about Market Risk. +Item 8. Financial Statements and Supplementary Data. +Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. +Item 9A. Controls and Procedures. +Item 9B. Other Information. +Item 10. Directors, Executive Officers and Corporate Governance. +Item 11. Executive Compensation. +Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. +Item 13. Certain Relationships and Related Transactions, and Director Independence. +Item 14. Principal Accounting Fees and Services. +Item 15. Exhibits, Financial Statement Schedules. \ No newline at end of file diff --git a/raw/filings/0000910521/2008/0001047469-09-002106/filing_metadata.csv b/raw/filings/0000910521/2008/0001047469-09-002106/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..284d4e5a771a494545305ed005b466edcd1f2a20 --- /dev/null +++ b/raw/filings/0000910521/2008/0001047469-09-002106/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000910521,DECK,DECKERS OUTDOOR CORP,10-K,2009-03-02,2008-12-31,2009-03-02T20:19:30.000Z,0001047469-09-002106,a2190215z10-k.htm,10-K,1311507,0,0,https://www.sec.gov/Archives/edgar/data/910521/000104746909002106/a2190215z10-k.htm,https://www.sec.gov/Archives/edgar/data/910521/000104746909002106/,2008,2008,1 diff --git a/raw/filings/0000910521/2008/0001047469-09-002106/item1.txt b/raw/filings/0000910521/2008/0001047469-09-002106/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..73f979ba06ce6a758107018c5fb3da0f798708dc --- /dev/null +++ b/raw/filings/0000910521/2008/0001047469-09-002106/item1.txt @@ -0,0 +1,641 @@ +Item 1. Business. +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 and accessories. +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, including accessories such as +handbags, headwear, packs and outerwear, through quality domestic retailers and international distributors and directly to end-user consumers, both domestically and internationally, +through our websites, call centers, retail concept stores 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 four proprietary brands: +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 reception, driven by consistent introductions of new styles, introductions of UGG products in the fall and spring seasons and geographic distribution expansion. We +carefully manage the distribution of our UGG products within high-end specialty and department store retailers in order to best reach our target consumers, preserve the UGG brand's retail +channel positioning and maintain the UGG brand's 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. In recent years, sales of UGG products have benefited from significant national media +attention and celebrity endorsement through our marketing programs and product placement activities, raising the profile of our UGG brand as a luxury comfort brand. We have further supported the UGG +brand's market positioning by expanding the selection of styles available in order to build consumer interest in +our UGG brand collection. We also remain committed to limiting distribution of UGG products to high-end retail channels. +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 product line has since +expanded to include casual open-toe and closed-toe footwear, including adventure travel shoes, outdoor multi-sport shoes, trail +3 +Table of Contents +running +shoes, amphibious footwear, light hikers and other rugged outdoor footwear styles and accessories. +From +1985 until November 2002, we sold our Teva products under a license agreement with the brand's founder. In November 2002, we acquired all of the Teva worldwide assets, including the +Teva eCommerce 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. +In +recent seasons, we have focused on regaining the leadership position in the performance sandal market, while broadening our performance platform to include other outdoor activities +such as multi-sport, trail running and light hiking to lessen our overall reliance on sandal sales. In 2008, we introduced a modest assortment of fall and winter footwear. We are following that up in +fall 2009 with a more complete collection of seasonally appropriate performance and lifestyle products for men, women and children. This includes light hikers with eVent waterproof membranes and +Vibram rubber outsoles, as well as women's lifestyle boots in both leather and suede with warm, faux fur linings. In the future, we intend to selectively expand our activity in the outdoor performance +and lifestyle arenas. +Simple®. Simple Shoes began in 1991 as an alternative to all the over-built, over-priced, and over-hyped products in the +marketplace. The brand's legacy was built on its original sneaker design, the Old School Sneaker, and grew to include successful sandal and casual products. In 2005, as a response to the massive +amount of waste produced by the footwear industry, the Simple brand launched a new collection of sustainable footwear called Green Toe®. Green Toe represents a revolutionary shift in +thinking about footwear by building a shoe from the inside out using sustainable materials and processes. The Simple brand's mission is to be 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 as well as making products. We +are committed to our +goal of making Simple products 100% sustainable; thus, minimizing the ecological footprint left on the planet. +TSUBO®. In May 2008, we acquired 100% of the ownership interests of TSUBO, LLC ("TSUBO"). TSUBO, meaning pressure point +in Japanese, was a company +co-founded by a British designer in 1998. The TSUBO brand was marketed as a high-end casual footwear company with products for men and women. The brand is the synthesis of +ergonomics and style, with a full line of sport and dress casuals, boots, sandals and heels constructed to provide consumers with contemporary footwear that incorporates style, function and maximum +comfort. TSUBO products are sold throughout the United States primarily at department stores and independent shoe stores, as well as several countries worldwide, including Canada, France, Australia, +and Japan. +We +believe that the TSUBO brand represents an ideal complement to our existing portfolio of lifestyle brands. The TSUBO brand's target consumer, product selection, industry niche and +relative under-penetration in the marketplace make it a good fit for our business model. In addition, the TSUBO brand's commitment to quality distribution and its unique performance comfort platform +allow us to develop a compelling brand story for the global marketplace. We intend to leverage our design, marketing and distribution capabilities to grow the TSUBO brand into a meaningful business +over the next few years, consistent with our mission to build niche brands into global market leaders. +In +July 2008, we entered into a joint venture agreement with an affiliate of Stella International Holdings Limited ("Stella International") for the opening of retail stores and wholesale +distribution for the UGG brand in China. Under this agreement, we opened our first UGG Australia concept store in Beijing in November. The joint venture is owned 51% by Deckers and 49% by Stella +International. The total initial investment in the joint venture was $1 million contributed by both parties in proportion to their respective ownership in the joint venture. The estimated total +investment by Deckers and Stella International, +4 +Table of Contents +including +contributed capital and loans, for the joint venture is expected to be approximately $5 million. Stella International is also one of our major manufacturers in China. +Also +in 2008, Deckers was named one of Outside magazine's Best Places to Work 2008. This first time program was created by the magazine in +partnership with the Outdoor Industry Association and Best Companies Group. This survey and awards program was designed to identify, recognize and honor the best employers in the country that not only +create a great work environment but also promote an environmentally friendly business process and create a work-outdoor life balance for employees. +Through +continued innovation, expansion of product offerings, premium distribution and strategic marketing initiatives, we have successfully developed three premier lifestyle brands and +acquired one additional brand in 2008. Our total net sales increased by 53.6% from $448,929 in 2007 to $689,445 in 2008, and our income from operations increased by 10.8% from $105,553 in 2007 to +$116,919 in 2008. For 2008, wholesale shipments of UGG, Teva, Simple and TSUBO products aggregated $483,781, $80,882, $13,909 and $3,649, respectively, and represented 70.2%, 11.7%, 2.0% and 0.5% of +our total net sales, respectively. Sales of our brands through our eCommerce division and our retail store division, which are in addition to our wholesale shipments, were $68,769 and $38,455, +respectively, representing 10.0% and 5.6%, respectively, of total net sales in 2008. +History +Deckers was 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 Teva's founder. 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. +Deckers +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 +U.S., Mexico and Costa Rica, and today independent manufacturers in China and New Zealand manufacture all of our footwear products for us. We maintain our own offices in China and Macau to oversee and +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. In 2008, we bought TSUBO from its founders. The TSUBO brand markets high-end casual and dress footwear +with products for men and women. +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, seasons and demographic groups. Key elements of our business strategies are: +Building Leading Global Brands. Our mission is to build niche footwear lines into global brands with market leadership +positions. Our UGG, Teva, and +Simple brands began as footwear lines appealing to a narrow core enthusiast market. We have since built these lines into considerable global lifestyle brands with potential for further growth and line +extensions. 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 distribution strategy to ensure that we reach brand appropriate retail distribution channels. We believe that +5 +Table of Contents +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. +Sustaining Brand Authenticity. We believe our ability to increase sales, maintain strong gross margins, and grow market share +results in part from +the appeal of brand heritage. Our UGG brand marketing strategy positions our products as a premium, luxury collection but also as functional footwear. UGG products are primarily marketed through +national print advertising in major magazines and through our retailers and their catalogs and other advertising. Historically, our marketing for UGG products has been focused on women, but with the +recent introduction of innovative men's styles, we are increasing our marketing appeal to men through advertisements in national men's magazines with a continued focus on lifestyle and comfort. We +believe that Teva footwear consumers are passionate and serious about the outdoors. Our Teva brand marketing programs primarily focus on performance and feature national advertising in +outdoor-oriented media as well as sponsorship of outdoor events and professional athletes. These efforts reinforce the Teva brand's heritage and positioning as a highly technical, performance-oriented +outdoor footwear brand. We promote our Simple brand by emphasizing that we make fun, casual, and comfortable footwear, while also striving for our products to be 100% sustainable. Our goal for the +Simple brand is to create a dialogue with the consumer through all communication vehicles and to show people that sustainability is an emerging lifestyle for everyone, not just environmentally +conscious individuals. Our print advertising campaigns for our Simple brand include national publications and alternative weekly publications in select cities around the world. We also have an +extensive online advertising campaign that reaches consumers through websites that focus on sustainability as well as popular culture. We also sponsor environmental-themed concerts, film +festivals, and green expos to showcase and tell the sustainable lifestyle brand story. TSUBO is a brand inspired by and built for the city. Our mission is to be the premier footwear solution for +people in the city, providing all day comfort, style and quality. Our product incorporates unique design, premium materials and innovative cushioning technologies to meet the all-day needs +of the TSUBO target consumer. We will market TSUBO, focusing on consumers in key influential cities through regional and national print advertising, outdoor and out-of-home +advertising, grass roots marketing, product placement and public relations. +Driving 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 Frame which we introduced in 2007, and the Encapsulated Shoc +Pad™ included in all of our fall 2008 light hikers, all provide uncompromised performance for today's outdoor athlete. We also continue to develop innovative styles, products and product +categories for our UGG collection in order to support the UGG brand's 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. The goal of the Simple brand is to revolutionize the footwear industry by producing 100% +sustainable products. We believe that consumers are increasingly interested in living an environmentally friendly lifestyle and seeking out sustainable products. We are at the forefront of the +industry in using new sustainable materials, such as bamboo, certified organic cotton, natural latex and cork combinations, recycled car tires, silk and recycled carpet padding throughout our product +line. The Simple brand will continue to innovate with the goal of achieving 100% sustainability in design, development, and material applications. Our goal with the TSUBO brand is to continue to +identify and create premium materials and offer innovative cushioning technologies to deliver on our product promise of all-day style, comfort and quality in our footwear. With that as our +focus, we offer a broad line of footwear for men and women ranging from sport-influenced casuals to formal-influenced dress shoes. +6 +Table of Contents +Maintaining Efficient Development and Production Processes. We believe our product development processes enable us to produce +leading edge products +on a timely and a cost effective basis. We design most of 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. This enables us to carefully monitor the product creation and production process, from receipt of the design brief to production of interim and final samples to +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, +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 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 men's and kids' product lines and have introduced a cold-weather series featuring +sheepskin, waterproof eVent uppers and Vibram outsoles. Our UGG brand enhanced its spring 2008 collection by introducing new fashion comfort categories for men, women and children. We have expanded +the open-toe footwear category for our Teva brand by launching new performance and lifestyle products and collections that provide varying levels of foot coverage and protection. We have +also introduced new closed-toe performance and lifestyle products including multi-sport, light hikers and trail runners, many of which incorporate eVent waterproof uppers and durable +Vibram rubber outsoles. We are actively pursuing further expansion into the outdoor lifestyle footwear market, which, in the aggregate, is considerably larger than the market for the Teva brand's core +sport sandals. +As +the sustainability lifestyle movement is reaching the mainstream market, our goal for the Simple brand is to lead the industry through new product innovations and pursue new solutions +to make our business practices and products more sustainable. The influence of our Green Toe collection, products made primarily from sustainable materials, is seen throughout the entire Simple +product line, especially in our sneaker segment with the introduction of ecoSNEAKS in 2007. We also expanded our kids' and infants' collection with Green Piggies and ecoSNEAKS. In 2008, we introduced +a new line of premium, comfort, leather casuals with our Planet Walkers collection. 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, which we launched in 2006 and has since expanded. By introducing new categories under our brands, in particular, the closed-toe footwear under our +Teva brand and the spring product offerings under our UGG brand, we believe we will continue to expand the selling seasons for our brands with the goal of increasing sales and creating a more balanced +year round business for each of these brands. +We +have significantly expanded the TSUBO product line for 2009. We will launch new product offerings for both men and women across four categories: City Active (sports influenced +casuals), City +Weekend (leisure influenced casuals), City Workday (business influenced dress shoes), and City Occasion (formal influenced dress shoes). +Expand Domestic Distribution. We believe that we have significant opportunities to increase our sales by expanding domestic +distribution of our +products. The UGG brand originally realized a substantial portion of its sales in California. Today, we have a more balanced business, increasing our business significantly in the Midwest and +Northeast. For our Simple line, we are focusing distribution on specialty independent retailers, department stores, outdoor retailers, internet retailers and the health and wellness retail channel. +Our Teva brand has historically been distributed primarily through the outdoor specialty +7 +Table of Contents +and +sporting goods retail channels. In addition to these retail channels, we see the potential for expansion into the better footwear, athletic specialty and running specialty channels, as well as +increased penetration in the department store channel, with strategic and focused product and marketing programs. Our TSUBO domestic distribution strategy is to focus on better department stores, +specialty independent retailers and online retailers. We feel that the brand is underpenetrated across these three distribution channels and believe there is a significant opportunity for growth in +the TSUBO business domestically. We also plan to expand internet sales, by creating and managing online marketing campaigns and programs that include paid and natural search engine marketing, +comparison shopping sites, online advertising and emerging online marketing opportunities as they become available. In addition, we continue to gradually grow our retail stores segment, having ten +retail stores domestically as of the end of 2008. We plan to open two to three new retail stores domestically in 2009. +Expand International Distribution. In 2008, our international net sales totaled $107,933, representing approximately 15.7% of +total net sales, an +increase of 73.1% compared to 2007. The largest share of our international sales occurred in Europe, with the remainder in the Asia Pacific, Canada and Latin America regions. In addition to the +overall increased level of business internationally in 2008, many developments occurred in conjunction with our short and long-term international strategic growth plans. In Europe, we +further strengthened our organizational structure, including the appointment of specific brand managers for our UGG Australia, Teva and Simple brands, respectively. We designed our retail structure to +ensure a successful introduction of our first two UGG Australia retail stores in Europe, both located in the London area. We also increased headcount in finance and operations to ensure the support +aspects of our international business are effectively managed and developed on an ongoing basis. +In +the Asia Pacific region, we entered into a joint venture agreement to introduce and sell the UGG Australia brand in China. In December 2008, we opened our first UGG Australia retail +store in Beijing with our joint venture partner. In 2009, we plan to further strengthen our structure in the Asia Pacific regional office in Hong Kong by recruiting finance and business development +personnel. Additionally, +we plan to open another new store in 2009 with our joint venture partner, as well as open several shop-in-shops in department stores. +During +2008, we commenced the integration of the TSUBO brand into our international business structure. For 2009, our primary objectives for the TSUBO brand internationally will be +ensuring appropriate brand positioning, generating brand awareness and increasing retail distribution. +During +2009, we intend to further strengthen our international infrastructure to ensure optimum results with both short and long-term goals in mind. We will continue to work +closely with our distributors on the effective management of our business objectives and brand strategies. In addition to our existing retail distribution, we will commence a phased introduction of +internet sales direct to consumers via our individual brand websites. We plan to open two to five new stores internationally in key metropolitan markets in Europe and Asia. We will also consider the +opening of additional stand-alone brand retail stores as appropriate opportunities arise, particularly in the case of our UGG Australia brand. We plan to further expand internationally in Japan where +we will assume ownership of the UGG Australia concept store in Omotesando Hills in Tokyo. With the assistance of local logistics and sales expertise, we will also assume direct responsibility for our +wholesale operations in this market. Under our direction, we believe we can increase exposure and drive demand in Japan by selectively increasing distribution and implementing a cohesive and +comprehensive marketing and advertising strategy. +Acquire and Build New Brands. We are continually exploring 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. An example of this strategy is our May 2008 +acquisition of the TSUBO brand. +8 +Table of Contents +Products +Our primary product lines are: +UGG Footwear. 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 have since expanded the collection, offering consumers many footwear categories including casuals, fashion heels, and cold weather footwear +and accessories in luxurious materials including sheepskin, leather, suede and fabrics. +Our +UGG product line comprises seven footwear collections, each of which includes styles for men, women and children: +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 basic and fashion colors. +Ultra/Ultimate Collection. The Ultra/Ultimate Collection builds upon the heritage of the original Ultra boot. These boots are +designed with our comfort system, featuring a +multi-surfaced rugged 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 mylar lining 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. +Fashion Collection. Our Fashion Collection offers fashion forward styles for women, men, and children without compromising +comfort. Luxurious materials and +trend-influenced styles make this collection stand out. Within this collection is a fashion wedge group, a leather stacked heel group for women, a European influenced collection for men, and +fashionable styles for children. +Casual Collection. This collection features refined, sophisticated styles for men, women, and children. These footwear styles +include suede and glove leather uppers, +lined in a thinner insole of sheepskin for added comfort. Styles from the men's 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 style including sandals, clogs, and boots that incorporate a thin layer of sheepskin for luxury and comfort. +Cold Weather Collection. This collection is designed with more rugged styling and features Vibram outsoles and waterproof eVent +uppers designed to withstand colder, wetter +climates. +Slipper Collection. Our Slipper Collection builds upon the UGG brand's reputation for comfort, warmth and luxury and is offered +in a wide selection of styles and colors. +We +have expanded our UGG brand collections from the Classic and Ultra sheepskin boots and slippers 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. Our outerwear collection for fall 2008 was a small offering of men's and women's luxurious sheepskin and leather jackets, and we +are expanding this collection for fall 2009. Over the last few years, our line expansion, distribution and high-end marketing strategies, among other factors, have resulted in significantly increased +exposure for our UGG products and have contributed to the growth of the UGG brand's year round business. The manufacturer's suggested domestic retail prices for the spring 2009 UGG product collections +range from $35.00 to $230.00. +9 +Table of Contents +Teva Performance Outdoor Footwear. We believe there will be a continuing shift in consumer preferences and lifestyles to include +more outdoor +recreational activities, including light hiking, trail running, mountain biking, camping, kayaking 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' active pursuits have evolved, we have retained our outdoor heritage and +product integrity, while adding new products to our line, including amphibious footwear, trail running shoes, light hiking shoes and boots, multi-sport shoes and other rugged closed-toe +footwear. Our brand remains popular among professional and amateur outdoor athletes seeking authentic, performance-oriented footwear, as well as among general footwear consumers seeking high quality, +durable and comfortable styles for everyday use. +We +market the Teva brand as the brand of GO.DO.BE. This captures the attitude and lifestyle of today's 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. We have two main categories of products: performance and lifestyle. +Our +performance products are technical, lightweight and engineered for the performance needs of today's 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. +Our +lifestyle products are versatile, rugged and comfortable for travel, leisure and light outdoor activities. Collections include styles which are inspired by classic Teva sandal +architecture, as well as fresh, contemporary designs inspired by the laid-back attitude of life in the outdoors. +We +plan to inject each new seasonal offering with innovative styles for men, women and children. Our kids' product collection is now a fun, colorful assortment of sandals, +closed-toe, and amphibious styles for a variety of outdoor and water-based activities. The manufacturer's suggested domestic retail prices for the spring 2009 Teva product collections +range from $15.00 to $140.00. +Simple Sustainable Footwear. Our goal is to continue to be a leader in the footwear industry through new, sustainable product +innovations as +demonstrated by our use of sustainable materials such as certified organic cotton and recycled car tires. In addition, our Simple brand won the Footwear +Plus Award for Design Excellence in the Green Category in both 2008 and 2007. +Men's and Women's Green Toe. Green Toe products represent our best efforts to reduce the ecological footprint left by shoes. +This collection uses the newest and most innovative +materials and processes each season. Green Toe products are primarily made of sustainable materials like bamboo, jute, organic cotton, linen, coconut buttons, cork, crepe, latex, recycled car tires, +and water based adhesives. This line includes sandals, loafers, mary janes, oxfords and boots. +Men's and Women's ecoSNEAKS. ecoSNEAKS are vulcanized sneakers that use recycled car tires for the soles, recycled polyethylene +terephthalate, commonly known as PET (from plastic +bottles), for the shoelaces, certified organic cotton and hemp for the uppers, thus leaving a better ecological footprint than ordinary sneakers. +Men's and Women's Planet Walkers. Planet Walkers is our newly introduced line of premium, comfort, leather casuals. They use +materials such as eco-certified premium +leathers, molded Ortholite® and recycled rubber insoles, cork and recycled ethyl vinyl acetate ("EVA") midsoles, and recycled car tire and latex soles. +Kids' Product. Our Kids' product line is made up of ecoSNEAKS and Green Piggies. Green Piggies is a kids' and infants' product +collection that represents the +brand's best ecological efforts +10 +Table of Contents +through +material and construction innovation. It uses materials such as certified organic cotton, hemp, and wool felt. +Bags. Our sustainable bag collection includes messenger bags, backpacks and totes. These are made from materials such as +certified organic cotton, jute, +hemp, coconuts and PET. +Our +target consumers are the committed consumer and the positive choosers. The committed consumers are concerned, active, and aware about environmental issues and take action to purchase +products from companies that are making a difference when it comes to protecting the planet. The positive choosers seek a good choice lifestyle and are motivated by positive messaging. They are highly +aware of environmental and social issues and, if made easy, will take affirmative actions. The manufacturer's suggested domestic retail prices for our spring 2009 Simple footwear collections range +from $24.00 to $140.00 and our Simple bags are priced from $20.00 to $100.00. +TSUBO Footwear. The TSUBO brand markets high-end casual and dress footwear for men and women. TSUBO is the synthesis of +ergonomics and +style, with a full line of sport and dress casuals, boots, sandals and heels constructed to provide consumers with innovative style, function and maximum comfort. We address the lifestyle footwear +needs of our consumers, creating product in four categories for women and men: City Active (sports influenced casuals), City Weekend (leisure influenced casuals), City Workday (business influenced +dress shoes and boots), and City Occasion (formal influenced dress shoes and boots). +Our +TSUBO brand's core consumers live in the city or are metropolitan-minded. They are creative personally or professionally and live an active, 24 hours a day, 7 days a +week lifestyle. They are style +conscious and design savvy and, while they appreciate and seek great design, they will not compromise comfort. Our product incorporates premium materials and cushioning technologies to achieve a +distinct look and feel. The manufacturer's suggested domestic retail prices for our spring/summer 2009 TSUBO product collections range from $75.00 to $170.00. +Sales and Distribution +At the wholesale level, we distribute our products in the U.S. through a dedicated network of approximately 50 independent sales +representatives. Our sales representatives are organized geographically and by brand and visit retail stores to communicate the features, styling and technology of our products. In addition, we have +approximately 10 employee sales representatives who serve as territory representatives or key account executives for several of our largest customers. We also sell products directly to the consumers +through our websites and retail stores. +Until +mid-2005, our sales force was divided into two teams, one for UGG and Simple products and one for Teva 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 UGG and Simple brands' sales forces into two distinct groups to provide the Simple brand with its own dedicated sales function to improve its sales efforts and resources. We have +realigned the TSUBO sales force to position it for the future of the brand. While there is still some overlap between the sales teams, we have now established separate dedicated sales forces for each +of our brands. Each brand's respective 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. +We +distribute products sold in the U.S. through our distribution centers in Ventura, California and in Camarillo, California. Our distribution centers feature a warehouse management +system that enables us to efficiently pick and pack products for direct shipment to retailers and distributors across the world. For certain customers requiring special handling, each shipment is +pre-labeled and packed to the retailer's 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 quality inspection process. +11 +Table of Contents +Internationally, +we distribute our products at the wholesale level through approximately 50 independent distributors in over 60 countries. During 2008, we commenced new distributor +relationships for one or more of our brands in the Asian and European markets. Additionally, we commenced relationships with existing TSUBO distributors, who currently represent the TSUBO brand in +approximately 10 countries, included in the total countries previously noted. In 2009, we plan to enter the Russian market with our UGG Australia brand for the first time. We will continue to focus on +key markets within Europe and Asia, as well as Canada. We will also continue to analyze opportunities in the developing market economies such as India and certain countries in Latin America. +Our +principal customers include specialty retailers, selected department stores, outdoor retailers, sporting goods retailers, shoe stores and online retailers. Our five largest customers +accounted for approximately 30.4% of our net sales for 2007, compared to 30.6% for 2008. One customer, Nordstrom, accounted for greater than 10% of our consolidated net sales in 2007 and 2008, with +the majority of those being related to our UGG segment. +UGG. We sell our UGG products primarily through high-end department stores such as Nordstrom, Neiman Marcus and Bloomingdale's, +as well +as independent specialty retailers such as Journey's, 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. +Teva. We sell our Teva products primarily through specialty outdoor and sporting goods retailers such as REI, L.L. Bean, Dick's +Sporting Goods and +The Sports Authority. 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 performance products to the consumer best sell our Teva products. +Simple. Our Simple products are targeted primarily towards select department stores, outdoor specialty accounts, independent +specialty retailers, +internet retailers, and health and wellness retailers that target consumers seeking comfortable, high quality, and sustainable footwear. These include key accounts such as Nordstrom, Dillard's, REI, +Whole Earth Provision, Zappos.com and Whole Foods Market. +TSUBO. TSUBO products are sold throughout the United States primarily at better department stores, independent specialty +retailers and with online +retailers that support our brand ideals of comfort, style and quality. Key accounts include Nordstrom, Hanigs, and Zappos. +eCommerce. Our eCommerce business enables us to interact and reinforce our relationships with the consumer. We operate our +eCommerce business through +UGGAustralia.com, Teva.com, SimpleShoes.com, and TSUBO.com websites. Our websites support the brands' marketing goals and also drive offline sales by providing information to consumers about the +brands' products and where to find retailers that carry our brands. We plan to expand our websites' international capabilities by creating sites translated into foreign languages and listing products +in local currencies, making our products available to international consumers through our websites. In 2009, we plan to open and operate call centers internationally to accommodate these website +sales. Our domestic eCommerce business is headquartered in Flagstaff, Arizona and order fulfillment is performed by our 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. Products sold through our eCommerce business are sold at prices which +approximate retail prices, enabling us to capture the full retail margin on each direct to consumer transaction. +Retail Stores. Our retail store business allows us to directly reach our customers and meet the growing demand for our products. +In addition, our UGG +Australia concept stores allow us to showcase the entire lines for spring and fall; whereas, most retailers do not carry the full line. In 2008, we opened one new +12 +Table of Contents +retail +outlet store in Jersey Shore, New Jersey as well as two new UGG brand concept stores, one in San Francisco, California in August and one in New York City, New York near Lincoln Square in +November. As of December 31, 2008, we had a total of four UGG Australia concept stores and six retail outlet stores in the U.S. Products sold through our concept stores are sold at prices which +approximate department store prices, enabling us to capture the full retail margin on each direct to consumer transaction. The outlet stores carry a combination of UGG Australia, Teva, and Simple +products that are discontinued or overstocked that are offered at a discount to the customer. Internationally, we opened two UGG Australia concept stores in the London area and, along with our China +joint venture partner, one in Beijing. We utilize a third party logistics and distribution company in the UK for importation and distribution to our retail stores in the UK. +For +2009, we intend to invest in our retail store business both in the U.S. and internationally, primarily building upon the success of the UGG brand. We plan to open two to three retail +stores domestically, plus two to five retail stores internationally, focusing on key metropolitan cities in the European and Asian markets. +Marketing and Advertising +Our brands are generally advertised and promoted through a variety of consumer media campaigns. We benefit from editorial coverage in +both consumer and trade publications. Each brand's dedicated marketing team works closely with targeted accounts to maximize advertising and promotional effectiveness. We incurred approximately +$17,315, $17,035, and $24,866 in advertising, marketing and promotional expenses in 2006, 2007 and 2008, respectively. The increase in 2008 was primarily due to advertising and promotion costs related +to our UGG brand domestically. +UGG. We seek to build upon the success of our UGG brand's national print advertising campaign. Currently, we advertise in +upscale national magazines +such as Vogue, Teen Vogue, Glamour, Vanity Fair, and O Magazine. UGG Australia also advertises men's +focused advertising, including print advertising in Outside, Men's 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. Also, we benefit from editorial coverage of the UGG brand collection +through numerous articles that have appeared in such magazines as Glamour, InStyle, Cosmopolitan, Marie Claire, People, US Weekly, Maxim, Shape, Self, O +Magazine and Real Simple. In 2004, the UGG brand was awarded "Brand of the Year" by Footwear +Plus, a leading trade publication, and was recognized with the ACE Award for the "it" accessory of the year by the Accessories Council. In 2008, our UGG brand was again awarded +"Brand of the Year" and also won the "Plus Award for Design Excellence in Boots" both by Footwear Plus. International exposure has also expanded with +features in leading fashion publications like Vogue Japan, Elle Japan, Marie Claire UK, and Vogue UK. +Internationally, +the UGG Australia brand significantly increased in popularity in 2008, particularly in the markets of the UK, Canada, the Netherlands and Italy. The women's boots in +particular have been very successful at retail including Classics, Ultimate styles, and Cardy boots. We also increased our spending on international marketing in high-end publications and +billboards, as well as improved retail visibility. We believe these factors have increased consumer awareness leading to the increased popularity. +We +also actively seek to place UGG products at selected events. In collaboration with our distributor in Switzerland, we produced a special edition UGG brand cold weather boot featuring +a matching red outsole for the entire 2006 Swiss Olympic Team. We believe this product placement further strengthened the consumer's image of UGG products as high quality, luxurious sheepskin goods +well-suited for use in cold weather. +We +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 television shows, +including Entourage, The Sopranos, Gilmore Girls, The Oprah Winfrey Show, The King of Queens, Still Standing, Will +13 +Table of Contents +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 several recent feature films. In addition, the UGG brand has been embraced by Hollywood celebrities, who are often seen and photographed wearing UGG brand boots. +We believe our target consumer identifies with celebrities and that greater exposure further heightens awareness of the brand and stimulates sales. In 2009, we will continue to market our UGG brand in +high-end magazines and outdoor media as well as seed product to celebrities and editors. We also plan to expand our shop-in-shop program in the U.S. and abroad. +We +also market the UGG brand through our dedicated website, UGGAustralia.com. The UGG Australia website supports the brand's marketing goals and drives offline sales by providing +information to consumers about the brand's products and where to find retailers that carry the brand. Our UGGAustralia.com website won BizRate's Circle of Excellence Platinum Award in both 2007 and +2008. This award recognizes the online retailers with top customer satisfaction ratings. +Teva. We use the following marketing methods to promote the Teva brand: +• targeted print billboard and online advertising; +• sponsorship of the annual Teva Mountain Games in Vail, Colorado and a variety of smaller regional events and competitions; +• sponsorship of world-class outdoor athletes and teams, including the Teva Whitewater Rafting Team and the Teva U.S. +Mountain Running Team; +• preferred buyer programs to professional river guides, kayakers, mountain bikers, rock climbers, and other outdoor +athletes; +• product seeding with various athletes and trendsetters; +• in-store promotions with key accounts; and +• our Teva.com website, which won BizRate's Circle of Excellence Platinum Award in both 2007 and 2008. +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 Runner's World, Trail Runner and Running Times, among other publications. To support our casual lines, we advertise in more mainstream publications such as Women's Health , Men's Journal and Rolling Stone . +The +Teva brand is rooted in outdoor lifestyle pursuits such as river rafting, kayaking, bouldering, mountain biking, kite boarding, hiking and trail running. We sponsor relevant outdoor +athletes and events around the world. For example, our international distributors sponsor outdoor events in many countries, including the UK, France, the Netherlands, Germany, Switzerland, Italy, Hong +Kong, Australia and New Zealand in order to increase our brand visibility to the outdoor consumer on a global scale. +In +2008, the Teva brand was the presenting sponsor of MacGillivray Freeman's new three dimensional documentary IMAX film, " Grand Canyon Adventure, River at +Risk, " which was released to IMAX theaters in March 2008. 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 world's best male and female professional and amateur athletes across several outdoor sports. Our Teva promotional team attends events across the U.S., +Europe, Asia and Latin America. 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. +14 +Table of Contents +Key +elements of our 2009 Teva marketing campaign include print and online advertising, an enhanced presence within social on-line media, in-store point of +purchase materials, and focused promotional programs and events. These are designed to increase brand exposure and drive sales at retail. The advertising theme is replicated in our +in-store materials and depicts key product introductions in action. Our primary promotional event for 2009 is the 8th Annual Teva Mountain Games in early June. +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 reflects our consumers' commitment to purchase products made in the same fashion. In 2008, the Simple brand won the Footwear +Plus "Plus Award for Design Excellence in Green." We will continue to establish the brand as a leader in sustainable footwear through our +marketing initiatives. In 2008, the Simple brand continued with a national print advertising campaign targeted at various demographic groups, which included print ads targeted at the +ecologically-minded consumer through magazines like RollingStone, Teen Vogue, Lucky, Details, Wired, Surfer, and Surfing. We also benefit from print and +television editorial coverage of the Simple brand collection. In addition, we target online consumers through +sustainability websites like Treehugger.com. We will continue to advertise on TheOnion.com, which complements our Onion print campaign in key markets. We are also active on popular culture websites +such as Pitchforkmedia.com, a popular independent-focused online music site and Facebook.com, the number one social networking site. In 2009, we will launch a new Simple brand marketing campaign +called "less>more" through national print publications, regional print, college campus newspapers, the internet, outdoor advertising, and events. +In +2008, we sponsored environmental-themed concerts, film festivals, and green expos around Earth Day to support our leadership position in sustainable footwear. We were present at +several Earth Day celebrations in key cities such as San Francisco, New York, Boulder, Austin, Seattle, Chicago and Santa Barbara. Our Earth Day promotions were supported with local advertising, +community outreach and extensive press coverage. +We +also market the Simple brand through our dedicated website, SimpleShoes.com. The Simple website supports the brand's marketing goals and drives offline sales by providing information +to consumers about the brand's products and where to find retailers that carry the Simple brand. We will continue to use the Simple website as a vehicle that creates the ultimate brand experience for +the consumer. We experienced a substantial increase in traffic on our website in 2008, demonstrating that our marketing is resonating positively with the consumer. +TSUBO. Our marketing strategy for our 2009 campaign will focus on developing a deep brand presence in influential retail +corridors in five major +cities in the US: New York, Miami, Chicago, Los Angeles and San Francisco. We believe that these cities represent the most important style, design, architecture, art and fashion centers in the US. The +same city focus strategy will be employed internationally in key cities globally, including London, Tokyo, and Paris. We expect this concentrated brand penetration to increase brand awareness, engage +consumers, and establish TSUBO in the city. +Specific +to the city focus strategy are the following elements: +• print advertising in influential regional media to engage local consumers (including publications like Gotham, Village Voice, Angeleno, LA Confidential, San Francisco Bay +Guardian, Chicago Reader, Michigan Avenue, Miami Magazine, and Ocean Drive); +• outdoor and out-of-home advertising in retail sectors with TSUBO retail partners, using transit, +unconventional real estate spaces and traditional outdoor advertising to drive consumers to TSUBO retailers; +• consumer engagement programs and events in each city tying the TSUBO brand to the cities' creative consumer communities; +15 +Table of Contents +• product placement to create influential brand ambassadors in each city; +• public relations to extend our message through editorial, product reviews, product placement and other media opportunities +that are not advertising-based. +Underlying +the initiatives in each city will be national media in key fashion and culture publications, which may include InStyle, Vogue, Wallpaper, Wired, +Blender and Details . Similar online advertising will give us access to the online world of shopping and social media to extend +our advertising value, drive sales and support vendor programs. Online media sites may include DailyBeast.com, InStyle.com, Gawker.com, Jezebel.com, Facebook.com, +DailyCandy.com and related fashion, culture and creative community ad networks. Additionally, as with our other brands, our TSUBO.com website supports the brand's marketing +goals and drives offline sales by providing information to consumers about the brand's products and where to find retailers that carry the brand. +Product Design and Development +The design and product development staff for each of our brands creates 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. +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 these 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 new categories +for the brand, including the introduction of the first sustainable sneakers in our ecoSNEAKS collection and our new premium, comfort, leather collection, Planet Walkers. We believe that our commitment +to become 100% sustainable makes Simple a leader in sustainable footwear and accessories. We also believe that our ability to incorporate up-to-date styles while remaining true +to our heritage, combined with the performance-oriented features that consumers have come to expect, will result in continued enthusiasm for our brands in the marketplace. +To +ensure that high performance technical products continue to satisfy the requirements of the Teva brand's historical consumer base of performance-oriented "core enthusiasts," our +design staff solicits input from our Teva Whitewater Team athletes, our Teva U.S. Mountain Running Team and other professional outdoor athletes, as well as several of our key retailers. We regularly +add new innovations, components and styles to our product line in response to their input. For example, in 2007, our proprietary Wraptor technology was incorporated into performance water sport and +trail running shoes, 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 +rubber compound that combines the non-slip traction of Spider Rubber with durability for use in both wet and dry conditions. +Our +TSUBO brand continues to carry on its heritage with the same dedicated design team, working in conjunction with product development to create footwear that delivers on our promise of +all-day comfort, style and quality. Careful consideration is taken in design, material selection, construction, and cushioning technologies during the design and development process. We +have multiple design and development reviews throughout the product creation process to ensure that we are addressing the footwear needs of our consumers. +16 +Table of Contents +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 our various product lines. We develop detailed drawings and prototypes of our new products to aid in 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 with our domestic and overseas 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 products; we outsource the production of our brand footwear to independent manufacturers in China. We also +outsource the production of a portion of our UGG brand footwear to independent manufacturers in New Zealand. We require our independent contract manufacturers and designated suppliers to adopt our +Factory Charter, which specifies that they comply with all local laws and regulations governing human rights, working conditions and environmental compliance before we are willing to conduct business +with them. We require our manufacturing partners to comply with our Ethical Supply Chain guidelines as a condition of doing business with our company. 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. 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. To ensure the production of high quality products, the majority 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, Europe and +the U.S. We maintain constant communication with the tanneries to monitor the supply of sufficient high quality sheepskin available for our projected UGG brand 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. Refer to Item 7 of Part II "Management's Discussion and Analysis of +Financial Condition and Results of Operations — Contractual Obligations" for further discussion on our sheepskin purchase commitment. We believe current 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. +17 +Table of Contents +Our Simple brand 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, the 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 +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 our own employee 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 distribution centers. +Patents and Trademarks +We now hold more than 150 utility and design patents and registrations in the U.S. and abroad and have filed for more than 60 new +patents which are currently pending. These patents expire at various times, and patents issued for applications filed this year will generally have a remaining duration from now to 2023 for design +patents and from now to 2029 for utility patents. We also currently hold trademark registrations for UGG, Teva, Simple, TSUBO and other marks 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. +Seasonality +Our business is seasonal, with the highest percentage of UGG brand net sales occurring in the third and fourth quarters of each year, +and the highest percentage of Teva brand net sales occurring in the first and second quarters of each year. To date, the Simple brand has not had a seasonal impact on the Company. Similarly, we do not +anticipate the TSUBO brand to have 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 2009, 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 Part I, Item 1A, +"Risk Factors." For further discussion on our working capital and inventory management, see Item 7 of Part II, "Management's Discussion and Analysis of Financial Condition and Results of +Operations — Liquidity and Capital Resources." +Backlog +Historically, we have encouraged our customers to place, and we have received, a significant portion of orders as preseason orders, +generally four to eight months prior to shipment date. We provide customers with price incentives, and in certain cases extended payment terms, to participate in such preseason 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 which can be cancelled prior to shipment. The backlog as of a particular date is affected by a number of factors, including seasonality, manufacturing schedule and the timing of product shipments +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. +At +December 31, 2008, our backlog of orders from our wholesale customers and distributors was approximately $240,000 compared to approximately $170,000 at December 31, +2007. While all orders in the backlog are subject to cancellation by customers, we expect that the majority of such orders will be filled in 2009. We believe that backlog at year-end is an +imprecise indicator of total revenue that may be +18 +Table of Contents +achieved +for the full year because backlog only relates to wholesale orders for the next season and current season fill-in orders, is affected by the timing of customers' orders and +product availability, and excludes potential sales in our eCommerce business and retail stores during the year. The increase in backlog is primarily due to increased demand for UGG product. +Competition +The casual, outdoor, athletic, fashion and formal footwear markets are highly competitive. We compete with numerous domestic and +foreign footwear designers, manufacturers and marketers. Our UGG brand 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 Teva +brand primarily competes with Nike, Adidas-Salomon, The North Face, Merrell, Patagonia, Chaco, Reef, Columbia Sportswear, Hi-Tech, and Keen. Our Simple line primarily competes with Vans, +Converse, Keds, Sanuk, Merrell, Keen, Patagonia, and Earth. Our TSUBO brand competes with many footwear brands of similar price point, primarily Clarks, Ecco, Palladium, Lacoste and Cole Haan. +Our +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: +• shape and stimulate consumer tastes and preferences by offering innovative, attractive and exciting products; +• anticipate and respond to changing consumer demands in a timely manner; +• maintain brand authenticity; +• develop high quality products that appeal to consumers; +• appropriately price our products; +• provide strong and effective marketing support; and +• ensure product availability. +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, 2008, we employed approximately 640 employees in our U.S. facilities including retail stores and approximately +140 employees located in Asia and the U.K., none of whom were represented by a union. The large increase in employees during the year was primarily related to the expansion of our retail stores, which +includes part-time employees. We believe our relationships with our employees are good. +Financial Information about Segments and Geographic Areas +Our six reportable business segments include the strategic business units responsible for the worldwide wholesale operations of each of +our brands' (UGG, Teva, Simple and TSUBO) wholesale +19 +Table of Contents +divisions, +as well as our eCommerce and retail store businesses. The following table shows our domestic and international revenues for each of the years ended December 31, 2006, 2007 and 2008. +Years Ended December 31, +2006 +2007 +2008 +Net sales by location: +U.S. +$ +266,092 +$ +386,593 +$ +581,512 +International +38,331 +62,336 +107,933 +Total +$ +304,423 +$ +448,929 +$ +689,445 +Refer +to Note 9 to our accompanying consolidated financial statements for further discussion of our business segment data. As of December 31, 2006, 2007, and 2008, +substantially all of our long-lived assets were held in the U.S. Refer to Note 1 to our accompanying consolidated financial statements for a discussion of our research and +development costs for the last three years. +Compliance +with federal, state and local environmental regulations has not had, nor is it expected to have, any material effect on our capital expenditures, earnings or competitive +position based on information and circumstances known to us at this time. +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 (the "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 SEC's Public Reference Room at 100 F Street, NE, +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 . \ No newline at end of file diff --git a/raw/filings/0000910521/2008/0001047469-09-002106/item13.txt b/raw/filings/0000910521/2008/0001047469-09-002106/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..f237be63cb044fe4bd1dae9af9099810c24cdbbd --- /dev/null +++ b/raw/filings/0000910521/2008/0001047469-09-002106/item13.txt @@ -0,0 +1,4 @@ +Item 13. Certain Relationships and Related Transactions, and Director Independence. +Information relating to Certain Relationships and Related Transactions is set forth under "Proposal No. 1 — Election +of Directors" in the Company's definitive proxy statement relating to the Registrant's 2009 annual meeting of stockholders, which will be filed pursuant to Regulation 14A within 120 days +after the end of the Company's fiscal year ended December 31, 2008, and such information is incorporated herein by reference. \ No newline at end of file diff --git a/raw/filings/0000910521/2008/0001047469-09-002106/item9a.txt b/raw/filings/0000910521/2008/0001047469-09-002106/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..ec6d8cdfc24a18d6b8b4b1d35ee6f6c30a9220e4 --- /dev/null +++ b/raw/filings/0000910521/2008/0001047469-09-002106/item9a.txt @@ -0,0 +1,42 @@ +Item 9A. Controls and Procedures. +(a) Disclosure Controls and Procedures. +Disclosure controls and procedures are the controls and other procedures that are designed to ensure that information required to be disclosed in the reports that +the Company files or submits under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized and reported within the time periods specified in the SEC's +rules and forms. Disclosure controls and procedures include, among other processes, controls and procedures designed to ensure that information required to be disclosed in the reports that the Company +files or submits under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions +regarding required disclosure. +The +Company carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the +effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2008 pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, +the Chief Executive Officer and Chief Financial Officer believe that as of the end of the period covered by this report, the Company's disclosure controls +58 +Table of Contents +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. +(b) Management's Report on Internal Control over Financial Reporting +Management is responsible for establishing and maintaining adequate internal control over financial reporting at the Company. Our internal control over financial +reporting is a process designed under the supervision of the Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and +the preparation of the Company's financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles (GAAP). A company's internal control over +financial reporting includes those policies and procedures that: +• pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and +dispositions of the assets of the company; +• provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in +accordance with GAAP, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and the directors of the company; and +• provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of +the company's assets that could have a material effect on the financial statements. +Because +of 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 Company's internal control over financial reporting as of December 31, 2008. 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"). Management's assessment included an evaluation of the design of the Company's 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, 2008, the Company maintained effective internal control over financial reporting. The registered public +accounting firm that audited the consolidated financial statements included in this Annual Report has issued an attestation report on the Company's internal control over financial reporting. 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. +(c) Changes in Internal Control over Financial Reporting +There was no change in our internal control over financial reporting that occurred during the quarter ended December 31, 2008 that has materially affected, +or is reasonably likely to materially affect, our internal control over financial reporting. \ No newline at end of file diff --git a/raw/filings/0000910521/2008/0001047469-09-002106/rp_note.txt b/raw/filings/0000910521/2008/0001047469-09-002106/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000910521/2008/0001047469-09-002106/rpt_disclosure.txt b/raw/filings/0000910521/2008/0001047469-09-002106/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..f8bc950f03f19333283354726fe0efffb08f36b2 --- /dev/null +++ b/raw/filings/0000910521/2008/0001047469-09-002106/rpt_disclosure.txt @@ -0,0 +1,29 @@ +Certain Relationships and Related Transactions +The legal department is primarily responsible for identifying and reviewing relationships and transactions in which the Company and our +directors, executive officers, +certain of our shareholders or their immediate family members are participants to determine whether any of these related persons had or will have a direct or indirect material interest. In order to +identify potential related person transactions, the Company's legal department annually prepares and distributes to all directors and executive officers a written questionnaire which includes +questions intended to elicit information about any related person transactions. In addition, the Company's Code of Business Conduct and Ethics addresses conflicts of interest where an individual's +private interests interfere or conflict with the interests of the Company, including relationships with suppliers, customers or competitors. Conflicts of interest which might impair or appear to +impair the exercise of judgment solely for the benefit of the Company are prohibited. In general, such conflicts must be approved by the legal department, the employee's supervisor or, in the case of +directors, the Board. Information regarding potential conflicts of interests in violation of the Company's Code of Business Conduct and Ethics may be reported to the Company's anonymous reporting +hotline and may be subsequently obtained by the Audit Committee Chair, the Chair of the Board and the chief audit executive. +If +a related person transaction is identified by the legal department as one which must be reported in the Company's Proxy Statement pursuant to applicable Securities and Exchange +Commission regulations, our Board is responsible for reviewing and approving or ratifying any such related person transactions. In evaluating related person transactions, our Board members apply the +same standards of good faith and fiduciary duty they apply to their general responsibilities as the Board and as individual directors. The Board may approve a related person transaction when, in its +good faith judgment, the transaction is in the best interests of the Company. +There +were no disclosable transactions with related persons under Item 404 of Regulation S-K during the fiscal year ended December 31, 2008 or currently +proposed. +Limitation of Liability and Indemnification of Directors and Officers +Our Certificate of Incorporation and Bylaws provide that we shall indemnify directors and executive officers to the fullest extent now +or hereafter permitted by the Delaware General Corporation Law (the "DGCL"). In addition, we have entered into Indemnification Agreements with our directors and executive officers in +which we agree to indemnify such persons to the fullest extent now or hereafter permitted by the DGCL. +We +have obtained a liability policy for our directors and officers as permitted by the DGCL which extends to, among other things, liability arising under the Securities Act of 1933, as +amended. +36 +We maintain an insurance policy pursuant to which our directors and officers are insured, within the limits and subject to the limitations of the policy, against specified expenses in +connection with the defense of claims, actions, suits or proceedings, and liabilities which might be imposed as a result of such claims, actions, suits or proceedings, that may be brought against them +by reason of their being or having been directors or officers. \ No newline at end of file diff --git a/raw/filings/0000910521/2009/0001047469-10-001651/filing.txt b/raw/filings/0000910521/2009/0001047469-10-001651/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..609b545c049c14f37c45a33d2334946d1b6f754a --- /dev/null +++ b/raw/filings/0000910521/2009/0001047469-10-001651/filing.txt @@ -0,0 +1,5798 @@ +10-K +1 +a2196208z10-k.htm +10-K +Table of Contents +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +FORM 10-K +(Mark one) +ý +ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the fiscal year ended December 31, 2009 +or +o +TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the transition period +from to +Commission File No. 0-22446 +DECKERS OUTDOOR CORPORATION +(Exact name of registrant as specified in its charter) +Delaware +(State or other jurisdiction of +incorporation or organization) +95-3015862 +(I.R.S. Employer +Identification No.) +495-A South Fairview Avenue, Goleta, California +(Address of principal executive offices) +93117 +(Zip Code) +Registrant's telephone number, including area code: (805) 967-7611 +Securities registered pursuant to Section 12(b) of the Act: None +Title of each class +Name of each exchange on which registered +Common Stock, Par value $0.01 per share +NASDAQ Global Select Market +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 o No ý +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 ý +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 ý No o +Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and +posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the +registrant was required to submit and post such files). Yes o No o +Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not +contained herein, and will not be contained to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this +Form 10-K or any amendment to this Form 10-K. o +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the +definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. +Large accelerated filer ý +Accelerated filer o +Non-accelerated filer o +(Do not check if a +smaller reporting company) +Smaller reporting company 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 ý +The aggregate market value of the common stock held by non-affiliates of the registrant was $885,666,637 based on the June 30, 2009 closing price of $70.27 on +the NASDAQ Global Select Market on such date. +The +number of shares of the registrant's Common Stock outstanding at February 16, 2010 was 12,875,147. +DOCUMENTS INCORPORATED BY REFERENCE +Portions +of the registrant's definitive proxy statement relating to the registrant's 2010 annual meeting of stockholders, which will be filed pursuant to Regulation 14A within 120 days +after the end of the registrant's fiscal year ended December 31, 2009, are incorporated by reference in Part III of this Annual Report on Form 10-K. +Table of Contents +DECKERS OUTDOOR CORPORATION +For the Fiscal Year Ended December 31, 2009 +Table of Contents to Annual Report on Form 10-K +Page +PART I +Item 1. +Business +3 +Item 1A. +Risk Factors +10 +Item 1B. +Unresolved Staff Comments +20 +Item 2. +Properties +20 +Item 3. +Legal Proceedings +20 +Item 4. +Submission of Matters to a Vote of Security Holders +20 +PART II +Item 5. +Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +21 +Item 6. +Selected Financial Data +24 +Item 7. +Management's Discussion and Analysis of Financial Condition and Results of Operations +25 +Item 7A. +Quantitative and Qualitative Disclosures about Market Risk +47 +Item 8. +Financial Statements and Supplementary Data +47 +Item 9. +Changes in and Disagreements With Accountants on Accounting and Financial Disclosure +47 +Item 9A. +Controls and Procedures +47 +Item 9B. +Other Information +48 +PART III +Item 10. +Directors, Executive Officers and Corporate Governance +49 +Item 11. +Executive Compensation +49 +Item 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +49 +Item 13. +Certain Relationships and Related Transactions, and Director Independence +49 +Item 14. +Principal Accounting Fees and Services +49 +PART IV +Item 15. +Exhibits, Financial Statement Schedules +50 +Signatures +54 +2 +Table of Contents +PART I +References in this Annual Report on Form 10-K to "Deckers", "we", "our", "us", or the "Company" refer to Deckers +Outdoor Corporation. This Annual Report on Form 10-K contains forward-looking statements based on expectations, estimates and projections as of the date of this filing. Actual +results may differ materially from those expressed in forward-looking statements. See Item 7 of Part II — "Management's Discussion and Analysis of Financial Condition +and Results of Operations — Forward-Looking Statements." Ahnu®, Deckers®, Drain Frame™, ecoSNEAKS®, Green Toe®, Planet +Walkers®, Simple®, Spider Rubber®, Teva®, TSUBO®, UGG®, Wraptor®, and Wraptor-Lite™ are some +of our trademarks. Other trademarks or trade names appearing elsewhere in this report are the property of their respective owners. +Item 1. Business. +Unless otherwise specifically indicated, all amounts in Item 1. and Item 1A. herein are expressed in thousands, except +for share quantity, per share data, and selling prices. +General +Deckers Outdoor Corporation was incorporated in 1975 under the laws of the State of California and, in 1993, reincorporated under the +laws of the State of Delaware. We are a leading designer, producer, marketer, and brand manager of innovative, high-quality footwear and accessories. Our footwear is distinctive and +appeals broadly to men, women and children. We sell our products, including accessories such as handbags, headwear, and outerwear, through quality domestic retailers and international distributors and +directly to end-user consumers, both domestically and internationally, through our websites, call centers, retail concept stores and retail outlet stores. Our primary objective is to build +our footwear lines into global lifestyle brands with market leadership positions. We seek to differentiate our brands and products by offering diverse lines that emphasize authenticity, functionality, +quality and comfort and products tailored to a variety of activities, seasons and demographic groups. Virtually all of our products are manufactured by independent contractors outside of the United +States (US). Our continued growth will depend upon the broadening of our products offered under each brand, expanding domestic and international distribution, and developing or acquiring new brands. +Products +We market our products primarily under three proprietary brands: +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 reception, driven by consistent introductions of new styles, introductions of UGG products in the fall and spring seasons and strategic geographic expansion of our +distribution. We carefully manage the distribution of our UGG products within high-end specialty and department store +retailers in order to best reach our target consumers, preserve the UGG brand's retail channel positioning and maintain the UGG brand's position as a mid- to upper-price luxury brand. +In +recent years, sales of UGG products have benefited from significant national media attention and celebrity endorsement through our marketing programs and product placement activities, +raising the profile of our UGG brand as a luxury comfort brand. We have further supported the UGG brand's market positioning by expanding the selection of styles available in order to build consumer +interest in our UGG brand collection. We also remain committed to limiting distribution of UGG products to high-end retail channels. +Teva®. Teva is our outdoor performance and lifestyle brand and pioneer of the sport sandal market. We have expanded the Teva +product line over time to +include open and closed-toe outdoor +3 +Table of Contents +lifestyle +footwear, as well as additional outdoor performance footwear, including multi-sport shoes, light hiking shoes, amphibious footwear, and rugged outdoor travel shoes. +In +recent seasons, we have focused on regaining our leadership position in the performance sandal market, while broadening our performance platform to include other outdoor activities +such as multi-sport and light hiking to lessen our overall reliance on sandal sales, while bringing youthfulness back to the brand through contemporary designs, colors and materials. In 2008, we +introduced a modest assortment of fall and winter footwear. We followed that up in fall 2009 with a more complete collection of seasonally appropriate performance and lifestyle products for men, women +and children. The fall 2009 line included high performance light hikers with eVent waterproof membranes and Vibram rubber outsoles, rugged multi-sport shoes and a range of women's lifestyle boots in +both leather and suede with warm, faux fur linings. +In +2010, we plan to continue to build on our water-related performance heritage and continue to inject youthfulness into the Teva brand. We will introduce a more expansive collection of +performance and lifestyle open-toe product, while also significantly increasing our offering in closed-toe light hiking, multi-sport and rugged casual footwear. +Simple®. In 2005, as a response to the massive amount of waste produced by the footwear industry, the Simple brand launched +a new collection of sustainable +footwear called Green Toe®. Green Toe represents a revolutionary shift in thinking about footwear by building a +shoe from the inside out using sustainable materials and processes. The Simple brand's mission is to be the world leader in sustainable and stylish 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 as well as making products that are fashionable, +youthful and functional. +In +addition to our primary brands, our newest brands include TSUBO®, a line of high-end casual footwear that incorporates style, function and maximum comfort, and +Ahnu®, a line of outdoor performance and lifestyle footwear. We acquired 100% of the ownership interests of TSUBO, LLC in May 2008, and we acquired 100% of the ownership interest of +Ahnu, Inc. in March 2009. +Sales and Distribution +At the wholesale level, we distribute our products in the US through a dedicated network of independent sales representatives. Our +sales representatives are organized geographically and by brand and visit retail stores to communicate the features, styling and technology of our products. In addition, we have employee sales +representatives who serve as territory representatives or key account executives for several of our largest customers. We also sell products directly to the consumers through our websites and retail +stores. Our brands are generally advertised and promoted through a variety of consumer media campaigns. We benefit from editorial coverage in both consumer and trade publications. Each brand's +dedicated marketing team works closely with targeted accounts to maximize advertising and promotional effectiveness. +Our +sales force is generally separated by brand, as each brand generally has certain specialty consumers; however, there is overlap between the sales teams and customers. We have aligned +our brands' sales forces to position them for the future of the brands. Each brand's respective sales manager recruits and manages their network of sales representatives and coordinates sales to +national accounts. We believe this approach for the US market maximizes the selling efforts to our national retail accounts on a cost-effective basis. +We +distribute products sold in the US through our distribution centers in Ventura and Camarillo, California. Our distribution centers feature a warehouse management system that enables +us to efficiently pick and pack products for direct shipment to customers. For certain customers requiring special handling, +4 +Table of Contents +each +shipment is pre-labeled and packed to the retailer's 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 quality inspection process. +Internationally, +we distribute our products through independent distributors and retailers in a vast number of countries, including countries throughout Europe, Asia Pacific, Canada, and +Latin America, among others. In addition, we sell products directly to consumers through our websites and our retail stores. We utilize a third-party logistics company in the United Kingdom (UK) for +the distribution of inventory to our UK retail stores. Our principal customers include specialty retailers, selected department stores, outdoor retailers, sporting goods retailers, shoe stores, and +online retailers. In 2010, we will continue to assume the distribution rights from certain international distributors and sell directly to retailers in those regions. +In +July 2008, we entered into a joint venture agreement with an affiliate of Stella International Holdings Limited ("Stella International") for the opening of retail stores and wholesale +distribution for the UGG brand in China. Under this agreement, we opened our first UGG Australia concept store in Beijing in November 2008. The joint venture is owned 51% by Deckers and 49% by Stella +International. Stella International is also one of our major manufacturers in China. +Our +five largest customers accounted for approximately 30.6% of our net sales for 2008, compared to 30.0% for 2009. One customer, Nordstrom, accounted for greater than 10% of our +consolidated net sales in 2008 and 2009, with the majority of those being related to our UGG segment. +UGG. We sell our UGG footwear and accessories primarily through high-end department stores such as Nordstrom, Neiman Marcus and +Bloomingdale's, as well as independent specialty retailers such as Journey's, David Z. and internet customers such as Zappos.com. 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. +Teva. We sell our Teva footwear primarily through specialty outdoor and +sporting goods retailers such as REI, L.L. Bean, Dick's Sporting Goods and The Sports Authority as well as on-line retailers such as Zappos.com. 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 performance products to the consumer best sell our Teva footwear. +Simple. Our Simple products are targeted primarily towards select department stores, outdoor specialty accounts, footwear and +independent specialty +retailers, internet retailers, and health and wellness retailers that target consumers seeking fashionable, youthful, functional, and sustainable footwear. These include key accounts such as +Nordstrom, Dillard's, REI, Whole Earth Provision, Zappos.com and Whole Foods Market. +Other brands. Our other brands are sold throughout the US primarily at better department stores, independent specialty +retailers and with online retailers that +support our brand ideals of comfort, style and quality. Key accounts include Nordstrom, Hanigs, REI and Zappos.com. +eCommerce. Our eCommerce business enables us to interact and reinforce our relationships with the consumer. We operate our +eCommerce business primarily through +UGGAustralia.com, Teva.com, and SimpleShoes.com websites. Our websites support the brands' marketing goals and also drive offline sales by providing information to consumers about the brands' products +and where to find retailers that carry our brands. We have expanded our websites' international capabilities by creating sites translated into foreign languages and listing products in local +currencies, making our products available to international consumers through our websites. In 2010, we plan to continue to open and operate call centers internationally to accommodate these website +sales. Our domestic +5 +Table of Contents +eCommerce +business is headquartered in Flagstaff, Arizona and order fulfillment is performed by our 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. Products sold through our eCommerce business are sold at prices which approximate retail +prices, enabling us to capture the full retail margin on each direct to consumer transaction. +Retail Stores. Our retail store business allows us to directly reach our customers and +meet the growing demand for our products. In addition, our UGG Australia concept stores allow us to showcase the entire lines for spring and fall; whereas, most retailers do not carry our full line. +In the US in 2009, we opened an outlet store in Cabazon, California and an UGG Australia concept store in Honolulu, Hawaii. As of December 31, 2009, we had a total of five UGG Australia concept +stores and seven retail outlet stores in the US. Products sold through our concept stores are sold at prices which approximate department store prices, enabling us to capture the full retail margin on +each direct to consumer transaction. The outlet stores sell some of our discontinued styles from the previous season, plus products made specifically for the outlet stores. Internationally, in 2009, +we opened UGG Australia concept stores in Manchester, England and Tokyo, Japan, as well as our first international UGG Australia outlet store in Bicester, England. During 2010, we intend to expand our +retail store business both in the US and internationally, primarily with the UGG brand. +Product Design and Development +The design and product development staff for each of our brands creates 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. Refer to Note 1 to our accompanying consolidated financial statements for a discussion of our research and development costs for the last three years. +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 and accessories for our various product lines. We develop detailed drawings and prototypes of our new products to aid in conceptualization and to ensure our contemplated new products meet +the standards for innovation and performance that our consumers demand. Throughout the development process, we have multiple design and development reviews, and members of the design staff coordinate +with our domestic and overseas product development, manufacturing and sourcing personnel. This ensures that we are addressing the needs of our consumers and are working 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 products; we outsource the production of our brand footwear primarily to independent manufacturers in China. +We also outsource the production of a portion of our UGG footwear to an independent manufacturer in New Zealand. We require our +independent contract manufacturers and designated suppliers to adopt our Factory Charter, which specifies that they comply with all local laws and regulations governing human rights, working +conditions and environmental compliance before we are willing to conduct business with them. We also require our manufacturing partners to comply with our Ethical Supply Chain guidelines as a +condition of doing business with our company. 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. +6 +Table of Contents +The +production of footwear by our independent manufacturers is performed in accordance with our detailed specifications and is subject to our quality control standards. 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. To ensure the production of high quality products, the majority 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 +generally 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 three tanneries in China, which source their skins from Australia, Europe +and the US. We maintain constant communication with the tanneries to monitor the supply of sufficient high quality sheepskin available for our projected UGG brand production. To ensure adequate +supplies for our manufacturers, we forecast our usage of top grade sheepskin one year in advance at a forward price. Refer to Item 7 of Part II "Management's Discussion and Analysis of +Financial Condition and Results of Operations — Contractual Obligations" for further discussion on our sheepskin purchase commitment. We believe current 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. +Our +Simple brand 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, the 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 +have instituted pre-production, in-line, and post-production inspections to meet or exceed the high quality demanded by us and consumers of our +products. Our quality assurance program includes our own employee 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 distribution centers. +Patents and Trademarks +We utilize trademarks on nearly all of our products and believe that having distinctive marks that are readily identifiable is an +important factor in creating a market for our goods, in identifying the Company, and in distinguishing our goods from the goods of others. We currently hold trademark registrations for UGG, Teva, +Simple, TSUBO, Ahnu and other marks in the US and in many other countries, including the countries of the European Union, Canada, Japan and Korea. We now hold more than 150 utility and design patents +and registrations in the US and abroad and have filed for more than 90 new patents which are currently pending. These patents expire at various times, and patents issued for applications filed this +year will generally have a remaining duration from now to 2024 for design patents and from now to 2030 for utility patents. We regard our proprietary rights as valuable assets and vigorously protect +such rights against infringement by third parties. +7 +Table of Contents +Seasonality +Our business is seasonal, with the highest percentage of UGG brand net sales occurring in the third and fourth quarters of each +calendar year. Thus, our net sales in the last half of the year have exceeded that for the first half of the year, and we expect this trend to continue. Our other brands do not have a significant +seasonal impact on our business. 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 Part I, Item 1A, "Risk Factors." For further discussion on our working capital and inventory management, see +Item 7 of Part II, "Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources." +Backlog +Historically, we have encouraged our customers to place, and we have received, a significant portion of orders as preseason orders, +generally four to eight months prior to shipment date. We provide customers with price incentives, and in certain cases extended payment terms, to participate in such preseason 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, +which can be cancelled prior to shipment. The backlog as of a particular date is affected by a number of factors, including seasonality, manufacturing schedule and the timing of product shipments 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. +At +December 31, 2009, our backlog of orders from our wholesale customers and distributors was approximately $245,000 compared to approximately $240,000 at December 31, +2008. While all orders in the backlog are subject to cancellation by customers, we expect that the majority of such orders will be filled in 2010. We believe that backlog at year-end is an +imprecise indicator of total revenue that may be achieved for the full year for several reasons. Backlog only relates to wholesale orders for the next season and current season fill-in +orders and excludes potential sales in our eCommerce business and retail stores during the year. Backlog also is effected by the timing of customers' orders and product availability. +Competition +The casual, outdoor, athletic, fashion and formal footwear markets are highly competitive. Our competitors include athletic and +footwear companies, branded apparel companies, and retailers with their own private labels. Although the footwear industry is fragmented to a certain degree, many of our competitors are larger and +have substantially greater resources than us, including athletic shoe companies, several of which compete directly with some of our 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 and accessory industries. Due to the popularity of our UGG products, we face +increasing competition from a significant number of competitors selling imitation products. +Our +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: +• shape and stimulate consumer tastes and preferences by offering innovative, attractive and exciting products; +• anticipate and respond to changing consumer demands in a timely manner; +• maintain brand authenticity; +8 +Table of Contents +• develop high quality products that appeal to consumers; +• suitably price our products; +• provide strong and effective marketing support; and +• ensure product availability. +We +believe we are well positioned to compete in the footwear industry. 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, 2009, we employed approximately one thousand employees in the US, Europe and Asia, none of whom were represented +by a union. This figure includes approximately 470 employees in our retail stores worldwide, which includes part-time and seasonal employees. The large increase in employees during the +year was primarily related to increased selling, general and administration headcount commensurate with our growth. We intend to increase our employee count further in 2010 primarily related to retail +stores and our other expansion initiatives. We believe our relationships with our employees are good. +Financial Information about Segments and Geographic Areas +Our six reportable business segments include the strategic business units responsible for the worldwide operations of our brands' (UGG, +Teva, Simple and other brands) wholesale divisions, as well as our eCommerce and retail store businesses. The following table shows our domestic and international revenues: +Years Ended December 31, +2007 +2008 +2009 +Net sales by location: +US +$ +386,593 +$ +581,512 +$ +645,993 +International +62,336 +107,933 +167,184 +Total +$ +448,929 +$ +689,445 +$ +813,177 +As +of December 31, 2008, substantially all long-lived assets were held in the US. As of December 31, 2009, long-lived assets, which consist of +property and equipment, by major country were as follows: +2009 +US +$ +27,405 +UK +6,341 +All other countries* +1,696 +Total +$ +35,442 +* No +other country's long-lived assets comprise more than 10% of total long-lived assets as of December 31, 2009. +Refer +to Note 10 to our accompanying consolidated financial statements for further discussion of our business segment data. +Compliance +with federal, state and local environmental regulations has not had, nor is it expected to have, any material effect on our capital expenditures, earnings or competitive +position based on information and circumstances known to us at this time. +9 +Table of Contents +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 SEC's Public Reference Room at 100 F Street, NE, +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 at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. +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 related to our company as well as general investor risks, 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. Please also see Item 7 of Part II — +"Management's Discussion and Analysis of Financial Condition and Results of Operations — Forward-Looking Statements." +The recent financial crisis and general economic conditions that are largely out of our control may adversely affect our financial condition and results of operations. +Recessionary economic cycles or uncertainty about current and future global economic conditions may affect consumer spending or our +customer buying habits which would adversely affect demand for our products. In addition, a number of our customers may be impacted by the significant decrease in available credit. If credit pressures +or other financial difficulties result in insolvency for these customers, it would adversely impact our estimated allowances and reserves as well as our overall financial results. There can also be no +assurance that government responses to the disruptions in the financial markets or increasing unemployment will be sustainable or restore consumer confidence and spending. +Furthermore, +reduced traffic in retail stores or limitations on the prices we can charge for our products could reduce our sales and profit margins and have a material adverse affect on +our financial condition and results of operations. Also, economic factors such as increased transportation costs, inflation, higher costs of labor, insurance and healthcare, and changes in other laws +and regulations may increase our cost of sales and our operating expenses, and otherwise adversely affect our financial condition, results of operations, and cash flows. Our business, financial +condition, results of operations, access to credit, and trading price of common stock could be materially and adversely affected if the economy fails to stabilize, or if current economic conditions do +not improve or worsen. +Our financial success is influenced by the success of our customers. +Much of our financial success is directly related to the success of our retailers and distributors to market and sell our brands +through to the consumer. If a retailer or +distributor fails to meet annual sales goals, it may be difficult and costly to either locate an acceptable substitute distributor or convert to a wholesale direct model. If a change becomes +necessary, we may experience increased costs, loss of customers, increased credit risk, and increased inventory risk, as well as substantial disruption and a potential loss of sales. +10 +Table of Contents +We +currently 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. We use the timing of delivery dates in our customer orders to forecast our sales and earnings for future periods. If any of our +major customers, including independent distributors, experience a significant downturn in business or fail to remain committed to our products or brands, then these customers could postpone, reduce, +or discontinue purchases from us. As a result, we could experience a decline in sales or gross margins, write downs of excess inventory, increased discounts or extended credit terms to our customers, +which could have a material adverse effect on our business, results of operations, financial condition, cash flows, and our stock price. +Our +five largest customers accounted for approximately 30.6% of worldwide net sales in 2008 and 30.0% of worldwide net sales in 2009. Any loss of a key customer, the financial collapse +or bankruptcy of a key customer, or a significant reduction in purchases from a key customer could have a material adverse effect on our business, results of operations and financial condition. +Our new and existing retail stores may not realize returns on our investments. +Our retail segment has grown substantially in both net sales and total assets during the past year. We have entered into significant +long-term leases for certain of our retail locations. Global store openings involve substantial investments, including constructing leasehold improvements, furniture and fixtures, +equipment, information systems, inventory and personnel. In addition, since many of our retail store costs are fixed, if we have insufficient sales, we may be unable to reduce expenses in order to +avoid losses or negative cash flows. Due to the high fixed cost structure associated with the retail segment, negative cash flows or the closure of a store could result in write-downs of inventory and +leasehold improvements, severance costs, significant lease termination costs, impairment losses on long-lived assets, or loss of our working capital, which could adversely impact our +financial position, results of operations, or cash flows. +If we do not accurately forecast consumer demand, we may have excess inventory to liquidate or have difficulty filling our customers' orders. +Because the footwear industry has relatively long lead times for design and production, we must plan our production tooling and +projected volumes many months before consumer tastes become apparent. The footwear industry is subject to rapid changes in consumer preferences, as well as the effects of weather, general market +conditions and other factors affecting demand. A large number of models, colors and sizes in our product lines can increase these risks. As a result, we may fail to accurately forecast styles, colors +and features that will be in demand. If we overestimate demand for any products or styles, we may be forced to provide additional marketing assistance, incur higher markdowns, or sell excess +inventories at reduced prices resulting in lower, or negative, gross margins. +Our success depends on our ability to anticipate fashion trends. +Our success depends largely on the continued strength of our brands, on our ability to anticipate, understand and react to the rapidly +changing fashion tastes of footwear and accessory consumers and to provide appealing merchandise in a timely and cost effective 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 or that we will (1) respond quickly enough to changes in consumer preferences, (2) market our products successfully, or +(3) successfully introduce acceptable new models and styles of footwear or accessories to our target consumer. Achieving market acceptance for new products also will likely require us to exert +substantial product development and marketing efforts and expend significant funds to attract consumers. A failure to introduce new products that gain market acceptance or maintain market share with +our current products would erode our +11 +Table of Contents +competitive +position, which would reduce our profits and could adversely affect the image of our brands, resulting in long-term harm to our business. +Our +UGG brand has experienced strong growth over the past several years, with double-digit increases in net wholesale sales of UGG products. We do not anticipate sustaining this growth +rate in the future. UGG products include fashion items that could go out of style at any time. UGG products represent a majority of our business, and if UGG product sales were to decline or fail to +increase in the future, our overall financial performance would be adversely affected. +Many of our products are seasonal, and our sales are sensitive to weather conditions. +Sales of our products, particularly those under the UGG brand, are highly seasonal and are sensitive to weather conditions. For +example, extended periods of unseasonably warm weather during the fall and winter months may reduce demand for our UGG products. Even though we are creating more off-season styles for our +brands, 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. +We may not succeed in implementing our growth strategies. +As part of our growth strategy, we seek to enhance the positioning of our brands, extend our brands into complementary product +categories and markets, partner with compatible companies, expand geographically, and improve our operational performance. We continue to expand the nature and scope of our operations considerably, +including significantly increasing the number of employees worldwide. We anticipate that substantial further expansion will be required to realize our growth potential and new market opportunities. +We +are growing globally through our retail, eCommerce, wholesale, and distributor channels. In addition, as part of our international growth strategy, we intend to reacquire distribution +rights from select distributors and transition from third-party distribution to direct-to-consumer distribution through wholly-owned subsidiaries. Implementing our growth +strategies, or failure to effectively execute them, could affect near term revenues from the postponement of sales recognition to future periods, our rate of growth or profitability, which in turn +could have a negative effect on the value of our common stock. In addition, our growth initiatives could: +• increase our working capital needs beyond our capacity; +• create remote-site management issues, which would adversely affect our internal control environment; +• have significant domestic or international legal or compliance implications; +• make it difficult to attract, retain, and manage adequate human resources in remote locations; +• cause additional inventory manufacturing, distribution, and management costs; +• cause us to experience difficulty in filling customer orders; +• result in distribution termination transaction costs; or +• create other production, distribution, and operating difficulties. +Failure to deter counterfeiting and establish and protect our trademarks, patents and other intellectual property could diminish the value of our brands and reduce sales. +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 US laws. From time to time, we discover counterfeit products in the marketplace +12 +Table of Contents +that +infringe upon our intellectual property rights. If we are unsuccessful in challenging a third party's products on the basis of patent and trade dress rights, particularly in some foreign +countries, continued sales of such competing products by third parties could adversely impact our sales, financial condition +and results of operations. If our brands are associated with infringers' or competitors' inferior products, this could also adversely affect the integrity of our brands. Furthermore, our efforts to +enforce our intellectual property rights are typically met with defenses and counterclaims attacking the validity and enforceability of our intellectual property rights. +Similarly, +from time to time we may be the subject of litigation challenging our ownership of intellectual property. Any decision or settlement in any of these matters that allowed a +third party to continue to use our brand trademarks or a domain name with our brand trademarks 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. Unplanned increases in legal fees and other costs associated with the defense of our intellectual property could result in higher operating expenses and lower earnings. +Our goodwill and other intangible assets may incur impairment losses. +We conducted our annual impairment tests of goodwill and other intangible assets as of December 31, 2007, 2008, and 2009. In +addition, we conducted interim impairment evaluations when impairment indicators arose. We recognized the following impairment charges in our income from operations: +Years Ended December 31, +2007 +2008 +2009 +Teva trademarks +$ +— +$ +20,400 +$ +— +Teva goodwill +— +11,929 +— +Other brands trademarks +— +— +1,000 +Other brands goodwill +— +3,496 +— +Total impairment loss +$ +— +$ +35,825 +$ +1,000 +If +any brand's product sales or operating margins decline to a point that the fair value falls below its carrying value, we may be required to further write down the related intangible +assets. These or other related declines could cause us to incur additional impairment losses, which could materially affect our consolidated financial statements and results of operations. The value +of our trademarks is highly dependent on forecasted revenues and earnings before interest and taxes for our brands, as well as derived discount and royalty rates. In addition, the valuation of +intangible assets is subject to a high degree of judgment and complexity. After the impairment charges recorded during 2009, the remaining balances of goodwill and nonamortizable intangibles by brand +are as follows: +As of December 31, 2009 +UGG +Teva +Other Brands +Total +Trademarks +$ +152 +$ +15,300 +$ +— +$ +15,452 +Goodwill +6,101 +— +406 +6,507 +Total nonamortizable intangibles +$ +6,253 +$ +15,300 +$ +406 +$ +21,959 +13 +Table of Contents +If raw materials do not meet our specifications, or experience price increases or shortages, we could realize interruptions in manufacturing, increased costs, higher product +return rates, a loss of sales, or a reduction in our gross margins. +Our independent manufacturers use various raw materials in the production of our footwear and accessories that must meet our design +specifications and, in some cases, additional technical requirements for performance footwear. If these raw materials and the end product do not conform to our specifications, we could experience a +higher rate of customer returns and deterioration in the image of our brands, which could have a material adverse effect on our business, results of operations, and financial condition. +We +depend on a limited number of key sources for certain raw materials like sheepskin, the principal raw material of our UGG Classic products. The top grade sheepskin used in UGG +products is in high demand and limited supply. The supply of sheepskin can be adversely impacted by weather conditions, disease, and harvesting decisions that are completely outside our control. The +potential inability to obtain top grade raw materials could impair our ability to meet our production requirements and could lead to inventory shortages, which can result in lost sales, delays in +shipments to customers, strain on our relationships with customers and diminished brand loyalty. There have also been significant increases in the prices of top grade sheepskin as the demand from +competitors and counterfeiters for this material has increased. Any price increases in key raw materials will likely raise our costs and decrease our profitability unless we are able to commensurately +increase our selling prices. +Because we depend on independent manufacturers, we face challenges in maintaining a continuous supply of finished goods that meet our quality standards. +We use independent manufacturers in China and New Zealand to produce all of our products, with substantially all production performed +by a limited number of independent manufacturers in China. We depend on these manufacturers' ability to finance the production of goods ordered and to maintain manufacturing capacity. We do not exert +direct control over either the independent manufacturers or their materials suppliers, so we may be unable to obtain timely and continuous delivery of acceptable products. In addition, while we do +have long standing relationships with most of our factories, we currently 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 acceptable quality and competitively priced products +from our independent manufacturers. If there is an interruption, we may not be able to substitute suitable alternative manufacturers to provide 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, +which could result in a loss of sales and earnings. +Interruptions +in supply can also result from natural disasters and other adverse events that would impair our manufacturers' operations. We keep proprietary materials involved in the +production process, such as shoe molds, knives, and raw materials, under the custody of our independent manufacturers. If these independent manufacturers were to experience loss or damage to our +proprietary materials involved in the production process, we cannot be assured that such independent manufacturers would have adequate insurance to cover such loss or damage and, in any event, the +replacement of such materials would likely result in significant delays in the production of our products and could result in a loss of sales and earnings. +14 +Table of Contents +Our independent manufacturers are located outside the US, where we are subject to the risks of international commerce. +All of our third party manufacturers are in China and New Zealand with substantially all production performed by a limited number of +manufacturers in China, with planned 2010 production in Vietnam as well. Foreign manufacturing is subject to numerous risks, including the following: +• tariffs, import and export controls and other non-tariff barriers such as quotas and local content rules on +raw materials and finished products, including the potential threat of anti-dumping duties and quotas such as those which have been imposed by the European Union on the import of certain +types of footwear from China; +• increasing transportation costs; +• poor infrastructure and shortages of equipment, which can disrupt transportation and utilities; +• restrictions on the transfer of funds; +• changing economic conditions; +• violations or changes in governmental policies and regulations including labor, safety, and environmental regulations in +China, the US and elsewhere; +• refusal to adopt or comply with our Factory Charter and Ethical Supply Chain guidelines; +• customary business traditions in China such as local holidays, which are traditionally accompanied by high levels of +turnover in the factories; +• labor unrest, which can lead to work stoppages and interruptions in transportation or supply; +• delays during shipping, at the port of entry, or at the port of departure; +• political instability, which can interrupt commerce; +• use of unauthorized or prohibited materials or reclassification of materials; +• expropriation and nationalization; and +• adverse changes in consumer perception of goods from China, trade or political relations with China. +These +factors could severely interfere with the manufacture or shipment of our products, which could make it difficult to obtain adequate supplies of quality products when we need them, +thus materially affecting our sales and results of operations. If we ceased dealing with non-compliant manufacturers or suppliers, 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. +We conduct business outside the US, which exposes us to foreign currency, global liquidity, and other risks. +As we increase our international operations, our sales and expenditures in foreign currencies will become more material and subject to +currency fluctuations and global credit markets. Some of our international operating expenses are in local currencies. Also, our foreign distributors sell in local currencies, which impacts the price +to foreign customers. We currently do not use currency hedges. However, as we expand international operations, we anticipate we will use currency hedges to minimize income statement volatility. Our +hedging strategies will depend on our cash flow projections, which are inherently subject to inaccuracies. Therefore, our hedging strategies may be ineffective. Future changes in foreign currency +exchange rates and global credit markets may cause changes in the dollar value of our purchases or sales and materially affect our profit margins or results of operations. +15 +Table of Contents +While +our purchases from the Chinese factories are currently denominated in US dollars, certain operating and manufacturing costs of the factories are denominated in Chinese and other +currencies. As a result, fluctuations in these currencies versus the US dollar could impact our purchase prices from the factories in the event that they adjust their selling prices accordingly. +Key business processes and supporting information systems could be interrupted and adversely affect our business. +Our future success and growth depend on the continued operation of our key business processes, including information systems, global +communications, the internet, and key personnel. Hackers and computer viruses have disrupted operations at many major companies. We may be vulnerable to similar acts of sabotage. Key processes could +also be interrupted by a failure due to weather, natural disaster, power loss, telecommunications failure, failure of our computer systems, sabotage, terrorism, or similar event such +that: +• critical business systems become inoperable or require significant costs to restore; +• key personnel are unable to perform their duties, communicate, or access information systems; +• significant quantities of merchandise are damaged or destroyed; +• we are required to make unanticipated investment in state-of-the-art technologies and +security measures; +• key wholesale customers cannot place or receive orders; +• eCommerce customer orders may not be received or fulfilled; +• we are exposed to unanticipated liabilities; or +• carriers cannot ship or unload shipments. +These +interruptions to key business processes could have a material adverse effect on our business and operations and result in lost sales and reduced earnings. +We +rely on our information management and other enterprise resource planning systems to operate our business, prepare forecasts and track our operating results. Our information +management and enterprise planning systems will require modification and refinement as we grow and our business needs change. We may experience difficulties in transitioning to new or upgraded +information technology systems, including loss of data, unreliable data, and decreases in productivity as our personnel become familiar with the new systems. If we experience a significant system +failure or if we are unable to competitively modify our information management systems to respond to changes in our business needs, then our ability to properly run our business and report financial +results could be adversely affected. +The +loss of the services and expertise of any key employee could also harm our business. Our future success depends on our ability to identify, attract and retain qualified personnel on +a timely basis. +We could be adversely affected by the loss of our warehouses. +The warehousing of our inventory is located at a limited number of self-managed domestic and third-party managed +international facilities, the loss of any of which could adversely impact our sales, business performance and operating results. In addition, we could face a significant disruption in our domestic +distribution center operations if our automated pick module does not perform as anticipated or ceases to function for an extended period. +16 +Table of Contents +The costs of production and transportation of our products can increase as petroleum and other energy prices rise. +The manufacture and transportation of our products requires the use of petroleum-based materials and energy costs. Any future increases +in the costs of, or interruption of access to, these materials and energy sources could increase the cost of our goods which would reduce our gross margins unless we can successfully raise our selling +prices to compensate for the increased costs. +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, which could increase our costs and adversely impact our operating results. +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 operations that could adversely affect our sales and results of operations. These include: +• changes in currency exchange rates, which impact the price to international consumers; +• the burdens of complying with a variety of foreign laws and regulations; +• unexpected changes in regulatory requirements; +• inability to fulfill import tariff quota requirements; +• changes in tax laws; +• complications due to lack of familiarity with local customs; +• difficulties associated with promoting products in unfamiliar cultures; +• political instability; +• changes in diplomatic and trade relationships; and +• general economic fluctuations in specific countries or markets. +International trade and import 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 US 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 and our forecasted gross margins. +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 competitive price. Meanwhile, the continued negotiation of bilateral and multilateral free trade agreements by the US 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 and +accessories to our target markets at preferred rates of duty, which may have an effect on our sales and operations. +In +2006, the European Commission imposed definitive duties on leather upper footwear originating from China and certain other countries imported into European Member states. These duties +were +17 +Table of Contents +effective +for a two-year period with a final 16.5% rate for China-sourced footwear and 10% on Vietnam-sourced footwear. In December 2009, the European Commission decided to extend the +duties for a 15 month period, and accordingly, the duties are extended through March 31, 2011. 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. The extension of anti-dumping duties or quotas on products manufactured in China may +impact our sales and gross margins in the European market. +Additionally, +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 and increase our costs. +The investment of our substantial cash and cash equivalents and short-term investments are subject to risks, which may cause losses and affect the liquidity of +these investments. +At December 31, 2009 we had cash and cash equivalents and short-term investments of $341,982. A portion of these are +held as cash in operating accounts that are with third party financial institutions. These balances routinely exceed the Federal Deposit Insurance Corporation (FDIC) insurance limits. While we +regularly monitor the cash balances in our operating accounts and adjust the balances as appropriate, these cash balances could be lost or become inaccessible if the underlying financial institutions +fail or are subject to other adverse conditions in the financial markets. To date, we have experienced no loss or lack of access to cash in our operating accounts. +The +remainder of our cash and cash equivalents and short-term investments are invested in funds managed by third party investment management institutions. These investments +include US treasuries and government agencies, money market funds, and municipal bonds, among other investments. Certain of these investments are subject to general credit, liquidity, market, and +interest rate risks. While we do not hold any investments whose value is directly correlated to mortgage debt, +investment risk has been and may further be exacerbated by US mortgage defaults and credit and liquidity issues, which have affected various sectors of the financial markets. To date, we have +experienced no material loss or lack of access to our cash and cash equivalents and short-term investments. However, we can provide no assurance that access to our cash and cash +equivalents and short-term investments, or their earning potential, will not be impacted by adverse conditions in the financial markets. These market risks associated with our investment +portfolio may have an adverse effect on our results of operations, liquidity and financial condition. +We could be subject to additional income tax liabilities. +We are subject to income taxes in the US and foreign jurisdictions. Significant judgment and specialized expertise is required in +evaluating and estimating our worldwide provision for income taxes. We are subject to audits in various jurisdictions, and such jurisdictions may assess additional income taxes against us. Although we +believe our tax estimates are reasonable, the final determination of tax audits and any related litigation could be materially different from our historical income tax provisions and accruals. The +results of an audit or litigation could have a material effect on our operating results or cash flows in the periods for which that determination is made and may require a restatement of prior +financial reports at a material cost. In addition, future period earnings may be adversely impacted by litigation costs, settlements, penalties, or interest assessments. Similarly, unanticipated +changes in the ratio of US to International sales can have a significant effect on our tax provision and consolidated tax rate. +Recently, +the US has proposed legislation what would change how multinational corporations are taxed on their global income. Although the scope of the proposed changes is unclear, it is +possible that these or other changes in the US tax laws could increase our income tax liability and adversely affect our net income and long term effective tax rates. +18 +Table of Contents +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 many new competitors have entered 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 and accessory markets. 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 and accessory industries. +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. If we fail to compete successfully in the future, our sales and earnings will decline, as will the value of our business, +financial condition and 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 16, 2010 was approximately 610,000 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, have ranged from $37.71 to $111.99 for the 52-week period ended +February 16, 2010. 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, whether realized or perceived; +• changes in estimates by securities analysts or failure to meet such estimates; +• published research and opinions by securities analysts and other market forecasters; +• changes in our credit ratings; +• the financial results and liquidity of our customers; +• shift of revenue recognition as a result of changes in our distribution model, delivery of merchandise, or entering into +agreements with related parties; +• claims brought against us by our stockholders; +• quarterly fluctuations in our sales, expenses, and financial results; +• general equity market conditions and investor sentiment; +• economic conditions and consumer confidence; +• broad market fluctuations in volume and price; +• increasing short sales of our stock; +• announcements to repurchase our stock; +• the declaration of stock or cash dividends; and +19 +Table of Contents +• a variety of risk factors, including the ones described elsewhere in this Annual Report on Form 10-K +and in our other periodic reports. +In +addition, the stock market in general has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of +individual companies. Accordingly, the price of our common stock is volatile and any investment in our stock is subject to risk of loss. These broad market and industry factors and other general +macroeconomic conditions unrelated to our financial performance may also affect our stock price. +Item 1B. Unresolved Staff Comments. +None. +Item 2. Properties. +Our corporate headquarters is located in Goleta, California. We have two US distribution centers, both in California, our eCommerce +operations in Arizona, and twelve retail stores in the US ranging from approximately 2,000 to 7,000 square feet. We also have an office in China to oversee the quality and manufacturing standards of +our products, an office in Macau to coordinate logistics, an office in Hong Kong to coordinate sales and marketing efforts and offices in the UK to oversee European operations and administration. +Internationally, we have five Company-owned +retail stores in the UK and Japan and one jointly-owned retail store in China. We have no manufacturing facilities, as all of our products are manufactured by independent manufacturers in China and +New Zealand. We lease, rather than own, all of our facilities from unrelated parties. With the exception of our eCommerce and retail store facilities, 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: +Facility Location +Description +Business Segment +Approximate +Square Footage +Camarillo, California +Warehouse Facility +unallocated +723,000 +Ventura, California +Warehouse Facility and Retail Outlet +unallocated +126,000 +Goleta, California +Corporate Offices +unallocated +52,000 +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 US Patent and Trademark +Office, foreign trademark offices and US federal and foreign courts regarding unauthorized use or registration of our brand trademarks. We also are aware of many instances throughout the world in +which a third party is using our UGG trademarks within its internet domain name, and we have discovered and are investigating several manufacturers and distributors of counterfeit Teva and UGG +products. +Item 4. Submission of Matters to a Vote of Security Holders. +No matter was submitted during the fourth quarter of the fiscal year covered by this Annual Report to a vote of our security holders, +through the solicitation of proxies or otherwise. +20 +Table of Contents +PART II +Item 5. Market for Registrant's 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, 2008: +First Quarter +$ +91.50 +$ +153.96 +Second Quarter +$ +106.79 +$ +143.51 +Third Quarter +$ +99.28 +$ +137.56 +Fourth Quarter +$ +48.25 +$ +102.68 +Year ended December 31, 2009: +First Quarter +$ +37.71 +$ +83.91 +Second Quarter +$ +48.85 +$ +73.90 +Third Quarter +$ +63.74 +$ +84.93 +Fourth Quarter +$ +78.78 +$ +103.86 +As +of February 16, 2010, there were 76 record holders of our common stock and we believe there are approximately 19,000 beneficial holders of our common stock. +We +did not sell any equity securities during the year ended December 31, 2009 that were not registered under the Securities Act of 1933, as amended. +21 +Table of Contents +STOCKHOLDER RETURN PERFORMANCE PRESENTATION +Set forth below is a line graph comparing the percentage change in the cumulative total stockholder return on the Company's common +stock against the cumulative total return of the NASDAQ Market Index and a peer group index for the five-year period commencing December 31, 2004 and ending December 31, +2009. The data represented below assumes one hundred dollars invested in each of the Company's Common Stock, the NASDAQ Market Index and the peer group index on January 1, 2005. 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. Total return assumes reinvestment of dividends; we have paid no dividends on our common stock and have not done so since our inception. +December 31, +2004 +2005 +2006 +2007 +2008 +2009 +Deckers Outdoor Corporation +$ +100.0 +$ +58.8 +$ +127.6 +$ +330.0 +$ +170.0 +$ +216.5 +Old Peer Group Index* +100.0 +105.0 +129.5 +113.0 +48.2 +78.2 +NASDAQ Market Index# +100.0 +102.2 +112.7 +124.6 +74.7 +108.6 +New Peer Group Index* +100.0 +107.9 +138.2 +118.3 +54.5 +89.5 +* The +Old Peer Group Index included each of the companies in our New Peer Group Index and Rocky Brands, Inc., which was removed as the Company does not +consider it a comparable company due to its size and extent of product offering. In addition, the Old Peer Group Index did not include LaCrosse Footwear, Inc. and Steven Madden, Ltd. +These peers were added, as we have broadened our portfolio of brands. The New Peer Group Index consists of LaCrosse Footwear, Inc.; Steven Madden, Ltd.; K-Swiss Inc.; +Kenneth Cole Productions, Inc.; The Timberland Company; Wolverine World Wide, Inc.; Crocs, Inc.; and Skechers USA, Inc. +# The +NASDAQ Market Index is the same NASDAQ Index used in our 2008 Form 10-K. +22 +Table of Contents +DIVIDEND POLICY +We have not declared or paid any cash dividends on our common stock since our inception. We currently do not anticipate declaring or +paying any cash dividends in the foreseeable future. Moreover, our credit facility currently contains covenants expressly prohibiting us from paying dividends. +STOCK REPURCHASE PROGRAM +In June 2009, our Board of Directors approved a stock repurchase program to repurchase up to $50,000 of our common stock in the open +market or in privately negotiated transactions, subject to market conditions, applicable legal requirements, government regulations, and other factors. The program does not obligate us to acquire any +particular amount of common stock and the program may be suspended at any time at our discretion. The purchases will be funded from available excess working capital. Activity under the program for the +year ended December 31, 2009, was as follows: +Period +Total number of +shares purchased* +(in thousands) +Average price +paid per +share +Approximate dollar +value of shares that +may yet be +purchased +(in thousands) +As of June 30 +$ +50,000 +July 1 - July 31 +146 +$ +68.43 +$ +40,000 +August 1 - August 31 +17 +$ +64.00 +$ +38,900 +September 1 - September 30 +138 +$ +64.62 +$ +30,000 +October 1 - December 31 +— +$ +— +$ +30,000 +Total +301 +* All +shares purchased were purchased as part of a publicly announced program in open-market transactions. +23 +Table of Contents +Item 6. Selected Financial Data +We derived the following selected consolidated financial data from our consolidated financial statements. Historical results are not +necessarily indicative of the results to be expected in the future. You should read the following consolidated financial information together with our consolidated financial statements and the related +notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in Part II. +Years ended December 31, +2005 +2006 +2007 +2008 +2009 +(In thousands, except per share data) +Statements of operations data +Net sales: +UGG wholesale +$ +150,279 +$ +182,369 +$ +291,908 +$ +483,781 +$ +566,964 +Teva wholesale +80,446 +75,283 +82,003 +80,882 +71,952 +Simple wholesale +6,980 +10,903 +11,163 +13,909 +10,544 +Other brands wholesale +— +— +— +3,649 +9,100 +eCommerce +25,912 +28,886 +45,473 +68,769 +75,666 +Retail stores +1,143 +6,982 +18,382 +38,455 +78,951 +264,760 +304,423 +448,929 +689,445 +813,177 +Cost of sales +153,598 +163,692 +241,458 +384,127 +442,087 +Gross profit +111,162 +140,731 +207,471 +305,318 +371,090 +Selling, general and administrative expenses +59,254 +73,989 +101,918 +152,574 +188,843 +Impairment loss(1) +— +15,300 +— +35,825 +1,000 +Income from operations +51,908 +51,442 +105,553 +116,919 +181,247 +Other expense (income), net +374 +(1,910 +) +(4,486 +) +(3,583 +) +(1,976 +) +Income before income taxes +51,534 +53,352 +110,039 +120,502 +183,223 +Income taxes +20,387 +22,743 +43,602 +46,631 +66,304 +Net income +31,147 +30,609 +66,437 +73,871 +116,919 +Net loss (income) attributable to noncontrolling interest +— +— +— +77 +(133 +) +Net income attributable to Deckers Outdoor Corporation +$ +31,147 +$ +30,609 +$ +66,437 +$ +73,948 +$ +116,786 +Net income attributable to Deckers Outdoor Corporation common stockholders per share: +Basic +$ +2.52 +$ +2.45 +$ +5.18 +$ +5.67 +$ +8.98 +Diluted +$ +2.42 +$ +2.38 +$ +5.06 +$ +5.60 +$ +8.89 +Weighted-average common shares outstanding: +Basic +12,349 +12,519 +12,835 +13,042 +13,008 +Diluted +12,866 +12,882 +13,129 +13,195 +13,131 +(1) The +impairment loss in 2006 relates to our Teva trademarks. The impairment loss in 2008 relates to our Teva trademarks, Teva goodwill, and TSUBO goodwill. +The impairment loss in 2009 relates to TSUBO trademarks. During our annual and interim assessments of goodwill and other intangible assets, we concluded that the fair values were lower than the +carrying amounts and therefore wrote down the trademarks and goodwill to their respective fair values. +As of December 31, +2005 +2006 +2007 +2008 +2009 +(In thousands) +Balance sheet data +Cash and cash equivalents +$ +50,749 +$ +34,255 +$ +54,525 +$ +176,804 +$ +315,862 +Working capital +104,205 +147,860 +230,173 +317,755 +420,117 +Total assets +208,665 +249,973 +370,032 +483,721 +599,043 +Long-term liabilities +— +— +— +3,847 +6,269 +Total Deckers Outdoor Corporation stockholders' equity +174,640 +210,410 +298,638 +384,252 +491,358 +24 +Table of Contents +Item 7. Management's 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 Exchange 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 and geographic mix; +• the success of new products; +• the impact of seasonality on our operations; +• expectations regarding our net sales and earnings growth and other financial metrics; +• our development of international distribution channels; +• trends affecting our financial condition or results of operations; +• overall global economic trends; and +• reliable overseas factory production and availability of raw materials. +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 Part I, Item 1A, and +"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 read this report in its entirety, together with the documents that we file 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. +The +"UGG," "Teva," "Simple," "TSUBO," and "Ahnu" families of related marks, images and symbols are our trademarks and intellectual property. Other trademarks, trade names and service +marks appearing in this report are the property of their respective holders. References to "Deckers," "we," "us," "our," or similar terms refer to Deckers Outdoor Corporation together with its +consolidated subsidiaries. Unless otherwise specifically indicated, all amounts herein are expressed in thousands, except for share quantity, per share data, and selling prices. +Overview +We are a leading designer, producer, marketer, and brand manager of innovative, high-quality footwear and accessories. We +market our products primarily under three proprietary brands: +• UGG®: Premier brand in luxury and comfort footwear and accessories; +25 +Table of Contents +• Teva®: High performance sport shoes and rugged outdoor footwear; and +• Simple®: Innovative sustainable-lifestyle footwear and accessories. +In +addition to our primary brands, our other brands include TSUBO®, a line of high-end casual footwear that incorporates style, function and maximum comfort, and +Ahnu®, a line of outdoor performance and lifestyle footwear. +We +sell our brands through our quality domestic retailers and international distributors and retailers, as well as directly to our end-user consumers through our eCommerce +business and our retail stores. Independent third parties manufacture all of our products. +Our +business has been impacted by several important trends affecting our end markets: +• Recent changes in US and global economic conditions have adversely impacted businesses generally. Some of our customers +have been, and more may be, adversely affected. This in turn has, and may continue to, adversely impact our financial results. +• 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. +• There is an emerging sustainable lifestyle movement happening all around the world. Consumers are demanding that brands +and companies take a more responsible approach when it comes to protecting the environment. +By +emphasizing our brands' images and our focus on comfort, performance and authenticity, we believe we can 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. +UGG Brand Overview +The UGG brand has become well-known throughout the US as well as internationally. Over the past several years, our UGG +brand has received increased media exposure including increased print media in national ads and cooperative advertising with our customers, which has contributed to broader public awareness of the +brand and significantly increased demand for the diverse categories within the brand. We believe that the increased media focus and demand for UGG products were driven by the +following: +• consumer brand loyalty, due to the luxury and comfort of UGG footwear and accessories; +• increased marketing in high-end magazines; +• successful targeting of high-end distribution; +• adoption by high-profile film and television celebrities as a favored brand; +26 +Table of Contents +• increased media attention that has enabled us to introduce the brand to consumers much faster than we would have otherwise +been able to; +• increased exposure to the brand driven by our retail concept stores which showcase all of our product offerings; +• continued geographic expansion across the US and internationally; and +• continued innovation of new product categories and styles. +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 increased our product offering, including a growing spring line, an expanded men's line, and a +fall line that consists of a range of luxurious collections for both genders, an expanded kid's line, as well as handbags and cold weather outerwear and accessories. +Teva Brand Overview +Though participation in many traditional outdoor recreational activities is on the decline, we continue to see consumer preferences +shifting towards an outdoor lifestyle and to outdoor activities that can be done in a day, an afternoon, or even an hour. Because of our Teva brand's heritage in outdoor footwear as well as our +continued commitment to product innovation, the brand remains popular with traditional outdoor athletes and enthusiasts. Although 2009 sales were lower than 2008, the Teva brand held up through the +economic downturn. While our first true fall line, which debuted in 2008, had solid sell-in, weaker than expected sell-through exposed a lack of direction in development of the +product line. The 2010 Teva product line now includes a broad range of performance and lifestyle products and price points, both open and closed toe footwear, appropriate for all seasons, for men, +women and children. +We +see continuing opportunity to grow the Teva brand within our core outdoor specialty and sporting goods channels of trade. We also believe there are expansion opportunities into the +family footwear, department store, and better footwear channels. Through effective channel management and clear product line segmentation, we believe we can grow the Teva brand in all of these +channels without alienating our core consumer or retailers in the outdoor specialty channel. However, we cannot assure investors that these efforts will be successful. +Simple Brand Overview +The Simple brand is committed to style and innovation in fashionable, youthful, functional, and sustainably-produced footwear and +accessories. The brand is a leader in sustainable footwear and accessories, and 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 our goal of making Simple products 100% sustainable, thus minimizing the ecological footprint left on the planet. Green +Toe®, our collection of sustainable footwear, represents a revolutionary shift in thinking about footwear by building a shoe from the inside out using sustainable materials and processes. +The +progress in Green Toe has influenced the rest of the Simple product line, which has led to the development of additional product platforms, such as ecoSNEAKS®. This +product collection also uses sustainable materials such as water-based cements, certified organic cotton, British Leather Consortium (BLC) and International Standards Organization (ISO) 14001 +leathers, hemp, and outsoles made from recycled car tires. We promote our Simple brand by emphasizing that we make fashionable, youthful, functional and sustainable footwear. Our goal for the Simple +brand is to engage the consumer through all communication vehicles and to show people that sustainability is an emerging lifestyle for everyone, not just environmentally conscious individuals. Our +marketing vehicles include small print in regional +27 +Table of Contents +publications, +a digital media platform, including a social media strategy, public relations and consumer events that focus on music and sustainability. +Other Brands Overview +Our other brands consist primarily of the TSUBO and Ahnu brands. In May 2008, we acquired 100% of the ownership interest of +TSUBO, LLC. TSUBO, meaning pressure point in Japanese, is marketed as high-end casual footwear for men and women. The brand is the synthesis of ergonomics and style, with a full +line of sport and dress casuals, boots, sandals and heels constructed to provide consumers with contemporary footwear that incorporates style, function and maximum comfort. The TSUBO brand has a rich +heritage with consumers in major cities around the world who appreciate design, pay attention to detail, and will not sacrifice comfort. We intend to build on this heritage, positioning the TSUBO +brand as the premium footwear solution for people in the city, providing all day comfort, style and quality. The TSUBO brand strives to become well known in the most important style, design, +architecture, art and fashion centers around the world. We will continue to create product addressing consumers' unique needs: all-day comfort, innovative style and superior quality. At +the same time, we will market to the TSUBO brand consumers where they live, emphasizing regional advertising and in-market grass roots, product placement and public relations efforts. +In +March 2009, we acquired 100% of the ownership interest of Ahnu, Inc. The Ahnu brand is an outdoor performance and lifestyle footwear brand with products for men, women and +children. The name Ahnu is derived from the goddess of balance and well-being in Celtic mythology. The brand focuses on balancing work and play, family and friends, and self and society. +The product goal is to achieve uncompromising footwear performance by developing footwear that will provide the appropriate balance of traction, grip, flexibility, cushioning and durability for a +variety of outdoor activities — whether on trails, beaches or sidewalks. Ahnu products are sold throughout the US, primarily at outdoor specialty stores and independent shoe stores, +as well as certain regions internationally. +We +believe that the TSUBO and Ahnu brands complement our existing portfolio of lifestyle brands, and that the TSUBO and Ahnu brands' target consumer, product selection, industry niche +and relative under-penetration in the marketplace make these brands a good fit for us. We expect to leverage our design, marketing and distribution capabilities to grow these brands over the next +several years, consistent with our mission to build niche brands into global market leaders. Nevertheless, we cannot assure investors that our efforts will be successful. +eCommerce Overview +Our eCommerce business, which sells all of our primary brands, enables us to meet the growing demand for these products, sell the +products at retail prices and provide significant incremental operating income. The eCommerce business enables us to directly interact and reinforce our relationships with the consumer. In recent +years, our eCommerce business has had significant revenue growth, much of which occurred as the UGG brand gained popularity and as consumers continued to increase internet usage for footwear and other +purchases. +Managing +our eCommerce business requires us to focus on the latest trends and techniques for web design, to generate internet traffic to our websites, to effectively convert website +visits into orders, and to maximize average order sizes. We plan to continue to grow our internet business through improved website features and performance, increased marketing and more international +websites. Nevertheless, we cannot assure investors that revenue from our eCommerce business will continue to grow. +Retail Stores Overview +Our retail stores are predominantly UGG Australia concept stores and UGG Australia outlet stores. Our retail stores enable us to +directly impact our customers' experience, meet the growing demand for +28 +Table of Contents +these +products, sell the products at retail prices and provide us with incremental operating income. In addition, our UGG Australia concept stores allow us to showcase our entire line; whereas, a +retailer may not carry the whole line. Through our outlet stores, we sell some of our discontinued styles from prior seasons, plus products made specifically for the outlet stores. We sell most of our +brands through our UGG Australia outlet stores. For 2010, we plan to open additional retail stores in the US and internationally. +As +of December 31, 2009, we had a total of 18 retail stores worldwide. Continuing to build on the success of our existing UGG Australia stores, in 2009, we opened an outlet store +in Cabazon, California and an UGG Australia concept store in Honolulu, Hawaii. Internationally, in 2009, we opened an outlet store in Bicester, UK and UGG Australia concept stores in Tokyo, Japan and +Manchester, UK. +In +July 2008, we entered into a joint venture agreement with an affiliate of Stella International Holdings Limited for the opening of retail stores and wholesale distribution for the UGG +brand in China. Under this agreement, we opened our first UGG Australia concept store in Beijing in December 2008. We own 51% of the joint venture. +Seasonality +Our business is seasonal, with the highest percentage of UGG brand net sales occurring in the third and fourth quarters. Our other +brands do not have a significant seasonal impact. +2008 +First +Quarter +Second +Quarter +Third +Quarter +Fourth +Quarter +Net sales +$ +97,535 +$ +91,116 +$ +197,288 +$ +303,506 +Income (loss) from operations* +$ +17,060 +$ +(6,944 +) +$ +43,081 +$ +63,722 +2009 +First +Quarter +Second +Quarter +Third +Quarter +Fourth +Quarter +Net sales +$ +134,226 +$ +102,548 +$ +228,414 +$ +347,989 +Income from operations* +$ +19,326 +$ +3,225 +$ +53,080 +$ +105,616 +* Included +in income (loss) from operations in the second quarter of 2008 is a $14,900 impairment loss on our Teva trademarks. Included in the fourth quarter of +2008 is a $20,925 impairment loss on our Teva trademarks, Teva goodwill, and TSUBO goodwill. Included in the second quarter of 2009 is a $1,000 impairment loss on our TSUBO trademarks. +With +the large growth in the UGG brand in recent years, net sales in the last half of the year have exceeded that for the first half of the year. Given our expectations for our brands, +we currently expect this trend to continue. Nonetheless, actual results could differ materially depending upon consumer +preferences, availability of product, competition and our customers continuing to carry and promote our various product lines, among other risks and uncertainties. See Part I, Item 1A, +"Risk Factors." +29 +Table of Contents +Results of Operations +Year Ended December 31, 2008 Compared to Year Ended December 31, 2009 +The following table summarizes our results of operations: +Years Ended December 31, +2008 +2009 +Change +Amount +% +Amount +% +Amount +% +Net sales +$ +689,445 +100.0 +% +$ +813,177 +100.0 +% +$ +123,732 +17.9 +% +Cost of sales +384,127 +55.7 +442,087 +54.4 +57,960 +15.1 +Gross profit +305,318 +44.3 +371,090 +45.6 +65,772 +21.5 +Selling, general and administrative expenses +152,574 +22.1 +188,843 +23.2 +36,269 +23.8 +Impairment loss +35,825 +5.2 +1,000 +0.1 +(34,825 +) +(97.2 +) +Income from operations +116,919 +17.0 +181,247 +22.3 +64,328 +55.0 +Other income, net +(3,583 +) +(0.5 +) +(1,976 +) +(0.2 +) +1,607 +44.9 +Income before income taxes +120,502 +17.5 +183,223 +22.5 +62,721 +52.0 +Income taxes +46,631 +6.8 +66,304 +8.2 +19,673 +42.2 +Net income +73,871 +10.7 +116,919 +14.4 +43,048 +58.3 +Net loss (income) attributable to the noncontrolling interest +77 +* +(133 +) +* +(210 +) +* +Net income attributable to Deckers Outdoor Corporation +$ +73,948 +10.7 +% +$ +116,786 +14.4 +% +$ +42,838 +57.9 +% +* Calculation +of percentage change is not meaningful. +Overview. The increase in net sales was primarily due to an increase in UGG wholesale product sales as well as retail stores +sales. The increase in +income from operations resulted primarily from the increase in net sales and gross margin, partially offset by higher selling, general and administrative expenses. In addition, we experienced a +significant reduction in impairment losses. +30 +Table of Contents +Net Sales. The following table summarizes net sales by location and net sales by brand and distribution channel: +Years Ended December 31, +Change +2008 +2009 +Amount +% +Net sales by location: +US +$ +581,512 +$ +645,993 +$ +64,481 +11.1 +% +International +107,933 +167,184 +59,251 +54.9 +Total +$ +689,445 +$ +813,177 +$ +123,732 +17.9 +% +Net sales by brand and distribution channel: +UGG: +Wholesale +$ +483,781 +$ +566,964 +$ +83,183 +17.2 +% +eCommerce +60,642 +66,939 +6,297 +10.4 +Retail stores +37,558 +77,934 +40,376 +107.5 +Total +581,981 +711,837 +129,856 +22.3 +Teva: +Wholesale +80,882 +71,952 +(8,930 +) +(11.0 +) +eCommerce +5,219 +5,289 +70 +1.3 +Retail stores +417 +421 +4 +1.0 +Total +86,518 +77,662 +(8,856 +) +(10.2 +) +Simple: +Wholesale +13,909 +10,544 +(3,365 +) +(24.2 +) +eCommerce +2,786 +3,100 +314 +11.3 +Retail stores +480 +484 +4 +0.8 +Total +17,175 +14,128 +(3,047 +) +(17.7 +) +Other brands: +Wholesale +3,649 +9,100 +5,451 +149.4 +eCommerce +122 +338 +216 +177.0 +Retail stores +— +112 +112 +* +Total +3,771 +9,550 +5,779 +153.2 +Total +$ +689,445 +$ +813,177 +$ +123,732 +17.9 +% +Total eCommerce +$ +68,769 +$ +75,666 +$ +6,897 +10.0 +% +Total Retail stores +$ +38,455 +$ +78,951 +$ +40,496 +105.3 +% +* Calculation +of percentage change is not meaningful. +The +increase in net sales was primarily driven by strong sales for the UGG brand. In addition, our weighted-average wholesale selling price per pair increased approximately 8.0% in 2009 +versus 2008, resulting primarily from higher UGG sales, which generally carry higher average selling prices. We experienced an increase in the number of pairs sold of our UGG brand, as well as +contributions from our new brands, partially offset by a decrease in the number of pairs sold of our Teva and Simple brands. This resulted in a 6.8% overall increase in the volume of footwear sold for +all brands from approximately 14.7 million pairs for 2008 to approximately 15.7 million pairs for 2009. +31 +Table of Contents +Wholesale +net sales of our UGG brand increased primarily due to an increase in sales to both domestic and international customers, as well as higher weighted-average wholesale selling +prices per pair. We cannot assure investors that UGG brand sales will continue to grow at their past pace or that revenue from UGG products will not at some point decline. +Wholesale +net sales of our Teva brand decreased primarily due to a decrease in the number of pairs sold as well as reduced closeout sales, partially offset by a slight increase in the +weighted-average wholesale selling price per pair. +Wholesale +net sales of our Simple brand decreased due to both a decrease in the weighted-average wholesale selling price per pair and a decrease in the number of pairs sold. +Wholesale +net sales of our other brands increased, as we did not own our other brands during all of 2008. +Net +sales of our eCommerce business increased primarily due to an increase in pairs shipped, with the greatest impact from the UGG brand. +Net +sales of our retail store business, which are predominantly UGG Australia stores, increased primarily due to the addition of five new stores opened since December 31, 2008 and +sales increases from existing stores. We do not expect this growth rate to continue because as we increase the number of our stores, each new store will have less proportional impact on our growth +rate. For those stores that were open for the full year ended December 31, 2008 and 2009, same store sales grew by 27.6%. Nevertheless, we cannot assure investors that retail store sales will +continue to grow at their recent pace or that revenue from our retail store business will not at some point decline. +International +sales, which are included in the segment sales above, for all of our products combined represented 15.7% of worldwide net sales for 2008 compared to 20.6% for 2009. The +majority of the international sales growth was from the UGG brand, including our retail stores which were not open for the full year of 2008, plus our new stores we opened in 2009. Our international +growth was led by the European region. +Gross Profit. As a percentage of net sales, gross margin increased from 44.3% for 2008 to 45.6% for 2009, primarily due to a +higher percentage of +retail sales and increased margins for our UGG wholesale and retail stores segments. We were able to contain certain costs for production and shipping, primarily related to UGG products. This was +partially offset by an increased impact of Simple closeout sales including negative average margins. In addition, our international distributor sales +increased, which carry lower margins. International sales represented a greater percentage of our total sales for 2009 versus 2008. +Selling, General and Administrative Expenses (SG&A). As a percentage of net sales, SG&A increased from 22.1% of net sales +for 2008 to 23.2% for 2009. +The increase in SG&A both as a percentage of sales and in absolute dollars resulted primarily from a planned increase in payroll expenses as well as costs associated with five new retail stores that +were not open at December 31, 2008. +Impairment Loss. We conducted our annual impairment evaluation of goodwill and nonamortizable intangible assets as of +December 31, 2008 and +2009. In 2008, we recognized an impairment loss of $20,400 on our Teva trademarks, $11,929 on our Teva goodwill and $3,496 on our TSUBO goodwill. In addition to our annual impairment test, as of +June 30, 2009, impairment indicators arose that the TSUBO intangible assets were possibly impaired. As a result, we conducted an interim impairment evaluation of the TSUBO trademarks and +concluded that the fair value was lower than the carrying amount. Therefore, we recognized an impairment loss of $1,000 on the TSUBO trademarks during the three months ended June 30, 2009. For +further discussion of our impairment evaluations, refer to "Critical Accounting Policies and Estimates" below. +32 +Table of Contents +Income (Loss) from Operations. The following table summarizes operating income (loss) by segment. The gross profit derived from +the sales to third +parties of the eCommerce and retail store segments for the US is separated into two components: (i) the wholesale profit is included in the operating income or loss of each wholesale segment, +and (ii) the remaining profit is included in the eCommerce and retail stores segments. The gross profit of the international portion of the eCommerce and retail stores segments includes both +the wholesale and retail profit. +Years Ended December 31, +Change +2008 +2009 +Amount +% +UGG wholesale +$ +187,824 +$ +232,712 +$ +44,888 +23.9 +% +Teva wholesale(1) +(18,688 +) +12,495 +31,183 +166.9 +Simple wholesale +(2,262 +) +(7,284 +) +(5,022 +) +* +Other brands wholesale(2) +(4,842 +) +(7,414 +) +(2,572 +) +* +eCommerce +22,364 +21,073 +(1,291 +) +(5.8 +) +Retail stores +6,649 +18,498 +11,849 +178.2 +Unallocated overhead costs +(74,126 +) +(88,833 +) +(14,707 +) +(19.8 +) +Total +$ +116,919 +$ +181,247 +$ +64,328 +55.0 +% +* Calculation +of percentage change is not meaningful. +(1) Included +in Teva loss from operations in 2008 is an impairment loss of $32,329. +(2) Included +in Other brands loss from operations in 2008 and 2009 is an impairment loss of $3,496 and $1,000, respectively. +Income +from operations increased primarily due to the increase in net sales and gross margins as well as a significantly lower impairment loss in 2009, partially offset by higher +selling, general and administrative expenses. +The +increase in income from operations of UGG brand wholesale was primarily the result of the higher sales and gross margins as well as lower bad debt expenses and lower selling +expenses, mainly due to a change in the commission structure. These results were partially offset by increased marketing and promotional expenses. +The +increase in income from operations of Teva brand wholesale was largely due to the impairment loss in 2008 as well as our portion of the production costs for the documentary IMAX +film, " Grand Canyon Adventure, River at Risk " in 2008. In addition, we reduced marketing and selling expenses in 2009. These reductions in expenses were +partially offset by lower sales and gross margins. +The +increase in the loss from operations of Simple brand wholesale was primarily due to lower gross margins, mainly attributed to an increased impact of closeout sales and inventory +write-downs, and lower total sales. In addition, we recognized our planned increase in marketing and promotional expenses in the first half of the year. +We +did not own our other brands during the full year of 2008. We acquired, integrated, or continued to develop our other brands during 2009. +Income +from operations of our eCommerce business decreased primarily due to higher operating costs and lower gross margins, partially offset by higher sales, mainly UGG brand sales. The +higher operating costs were related to increased marketing and promotional expenses as well as increased payroll and related expense in support of our enhancement and expansion plans. The lower gross +margins were largely due to not passing on shipping charges to our customers to remain competitive online. +33 +Table of Contents +Income +from operations of our retail store business increased primarily due to the increase in net sales and gross margin, partially offset by higher operating expense primarily related +to our new store openings. +Unallocated +overhead costs increased primarily from higher corporate payroll costs resulting from our planned increase in headcount related to our continued worldwide growth. +Other (Income) Expense. Interest income decreased by $2,180 from 2008 to 2009, primarily from lower overall market interest +rates, as well as a shift +in our investment mix to a greater percentage of safer, more liquid and lower yielding investments. Interest expense was negative due to the reversal of accrued interest originally recorded in prior +periods related to certain tax obligations for one of our foreign subsidiaries. Management determined that any remaining liability for such matters is remote, and therefore, we reversed the previously +accrued amount. +Income Taxes. Income tax expense and effective income tax rates were as follows: +Years Ended +December 31, +2008 +2009 +Income tax expense +$ +46,631 +$ +66,304 +Effective income tax rate +38.7 +% +36.2 +% +The +decrease in the effective tax rate was primarily due to the increase in our annual international pre-tax income as a percentage of worldwide pre-tax income, +as income generated in most of our foreign jurisdictions are taxed at significantly lower rates than the US. Also, in 2008, we had impairment losses attributable to a foreign subsidiary that received +no tax benefit from the charge. The effective tax rate is subject to ongoing review and evaluation by management and can vary from year to year. +Net Loss (Income) Attributable to the Noncontrolling Interest. Net income attributable to the noncontrolling interest in our +joint venture with +Stella International, which was formed in July 2008, was a net loss of $77 in 2008, compared to net income of $133 for 2009. +Net Income Attributable to Deckers Outdoor Corporation. Our net income increased as a result of the items discussed above. Our +diluted earnings per +share increased by 58.8% from $5.60 in 2008 to $8.89 for 2009, as a result of the increase in net income, as well as lower weighted-average diluted shares, primarily related to our stock repurchases +in 2009. +34 +Table of Contents +Year Ended December 31, 2007 Compared to Year Ended December 31, 2008 +The following table summarizes our results of operations: +Years Ended December 31, +2007 +2008 +Change +Amount +% +Amount +% +Amount +% +Net sales +$ +448,929 +100.0 +% +$ +689,445 +100.0 +% +$ +240,516 +53.6 +% +Cost of sales +241,458 +53.8 +384,127 +55.7 +142,669 +59.1 +Gross profit +207,471 +46.2 +305,318 +44.3 +97,847 +47.2 +Selling, general and administrative expenses +101,918 +22.7 +152,574 +22.1 +50,656 +49.7 +Impairment loss +— +— +35,825 +5.2 +35,825 +* +Income from operations +105,553 +23.5 +116,919 +17.0 +11,366 +10.8 +Other income, net +(4,486 +) +(1.0 +) +(3,583 +) +(0.5 +) +903 +20.1 +Income before income taxes +110,039 +24.5 +120,502 +17.5 +10,463 +9.5 +Income taxes +43,602 +9.7 +46,631 +6.8 +3,029 +6.9 +Net income +66,437 +14.8 +73,871 +10.7 +7,434 +11.2 +Net income attributable to the noncontrolling interest +— +— +77 +* +77 +* +Net income attributable to Deckers Outdoor Corporation +$ +66,437 +14.8 +% +$ +73,948 +10.7 +% +$ +7,511 +11.3 +% +* Calculation +of percentage change is not meaningful. +Overview. The increase in net sales was primarily due to higher UGG brand net sales. Income from operations increased primarily +as a result of the +increase in net sales, partially offset by a lower gross margin and higher selling, general and administrative expenses as well as impairment losses recognized during the second and fourth quarters of +2008. Also, in May 2008, we acquired the ownership interests of TSUBO, LLC which had a loss from operations as discussed below. +35 +Table of Contents +Net Sales. The following table summarizes net sales by location and net sales by brand and distribution channel: +Years Ended December 31, +Change +2007 +2008 +Amount +% +Net sales by location: +US +$ +386,593 +$ +581,512 +$ +194,919 +50.4 +% +International +62,336 +107,933 +45,597 +73.1 +Total +$ +448,929 +$ +689,445 +$ +240,516 +53.6 +% +Net sales by brand and distribution channel: +UGG: +Wholesale +$ +291,908 +$ +483,781 +$ +191,873 +65.7 +% +eCommerce +37,880 +60,642 +22,762 +60.1 +Retail stores +17,766 +37,558 +19,792 +111.4 +Total +347,554 +581,981 +234,427 +67.5 +Teva: +Wholesale +82,003 +80,882 +(1,121 +) +(1.4 +) +eCommerce +5,630 +5,219 +(411 +) +(7.3 +) +Retail stores +260 +417 +157 +60.4 +Total +87,893 +86,518 +(1,375 +) +(1.6 +) +Simple: +Wholesale +11,163 +13,909 +2,746 +24.6 +eCommerce +1,963 +2,786 +823 +41.9 +Retail stores +356 +480 +124 +34.8 +Total +13,482 +17,175 +3,693 +27.4 +Other brands: +Wholesale +— +3,649 +3,649 +* +eCommerce +— +122 +122 +* +Retail stores +— +— +— +* +Total +— +3,771 +3,771 +* +Total +$ +448,929 +$ +689,445 +$ +240,516 +53.6 +% +Total eCommerce +$ +45,473 +$ +68,769 +$ +23,296 +51.2 +% +Total Retail stores +$ +18,382 +$ +38,455 +$ +20,073 +109.2 +% +* Calculation +of percentage change is not meaningful. +The +increase in net sales was due primarily to: +• increases in UGG brand sales worldwide, +• an increase in the weighted-average wholesale selling price per pair, which increased 22.8% from $34.55 in 2007 to $42.41 +in 2008, primarily from an increase in sales of UGG products, which carry higher average selling prices, +• a 24.6% overall increase in the volume of footwear sold from 11.8 million pairs in 2007 to 14.7 million +pairs in 2008, +36 +Table of Contents +• the continued growth of our eCommerce business and expansion of our retail store business, and +• an increase in full price sales, as we had fewer closeout sales as a percent of total sales, in 2008 compared to 2007. +Net +wholesale sales of UGG products increased primarily due to an increase in the number of pairs sold as well as an increased weighted-average wholesale selling price per pair. +Net +wholesale sales of Teva products decreased primarily due to a decrease in the number of pairs sold, partially offset by an increase in the weighted-average wholesale selling price +per pair. +Net +wholesale sales of Simple products increased driven primarily by an increase in the weighted-average wholesale selling price per pair as well as an increase in the number of pairs +sold. +Net +wholesale sales of our other brands increased, as we did not own our other brands during 2007. +The +increase in net sales of the eCommerce business was driven by greater demand for our UGG products. +Net +sales of the retail store business increased primarily due to UGG brand sales. The large increase in UGG brand sales is partially attributable to our five new UGG brand concept +stores opened in 2008 and the additional stores that were not open for the full year of 2007. +International +sales for all of our products increased by 73.1% in 2008 compared to 2007, representing 13.9% of net sales in 2007 and 15.7% of net sales in 2008. The majority of the +international sales growth was due to increases in UGG and Simple brand sales, as well as our retail stores that opened in 2008. The largest increase in international sales comes from our UGG brand +sales, led by the European region. +Gross Profit. The decline in our gross margin was primarily due to increased factory costs associated with our UGG brand, an +increased percentage of +international sales, which carry lower gross margins, and increased inventory write-offs. +Selling, General and Administrative Expenses. The increase in SG&A in absolute dollars resulted from: +• an increase in personnel costs, including additional stock compensation related to our long-term incentive +plan; +• additional costs related to our expanded distribution center; +• higher sales and marketing variable costs related to the increase in sales and six new retail stores that were not open +during the full year of 2007; +• higher fixed selling costs related to new retail stores, including rent expenses; +• increased legal costs due primarily to increased efforts to defend and protect our intellectual property; +• an increase in our bad debt reserve due to higher credit risk in the economic environment, and +• our portion of the production costs for the documentary IMAX film, " Grand Canyon Adventure, River +at Risk ," which was sponsored by Teva and was released in IMAX theaters in March 2008. +37 +Table of Contents +Impairment Loss. We conducted our annual impairment evaluation of goodwill and nonamortizable intangible assets as of +December 31, 2007 and +2008. As of December 31, 2007, we concluded there was no impairment of any of our goodwill and nonamortizable intangible assets. As of December 31, 2008, we concluded that the fair value +of our Teva trademarks and goodwill were below their respective carrying amounts. In addition, we concluded that the fair value of our TSUBO goodwill was also below its carrying amount. Therefore, we +recognized an impairment loss in the fourth quarter of 2008 of $5,500 on our Teva trademarks and $15,425 on our Teva and TSUBO goodwill. In addition to our annual impairment test, as of +June 30, 2008, impairment indicators arose that the Teva goodwill and other intangible assets were possibly impaired. As a result, we conducted an interim impairment evaluation of the Teva +goodwill and Teva trademarks. As of June 30, 2008, we concluded that the Teva goodwill was not impaired, but the fair value of the Teva trademarks was lower than the carrying amount. Therefore, +we recognized an impairment loss of $14,900 on the Teva trademarks during the three months ended June 30, 2008. For further discussion of our impairment evaluations, refer to "Critical +Accounting Policies and Estimates" below. +Income (Loss) from Operations. The gross profit derived from the sales to third parties of the eCommerce and retail store +segments for the US is +separated into two components: (i) the wholesale profit is included in the operating income or loss of each wholesale segment, and (ii) the remaining profit is included in the eCommerce +and retail stores segments. The gross profit of the international portion of the eCommerce and retail stores segments includes both the wholesale and retail profit. The following table summarizes +operating income (loss) by segment: +Years Ended December 31, +Change +2007 +2008 +Amount +% +UGG wholesale +$ +119,193 +$ +187,824 +$ +68,631 +57.6 +% +Teva wholesale(1) +21,121 +(18,688 +) +(39,809 +) +(188.5 +) +Simple wholesale +(2,077 +) +(2,262 +) +(185 +) +(8.9 +) +Other brands wholesale(2) +— +(4,842 +) +(4,842 +) +* +eCommerce +14,502 +22,364 +7,862 +54.2 +Retail stores +3,194 +6,649 +3,455 +108.2 +Unallocated overhead costs +(50,380 +) +(74,126 +) +(23,746 +) +(47.1 +) +Total +$ +105,553 +$ +116,919 +$ +11,366 +10.8 +% +* Calculation +of percentage change is not meaningful. +(1) Included +in Teva loss from operations in 2008 is an impairment loss of $32,329. +(2) Included +in Other brands loss from operations in 2008 is an impairment loss of $3,496. +Income +from operations represented 23.5% of sales in 2007 and 17.0% in 2008. This decrease in percent of sales was due primarily to the lower gross margin, higher selling, general and +administrative expenses and the impairment loss during 2008, partially offset by the increase in net sales. +The +increase in income from operations of the UGG brand at wholesale was primarily the result of the higher sales volumes, partially offset by lower gross margins and increased +divisional sales expenses, marketing expenses, commissions, bad debt reserves, and research and development expenses. +We +had a loss from operations of the Teva brand at wholesale in 2008 compared to income from operations in 2007. This decline in performance was largely due to the impairment loss and +was also caused by lower sales and gross margins as well as higher divisional expenses. +38 +Table of Contents +Loss +from operations of the Simple brand at wholesale increased slightly primarily due to higher marketing, product design, and divisional sales expenses, partially offset by higher +sales and gross margins due to an increase in the weighted-average wholesale selling price per pair. +Loss +from operations of our other brands includes an impairment loss of $3,496. +Income +from operations of our eCommerce business increased primarily due to the increase in net sales, partially offset by lower gross margins and increased operating costs. +Income +from operations of our retail store business increased primarily due to higher retail sales, partially offset by the higher operating costs associated with our new retail stores +that were not open during the full year of 2007. +Unallocated +overhead costs increased primarily from higher corporate payroll costs, including stock compensation, additional costs related to our expanded distribution center, and +increased legal costs related to defense and protection of our intellectual property. +Other Expense (Income). Interest income decreased by $1,665 primarily from a significant shift in the mix of our cash and cash +equivalents and +investment balances in 2008 versus 2007 to safer, more liquid, and lower yielding investments as well as lower market interest rates. Interest expense decreased primarily due to the reversal of +interest expense related to income tax uncertainties due to settlements during 2008 that were previously accrued, and in 2007, we incurred interest expense related to certain tax matters in the Far +East. +Income Taxes. Income tax expense and effective income tax rates were as follows: +Years Ended December 31, +2007 +2008 +Income tax expense +$ +43,602 +$ +46,631 +Effective income tax rate +39.6 +% +38.7 +% +The +decrease in the effective tax rate was primarily due to an increase in the Company's international sales as a percentage of total worldwide sales. The Company's average international +tax rate is significantly less than the Company's US rate, and therefore a higher ratio of international sales and international pre-tax income decreases the Company's overall effective +tax rate. This decrease was partially offset by approximately $6,531 of impairment losses in 2008 attributable to a foreign subsidiary that receives no tax benefit from the charge, as this subsidiary +is in a tax free jurisdiction. In 2008, buy-in payments were substantially completed for our intellectual property rights, which were taxable in the US at the higher tax rate. In 2007 and +2008, these buy-in payments resulted in an increase in the Company's US pre-tax income and a decrease in the Company's international pre-tax income. +Net Loss Attributable to the Noncontrolling Interest. Net loss attributable to the noncontrolling interest in our joint venture +with Stella +International, which was formed in July 2008, was $77 for 2008. +Net Income Attributable to Deckers Outdoor Corporation. Our net income increased primarily as a result of higher net sales and +higher gross profit +dollars in 2008, partially offset by higher SG&A and the impairment loss. Our earnings per diluted share increased 10.7% from $5.06 in 2007 to $5.60 in 2008, primarily as a result of the increase in +net income. +Off-Balance Sheet Arrangements +We have off-balance sheet arrangements consisting of operating lease obligations and purchase obligations. See "Contractual +Obligations" below. +39 +Table of Contents +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, as needed, the credit available under our revolving credit facility. In an economic recession or under other adverse economic +conditions, we may be unable to realize a return on our cash and cash equivalents and short-term investments, secure additional credit on favorable terms, renew our existing credit or +access our existing line of credit. Such failures may impact our working capital reserves and have a material adverse effect on our business. +Since +the latter part of 2007, US and foreign credit markets have experienced adverse conditions, including unusual volatility and a lack of secondary market liquidity, which conditions +have presented, and continue to present, significant challenges to the investment markets and have limited the availability of short-term debt for working capital. While it is difficult to +predict how long these adverse conditions will exist, these factors, if they continue, could adversely impact our future financial condition and our future results of operations. +Our +cash flow cycle includes the purchase of inventories, the subsequent sale of the inventories and the eventual collection of the resulting accounts receivables. As a result, our +working capital requirements begin when we purchase the inventories and continue until we ultimately collect the resulting receivables. The seasonality of our UGG brand business requires us to build +fall and winter inventories in the second and third quarters to support sales for the UGG brand's major selling seasons, which historically occur during the third and fourth quarters. Given the +seasonality of our UGG brand, our working capital requirements fluctuate significantly throughout the year. The cash required to fund these working capital fluctuations has been provided using our +internal cash flows. If necessary, we may borrow funds under our revolving credit facility. During 2007, 2008, and 2009, we did not borrow funds under our revolving credit facility. +The +following table summarizes our cash flows and working capital: +Year Ended December 31, +Change +2008 +2009 +Amount +% +Net cash provided by operating activities +$ +53,276 +$ +185,474 +$ +132,198 +248.1 +% +Net cash provided by (used in) investing activities +$ +66,716 +$ +(25,398 +) +$ +(92,114 +) +(138.1 +)% +Net cash provided by (used in) financing activities +$ +2,267 +$ +(21,065 +) +$ +(23,332 +) +(1029.2 +)% +Year Ended December 31, +Change +2008 +2009 +Amount +% +Cash and cash equivalents +$ +176,804 +$ +315,862 +$ +139,058 +78.7 +% +Short-term investments +17,976 +26,120 +8,144 +45.3 +Trade accounts receivable +108,129 +76,427 +(31,702 +) +(29.3 +) +Inventories +92,740 +85,356 +(7,384 +) +(8.0 +) +Other current assets +17,315 +17,222 +(93 +) +(0.5 +) +Total current assets +$ +412,964 +$ +520,987 +$ +108,023 +26.2 +% +Trade accounts payable +$ +42,960 +$ +47,331 +$ +4,371 +10.2 +% +Other current liabilities +52,249 +53,539 +1,290 +2.5 +Total current liabilities +$ +95,209 +$ +100,870 +$ +5,661 +5.9 +% +Net working capital +$ +317,755 +$ +420,117 +$ +102,362 +32.2 +% +40 +Table of Contents +Cash from Operating Activities. The increase in net cash provided by operating activities was primarily due to decreases in +accounts receivable and +inventory in 2009 compared to 2008. The decrease in accounts receivable was primarily due to increased cash collections. The decrease in inventory was largely due to decreased Teva inventory, as we +purchased in smaller quantities, more often, and closer to demand. These changes were partially offset by a decrease in income taxes payable related to our decreased effective tax rate. Net working +capital improved primarily as a result of higher cash and cash equivalents, partially offset by decreased accounts receivable. The changes in working capital are due to increased sales and collections +as well as our normal seasonality and timing of cash receipts and cash payments. +Wholesale +accounts receivable turnover increased from 7.5 times in the twelve months ended December 31, 2008 to 7.8 times in the twelve months ended December 31, 2009, +primarily as a result of increased sales and faster collections in 2009 compared to 2008 due to the continued demand for UGG product in 2009, which encouraged retailers to pay their receivables +balances faster to expedite upcoming deliveries. In 2008, we used both wholesale and consumer direct sales in our accounts receivable turnover calculations. As of September 30, 2009, we changed +the method of our calculation to exclude consumer direct sales, as this is more consistent with how management views the business, and, in general, our consumer direct sales do not carry accounts +receivable balances. +Inventory +turnover decreased from 4.1 times for the year ended December 31, 2008 to 3.8 times for the year ended December 31, 2009, largely due to higher average inventory +balances during the twelve months ended December 31, 2009 compared to the twelve months ended December 31, 2008. The higher average inventory balances were in support of our increased +sales. +Cash from Investing Activities. Net cash provided by investing activities in 2008 was comprised primarily of net sales of +short-term +investments, partially offset by purchases of property and equipment and our acquisition of TSUBO, LLC. Our capital expenditures were primarily related to a new inventory pick module in our +distribution center, leasehold improvements for new retail stores, and computer hardware and software. Net cash used in investing activities in 2009 was comprised primarily of purchases of property +and equipment and net purchases of short-term investments. Our larger capital expenditures were related to the build out of new retail stores, expansion of our warehouse pick module and +computer hardware and software. As our short-term investments matured, we invested in cash equivalents, thus decreasing purchases and sales of short-term investments. +As +of December 31, 2009, we had no material commitments for future capital expenditures, but we estimate that the capital expenditures for 2010 will range from approximately +$25,000 to $30,000 and anticipate those will include the build-out of new retail stores and miscellaneous computer hardware and software. We intend to amend our credit facility to increase +the capital expenditure limits set forth in the credit agreement. The actual amount of capital expenditures for 2010 may differ from this estimate, largely depending on any unforeseen needs to replace +existing assets and the timing of expenditures. +Cash from Financing Activities. In 2008, net cash provided by financing activities consisted of the excess tax benefits from +shared-based +compensation as well as the contribution from our new joint venture partner and cash received from the exercise of stock options, partially offset by cash paid for shares withheld for taxes. In 2009, +net cash used in financing activities was comprised primarily of repurchases of our common stock under our stock repurchase program. In addition, we used cash for shares withheld for taxes from +employee stock unit vestings, primarily offset by excess tax benefits from stock compensation. +In +June 2009, our Board of Directors approved a stock repurchase program to repurchase up to $50,000 of our common stock in the open market or in privately negotiated transactions, +subject to market conditions, applicable legal requirements and other factors. The program does not obligate us to acquire any particular amount of common stock and the program may be suspended at any +time at our discretion. The purchases will be funded from available working capital. As of December 31, 2009, we repurchased approximately 300,000 shares of our common stock under this program +for approximately $20,000, or an +41 +Table of Contents +average +price of $66.43 per share. As of December 31, 2009, the remaining amount approved to repurchase shares is approximately $30,000. +Our +revolving credit facility with Comerica Bank, or the Facility, provides for a maximum availability of $20,000. Up to $12,500 of borrowings may be in the form of letters of credit. +The Facility bears interest at the lender's prime rate (3.25% at December 31, 2009) or, at our option, at the London Interbank Offered Rate, or LIBOR, (0.23% at December 31, 2009) 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 expires on June 1, 2010. At December 31, 2009, we had no outstanding borrowings under the Facility and outstanding letters of credit of $189. As a +result, $19,811 was available under the Facility at December 31, 2009. +The +agreements underlying the Facility contain certain financial covenants. We amended the Facility in June 2009, including amending some of these covenants. The covenants currently +include a limitation on aggregate annual lease payments of $20,000, a quick ratio requirement of at least 0.90:1.00, a minimum profitability requirement of $1,000 per fiscal quarter (except for the +quarter ended June 30, 2009, there was a maximum net loss of $3,000), a limitation on annual consolidated capital expenditures of $25,000 in fiscal year 2009 and $15,000 in any fiscal year +thereafter, a minimum tangible net worth requirement of $37,000 commencing with the fiscal year ended December 31, 2004, plus 75% of consolidated net profit on a cumulative basis, and a +requirement that our consolidated total liabilities to consolidated effective tangible net worth ratio be no greater than 1.50:1.00. The agreements also contain a prohibition on the payment of +dividends. At December 31, 2009, we were in compliance with all covenants and remain so as of the date of this report. +Contractual Obligations. The following table summarizes our contractual obligations at December 31, 2009 and the effects +such obligations are +expected to have on liquidity and cash flow in future periods. +Payments Due by Period +Total +Less than +1 Year +1-3 Years +3-5 Years +More than +5 Years +Operating lease obligations(1) +$ +77,298 +$ +14,131 +$ +27,263 +$ +13,376 +$ +22,528 +Purchase obligations(2) +168,603 +166,240 +2,363 +— +— +Unrecognized tax benefits(3) +5,011 +— +5,011 +— +— +Total +$ +250,912 +$ +180,371 +$ +34,637 +$ +13,376 +$ +22,528 +(1) Our +operating lease obligations consist primarily of building leases for our retail locations, distribution centers, and corporate and regional offices. +Other long-term liabilities on our consolidated balance sheet include primarily deferred rents, which are included in operating lease obligations in this table. +(2) Our +purchase obligations consist largely of purchase orders. They also include promotional expenses, service contracts, and minimum purchase commitments. +Outstanding purchase orders are primarily with our third party manufacturers and are expected to be paid within one year. These are outstanding open orders and not minimum obligations. Our promotional +expenditures and service contracts are due periodically through 2012. In February 2009, we entered into a contract requiring minimum purchase commitments of sheepskin with a remaining commitment of +approximately $64,000 as of December 31, 2009 that Deckers' affiliates, manufacturers, factories and other agents (each or collectively, a "Buyer") must make on or before December 31, +2010. This contract may result in an unconditional purchase obligation if a Buyer does not meet the minimum purchase requirements. In the event that a Buyer does not purchase such minimum commitments +on or before December 31, 2010, Deckers is required to purchase any remaining amounts on or before December 31, 2010. We expect our sheepskin purchases by third party factories supplying +UGG product to us will exceed these levels. Therefore, we do not anticipate having to make any non-performance payments under this +42 +Table of Contents +contractual +arrangement; however, we are not able to reasonably estimate when or if cash payments will occur and have included the remaining amount in this table. We believe this will not materially +affect our liquidity or results of operations, as it is in the normal course of our business. +(3) The +unrecognized tax benefits are related to uncertain tax positions taken in our income tax return that would impact the effective tax rate or additional +paid-in capital, if recognized. +In +addition to the amounts in the table above, we have entered into other off-balance sheet arrangements: +We +agreed to make loans to our joint venture with Stella International, should the need arise. As of December 31, 2009, the estimated total loans by Deckers and Stella +International was expected to be approximately $4,000 contributed by both parties in proportion to their respective ownership in the joint venture. We also have potential future earn-out +payments relating to our May 2008 acquisition of TSUBO, LLC and our March 2009 acquisition of Ahnu, Inc. The potential earn-out for TSUBO, LLC is based on the amount, +if any, that sales of TSUBO products exceed certain base revenue levels for each year from 2008 to 2012. See Note 9, "Commitments and Contingencies," to the consolidated financial statements +for further discussion. The potential earn-out for Ahnu, Inc. is based on the amount, if any, that gross profit of Ahnu products exceeds certain base levels for each year from 2010 +to 2013. See Note 13, "Business Combinations," to the consolidated financial statements for further discussion. These amounts were excluded from the table above as all conditions for the +earn-out payments have not been met. As of December 31, 2009, the present value of the earn-out payments of $651 is included within long-term liabilities in +the consolidated balance sheet. +We +entered into or amended agreements with certain of our international distributors to assume control of the distribution rights in those regions. Under these agreements, we expect to +make total payments to these distributors of approximately $10,500 from 2010 through 2011. The payments include consideration for the purchase of certain assets and services. +We +believe that internally generated funds, the available borrowings under our existing Facility or a new credit 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, the availability of short-term credit, and market volatility, among others. See Part I, Item 1A, and "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 requirements, 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 other material present understandings, commitments or agreements with respect to the acquisition of any other businesses, we may evaluate +acquisitions of other businesses or brands. +Impact of Inflation +We believe that the rates of inflation in the three most recent fiscal years have not had a significant impact on our net sales or +profitability. +43 +Table of Contents +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 reasonably assured, persuasive evidence of an arrangement exists, and the sales price is fixed or determinable. Allowances for estimated returns, discounts, chargebacks, 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 US generally accepted accounting principles 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 and known circumstances, authoritative accounting pronouncements +and other factors that management believes to be reasonable. Management reasonably could use different 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 materially +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. +The +following table summarizes data related to the critical accounting estimates for accounts receivable allowances and reserves, which are discussed below: +December 31, 2008 +December 31, 2009 +Amount +% of Gross +Trade Accounts +Receivable +Amount +% of Gross +Trade Accounts +Receivable +Gross trade accounts receivable +$ +118,835 +$ +88,217 +Allowance for doubtful accounts +$ +2,482 +2.1 +% +$ +2,710 +3.1 +% +Reserve for sales discounts +$ +4,241 +3.6 +% +$ +2,796 +3.2 +% +Allowance for estimated chargebacks +$ +1,648 +1.4 +% +$ +3,049 +3.5 +% +Amount +% of Net Sales +Amount +% of Net Sales +Net sales for the three months ended +$ +303,506 +$ +347,989 +Allowance for estimated returns +$ +2,335 +0.8 +% +$ +3,235 +0.9 +% +Estimated returns liability +$ +4,419 +1.5 +% +$ +4,018 +1.2 +% +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 and forecasts, 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 all or a portion of are identified as potentially uncollectible, plus a non-specific reserve for the balance of accounts based on our +historical loss experience. Reserves have been established for all projected losses of this nature. The increase in the allowance for doubtful accounts from December 31, 2008 to +December 31, 2009 was primarily due to an increase in one account's specific reserve because that account filed for bankruptcy. 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 we consider to have credit risk and are not specifically identified as uncollectible +would change the allowance for doubtful accounts at December 31, 2009 by approximately $520. +44 +Table of Contents +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 available to be taken against the +period-end trade accounts receivable, and we record a corresponding reserve for sales discounts. The decrease in the reserve as a percentage of accounts receivable was primarily due to a +lower percentage of total outstanding customer balances being eligible for terms discounts. 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, 2009 by approximately $280. +Allowance for Estimated Chargebacks. When our domestic wholesale customers pay their invoices, they often take deductions for +chargebacks against +their invoices, which are often valid. Therefore, we record an allowance for the balance of chargebacks that are outstanding in our accounts receivable balance as of the end of each quarter, along +with an estimated reserve for chargebacks that have not yet been taken against outstanding accounts receivable balances. This estimate is based on historical trends of the timing of chargebacks taken +against invoices. The increase in the allowance was largely attributable to a substantial increase in accounts receivable turnover and increased sales in the fourth quarter of 2009, resulting in +increased chargeback activity compared to 2008. +Allowance for Estimated Returns. We record an allowance for anticipated future returns of goods shipped prior to period-end and +a +liability for anticipated returns of goods sold direct to consumers. In general, we accept returns for damaged or defective products but discourage returns for other reasons. We also accept returns +from our retail and eCommerce customers for a thirty day period. We base the amounts of the allowance and liability on any approved customer requests for returns, historical returns experience and any +recent events that could result in a change from historical returns rates, among other factors. 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, 2009 by approximately $2,410. +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, 2009, inventories were stated at $85,356, +net of inventory write-downs of $1,846. At December 31, 2008, inventories were stated at $92,740, net of inventory write-downs of $3,680. The decrease in inventory write-downs at +December 31, 2009 compared to December 31, 2008 was primarily due to sales of previously written-down inventory during 2009, primarily in our Teva and Simple brand +inventories. 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, 2009 by approximately $230. +Valuation of Goodwill, Intangible and Other Long-Lived Assets. Annually, or whenever events or changes in circumstances indicate +that the +carrying amount of an asset may not be recoverable, we assess the impairment of goodwill, intangible and other long-lived assets on a separate asset basis based on assumptions and +judgments regarding the carrying amount of these assets individually. We test goodwill and nonamortizable intangible assets for impairment on an annual basis as of December 31 based on the fair +value of the reporting unit for goodwill and 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: +• the assets' ability to continue to generate income from operations and positive cash flow in future periods; +45 +Table of Contents +• changes in consumer demand or acceptance of the related brand names, products or features associated with the assets; +• increased competition; and +• deterioration of general economic conditions or the retail environment, and customers reducing orders in response to such +conditions. +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. +As +of June 30, 2008, our inability to reach our 2008 Teva brand period to date sales targets along with a reduced long-term forecast for Teva brand sales growth were +indicators that the Teva goodwill and other intangible assets were possibly impaired. As a result, we conducted an interim impairment evaluation of the Teva goodwill and other intangible assets as of +June 30, 2008 and concluded that the Teva goodwill was not impaired, but the fair value of the Teva trademarks was lower than the carrying amount. Therefore, we recognized an impairment loss of +$14,900 in the second quarter of 2008 on the Teva trademarks. As of December 31, 2008, due in part to the continued decline in the economy in the second half of 2008, we reduced our +long-term Teva brand sales forecast. In addition, as of December 31, 2008, we experienced a significant decline in our market capitalization due to declines in market multiples. As +a result of the reduced sales forecast and the decline in market capitalization, we concluded that the fair value of our Teva trademarks and Teva goodwill were below their respective carrying amounts. +Further, due to the decline in our market capitalization, we concluded that the fair value of our TSUBO goodwill was also below its carrying amount. Therefore, we recognized an impairment loss in the +fourth quarter of 2008 of $5,500 on our Teva trademarks and $15,425 on our goodwill, which was the entire balance of both our Teva and TSUBO goodwill. The impairment loss is reflected in our +consolidated statement of operations for the year ended December 31, 2008. +As +of June 30, 2009, our inability to reach our 2009 TSUBO brand period to date sales targets along with a reduced long-term forecast for TSUBO brand sales growth were +indicators that the TSUBO intangible assets were possibly impaired. As a result, we conducted an interim impairment evaluation of the TSUBO intangible assets as of June 30, 2009 and concluded +that the fair value of the TSUBO trademarks was lower than the carrying amount. Therefore, we recognized an impairment loss of $1,000 in the second quarter of 2009 on the TSUBO trademarks. In +addition, we began amortizing the remaining balance of the TSUBO trademarks over 10 years. +On +December 31, 2009, we performed our annual impairment test of goodwill and nonamortizable intangible assets using market value approaches and valuation techniques and +determined that there was no impairment of goodwill or intangible assets as of December 31, 2009. Our use of different +estimates (including estimated royalty rates, discount rates, market multiples, and future revenues, among others) and assumptions could produce different financial results. As of December 31, +2009, our Teva trademarks had a carrying value of $15,300. At that date, our estimate of the trademarks' fair value was approximately 12% greater than the carrying value. Accordingly, if growth rates +fail to meet our forecasts, impairment of the Teva trademark may occur in the future. Our goodwill balance at December 31, 2009 represents goodwill primarily in the UGG reporting unit which has +a fair value substantially in excess of the carrying value. +Stock Compensation Expense. Stock compensation transactions with employees are accounted for using the fair value method and +expensed ratably over +the vesting period of the award. Stock compensation expense is based on the fair values of all share-based awards as of the grant date. Determining the expense of share-based awards at the grant date +requires judgment, including estimating the percentage of awards that will be forfeited, probabilities of meeting criteria for performance-based awards, stock volatility, the expected life of the +award, and other inputs. If actual forfeitures differ significantly from the estimates, stock compensation expense and our results of operations could be materially impacted. +46 +Table of Contents +Item 7A. Quantitative and Qualitative Disclosures about Market Risk. +Derivative Instruments. Although we have used foreign currency hedges in the past, we currently do not utilize forward contracts +or other derivative +instruments to mitigate exposure to fluctuations in the foreign currency exchange rate, as the majority of our purchases and sales for the foreseeable future will be denominated in US currency. As our +international operations grow and we increase purchases and sales in foreign currencies, we will evaluate and utilize derivative instruments, as needed, to hedge our foreign currency exposures. +Although +the majority of our sales and inventory purchases are denominated in US currency, our sales and inventory purchases may be impacted by fluctuations in the exchange rates between +the US dollar and the local currencies in the international markets where our products are sold and manufactured. If the US 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. +Interest Rate Risk. Our market risk exposure with respect to financial instruments is to changes in the prime rate in the US 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, 2009, 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. +Foreign Currency Exchange Rate Risk. We face market risk to the extent that changes in foreign currency exchange rates affect +our foreign assets and +liabilities. We manage these risks by attempting to denominate contractual and other foreign arrangements in US dollars and by maintaining a significant percentage of our liabilities in US dollars. We +do not believe that there has been a material change in the nature of our primary market risk exposures, including the categories of market risk to which we are exposed and the particular markets that +present the primary risk of loss. As of the date of this Annual Report on Form 10-K, we do not know of or expect there to be any material change in the general nature of our primary +market risk exposure in the near term. +Item 8. Financial Statements and Supplementary Data. +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. +Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. +None. +Item 9A. Controls and Procedures. +(a) Disclosure Controls and Procedures. +Disclosure controls and procedures are the controls and other procedures that are designed to ensure that information required to be disclosed in the reports that +the Company files or submits under the Securities Exchange Act of 1934, as amended (Exchange Act), is recorded, processed, summarized and reported within the time periods specified in the SEC's rules +and forms. Disclosure controls and procedures include, among other processes, controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files +or submits under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding +required disclosure. +47 +Table of Contents +The +Company carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer of the +effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2009 pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, +the Chief Executive Officer and Chief Financial Officer believe that as of the end of the period covered by this report, the Company's 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. +(b) Management's Report on Internal Control over Financial Reporting +Management is responsible for establishing and maintaining adequate internal control over financial reporting at the Company. Our internal control over financial +reporting is a process designed under the supervision of the Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and +the preparation of the Company's financial statements for external reporting purposes in accordance with US generally accepted accounting principles (GAAP). A company's internal control over financial +reporting includes those policies and procedures that: +• pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and +dispositions of the assets of the company; +• provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in +accordance with GAAP, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and the directors of the company; and +• provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of +the company's assets that could have a material effect on the financial statements. +Because +of 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 Company's internal control over financial reporting as of December 31, 2009. 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. Management's assessment included an evaluation of the design of the Company's 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, 2009, the Company maintained effective internal control over financial reporting. The registered public +accounting firm that audited the consolidated financial statements included in this Annual Report has issued an attestation report on the Company's internal control over financial reporting. 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. +(c) Changes in Internal Control over Financial Reporting +There was no change in our internal control over financial reporting that occurred during the quarter ended December 31, 2009 that has materially affected, +or is reasonably likely to materially affect, our internal control over financial reporting. +Item 9B. Other Information. +None. +48 +Table of Contents +PART III +Item 10. Directors, Executive Officers and Corporate Governance. +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 and is posted on our website at www.deckers.com. Our code of ethics is designed to meet the requirements of Section 406 of +Regulation S-K and the rules promulgated there under. 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 Company's definitive proxy +statement relating to the Registrant's 2010 annual meeting of stockholders, which will be filed pursuant to Regulation 14A within 120 days after the end of the Company's fiscal year +ended December 31, 2009, and such information is incorporated herein by reference. +Item 11. Executive Compensation. +Information relating to Executive Compensation is set forth under "Proposal No. 1-Election of Directors" in the +Company's definitive proxy statement relating to the Registrant's 2010 annual meeting of stockholders, which will be filed pursuant to Regulation 14A within 120 days after the end of the +Company's fiscal year ended December 31, 2009, and such information is incorporated herein by reference. +Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. +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 Company's definitive proxy statement relating to the Registrant's 2010 annual meeting of stockholders, which will be filed +pursuant to Regulation 14A within 120 days after the end of the Company's fiscal year ended December 31, 2009, and such information is incorporated herein by reference. +Item 13. Certain Relationships and Related Transactions, and Director Independence. +Information relating to Certain Relationships and Related Transactions is set forth under "Proposal No. 1-Election +of Directors" in the Company's definitive proxy statement relating to the Registrant's 2010 annual meeting of stockholders, which will be filed pursuant to Regulation 14A within 120 days +after the end of the Company's fiscal year ended December 31, 2009, and such information is incorporated herein by reference. +Item 14. Principal Accounting Fees and Services. +Information relating to Principal Accountant Fees and Services is set forth under "Proposal No. 2-Independent +Registered Public Accounting Firm" in the Company's definitive proxy statement relating to the Registrant's 2010 annual meeting of stockholders, which will be filed pursuant to Regulation 14A +within 120 days after the end of the Company's fiscal year ended December 31, 2009, and such information is incorporated herein by reference. +49 +Table of Contents +PART IV +Item 15. Exhibits, Financial Statement Schedules. +Consolidated Financial Statements and Schedules required to be filed hereunder are indexed on Page F-1 hereof. +Exhibit +3.1 +Amended and Restated Certificate of Incorporation of Deckers Outdoor Corporation as amended through June 4, 2009. (Exhibit 3.1 to the Registrant's Form 10-Q for the quarterly period ended June 30, 2009 +and incorporated by reference herein) +3.2 +Restated Bylaws of Deckers Outdoor Corporation, as amended by the Board of Directors through March 11, 2009. (Exhibit 3.2 to the Registrant's Form 10-Q for the quarterly period ended March 31, 2009 +and incorporated by reference herein) +#10.1 +1993 Employee Stock Incentive Plan. (Exhibit 99 to the Registrant's Registration Statement on Form S-8, File No. 33-47097 and incorporated by reference herein) +#10.2 +Form of Incentive Stock Option Agreement under 1993 Employee Stock Incentive Plan. (Exhibit 10.9 to the Registrant's Registration Statement on Form S-1, File No. 33-67248 and incorporated by reference +herein) +#10.3 +Form of Non-Qualified Stock Option Agreement under 1993 Employee Stock Incentive Plan. (Exhibit 10.10 to the Registrant's Registration Statement on Form S-1, File No. 33-67248 and incorporated by +reference herein) +#10.4 +Form of Restricted Stock Agreement under 1993 Employee Stock Incentive Plan. (Exhibit 10.11 to the Registrant's Registration Statement on Form S-1, File No. 33-67248 and incorporated by reference +herein) +#10.5 +Deckers Outdoor Corporation 1995 Employee Stock Purchase Plan. (Exhibit 4.4 to the Registrant's Registration Statement on Form S-8, File No. 33-96850 and incorporated by reference herein) +10.6 +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 Registrant's Form 10-K +for the year ended December 31, 2001 and incorporated by reference herein.) +10.7 +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 Registrant's +Form 10-K for the period ended December 31, 2002 and incorporated by reference herein) +10.8 +Amendment Number One to Amended and Restated Revolving Credit Agreement dated April 29, 2003. (Exhibit 10.1 to the Registrant's Form 10-Q for the period ended June 30, 2003 and incorporated by +reference herein) +10.9 +Amendment Number Two to Amended and Restated Revolving Credit Agreement dated June 27, 2003. (Exhibit 10.2 to the Registrant's Form 10-Q for the period ended June 30, 2003 and incorporated by +reference herein) +10.10 +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 Registrant's +Form 10-Q for the period ended September 30, 2003 and incorporated by reference herein) +50 +Table of Contents +Exhibit +10.11 +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 Registrant's Form 10-K for the +period ended December 31, 2003 and incorporated by reference herein) +10.12 +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 +Registrant's Form 10-K for the period ended December 31, 2003 and incorporated by reference herein) +10.13 +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 Registrant's Form 10-K for the period +ended December 31, 2004 and incorporated by reference herein) +10.14 +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 Registrant's Form 10-K for the period ended December 31, 2004 and incorporated by reference herein) +10.15 +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 Registrant's Form 10-K for the period ended December 31, 2004 and incorporated by reference herein) +10.16 +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 Registrant's Form 10-Q for the +period ended June 30, 2005 and incorporated by reference herein) +10.17 +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 Registrant's Form 10-Q for the period +ended September 30, 2005 and incorporated by reference herein) +#10.18 +Deckers Outdoor Corporation 2006 Equity Incentive Plan (incorporated herein by reference to Appendix A to the Registrant's Definitive Proxy Statement dated April 21, 2006 in connection with its 2006 Annual +Meeting of Stockholders) +10.19 +Amendment Number Eight to Amended and Restated Credit Agreement between Deckers Outdoor Corporation and Comerica Bank dated as of September 5, 2006 (Exhibit 10.1 to the Registrant's Form 8-K filed on +September 6, 2006 and incorporated by reference herein) +#10.20 +First Amendment to Deckers Outdoor Corporation 2006 Equity Incentive Plan (incorporated herein by reference to Appendix A to the Registrant's Definitive Proxy Statement dated April 9, 2007 in connection with +its 2007 Annual Meeting of Stockholders) +#10.21 +Form of Restricted Stock Unit Award Agreement (Level 1) Under 2006 Equity Incentive Plan (Exhibit 10.2 to the Registrant's Form 8-K filed on May 11, 2007 and incorporated by reference +herein) +#10.22 +Form of Restricted Stock Unit Award Agreement (Level 2) Under 2006 Equity Incentive Plan (Exhibit 10.3 to the Registrant's Form 8-K filed on May 11, 2007 and incorporated by reference +herein) +51 +Table of Contents +Exhibit +#10.23 +Form of Stock Appreciation Rights Award Agreement (Level 1) Under 2006 Equity Incentive Plan (Exhibit 10.4 to the Registrant's Form 8-K filed on May 11, 2007 and incorporated by reference +herein) +#10.24 +Form of Stock Appreciation Rights Award Agreement (Level 2) Under 2006 Equity Incentive Plan (Exhibit 10.5 to the Registrant's Form 8-K filed on May 11, 2007 and incorporated by reference +herein) +10.25 +Amendment Number Nine to Amended and Restated Credit Agreement, dated as of June 4, 2007, among Deckers Outdoor Corporation and Comerica Bank (Exhibit 10.1 to the Registrant's Form 8-K filed on +June 4, 2007 and incorporated by reference herein) +#10.26 +Senior Executive Employment Agreement dated April 24, 2008 between Deckers Outdoor Corporation and Thomas R. Hillebrandt (Exhibit 10.1 to the Registrant's Form 8-K filed on April 24, 2008 and +incorporated by reference herein) +#10.27 +Form of Indemnification Agreement (Exhibit 10.1 to the Registrant's Form 8-K filed on June 2, 2008 and incorporated by reference herein) +10.28 +Waiver and Amendment No. 10 dated June 30, 2008 to Amended and Restated Credit Agreement between Deckers Outdoor Corporation and Comerica Bank (Exhibit 10.1 to the Registrant's Form 8-K filed on +July 3, 2008 and incorporated by reference herein) +#10.29 +Form of Amendment dated August 6, 2008 to Senior Executive Employment Agreement with Deckers Outdoor Corporation for Thomas Hillebrandt (Exhibit 10.1 to the Registrant's Form 8-K filed on August 11, +2008 and incorporated by reference herein) +#10.30 +Deckers Outdoor Corporation Deferred Stock Unit Compensation Plan, a Sub Plan under the Deckers Outdoor Corporation 2006 Equity Incentive Plan, adopted by the Board of Directors on December 12, 2008 +(Exhibit 10.49 to the Registrant's Form 10-K filed on March 2, 2009 and incorporated by reference herein) +10.31 +Amendment No. 11 to Amended and Restated Credit Agreement among Deckers Outdoor Corporation and Comerica Bank (Exhibit 10.1 to the Registrant's Form 8-K filed on July 8, 2009 and incorporated by +reference herein) +#10.32 +Replacement Director Compensation Agreement and Mutual Release, dated December 16, 2009 (Exhibit 10.1 to the Registrant's Form 8-K filed on December 17, 2009 and incorporated by reference +herein) +*#10.33 +Change of Control and Severance Agreement with Deckers Outdoor Corporation for Angel Martinez on December 22, 2009 +*#10.34 +Change of Control and Severance Agreement with Deckers Outdoor Corporation for Zohar Ziv on December 22, 2009 +*#10.35 +Change of Control and Severance Agreement with Deckers Outdoor Corporation for Thomas George on December 22, 2009 +*#10.36 +Change of Control and Severance Agreement with Deckers Outdoor Corporation for Constance Rishwain on December 22, 2009 +*#10.37 +Change of Control and Severance Agreement with Deckers Outdoor Corporation for Colin Clark on December 22, 2009 +#10.38 +Deckers Outdoor Corporation Nonqualified Deferred Compensation Plan (Exhibit 10.2 to the Registrant's Form 8-K filed on December 22, 2009 and incorporated by reference herein) +52 +Table of Contents +Exhibit +*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 USC. 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. +53 +Table of Contents +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) +/s/ ANGEL R. MARTINEZ +Angel R. Martinez +Chief Executive Officer +Date: +March 1, 2010 +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/ ANGEL R. MARTINEZ +Angel R. Martinez +Chairman of the Board, +President and Chief Executive Officer +(Principal Executive Officer) +March 1, 2010 +/s/ THOMAS A. GEORGE +Thomas A. George +Chief Financial Officer +(Principal Financial and Accounting Officer) +March 1, 2010 +/s/ KARYN O. BARSA +Karyn O. Barsa +Director +March 1, 2010 +/s/ MAUREEN CONNERS +Maureen Conners +Director +March 1, 2010 +/s/ JOHN M. GIBBONS +John M. Gibbons +Director +March 1, 2010 +/s/ REX A. LICKLIDER +Rex A. Licklider +Director +March 1, 2010 +/s/ RUTH M. OWADES +Ruth M. Owades +Director +March 1, 2010 +54 +Table of Contents +/s/ JOHN G. PERENCHIO +John G. Perenchio +Director +March 1, 2010 +/s/ TORE STEEN +Tore Steen +Director +March 1, 2010 +55 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +INDEX TO CONSOLIDATED FINANCIAL STATEMENTS +AND FINANCIAL STATEMENT SCHEDULE +Page +Consolidated Financial Statements +Reports of Independent Registered Public Accounting Firm +F-2 +Consolidated Balance Sheets as of December 31, 2008 and 2009 +F-4 +Consolidated Statements of Operations for each of the years in the three-year period ended December 31, +2009 +F-5 +Consolidated Statements of Stockholders' Equity and Comprehensive Income for each of the years in the three-year +period ended December 31, 2009 +F-6 +Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, +2009 +F-7 +Notes to Consolidated Financial Statements +F-8 +Consolidated Financial Statement Schedule +Valuation and Qualifying Accounts for each of the years in the three-year period ended December 31, +2009 +F-33 +All +other schedules are omitted because they are not applicable or the required information is shown in the Company's consolidated financial statements or the related notes thereto. +F-1 +Table of Contents +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 (the Company) as listed in the accompanying index. In connection with +our audits of the consolidated financial statements, we also have audited the related consolidated financial statement +schedule as listed in the accompanying index. These consolidated financial statements and consolidated financial statement schedule are the responsibility of the Company's management. Our +responsibility is to express an opinion on these consolidated financial statements and the consolidated 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 the Company as of December 31, 2008 and +2009, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2009, 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. +We +also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of +December 31, 2009, 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 1, 2010 expressed an unqualified opinion on the effectiveness of the Company's internal control over +financial reporting. +/s/ +KPMG LLP +Los +Angeles, California +March 1, 2010 +F-2 +Table of Contents +Report of Independent Registered Public Accounting Firm +The +Board of Directors and Stockholders +Deckers Outdoor Corporation: +We +have audited Deckers Outdoor Corporation and subsidiaries' (the Company) internal control over financial reporting as of December 31, 2009 based on criteria established in Internal Control — Integrated +Framework issued by the Committee of Sponsoring Organizations of +the Treadway Commission (COSO). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal +control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting in Item 9A. Our responsibility is to express an opinion on the +Company's 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, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our +audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +A +company's 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 company's 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 company's 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, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, 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, 2008 and 2009, 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, 2009, and the related consolidated financial statement schedule, and our report dated March 1, 2010 expressed an unqualified opinion +on those consolidated financial statements and consolidated financial statement schedule. +/s/ +KPMG LLP +Los +Angeles, California +March 1, 2010 +F-3 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +CONSOLIDATED BALANCE SHEETS +(amounts in thousands, except par value) +December 31, +2008 +2009 +ASSETS +Current assets: +Cash and cash equivalents +$ +176,804 +$ +315,862 +Restricted cash +300 +300 +Short-term investments +17,976 +26,120 +Trade accounts receivable, net of allowances of $10,706 and $11,790 in 2008 and 2009, respectively +108,129 +76,427 +Inventories +92,740 +85,356 +Prepaid expenses and other current assets +3,691 +7,210 +Deferred tax assets +13,324 +9,712 +Total current assets +412,964 +520,987 +Restricted cash +700 +400 +Property and equipment, at cost, net +28,318 +35,442 +Goodwill +6,101 +6,507 +Other intangible assets, net +17,933 +17,433 +Deferred tax assets +17,447 +16,704 +Other assets +258 +1,570 +Total assets +$ +483,721 +$ +599,043 +LIABILITIES AND STOCKHOLDERS' EQUITY +Current liabilities: +Trade accounts payable +$ +42,960 +$ +47,331 +Accrued payroll +14,996 +20,869 +Other accrued expenses +12,676 +12,985 +Income taxes payable +24,577 +19,685 +Total current liabilities +95,209 +100,870 +Long-term liabilities +3,847 +6,269 +Commitments and contingencies (note 9) +Stockholders' equity: +Deckers Outdoor Corporation stockholders' equity: +Common stock, $0.01 par value; authorized 20,000 and 50,000 shares; issued and outstanding 13,089 and 12,868 shares for 2008 and 2009, +respectively +131 +129 +Additional paid-in capital +115,214 +125,431 +Retained earnings +268,515 +365,304 +Accumulated other comprehensive income +392 +494 +Total Deckers Outdoor Corporation stockholders' equity +384,252 +491,358 +Noncontrolling interest +413 +546 +Total equity +384,665 +491,904 +Total liabilities and equity +$ +483,721 +$ +599,043 +See +accompanying notes to consolidated financial statements. +F-4 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF OPERATIONS +(amounts in thousands, except per share data) +Years Ended December 31, +2007 +2008 +2009 +Net sales +$ +448,929 +$ +689,445 +$ +813,177 +Cost of sales +241,458 +384,127 +442,087 +Gross profit +207,471 +305,318 +371,090 +Selling, general and administrative expenses +101,918 +152,574 +188,843 +Impairment loss +— +35,825 +1,000 +Income from operations +105,553 +116,919 +181,247 +Other (income) expense, net: +Interest income +(4,855 +) +(3,190 +) +(1,010 +) +Interest expense +768 +(142 +) +(875 +) +Other, net +(399 +) +(251 +) +(91 +) +(4,486 +) +(3,583 +) +(1,976 +) +Income before income taxes +110,039 +120,502 +183,223 +Income taxes +43,602 +46,631 +66,304 +Net income +66,437 +73,871 +116,919 +Net loss (income) attributable to noncontrolling interest +— +77 +(133 +) +Net income attributable to Deckers Outdoor Corporation +$ +66,437 +$ +73,948 +$ +116,786 +Net income attributable to Deckers Outdoor Corporation common stockholders per share: +Basic +$ +5.18 +$ +5.67 +$ +8.98 +Diluted +$ +5.06 +$ +5.60 +$ +8.89 +Weighted-average common shares outstanding: +Basic +12,835 +13,042 +13,008 +Diluted +13,129 +13,195 +13,131 +See +accompanying notes to consolidated financial statements. +F-5 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY +AND COMPREHENSIVE INCOME +(amounts in thousands) +Years Ended December 31, 2007, 2008 and 2009 +Total +Deckers +Outdoor +Corp. +Stockholders' +Equity +Common Stock +Accumulated +Other +Comprehensive +Income +Additional +Paid-in +Capital +Retained +Earnings +Non- +controlling +Interest +Total +Stockholders' +Equity +Comprehensive +Income +Shares +Amount +Balance December 31, 2006 +12,588 +$ +126 +$ +81,761 +$ +128,130 +$ +393 +$ +210,410 +— +$ +210,410 +Stock compensation expense +10 +— +6,554 +— +— +6,554 +— +6,554 +Exercise of stock options +406 +4 +2,274 +— +— +2,278 +— +2,278 +Excess tax benefit from stock compensation +— +— +13,070 +— +— +13,070 +— +13,070 +Net income +— +— +— +66,437 +— +66,437 +— +66,437 +$ +66,437 +Foreign currency translation adjustment +— +— +— +— +92 +92 +— +92 +92 +Unrealized loss on short-term investments +— +— +— +— +(203 +) +(203 +) +— +(203 +) +(203 +) +Total comprehensive income +$ +66,326 +Balance December 31, 2007 +13,004 +$ +130 +$ +103,659 +$ +194,567 +$ +282 +$ +298,638 +— +$ +298,638 +Contribution from noncontrolling interest +— +$ +— +$ +— +$ +— +$ +— +$ +— +$ +490 +$ +490 +Stock compensation expense +11 +1 +10,192 +— +— +10,193 +— +10,193 +Exercise of stock options +36 +— +404 +— +— +404 +— +404 +Shares issued upon vesting +38 +— +— +— +— +— +— +— +Excess tax benefit from stock compensation +— +— +2,989 +— +— +2,989 +— +2,989 +Shares withheld for taxes +— +— +(2,030 +) +— +— +(2,030 +) +— +(2,030 +) +Net income (loss) +— +— +— +73,948 +— +73,948 +(77 +) +73,871 +$ +73,871 +Foreign currency translation adjustment +— +— +— +— +(47 +) +(47 +) +— +(47 +) +(47 +) +Unrealized gain on short-term investments +— +— +— +— +157 +157 +— +157 +157 +Total comprehensive income +$ +73,981 +Balance December 31, 2008 +13,089 +$ +131 +$ +115,214 +$ +268,515 +$ +392 +$ +384,252 +$ +413 +$ +384,665 +Stock compensation expense +8 +— +13,016 +— +— +13,016 +— +$ +13,016 +Exercise of stock options +5 +— +107 +— +— +107 +— +107 +Shares issued upon vesting +67 +1 +— +— +— +1 +— +1 +Excess tax detriment from stock compensation +— +— +(824 +) +— +— +(824 +) +— +(824 +) +Shares withheld for taxes +— +— +(2,082 +) +— +— +(2,082 +) +— +(2,082 +) +Stock repurchase +(301 +) +(3 +) +(19,997 +) +(20,000 +) +— +(20,000 +) +Net income +— +— +— +116,786 +— +116,786 +133 +116,919 +$ +116,919 +Foreign currency translation adjustment +— +— +— +— +146 +146 +— +146 +146 +Unrealized loss on short-term investments +— +— +— +— +(44 +) +(44 +) +— +(44 +) +(44 +) +Total comprehensive income +$ +117,021 +Balance December 31, 2009 +12,868 +$ +129 +$ +125,431 +$ +365,304 +$ +494 +$ +491,358 +$ +546 +$ +491,904 +See accompanying notes to consolidated financial statements. +F-6 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF CASH FLOWS +(amounts in thousands) +Years Ended December 31, +2007 +2008 +2009 +Cash flows from operating activities: +Net income +$ +66,437 +$ +73,871 +$ +116,919 +Adjustments to reconcile net income to net cash provided by operating activities: +Depreciation, amortization and accretion +3,516 +6,008 +10,194 +(Recovery of) provision for doubtful accounts, net +(113 +) +2,233 +399 +Write-down of inventory +3,367 +4,785 +3,955 +Impairment loss +— +35,825 +1,000 +Deferred tax provision +(3,933 +) +(22,125 +) +5,308 +Stock compensation +6,554 +10,193 +13,016 +Other +(14 +) +(17 +) +60 +Changes in operating assets and liabilities, net of assets and liabilities acquired in the acquisition of businesses: +Restricted cash +(1,250 +) +250 +300 +Trade accounts receivable +(22,525 +) +(38,153 +) +31,527 +Inventories +(22,768 +) +(45,749 +) +5,247 +Prepaid expenses and other current assets +(674 +) +(415 +) +(3,408 +) +Other assets +(19 +) +(185 +) +(1,312 +) +Trade accounts payable +15,168 +6,739 +3,790 +Accrued expenses +6,817 +9,049 +2,583 +Income taxes payable +10,491 +7,120 +(6,525 +) +Long-term liabilities +— +3,847 +2,421 +Net cash provided by operating activities +61,054 +53,276 +185,474 +Cash flows from investing activities: +Purchases of short-term investments +(225,371 +) +(204,179 +) +(66,900 +) +Proceeds from sales of short-term investments +176,135 +299,049 +57,078 +Purchases of property and equipment +(6,331 +) +(22,218 +) +(13,699 +) +Acquisitions of businesses +— +(5,936 +) +(1,877 +) +Net cash (used in) provided by investing activities +(55,567 +) +66,716 +(25,398 +) +Cash flows from financing activities: +Cash paid for shares withheld for taxes +— +(1,527 +) +(1,982 +) +Excess tax benefits from stock compensation +12,562 +2,900 +810 +Cash received from issuances of common stock +2,278 +404 +107 +Cash paid for repurchases of common stock +— +— +(20,000 +) +Contribution from minority interest holder of consolidated entity +— +490 +— +Net cash provided by (used in) financing activities +14,840 +2,267 +(21,065 +) +Effect of exchange rates on cash +(57 +) +20 +47 +Net change in cash and cash equivalents +20,270 +122,279 +139,058 +Cash and cash equivalents at beginning of year +34,255 +54,525 +176,804 +Cash and cash equivalents at end of year +$ +54,525 +$ +176,804 +$ +315,862 +Supplemental disclosure of cash flow information: +Cash paid during the year for: +Income taxes +$ +24,293 +$ +58,741 +$ +66,540 +Interest +$ +9 +$ +563 +$ +19 +Non-cash investing activity: +Accruals for purchases of property and equipment +$ +— +$ +186 +$ +1,356 +Non-cash financing activity: +Accruals for shares withheld for taxes +$ +— +$ +503 +$ +603 +See accompanying notes to consolidated financial statements. +F-7 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements +(amounts in thousands, except share quantity and per share data) +(1) The Company and Summary of Significant Accounting Policies +The Company and Basis of Presentation +The consolidated financial statements include the accounts of Deckers Outdoor Corporation and its wholly-owned subsidiaries and +majority-owned subsidiary (collectively referred to as the "Company"). Accordingly, all references herein to "Deckers Outdoor Corporation" or "Deckers" include the consolidated results of the Company +and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. +In +July 2008, the Company entered into a joint venture agreement with an affiliate of Stella International Holdings Limited ("Stella International") for the opening of retail stores and +wholesale distribution for the UGG brand in China. The joint venture is owned 51% by Deckers and 49% by Stella International. Stella International is also one of the Company's major manufacturers in +China. +The +Company builds niche products into global lifestyle brands by designing and marketing innovative, functional and fashion-oriented footwear and accessories, developed for both high +performance outdoor activities and everyday casual lifestyle use. +Inventories +Inventories, principally finished goods, are stated at the lower of cost (first-in, first-out) or market (net +realizable value). Cost includes initial molds and tooling that are amortized over the life of the mold in cost of sales. Cost also includes shipping and handling fees and costs, which are +subsequently expensed to cost of sales. Market values are determined by historical experience with discounted sales, industry trends and the retail environment. +Revenue Recognition +The Company recognizes revenue when products are shipped and the customer takes title and assumes risk of loss, collection of relevant +receivable is reasonably assured, persuasive evidence of an arrangement exists, and the sales price is fixed or determinable. Allowances for estimated returns, discounts, chargebacks, and bad debts +are provided for when related revenue is recorded. The Company presents revenue net of taxes collected from customers and remitted to governmental authorities. +Accounting for Long-Lived Assets +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. Intangible assets subject to amortization are amortized over their respective estimated useful lives to +their estimated residual values. The Company uses the straight-line method for depreciation and amortization of long-lived assets, because the Company cannot reliably determine +the pattern in which the economic benefits of the assets will be consumed. +F-8 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +Goodwill and Other Intangible Assets +Intangible assets consist primarily of goodwill, trademarks, and distributor relationships arising from the application of purchase +accounting. Intangible assets with estimable useful lives are amortized and reviewed for impairment. 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. 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 +assessment of goodwill impairment involves valuing the Company's reporting units that carry goodwill. Currently, the Company's reporting units are the same as the Company's operating +segments. The first step is a comparison of the fair value of the reporting unit with its carrying amount. If the fair value exceeds the carrying amount, the goodwill is not impaired. If the fair +value of the reporting unit is below the carrying amount, then a second step is performed to measure the amount of the impairment, if any. +The +Company also evaluates the fair values of other intangible assets with indefinite useful lives in relation to the carrying values. If the fair value of the indefinite life intangible +exceeds its carrying amount, no impairment charge will be recognized. If the fair value of the indefinite life intangible is less than the carrying amount, the Company will record an impairment charge +to write-down the intangible asset to its fair value. +Determining +fair value of goodwill and other intangible assets is highly subjective and requires the use of estimates and assumptions. The Company uses estimates including estimated +future revenues, royalty rates, discount rates, and market multiples, among others. The Company also considers the following factors: +• the assets' ability to continue to generate income from operations and positive cash flow in future periods; +• changes in consumer demand or acceptance of the related brand names, products or features associated with the assets; and +• other considerations that could affect fair value or otherwise indicate potential impairment. +In +addition, facts and circumstances could change, including further deterioration of general economic conditions or the retail environment, customers reducing orders in response to such +conditions and increased competition. These or other factors could result in changes to the calculation of fair value which could result in further impairment of the Company's remaining goodwill and +other intangible assets. Changes in any one or more of these estimates and assumptions could produce different financial results. +Depreciation and Amortization +Depreciation of property and equipment is calculated using the straight-line method based on estimated useful lives ranging +from two to ten years. Leasehold improvements are amortized on the straight-line basis over their estimated economic useful lives or the lease term, whichever is shorter. Leasehold +improvement lives range from one to fifteen years. +Fair Value of Measurements +The fair values of the Company's cash and cash equivalents, restricted cash, trade accounts receivable, prepaid expenses and other +current assets, trade accounts payable, accrued expenses, and income taxes +F-9 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +payable +approximate the carrying values due to the relatively short maturities of these instruments. The fair values of the Company's long-term liabilities, if recalculated based on +current interest rates, would not significantly differ from the recorded amounts. +The +Company adopted the provisions of Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value +Measurements and Disclosures , included in Accounting Standards Codification (ASC) Topic 820, Fair Value Measurements and +Disclosures (ASC 820), for financial assets and liabilities, and nonfinancial items that are recognized or disclosed at fair value in the financial statements on a recurring +basis effective January 1, 2008 and for nonfinancial items that are recognized or disclosed at fair value in the financial statements on a non-recurring basis beginning +January 1, 2009. The adoption of this standard did not have a material effect on the Company's consolidated financial statements. ASC 820 prioritizes the inputs used in measuring fair value +into the following hierarchy: +• Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities. +• Level 2: Inputs other than quoted prices included within Level 1 that are either directly or indirectly +observable. +• Level 3: Unobservable inputs in which little or no market activity exists, therefore requiring an entity to develop +its own assumptions about the assumptions that market participants would use in pricing. +Short-term +investments are classified as available for sale and 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. The cost of securities sold is based on the specific identification method. Securities with +original maturities of three months or less are classified as cash equivalents. Those that mature over three months from their original date and in less than one year are classified as +short-term investments, as the funds are used for working capital requirements. The fair values of the Company's short-term investments are shown in the table below and were +determined based on Level 1 inputs. +December 31, 2008 +December 31, 2009 +Cost +Unrealized +Gains +Fair Value +Cost +Unrealized +Gains +Fair Value +Government and agency securities +$ +17,930 +$ +46 +$ +17,976 +$ +26,118 +$ +2 +$ +26,120 +Total +$ +17,930 +$ +46 +$ +17,976 +$ +26,118 +$ +2 +$ +26,120 +Stock Compensation +Stock compensation cost is measured at the grant date based on the value of the award and is expensed ratably over the vesting period. +Determining the fair value of share-based awards at the grant date requires judgment, including estimating the percentage of awards that will be forfeited, stock volatility, the expected life of the +award, and other inputs. If actual forfeitures differ significantly from the estimates, stock compensation expense and the Company's results of operations could be materially impacted. +F-10 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +Use of Estimates +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 US generally accepted accounting principles. Significant +areas requiring the use of management estimates relate to inventory reserves, accounts receivable reserves, stock compensation, impairment assessments, depreciation and amortization, income tax +liabilities and uncertain tax positions, fair value of financial instruments, and fair values of acquired intangibles, assets and liabilities. Actual results could differ materially from these +estimates. +Research and Development Costs +All research and development costs are expensed as incurred. Such costs amounted to $2,916, $5,619 and $8,111 in 2007, 2008 and 2009, +respectively, and are included in selling, general and administrative expenses in the consolidated statements of operations. +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 2007, 2008 and 2009 were $17,035, $24,866, and $28,727 respectively. Included in prepaid and other current +assets at December 31, 2008 and 2009 were $1,475 and $601, respectively, related to prepaid advertising, marketing, and promotion expenses for programs to take place after December 31, +2008 and 2009, respectively. +Income Taxes +Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future +tax consequences attributable to temporary 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. +The +Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest +amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company accounts for interest +and penalties generated by income tax contingencies as interest expense in the consolidated statements of operations. +Net Income Attributable to Deckers Outdoor Corporation Common Stockholders per Share +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, 2007, 2008, and 2009, 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 (NSUs). +F-11 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +The +reconciliations of basic to diluted weighted-average common shares are as follows: +Year Ended December 31, +2007 +2008 +2009 +Weighted-average shares used in basic computation +12,835,000 +13,042,000 +13,008,000 +Dilutive effect of stock options and NSUs +294,000 +153,000 +123,000 +Weighted-average shares used for diluted computation +13,129,000 +13,195,000 +13,131,000 +All +options outstanding as of December 31, 2007, 2008, and 2009 were included in the computation of diluted income per share for 2007, 2008, and 2009, respectively. +The +Company excluded 5,000 contingently issuable shares of common stock underlying its NSUs from the diluted income per share computation for 2008, and all NSUs were included for 2007 +and 2009. The Company excluded all of its stock appreciation rights (SARs) and restricted stock units (RSUs) from the diluted income per share computations for the years ended December 31, +2007, 2008 and 2009. The shares were excluded because the necessary conditions had not been satisfied for the shares to be issuable based on the Company's performance through December 31, 2007, +2008 and 2009, respectively. +Foreign Currency Translation +The Company considers the US dollar as its functional currency. Gains and losses that arise from exchange rate fluctuations on sales +and purchase transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. +Comprehensive Income +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. +Business Segment Reporting +Management of the Company has determined its reportable segments are its strategic business units. The six reportable segments are the +UGG®, Teva®, Simple® and other brands wholesale divisions, the eCommerce business and the retail store business. The Company performs an annual analysis of its +reportable segments. Information related to the Company's business segments is summarized in note 10. +Cash Equivalents +The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. +Reclassifications +Certain reclassifications have been made to the 2007 and 2008 amounts to conform to the 2009 presentation. +F-12 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +New Accounting Standards +In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business +Combinations , included in ASC Topic 805, Business Combinations (ASC 805). The objective of ASC 805 is to improve the relevance, representational faithfulness, and comparability +of the information that a reporting entity provides in its financial reports about a business combination and its effects. ASC 805 requires that all business combinations be accounted for by applying +the acquisition method (previously referred to as the purchase method), and most identifiable assets, liabilities, noncontrolling interests, and goodwill acquired in business combinations to be +recorded at "full fair value." ASC 805 also broadens the definition of a business and changes the treatment of direct acquisition-related costs from being included in the purchase price to instead +being generally expensed if they are not costs associated with issuing debt or equity securities. The Company adopted ASC 805 on January 1, 2009, and applied the provisions to its new business +combination. In its business combinations accounted for under ASC 805, the Company recorded a liability of $651 for contingent consideration, included in long-term liabilities in the +consolidated balance sheet that would not have otherwise been recorded when compared to the previous guidance. +In +April 2009, the FASB issued Staff Position No. 141R-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That +Arise from Contingencies , included in ASC 805. This standard amends the provisions for the initial recognition and measurement, subsequent measurement and accounting, and +disclosures for assets and liabilities arising from contingencies in business combinations. The standard eliminates the distinction between contractual and non-contractual contingencies, +including the initial recognition and measurement criteria and instead carries forward most of the provisions for acquired contingencies. The standard was effective for contingent assets and +contingent liabilities acquired in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, +2008. The Company applied the provisions effective January 1, 2009, and the adoption did not have a material impact on the Company's consolidated financial statements. +In +December 2007, the FASB issued SFAS No. 160, Non-Controlling Interests in Consolidated Financial Statements — an +amendment of ARB No. 51 , included in ASC Topic 810, Consolidation (ASC 810). The objective of the new standard is to +improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements by establishing accounting and reporting +standards for noncontrolling interests in a subsidiary and for the deconsolidation of a subsidiary. Noncontrolling interests (previously referred to as minority interests) are now reported as a +separate component of equity, not as a liability or other item outside of equity, which changes the accounting for transactions with noncontrolling interest holders. The Company adopted this standard +on January 1, 2009, and applied the provisions to the Company's current noncontrolling interest and reclassified it into equity on the consolidated balance sheets. In addition, net income and +net income attributable to Deckers Outdoor Corporation have been adjusted on the consolidated statements of operations to conform to the new standard. +In +June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting +Principles — a replacement of FASB Statement No. 162 , included in ASC Topic 105, Generally Accepted Accounting +Principles (ASC 105). ASC 105 establishes the FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by the FASB to be applied +by non-governmental entities in the preparation of financial statements in conformity with US GAAP. ASC 105 was effective for financial statements issued for interim and annual +periods ending after September 15, 2009. The Company early adopted this standard and included the new references in its consolidated financial statements effective with the period ending +June 30, 2009. +F-13 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +(2) Restricted Cash +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 was initiated in conjunction with the Company's purchase obligation with a movie production company for advertising services. As a result of +the agreement, during the year ended December 31, 2009, the Company paid $300 of the purchase obligation and the Company had $700 of restricted cash related to this obligation remaining as of +December 31, 2009. Film production was completed and the movie was released in March 2008. Accordingly, the Company recorded the full $1,250 obligation as advertising expense during the first +quarter of 2008. Of the total restricted cash related to this purchase obligation, $300 was short-term and was included as a current asset, and the remaining $400 was long-term +and was included as a noncurrent asset in the Company's consolidated balance sheet at December 31, 2009. The escrow agreement contains a +disbursement schedule according to when the remaining funds will be disbursed to the production company, which is as follows: +January 2010 +$ +300 +January 2011 +200 +January 2012 +200 +$ +700 +(3) Retirement Plan +The Company provides a 401(k) defined contribution plan that substantially all employees are eligible to participate in through +tax-deferred contributions. The Company matches 50% of an employee's contribution up to the greater of $2.4 or 6% of their eligible compensation per year. Matching contributions totaled +$368, $517 and $1,023 during 2007, 2008, and 2009, respectively. In addition, the Company may also make discretionary profit sharing contributions to the plan. However, the Company did not make any +profit sharing contributions for the years ended December 31, 2007, 2008 or 2009. +(4) Property and Equipment +Property and equipment is summarized as follows: +December 31, +2008 +2009 +Machinery and equipment +$ +23,760 +$ +29,566 +Furniture and fixtures +4,552 +6,741 +Leasehold improvements +16,705 +23,019 +45,017 +59,326 +Less accumulated depreciation and amortization +16,699 +23,884 +Net property and equipment +$ +28,318 +$ +35,442 +F-14 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +(5) Notes Payable and Long-Term Debt +The Company's revolving credit facility with Comerica Bank (the "Facility") provides for a maximum availability of $20,000. Up to +$12,500 of borrowings may be in the form of letters of credit. The Facility bears interest at the lender's prime rate (3.25% at December 31, 2009) or, at the Company's option, at the London +Interbank Offered Rate, or LIBOR, (0.23% at December 31, 2009) 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 expires on June 1, 2010. At December 31, 2009, the Company had no outstanding +borrowings under the Facility and outstanding letters of credit aggregated $189. As a result, $19,811 was available under the Facility at December 31, 2009. +The +agreements underlying the Facility contain certain financial covenants. The Company amended the Facility including certain financial covenants in June 2009. The covenants currently +include a limitation on aggregate annual lease payments of $20,000, a quick ratio requirement of at least 0.90:1.00, a minimum profitability requirement of $1,000 per fiscal quarter (except for the +quarter ended June 30, 2009, there was a maximum net loss of $3,000), a limitation on annual consolidated capital expenditures of $25,000 in fiscal year 2009 and $15,000 in any fiscal year +thereafter, a minimum tangible net worth requirement of $37,000 commencing with the fiscal year ended December 31, 2004 plus 75% of consolidated net profit on a cumulative basis, and a +requirement that the Company's consolidated total liabilities to consolidated effective tangible net worth ratio be no greater than 1.50:1.00. The agreements also contain a prohibition on the payment +of dividends. +(6) Income Taxes +Components of income taxes are as follows: +Federal +State +Foreign +Total +2007: +Current +$ +36,493 +$ +9,207 +$ +1,835 +$ +47,535 +Deferred +(2,695 +) +(630 +) +(608 +) +(3,933 +) +$ +33,798 +$ +8,577 +$ +1,227 +$ +43,602 +2008: +Current +$ +55,505 +$ +12,426 +$ +825 +$ +68,756 +Deferred +(18,129 +) +(3,768 +) +(228 +) +(22,125 +) +$ +37,376 +$ +8,658 +$ +597 +$ +46,631 +2009: +Current +$ +48,523 +$ +10,350 +$ +2,123 +$ +60,996 +Deferred +4,752 +587 +(31 +) +5,308 +$ +53,275 +$ +10,937 +$ +2,092 +$ +66,304 +Foreign +income before income taxes was $7,248, $7,155 and $27,912 during the years ended December 31, 2007, 2008 and 2009, respectively. +F-15 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +Actual +income taxes differed from that obtained by applying the statutory federal income tax rate to income before income taxes as follows: +Years Ended December 31 +2007 +2008 +2009 +Computed "expected" income taxes +$ +38,526 +$ +42,212 +$ +64,105 +State income taxes, net of federal income tax benefit +5,908 +5,904 +7,600 +Foreign rate differential +(1,605 +) +(492 +) +(7,878 +) +Other +773 +(993 +) +2,477 +$ +43,602 +$ +46,631 +$ +66,304 +The +tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities at December 31, 2008 and 2009 are presented +below: +2008 +2009 +Deferred tax assets (liabilities), current: +Uniform capitalization adjustment to inventory +$ +3,937 +$ +1,995 +Bad debt and other reserves +7,879 +6,288 +State taxes +2,641 +2,771 +Prepaid expenses +(1,133 +) +(1,342 +) +Total deferred tax assets, current +13,324 +9,712 +Deferred tax assets (liabilities), noncurrent: +Amortization and impairment of intangible assets +9,340 +8,526 +Depreciation of property and equipment +1,463 +(2,572 +) +Share-based compensation +6,453 +9,640 +Net operating loss carryforwards +191 +1,110 +Total deferred tax assets, noncurrent +17,447 +16,704 +Net deferred tax assets +$ +30,771 +$ +26,416 +In +order to fully realize the deferred tax assets, the Company will need to generate future taxable income of $67,473. The deferred tax assets are primarily related to the Company's +domestic operations. The change in net deferred tax assets from December 31, 2008 to December 31, 2009 includes $953 attributable to acquired deferred tax assets. Domestic taxable income +for the years ended December 31, 2008 and 2009 was $151,041 and $154,492, respectively. 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 was recorded in 2008 or 2009. +As +of December 31, 2009, withholding and US taxes have not been provided on approximately $46,000 of unremitted earnings of non-US subsidiaries because the Company has +currently reinvested these earnings permanently in such operations. Such earnings would become taxable upon the sale or liquidation of these subsidiaries or upon remittance of dividends. +F-16 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +When +tax returns are filed, some positions taken are subject to uncertainty about the merits of the position taken or the amount that would be ultimately sustained. The benefit of a tax +position is recognized in the financial statements in the period during which management believes it is more likely than not that the position will be sustained upon examination. Tax positions that +meet the more likely than not recognition threshold are measured as the largest amount of tax benefit that is more than 50% likely of being realized upon settlement. The portion of the benefits that +exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying consolidated balance sheets along with any associated interest and +penalties that would be payable to the taxing authorities upon examination. A reconciliation of the beginning and ending amounts of total unrecognized tax benefits is as follows: +Balance at December 31, 2008 +$ +2,269 +Gross increase related to current year tax positions +1,325 +Gross increase related to prior years' tax positions +1,505 +Lapse of statute of limitations +(88 +) +Balance at December 31, 2009 +$ +5,011 +The +amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate as of December 31, 2009 was $3,175. Also, included in the balance of unrecognized +tax benefits at December 31, 2009 was $1,836 that, if recognized, would be recorded as an adjustment to additional paid-in capital. For the year ended December 31, 2009, $85 +of interest generated by income tax contingencies was recognized in the consolidated statements of operations. As of December 31, 2008 and 2009, $234 and $319, respectively, of interest was +accrued in the consolidated balance sheets. +The +Company files income tax returns in the US federal jurisdiction and various state, local and foreign jurisdictions. With few exceptions, the Company is no longer subject to US +federal, state, local or non-US income tax examinations by tax authorities for years before 2006. In March 2009, the Company acquired 100% of the ownership interest of Ahnu, Inc. +Ahnu, Inc. had approximately $2,600 in net operating loss carryforwards that were assumed as part of the acquisition, which are subject to Internal Revenue Service (IRS) limitations. The +Company expects to fully utilize all net operating loss deferred tax assets over the next 5 to 6 years. Therefore, no valuation allowance was recorded for these net operating losses. The IRS +commenced an examination of the Company's US income tax return for the year 2004 in 2007 and completed the audit during 2008. The IRS proposed an immaterial adjustment that did not result in a change +to the Company's effective tax rate. The adjustment was limited to the particular tax position taken in 2004. However, that same position was taken in subsequent years. Accordingly, as of +December 31, 2008, the Company has accounted for such subsequent positions as unrecognized tax benefits. In 2009, the IRS selected the Company's US federal income tax return for the year ended +December 31, 2007 for examination and has since expanded the audit period to include the years ending December 31, 2006 through 2008. The Company does not know the timing of completion +of the examination and if the examination will result in a material effect to the Company's financial statements. It is reasonably possible that the Company's unrecognized tax benefit could change, +and the Company has not yet determined if any change will be material. +(7) Stockholders' Equity +In May 2006, the Company adopted the 2006 Equity Incentive Plan, which was amended by Amendment No. 1 dated May 9, 2007, +or the 2006 Plan. The primary purpose of the 2006 Plan is to +F-17 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +encourage +ownership in the Company by key personnel, whose long-term service is considered essential to the Company's continued progress. The 2006 Plan provides for 2,000,000 shares of the +Company's 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 Company's 1993 Stock Incentive Plan, as amended, or the 1993 Plan, which was subsequently terminated for new grants. +The +Company generally grants nonvested stock units (NSUs) annually to key personnel. The NSUs granted 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. Most of these awards include vesting that is also subject to achievement of certain performance +targets. +The +Company also has long-term incentive award agreements under the 2006 Plan for issuance of SAR awards and RSU awards to the Company's current and future executive +officers. These awards vest subject to certain long-term performance objectives and certain long-term service conditions. Provided that these conditions are met, +one-half of the SAR and RSU awards vest 80% on December 31, 2010 and 20% on December 31, 2011, and one-half of the SAR and RSU awards vest 80% on +December 31, 2015 and 20% on December 31, 2016. The Company recognizes expense only for those awards that management deems probable of achieving the performance and service objectives. +Prior to the beginning of the three month period ended September 30, 2008, the Company did not believe that the achievement of the performance objectives for the SAR and RSU awards with final +vesting dates of December 31, 2016 was probable, and therefore the Company had not recognized compensation expense for those awards. However, as of September 30, 2008, the Company +determined that the achievement of the performance objectives for those awards was probable based on updated projections of future sales and diluted earnings per share. As a result, the Company began +recording compensation expense for those awards during the three months ended September 30, 2008 with an adjustment of $1,531 recorded to recognize the cumulative to date compensation expense +for those awards. +In +May 2009, the stockholders of the Company approved an amendment to the Company's Restated Certificate of Incorporation to increase the authorized number of shares of common stock from +20,000,000 shares to 50,000,000 shares. +In +June 2009, the Company's Board of Directors approved a stock repurchase program to repurchase up to $50,000 of the Company's common stock in the open market or in privately negotiated +transactions, subject to market conditions, applicable legal requirements, government regulations, and other factors. The program does not obligate the Company to acquire any particular amount of +common stock and the program may be suspended at any time at the Company's discretion. The purchases will be funded from available working capital. During the year ended December 31, 2009, the +Company repurchased approximately 300,000 shares for approximately $20,000, or an average price of $66.43 per share, under this program. As of December 31, 2009, the remaining approved amount +for repurchases was approximately $30,000. +On +a quarterly basis, the Company generally grants fully-vested shares of its common stock to each of its outside directors. The fair value of such shares is expensed on the date of +issuance. +F-18 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +The +table below summarizes stock compensation amounts recognized in the consolidated statements of operations: +Year Ended December 31, +2007 +2008 +2009 +Compensation expense recorded for: +Stock options +$ +512 +$ +— +$ +— +NSUs +3,482 +4,344 +5,652 +SARs +1,375 +3,856 +5,287 +RSUs +290 +723 +994 +Directors' shares +895 +1,270 +1,083 +Total compensation expense +6,554 +10,193 +13,016 +Income tax benefit recognized +(2,677 +) +(4,154 +) +(5,096 +) +Net compensation expense +$ +3,877 +$ +6,039 +$ +7,920 +In +the fourth quarter of 2007, one employee's status changed to nonemployee causing a modification of the awards resulting in recognition of the compensation expense equal to the fair +value of the award at the date of the modification for 3,000 unvested stock options and 10,000 nonvested stock units. Accordingly, the Company recognized $235 and $1,184 of compensation expense in +2007 for these stock options and NSUs, respectively. Under the terms of the agreement, the vesting provisions remained unchanged. +The +table below summarizes the total remaining unrecognized compensation cost related to nonvested awards and the weighted-average period over which the cost is expected to be recognized +as of December 31, 2009: +Unrecognized +Compensation +Cost +Weighted-Average +Remaining +Vesting Period +(Years) +NSUs +$ +8,122 +2.1 +SARs +11,478 +3.6 +RSUs +1,935 +3.6 +Total +$ +21,535 +A +summary of the activity under the 1993 Plan and 2006 Plan as of December 31, 2007, 2008 and 2009 and changes during the period are presented below. +F-19 +Table of Contents +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 +Number of +Shares +Weighted- +Average +Exercise +Price +Weighted- +Average +Remaining +Contractual +Term (Years) +Aggregate +Intrinsic +Value +Outstanding at January 1, 2007 +466,000 +$ +6.59 +3.9 +$ +24,896 +Granted +— +— +Exercised +(406,000 +) +5.62 +Forfeited or expired +— +— +Outstanding at December 31, 2007 +60,000 +$ +12.97 +5.2 +$ +8,490 +Granted +— +— +Exercised +(36,000 +) +11.14 +Forfeited or expired +— +— +Outstanding at December 31, 2008 +24,000 +$ +15.81 +4.2 +$ +1,503 +Granted +— +— +Exercised +(5,000 +) +28.28 +Forfeited or expired +— +— +Outstanding and exercisable at December 31, 2009 +19,000 +$ +11.99 +3.3 +$ +1,827 +As +of December 31, 2007, all options were vested. The total intrinsic value of options exercised during the years ended December 31, 2007, 2008 and 2009, was $33,300, +$3,731 and $301, respectively. +Nonvested Stock Units Issued Under the 2006 Plan +Number of Shares +Weighted- +Average +Grant-Date +Fair Value +Nonvested at January 1, 2007 +239,000 +$ +40.36 +Granted +3,000 +63.06 +Vested +— +— +Forfeited +(3,000 +) +40.30 +Nonvested at December 31, 2007 +239,000 +$ +40.64 +Granted +86,000 +127.77 +Vested +(57,000 +) +37.79 +Forfeited +(20,000 +) +52.32 +Nonvested at December 31, 2008 +248,000 +$ +70.55 +Granted +97,000 +53.40 +Vested +(96,000 +) +31.26 +Forfeited +(10,000 +) +79.02 +Nonvested at December 31, 2009 +239,000 +$ +79.01 +F-20 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +Stock Appreciation Rights Issued Under the 2006 Plan +Number of +Shares +Weighted- +Average +Exercise +Price +Weighted- +Average +Remaining +Contractual +Term (Years) +Aggregate +Intrinsic +Value +Outstanding at January 1, 2007 +— +$ +— +— +$ +— +Granted +450,000 +80.20 +Exercised +— +— +Forfeited +(50,000 +) +80.20 +Outstanding at December 31, 2007 +400,000 +$ +80.20 +11.8 +$ +29,944 +Granted +— +— +Exercised +— +— +Forfeited +— +— +Outstanding at December 31, 2008 +400,000 +$ +80.20 +10.8 +$ +— +Granted +— +— +Exercised +— +— +Forfeited +— +— +Outstanding at December 31, 2009 +400,000 +$ +80.20 +9.8 +$ +8,608 +Exercisable at December 31, 2009 +— +$ +— +— +$ +— +Expected to vest and exercisable at December 31, 2009 +371,000 +$ +80.20 +9.7 +$ +7,984 +The +maximum contractual term is 10 and 15 years from the date of grant for those SARs with final vesting dates of December 31, 2011 and December 31, 2016, +respectively. The number of SARs expected to vest is based on the probability of achieving certain performance conditions and is also reduced by estimated forfeitures. Approximately 5,000 and 24,000 +of the SAR awards with final vesting dates of December 31, 2011 and December 31, 2016, respectively, were estimated to be forfeited due to failure to meet the long-term +service conditions and were consequently excluded from the expected to vest number above. +For +the SARs that are expected to vest on December 31, 2010 and December 31, 2011, the per share fair value of SARs granted was $50.40 on the date of grant using the +Black-Scholes pricing model with the following weighted-average assumptions: expected dividend yield of 0%, expected stock volatility of 59.0%, risk-free interest rate of 4.6%, and an +expected life of 6.9 years. For the SARs that are expected to vest on December 31, 2015 and December 31, 2016, the per share fair value of SARs granted was $68.90 on the date of +grant using the Black-Scholes pricing model with the following weighted-average assumptions: expected dividend yield of 0.0%, expected stock volatility of 76.4%, risk-free interest rate of +4.6%, and an expected life of 11.9 years. +F-21 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +Restricted Stock Units Issued Under the 2006 Plan +Number of +Shares +Weighted- +Average +Grant-Date +Fair Value +Nonvested at January 1, 2007 +— +$ +— +Granted +60,000 +80.20 +Vested +— +— +Forfeited +(7,000 +) +80.20 +Nonvested at December 31, 2007 +53,000 +$ +80.20 +Granted +— +— +Vested +— +— +Forfeited +— +— +Nonvested at December 31, 2008 +53,000 +$ +80.20 +Granted +— +— +Vested +— +— +Forfeited +— +— +Nonvested at December 31, 2009 +53,000 +$ +80.20 +Expected to vest at December 31, 2009 +49,000 +$ +80.20 +The +number of RSUs expected to vest is based on the probability of achieving certain performance conditions and is also reduced by estimated forfeitures. Approximately 1,000 and 3,000 of +the RSUs awards with final vesting dates of December 31, 2011 and December 31, 2016, respectively, were estimated to be forfeited due to expected failure to meet the +long-term service conditions. +(8) Accumulated Other Comprehensive Income +Accumulated balances of the components within accumulated other comprehensive income are as follows: +December 31, +2008 +2009 +Cumulative foreign currency translation adjustment +$ +346 +$ +492 +Unrealized gain on short-term investments +46 +2 +Accumulated other comprehensive income +$ +392 +$ +494 +F-22 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +(9) Commitments and Contingencies +The Company leases office, distribution and retail facilities under operating lease agreements, which expire through January 2024. 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: +2010 +$ +14,131 +2011 +13,951 +2012 +13,312 +2013 +6,946 +2014 +6,430 +Thereafter +22,528 +$ +77,298 +Rent +expense is recorded using the straight-line method to account for scheduled rental increases or rent holidays. Lease incentives for tenant improvement allowances are +recorded as reductions of rent expense over the lease term. The rental payments under some of our retail store leases are based on a minimum rental plus a percentage of the store's sales in excess of +stipulated amounts. The following schedule shows the composition of total rental expense. +Years Ended December 31, +2007 +2008 +2009 +Minimum rentals +$ +5,170 +$ +10,526 +$ +13,707 +Contingent rentals +339 +570 +1,147 +$ +5,509 +$ +11,096 +$ +14,854 +The +Company had $165,198 of outstanding purchase orders with its manufacturers as of December 31, 2009. Included in this amount is approximately $64,000 as of December 31, +2009 for a contract requiring minimum purchase commitments of sheepskin, that Deckers' affiliates, manufacturers, factories and other agents (each or collectively, a "Buyer") must make on or before +December 31, 2010. This contract may result in an unconditional purchase obligation if a Buyer does not meet the minimum purchase requirements. In the event that a Buyer does not purchase such +minimum commitments on or before December 31, 2010, the Company is required to purchase any remaining amounts on or before December 31, 2010. The contract does not permit net settlement. +The Company expects sheepskin purchases by third party factories will exceed the contract levels. Therefore, management believes the likelihood of any non-performance payments under this +contractual arrangement is remote and would have an immaterial effect on the consolidated financial statements. The Company determined this based upon its historical and projected sales and inventory +purchases. In addition, the Company entered into +F-23 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +agreements +of $3,405 for promotional activities and other services. Future commitments under these purchase orders and other agreements are as follows: +Year ending December 31 +2010 +$ +166,240 +2011 +600 +2012 +1,763 +2013 +— +Thereafter +— +$ +168,603 +In +addition to the amounts in the tables above, the Company has entered into other off-balance sheet arrangements: +The +Company agreed to make loans to its joint venture with Stella International, should the need arise. As of December 31, 2009, the estimated total loans by Deckers and Stella +International was expected to be approximately $4,000 contributed by both parties in proportion to their respective ownership in the joint venture. The Company owns 51% of the joint venture. The +Company also entered into agreements to make potential future earn-out payments relating to its acquisitions of TSUBO, LLC and Ahnu, Inc. The potential TSUBO, LLC +earn-out is based on the amount, if any, that sales of TSUBO products exceed certain predetermined base revenue levels for each year from 2008 to 2012. At December 31, 2009, the +Company did not anticipate, and therefore did not accrue, any earn-out payments for TSUBO, LLC. The potential Ahnu, Inc. earn-out is based on the amount, if any, +that gross profit of Ahnu products exceeds certain base levels for each year from 2010 to 2013. As of December 31, 2009, $651 was included for the Ahnu, Inc. earn-out within +long-term liabilities in the consolidated balance sheet. +The +Company entered into or amended agreements with certain of its international distributors to assume control of the distribution rights in those regions. Under one of these +agreements, the Company is obligated to make total payments of approximately $3,800 from 2010 through 2011. The payments include consideration for the purchase of certain assets and services. The +Company expects to make additional payments under these agreements for the purchase of certain assets and services from 2010 through 2011. +The +Company had certain tax obligations to authorities in China for one of the Company's foreign subsidiaries. The Company paid certain amounts against these obligations and also +negotiated certain reductions of previously accrued amounts. As of June 30, 2009, management had determined that any remaining liability for such matters was remote. Accordingly, the Company +reversed the previously accrued amount of approximately $1,600, primarily as a reduction of cost of sales of approximately $600 and interest expense of approximately $1,000, in the year ended +December 31, 2009. +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 Company's financial position or results of operations. In addition, the Company has agreed to indemnify certain of its licensees, distributors and promotional partners in +connection with claims related to the use of the Company's intellectual property. The terms of such agreements range up to five years initially and generally do not provide for a limitation on the +maximum potential future payments. Management believes the likelihood of any payments is remote and would be immaterial. The Company +F-24 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +determined +the risk was low based on a prior history of insignificant claims. The Company is not currently involved in any indemnification matters in regards to its intellectual property. +(10) Business Segments, Concentration of Business, and Credit Risk and Significant Customers +The Company's accounting policies of the segments below are the same as those described in the summary of significant accounting +policies, except that the Company does not allocate corporate overhead costs, stock compensation, non-operating income and expenses, income taxes, or net loss (income) attributable to the +noncontrolling interest to segments. The Company evaluates segment performance primarily based on net sales and income or loss from operations. The Company's reportable segments include the strategic +business units responsible for the worldwide wholesale operations of the UGG brand, Teva brand, Simple brand, and its other brands, its eCommerce business and its retail store business. The wholesale +operations of each brand are managed separately because each requires different marketing, research and development, design, sourcing and sales strategies. The eCommerce and retail store segments are +managed separately because they are direct to consumer sales, while the brand segments are wholesale sales. The income or loss 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, bad debts, depreciation, amortization and the costs of employees and their respective expenses that are 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 centers, certain executive compensation, accounting and finance, legal, +information technology, human resources and facilities costs, among others. The gross profit derived from the sales to third parties of the eCommerce and retail stores segments for the US is separated +into two components: (i) the wholesale profit is included in the operating income or loss of each wholesale segment, and (ii) the retail profit is included in the operating income or +loss of the eCommerce and retail stores segments. The gross profit of the international portion of the eCommerce and retail stores segments includes both the wholesale and retail profit. +The +Company's other brands include TSUBO and Ahnu. In May 2008, the Company acquired 100% of the ownership interest of TSUBO, LLC, and in March 2009, the Company acquired 100% of +the ownership interest of Ahnu, Inc. The wholesale operations of the Company's other brands are included as +F-25 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +one +reportable segment, other wholesale, presented in the figures below. Business segment information is summarized as follows: +Years Ended Decemer 31, +2007 +2008 +2009 +Net sales to external customers: +UGG wholesale +$ +291,908 +$ +483,781 +$ +566,964 +Teva wholesale +82,003 +80,882 +71,952 +Simple wholesale +11,163 +13,909 +10,544 +Other brands wholesale +— +3,649 +9,100 +eCommerce +45,473 +68,769 +75,666 +Retail stores +18,382 +38,455 +78,951 +$ +448,929 +$ +689,445 +$ +813,177 +Income (loss) from operations: +UGG wholesale +$ +119,193 +$ +187,824 +$ +232,712 +Teva wholesale(1) +21,121 +(18,688 +) +12,495 +Simple wholesale +(2,077 +) +(2,262 +) +(7,284 +) +Other brands wholesale(2) +— +(4,842 +) +(7,414 +) +eCommerce +14,502 +22,364 +21,073 +Retail stores +3,194 +6,649 +18,498 +Unallocated overhead +(50,380 +) +(74,126 +) +(88,833 +) +$ +105,553 +$ +116,919 +$ +181,247 +Depreciation and amortization: +UGG wholesale +$ +221 +$ +243 +$ +253 +Teva wholesale +527 +346 +267 +Simple wholesale +127 +161 +306 +Other brands wholesale +— +80 +707 +eCommerce +142 +178 +210 +Retail stores +369 +790 +2,365 +Unallocated overhead +2,130 +3,484 +4,352 +$ +3,516 +$ +5,282 +$ +8,460 +Capital expenditures: +UGG wholesale +$ +473 +$ +88 +$ +52 +Teva wholesale +56 +25 +21 +Simple wholesale +305 +184 +616 +Other brands wholesale +— +84 +644 +eCommerce +172 +542 +304 +Retail stores +1,861 +7,323 +6,498 +Unallocated overhead +3,518 +14,091 +5,836 +$ +6,385 +$ +22,337 +$ +13,971 +Total assets from reportable segments: +UGG wholesale +$ +93,554 +$ +158,726 +$ +130,493 +Teva wholesale +78,612 +43,999 +31,105 +Simple wholesale +5,648 +7,693 +5,357 +Other brands wholesale +— +5,211 +6,194 +eCommerce +491 +2,726 +2,431 +Retail stores +5,413 +18,482 +27,931 +$ +183,718 +$ +236,837 +$ +203,511 +(1) Included +in Teva income (loss) from operations in 2008 are impairment losses of $32,329, (see note 12). +(2) Included +in Other brands loss from operations in 2008 and 2009 are impairment losses of $3,496 and $1,000, respectively (see note 12). +F-26 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +The assets allocable to each reporting segment generally include accounts receivable, inventory, intangible assets and certain other assets that +are specifically identifiable with one of the Company's business segments. Unallocated assets are the assets not specifically related to the segments and generally include the Company's cash and cash +equivalents, short-term investments, deferred tax assets, and various other assets shared by the Company's segments. Reconciliations of total assets from reportable segments to the +consolidated balance sheets are as follows: +2008 +2009 +Total assets from reportable segments +$ +236,837 +$ +203,511 +Unallocated cash and cash equivalents and short-term investments +194,780 +341,982 +Unallocated deferred tax assets +30,771 +26,416 +Other unallocated corporate assets +21,333 +27,134 +Consolidated total assets +$ +483,721 +$ +599,043 +At +December 31, 2009, the Company had cash and cash equivalents and short-term investments of $341,982. A portion of these are held as cash in operating accounts that +are with third party financial institutions. These balances, at times, exceed the Federal Deposit Insurance Corporation (FDIC) insurance limits. While the Company regularly monitors the cash balances +in its operating accounts and adjusts the balances as appropriate, these cash balances could be impacted if the underlying financial institutions fail or are subject to other adverse conditions in the +financial markets. +As of December 31, 2009, the Company had experienced no loss or lack of access to cash in its operating accounts. +The +remainder of the Company's cash equivalents and short-term investments are invested in interest bearing funds managed by third party investment management institutions. +These investments can include US treasuries and government agencies, money market funds, and municipal bonds, among other investments. Certain of these investments are subject to general credit, +liquidity, market, and interest rate risks. While the Company does not hold any investments whose value is directly correlated to mortgage debt, investment risk has been and may further be exacerbated +by US mortgage defaults and credit and liquidity issues, which have affected various sectors of the financial markets. As of December 31, 2009, the Company had experienced no material loss or +lack of access to its cash and cash equivalents and short-term investments. +The +Company sells its products to customers throughout the US and to foreign customers located in Europe, Canada, Australia, Asia, and Latin America, among other regions. International +sales were 13.9%, 15.7%, and 20.6% of the Company's total net sales for the years ended December 31, 2007, 2008 and 2009, respectively. The Company does not consider international operations a +separate segment, as management reviews such operations in the aggregate with the aforementioned segments. +F-27 +Table of Contents +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, 2008, substantially all long-lived assets were held in the US. As of December 31, 2009, long-lived assets, which consist of +property and equipment, by major country were as follows: +2009 +US +$ +27,405 +UK +6,341 +All other countries* +1,696 +Total +$ +35,442 +* No +other country's long-lived assets comprise more than 10% of total long-lived assets as of December 31, 2009. +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 17.0%, 15.0%, and 13.2% of the Company's net sales in 2007, 2008 and 2009, respectively. This customer's revenues were generated from the UGG, Teva, Simple, and other +wholesale segments. No other customer accounted for more than 10% of net sales in the years ended December 31, 2007, 2008 or 2009. As of December 31, 2008 and 2009, the Company had one +customer representing 34.1% and 28.0% of net trade accounts receivable, respectively. +The +Company's production and sourcing is concentrated in China, New Zealand and Australia, with the vast majority of its production at a limited number of independent contractor +factories in China. The Company's operations are subject to the customary risks of doing business abroad, including, but not limited to, currency fluctuations, customs duties and related fees, various +import controls and other nontariff barriers, restrictions on the transfer of funds, labor unrest and strikes and, in certain parts of the world, political instability. +(11) Quarterly Summary of Information (Unaudited) +Summarized unaudited quarterly financial data are as follows: +2008 +March 31 +June 30 +September 30 +December 31 +Net sales +$ +97,535 +$ +91,116 +$ +197,288 +$ +303,506 +Gross profit +46,148 +36,340 +85,340 +137,490 +Net income (loss) attributable to Deckers Outdoor Corporation* +11,294 +(3,820 +) +26,014 +40,460 +Net income (loss) attributable to Deckers Outdoor Corporation common stockholders per share: +Basic +$ +0.87 +$ +(0.29 +) +$ +1.99 +$ +3.10 +Diluted +$ +0.86 +$ +(0.29 +) +$ +1.97 +$ +3.07 +F-28 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +2009 +March 31 +June 30 +September 30 +December 31 +Net sales +$ +134,226 +$ +102,548 +$ +228,414 +$ +347,989 +Gross profit +58,913 +40,785 +97,951 +173,441 +Net income attributable to Deckers Outdoor Corporation* +12,340 +2,879 +33,825 +67,742 +Net income attributable to Deckers Outdoor Corporation common stockholders per share: +Basic +$ +0.94 +$ +0.22 +$ +2.61 +$ +5.27 +Diluted +$ +0.93 +$ +0.22 +$ +2.59 +$ +5.22 +* Included +in net income (loss) in the quarters ended June 30, 2008 and December 31, 2008 are impairment losses of $14,900 and $20,925, +respectively. Included in the quarter ended June 30, 2009 is an impairment loss of $1,000. (See note 12.) +(12) Goodwill and Other Intangible Assets +Most of the Company's goodwill is related to the UGG reportable segment. The Company's goodwill and other intangible assets are +summarized as follows: +Gross +Carrying +Amount +Weighted- +Average +Amortization +Period +Accumulated +Amortization +Net +Carrying +Amount +As of December 31, 2008 +Intangibles subject to amortization +$ +2,222 +6 years +$ +1,711 +$ +511 +Intangibles not subject to amortization: +Trademarks +17,422 +Goodwill +6,101 +Total goodwill and other intangible assets +$ +24,034 +As of December 31, 2009 +Intangibles subject to amortization +$ +4,080 +8 years +$ +2,099 +$ +1,981 +Intangibles not subject to amortization: +Trademarks +15,452 +Goodwill +6,507 +Total goodwill and other intangible assets +$ +23,940 +F-29 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +Changes +in the Company's goodwill are summarized as follows: +Goodwill, +Gross +Accumulated +Impairment +Goodwill, +Net +Balance at December 31, 2007 +$ +18,030 +$ +— +$ +18,030 +Additions through acquisitions +3,496 +— +3,496 +Impairment loss +— +(15,425 +) +(15,425 +) +Balance at December 31, 2008 +$ +21,526 +$ +(15,425 +) +$ +6,101 +Additions through acquisitions +406 +— +406 +Balance at December 31, 2009 +$ +21,932 +$ +(15,425 +) +$ +6,507 +The +Company performed its annual impairment test of nonamortizable intangible assets as of December 31, 2008 and 2009. In June 2008, the Company had not reached its 2008 Teva +brand period to date sales targets and reduced its long-term forecast for Teva brand sales. As a result, +the Company conducted an interim impairment evaluation of the Teva goodwill and intangible assets as of June 30, 2008 and concluded that the Teva goodwill was not impaired, but the fair value +of the Teva trademarks was lower than the carrying amount. Therefore, the Company recognized an impairment loss of $14,900 on the Teva trademarks in the second quarter of 2008. At the time of its +annual impairment testing, due in part to the continued decline in the economy in the second half of 2008, the Company reduced its long-term forecast for Teva brand sales. In addition, as +of December 31, 2008, the Company experienced a significant decline in its market capitalization due to declines in market multiples. As a result of the reduced sales forecast and the decline +in the Company's market capitalization, the Company concluded that the fair value of its Teva trademarks and goodwill were below their respective carrying amounts. Further, due to the decline in the +Company's market capitalization, the Company concluded that the fair value of its TSUBO goodwill was also below its carrying amount. Therefore, the Company recognized an impairment loss in the fourth +quarter of 2008 of $5,500 on the Teva trademarks and $15,425 on goodwill, which was the entire balance of both Teva and TSUBO goodwill. The impairment loss was included in a separate line item within +income from operations, and as a part of the Teva and other brands' reportable segments, respectively. +As +of June 30, 2008, the Company evaluated its Teva goodwill utilizing a combination of a market approach and an income approach. The market approach used a market multiples +methodology and a comparable transactions methodology. The income approach used a discounted cash flow methodology which involved EBITDA exit multiple and Gordon Growth approaches. The Teva trademarks +were evaluated using a relief from royalty method, primarily based on management's forecasted sales, a royalty rate, and discount rates. +As +of December 31, 2008, the Company evaluated the Teva goodwill utilizing the same approach that was used as of June 30, 2008 except comparable transactions were not used. +Management determined there were insufficient comparable transactions in the marketplace at that time due to significant increased uncertainty in the market during the six months ended +December 31, 2008. For the TSUBO goodwill, the Company used the same method as the Teva goodwill evaluation as of December 31, 2008, except that management deemed a revenue exit multiple +approach was a more reliable indicator of fair value than the EBITDA exit multiple approach for the TSUBO brand based on the projected growth, size, and profitability of TSUBO relative to the +comparable companies. The Teva and TSUBO trademarks were evaluated under the same method used for the Teva trademarks as of June 30, 2008. +F-30 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +As +of June 30, 2009, the Company did not reach its 2009 TSUBO brand period-to-date sales targets and reduced its long-term forecast for TSUBO +brand sales. These factors were indicators that the TSUBO intangible assets were possibly impaired. As a result, the Company conducted an interim impairment evaluation of the TSUBO intangible assets +as of June 30, 2009 and concluded that the fair value of the TSUBO trademarks was lower than the carrying amount. Therefore, the Company recognized an impairment loss of $1,000 on the TSUBO +trademarks during the three months ended June 30, 2009, which was included in the other brands' reportable segment. In addition, the Company is amortizing the +remaining TSUBO trademarks over ten years. The TSUBO trademarks were evaluated using a relief from royalty method, primarily based on management's forecasted sales, a royalty rate, and discount rates. +These +impairment losses are reported in a separate line item within the Company's income from operations. All goodwill and other intangibles were evaluated based on Level 3 +inputs. +As +of December 31, 2008 and 2009, the Company evaluated its UGG and other brands' goodwill and trademarks. Also as of December 31, 2009, the company evaluated its Teva +trademarks. Based on the carrying amounts of the UGG, Teva, and other brands' goodwill, trademarks, and net assets, the brands' 2008 and 2009 sales and operating results, and the brands' +long-term forecasts of sales and operating results as of December 31, 2008 and 2009, the Company concluded that the carrying amounts of the UGG and other brands' goodwill and +trademarks, as well as the Teva trademarks, were not impaired. +Aggregate +amortization expense for amortizable intangible assets using the straight-line amortization method for the years ended December 31, 2007, 2008 and 2009 was +$268, $208, and $388 respectively. Amortization expense on existing intangible assets for the next five years is expected to be between $350 and $170 per year. +(13) Business Combinations +In March 2009, the Company acquired 100% of the ownership interest of Ahnu, Inc., an outdoor performance and lifestyle footwear +brand. The Company paid cash consideration in the form of a loan that was entered into concurrently with a definitive agreement for the acquisition of Ahnu, Inc. The fair value of the total +consideration transferred was as follows: +As of +Acquisition +Date +Consideration +Cash paid +$ +1,675 +Contingent consideration arrangement +820 +$ +2,495 +Total identifiable net assets +$ +2,089 +Goodwill +406 +$ +2,495 +The +Company may pay future earn-outs based on the amount, if any, that gross profit of Ahnu products exceeds certain base levels for each year from 2010 to 2013. The +earn-out for each year, if any, will be payable within ninety days after the end of each year. There is no maximum to this potential earn-out; however, as of the acquisition +date, management believes the estimated undiscounted range of outcomes for this contingent consideration was zero to $8,800. The weighted-average fair value of the +F-31 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +potential +earn-out of $651, based on Level 3 inputs, is included within long-term liabilities in the consolidated balance sheet as of December 31, 2009. +The +Company made this acquisition because it believes that the Ahnu brand complements its existing portfolio of lifestyle brands, and that the Ahnu brand's target consumer, product +selection, industry niche and relative under-penetration in the marketplace make it a good fit for the Company. The acquisition resulted in the recognition of $406 of goodwill, and amortizable +intangible assets of $695 related to the Ahnu trademarks, trade name and customer relationships, and was determined, in part, based on the Company's expectation that it can leverage its design, +marketing and distribution capabilities to grow the Ahnu brand into a meaningful business, consistent with the Company's mission to build niche brands into global market leaders. The goodwill is +included in the Company's other brands wholesale reportable segment and none of it is expected to be deductible for tax purposes. The +trademarks and trade name are being amortized over ten years and the customer relationships are being amortized over four years. +F-32 +Table of Contents +Schedule II +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +VALUATION AND QUALIFYING ACCOUNTS +Three Years Ended December 31, 2007, 2008 and 2009 +Balance at +Beginning +of Year +Additions +Deductions +Balance at +End of Year +Year ended December 31, 2007: +Allowance for doubtful accounts(1) +$ +735 +$ +(113 +) +$ +243 +$ +379 +Allowance for sales discounts(2) +2,502 +15,126 +14,410 +3,218 +Allowance for sales returns(3) +1,618 +12,730 +10,661 +3,687 +Chargeback allowance(4) +1,245 +(130 +) +44 +1,071 +Year ended December 31, 2008: +Allowance for doubtful accounts(1) +$ +379 +$ +2,233 +$ +130 +$ +2,482 +Allowance for sales discounts(2) +3,218 +19,193 +18,170 +4,241 +Allowance for sales returns(3) +3,687 +5,506 +6,858 +2,335 +Chargeback allowance(4) +1,071 +635 +58 +1,648 +Year ended December 31, 2009: +Allowance for doubtful accounts(1) +$ +2,482 +$ +399 +$ +171 +$ +2,710 +Allowance for sales discounts(2) +4,241 +22,630 +24,075 +2,796 +Allowance for sales returns(3) +2,335 +15,947 +15,047 +3,235 +Chargeback allowance(4) +1,648 +1,644 +243 +3,049 +(1) The +additions to the allowance for doubtful accounts represent the estimates of our bad debt expense based upon the factors for which we evaluate the +collectability of our accounts receivable. Deductions are the actual write offs of the receivables. In 2007, additions were negative because the Company collected on accounts that were deemed to be +potentially uncollectible as of December 31, 2006. +(2) The +additions to the reserve for sales discounts represent estimates of discounts to be taken by our customers based upon the amount of available +outstanding terms discounts in the year-end aging. Deductions are the actual discounts taken by our customers. +(3) The +additions to the allowance for returns represent estimates of returns based upon our historical returns experience. Deductions are the actual returns of +products. +(4) The +additions to the chargeback allowance represent chargebacks taken in the respective year as well as an estimate of chargebacks related to sales in the +respective reporting period that will be taken subsequent to the respective reporting period. Deductions are the actual chargebacks written off against outstanding accounts receivable. The Company has +estimated the additions and deductions by netting each quarter's change and summing the four quarters for the respective year. +See +accompanying report of independent registered public accounting firm. +F-33 \ No newline at end of file diff --git a/raw/filings/0000910521/2009/0001047469-10-001651/filing_metadata.csv b/raw/filings/0000910521/2009/0001047469-10-001651/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..279d31294181efaa3b6d0102cd6fc994994dfc3b --- /dev/null +++ b/raw/filings/0000910521/2009/0001047469-10-001651/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000910521,DECK,DECKERS OUTDOOR CORP,10-K,2010-03-01,2009-12-31,2010-03-01T21:22:10.000Z,0001047469-10-001651,a2196208z10-k.htm,10-K,2160495,0,0,https://www.sec.gov/Archives/edgar/data/910521/000104746910001651/a2196208z10-k.htm,https://www.sec.gov/Archives/edgar/data/910521/000104746910001651/,2009,2009,1 diff --git a/raw/filings/0000910521/2009/0001047469-10-001651/item1.txt b/raw/filings/0000910521/2009/0001047469-10-001651/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..348ec20b3346560343b60eef9998ca90e03893e6 --- /dev/null +++ b/raw/filings/0000910521/2009/0001047469-10-001651/item1.txt @@ -0,0 +1,264 @@ +Item 1. Business. +Unless otherwise specifically indicated, all amounts in Item 1. and Item 1A. herein are expressed in thousands, except +for share quantity, per share data, and selling prices. +General +Deckers Outdoor Corporation was incorporated in 1975 under the laws of the State of California and, in 1993, reincorporated under the +laws of the State of Delaware. We are a leading designer, producer, marketer, and brand manager of innovative, high-quality footwear and accessories. Our footwear is distinctive and +appeals broadly to men, women and children. We sell our products, including accessories such as handbags, headwear, and outerwear, through quality domestic retailers and international distributors and +directly to end-user consumers, both domestically and internationally, through our websites, call centers, retail concept stores and retail outlet stores. Our primary objective is to build +our footwear lines into global lifestyle brands with market leadership positions. We seek to differentiate our brands and products by offering diverse lines that emphasize authenticity, functionality, +quality and comfort and products tailored to a variety of activities, seasons and demographic groups. Virtually all of our products are manufactured by independent contractors outside of the United +States (US). Our continued growth will depend upon the broadening of our products offered under each brand, expanding domestic and international distribution, and developing or acquiring new brands. +Products +We market our products primarily under three proprietary brands: +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 reception, driven by consistent introductions of new styles, introductions of UGG products in the fall and spring seasons and strategic geographic expansion of our +distribution. We carefully manage the distribution of our UGG products within high-end specialty and department store +retailers in order to best reach our target consumers, preserve the UGG brand's retail channel positioning and maintain the UGG brand's position as a mid- to upper-price luxury brand. +In +recent years, sales of UGG products have benefited from significant national media attention and celebrity endorsement through our marketing programs and product placement activities, +raising the profile of our UGG brand as a luxury comfort brand. We have further supported the UGG brand's market positioning by expanding the selection of styles available in order to build consumer +interest in our UGG brand collection. We also remain committed to limiting distribution of UGG products to high-end retail channels. +Teva®. Teva is our outdoor performance and lifestyle brand and pioneer of the sport sandal market. We have expanded the Teva +product line over time to +include open and closed-toe outdoor +3 +Table of Contents +lifestyle +footwear, as well as additional outdoor performance footwear, including multi-sport shoes, light hiking shoes, amphibious footwear, and rugged outdoor travel shoes. +In +recent seasons, we have focused on regaining our leadership position in the performance sandal market, while broadening our performance platform to include other outdoor activities +such as multi-sport and light hiking to lessen our overall reliance on sandal sales, while bringing youthfulness back to the brand through contemporary designs, colors and materials. In 2008, we +introduced a modest assortment of fall and winter footwear. We followed that up in fall 2009 with a more complete collection of seasonally appropriate performance and lifestyle products for men, women +and children. The fall 2009 line included high performance light hikers with eVent waterproof membranes and Vibram rubber outsoles, rugged multi-sport shoes and a range of women's lifestyle boots in +both leather and suede with warm, faux fur linings. +In +2010, we plan to continue to build on our water-related performance heritage and continue to inject youthfulness into the Teva brand. We will introduce a more expansive collection of +performance and lifestyle open-toe product, while also significantly increasing our offering in closed-toe light hiking, multi-sport and rugged casual footwear. +Simple®. In 2005, as a response to the massive amount of waste produced by the footwear industry, the Simple brand launched +a new collection of sustainable +footwear called Green Toe®. Green Toe represents a revolutionary shift in thinking about footwear by building a +shoe from the inside out using sustainable materials and processes. The Simple brand's mission is to be the world leader in sustainable and stylish 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 as well as making products that are fashionable, +youthful and functional. +In +addition to our primary brands, our newest brands include TSUBO®, a line of high-end casual footwear that incorporates style, function and maximum comfort, and +Ahnu®, a line of outdoor performance and lifestyle footwear. We acquired 100% of the ownership interests of TSUBO, LLC in May 2008, and we acquired 100% of the ownership interest of +Ahnu, Inc. in March 2009. +Sales and Distribution +At the wholesale level, we distribute our products in the US through a dedicated network of independent sales representatives. Our +sales representatives are organized geographically and by brand and visit retail stores to communicate the features, styling and technology of our products. In addition, we have employee sales +representatives who serve as territory representatives or key account executives for several of our largest customers. We also sell products directly to the consumers through our websites and retail +stores. Our brands are generally advertised and promoted through a variety of consumer media campaigns. We benefit from editorial coverage in both consumer and trade publications. Each brand's +dedicated marketing team works closely with targeted accounts to maximize advertising and promotional effectiveness. +Our +sales force is generally separated by brand, as each brand generally has certain specialty consumers; however, there is overlap between the sales teams and customers. We have aligned +our brands' sales forces to position them for the future of the brands. Each brand's respective sales manager recruits and manages their network of sales representatives and coordinates sales to +national accounts. We believe this approach for the US market maximizes the selling efforts to our national retail accounts on a cost-effective basis. +We +distribute products sold in the US through our distribution centers in Ventura and Camarillo, California. Our distribution centers feature a warehouse management system that enables +us to efficiently pick and pack products for direct shipment to customers. For certain customers requiring special handling, +4 +Table of Contents +each +shipment is pre-labeled and packed to the retailer's 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 quality inspection process. +Internationally, +we distribute our products through independent distributors and retailers in a vast number of countries, including countries throughout Europe, Asia Pacific, Canada, and +Latin America, among others. In addition, we sell products directly to consumers through our websites and our retail stores. We utilize a third-party logistics company in the United Kingdom (UK) for +the distribution of inventory to our UK retail stores. Our principal customers include specialty retailers, selected department stores, outdoor retailers, sporting goods retailers, shoe stores, and +online retailers. In 2010, we will continue to assume the distribution rights from certain international distributors and sell directly to retailers in those regions. +In +July 2008, we entered into a joint venture agreement with an affiliate of Stella International Holdings Limited ("Stella International") for the opening of retail stores and wholesale +distribution for the UGG brand in China. Under this agreement, we opened our first UGG Australia concept store in Beijing in November 2008. The joint venture is owned 51% by Deckers and 49% by Stella +International. Stella International is also one of our major manufacturers in China. +Our +five largest customers accounted for approximately 30.6% of our net sales for 2008, compared to 30.0% for 2009. One customer, Nordstrom, accounted for greater than 10% of our +consolidated net sales in 2008 and 2009, with the majority of those being related to our UGG segment. +UGG. We sell our UGG footwear and accessories primarily through high-end department stores such as Nordstrom, Neiman Marcus and +Bloomingdale's, as well as independent specialty retailers such as Journey's, David Z. and internet customers such as Zappos.com. 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. +Teva. We sell our Teva footwear primarily through specialty outdoor and +sporting goods retailers such as REI, L.L. Bean, Dick's Sporting Goods and The Sports Authority as well as on-line retailers such as Zappos.com. 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 performance products to the consumer best sell our Teva footwear. +Simple. Our Simple products are targeted primarily towards select department stores, outdoor specialty accounts, footwear and +independent specialty +retailers, internet retailers, and health and wellness retailers that target consumers seeking fashionable, youthful, functional, and sustainable footwear. These include key accounts such as +Nordstrom, Dillard's, REI, Whole Earth Provision, Zappos.com and Whole Foods Market. +Other brands. Our other brands are sold throughout the US primarily at better department stores, independent specialty +retailers and with online retailers that +support our brand ideals of comfort, style and quality. Key accounts include Nordstrom, Hanigs, REI and Zappos.com. +eCommerce. Our eCommerce business enables us to interact and reinforce our relationships with the consumer. We operate our +eCommerce business primarily through +UGGAustralia.com, Teva.com, and SimpleShoes.com websites. Our websites support the brands' marketing goals and also drive offline sales by providing information to consumers about the brands' products +and where to find retailers that carry our brands. We have expanded our websites' international capabilities by creating sites translated into foreign languages and listing products in local +currencies, making our products available to international consumers through our websites. In 2010, we plan to continue to open and operate call centers internationally to accommodate these website +sales. Our domestic +5 +Table of Contents +eCommerce +business is headquartered in Flagstaff, Arizona and order fulfillment is performed by our 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. Products sold through our eCommerce business are sold at prices which approximate retail +prices, enabling us to capture the full retail margin on each direct to consumer transaction. +Retail Stores. Our retail store business allows us to directly reach our customers and +meet the growing demand for our products. In addition, our UGG Australia concept stores allow us to showcase the entire lines for spring and fall; whereas, most retailers do not carry our full line. +In the US in 2009, we opened an outlet store in Cabazon, California and an UGG Australia concept store in Honolulu, Hawaii. As of December 31, 2009, we had a total of five UGG Australia concept +stores and seven retail outlet stores in the US. Products sold through our concept stores are sold at prices which approximate department store prices, enabling us to capture the full retail margin on +each direct to consumer transaction. The outlet stores sell some of our discontinued styles from the previous season, plus products made specifically for the outlet stores. Internationally, in 2009, +we opened UGG Australia concept stores in Manchester, England and Tokyo, Japan, as well as our first international UGG Australia outlet store in Bicester, England. During 2010, we intend to expand our +retail store business both in the US and internationally, primarily with the UGG brand. +Product Design and Development +The design and product development staff for each of our brands creates 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. Refer to Note 1 to our accompanying consolidated financial statements for a discussion of our research and development costs for the last three years. +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 and accessories for our various product lines. We develop detailed drawings and prototypes of our new products to aid in conceptualization and to ensure our contemplated new products meet +the standards for innovation and performance that our consumers demand. Throughout the development process, we have multiple design and development reviews, and members of the design staff coordinate +with our domestic and overseas product development, manufacturing and sourcing personnel. This ensures that we are addressing the needs of our consumers and are working 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 products; we outsource the production of our brand footwear primarily to independent manufacturers in China. +We also outsource the production of a portion of our UGG footwear to an independent manufacturer in New Zealand. We require our +independent contract manufacturers and designated suppliers to adopt our Factory Charter, which specifies that they comply with all local laws and regulations governing human rights, working +conditions and environmental compliance before we are willing to conduct business with them. We also require our manufacturing partners to comply with our Ethical Supply Chain guidelines as a +condition of doing business with our company. 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. +6 +Table of Contents +The +production of footwear by our independent manufacturers is performed in accordance with our detailed specifications and is subject to our quality control standards. 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. To ensure the production of high quality products, the majority 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 +generally 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 three tanneries in China, which source their skins from Australia, Europe +and the US. We maintain constant communication with the tanneries to monitor the supply of sufficient high quality sheepskin available for our projected UGG brand production. To ensure adequate +supplies for our manufacturers, we forecast our usage of top grade sheepskin one year in advance at a forward price. Refer to Item 7 of Part II "Management's Discussion and Analysis of +Financial Condition and Results of Operations — Contractual Obligations" for further discussion on our sheepskin purchase commitment. We believe current 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. +Our +Simple brand 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, the 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 +have instituted pre-production, in-line, and post-production inspections to meet or exceed the high quality demanded by us and consumers of our +products. Our quality assurance program includes our own employee 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 distribution centers. +Patents and Trademarks +We utilize trademarks on nearly all of our products and believe that having distinctive marks that are readily identifiable is an +important factor in creating a market for our goods, in identifying the Company, and in distinguishing our goods from the goods of others. We currently hold trademark registrations for UGG, Teva, +Simple, TSUBO, Ahnu and other marks in the US and in many other countries, including the countries of the European Union, Canada, Japan and Korea. We now hold more than 150 utility and design patents +and registrations in the US and abroad and have filed for more than 90 new patents which are currently pending. These patents expire at various times, and patents issued for applications filed this +year will generally have a remaining duration from now to 2024 for design patents and from now to 2030 for utility patents. We regard our proprietary rights as valuable assets and vigorously protect +such rights against infringement by third parties. +7 +Table of Contents +Seasonality +Our business is seasonal, with the highest percentage of UGG brand net sales occurring in the third and fourth quarters of each +calendar year. Thus, our net sales in the last half of the year have exceeded that for the first half of the year, and we expect this trend to continue. Our other brands do not have a significant +seasonal impact on our business. 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 Part I, Item 1A, "Risk Factors." For further discussion on our working capital and inventory management, see +Item 7 of Part II, "Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources." +Backlog +Historically, we have encouraged our customers to place, and we have received, a significant portion of orders as preseason orders, +generally four to eight months prior to shipment date. We provide customers with price incentives, and in certain cases extended payment terms, to participate in such preseason 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, +which can be cancelled prior to shipment. The backlog as of a particular date is affected by a number of factors, including seasonality, manufacturing schedule and the timing of product shipments 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. +At +December 31, 2009, our backlog of orders from our wholesale customers and distributors was approximately $245,000 compared to approximately $240,000 at December 31, +2008. While all orders in the backlog are subject to cancellation by customers, we expect that the majority of such orders will be filled in 2010. We believe that backlog at year-end is an +imprecise indicator of total revenue that may be achieved for the full year for several reasons. Backlog only relates to wholesale orders for the next season and current season fill-in +orders and excludes potential sales in our eCommerce business and retail stores during the year. Backlog also is effected by the timing of customers' orders and product availability. +Competition +The casual, outdoor, athletic, fashion and formal footwear markets are highly competitive. Our competitors include athletic and +footwear companies, branded apparel companies, and retailers with their own private labels. Although the footwear industry is fragmented to a certain degree, many of our competitors are larger and +have substantially greater resources than us, including athletic shoe companies, several of which compete directly with some of our 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 and accessory industries. Due to the popularity of our UGG products, we face +increasing competition from a significant number of competitors selling imitation products. +Our +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: +• shape and stimulate consumer tastes and preferences by offering innovative, attractive and exciting products; +• anticipate and respond to changing consumer demands in a timely manner; +• maintain brand authenticity; +8 +Table of Contents +• develop high quality products that appeal to consumers; +• suitably price our products; +• provide strong and effective marketing support; and +• ensure product availability. +We +believe we are well positioned to compete in the footwear industry. 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, 2009, we employed approximately one thousand employees in the US, Europe and Asia, none of whom were represented +by a union. This figure includes approximately 470 employees in our retail stores worldwide, which includes part-time and seasonal employees. The large increase in employees during the +year was primarily related to increased selling, general and administration headcount commensurate with our growth. We intend to increase our employee count further in 2010 primarily related to retail +stores and our other expansion initiatives. We believe our relationships with our employees are good. +Financial Information about Segments and Geographic Areas +Our six reportable business segments include the strategic business units responsible for the worldwide operations of our brands' (UGG, +Teva, Simple and other brands) wholesale divisions, as well as our eCommerce and retail store businesses. The following table shows our domestic and international revenues: +Years Ended December 31, +2007 +2008 +2009 +Net sales by location: +US +$ +386,593 +$ +581,512 +$ +645,993 +International +62,336 +107,933 +167,184 +Total +$ +448,929 +$ +689,445 +$ +813,177 +As +of December 31, 2008, substantially all long-lived assets were held in the US. As of December 31, 2009, long-lived assets, which consist of +property and equipment, by major country were as follows: +2009 +US +$ +27,405 +UK +6,341 +All other countries* +1,696 +Total +$ +35,442 +* No +other country's long-lived assets comprise more than 10% of total long-lived assets as of December 31, 2009. +Refer +to Note 10 to our accompanying consolidated financial statements for further discussion of our business segment data. +Compliance +with federal, state and local environmental regulations has not had, nor is it expected to have, any material effect on our capital expenditures, earnings or competitive +position based on information and circumstances known to us at this time. +9 +Table of Contents +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 SEC's Public Reference Room at 100 F Street, NE, +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 at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. \ No newline at end of file diff --git a/raw/filings/0000910521/2009/0001047469-10-001651/item13.txt b/raw/filings/0000910521/2009/0001047469-10-001651/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..e779b90e40885913d4b3ffe5d6fbbcab2a293693 --- /dev/null +++ b/raw/filings/0000910521/2009/0001047469-10-001651/item13.txt @@ -0,0 +1,4 @@ +Item 13. Certain Relationships and Related Transactions, and Director Independence. +Information relating to Certain Relationships and Related Transactions is set forth under "Proposal No. 1-Election +of Directors" in the Company's definitive proxy statement relating to the Registrant's 2010 annual meeting of stockholders, which will be filed pursuant to Regulation 14A within 120 days +after the end of the Company's fiscal year ended December 31, 2009, and such information is incorporated herein by reference. \ No newline at end of file diff --git a/raw/filings/0000910521/2009/0001047469-10-001651/item9a.txt b/raw/filings/0000910521/2009/0001047469-10-001651/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..c77078f0b68c4af8f1d11e6b5db32f072d990fe1 --- /dev/null +++ b/raw/filings/0000910521/2009/0001047469-10-001651/item9a.txt @@ -0,0 +1,41 @@ +Item 9A. Controls and Procedures. +(a) Disclosure Controls and Procedures. +Disclosure controls and procedures are the controls and other procedures that are designed to ensure that information required to be disclosed in the reports that +the Company files or submits under the Securities Exchange Act of 1934, as amended (Exchange Act), is recorded, processed, summarized and reported within the time periods specified in the SEC's rules +and forms. Disclosure controls and procedures include, among other processes, controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files +or submits under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding +required disclosure. +47 +Table of Contents +The +Company carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer of the +effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2009 pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, +the Chief Executive Officer and Chief Financial Officer believe that as of the end of the period covered by this report, the Company's 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. +(b) Management's Report on Internal Control over Financial Reporting +Management is responsible for establishing and maintaining adequate internal control over financial reporting at the Company. Our internal control over financial +reporting is a process designed under the supervision of the Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and +the preparation of the Company's financial statements for external reporting purposes in accordance with US generally accepted accounting principles (GAAP). A company's internal control over financial +reporting includes those policies and procedures that: +• pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and +dispositions of the assets of the company; +• provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in +accordance with GAAP, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and the directors of the company; and +• provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of +the company's assets that could have a material effect on the financial statements. +Because +of 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 Company's internal control over financial reporting as of December 31, 2009. 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. Management's assessment included an evaluation of the design of the Company's 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, 2009, the Company maintained effective internal control over financial reporting. The registered public +accounting firm that audited the consolidated financial statements included in this Annual Report has issued an attestation report on the Company's internal control over financial reporting. 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. +(c) Changes in Internal Control over Financial Reporting +There was no change in our internal control over financial reporting that occurred during the quarter ended December 31, 2009 that has materially affected, +or is reasonably likely to materially affect, our internal control over financial reporting. \ No newline at end of file diff --git a/raw/filings/0000910521/2009/0001047469-10-001651/rp_note.txt b/raw/filings/0000910521/2009/0001047469-10-001651/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000910521/2009/0001047469-10-001651/rpt_disclosure.txt b/raw/filings/0000910521/2009/0001047469-10-001651/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..b3eec52b50f39d47d9ae6bf15401e442338fd4aa --- /dev/null +++ b/raw/filings/0000910521/2009/0001047469-10-001651/rpt_disclosure.txt @@ -0,0 +1,30 @@ +Certain Relationships and Related Person Transactions +The legal department is primarily responsible for identifying and reviewing relationships and transactions in which the Company and our +directors, executive officers, certain of our stockholders or their immediate family members are participants to determine whether any of these related persons had or will have a direct or indirect +material interest. In order to identify potential related person transactions, the Company's legal department annually prepares and distributes to all directors and executive officers a written +questionnaire which includes questions intended to elicit information about any related person transactions. In addition, the Company's Code of Business Conduct and Ethics addresses conflicts of +interest where an individual's private interests interfere or conflict with the interests of the Company, including relationships with suppliers, customers or competitors. Conflicts of interest which +might impair or appear to impair the exercise of judgment solely for the benefit of the Company are prohibited. In general, such conflicts must be approved by the legal department, the employee's +supervisor or, in the case of directors, the Audit Committee. Information regarding potential conflicts of interests in violation of the Company's Code of Business Conduct and Ethics may be reported +to the Company's anonymous reporting hotline and may be +subsequently obtained by the Audit Committee Chair, the Chair of the Board and the Chief Audit Executive. +If +a related person transaction is identified by the legal department as one which must be reported in the Company's Proxy Statement pursuant to applicable Securities and Exchange +Commission regulations, our Audit Committee is responsible for reviewing and approving or ratifying any such related person transactions. In evaluating related person transactions, our Audit Committee +members apply the same standards of good faith and fiduciary duty they apply to their general responsibilities as the Audit Committee and as individual directors. The Audit Committee may approve a +related person transaction when, in its good faith judgment, the transaction is in the best interests of the Company. +There +were no disclosable transactions with related persons under Item 404 of Regulation S-K during the fiscal year ended December 31, 2010 nor are any +such transactions currently proposed. +Limitation of Liability and Indemnification of Directors and Officers +Our Certificate of Incorporation and Bylaws provide that we shall indemnify directors and executive officers to the fullest extent now +or hereafter permitted by the Delaware General Corporation Law (the "DGCL"). In addition, we have entered into Indemnification Agreements with our directors and executive officers in +which we agree to indemnify such persons to the fullest extent now or hereafter permitted by the DGCL. +We +have obtained a liability policy for our directors and officers as permitted by the DGCL which extends to, among other things, liability arising under the Securities Act of 1933, as +amended. +46 +We +maintain an insurance policy pursuant to which our directors and officers are insured, within the limits and subject to the limitations of the policy, against specified expenses in +connection with the defense of claims, actions, suits or proceedings, and liabilities which might be imposed as a result of such claims, actions, suits or proceedings, that may be brought against them +by reason of their being or having been directors or officers. \ No newline at end of file diff --git a/raw/filings/0000910521/2010/0001047469-11-001618/filing.txt b/raw/filings/0000910521/2010/0001047469-11-001618/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..78aec34cdc19a754dfe3835462ff83257ce74551 --- /dev/null +++ b/raw/filings/0000910521/2010/0001047469-11-001618/filing.txt @@ -0,0 +1,5613 @@ +10-K +1 +a2202162z10-k.htm +10-K +Table of Contents +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +FORM 10-K +(Mark one) +ý +ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the fiscal year ended December 31, 2010 +or +o +TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the transition period +from to +Commission File No. 0-22446 +DECKERS OUTDOOR CORPORATION +(Exact name of registrant as specified in its charter) +Delaware +(State or other jurisdiction of +incorporation or organization) +95-3015862 +(I.R.S. Employer +Identification No.) +495-A South Fairview Avenue, Goleta, California +(Address of principal executive offices) +93117 +(Zip Code) +Registrant's telephone number, including area code: (805) 967-7611 +Securities registered pursuant to Section 12(b) of the Act: None +Title of each class +Name of each exchange on which registered +Common Stock, Par value $0.01 per share +NASDAQ Global Select Market +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 o No ý +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 ý +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 ý No o +Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and +posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the +registrant was required to submit and post such files). Yes ý No o +Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not +contained herein, and will not be contained to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this +Form 10-K or any amendment to this Form 10-K. o +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting +company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. +Large accelerated filer ý +Accelerated filer o +Non-accelerated filer o +(Do not check if a smaller reporting company) +Smaller reporting company 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 ý +The aggregate market value of the common stock held by non-affiliates of the registrant was $1,763,604,129 based on the June 30, 2010 closing price of $47.62 +on the NASDAQ Global Select Market on such date. +The +number of shares of the registrant's Common Stock outstanding at February 15, 2011 was 38,581,395. +DOCUMENTS INCORPORATED BY REFERENCE +Portions +of the registrant's definitive proxy statement relating to the registrant's 2011 annual meeting of stockholders, which will be filed pursuant to Regulation 14A within 120 days +after the end of the registrant's fiscal year ended December 31, 2010, are incorporated by reference in Part III of this Annual Report on Form 10-K. +Table of Contents +DECKERS OUTDOOR CORPORATION +For the Fiscal Year Ended December 31, 2010 +Table of Contents to Annual Report on Form 10-K +Page +PART I +Item 1. +Business +3 +Item 1A. +Risk Factors +10 +Item 1B. +Unresolved Staff Comments +20 +Item 2. +Properties +21 +Item 3. +Legal Proceedings +21 +Item 4. +(Removed and Reserved) +21 +PART II +Item 5. +Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +22 +Item 6. +Selected Financial Data +25 +Item 7. +Management's Discussion and Analysis of Financial Condition and Results of Operations +26 +Item 7A. +Quantitative and Qualitative Disclosures about Market Risk +46 +Item 8. +Financial Statements and Supplementary Data +47 +Item 9. +Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +47 +Item 9A. +Controls and Procedures +47 +Item 9B. +Other Information +48 +PART III +Item 10. +Directors, Executive Officers and Corporate Governance +49 +Item 11. +Executive Compensation +49 +Item 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +49 +Item 13. +Certain Relationships and Related Transactions, and Director Independence +49 +Item 14. +Principal Accounting Fees and Services +49 +PART IV +Item 15. +Exhibits, Financial Statement Schedules +50 +Signatures +53 +2 +Table of Contents +SPECIAL NOTE ON 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 Exchange 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 global business, growth, operating and financing strategies; +• our product and geographic mix; +• the success of new products, new brands, and other growth initiatives; +• the impact of seasonality on our operations; +• expectations regarding our net sales and earnings growth and other financial metrics; +• our development of worldwide distribution channels; +• trends affecting our financial condition or results of operations; +• overall global economic trends; and +• reliability of overseas factory production and storage and availability of raw materials. +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 Part I, 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 read this report in its entirety, together with the documents that we file 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. +PART I +References in this Annual Report on Form 10-K to "Deckers", "we", "our", "us", or the "Company" refer to Deckers +Outdoor Corporation. Ahnu®, Deckers®, Simple®, Teva®, TSUBO®, and UGG® are some of our trademarks. Other trademarks or trade +names appearing elsewhere in this report are the property of their respective owners. +Item 1. Business. +Unless otherwise specifically indicated, all amounts in Item 1. and Item 1A. herein are expressed in thousands, except +for share quantity, per share data, selling prices, and employees. +General +Deckers Outdoor Corporation was incorporated in 1975 under the laws of the State of California and, in 1993, reincorporated under the +laws of the State of Delaware. We strive to be a premier lifestyle marketer that builds niche brands into global market leaders by designing and marketing innovative, functional and fashion-oriented +footwear developed for both high performance outdoor activities and everyday casual lifestyle use. We believe that our footwear is distinctive and appeals broadly to men, women and children. We sell +our products, including accessories such as handbags and outerwear, through +3 +Table of Contents +quality +domestic and international retailers, international distributors, and directly to end-user consumers, both domestically and internationally, through our websites, call centers, +retail concept stores and retail outlet stores. Our primary objective is to build our footwear lines into global lifestyle brands with market leadership positions. We seek to differentiate our brands +and products by offering diverse lines that emphasize authenticity, functionality, quality and comfort and products tailored to a variety of activities, seasons and demographic groups. Virtually all +of our products are manufactured by independent contractors outside of the United States (US). Our continued growth will depend upon the broadening of our products offered under each brand, expanding +domestic and international distribution, successfully opening new retail stores, increasing sales to end-user consumers, and developing or acquiring new brands. +In +July 2008, we entered into a joint venture agreement with an affiliate of Stella International Holdings Limited ("Stella International") for the opening of retail stores and wholesale +distribution for the UGG brand in China. The joint venture is owned 51% by Deckers and 49% by Stella International. Stella International is also one of our major manufacturers in China. In May 2008, +we acquired 100% of the ownership interest of TSUBO, LLC, a high-end casual footwear brand. In March 2009, we acquired 100% of the ownership interest of Ahnu, Inc., an +outdoor performance and lifestyle footwear brand. In September 2009, we began to reacquire our international distribution rights, beginning in Japan. In January 2010, we acquired certain assets and +liabilities, including reacquisition of our distribution rights, from our Teva distributor that sold to retailers in Belgium, the Netherlands, and Luxemburg (Benelux) as well as France. In September +2010, we purchased a portion of a privately held footwear company as an equity method investment. +On +May 28, 2010, we announced that our Board of Directors authorized a three-for-one stock split to be effected in the form of a stock dividend. Each +stockholder of record received two additional shares of common stock for each share held on June 17, 2010, that was paid on July 2, 2010. All share and related information presented in +this Annual Report on Form 10-K reflect the increased number of shares and decreased stock prices resulting from this stock split for all periods presented. +Products +We market our products primarily under two proprietary brands: +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 reception, driven by consistent introductions of new styles in the fall and spring seasons and strategic geographic expansion of our distribution. We +carefully manage the distribution of our UGG products within high-end specialty and department store retailers in order to best reach our target consumers, preserve the UGG brand's retail +channel positioning and maintain the UGG brand's position as a mid- to upper-price luxury brand. +In +recent years, sales of UGG products have benefited from significant national media attention and celebrity endorsement through our marketing programs and product placement activities, +raising the profile of our UGG brand as a luxury comfort brand. We have further supported the UGG brand's market positioning by expanding the selection of styles available in order to build consumer +interest in our UGG brand collection. We also remain committed to limiting distribution of UGG products to high-end retail channels. +Teva®. Teva is our outdoor performance and lifestyle brand and pioneer of the sport sandal market. We have expanded the Teva +product line +over time to include open and closed-toe outdoor lifestyle footwear, as well as additional outdoor performance footwear, including multi-sport shoes, light hiking shoes, amphibious +footwear, and rugged outdoor travel shoes. +In +recent years, we have focused on regaining our leadership position in the performance sandal market, while broadening our performance platform to include other outdoor activities such +as multi-sport and light hiking to lessen our overall reliance on sandal sales, while bringing youthfulness back to the brand through contemporary designs, colors and materials. In 2008, we introduced +a modest assortment of +4 +Table of Contents +fall +and winter footwear. We followed that up in fall 2009 with a more complete collection of seasonally appropriate performance and lifestyle products for men, women and children. The fall 2009 line +included high performance light hikers with eVent waterproof membranes and Vibram rubber outsoles, +rugged multi-sport shoes and a range of women's lifestyle boots in both leather and suede with warm, faux fur linings. In 2010, we continued to build on our water-related performance heritage and +continued to inject youthfulness into the Teva brand. We introduced a more expansive collection of performance and lifestyle open-toe product, while also significantly increasing our +offering in closed-toe light hiking, multi-sport and rugged casual footwear. +In +addition to our primary brands, our other brands include Simple®, a line of sustainable and stylish footwear, TSUBO®, a line of high-end casual +footwear that incorporates style, function and maximum comfort, and Ahnu®, a line of outdoor performance and lifestyle footwear. +Sales and Distribution +At the wholesale level, we distribute our products in the US through a dedicated network of independent sales representatives, as well +as through employee sales representatives who serve as territory representatives or key account executives for several of our largest customers. Our sales representatives are organized geographically +and by brand and visit retail stores to communicate the features, styling and technology of our products. In addition to our wholesale business, we also sell products directly to consumers through our +websites and retail stores. Our brands are generally advertised and promoted through a variety of consumer media campaigns. We benefit from editorial coverage in both consumer and trade publications. +Each brand's dedicated marketing team works closely with targeted accounts to maximize advertising and promotional effectiveness. +Our +sales force is generally separated by brand, as each brand generally has certain specialty consumers; however, there is overlap between the sales teams and customers. We have aligned +our brands' sales forces to position them for the future of the brands. Each brand's respective sales manager recruits and manages their network of sales representatives and coordinates sales to +national accounts. We believe this approach for the US market maximizes the selling efforts to our national retail accounts on a cost-effective basis. +We +distribute products sold in the US through our distribution centers in Ventura and Camarillo, California. Our distribution centers feature a warehouse management system that enables +us to efficiently pick and pack products for direct shipment to customers. For certain customers requiring special handling, each shipment is pre-labeled and packed to the retailer's +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 quality inspection process. +Internationally, +we distribute our products through independent distributors and retailers in a vast number of countries, including countries throughout Europe, Asia Pacific, Canada, and +Latin America, +among others. In addition, as we do in the US, we sell products directly to international consumers through our websites and our retail stores, including retail stores with our joint venture partner +in China. We utilize a third-party logistics company in the United Kingdom (UK) for the distribution of inventory to our UK retail stores. In Japan, we work with a trading company for importation and +use a third-party logistics company for distribution to our wholesale customers and to our retail store. We operate a distribution center in the Netherlands for the distribution of Teva products in +Belgium, the Netherlands, and Luxembourg (Benelux) and France. Our principal customers include specialty retailers, selected department stores, outdoor retailers, sporting goods retailers, shoe +stores, and online retailers. In 2010, we continued to assume the distribution rights from certain international distributors and sell directly to retailers in those regions, and we plan to continue +distributor conversions in the future. +Our +five largest customers accounted for approximately 28.9% of our net sales for 2010, compared to 30.0% for 2009. One customer, Nordstrom, accounted for greater than 10% of our +consolidated net sales in 2010 and 2009, with the majority of those being related to our UGG segment. +5 +Table of Contents +UGG. We sell our UGG footwear and accessories primarily through high-end department stores such as Nordstrom, Neiman Marcus and +Bloomingdale's, as well as independent specialty retailers such as Journey's, David Z. and internet customers such as Zappos.com. 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. +Teva. We sell our Teva footwear primarily through specialty outdoor and sporting goods retailers such as REI, L.L. Bean, Dick's +Sporting Goods and +The Sports Authority as well as on-line retailers such as Zappos.com. 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 performance products to the consumer +best sell our Teva footwear. +Other brands. Our other brands are sold throughout the world primarily at better department stores, outdoor specialty accounts, +independent specialty +retailers, and with online retailers that support our brand ideals of comfort, style and quality. We also sell our Simple brand through health and wellness +retailers that target consumers seeking fashionable, youthful, functional, and sustainable footwear. Key accounts of our other brands include Nordstrom, Dillard's, Hanigs, REI and Zappos.com. +eCommerce. Our eCommerce business enables us to interact and reinforce our relationships with the consumer. We operate our +eCommerce business +primarily through uggaustralia.com, Teva.com, Tsubo.com, Ahnu.com, and SimpleShoes.com websites. Our websites support the brands' marketing goals and also drive offline sales by providing information +to consumers about the brands' products and where to find retailers that carry our brands. We have expanded our international capabilities by developing sites to service international markets. These +sites are translated into the local language, provide product through local distribution centers and price the products in the consumers' local currency. In 2010, we significantly upgraded our +eCommerce platform to support our international and domestic sites and opened and operated an international call center to accommodate these international website sales. Our eCommerce business has +offices in Flagstaff, Arizona and Richmond, England. Order fulfillment is performed by our distribution centers in California and the UK in order to reduce the cost of order fulfillment, minimize out +of stock positions and further leverage our distribution centers' operations. Products sold through our eCommerce business are sold at prices which approximate retail prices, enabling us to capture +the full retail margin on each direct to consumer transaction. +Retail Stores. Our retail store business allows us to directly reach our customers and meet the growing demand for our products. +In addition, our UGG +Australia concept stores allow us to showcase the entire lines for spring and fall; whereas, most retailers do not carry our full line. In 2010, we opened six stores in the US and three +internationally. As of December 31, 2010, we had a total of 18 UGG Australia concept stores and nine retail outlet stores worldwide. Products sold through our concept stores are sold at prices +which approximate department store prices, enabling us to capture the full retail margin on each direct to consumer transaction. The outlet stores sell some of our discontinued styles from the +previous season, plus products made specifically for the outlet stores. During 2011, we plan to open additional retail stores in the US and significantly expand our retail store business +internationally. +Product Design and Development +The design and product development staff for each of our brands creates 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 freelance designers. By +utilizing outside designers, 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. Refer +to Note 1 to our accompanying consolidated financial statements for a discussion of our research and development costs for the last three years. +6 +Table of Contents +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 and accessories for our various product lines. We develop detailed drawings and prototypes of our new products to aid in conceptualization and to ensure our contemplated new products meet +the standards for innovation and performance that our consumers demand. Throughout the development process, we have multiple design and development reviews, and members of the design staff coordinate +with our domestic and overseas product development, manufacturing and sourcing personnel. This ensures that we are addressing the needs of our consumers and are working 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 products; we outsource the production of our brand footwear primarily to independent manufacturers in China. +During 2009, we began to diversify our manufacturing locations by outsourcing a limited amount of production to manufacturers in Vietnam, and in 2010 increased this production volume. We also +outsource the production of a portion of our UGG footwear to an independent manufacturer in New Zealand. We require our independent contract manufacturers and designated suppliers to adopt our Factory +Charter, which specifies that they comply with all local laws and regulations governing human rights, working conditions and environmental compliance before we are willing to conduct business with +them. We also require our manufacturing partners to comply with our Ethical Supply Chain guidelines and Restricted Substances policy as a condition of doing business with our company. 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. 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. To ensure the production of high quality products, the majority 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 +generally 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, Europe and +the US. We maintain constant communication with the tanneries to monitor the supply of sufficient high quality sheepskin available for our projected UGG brand production. To ensure adequate supplies +for our manufacturers, we forecast our usage of top grade sheepskin in advance at a forward price. We believe current 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. +We +have instituted pre-production, in-line, and post-production inspections to meet or exceed the high quality demanded by us and consumers of our +products. Our quality assurance program includes our own employee on-site inspectors at our independent manufacturers who oversee the production process +7 +Table of Contents +and +perform quality assurance inspections. We also inspect our products upon arrival at our distribution centers. +Patents and Trademarks +We utilize trademarks on nearly all of our products and believe that having distinctive marks that are readily identifiable is an +important factor in creating a market for our goods, in identifying the Company, and in distinguishing our goods from the goods of others. We currently hold trademark registrations for UGG, Teva, +Simple, TSUBO, Ahnu and other marks in the US and in many other countries, including the countries of the European Union, Canada, China, Japan and Korea. We now hold more than 260 utility and design +patents and registrations in the US and abroad and have filed for more than 100 new patents which are currently pending. These patents expire at various times, and patents issued for applications +filed this year will generally have a remaining duration from now to 2025 for design patents and from now to 2031 for utility patents. We regard our proprietary rights as valuable assets and +vigorously protect such rights against infringement by third parties. +Seasonality +Our business is seasonal, with the highest percentage of UGG brand net sales occurring in the third and fourth quarters and the highest +percentage of Teva brand net sales occurring in the first and second quarters of each year. Thus, our net sales in the last half of the year have exceeded that for the first half of the year, and we +expect this trend to continue. Our other brands do not have a significant seasonal impact on our business. 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 Part I, Item 1A, "Risk +Factors." For further discussion on our working capital and inventory management, see Item 7 of Part II, "Management's Discussion and Analysis of Financial Condition and Results of +Operations — Liquidity and Capital Resources." +Backlog +Historically, we have encouraged our customers to place, and we have received, a significant portion of orders as preseason orders, +generally four to eight months prior to shipment date. We provide customers with price incentives, and in certain cases extended payment terms, to participate in such preseason 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, +which can be cancelled prior to shipment. The backlog as of a particular date is affected by a number of factors, including seasonality, manufacturing schedule and the timing of product shipments 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. +At +December 31, 2010, our backlog of orders from our wholesale customers and distributors was approximately $336,000 compared to approximately $245,000 at December 31, +2009. While all orders in the backlog are subject to cancellation by customers, we expect that the majority of such orders will be filled in 2011. We believe that backlog at year-end is an +imprecise indicator of total revenue that may be achieved for the full year for several reasons. Backlog only relates to wholesale orders for the next season and current season fill-in +orders and excludes potential sales in our eCommerce business and retail stores during the year. Backlog also is effected by the timing of customers' orders and product availability. +Competition +The casual, outdoor, athletic, fashion and formal footwear markets are highly competitive. Our competitors include athletic and +footwear companies, branded apparel companies, and retailers with their own private labels. Although the footwear industry is fragmented to a certain degree, many of our competitors are larger and +have substantially greater resources than us, including athletic shoe companies, +8 +Table of Contents +several +of which compete directly with some of our 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 and accessory industries. Due to the popularity of our UGG products, we face increasing competition from a significant number of competitors selling imitation +products. +Our +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: +• shape and stimulate consumer tastes and preferences by offering innovative, attractive and exciting products; +• anticipate and respond to changing consumer demands in a timely manner; +• maintain brand authenticity; +• develop high quality products that appeal to consumers; +• suitably price our products; +• provide strong and effective marketing support; and +• ensure product availability. +We +believe we are well positioned to compete in the footwear industry. 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, 2010, we employed approximately 1,500 employees in the US, Europe and Asia, none of whom were represented by a +union. This figure includes approximately 800 employees in our retail stores worldwide, which includes part-time and seasonal employees. The large increase in employees during the year was +primarily related to increased selling, general and administration headcount commensurate with our growth. We intend to increase our employee count further in 2011 primarily related to retail stores +and our other expansion initiatives. We believe our relationships with our employees are good. +Financial Information about Segments and Geographic Areas +Our five reportable business segments include the strategic business units responsible for the worldwide operations of our brands' +(UGG, Teva and other brands) wholesale divisions, as well as our eCommerce and retail store businesses. The majority of our sales and long-lived assets are in the US. Refer to +Note 9 to our accompanying consolidated financial statements for further discussion of our business segment data. Refer to Item 1A of this Part I for a discussion of the risks +attendant to our foreign operations. +Compliance +with federal, state and local environmental regulations has not had, nor is it expected to have, any material effect on our capital expenditures, earnings or competitive +position based on information and circumstances known to us at this time. +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, Proxy Statements, 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 SEC's Public Reference Room at +100 F Street, NE, 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 at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file +electronically with the SEC. +9 +Table of Contents +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 related to our company as well as general investor risks, 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. Please also see Item 7 of Part II — +"Management's Discussion and Analysis of Financial Condition and Results of Operations — Forward-Looking Statements." +The recent financial crisis and current economic uncertainty may adversely affect our financial condition and results of operations. +The recent economic recession and continuing economic uncertainty, have affected, and will likely continue to affect consumer spending +generally and the buying habits and preferences of our customers in particular. A significant portion of the products we sell, especially those sold under the UGG Australia brand, are considered to be +luxury retail products. The purchase of these products by customers is largely discretionary, and is therefore highly dependent upon the level of consumer spending, particularly among affluent +customers. Sales of these products may be adversely affected by a continuation or worsening of recent economic conditions, increases in consumer debt levels, uncertainties regarding future economic +prospects, or a decline in consumer confidence. During an actual or perceived economic downturn, fewer customers may shop for our products and those who do shop may limit the amounts of their +purchases. As a result, we could be required to reduce the price we can charge for our products or increase our marketing and promotional expenses in response to lower than anticipated levels of +demand for our products. In either case, these changes, or other similar changes in our marketing strategy, would reduce our revenues and profit margins and could have a material adverse affect on our +financial condition and results of operations. +We +sell the majority of our products through high-end specialty and department store retailers. These retailer customers may be impacted by continuing economic uncertainty, +reduced customer demand for luxury products, and a significant decrease in available credit. If reduced consumer spending, lower demand for luxury products, or credit pressures result in financial +difficulties or insolvency for these customers, it would adversely impact our estimated allowances and reserves as well as our overall financial results. Also, economic factors such as increased +transportation costs, inflation, higher costs of labor, insurance and healthcare, and changes in other laws and regulations may increase our cost of sales and our operating expenses, and otherwise +adversely affect our financial condition, results of operations, and cash flows. Our business, financial condition, results of operations, access to credit, and trading price of common stock could be +materially and adversely affected if the economy fails to stabilize, or if current economic conditions do not improve or worsen. +Our financial success is influenced by the success of our customers. +Much of our financial success is directly related to the success of our retailers and distributors to market and sell our brands +through to the consumer. If a retailer fails to meet annual sales goals, it may be difficult to locate an acceptable substitute retailer. If a distributor fails to meet annual sales goals, it may be +difficult and costly to either locate an acceptable substitute distributor or convert to a wholesale direct model. If a change becomes necessary, we may experience increased costs, loss of customers, +increased credit risk, and increased inventory risk, as well as substantial disruption to operations and a potential loss of sales. +We +currently 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 wholesale customers. We use the timing of delivery dates in our wholesale customer orders to forecast our +10 +Table of Contents +sales +and earnings for future periods. If any of our major customers, including independent distributors, experience a significant downturn in business or fail to remain committed to our products or +brands, then these customers could postpone, reduce, or discontinue purchases from us. As a result, we could experience a decline in sales or gross margins, write downs of excess inventory, increased +discounts or extended credit terms to our customers, which could have a material adverse effect on our business, results of operations, financial condition, cash flows, and our common stock price. +Our +five largest customers accounted for approximately 28.9% of worldwide net sales in 2010 and 30.0% of worldwide net sales in 2009. Any loss of a key customer, the financial collapse +or bankruptcy of a key customer, or a significant reduction in purchases from a key customer could have a material adverse effect on our business, results of operations and financial condition. +Our new and existing retail stores may not realize returns on our investments. +Our retail segment has grown substantially in both net sales and total assets during the past year, and we intend to rapidly expand +this segment in the future. We have entered into significant long-term leases for certain of our retail locations. Global store openings involve substantial investments, including +constructing leasehold improvements, furniture and fixtures, equipment, information systems, inventory and personnel. In addition, since certain of our retail store costs are fixed, if we have +insufficient sales, we may be unable to reduce expenses in order to avoid losses or negative cash flows. Due to the high fixed cost structure associated with the retail segment, negative cash flows or +the closure of a store could result in write-downs of inventory and leasehold improvements, severance costs, significant lease termination costs, impairment losses on long-lived assets, or +loss of our working capital, which could adversely impact our financial position, results of operations, or cash flows. +If we do not accurately forecast consumer demand, we may have excess inventory to liquidate or have difficulty filling our customers' orders. +Because the footwear industry has relatively long lead times for design and production, we must plan our production tooling and +projected volumes many months before consumer tastes become apparent. The footwear industry is subject to rapid changes in consumer preferences, as well as the effects of weather, general market +conditions, competition, and other factors +affecting demand. A large number of models, colors and sizes in our product lines can increase these risks. As a result, we may fail to accurately forecast styles, colors and features that will be in +demand. If we overestimate demand for any products or styles, we may be forced to provide additional marketing assistance, incur higher markdowns, or sell excess inventories at reduced prices +resulting in lower, or negative, gross margins. +Our success depends on our ability to anticipate fashion trends. +Our success depends largely on the continued strength of our brands, on our ability to anticipate, understand and react to the rapidly +changing fashion tastes of footwear and accessory consumers and to provide appealing merchandise in a timely and cost effective 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 or that we will (1) respond quickly enough to changes in consumer preferences, (2) market our products successfully, or +(3) successfully introduce acceptable new models and styles of footwear or accessories to our target consumer. Achieving market acceptance for new products also will likely require us to exert +substantial product development and marketing efforts and expend significant funds to attract consumers. A failure to introduce new products that gain market acceptance or maintain market share with +our current products 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. +11 +Table of Contents +Our +UGG brand has experienced strong growth over the past several years, with double-digit increases in net wholesale sales of UGG products. We cannot anticipate how long we will +continue sustaining this growth rate in the future. UGG products include fashion items that could go out of style at any time. UGG products represent a majority of our business, and if UGG product +sales were to decline or fail to increase in the future, our overall financial performance and common stock price would be adversely affected. +Many of our products are seasonal, and our sales are sensitive to weather conditions. +Sales of our products are highly seasonal and are sensitive to weather conditions. For example, extended periods of unseasonably warm +weather during the fall and winter +months may reduce demand for our UGG products. Even though we are creating more year-round styles for our brands, 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. +We may not succeed in implementing our growth strategies. +As part of our growth strategy, we seek to enhance the positioning of our brands, extend our brands into complementary product +categories and markets, partner with or acquire compatible companies, expand geographically, increase our retail presence, and improve our operational performance. We continue to expand the nature and +scope of our operations considerably, including significantly increasing the number of employees worldwide. We anticipate that substantial further expansion will be required to realize our growth +potential and new market opportunities. +We +are growing globally through our retail, eCommerce, wholesale, consignment, and distributor channels. In addition, as part of our international growth strategy, we intend to continue +reacquiring distribution rights from select distributors and transition from third-party distribution to direct distribution through wholly-owned subsidiaries. Implementing our growth strategies, or +failure to effectively execute them, could affect near term revenues from the postponement of sales recognition to future periods, our rate of growth or profitability, which in turn could have a +negative effect on the value of our common stock. In addition, our growth initiatives could: +• increase our working capital needs beyond our capacity; +• increase costs if we fail to successfully integrate a newly acquired business or achieve expected cost savings; +• result in impairment charges related to newly acquired businesses; +• create remote-site management issues, which would adversely affect our internal control environment; +• have significant domestic or international legal or compliance implications; +• make it difficult to attract, retain, and manage adequate human resources in remote locations; +• cause additional inventory manufacturing, distribution, and management costs; +• cause us to experience difficulty in filling customer orders; +• result in distribution termination transaction costs; or +• create other production, distribution, and operating difficulties. +Failure to adequately protect our trademarks, patents and other intellectual property rights or deter counterfeiting could diminish the value of our brands and reduce sales. +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 +12 +Table of Contents +to +the same extent as do US laws. From time to time, we discover counterfeit products in the marketplace that infringe upon our intellectual property rights. If we are unsuccessful in challenging a +third party's products on the basis of patent, trademark and trade dress rights, particularly in some foreign countries, this could adversely affect our continued sales, financial condition and +results of operation. If our brands are associated with infringers' or competitors' inferior products, this could also adversely affect the integrity of our brands. Furthermore, our efforts to enforce +our intellectual property rights are typically met with defenses and counterclaims attacking the validity and enforceability of our intellectual property rights. +Similarly, +from time to time we may need to defend against claims that the word "ugg" is a generic term and that "UGG Australia" should not be registered as a trademark. Such a claim was +successful in Australia, but such claims have been rejected by courts in the United States and in the Netherlands. Any decision or settlement in any of these matters that prevents trademark protection +of the "UGG Australia" brand in our major markets, or that allows a third party to continue to use our brand trademarks in connection with the sale of products similar to our products, or to continue +to manufacture or distribute counterfeit products could result in intensified commercial competition and could have a material adverse effect on our results of operations and financial condition. +Unplanned increases in legal fees and other costs associated with the defense of our intellectual property or rebranding could result in higher operating expenses and lower earnings. +Our goodwill and other intangible assets may incur impairment losses. +We conducted our annual impairment tests of goodwill and other intangible assets for 2010, 2009, and 2008. In addition, we conducted +interim impairment evaluations when impairment indicators arose. In 2010, we did not recognize any impairment charges on our goodwill and other intangible assets. We recognized the following +impairment charges in 2009 and 2008 in our income from operations: +Years Ended December 31, +2009 +2008 +Teva trademarks +$ +— +$ +20,400 +Teva goodwill +— +11,929 +Other brands trademarks +1,000 +— +Other brands goodwill +— +3,496 +Total impairment loss on intangible assets +$ +1,000 +$ +35,825 +If +any brand's product sales or operating margins decline to a point that the fair value falls below its carrying value, we may be required to further write down the related intangible +assets. These or other related declines could cause us to incur additional impairment losses, which could materially affect our consolidated financial statements and results of operations. The value +of our trademarks is highly dependent on forecasted revenues and earnings before interest and taxes for our brands, as well as derived discount and royalty rates. In addition, the valuation of +intangible assets is subject to a high degree of judgment and complexity. We may also decide to discontinue a brand which would result in the write down of all related intangible assets. The balances +of goodwill and nonamortizable intangibles by brand are as follows: +As of December 31, 2010 +UGG +Teva +Other Brands +Total +Trademarks +$ +152 +$ +15,300 +$ +— +$ +15,452 +Goodwill +6,101 +— +406 +6,507 +Total nonamortizable intangibles +$ +6,253 +$ +15,300 +$ +406 +$ +21,959 +13 +Table of Contents +If raw materials do not meet our specifications, or experience price increases or shortages, we could realize interruptions in manufacturing, increased costs, higher product +return rates, a loss of sales, or a reduction in our gross margins. +We depend on a limited number of key sources for certain raw materials like sheepskin, the principal raw material of our UGG Classic +products. The top grade sheepskin used in UGG products is in high demand and limited supply. The supply of sheepskin can be adversely impacted by weather conditions, disease, and harvesting decisions +that are completely outside our control. The potential inability to obtain top grade raw materials could impair our ability to meet our production requirements and could lead to inventory shortages, +which can result in lost sales, delays in shipments to customers, strain on our relationships with customers and diminished brand loyalty. There have also been significant increases in the prices of +top grade sheepskin as the demand from competitors for this material has increased. Any price increases in key raw materials will likely raise our costs and decrease our profitability unless we are +able to commensurately increase our selling prices. +Our +independent manufacturers use various raw materials in the production of our footwear and accessories that must meet our design specifications and, in some cases, additional +technical requirements for performance footwear. If these raw materials and the end product do not conform to our specifications, we could experience a higher rate of customer returns and +deterioration in the image of our brands, which could have a material adverse effect on our business, results of operations, and financial condition. +Because we depend on independent manufacturers, we face challenges in maintaining a continuous supply of finished goods that meet our quality standards. +Most of our production is performed by a limited number of independent manufacturers in China. We depend on these manufacturers' +ability to finance the production of goods ordered and to maintain manufacturing capacity, and store completed goods pending shipment in a safe and sound location. We do not possess direct control +over either the independent manufacturers or their materials suppliers, so we may be unable to obtain timely and continuous delivery of acceptable products. In addition, while we do have long standing +relationships with most of our factories, we currently 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 acceptable quality and competitively priced products from our +independent manufacturers. If there is an interruption, we may not be able to substitute suitable alternative manufacturers to provide 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, which could +result in a loss of sales and earnings. +Interruptions +in the supply chain can also result from natural disasters and other adverse events that would impair our manufacturers' operations. We keep proprietary materials involved +in the production process, such as shoe molds, knives, and raw materials, under the custody of our independent manufacturers. If these independent manufacturers were to experience loss or damage to +our proprietary materials involved in the production process, we cannot be assured that such independent manufacturers would have adequate insurance to cover such loss or damage and, in any event, the +replacement of such materials would likely result in significant delays in the production of our products and could result in a loss of sales and earnings. +14 +Table of Contents +Our independent manufacturers are located outside the US, where we are subject to the risks of international commerce. +Substantially all of our independent manufacturers are in China and Vietnam, with the vast majority of production performed by a +limited number of manufacturers in China. Foreign manufacturing is subject to numerous risks, including the following: +• tariffs, import and export controls and other non-tariff barriers such as quotas and local content rules on +raw materials and finished products, including the potential threat of anti-dumping duties and quotas such as those which have been imposed by the European Union on the import of certain +types of footwear from China and Vietnam; +• increasing transportation costs; +• poor infrastructure and shortages of equipment, which can disrupt transportation and utilities; +• restrictions on the transfer of funds; +• changing economic conditions; +• violations or changes in governmental policies and regulations including labor, safety, and environmental regulations in +China, Vietnam, the US and elsewhere; +• refusal to adopt or comply with our Factory Charter, Ethical Supply Chain guidelines, and Restricted Substances Policy; +• customary business traditions in China and Vietnam such as local holidays, which are traditionally accompanied by high +levels of turnover in the factories; +• labor unrest, which can lead to work stoppages and interruptions in transportation or supply; +• delays during shipping, at the port of entry, or at the port of departure; +• political instability, which can interrupt commerce; +• use of unauthorized or prohibited materials or reclassification of materials; +• expropriation and nationalization; and +• adverse changes in consumer perception of goods, trade or political relations with China and Vietnam. +These +factors could severely interfere with the manufacture or shipment of our products, which could make it difficult to obtain adequate supplies of quality products when we need them, +thus materially affecting our sales and results of operations. While we periodically visit and audit the operations of our independent manufacturers, we do not control their business practices. If we +discovered non-compliant manufacturers or suppliers that cannot or will not become compliant, we would cease dealing with them, 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. +We conduct business outside the US, which exposes us to foreign currency, global liquidity, and other risks. +As we increase our international operations, our sales and expenditures in foreign currencies will become more material and subject to +currency fluctuations and global credit markets. A significant portion of our international operating expenses are paid in local currencies. Also, our foreign distributors sell in local currencies, +which impacts the price to foreign customers. Effective January 1, 2011, our business changed such that certain of our subsidiaries' functional currency designations changed from US dollars to +the local currencies. We currently utilize forward contracts or other derivative instruments to mitigate exposure to fluctuations in the foreign currency exchange rate, for the amounts we expect to +purchase and sell in foreign currencies. As we expand international operations and increase purchases and sales in +15 +Table of Contents +foreign +currencies, we will evaluate and may utilize additional derivative instruments, as needed, to hedge our foreign currency exposures. Our hedging strategies depend on our forecasts of sales, +expenses and cash flows, which are inherently subject to inaccuracies. Therefore, our hedging strategies may be ineffective. Future changes in foreign currency exchange rates and global credit markets +may cause changes in the US dollar value of our purchases or sales and materially affect our sales, profit margins or results of operations, when converted to US dollars. In addition, the failure of +financial institutions that underwrite our derivative contracts may negate our efforts to hedge our foreign currency exposures and result in material foreign currency or contract losses. Foreign +currency hedging activities, transactions, or translations could materially impact our financial statements. +While +our purchases from overseas factories are currently denominated in US dollars, certain operating and manufacturing costs of the factories are denominated in other currencies. As a +result, fluctuations in these currencies versus the US dollar could impact our purchase prices from the factories in the event that they adjust their selling prices accordingly. +The currency exchange rate between US dollars and the Chinese Renminbi (RMB) could adversely affect our financial condition. +To the extent we need to convert US dollars into RMB for our operational needs, our financial position and the price of our common +stock may be adversely affected should the RMB appreciate against the US dollar. Conversely, if we decide to convert our RMB into US dollars for operational needs, the dollar equivalent of earnings +from our subsidiaries in China would be reduced should the US dollar appreciate against the RMB. +In +2005, the People's Republic of China revalued its currency and abandoned its peg to the US dollar. Under this policy, which was halted in 2008 due to the worldwide financial crisis, +the RMB was permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. In June 2010, the Chinese government announced its intention to again allow the RMB +to fluctuate within the 2005 parameters. It is possible that the Chinese government could adopt an even more flexible currency policy, which could result in further and more significant appreciation +of the RMB against the US dollar. We currently source substantially all production from China. While our purchases from the Chinese factories are currently denominated in US dollars, certain operating +and manufacturing costs of the factories are denominated in the RMB. As a result, any further revaluations in the RMB versus the US 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. +Key business processes and supporting information systems could be interrupted and adversely affect our business. +Our future success and growth depend on the continued operation of our key business processes, including information systems, global +communications, the internet, and key personnel. Hackers and computer viruses have disrupted operations at many major companies. We may be vulnerable to similar acts of sabotage. Key processes could +also be interrupted by a failure due to weather, natural disaster, power loss, telecommunications failure, failure of our computer systems, sabotage, terrorism, or similar event such +that: +• critical business systems become inoperable or require significant costs to restore; +• key personnel are unable to perform their duties, communicate, or access information systems; +• significant quantities of merchandise are damaged or destroyed; +• we are required to make unanticipated investment in state-of-the-art technologies and +security measures; +16 +Table of Contents +• key wholesale customers cannot place or receive orders; +• eCommerce customer orders may not be received or fulfilled; +• we are exposed to unanticipated liabilities; or +• carriers cannot ship or unload shipments. +These +interruptions to key business processes could have a material adverse effect on our business and operations and result in lost sales and reduced earnings. +We +rely on our information management, internet cloud providers and other enterprise resource planning systems to operate our business, prepare forecasts and track our operating results. +Our information management and enterprise planning systems will require modification and refinement as we grow and our business needs change. We may experience difficulties in transitioning to new or +upgraded information technology systems, including loss of data, unreliable data, and decreases in productivity as our personnel become familiar with the new systems. If we experience a significant +system failure or if we are unable to competitively modify our information management systems to respond to changes in our business needs, then our ability to properly run our business and report +financial results could be adversely affected. +The +loss of the services and expertise of any key employee could also harm our business. Our future success depends on our ability to identify, attract and retain qualified personnel on +a timely basis. +We could be adversely affected by the loss of our warehouses. +The warehousing of our inventory is located at a limited number of self-managed domestic and primarily third party managed +international facilities, the loss of any of which could adversely impact our sales, business performance and operating results. In addition, we could face a significant disruption in our domestic +distribution center operations if our automated pick module does not perform as anticipated or ceases to function for an extended period. +The costs of production and transportation of our products can increase as petroleum and other energy prices rise, or demand for ocean containers or other means of +transportation exceed existing supply. +The manufacture and transportation of our products requires the use of petroleum-based materials and energy costs. Any future increases +in the costs of, or interruption of access to, these materials and energy sources could increase the cost of our goods which would reduce our gross margins unless we can successfully raise our selling +prices to compensate for the increased costs. In addition, we rely on ocean carriers and other freight companies to transport our goods. In the event demand for transportation exceeds existing +capacity, additional costs will be incurred which will increase our cost of goods sold and could decrease our profitability. +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, which could increase our costs and adversely impact our operating results. +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 operations and joint ventures with international partners that could adversely affect our sales and results of operations. These +include: +• changes in currency exchange rates, which impact the price to international consumers; +• ability to move currency out of international markets; +• the burdens of complying with a variety of foreign laws and regulations; +• legal costs and penalties related to defending allegations of non-compliance; +17 +Table of Contents +• unexpected changes in regulatory requirements; +• inability to fulfill import tariff quota requirements; +• changes in tax laws; +• complications due to lack of familiarity with local customs; +• difficulties associated with promoting products in unfamiliar cultures; +• political instability; +• changes in diplomatic and trade relationships; and +• general economic fluctuations in specific countries or markets. +International trade and import 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 US 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 and our forecasted gross margins. +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 competitive price. Meanwhile, the continued negotiation of bilateral and multilateral free trade agreements by the US 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 and accessories to our target markets at preferred rates of duty, which may have an effect on our sales and operations. +In +2006, the European Commission imposed definitive duties on leather upper footwear originating from China and certain other countries imported into European Member states. These duties +were effective for a two-year period with a final 16.5% rate for China-sourced footwear and 10% on Vietnam-sourced footwear. In December 2009, the European Commission decided to extend the +duties for a 15 month period, and accordingly, the duties are extended through March 31, 2011. Any increase in duties or the requirement for quotas will increase the cost of our products +and may limit the amount of China and Vietnam sourced products that we are able to sell to the European market. The extension of anti-dumping duties or quotas on products manufactured in +China and Vietnam may impact our sales and gross margins in the European market. +Additionally, +the increased threat of terrorist activity and 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 and increase our costs. +The investment of our substantial cash and cash equivalents and short-term investments are subject to risks, which may cause losses and affect the liquidity of +these investments. +At December 31, 2010 we had cash and cash equivalents of $445,226. A portion of these are held as cash in operating accounts +that are with third party financial institutions. These balances routinely exceed the Federal Deposit Insurance Corporation (FDIC) insurance limits. While we regularly monitor the cash balances in our +operating accounts and adjust the balances as appropriate, these cash balances could lose +18 +Table of Contents +value +or become inaccessible if the underlying financial institutions fail or are subject to other adverse conditions in the financial markets. To date, we have experienced no loss or lack of access +to cash in our operating accounts. +The +remainder of our cash and cash equivalents and short-term investments are invested in funds managed by third party investment management institutions. These investments +include US treasuries and government agencies, money market funds, and municipal bonds, among other investments. Certain of these investments are subject to general credit, liquidity, market, and +interest rate risks. While we do not hold any investments whose value is directly correlated to mortgage debt, investment risk has been and may further be exacerbated by US mortgage defaults and +credit and liquidity issues, which have affected various sectors of the financial markets. To date, we have experienced no material loss or lack of access to our cash and cash equivalents and +short-term investments. However, we can provide no assurance that access to our cash and cash equivalents and short-term investments, or their earning potential, will not be +impacted by adverse conditions in the financial markets. These market risks associated with our investment portfolio may have an adverse effect on our results of operations, liquidity and financial +condition. +The tax laws applicable to our business are very complicated and we may be subject to additional income tax liabilities as a result of audits by various taxing authorities +or changes in tax laws applicable to our business. +We conduct our operations through subsidiaries in several countries including the US, the UK, Japan, China, Hong Kong, the Netherlands +and Bermuda. As a result, we are subject to tax laws and regulations in each of those jurisdictions, and to tax treaties between the US and other nations. These tax laws are highly complex, and +significant judgment and specialized expertise is required in evaluating and estimating our worldwide provision for income taxes. +We +are subject to audits in each of the various jurisdictions where we conduct business, and any of these jurisdictions may assess additional income taxes against us as a result of their +audits. Although we believe our tax estimates are reasonable, and we undertake to prepare our tax filings in accordance with all applicable tax laws, the final determination with respect to any tax +audits, and any related litigation, could be materially different from our estimates or from our historical income tax provisions and accruals. The results of an audit or litigation could have a +material effect on our operating results or cash flows in the periods for which that determination is made and may require a restatement of prior financial reports at a material cost. In addition, +future period earnings may be adversely impacted by litigation costs, settlements, penalties, or interest assessments. +We +are also subject to constant changes in tax laws, regulations and treaties in and between the nations in which we operate. Our income tax expense is based upon our interpretation of +the tax laws in effect in various countries at the time that the expense was incurred. A change in these tax laws, treaties or regulations, including those in and involving the US, or in the +interpretation thereof, could result in a materially higher tax expense or a higher effective tax rate on our worldwide earnings. For example, on February 1, 2010, the US Department of the +Treasury released a general explanation of the Obama administration's tax proposals for its fiscal year 2011 budget, which describes a number of proposed amendments to the international provisions of +the US Internal Revenue Code that may be applicable to our business. It is possible that these proposals could result in changes to the existing US tax laws that affect us. We are unable to predict +whether any of these or other proposals will ultimately be +enacted. Any such changes could increase our income tax liability and adversely affect our net income and long term effective tax rates. +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 many new competitors have entered into the marketplace, as well as increased +competition from established companies. A number of our competitors +19 +Table of Contents +have +significantly greater financial, technological, engineering, manufacturing, marketing and distribution resources than we do, as well as greater brand awareness in the footwear and accessory +markets. 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 and accessory industries. +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. If we fail to compete successfully in the future, our sales and earnings will decline, as will the value of our business, +financial condition and common stock price. +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 15, 2011 was approximately 1,420,000 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, have ranged from $33.71 to $87.02 for the 52-week period ended +February 15, 2011. 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, whether realized or perceived; +• changes in estimates by securities analysts or failure to meet such estimates; +• published research and opinions by securities analysts and other market forecasters; +• changes in our credit ratings; +• the financial results and liquidity of our customers; +• shift of revenue recognition as a result of changes in our distribution model, delivery of merchandise, or entering into +agreements with related parties; +• claims brought against us by a regulatory agency or our stockholders; +• quarterly fluctuations in our sales, expenses, and financial results; +• general equity market conditions and investor sentiment; +• economic conditions and consumer confidence; +• broad market fluctuations in volume and price; +• increasing short sales of our stock; +• announcements to repurchase our stock; +• the declaration of stock or cash dividends; 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. +In +addition, the stock market in general has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of +individual companies. Accordingly, the price of our common stock is volatile and any investment in our stock is subject to risk of loss. These broad market and industry factors and other general +macroeconomic conditions unrelated to our financial performance may also affect our common stock price. +20 +Table of Contents +Item 1B. Unresolved Staff Comments. +None. +Item 2. Properties. +Our corporate headquarters is located in Goleta, California. We have two US distribution centers, both in California, and an +international distribution center in the Netherlands. Our eCommerce operations are in Arizona and England. We also have an office in China to oversee the quality and manufacturing standards of our +products, an office in Macau to coordinate logistics, an office in Hong Kong to coordinate sales and marketing efforts, and offices in the UK and the Netherlands to oversee European operations and +administration. As of December 31, 2010, we had 18 retail stores in the US ranging from approximately 1,000 to 7,000 square feet. Internationally, we had five Company-owned retail stores in the +UK and Japan and four jointly-owned retail stores in China. We have no manufacturing facilities, as all of our products are manufactured by independent manufacturers in China, Vietnam, and New +Zealand. We also utilize third-party managed distribution centers in England and Japan. We lease, rather than own, all of our facilities from unrelated parties. With the exception of our eCommerce and +retail store facilities, 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. We may utilize additional third-party managed distribution centers +internationally, as we continue converting our international distributor businesses into wholesale businesses. +The +following table reflects the location, use, segment, and approximate size of our significant physical properties: +Facility Location +Description +Business Segment +Approximate Square Footage +Camarillo, California +Warehouse Facility +unallocated +723,000 +Ventura, California +Warehouse Facility and Retail Outlet +unallocated +126,000 +Goleta, California +Corporate Offices +unallocated +52,000 +Item 3. Legal Proceedings. +We are involved in various routine legal proceedings as both plaintiff and defendant incident to the ordinary course of our business, +including proceedings to protect our intellectual property rights. +As +part of our policing program for our intellectual property rights, from time to time, we file lawsuits in the US and abroad alleging acts of trademark counterfeiting, trademark +infringement, patent infringement, trade dress infringement, trademark dilution, and state or foreign law claims. At any given point in time, we may have a number of such actions pending. These +actions often result in seizure of counterfeit merchandise or out of court settlements with defendants or both. From time to time, we are subject to claims where plaintiffs will raise, or defendants +will raise, either as affirmative defenses or as counterclaims, the invalidity or unenforceability of certain of our intellectual properties, including our trademark registration for UGG Australia. We +also are aware of many instances throughout the world in which a third party is using our UGG trademarks within its internet domain name, and we have discovered and are investigating several +manufacturers and distributors of counterfeit Teva and UGG products. +We +believe that the outcome of all pending legal proceedings in the aggregate will not have a material adverse effect on our business or consolidated financial statements. +Item 4. ( Removed and Reserved). +21 +Table of Contents +PART II +Item 5. Market for Registrant's 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." +On +May 28, 2010, we announced that our Board of Directors approved a three-for-one split of our outstanding shares of common stock. As a result of the +stock split, stockholders received two additional shares of our common stock, in the form of a stock dividend, for every share of our common stock held on June 17, 2010, the record date for the +stock split. The common stock was distributed to stockholders after the close of trading on the NASDAQ Global Select Market on July 2, 2010, by our transfer agent BNY Mellon Shareholder +Services. The common stock began trading on a post-split basis on the NASDAQ Global Select Market at the opening of trading on July 6, 2010. All applicable share and per share +information in this Item 5 has been adjusted retrospectively for the three-for-one stock split. +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. All stock +prices reflect the three-for-one stock split effected in the form of a common stock dividend distributed on July 2, 2010. +Common Stock Price Per Share +Low +High +Year ended December 31, 2010: +First Quarter +$ +31.53 +$ +46.94 +Second Quarter +$ +41.56 +$ +54.97 +Third Quarter +$ +43.41 +$ +51.93 +Fourth Quarter +$ +49.41 +$ +87.02 +Year ended December 31, 2009: +First Quarter +$ +12.57 +$ +27.97 +Second Quarter +$ +16.28 +$ +24.63 +Third Quarter +$ +21.25 +$ +28.31 +Fourth Quarter +$ +26.26 +$ +34.62 +As +of February 15, 2011, there were 66 record holders of our common stock and we believe there were approximately 53,000 beneficial holders of our common stock. +We +did not sell any equity securities during the year ended December 31, 2010 that were not registered under the Securities Act of 1933, as amended. +22 +Table of Contents +STOCKHOLDER RETURN PERFORMANCE PRESENTATION +Set forth below is a line graph comparing the percentage change in the cumulative total stockholder return on the Company's common +stock against the cumulative total return of the NASDAQ Market Index and a peer group index for the five-year period commencing December 31, 2005 and ending December 31, +2010. The data represented below assumes one hundred dollars invested in each of the company's common stock, the NASDAQ Market Index and the peer group index on January 1, 2006. 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. Total return assumes reinvestment of dividends; we have paid no dividends on our common stock and have not done so since our inception. +December 31, +2005 +2006 +2007 +2008 +2009 +2010 +Deckers Outdoor Corporation +$ +100.0 +$ +217.1 +$ +561.4 +$ +289.2 +$ +368.3 +$ +866.1 +NASDAQ Market Index# +100.0 +110.3 +121.9 +73.1 +106.2 +125.4 +Peer Group Index* +100.0 +128.1 +109.6 +50.5 +83.0 +108.3 +# The +NASDAQ Market Index is the same NASDAQ Index used in our 2009 Form 10-K. +* The +Peer Group Index consists of LaCrosse Footwear, Inc.; Steven Madden, Ltd.; K-Swiss Inc.; Kenneth Cole +Productions, Inc.; The Timberland Company; Wolverine World Wide, Inc.; Crocs, Inc.; and Skechers USA, Inc. +DIVIDEND POLICY +We have not declared or paid any cash dividends on our common stock since our inception. We currently do not anticipate declaring or +paying any cash dividends in the foreseeable future. Our current credit agreement allows us to make cash dividends, provided that no event of default has occurred or is continuing and provided that we +are in compliance with the financial covenants without regard to the amount of outstanding obligations. +23 +Table of Contents +STOCK REPURCHASE PROGRAM +In June 2009, our Board of Directors approved a stock repurchase program to repurchase up to $50,000 of our common stock in the open +market or in privately negotiated transactions, subject to market conditions, applicable legal requirements, government +regulations, and other factors. The program does not obligate us to acquire any particular amount of common stock and the program may be suspended at any time at our discretion. The purchases will be +funded from available excess working capital. We repurchased 230,000 shares for approximately $10,100, or an average price of $43.67 per share under the program for the year ended December 31, +2010. All shares purchased were purchased as part of a publicly announced program in open-market transactions. As of December 31, 2010, the remaining approved amount for repurchases +was approximately $20,000. The following table summarizes our stock repurchases and the effect of the stock split for the year ended December 31, 2010: +2010 +Actual Shares +Split-Adjusted Shares +January 1 – March 31 +— +— +April 1 – June 30* +20,000 +60,000 +July 1 – September 30** +170,000 +170,000 +October 1 – December 31 +— +— +190,000 +230,000 +* Prior +to the stock split, the Company repurchased shares that were retired. The shares are split-adjusted for reporting purposes. +** Shares +purchased for the quarter ended September 30, 2010, were purchased post-split. +24 +Table of Contents +Item 6. Selected Financial Data +We derived the following selected consolidated financial data from our consolidated financial statements. Historical +results are not necessarily indicative of the results to be expected in the future. You should read the following consolidated financial information together with our consolidated financial statements +and the related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in Part II. +Years ended December 31, +2010 +2009 +2008 +2007 +2006 +(In thousands, except per share data) +Statements of operations data +Net sales: +UGG wholesale +$ +663,854 +$ +566,964 +$ +483,781 +$ +291,908 +$ +182,369 +Teva wholesale +96,207 +71,952 +80,882 +82,003 +75,283 +Other brands wholesale +23,476 +19,644 +17,558 +11,163 +10,903 +eCommerce +91,808 +75,666 +68,769 +45,473 +28,886 +Retail stores +125,644 +78,951 +38,455 +18,382 +6,982 +1,000,989 +813,177 +689,445 +448,929 +304,423 +Cost of sales +498,051 +442,087 +384,127 +241,458 +163,692 +Gross profit +502,938 +371,090 +305,318 +207,471 +140,731 +Selling, general and administrative expenses +253,850 +188,843 +152,574 +101,918 +73,989 +Impairment loss on intangible assets(1) +— +1,000 +35,825 +— +15,300 +Income from operations +249,088 +181,247 +116,919 +105,553 +51,442 +Other income, net +(1,021 +) +(1,976 +) +(3,583 +) +(4,486 +) +(1,910 +) +Income before income taxes +250,109 +183,223 +120,502 +110,039 +53,352 +Income taxes +89,732 +66,304 +46,631 +43,602 +22,743 +Net income +160,377 +116,919 +73,871 +66,437 +30,609 +Net (income) loss attributable to noncontrolling interest +(2,142 +) +(133 +) +77 +— +— +Net income attributable to Deckers Outdoor Corporation +$ +158,235 +$ +116,786 +$ +73,948 +$ +66,437 +$ +30,609 +Net income per share attributable to Deckers Outdoor Corporation common stockholders: +Basic +$ +4.10 +$ +2.99 +$ +1.89 +$ +1.73 +$ +0.82 +Diluted +$ +4.03 +$ +2.96 +$ +1.87 +$ +1.69 +$ +0.79 +Weighted-average common shares outstanding: +Basic +38,615 +39,024 +39,126 +38,505 +37,557 +Diluted +39,292 +39,393 +39,585 +39,387 +38,646 +(1) The +impairment loss in 2009 relates to TSUBO trademarks. The impairment loss in 2008 relates to our Teva trademarks, Teva goodwill, and TSUBO goodwill. The +impairment loss in 2006 relates to our Teva trademarks. During our annual and interim assessments of goodwill and other intangible assets, we concluded that the fair values were lower than the +carrying amounts and therefore wrote down the trademarks and goodwill to their respective fair values. +As of December 31, +2010 +2009 +2008 +2007 +2006 +(In thousands) +Balance sheet data +Cash and cash equivalents +$ +445,226 +$ +315,862 +$ +176,804 +$ +54,525 +$ +34,255 +Working capital +570,869 +420,117 +317,755 +230,173 +147,860 +Total assets +808,994 +599,043 +483,721 +370,032 +249,973 +Long-term liabilities +8,456 +6,269 +3,847 +— +— +Total Deckers Outdoor Corporation stockholders' equity +652,987 +491,358 +384,252 +298,638 +210,410 +25 +Table of Contents +Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation. +References to "Deckers," "we," "us," "our," or similar terms refer to Deckers Outdoor Corporation together with its consolidated +subsidiaries. Unless otherwise specifically indicated, all amounts herein are expressed in thousands, except for share quantity, per share data, and selling prices. All share and related information +presented herein reflects the increased number of shares resulting from the three-for-one stock split paid on July 2, 2010. The following discussion of our financial +condition and results of operations should be read together with our consolidated financial statements and the accompanying notes to those statements included elsewhere in this document. +Overview +We are a leading designer, producer, marketer, and brand manager of innovative, high-quality footwear and accessories. We +market our products primarily under two proprietary brands: +• UGG®: Premier brand in luxury and comfort footwear and accessories; and +• Teva®: High performance multi-sport shoes, rugged outdoor footwear, and sport sandals. +In +addition to our primary brands, our other brands include Simple®, a line of casual and sustainable-lifestyle sneakers and accessories; TSUBO®, a line of +high-end casual footwear that incorporates style, function and maximum comfort; and Ahnu®, a line of outdoor performance and lifestyle footwear. +We +sell our brands through our quality domestic retailers and international distributors and retailers, as well as directly to our end-user consumers through our eCommerce +business and our retail stores. Independent third parties manufacture all of our products. In 2010, we converted our Teva business in Belgium, the Netherlands, and Luxemburg (Benelux) from a +distributor model to a wholesale model. In 2011, we will convert from a distributor model to a wholesale model for the UGG, Teva, and Simple brands in the UK and Ireland and the UGG and Simple brands +in Benelux. +Our +business has been impacted by several important trends affecting our end markets: +• The prolonged US and global economic conditions have adversely impacted businesses worldwide in general. Some of our +customers have been, and more may be, adversely affected, which in turn has, and may continue to, adversely impact our financial results. +• The top grade sheepskin used in UGG products is in high demand and limited supply and there have been significant +increases in the prices of top grade sheepskin as the demand from competitors for this material has increased. +• 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. +• There is an emerging sustainable lifestyle movement happening all around the world. Consumers are demanding that brands +and companies become more environmentally responsible. +26 +Table of Contents +By +emphasizing our brands' images and our focus on comfort, performance and authenticity, we believe we can 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 key factors that affect each business and some of our strategies for growing each business. +UGG Brand Overview +The UGG brand has become well-known throughout the US as well as internationally. Over the past several years, our UGG +brand has received increased global media exposure including increased print media in ads and cooperative advertising with our customers, which has contributed to broader public awareness of the brand +and significantly increased demand for the collection. We believe that the increased global media focus and demand for UGG products were driven by the following: +• consumer brand loyalty, due to the luxury and comfort of UGG footwear; +• continued innovation of new product categories and styles; +• increased marketing in high-end magazines; +• successful targeting of high-end distribution; +• adoption by high-profile 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 otherwise +been able to; +• increased exposure to the brand driven by our concept stores which showcase all of our product offerings; +• retail expansion to 27 stores worldwide at the end of 2010; and +• continued geographic expansion across the US and internationally. +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 increased our product offering, including a growing spring line, an expanded men's line, and a fall line that consists of a range of luxurious collections for both genders, an expanded kids' +line, as well as handbags and cold weather outerwear and accessories. We believe that the evolution of the UGG brand and our strategy of product diversification also will help decrease our reliance on +prime twinface sheepskin, which is in high demand and subject to price volatility. +Teva Brand Overview +Our Teva brand is positioned to be an innovative global adventure brand, with a 25-year track record of contributing to the +outdoor experience. The Teva brand pioneered the water sport sandal category in 1984, and heading into 2011, our brand mission is to inspire spontaneity, camaraderie and adventure on, around, or in +water. Leveraging our core performance competencies of traction, hydro and comfort, we are focused on driving growth through innovation in the growing closed toe markets of multi-sport and light +hiking, while maintaining our stronghold in the sandal market. +Our +efforts to expand the Teva brand beyond sandals, while embracing our core water-based competencies, have contributed to the significant revenue growth in 2010. Throughout 2010, our +broader range of products has shown strong retail sell-through across all channels, and we believe that our retail partners have viewed both our product and marketing innovations as +relevant and compelling. +27 +Table of Contents +We +see an opportunity to grow the Teva brand significantly outside of the US. In January 2010, we converted from a distributor model to a wholesale model in the Benelux region and +France, enhancing our marketing and distribution capabilities in the outdoor active Benelux market. For 2011, we will make a similar conversion from an independent distributor to a wholesale model in +the UK and Ireland, which affords us the opportunity to better drive our brand building and growth initiatives in this important influential market. Within the US, we see strong growth opportunities +within our current core channels of distribution, outdoor specialty and sporting goods, as our product assortment evolves and expands. Also, through effective product and distribution segmentation, we +see significant expansion opportunities within the family value, department store, better footwear, and action sports channels. However, we cannot assure investors that these efforts will be +successful. +Other Brands Overview +Our other brands consist primarily of the Simple, TSUBO and Ahnu brands. The Simple brand is our casual sneaker brand recognized by its +name. We believe that we have expertise and a reputation of leadership in sustainable footwear. Since 2005, sustainability has been the primary marketing focus. Beginning in 2011, we are expanding the +brand's positioning to deliver on a broader brand promise of "less is more." Sustainability will remain a very important brand attribute, but equal emphasis will be placed on style, comfort, quality, +and the price to value relationship. We intend to make Simple sneakers timeless and versatile, and we plan to selectively increase our distribution. +TSUBO, +meaning pressure point in Japanese, is marketed as high-end casual footwear for men and women. The brand is the synthesis of ergonomics and style, with a full line of +sport and dress casuals, boots, sandals and heels constructed to provide consumers with contemporary footwear that incorporates style, function and maximum comfort. The TSUBO brand has a rich heritage +with consumers in major cities around the world who appreciate design, pay attention to detail, and will not sacrifice comfort. We are building on this heritage, positioning the TSUBO brand as the +premium footwear solution for people in the city, providing all day comfort, style and quality. We are continuing to create products to address consumers' unique needs: all-day comfort, +innovative style and superior quality. At the same time, we will market to the TSUBO brand consumers where they live, emphasizing regional advertising and in-market grass roots, product +placement and public relations efforts. +The +Ahnu brand is an outdoor performance and lifestyle footwear brand with products for men and women. The name Ahnu is derived from the Celtic goddess representing the balance of +well-being and prosperity. The brand focuses primarily on women consumers offering style and comfort for active women on both trails and pavement. The product goal is to achieve +uncompromising footwear performance by developing footwear that will provide the appropriate balance of traction, grip, flexibility, cushioning and durability for a variety of outdoor +activities — whether on trails, beaches or sidewalks. Ahnu products are sold throughout the US, primarily at outdoor specialty stores and independent shoe stores, as well as certain +regions internationally. +We +expect to leverage our design, marketing and distribution capabilities to grow these brands over the next several years, consistent with our mission to build niche brands into global +market leaders. Nevertheless, we cannot assure investors that our efforts will be successful. +eCommerce Overview +Our eCommerce business, which sells most of our brands, allows us to reinforce our relationship with the consumer. eCommerce enables us +to meet the growing demand for our products, sell the products at retail prices and provide significant incremental operating income. The eCommerce business provides us an opportunity to communicate +to the consumer with a consistent brand message that is in line with our brands' promises, drives awareness of key brand initiatives, and offers targeted information to specific consumer segments. In +recent years, our eCommerce business has had significant revenue growth, much of +28 +Table of Contents +which +occurred as the UGG brand gained popularity and as consumers continued to increase internet usage for footwear and other purchases. +Managing +our eCommerce business requires us to focus on the latest trends and techniques for web design and marketing, to generate internet traffic to our websites, to effectively +convert website visits into orders, and to maximize average order sizes. We plan to continue to grow our eCommerce business through improved website features and performance, increased marketing and +more international websites. Nevertheless, we cannot assure investors that revenue from our eCommerce business will continue to grow. +Retail Stores Overview +Our retail stores are predominantly UGG Australia concept stores and UGG Australia outlet stores. Our retail stores enable us to +directly impact our customers' experience, meet the growing demand for these products, sell the products at retail prices and provide us with incremental operating income. In addition, our UGG +Australia concept stores allow us to showcase our entire line; whereas, a retailer may not carry the whole line. Through our outlet stores, we sell some of our discontinued styles from prior seasons, +plus products made specifically for the outlet stores. We sell Teva products as well as some of our other brands through our UGG Australia outlet stores. +As +of December 31, 2010, we had a total of 27 retail stores worldwide. Continuing to build on the success of our existing UGG Australia stores, in 2010, we opened nine new stores +globally. We opened six in the US and three new stores in China through our joint venture. For 2011, we plan to open additional retail stores in the US and significantly expand our retail presence +internationally. +Seasonality +Our business is seasonal, with the highest percentage of UGG brand net sales occurring in the third and fourth quarters and the highest +percentage of Teva brand net sales occurring in the first and second quarters of each year. Our other brands do not have a significant seasonal impact. +2010 +First +Quarter +Second +Quarter +Third +Quarter +Fourth +Quarter +Net sales +$ +155,927 +$ +137,059 +$ +277,879 +$ +430,124 +Income from operations +$ +28,821 +$ +13,216 +$ +66,314 +$ +140,737 +2009 +First +Quarter +Second +Quarter +Third +Quarter +Fourth +Quarter +Net sales +$ +134,226 +$ +102,548 +$ +228,414 +$ +347,989 +Income from operations* +$ +19,326 +$ +3,225 +$ +53,080 +$ +105,616 +* Included +in the second quarter of 2009 is a $1,000 impairment loss on our TSUBO trademarks. +With +the large growth in the UGG brand over the past several years, net sales in the last half of the year have exceeded that for the first half of the year. Given our expectations for +our brands, we currently expect this trend to continue. Nonetheless, actual results could differ materially depending upon consumer preferences, availability of product, competition and our customers +continuing to carry and promote our various product lines, among other risks and uncertainties. See Part I, Item 1A, "Risk Factors." +29 +Table of Contents +Results of Operations +Year Ended December 31, 2010 Compared to Year Ended December 31, 2009 +The following table summarizes our results of operations: +Years Ended December 31, +2010 +2009 +Change +Amount +% +Amount +% +Amount +% +Net sales +$ +1,000,989 +100.0 +% +$ +813,177 +100.0 +% +$ +187,812 +23.1 +% +Cost of sales +498,051 +49.8 +442,087 +54.4 +55,964 +12.7 +Gross profit +502,938 +50.2 +371,090 +45.6 +131,848 +35.5 +Selling, general and administrative expenses +253,850 +25.4 +188,843 +23.2 +65,007 +34.4 +Impairment loss on intangible assets +— +— +1,000 +0.1 +(1,000 +) +(100.0 +) +Income from operations +249,088 +24.9 +181,247 +22.3 +67,841 +37.4 +Other income, net +(1,021 +) +(0.1 +) +(1,976 +) +(0.2 +) +955 +48.3 +Income before income taxes +250,109 +25.0 +183,223 +22.5 +66,886 +36.5 +Income taxes +89,732 +9.0 +66,304 +8.2 +23,428 +35.3 +Net income +160,377 +16.0 +116,919 +14.4 +43,458 +37.2 +Net income attributable to the noncontrolling interest +(2,142 +) +(0.2 +) +(133 +) +* +(2,009 +) +* +Net income attributable to Deckers Outdoor Corporation +$ +158,235 +15.8 +% +$ +116,786 +14.4 +% +$ +41,449 +35.5 +% +* Calculation +of percentage change is not meaningful. +30 +Table of Contents +Overview. The increase in net sales was primarily due to an increase in UGG product sales in all channels as well as Teva +wholesale sales. The +increase in income from operations resulted primarily from the increase in net sales and gross margin, partially offset by higher selling, general and administrative expenses. +Net Sales. The following table summarizes net sales by location and net sales by brand and distribution channel: +Years Ended December 31, +Change +2010 +2009 +Amount +% +Net sales by location: +US +$ +764,111 +$ +645,993 +$ +118,118 +18.3 +% +International +236,878 +167,184 +69,694 +41.7 +Total +$ +1,000,989 +$ +813,177 +$ +187,812 +23.1 +% +Net sales by brand and distribution channel: +UGG: +Wholesale +$ +663,854 +$ +566,964 +$ +96,890 +17.1 +% +eCommerce +84,574 +66,939 +17,635 +26.3 +Retail stores +124,718 +77,934 +46,784 +60.0 +Total +873,146 +711,837 +161,309 +22.7 +Teva: +Wholesale +96,207 +71,952 +24,255 +33.7 +eCommerce +4,838 +5,289 +(451 +) +(8.5 +) +Retail stores +302 +421 +(119 +) +(28.3 +) +Total +101,347 +77,662 +23,685 +30.5 +Other brands: +Wholesale +23,476 +19,644 +3,832 +19.5 +eCommerce +2,396 +3,438 +(1,042 +) +(30.3 +) +Retail stores +624 +596 +28 +4.7 +Total +26,496 +23,678 +2,818 +11.9 +Total +$ +1,000,989 +$ +813,177 +$ +187,812 +23.1 +% +Total eCommerce +$ +91,808 +$ +75,666 +$ +16,142 +21.3 +% +Total Retail stores +$ +125,644 +$ +78,951 +$ +46,693 +59.1 +% +The +increase in net sales was primarily driven by strong sales for the UGG brand. We experienced an increase in the number of pairs sold in all segments, led by our UGG and Teva +wholesale channels and our retail stores. This resulted in a 14.6% overall increase in the volume of footwear sold for all brands to approximately 18.0 million pairs for 2010 from approximately +15.7 million pairs for 2009. In addition, our weighted-average wholesale selling price per pair increased approximately 4.1% to $47.71 in 2010 from $45.83 in 2009. This increase resulted +primarily from higher UGG sales, which generally carry higher average selling prices, and from higher Teva brand selling prices. +Wholesale +net sales of our UGG brand increased primarily due to an increase in pairs sold, as well as an increase in the average selling price. We cannot assure investors that UGG brand +sales will continue to grow at their past pace. +31 +Table of Contents +Wholesale +net sales of our Teva brand increased due to both an increase in the average selling price and an increase in pairs sold. The average selling price increase was primarily the +result of decreased closeout sales and was also the result of realizing the benefit of assuming the distribution rights in Benelux and France starting in January 2010. +Wholesale +net sales of our other brands increased due to both an increase in pairs sold and an increase in average selling price. +Net +sales of our eCommerce business increased due to an increase in both the average selling price and the number of pairs sold. +The +increase in net sales of our retail store business, consisting mainly of UGG brand sales, was largely due to the addition of nine new stores opened since December 31, 2009. +New stores that were not open for the full year ended December 31, 2009 contributed approximately $44,000 of retail sales for year ended December 31, 2010 compared to approximately +$9,000 in 2009. We do not expect this growth rate to continue because as we increase the number of our stores, each new store will have less proportional impact on our growth rate. For those stores +that were open during the full year ended December 31, 2009 and 2010, same store sales grew by 16.6%. Nevertheless, we cannot assure investors that retail store sales will continue to grow at +their recent pace or that revenue from our retail store business will not at some point decline. +International +sales, which are included in the segment sales above, for all of our products combined represented 23.7% and 20.6% of worldwide net sales for 2010 and 2009, respectively. +The international sales growth was led by the UGG brand, including our retail stores, and the Teva brand in the European region. +Gross Profit. As a percentage of net sales, gross margin increased to 50.2% for 2010 from 45.6% for 2009, primarily due to a +higher percentage of +retail sales and increased wholesale margins in all wholesale segments. We experienced a reduced impact of closeout sales for the Teva brand and began realizing the benefit of the direct wholesale +business in Benelux starting in January 2010. In addition, we received approximately $7,000 in duty refunds during the year ended December 31, 2010, which we do not expect to recur at this +level. Our gross margins fluctuate based on several factors, and we expect our gross margin to increase for the full year of 2011 compared to 2010. +Selling, General and Administrative Expenses (SG&A). As a percentage of net sales, SG&A increased to 25.4% of net sales +for 2010 from 23.2% for 2009. +The increase in SG&A resulted primarily from: +• a planned increase in international expenses of approximately $22,000 in support of our continued growth globally, +including initial distributor conversion expenses and fixed costs related to three new international retail stores that were not open as of December 31, 2009, +• approximately $10,000 of divisional expenses primarily related to our UGG brand, and +• fixed costs of approximately $9,000 related to six new domestic retail stores that were not open as of December 31, +2009. +Impairment Loss. We conducted our annual impairment evaluation of goodwill and nonamortizable intangible assets for 2010 and +2009. We did not +recognize an impairment loss in 2010. In addition to our annual impairment test for 2009, as of June 30, 2009, impairment indicators arose that the TSUBO intangible assets were possibly +impaired. As a result, we conducted an interim impairment evaluation of +the TSUBO trademarks and concluded that the fair value was lower than the carrying amount. Therefore, we recognized an impairment loss of $1,000 on the TSUBO trademarks during the three months ended +June 30, 2009. For further discussion of our impairment evaluations, refer to "Critical Accounting Policies and Estimates" below. +32 +Table of Contents +Income (Loss) from Operations. The gross profit derived from the sales to third parties of the eCommerce and retail store +segments for the US is +separated into two components: (i) the wholesale profit is included in the related operating income or loss of each wholesale segment, and (ii) the remaining profit is included in the +eCommerce and retail stores segments. The gross profit of the international portion of the eCommerce and retail stores segments includes both the wholesale and retail profit. The following table +summarizes operating income (loss) by segment: +Years Ended December 31, +Change +2010 +2009 +Amount +% +UGG wholesale +$ +305,132 +$ +232,712 +$ +72,420 +31.1 +% +Teva wholesale +16,379 +12,495 +3,884 +31.1 +Other brands wholesale(1) +(6,373 +) +(14,698 +) +8,325 +56.6 +eCommerce +23,541 +21,073 +2,468 +11.7 +Retail stores +30,682 +18,498 +12,184 +65.9 +Unallocated overhead costs +(120,273 +) +(88,833 +) +(31,440 +) +(35.4 +) +Total +$ +249,088 +$ +181,247 +$ +67,841 +37.4 +% +(1) Included +in Other brands loss from operations in 2009 is an impairment loss of $1,000. +Income +from operations increased primarily due to the increase in sales and gross margins, partially offset by higher selling, general and administrative expenses. +The +increase in income from operations of UGG brand wholesale was primarily the result of the higher sales and an increase of 5.5 percentage points on gross margin, partially +attributable to the duty refunds and the higher content of retail sales, as well as increased net bad debt recoveries of approximately $1,000. The increase was partially offset by approximately +$10,000 of increased marketing and promotional expenses; research, development, and design expenses; and divisional sales expenses. +The +increase in income from operations of Teva brand wholesale was primarily the result of higher sales and an increase of 3.2 percentage points on gross margin largely due to the +benefit of the direct business in Benelux, partially offset by an approximate $5,000 increase in divisional expenses. +The +loss from operations of our other brands wholesale improved primarily due to a 14.6 percentage point increase on gross margin, increased sales, and an approximate $3,000 +decrease in marketing and promotional expenses. +Income +from operations of our eCommerce business increased primarily due to an increase in sales, partially offset by approximately $5,000 in increased operating expenses primarily due +to increased marketing and promotional expenses as well as increased payroll expenses. +Income +from operations of our retail store business increased primarily due to the higher sales and a 1.2 percentage point increase in gross margin, partially offset by +approximately $15,000 of higher operating expenses primarily related to our new store openings. +Unallocated +overhead costs increased most significantly from an increase of approximately $11,000 related to international infrastructure costs to support our continued growth. +Other (Income) Expense. Interest expense increased due to negative interest expense in 2009 due to the reversal of accrued +interest related to +certain tax obligations for one of the Company's foreign subsidiaries. In addition, we incurred additional interest expense on income tax related liabilities in 2010. Interest income decreased +primarily from significantly lower market interest rates, as well as a shift in our investment mix to all highly liquid cash equivalents. Other income, net increased primarily due to a +one-time foreign sales tax exemption of approximately $1,000. +33 +Table of Contents +Income Taxes. Income tax expense and effective income tax rates were as follows: +Years Ended December 31, +2010 +2009 +Income tax expense +$ +89,732 +$ +66,304 +Effective income tax rate +35.9 +% +36.2 +% +The +effective tax rate is subject to ongoing review and evaluation by management and can vary from year to year. We anticipate our effective tax rate for the full year 2011 to decrease +from 2010, primarily due to an increase in our projected annual international pre-tax income as a percentage of worldwide pre-tax income, as income generated in most of our +foreign jurisdictions are taxed at significantly lower rates than the US. +Net Income Attributable to the Noncontrolling Interest. Net income attributable to the noncontrolling interest in our joint +venture with Stella +International increased in 2010 over 2009 primarily due to the opening of three new retail stores in China, which became profitable during their first year. +Net Income Attributable to Deckers Outdoor Corporation. Our net income increased as a result of the items discussed above. Our +diluted earnings per +share increased by 36.1% to $4.03 in 2010 from $2.96 in 2009, primarily as a result of the increase in net income. +Year Ended December 31, 2009 Compared to Year Ended December 31, 2008 +The following table summarizes our results of operations: +Years Ended December 31, +2009 +2008 +Change +Amount +% +Amount +% +Amount +% +Net sales +$ +813,177 +100.0 +% +$ +689,445 +100.0 +% +$ +123,732 +17.9 +% +Cost of sales +442,087 +54.4 +384,127 +55.7 +57,960 +15.1 +Gross profit +371,090 +45.6 +305,318 +44.3 +65,772 +21.5 +Selling, general and administrative expenses +188,843 +23.2 +152,574 +22.1 +36,269 +23.8 +Impairment loss on intangible assets +1,000 +0.1 +35,825 +5.2 +(34,825 +) +(97.2 +) +Income from operations +181,247 +22.3 +116,919 +17.0 +64,328 +55.0 +Other income, net +(1,976 +) +(0.2 +) +(3,583 +) +(0.5 +) +1,607 +44.9 +Income before income taxes +183,223 +22.5 +120,502 +17.5 +62,721 +52.0 +Income taxes +66,304 +8.2 +46,631 +6.8 +19,673 +42.2 +Net income +116,919 +14.4 +73,871 +10.7 +43,048 +58.3 +Net (income) loss attributable to the noncontrolling interest +(133 +) +* +77 +* +(210 +) +* +Net income attributable to Deckers Outdoor Corporation +$ +116,786 +14.4 +% +$ +73,948 +10.7 +% +$ +42,838 +57.9 +% +* Calculation +of percentage change is not meaningful. +Overview. The increase in net sales was primarily due to an increase in UGG wholesale product sales as well as retail store +sales. The increase in +income from operations resulted primarily from the increase in net sales and gross margin, partially offset by higher selling, general and administrative expenses. In addition, we experienced a +significant reduction in impairment losses. +34 +Table of Contents +Net Sales. The following table summarizes net sales by location and net sales by brand and distribution channel: +Years Ended December 31, +Change +2009 +2008 +Amount +% +Net sales by location: +US +$ +645,993 +$ +581,512 +$ +64,481 +11.1 +% +International +167,184 +107,933 +59,251 +54.9 +Total +$ +813,177 +$ +689,445 +$ +123,732 +17.9 +% +Net sales by brand and distribution channel: +UGG: +Wholesale +$ +566,964 +$ +483,781 +$ +83,183 +17.2 +% +eCommerce +66,939 +60,642 +6,297 +10.4 +Retail stores +77,934 +37,558 +40,376 +107.5 +Total +711,837 +581,981 +129,856 +22.3 +Teva: +Wholesale +71,952 +80,882 +(8,930 +) +(11.0 +) +eCommerce +5,289 +5,219 +70 +1.3 +Retail stores +421 +417 +4 +1.0 +Total +77,662 +86,518 +(8,856 +) +(10.2 +) +Other brands: +Wholesale +19,644 +17,558 +2,086 +11.9 +eCommerce +3,438 +2,908 +530 +18.2 +Retail stores +596 +480 +116 +24.2 +Total +23,678 +20,946 +2,732 +13.0 +Total +$ +813,177 +$ +689,445 +$ +123,732 +17.9 +% +Total eCommerce +$ +75,666 +$ +68,769 +$ +6,897 +10.0 +% +Total Retail stores +$ +78,951 +$ +38,455 +$ +40,496 +105.3 +% +The +increase in net sales was primarily driven by strong sales for the UGG brand. In addition, our weighted-average wholesale selling price per pair increased approximately 8.0% in 2009 +versus 2008, resulting primarily from higher UGG sales, which generally carry higher average selling prices. We experienced an increase in the number of pairs sold of our UGG brand, partially offset +by a decrease in the number of pairs sold of our Teva brand. This resulted in a 6.8% overall increase in the volume +of footwear sold for all brands to approximately 15.7 million pairs for 2009 from approximately 14.7 million pairs for 2008. +Wholesale +net sales of our UGG brand increased primarily due to an increase in sales to both domestic and international customers, as well as higher weighted-average wholesale selling +prices per pair. +Wholesale +net sales of our Teva brand decreased primarily due to a decrease in the number of pairs sold as well as reduced closeout sales, partially offset by a slight increase in the +weighted-average wholesale selling price per pair. +Wholesale +net sales of our other brands increased, as we did not own all of our other brands during 2008. +35 +Table of Contents +Net sales of our eCommerce business increased primarily due to an increase in pairs shipped, with the greatest impact from the UGG brand. +Net +sales of our retail store business, which are predominantly UGG Australia stores, increased primarily due to the addition of five new stores opened since December 31, 2008 and +sales increases from existing stores. For those stores that were open for the full year ended December 31, 2008 and 2009, same store sales grew by 27.6%. +International +sales, which are included in the segment sales above, for all of our products combined represented 20.6% of worldwide net sales for 2009 compared to 15.7% for 2008. The +majority of the international sales growth was from the UGG brand, including our retail stores which were not open for the full year of 2008, plus our new stores we opened in 2009. Our international +growth was led by the European region. +Gross Profit. As a percentage of net sales, gross margin increased to 45.6% for 2009 from 44.3% for 2008, primarily due to a +higher percentage of +retail sales and increased margins for our UGG wholesale and retail stores segments. We were able to contain certain costs for production and shipping, primarily related to UGG products. This was +partially offset by an increased impact of closeout sales for our other brands including negative average margins. In addition, our international distributor sales increased, which carry lower +margins. International sales represented a greater percentage of our total sales for 2009 versus 2008. +Selling, General and Administrative Expenses (SG&A). As a percentage of net sales, SG&A increased to 23.2% for 2009 from +22.1% of net sales for 2008. +The increase in SG&A both as a percentage of sales and in absolute dollars resulted primarily from a planned increase in payroll expenses of approximately $21,000, as well as costs of approximately +$10,000 primarily associated with five new retail stores that were not open at December 31, 2008. +Impairment Loss on Intangible Assets. We conducted our annual impairment evaluation of goodwill and nonamortizable intangible +assets as of +December 31, 2009 and 2008. In addition to our annual impairment test, as of June 30, 2009, impairment indicators arose that the TSUBO intangible assets were possibly impaired. As a +result, we conducted an interim impairment evaluation of the TSUBO trademarks and concluded that the fair value was lower than the carrying amount. Therefore, we recognized an impairment loss of +$1,000 on the TSUBO trademarks during the three months ended June 30, 2009. In 2008, we recognized an impairment loss of $20,400 on our Teva trademarks, $11,929 on our Teva goodwill and $3,496 +on our TSUBO goodwill. For further discussion of our impairment evaluations, refer to "Critical Accounting Policies and Estimates" below. +Income (Loss) from Operations. The following table summarizes operating income (loss) by segment. The gross profit derived from +the sales to third +parties of the eCommerce and retail store segments for the US is separated into two components: (i) the wholesale profit is included in the operating income or loss of each wholesale segment, +and (ii) the remaining profit is included in the eCommerce and retail stores +36 +Table of Contents +segments. +The gross profit of the international portion of the eCommerce and retail stores segments includes both the wholesale and retail profit. +Years Ended December 31, +Change +2009 +2008 +Amount +% +UGG wholesale +$ +232,712 +$ +187,824 +$ +44,888 +23.9 +% +Teva wholesale(1) +12,495 +(18,688 +) +31,183 +166.9 +Other brands wholesale(2) +(14,698 +) +(7,104 +) +(7,594 +) +(106.9 +) +eCommerce +21,073 +22,364 +(1,291 +) +(5.8 +) +Retail stores +18,498 +6,649 +11,849 +178.2 +Unallocated overhead costs +(88,833 +) +(74,126 +) +(14,707 +) +(19.8 +) +Total +$ +181,247 +$ +116,919 +$ +64,328 +55.0 +% +(1) Included +in Teva loss from operations in 2008 is an impairment loss of $32,329. +(2) Included +in Other brands loss from operations in 2009 and 2008 is an impairment loss of $1,000 and $3,496, respectively. +Income +from operations increased primarily due to the increase in net sales and gross margins as well as a significantly lower impairment loss in 2009, partially offset by higher +selling, general and administrative expenses. +The +increase in income from operations of UGG brand wholesale was primarily the result of the higher sales and gross margins as well as lower bad debt expenses and lower selling +expenses, mainly due to a +change in the commission structure. These results were partially offset by increased marketing and promotional expenses. +The +increase in income from operations of Teva brand wholesale was largely due to the impairment loss in 2008 as well as our portion of the production costs for the documentary IMAX +film, " Grand Canyon Adventure, River at Risk " in 2008. In addition, we reduced marketing and selling expenses in 2009. These reductions in expenses were +partially offset by lower sales and gross margins. +The +increase in the loss from operations of our other brands was largely due to lower gross margins, mainly attributed to an increased impact of closeout sales and inventory write-downs. +In addition, we recognized our planned increase in marketing and promotional expenses in the first half of 2009. We did not own all of our other brands during 2008. We acquired, integrated, or +continued to develop our other brands during 2009. +Income +from operations of our eCommerce business decreased primarily due to higher operating costs and lower gross margins, partially offset by higher sales, mainly UGG brand sales. The +higher operating costs were related to increased marketing and promotional expenses as well as increased payroll and related expense in support of our enhancement and expansion plans. The lower gross +margins were largely due to not passing on shipping charges to our customers to remain competitive online. +Income +from operations of our retail store business increased primarily due to the increase in net sales and gross margin, partially offset by higher operating expense primarily related +to our new store openings. +Unallocated +overhead costs increased primarily from higher corporate payroll costs resulting from our planned increase in headcount related to our continued worldwide growth. +Other (Income) Expense. Interest income decreased by $2,180 in 2009 from 2008, primarily from lower overall market interest +rates, as well as a shift +in our investment mix to a greater percentage of safer, more +37 +Table of Contents +liquid +and lower yielding investments. Interest expense was negative due to the reversal of accrued interest originally recorded in prior periods related to certain tax obligations for one of our +foreign subsidiaries. Management determined that any remaining liability for such matters was remote, and therefore, we reversed the previously accrued amount. +Income Taxes. Income tax expense and effective income tax rates were as follows: +Years Ended +December 31, +2009 +2008 +Income tax expense +$ +66,304 +$ +46,631 +Effective income tax rate +36.2 +% +38.7 +% +The +decrease in the effective tax rate was primarily due to the increase in our annual international pre-tax income as a percentage of worldwide pre-tax income, +as income generated in most of our foreign jurisdictions are taxed at significantly lower rates than the US. Also, in 2008, we had impairment losses attributable to a foreign subsidiary that received +no tax benefit from the charge. +Net (Income) Loss Attributable to the Noncontrolling Interest. Net income attributable to the noncontrolling interest in our +joint venture with +Stella International, which was formed in July 2008, was $133 for 2009, compared to a net loss of $77 in 2008. +Net Income Attributable to Deckers Outdoor Corporation. Our net income increased as a result of the items discussed above. Our +diluted earnings per +share increased by 58.8% to $2.96 for 2009 from $1.87 in 2008, as a result of the increase in net income, as well as lower weighted-average diluted shares, primarily related to our stock repurchases +in 2009. +Off-Balance Sheet Arrangements +We have off-balance sheet arrangements consisting of operating lease obligations and purchase obligations. See "Contractual +Obligations" below. +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, as needed, the credit available under our credit agreement. In an economic recession or under other adverse economic conditions, +we may be unable to realize a return on our cash and cash equivalents and short-term investments, secure additional credit on favorable terms, renew our existing credit or access our +existing line of credit. Such failures may impact our working capital reserves and have a material adverse effect on our business. +The +recent economic recession and continuing economic uncertainty present significant challenges to the investment markets and have limited the availability of short-term +debt for working capital. These factors could adversely impact our future financial condition and our future results of operations. +Our +cash flow cycle includes the purchase of inventories, the subsequent sale of the inventories and the eventual collection of the resulting accounts receivables. As a result, our +working capital requirements begin when we purchase the inventories and continue until we ultimately collect the resulting receivables. The seasonality of our UGG brand business requires us to build +fall and winter inventories in the second and third quarters to support sales for the UGG brand's major selling seasons, which historically occur during the third and fourth quarters; whereas, the +Teva brand generally begins to build its inventory levels beginning in the fourth and first quarters in anticipation of the spring selling season that occurs in the first and second quarters. Given +the seasonality of our UGG and our Teva brands, our working capital requirements fluctuate significantly throughout the year. The cash required to fund these working capital +38 +Table of Contents +fluctuations +has been provided using our internal cash flows. If necessary, we may borrow funds under our credit agreement. During 2010, 2009, and 2008, we did not borrow funds under our credit +agreement. +The +following table summarizes our cash flows and working capital: +Year Ended December 31, +Change +2010 +2009 +Amount +% +Net cash provided by operating activities +$ +139,922 +$ +185,474 +$ +(45,552 +) +(24.6 +)% +Net cash used in investing activities +$ +(1,600 +) +$ +(25,398 +) +$ +23,798 +93.7 +% +Net cash used in financing activities +$ +(9,052 +) +$ +(21,065 +) +$ +12,013 +57.0 +% +Year Ended December 31, +Change +2010 +2009 +Amount +% +Cash and cash equivalents +$ +445,226 +$ +315,862 +$ +129,364 +41.0 +% +Short-term investments +— +26,120 +(26,120 +) +* +Trade accounts receivable +116,663 +76,427 +40,236 +52.6 +Inventories +124,995 +85,356 +39,639 +46.4 +Other current assets +28,848 +17,222 +11,626 +67.5 +Total current assets +$ +715,732 +$ +520,987 +$ +194,745 +37.4 +% +Trade accounts payable +$ +67,073 +$ +47,331 +$ +19,742 +41.7 +Other current liabilities +77,790 +53,539 +24,251 +45.3 +Total current liabilities +$ +144,863 +$ +100,870 +$ +43,993 +43.6 +% +Net working capital +$ +570,869 +$ +420,117 +$ +150,752 +35.9 +% +* Calculation +of percentage change is not meaningful. +Cash from Operating Activities. Net cash provided by operating activities decreased primarily due to increases in accounts +receivable and inventory +in 2010 versus decreases in 2009. The increase in accounts receivable was primarily due to increased international accounts receivable, driven by the international sales growth which carry longer +terms, and also due to the timing of customer purchases. The increase in inventory was primarily due to higher projected sales in the first quarter of 2011 versus 2010, nine new stores, and increased +international inventory. These changes were partially offset by larger increases in net income, accrued expenses, and accounts payable in 2010 versus 2009. The larger increase in accrued expenses was +primarily due to increased accrued payroll related to increased headcount and timing of payments. The larger increase in accounts payable was primarily due to timing of cash payments, as well as +increased purchases of inventory and other expenses in support of our growth. Net working capital increased as of December 31, 2010 compared to December 31, 2009, primarily as a result +of higher cash and cash equivalents, accounts receivable, and inventories, partially offset by other current liabilities and accounts payable. Changes in working capital are due to the items discussed +above, as well as our normal seasonality and timing of cash receipts and cash payments. +Wholesale +accounts receivable turnover increased to 8.3 times in the twelve months ended December 31, 2010 from 7.8 times in the twelve months ended December 31, 2009, +primarily due to increased sales and cash collections for the twelve months ended December 31, 2010 compared to the twelve months ended December 31, 2009. +Inventory +turnover increased to 4.2 times for the year ended December 31, 2010 from 3.8 times for the year ended December 31, 2009, mainly because sales, and related costs +of sales, increased at a higher rate +39 +Table of Contents +than +the increase in average inventory balances during the twelve months ended December 31, 2010 compared to the twelve months ended December 31, 2009. +Cash from Investing Activities. Net cash used in investing activities for 2010 resulted primarily from purchases of property and +equipment and +acquisitions of businesses, partially offset by sales of short-term investments. Our larger capital expenditures were related to the build out of new retail stores and computer hardware +and software. In addition, we did not purchase short-term investments in 2010, as we shifted our investments to highly liquid cash equivalents. Net cash used in investing activities in +2009 was comprised primarily of purchases of property and equipment and net purchases of short-term investments. Our capital expenditures in 2009 were primarily related to the build out of +new retail stores, expansion of our warehouse pick module and computer hardware and software. As our short-term investments matured, we invested in cash equivalents, thus decreasing +purchases and sales of short-term investments. +As +of December 31, 2010, we had no material commitments for future capital expenditures, but we estimate that the capital expenditures for 2011 will range from approximately +$55,000 to $60,000 and anticipate those will include the build-out of new retail stores and miscellaneous computer hardware and software. The actual amount of capital expenditures for 2011 +may differ from this estimate, largely depending on any unforeseen needs to replace existing assets and the timing of expenditures. +Cash from Financing Activities. In both 2010 and 2009, net cash used in financing activities was comprised primarily of cash used +for repurchases of +our common stock and for shares withheld for taxes from employee stock unit vestings, partially offset by excess tax benefits from stock compensation. +In +June 2009, we announced that our Board of Directors approved a stock repurchase program to repurchase up to $50,000 of our common stock in the open market or in privately negotiated +transactions, subject to market conditions, applicable legal requirements and other factors. The program does not obligate us to acquire any particular amount of common stock and the program may be +suspended at any time at our discretion. Prior to the stock split, we repurchased shares that were retired; the repurchased shares and repurchase price were not affected by the stock split. During the +twelve months ended December 31, 2010, we repurchased approximately 230,000 shares for approximately $10,100, or an average price of $43.67 per share. As of December 31, 2010, the +remaining amount approved to repurchase shares was approximately $20,000. +In +May 2010, we entered into the Second Amendment and Restated Credit Agreement with Comerica Bank, or the Credit Agreement. The Credit Agreement provides for a maximum availability of +$20,000. Up to $12,500 of borrowings may be in the form of letters of credit. The Credit Agreement bears interest at the lender's prime rate (3.25% at December 31, 2010) or, at our option, at +the London Interbank Offered Rate, or LIBOR, (0.26% at December 31, 2010) plus 1.0%, and is secured by substantially all of our assets. The Credit Agreement includes annual commitment fees of +$60 per year which can be waived if we deposit $10,000 in non-interest bearing new deposits with Comerica Bank, provided that such deposits may be removed by us at any time, subject to +paying a pro-rated annual commitment fee. The Credit Agreement expires on June 1, 2012. At December 31, 2010, we had no outstanding borrowings under the Credit Agreement and +outstanding letters of credit of $724. As a result, $19,276 was available under the Credit Agreement at December 31, 2010. +The +Credit Agreement contains certain financial covenants. The covenants currently include a maximum additional debt of $20,000, maximum asset sales of $5,000, maximum loans to employees +of $200, and maximum loans to subsidiaries who are not parties to the Credit Agreement of $25,000. As of December 31, 2010, we were in compliance with all covenants and remain so as of the date +of this report. The agreements underlying the Credit Agreement also contain certain financial covenants, if outstanding obligations exceed $2,000, including a minimum tangible net worth requirement of +$294,891 plus 75% of the consolidated net profit on a cumulative basis, commencing with the fiscal year ended December 31, 2010, no consolidated net loss for two or more consecutive fiscal +quarters and maximum acquisitions of +40 +Table of Contents +$25,000 +per calendar year. At December 31, 2010, these covenants were not in effect because our balance did not exceed $2,000. +Contractual Obligations. The following table summarizes our contractual obligations at December 31, 2010 and the effects +such obligations are +expected to have on liquidity and cash flow in future periods. +Payments Due by Period +Total +Less than 1 Year +1-3 Years +3-5 Years +More than 5 Years +Operating lease obligations(1) +$ +120,204 +$ +21,928 +$ +34,590 +$ +25,526 +$ +38,160 +Purchase obligations(2) +196,427 +191,593 +3,734 +1,100 +— +Unrecognized tax benefits(3) +5,506 +5,506 +— +— +— +Total +$ +322,137 +$ +219,027 +$ +38,324 +$ +26,626 +$ +38,160 +(1) Our +operating lease obligations consist primarily of building leases for our retail locations, distribution centers, and corporate and regional offices. +Other long-term liabilities on our consolidated balance sheets include primarily deferred rents, of which the cash lease payments are included in operating lease obligations in this table. +(2) Our +purchase obligations consist largely of open purchase orders. They also include promotional expenses and service contracts. Outstanding purchase orders +are primarily with our third party manufacturers and are expected to be paid within one year. These are outstanding open orders and not minimum purchase obligations. Our promotional expenditures and +service contracts are due periodically through 2014. +(3) The +unrecognized tax benefits are related to uncertain tax positions taken in our income tax return that would impact the effective tax rate or additional +paid-in capital, if recognized. See Note 5 to our accompanying consolidated financial statements. +In +addition to the amounts in the table above, we have entered into other off-balance sheet arrangements. We agreed to make loans to our joint venture with Stella +International, should the need arise. As of December 31, 2010, the estimated remaining loans by Deckers were expected to be approximately $1,000. We also have potential future +earn-out payments relating to our acquisitions of TSUBO, LLC and Ahnu, Inc. through 2013. These amounts were excluded from the table above as all conditions for the +earn-out payments have not been met. Additionally, we entered into or amended agreements with certain of our international distributors to assume control of the distribution rights in +those regions. Under these agreements, we expect to make total payments to these distributors of approximately $12,000 in 2011. The payments include consideration for the purchase of certain assets +and services. +We +believe that internally generated funds, the available borrowings under our existing Credit Agreement or a new credit agreement, 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, the availability of short-term credit, and market volatility, among others. See Part I, Item 1A, and "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 requirements, we may seek to sell debt securities or additional equity +securities or to obtain a new credit agreement or draw on our existing Credit Agreement. The sale of convertible debt securities or additional equity securities could result in additional dilution to +our +41 +Table of Contents +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 is no material definitive agreement with respect to the acquisition of any +other businesses, we may evaluate acquisitions of other businesses or brands. +Impact of Inflation +We believe that the rates of inflation in the three most recent fiscal 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 reasonably assured, persuasive evidence of an arrangement exists, and the sales price is fixed or determinable. Allowances for estimated returns, discounts, chargebacks, 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 US generally accepted accounting principles +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 and known circumstances, authoritative accounting pronouncements and other factors that management +believes to be reasonable. Management reasonably could use different 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 materially 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. +The +following table summarizes data related to the critical accounting estimates for accounts receivable allowances and reserves, which are discussed below: +December 31, 2010 +December 31, 2009 +Amount +% of Gross +Trade Accounts +Receivable +Amount +% of Gross +Trade Accounts +Receivable +Gross trade accounts receivable +$ +130,435 +$ +88,217 +Allowance for doubtful accounts +$ +1,379 +1.1 +% +$ +2,710 +3.1 +% +Reserve for sales discounts +$ +5,819 +4.5 +% +$ +2,796 +3.2 +% +Allowance for estimated chargebacks +$ +2,535 +1.9 +% +$ +3,049 +3.5 +% +Amount +% of Net Sales +Amount +% of Net Sales +Net sales for the three months ended +$ +430,124 +$ +347,989 +Allowance for estimated returns +$ +4,039 +0.9 +% +$ +3,235 +0.9 +% +Estimated returns liability +$ +4,838 +1.1 +% +$ +4,018 +1.2 +% +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 +42 +Table of Contents +analyzing +known uncollectible accounts, aged trade accounts receivables, economic conditions and forecasts, 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 all or a portion of are identified as +potentially uncollectible, plus a non-specific reserve for the balance of accounts based on our historical loss experience. Reserves have been established for all projected losses of this +nature. The decrease in the allowance for doubtful accounts as of December 31, 2010 compared to December 31, 2009 was primarily due to a decrease of approximately $1,100 in one account's +specific reserve, as that customer had filed for bankruptcy, and subsequently, we recovered the outstanding account balance against which we had previously reserved. 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 we consider to have credit risk and are not specifically +identified as uncollectible would change the allowance for doubtful accounts at December 31, 2010 by approximately $580. +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 available to be taken against the +period-end trade accounts receivable, and we record a corresponding reserve for sales discounts. The increase in the reserve was primarily due to increased sales to customers with allowed +discounts. 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 are entitled to +discounts would change the reserve for sales discounts at December 31, 2010 by approximately $580. +Allowance for Estimated Chargebacks. When our domestic wholesale customers pay their invoices, they often take deductions for +chargebacks against +their invoices, which are often valid. Therefore, we record an allowance for the balance of chargebacks that are outstanding in our accounts receivable balance as of the end of each quarter, along +with an estimated reserve for chargebacks that have not yet been taken against outstanding accounts receivable balances. This estimate is based on historical trends of the timing and amount of +chargebacks taken against invoices. The decrease in the allowance was largely attributable to additional resources focused on customer deductions. +Allowance for Estimated Returns and Estimated Returns Liability. We record an allowance for anticipated +future returns of goods shipped prior to period-end and a liability for anticipated returns of goods sold direct to consumers. In general, we accept returns for damaged or defective +products but discourage returns for other reasons. We also accept returns from our retail and eCommerce customers for a thirty day period. We base the amounts of the allowance and liability on any +approved customer requests for returns, historical returns experience and any recent events that could result in a change from historical returns rates, among other factors. 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 +allowance and liability reserves for returns in total at December 31, 2010 by approximately $2,750. +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, 2010, inventories were stated at $124,995 +net of inventory write-downs of $1,684. At December 31, 2009, inventories were stated at $85,356, net of inventory write-downs of $1,846. The decrease in inventory write-downs at +December 31, 2010 compared to December 31, 2009 was primarily due to sales of previously written-down inventory, primarily in our other brands segment inventories, and a +reduction in prior season inventory. 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, 2010 by approximately $290. +43 +Table of Contents +Valuation of Goodwill, Intangible and Other Long-Lived Assets. Annually, or whenever events or changes in circumstances indicate +that the +carrying amount of an asset may not be recoverable, we assess the impairment of goodwill, intangible and other long-lived assets on a separate asset basis based on assumptions and +judgments regarding the carrying amount of these assets individually. We test goodwill and nonamortizable intangible assets for impairment on an annual basis as of December 31, except for our +Teva trademarks which, beginning in 2010 to allow sufficient time to complete the analysis before our year-end reporting, are tested as of October 31, based on the fair value of the +reporting unit for goodwill and 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: +• the assets' ability to continue to generate income from operations and positive cash flow in future periods; +• changes in consumer demand or acceptance of the related brand names, products or features associated with the assets; +• increased competition; and +• deterioration of general economic conditions or the retail environment, and customers reducing orders in response to such +conditions. +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. +As +of October 31 (for our Teva trademarks) and as of December 31, 2010, we performed our annual impairment tests of goodwill and nonamortizable intangible assets using +income approaches and valuation techniques and determined that there was no impairment of goodwill or intangible assets as of October 31 or December 31, 2010 on our Teva trademarks or +other nonamortizable intangible assets and goodwill, respectively. Our Teva trademarks were evaluated using the relief from royalty method. Our use of different estimates (including estimated royalty +rates, discount rates, market multiples, and future revenues, among others) and assumptions could produce different financial results. As of October 31, 2010, our Teva trademarks had a carrying +value of $15,300. At that date, our estimate of the trademarks' fair value was substantially in excess of the carrying value. However, if growth rates fail to meet our forecasts, impairment of the +Teva trademark may occur in the future. Our goodwill balance at December 31, 2010 represents goodwill primarily in the UGG reporting unit which has a fair value substantially in excess of the +carrying value. +On +December 31, 2009, we performed our annual impairment test of goodwill and nonamortizable intangible assets using income approaches and valuation techniques and determined that +there was no impairment of goodwill or intangible assets as of December 31, 2009. +As +of June 30, 2009, our inability to reach our 2009 TSUBO brand period to date sales targets along with a reduced long-term forecast for TSUBO brand sales growth were +indicators that +the TSUBO nonamortizable intangible assets were possibly impaired. As a result, we conducted an interim impairment evaluation of the TSUBO nonamortizable intangible assets as of June 30, 2009 +and concluded that the fair value of the TSUBO trademarks was lower than the carrying amount. Therefore, we recognized an impairment loss of $1,000 in the second quarter of 2009 on the TSUBO +trademarks. In addition, we began amortizing the remaining balance of the TSUBO trademarks over 10 years. +As +of June 30, 2008, our inability to reach our 2008 Teva brand period to date sales targets along with a reduced long-term forecast for Teva brand sales growth were +indicators that the Teva goodwill and other nonamortizable intangible assets were possibly impaired. As a result, we conducted an interim impairment +44 +Table of Contents +evaluation +of the Teva goodwill and other nonamortizable intangible assets as of June 30, 2008 and concluded that the Teva goodwill was not impaired, but the fair value of the Teva trademarks +was lower than the carrying amount. Therefore, we recognized an impairment loss of $14,900 in the second quarter of 2008 on the Teva trademarks. As of December 31, 2008, due in part to the +continued decline in the economy in the second half of 2008, we reduced our long-term Teva brand sales forecast. In addition, as of December 31, 2008, we experienced a significant +decline in our market capitalization due to declines in market multiples. As a result of the reduced sales forecast and the decline in market capitalization, we concluded that the fair value of our +Teva trademarks and Teva goodwill were below their respective carrying amounts. Further, due to the decline in our market capitalization, we concluded that the fair value of our TSUBO goodwill was +also below its carrying amount. Therefore, we recognized an impairment loss in the fourth quarter of 2008 of $5,500 on our Teva trademarks and $15,425 on our goodwill, which was the entire balance of +both our Teva and TSUBO goodwill. The impairment loss is reflected in our consolidated statements of income for the year ended December 31, 2008. +We +evaluate amortizable long-lived assets, including intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying value of an +asset may not be recoverable. At least quarterly, we evaluate whether any impairment triggering events, including the following, have occurred which would require such asset groups to be tested for +impairment: +• A significant decrease in the market price of a long-lived asset group; +• a significant adverse change in the extent or manner in which a long-lived asset group is being used or in its +physical condition; +• a significant adverse change in legal factors or in business climate that could affect the value of a +long-lived asset group, including an adverse action or assessment by a regulator; +• an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of +a long-lived asset group; +• a current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or +forecast that demonstrates continuing losses associated with the use of a long-lived asset group; or +• a current expectation that, more likely than not, a long-lived asset group will be sold or otherwise disposed +of significantly before the end of its previously estimated useful life. +When +an impairment triggering event has occurred, we test for recoverability of the asset groups carrying value using estimates of undiscounted future cash flows based on the existing +service potential of the applicable asset group in determining the fair value of each asset group. In determining the service potential of a long-lived asset group, we consider its +remaining useful life, cash-flow generating capacity, and physical output capacity. These estimates include the undiscounted cash flows associated with future expenditures necessary to +maintain the existing service potential, as well as future capital expenditures that would increase the service potential of a long-lived asset group. Our long-lived assets are +grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. An impairment loss, if any, +would only reduce the carrying amount of long-lived assets in the group based on the fair value of the group assets. We have identified our asset groups as follows: each retail store, our +eCommerce business, and the UGG, Teva, and each of our other brands wholesale businesses. As of December 31, 2010, the fair value of assets in our other brands asset group did not exceed the +carrying values, and therefore we recorded an impairment on those individual brands' assets that did not exceed their carrying values. The amount was not material to our financial statements and was +recorded in selling, general and administrative expenses. All other asset groups' fair values were substantially in excess of the carrying values. Our methodologies used as of December 31, 2010 +did not change from the prior year. +45 +Table of Contents +Stock Compensation Expense. Stock compensation transactions with employees are accounted for using the fair value method and +expensed ratably over +the vesting period of the award. Stock compensation expense is based on the fair values of all share-based awards as of the grant date. Determining the expense of share-based awards at the grant date +requires judgment, including estimating the percentage of awards that will be forfeited, probabilities of meeting criteria for performance-based awards, stock volatility, the expected life of the +award, and other inputs. If actual forfeitures differ significantly from the estimates, stock compensation expense and our results of operations could be materially impacted. +Item 7A. Quantitative and Qualitative Disclosures about Market Risk. +Interest Rate Risk. Our market risk exposure with respect to financial instruments is tied to changes in the prime rate in the +US and changes in +LIBOR. Our credit agreement provides for interest on outstanding borrowings at rates tied to the prime rate or, at our election, tied to LIBOR. At December 31, 2010, we had no outstanding +borrowings under the credit agreement. A 1.0% increase in interest rates on our current borrowings would have no impact on income before income taxes. +Foreign Currency Exchange Rate Risk. We face market risk to the extent that changes in foreign currency exchange rates affect our +foreign assets, +liabilities, revenues and expenses. We hedge certain foreign currency forecasted transactions and exposures from existing assets and liabilities, compared to the year ended December 31, 2009 +when we did not hedge foreign currency exchange rate risk. Other than an increasing amount of sales, expenses, and financial positions denominated in foreign currencies, as discussed above, we do not +believe that there has been a material change in the nature of our primary market risk exposures, including the categories of market risk to which we are exposed and the particular markets that +present the primary risk of loss. As of the date of this Annual Report on Form 10-K, we do not know of or expect there to be any material change in the general nature of our primary +market risk exposure in the near term. +We +currently utilize forward contracts and other derivative instruments to mitigate exposure to fluctuations in the foreign currency exchange rate, for a portion of the amounts we expect +to purchase and sell in foreign currencies. As our international operations grow and we increase purchases and sales in foreign currencies, we will evaluate and utilize additional derivative +instruments, as needed, to hedge our foreign currency exposures. We do not use foreign currency contracts for trading purposes. +Although +the majority of our sales and inventory purchases are denominated in US currency, our sales and inventory purchases may be impacted by fluctuations in the exchange rates between +the US dollar and the local currencies in the international markets where our products are sold and manufactured. Our foreign currency exposure is generated primarily from our Asian and European +operations. Approximately $70,000, or 7.1%, of our total net sales during the year ended December 31, 2010 were denominated in foreign currencies. As we begin to hold more cash in foreign +currencies, we are exposed to financial statement translation gains and losses as a result of translating the operating results and financial positions held in foreign currencies into US dollars. We +translate monetary assets and liabilities denominated in foreign currencies into US dollars using the exchange rate as of the end of the reporting period. Changes in foreign exchange rates affect our +reported profits and can distort comparisons from year to year. In addition, if the US dollar strengthens, it may result in increased pricing pressure on our foreign distributors, which may have a +negative impact on our net sales and gross margins. As of December 31, 2010, our hedging contracts had notional amounts totaling approximately $66,000. Based upon sensitivity analysis as of +December 31, 2010, a 10% change in foreign exchange rates would cause the fair value of our financial instruments to increase or decrease by approximately $5,800. +Commodity Price Risk. We purchase certain materials that are affected by commodity prices and are, therefore, subject to price +volatility caused by +weather, global economic conditions, and other factors which are not considered predictable or within our control. Although these materials are subject to changes in commodity prices, we use +purchasing contracts or pricing arrangements to reduce the impact of +46 +Table of Contents +price +volatility as an alternative to hedging commodity prices. The purchasing contracts and pricing arrangements we use may result in unconditional purchase obligations, which are not reflected in +our consolidated balance sheets. In the event of significant commodity cost increases, we may not be able to adjust our selling prices sufficiently to mitigate the impact on our margins. +Item 8. Financial Statements and Supplementary Data. +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. +Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. +None. +Item 9A. Controls and Procedures. +(a) Disclosure Controls and Procedures. +The Company maintains a system of disclosure controls and procedures which are designed to provide reasonable assurance that information required to be disclosed +in the reports that the Company files or submits under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods +specified in the Securities and Exchange Commission's rules and forms. These disclosure controls and procedures include, among other processes, controls and procedures designed to ensure that +information required to be disclosed in the reports that the Company files or submits under the Exchange Act is accumulated and communicated to management, including the principal executive officer +and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. +The +Company carried out an evaluation, under the supervision and with the participation of management, including the principal executive officer and the principal financial officer of +the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2010 pursuant to Exchange Act Rule 13a-15. Based upon that +evaluation, the principal executive officer and the principal financial officer concluded that the Company's disclosure controls and procedures, as defined in Exchange Act +Rule 13a-15(e) and 15d-15(e), were effective as of the end of the period covered by this report. +(b) Management's Report on Internal Control over Financial Reporting +Management is responsible for establishing and maintaining adequate internal control over financial reporting at the Company. Our internal control over financial +reporting is a process designed under the supervision of the Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and +the preparation of the Company's financial statements for external reporting purposes in accordance with US generally accepted accounting principles (GAAP). A company's internal control over financial +reporting includes those policies and procedures that: +• pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and +dispositions of the assets of the company; +• provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in +accordance with GAAP, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and the directors of the company; and +47 +Table of Contents +• provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of +the company's assets that could have a material effect on the financial statements. +Because +of 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 Company's internal control over financial reporting as of December 31, 2010. 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). Management's assessment included an evaluation of the design of the Company's 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, 2010, the Company maintained effective internal control over financial reporting. The registered public +accounting firm that audited the consolidated financial statements included in this Annual Report has issued an attestation report on the Company's internal control over financial reporting. 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. +(c) Changes in Internal Control over Financial Reporting +There was no change in our internal control over financial reporting that occurred during the quarter ended December 31, 2010 that has materially affected, +or is reasonably likely to materially affect, our internal control over financial reporting. +Item 9B. Other Information. +None. +48 +Table of Contents +PART III +Item 10. Directors, Executive Officers and Corporate Governance. +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 and is posted on our website at www.deckers.com. Our code of ethics is designed to meet the requirements of Section 406 of +Regulation S-K and the rules promulgated there under. 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 Company's definitive proxy +statement relating to +the Registrant's 2011 annual meeting of stockholders, which will be filed pursuant to Regulation 14A within 120 days after the end of the Company's fiscal year ended December 31, +2010, and such information is incorporated herein by reference. +Item 11. Executive Compensation. +Information relating to Executive Compensation is set forth under "Proposal No. 1-Election of Directors" in the +Company's definitive proxy statement relating to the Registrant's 2011 annual meeting of stockholders, which will be filed pursuant to Regulation 14A within 120 days after the end of the +Company's fiscal year ended December 31, 2010, and such information is incorporated herein by reference. +Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. +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 Company's definitive proxy statement relating to the Registrant's 2011 annual meeting of stockholders, which will be filed +pursuant to Regulation 14A within 120 days after the end of the Company's fiscal year ended December 31, 2010, and such information is incorporated herein by reference. +Item 13. Certain Relationships and Related Transactions, and Director Independence. +Information relating to Certain Relationships and Related Transactions is set forth under "Proposal No. 1-Election +of Directors" in the Company's definitive proxy statement relating to the Registrant's 2011 annual meeting of stockholders, which will be filed pursuant to Regulation 14A within 120 days +after the end of the Company's fiscal year ended December 31, 2010, and such information is incorporated herein by reference. +Item 14. Principal Accounting Fees and Services. +Information relating to Principal Accountant Fees and Services is set forth under "Proposal No. 2-Independent +Registered Public Accounting Firm" in the Company's definitive proxy statement relating to the Registrant's 2011 annual meeting of stockholders, which will be filed pursuant to Regulation 14A +within 120 days after the end of the Company's fiscal year ended December 31, 2010, and such information is incorporated herein by reference. +49 +Table of Contents +PART IV +Item 15. Exhibits, Financial Statement Schedules. +Consolidated Financial Statements and Schedules required to be filed hereunder are indexed on Page F-1 hereof. +Exhibit Number +Description of Exhibit +3.1 +Amended and Restated Certificate of Incorporation of Deckers Outdoor Corporation as amended through May 27, 2010. (Exhibit 3.1 to the Registrant's Form 10-Q for the quarterly period ended June 30, 2010 +and incorporated by reference herein) +3.2 +Restated Bylaws of Deckers Outdoor Corporation, as amended by the Board of Directors through March 11, 2009. (Exhibit 3.2 to the Registrant's Form 10-Q for the quarterly period ended March 31, 2009 +and incorporated by reference herein) +#10.1 +1993 Employee Stock Incentive Plan. (Exhibit 99 to the Registrant's Registration Statement on Form S-8, File No. 33-47097 and incorporated by reference herein) +#10.2 +Form of Incentive Stock Option Agreement under 1993 Employee Stock Incentive Plan. (Exhibit 10.9 to the Registrant's Registration Statement on Form S-1, File No. 33-67248 and incorporated by reference +herein) +#10.3 +Form of Non-Qualified Stock Option Agreement under 1993 Employee Stock Incentive Plan. (Exhibit 10.10 to the Registrant's Registration Statement on Form S-1, File No. 33-67248 and incorporated by +reference herein) +#10.4 +Form of Restricted Stock Agreement under 1993 Employee Stock Incentive Plan. (Exhibit 10.11 to the Registrant's Registration Statement on Form S-1, File No. 33-67248 and incorporated by reference +herein) +10.5 +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 +Registrant's Form 10-K for the period ended December 31, 2003 and incorporated by reference herein) +10.6 +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 Registrant's Form 10-K for the period ended December 31, 2004 and incorporated by reference herein) +10.7 +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 Registrant's Form 10-K for the period ended December 31, 2004 and incorporated by reference herein) +#10.8 +Deckers Outdoor Corporation 2006 Equity Incentive Plan (incorporated herein by reference to Appendix A to the Registrant's Definitive Proxy Statement dated April 21, 2006 in connection with its 2006 Annual +Meeting of Stockholders) +#10.9 +First Amendment to Deckers Outdoor Corporation 2006 Equity Incentive Plan (incorporated herein by reference to Appendix A to the Registrant's Definitive Proxy Statement dated April 9, 2007 in connection with +its 2007 Annual Meeting of Stockholders) +#10.10 +Form of Restricted Stock Unit Award Agreement (Level 1) Under 2006 Equity Incentive Plan (Exhibit 10.2 to the Registrant's Form 8-K filed on May 11, 2007 and incorporated by reference +herein) +50 +Table of Contents +Exhibit Number +Description of Exhibit +#10.11 +Form of Restricted Stock Unit Award Agreement (Level 2) Under 2006 Equity Incentive Plan (Exhibit 10.3 to the Registrant's Form 8-K filed on May 11, 2007 and incorporated by reference herein) +#10.12 +Form of Stock Appreciation Rights Award Agreement (Level 1) Under 2006 Equity Incentive Plan (Exhibit 10.4 to the Registrant's Form 8-K filed on May 11, 2007 and incorporated by reference +herein) +#10.13 +Form of Stock Appreciation Rights Award Agreement (Level 2) Under 2006 Equity Incentive Plan (Exhibit 10.5 to the Registrant's Form 8-K filed on May 11, 2007 and incorporated by reference +herein) +#10.14 +Form of Indemnification Agreement (Exhibit 10.1 to the Registrant's Form 8-K filed on June 2, 2008 and incorporated by reference herein) +#10.15 +Replacement Director Compensation Agreement and Mutual Release, dated December 16, 2009 (Exhibit 10.1 to the Registrant's Form 8-K filed on December 17, 2009 and incorporated by reference +herein) +#10.16 +Change of Control and Severance Agreement with Deckers Outdoor Corporation for Angel Martinez on December 22, 2009 (Exhibit 10.33 to the Registrant's Form 10-K filed on March 1, 2010 and +incorporated by reference herein.) +#10.17 +Change of Control and Severance Agreement with Deckers Outdoor Corporation for Zohar Ziv on December 22, 2009 (Exhibit 10.34 to the Registrant's Form 10-K filed on March 1, 2010 and incorporated by +reference herein.) +#10.18 +Change of Control and Severance Agreement with Deckers Outdoor Corporation for Thomas George on December 22, 2009 (Exhibit 10.35 to the Registrant's Form 10-K filed on March 1, 2010 and +incorporated by reference herein.) +#10.19 +Change of Control and Severance Agreement with Deckers Outdoor Corporation for Constance Rishwain on December 22, 2009 (Exhibit 10.36 to the Registrant's Form 10-K filed on March 1, 2010 and +incorporated by reference herein.) +#10.20 +Change of Control and Severance Agreement with Deckers Outdoor Corporation for Colin Clark on December 22, 2009 (Exhibit 10.37 to the Registrant's Form 10-K filed on March 1, 2010 and incorporated +by reference herein.) +#10.21 +Deckers Outdoor Corporation Deferred Compensation Plan (Exhibit 10.2 to the Registrant's Form 8-K filed on December 22, 2009 and incorporated by reference herein) +*#10.22 +First Amendment to the Deckers Outdoor Corporation Deferred Compensation Plan, dated February 19, 2010 +10.23 +Second Amended and Restated Credit Agreement among Deckers Outdoor Corporation, TSUBO, LLC and Comerica Bank (Exhibit 10.1 to the Registrant's Form 8-K filed on May 28, 2010 and incorporated by +reference herein) +*#10.24 +Deckers Outdoor Corporation Amended and Restated Deferred Stock Unit Compensation Plan, a Sub Plan under the Deckers Outdoor Corporation 2006 Equity Incentive Plan, adopted by the Board of Directors on +December 14, 2010 +*21.1 +Subsidiaries of Registrant +*23.1 +Consent of Independent Registered Public Accounting Firm +51 +Table of Contents +Exhibit Number +Description of Exhibit +*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 USC. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 +**101.1 +The following materials from the Company's Annual Report on Form 10-K for the annual period ended December 31, 2010, formatted in XBRL (eXtensible Business Reporting Language); (i) Consolidated Balance +Sheets as of December 31, 2010 and 2009; (ii) Consolidated Statements of Income for the years ended December 31, 2010, 2009 and 2008; (iii) Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and +2008, and (iv) Notes to Consolidated Financial Statements, tagged as blocks of text. +* Filed +herewith. +** Pursuant +to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of +registration statement prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and +Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections. +# Management +contract or compensatory plan or arrangement. +52 +Table of Contents +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) +/s/ ANGEL R. MARTINEZ +Angel R. Martinez +Chief Executive Officer +Date: +March 1, 2011 +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/ ANGEL R. MARTINEZ +Angel R. Martinez +Chairman of the Board, +President and Chief Executive +Officer (Principal Executive Officer) +March 1, 2011 +/s/ THOMAS A. GEORGE +Thomas A. George +Chief Financial Officer +(Principal Financial and Accounting Officer) +March 1, 2011 +/s/ KARYN O. BARSA +Karyn O. Barsa +Director +March 1, 2011 +/s/ MAUREEN CONNERS +Maureen Conners +Director +March 1, 2011 +/s/ JOHN M. GIBBONS +John M. Gibbons +Director +March 1, 2011 +/s/ REX A. LICKLIDER +Rex A. Licklider +Director +March 1, 2011 +/s/ RUTH M. OWADES +Ruth M. Owades +Director +March 1, 2011 +/s/ JOHN G. PERENCHIO +John G. Perenchio +Director +March 1, 2011 +/s/ TORE STEEN +Tore Steen +Director +March 1, 2011 +53 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +INDEX TO CONSOLIDATED FINANCIAL STATEMENTS +AND FINANCIAL STATEMENT SCHEDULE +Page +Consolidated Financial Statements +Reports of Independent Registered Public Accounting Firm +F-2 +Consolidated Balance Sheets as of December 31, 2010 and 2009 +F-4 +Consolidated Statements of Income for each of the years in the three-year period ended December 31, +2010 +F-5 +Consolidated Statements of Stockholders' Equity and Comprehensive Income for each of the years in the three-year +period ended December 31, 2010 +F-6 +Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, +2010 +F-7 +Notes to Consolidated Financial Statements +F-8 +Consolidated Financial Statement Schedule +Valuation and Qualifying Accounts for each of the years in the three-year period ended December 31, +2010 +F-31 +All +other schedules are omitted because they are not applicable or the required information is shown in the Company's consolidated financial statements or the related notes thereto. +F-1 +Table of Contents +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 (the Company) as listed in the accompanying index. In connection with +our audits of the consolidated financial statements, we also have audited the related consolidated financial statement +schedule as listed in the accompanying index. These consolidated financial statements and consolidated financial statement schedule are the responsibility of the Company's management. Our +responsibility is to express an opinion on these consolidated financial statements and the consolidated 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 the Company as of December 31, 2010 and +2009, and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 2010, 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, present fairly, in +all material respects, the information set forth therein. +We +also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of +December 31, 2010, 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 1, 2011 expressed an unqualified opinion on the effectiveness of the Company's internal control over +financial reporting. +/s/ +KPMG LLP +Los +Angeles, California +March 1, 2011 +F-2 +Table of Contents +Report of Independent Registered Public Accounting Firm +The +Board of Directors and Stockholders +Deckers Outdoor Corporation: +We +have audited Deckers Outdoor Corporation and subsidiaries' (the Company) internal control over financial reporting as of December 31, 2010 based on criteria established in Internal Control — Integrated +Framework issued by the Committee of Sponsoring Organizations of +the Treadway Commission (COSO). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal +control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting in Item 9A. Our responsibility is to express an opinion on the +Company's 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, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our +audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +A +company's 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 company's 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 company's 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, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control — Integrated +Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. +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, 2010 and 2009, and the related consolidated statements of income, stockholders' equity and comprehensive income, and cash flows for each of the years in the +three year period ended December 31, 2010, and the related consolidated financial statement schedule, and our report dated March 1, 2011 expressed an unqualified opinion on those +consolidated financial statements and consolidated financial statement schedule. +/s/ +KPMG LLP +Los +Angeles, California +March 1, 2011 +F-3 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +CONSOLIDATED BALANCE SHEETS +(amounts in thousands, except par value) +December 31, +2010 +2009 +ASSETS +Current assets: +Cash and cash equivalents +$ +445,226 +$ +315,862 +Short-term investments +— +26,120 +Trade accounts receivable, net of allowances of $13,772 and $11,790 in 2010 +and 2009, respectively +116,663 +76,427 +Inventories +124,995 +85,356 +Prepaid expenses and other current assets +16,846 +7,510 +Deferred tax assets +12,002 +9,712 +Total current assets +715,732 +520,987 +Property and equipment, at cost, net +47,737 +35,442 +Goodwill +6,507 +6,507 +Other intangible assets, net +18,411 +17,433 +Deferred tax assets +15,121 +16,704 +Other assets +5,486 +1,970 +Total assets +$ +808,994 +$ +599,043 +LIABILITIES AND STOCKHOLDERS' EQUITY +Current liabilities: +Trade accounts payable +$ +67,073 +$ +47,331 +Accrued payroll +35,109 +20,869 +Other accrued expenses +17,515 +12,985 +Income taxes payable +25,166 +19,685 +Total current liabilities +144,863 +100,870 +Long-term liabilities +8,456 +6,269 +Commitments and contingencies (note 8) +Stockholders' equity: +Deckers Outdoor Corporation stockholders' equity: +Common stock, $0.01 par value; authorized 125,000 and 50,000 shares; issued and outstanding 38,581 and 38,604 shares for 2010 and 2009, +respectively +386 +387 +Additional paid-in capital +137,989 +125,173 +Retained earnings +513,459 +365,304 +Accumulated other comprehensive income +1,153 +494 +Total Deckers Outdoor Corporation stockholders' equity +652,987 +491,358 +Noncontrolling interest +2,688 +546 +Total equity +655,675 +491,904 +Total liabilities and equity +$ +808,994 +$ +599,043 +See +accompanying notes to consolidated financial statements. +F-4 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF INCOME +(amounts in thousands, except per share data) +Years Ended December 31, +2010 +2009 +2008 +Net sales +$ +1,000,989 +$ +813,177 +$ +689,445 +Cost of sales +498,051 +442,087 +384,127 +Gross profit +502,938 +371,090 +305,318 +Selling, general and administrative expenses +253,850 +188,843 +152,574 +Impairment loss on intangible assets +— +1,000 +35,825 +Income from operations +249,088 +181,247 +116,919 +Other (income) expense, net: +Interest income +(234 +) +(1,010 +) +(3,190 +) +Interest expense +566 +(875 +) +(142 +) +Other, net +(1,353 +) +(91 +) +(251 +) +(1,021 +) +(1,976 +) +(3,583 +) +Income before income taxes +250,109 +183,223 +120,502 +Income taxes +89,732 +66,304 +46,631 +Net income +160,377 +116,919 +73,871 +Net (income) loss attributable to noncontrolling interest +(2,142 +) +(133 +) +77 +Net income attributable to Deckers Outdoor Corporation +$ +158,235 +$ +116,786 +$ +73,948 +Net income per share attributable to Deckers Outdoor Corporation common stockholders: +Basic +$ +4.10 +$ +2.99 +$ +1.89 +Diluted +$ +4.03 +$ +2.96 +$ +1.87 +Weighted-average common shares outstanding: +Basic +38,615 +39,024 +39,126 +Diluted +39,292 +39,393 +39,585 +See +accompanying notes to consolidated financial statements. +F-5 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY +AND COMPREHENSIVE INCOME +(amounts in thousands) +Years Ended December 31, 2008, 2009 and 2010 +Total +Deckers +Outdoor +Corp. +Stockholders' +Equity +Common Stock +Accumulated +Other +Comprehensive +Income +Additional +Paid-in +Capital +Retained +Earnings +Non- +controlling +Interest +Total +Stockholders' +Equity +Comprehensive +Income +Shares +Amount +Balance December 31, 2007 +39,012 +$ +390 +$ +103,399 +$ +194,567 +$ +282 +$ +298,638 +$ +— +$ +298,638 +Contribution from noncontrolling interest +— +— +— +— +— +— +490 +490 +Stock compensation expense +33 +1 +10,192 +— +— +10,193 +— +10,193 +Exercise of stock options +108 +1 +403 +— +— +404 +— +404 +Shares issued upon vesting +114 +1 +(1 +) +— +— +— +— +— +Excess tax benefit from stock compensation +— +— +2,989 +— +— +2,989 +— +2,989 +Shares withheld for taxes +— +— +(2,030 +) +— +— +(2,030 +) +— +(2,030 +) +Net income (loss) +— +— +— +73,948 +— +73,948 +(77 +) +73,871 +$ +73,871 +Foreign currency translation adjustment +— +— +— +— +(47 +) +(47 +) +— +(47 +) +(47 +) +Unrealized gain on short-term investments +— +157 +157 +— +157 +157 +Total comprehensive income +$ +73,981 +Balance December 31, 2008 +39,267 +$ +393 +$ +114,952 +$ +268,515 +$ +392 +$ +384,252 +$ +413 +$ +384,665 +Stock compensation expense +24 +1 +13,015 +— +— +13,016 +— +13,016 +Exercise of stock options +15 +— +107 +— +— +107 +— +107 +Shares issued upon vesting +201 +2 +(1 +) +— +— +1 +— +1 +Excess tax detriment from stock compensation +— +— +(824 +) +— +— +(824 +) +— +(824 +) +Shares withheld for taxes +— +— +(2,082 +) +— +— +(2,082 +) +— +(2,082 +) +Stock repurchase +(903 +) +(9 +) +6 +(19,997 +) +— +(20,000 +) +— +(20,000 +) +Net income +— +— +— +116,786 +— +116,786 +133 +116,919 +$ +116,919 +Foreign currency translation adjustment +— +— +— +— +146 +146 +— +146 +146 +Unrealized loss on short-term investments +— +— +— +— +(44 +) +(44 +) +— +(44 +) +(44 +) +Total comprehensive income +$ +117,021 +Balance December 31, 2009 +38,604 +$ +387 +$ +125,173 +$ +365,304 +$ +494 +$ +491,358 +$ +546 +$ +491,904 +Stock compensation expense +30 +— +12,782 +— +— +12,782 +— +12,782 +Exercise of stock options +31 +— +89 +— +— +89 +— +89 +Shares issued upon vesting +146 +1 +(1 +) +— +— +— +— +— +Excess tax benefit from stock compensation +— +— +3,525 +— +— +3,525 +— +3,525 +Shares withheld for taxes +— +— +(3,579 +) +— +— +(3,579 +) +— +(3,579 +) +Stock repurchase +(230 +) +(2 +) +— +(10,080 +) +— +(10,082 +) +— +(10,082 +) +Net income +— +— +— +158,235 +— +158,235 +2,142 +160,377 +$ +160,377 +Foreign currency translation adjustment +— +— +— +— +(905 +) +(905 +) +— +(905 +) +(905 +) +Unrealized gain on foreign currency hedging, net of tax +— +— +— +— +1,564 +1,564 +— +1,564 +1,564 +Total comprehensive income +$ +161,036 +Balance December 31, 2010 +38,581 +$ +386 +$ +137,989 +$ +513,459 +$ +1,153 +$ +652,987 +$ +2,688 +$ +655,675 +See accompanying notes to consolidated financial statements. +F-6 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF CASH FLOWS +(amounts in thousands) +Years Ended December 31, +2010 +2009 +2008 +Cash flows from operating activities: +Net income +$ +160,377 +$ +116,919 +$ +73,871 +Adjustments to reconcile net income to net cash provided by operating activities: +Depreciation, amortization and accretion +12,283 +10,194 +6,008 +(Recovery of) provision for doubtful accounts, net +(786 +) +399 +2,233 +Write-down of inventory +2,465 +3,955 +4,785 +Impairment loss on intangible assets +— +1,000 +35,825 +Deferred tax provision +(1,712 +) +5,308 +(22,125 +) +Stock compensation +12,782 +13,016 +10,193 +Other +(391 +) +60 +(17 +) +Changes in operating assets and liabilities, net of assets and +liabilities acquired in the acquisition of businesses: +Trade accounts receivable +(39,449 +) +31,527 +(38,153 +) +Inventories +(41,107 +) +5,247 +(45,749 +) +Prepaid expenses and other current assets +(6,766 +) +(3,408 +) +(465 +) +Other assets +(1,651 +) +(1,012 +) +115 +Trade accounts payable +19,742 +3,790 +6,739 +Accrued expenses +16,468 +2,583 +9,049 +Income taxes payable +5,480 +(6,525 +) +7,120 +Long-term liabilities +2,187 +2,421 +3,847 +Net cash provided by operating activities +139,922 +185,474 +53,276 +Cash flows from investing activities: +Purchases of short-term investments +— +(66,900 +) +(204,179 +) +Proceeds from sales of short-term investments +26,080 +57,078 +299,049 +Purchases of property and equipment +(22,489 +) +(13,699 +) +(22,218 +) +Acquisitions of businesses +(5,191 +) +(1,877 +) +(5,936 +) +Net cash (used in) provided by investing activities +(1,600 +) +(25,398 +) +66,716 +Cash flows from financing activities: +Cash paid for shares withheld for taxes +(2,584 +) +(1,982 +) +(1,527 +) +Excess tax benefits from stock compensation +3,525 +810 +2,900 +Cash received from issuances of common stock +89 +107 +404 +Cash paid for repurchases of common stock +(10,082 +) +(20,000 +) +— +Contribution from minority interest holder of consolidated entity +— +— +490 +Net cash (used in) provided by financing activities +(9,052 +) +(21,065 +) +2,267 +Effect of exchange rates on cash +94 +47 +20 +Net change in cash and cash equivalents +129,364 +139,058 +122,279 +Cash and cash equivalents at beginning of year +315,862 +176,804 +54,525 +Cash and cash equivalents at end of year +$ +445,226 +$ +315,862 +$ +176,804 +Supplemental disclosure of cash flow information: +Cash paid during the year for: +Income taxes +$ +82,493 +$ +66,540 +$ +58,741 +Interest +$ +59 +$ +19 +$ +563 +Non-cash investing activity: +Accruals for purchases of property and equipment +$ +247 +$ +1,356 +$ +186 +Accruals for asset retirement obligation assets +$ +388 +$ +— +$ +— +Non-cash financing activity: +Accruals for shares withheld for taxes +$ +1,598 +$ +603 +$ +503 +See accompanying notes to consolidated financial statements. +F-7 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements +(amounts in thousands, except share quantity and per share data) +(1) The Company and Summary of Significant Accounting Policies +The Company and Basis of Presentation +The consolidated financial statements include the accounts of Deckers Outdoor Corporation and its wholly-owned subsidiaries and +majority-owned subsidiary (collectively referred to as the "Company"). Accordingly, all references herein to "Deckers Outdoor Corporation" or "Deckers" include the consolidated results of the Company +and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. +Deckers +Outdoor Corporation strives to be a premier lifestyle marketer that builds niche brands into global market leaders by designing and marketing innovative, functional and +fashion-oriented footwear and accessories, developed for both high performance outdoor activities and everyday casual lifestyle use. The Company's business is seasonal, with the highest percentage of +UGG® brand net sales occurring in the third and fourth quarters and the highest percentage of Teva® brand net sales occurring in the first and second quarters of each year. The +other brands do not have a significant seasonal impact on the Company. The Company owns 51% of a joint venture with an affiliate of Stella International Holdings Limited (Stella International) for the +primary purpose of opening and operating retail stores for the UGG brand in China. Stella International is also one of the Company's major manufacturers in China. In March 2009, the Company acquired +100% of the ownership interest of Ahnu, Inc., an outdoor performance and lifestyle footwear brand. In January 2010, the Company acquired certain assets and liabilities, including reacquisition +of its distribution rights, from its Teva distributor that sold to retailers in Belgium, the Netherlands, and Luxemburg (Benelux) as well as France. On September 30, 2010, the Company purchased +a portion of a privately held footwear company as an equity method investment. +On +May 28, 2010, the Company announced that the Company's Board of Directors authorized a three-for-one stock split to be effected in the form of a stock +dividend. Each stockholder of record received two additional shares of common stock for each share held on June 17, 2010, that was paid on July 2, 2010. All share and related information +presented in these consolidated financial statements and notes reflect the increased number of shares and decreased stock prices resulting from this stock split for all periods presented. +Inventories +Inventories, principally finished goods, are stated at the lower of cost (first-in, first-out) or market (net +realizable value). Cost includes initial molds and tooling that are amortized over the life of the mold in cost of sales. Cost also includes shipping and handling fees and costs, which are +subsequently expensed to cost of sales. Market values are determined by historical experience with discounted sales, industry trends and the retail environment. +Revenue Recognition +The Company recognizes revenue when products are shipped and the customer takes title and assumes risk of loss, collection of relevant +receivable is reasonably assured, persuasive evidence of an arrangement exists, and the sales price is fixed or determinable. Allowances for estimated returns, discounts, chargebacks, and bad debts +are provided for when related revenue is recorded. The Company presents revenue net of taxes collected from customers and remitted to governmental authorities. +F-8 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +Accounting for Long-Lived Assets +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. Intangible assets subject to amortization are amortized over their respective estimated useful lives to +their estimated residual values. The Company uses the straight-line method for depreciation and amortization of long-lived assets, because the Company cannot reliably determine +the pattern in which the economic benefits of the assets will be consumed. +Goodwill and Other Intangible Assets +Intangible assets consist primarily of goodwill, trademarks, and distributor relationships arising from the application of purchase +accounting. Intangible assets with estimable useful lives are amortized and reviewed for impairment. Goodwill and intangible assets with indefinite useful lives are not amortized, but are tested for +impairment at least annually, as of December 31, except for the Teva trademarks which are tested as of October 31. For 2010, the Company changed its +testing date for the Teva trademarks from December 31 to October 31 to allow it sufficient time to complete the analysis before its year-end reporting. 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 +assessment of goodwill impairment involves valuing the Company's reporting units that carry goodwill. Currently, the Company's reporting units are the same as the Company's operating +segments. The first step is a comparison of the fair value of the reporting unit with its carrying amount. If the fair value exceeds the carrying amount, the goodwill is not impaired. If the fair +value of the reporting unit is below the carrying amount, then a second step is performed to measure the amount of the impairment, if any. +The +Company also evaluates the fair values of other intangible assets with indefinite useful lives in relation to the carrying values. If the fair value of the indefinite life intangible +exceeds its carrying amount, no impairment charge will be recognized. If the fair value of the indefinite life intangible is less than the carrying amount, the Company will record an impairment charge +to write-down the intangible asset to its fair value. +Determining +fair value of goodwill and other intangible assets is highly subjective and requires the use of estimates and assumptions. The Company uses estimates including estimated +future revenues, royalty rates, discount rates, and market multiples, among others. The Company also considers the following factors: +• the assets' ability to continue to generate income from operations and positive cash flow in future periods; +• changes in consumer demand or acceptance of the related brand names, products or features associated with the assets; and +• other considerations that could affect fair value or otherwise indicate potential impairment. +F-9 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +In +addition, facts and circumstances could change, including further deterioration of general economic conditions or the retail environment, customers reducing orders in response to such +conditions and increased competition. These or other factors could result in changes to the calculation of fair value which could result in further impairment of the Company's remaining goodwill and +other intangible assets. Changes in any one or more of these estimates and assumptions could produce different financial results. +Depreciation and Amortization +Depreciation of property and equipment is calculated using the straight-line method based on estimated useful lives ranging +from two to ten years. Leasehold improvements are amortized on the straight-line basis over their estimated economic useful lives or the lease term, whichever is shorter. Leasehold +improvement lives range from one to fifteen years. The Company allocates depreciation and amortization of property, plant, and equipment to cost of sales and selling, general and administrative +expenses (SG&A). The majority of the Company's depreciation and amortization is included in SG&A expenses due to the nature of its operations. Most of the Company's depreciation is from its warehouse +and its retail stores. The Company outsources all manufacturing; therefore, the amount allocated to cost of sales is not material. +Fair Value of Measurements +The fair values of the Company's cash and cash equivalents, restricted cash, 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. The fair values of the +Company's long-term liabilities, if recalculated based on current interest rates, would not significantly differ from the recorded amounts. The fair value of the Company's derivatives are +measured and recorded at fair value on a recurring basis (see note 10 for further information). +The +inputs used in measuring fair value are prioritized into the following hierarchy: +• Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities. +• Level 2: Inputs other than quoted prices included within Level 1 that are either directly or indirectly +observable. +• Level 3: Unobservable inputs in which little or no market activity exists, therefore requiring an entity to develop +its own assumptions about the assumptions that market participants would use in pricing. +Short-term +investments are classified as available for sale and 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 income. The cost of securities sold is based on the specific identification method. +Securities with original maturities of three months or less are classified as cash equivalents. Those that mature over three months from their original date and in less than one year are classified as +short-term investments, as the funds are used for working capital requirements. The fair values of the Company's short-term investments are shown in the table below and +F-10 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +were +determined based on Level 1 inputs. The Company had no short-term investments at December 31, 2010. +December 31, 2009 +Cost +Unrealized +Gains +Fair Value +Government and agency securities +$ +26,118 +$ +2 +$ +26,120 +Total +$ +26,118 +$ +2 +$ +26,120 +Stock Compensation +Stock compensation cost is measured at the grant date based on the value of the award and is expensed ratably over the vesting period. +Determining the fair value of share-based awards at the grant date requires judgment, including estimating the percentage of awards that will be forfeited, stock volatility, the expected life of the +award, and other inputs. If actual forfeitures differ significantly from the estimates, stock compensation expense and the Company's results of operations could be materially impacted. +Nonqualified Deferred Compensation +The Company established a nonqualified deferred compensation program effective February 1, 2010 ("the Plan"). The Plan permits a +select group of management employees, designated by the Plan Committee, to defer earnings to a future date on a nonqualified basis. For each plan year, the Board may, but is not required to, +contribute any amount it desires to any participant under the Plan. The Company's contribution will be determined by the Board annually in the fourth quarter. No such contribution had been approved as +of December 31, 2010. All amounts deferred under +this plan are presented in long-term liabilities in the consolidated balance sheet. The Company has established a trust as a reserve for the benefits payable under the Plan. The amounts +deferred and the assets in trust related to the Plan were immaterial as of December 31, 2010. +Use of Estimates +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 US generally accepted accounting principles. Significant +areas requiring the use of management estimates relate to inventory reserves, accounts receivable reserves, stock compensation, impairment assessments, depreciation and amortization, income tax +liabilities and uncertain tax positions, fair value of financial instruments, and fair values of acquired intangibles, assets and liabilities. Actual results could differ materially from these +estimates. +Research and Development Costs +All research and development costs are expensed as incurred. Such costs amounted to $11,833, $8,111 and $5,619 in 2010, 2009 and 2008, +respectively, and are included in selling, general and administrative expenses in the consolidated statements of income. +F-11 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +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 2010, 2009 and 2008 were $33,104, $28,727, and $24,866 respectively. Included in prepaid and other current +assets at December 31, 2010 and 2009 were $368 and $601, respectively, related to prepaid advertising, marketing, and promotion expenses for programs to take place after December 31, +2010 and 2009, respectively. +Income Taxes +Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future +tax consequences attributable to temporary 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. +The +Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest +amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company accounts for interest +and penalties generated by income tax contingencies as interest expense in the consolidated statements of income. +Net Income per Share Attributable to Deckers Outdoor Corporation Common Stockholders +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, 2010, 2009, and 2008, the difference between the weighted-average number of basic and diluted common shares resulted from the dilutive impact of stock-based awards. +The +reconciliations of basic to diluted weighted-average common shares are as follows: +Year Ended December 31, +2010 +2009 +2008 +Weighted-average shares used in basic computation +38,615,000 +39,024,000 +39,126,000 +Dilutive effect of stock-based awards +677,000 +369,000 +459,000 +Weighted-average shares used for diluted computation +39,292,000 +39,393,000 +39,585,000 +All +options outstanding as of December 31, 2010, 2009, and 2008 were included in the computation of diluted income per share for 2010, 2009, and 2008, respectively. +The +Company included all nonvested stock units (NSUs) in the diluted income per share computation for 2010 and 2009 and excluded 5,000 contingently issuable shares of common stock +underlying its NSUs for 2008. For 2010, the Company included its stock appreciation rights (SARs) and restricted stock units +F-12 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +(RSUs) +for the awards that vested on December 31, 2010 that settled on March 1, 2011 (see note 6), but excluded those shares in 2009 and 2008. For 2010, 2009, and 2008, the +Company excluded the SARs and RSUs for the awards that are expected to vest on December 31, 2011 through December 31, 2016. The shares were excluded because the necessary conditions had +not been satisfied for the shares to be issuable based on the Company's performance through December 31, 2010, 2009 and 2008, respectively. +Foreign Currency Translation +The Company considers the US dollar as its functional currency. The Company has certain wholly-owned foreign subsidiaries with +functional currencies other than the US dollar. Gains and losses that arise from exchange rate fluctuations on sales and purchase transactions denominated in a currency other than the functional +currency are included in SG&A in the results of operations as incurred. +Derivative Instruments and Hedging Activities +The Company transacts business in various foreign currencies and has international sales and expenses denominated in foreign +currencies, subjecting the Company to foreign currency risk. The Company may enter into foreign currency forward or option contracts, generally with maturities of 12 months or less, to reduce +the volatility of cash flows primarily related to forecasted revenue denominated in certain foreign currencies. In addition, the Company utilizes foreign exchange forward and option contracts to +mitigate foreign currency exchange rate risk associated with foreign currency-denominated assets and liabilities, primarily intercompany balances. The Company does not use foreign currency contracts +for speculative or trading purposes. +The +Company enters into derivative contracts that it intends to designate as a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a +recognized asset or liability (cash flow hedge). The Company records the assets or liabilities associated with derivative instruments and hedging activities at fair value based on Level 2 +inputs in other current assets or other current liabilities, respectively, in the consolidated balance sheets. The Level 2 inputs consist of forward spot rates at the end of the reporting +period. The accounting for gains and losses resulting from changes in fair value depends on the use of the derivative and whether it is designated and qualifies for hedge accounting. +For +all hedging relationships, the Company formally documents the hedging relationship and its risk management objective and strategy for undertaking the hedge, the hedging instrument, +the hedged transaction, the nature of the risk being hedged, how the hedging instrument's effectiveness in offsetting the hedged risk will be assessed prospectively and retrospectively, and a +description of the method used to measure ineffectiveness. The Company also formally assesses, both at the inception of the hedging relationship and on an ongoing basis, whether the derivatives that +are used in hedging relationships are highly effective in offsetting changes in cash flows of hedged transactions. For derivative instruments that are designated and qualify as part of a cash flow +hedging relationship, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods +during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge +ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. +The +Company discontinues hedge accounting prospectively when it determines that the derivative is no longer effective in offsetting cash flows attributable to the hedged risk, the +derivative expires or is sold, terminated, or exercised, the cash flow hedge is dedesignated because a forecasted transaction is not probable of occurring, or management determines to remove the +designation of the cash flow hedge. In all +F-13 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +situations +in which hedge accounting is discontinued and the derivative remains outstanding, the Company continues to carry the derivative at its fair value on the balance sheet and recognizes any +subsequent changes in its fair value in earnings. When it is probable that a forecasted transaction will not occur, the Company discontinues hedge accounting and recognizes immediately in earnings +gains and losses that were accumulated in other comprehensive income related to the hedging relationship. +Some +foreign exchange contracts are not designated as hedging instruments for financial accounting purposes. Accordingly, any gains or losses resulting from changes in the fair value of +the non-designated contracts are reported in selling, general and administrative expenses in the consolidated statements of income. The gains and losses on these contracts generally offset +the gains and losses associated with the underlying foreign currency-denominated balances, which are also reported in selling, general and administrative expenses. See note 10 for the impact of +derivative instruments and hedging activities on the Company's consolidated financial statements. +Comprehensive Income +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 cash flow hedges and available for sale investments, the Company does not have any transactions and other economic events that +qualify as comprehensive income. +Business Segment Reporting +Management of the Company has determined its reportable segments are its strategic business units. The five reportable segments are the +UGG®, Teva®, and other brands wholesale divisions, the eCommerce business, and the retail store business. The Company performs an annual analysis of its reportable segments. +Information related to the Company's business segments is summarized in note 9. +Cash Equivalents +The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. +Reclassifications +Certain items in the prior years' consolidated financial statements have been reclassified to conform to the current presentation. +(2) Retirement Plan +The Company provides a 401(k) defined contribution plan that eligible employees may elect to participate through +tax-deferred contributions. The Company matches 50% of each eligible participant's tax-deferred contributions on up to 6% of eligible compensation on a per payroll period +basis, with a true-up contribution if such eligible participant is employed by the Company on the last day of the calendar year. Matching contributions totaled $2,472, $1,023 and $517 +during 2010, 2009, and 2008, respectively. In addition, the Company may also make discretionary profit sharing contributions to the plan. However, the Company did not make any profit sharing +contributions for the years ended December 31, 2010, 2009 or 2008. +F-14 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +(3) Property and Equipment +Property and equipment is summarized as follows: +December 31, +2010 +2009 +Machinery and equipment +$ +36,978 +$ +29,566 +Furniture and fixtures +8,986 +6,741 +Leasehold improvements +35,246 +23,019 +81,210 +59,326 +Less accumulated depreciation and amortization +33,473 +23,884 +Net property and equipment +$ +47,737 +$ +35,442 +(4) Notes Payable and Long-Term Debt +In May 2010, the Company and its subsidiary, TSUBO, LLC, entered into the Second Amended and Restated Credit Agreement with +Comerica Bank (the "Credit Agreement"). The Credit Agreement provides for a maximum availability of $20,000. Up to $12,500 of borrowings may be in the form of letters of credit. Amounts borrowed under +the Credit Agreement bears interest at the lender's prime rate or, at the Company's option, at the London Interbank Offered Rate, or LIBOR, plus 1.0%, and is secured by substantially all of the +Company's assets. The Credit Agreement includes annual commitment fees of $60 per year, which can be waived if the Company deposits $10,000 in non-interest bearing new deposits with +Comerica Bank; provided that such +deposits may be removed by the Company at any time, subject to paying a pro-rated annual commitment fee. The Credit Agreement expires on June 1, 2012. At December 31, 2010, +the Company had no outstanding borrowings under the Credit Agreement and outstanding letters of credit of $724. As a result, $19,276 was available under the Credit Agreement at December 31, +2010. +The +Credit Agreement contains certain financial covenants. The covenants currently include a maximum additional debt of $20,000, maximum asset sales of $5,000, maximum loans to employees +of $200, and maximum loans to subsidiaries who are not parties to the Credit Agreement of $25,000. The Credit Agreement contains certain financial covenants if the outstanding obligations exceed +$2,000, including a minimum tangible net worth requirement of $294,891 commencing with the fiscal year ended December 31, 2010 plus 75% of consolidated net profit on a cumulative basis, no +consolidated net loss for two or more consecutive fiscal quarters and maximum acquisitions of $25,000 per calendar year. +F-15 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +(5) Income Taxes +Components of income taxes are as follows: +Federal +State +Foreign +Total +2010: +Current +$ +71,032 +$ +16,764 +$ +3,648 +$ +91,444 +Deferred +(2,182 +) +377 +93 +(1,712 +) +$ +68,850 +$ +17,141 +$ +3,741 +$ +89,732 +2009: +Current +$ +48,523 +$ +10,350 +$ +2,123 +$ +60,996 +Deferred +4,752 +587 +(31 +) +5,308 +$ +53,275 +$ +10,937 +$ +2,092 +$ +66,304 +2008: +Current +$ +55,505 +$ +12,426 +$ +825 +$ +68,756 +Deferred +(18,129 +) +(3,768 +) +(228 +) +(22,125 +) +$ +37,376 +$ +8,658 +$ +597 +$ +46,631 +Foreign +income before income taxes was $43,327, $27,912 and $7,155 during the years ended December 31, 2010, 2009 and 2008, respectively. +Actual +income taxes differed from that obtained by applying the statutory federal income tax rate to income before income taxes as follows: +Years Ended December 31 +2010 +2009 +2008 +Computed "expected" income taxes +$ +87,517 +$ +64,105 +$ +42,212 +State income taxes, net of federal income tax benefit +10,566 +7,600 +5,904 +Foreign rate differential +(11,304 +) +(7,878 +) +(492 +) +Other +2,953 +2,477 +(993 +) +$ +89,732 +$ +66,304 +$ +46,631 +F-16 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +The +tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities at December 31, 2010 and 2009 are presented +below: +2010 +2009 +Deferred tax assets (liabilities), current: +Uniform capitalization adjustment to inventory +$ +3,127 +$ +1,995 +Bad debt and other reserves +7,365 +6,288 +State taxes +4,360 +2,771 +Prepaid expenses +(2,850 +) +(1,342 +) +Total deferred tax assets, current +12,002 +9,712 +Deferred tax assets (liabilities), noncurrent: +Amortization and impairment of intangible assets +6,262 +8,526 +Depreciation of property and equipment +(3,230 +) +(2,572 +) +Share-based compensation +11,105 +9,640 +Foreign currency translation +(1,062 +) +— +Deferred rent +1,245 +— +Other +63 +— +Net operating loss carryforwards +738 +1,110 +Total deferred tax assets, noncurrent +15,121 +16,704 +Net deferred tax assets +$ +27,123 +$ +26,416 +In +order to fully realize the deferred tax assets, the Company will need to generate future taxable income of $69,159. The deferred tax assets are primarily related to the Company's +domestic operations. The change in net deferred tax assets between December 31, 2010 and December 31, 2009 includes $1,005 attributable to other comprehensive income. Domestic taxable +income for the years ended December 31, 2010 and 2009 was $194,228 and $154,492, respectively. 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 was recorded in 2010 or 2009. +As +of December 31, 2010, withholding and US taxes have not been provided on approximately $85,000 of unremitted earnings of non-US subsidiaries because the Company has +reinvested these earnings permanently in such operations. Such earnings would become taxable upon the sale or liquidation of these subsidiaries or upon remittance of dividends. +When +tax returns are filed, some positions taken are subject to uncertainty about the merits of the position taken or the amount that would be ultimately sustained. The benefit of a tax +position is recognized in the financial statements in the period during which management believes it is more likely than not that the position will be sustained upon examination. Tax positions that +meet the more likely than not recognition threshold are measured as the largest amount of tax benefit that is more than 50% likely of being realized upon settlement. The portion of the benefits that +exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying consolidated balance sheets along with any associated interest and +penalties that would be payable to the taxing +F-17 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +authorities +upon examination. A reconciliation of the beginning and ending amounts of total unrecognized tax benefits is as follows: +Balance at December 31, 2008 +$ +2,269 +Gross increase related to current year tax positions +1,325 +Gross increase related to prior years' tax positions +1,505 +Lapse of statute of limitations +(88 +) +Balance at December 31, 2009 +$ +5,011 +Gross increase related to current year tax positions +2,235 +Settlements +(1,740 +) +Balance at December 31, 2010 +$ +5,506 +The +amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate as of December 31, 2010 was $3,175. Also, included in the balance of unrecognized +tax benefits at December 31, 2010 was $2,331 that, if recognized, would be recorded as an adjustment to long term deferred tax assets. For the year ended December 31, 2010, $361 of +interest generated by income tax contingencies was recognized in the consolidated statements of income. As of December 31, 2010 and 2009, $734 and $319, respectively, of interest was accrued in +the consolidated balance sheets. +The +Company files income tax returns in the US federal jurisdiction and various state, local and foreign jurisdictions. With few exceptions, the Company is no longer subject to US +federal, state, local or non-US income tax examinations by tax authorities for years before 2006. In March 2009, the Company acquired 100% of the ownership interest of Ahnu, Inc. +Ahnu, Inc. had approximately $2,600 in net operating loss carryforwards that were assumed as part of the acquisition, which are subject to limitations under Internal Revenue Code +Section 382. The Company expects to fully utilize all net operating loss deferred tax assets related to this acquisition over the next 5 to 6 years. Therefore, no valuation allowance was +recorded for these net operating losses. The Company's federal income tax returns for the years ended December 31, 2006 through December 31, 2009 are under examination by the Internal +Revenue Service. The Company does not know the timing of completion of the examination or if the examination will result in a material effect to the Company's consolidated financial statements. It is +reasonably possible that the Company's unrecognized tax benefit could +change, and the Company cannot determine if any such change will be material. The Company believes its unrecognized tax benefits are appropriately reported. +The +Company has on-going income tax examinations under various state tax jurisdictions. It is the opinion of management that these audits and inquiries will not have a +material impact on the Company's consolidated financial statements. +(6) Stockholders' Equity +In May 2006, the Company adopted the 2006 Equity Incentive Plan, which was amended by Amendment No. 1 dated May 9, 2007, +or 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 essential to the Company's continued +progress. The 2006 Plan provides for 6,000,000 shares of the Company's 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 4,500,000. Pursuant to the Deferred Stock Unit Compensation Plan, a Sub Plan under the 2006 Plan, a participant may +elect to defer settlement of their outstanding unvested awards until such time as +F-18 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +elected +by the participant. The 2006 Plan supersedes the Company's 1993 Stock Incentive Plan, as amended, or the 1993 Plan, which was subsequently terminated for new grants. +The +Company generally grants NSUs annually to key personnel. The NSUs granted 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. Most of these awards include vesting that is also subject to achievement of certain performance targets. +The +Company also has long-term incentive award agreements under the 2006 Plan for issuance of SAR awards and RSU awards to the Company's current and future executive +officers. These awards vest subject to certain long-term performance objectives and certain long-term service conditions. Provided that these conditions are met, +one-half of the SAR and RSU awards vest 80% on December 31, 2010 and 20% on December 31, 2011, and one-half of the SAR and RSU awards vest 80% on +December 31, 2015 and 20% on December 31, 2016. The awards that vested on December 31, 2010 were settled on March 1, 2011. The Company fully expensed these awards as of +December 31, 2010. The Company recognizes expense only for those awards that management deems probable of achieving the performance and service objectives. Prior to the beginning of the three +month period ended September 30, 2008, the Company did not believe that the achievement of the performance objectives +for the SAR and RSU awards with final vesting dates of December 31, 2016 was probable, and therefore the Company had not recognized compensation expense for those awards. However, as of +September 30, 2008, the Company determined that the achievement of the performance objectives for those awards was probable based on updated projections of future sales and diluted earnings per +share. As a result, the Company began recording compensation expense for those awards during the three months ended September 30, 2008 with an adjustment of $1,531 recorded to recognize the +cumulative to date compensation expense for those awards. +In +May 2009, the stockholders of the Company approved an amendment to the Company's Restated Certificate of Incorporation to increase the authorized number of shares of common stock from +20,000,000 shares to 50,000,000 shares. Subsequently, in May 2010, the stockholders approved another amendment to the Company's Restated Certificate of Incorporation to increase the authorized number +of shares of common stock from 50,000,000 to 125,000,000 shares. +In +June 2009, the Company announced that the Board of Directors approved a stock repurchase program to repurchase up to $50,000 of the Company's common stock in the open market or in +privately negotiated transactions, subject to market conditions, applicable legal requirements and other factors. The program does not obligate the Company to acquire any particular amount of common +stock and the program may be suspended at any time at the Company's discretion. The purchases will be funded from available working capital. During the year ended December 31, 2010, the Company +repurchased 230,000 shares for approximately $10,100, or an average price of $43.67 per share. As of December 31, 2010, the remaining approved amount for repurchases was approximately $20,000. +On +a quarterly basis, the Company generally grants fully-vested shares of its common stock to each of its outside directors. The fair value of such shares is expensed on the date of +issuance. +F-19 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +The +table below summarizes stock compensation amounts recognized in the consolidated statements of income: +Year Ended December 31, +2010 +2009 +2008 +Compensation expense recorded for: +NSUs +$ +7,915 +$ +5,652 +$ +4,344 +SARs +3,420 +5,287 +3,856 +RSUs +677 +994 +723 +Directors' shares +770 +1,083 +1,270 +Total compensation expense +12,782 +13,016 +10,193 +Income tax benefit recognized +(5,127 +) +(5,096 +) +(4,154 +) +Net compensation expense +$ +7,655 +$ +7,920 +$ +6,039 +In +the fourth quarter of 2010, one employee forfeited their SAR and RSU awards with final vesting dates of December 31, 2016. This resulted in a reversal of $544 and $89 of SAR +and RSU compensation expense, respectively, in 2010 that was recorded during the year, as well as in prior periods. +The +table below summarizes the total remaining unrecognized compensation cost related to nonvested awards and the weighted-average period over which the cost is expected to be recognized +as of December 31, 2010: +Unrecognized +Compensation +Cost +Weighted-Average +Remaining Vesting +Period (Years) +NSUs +$ +15,563 +1.9 +SARs +8,197 +4.4 +RSUs +1,286 +4.4 +Total +$ +25,046 +A +summary of the activity under the 1993 Plan and 2006 Plan are presented below. +F-20 +Table of Contents +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 +Number of +Shares +Weighted- +Average +Exercise +Price +Weighted- +Average +Remaining +Contractual +Term (Years) +Aggregate +Intrinsic +Value +Outstanding at January 1, 2008 +180,000 +$ +4.32 +5.2 +$ +8,490 +Granted +— +— +Exercised +(108,000 +) +3.71 +Forfeited or expired +— +— +Outstanding at December 31, 2008 +72,000 +$ +5.27 +4.2 +$ +1,503 +Granted +— +— +Exercised +(15,000 +) +9.43 +Forfeited or expired +— +— +Outstanding at December 31, 2009 +57,000 +$ +4.00 +3.3 +$ +1,827 +Granted +— +— +Exercised +(31,000 +) +3.16 +Forfeited or expired +— +— +Outstanding and exercisable at December 31, 2010 +26,000 +$ +4.91 +2.5 +$ +1,913 +As +of December 31, 2007, all options were vested. The total intrinsic value of options exercised during the years ended December 31, 2010, 2009 and 2008, was $1,121, $301 +and $3,731, respectively. +Nonvested Stock Units Issued Under the 2006 Plan +Number of +Shares +Weighted- +Average +Grant-Date +Fair Value +Nonvested at January 1, 2008 +717,000 +$ +13.55 +Granted +258,000 +42.59 +Vested +(171,000 +) +12.60 +Forfeited +(60,000 +) +17.44 +Nonvested at December 31, 2008 +744,000 +$ +23.52 +Granted +291,000 +17.80 +Vested +(288,000 +) +10.42 +Forfeited +(30,000 +) +26.34 +Nonvested at December 31, 2009 +717,000 +$ +26.34 +Granted +315,000 +45.99 +Vested +(208,000 +) +22.83 +Forfeited +(26,000 +) +25.98 +Nonvested at December 31, 2010 +798,000 +$ +35.61 +F-21 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +Stock Appreciation Rights Issued Under the 2006 Plan +Number of +Shares +Weighted- +Average +Exercise +Price +Weighted- +Average +Remaining +Contractual +Term (Years) +Aggregate +Intrinsic +Value +Outstanding at January 1, 2008 +1,200,000 +$ +26.73 +11.8 +$ +29,944 +Granted +— +— +Exercised +— +— +Forfeited +— +— +Outstanding at December 31, 2008 +1,200,000 +$ +26.73 +10.8 +$ +— +Granted +— +— +Exercised +— +— +Forfeited +— +— +Outstanding at December 31, 2009 +1,200,000 +$ +26.73 +9.8 +$ +8,608 +Granted +— +— +Exercised +— +— +Forfeited +(75,000 +) +26.73 +Outstanding at December 31, 2010 +1,125,000 +$ +26.73 +8.7 +$ +59,636 +Exercisable at December 31, 2010 +— +$ +— +— +$ +— +Expected to vest and exercisable at December 31, 2010 +1,053,000 +$ +26.73 +8.7 +$ +55,841 +The +maximum contractual term is 10 and 15 years from the date of grant for those SARs with final vesting dates of December 31, 2011 and December 31, 2016, +respectively. The number of SARs expected to vest is based on the probability of achieving certain performance conditions and is also reduced by estimated forfeitures. The difference between the +amount outstanding and the amount expected to vest and exercisable at December 31, 2010 was estimated forfeitures for estimated failure to meet the long-term service conditions. On +March 1, 2011, 480,000 SARs became exercisable. +F-22 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +Restricted Stock Units Issued Under the 2006 Plan +Number of +Shares +Weighted- +Average +Grant-Date +Fair Value +Nonvested at January 1, 2008 +159,000 +$ +26.73 +Granted +— +— +Vested +— +— +Forfeited +— +— +Nonvested at December 31, 2008 +159,000 +$ +26.73 +Granted +— +— +Vested +— +— +Forfeited +— +— +Nonvested at December 31, 2009 +159,000 +$ +26.73 +Granted +— +— +Vested +(64,000 +) +26.73 +Forfeited +(10,000 +) +26.73 +Nonvested at December 31, 2010 +85,000 +$ +26.73 +Expected to vest at December 31, 2010 +75,000 +$ +26.73 +The +number of RSUs expected to vest is based on the probability of achieving certain performance conditions and is also reduced by estimated forfeitures. The difference between the +amount nonvested and the amount expected to vest at December 31, 2010 was estimated forfeitures for estimated failure to meet the long-term service conditions. The Company issued +the 64,000 vested shares on March 1, 2011. +(7) Accumulated Other Comprehensive Income +Accumulated balances of the components within accumulated other comprehensive income are as follows: +December 31, +2010 +2009 +Cumulative foreign currency translation adjustment +$ +(413 +) +$ +492 +Unrealized gain on foreign currency hedging, net of tax +1,564 +— +Unrealized gain on short-term investments, net of tax +2 +2 +Accumulated other comprehensive income +$ +1,153 +$ +494 +F-23 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +(8) Commitments and Contingencies +The Company leases office, distribution and retail facilities under operating lease agreements, which expire through January 2024. Some +of the leases contain renewal options for approximately 2 to 10 years. Future minimum commitments under the lease agreements are as follows: +Year ending December 31: +2011 +$ +21,928 +2012 +21,144 +2013 +13,446 +2014 +12,855 +2015 +12,671 +Thereafter +38,160 +$ +120,204 +Rent +expense is recorded using the straight-line method to account for scheduled rental increases or rent holidays. Lease incentives for tenant improvement allowances are +recorded as reductions of rent expense over the lease term. The rental payments under some of our retail store leases are based on a minimum rental plus a percentage of the store's sales in excess of +stipulated amounts. The following schedule shows the composition of total rental expense. +Years Ended Decemer 31, +2010 +2009 +2008 +Minimum rentals +$ +18,551 +$ +13,707 +$ +10,526 +Contingent rentals +2,496 +1,147 +570 +$ +21,047 +$ +14,854 +$ +11,096 +The +Company had $189,988 of outstanding purchase orders with its manufacturers as of December 31, 2010. In addition, the Company entered into agreements of $6,439 for promotional +activities and other services. Future commitments under these purchase orders and other agreements are as follows: +Year ending December 31: +2011 +$ +191,593 +2012 +2,244 +2013 +1,490 +2014 +1,100 +$ +196,427 +In +addition to the amounts in the tables above, the Company has entered into other off-balance sheet arrangements. The Company agreed to make loans to its joint venture with +Stella International, should the need arise. As of December 31, 2010, the estimated remaining loans by Deckers were expected to be approximately $1,000. The Company owns 51% of the joint +venture. The Company also entered into or amended agreements with certain of its international distributors to assume control of the distribution rights in those regions. Under these agreements, the +Company is obligated to make total payments of +F-24 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +approximately +$12,000 in 2011. The payments include consideration for the purchase of certain assets and services. +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 Company's financial position or results of operations. In addition, the Company has agreed to indemnify certain of its licensees, distributors and promotional partners in +connection with claims related to the use of the Company's intellectual property. The terms of such agreements range up to five years initially and generally do not provide for a limitation on the +maximum potential future payments. Management believes the likelihood of any payments is remote and would be immaterial. The Company determined the risk was low based on a prior history of +insignificant claims. The Company is not currently involved in any indemnification matters in regards to its intellectual property. +(9) Business Segments, Concentration of Business, and Credit Risk and Significant Customers +In the first quarter of 2010, as part of a refinement of its business strategy, the Company combined its Simple® wholesale +reportable segment into the other wholesale reportable segment. None of the brands included in the other wholesale reportable segment met the quantitative thresholds for individual segment reporting, +and they share a majority of the aggregation criteria, thus permitting the Company to aggregate these brands for segment reporting purposes. This change in segment reporting did not have a material +impact on the Company's consolidated financial statements for any periods. The segment information for the years ended December 31, 2010, 2009 and 2008 has been adjusted retrospectively to +conform to the current period presentation. +The +Company's accounting policies of the segments below are the same as those described in the summary of significant accounting policies, except that the Company does not allocate +corporate overhead costs or non-operating income and expenses to segments. The Company evaluates segment performance primarily based on net sales and income or loss from operations. The +Company's reportable segments include the strategic business units for the worldwide wholesale operations of the UGG brand, Teva brand, and its other brands, its eCommerce business and its retail +store business. The wholesale operations of each brand are managed separately because each requires different marketing, research and development, design, sourcing and sales strategies. The eCommerce +and retail store segments are managed separately because they are direct to consumer sales, while the brand segments are wholesale sales. The income or loss 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, selling and marketing, depreciation, +amortization and the costs of employees and their respective expenses that are 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 centers, certain executive and stock compensation, accounting and finance, legal, information technology, human resources and +facilities costs, among others. The gross profit derived from the sales to third parties of the eCommerce and retail stores segments for the US is separated into two components: (i) the +wholesale profit is included in the related operating income or loss of each wholesale segment, and (ii) the retail profit is included in the operating income of the eCommerce and retail stores +segments. The gross profit of the international portion of the eCommerce and retail stores segments includes both the wholesale and retail profit. +The +Company's other brands include Simple®, TSUBO®, and Ahnu®. In May 2008, the Company acquired 100% of the ownership interest of TSUBO, LLC, +and in March 2009, the Company acquired 100% of the ownership interest of Ahnu, Inc. The wholesale operations of the Company's other brands are +F-25 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +included +as one reportable segment, other wholesale, presented in the figures below. Business segment information is summarized as follows: +Years Ended Decemer 31, +2010 +2009 +2008 +Net sales to external customers: +UGG wholesale +$ +663,854 +$ +566,964 +$ +483,781 +Teva wholesale +96,207 +71,952 +80,882 +Other brands wholesale +23,476 +19,644 +17,558 +eCommerce +91,808 +75,666 +68,769 +Retail stores +125,644 +78,951 +38,455 +$ +1,000,989 +$ +813,177 +$ +689,445 +Income (loss) from operations: +UGG wholesale +$ +305,132 +$ +232,712 +$ +187,824 +Teva wholesale(1) +16,379 +12,495 +(18,688 +) +Other brands wholesale(2) +(6,373 +) +(14,698 +) +(7,104 +) +eCommerce +23,541 +21,073 +22,364 +Retail stores +30,682 +18,498 +6,649 +Unallocated overhead +(120,273 +) +(88,833 +) +(74,126 +) +$ +249,088 +$ +181,247 +$ +116,919 +Depreciation and amortization: +UGG wholesale +$ +112 +$ +253 +$ +243 +Teva wholesale +2,024 +267 +346 +Other brands wholesale +1,125 +1,013 +241 +eCommerce +232 +210 +178 +Retail stores +3,018 +2,365 +790 +Unallocated overhead +5,772 +4,352 +3,484 +$ +12,283 +$ +8,460 +$ +5,282 +Capital expenditures: +UGG wholesale +$ +1,155 +$ +52 +$ +88 +Teva wholesale +150 +21 +25 +Other brands wholesale +226 +1,260 +268 +eCommerce +1,030 +304 +542 +Retail stores +11,296 +6,498 +7,323 +Unallocated overhead +9,191 +5,836 +14,091 +$ +23,048 +$ +13,971 +$ +22,337 +Total assets from reportable segments: +UGG wholesale +$ +194,028 +$ +130,493 +$ +158,726 +Teva wholesale +49,849 +31,105 +43,999 +Other brands wholesale +12,031 +11,551 +12,904 +eCommerce +4,053 +2,431 +2,726 +Retail stores +39,377 +27,931 +18,482 +$ +299,338 +$ +203,511 +$ +236,837 +(1) Included +in Teva income (loss) from operations in 2008 are impairment losses of $32,329. +(2) Included +in Other brands loss from operations in 2009 and 2008 are impairment losses of $1,000 (see note 12) and $3,496, respectively. +F-26 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +The +assets allocable to each reporting segment generally include accounts receivable, inventory, fixed assets, intangible assets and certain other assets that are +specifically identifiable with one of the Company's segments. Unallocated assets are the assets not specifically related to the segments and generally include cash and cash equivalents, +short-term investments, deferred tax assets, and various other assets shared by the Company's segments. Reconciliations of total assets from reportable segments to the consolidated balance +sheets are as follows: +December 31, +2010 +2009 +Total assets from reportable segments +$ +299,338 +$ +203,511 +Unallocated cash and cash equivalents and short-term investments +445,226 +341,982 +Unallocated deferred tax assets +27,123 +26,416 +Other unallocated corporate assets +37,307 +27,134 +Consolidated total assets +$ +808,994 +$ +599,043 +At +December 31, 2010, the Company had cash and cash equivalents of $445,226. A portion of these are held as cash in operating accounts that are with third party financial +institutions. These balances, at times, exceed the Federal Deposit Insurance Corporation (FDIC) insurance limits. While the Company regularly monitors the cash balances in its operating accounts and +adjusts the balances as appropriate, these cash balances could be impacted if the underlying financial institutions fail or are subject to other adverse conditions in the financial markets. As of +December 31, 2010, the Company had experienced no loss or lack of access to cash in its operating accounts. +The +remainder of the Company's cash equivalents is invested in interest bearing funds managed by third party investment management institutions. These investments can include US +treasuries and government agencies, money market funds, and municipal bonds, among other investments. Certain of these investments are subject to general credit, liquidity, market, and interest rate +risks. Investment risk has been and may further be exacerbated by US mortgage defaults and credit and liquidity issues, which have affected various sectors of the financial markets. As of +December 31, 2010, the Company had experienced no loss or lack of access to its cash and cash equivalents. +The +Company sells its products to customers throughout the US and to foreign customers located in Europe, Canada, Australia, Asia, and Latin America, among other regions. International +sales were 23.7%, 20.6%, and15.7% of the Company's total net sales for the years ended December 31, 2010, 2009 and 2008, respectively. As of December 31, 2010, no single foreign country +comprised more than 10% of total sales. The Company does not consider international operations a separate segment, as management reviews such operations in the aggregate with the aforementioned +segments. +F-27 +Table of Contents +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, 2008, substantially all long-lived assets were held in the US. As of December 31, 2010 and 2009, long-lived assets, which consist +of property and equipment, by major country were as follows: +December 31, +2010 +2009 +US +$ +36,591 +$ +27,405 +UK +6,753 +6,341 +All other countries* +4,393 +1,696 +Total +$ +47,737 +$ +35,442 +* No +other country's long-lived assets comprise more than 10% of total long-lived assets as of December 31, 2010 and 2009. +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 11.9%, 13.2%, and 15.0% of the Company's net sales in 2010, 2009 and 2008, respectively. This customer's revenues were generated from the UGG, Teva, and other wholesale +segments. No other customer accounted for more than 10% of net sales in the years ended December 31, 2010, 2009 or 2008. As of December 31, 2010, the Company had one customer +representing 33.2% and another customer representing 10.1% of net trade accounts receivable. As of December 31, 2009, the Company had one customer representing 28.0% of net trade accounts +receivable. +The +Company's production is concentrated at a limited number of independent contractor factories in China. The Company's sourcing is concentrated in Australia and China and include a +limited number of key sources for the principal raw material for certain UGG products, sheepskin. The Company's operations are subject to the customary risks of doing business abroad, including, but +not limited to, currency fluctuations, customs duties and related fees, various import controls and other nontariff barriers, restrictions on the transfer of funds, labor unrest and strikes and, in +certain parts of the world, political instability. The supply of sheepskin can be adversely impacted by weather conditions, disease, and harvesting decisions that are completely outside the Company's +control. Further, the price of sheepskin is impacted by demand, industry, and competitors. +(10) Foreign Currency Exchange Contracts and Hedging +Certain of the Company's foreign currency forward contracts are designated cash flow hedges of forecasted intercompany sales and are +subject to foreign currency exposures. These contracts allow the Company to sell Euros and British Pounds in exchange for US dollars at specified contract rates. As of December 31, 2010, the +Company's hedging contracts had notional amounts totaling approximately $66,000, held by two counterparties. At December 31, 2010, the outstanding contracts were expected to mature over the +next twelve months. Forward contracts are used to hedge forecasted intercompany sales over specific quarters. Changes in the fair value of these forward contracts designated as cash flow hedges are +recorded as a component of accumulated other comprehensive income within stockholders' equity, and are recognized in sales in the consolidated statement of income during the period which approximates +the time the corresponding third-party sales occur. +F-28 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +The +Company has factored into the fair value measurements of its derivatives the nonperformance risk of the Company and the counterparty, and it did not have a material impact on the +fair value of the derivatives. As of December 31, 2010, the fair value of the Company's designated and non-designated derivatives was $2,434 and $(95), respectively. The Company +assesses hedge effectiveness and measures hedge ineffectiveness at least quarterly. During the year ended December 31, 2010, the ineffective portion relating to these hedges was immaterial and +the hedges remained effective as of December 31, 2010. For the year ended December 31, 2010, gains and losses reclassified from accumulated other comprehensive income into income on the +Company's designated option contracts were zero, and the loss on the non-designated derivatives was $95. As of December 31, 2010, the total amount in accumulated other comprehensive +income (see note 7) is expected to be reclassified into income within the next twelve months. +(11) Quarterly Summary of Information (Unaudited) +Summarized unaudited quarterly financial data are as follows: +2010 +March 31 +June 30 +September 30 +December 31 +Net sales +$ +155,927 +$ +137,059 +$ +277,879 +$ +430,124 +Gross profit +77,907 +60,743 +130,953 +233,335 +Net income attributable to Deckers Outdoor Corporation +17,895 +8,966 +42,143 +89,231 +Net income per share attributable to Deckers Outdoor Corporation common stockholders: +Basic +$ +0.46 +$ +0.23 +$ +1.09 +$ +2.31 +Diluted +$ +0.46 +$ +0.23 +$ +1.07 +$ +2.27 +2009 +March 31 +June 30 +September 30 +December 31 +Net sales +$ +134,226 +$ +102,548 +$ +228,414 +$ +347,989 +Gross profit +58,913 +40,785 +97,951 +173,441 +Net income attributable to Deckers Outdoor Corporation* +12,340 +2,879 +33,825 +67,742 +Net income per share attributable to Deckers Outdoor Corporation common stockholders: +Basic +$ +0.31 +$ +0.07 +$ +0.87 +$ +1.76 +Diluted +$ +0.31 +$ +0.07 +$ +0.86 +$ +1.74 +* Included +in the quarter ended June 30, 2009 is an impairment loss of $1,000 (see note 12). +F-29 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +(12) Goodwill and Other Intangible Assets +Most of the Company's goodwill is related to the UGG reportable segment. The Company's goodwill and other intangible assets are +summarized as follows: +Gross +Carrying +Amount +Weighted- +Average +Amortization +Period +Accumulated +Amortization +Net Carrying +Amount +As of December 31, 2010 +Intangibles subject to amortization +$ +5,854 +7 years +$ +2,895 +$ +2,959 +Intangibles not subject to amortization: +Trademarks +15,452 +Goodwill +6,507 +Total goodwill and other intangible assets +$ +24,918 +As of December 31, 2009 +Intangibles subject to amortization +$ +4,080 +8 years +$ +2,099 +$ +1,981 +Intangibles not subject to amortization: +Trademarks +15,452 +Goodwill +6,507 +Total goodwill and other intangible assets +$ +23,940 +Changes +in the Company's goodwill are summarized as follows: +Goodwill, +Gross +Accumulated +Impairment +Goodwill, Net +Balance at December 31, 2008 +$ +21,526 +$ +(15,425 +) +$ +6,101 +Additions through acquisitions +406 +— +406 +Balance at December 31, 2009 +$ +21,932 +$ +(15,425 +) +$ +6,507 +Additions through acquisitions +— +— +— +Balance at December 31, 2010 +$ +21,932 +$ +(15,425 +) +$ +6,507 +As +of December 31, 2010 and 2009, the Company performed its annual impairment tests and evaluated its UGG and other brands' goodwill. Also, as of October 31, 2010 and +December 31, 2009, the company evaluated its Teva trademarks. Based on the carrying amounts of the UGG, Teva, and other brands' goodwill, trademarks, and net assets, the brands' 2010 and 2009 +sales and operating results, and the brands' long-term forecasts of sales and operating results as of December 31, 2010 and 2009, the Company concluded that the carrying amounts of +the UGG and other brands' goodwill, as well as the Teva trademarks, were not impaired. All goodwill and other intangibles were evaluated based on Level 3 inputs. +As +of June 30, 2009, the Company did not reach its 2009 TSUBO brand period-to-date sales targets and reduced its long-term forecast for TSUBO +brand sales. These factors were indicators that the TSUBO intangible assets were possibly impaired. As a result, the Company conducted an interim impairment evaluation of the TSUBO intangible assets +as of June 30, 2009 and concluded that the fair value of the TSUBO trademarks was lower than the carrying amount. Therefore, the Company recognized an impairment loss of $1,000 on the TSUBO +trademarks during the three months ended June 30, 2009. The impairment loss is included as a part of the other wholesale reportable segment and is reported in a +F-30 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +separate +line item within the Company's income from operations. The TSUBO trademarks were evaluated using a relief from royalty method, primarily based on management's forecasted sales, a royalty +rate, and discount rates. +Aggregate +amortization expense for amortizable intangible assets using the straight-line amortization method for the years ended December 31, 2010, 2009 and 2008 was +$2,598, $388, and $208 respectively. Amortization expense on existing intangible assets for the next five years is expected to be between $800 and $150 per year. +F-31 +Table of Contents +Schedule II +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +VALUATION AND QUALIFYING ACCOUNTS +Three Years Ended December 31, 2010, 2009 and 2008 +Balance at Beginning of Year +Additions +Deductions +Balance at End of Year +Year ended December 31, 2010: +Allowance for doubtful accounts(1) +$ +2,710 +$ +(763 +) +$ +568 +$ +1,379 +Allowance for sales discounts(2) +2,796 +26,514 +23,491 +5,819 +Allowance for sales returns(3) +3,235 +20,726 +19,922 +4,039 +Chargeback allowance(4) +3,049 +(253 +) +261 +2,535 +Year ended December 31, 2009: +Allowance for doubtful accounts(1) +$ +2,482 +$ +399 +$ +171 +$ +2,710 +Allowance for sales discounts(2) +4,241 +22,630 +24,075 +2,796 +Allowance for sales returns(3) +2,335 +15,947 +15,047 +3,235 +Chargeback allowance(4) +1,648 +1,644 +243 +3,049 +Year ended December 31, 2008: +Allowance for doubtful accounts(1) +$ +379 +$ +2,233 +$ +130 +$ +2,482 +Allowance for sales discounts(2) +3,218 +19,193 +18,170 +4,241 +Allowance for sales returns(3) +3,687 +5,506 +6,858 +2,335 +Chargeback allowance(4) +1,071 +635 +58 +1,648 +(1) The +additions to the allowance for doubtful accounts represent the estimates of our bad debt expense based upon the factors for which we evaluate the +collectability of our accounts receivable, with actual recoveries netted into additions. Deductions are the actual write offs of the receivables. In 2010, the additions were negative due to recoveries +of amounts reserved as of December 31, 2009. +(2) The +additions to the reserve for sales discounts represent estimates of discounts to be taken by our customers based upon the amount of available +outstanding terms discounts in the year-end aging. Deductions are the actual discounts taken by our customers. +(3) The +additions to the allowance for returns represent estimates of returns based upon our historical returns experience. Deductions are the actual returns of +products. +(4) The +additions to the chargeback allowance represent chargebacks taken in the respective year as well as an estimate of chargebacks related to sales in the +respective reporting period that will be taken subsequent to the respective reporting period. Deductions are the actual chargebacks written off against outstanding accounts receivable. The Company has +estimated the additions and deductions by netting each quarter's change and summing the four quarters for the respective year. +See +accompanying report of independent registered public accounting firm. +F-32 \ No newline at end of file diff --git a/raw/filings/0000910521/2010/0001047469-11-001618/filing_metadata.csv b/raw/filings/0000910521/2010/0001047469-11-001618/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..0a7a6d8a0cba357900100253aab6ef8e5c030baf --- /dev/null +++ b/raw/filings/0000910521/2010/0001047469-11-001618/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000910521,DECK,DECKERS OUTDOOR CORP,10-K,2011-03-01,2010-12-31,2011-03-01T20:36:48.000Z,0001047469-11-001618,a2202162z10-k.htm,10-K,4852486,1,0,https://www.sec.gov/Archives/edgar/data/910521/000104746911001618/a2202162z10-k.htm,https://www.sec.gov/Archives/edgar/data/910521/000104746911001618/,2010,2010,1 diff --git a/raw/filings/0000910521/2010/0001047469-11-001618/rp_note.txt b/raw/filings/0000910521/2010/0001047469-11-001618/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000910521/2010/0001047469-11-001618/rpt_disclosure.txt b/raw/filings/0000910521/2010/0001047469-11-001618/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..0e01b60bc307632b83ae5c1c1c2092b7ac5911a3 --- /dev/null +++ b/raw/filings/0000910521/2010/0001047469-11-001618/rpt_disclosure.txt @@ -0,0 +1,30 @@ +Certain Relationships and Related Person Transactions +The Company's legal department is primarily responsible for identifying and reviewing relationships and transactions in which the Company and our directors, +executive officers, certain of our stockholders or their immediate family members are participants to determine whether any of these related persons had or will have a direct or indirect material +interest. In order to identify potential related person transactions, the Company's legal department annually prepares and distributes to all directors and executive officers a written questionnaire +which includes questions intended to elicit information about any related person transactions. In addition, the Company's Code of Business Conduct and Ethics addresses conflicts of interest where an +individual's private interests interfere or conflict with the interests of the Company, including relationships with suppliers, customers or competitors. Conflicts of interest which might impair or +appear to impair the exercise of judgment solely for the benefit of the +Company are prohibited. In general, such conflicts must be approved by the legal department, the employee's supervisor or, in the case of directors, the Audit Committee. Information regarding +potential conflicts of interests in violation of the Company's Code of Business Conduct and Ethics may be reported to the Company's anonymous reporting hotline and may be subsequently obtained by the +Chair of the Audit Committee, the Chair of the Board of Directors and the highest ranking manager of internal audit. +If +a related person transaction is identified by the legal department as one which must be reported in the Company's Proxy Statement pursuant to applicable SEC regulations, the Audit +Committee is responsible for reviewing and approving or ratifying any such related person transactions. In evaluating related person transactions, the Audit Committee members apply the same standards +of good faith and fiduciary duty they apply to their general responsibilities as the Audit Committee and as individual directors. The Audit Committee may approve a related person transaction when, in +its good faith judgment, the transaction is in the best interests of the Company. +There +were no disclosable transactions with related persons under Item 404 of Regulation S-K during the fiscal year ended December 31, 2011 nor are any +such transactions currently proposed. +60 +Limitation of Liability and Indemnification of Directors and Officers +Our Certificate of Incorporation and Bylaws provide that we shall indemnify directors and executive officers to the fullest extent now or hereafter permitted by +the Delaware General Corporation Law (DGCL). In addition, we have entered into indemnification agreements with our directors and executive officers in which we agree to indemnify such persons to the +fullest extent now or hereafter permitted by the DGCL. +We +have obtained a liability policy for our directors and officers as permitted by the DGCL which extends to, among other things, liability arising under the Securities Act of 1933, as +amended. +We +maintain an insurance policy pursuant to which our directors and officers are insured, within the limits and subject to the limitations of the policy, against specified expenses in +connection with the defense of claims, actions, suits or proceedings, and liabilities which might be imposed as a result of such claims, actions, suits or proceedings, that may be brought against them +by reason of their being or having been directors or officers. \ No newline at end of file diff --git a/raw/filings/0000910521/2011/0001047469-12-001917/filing.txt b/raw/filings/0000910521/2011/0001047469-12-001917/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..5bf9984301877042db78ebb65b2f90fb839b2a6c --- /dev/null +++ b/raw/filings/0000910521/2011/0001047469-12-001917/filing.txt @@ -0,0 +1,6191 @@ +10-K +1 +a2207209z10-k.htm +10-K +Table of Contents +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +FORM 10-K +(Mark one) +ý +ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the fiscal year ended December 31, 2011 +or +o +TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the transition period +from to +Commission File No. 0-22446 +DECKERS OUTDOOR CORPORATION +(Exact name of registrant as specified in its charter) +Delaware +(State or other jurisdiction of +incorporation or organization) +95-3015862 +(I.R.S. Employer +Identification No.) +495-A South Fairview Avenue, Goleta, California +(Address of principal executive offices) +93117 +(Zip Code) +Registrant's telephone number, including area code: (805) 967-7611 +Securities registered pursuant to Section 12(b) of the Act: None +Title of each class +Name of each exchange on which registered +Common Stock, Par value $0.01 per share +NASDAQ Global Select Market +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 o No ý +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 ý +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 ý No o +Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and +posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the +registrant was required to submit and post such files). Yes ý No o +Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not +contained herein, and will not be contained to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this +Form 10-K or any amendment to this Form 10-K. o +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting +company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. +Large accelerated filer ý +Accelerated filer o +Non-accelerated filer o +(Do not check if a smaller reporting company) +Smaller reporting company 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 ý +The aggregate market value of the common stock held by non-affiliates of the registrant was $3,255,935,670 based on the June 30, 2011 closing price of $88.14 +on the NASDAQ Global Select Market on such date. +The +number of shares of the registrant's Common Stock outstanding at February 15, 2012 was 38,693,544. +DOCUMENTS INCORPORATED BY REFERENCE +Portions +of the registrant's definitive proxy statement relating to the registrant's 2012 annual meeting of stockholders, which will be filed pursuant to Regulation 14A within 120 days +after the end of the registrant's fiscal year ended December 31, 2011, are incorporated by reference in Part III of this Annual Report on Form 10-K. +Table of Contents +DECKERS OUTDOOR CORPORATION +For the Fiscal Year Ended December 31, 2011 +Table of Contents to Annual Report on Form 10-K +Page +PART I +Item 1. +Business +2 +Item 1A. +Risk Factors +10 +Item 1B. +Unresolved Staff Comments +20 +Item 2. +Properties +21 +Item 3. +Legal Proceedings +21 +Item 4. +Mine Safety Disclosures +21 +PART II +Item 5. +Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +22 +Item 6. +Selected Financial Data +25 +Item 7. +Management's Discussion and Analysis of Financial Condition and Results of Operations +26 +Item 7A. +Quantitative and Qualitative Disclosures about Market Risk +47 +Item 8. +Financial Statements and Supplementary Data +48 +Item 9. +Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +48 +Item 9A. +Controls and Procedures +48 +Item 9B. +Other Information +49 +PART III +Item 10. +Directors, Executive Officers and Corporate Governance +50 +Item 11. +Executive Compensation +50 +Item 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +50 +Item 13. +Certain Relationships and Related Transactions, and Director Independence +50 +Item 14. +Principal Accounting Fees and Services +50 +PART IV +Item 15. +Exhibits, Financial Statement Schedules +51 +Signatures +54 +1 +Table of Contents +SPECIAL NOTE ON 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 Exchange 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 global business, growth, operating, investing, and financing strategies; +• our product, distribution channel, and geographic mix; +• the success of new products, new brands, and other growth initiatives; +• the impact of seasonality on our operations; +• expectations regarding our net sales and earnings growth and other financial metrics; +• our development of worldwide distribution channels; +• trends affecting our financial condition, results of operations, or cash flows; +• our expectations for expansion of our retail and eCommerce capabilities; +• overall global economic trends; and +• reliability of overseas factory production and storage and availability of raw materials. +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 Part I, 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 read this report in its entirety, together with the documents that we file 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. +PART I +References in this Annual Report on Form 10-K to "Deckers", "we", "our", "us", or the "Company" refer to Deckers +Outdoor Corporation together with its consolidated subsidiaries. Ahnu®, Deckers®, MOZO®, Sanuk®, Simple®, Teva®, +TSUBO®, and UGG® are some of our trademarks. Other trademarks or trade names appearing elsewhere in this report are the property of their respective owners. +Item 1. Business. +Unless otherwise specifically indicated, all amounts in Item 1. and Item 1A. herein are expressed in thousands, except +for employees, share quantity, per share data, and selling prices. +2 +Table of Contents +General +Deckers Outdoor Corporation was incorporated in 1975 under the laws of the State of California and, in 1993, reincorporated under the +laws of the State of Delaware. We strive to be a premier lifestyle marketer that builds niche brands into global market leaders by designing and marketing innovative, functional and fashion-oriented +footwear developed for both high performance outdoor activities and everyday casual lifestyle use. We believe that our footwear is distinctive and appeals broadly to men, women and children. We sell +our products, including accessories such as handbags and outerwear, through quality domestic and international retailers, international distributors, and directly to end-user consumers +both domestically and internationally, through our websites, call centers, retail concept stores and retail outlet stores. Our primary objective is to build our footwear lines into global lifestyle +brands with market leadership positions. We seek to differentiate our brands and products by offering diverse lines that emphasize authenticity, functionality, quality, and comfort and products +tailored to a variety of activities, seasons, and demographic groups. Virtually all of our products are currently manufactured by independent contractors outside of the United States (US). Our +continued growth will depend upon the broadening of our products offered under each brand, the appeal of our products to our consumers, expanding domestic and international distribution, successfully +opening new retail stores, increasing sales to consumers, and developing or acquiring new brands. +In +July 2008, we entered into a joint venture agreement with an affiliate of Stella International Holdings Limited ("Stella International") for the opening of retail stores and wholesale +distribution for the UGG brand in China. The joint venture is owned 51% by Deckers and 49% by Stella International. Stella International is also one of our major manufacturers in China. In May 2008, +we acquired 100% of the ownership interest of TSUBO, LLC, a high-end casual footwear brand. In March 2009, we acquired 100% of the ownership interest of Ahnu, Inc., an +outdoor performance and lifestyle footwear brand. In September 2009, we began to reacquire our international distribution rights, beginning in Japan. In January 2010, we acquired certain assets and +liabilities, including reacquisition of our distribution rights, from our Teva distributor that sold to retailers in Belgium, the Netherlands, and Luxemburg (Benelux) as well as France. In September +2010, we purchased a portion of a privately held footwear company as an equity method investment. In January 2011, we acquired certain assets from our UGG, Teva, and Simple brands distributor that +sold to retailers in the United Kingdom (UK) and from our UGG and Simple brands distributor that sold to retailers in Benelux and France. The distribution rights in these regions reverted back to us +on December 31, 2010 upon the expiration of the distribution agreements. On May 19, 2011, we entered into an asset purchase agreement with Sanuk USA LLC, C&C +Partners, Ltd., and the equity holders of both entities (collectively referred to as "Sanuk" or the "Sanuk brand"). On July 1, 2011, we completed the acquisition of the purchased assets +and the assumption of the assumed liabilities of the Sanuk brand. Our consolidated financial statements include the operations of Sanuk beginning July 1, 2011. +Products +We market our products primarily under three proprietary brands: +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 end-user consumer reception, driven by consistent introductions of new styles in the fall and spring seasons, as well as year-round styles. +We have also strategically expanded our geographic distribution as well as our consumer base with more men's products. Additionally, we have broadened the brand into additional product categories +beyond footwear, such as handbags, apparel, and cold weather accessories. We carefully manage the distribution of our UGG products within higher-end specialty and department store +retailers in order to best reach our target consumers, preserve the UGG brand's retail channel positioning and maintain the UGG brand's position as a mid- to upper-price luxury brand. +3 +Table of Contents +In +recent years, sales of UGG products have benefited from significant national media attention and celebrity endorsement through our marketing programs and product placement activities, +raising the profile of our UGG brand as a luxury comfort brand. We have further supported the UGG brand's market positioning by expanding the selection of styles available in order to build consumer +interest in our UGG brand collection. We also remain committed to limiting distribution of UGG products to higher-end retail channels. +Teva®. Teva is our outdoor performance and lifestyle brand and pioneer of the sport sandal market. We have expanded the Teva +product line +over time to include open and closed-toe outdoor lifestyle footwear, as well as additional outdoor performance footwear, including multi-sport shoes, light hiking shoes, amphibious +footwear, and rugged outdoor travel shoes. +In +recent years, we have focused on regaining our leadership position in the performance sandal market, while broadening our performance platform to include other outdoor activities such +as multi-sport, light hiking, and freestyle mountain bike riding to lessen our overall reliance on sandal +sales, while bringing youthfulness back to the brand through contemporary designs, colors, and materials. Throughout 2010 and 2011, we have continued to expand our closed-toe offering in +both performance and lifestyle outdoor footwear. This includes a closed-toe line extension of our popular Mush™ flip flop collection, as well as a line of insulated outdoor +boots. +Sanuk®. Sanuk is our action sport footwear brand rooted in the surf community. The Sanuk brand's offerings include the +patented SIDEWALK +SURFERS® shoe which effectively introduced the deconstructed footwear movement, the Fraid Not™ sandal collection, and the Yoga Mat sandal made from yoga mat material. The brand +has a history of innovation, product invention, foot-friendly comfort, and clever branding. +In +recent years, Sanuk products have been twice recognized at the Surf Industry Manufacturers Association (SIMA) Image Awards as the 2007 and 2010 Footwear Product of the Year. The +brand's SIDEWALK SURFERS are marketed through the "THESE ARE NOT SHOES, THEY'RE SANDALS®" campaign, in reference to its patented sandal construction, which allows the consumers feet to +bend and flex in natural comfort. We plan to continue to build on the Sanuk brand's authentic position in the surf and outdoor markets through its relationships with prominent professional athletes, +including surfers, bouldering athletes, and rock climbers, known as much for their unique personal styles and charisma as for their specialized talents. +In +addition to our primary brands, our other brands include TSUBO, a line of high-end casual footwear that incorporates style, function, and maximum comfort; Ahnu, a line of +outdoor performance and lifestyle footwear; MOZO, a line of footwear that combines running shoe technology with work shoe toughness for individuals that spend long hours working on their feet; and +Simple, a line for which we ceased distribution effective December 31, 2011. +Sales and Distribution +At the wholesale level, we distribute our products in the US through a dedicated network of independent sales representatives, as well +as through employee sales representatives who serve as territory representatives or key account executives for several of our largest customers. Our sales representatives are organized geographically +and by brand and visit retail stores to communicate the features, styling, and technology of our products. In addition to our wholesale business, we also sell products directly to consumers through +our websites and retail stores. Our brands are generally advertised and promoted through a variety of consumer media campaigns. We benefit from editorial coverage in both consumer and trade +publications. Each brand's dedicated marketing team works closely with targeted accounts to maximize advertising and promotional effectiveness. We also manage brand marketing on a global basis to +ensure consistent consumer +communications in all regions and channels. We determine our global communication plans based on brand strategies, consumer insights, and return on investment measures. +4 +Table of Contents +Our +sales force is generally separated by brand, as each brand generally has certain specialty consumers; however, there is overlap between the sales teams and customers. We have aligned +our brands' sales forces to position them for the future of the brands. Each brand's respective sales manager recruits and manages their network of sales representatives and coordinates sales to +national accounts. We believe this approach for the US market maximizes the selling efforts to our national retail accounts on a cost-effective basis. +We +distribute products sold in the US through our distribution centers in Ventura and Camarillo, California. Our distribution centers feature a warehouse management system that enables +us to efficiently pick and pack products for direct shipment to customers. For certain customers requiring special handling, each shipment is pre-labeled and packed to the retailer's +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 quality inspection process. +Internationally, +we distribute our products through independent distributors and retailers in many countries, including countries throughout Europe, Asia Pacific, Canada, and Latin +America, among others. In addition, as we do in the US, in certain countries, we sell products directly to international consumers through our websites and our retail stores, including retail stores +with our joint venture partner in China. For our wholesale and direct to consumer businesses, we operate distribution centers in certain international locations and utilize third-party distribution +companies in other countries. We may also work with trading companies for importation, as needed. Our principal wholesale customers include specialty retailers, selected department stores, outdoor +retailers, sporting goods retailers, shoe stores, and online retailers. In 2011, we continued to assume the distribution rights from certain international distributors and sold directly to retailers +in those regions. We plan to selectively continue distributor conversions in the future. +Our +five largest customers accounted for approximately 24.0% of our net sales for 2011, compared to 28.9% for 2010. No single customer accounted for greater than 10% of our consolidated +net sales in 2011. One customer, Nordstrom, accounted for greater than 10% of our consolidated net sales in 2010, with the majority of those being related to our UGG segment. +UGG. We sell our UGG footwear and accessories primarily through higher-end +department stores such as Nordstrom, Neiman Marcus and Bloomingdale's, as well as independent specialty retailers such as Journey's and David Z., and internet customers such as Zappos.com. 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. +Teva. We sell our Teva footwear primarily through specialty outdoor and sporting goods retailers such as REI, L.L. Bean, Dick's +Sporting Goods, and +The Sports Authority as well as on-line retailers such as Zappos.com. 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 performance products to the consumer are +best equipped to sell our Teva footwear. +Sanuk. We sell our Sanuk footwear primarily through independent action sports retailers including specialty surf and skate shops, +outdoor retailers +such as REI, EMS, and Bass Pro, specialty retailers including Fred Segal and Nordstrom, and larger national chains including Journeys, Dillards, and The Buckle. We believe these retailers showcase the +brand's creativity, fun, and comfort and allow us to effectively reach our target consumers for this brand. +Other brands. Our other brands are sold throughout the world primarily at better department stores, outdoor specialty accounts, +independent specialty +retailers, and with online retailers that support our brand ideals of comfort, style, and quality. Key accounts of our other brands include Nordstrom, Dillard's, Hanigs, REI, and Zappos.com. +5 +Table of Contents +eCommerce. Our eCommerce business enables us to interact and reinforce our relationships with the consumer. We operate our +eCommerce business +primarily through the Uggaustralia.com, Teva.com, Sanuk.com, Tsubo.com, Ahnu.com, and Mozoshoes.com websites. Our websites support the brands' marketing goals and drive offline sales by educating our +consumers about our brands and products and also directing consumers to retailers that carry our brands, including our own retail stores. We have expanded our international capabilities by developing +sites to service certain international markets. These sites are translated into the local language, provide product through local distribution centers and price the products in the consumers' local +currency. In 2011, we launched sites in the UK, +Netherlands, France, Japan, and Canada. Our eCommerce business has offices in Flagstaff, Arizona; Richmond, England; and Tokyo, Japan. In order to reduce the cost of order fulfillment, minimize out of +stock positions, and further leverage our distributions centers' operations, order fulfillment is performed by our distribution centers in California, the UK, Canada, and Japan. Products sold through +our eCommerce business are sold at prices which approximate retail prices, enabling us to capture the full retail margin on each direct to consumer transaction. +Retail Stores. Our retail stores include company-owned stores as well as stores owned with our joint venture partner in China. +Our retail store +business allows us to directly reach our consumers and meet the growing demand for our products. In addition, our UGG Australia concept stores allow us to showcase the entire lines for spring and +fall; whereas, most retailers do not carry our full line. In 2011, we opened one store in the US and seventeen internationally. As of December 31, 2011, we had a total of 34 UGG Australia +concept stores and 11 retail outlet stores worldwide. Products sold through our concept stores are sold at our suggested retail prices, enabling us to capture the full retail margin on each direct to +consumer transaction. The outlet stores sell some of our discontinued styles from the previous season, plus products made specifically for the outlet stores. During 2012, we plan to open additional +retail stores in the US and internationally. +Product Design and Development +The design and product development staff for each of our brands creates 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 freelance designers. By +utilizing outside designers, 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. Refer +to Note 1 to our accompanying consolidated financial statements for a discussion of our research and development costs for the last three years. +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 and accessories for our various product lines. We develop detailed drawings and prototypes of our new products to aid in conceptualization and to ensure our contemplated +new products meet the standards for innovation and performance that our consumers demand. Throughout the development process, we have multiple design and development reviews, which we then coordinate +with our independent manufacturers. This ensures that we are addressing the needs of our consumers and are working 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 products; we outsource the production of our brand footwear to independent manufacturers primarily in China. +During 2009, we began to diversify our manufacturing locations by outsourcing a limited amount of production to manufacturers in Vietnam, and in 2010 and 2011 increased this production volume while +also opening manufacturing locations in 2011 in the US and +6 +Table of Contents +Latin +America. We require our independent contract manufacturers and designated suppliers to adopt our Supplier Code of Conduct, which specifies that they comply with all local laws and regulations +governing human rights, working conditions, and environmental compliance before we are willing to conduct business with them. Our Supplier Code of Conduct applies to all of our manufacturers, +distributors, vendors, and other independent contractors. We also require our manufacturing partners to comply with our Ethical Supply Chain guidelines and Restricted Substances policy as a condition +of doing business with our company. 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. We maintain an +on-site supervisory office in Pan Yu City, China that serves 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. To ensure the production of high quality products, the majority 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 generally +outsource our manufacturing requirements on the basis of individual purchase orders or short-term purchase commitments 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 for our products primarily +from Australia, Europe, and the US. We maintain constant communication with the tanneries to monitor the supply of sufficient high quality sheepskin available for our projected UGG brand production. +To +ensure adequate supplies for our manufacturers, we forecast our usage of sheepskin in advance at a forward price. We believe current supplies are sufficient to meet our needs in the near future, but +we continue to investigate our options to accommodate any unexpected future growth. +We +have instituted pre-production, in-line, and post-production inspections to meet or exceed the high quality demanded by us and consumers of our +products. Our quality assurance program includes our own employee 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 distribution centers. +Patents and Trademarks +We utilize trademarks on nearly all of our products and believe that having distinctive marks that are readily identifiable is an +important factor in creating a market for our goods, in identifying the Company, and in distinguishing our goods from the goods of others. We currently hold trademark registrations for UGG, Teva, +Sanuk, Simple, TSUBO, Ahnu, MOZO, and other marks in the US and in many other countries, including the countries of the European Union, Canada, China, Japan and Korea. We now hold more than 150 +utility and design patent registrations in the US and abroad and have filed more than 15 new patent applications which are currently pending. These patents expire at various times; US patents that are +registered this year will remain valid to 2026 for design patents and to 2032 for utility patents. We regard our proprietary rights as valuable assets and vigorously protect such rights against +infringement by third parties. No single patent is critical to our business, and no group of patents expiring in the same year is critical to our business. +7 +Table of Contents +Seasonality +Our business is seasonal, with the highest percentage of UGG brand net sales occurring in the third and fourth calendar quarters and +the highest percentage of Teva and Sanuk brand net sales occurring in the first and second calendar quarters of each year. Our financial results include the Sanuk brand beginning July 1, 2011. +Our total net sales in the last half of the year have exceeded that for the first half of the year, and we expect this trend to continue. Our other brands do not have a significant seasonal impact on +our business. Nonetheless, actual results could differ +materially depending upon consumer preferences, availability of product, competition, and our wholesale and distributor customers continuing to carry and promote our various product lines, among other +risks and uncertainties. See Part I, Item 1A, "Risk Factors." For further discussion on our working capital and inventory management, see Item 7 of Part II, "Management's +Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources." +Backlog +Historically, we have encouraged our wholesale and distributor customers to place, and we have received, a significant portion of +orders as preseason orders, generally four to eight months prior to shipment date. We provide customers with price incentives, and in certain cases extended payment terms, to participate in such +preseason 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, which can be cancelled prior to shipment. The backlog as of a particular date is affected by a number of factors, including seasonality, manufacturing schedule, and the +timing of product shipments 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. +At +December 31, 2011, our backlog of orders from our wholesale customers and distributors was approximately $387,000 compared to approximately $336,000 at December 31, +2010. Our 2011 backlog includes the Sanuk brand, which we did not have in 2010. While all orders in the backlog are subject to cancellation by customers, we expect that the majority of such orders +will be filled in 2012. We believe that backlog at year-end is an imprecise indicator of total revenue that may be achieved for the full year for several reasons. Backlog only relates to +wholesale and distributor orders for the next season and current season fill-in orders and excludes potential sales in our eCommerce business and retail stores during the year. Backlog +also is affected by the timing of customers' orders and product availability. +Competition +The casual, outdoor, athletic, fashion, and formal footwear markets are highly competitive. Our competitors include athletic and +footwear companies, branded apparel companies, and retailers with their own private labels. Although the footwear industry is fragmented to a certain degree, many of our competitors are larger and +have substantially greater resources than us, including athletic shoe companies, several of which compete directly with some of our 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 and accessory industries. Due to the popularity of our UGG products, we face increasing competition from a significant number of +competitors selling imitation products. +Our +footwear lines compete primarily on the basis of brand recognition and authenticity, product quality and design, functionality, performance, comfort, fashion appeal, and price. Our +ability to successfully compete depends on our ability to: +• shape and stimulate consumer tastes and preferences by offering innovative, attractive, and exciting products; +8 +Table of Contents +• anticipate and respond to changing consumer demands in a timely manner; +• maintain brand authenticity; +• develop high quality products that appeal to consumers; +• suitably price our products; +• provide strong and effective marketing support; and +• ensure product availability. +We +believe we are well positioned to compete in the footwear industry. 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, 2011, we employed approximately 1,900 employees in the US, Europe, and Asia, none of whom were represented by a +union. This figure includes approximately 1,000 employees in our retail stores worldwide, which includes part-time and seasonal employees. The large increase in employees during the year +was primarily related to increased selling, general and administration headcount commensurate with our growth. We intend to increase our employee count further in 2012 primarily related to retail +stores and our other expansion initiatives. We believe our relationships with our employees are good. +Financial Information about Segments and Geographic Areas +Our six reportable business segments include the strategic business units responsible for the worldwide operations of our brands' (UGG, +Teva, Sanuk and other brands) wholesale divisions, as well as our eCommerce and retail store businesses. The majority of our sales and long-lived assets are in the US. Refer to +Note 10 to our accompanying consolidated financial statements for further discussion of our business segment data. Refer to Item 1A of this Part I for a discussion of the risks +related to our foreign operations. +Compliance +with federal, state, and local environmental regulations has not had, nor is it expected to have, any material effect on our capital expenditures, earnings, or competitive +position based on information and circumstances known to us at this time. +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, Proxy Statements, 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 SEC's Public Reference Room at 100 F Street, NE, 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 at +www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. +9 +Table of Contents +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 related to our company as well as general investor risks, 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. Please also see the section entitled "Special Note on Forward-Looking +Statements"on page 2 of this Annual Report on Form 10-K. +The recent financial crisis and current economic uncertainty may adversely affect our financial condition and results of operations. +The recent economic recession and continuing economic uncertainty have affected, and will likely continue to affect consumer spending +generally and the buying habits and preferences of our customers and end-user consumers in particular. A significant portion of the products we sell, especially those sold under the UGG +Australia brand, are considered to be luxury retail products. The purchase of these products by consumers is largely discretionary, and is therefore highly dependent upon the level of consumer +spending, particularly among affluent consumers. Sales of these products may be adversely affected by a continuation or worsening of recent economic conditions, increases in consumer debt levels, +uncertainties regarding future economic prospects, or a decline in consumer confidence. During an actual or perceived economic downturn, fewer consumers may shop for our products and those who do shop +may limit the amounts of their purchases. As a result, we could be required to reduce the price we can charge for our products or increase our marketing and promotional expenses in response to lower +than anticipated levels of demand for our products. In either case, these changes, or other similar changes in our marketing strategy, would reduce our revenues and profit margins and could have a +material adverse effect on our financial condition and results of operations. +We +sell the majority of our products through higher-end specialty and department store retailers. These retailer customers may be impacted by continuing economic uncertainty, +reduced customer demand for luxury products, and a significant decrease in available credit. If reduced consumer spending, lower demand for luxury products, or credit pressures result in financial +difficulties or insolvency for these customers, it would adversely impact our estimated allowances and reserves as well as our overall financial results. Also, economic factors such as increased +transportation costs, inflation, higher costs of labor, and higher insurance and healthcare costs may increase our cost of sales and our operating expenses, and otherwise adversely affect our +financial condition, results of operations, and cash flows. Our business, access to credit, and trading price of common stock could be materially and adversely affected if the current economic +conditions do not improve or worsen. +Our financial success is influenced by the success of our customers . +Much of our financial success is directly related to the success of our retailers and distributor partners to market and sell our +brands through to the consumer. If a retailer fails to meet annual sales goals, it may be difficult to locate an acceptable substitute retailer. If a distributor fails to meet annual sales goals, it +may be difficult and costly to either locate an acceptable substitute distributor or convert to a wholesale direct model. If a change becomes necessary, we may experience increased costs, loss of +customers, increased credit risk, and increased inventory risk, as well as substantial disruption to operations and a potential loss of sales. +We +currently do not have long-term contracts with any of our retailers. We do have contracts with our distributors with terms ranging up to five-years, however, +while these +contracts may have annual purchase minimums which must be met in order to retain the distribution rights, the distributors are not otherwise obligated to purchase product. Sales to our retailers and +distributors are generally on an order-by-order +10 +Table of Contents +basis +and are subject to rights of cancellation and rescheduling by our wholesale customers. We use the timing of delivery dates in our wholesale customer orders to forecast our sales and earnings for +future periods. If any of our major customers, including independent distributors, experience a significant downturn in business or fail to remain committed to our products or brands, then these +customers could postpone, reduce, or discontinue purchases from us. As a result, we could experience a decline in sales or gross margins, write downs of excess inventory, increased discounts or +extended credit terms to our customers, which could have a material adverse effect on our business, results of operations, financial condition, cash flows, and our common stock price. +Our +five largest customers accounted for approximately 24.0% of worldwide net sales in 2011 and 28.9% of worldwide net sales in 2010. Any loss of a key customer, the financial collapse +or bankruptcy of a key customer, or a significant reduction in purchases from a key customer could have a material adverse effect on our business, results of operations, and financial condition. +Failure to adequately protect our trademarks, patents, and other intellectual property rights or deter counterfeiting could diminish the value of our brands and reduce +sales. +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 US laws. Furthermore, our efforts to enforce our intellectual property rights are typically met with +defenses and counterclaims attacking the validity and enforceability of our intellectual property rights. Unplanned increases in legal fees and other costs associated with the defense of our +intellectual property or rebranding could result in higher operating expenses and lower earnings. +Similarly, +from time to time, we may need to defend against claims that the word "ugg" is a generic term and that "UGG Australia" should not be registered as a trademark. Such a claim +was successful in Australia, but such claims have been rejected by courts in the United States and in the Netherlands. Any decision or settlement in any of these matters that prevents trademark +protection of the "UGG Australia" brand in our major markets, or that allows a third party to continue to use our brand trademarks in connection with the sale of products similar to our products, or +to continue to manufacture or distribute counterfeit products could result in intensified commercial competition and could have a material adverse effect on our results of operations and financial +condition. +From +time to time, we discover counterfeit products in the marketplace that infringe upon our intellectual property rights. If we are unsuccessful in challenging a third party's products +on the basis of patent, trademark and trade dress rights, particularly in some foreign countries, this could adversely affect our continued sales, financial condition, and results of operation. If our +brands are associated with infringers' or competitors' inferior products, this could also adversely affect the integrity of our brands. +If raw materials do not meet our specifications, or experience price increases or shortages, we could realize interruptions in manufacturing, increased costs, higher product +return rates, a loss of sales, or a reduction in our gross margins . +We depend on a limited number of key sources for certain raw materials. For sheepskin, the raw material used in a significant portion +of our UGG products, we rely on two tanneries. Both the top grade twinface and other grades of sheepskin used in UGG products are in high demand and limited supply. Furthermore, our unique sheepskin +needs require certain types of sheepskin that may only be found in certain geographic locations and tanneries with sufficient expertise and capacity to deliver sheepskin which meets our +specifications. The supply of sheepskin can be adversely impacted by weather conditions, disease, and harvesting decisions that are completely outside our control. For example, if the price of wool +increases, sheep herders may choose not to harvest their sheep and instead choose to shear their sheep for wool, thus decreasing the supply of sheepskin. Sheepskin is also a by-product of +the food industry and is therefore dependent upon the demand by the food industry, which has generally been decreasing thus +11 +Table of Contents +leading +to an overall reduction in the number of sheep available. The potential inability to obtain sheepskin and other raw materials could impair our ability to meet our production requirements and +could lead to inventory shortages, which can result in lost sales, delays in shipments to customers, strain on our relationships with customers, and diminished brand loyalty. There have also been +significant increases in the prices of sheepskin as the demand from competitors for this material has increased and supply of sheep has decreased. We experienced a 27% increase in sheepskin costs in +2011 and expect an additional 40% increase in 2012. We attempt to cover the full amount of our sheepskin purchases under fixed price contracts. Any price increases in key raw materials will likely +raise our costs and decrease our profitability unless we are able to commensurately increase our selling prices and implement other cost savings measures. +In +addition, our sheepskin suppliers warehouse their inventory at a limited number of facilities in China, the loss of any of which due to natural disasters and other adverse events +would likely result in +shortages of sheepskin leading to delays in the production of our products and could result in a loss of sales and earnings. +Our +independent manufacturers use various raw materials in the production of our footwear and accessories that must meet our design specifications and, in some cases, additional +technical requirements for performance footwear. If these raw materials and the end product do not conform to our specifications, we could experience a higher rate of customer returns and +deterioration in the image of our brands, which could have a material adverse effect on our business, results of operations, and financial condition. +Our new and existing retail stores may not realize returns on our investments. +Our retail segment has grown substantially in both net sales and total assets during the past year, and we intend to rapidly expand +this segment in the future. We have entered into significant long-term leases for many of our retail locations. Global store openings involve substantial investments, including +constructing leasehold improvements, furniture and fixtures, equipment, information systems, inventory, and personnel. In addition, since certain of our retail store costs are fixed, if we have +insufficient sales, we may be unable to reduce expenses in order to avoid losses or negative cash flows. Due to the high fixed cost structure associated with the retail segment, negative cash flows or +the closure of a store could result in significant write-downs of inventory, severance costs, lease termination costs, impairment losses on long-lived assets, or loss of our working +capital, which could adversely impact our financial position, results of operations, or cash flows. +In +addition, from time to time we license the right to operate retail stores for our brands to third parties, including our independent distributors. We provide training to support these +stores, and set and monitor operational standards. However, the quality of these store operations may decline due to the failure of these third parties to operate the stores in a manner consistent +with our standards, which could harm their sales and as a result harm our results of operations or cause our brand image to suffer. +If we do not accurately forecast consumer demand, we may have excess inventory to liquidate or have difficulty filling our customers' orders . +Because the footwear industry has relatively long lead times for design and production, we must plan our production tooling and +projected volumes many months before consumer tastes become apparent. The footwear and fashion industry is subject to rapid changes in consumer preferences, as well as the effects of weather, general +market conditions, competition, and other factors affecting demand. A large number of models, colors, and sizes in our product lines can increase these risks. As a result, we may fail to accurately +forecast styles, colors, and features that will +be in demand. If we overestimate demand for any products or styles, we may be forced to incur higher markdowns or sell excess inventories at reduced prices resulting in lower, or negative, gross +margins. +12 +Table of Contents +Our success depends on our ability to anticipate fashion trends. +Our success depends largely on the continued strength of our brands, on our ability to anticipate, understand, and react to the rapidly +changing fashion tastes of footwear, apparel, and accessory consumers and to provide appealing merchandise in a timely and cost effective 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 consumer receptivity to our products and marketing strategy. There can be no assurance +that consumers will continue to prefer our brands or that we will (1) respond quickly enough to changes in consumer preferences, (2) market our products successfully, or +(3) successfully introduce acceptable new models and styles of footwear or accessories to our target consumer. Achieving market acceptance for new products also likely will require us to exert +substantial product development and marketing efforts and expend significant funds to attract consumers. A failure to introduce new products that gain market acceptance or maintain market share with +our current products 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. +Our +UGG brand has experienced strong growth over the past several years, with double-digit increases in net wholesale sales of UGG products. We cannot anticipate how long we will +continue sustaining this growth rate in the future. UGG products include fashion items that could go out of style at any time. UGG products represent a majority of our business, and if UGG product +sales were to decline or fail to increase in the future, our overall financial performance and common stock price would be adversely affected. +Many of our products are seasonal, and our sales are sensitive to weather conditions . +Sales of our products are highly seasonal and are sensitive to weather conditions. For example, extended periods of unseasonably warm +weather during the fall and winter months may reduce demand for our UGG products. Even though we are creating more year-round styles for our brands, 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. +We may not succeed in implementing our growth strategies . +As part of our growth strategy, we seek to enhance the positioning of our brands, extend our brands into complementary product +categories and markets, partner with or acquire compatible companies or brands, expand geographically, increase our retail presence, and improve our operational performance. We continue to expand the +nature and scope of our operations considerably, including significantly increasing the number of our employees worldwide. We anticipate that substantial further expansion will be required to realize +our growth potential and new market opportunities. +We +are growing globally through our retail, eCommerce, wholesale, and distributor channels. In addition, as part of our international growth strategy, we intend to continue to transition +from third-party distribution to direct distribution through wholly-owned subsidiaries. Implementing our growth strategies, or failure to effectively execute them, could affect near term revenues from +the postponement of sales recognition to future periods, our rate of growth or profitability, which in turn could have a negative effect on the value of our common stock. In addition, our growth +initiatives could: +• increase our working capital needs beyond our capacity; +• increase costs if we fail to successfully integrate a newly acquired business or achieve expected cost savings; +• result in impairment charges related to acquired businesses; +13 +Table of Contents +• create remote-site management issues, which would adversely affect our internal control environment; +• have significant domestic or international legal or compliance implications; +• make it difficult to attract, retain, and manage adequate human resources in remote locations; +• cause additional inventory manufacturing, distribution, and management costs; +• cause us to experience difficulty in filling customer orders; +• result in distribution termination transaction costs; or +• create other production, distribution, and operating difficulties. +Our goodwill and other intangible assets may incur impairment losses. +We conducted our annual impairment tests of goodwill and other intangible assets for 2011, 2010, and 2009. In addition, we conducted +interim impairment evaluations when impairment indicators arose. In 2011, 2010, and 2009, we did not recognize any material impairment charges on our goodwill and other intangible assets. +If +any brand's product sales or operating margins decline to a point that the fair value falls below its carrying value, we may be required to write down the related intangible assets. +These or other related declines could cause us to incur additional impairment losses, which could materially affect our consolidated financial statements and results of operations. The value of our +trademarks is highly dependent on forecasted revenues and earnings before interest and taxes for our brands, as well as derived discount and royalty rates. In addition, the valuation of intangible +assets is subject to a high degree of judgment and complexity. We may also decide to discontinue a brand which would result in the write down of all related intangible assets. The balances of goodwill +and nonamortizable intangibles by brand are as follows: +As of December 31, 2011 +UGG +Teva +Sanuk +Total +Trademarks +$ +154 +$ +15,301 +$ +— +$ +15,455 +Goodwill +6,101 +— +113,944 +120,045 +Total nonamortizable intangibles +$ +6,255 +$ +15,301 +$ +113,944 +$ +135,500 +Because we depend on independent manufacturers, we face challenges in maintaining a continuous supply of finished goods that meet our quality +standards . +Most of our production is performed by a limited number of independent manufacturers in China. We depend on these manufacturers' +ability to finance the production of goods ordered and to maintain manufacturing capacity, and store completed goods in a safe and sound location pending shipment. We do not possess direct control +over either the independent manufacturers or their materials suppliers, so we may be unable to obtain timely and continuous delivery of acceptable products. In addition, while we do have long standing +relationships with most of our +factories, we currently 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 acceptable quality and competitively priced products from our independent manufacturers. If there is +an interruption, we may not be able to substitute suitable alternative manufacturers to provide 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 +14 +Table of Contents +increased +costs as well as substantial disruption of our business, which could result in a loss of sales and earnings. +Interruptions +in the supply chain can also result from natural disasters and other adverse events that would impair our manufacturers' operations. We keep proprietary materials involved +in the production process, such as shoe molds, knives, and raw materials, under the custody of our independent manufacturers. If these independent manufacturers were to experience loss or damage to +our proprietary materials involved in the production process, we cannot be assured that such independent manufacturers would have adequate insurance to cover such loss or damage and, in any event, the +replacement of such materials would likely result in significant delays in the production of our products and could result in a loss of sales and earnings. +Our independent manufacturers are located outside the US, where we are subject to the risks of international commerce . +Most of our independent manufacturers are in China and Vietnam, with the vast majority of production performed by a limited number of +manufacturers in China. Foreign manufacturing is subject to numerous risks, including the following: +• tariffs, import and export controls, and other non-tariff barriers such as quotas and local content rules on +raw materials and finished products, including the potential threat of anti-dumping duties and quotas; +• increasing transportation costs; +• poor infrastructure and shortages of equipment, which can disrupt transportation and utilities; +• restrictions on the transfer of funds; +• changing economic conditions; +• violations or changes in governmental policies and regulations including labor, safety, and environmental regulations in +China, Vietnam, the US, and elsewhere; +• refusal to adopt or comply with our Supplier Code of Conduct and Restricted Substances Policy; +• customary business traditions in China and Vietnam such as local holidays, which are traditionally accompanied by high +levels of turnover in the factories; +• labor unrest, which can lead to work stoppages and interruptions in transportation or supply; +• delays during shipping, at the port of entry or at the port of departure; +• political instability, which can interrupt commerce; +• use of unauthorized or prohibited materials or reclassification of materials; +• expropriation and nationalization; and +• adverse changes in consumer perception of goods, trade, or political relations with China and Vietnam. +These +factors could severely interfere with the manufacture or shipment of our products, which could make it difficult to obtain adequate supplies of quality products when we need them, +thus materially affecting our sales and results of operations. While we periodically visit and audit the operations of our independent manufacturers, we do not control their business practices. If we +discovered non-compliant manufacturers or suppliers that cannot or will not become compliant, we would cease dealing with them, and we could suffer an interruption in our product supply +chain. In addition, the manufacturers' or +15 +Table of Contents +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. +In +addition, the costs of production and transportation of our products can increase as petroleum and other energy prices rise, or demand for ocean containers or other means of +transportation exceed existing supply. +We conduct business outside the US, which exposes us to foreign currency, global liquidity, and other risks . +The state of the global economy continues to influence the level of consumer spending for discretionary items. This affects our +business as it is highly dependent on consumer demand for our products. The current political and economic environments in certain countries in Europe have resulted in significant macroeconomic risks, +including high rates of unemployment, high fuel prices, and continued global economic uncertainty largely precipitated by the European debt crisis. +We +operate on a global basis, with approximately 31.4% of our net sales for the year ended December 31, 2011 from operations outside the US. As we continue to increase our +international operations, our sales and expenditures in foreign currencies become more material and subject to currency fluctuations and global credit markets. A significant portion of our +international operating expenses are paid in local currencies. Also, our foreign distributors sell in local currencies, which impacts the price to foreign consumers. Effective January 1, 2011, +our business changed such that certain of our subsidiaries' functional currency designations changed from US dollars to the local currencies. We currently utilize forward contracts or other derivative +instruments for the amounts we expect to purchase and sell in foreign currencies to mitigate exposure to fluctuations in the foreign currency exchange rate. As we continue to expand international +operations and increase purchases and sales in foreign currencies, we will evaluate and may utilize additional derivative instruments, as needed, to hedge our foreign currency exposures. Our hedging +strategies depend on our forecasts of sales, expenses, and cash flows, which are inherently subject to inaccuracies. Therefore, our hedging strategies may be ineffective. Future changes in foreign +currency exchange rates and global credit markets may cause changes in the US dollar value of our purchases or sales and materially affect our sales, profit margins, or results of operations, when +converted to US dollars. In addition, the failure of financial institutions that underwrite our derivative contracts may negate our efforts to hedge our foreign currency exposures and result in +material foreign currency or contract losses. Foreign currency hedging activities, transactions, or translations could materially impact our consolidated financial statements. +While +our purchases from overseas factories are currently denominated in US dollars, certain operating and manufacturing costs of the factories are denominated in other currencies. As a +result, fluctuations in these currencies versus the US dollar could impact our purchase prices from the factories in the event that they adjust their selling prices accordingly. +Key business processes and supporting information systems could be interrupted and adversely affect our business . +Our future success and growth depend on the continued operation of our key business processes, including information systems, global +communications, the internet, and key personnel. Hackers and computer viruses have disrupted operations at many major companies. We may +be vulnerable to similar acts of sabotage. Key processes could also be interrupted by a failure due to weather, natural disaster, power loss, telecommunications failure, failure of our computer +systems, sabotage, terrorism, or similar event such that: +• critical business systems become inoperable or require significant costs to restore; +• key personnel are unable to perform their duties, communicate, or access information systems; +• significant quantities of merchandise are damaged or destroyed; +16 +Table of Contents +• we are required to make unanticipated investment in state-of-the-art technologies and +security measures; +• key wholesale and distributor customers cannot place or receive orders; +• eCommerce customer orders may not be received or fulfilled; +• confidential information about our customers may be misappropriated or lost damaging our reputation and customer +relationships; +• we are exposed to unanticipated liabilities; or +• carriers cannot ship or unload shipments. +These +interruptions to key business processes could have a material adverse effect on our business and operations and result in lost sales and reduced earnings. +We +rely on our information management, internet cloud providers, and other enterprise resource planning systems to operate our business, prepare forecasts and track our operating +results. Our information management and enterprise planning systems will require modification and refinement as we grow and our business needs change. We may experience difficulties in transitioning +to new or upgraded information technology systems, including loss of data, unreliable data, and decreases in productivity as our personnel become familiar with the new systems. If we experience a +significant system failure or if we are unable to competitively modify our information management systems to respond to changes in our business needs, then our ability to properly run our business and +report financial results could be adversely affected. +The +loss of the services and expertise of any key employee could also harm our business. Our future success depends on our ability to identify, attract, and retain qualified personnel on +a timely basis. +We may not be able to attract or retain highly capable employees who can achieve our strategic goals and objectives. +Our future success depends on our ability to identify, attract, and retain qualified personnel on a timely basis. The loss of the +services and expertise of any key employee could also harm our business through business process interruptions, loss of institutional knowledge, and recruitment and training costs. +We could be adversely affected by the loss of our warehouses. +The warehousing of our inventory is located at a limited number of self-managed domestic facilities and +self-managed and third party managed international facilities, the loss of any of which could adversely impact our sales, business performance, and operating results. In addition, we could +face a significant disruption in our domestic distribution center operations if our automated pick module does not perform as anticipated or ceases to function for an extended period. +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, which could increase our costs and adversely impact our operating results . +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 operations and joint ventures with international partners that could adversely affect our sales and results of operations. These +include: +• changes in currency exchange rates, which impact the price to international consumers; +• ability to move currency out of international markets; +17 +Table of Contents +• the burdens of complying with a variety of foreign laws and regulations; +• legal costs and penalties related to defending allegations of non-compliance; +• unexpected changes in regulatory requirements; +• inability to successfully import into a country; +• changes in tax laws; +• complications due to lack of familiarity with local customs; +• difficulties associated with promoting products in unfamiliar cultures; +• political instability; +• changes in diplomatic and trade relationships; and +• general economic fluctuations in specific countries or markets. +International trade and import 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 US 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 and our forecasted gross margins. +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 +make it difficult to obtain products of our customary quality at a competitive price. Meanwhile, the continued negotiation of bilateral and multilateral free trade agreements by the US 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 +and accessories to our target markets at preferred rates of duty, which may have an effect on our sales and operations. +Additionally, +the increased threat of terrorist activity and 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 and increase our costs. +The investment of our substantial cash and cash equivalents are subject to risks, which may cause losses and affect the liquidity of these investments. +A portion of our cash and cash equivalents are held as cash in operating accounts that are with third party financial institutions. +These balances routinely exceed the Federal Deposit Insurance Corporation (FDIC) insurance limits. While we regularly monitor the cash balances in our operating accounts and adjust the balances as +appropriate, these cash balances could lose value or become inaccessible if the underlying financial institutions fail or are subject to other adverse conditions in the financial markets. To date, we +have experienced no loss or lack of access to cash in our operating accounts. +The +remainder of our cash and cash equivalents is invested in funds managed by third party investment management institutions. These investments include US treasuries and government +agencies, money market funds, and municipal bonds, among other investments. Certain of these investments are +18 +Table of Contents +subject +to general credit, liquidity, market, and interest rate risks. While we do not hold any investments whose value is directly correlated to mortgage debt, investment risk has been and may +further be exacerbated by US mortgage defaults and credit and liquidity issues, which have affected various sectors of the financial markets. To date, we have experienced no material loss or lack of +access to our cash and cash equivalents. However, we can provide no assurance that access to our cash and cash equivalents, or their earning potential, will not be impacted by adverse conditions in +the financial markets. These market risks associated with our investment portfolio may have an adverse effect on our results of operations, liquidity, and financial condition. +The tax laws applicable to our business are very complicated and we may be subject to additional income tax liabilities as a result of audits by various taxing authorities +or changes in tax laws applicable to our business. +We conduct our operations through subsidiaries in several countries including the US, the UK, Japan, China, Hong Kong, the Netherlands, +Bermuda, France, and Canada. As a result, we are subject to tax laws and regulations in each of those jurisdictions, and to tax treaties between the US and other nations. These tax laws are highly +complex, and significant judgment and specialized expertise is required in evaluating and estimating our worldwide provision for income taxes. +We +are subject to audits in each of the various jurisdictions where we conduct business, and any of these jurisdictions may assess additional income taxes against us as a result of their +audits. Although we believe our tax estimates are reasonable, and we undertake to prepare our tax filings in accordance with all applicable tax laws, the final determination with respect to any tax +audits, and any related litigation, could be materially different from our estimates or from our historical income tax provisions and accruals. The results of an audit or litigation could have a +material effect on our operating results or cash flows in the periods for which that determination is made and may require a restatement of prior financial reports at a material cost. In addition, +future period earnings may be adversely impacted by litigation costs, settlements, penalties, or interest assessments. See Note 5 of our accompanying consolidated financial statements for +discussion of our pending Internal Revenue Service (IRS) audit. +We +are also subject to constant changes in tax laws, regulations and treaties in and between the nations in which we operate. Our income tax expense is based upon our interpretation of +the tax laws in effect in various countries at the time that the expense was incurred. A change in these tax laws, treaties or +regulations, including those in and involving the US, or in the interpretation thereof, could result in a materially higher tax expense or a higher effective tax rate on our worldwide earnings. It is +possible that tax proposals could result in changes to the existing US tax laws that affect us. We are unable to predict whether any proposals will ultimately be enacted. Any such changes could +increase our income tax liability and adversely affect our net income and long term effective tax rates. +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 many new competitors have entered into the marketplace. Additionally, we have +experienced 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 and accessory markets. 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 develop new products more quickly. 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 and accessory industries. +19 +Table of Contents +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 consumers to shift their purchases away from our products. If we fail to compete successfully in the future, our sales and earnings will decline, as will the value of our business, +financial condition, and common stock price. +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 15, 2012 was approximately 1,386,000 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, have ranged from $73.28 to $117.66 for the 52-week period ended February 15, 2012. 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, whether realized or perceived; +• changes in estimates by securities analysts or failure to meet such estimates; +• published research and opinions by securities analysts and other market forecasters; +• changes in our credit ratings; +• the financial results and liquidity of our customers; +• shift of revenue recognition as a result of changes in our distribution model, delivery of merchandise, or entering into +agreements with related parties; +• claims brought against us by a regulatory agency or our stockholders; +• quarterly fluctuations in our sales, expenses, and financial results; +• general equity market conditions and investor sentiment; +• economic conditions and consumer confidence; +• broad market fluctuations in volume and price; +• increasing short sales of our stock; +• announcements to repurchase our stock; +• the declaration of stock or cash dividends; 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. +In +addition, the stock market in general has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of +individual companies. Accordingly, the price of our common stock is volatile and any investment in our stock is subject to risk of loss. These broad market and industry factors and other general +macroeconomic conditions unrelated to our financial performance may also affect our common stock price. +Item 1B. Unresolved Staff Comments. +None. +20 +Table of Contents +Item 2. Properties. +Our corporate headquarters is located in Goleta, California. We have two US distribution centers, both in California, and an +international distribution center in the Netherlands. Our eCommerce operations are in Arizona, England, and Japan. We also have an office in China to oversee the quality and manufacturing standards of +our products, an office in Macau to coordinate logistics, an office in Hong Kong to coordinate sales and marketing efforts, and offices in the UK and the Netherlands to oversee European operations and +administration. As of December 31, 2011, we had nineteen retail stores in the US ranging from approximately 2,000 to 7,000 square feet. Internationally, we had fifteen Company-owned retail +stores in the UK, Japan, and Canada and eleven jointly-owned retail stores in China. We have no manufacturing facilities, as all of our products are manufactured by independent manufacturers. We also +utilize third-party managed distribution centers in certain international countries. We lease, rather than own, our facilities from unrelated parties. In 2011, we purchased approximately fourteen +acres of land to build a new corporate headquarters in Goleta, California. We expect the construction of the headquarters to be completed in 2013. With the exception of our eCommerce and retail store +facilities, our facilities are attributable to multiple segments of our business and are not allocated to the reportable 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. We may utilize additional third-party managed distribution centers +internationally, as we continue converting selective international distributor businesses into wholesale businesses. +The +following table reflects the location, use, segment, and approximate size of our significant physical properties: +Facility Location +Description +Business Segment +Approximate Square Footage +Camarillo, California +Warehouse Facility +unallocated +723,000 +Goleta, California +Corporate Offices +unallocated +66,000 +Item 3. Legal Proceedings. +We are involved in various routine legal proceedings as both plaintiff and defendant incident to the ordinary course of our business, +including proceedings to protect our intellectual property rights. +As +part of our policing program for our intellectual property rights, from time to time, we file lawsuits in the US and abroad alleging acts of trademark counterfeiting, trademark +infringement, patent infringement, trade dress infringement, trademark dilution, and state or foreign law claims. At any given point in time, we may have a number of such actions pending. These +actions often result in seizure of counterfeit merchandise or out of court settlements with defendants or both. From time to +time, we are subject to claims where plaintiffs will raise, or defendants will raise, either as affirmative defenses or as counterclaims, the invalidity or unenforceability of certain of our +intellectual properties, including our trademark registration for UGG Australia. We also are aware of many instances throughout the world in which a third party is using our UGG trademarks within its +internet domain name, and we have discovered and are investigating several manufacturers and distributors of counterfeit Teva, UGG, and Sanuk products. +We +believe that the outcome of all pending legal proceedings in the aggregate will not have a material adverse effect on our business or consolidated financial statements. +Item 4. Mine Safety Disclosures. +Not applicable. +21 +Table of Contents +PART II +Item 5. Market for Registrant's 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." +In +May 2010, we announced a three-for-one split of our outstanding shares of common stock. As a result of the stock split, stockholders received two additional +shares of our common stock, in the form of a stock dividend, for every share of our common stock held on June 17, 2010, the record date for the stock split. The common stock was distributed to +stockholders after the close of trading on the NASDAQ Global Select Market on July 2, 2010, by our transfer agent BNY Mellon Shareholder Services. The common stock began trading on a +post-split basis on the NASDAQ Global Select Market at the opening of trading on July 6, 2010. All applicable share and per share information in this Item 5 has been adjusted +retrospectively for the three-for-one stock split. +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, 2011: +First Quarter +$ +72.38 +$ +90.57 +Second Quarter +$ +77.66 +$ +96.72 +Third Quarter +$ +73.28 +$ +105.01 +Fourth Quarter +$ +75.57 +$ +117.66 +Year ended December 31, 2010: +First Quarter +$ +31.53 +$ +46.94 +Second Quarter +$ +41.56 +$ +54.97 +Third Quarter +$ +43.41 +$ +51.93 +Fourth Quarter +$ +49.41 +$ +87.02 +As +of February 15, 2012, there were 59 record holders of our common stock, and we believe there were approximately 50,000 beneficial holders of our common stock. +We +did not sell any equity securities during the year ended December 31, 2011 that were not registered under the Securities Act of 1933, as amended. +22 +Table of Contents +STOCKHOLDER RETURN PERFORMANCE PRESENTATION +Below is a graph comparing the percentage change in the cumulative total stockholder return on the Company's common stock against the +cumulative total return of the NASDAQ Market Index and a peer group index for the five-year period commencing December 31, 2006 and ending December 31, 2011. The data +represented below assumes one hundred dollars invested in each of the Company's common stock, the NASDAQ Market Index, and the peer group index on January 1, 2007. 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. Total return assumes reinvestment of dividends; we have paid no dividends on our common stock and have not done so since our inception. +December 31, +2006 +2007 +2008 +2009 +2010 +2011 +Deckers Outdoor Corporation +$ +100.0 +$ +258.6 +$ +133.2 +$ +169.7 +$ +398.9 +$ +378.0 +NASDAQ Market Index# +100.0 +110.7 +66.4 +96.5 +114.1 +113.2 +Peer Group Index* +100.0 +93.8 +41.1 +68.8 +89.3 +82.0 +# The +NASDAQ Market Index is the same NASDAQ Index used in our 2010 Form 10-K. +* The +Peer Group Index consists of LaCrosse Footwear, Inc.; Steven Madden, Ltd.; K-Swiss Inc.; Kenneth Cole +Productions, Inc.; Wolverine World Wide, Inc.; Crocs, Inc.; and Skechers USA, Inc. In our 2010 Form 10-K, the peer group also included The Timberland +Company, which is not included in the current presentation because that company was acquired during 2011. +DIVIDEND POLICY +We have not declared or paid any cash dividends on our common stock since our inception. We currently do not anticipate declaring or +paying any cash dividends in the foreseeable future. Our current credit agreement allows us to make cash dividends, provided that no event of default has occurred or is continuing and provided that we +have a minimum amount of cash plus unused credit of $75,000. +23 +Table of Contents +STOCK REPURCHASE PROGRAM +In June 2009, our Board of Directors approved a stock repurchase program to repurchase up to $50,000 of our common stock in the open +market or in privately negotiated transactions, subject to market conditions, applicable legal requirements, government regulations, and other factors. The program did not obligate us to acquire any +particular amount of common stock and the program could be suspended at any time at our discretion. The purchases were funded from available excess working capital. We repurchased 245,000 shares for +approximately $20,000, or an average price of $81.22 per share under the program for the year ended December 31, 2011. All shares purchased were purchased as part of a publicly announced +program in open-market transactions. As of December 31, 2011, we had repurchased the full amount authorized under this program. The following table summarizes our stock repurchases +for the year ended December 31, 2011: +Period +Total number +of shares +purchased* +(in thousands) +Average price +paid per share +Approximate dollar +value of shares that may +yet be purchased +(in thousands) +As of December 31, 2010 +$ +20,000 +January 1 — May 31, 2011 +— +$ +— +$ +20,000 +June 1 — June 30, 2011 +245 +$ +81.22 +$ +— +July 1 — December 31, 2011 +— +$ +— +$ +— +Total +245 +* All +shares purchased were purchased as part of a publicly announced program in open-market transactions. +On +February 23, 2012, our Board of Directors approved a new stock repurchase program to repurchase up to $100,000 of our common stock in the open market or in privately negotiated +transactions, subject to market conditions, applicable legal requirements, and other factors. The program does not obligate us to acquire any particular amount of common stock and the program may be +suspended at any time at our discretion. The purchases will be funded from available working capital. +24 +Table of Contents +Item 6. Selected Financial Data. +We derived the following selected consolidated financial data from our consolidated financial statements. Historical results are not +necessarily indicative of the results to be expected in the future. You should read the following consolidated financial information together with our consolidated financial statements and the related +notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in Part II of this Annual Report on Form 10-K. +Years ended December 31, +2011 +2010 +2009 +2008 +2007 +(In thousands, except per share data) +Statements of operations data +Net sales: +UGG wholesale +$ +915,203 +$ +663,854 +$ +566,964 +$ +483,781 +$ +291,908 +Teva wholesale +118,742 +96,207 +71,952 +80,882 +82,003 +Sanuk wholesale +26,039 +— +— +— +— +Other brands wholesale +21,801 +23,476 +19,644 +17,558 +11,163 +eCommerce +106,498 +91,808 +75,666 +68,769 +45,473 +Retail stores +189,000 +125,644 +78,951 +38,455 +18,382 +1,377,283 +1,000,989 +813,177 +689,445 +448,929 +Cost of sales +698,288 +498,051 +442,087 +384,127 +241,458 +Gross profit +678,995 +502,938 +371,090 +305,318 +207,471 +Selling, general and administrative expenses(1) +394,157 +253,850 +189,843 +188,399 +101,918 +Income from operations +284,838 +249,088 +181,247 +116,919 +105,553 +Other income, net +(424 +) +(1,021 +) +(1,976 +) +(3,583 +) +(4,486 +) +Income before income taxes +285,262 +250,109 +183,223 +120,502 +110,039 +Income taxes +83,404 +89,732 +66,304 +46,631 +43,602 +Net income +201,858 +160,377 +116,919 +73,871 +66,437 +Net (income) loss attributable to noncontrolling interest +(2,806 +) +(2,142 +) +(133 +) +77 +— +Net income attributable to Deckers Outdoor Corporation +$ +199,052 +$ +158,235 +$ +116,786 +$ +73,948 +$ +66,437 +Net income per share attributable to Deckers Outdoor Corporation common stockholders: +Basic +$ +5.16 +$ +4.10 +$ +2.99 +$ +1.89 +$ +1.73 +Diluted +$ +5.07 +$ +4.03 +$ +2.96 +$ +1.87 +$ +1.69 +Weighted-average common shares outstanding: +Basic +38,605 +38,615 +39,024 +39,126 +38,505 +Diluted +39,265 +39,292 +39,393 +39,585 +39,387 +(1) 2008 +includes impairment losses of $35,825 related to our Teva trademarks, Teva goodwill, and TSUBO goodwill. During our annual and interim assessments of +goodwill and other intangible assets, we concluded that the fair values were lower than the carrying amounts and therefore wrote down the trademarks and goodwill to their respective fair values. +25 +Table of Contents +As of December 31, +2011 +2010 +2009 +2008 +2007 +(In thousands) +Balance sheet data +Cash and cash equivalents +$ +263,606 +$ +445,226 +$ +315,862 +$ +176,804 +$ +54,525 +Working capital +585,823 +570,869 +420,117 +317,755 +230,173 +Total assets +1,146,196 +808,994 +599,043 +483,721 +370,032 +Long-term liabilities +72,687 +8,456 +6,269 +3,847 +— +Total Deckers Outdoor Corporation +stockholders' equity +835,936 +652,987 +491,358 +384,252 +298,638 +Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation. +References to "Deckers," "we," "us," "our," or similar terms refer to Deckers Outdoor Corporation together with its consolidated +subsidiaries. Unless otherwise specifically indicated, all amounts herein are expressed in thousands, except for share quantity, per share data, and selling prices. All share and related information +presented herein reflects the increased number of shares resulting from the three-for-one stock split paid on July 2, 2010. The following discussion of our financial +condition and results of operations should be read together with our consolidated financial statements and the accompanying notes to those statements included elsewhere in this document. +Overview +We are a leading designer, producer, marketer, and brand manager of innovative, high-quality footwear, apparel, and +accessories. We market our products primarily under three proprietary brands: +• UGG®: Premier brand in luxury and comfort footwear, handbags, apparel, and cold weather accessories; +• Teva®: High performance multi-sport shoes, rugged outdoor footwear, and sport sandals; and +• Sanuk®: Innovative action sport footwear brand rooted in the surf community. +Our +financial condition and results of operations include the operations of Sanuk beginning July 1, 2011, the acquisition date. In addition to our primary brands, our other brands +include TSUBO®, a line of high-end casual footwear that incorporates style, function and maximum comfort; Ahnu®, a line of outdoor performance and lifestyle +footwear; MOZO®, a line of footwear that combines running shoe technology with work shoe toughness for individuals that spend long hours working on their feet; and Simple®, a +line for which we ceased distribution effective December 31, 2011. +We +sell our brands through our quality domestic retailers and international distributors and retailers, as well as directly to our end-user consumers through our eCommerce +business and our retail stores. Independent third parties manufacture all of our products. In 2010, we converted our Teva business in Belgium, the Netherlands, and Luxemburg (Benelux) and France from +a distributor model to a wholesale model. In January 2011, we converted from a distributor model to a wholesale model for the UGG, Teva, and Simple brands in the United Kingdom (UK) and Ireland and +the UGG and Simple brands in Benelux and France. +Our +business has been impacted by several important trends affecting our end markets: +• The prolonged US and global economic conditions have adversely impacted businesses worldwide in general. Some of our +customers have been, and more may be, adversely affected, which in turn has, and may continue to, adversely impact our financial results. +26 +Table of Contents +• The sheepskin used in certain UGG products is in high demand and limited supply, and there have been significant increases +in the prices of sheepskin as the demand from competitors for this material has increased. +• 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 consumers 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. +• There is an emerging sustainable lifestyle movement happening all around the world. Consumers are demanding that brands +and companies become more environmentally responsible. +By +emphasizing our brands' images and our focus on comfort, performance and authenticity, we believe we can continue to maintain a loyal consumer following that is less susceptible to +fluctuations caused by changing fashions and changes in consumer preferences. We have also responded to consumer focus on sustainability by establishing objectives, policies, and procedures to help us +drive key sustainability initiatives around human rights, environmental sustainability, and community affairs. +We +have experienced costs increases, most significantly with sheepskin. We attempt to cover the full amount of our sheepskin purchases under fixed price contracts. We continually strive +to contain our material costs through increasing the mix of non-sheepskin products, exploring new footwear materials and new production technologies, and utilizing lower cost production, +including the US where we will begin sourcing product from in 2012. Also, refer to Item 7A. Quantitative and Qualitative Disclosures about Market Risk for further discussion of our commodity +price risk. +Below +is an overview of the various components of our business, including some key factors that affect each business and some of our strategies for growing each business. +UGG Brand Overview +The UGG brand has become well-known throughout the US as well as internationally. Over the past several years, our UGG +brand has received increased global media exposure including increased print media in ads and cooperative advertising with our customers, which has contributed to broader public awareness of the brand +and significantly increased demand for the collection. We believe that the increased global media focus and demand for UGG products were driven by the +following: +• consumer brand loyalty, due to the luxury and comfort of UGG footwear; +• continued innovation of new product categories and styles, including those beyond footwear; +• increased marketing in high-end magazines, out of home and digital advertising for women and men; +• a targeted UGG for Men campaign featuring Tom Brady; +• targeted marketing at prospective consumers in new catalogs and direct mail pieces; +• successful targeting of higher-end distribution; +• expanded product assortment purchases from existing accounts; +27 +Table of Contents +• adoption by high-profile 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 otherwise +been able to; +• increased exposure to the brand driven by our concept stores that showcase all of our product offerings; +• continued expansion of worldwide retail through new UGG Australia stores; +• continued geographic expansion across the US and internationally; and +• expansion of our shop-in-shop program worldwide. +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 increased our product offering, including a growing spring line, an expanded men's line, and a +fall line that consists of a range of luxurious collections for both genders, an expanded kids' line, as well as handbags, cold weather accessories, and apparel. We have also recently expanded our +marketing and promotional efforts, which we believe has and will continue to contribute to our growth. We believe that the evolution of the UGG brand and our strategy of product diversification also +will help decrease our reliance on sheepskin, which is in high demand and subject to price volatility. Nonetheless, we cannot assure investors that our efforts will continue to provide UGG brand +growth. +Teva Brand Overview +Our Teva brand is positioned to be a leading innovative, global, action-outdoor brand, with over 25 years worth of contributions +to the outdoor adventure experience. The Teva brand pioneered the water sport sandal category in 1984, and to this day, our brand mission is to inspire spontaneity, camaraderie, and adventure on, +around, or in water. Leveraging our core performance competencies of traction, hydro, and comfort footwear, we are focused on driving growth through innovation in the emerging action-outdoor space +through multi-sport, light hiking, freestyle mountain bike riding, action water sports, and other action-outdoor lifestyle products. +Our +efforts to expand the Teva brand beyond sandals, while embracing our core water-based competencies, contributed to significant revenue growth in 2010 and 2011. Throughout the past +few years, our broader range of footwear demonstrated strong retail sell-through across all channels, and we believe that our retail partners have viewed both our product and marketing +innovations as relevant and compelling. +We +see an opportunity to grow the Teva brand significantly outside of the US. In January 2010, we converted from a distributor model to a wholesale model in the Benelux region and +France, enhancing our marketing and distribution capabilities in the outdoor active Benelux market. In January 2011, we converted our Teva brand international business from an independent distributor +to a wholesale model in the UK, including Scotland and Ireland, which now affords us the opportunity to better drive our brand building and growth initiatives in this influential market. In 2012, our +Teva brand will be re-launched in the Japanese market by our Japan subsidiary. Within the US, we see strong growth opportunities within our current core channels of distribution, outdoor +specialty, and sporting goods, as our product assortment evolves and expands. Also, through effective product and distribution segmentation, we see significant expansion opportunities within the +family value, department store, better footwear, and action sports channels. However, we cannot assure investors that these efforts will be successful. +28 +Table of Contents +Sanuk Brand Overview +On July 1, 2011 we acquired the Sanuk brand, a dynamic action sport footwear brand rooted in surf, known for its original +sandals and shoes and irreverent marketing. The brand has a history of innovation, product invention, foot-friendly comfort, and clever branding. Sanuk is currently available in more than +1,700 retailers in 40 countries and at Sanuk.com. +We +believe that the Sanuk brand is an ideal addition to the Deckers family of brands and that each of our brands can leverage off each others' distribution channels. The Sanuk business +is a profitable, well-run business that we believe provides for substantial growth opportunities within the action sports market, as well as other markets and channels in which Deckers is +already established. In the 14 years since its inception, the Sanuk brand has consistently brought creativity, fun, and comfort to the line of sandals and shoes for men, women, and children. We +plan to continue to build on the Sanuk brand's authentic position in the surf and outdoor markets through its relationships with prominent professional athletes, including surfers, bouldering +athletes, and rock climbers, known as much for their unique personal styles and charisma as for their specialized talents. +Other Brands Overview +Our other brands consist of TSUBO, Ahnu, MOZO, and Simple. Our other brands are all sold through most of our distribution channels, +with the majority through wholesale channels. We ceased distribution of the Simple brand effective December 31, 2011. +TSUBO, +meaning pressure point in Japanese, is marketed as high-end casual footwear for men and women. The brand is the synthesis of ergonomics and style, with a full line of +sport and dress casuals, boots, sandals and heels constructed to provide consumers with contemporary footwear that incorporates style, function, and maximum comfort. We are positioning the TSUBO brand +as the premium footwear solution for people in the city. We are continuing to create products to address consumers' unique needs of all-day comfort, innovative style, and superior quality. +The +Ahnu brand is an outdoor performance and lifestyle footwear brand for men and women. The name Ahnu is derived from the Celtic goddess representing the balance of +well-being and prosperity. The brand focuses primarily on women consumers offering style and comfort for active women on both trails and pavement. The product goal is to achieve +uncompromising footwear performance by developing footwear that will provide the appropriate balance of traction, grip, flexibility, cushioning, and durability for a variety of outdoor +activities — whether on trails, beaches, or sidewalks. +The +MOZO brand strives to deliver revolutionary footwear for creative, passionate, and talented professionals that spend long hours working on their feet. Our +high-performance footwear is designed to the standards of these professionals, not just their workplace. In 2011, MOZO introduced The Chef Signature Collection: footwear designed by Marcus +Samuelsson, Aaron Sanchez, and Chris Cosentino. This collection has put the MOZO brand in the press for the first time and allowed the brand to open up new distribution opportunities. We have recently +expanded our distribution to include large on-line retailers and into the health care worker market. +We +expect to leverage our design, marketing, and distribution capabilities to grow our other brands over the next several years, consistent with our mission to build niche brands into +global market leaders. Nevertheless, we cannot assure investors that our efforts to grow these brands will be successful. +eCommerce Overview +Our eCommerce business, which sells all of our brands, allows us to reinforce our relationship with the consumer. eCommerce enables us +to meet the growing demand for our products, sell the products at retail prices, and provide significant incremental operating income. The eCommerce business provides us an opportunity to communicate +to the consumer with a consistent brand message that is in line with our +29 +Table of Contents +brands' +promises, drives awareness of key brand initiatives, and offers targeted information to specific consumer segments. Our websites also drive wholesale and distributor sales through brand +awareness and directing consumers to retailers that carry our brands, including our own retail stores. In recent years, our eCommerce business has had significant revenue growth, much of which +occurred as the UGG brand gained popularity and as consumers continued to increase internet usage for footwear and other purchases. +Managing +our eCommerce business requires us to focus on the latest trends and techniques for web design and marketing, to generate internet traffic to our websites, to effectively +convert website visits into orders, and to maximize average order sizes. We plan to continue to grow our eCommerce business through improved website features and performance, increased marketing, +expansion into international markets, and utilization of mobile and tablet technology. Nevertheless, we cannot assure investors that revenue from our eCommerce business will continue to grow. +Retail Stores Overview +Our retail stores are predominantly UGG Australia concept stores and UGG Australia outlet stores. Our retail stores enable us to +directly impact our customers' experience, meet the growing demand for these products, sell the products at retail prices and provide us with incremental operating income. In addition, our UGG +Australia concept stores allow us to showcase our entire line; whereas, a retailer may not carry the whole line. Through our outlet stores, we sell some of our discontinued styles from prior seasons, +plus products made specifically for the outlet stores. We sell Teva products as well as some of our other brands through our UGG Australia outlet stores. +As +of December 31, 2011, we had a total of 45 retail stores worldwide. These stores are company-owned and operated and include our China stores, which are owned and operated with +our joint venture partner. During 2012, we plan to open additional retail stores, with the majority in international locations, with the total being more than the number of stores we opened in 2011, +and we intend to continue opening more retail stores worldwide beyond 2012. +Seasonality +Our business is seasonal, with the highest percentage of UGG brand net sales occurring in the third and fourth calendar quarters and +the highest percentage of Teva and Sanuk brand net sales occurring in the first and second calendar quarters of each year. Our financial results include the Sanuk brand beginning July 1, 2011. +Our other brands do not have a significant seasonal impact. +2011 +First +Quarter +Second +Quarter +Third +Quarter +Fourth +Quarter +Net sales +$ +204,851 +$ +154,222 +$ +414,358 +$ +603,852 +Income (loss) from operations +$ +28,195 +$ +(10,798 +) +$ +90,661 +$ +176,780 +2010 +First +Quarter +Second +Quarter +Third +Quarter +Fourth +Quarter +Net sales +$ +155,927 +$ +137,059 +$ +277,879 +$ +430,124 +Income from operations +$ +28,821 +$ +13,216 +$ +66,314 +$ +140,737 +With +the large growth in the UGG brand over the past several years, net sales in the last half of the year have exceeded net sales for the first half of the year. Given our expectations +for our brands, we currently expect this trend to continue. Nonetheless, actual results could differ materially depending upon consumer preferences, availability of product, competition, and our +wholesale and distributor customers continuing to carry and promote our various product lines, among other risks and uncertainties. See Part I, Item 1A, "Risk Factors." +30 +Table of Contents +Results of Operations +Year Ended December 31, 2011 Compared to Year Ended December 31, 2010 +The following table summarizes our results of operations: +Years Ended December 31, +2011 +2010 +Change +Amount +% +Amount +% +Amount +% +Net sales +$ +1,377,283 +100.0 +% +$ +1,000,989 +100.0 +% +$ +376,294 +37.6 +% +Cost of sales +698,288 +50.7 +498,051 +49.8 +200,237 +40.2 +Gross profit +678,995 +49.3 +502,938 +50.2 +176,057 +35.0 +Selling, general and administrative expenses +394,157 +28.6 +253,850 +25.4 +140,307 +55.3 +Income from operations +284,838 +20.7 +249,088 +24.9 +35,750 +14.4 +Other income, net +(424 +) +— +(1,021 +) +(0.1 +) +597 +58.5 +Income before income taxes +285,262 +20.7 +250,109 +25.0 +35,153 +14.1 +Income taxes +83,404 +6.1 +89,732 +9.0 +(6,328 +) +(7.1 +) +Net income +201,858 +14.7 +160,377 +16.0 +41,481 +25.9 +Net income attributable to the noncontrolling interest +(2,806 +) +(0.2 +) +(2,142 +) +(0.2 +) +(664 +) +(31.0 +) +Net income attributable to Deckers Outdoor Corporation +$ +199,052 +14.5 +% +$ +158,235 +15.8 +% +$ +40,817 +25.8 +% +Overview. The Sanuk brand operations are included in our results of operations effective upon the acquisition date of +July 1, 2011. The +increase in net sales was primarily due to an increase in UGG product sales. The increase in income from operations resulted from higher sales, partially offset by higher selling, general and +administrative expenses (SG&A) and lower gross margin. +31 +Table of Contents +Net Sales. The following table summarizes net sales by location and net sales by brand and distribution channel: +Years Ended December 31, +Change +2011 +2010 +Amount +% +Net sales by location: +US +$ +945,109 +$ +764,111 +$ +180,998 +23.7 +% +International +432,174 +236,878 +195,296 +82.4 +Total +$ +1,377,283 +$ +1,000,989 +$ +376,294 +37.6 +% +Net sales by brand and distribution channel: +UGG: +Wholesale +$ +915,203 +$ +663,854 +$ +251,349 +37.9 +% +eCommerce +98,256 +84,574 +13,682 +16.2 +Retail stores +188,377 +124,718 +63,659 +51.0 +Total +1,201,836 +873,146 +328,690 +37.6 +Teva: +Wholesale +118,742 +96,207 +22,535 +23.4 +eCommerce +5,571 +4,838 +733 +15.2 +Retail stores +452 +302 +150 +49.7 +Total +124,765 +101,347 +23,418 +23.1 +Sanuk: +Wholesale +26,039 +— +26,039 +* +eCommerce +539 +— +539 +* +Retail stores +— +— +— +— +Total +26,578 +— +26,578 +* +Other brands: +Wholesale +21,801 +23,476 +(1,675 +) +(7.1 +) +eCommerce +2,132 +2,396 +(264 +) +(11.0 +) +Retail stores +171 +624 +(453 +) +(72.6 +) +Total +24,104 +26,496 +(2,392 +) +(9.0 +) +Total +$ +1,377,283 +$ +1,000,989 +$ +376,294 +37.6 +% +Total eCommerce +$ +106,498 +$ +91,808 +$ +14,690 +16.0 +% +Total Retail stores +$ +189,000 +$ +125,644 +$ +63,356 +50.4 +% +* Calculation +of percentage change is not meaningful. +The +increase in net sales was primarily driven by strong sales for the UGG brand. We experienced an increase in the number of pairs sold primarily through our UGG and Teva wholesale +channels, as well as the addition of the Sanuk brand. This resulted in a 26.7% overall increase in the volume of footwear sold for all brands to approximately 22.8 million pairs for the year +ended December 31, 2011 compared to approximately 18.0 million pairs for 2010. Our weighted-average wholesale selling price per pair increased to $52.38 for the year ended +December 31, 2011 from $47.71 for 2010. The increased average selling price was partially due to higher selling prices resulting from our conversion from a distributor model to a direct +wholesale model for our UGG brand in the UK and Benelux and for our Teva brand in the UK. The +32 +Table of Contents +increased +selling prices over the prior year period from this conversion will not recur; however, we expect to maintain the wholesale selling prices in these regions in the future. +Wholesale +net sales of our UGG brand increased primarily due to the volume of pairs sold, as well as an increase in the average selling price, which was largely related to our conversion +to a direct wholesale model in the UK and Benelux. We cannot assure investors that UGG brand sales will continue to grow at their past pace. +Wholesale +net sales of our Teva brand increased due to both an increase in the volume of pairs sold, as well as an increase in the average selling price, which was largely related to our +conversion to a direct wholesale model in the UK, as well as increased closed-toe footwear that carry higher average selling prices. +Wholesale +net sales of our Sanuk brand, which we acquired in July 2011, were $26,039. +Wholesale +net sales of our other brands decreased due to a decrease in the average selling price, primarily due to closeout sales for our Simple brand, partially offset by an increase in +pairs sold. +Net +sales of our eCommerce business increased due to both an increase in the volume of pairs sold and an increase in the average selling price, primarily for the UGG brand. +Net +sales of our retail store business, which are primarily UGG brand sales, increased largely due to the addition of 18 new stores opened since December 31, 2010. New stores that +were not open during the full year ended December 31, 2010 contributed approximately $75,000 of retail sales for the year ended December 31, 2011 compared to their partial year sales of +approximately $19,000 in 2010. We do not expect this growth rate to continue because as we increase the number of our stores, each new store will have less proportional impact on our growth rate. For +those stores that were open during the full year ended December 31, 2011 and 2010, same store sales grew by 6.3%. Nevertheless, we cannot assure investors that retail store sales will continue +to grow at their recent pace or that revenue from our retail store business will not at some point decline. +International +sales, which are included in the segment sales above, for all of our products combined represented 31.4% and 23.7% of worldwide net sales for the year ended +December 31, 2011 and 2010, respectively. The international sales growth was led by the UGG and Teva brands in the European region largely due to our conversion to a direct wholesale model. +Gross Profit. As a percentage of net sales, gross margin decreased primarily due to increased sheepskin and other material costs +as well as increased +factory costs. Our sheepskin costs in 2011 were 27% higher than 2010 costs, partially offset by increased sales prices. In addition, we received approximately $7,000 in duty refunds during the year +ended December 31, 2010, which did not recur in 2011. The decrease was partially offset by a higher percentage mix of retail sales and higher average selling prices. We began realizing the +benefit of the direct wholesale model, versus distributor margins, in the UK for our UGG and Teva brands and in Benelux for our UGG brand starting in January 2011. Our gross margins fluctuate based on +several factors, and we expect our gross margin to decrease for the full year 2012 compared to 2011. We expect product costs to be approximately 10% higher in 2012, primarily due to further increasing +sheepskin costs of 40%. We intend to mitigate these increases through selective price increases, higher margins from a full year of our Sanuk brand, and a higher retail mix. +Selling, General and Administrative Expenses. SG&A increased primarily from: +• increased retail costs of approximately $30,000 largely related to 18 new retail stores that were not open as of +December 31, 2010; +• increased international division expenses of approximately $21,000 in support of our international expansion and our +distributor conversions to the wholesale model; +• increased marketing expenses of approximately $19,000 primarily related to our UGG brand; +33 +Table of Contents +• increased commissions and other selling expenses of approximately $17,000 related to our increased sales; and +• increased depreciation, amortization, and accretion expenses of approximately $11,000, primarily related to our Sanuk +acquisition intangible assets and contingent consideration. +Income (Loss) from Operations. The gross profit derived from the sales to third parties of the eCommerce and retail store +segments is separated into +two components: (i) the wholesale profit is included in the related operating income or loss of each wholesale segment, and (ii) the remaining profit is included in the eCommerce and +retail stores segments. The following table summarizes operating income (loss) by segment: +Years Ended December 31, +Change +2011 +2010 +Amount +% +UGG wholesale +$ +388,275 +$ +307,478 +$ +80,797 +26.3 +% +Teva wholesale +20,267 +18,684 +1,583 +8.5 +Sanuk wholesale +797 +— +797 +* +Other brands wholesale +(9,524 +) +(6,184 +) +(3,340 +) +(54.0 +) +eCommerce +24,255 +23,536 +719 +3.1 +Retail stores +31,461 +27,310 +4,151 +15.2 +Unallocated overhead costs +(170,693 +) +(121,736 +) +(48,957 +) +(40.2 +) +Total +$ +284,838 +$ +249,088 +$ +35,750 +14.4 +% +* Calculation +of percentage change is not meaningful. +Income +from operations as a percentage of sales decreased due to increased SG&A and decreased gross margin, partially offset by increased sales. +The +increase in income from operations of UGG brand wholesale was the result of higher sales. The increase to income was partially offset by a 1.8 percentage point decrease in +gross margin primarily related to the increased sheepskin and other material costs. We also experienced increases in marketing and promotional expenses of approximately $17,000; increased sales +expenses of approximately $6,000; increased sales commissions of approximately $5,000; and higher amortization expenses, primarily related to order books we acquired from our distributor conversions +in Europe, of approximately $4,000. +The +increase in income from operations of Teva brand wholesale was largely due to increased sales and decreased amortization of approximately $2,000, partially offset by a +0.6 percentage point decrease in gross margin, primarily due to higher inventory write-downs and an increased impact of closeout sales. In addition, we recognized increased divisional sales +expenses and increased marketing and promotional expenses totaling approximately $5,000. +The +income from operations of our Sanuk brand, which we acquired in July 2011, was $797. +The +loss from operations of our other brands wholesale increased primarily due to a 14.8 percentage point decrease in gross margin as well as the decreased sales. In the process +of ceasing distribution of the Simple brand as of December 31, 2011, we experienced an increased impact from Simple brand closeout sales. The increase in the loss was partially offset by lower +operating expenses of approximately $400. +Income +from operations of our eCommerce business increased slightly due to the increased sales, partially offset by increased operating expenses of approximately $6,000, while gross +margin remained flat. +Income +from operations of our retail store business, which is primarily the UGG brand, increased due to the increased sales, partially offset by increased operating expenses of +approximately $30,000, while +34 +Table of Contents +gross +margin remained flat. The increased operating expenses were largely attributable to the 18 new stores. +The +increase in unallocated overhead costs resulted most significantly from an increase of approximately $21,000 related to international infrastructure costs primarily to support our +conversions from distributor models to direct wholesale models, as well as increased legal expenses of approximately $7,000 primarily related to the protection of our intellectual property including +our trademarks. We also incurred approximately $4,000 related to Sanuk acquisition costs. +Other Income, Net. Other income, net decreased primarily due to a one-time foreign sales +tax exemption of approximately $1,000 recognized in the prior year, partially offset by a credit to interest expense in the current year resulting from a reversal of a prior year income tax related +accrual. +Income Taxes. Income tax expense and effective income tax rates were as follows: +Years Ended December 31, +2011 +2010 +Income tax expense +$ +83,404 +$ +89,732 +Effective income tax rate +29.2 +% +35.9 +% +The +decrease in the effective tax rate was primarily due to the increase in our annual foreign pre-tax income as a percentage of worldwide pre-tax income, as +income generated in the US is taxed at significantly higher rates than most of our foreign jurisdictions. For the full year 2011, we generated approximately 28.0% of our pre-tax earnings +from a country which does not impose a corporate income tax. Unremitted earnings of non-US subsidiaries are expected to be reinvested outside of the US indefinitely. Such earnings would +become taxable upon the sale or liquidation of these subsidiaries or upon the remittance of dividends. As of December 31, 2011, we had approximately $43,000 of cash and cash equivalents outside +the US that would be subject to additional income taxes if it were to be repatriated. We have no plans to repatriate any of our foreign cash. We anticipate our effective tax rate for the full year +2012 to increase compared to the full year 2011 rate, but still remain lower than the full year 2010 rate. +Net Income Attributable to the Noncontrolling Interest. Net income attributable to the noncontrolling interest in our joint +venture with Stella +International increased slightly primarily due to the new stores in China. +Net Income Attributable to Deckers Outdoor Corporation. Our net income increased as a result of the items discussed above. Our +diluted earnings per +share increased for the year ended December 31, 2011 compared to the same period of 2010, primarily as a result of the increase in net income. +35 +Table of Contents +Year Ended December 31, 2010 Compared to Year Ended December 31, 2009 +The following table summarizes our results of operations: +Years Ended December 31, +2010 +2009 +Change +Amount +% +Amount +% +Amount +% +Net sales +$ +1,000,989 +100.0 +% +$ +813,177 +100.0 +% +$ +187,812 +23.1 +% +Cost of sales +498,051 +49.8 +442,087 +54.4 +55,964 +12.7 +Gross profit +502,938 +50.2 +371,090 +45.6 +131,848 +35.5 +Selling, general and administrative expenses +253,850 +25.4 +189,843 +23.3 +64,007 +33.7 +Income from operations +249,088 +24.9 +181,247 +22.3 +67,841 +37.4 +Other income, net +(1,021 +) +(0.1 +) +(1,976 +) +(0.2 +) +955 +48.3 +Income before income taxes +250,109 +25.0 +183,223 +22.5 +66,886 +36.5 +Income taxes +89,732 +9.0 +66,304 +8.2 +23,428 +35.3 +Net income +160,377 +16.0 +116,919 +14.4 +43,458 +37.2 +Net income attributable to the noncontrolling interest +(2,142 +) +(0.2 +) +(133 +) +* +(2,009 +) +* +Net income attributable to Deckers Outdoor Corporation +$ +158,235 +15.8 +% +$ +116,786 +14.4 +% +$ +41,449 +35.5 +% +* Calculation +of percentage change is not meaningful. +Overview. The increase in net sales was primarily due to an increase in UGG product sales in all channels as well as Teva +wholesale sales. The +increase in income from operations resulted primarily from the increase in net sales and gross margin, partially offset by higher selling, general and administrative expenses. +36 +Table of Contents +Net Sales. The following table summarizes net sales by location and net sales by brand and distribution channel: +Years Ended December 31, +Change +2010 +2009 +Amount +% +Net sales by location: +US +$ +764,111 +$ +645,993 +$ +118,118 +18.3 +% +International +236,878 +167,184 +69,694 +41.7 +Total +$ +1,000,989 +$ +813,177 +$ +187,812 +23.1 +% +Net sales by brand and distribution channel: +UGG: +Wholesale +$ +663,854 +$ +566,964 +$ +96,890 +17.1 +% +eCommerce +84,574 +66,939 +17,635 +26.3 +Retail stores +124,718 +77,934 +46,784 +60.0 +Total +873,146 +711,837 +161,309 +22.7 +Teva: +Wholesale +96,207 +71,952 +24,255 +33.7 +eCommerce +4,838 +5,289 +(451 +) +(8.5 +) +Retail stores +302 +421 +(119 +) +(28.3 +) +Total +101,347 +77,662 +23,685 +30.5 +Other brands: +Wholesale +23,476 +19,644 +3,832 +19.5 +eCommerce +2,396 +3,438 +(1,042 +) +(30.3 +) +Retail stores +624 +596 +28 +4.7 +Total +26,496 +23,678 +2,818 +11.9 +Total +$ +1,000,989 +$ +813,177 +$ +187,812 +23.1 +% +Total eCommerce +$ +91,808 +$ +75,666 +$ +16,142 +21.3 +% +Total Retail stores +$ +125,644 +$ +78,951 +$ +46,693 +59.1 +% +The +increase in net sales was primarily driven by strong sales for the UGG brand. We experienced an increase in the number of pairs sold in all segments, led by our UGG and Teva +wholesale channels and our retail stores. This resulted in a 14.6% overall increase in the volume of footwear sold for all brands to approximately 18.0 million pairs for 2010 from approximately +15.7 million pairs for 2009. In addition, our weighted-average wholesale selling price per pair increased approximately 4.1% to $47.71 in 2010 +from $45.83 in 2009. This increase resulted primarily from higher UGG sales, which generally carry higher average selling prices, and from higher Teva brand selling prices. +Wholesale +net sales of our UGG brand increased primarily due to an increase in pairs sold, as well as an increase in the average selling price. +Wholesale +net sales of our Teva brand increased due to both an increase in the average selling price and an increase in pairs sold. The average selling price increase was primarily the +result of decreased closeout sales and was also the result of realizing the benefit of assuming the distribution rights in Benelux and France starting in January 2010. +Wholesale +net sales of our other brands increased due to both an increase in pairs sold and an increase in average selling price. +37 +Table of Contents +Net sales of our eCommerce business increased due to an increase in both the average selling price and the number of pairs sold. +The +increase in net sales of our retail store business, consisting mainly of UGG brand sales, was largely due to the addition of nine new stores opened since December 31, 2009. +New stores that were not open for the full year ended December 31, 2009 contributed approximately $44,000 of retail sales for year ended December 31, 2010 compared to approximately +$9,000 in 2009. For those stores that were open during the full year ended December 31, 2009 and 2010, same store sales grew by 16.6%. +International +sales, which are included in the segment sales above, for all of our products combined represented 23.7% and 20.6% of worldwide net sales for 2010 and 2009, respectively. +The international sales growth was led by the UGG brand, including our retail stores, and the Teva brand in the European region. +Gross Profit. As a percentage of net sales, gross margin increased primarily due to a higher percentage of retail sales and +increased wholesale +margins in all wholesale segments. We experienced a reduced impact of closeout sales for the Teva brand and began realizing the benefit of the direct wholesale business in Benelux starting in January +2010. In addition, we received approximately $7,000 in duty refunds during the year ended December 31, 2010. +Selling, General and Administrative Expenses (SG&A). SG&A increased primarily from: +• a planned increase in international expenses of approximately $22,000 in support of our continued growth globally, +including initial distributor conversion expenses and fixed costs related to three new international retail stores that were not open as of December 31, 2009, +• approximately $10,000 of divisional expenses primarily related to our UGG brand, and +• fixed costs of approximately $9,000 related to six new domestic retail stores that were not open as of December 31, +2009. +Income (Loss) from Operations. The gross profit derived from the sales to third parties of the eCommerce and retail store +segments for the US is +separated into two components: (i) the wholesale profit is included in the related operating income or loss of each wholesale segment, and (ii) the remaining profit is included in the +eCommerce and retail stores segments. The following table summarizes operating income (loss) by segment: +Years Ended December 31, +Change +2010 +2009 +Amount +% +UGG wholesale +$ +307,478 +$ +235,849 +$ +71,629 +30.4 +% +Teva wholesale +18,684 +12,495 +6,189 +49.5 +Other brands wholesale +(6,184 +) +(14,698 +) +8,514 +57.9 +eCommerce +23,536 +21,073 +2,463 +11.7 +Retail stores +27,310 +15,361 +11,949 +77.8 +Unallocated overhead costs +(121,736 +) +(88,833 +) +(32,903 +) +(37.0 +) +Total +$ +249,088 +$ +181,247 +$ +67,841 +37.4 +% +Income +from operations increased primarily due to the increase in sales and gross margins, partially offset by higher selling, general and administrative expenses. +The +increase in income from operations of UGG brand wholesale was primarily the result of the higher sales and an increase in gross margin, partially attributable to the duty refunds and +the higher content of retail sales, as well as increased net bad debt recoveries of approximately $1,000. The increase +38 +Table of Contents +was +partially offset by approximately $10,000 of increased marketing and promotional expenses; research, development, and design expenses; and divisional sales expenses. +The +increase in income from operations of Teva brand wholesale was primarily the result of higher sales and an increase of 3.2 percentage points on gross margin largely due to the +benefit of the direct business in Benelux, partially offset by an approximate $5,000 increase in divisional expenses. +The +loss from operations of our other brands wholesale improved primarily due to a 14.6 percentage point increase on gross margin, increased sales, and an approximate $3,000 +decrease in marketing and promotional expenses. +Income +from operations of our eCommerce business increased primarily due to an increase in sales, partially offset by approximately $5,000 in increased operating expenses primarily due +to increased marketing and promotional expenses as well as increased payroll expenses. +Income +from operations of our retail store business increased primarily due to the higher sales and an increase in gross margin, partially offset by approximately $15,000 of higher +operating expenses primarily related to our new store openings. +Unallocated +overhead costs increased most significantly from an increase of approximately $11,000 related to international infrastructure costs to support our continued growth. +Other (Income) Expense, Net. Interest expense increased due to negative interest expense in 2009 due to the reversal of accrued +interest related to +certain tax obligations for one of our foreign subsidiaries. In addition, we incurred additional interest expense on income tax related liabilities in 2010. Interest income decreased primarily from +significantly lower market interest rates, as well as a shift in our investment mix to all highly liquid cash equivalents. Other income, net increased primarily due to a one-time foreign +sales tax exemption of approximately $1,000. +Income Taxes. Income tax expense and effective income tax rates were as follows: +Years Ended +December 31, +2010 +2009 +Income tax expense +$ +89,732 +$ +66,304 +Effective income tax rate +35.9 +% +36.2 +% +Net Income Attributable to the Noncontrolling Interest. Net income attributable to the noncontrolling interest in our joint +venture with Stella +International increased in 2010 over 2009 primarily due to the opening of three new retail stores in China, which became profitable during their first year. +Net Income Attributable to Deckers Outdoor Corporation. Our net income increased as a result of the items discussed above. Our +diluted earnings per +share increased primarily as a result of the increase in net income. +Off-Balance Sheet Arrangements +We have off-balance sheet arrangements consisting of guarantee contracts. See "Contractual Obligations" below. +Liquidity and Capital Resources +We finance our working capital and operating needs using a combination of our cash and cash equivalents balances, cash generated from +operations, and as needed, the credit available under our credit agreement. In an economic recession or under other adverse economic conditions, we may be unable to realize a return on our cash and +cash equivalents, secure additional credit on favorable terms, or renew or +39 +Table of Contents +access +our existing credit. Such failures may impact our working capital reserves and have a material adverse effect on our business. +Our +cash flow cycle includes the purchase of inventories, the subsequent sale of the inventories, and the eventual collection of the resulting accounts receivables. As a result, our +working capital requirements begin when we purchase, or make deposits on, the inventories and continue until we ultimately collect the resulting receivables. The seasonality of our UGG brand business +requires us to build fall and winter inventories in the second and third quarters to support sales for the UGG brand's major selling seasons, which historically occur during the third and fourth +quarters; whereas, the Teva and Sanuk brands generally begin to build inventory levels beginning in the fourth and first quarters in anticipation of the spring selling season that occurs in the first +and second quarters. Given the seasonality of our UGG, Teva, and Sanuk brands, our working capital requirements fluctuate significantly throughout the year. The cash required to fund these working +capital fluctuations has been provided using our internal cash flows and short-term borrowings. As needed, we borrow funds under our credit agreement. +The +following table summarizes our cash flows and working capital: +Year Ended December 31, +Change +2011 +2010 +Amount +% +Net cash provided by operating activities +$ +30,091 +$ +139,922 +$ +(109,831 +) +(78.5 +)% +Net cash used in investing activities +$ +(184,766 +) +$ +(1,600 +) +$ +(183,166 +) +* +Net cash used in financing activities +$ +(27,160 +) +$ +(9,052 +) +$ +(18,108 +) +(200.0 +) +Cash and cash equivalents +$ +263,606 +$ +445,226 +$ +(181,620 +) +(40.8 +)% +Trade accounts receivable +193,375 +116,663 +76,712 +65.8 +Inventories +253,270 +124,995 +128,275 +102.6 +Prepaids and other current assets +107,651 +28,848 +78,803 +273.2 +Total current assets +$ +817,902 +$ +715,732 +$ +102,170 +14.3 +% +Trade accounts payable +$ +110,853 +$ +67,073 +$ +43,780 +65.3 +Other current liabilities +121,226 +77,790 +43,436 +55.8 +Total current liabilities +$ +232,079 +$ +144,863 +$ +87,216 +60.2 +% +Net working capital +$ +585,823 +$ +570,869 +$ +14,954 +2.6 +% +* Calculation +of percentage change is not meaningful. +Cash from Operating Activities. Net cash provided by operating activities decreased primarily due to greater increases in +inventory, other current +assets, and accounts receivable in 2011 versus the increases in 2010. The larger increase in inventories was primarily due to higher material costs, a larger spring 2012 assortment for the UGG brand, +early delivery of spring inventory for the UGG and Teva brands, the additional inventory associated with the Sanuk brand, and increased retail store inventory due to the 18 new stores. The larger +increase in other current assets was primarily due to deposits with respect to purchase commitments made pursuant to our sheepskin contracts with a supplier. The larger increase in accounts receivable +was primarily due to increased sales and our new wholesale European business. These decreases in operating cash flows were partially offset by a significant increase in accounts payable, which +increased more in the year ended December 31, 2011 versus 2010. Accounts payable increased primarily due to our increased inventory purchases. Net working capital increased as of +December 31, 2011 from December 31, 2010, primarily as a result of increased inventory, other current assets, and accounts receivable. The increase in working capital was partially +offset by lower cash and cash equivalents primarily due to cash paid for our Sanuk acquisition, the higher trade accounts payable, and higher other accrued expenses primarily attributable to the Sanuk +contingent consideration. Changes in working capital are due +40 +Table of Contents +to +the items discussed above, as well as our normal seasonality and timing of cash receipts and cash payments. +Wholesale +accounts receivable turnover decreased to 7.5 times in the twelve months ended December 31, 2011 from 8.3 times for the twelve months ended December 31, 2010, +primarily due to higher average accounts receivable balances, partially offset by increased cash collections for the twelve months ended December 31, 2011 compared to the twelve months ended +December 31, 2010. The higher +accounts receivable balances were primarily attributed to increased sales, including the conversion to our European wholesale operations, which provides us higher selling prices. +Inventory +turnover decreased to 3.3 times for the twelve months ended December 31, 2011 compared to 4.2 times for the twelve months ended December 31, 2010, primarily due +to higher average inventory levels during the twelve months ended December 31, 2011 compared to the twelve months ended December 31, 2010, partially offset by increased sales. The higher +inventory balances were primarily attributed to our actual and projected increased sales, increased international inventory, new retail locations, and increased costs of materials and factories. +Cash from Investing Activities. Net cash used in investing activities for the year ended December 31, 2011 resulted +primarily from our +acquisition of the Sanuk brand (see Note 9 to our accompanying consolidated financial statements) and purchases of property and equipment. Our larger capital expenditures included the purchase +of land for our new corporate headquarters and new retail stores. In November 2011, we made a cash payment of approximately $20,000 for approximately fourteen acres of land for our new headquarters +facility in Goleta, California. +For +the year ended December 31, 2010, net cash used in investing activities resulted primarily from purchases of property and equipment and acquisitions of businesses, partially +offset by sales of short-term investments. Our larger capital expenditures were related to the build out of new retail stores and computer hardware and software. In addition, we did not +purchase short-term investments in 2010, as we shifted our investments to cash and cash equivalents. +As +of December 31, 2011, we had no material commitments for future capital expenditures but estimate that the capital expenditures for 2012 will range from approximately $90,000 +to $95,000. We anticipate these expenditures will primarily include the initial design and construction costs of our new headquarters and new retail stores, more than the number of stores we opened in +2011. The actual amount of capital expenditures for the year may differ from this estimate, largely depending on the timing of new store openings or any unforeseen needs to replace existing assets and +the timing of other expenditures, including design and construction of the new headquarters. +Cash from Financing Activities. For the year ended December 31, 2011, net cash used in financing activities was comprised +primarily of +repayments of short-term borrowings, cash used for shares withheld for taxes from employee stock unit vesting and for repurchases of our common stock. The cash used was partially offset by +cash from of our short-term borrowings, leaving a zero balance for borrowings as of December 31, 2011, and excess tax benefits from stock compensation. The excess tax benefits from +stock compensation changes were larger than the prior period primarily due to the issuance of stock in relation to our long-term incentive program. +For +the year ended December 31, 2010, net cash used in financing activities was comprised primarily of cash used for repurchases of our common stock and for shares withheld for +taxes from employee stock unit vesting, partially offset by excess tax benefits from stock compensation. +In +June 2009, our Board of Directors approved a stock repurchase program to repurchase up to $50,000 of our common stock in the open market or in privately negotiated transactions, +subject to market conditions, applicable legal requirements and other factors. The program did not obligate us to acquire any particular amount of common stock and the program could be suspended at +any time at our discretion. As of June 30, 2011, we had repurchased the full amount authorized under this program. During the year +41 +Table of Contents +ended +December 31, 2011, we repurchased approximately 245,000 shares for approximately $20,000, or an average price of $81.22 per share. +On +February 23, 2012, our Board of Directors approved a new stock repurchase program to repurchase up to $100,000 of our common stock in the open market or in privately negotiated +transactions, subject to market conditions, applicable legal requirements, and other factors. The program does not obligate us to acquire any particular amount of common stock and the program may be +suspended at any time at our discretion. The purchases will be funded from available working capital. +On +August 30, 2011, we entered into a Credit Agreement (the "Credit Agreement") with JPMorgan Chase Bank, National Association as the administrative agent, Comerica Bank and HSBC +Bank USA, National Association, as syndication agents, and the lenders party thereto. The Credit Agreement is a five-year, $200,000 secured revolving credit facility which contains a +$50,000 sublimit for the issuance of letters of credit and a $5,000 sublimit for swingline loans and replaces the Previous Credit Agreement. Subject to customary conditions and the approval of any +lender whose commitment would be increased, we have the option to increase the maximum principal amount available under the Credit Agreement by up to an additional $100,000, resulting in a maximum +available principal amount of $300,000. None of the lenders under the Credit Agreement has committed at this time or is obligated to provide any such increase in the commitments. At our option, +revolving loans issued under the Credit Agreement will bear interest at either adjusted LIBOR for 30 days (0.30% at December 31, 2011) plus 1.25% per annum, in the case of LIBOR +borrowings, or at the alternate base rate plus 0.25% per annum, and thereafter the interest rate will fluctuate between adjusted LIBOR plus 1.25% per annum and adjusted LIBOR plus 1.50% per annum (or +between the alternate base rate plus 0.25% per annum and the alternate base rate plus 0.50% per annum), based upon our total adjusted leverage ratio at such time. In addition, we will initially be +required to pay fees of 0.20% per annum on the daily unused amount of the revolving credit facility, and thereafter the fee rate will fluctuate between 0.20% and 0.30% per annum, based upon our total +adjusted leverage ratio. At December 31, 2011, we +had no outstanding borrowings under the Credit Agreement and outstanding letters of credit of $553. As a result, $199,447 was available under the Credit Agreement at December 31, 2011. +Our +obligations under the Credit Agreement are guaranteed by our existing and future domestic subsidiaries other than certain immaterial subsidiaries and foreign subsidiaries (the +"Guarantors"), and is secured by a first-priority security interest in substantially all of our assets and the Guarantors', including all or a portion of the equity interests of certain of our +domestic and foreign subsidiaries. +The +Credit Agreement contains financial covenants which include: our asset coverage ratio must be greater than 1.10 to 1.00; and the sum of the consolidated annual earnings before +interest, taxes, depreciation, and amortization (EBITDA) and annual rental expense, divided by the sum of the annual interest expense and the annual rental expense must be greater than 2.25 to 1.00; +and other customary limitations. The Credit Agreement contains certain other covenants which include: a maximum additional secured debt related to a capital asset not to exceed $20,000, maximum +additional unsecured debt not to exceed $200,000; maximum secured debt not related to a capital asset not to exceed $5,000, maximum judgment of $10,000; maximum ERISA event of $10,000 in one year, +$20,000 in all years; we may not have a change of control; there is no limit on acquisitions, if the total adjusted leverage ratio does not exceed 2.75 to 1.00 and we must have a minimum amount of +cash plus unused credit of $75,000; and there is no restriction on dividends or share repurchases, if the minimum amount of cash plus unused credit is $75,000. As of December 31, 2011, we were +in compliance with all covenants and remain so as of the date of this report. +42 +Table of Contents +Contractual Obligations. The following table summarizes our contractual obligations at December 31, 2011 and the effects +such obligations are +expected to have on liquidity and cash flow in future periods. +Payments Due by Period +Total +Less than +1 Year +1-3 Years +3-5 Years +More than +5 Years +Operating lease obligations(1) +$ +153,569 +$ +27,241 +$ +45,907 +$ +37,245 +$ +43,176 +Purchase obligations(2) +271,107 +268,221 +2,886 +— +— +Unrecognized tax benefits(3) +3,271 +— +3,271 +— +— +Total +$ +427,947 +$ +295,462 +$ +52,064 +$ +37,245 +$ +43,176 +(1) Our +operating lease obligations consist primarily of building leases for our retail locations, distribution centers, and corporate and regional offices. The +majority of other long-term liabilities on our consolidated balance sheets, with the exception of our Sanuk contingent consideration liability discussed below, are related to deferred +rents, of which the cash lease payments are included in operating lease obligations in this table. +(2) Our +purchase obligations consist mostly of open purchase orders. They also include promotional expenses and service contracts. Outstanding purchase orders +are primarily with our third party manufacturers and are expected to be paid within one year. These are outstanding open orders and not minimum purchase obligations. Our promotional expenditures and +service contracts are due periodically through 2014. +We +also entered into minimum purchase commitments (see Note 8 to our accompanying consolidated financial statements). We have included the total remaining cash commitments, net of deposits, as +of December 31, 2011 in this table. We expect our sheepskin purchases by third party factories supplying UGG product to us will eventually exceed the minimum commitment levels; therefore we +believe the deposits will become fully refundable, and thus, we believe this will not materially affect our results of operations, as it is in the normal course of our business. +(3) The +unrecognized tax benefits are related to uncertain tax positions taken in our income tax return that would impact the effective tax rate or additional +paid-in capital, if recognized. See Note 5 to our accompanying consolidated financial statements. +The +purchase price for the Sanuk brand also includes contingent consideration over the next five years as follows: +• 2011 EBITDA of the Sanuk brand multiplied by ten, less the closing payment, up to maximum of $30,000, which we expect to +pay $30,000 in March 2012; +• 51.8% of the gross profit of the Sanuk brand in 2012, defined as total sales less the cost of sales for the business of +the sellers; +• 36.0% of gross profit of the Sanuk brand in 2013; and +• 8.0% of the product of gross profit of the Sanuk brand in 2015 multiplied by five. +There +is no maximum to the contingent consideration payments for 2012, 2013, and 2015. These payments were excluded from the table above as all conditions for the payments have not been +met. Contingent consideration payments of $91,600 are included within other accrued expenses and long-term liabilities in the consolidated balance sheet as of December 31, 2011. +We +are 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 our financial position or results of operations. In addition, we have agreed to indemnify certain licensees, distributors and promotional partners in connection with claims related to the +use of our intellectual +43 +Table of Contents +property. +The terms of such agreements range up to five years initially and generally do not provide for a limitation on the maximum potential future payments. Management believes the likelihood of +any payments is remote and would be immaterial. We determined the risk was low based on a prior history of insignificant claims. We are not currently involved in any indemnification matters in regards +to our intellectual property. +We +believe that internally generated funds, the available borrowings under our existing Credit Agreement, and our cash and cash equivalents will provide sufficient liquidity to enable us +to meet our working capital requirements for at least the next 12 months. 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, our ability to generate returns on our acquisitions of businesses, and market volatility, 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 requirements, we may seek to sell debt securities or additional equity securities or to obtain a new +credit agreement or draw on our existing Credit Agreement. 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 other material present understandings, commitments or agreements with respect to the +acquisition of any other businesses, we may evaluate acquisitions of other businesses or brands. +Recent Accounting Pronouncements +In June 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU), Presentation of Comprehensive +Income, an amendment to ASC 220, Comprehensive Income, that brings US Generally Accepted Accounting Principles (GAAP) into alignment with International Financial Reporting Standards for the +presentation of other comprehensive income (OCI). Effective for us beginning January 1, 2012, the option in current GAAP that permits the presentation of OCI in the statement of changes in +equity has been eliminated. The provisions of the update provide that an entity that reports items of OCI has two options: (1) a single statement must present the components of net income, +total net income, the components of OCI, total OCI, and total comprehensive income; or (2) a two-statement approach whereby an entity must present the components of net income and +total net income in the first statement. That statement must be immediately followed by a financial statement that presents the components of OCI, a total for OCI, and a total for comprehensive +income. Beginning January 1, 2012, we will adopt this +ASU using the single statement approach. The adoption of this ASU will only change the presentation of OCI on our consolidated financial statements. +Impact of Inflation +We believe that the rates of inflation in the three most recent fiscal years have not had a significant impact on our net sales or +profitability. +Critical Accounting Policies and Estimates +Refer to Note 1 to our accompanying consolidated financial statements for a discussion of our significant accounting policies. +Those policies and estimates that we believe are most critical to the understanding of our consolidated financial statements contained in this report are revenue recognition; use of estimates, which +includes the below reserves and allowances; inventories; accounting for long-lived assets; goodwill and other intangible assets; fair value of contingent consideration; and stock +compensation. +44 +Table of Contents +Use of Estimates. The preparation of financial statements in conformity with US generally accepted accounting principles +requires management to make +estimates and assumptions that affect the reported amounts during the reporting period. Management reasonably could use different 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 materially accurate in our estimates used for the reserves and allowances below. +The +following table summarizes data related to the critical accounting estimates for accounts receivable allowances and reserves, which are discussed below: +December 31, 2011 +December 31, 2010 +Amount +% of Gross +Trade Accounts +Receivable +Amount +% of Gross +Trade Accounts +Receivable +Gross trade accounts receivable +$ +215,067 +$ +130,435 +Allowance for doubtful accounts +$ +1,719 +0.8 +% +$ +1,379 +1.1 +% +Reserve for sales discounts +$ +4,629 +2.2 +% +$ +5,819 +4.5 +% +Allowance for estimated chargebacks +$ +4,031 +1.9 +% +$ +2,535 +1.9 +% +Amount +% of Net Sales +Amount +% of Net Sales +Net sales for the three months ended +$ +603,852 +$ +430,124 +Allowance for estimated returns +$ +11,313 +1.9 +% +$ +4,039 +0.9 +% +Estimated returns liability +$ +6,413 +1.1 +% +$ +4,838 +1.1 +% +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 and forecasts, 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 all or a portion of are identified as potentially uncollectible, plus a non-specific reserve for the balance of accounts based on our historical loss experience. Reserves +have been established for all projected losses of this nature. 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 we consider to have credit risk +and are not specifically identified as uncollectible would change the allowance for doubtful accounts at December 31, 2011 by approximately $1,100. +Reserve for Sales Discounts. A significant portion of our domestic net sales, as well as our international wholesale sales, and +resulting trade +accounts receivable reflects a discount that our customers may take, generally based upon meeting certain order, shipment and payment timelines. We use the amount of the discounts that are available +to be taken against the period-end trade accounts receivable to estimate and record a corresponding reserve for sales discounts. The decrease in the reserve was primarily due to one of our +largest customers receiving discounted pricing on invoices rather than receiving payment terms discounts, which lowered the overall reserve. +Allowance for Estimated Chargebacks. When our wholesale customers pay their invoices, they often take deductions for chargebacks +against their +invoices, which are often valid. Therefore, we record an allowance for the balance of chargebacks that are outstanding in our accounts receivable balance as of the end of each period, along with an +estimated reserve for chargebacks that have not yet been taken against outstanding accounts receivable balances. This estimate is based on historical trends of the timing and amount of chargebacks +taken against invoices. +45 +Table of Contents +Allowance for Estimated Returns and Estimated Returns Liability. We record an allowance for anticipated future returns of goods +shipped prior to +period-end and a liability for anticipated returns of goods sold direct to consumers. In general, we accept returns for damaged or defective products. We also have a policy whereby we +accept returns from our retail and eCommerce customers for a thirty day period. We base the amounts of the allowance and liability on any approved customer requests for returns, historical returns +experience, and any recent events that could result in a change from historical returns rates, among other factors. The allowance for estimated returns increased as a percentage of net sales due to +higher levels of actual returns received subsequent to year end. 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 allowance and liability reserves for returns in total at December 31, 2011 by approximately $5,600. +Inventory Write-Downs. 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 expected future net selling prices. At December 31, 2011, inventories were stated at $253,270, net of inventory write-downs of $2,419. At +December 31, 2010, inventories were stated at $124,995 net of inventory write-downs of $1,684. The increase in inventory write-downs was primarily due to additional write-downs primarily in our +other brand segment related to Simple brand inventories. 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, 2011 by approximately $560. +Valuation of Goodwill, Intangible and Other Long-Lived Assets. We assess the impairment of goodwill, intangible, and other +long-lived assets on a separate asset basis based on assumptions and judgments regarding the carrying amount of these assets individually. +We +performed our 2011 annual impairment tests for goodwill and nonamortizable intangible assets. We evaluated our UGG and Sanuk goodwill and our Teva trademarks. Based on the carrying +amounts of the UGG, Teva, and Sanuk goodwill, trademarks, and net assets, the brands' 2011 sales and operating results, and the brands' long-term forecasts of sales and operating results +as of their evaluation dates, we concluded that the carrying amounts of the UGG and Sanuk goodwill, as well as the Teva trademarks, were not impaired. Our Teva trademarks were evaluated using the +relief from royalty method. Our use of different estimates (including estimated royalty rates, discount rates, and future revenues, among others) and assumptions could produce different financial +results. As of October 31, 2011, our Teva trademarks had a carrying value of $15,301. At that date, our estimate of the trademarks' fair value was substantially in excess of the carrying value. +However, if growth rates fail to meet our forecasts, impairment of the Teva trademark may occur in the future. Our goodwill balance at December 31, 2011 represents goodwill in the Sanuk and UGG +reporting units. We believe the UGG reporting unit's fair value is substantially in excess of its carrying value. We believe the Sanuk reporting unit's fair value is greater than its carrying value, +as we have increased our Sanuk sales and profitability forecasts since the acquisition. All goodwill was evaluated based on qualitative analyses, and the Teva trademarks were evaluated based on +Level 3 inputs. +For +2010, we performed our annual impairment tests of goodwill and nonamortizable intangible assets using income approaches and valuation techniques and determined that there was no +impairment of goodwill or intangible assets as of October 31 or December 31, 2010 on our Teva trademarks or other nonamortizable intangible assets and goodwill, respectively. +We +also evaluated amortizable long-lived assets, including intangible assets as of December 31, 2011 and 2010. We recorded immaterial impairment losses in SG&A in our +other brands segment for which the fair values did not exceed their carrying values. We recorded certain amortizable intangible assets related to our Sanuk acquisition (see Note 9 to our +accompanying consolidated financial statements for the valuation methodologies used). Our other valuation methodologies used as of December 31, 2011 did not change from the prior year. +46 +Table of Contents +Fair Value of Contingent Consideration. We have entered into contingent consideration arrangements when we acquired brands. The +fair value of our +Sanuk brand contingent consideration is material and highly subjective. It is based on estimated future sales and gross profits, and discount rates, among other variables and estimates, and certain +years have no maximum payment (see Note 9 to our accompanying consolidated financial statements). These are evaluated each reporting period and the contingent consideration is adjusted +accordingly. Our estimated revenue forecasts include a compound annual growth rate of 17.8% through 2015. Our use of different estimates and assumptions could produce different financial results. For +example, a 5.0% change in the estimated compound annual growth rate would change the total liability balance at December 31, 2011 by approximately $5,300. +Item 7A. Quantitative and Qualitative Disclosures about Market Risk. +Interest Rate Risk. Our market risk exposure with respect to financial instruments is tied to changes in the prime rate in the +US and changes in +LIBOR. Our credit agreement provides for interest on outstanding borrowings at rates tied to the prime rate or, at our election, tied to LIBOR. At December 31, 2011, we did not have any +outstanding borrowings under the credit agreement. A 1.0% increase in interest rates on our current borrowings would have no impact on income before income taxes. +Foreign Currency Exchange Rate Risk. We face market risk to the extent that changes in foreign currency exchange rates affect +our foreign assets, +liabilities, revenues and expenses. We hedge certain foreign currency forecasted transactions and exposures from existing assets and liabilities. Other than an increasing amount of sales, expenses, +and financial positions denominated in foreign currencies, as discussed above, we do not believe that there has been a material change in the nature of our primary market risk exposures, including the +categories of market risk to which we are exposed and the particular markets that present the primary risk of loss. As of the date of this Annual Report on Form 10-K, we do not know +of or expect there to be any material change in the general nature of our primary market risk exposure in the near term. +We +currently utilize forward contracts and other derivative instruments to mitigate exposure to fluctuations in the foreign currency exchange rate, for a portion of the amounts we expect +to purchase and sell in foreign currencies. As our international operations grow and we increase purchases and sales in foreign currencies, we will evaluate and may utilize additional derivative +instruments, as needed, to hedge our foreign currency exposures. We do not use foreign currency contracts for trading purposes. +Although +the majority of our sales and inventory purchases are denominated in US currency, these sales and inventory purchases may be impacted by fluctuations in the exchange rates +between the US dollar and the local currencies in the international markets where our products are sold and manufactured. Our foreign currency exposure is generated primarily from our Asian and +European operations. Approximately $283,000, or 20.5%, of our total net sales for the year ended December 31, 2011 were denominated in foreign currencies. As we begin to hold more cash and +other monetary assets and liabilities in foreign currencies, we are exposed to financial statement translation gains and losses as a result of translating the operating results and financial positions +held in foreign currencies into US dollars. We translate monetary assets and liabilities denominated in foreign currencies into US dollars using the exchange rate as of the end of the reporting +period. In addition, certain of our foreign +subsidiaries' local currency is their designated functional currency. Accordingly, we translate those assets and liabilities into US dollars using the exchange rates at of the end of the reporting +period, which results in financial statement translation gains and losses in OCI. Changes in foreign exchange rates affect our reported profits and can distort comparisons from year to year. In +addition, if the US dollar strengthens, it may result in increased pricing pressure on our foreign distributors, and retailers, which may have a negative impact on our net sales and gross margins. As +of December 31, 2011, our hedging contracts had notional amounts totaling approximately $66,000. Based upon sensitivity analysis as of December 31, 2011, a 10.0% change in foreign +exchange rates would cause the fair value of our financial instruments to increase or decrease by approximately $6,400. +47 +Table of Contents +Commodity Price Risk. We purchase certain materials that are affected by commodity prices, the most significant of which is +sheepskin. The supply of +sheepskin used in certain UGG products is in high demand and there are a limited number of suppliers able to meet our expectations for the quantity and quality of sheepskin required. There have been +significant increases in the price of sheepskin in recent years as the demand from our competitors for this commodity has increased. We experienced a 27% increase in sheepskin costs in 2011 compared +to 2010, and we expect an additional 40% increase in 2012 for this commodity. Other significant factors affecting the price of sheepskin include weather patterns, harvesting decisions, global economic +conditions, and other factors which are not considered predictable or within our control. We use purchasing contracts, pricing arrangements, and refundable deposits to attempt to reduce the impact of +price volatility as an alternative to hedging commodity prices. The purchasing contracts and pricing arrangements we use may result in unconditional purchase obligations, which are not reflected in +our consolidated balance sheets. In the event of significant commodity cost increases, we will likely not be able to adjust our selling prices sufficiently to mitigate the impact on our margins. +Item 8. Financial Statements and Supplementary Data. +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. +Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. +None. +Item 9A. Controls and Procedures. +(a) Disclosure Controls and Procedures. +The Company maintains a system of disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed +in the reports that the Company files or submits under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods +specified in the Securities and Exchange Commission's rules and forms. These disclosure controls and procedures include, among other processes, controls and procedures designed to ensure that +information required to be disclosed in the reports that the Company files or submits under the Exchange Act is accumulated and communicated to management, including the principal executive officer +and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. +The +Company carried out an evaluation, under the supervision and with the participation of management, including the principal executive officer and the principal financial officer of +the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2011 pursuant to Exchange Act Rule 13a-15. Based upon that +evaluation, the principal executive officer and the principal financial officer concluded that the Company's disclosure controls and procedures, as defined in Exchange Act +Rule 13a-15(e) and 15d-15(e), were effective as of the end of the period covered by this report. +(b) Management's Report on Internal Control over Financial Reporting. +Management is responsible for establishing and maintaining adequate internal control over financial reporting at the Company. Our internal control over financial +reporting is a process designed under the supervision of the Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and +the preparation of the Company's financial statements +48 +Table of Contents +for +external reporting purposes in accordance with US generally accepted accounting principles (GAAP). A company's internal control over financial reporting includes those policies and procedures +that: +• pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and +dispositions of the assets of the company; +• provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in +accordance with GAAP, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and the directors of the company; and +• provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of +the company's assets that could have a material effect on the financial statements. +Because +of 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 Company's internal control over financial reporting as of December 31, 2011. 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). Management's +assessment included an evaluation of the design of the Company's 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, 2011, the Company maintained effective internal control over financial reporting. The registered public +accounting firm that audited the consolidated financial statements included in this Annual Report has issued an attestation report on the Company's internal control over financial reporting. 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. +(c) Changes in Internal Control over Financial Reporting. +There was no change in our internal control over financial reporting that occurred during the quarter ended December 31, 2011 that has materially affected, +or is reasonably likely to materially affect, our internal control over financial reporting. +Item 9B. Other Information. +None. +49 +Table of Contents +PART III +Item 10. Directors, Executive Officers and Corporate Governance. +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 and is posted on our website at www.deckers.com. Our code of ethics is designed to meet the requirements of Section 406 of +Regulation S-K and the rules promulgated there under. 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 Company's definitive proxy +statement relating to the Registrant's 2012 annual meeting of stockholders, which will be filed pursuant to Regulation 14A within 120 days after the end of the Company's fiscal year +ended December 31, 2011, and such information is incorporated herein by reference. +Item 11. Executive Compensation. +Information relating to Executive Compensation is set forth under "Proposal No. 1-Election of Directors" in the +Company's definitive proxy statement relating to the Registrant's 2012 annual meeting of stockholders, which will be filed pursuant to Regulation 14A within 120 days after the end of the +Company's fiscal year ended December 31, 2011, and such information is incorporated herein by reference. +Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. +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 Company's definitive proxy statement relating to the Registrant's 2012 annual meeting of stockholders, which will be filed +pursuant to Regulation 14A within +120 days after the end of the Company's fiscal year ended December 31, 2011, and such information is incorporated herein by reference. +Item 13. Certain Relationships and Related Transactions, and Director Independence. +Information relating to Certain Relationships and Related Transactions is set forth under "Proposal No. 1-Election +of Directors" in the Company's definitive proxy statement relating to the Registrant's 2012 annual meeting of stockholders, which will be filed pursuant to Regulation 14A within 120 days +after the end of the Company's fiscal year ended December 31, 2011, and such information is incorporated herein by reference. +Item 14. Principal Accounting Fees and Services. +Information relating to Principal Accountant Fees and Services is set forth under "Proposal No. 2-Independent +Registered Public Accounting Firm" in the Company's definitive proxy statement relating to the Registrant's 2012 annual meeting of stockholders, which will be filed pursuant to Regulation 14A +within 120 days after the end of the Company's fiscal year ended December 31, 2011, and such information is incorporated herein by reference. +50 +Table of Contents +PART IV +Item 15. Exhibits, Financial Statement Schedules. +Consolidated Financial Statements and Schedules required to be filed hereunder are indexed on Page F-1 hereof. +Exhibit Number +Description of Exhibit +3.1 +Amended and Restated Certificate of Incorporation of Deckers Outdoor Corporation as amended through May 27, 2010 (Exhibit 3.1 to the Registrant's Form 10-Q for the quarterly period ended June 30, 2010 +and incorporated by reference herein) +3.2 +Restated Bylaws of Deckers Outdoor Corporation, as amended by the Board of Directors through September 12, 2011 (Exhibit 3.2 to the Registrant's Form 10-Q for the quarterly period ended +September 30, 2011 and incorporated by reference herein) +10.1 +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 +Registrant's Form 10-K for the period ended December 31, 2003 and incorporated by reference herein) +10.2 +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 Registrant's Form 10-K for the period ended December 31, 2004 and incorporated by reference herein) +10.3 +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 Registrant's Form 10-K for the period ended December 31, 2004 and incorporated by reference herein) +#10.4 +Deckers Outdoor Corporation 2006 Equity Incentive Plan (incorporated herein by reference to Appendix A to the Registrant's Definitive Proxy Statement dated April 21, 2006 in connection with its 2006 Annual +Meeting of Stockholders) +#10.5 +First Amendment to Deckers Outdoor Corporation 2006 Equity Incentive Plan (incorporated herein by reference to Appendix A to the Registrant's Definitive Proxy Statement dated April 9, 2007 in connection with +its 2007 Annual Meeting of Stockholders) +#10.6 +Form of Restricted Stock Unit Award Agreement (Level 1) Under 2006 Equity Incentive Plan (Exhibit 10.2 to the Registrant's Form 8-K filed on May 11, 2007 and incorporated by reference +herein) +#10.7 +Form of Restricted Stock Unit Award Agreement (Level 2) Under 2006 Equity Incentive Plan (Exhibit 10.3 to the Registrant's Form 8-K filed on May 11, 2007 and incorporated by reference +herein) +#10.8 +Form of Stock Appreciation Rights Award Agreement (Level 1) Under 2006 Equity Incentive Plan (Exhibit 10.4 to the Registrant's Form 8-K filed on May 11, 2007 and incorporated by reference +herein) +#10.9 +Form of Stock Appreciation Rights Award Agreement (Level 2) Under 2006 Equity Incentive Plan (Exhibit 10.5 to the Registrant's Form 8-K filed on May 11, 2007 and incorporated by reference +herein) +#10.10 +Form of Indemnification Agreement (Exhibit 10.1 to the Registrant's Form 8-K filed on June 2, 2008 and incorporated by reference herein) +51 +Table of Contents +Exhibit Number +Description of Exhibit +#10.11 +Change of Control and Severance Agreement with Deckers Outdoor Corporation for Angel Martinez on December 22, 2009 (Exhibit 10.33 to the Registrant's Form 10-K filed on March 1, 2010 and incorporated +by reference herein) +#10.12 +Change of Control and Severance Agreement with Deckers Outdoor Corporation for Zohar Ziv on December 22, 2009 (Exhibit 10.34 to the Registrant's Form 10-K filed on March 1, 2010 and incorporated by +reference herein) +#10.13 +Change of Control and Severance Agreement with Deckers Outdoor Corporation for Thomas George on December 22, 2009 (Exhibit 10.35 to the Registrant's Form 10-K filed on March 1, 2010 and +incorporated by reference herein) +#10.14 +Change of Control and Severance Agreement with Deckers Outdoor Corporation for Constance Rishwain on December 22, 2009 (Exhibit 10.36 to the Registrant's Form 10-K filed on March 1, 2010 and +incorporated by reference herein) +10.15 +Second Amended and Restated Credit Agreement among Deckers Outdoor Corporation, TSUBO, LLC and Comerica Bank (Exhibit 10.1 to the Registrant's Form 8-K filed on May 28, 2010 and incorporated by +reference herein) +#10.16 +Deckers Outdoor Corporation Amended and Restated Deferred Stock Unit Compensation Plan, a Sub Plan under the Deckers Outdoor Corporation 2006 Equity Incentive Plan, adopted by the Board of Directors on +December 14, 2010 (Exhibit 10.24 to the Registrant's Form 10-K filied on March 1, 2011 and incorporated by reference herein) +*#10.17 +Deckers Outdoor Corporation Amended and Restated Deferred Compensation Plan effective as of January 1, 2011 +10.18 +Asset Purchase Agreement, dated as of May 19, 2011 by and among Deckers Outdoor Corporation, Deckers Acquisition, Inc., Deckers International Limited, Sanuk USA, LLC, Thomas J. Kelley, Ian L. Kessler, +C&C Partners, Ltd., Donald A. Clark and Paul Carr (Exhibit 10.1 to the Registrant's Form 8-K filed on May 19, 2011 and incorporated herein by reference) +#10.19 +Form of Restricted Stock Unit Award Agreement (Level III) Under 2006 Equity Incentive Plan adopted on June 22, 2011 (Exhibit 10.1 to the Registrant's Form 8-K filed on June 28, 2011 and +incorporated by reference herein) +10.20 +Amendment No. 1 to Asset Purchase Agreement, dated as of July 1, 2011, by and among Deckers Outdoor Corporation, Deckers Acquisition, Inc., Deckers International Limited, Sanuk USA, LLC, Thomas J. +Kelley, Ian L. Kessler, C&C Partners, Ltd., Donald A. Clark and Paul Carr (Exhibit 10.1 to the Registrant's Form 8-K filed on July 6, 2011 and incorporated by reference herein) +10.21 +Amendment Number Two to Second Amended and Restated Credit Agreement and Amendment Number One to LIBOR/Prime Rate Addendum, dated August 10, 2011, by and among Deckers Outdoor Corporation, TSUBO, LLC and +Comerica Bank (Exhibit 10.1 to the Registrant's Form 8-K filed on August 15, 2011 and incorporated by reference herein) +10.22 +Credit Agreement, dated as of August 30, 2011, by and among Deckers Outdoor Corporation, as Borrower, JPMorgan Chase Bank, National Association, as Administrative Agent, Comerica Bank and HSBC Bank USA, National +Association, as Syndication Agents, and the lenders from time to time party thereto (Exhibit 10.1 to the Registrant's Form 8-K filed on September 6, 2011 and incorporated by reference herein) +52 +Table of Contents +Exhibit Number +Description of Exhibit +*10.23 +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 September 1, 2011 +*10.24 +Amendment to Lease Agreement between 450 N. Baldwin Park Associates, LLC and Deckers Outdoor Corporation for distribution center at 3175 Mission Oaks Blvd., Camarillo, CA 93012, dated September 1, +2011 +10.25 +Purchase and Sale Agreement, dated as of September 2, 2011, by and among Deckers Outdoor Corporation and Santa Barbara Realty Development, L.L.C. (Exhibit 10.3 to the Registrant's Form 10-Q for the +quarterly period ended September 30, 2011 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 USC. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 +**101.1 +The following materials from the Company's Annual Report on Form 10-K for the annual period ended December 31, 2011, formatted in XBRL (eXtensible Business Reporting Language); (i) Consolidated Balance +Sheets as of December 31, 2011 and 2010; (ii) Consolidated Statements of Income for the years ended December 31, 2011, 2010, and 2009; (iii) Consolidated Statements of Cash Flows for the years ended December 31, 2011, 2010, +and 2009, and (iv) Notes to Consolidated Financial Statements. +* Filed +herewith. +** Pursuant +to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of +registration statement prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and +Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections. +# Management +contract or compensatory plan or arrangement. +53 +Table of Contents +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) +/s/ ANGEL R. MARTINEZ +Angel R. Martinez +Chief Executive Officer +Date: +February 29, 2012 +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/ ANGEL R. MARTINEZ +Angel R. Martinez +Chairman of the Board, +President and Chief Executive +Officer (Principal Executive Officer) +February 29, 2012 +/s/ THOMAS A. GEORGE +Thomas A. George +Chief Financial Officer +(Principal Financial and Accounting Officer) +February 29, 2012 +/s/ KARYN O. BARSA +Karyn O. Barsa +Director +February 29, 2012 +/s/ MAUREEN CONNERS +Maureen Conners +Director +February 29, 2012 +/s/ MICHAEL DEVINE +Michael Devine +Director +February 29, 2012 +/s/ JOHN M. GIBBONS +John M. Gibbons +Director +February 29, 2012 +/s/ REX A. LICKLIDER +Rex A. Licklider +Director +February 29, 2012 +/s/ RUTH M. OWADES +Ruth M. Owades +Director +February 29, 2012 +54 +Table of Contents +/s/ JOHN G. PERENCHIO +John G. Perenchio +Director +February 29, 2012 +/s/ JAMES QUINN +James Quinn +Director +February 29, 2012 +/s/ LAURI SHANAHAN +Lauri Shanahan +Director +February 29, 2012 +55 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +INDEX TO CONSOLIDATED FINANCIAL STATEMENTS +AND FINANCIAL STATEMENT SCHEDULE +Page +Consolidated Financial Statements +Reports of Independent Registered Public Accounting Firm +F-2 +Consolidated Balance Sheets as of December 31, 2011 and 2010 +F-4 +Consolidated Statements of Income for each of the years in the three-year period ended December 31, +2011 +F-5 +Consolidated Statements of Stockholders' Equity and Comprehensive Income for each of the years in the three-year period +ended December 31, 2011 +F-6 +Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, +2011 +F-7 +Notes to Consolidated Financial Statements +F-8 +Consolidated Financial Statement Schedule +Valuation and Qualifying Accounts for each of the years in the three-year period ended December 31, +2011 +F-38 +All +other schedules are omitted because they are not applicable or the required information is shown in the Company's consolidated financial statements or the related notes thereto. +F-1 +Table of Contents +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 (the Company) as listed in the accompanying index. In connection with +our audits of the consolidated financial statements, we also have audited the related consolidated financial statement schedule as listed in the accompanying index. These consolidated financial +statements and consolidated financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and +the consolidated 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, 2011 and 2010, and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 2011, 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, present fairly, in all material respects, the information set forth therein. +We +also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of +December 31, 2011, 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 February 29, 2012 expressed an unqualified opinion on the effectiveness of the Company's internal control over +financial reporting. +/s/ +KPMG LLP +Los +Angeles, California +February 29, 2012 +F-2 +Table of Contents +Report of Independent Registered Public Accounting Firm +The +Board of Directors and Stockholders +Deckers Outdoor Corporation: +We +have audited Deckers Outdoor Corporation's (the Company) internal control over financial reporting as of December 31, 2011 based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The +Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, +included in the accompanying Management's Report on Internal Control over Financial Reporting in Item 9A. Our responsibility is to express an opinion on the Company's 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, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our +audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +A +company's 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 company's 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 company's 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, Deckers Outdoor Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on criteria +established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway +Commission. +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, 2011 and 2010, and the related consolidated statements of income, stockholders' equity and comprehensive income, and cash flows for each of the years in the +three year period ended December 31, 2011, and the related consolidated financial statement schedule, and our +report dated February 29, 2012 expressed an unqualified opinion on those consolidated financial statements and consolidated financial statement schedule. +/s/ +KPMG LLP +Los +Angeles, California +February 29, 2012 +F-3 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +CONSOLIDATED BALANCE SHEETS +(amounts in thousands, except par value) +December 31, +2011 +2010 +ASSETS +Current assets: +Cash and cash equivalents +$ +263,606 +$ +445,226 +Trade accounts receivable, net of allowances of $21,692 and $13,772 in 2011 and 2010, respectively +193,375 +116,663 +Inventories +253,270 +124,995 +Prepaid expenses +8,697 +7,928 +Other current assets +84,540 +8,918 +Deferred tax assets +14,414 +12,002 +Total current assets +817,902 +715,732 +Property and equipment, net +90,257 +47,737 +Goodwill +120,045 +6,507 +Other intangible assets, net +94,449 +18,411 +Deferred tax assets +13,223 +15,121 +Other assets +10,320 +5,486 +Total assets +$ +1,146,196 +$ +808,994 +LIABILITIES AND STOCKHOLDERS' EQUITY +Current liabilities: +Trade accounts payable +$ +110,853 +$ +67,073 +Accrued payroll +32,594 +35,109 +Other accrued expenses +57,744 +17,515 +Income taxes payable +30,888 +25,166 +Total current liabilities +232,079 +144,863 +Long-term liabilities +72,687 +8,456 +Commitments and contingencies (note 8) +Stockholders' equity: +Deckers Outdoor Corporation stockholders' equity: +Common stock, $0.01 par value; authorized 125,000 shares; issued and outstanding 38,692 and 38,581 shares for 2011 and 2010, respectively +387 +386 +Additional paid-in capital +144,684 +137,989 +Retained earnings +692,595 +513,459 +Accumulated other comprehensive (loss) income +(1,730 +) +1,153 +Total Deckers Outdoor Corporation stockholders' equity +835,936 +652,987 +Noncontrolling interest +5,494 +2,688 +Total equity +841,430 +655,675 +Total liabilities and equity +$ +1,146,196 +$ +808,994 +See accompanying notes to consolidated financial statements. +F-4 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF INCOME +(amounts in thousands, except per share data) +Years Ended December 31, +2011 +2010 +2009 +Net sales +$ +1,377,283 +$ +1,000,989 +$ +813,177 +Cost of sales +698,288 +498,051 +442,087 +Gross profit +678,995 +502,938 +371,090 +Selling, general and administrative expenses +394,157 +253,850 +189,843 +Income from operations +284,838 +249,088 +181,247 +Other (income) expense, net: +Interest income +(180 +) +(234 +) +(1,010 +) +Interest expense +249 +566 +(875 +) +Other, net +(493 +) +(1,353 +) +(91 +) +(424 +) +(1,021 +) +(1,976 +) +Income before income taxes +285,262 +250,109 +183,223 +Income taxes +83,404 +89,732 +66,304 +Net income +201,858 +160,377 +116,919 +Net income attributable to noncontrolling interest +(2,806 +) +(2,142 +) +(133 +) +Net income attributable to Deckers Outdoor Corporation +$ +199,052 +$ +158,235 +$ +116,786 +Net income per share attributable to Deckers Outdoor Corporation common stockholders: +Basic +$ +5.16 +$ +4.10 +$ +2.99 +Diluted +$ +5.07 +$ +4.03 +$ +2.96 +Weighted-average common shares outstanding: +Basic +38,605 +38,615 +39,024 +Diluted +39,265 +39,292 +39,393 +See accompanying notes to consolidated financial statements. +F-5 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY +AND COMPREHENSIVE INCOME +(amounts in thousands) +Years Ended December 31, 2009, 2010 and 2011 +Comprehensive +Income +Attributable to +Non- +controlling +Interest +Comprehensive +Income +Attributable to +Deckers Outdoor +Corp. +Common Stock +Accumulated +Other +Comprehensive +Income (Loss) +Total Deckers +Outdoor Corp. +Stockholders' +Equity +Additional +Paid-in +Capital +Retained +Earnings +Non- +controlling +Interest +Total +Stockholders' +Equity +Total +Comprehensive +Income +Shares +Amount +Balance December 31, 2008 +39,267 +$ +393 +$ +114,952 +$ +268,515 +$ +392 +$ +384,252 +$ +413 +$ +384,665 +Stock compensation expense +24 +1 +13,015 +— +— +13,016 +— +13,016 +Exercise of stock options +15 +— +107 +— +— +107 +— +107 +Shares issued upon vesting +201 +2 +(1 +) +— +— +1 +— +1 +Excess tax detriment from stock compensation +— +— +(824 +) +— +— +(824 +) +— +(824 +) +Shares withheld for taxes +— +— +(2,082 +) +— +— +(2,082 +) +— +(2,082 +) +Stock repurchase +(903 +) +(9 +) +6 +(19,997 +) +— +(20,000 +) +— +(20,000 +) +Net income +— +— +— +116,786 +— +116,786 +133 +116,919 +$ +133 +$ +116,786 +$ +116,919 +Foreign currency translation adjustment +— +— +— +— +146 +146 +— +146 +— +146 +146 +Unrealized loss on short-term investments +— +— +— +— +(44 +) +(44 +) +— +(44 +) +— +(44 +) +(44 +) +Total comprehensive income +$ +133 +$ +116,888 +$ +117,021 +Balance December 31, 2009 +38,604 +$ +387 +$ +125,173 +$ +365,304 +$ +494 +$ +491,358 +$ +546 +$ +491,904 +Stock compensation expense +30 +— +12,782 +— +— +12,782 +— +12,782 +Exercise of stock options +31 +— +89 +— +— +89 +— +89 +Shares issued upon vesting +146 +1 +(1 +) +— +— +— +— +— +Excess tax benefit from stock compensation +— +— +3,525 +— +— +3,525 +— +3,525 +Shares withheld for taxes +— +— +(3,579 +) +— +— +(3,579 +) +— +(3,579 +) +Stock repurchase +(230 +) +(2 +) +— +(10,080 +) +— +(10,082 +) +— +(10,082 +) +Net income +— +— +— +158,235 +— +158,235 +2,142 +160,377 +$ +2,142 +$ +158,235 +$ +160,377 +Foreign currency translation adjustment +— +— +— +— +(905 +) +(905 +) +— +(905 +) +— +(905 +) +(905 +) +Unrealized gain on foreign currency hedging, net of tax +— +— +— +— +1,564 +1,564 +— +1,564 +— +1,564 +1,564 +Total comprehensive income +$ +2,142 +$ +158,894 +$ +161,036 +Balance December 31, 2010 +38,581 +$ +386 +$ +137,989 +$ +513,459 +$ +1,153 +$ +652,987 +$ +2,688 +$ +655,675 +Stock compensation expense +10 +— +14,803 +— +— +14,803 +— +14,803 +Exercise of stock options +12 +— +62 +— +— +62 +— +62 +Shares issued upon vesting +334 +3 +(3 +) +— +— +— +— +— +Excess tax benefit from stock compensation +— +— +15,330 +— +— +15,330 +— +15,330 +Shares withheld for taxes +— +— +(23,497 +) +— +— +(23,497 +) +— +(23,497 +) +Stock repurchase +(245 +) +(2 +) +— +(19,916 +) +— +(19,918 +) +— +(19,918 +) +Net income +— +— +— +199,052 +— +199,052 +2,806 +201,858 +$ +2,806 +$ +199,052 +$ +201,858 +Foreign currency translation adjustment +— +— +— +— +(1,952 +) +(1,952 +) +— +(1,952 +) +— +(1,952 +) +(1,952 +) +Unrealized loss on foreign currency hedging, net of tax +— +— +— +— +(931 +) +(931 +) +— +(931 +) +— +(931 +) +(931 +) +Total comprehensive income +$ +2,806 +$ +196,169 +$ +198,975 +Balance December 31, 2011 +38,692 +$ +387 +$ +144,684 +$ +692,595 +$ +(1,730 +) +$ +835,936 +$ +5,494 +$ +841,430 +See accompanying notes to consolidated financial statements. +F-6 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF CASH FLOWS +(amounts in thousands) +Years Ended December 31, +2011 +2010 +2009 +Cash flows from operating activities: +Net income +$ +201,858 +$ +160,377 +$ +116,919 +Adjustments to reconcile net income to net cash provided by operating activities: +Depreciation, amortization, and accretion +28,977 +12,283 +10,194 +(Recovery of) provision for doubtful accounts, net +(704 +) +(786 +) +399 +Write-down of inventory +7,009 +2,465 +3,955 +Deferred tax provision +(67 +) +(1,712 +) +5,308 +Stock compensation +14,803 +12,782 +13,016 +Other +2,735 +(391 +) +1,060 +Changes in operating assets and liabilities, net of assets and +liabilities acquired in the acquisition of businesses: +Trade accounts receivable +(63,199 +) +(39,449 +) +31,527 +Inventories +(127,739 +) +(41,107 +) +5,247 +Prepaid expenses and other current assets +(75,525 +) +(6,766 +) +(3,408 +) +Other assets +(5,385 +) +(1,651 +) +(1,012 +) +Trade accounts payable +38,237 +19,742 +3,790 +Accrued expenses +850 +16,468 +2,583 +Income taxes payable +5,722 +5,480 +(6,525 +) +Long-term liabilities +2,519 +2,187 +2,421 +Net cash provided by operating activities +30,091 +139,922 +185,474 +Cash flows from investing activities: +Purchases of short-term investments +— +— +(66,900 +) +Proceeds from sales of short-term investments +— +26,080 +57,078 +Purchases of property and equipment +(55,538 +) +(22,489 +) +(13,699 +) +Acquisitions of businesses and equity method investment +(125,203 +) +(5,191 +) +(1,877 +) +Purchases of intangible assets +(4,025 +) +— +— +Net cash used in investing activities +(184,766 +) +(1,600 +) +(25,398 +) +Cash flows from financing activities: +Proceeds from issuance of short-term borrowings +45,000 +— +— +Repayments of short-term borrowings +(45,000 +) +— +— +Cash paid for shares withheld for taxes +(22,634 +) +(2,584 +) +(1,982 +) +Excess tax benefits from stock compensation +15,330 +3,525 +810 +Cash received from issuances of common stock +62 +89 +107 +Cash paid for repurchases of common stock +(19,918 +) +(10,082 +) +(20,000 +) +Net cash used in financing activities +(27,160 +) +(9,052 +) +(21,065 +) +Effect of exchange rates on cash +215 +94 +47 +Net change in cash and cash equivalents +(181,620 +) +129,364 +139,058 +Cash and cash equivalents at beginning of year +445,226 +315,862 +176,804 +Cash and cash equivalents at end of year +$ +263,606 +$ +445,226 +$ +315,862 +Supplemental disclosure of cash flow information: +Cash paid during the year for: +Income taxes +$ +62,405 +$ +82,493 +$ +66,540 +Interest +$ +88 +$ +59 +$ +19 +Non-cash investing activity: +Accruals for purchases of property and equipment +$ +3,268 +$ +247 +$ +1,356 +Contingent consideration arrangement for acquisition of business +$ +88,100 +$ +— +$ +— +Accruals for asset retirement obligations +$ +236 +$ +388 +$ +— +Non-cash financing activity: +Accruals for shares withheld for taxes +$ +2,460 +$ +1,598 +$ +603 +See accompanying notes to consolidated financial statements. +F-7 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements +(amounts in thousands, except share quantity and per share data) +(1) The Company and Summary of Significant Accounting Policies +The Company and Basis of Presentation +The consolidated financial statements include the accounts of Deckers Outdoor Corporation and its wholly-owned subsidiaries and +majority-owned subsidiary (collectively referred to as the "Company"). Accordingly, all references herein to "Deckers Outdoor Corporation" or "Deckers" include the consolidated results of the Company +and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. +Deckers +Outdoor Corporation strives to be a premier lifestyle marketer that builds niche brands into global market leaders by designing and marketing innovative, functional, and +fashion-oriented footwear and accessories, developed for both high performance outdoor activities and everyday casual lifestyle use. The Company's business is seasonal, with the highest percentage of +UGG® brand net sales occurring in the third and fourth quarters and the highest percentage of Teva® and Sanuk® brand net sales occurring in the first and second +quarters of each year. The other brands do not have a significant seasonal impact on the Company. The Company owns 51% of a joint venture with an affiliate of Stella International Holdings Limited +(Stella International) for the primary purpose of opening and operating retail stores for the UGG brand in China. Stella International is also one of the Company's major manufacturers in China. In +March 2009, the Company acquired 100% of the ownership interest of Ahnu, Inc., an outdoor performance and lifestyle footwear brand. In January 2010, the Company acquired certain assets and +liabilities, including reacquisition of its distribution rights, from its Teva brand distributor that sold to retailers in Belgium, the Netherlands, and Luxemburg (Benelux) as well as France. In +September 2010, the Company purchased a portion of a privately held footwear company as an equity method investment. In January 2011, the Company acquired certain assets from its UGG, Teva, and +Simple® brands distributor that sold to retailers in the United Kingdom (UK) and from its UGG and Simple brands distributor that sold to retailers in Benelux and France. The distribution +rights in these regions reverted back to the Company on December 31, 2010 upon the expiration of the distribution agreements. On May 19, 2011, the Company entered into an asset purchase +agreement with Sanuk USA LLC, C&C Partners, Ltd., and the equity holders of both entities (collectively referred to as "Sanuk" or the "Sanuk brand"). On July 1, 2011, the Company +completed the acquisition of the purchased assets and the assumption of the assumed liabilities of the Sanuk brand. Deckers Outdoor Corporation's consolidated financial statements include the +operations of Sanuk beginning July 1, 2011. +Inventories +Inventories, principally finished goods, are stated at the lower of cost (first-in, first-out) or market (net +realizable value). Cost includes initial molds and tooling that are amortized over the life of the mold in cost of sales. Cost also includes shipping and handling fees and costs, which are +subsequently expensed to cost of sales. Market values are determined by historical experience with discounted sales, industry trends, and the retail environment. +Revenue Recognition +The Company recognizes wholesale, eCommerce, and international distributor revenue when products are shipped and retail revenue at the +point of sale. All sales are recognized when the customer takes title and assumes risk of loss, collection of relevant receivable is reasonably assured, persuasive evidence of an arrangement exists, +and the sales price is fixed or determinable. For wholesale and +F-8 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +international +distributor sales, allowances for estimated returns, discounts, chargebacks, and bad debts are provided for when related revenue is recorded. For eCommerce sales, allowances for +estimated returns and bad debts are provided for when related revenue is recorded. For retail sales, allowances for estimated returns 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. The Company presents revenue +net of taxes collected from customers and remitted to governmental authorities. +Accounting for Long-Lived Assets +Other long-lived assets, such as land, 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. Intangible assets subject to amortization are amortized over their respective estimated useful +lives to their estimated residual values. The Company uses the straight-line method for depreciation and amortization of long-lived assets, except for certain intangible assets +where the Company can reliably determine the pattern in which the economic benefits of the assets will be consumed. +At +least quarterly, the Company evaluates whether any impairment triggering events, including the following, have occurred which would require such asset groups to be tested for +impairment: +• A significant decrease in the market price of a long-lived asset group; +• a significant adverse change in the extent or manner in which a long-lived asset group is being used or in its +physical condition; +• a significant adverse change in legal factors or in business climate that could affect the value of a +long-lived asset group, including an adverse action or assessment by a regulator; +• an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of +a long-lived asset group; +• a current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or +forecast that demonstrates continuing losses associated with the use of a long-lived asset group; or +• a current expectation that, more likely than not, a long-lived asset group will be sold or otherwise disposed +of significantly before the end of its previously estimated useful life. +When +an impairment triggering event has occurred, the Company tests for recoverability of the asset groups carrying value using estimates of undiscounted future cash flows based on the +existing service potential of the applicable asset group. In determining the service potential of a long-lived asset group, the Company considers its remaining useful life, +cash-flow generating capacity, and physical output capacity. These estimates include the undiscounted cash flows associated with future expenditures necessary to maintain the existing +service potential. Long-lived assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other +assets and +liabilities. An impairment loss, if any, would only reduce the carrying amount of long-lived assets in the group based on the fair value of the group assets. +F-9 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +Goodwill and Other Intangible Assets +Intangible assets consist primarily of goodwill, trademarks, customer and distributor relationships, patents, and +non-compete agreements arising from the application of purchase accounting. Intangible assets with estimable useful lives are amortized and reviewed for impairment. Goodwill and intangible +assets with indefinite useful lives are not amortized, but are tested for impairment at least annually, as of December 31, except for the Teva trademarks which are tested as of +October 31. 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. +In +September 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU), Intangibles — Goodwill and +Other , which allows an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment +test. Under this amendment, an entity is not required to perform the two step impairment test for a reporting unit unless the entity determines, based on a qualitative assessment, that it is more +likely than not that its fair value is less than its carrying amount. This ASU will be effective for the Company January 1, 2012, with early adoption permitted. As permitted, the Company early +adopted this update effective with its December 31, 2011 reporting period, and performed a qualitative assessment of all reporting units that carry goodwill, including the newly acquired Sanuk +reporting unit, concluding that it was more likely than not that their fair values exceeded their carrying values. The Company evaluated qualitative measures including macroeconomic conditions, +industry and market considerations, cost factors, overall financial performance, other relevant entity-specific events, and events affecting a reporting unit. +The +assessment of goodwill impairment involves valuing the Company's reporting units that carry goodwill. Currently, the Company's reporting units are the same as the Company's operating +segments. The Company first assesses qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. The Company does not calculate +the fair value of the reporting unit unless the Company determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. If the +Company determines this, then the first quantitative step is a comparison of the fair value of the reporting unit with its carrying amount. If the fair value exceeds the carrying amount, the goodwill +is not impaired. If the fair value of +the reporting unit is below the carrying amount, then a second step is performed to measure the amount of the impairment, if any. +The +Company also evaluates the fair values of other intangible assets with indefinite useful lives in relation to the carrying values. If the fair value of the indefinite life intangible +exceeds its carrying amount, no impairment charge will be recognized. If the fair value of the indefinite life intangible is less than the carrying amount, the Company will record an impairment charge +to write-down the intangible asset to its fair value. +Determining +fair value of goodwill and other intangible assets is highly subjective and requires the use of estimates and assumptions. The Company uses estimates including future +revenues, royalty rates, discount rates, attrition rates, and market multiples, among others. The Company also considers the following factors: +• the assets' ability to continue to generate income from operations and positive cash flow in future periods; +• changes in consumer demand or acceptance of the related brand names, products, or features associated with the assets; and +F-10 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +• other considerations that could affect fair value or otherwise indicate potential impairment. +In +addition, facts and circumstances could change, including further deterioration of general economic conditions or the retail environment, customers reducing orders in response to such +conditions, and increased competition. These or other factors could result in changes to the calculation of fair value which could result in further impairment of the Company's remaining goodwill and +other intangible assets. Changes in any one or more of these estimates and assumptions could produce different financial results. +Depreciation and Amortization +Depreciation of property and equipment is calculated using the straight-line method based on estimated useful lives ranging +from two to ten years. Leasehold improvements are amortized on the straight-line basis over their estimated economic useful lives or the lease term, whichever is shorter. Leasehold +improvement lives range from one to fifteen years. The Company allocates depreciation and amortization of property, plant, and equipment to cost of sales and selling, general and administrative +expenses (SG&A). The majority of the Company's depreciation and amortization is included in SG&A due to the nature of its operations. Most of the Company's depreciation is from its warehouses and its +retail stores. The Company outsources all manufacturing; therefore, the amount allocated to cost of sales is not material. +Fair Value Measurements +The fair values of the Company's cash and cash equivalents, trade accounts receivable, prepaid expenses and other current assets, +income taxes receivable, short-term borrowings, trade accounts payable, accrued expenses, and income taxes payable approximate the carrying values due to the relatively short maturities of +these instruments. The fair values of the Company's long-term liabilities, other than contingent consideration, if recalculated based on current interest rates, would not significantly +differ from the recorded amounts. The fair value of the contingent consideration related to acquisitions and of the Company's derivatives are measured and recorded at fair value on a recurring basis. +The Company records the fair value of assets or liabilities associated with derivative instruments and hedging activities in other current assets or other current liabilities, respectively, in the +consolidated balance sheets. The Level 2 inputs described below consist of forward spot rates at the end of the reporting period (see note 11). +The +inputs used in measuring fair value are prioritized into the following hierarchy: +• Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities. +• Level 2: Inputs other than quoted prices included within Level 1 that are either directly or indirectly +observable. +• Level 3: Unobservable inputs in which little or no market activity exists, therefore requiring an entity to develop +its own assumptions about the assumptions that market participants would use in pricing. +F-11 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +The +tables below summarize the Company's financial liabilities and assets that are measured on a recurring basis at fair value: +Fair Value Measurement Using +Fair Value at December 31, 2011 +Level 1 +Level 2 +Level 3 +Assets (Liabilities) at fair value +Nonqualified deferred compensation +$ +1,991 +$ +1,991 +$ +— +$ +— +Designated derivatives +$ +1,117 +$ +— +$ +1,117 +$ +— +Designated derivatives +$ +(87 +) +$ +— +$ +(87 +) +$ +— +Contingent consideration for acquisition of business +$ +91,600 +$ +— +$ +— +$ +91,600 +Fair Value Measurement Using +Fair Value at December 31, 2010 +Level 1 +Level 2 +Level 3 +Assets (Liabilities) at fair value +Nonqualified deferred compensation +$ +132 +$ +132 +$ +— +$ +— +Designated derivatives +$ +2,434 +$ +— +$ +2,434 +$ +— +Non-designated derivatives +$ +(95 +) +$ +— +$ +(95 +) +$ +— +The +following table presents a reconciliation of the beginning and ending amounts related to the fair value for contingent consideration for acquisition of business, categorized as +Level 3: +Beginning balance, January 1, 2011 +$ +— +Contingent consideration for acquisition of business +88,100 +Change in fair value +3,500 +Balance, December 31, 2011 +$ +91,600 +Stock Compensation +All of the Company's stock compensation issuances are classified within stockholders' equity. Stock compensation cost is measured at +the grant date based on the value of the award and is expensed ratably over the vesting period. The Company recognizes expense only for those awards that management deems probable of achieving the +performance and service objectives. Determining the expense of share-based awards requires judgment, including estimating the percentage of awards that will be forfeited and probabilities of meeting +the awards' performance criteria. If actual forfeitures differ significantly from the estimates or if probabilities change during a period, stock compensation expense and the Company's results of +operations could be materially impacted. +Nonqualified Deferred Compensation +In 2010, the Company established a nonqualified deferred compensation program (referred to as "the Plan"). The Plan permits a select +group of management employees, +designated by the Plan Committee, to defer earnings to a future date on a nonqualified basis. For each plan year, on behalf of the Company, the Board may, but is not required to, contribute any amount +it desires to any participant under the Plan. The Company's contribution will be determined by the Board annually in the fourth quarter. No such +F-12 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +contribution +has been approved as of December 31, 2011. All amounts deferred under this plan are presented in long-term liabilities in the consolidated balance sheets. The value of +the deferred compensation is recognized based on the fair value of the participants' accounts. The Company has established a rabbi trust as a reserve for the benefits payable under the Plan. +Use of Estimates +The preparation of the Company's consolidated financial statements in accordance with US generally accepted accounting principles +requires management to make estimates and assumptions that affect the amounts reported in these consolidated financial statements and accompanying notes. Management bases these estimates and +assumptions upon historical experience, existing and known circumstances, authoritative accounting pronouncements and other factors that management believes to be reasonable. Significant areas +requiring the use of management estimates relate to inventory write-downs, accounts receivable reserves, returns liabilities, stock compensation, impairment assessments, depreciation and amortization, +income tax liabilities and uncertain tax positions, fair value of financial instruments, and fair values of acquired intangibles, assets and liabilities, including estimated contingent consideration +payments. Actual results could differ materially from these estimates. +Research and Development Costs +All research and development costs are expensed as incurred. Such costs amounted to $14,160, $11,833 and $8,111 in 2011, 2010 and 2009, +respectively, and are included in SG&A in the consolidated statements of income. +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 2011, 2010 and 2009 were $57,259, $33,104, and $28,727 respectively. Included in prepaid and other current +assets at December 31, 2011 and 2010 were $139 and $368, respectively, related to prepaid advertising, marketing, and promotion expenses for programs to take place after December 31, +2011 and 2010, respectively. +Income Taxes +Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future +tax consequences attributable to temporary 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. +The +Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest +amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company accounts for interest +and penalties generated by income tax contingencies as interest expense in the consolidated statements of income. +F-13 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +Net Income per Share Attributable to Deckers Outdoor Corporation Common Stockholders +Basic net income per share represents net income attributable to Deckers Outdoor Corporation divided by the weighted-average number of +common shares outstanding for the period. Diluted net income per share represents net income attributable to Deckers Outdoor Corporation 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, 2011, 2010, and 2009, the difference between the weighted-average number of basic and +diluted common shares resulted from the dilutive impact of nonvested stock units (NSUs), restricted stock units (RSUs), stock appreciation rights (SARs), and options to purchase common stock. The +reconciliations of basic to diluted weighted-average common shares outstanding were as follows: +Year Ended December 31, +2011 +2010 +2009 +Weighted-average shares used in basic computation +38,605,000 +38,615,000 +39,024,000 +Dilutive effect of stock-based awards* +660,000 +677,000 +369,000 +Weighted-average shares used for diluted computation +39,265,000 +39,292,000 +39,393,000 +*Excluded NSUs and RSUs as of December 31, 2011, 2010, and 2009 +319,000 +85,000 +159,000 +*Excluded SARs as of December 31, 2011, 2010, and 2009 +525,000 +645,000 +1,200,000 +The +share-based awards that were excluded from the dilutive effect were excluded because the necessary conditions had not been satisfied for the shares to be issuable based on the +Company's performance through December 31, 2011, 2010, and 2009, respectively. As of December 31, 2011, the excluded RSUs include the maximum amount of the Level III Awards, as +defined and discussed in note 6. +Foreign Currency Translation +The Company considers the US dollar as its functional currency. The Company has certain wholly-owned foreign subsidiaries with +functional currencies other than the US dollar. Gains and losses that arise from exchange rate fluctuations on sales and purchase transactions denominated in a currency other than the functional +currency are included in SG&A in the results of operations as incurred. +Derivative Instruments and Hedging Activities +The Company transacts business in various foreign currencies and has international sales and expenses denominated in foreign +currencies, subjecting the Company to foreign currency risk. The Company may enter into foreign currency forward or option contracts, generally with maturities of 15 months or less, to reduce +the volatility of cash flows primarily related to forecasted revenue denominated in certain foreign currencies. In addition, the Company utilizes foreign exchange forward and option contracts to +mitigate foreign currency exchange rate risk associated with foreign currency-denominated assets and liabilities, primarily intercompany balances. The Company does not use foreign currency contracts +for speculative or trading purposes. +F-14 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +Certain +of the Company's foreign currency forward contracts are designated cash flow hedges of forecasted intercompany sales and are subject to foreign currency exposures. These +contracts allow the Company to sell Euros and British Pounds in exchange for US dollars at specified contract rates. Forward contracts are used to hedge forecasted intercompany sales over specific +quarters. Changes in the fair value of these forward contracts designated as cash flow hedges are recorded as a component of accumulated other comprehensive (loss) income within stockholders' equity, +and are recognized in the consolidated statements of income during the period which approximates the time the +corresponding third-party sales occur. The Company may also enter into foreign exchange contracts that are not designated as hedging instruments for financial accounting purposes. Accordingly, any +gains or losses resulting from changes in the fair value of the non-designated contracts are reported in income. These contracts are generally entered into to offset the gains and losses +on certain intercompany balances until the expected time of repayment. +The +Company records the assets or liabilities associated with derivative instruments and hedging activities at fair value based on Level 2 inputs in other current assets or other +current liabilities, respectively, in the consolidated balance sheets. The Level 2 inputs consist of forward spot rates at the end of the reporting period. The accounting for gains and losses +resulting from changes in fair value depends on the use of the derivative and whether it is designated and qualifies for hedge accounting. +For +all hedging relationships, the Company formally documents the hedging relationship and its risk management objective and strategy for undertaking the hedge, the hedging instrument, +the hedged transaction, the nature of the risk being hedged, how the hedging instrument's effectiveness in offsetting the hedged risk will be assessed prospectively and retrospectively, and a +description of the method used to measure ineffectiveness. The Company factors the nonperformance risk of the Company and the counterparty into the fair value measurements of its derivatives. The +Company also formally assesses, both at the inception of the hedging relationship and on an ongoing basis, whether the derivatives that are used in hedging relationships are highly effective in +offsetting changes in cash flows of hedged transactions. The Company assesses hedge effectiveness and measures hedge ineffectiveness at least quarterly. For derivative instruments that are designated +and qualify as part of a cash flow hedging relationship, the effective portion of the gain or loss on the derivative is reported in other comprehensive income (OCI) and reclassified into earnings in +the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the +assessment of effectiveness are recognized in current earnings. +The +Company discontinues hedge accounting prospectively when it determines that the derivative is no longer effective in offsetting cash flows attributable to the hedged risk, the +derivative expires or is sold, terminated, or exercised, the cash flow hedge is dedesignated because a forecasted transaction is not probable of occurring, or management determines to remove the +designation of the cash flow hedge. In all situations in which hedge accounting is discontinued and the derivative remains outstanding, the Company continues to carry the derivative at its fair value +on the balance sheet and recognizes any subsequent changes in its fair value in earnings. When it is probable that a forecasted transaction will not occur, the Company discontinues hedge accounting +and recognizes immediately in earnings gains and losses that were accumulated in OCI related to the hedging relationship. +Some +foreign exchange contracts are not designated as hedging instruments for financial accounting purposes. Accordingly, any gains or losses resulting from changes in the fair value of +the non-designated contracts are reported in SG&A in the consolidated statements of income. The gains and losses on these contracts generally offset the gains and losses associated with +the underlying foreign currency-denominated +F-15 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +balances, +which are also reported in SG&A. See note 11 for the impact of derivative instruments and hedging activities on the Company's consolidated financial statements. +Comprehensive Income +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 cash flow hedges and available for sale investments, the Company does not have any transactions and other economic events that +qualify as comprehensive income. +Business Segment Reporting +Management of the Company has determined its reportable segments are its strategic business units. The six reportable segments are the +UGG, Teva, Sanuk and other brands wholesale divisions, the eCommerce business, and the retail store business. The Company performs an annual analysis of its reportable segments. Information related to +the Company's business segments is summarized in note 10. +Cash Equivalents +The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Cash and +cash equivalents include $196,000 and $384,000 of money market funds at December 31, 2011 and 2010, respectively. +Reclassifications +Certain items in the prior years' consolidated financial statements have been reclassified to conform to the current presentation. The +impairment loss of $1,000 has been reclassified from impairment loss to SG&A in the consolidated statement of income in 2009 to conform to the current presentation. +(2) Retirement Plan +The Company provides a 401(k) defined contribution plan that eligible US employees may elect to participate through +tax-deferred contributions. The Company matches 50% of each eligible participant's tax-deferred contributions on up to 6% of eligible compensation on a per payroll period +basis, with a true-up contribution if such eligible participant is employed by the Company on the last day of the calendar year. Internationally, the Company has various defined +contribution plans. Certain international locations require mandatory contributions under social programs, and the Company contributes at least the statutory minimums. Worldwide matching contributions +totaled $2,248, $2,472 and $1,023 during 2011, 2010, and 2009, respectively. In addition, the Company may also make discretionary profit sharing contributions to the plan. However, the Company did not +make any profit sharing contributions for the years ended December 31, 2011, 2010 or 2009. +F-16 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +(3) Property and Equipment +Property and equipment is summarized as follows: +December 31, +2011 +2010 +Land +$ +19,954 +$ +— +Machinery and equipment +50,081 +36,978 +Furniture and fixtures +13,794 +8,986 +Leasehold improvements +53,623 +35,246 +137,452 +81,210 +Less accumulated depreciation and amortization +47,195 +33,473 +Net property and equipment +$ +90,257 +$ +47,737 +(4) Notes Payable and Long-Term Debt +On August 30, 2011, the Company entered into a Credit Agreement (the "Credit Agreement") with JPMorgan Chase Bank, National +Association as the administrative agent, Comerica Bank and HSBC Bank USA, National Association, as syndication agents, and the lenders party thereto. The Credit Agreement is a five-year, +$200,000 secured revolving credit facility that contains a $50,000 sublimit for the issuance of letters of credit and a $5,000 sublimit for swingline loans and matures on August 30, 2016. +Subject to customary conditions and the approval of any lender whose commitment would be increased, the Company has the option to increase the maximum principal amount available under the Credit +Agreement by up to an additional $100,000, resulting in a maximum available principal amount of $300,000. None of the lenders under the Credit Agreement has committed at this time or is obligated to +provide any such increase in the commitments. At the Company's option, revolving loans issued under the Credit Agreement will bear interest at either adjusted London Interbank Offered Rate (LIBOR) for +30 days (0.30% at December 31, 2011) plus 1.25% per annum, in the case of LIBOR borrowings, or at the alternate base rate plus 0.25% per annum, and thereafter the interest rate will +fluctuate between adjusted LIBOR plus 1.25% per annum and adjusted LIBOR plus 1.50% per annum (or between the alternate base rate plus 0.25% per annum and the alternate base rate plus 0.50% per +annum), based upon the Company's total adjusted leverage ratio at such time. In addition, the Company will initially be required to pay fees of 0.20% per annum on the daily unused amount of the +revolving credit facility, and thereafter the fee rate will fluctuate between 0.20% and 0.30% per annum, based upon the Company's total adjusted leverage ratio. +The +Company's obligations under the Credit Agreement are guaranteed by the Company's existing and future domestic subsidiaries other than certain immaterial subsidiaries and foreign +subsidiaries (the "Guarantors"), and is secured by a first-priority security interest in substantially all of the assets of the Company and the Guarantors', including all or a portion of the equity +interests of certain of the Company's domestic and foreign subsidiaries. +The +Credit Agreement contains financial covenants which include: the asset coverage ratio must be greater than 1.10 to 1.00; and the sum of the consolidated annual earnings before +interest, taxes, depreciation, and amortization (EBITDA) and annual rental expense, divided by the sum of the annual interest expense and the annual rental expense must be greater than 2.25 to 1.00; +and other customary limitations. The Credit Agreement contains certain other covenants which include: a maximum additional +F-17 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +secured +debt related to a capital asset not to exceed $20,000, maximum additional unsecured debt not to exceed $200,000; maximum secured debt not related to a capital asset not to exceed $5,000, +maximum judgment of $10,000; maximum ERISA event of $10,000 in one year, $20,000 in all years; the Company may not have a change of control; there is no limit on acquisitions, if the total adjusted +leverage ratio does not exceed 2.75 to 1.00 and the Company must have a minimum amount of cash plus unused credit of $75,000; and there is no restriction on dividends or share repurchases, if the +minimum amount of cash plus unused credit is $75,000. +At +December 31, 2011, the Company had no outstanding borrowings under the Credit Agreement and outstanding letters of credit of $553. As a result, $199,447 was available under the +Credit Agreement at December 31, 2011. +(5) Income Taxes +Components of income taxes are as follows: +Federal +State +Foreign +Total +2011: +Current +$ +63,758 +$ +12,226 +$ +7,487 +$ +83,471 +Deferred +1,003 +(1,067 +) +(3 +) +(67 +) +$ +64,761 +$ +11,159 +$ +7,484 +$ +83,404 +2010: +Current +$ +71,032 +$ +16,764 +$ +3,648 +$ +91,444 +Deferred +(2,182 +) +377 +93 +(1,712 +) +$ +68,850 +$ +17,141 +$ +3,741 +$ +89,732 +2009: +Current +$ +48,523 +$ +10,350 +$ +2,123 +$ +60,996 +Deferred +4,752 +587 +(31 +) +5,308 +$ +53,275 +$ +10,937 +$ +2,092 +$ +66,304 +Foreign +income before income taxes was $108,738, $43,327 and $27,912 during the years ended December 31, 2011, 2010 and 2009, respectively. +Actual +income taxes differed from that obtained by applying the statutory federal income tax rate to income before income taxes as follows: +Years Ended December 31 +2011 +2010 +2009 +Computed "expected" income taxes +$ +99,842 +$ +87,517 +$ +64,105 +State income taxes, net of federal income tax benefit +6,912 +10,566 +7,600 +Foreign rate differential +(24,783 +) +(11,304 +) +(7,878 +) +Other +1,433 +2,953 +2,477 +$ +83,404 +$ +89,732 +$ +66,304 +F-18 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities are presented below: +2011 +2010 +Deferred tax assets (liabilities), current: +Uniform capitalization adjustment to inventory +$ +5,271 +$ +3,127 +Bad debt and other reserves +8,874 +7,365 +State taxes +1,729 +4,360 +Prepaid expenses +(1,460 +) +(2,850 +) +Total deferred tax assets, current +14,414 +12,002 +Deferred tax assets (liabilities), noncurrent: +Amortization and impairment of intangible assets +7,181 +6,262 +Depreciation of property and equipment +(6,056 +) +(3,230 +) +Share-based compensation +11,305 +11,105 +Foreign currency translation +(744 +) +(1,062 +) +Deferred rent +169 +1,245 +Acquisition costs +808 +— +Other +63 +63 +Net operating loss carryforwards +497 +738 +Total deferred tax assets, noncurrent +13,223 +15,121 +Net deferred tax assets +$ +27,637 +$ +27,123 +In +order to fully realize the deferred tax assets, the Company will need to generate future taxable income of $73,863. The deferred tax assets are primarily related to the Company's +domestic operations. The change in net deferred tax assets between December 31, 2011 and December 31, 2010 includes $448 attributable to OCI. Domestic taxable income for the years ended +December 31, 2011 and 2010 was $141,368 and $194,228, respectively. 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 was recorded in 2011 or 2010. +As +of December 31, 2011, withholding and US taxes have not been provided on approximately $186,000 of unremitted earnings of non-US subsidiaries because the earnings +are expected to be reinvested outside of the US indefinitely. Such earnings would become taxable upon the sale or liquidation of these subsidiaries or upon the remittance of dividends. As of +December 31, 2011, the Company had approximately $43,000 of cash and cash equivalents outside the US that would be subject to additional income taxes if it were to be repatriated. If the +Company were to repatriate foreign cash, +the Company would record the US tax liability net of any foreign income taxes previously paid on this cash. The Company has no plans to repatriate any of its foreign cash. For the full year 2011, the +Company generated approximately 28.0% of its pre-tax earnings from a country which does not impose a corporate income tax. +When +tax returns are filed, some positions taken are subject to uncertainty about the merits of the position taken or the amount that would be ultimately sustained. The benefit of a tax +position is recognized in the financial statements in the period during which management believes it is more likely than not that +F-19 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +the +position will be sustained upon examination. Tax positions that meet the more likely than not recognition threshold are measured as the largest amount of tax benefit that is more than 50% likely +of being realized upon settlement. The portion of the benefits that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying +consolidated balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. A reconciliation of the beginning and ending amounts of +total unrecognized tax benefits is as follows: +Balance at December 31, 2009 +$ +5,011 +Gross increase related to current year tax positions +2,235 +Settlements +(1,740 +) +Balance at December 31, 2010 +$ +5,506 +Gross decrease related to prior years' tax positions +(2,235 +) +Balance at December 31, 2011 +$ +3,271 +The +amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate as of December 31, 2011 was $3,175. Also, included in the balance of unrecognized +tax benefits at December 31, 2011 was $96 that, if recognized, would be recorded as an adjustment to long term deferred tax assets. For the year ended December 31, 2011, $83 of interest +expense generated by income tax contingencies was recognized in the consolidated statements of income. As of December 31, 2011 and 2010, $817 and $734, respectively, of interest was accrued in +the consolidated balance sheets. +The +Company files income tax returns in the US federal jurisdiction and various state, local, and foreign jurisdictions. With few exceptions, the Company is no longer subject to US +federal, state, local, or non-US income tax examinations by tax authorities for years before 2007. The Company's federal income tax returns for the years ended December 31, 2006 +through December 31, 2009 are under examination by the Internal Revenue Service (IRS). In connection with the examination, the Company has received notices of proposed adjustments (NOPAs), +which the Company agreed with and recorded in its consolidated financial statements. In addition, in March 2011, the Company received a NOPA related to transfer pricing arrangements with the Company's +subsidiaries in which adjustments were asserted totaling approximately $55,000 of additional taxable income, representing additional federal taxes and penalties of approximately $27,000, excluding +interest. The Company responded to this NOPA indicating that it disagrees with the proposed adjustments and will appeal the NOPA if the Company is unable to reach a resolution at the exam level. The +matter has now been sent to IRS Appeals and is scheduled for a hearing in April 2012. The Company does not know if the hearing at IRS Appeals will result in a material effect to the Company's +consolidated financial statements. It is reasonably possible that the Company's unrecognized tax benefit could change; however, the Company believes its unrecognized tax benefits are adequate. +Although +the Company believes its tax estimates are reasonable and prepares its tax filings in accordance with all applicable tax laws, the final determination with respect to any tax +audits, and any related litigation, could be materially different from the Company's estimates or from its historical income tax provisions and accruals. The results of an audit or litigation could +have a material effect on operating results or cash flows in the periods for which that determination is made. In addition, future period earnings may be adversely impacted by litigation costs, +settlements, penalties, or interest assessments. +F-20 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +The +Company has on-going income tax examinations under various state tax jurisdictions. It is the opinion of management that these audits and inquiries will not have a +material impact on the Company's consolidated financial statements. +(6) Stockholders' Equity +In May 2006, the Company adopted the 2006 Equity Incentive Plan (the 2006 Plan), which was amended by Amendment No. 1 dated +May 9, 2007. The primary purpose of the 2006 Plan is to encourage ownership in the Company by key personnel, whose long-term service is considered essential to the Company's +continued success. The 2006 Plan provides for 6,000,000 shares of the Company's 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 4,500,000. Pursuant to the Deferred Stock Unit Compensation Plan, a Sub Plan under the 2006 Plan, a +participant may elect to defer settlement of their outstanding unvested awards until such time as elected by the participant. +The +Company grants NSUs annually to key personnel. The NSUs granted entitle the employee recipients to receive shares of common stock in the Company. The vesting of all NSUs is subject +to achievement of certain performance targets. For NSUs granted prior to 2011, these awards vest in quarterly increments between the third and fourth anniversary of the grant. For NSUs granted in +2011, one-third of these awards will vest at the end of each of the three years after the performance goals are achieved. +The +Company also has long-term incentive award agreements under the 2006 Plan for issuance of SAR awards and RSU awards to the Company's current and future executive +officers. +These awards vest subject to certain long-term performance objectives and certain long-term service conditions. One-half of the SAR and RSU awards vested 80% on +December 31, 2010 and 20% on December 31, 2011, and, provided that the conditions are met, one-half of the SAR and RSU awards vest 80% on December 31, 2015 and 20% on +December 31, 2016. The awards that vested on December 31, 2011 were settled on February 29, 2012. The Company fully expensed these awards as of December 31, 2011. The +Company recognizes expense only for those awards that management deems probable of achieving the performance and service objectives. +In +May 2010, the stockholders approved an amendment to the Company's Restated Certificate of Incorporation to increase the authorized number of shares of common stock from 50,000,000 to +125,000,000 shares. +In +June 2009, the Company approved a stock repurchase program to repurchase up to $50,000 of the Company's common stock in the open market or in privately negotiated transactions, +subject to market conditions, applicable legal requirements and other factors. The program did not obligate the Company to acquire any particular amount of common stock. The purchases were funded from +available working capital. During the year ended December 31, 2011, the Company repurchased approximately 245,000 shares for approximately $20,000, or an average price of $81.22 per share. +During the year ended December 31, 2010, the Company repurchased approximately 230,000 shares for approximately $10,000, or an average price of $43.67 per share. During the year ended +December 31, 2009, the Company repurchased approximately 900,000 shares for approximately $20,000, or an average price of $22.14 per share. As of December 31, 2011, the Company had +repurchased the full amount authorized under this program. +F-21 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +In +June 2011, the Board of Directors of the Company adopted a new long-term incentive award under its 2006 Equity Incentive Plan (the "Level III Awards"). These awards +will be available for issuance to current and future members of the Company's management team, including the Company's named executive officers. Each recipient will receive a specified maximum number +of RSUs, each of which will represent the right to receive one share of the Company's common stock. These awards vest subject to certain long-term performance objectives and certain +long-term service conditions. The awards will vest on December 31, 2014 only if the Company meets certain revenue and diluted earnings per share targets for the year ended +December 31, 2014. No vesting of any Level III Award will occur if either of the threshold performance criteria is not met for the year ending December 31, 2014. To the extent +financial performance is achieved above the threshold levels, the number of RSUs that will vest will increase up to the maximum number of units granted under the award. Under this new program, the +Company granted a maximum amount of 275,000 RSUs during the year ended December 31, 2011. As of December 31, 2011, the Company did not believe that the achievement of the performance +objectives for the Level III Awards was probable, and therefore the Company did not recognize compensation expense for these awards. If the performance objectives become probable, the Company +will then begin recording an expense for the +Level III Awards and would recognize a cumulative catch-up adjustment in the period they become probable. As of December 31, 2011, the cumulative amount would be $2,740 based +on the maximum number of units if the performance objectives were probable. +Subsequent +to December 31, 2011, the Company approved a new stock repurchase program to repurchase up to $100,000 of the Company's common stock in the open market or in privately +negotiated transactions, subject to market conditions, applicable legal requirements, and other factors. The program does not obligate the Company to acquire any particular amount of common stock and +the program may be suspended at any time at the Company's discretion. The purchases will be funded from available working capital. +On +a quarterly basis, the Company grants fully-vested shares of its common stock to each of its outside directors. The fair value of such shares is expensed on the date of issuance. +The +table below summarizes stock compensation amounts recognized in the consolidated statements of income: +Year Ended December 31, +2011 +2010 +2009 +Compensation expense recorded for: +NSUs +$ +11,719 +$ +7,915 +$ +5,652 +SARs +1,813 +3,420 +5,287 +RSUs +305 +677 +994 +Directors' shares +966 +770 +1,083 +Total compensation expense +14,803 +12,782 +13,016 +Income tax benefit recognized +(5,788 +) +(5,127 +) +(5,096 +) +Net compensation expense +$ +9,015 +$ +7,655 +$ +7,920 +F-22 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +The +table below summarizes the total remaining unrecognized compensation cost related to nonvested awards and the weighted-average period over which the cost is expected to be recognized +as of December 31, 2011: +Unrecognized +Compensation +Cost +Weighted-Average +Remaining Vesting +Period (Years) +NSUs +$ +18,813 +1.4 +SARs +6,384 +4.2 +RSUs +981 +4.2 +Total +$ +26,178 +The +unrecognized compensation cost excludes a maximum of $20,591 of compensation cost on the Level III Awards, as achievement of the performance conditions are not considered +probable. +Nonvested Stock Units Issued Under the 2006 Plan +Number of +Shares +Weighted- +Average +Grant-Date +Fair Value +Nonvested at January 1, 2009 +744,000 +$ +23.52 +Granted +291,000 +17.80 +Vested +(288,000 +) +10.42 +Forfeited +(30,000 +) +26.34 +Nonvested at December 31, 2009 +717,000 +$ +26.34 +Granted +315,000 +45.99 +Vested +(208,000 +) +22.83 +Forfeited +(26,000 +) +25.98 +Nonvested at December 31, 2010 +798,000 +$ +35.61 +Granted +199,000 +87.50 +Vested +(263,000 +) +40.31 +Forfeited +(57,000 +) +46.61 +Nonvested at December 31, 2011 +677,000 +$ +48.14 +F-23 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +Stock Appreciation Rights Issued Under the 2006 Plan +Number of +SARs +Weighted- +Average +Exercise +Price +Weighted- +Average +Remaining +Contractual +Term (Years) +Aggregate +Intrinsic +Value +Outstanding at January 1, 2009 +1,200,000 +$ +26.73 +10.8 +$ +— +Granted +— +— +Exercised +— +— +Forfeited +— +— +Outstanding at December 31, 2009 +1,200,000 +$ +26.73 +9.8 +$ +8,608 +Granted +— +— +Exercised +— +— +Forfeited +(75,000 +) +26.73 +Outstanding at December 31, 2010 +1,125,000 +$ +26.73 +8.7 +$ +59,636 +Granted +— +— +Exercised +(365,000 +) +26.73 +Forfeited +— +— +Outstanding at December 31, 2011 +760,000 +$ +26.73 +8.8 +$ +37,118 +Exercisable at December 31, 2011 +115,000 +$ +26.73 +5.4 +$ +5,617 +Expected to vest and exercisable at December 31, 2011 +704,000 +$ +26.73 +8.7 +$ +34,381 +The +maximum contractual term is 10 and 15 years from the date of grant for those SARs with final vesting dates of December 31, 2011 and December 31, 2016, +respectively. The number of SARs expected to vest is based on the probability of achieving certain performance conditions and is also reduced by estimated forfeitures. The difference between the +amount outstanding and the amount expected to vest and exercisable at December 31, 2011 was estimated forfeitures for estimated failure to meet the long-term service conditions. On +February 29, 2012, 120,000 SARs that vested on December 31, 2011 became exercisable. +F-24 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements +(amounts in thousands, except share quantity and per share data) +Restricted Stock Units Issued Under the 2006 Plan +Number of +Shares +Weighted- +Average +Grant-Date +Fair Value +Nonvested at January 1, 2009 +159,000 +$ +26.73 +Granted +— +— +Vested +— +— +Forfeited +— +— +Nonvested at December 31, 2009 +159,000 +$ +26.73 +Granted +— +— +Vested +(64,000 +) +26.73 +Forfeited +(10,000 +) +26.73 +Nonvested at December 31, 2010 +85,000 +$ +26.73 +Granted +275,000 +82.09 +Vested +(16,000 +) +26.73 +Forfeited +(25,000 +) +82.09 +Nonvested at December 31, 2011 +319,000 +$ +70.15 +The +amounts granted in 2011 are the maximum amount under the Level III Awards. The Company issued 16,000 shares that vested on December 31, 2011 on February 29, +2012. +(7) Accumulated Other Comprehensive (Loss) Income +Accumulated balances of the components within accumulated other comprehensive (loss) income are as follows: +December 31, +2011 +2010 +Cumulative foreign currency translation adjustment +$ +(2,363 +) +$ +(413 +) +Unrealized gain on foreign currency hedging, net of tax +633 +1,564 +Unrealized gain on short-term investments, net of tax +— +2 +Accumulated other comprehensive (loss) income +$ +(1,730 +) +$ +1,153 +F-25 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +(8) Commitments and Contingencies +The Company leases office, distribution, and retail facilities under operating lease agreements, which expire through 2024. Some of the +leases contain renewal options for approximately one to ten years. Future minimum commitments under the lease agreements are as follows: +Year ending December 31: +2012 +$ +27,241 +2013 +24,364 +2014 +21,543 +2015 +20,037 +2016 +17,208 +Thereafter +43,176 +$ +153,569 +Rent +expense is recorded using the straight-line method to account for scheduled rental increases or rent holidays. Lease incentives for tenant improvement allowances are +recorded as reductions of rent expense over the lease term. The rental payments under some of our retail store leases are based on a minimum rental plus a percentage of the store's sales in excess of +stipulated amounts. The following schedule shows the composition of total rental expense. +Years Ended December 31, +2011 +2010 +2009 +Minimum rentals +$ +26,645 +$ +18,551 +$ +13,707 +Contingent rentals +6,085 +2,496 +1,147 +$ +32,730 +$ +21,047 +$ +14,854 +The +Company had $264,242 of outstanding purchase orders with its manufacturers as of December 31, 2011. In addition, the Company entered into agreements for promotional activities +and other services. Future commitments under these purchase orders and other agreements are as follows: +Year ending December 31: +2012* +$ +268,221 +2013 +1,767 +2014 +1,119 +$ +271,107 +* Included +in the 2012 amount are remaining commitments, net of deposits, that are also unconditional purchase obligations relating to sheepskin contracts. The +Company enters into contracts requiring minimum purchase commitments of sheepskin that Deckers' affiliates, manufacturers, factories, and other agents (each or collectively, a "Buyer") must make on or +before a specified target date. Under certain contracts, the Company may pay an advance deposit, that are included in other current assets on the consolidated balance sheets and shall be repaid to the +Company as Buyers purchase goods under the terms of these agreements. In the event that a Buyer does not purchase certain minimum commitments on +F-26 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +or +before certain target dates, the supplier may retain a portion of the advance deposit until the amounts of the commitments are fulfilled. All of these agreements may result in unconditional +purchase obligations if a Buyer does not meet the minimum purchase requirements. In the event that a Buyer does not purchase such minimum commitments, the Company shall be responsible for compliance +with any and all minimum purchase commitments under these contracts. The contracts do +not permit net settlement. The Company expects sheepskin purchases by third party factories will eventually exceed the contract levels. Therefore, management believes the likelihood of any +non-performance payments under these contractual arrangements is remote and would have an immaterial effect on the consolidated statements of income. The Company determined this based upon +its projected sales and inventory purchases. Minimum commitments for these contracts as of December 31, 2011 were as follows: +Contract +Effective Date +Final +Target Date +Advance +Deposit +Total +Minimum +Commitment +Remaining +Deposit +Remaining +Commitment, +Net of Deposit +July 2011 +January 31, 2012 +$ 20,000 +$ 39,271 +$ 13,400 +$ 6,421 +October 2011 +July 31, 2012 +$ 50,000 +$ 158,000 +$ 50,000 +$ 102,771 +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 Company's financial position or results of operations. In addition, the Company has agreed to indemnify certain of its licensees, distributors, and promotional partners in +connection with claims related to the use of the Company's intellectual property. The terms of such agreements range up to five years initially and generally do not provide for a limitation on the +maximum potential future payments. Management believes the likelihood of any payments is remote and would be immaterial. The Company determined the risk was low based on a prior history of +insignificant claims. The Company is not currently involved in any indemnification matters in regards to its intellectual property. +(9) Business Combination +On May 19, 2011, the Company entered into an asset purchase agreement whereby it agreed to acquire substantially all of the +assets and assume the related liabilities of Sanuk, an action sport footwear brand rooted in the surf community, known for its original sandals and shoes. On July 1, 2011, the Company completed +the acquisition of the purchased assets and the assumption of the assumed liabilities. The total purchase price for the assets related to the Sanuk brand was $123,544 plus contingent consideration. +The contingent consideration included 2011 EBITDA of the Sanuk brand multiplied by ten, less the closing payment, up to maximum of $30,000, expected to be paid in March 2012; and additional contingent +consideration payments as follows: +• 51.8% of the gross profit of the Sanuk brand in 2012, defined as total sales less the cost of sales for the business of +the sellers; +• 36.0% of gross profit of the Sanuk brand in 2013; +• 8.0% of the product of gross profit of the Sanuk brand in 2015 multiplied by five. +There +is no maximum to the contingent consideration payments for 2012, 2013, and 2015. +F-27 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +The +Company acquired the Sanuk brand based upon the belief that Sanuk is a profitable, well-run business with a similar corporate culture, and provides substantial growth +opportunities, particularly within the action sports market where it has a large and loyal consumer base of active outdoor enthusiasts. The Sanuk brand complements the Company's existing brand +portfolio with its unique market position through the combination of original and innovative product designs, as well as authentic and irreverent marketing campaigns. The brand assists in balancing +the Company's +existing seasonality, with its largest revenues being generated in the first half of the year. The Sanuk brand also brings additional distribution channels to the Company, as it sells to hundreds of +independent specialty surf and skate shops throughout the US that were not significantly in the Company's existing customer portfolio. The acquisition was accounted for as a business combination, and +the Sanuk brand is reported as a new reportable segment. +The +Company has included the operating results of the Sanuk brand in its consolidated financial statements since the date of acquisition, including worldwide revenue of $26,578 and +operating loss of $3,004 for all distribution channels. This operating loss includes overhead costs that are excluded from worldwide wholesale segment operating income of $797 (see note 10). +The operating loss also included $5,066 of amortization expense on the acquired Sanuk intangibles and $3,500 of expense related to the change in fair value of the Sanuk contingent consideration due to +accretion and updated forecasts of the gross profit of the Sanuk brand through 2015. For the year ended December 31, 2011, the Company incurred approximately $4,000 of transaction costs for the +Sanuk acquisition which was included in SG&A. +The +fair value of the contingent consideration is based on Level 3 inputs, and further changes in the fair value of the contingent consideration will be recorded through operating +income (see note 1). The Company allocated the excess of the purchase price over the identifiable intangible and net tangible assets to goodwill. The goodwill arising from the acquisition of +the Sanuk brand relates to the projected earnings power in the future, which includes the items discussed above. The goodwill is included in the Sanuk wholesale reportable segment and all of it is +expected to be deductible for tax purposes. +The +Company used the income approach to value the contingent consideration and identifiable intangible assets. The contingent consideration used a discounted cash flow method with a +discount rate of 5.0% in 2011 and 7.0% thereafter. The following table summarizes the methods used under the income approach for the identifiable intangible assets and their corresponding discount +rates and royalty rates, where applicable: +Identifiable intangible asset +Method +Discount Rate +Royalty Rate +US trademarks +Relief from royalty +15.0 +% +5.0 +% +International trademarks +Relief from royalty +17.0 +% +5.0 +% +Customer relationships +Excess earnings +15.5 +% +International distributor relationships +Lost profits +17.5 +% +US non-compete agreements +Lost profits +15.5 +% +International non-compete agreements +Lost profits +17.5 +% +Patents +Relief from royalty +16.5 +% +3.0 +% +US backlog +Excess earnings +14.0 +% +International backlog +Excess earnings +16.0 +% +The +amortizable intangible assets are being amortized straight-line over their estimated useful lives, with the exception of the customer relationships, which are being +amortized on an accelerated basis based +F-28 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +on +their aggregate projected after tax undiscounted cash flows. The following table summarizes the final purchase price allocation: +Estimated Fair Value +Estimated Useful Life (Years) +Consideration +Cash paid +$ +125,203 +Receivable from sellers +(1,659 +) +Contingent consideration arrangement +88,100 +Total consideration transferred +$ +211,644 +Recognized amounts of identifiable assets acquired and liabilities assumed: +Trade accounts receivable, net of allowances of $1,130 +$ +12,809 +Inventories +7,545 +Other assets +367 +Trade accounts payable +(5,544 +) +Other liabilities +(507 +) +Net tangible assets acquired +14,670 +Identifiable intangible assets: +Trademarks +47,200 +20 +Customer relationships +21,300 +8 +International distributor relationships +800 +2 +Non-compete agreements +5,300 +5 +Patents +6,600 +14 +Backlog +1,830 +1 +Goodwill +113,944 +Non-amortizable +Total purchase price +$ +211,644 +F-29 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +The +table below reconciles the preliminary purchase price allocation to the final purchase price allocation. The adjustments to cash paid and receivable from sellers are the final +working capital adjustment. +As of Acquisition +Adjustments +As of December 31, 2011 +Consideration +Cash paid +$ +122,524 +$ +2,679 +$ +125,203 +Receivable from sellers +— +(1,659 +) +(1,659 +) +Contingent consideration arrangement +84,300 +3,800 +88,100 +$ +4,820 +Trade accounts payable +$ +(5,590 +) +$ +46 +$ +(5,544 +) +Goodwill +109,170 +4,774 +113,944 +$ +4,820 +The +following table presents the unaudited pro forma results of the Company for the year ended December 31, 2011 and 2010 as if the acquisition of the Sanuk brand had occurred on +January 1, 2010. These results are not intended to reflect the actual operations of the Company had the acquisition occurred on January 1, 2010. Acquisition transaction costs have been +excluded from the pro forma operating income. +December 31, +2011 +2010 +Net sales +$ +1,419,557 +$ +1,049,389 +Income from operations +$ +297,835 +$ +246,130 +The +Company entered into a deferred purchase factoring agreement with CIT Commercial Services (CIT) whereby CIT collects the Sanuk accounts receivable at the gross amount of such +receivables, less any discounts and allowances. CIT is responsible for the servicing and administration of accounts receivables collected on behalf of the Company and, to the extent that an eligible +account is in default, CIT is required to purchase the account from the Company. CIT collects amounts due and remits collected funds, less factoring and various administrative fees. Open receivables +collected by CIT totaled approximately $4,700 at December 31, 2011 and are included in accounts receivable in the consolidated balance sheets. Collection fees for the year ended +December 31, 2011 were $111. +(10) Business Segments, Concentration of Business, and Credit Risk and Significant Customers +The Company's accounting policies of the segments below are the same as those described in the summary of significant accounting +policies (see note 1), except that the Company does not allocate corporate overhead costs or non-operating income and expenses to segments. The Company evaluates segment performance +primarily based on net sales and income or loss from operations. The Company's reportable segments include the strategic business units for the worldwide wholesale operations of the UGG brand, Teva +brand, Sanuk brand, and its other brands, its eCommerce business and its retail store business. The wholesale operations of each brand are managed separately because each requires different marketing, +research and development, design, sourcing, and sales strategies. The eCommerce and retail +F-30 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +store +segments are managed separately because they are direct to consumer sales, while the brand segments are wholesale sales. The income or loss 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, selling and marketing, depreciation, amortization, and +the costs of employees and their respective expenses that are directly related to each business segment. The unallocated corporate overhead costs include the following: costs of the distribution +centers, certain executive and stock compensation, accounting and finance, legal, information technology, human resources, and facilities costs, among others. The gross profit derived from the sales +to third parties of the eCommerce and retail stores segments is separated into two components: (i) the wholesale profit is included in the related operating income or loss of each wholesale +segment, and (ii) the retail profit is included in the operating income of the eCommerce and retail stores segments. In prior periods, the gross profit of the international portion of the +eCommerce and retail stores segments included both the wholesale and retail profit. This change in segment reporting only changed the presentation within the below table and did not impact the +Company's consolidated financial statements for any periods. The segment information for the years ended December 31, 2010 and 2009 has been adjusted retrospectively to conform to the current +period presentation. +The +Company's other brands include Simple®, TSUBO®, Ahnu®, and MOZO®. The Company ceased distribution of the Simple brand effective +December 31, 2011. The wholesale operations of the Company's other brands are included as one reportable segment, other wholesale, presented in the figures below. The +F-31 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +Sanuk +brand operations are included in the Company's segment reporting effective upon the acquisition date of July 1, 2011. Business segment information is summarized as follows: +Years Ended December 31, +2011 +2010 +2009 +Net sales to external customers: +UGG wholesale +$ +915,203 +$ +663,854 +$ +566,964 +Teva wholesale +118,742 +96,207 +71,952 +Sanuk wholesale +26,039 +— +— +Other brands wholesale +21,801 +23,476 +19,644 +eCommerce +106,498 +91,808 +75,666 +Retail stores +189,000 +125,644 +78,951 +$ +1,377,283 +$ +1,000,989 +$ +813,177 +Income (loss) from operations: +UGG wholesale +$ +388,275 +$ +307,478 +$ +235,849 +Teva wholesale +20,267 +18,684 +12,495 +Sanuk wholesale +797 +— +— +Other brands wholesale +(9,524 +) +(6,184 +) +(14,698 +) +eCommerce +24,255 +23,536 +21,073 +Retail stores +31,461 +27,310 +15,361 +Unallocated overhead +(170,693 +) +(121,736 +) +(88,833 +) +$ +284,838 +$ +249,088 +$ +181,247 +Depreciation and amortization: +UGG wholesale +$ +4,375 +$ +112 +$ +253 +Teva wholesale +587 +2,024 +267 +Sanuk wholesale +5,125 +— +— +Other brands wholesale +533 +1,125 +1,013 +eCommerce +540 +232 +210 +Retail stores +6,082 +3,018 +2,365 +Unallocated overhead +8,185 +5,772 +4,352 +$ +25,427 +$ +12,283 +$ +8,460 +Capital expenditures: +UGG wholesale +$ +706 +$ +1,155 +$ +52 +Teva wholesale +305 +150 +21 +Sanuk wholesale +1,778 +— +— +Other brands wholesale +198 +226 +1,260 +eCommerce +1,419 +1,030 +304 +Retail stores +22,297 +11,296 +6,498 +Unallocated overhead +29,083 +9,191 +5,836 +$ +55,786 +$ +23,048 +$ +13,971 +Total assets from reportable segments: +UGG wholesale +$ +347,213 +$ +194,028 +$ +130,493 +Teva wholesale +61,893 +49,849 +31,105 +Sanuk wholesale +217,936 +— +— +Other brands wholesale +10,690 +12,031 +11,551 +eCommerce +5,964 +4,053 +2,431 +Retail stores +80,514 +39,377 +27,931 +$ +724,210 +$ +299,338 +$ +203,511 +F-32 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +The assets allocable to each segment generally include accounts receivable, inventory, fixed assets, intangible assets, and certain other assets +that are specifically identifiable with one of the Company's segments. Unallocated assets are the assets not specifically related to the segments and include cash and cash equivalents, deferred tax +assets, and various other assets shared by the Company's segments. Reconciliations of total assets from reportable segments to the consolidated balance sheets are as follows: +December 31, +2011 +2010 +Total assets from reportable segments +$ +724,210 +$ +299,338 +Unallocated cash and cash equivalents +263,606 +445,226 +Unallocated deferred tax assets +27,637 +27,123 +Other unallocated corporate assets +130,743 +37,307 +Consolidated total assets +$ +1,146,196 +$ +808,994 +A +portion of the Company's cash and cash equivalents are held as cash in operating accounts that are with third party financial institutions. These balances, at times, exceed the Federal +Deposit Insurance Corporation (FDIC) insurance limits. While the Company regularly monitors the cash balances in its operating accounts and adjusts the balances as appropriate, these cash balances +could be impacted if the underlying financial institutions fail or are subject to other adverse conditions in the financial markets. As of December 31, 2011, the Company had experienced no loss +or lack of access to cash in its operating accounts. +The +remainder of the Company's cash equivalents is invested in interest bearing funds managed by third party investment management institutions. These investments can include US +treasuries and government agencies, money market funds, and municipal bonds, among other investments. Certain of these investments are subject to general credit, liquidity, market, and interest rate +risks. Investment risk has been and may further be exacerbated by US mortgage defaults, credit and liquidity issues, and the European debt crisis, which have affected various sectors of the financial +markets. As of December 31, 2011, the Company had experienced no loss or lack of access to its invested cash and cash equivalents. +The +Company sells its products to customers throughout the US and to foreign customers located in Europe, Canada, Australia, Asia, and Latin America, among other regions. International +sales were 31.4%, 23.7%, and 20.6% of the Company's total net sales for the years ended December 31, 2011, 2010, and 2009, respectively. For the year ended December 31, 2011, no single +foreign country comprised more than 10% of total sales. The Company does not consider international operations a separate segment, as +F-33 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +management +reviews such operations in the aggregate with the aforementioned segments. Long-lived assets, which consist of property and equipment, by major country were as follows: +December 31, +2011 +2010 +US +$ +65,034 +$ +36,591 +UK +6,703 +6,753 +All other countries* +18,520 +4,393 +Total +$ +90,257 +$ +47,737 +* No +other country's long-lived assets comprised more than 10% of total long-lived assets as of December 31, 2011 and 2010. +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. +No single customer accounted for more than 10% of net sales in the year ended December 31, 2011. One customer accounted for 11.9%, and 13.2% of the Company's net sales in 2010, and 2009, +respectively. This customer's revenues were generated from UGG, Teva, and other wholesale segments. No other +customer accounted for more than 10% of net sales in the years ended December 31, 2010, and 2009. As of December 31, 2011, the Company had one customer representing 17.1% of net trade +accounts receivable. As of December 31, 2010, the Company had one customer representing 33.2% and another customer representing 10.1% of net trade accounts receivable. +The +Company's production is concentrated at a limited number of independent contractor factories in China. The Company's sourcing is concentrated in Australia and China and include a +limited number of key sources for the principal raw material for certain UGG products, sheepskin. The Company's operations are subject to the customary risks of doing business abroad, including, but +not limited to, currency fluctuations, customs duties and related fees, various import controls and other nontariff barriers, restrictions on the transfer of funds, labor unrest and strikes and, in +certain parts of the world, political instability. The supply of sheepskin can be adversely impacted by weather conditions, disease, and harvesting decisions that are completely outside the Company's +control. Further, the price of sheepskin is impacted by demand, industry, and competitors. +(11) Foreign Currency Exchange Contracts and Hedging +As of December 31, 2011, the Company's total hedging contracts had notional amounts totaling approximately $66,000, held by one +counterparty. At December 31, 2011, the outstanding contracts were expected to mature over the next 12 months. +The +nonperformance risk of the Company and the counterparty did not have a material impact on the fair value of the derivatives. During the year ended December 31, 2011, the +ineffective portion relating to these hedges was immaterial and the hedges remained effective as of December 31, 2011. As of December 31, 2011, the total amount in accumulated other +comprehensive (loss) income (see note 7) was expected to be reclassified into income within the next 15 months. +F-34 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +The +following tables summarize the effect of derivative instruments on the consolidated financial statements: +For the Year +Ended +December 31, +Derivatives in +Designated +Cash Flow +Hedging +Relationships +Amount of +Gain (Loss) +Recognized in +OCI on +Derivative +(Effective +Portion) +Location of +Gain (Loss) +Reclassified +from +Accumulated +OCI into +Income +(Effective +Portion) +Amount of +Gain (Loss) +Reclassified +from +Accumulated +OCI into +Income +(Effective +Portion) +Location of +Amount +Excluded from +Effectiveness +Testing +Gain (Loss) +from Amount +Excluded from +Effectiveness +Testing +2011 +Foreign Exchange Contracts +$(1,376) +Net Sales +$125 +SG&A +$(260) +2010 +Foreign Exchange Contracts +$ 2,566 +Net Sales +— +SG&A +$(133) +For the Year Ended +December 31, +Derivatives Not Designated +as Hedging Instruments +Location of Gain (Loss) +Recognized in Income on +Derivatives +Amount of Gain (Loss) +Recognized in Income on +Derivatives +2011 +Foreign Exchange Contracts +SG&A +$(541) +2010 +Foreign Exchange Contracts +SG&A +$ (95) +(12) Quarterly Summary of Information (Unaudited) +Summarized unaudited quarterly financial data are as follows: +2011 +March 31 +June 30 +September 30 +December 31 +Net sales +$ +204,851 +$ +154,222 +$ +414,358 +$ +603,852 +Gross profit +102,478 +65,912 +202,853 +307,752 +Net income (loss) attributable to Deckers Outdoor Corporation +19,178 +(7,339 +) +62,484 +124,729 +Net income (loss) per share attributable to Deckers Outdoor Corporation common stockholders: +Basic +$ +0.50 +$ +(0.19 +) +$ +1.62 +$ +3.23 +Diluted +$ +0.49 +$ +(0.19 +) +$ +1.59 +$ +3.18 +F-35 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +2010 +March 31 +June 30 +September 30 +December 31 +Net sales +$ +155,927 +$ +137,059 +$ +277,879 +$ +430,124 +Gross profit +77,907 +60,743 +130,953 +233,335 +Net income attributable to Deckers Outdoor Corporation +17,895 +8,966 +42,143 +89,231 +Net income per share attributable to Deckers Outdoor Corporation common stockholders: +Basic +$ +0.46 +$ +0.23 +$ +1.09 +$ +2.31 +Diluted +$ +0.46 +$ +0.23 +$ +1.07 +$ +2.27 +(13) Goodwill and Other Intangible Assets +Most of the Company's goodwill is related to the Sanuk reportable segment, with the remaining related to the UGG reportable segment. +The Company's goodwill and other intangible assets are summarized as follows: +Gross +Carrying +Amount +Weighted- +Average +Amortization +Period +Accumulated +Amortization +Net +Carrying +Amount +As of December 31, 2011 +Intangibles subject to amortization +$ +85,847 +15 years +$ +6,853 +$ +78,994 +Intangibles not subject to amortization: +Goodwill +120,045 +Trademarks +15,455 +Total goodwill and other intangible assets +$ +214,494 +As of December 31, 2010 +Intangibles subject to amortization +$ +5,854 +7 years +$ +2,895 +$ +2,959 +Intangibles not subject to amortization: +Goodwill +6,507 +Trademarks +15,452 +Total goodwill and other intangible assets +$ +24,918 +The +additions to goodwill through acquisitions were attributable to the Sanuk reportable segment (see note 9), and the impairment loss was attributable to the other brands +reportable segment. Changes in the Company's goodwill are summarized as follows: +Goodwill, +Gross +Accumulated +Impairment +Goodwill, +Net +Balance at December 31, 2009 +$ +21,932 +$ +(15,425 +) +$ +6,507 +Additions through acquisitions +— +— +— +Balance at December 31, 2010 +$ +21,932 +$ +(15,425 +) +$ +6,507 +Additions through acquisitions +113,944 +— +113,944 +Impairment loss +— +(406 +) +(406 +) +Balance at December 31, 2011 +$ +135,876 +$ +(15,831 +) +$ +120,045 +F-36 +Table of Contents +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, 2011 and 2010, the Company performed its annual impairment tests and evaluated its UGG and Sanuk goodwill. Also, as of October 31, 2011 and 2010, the +company evaluated its Teva trademarks. Based on the carrying amounts of the UGG, Teva, Sanuk, and other brands' goodwill, trademarks, and net assets, the brands' 2011 and 2010 sales and operating +results, and the brands' long-term forecasts of sales and operating results as of their evaluation dates, the Company concluded that the carrying amounts of the UGG and Sanuk goodwill, as +well as the Teva trademarks, were not impaired. All goodwill was evaluated based on qualitative analyses, and other nonamortizable intangibles were evaluated based on Level 3 inputs. +Aggregate +amortization expense for amortizable intangible assets for the years ended December 31, 2011, 2010, and 2009 was $9,599, $2,598, and $388 respectively. The following +table summarizes the expected amortization expense on existing intangible assets for the next five years. +Year ending December 31: +2012 +$ +8,638 +2013 +7,655 +2014 +6,785 +2015 +6,382 +2016 +4,920 +Thereafter +44,614 +$ +78,994 +(14) Recent Accounting Pronouncements +In December 2010, the FASB issued ASU, Disclosure of Supplementary Pro Forma Information for Business +Combinations , an amendment to Accounting Standards Codification (ASC) 805, Business Combinations . The amendment specifies that +if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination had occurred as of the beginning +of the comparable prior reporting period only. The amendment also expands the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma +adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments are effective prospectively for business combinations for which +the acquisition date is on or after January 1, 2011. The Company adopted this standard in connection with its Sanuk acquisition and included the required disclosures in its consolidated +financial statements. +In +June 2011, the FASB issued ASU, Presentation of Comprehensive Income , an amendment to ASC 220, Comprehensive +Income , that brings US Generally Accepted Accounting Principles (GAAP) into alignment with International Financial Reporting Standards for the presentation of OCI. Effective +for the Company beginning January 1, 2012, the option in current GAAP that permits the presentation of +OCI in the statement of changes in equity has been eliminated. The provisions of the update provide that an entity that reports items of OCI has two options: (1) a single statement must present +the components of net income, total net income, the components of OCI, total OCI, and total comprehensive income; or (2) a two-statement approach whereby an entity must present the +components of net income and total net income in the first statement. That statement must be immediately followed by a financial statement that presents the components of OCI, a total for OCI, and a +total for comprehensive income. Beginning January 1, 2012, the Company will adopt this ASU using the single statement approach. The adoption of this ASU will only change the presentation of OCI +on the Company's consolidated financial statements. +F-37 +Table of Contents +Schedule II +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +VALUATION AND QUALIFYING ACCOUNTS +Three Years Ended December 31, 2011, 2010 and 2009 +Balance at +Beginning of +Year +Additions +Deductions +Balance at +End of Year +Year ended December 31, 2011: +Allowance for doubtful accounts(1) +$ +1,379 +$ +642 +$ +302 +$ +1,719 +Allowance for sales discounts(2) +5,819 +36,254 +37,444 +4,629 +Allowance for sales returns(3) +4,039 +37,355 +30,081 +11,313 +Chargeback allowance(4) +2,535 +1,744 +248 +4,031 +Year ended December 31, 2010: +Allowance for doubtful accounts(1) +$ +2,710 +$ +(763 +) +$ +568 +$ +1,379 +Allowance for sales discounts(2) +2,796 +26,514 +23,491 +5,819 +Allowance for sales returns(3) +3,235 +20,726 +19,922 +4,039 +Chargeback allowance(4) +3,049 +(253 +) +261 +2,535 +Year ended December 31, 2009: +Allowance for doubtful accounts(1) +$ +2,482 +$ +399 +$ +171 +$ +2,710 +Allowance for sales discounts(2) +4,241 +22,630 +24,075 +2,796 +Allowance for sales returns(3) +2,335 +15,947 +15,047 +3,235 +Chargeback allowance(4) +1,648 +1,644 +243 +3,049 +(1) The +additions to the allowance for doubtful accounts represent the estimates of our bad debt expense based upon the factors for which we evaluate the +collectability of our accounts receivable, with actual recoveries netted into additions. Deductions are the actual write offs of the receivables. In 2010, the additions were negative due to recoveries +of amounts reserved as of December 31, 2009. +(2) The +additions to the reserve for sales discounts represent estimates of discounts to be taken by our customers based upon the amount of available +outstanding terms discounts in the year-end aging. Deductions are the actual discounts taken by our customers. +(3) The +additions to the allowance for returns represent estimates of returns based upon our historical returns experience. Deductions are the actual returns of +products. +(4) The +additions to the chargeback allowance represent chargebacks taken in the respective year as well as an estimate of chargebacks related to sales in the +respective reporting period that will be taken subsequent to the respective reporting period. Deductions are the actual chargebacks written off against outstanding accounts receivable. The Company has +estimated the additions and deductions by netting each quarter's change and summing the four quarters for the respective year. +See accompanying report of independent registered public accounting firm. +F-38 \ No newline at end of file diff --git a/raw/filings/0000910521/2011/0001047469-12-001917/filing_metadata.csv b/raw/filings/0000910521/2011/0001047469-12-001917/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..a571dff1529b40da5d4dca1d84b77f98c8117922 --- /dev/null +++ b/raw/filings/0000910521/2011/0001047469-12-001917/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000910521,DECK,DECKERS OUTDOOR CORP,10-K,2012-02-29,2011-12-31,2012-02-29T21:49:12.000Z,0001047469-12-001917,a2207209z10-k.htm,10-K,11854352,1,0,https://www.sec.gov/Archives/edgar/data/910521/000104746912001917/a2207209z10-k.htm,https://www.sec.gov/Archives/edgar/data/910521/000104746912001917/,2011,2011,1 diff --git a/raw/filings/0000910521/2011/0001047469-12-001917/item1.txt b/raw/filings/0000910521/2011/0001047469-12-001917/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..7d0bd483fba4656cb1fc373fb0bc008bbeda0b2a --- /dev/null +++ b/raw/filings/0000910521/2011/0001047469-12-001917/item1.txt @@ -0,0 +1,242 @@ +Item 1. Business. +Unless otherwise specifically indicated, all amounts in Item 1. and Item 1A. herein are expressed in thousands, except +for employees, share quantity, per share data, and selling prices. +2 +Table of Contents +General +Deckers Outdoor Corporation was incorporated in 1975 under the laws of the State of California and, in 1993, reincorporated under the +laws of the State of Delaware. We strive to be a premier lifestyle marketer that builds niche brands into global market leaders by designing and marketing innovative, functional and fashion-oriented +footwear developed for both high performance outdoor activities and everyday casual lifestyle use. We believe that our footwear is distinctive and appeals broadly to men, women and children. We sell +our products, including accessories such as handbags and outerwear, through quality domestic and international retailers, international distributors, and directly to end-user consumers +both domestically and internationally, through our websites, call centers, retail concept stores and retail outlet stores. Our primary objective is to build our footwear lines into global lifestyle +brands with market leadership positions. We seek to differentiate our brands and products by offering diverse lines that emphasize authenticity, functionality, quality, and comfort and products +tailored to a variety of activities, seasons, and demographic groups. Virtually all of our products are currently manufactured by independent contractors outside of the United States (US). Our +continued growth will depend upon the broadening of our products offered under each brand, the appeal of our products to our consumers, expanding domestic and international distribution, successfully +opening new retail stores, increasing sales to consumers, and developing or acquiring new brands. +In +July 2008, we entered into a joint venture agreement with an affiliate of Stella International Holdings Limited ("Stella International") for the opening of retail stores and wholesale +distribution for the UGG brand in China. The joint venture is owned 51% by Deckers and 49% by Stella International. Stella International is also one of our major manufacturers in China. In May 2008, +we acquired 100% of the ownership interest of TSUBO, LLC, a high-end casual footwear brand. In March 2009, we acquired 100% of the ownership interest of Ahnu, Inc., an +outdoor performance and lifestyle footwear brand. In September 2009, we began to reacquire our international distribution rights, beginning in Japan. In January 2010, we acquired certain assets and +liabilities, including reacquisition of our distribution rights, from our Teva distributor that sold to retailers in Belgium, the Netherlands, and Luxemburg (Benelux) as well as France. In September +2010, we purchased a portion of a privately held footwear company as an equity method investment. In January 2011, we acquired certain assets from our UGG, Teva, and Simple brands distributor that +sold to retailers in the United Kingdom (UK) and from our UGG and Simple brands distributor that sold to retailers in Benelux and France. The distribution rights in these regions reverted back to us +on December 31, 2010 upon the expiration of the distribution agreements. On May 19, 2011, we entered into an asset purchase agreement with Sanuk USA LLC, C&C +Partners, Ltd., and the equity holders of both entities (collectively referred to as "Sanuk" or the "Sanuk brand"). On July 1, 2011, we completed the acquisition of the purchased assets +and the assumption of the assumed liabilities of the Sanuk brand. Our consolidated financial statements include the operations of Sanuk beginning July 1, 2011. +Products +We market our products primarily under three proprietary brands: +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 end-user consumer reception, driven by consistent introductions of new styles in the fall and spring seasons, as well as year-round styles. +We have also strategically expanded our geographic distribution as well as our consumer base with more men's products. Additionally, we have broadened the brand into additional product categories +beyond footwear, such as handbags, apparel, and cold weather accessories. We carefully manage the distribution of our UGG products within higher-end specialty and department store +retailers in order to best reach our target consumers, preserve the UGG brand's retail channel positioning and maintain the UGG brand's position as a mid- to upper-price luxury brand. +3 +Table of Contents +In +recent years, sales of UGG products have benefited from significant national media attention and celebrity endorsement through our marketing programs and product placement activities, +raising the profile of our UGG brand as a luxury comfort brand. We have further supported the UGG brand's market positioning by expanding the selection of styles available in order to build consumer +interest in our UGG brand collection. We also remain committed to limiting distribution of UGG products to higher-end retail channels. +Teva®. Teva is our outdoor performance and lifestyle brand and pioneer of the sport sandal market. We have expanded the Teva +product line +over time to include open and closed-toe outdoor lifestyle footwear, as well as additional outdoor performance footwear, including multi-sport shoes, light hiking shoes, amphibious +footwear, and rugged outdoor travel shoes. +In +recent years, we have focused on regaining our leadership position in the performance sandal market, while broadening our performance platform to include other outdoor activities such +as multi-sport, light hiking, and freestyle mountain bike riding to lessen our overall reliance on sandal +sales, while bringing youthfulness back to the brand through contemporary designs, colors, and materials. Throughout 2010 and 2011, we have continued to expand our closed-toe offering in +both performance and lifestyle outdoor footwear. This includes a closed-toe line extension of our popular Mush™ flip flop collection, as well as a line of insulated outdoor +boots. +Sanuk®. Sanuk is our action sport footwear brand rooted in the surf community. The Sanuk brand's offerings include the +patented SIDEWALK +SURFERS® shoe which effectively introduced the deconstructed footwear movement, the Fraid Not™ sandal collection, and the Yoga Mat sandal made from yoga mat material. The brand +has a history of innovation, product invention, foot-friendly comfort, and clever branding. +In +recent years, Sanuk products have been twice recognized at the Surf Industry Manufacturers Association (SIMA) Image Awards as the 2007 and 2010 Footwear Product of the Year. The +brand's SIDEWALK SURFERS are marketed through the "THESE ARE NOT SHOES, THEY'RE SANDALS®" campaign, in reference to its patented sandal construction, which allows the consumers feet to +bend and flex in natural comfort. We plan to continue to build on the Sanuk brand's authentic position in the surf and outdoor markets through its relationships with prominent professional athletes, +including surfers, bouldering athletes, and rock climbers, known as much for their unique personal styles and charisma as for their specialized talents. +In +addition to our primary brands, our other brands include TSUBO, a line of high-end casual footwear that incorporates style, function, and maximum comfort; Ahnu, a line of +outdoor performance and lifestyle footwear; MOZO, a line of footwear that combines running shoe technology with work shoe toughness for individuals that spend long hours working on their feet; and +Simple, a line for which we ceased distribution effective December 31, 2011. +Sales and Distribution +At the wholesale level, we distribute our products in the US through a dedicated network of independent sales representatives, as well +as through employee sales representatives who serve as territory representatives or key account executives for several of our largest customers. Our sales representatives are organized geographically +and by brand and visit retail stores to communicate the features, styling, and technology of our products. In addition to our wholesale business, we also sell products directly to consumers through +our websites and retail stores. Our brands are generally advertised and promoted through a variety of consumer media campaigns. We benefit from editorial coverage in both consumer and trade +publications. Each brand's dedicated marketing team works closely with targeted accounts to maximize advertising and promotional effectiveness. We also manage brand marketing on a global basis to +ensure consistent consumer +communications in all regions and channels. We determine our global communication plans based on brand strategies, consumer insights, and return on investment measures. +4 +Table of Contents +Our +sales force is generally separated by brand, as each brand generally has certain specialty consumers; however, there is overlap between the sales teams and customers. We have aligned +our brands' sales forces to position them for the future of the brands. Each brand's respective sales manager recruits and manages their network of sales representatives and coordinates sales to +national accounts. We believe this approach for the US market maximizes the selling efforts to our national retail accounts on a cost-effective basis. +We +distribute products sold in the US through our distribution centers in Ventura and Camarillo, California. Our distribution centers feature a warehouse management system that enables +us to efficiently pick and pack products for direct shipment to customers. For certain customers requiring special handling, each shipment is pre-labeled and packed to the retailer's +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 quality inspection process. +Internationally, +we distribute our products through independent distributors and retailers in many countries, including countries throughout Europe, Asia Pacific, Canada, and Latin +America, among others. In addition, as we do in the US, in certain countries, we sell products directly to international consumers through our websites and our retail stores, including retail stores +with our joint venture partner in China. For our wholesale and direct to consumer businesses, we operate distribution centers in certain international locations and utilize third-party distribution +companies in other countries. We may also work with trading companies for importation, as needed. Our principal wholesale customers include specialty retailers, selected department stores, outdoor +retailers, sporting goods retailers, shoe stores, and online retailers. In 2011, we continued to assume the distribution rights from certain international distributors and sold directly to retailers +in those regions. We plan to selectively continue distributor conversions in the future. +Our +five largest customers accounted for approximately 24.0% of our net sales for 2011, compared to 28.9% for 2010. No single customer accounted for greater than 10% of our consolidated +net sales in 2011. One customer, Nordstrom, accounted for greater than 10% of our consolidated net sales in 2010, with the majority of those being related to our UGG segment. +UGG. We sell our UGG footwear and accessories primarily through higher-end +department stores such as Nordstrom, Neiman Marcus and Bloomingdale's, as well as independent specialty retailers such as Journey's and David Z., and internet customers such as Zappos.com. 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. +Teva. We sell our Teva footwear primarily through specialty outdoor and sporting goods retailers such as REI, L.L. Bean, Dick's +Sporting Goods, and +The Sports Authority as well as on-line retailers such as Zappos.com. 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 performance products to the consumer are +best equipped to sell our Teva footwear. +Sanuk. We sell our Sanuk footwear primarily through independent action sports retailers including specialty surf and skate shops, +outdoor retailers +such as REI, EMS, and Bass Pro, specialty retailers including Fred Segal and Nordstrom, and larger national chains including Journeys, Dillards, and The Buckle. We believe these retailers showcase the +brand's creativity, fun, and comfort and allow us to effectively reach our target consumers for this brand. +Other brands. Our other brands are sold throughout the world primarily at better department stores, outdoor specialty accounts, +independent specialty +retailers, and with online retailers that support our brand ideals of comfort, style, and quality. Key accounts of our other brands include Nordstrom, Dillard's, Hanigs, REI, and Zappos.com. +5 +Table of Contents +eCommerce. Our eCommerce business enables us to interact and reinforce our relationships with the consumer. We operate our +eCommerce business +primarily through the Uggaustralia.com, Teva.com, Sanuk.com, Tsubo.com, Ahnu.com, and Mozoshoes.com websites. Our websites support the brands' marketing goals and drive offline sales by educating our +consumers about our brands and products and also directing consumers to retailers that carry our brands, including our own retail stores. We have expanded our international capabilities by developing +sites to service certain international markets. These sites are translated into the local language, provide product through local distribution centers and price the products in the consumers' local +currency. In 2011, we launched sites in the UK, +Netherlands, France, Japan, and Canada. Our eCommerce business has offices in Flagstaff, Arizona; Richmond, England; and Tokyo, Japan. In order to reduce the cost of order fulfillment, minimize out of +stock positions, and further leverage our distributions centers' operations, order fulfillment is performed by our distribution centers in California, the UK, Canada, and Japan. Products sold through +our eCommerce business are sold at prices which approximate retail prices, enabling us to capture the full retail margin on each direct to consumer transaction. +Retail Stores. Our retail stores include company-owned stores as well as stores owned with our joint venture partner in China. +Our retail store +business allows us to directly reach our consumers and meet the growing demand for our products. In addition, our UGG Australia concept stores allow us to showcase the entire lines for spring and +fall; whereas, most retailers do not carry our full line. In 2011, we opened one store in the US and seventeen internationally. As of December 31, 2011, we had a total of 34 UGG Australia +concept stores and 11 retail outlet stores worldwide. Products sold through our concept stores are sold at our suggested retail prices, enabling us to capture the full retail margin on each direct to +consumer transaction. The outlet stores sell some of our discontinued styles from the previous season, plus products made specifically for the outlet stores. During 2012, we plan to open additional +retail stores in the US and internationally. +Product Design and Development +The design and product development staff for each of our brands creates 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 freelance designers. By +utilizing outside designers, 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. Refer +to Note 1 to our accompanying consolidated financial statements for a discussion of our research and development costs for the last three years. +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 and accessories for our various product lines. We develop detailed drawings and prototypes of our new products to aid in conceptualization and to ensure our contemplated +new products meet the standards for innovation and performance that our consumers demand. Throughout the development process, we have multiple design and development reviews, which we then coordinate +with our independent manufacturers. This ensures that we are addressing the needs of our consumers and are working 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 products; we outsource the production of our brand footwear to independent manufacturers primarily in China. +During 2009, we began to diversify our manufacturing locations by outsourcing a limited amount of production to manufacturers in Vietnam, and in 2010 and 2011 increased this production volume while +also opening manufacturing locations in 2011 in the US and +6 +Table of Contents +Latin +America. We require our independent contract manufacturers and designated suppliers to adopt our Supplier Code of Conduct, which specifies that they comply with all local laws and regulations +governing human rights, working conditions, and environmental compliance before we are willing to conduct business with them. Our Supplier Code of Conduct applies to all of our manufacturers, +distributors, vendors, and other independent contractors. We also require our manufacturing partners to comply with our Ethical Supply Chain guidelines and Restricted Substances policy as a condition +of doing business with our company. 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. We maintain an +on-site supervisory office in Pan Yu City, China that serves 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. To ensure the production of high quality products, the majority 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 generally +outsource our manufacturing requirements on the basis of individual purchase orders or short-term purchase commitments 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 for our products primarily +from Australia, Europe, and the US. We maintain constant communication with the tanneries to monitor the supply of sufficient high quality sheepskin available for our projected UGG brand production. +To +ensure adequate supplies for our manufacturers, we forecast our usage of sheepskin in advance at a forward price. We believe current supplies are sufficient to meet our needs in the near future, but +we continue to investigate our options to accommodate any unexpected future growth. +We +have instituted pre-production, in-line, and post-production inspections to meet or exceed the high quality demanded by us and consumers of our +products. Our quality assurance program includes our own employee 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 distribution centers. +Patents and Trademarks +We utilize trademarks on nearly all of our products and believe that having distinctive marks that are readily identifiable is an +important factor in creating a market for our goods, in identifying the Company, and in distinguishing our goods from the goods of others. We currently hold trademark registrations for UGG, Teva, +Sanuk, Simple, TSUBO, Ahnu, MOZO, and other marks in the US and in many other countries, including the countries of the European Union, Canada, China, Japan and Korea. We now hold more than 150 +utility and design patent registrations in the US and abroad and have filed more than 15 new patent applications which are currently pending. These patents expire at various times; US patents that are +registered this year will remain valid to 2026 for design patents and to 2032 for utility patents. We regard our proprietary rights as valuable assets and vigorously protect such rights against +infringement by third parties. No single patent is critical to our business, and no group of patents expiring in the same year is critical to our business. +7 +Table of Contents +Seasonality +Our business is seasonal, with the highest percentage of UGG brand net sales occurring in the third and fourth calendar quarters and +the highest percentage of Teva and Sanuk brand net sales occurring in the first and second calendar quarters of each year. Our financial results include the Sanuk brand beginning July 1, 2011. +Our total net sales in the last half of the year have exceeded that for the first half of the year, and we expect this trend to continue. Our other brands do not have a significant seasonal impact on +our business. Nonetheless, actual results could differ +materially depending upon consumer preferences, availability of product, competition, and our wholesale and distributor customers continuing to carry and promote our various product lines, among other +risks and uncertainties. See Part I, Item 1A, "Risk Factors." For further discussion on our working capital and inventory management, see Item 7 of Part II, "Management's +Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources." +Backlog +Historically, we have encouraged our wholesale and distributor customers to place, and we have received, a significant portion of +orders as preseason orders, generally four to eight months prior to shipment date. We provide customers with price incentives, and in certain cases extended payment terms, to participate in such +preseason 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, which can be cancelled prior to shipment. The backlog as of a particular date is affected by a number of factors, including seasonality, manufacturing schedule, and the +timing of product shipments 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. +At +December 31, 2011, our backlog of orders from our wholesale customers and distributors was approximately $387,000 compared to approximately $336,000 at December 31, +2010. Our 2011 backlog includes the Sanuk brand, which we did not have in 2010. While all orders in the backlog are subject to cancellation by customers, we expect that the majority of such orders +will be filled in 2012. We believe that backlog at year-end is an imprecise indicator of total revenue that may be achieved for the full year for several reasons. Backlog only relates to +wholesale and distributor orders for the next season and current season fill-in orders and excludes potential sales in our eCommerce business and retail stores during the year. Backlog +also is affected by the timing of customers' orders and product availability. +Competition +The casual, outdoor, athletic, fashion, and formal footwear markets are highly competitive. Our competitors include athletic and +footwear companies, branded apparel companies, and retailers with their own private labels. Although the footwear industry is fragmented to a certain degree, many of our competitors are larger and +have substantially greater resources than us, including athletic shoe companies, several of which compete directly with some of our 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 and accessory industries. Due to the popularity of our UGG products, we face increasing competition from a significant number of +competitors selling imitation products. +Our +footwear lines compete primarily on the basis of brand recognition and authenticity, product quality and design, functionality, performance, comfort, fashion appeal, and price. Our +ability to successfully compete depends on our ability to: +• shape and stimulate consumer tastes and preferences by offering innovative, attractive, and exciting products; +8 +Table of Contents +• anticipate and respond to changing consumer demands in a timely manner; +• maintain brand authenticity; +• develop high quality products that appeal to consumers; +• suitably price our products; +• provide strong and effective marketing support; and +• ensure product availability. +We +believe we are well positioned to compete in the footwear industry. 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, 2011, we employed approximately 1,900 employees in the US, Europe, and Asia, none of whom were represented by a +union. This figure includes approximately 1,000 employees in our retail stores worldwide, which includes part-time and seasonal employees. The large increase in employees during the year +was primarily related to increased selling, general and administration headcount commensurate with our growth. We intend to increase our employee count further in 2012 primarily related to retail +stores and our other expansion initiatives. We believe our relationships with our employees are good. +Financial Information about Segments and Geographic Areas +Our six reportable business segments include the strategic business units responsible for the worldwide operations of our brands' (UGG, +Teva, Sanuk and other brands) wholesale divisions, as well as our eCommerce and retail store businesses. The majority of our sales and long-lived assets are in the US. Refer to +Note 10 to our accompanying consolidated financial statements for further discussion of our business segment data. Refer to Item 1A of this Part I for a discussion of the risks +related to our foreign operations. +Compliance +with federal, state, and local environmental regulations has not had, nor is it expected to have, any material effect on our capital expenditures, earnings, or competitive +position based on information and circumstances known to us at this time. +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, Proxy Statements, 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 SEC's Public Reference Room at 100 F Street, NE, 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 at +www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. +9 +Table of Contents \ No newline at end of file diff --git a/raw/filings/0000910521/2011/0001047469-12-001917/item13.txt b/raw/filings/0000910521/2011/0001047469-12-001917/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..c65c126cc2f6ff643e26f200f320740386b45bf0 --- /dev/null +++ b/raw/filings/0000910521/2011/0001047469-12-001917/item13.txt @@ -0,0 +1,4 @@ +Item 13. Certain Relationships and Related Transactions, and Director Independence. +Information relating to Certain Relationships and Related Transactions is set forth under "Proposal No. 1-Election +of Directors" in the Company's definitive proxy statement relating to the Registrant's 2012 annual meeting of stockholders, which will be filed pursuant to Regulation 14A within 120 days +after the end of the Company's fiscal year ended December 31, 2011, and such information is incorporated herein by reference. \ No newline at end of file diff --git a/raw/filings/0000910521/2011/0001047469-12-001917/item9a.txt b/raw/filings/0000910521/2011/0001047469-12-001917/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..953b1c92ea7814a11c746bcc74f8a530d860af5e --- /dev/null +++ b/raw/filings/0000910521/2011/0001047469-12-001917/item9a.txt @@ -0,0 +1,44 @@ +Item 9A. Controls and Procedures. +(a) Disclosure Controls and Procedures. +The Company maintains a system of disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed +in the reports that the Company files or submits under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods +specified in the Securities and Exchange Commission's rules and forms. These disclosure controls and procedures include, among other processes, controls and procedures designed to ensure that +information required to be disclosed in the reports that the Company files or submits under the Exchange Act is accumulated and communicated to management, including the principal executive officer +and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. +The +Company carried out an evaluation, under the supervision and with the participation of management, including the principal executive officer and the principal financial officer of +the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2011 pursuant to Exchange Act Rule 13a-15. Based upon that +evaluation, the principal executive officer and the principal financial officer concluded that the Company's disclosure controls and procedures, as defined in Exchange Act +Rule 13a-15(e) and 15d-15(e), were effective as of the end of the period covered by this report. +(b) Management's Report on Internal Control over Financial Reporting. +Management is responsible for establishing and maintaining adequate internal control over financial reporting at the Company. Our internal control over financial +reporting is a process designed under the supervision of the Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and +the preparation of the Company's financial statements +48 +Table of Contents +for +external reporting purposes in accordance with US generally accepted accounting principles (GAAP). A company's internal control over financial reporting includes those policies and procedures +that: +• pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and +dispositions of the assets of the company; +• provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in +accordance with GAAP, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and the directors of the company; and +• provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of +the company's assets that could have a material effect on the financial statements. +Because +of 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 Company's internal control over financial reporting as of December 31, 2011. 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). Management's +assessment included an evaluation of the design of the Company's 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, 2011, the Company maintained effective internal control over financial reporting. The registered public +accounting firm that audited the consolidated financial statements included in this Annual Report has issued an attestation report on the Company's internal control over financial reporting. 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. +(c) Changes in Internal Control over Financial Reporting. +There was no change in our internal control over financial reporting that occurred during the quarter ended December 31, 2011 that has materially affected, +or is reasonably likely to materially affect, our internal control over financial reporting. \ No newline at end of file diff --git a/raw/filings/0000910521/2011/0001047469-12-001917/rp_note.txt b/raw/filings/0000910521/2011/0001047469-12-001917/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000910521/2011/0001047469-12-001917/rpt_disclosure.txt b/raw/filings/0000910521/2011/0001047469-12-001917/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..0e01b60bc307632b83ae5c1c1c2092b7ac5911a3 --- /dev/null +++ b/raw/filings/0000910521/2011/0001047469-12-001917/rpt_disclosure.txt @@ -0,0 +1,30 @@ +Certain Relationships and Related Person Transactions +The Company's legal department is primarily responsible for identifying and reviewing relationships and transactions in which the Company and our directors, +executive officers, certain of our stockholders or their immediate family members are participants to determine whether any of these related persons had or will have a direct or indirect material +interest. In order to identify potential related person transactions, the Company's legal department annually prepares and distributes to all directors and executive officers a written questionnaire +which includes questions intended to elicit information about any related person transactions. In addition, the Company's Code of Business Conduct and Ethics addresses conflicts of interest where an +individual's private interests interfere or conflict with the interests of the Company, including relationships with suppliers, customers or competitors. Conflicts of interest which might impair or +appear to impair the exercise of judgment solely for the benefit of the +Company are prohibited. In general, such conflicts must be approved by the legal department, the employee's supervisor or, in the case of directors, the Audit Committee. Information regarding +potential conflicts of interests in violation of the Company's Code of Business Conduct and Ethics may be reported to the Company's anonymous reporting hotline and may be subsequently obtained by the +Chair of the Audit Committee, the Chair of the Board of Directors and the highest ranking manager of internal audit. +If +a related person transaction is identified by the legal department as one which must be reported in the Company's Proxy Statement pursuant to applicable SEC regulations, the Audit +Committee is responsible for reviewing and approving or ratifying any such related person transactions. In evaluating related person transactions, the Audit Committee members apply the same standards +of good faith and fiduciary duty they apply to their general responsibilities as the Audit Committee and as individual directors. The Audit Committee may approve a related person transaction when, in +its good faith judgment, the transaction is in the best interests of the Company. +There +were no disclosable transactions with related persons under Item 404 of Regulation S-K during the fiscal year ended December 31, 2011 nor are any +such transactions currently proposed. +60 +Limitation of Liability and Indemnification of Directors and Officers +Our Certificate of Incorporation and Bylaws provide that we shall indemnify directors and executive officers to the fullest extent now or hereafter permitted by +the Delaware General Corporation Law (DGCL). In addition, we have entered into indemnification agreements with our directors and executive officers in which we agree to indemnify such persons to the +fullest extent now or hereafter permitted by the DGCL. +We +have obtained a liability policy for our directors and officers as permitted by the DGCL which extends to, among other things, liability arising under the Securities Act of 1933, as +amended. +We +maintain an insurance policy pursuant to which our directors and officers are insured, within the limits and subject to the limitations of the policy, against specified expenses in +connection with the defense of claims, actions, suits or proceedings, and liabilities which might be imposed as a result of such claims, actions, suits or proceedings, that may be brought against them +by reason of their being or having been directors or officers. \ No newline at end of file diff --git a/raw/filings/0000910521/2013/0001445305-14-000820/filing.txt b/raw/filings/0000910521/2013/0001445305-14-000820/filing.txt new file mode 100644 index 0000000000000000000000000000000000000000..d43710705caa334941efb1a31a26d3647ccc0587 --- /dev/null +++ b/raw/filings/0000910521/2013/0001445305-14-000820/filing.txt @@ -0,0 +1,4832 @@ +10-K +1 +deck-20131231x10k.htm +10-K +DECK-2013.12.31-10K +UNITED STATES +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. 20549 +FORM 10-K +(Mark one) +ý +ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the fiscal year ended December 31, 2013 +or +o +TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 +For the transition period from to +Commission File No. 0-22446 +DECKERS OUTDOOR CORPORATION +(Exact name of registrant as specified in its charter) +Delaware +(State or other jurisdiction of +incorporation or organization) +95-3015862 +(I.R.S. Employer +Identification No.) +250 Coromar Drive, Goleta, California +(Address of principal executive offices) +93117 +(Zip Code) +Registrant's telephone number, including area code: (805) 967-7611 +Securities registered pursuant to Section 12(b) of the Act: +Title of each class +Name of each exchange on which registered +Common Stock, par value $0.01 per share +NASDAQ Global Select Market +Securities registered pursuant to Section 12(g) of the Act: None +Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý 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 ý +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 ý No o +Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o +Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o +Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. +Large accelerated filer ý +Accelerated filer o +Non-accelerated filer o +(Do not check if a smaller reporting company) +Smaller reporting company 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 ý +As of June 28, 2013 , the last business day of our most recently completed second fiscal quarter, the aggregate market value of the voting and non-voting stock held by the non-affiliates of the registrant was approximately $1,693,099,089 , based on the number of shares held by non-affiliates of the registrant as of that date, and the last reported sale price of the registrant's common stock on The NASDAQ Global Select market on that date, which was $50.51 . This calculation does not reflect a determination that persons are affiliates for any other purposes. +The number of shares of the registrant's Common Stock outstanding at February 14, 2014 was 34,620,587 . +DOCUMENTS INCORPORATED BY REFERENCE +Portions of the registrant's definitive Proxy Statement on Schedule 14A relating to the registrant's 2014 annual meeting of stockholders, to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this annual report, are incorporated by reference into Part III of this annual report. With the exception of the portions of the Proxy Statement specifically incorporated herein by reference, the Proxy Statement and related proxy solicitation materials are not deemed to be filed as part of this annual report. +DECKERS OUTDOOR CORPORATION +For the Fiscal Year Ended December 31, 2013 +Table of Contents to Annual Report on Form 10-K +Page +PART I +Item 1. +Business +3 +Item 1A. +Risk Factors +7 +Item 1B. +Unresolved Staff Comments +17 +Item 2. +Properties +17 +Item 3. +Legal Proceedings +18 +Item 4. +Mine Safety Disclosures +18 +PART II +Item 5. +Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities +19 +Item 6. +Selected Financial Data +21 +Item 7. +Management's Discussion and Analysis of Financial Condition and Results of Operations +27 +Item 7A. +Quantitative and Qualitative Disclosures about Market Risk +43 +Item 8. +Financial Statements and Supplementary Data +43 +Item 9. +Changes in and Disagreements with Accountants on Accounting and Financial Disclosure +44 +Item 9A. +Controls and Procedures +44 +Item 9B. +Other Information +45 +PART III +Item 10. +Directors, Executive Officers and Corporate Governance +46 +Item 11. +Executive Compensation +46 +Item 12. +Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters +46 +Item 13. +Certain Relationships and Related Transactions, and Director Independence +46 +Item 14. +Principal Accounting Fees and Services +46 +PART IV +Item 15. +Exhibits, Financial Statement Schedules +47 +Signatures +49 +1 +Table of Contents +SPECIAL NOTE ON 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 Exchange Act of 1934, as amended, that concern matters that involve risks and uncertainties that could cause actual results to differ materially from those anticipated or projected in the forward-looking statements. These forward-looking statements are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact contained in this annual report, including statements regarding future events, our future financial performance, our future business strategy and the plans and objectives of management for future operations, are forward-looking statements. We have attempted to identify forward-looking statements by using words such as "anticipate," "believe," "estimate," "expect," "intend," "may," "project," 'plan", "predict", "should," "will," and similar expressions, or the negative of these expressions, as they relate to us, our management and our industry, to identify forward-looking statements. Specifically, this report and the information incorporated by reference in this report contain forward-looking statements relating to, among other things: +• +our global business, growth, operating, investing, and financing strategies; +• +our product offerings, distribution channels and geographic mix; +• +the success of our new products, brands, and growth initiatives; +• +the impact of seasonality on our operations; +• +expectations regarding our net sales and earnings growth and other financial metrics; +• +our development of worldwide distribution channels; +• +trends affecting our financial condition, results of operations, or cash flows; +• +our expectations for expansion of our retail and E-Commerce capabilities; +• +information security and privacy of customer, employee or company information; +• +overall global economic trends; +• +reliability of overseas factory production and storage; and +• +the availability and cost of raw materials. +We have based our forward-looking statements on our current expectations and projections about trends affecting our business and industry and other future events. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy. As a result, actual results may differ materially from the results stated in or implied by our forward-looking statements. Some of the risks, uncertainties and assumptions that may cause actual results to differ from these forward-looking statements are described in Part I, Item 1A of this annual report in the section entitled "Risk Factors," as well as in our other filings with the Securities and Exchange Commission (SEC). In addition, actual results may differ as a result of additional risks and uncertainties of which we are currently unaware or which we do not currently view as material to our business. +You should read this annual report in its entirety, together with the documents that we file as exhibits to this annual report and the documents that we incorporate by reference in this annual report, with the understanding that our future results may be materially different from what we currently expect. We qualify all of our forward-looking statements by these cautionary statements and we expressly disclaim any intent or obligation to update any forward-looking statements after the date hereof to conform such statements to actual results or to changes in our opinions or expectations, except as required by applicable law or the rules of the NASDAQ Stock Market. +2 +Table of Contents +PART I +References in this Annual Report on Form 10-K to "Deckers", "we", "our", "us", or the "Company" refer to Deckers Outdoor Corporation together with its consolidated subsidiaries. Ahnu®, Deckers®, Hoka One One® (Hoka), MOZO®, Sanuk®, Teva®, TSUBO®, and UGG® are some of our trademarks. Other trademarks or trade names appearing elsewhere in this report are the property of their respective owners. +Item 1. Business. +Unless otherwise specifically indicated, all amounts in Item 1. and Item 1A. herein are expressed in thousands, except for employees, share quantity, per share data, and selling prices. +General +Deckers Outdoor Corporation was incorporated in 1975 under the laws of the State of California and, in 1993, reincorporated under the laws of the State of Delaware. We are a global leader in designing, marketing and distributing innovative footwear, apparel and accessories developed for both everyday casual lifestyle use and high performance activities. We believe that our footwear is distinctive and appeals broadly to men, women and children. We sell our products, including accessories such as handbags and loungewear, through quality domestic and international retailers, international distributors, and directly to end-user consumers both domestically and internationally, through our websites, call centers, and retail stores. Our primary objective is to build our footwear lines into global lifestyle brands with market leadership positions. We seek to differentiate our brands and products by offering diverse lines that emphasize authenticity, functionality, quality, and comfort and products tailored to a variety of activities, seasons, and demographic groups. All of our products are currently manufactured by independent contractors primarily in Asia. Our continued growth will depend upon the broadening of our products offered under each brand, the appeal of our products to our consumers, expanding domestic and international distribution, successfully opening new retail stores, increasing sales to consumers, and developing or acquiring new brands. +Products +We market our products primarily under three proprietary brands: +UGG. The UGG brand is one of the most iconic and recognized brands in the global footwear industry and highlights the Company’s successful track record of building niche brands into lifestyle market leaders. With loyal consumers around the world, the UGG brand has proven to be a highly resilient line of premium footwear, with an expanding product offering and a growing global audience that attracts women, men and children. UGG brand footwear continually earns media exposure from numerous outlets both organically and from strategic public relations efforts, including an increasing amount of exposure internationally. +Teva. Teva is our active lifestyle brand, born from the outdoors and rooted in adventure. Originator of the original sport sandal, today the Teva product line includes casual sandals, shoes, boots and amphibious footwear built for ultimate versatility. +We are focused on regaining our leadership position in the sandal market, and continuing to expand our casual and women’s offering to appeal to a wider range of consumers through utility driven design, color and premium materials. +Sanuk. Sanuk is our fun lifestyle footwear brand rooted in surf culture but embraced by an eclectic mix of style-savvy optimists. The Sanuk brand is probably best known for the patented SIDEWALK SURFERS® shoe which effectively introduced the hanging deconstructed footwear movement. Other primary offerings include the Beer Cozy TM and Yoga Mat TM sandal collections made from real yoga mat material. The brand has a history of innovation, product invention, foot-friendly comfort, unexpected materials and clever branding. +The brand's SIDEWALK SURFERS are marketed with the hand-crafted, humor driven "Cut&Paste" ad campaign and the slogan "THESE ARE NOT SHOES, THEY'RE SANDALS®" which references the patented sandal construction. We plan to build on the Sanuk brand's authentic position in the surf and outdoor markets through its relationships with prominent professional athletes and ambassadors, including surfers, rock climbers, photographers, artists, and musicians known as much for their unique personal styles and charisma as for their specialized talents. +In addition to our primary brands, our other brands include TSUBO, a line of mid and high-end dress and dress casual footwear that incorporates style, function, and maximum comfort; Ahnu, a line of outdoor performance and lifestyle footwear; MOZO, a line of footwear crafted for culinary professionals that redefines the industry dress code; Hoka, a line of footwear for all capacities of runners designed with a unique performance midsole geometry, oversize midsole volume and active footframe. +Sales and Distribution +3 +Table of Contents +At the wholesale level, we distribute our products in the US through sales representatives, who are organized geographically and by brand. In addition to our wholesale business, we also sell products directly to consumers through our websites and retail stores. Our brands are generally advertised and promoted through a variety of consumer media campaigns. We benefit from editorial coverage in both consumer and trade publications. Each brand's dedicated marketing team works closely with targeted accounts to maximize advertising and promotional effectiveness. We also manage brand marketing on a global basis to ensure consistent consumer communications in all regions and channels. We determine our global communication plans based on brand strategies, consumer insights, and return on investment measures. +Our sales force is generally separated by brand, as each brand generally has certain specialty consumers; however, there is overlap between the sales teams and customers. We have aligned our brands' sales forces to position them for the future of the brands. Each brand's respective sales manager recruits and manages their network of sales representatives. We believe this approach for the US market maximizes the selling efforts to our national retail accounts on a cost-effective basis. +We distribute products sold in the US through our distribution centers in Camarillo and Ventura, California. Our distribution centers feature a warehouse management system that enables us to efficiently pick and pack products for direct shipment to customers. We are also in the early stages of opening a new distribution center in Moreno Valley, California. For certain customers requiring special handling, each shipment is pre-labeled and packed to the retailer's 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 quality inspection process. +Internationally, we distribute our products through independent distributors and retailers in many countries, including throughout Europe, Asia Pacific, Canada, and Latin America, among others. In addition, as we do in the US, in certain countries, we sell products directly to international consumers through our websites and our retail stores. For our wholesale and Direct-to-Consumer businesses, we operate distribution centers in certain international locations and utilize third-party distribution companies in other countries. We may also work with trading companies for importation, as needed. Our principal wholesale customers include specialty retailers, selected department stores, outdoor retailers, sporting goods retailers, shoe stores, and online retailers. +Our five largest customers accounted for approximately 23.0 % of worldwide net sales for 2013 , compared to 22.8% for 2012 . No single customer accounted for greater than 10% of our consolidated net sales in 2013 . +UGG. We sell our UGG footwear and accessories primarily through higher-end department stores such as Nordstrom, Neiman Marcus and Bloomingdale's, as well as independent specialty retailers such as Journey's, and online retailers such as Zappos.com. 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. +Teva. We sell our Teva footwear primarily through specialty outdoor and sporting goods retailers such as REI, L.L. Bean, Dick's Sporting Goods, and The Sports Authority as well as online retailers such as Zappos.com. Our brand strength in casual and women’s has also expanded our business to a wider distribution of department store and mall channels including Nordstrom, Dillard’s and Journey’s, as well as family footwear with DSW and Famous Footwear. We believe distribution that services active lifestyle consumers with premium assortments, merchandising and customer experience will continue to be areas of growth for the brand. +Sanuk. We sell our Sanuk footwear primarily through independent action sports retailers including specialty surf and skate shops, outdoor retailers such as REI and Bass Pro Shops, specialty footwear retailers and larger national retail chains including Nordstrom, Journey's, Dillard's, DSW, and The Buckle. We believe these retailers showcase the brand's creativity, fun, and comfort and allow us to effectively reach our target consumers for the brand. +Other brands. Our other brands are sold primarily at better department stores, outdoor specialty accounts, independent specialty retailers, and with online retailers that support our brand ideals of comfort, style, and quality. Key accounts of our other brands include Nordstrom, Dillard's, Hanigs, REI, and Zappos.com. +E-Commerce. Our E-Commerce business enables us to market, communicate and build our relationships with the consumer. E-Commerce enables us to meet the growing demand for our products, sell the products at retail prices, and provide significant incremental operating income. The E-Commerce business provides us an opportunity to communicate to the consumer with a consistent brand message that is in line with our brands' promises, drives awareness of key brand initiatives, and offers targeted information to specific consumer segments. We operate our E-Commerce business through the Uggaustralia.com, Teva.com, Sanuk.com, Tsubo.com, Ahnu.com, and Hokaoneone.com websites. Our websites also drive wholesale and distributor sales through brand awareness and by directing consumers to retailers that carry our brands, including our own retail stores. In recent years, our E-Commerce business has had significant revenue growth, much of which occurred as the UGG brand gained popularity and as consumers continued to increase internet usage for footwear and other purchases. +4 +Table of Contents +We have expanded our international capabilities by developing sites to service certain international markets. These sites are translated into the local language, may provide product through local distribution centers and price the products in the consumers' local currency. In 2012, we launched additional sites in the US for our Sanuk brand and launched mobile sites for several of our brands in the US, Europe and Japan. Our E-Commerce business sells products directly to consumers throughout the world, including the US, the United Kingdom, Japan and China. In order to reduce the cost of order fulfillment, minimize out of stock positions, and further leverage our distribution centers' operations, order fulfillment is performed by our distribution centers in California, the UK, the Netherlands, China, and Japan. Products sold through our E-Commerce business are sold at prices which approximate retail prices, enabling us to capture the full retail margin on each Direct-to-Consumer transaction. +Retail Stores. Our retail stores are predominantly UGG concept stores and UGG outlet stores. In 2013 we expanded our fleet and opened our first Sanuk (two concept, one outlet) and Teva (one outlet) stores. Our retail stores enable us to directly impact our customers' experience, meet the growing demand for these products, sell the products at retail prices and generate strong annual operating income. In addition, our UGG concept stores allow us to showcase our entire product line including footwear, accessories, handbags, home, outerwear, lounge, and retail exclusive items; whereas, a wholesale account may not represent all of these categories. Through our outlet stores, we sell some of our discontinued styles from prior seasons, plus products made specifically for the outlet stores. +In 2013 , we opened 14 stores in the US and 26 internationally. As of December 31, 2013 , we had a total of 80 UGG concept stores and 33 UGG outlet stores worldwide. During 2014 , we plan to open additional retail stores in the US and internationally. +Product Design and Development +The design and product development staff for each of our brands creates 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 freelance designers. By utilizing outside designers, 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. Refer to Note 1 to our accompanying consolidated financial statements for a discussion of our research and development costs for the last three years. +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 and accessories for our various product lines. We develop detailed drawings and prototypes of our new products to aid in conceptualization and to ensure our contemplated new products meet the standards for innovation and performance that our consumers demand. Throughout the development process, we have multiple design and development reviews, which we then coordinate with our independent manufacturers. This ensures that we are addressing the needs of our consumers and are working toward a common goal of developing and producing a high quality product to be delivered on a timely basis. +Manufacturing and Supply Chain +We do not manufacture our products; we outsource the production of our brand footwear to independent manufacturers primarily in Asia. We require our independent contract manufacturers and designated suppliers to adopt our Supplier Code of Conduct, which specifies that they comply with all local laws and regulations governing human rights, working conditions, and environmental compliance before we are willing to conduct business with them. We also require our manufacturing partners and licensees to comply with our Restricted Substances policy as a condition of doing business with our company. 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. We maintain an on-site supervisory office in Pan Yu City, China that serves as a local link 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. To ensure the production of high quality products, the majority 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 to manufacture our footwear, including wool, rubber, leather, and nylon webbing are generally available from multiple sources at competitive prices. Beginning in 2013, in some of our UGG products we used a new raw material, UGGpure, which is wool woven into a durable backing. We generally outsource our manufacturing requirements on the basis of individual purchase orders or short-term purchase commitments rather than maintaining long-term purchase commitments with our independent manufacturers. +5 +Table of Contents +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 for our products primarily from Australia, Europe, and the US. We maintain communication with the tanneries to monitor the supply of sufficient high quality sheepskin available for our projected UGG brand production. To ensure adequate supplies for our manufacturers, we forecast our usage of sheepskin in advance at a forward price. We have also entered into minimum purchase commitments with certain sheepskin suppliers (see Note 7 to our accompanying consolidated financial statements.) We believe current supplies are sufficient to meet our needs in the near future, but we continue to investigate our options to accommodate any unexpected future growth. +We have instituted pre-production, in-line, and post-production inspections to meet or exceed the high quality demanded by us and consumers of our products. Our quality assurance program includes our own employee 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 distribution centers. +Patents and Trademarks +We utilize trademarks on virtually all of our products and believe that having distinctive marks that are readily identifiable is an important factor in creating a market for our goods, toward identifying the Company, and in distinguishing our goods from the goods of others. We currently hold trademark registrations for UGG, Teva, Sanuk, TSUBO, Ahnu, MOZO, Hoka One One, and other marks in the US and in many other countries, including the countries of the European Union, Canada, China, Japan and Korea. We now hold more than 160 utility and design patent registrations in the US and abroad and have filed more than 20 new patent applications which are currently pending. These patents expire at various times. We regard our proprietary rights as valuable assets and vigorously protect such rights against infringement by third parties. No single patent is critical to our business, and no group of patents expiring in the same year is critical to our business. +Seasonality +Our business is seasonal, with the highest percentage of UGG brand net sales occurring in the quarters ending September 30 and December 31 and the highest percentage of Teva and Sanuk brand net sales occurring in the quarters ending March 31 and June 30 of each year. Our financial results include the Sanuk brand beginning July 1, 2011 and the Hoka brand beginning September 27, 2012. Historically, our total net sales in the quarters ending September 30 and December 31 have exceeded total net sales for the quarters ending March 31 and June 30 of each year, and we expect this trend to continue. Our other brands do not have a significant seasonal impact on our business. Nonetheless, actual results could differ materially depending upon consumer preferences, availability of product, competition, and our wholesale and distributor customers continuing to carry and promote our various product lines, among other risks and uncertainties. See Part I, Item 1A, "Risk Factors." For further discussion on our working capital and inventory management, see Item 7 of Part II, "Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources." +Backlog +Historically, we have encouraged our wholesale and distributor customers to place, and we have received, a significant portion of orders as preseason orders, generally four to eight months prior to the anticipated shipment date. We work with our wholesale customers through preseason 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, which can be cancelled prior to shipment. The backlog as of a particular date is affected by a number of factors, including seasonality, manufacturing schedule, and the timing of product shipments 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. +At December 31, 2013 , our backlog of orders from our wholesale customers and distributors was approximately $ 401,000 compared to approximately $ 323,000 at December 31, 2012 . While all orders in the backlog are subject to cancellation by customers, we expect that the majority of such orders will be filled in 2014 . We believe that backlog at year-end is an imprecise indicator of total revenue that may be achieved for the full year for several reasons. Backlog only relates to wholesale and distributor orders for the next season and current season fill-in orders, and excludes potential sales in our E-Commerce business and retail stores during the year. Backlog also is affected by the timing of customers' orders and product availability. +Competition +The casual, outdoor, athletic, fashion, and formal footwear markets are highly competitive. Our competitors include athletic and footwear companies, branded apparel companies, and retailers with their own private labels. Although the footwear industry is fragmented to a certain degree, many of our competitors are larger and have substantially greater resources than us, including athletic shoe companies, several of which compete directly with some of our 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 +6 +Table of Contents +and accessory industries. In particular, in part due to the popularity of our UGG products, we face increasing competition from a significant number of competitors selling products designed to compete directly or indirectly with our UGG products. +We believe that our footwear lines and other product lines compete primarily on the basis of brand recognition and authenticity, product quality and design, functionality, performance, comfort, fashion appeal, and price. Our ability to successfully compete depends on our ability to: +• +shape and stimulate consumer tastes and preferences by offering innovative, attractive, and exciting products; +• +anticipate and respond to changing consumer demands in a timely manner; +• +maintain brand authenticity; +• +develop high quality products that appeal to consumers; +• +price our products suitably; +• +provide strong and effective marketing support; and +• +ensure product availability. +We believe we are well positioned to compete in the footwear industry. 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, 2013 , we employed approximately 3,200 employees in the US, Europe, and Asia, none of whom were represented by a union. This figure includes approximately 2,000 employees in our retail stores worldwide, which includes part-time and seasonal employees. The increase in employees during the year was primarily related to increased expansion efforts. We intend to increase our employee count further in 2014 primarily related to the opening of new retail stores and our other expansion initiatives. We believe our relationships with our employees are good. +Financial Information about Segments and Geographic Areas +Our six reportable business segments include the strategic business units responsible for the worldwide operations of our brands' (UGG, Teva, Sanuk and other brands) wholesale divisions, as well as our E-Commerce and retail store businesses. The majority of our sales and long-lived assets are in the US. Refer to Note 8 to our accompanying consolidated financial statements for further discussion of our business segment data. Refer to Item 1A of this Part I for a discussion of the risks related to our foreign operations. +Compliance with federal, state, and local environmental regulations has not had, nor is it expected to have, any material effect on our capital expenditures, earnings, or competitive position based on information and circumstances known to us at this time. +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 SEC: annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, Proxy Statements, and any amendments 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 SEC's Public Reference Room at 100 F Street, NE, 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 at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. +Item 1A. Risk Factors. +Our short and long-term success is subject to many factors beyond our control. Investing in our common stock involves substantial risk. Before investing in our stock, stockholders and potential stockholders should carefully consider the following risk factors related to our company as well as general investor risks, 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 +7 +Table of Contents +may lose all or part of their investment. Please also see the section entitled "Special Note on Forward-Looking Statements" on page 2 of this Annual Report on Form 10-K. +Many of our products are seasonal, and our sales are sensitive to weather conditions . +Sales of our products are highly seasonal and are sensitive to weather conditions, which are beyond our control. For example, extended periods of unseasonably warm weather during the fall and winter months may reduce demand for our UGG products. During 2011 and 2012, we experienced mild winters which negatively impacted our sales for UGG products. Furthermore, variations in weather conditions across the globe may impact sales of our products in ways that we cannot predict. If management is not able to timely adjust expenses in reaction to adverse events such as unfavorable weather, weak consumer spending patterns or unanticipated levels of order cancellations because of seasonal circumstances, our profitability may be materially affected. Even though we are creating more year-round styles for our brands, the effect of favorable or unfavorable weather on sales can be significant enough to affect our quarterly and annual results, with a resulting effect on our common stock price. +If raw materials do not meet our specifications, consumer expectations or experience price increases or shortages, we could realize interruptions in manufacturing, increased costs, higher product return rates, a loss of sales, or a reduction in our gross margins . +We depend on a limited number of key sources for certain raw materials. For sheepskin, the raw material used in many of our UGG products, we rely on two tanneries. Both the top grade twinface and other grades of sheepskin used in UGG products are in high demand and limited supply. Furthermore, our unique sheepskin needs require certain types of sheepskin that may only be found in certain geographic locations and tanneries with sufficient expertise and capacity to deliver sheepskin which meets our specifications. The supply of sheepskin can be adversely impacted by weather conditions, disease, and harvesting decisions that are completely outside our control. For example, if the price of wool increases, sheep herders may choose not to harvest their sheep and instead choose to shear their sheep for wool, thus decreasing the supply of sheepskin. Sheepskin is also a by-product of the food industry and is therefore dependent upon the demand by the food industry, which has generally been decreasing thus leading to an overall reduction in the number of sheep available. The potential inability to obtain sheepskin and other raw materials could impair our ability to meet our production requirements and could lead to inventory shortages, which can result in lost sales, delays in shipments to customers, strain on our relationships with customers, and diminished brand loyalty. There have also been significant fluctuations in the prices of sheepskin as the demand from competitors for this material and the supply of sheep have changed. We experienced an increase in sheepskin costs in 2012 and a decrease in 2013, with the majority of the decrease being realized in the fourth quarter of 2013. We attempt to cover the full amount of our sheepskin purchases under fixed price contracts. Any price increases in key raw materials will likely raise our costs and decrease our profitability unless we are able to commensurately increase our selling prices and implement other cost savings measures. +In addition, our sheepskin suppliers warehouse their inventory at a limited number of facilities in China, the loss of any of which due to natural disasters and other adverse events would likely result in shortages of sheepskin leading to delays in the production of our products and could result in a loss of sales and earnings. +Our independent manufacturers use various raw materials in the production of our footwear and accessories that must meet our design specifications and, in some cases, additional technical requirements for performance footwear. Beginning in 2013, in some of our UGG products we used a new raw material, UGGpure, which is wool woven into a durable backing. If these raw materials and the end product do not conform to our specification or fail to meet consumer expectations, we could experience a higher rate of customer returns and deterioration in the image of our brands, which could have a material adverse effect on our business, results of operations, and financial condition. +Our new and existing retail stores may not realize returns on our investments. +Our retail segment has grown substantially in both net sales and total assets during the past year, and we intend to rapidly expand this segment in the future. We have entered into significant long-term leases for many of our retail locations. Global store openings involve substantial investments, including constructing leasehold improvements, furniture and fixtures, equipment, information systems, inventory, and personnel. In addition, since a certain amount of our retail store costs are fixed, if we have insufficient sales, we may be unable to reduce expenses in order to avoid losses or negative cash flows. Due to the high fixed cost structure associated with the retail segment, negative cash flows or the closure of a store could result in significant write-downs of inventory, severance costs, lease termination costs, impairment losses on long-lived assets, or loss of our working capital, which could adversely impact our financial position, results of operations, or cash flows. +In addition, from time to time we license the right to operate retail stores for our brands to third parties, including our independent distributors. We provide training to support these stores, and set and monitor operational standards. However, the quality of these store operations may decline due to the failure of these third parties to operate the stores in a manner consistent with our standards, which could harm their sales and as a result harm our results of operations or cause our brand image to suffer. +8 +Table of Contents +If we do not accurately forecast consumer demand, we may have excess inventory to liquidate or have difficulty filling our customers' orders . +Because the footwear industry has relatively long lead times for design and production, we must plan our production tooling and projected volumes many months before consumer tastes become apparent. The footwear and fashion industry is subject to rapid changes in consumer preferences, making it difficult to accurately forecast demand for our products and our future results of operations. Many factors may significantly affect demand for our products, which include: consumer acceptance of our products, changes in consumer demand for products of our competitors, effects of weather conditions, our reliance on manual processes and judgment for certain supply and demand planning functions that are subject to human error, unanticipated changes in general market conditions, and weak economic conditions or consumer confidence that reduces demand for discretionary items, such as our products. +A large number of models, colors, and sizes in our product lines can increase these risks. As a result, we may fail to accurately forecast styles, colors, and features that will be in demand. If we overestimate demand for any products or styles, we may be forced to incur higher markdowns or sell excess inventories at reduced prices resulting in lower, or negative, gross margins. On the other hand, if we underestimate demand for our products or if our independent factories are unable to supply products when we need them, we may experience inventory shortages that may prevent us from fulfilling customer orders or delaying shipments to customers. This could negatively affect our relationship with customers and diminish our brand loyalty, which may have an adverse effect on our financial condition and results of operations. +Failure to adequately protect our trademarks, patents, and other intellectual property rights or deter counterfeiting could diminish the value of our brands and reduce sales. +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 US laws. Furthermore, our efforts to enforce our intellectual property rights are typically met with defenses and counterclaims attacking the validity and enforceability of our intellectual property rights. Unplanned increases in legal fees and other costs associated with the defense of our intellectual property or rebranding could result in higher operating expenses and lower earnings. +Similarly, from time to time, we may need to defend against claims that the word "ugg" is a generic term. Such a claim was successful in Australia, but such claims have been rejected by courts in the United States, China, Turkey and in the Netherlands. We have also faced claims that “UGG Australia” is geographically deceptive. Any decision or settlement in any of these matters that prevents trademark protection of the "UGG" brand in our major markets, or that allows a third party to continue to use our brand trademarks in connection with the sale of products similar to our products, or to continue to manufacture or distribute counterfeit products could result in intensified commercial competition and could have a material adverse effect on our results of operations and financial condition. +The success of the UGG brand has lead to trademark counterfeiting, product imitation and other infringements of our intellectual property rights. If we are unsuccessful in challenging a third party's products on the basis of trademark design patent and trade dress rights, this could adversely affect our continued sales, financial condition, and results of operation. If our brands are associated with infringers' or competitors' inferior products, this could also adversely affect the integrity of our brands. +Our success depends on our ability to anticipate fashion trends. +Our success depends largely on the continued strength of our brands, on our ability to anticipate, understand, and react to the rapidly changing fashion tastes of footwear, apparel, and accessory consumers and to provide appealing merchandise in a timely and cost effective 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 consumer receptivity to our products and marketing strategy. There can be no assurance that consumers will continue to prefer our brands or that we will (1) respond quickly enough to changes in consumer preferences, (2) market our products successfully, or (3) successfully introduce acceptable new models and styles of footwear or accessories to our target consumer. We believe that the ongoing economic uncertainty in many countries where we sell our products and the corresponding impact on consumer confidence and discretionary income may increase this uncertainty. Achieving market acceptance for new products also likely will require us to exert substantial product development and marketing efforts and expend significant funds to attract consumers. A failure to introduce new products that gain market acceptance or maintain market share with our current products 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. +UGG products include fashion items that could go out of style at any time and competition for the sale of products by the UGG brand is intense and has increased over time. UGG products represent a majority of our business, and if UGG product sales were to decline or fail to increase in the future, our overall financial performance and common stock price would be adversely affected. +9 +Table of Contents +We may not succeed in implementing our growth strategies . +As part of our growth strategy, we seek to enhance the positioning of our brands, extend our brands into complementary product categories and markets, partner with or acquire compatible companies or brands, expand geographically, increase our retail presence, and improve our operational performance. We continue to expand the nature and scope of our operations considerably, including significantly increasing the number of our employees worldwide. We anticipate that substantial further expansion will be required to realize our growth potential and new market opportunities. +We are growing globally through our retail, E-Commerce, wholesale, and distributor channels. In addition, as part of our international growth strategy, we may continue to transition from third-party distribution to direct distribution through wholly-owned subsidiaries. Implementing our growth strategies, or failure to effectively execute them, could affect near term revenues from the postponement of sales recognition to future periods, our rate of growth or profitability, which in turn could have a negative effect on the value of our common stock. In addition, our growth initiatives could: +• +increase our working capital needs beyond our capacity; +• +increase costs if we fail to successfully integrate a newly acquired business or achieve expected cost savings; +• +result in impairment charges related to acquired businesses; +• +create remote-site management issues, which would adversely affect our internal control environment; +• +have significant domestic or international legal or compliance implications; +• +make it difficult to attract, retain, and manage adequate human resources in remote locations; +• +cause additional inventory manufacturing, distribution, and management costs; +• +cause us to experience difficulty in filling customer orders; +• +result in distribution termination transaction costs; or +• +create other production, distribution, and operating difficulties. +Our goodwill and other intangible assets may incur impairment losses. +We conducted our annual impairment tests of goodwill and other intangible assets for 2013 , 2012 , and 2011 . In addition, we conducted interim impairment evaluations when impairment indicators arose. In 2013 , 2012 , and 2011 , we did not recognize any material impairment charges on our goodwill and other intangible assets. +If any brand's product sales or operating margins decline to a point that the fair value falls below its carrying value, we may be required to write down the related intangible assets. These or other related declines could cause us to incur additional impairment losses, which could materially affect our consolidated financial statements and results of operations. The value of our trademarks is highly dependent on forecasted revenues and earnings before interest and taxes for our brands, as well as derived discount and royalty rates. In addition, the valuation of intangible assets is subject to a high degree of judgment and complexity. We may also decide to discontinue a brand which would result in the write down of all related intangible assets. The balances of goodwill and nonamortizable intangibles by brand are as follows: +As of December 31, 2013 +UGG +Teva +Sanuk +Other +Total +Trademarks +$ +154 +$ +15,301 +$ +— +$ +— +$ +15,455 +Goodwill +6,101 +— +113,944 +8,680 +128,725 +Total nonamortizable intangibles +$ +6,255 +$ +15,301 +$ +113,944 +$ +8,680 +$ +144,180 +Because we depend on independent manufacturers, we face challenges in maintaining a continuous supply of finished goods that meet our quality standards . +Most of our production is performed by a limited number of independent manufacturers. We depend on these manufacturers' ability to finance the production of goods ordered and to maintain manufacturing capacity, and store completed goods in a safe and sound location pending shipment. We do not possess direct control over either the independent manufacturers or their materials +10 +Table of Contents +suppliers, so we may be unable to obtain timely and continuous delivery of acceptable products. In addition, while we do have long standing relationships with most of our factories, we currently 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 acceptable quality and competitively priced products from our independent manufacturers. If there is an interruption, we may not be able to substitute suitable alternative manufacturers to provide 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, which could result in a loss of sales and earnings. +Interruptions in the supply chain can also result from natural disasters and other adverse events that would impair our manufacturers' operations. We keep proprietary materials involved in the production process, such as shoe molds, knives, and raw materials, under the custody of our independent manufacturers. If these independent manufacturers were to experience loss or damage to our proprietary materials involved in the production process, we cannot be assured that such independent manufacturers would have adequate insurance to cover such loss or damage and, in any event, the replacement of such materials would likely result in significant delays in the production of our products and could result in a loss of sales and earnings. +Most of our independent manufacturers are located outside the US, where we are subject to the risks of international commerce . +Most of our independent manufacturers are in Asia and Latin America, with the majority of production performed by a limited number of manufacturers in China. Foreign manufacturing is subject to numerous risks, including the following: +• +tariffs, import and export controls, and other non-tariff barriers such as quotas and local content rules on raw materials and finished products, including the potential threat of anti-dumping duties and quotas; +• +increasing transportation costs and a limited supply of international shipping capacity; +• +increasing labor costs; +• +poor infrastructure and shortages of equipment, which can disrupt transportation and utilities; +• +restrictions on the transfer of funds; +• +changing economic conditions; +• +violations or changes in governmental policies and regulations including labor, safety, and environmental regulations in China, Vietnam, the US, and elsewhere; +• +refusal to adopt or comply with our Supplier Code of Conduct and Restricted Substances Policy; +• +customary business traditions in China and Vietnam such as local holidays, which are traditionally accompanied by high levels of turnover in the factories; +• +labor unrest, which can lead to work stoppages and interruptions in transportation or supply; +• +delays during shipping, at the port of entry or at the port of departure; +• +political instability, which can interrupt commerce; +• +use of unauthorized or prohibited materials or reclassification of materials; +• +expropriation and nationalization; and +• +adverse changes in consumer perception of goods, trade, or political relations with China and Vietnam. +These factors, or others of which we are currently unaware or which we do not currently view as material, could severely interfere with the manufacture or shipment of our products. This could make it difficult to obtain adequate supplies of quality products when we need them, thus materially affecting our sales and results of operations. +While we require that our independent manufacturers adhere to environmental, ethical, health, safety, and other standard business practices and applicable local laws, and we periodically visit and audit their operations, we do not control their business +11 +Table of Contents +practices. If we discovered non-compliant manufacturers or suppliers that cannot or will not become compliant, we would cease dealing with them, and we could suffer an interruption in our product supply chain. In addition, the manufacturers' or designated suppliers' violations of such standards and laws could damage our reputation and the value of our brands, resulting in negative publicity and discouraging customers and consumers from buying our products. +We conduct business outside the US, which exposes us to foreign currency, global liquidity, and other risks . +The state of the global economy continues to influence the level of consumer spending for discretionary items. This affects our business as it is highly dependent on consumer demand for our products. The current political and economic environments in certain countries in Europe have resulted in significant macroeconomic risks, including high rates of unemployment, high fuel prices, and continued global economic uncertainty largely precipitated by the European debt crisis. +We operate on a global basis, with approximately 33.0% of our net sales for the year ended December 31, 2013 from operations outside the US. As we continue to increase our international operations, our sales and expenditures in foreign currencies become more material and subject to currency fluctuations and global credit markets. A significant portion of our international operating expenses are paid in local currencies. Also, our foreign distributors sell in local currencies, which impacts the price to foreign consumers. Many of our subsidiaries operate with their local currency as their functional currency. We currently utilize forward contracts or other derivative instruments for the amounts we expect to purchase and sell in foreign currencies to mitigate exposure to fluctuations in the foreign currency exchange rate. As we continue to expand international operations and increase purchases and sales in foreign currencies, we will evaluate and may utilize additional derivative instruments, as needed, to hedge our foreign currency exposures. Our hedging strategies depend on our forecasts of sales, expenses, and cash flows, which are inherently subject to inaccuracies. Therefore, our hedging strategies may be ineffective. Future changes in foreign currency exchange rates and global credit markets may cause changes in the US dollar value of our purchases or sales and materially affect our sales, profit margins, or results of operations, when converted to US dollars. In addition, the failure of financial institutions that underwrite our derivative contracts may negate our efforts to hedge our foreign currency exposures and result in material foreign currency or contract losses. Foreign currency hedging activities, transactions, or translations could materially impact our consolidated financial statements. +While our purchases from overseas factories are currently denominated in US dollars, certain operating and manufacturing costs of the factories are denominated in other currencies. As a result, fluctuations in these currencies versus the US dollar could impact our purchase prices from the factories in the event that they adjust their selling prices accordingly. +Key business processes and supporting information systems could be interrupted and adversely affect our business . +Our future success and growth depend on the continued operation of our key business processes, including information systems, global communications, the internet, and key personnel. Hackers and computer viruses have disrupted operations at many major companies. We may be vulnerable to similar acts of sabotage. Key processes could also be interrupted by a failure due to weather, natural disaster, power loss, telecommunications failure, failure of our computer systems, sabotage, terrorism, or similar event such that: +• +critical business systems become inoperable or require significant costs to restore; +• +key personnel are unable to perform their duties, communicate, or access information systems; +• +significant quantities of merchandise are damaged or destroyed; +• +we are required to make unanticipated investment in state-of-the-art technologies and security measures; +• +key wholesale and distributor customers cannot place or receive orders; +• +E-Commerce customer orders may not be received or fulfilled; +• +confidential information about our customers may be misappropriated or lost damaging our reputation and customer relationships; +• +we are exposed to unanticipated liabilities; or +• +carriers cannot ship or unload shipments. +These interruptions to key business processes could have a material adverse effect on our business and operations and result in lost sales and reduced earnings. +12 +Table of Contents +We rely on our information management, internet cloud providers, and other enterprise resource planning systems to operate our business, prepare forecasts and track our operating results. Our information management and enterprise planning systems will require modification and refinement as we grow and our business needs change. We may experience difficulties in transitioning to new or upgraded information technology systems, including loss of data, unreliable data, and decreases in productivity as our personnel become familiar with the new systems. If we experience a significant system failure or if we are unable to competitively modify our information management systems to respond to changes in our business needs, then our ability to properly run our business and report financial results could be adversely affected. +The loss of the services and expertise of any key employee could also harm our business. Our future success depends on our ability to identify, attract, and retain qualified personnel on a timely basis. +We may not be able to attract or retain highly capable employees who can achieve our strategic goals and objectives. +Our future success depends on our ability to identify, attract, and retain qualified personnel on a timely basis. The loss of the services and expertise of any key employee could also harm our business through business process interruptions, loss of institutional knowledge, and recruitment and training costs. +We could be adversely affected by the loss of our warehouses. +The warehousing of our inventory is located at a limited number of self-managed domestic facilities and self-managed and third party managed international facilities, the loss of any of which could adversely impact our sales, business performance, and operating results. In addition, we could face a significant disruption in our domestic distribution center operations if our automated pick module does not perform as anticipated or ceases to function for an extended period, or if our plans for a new distribution facility are disrupted or delayed. +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, which could increase our costs and adversely impact our operating results . +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 operations that could adversely affect our sales and results of operations. These include: +• +changes in currency exchange rates, which impact the price to international consumers; +• +ability to move currency out of international markets; +• +the burdens of complying with a variety of foreign laws and regulations, the interpretation and application of which are uncertain; +• +legal costs and penalties related to defending allegations of non-compliance; +• +unexpected changes in legal and regulatory requirements; +• +inability to successfully import into a country; +• +changes in tax laws; +• +complications due to lack of familiarity with local customs; +• +difficulties associated with promoting products in unfamiliar cultures; +• +political instability; +• +changes in diplomatic and trade relationships; and +• +general economic fluctuations in specific countries or markets. +International trade and import 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 . +13 +Table of Contents +Products manufactured overseas and imported into the US 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 and our forecasted gross margins. +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 make it difficult to obtain products of our customary quality at a competitive price. Meanwhile, the continued negotiation of bilateral and multilateral free trade agreements by the US 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 and accessories to our target markets at preferred rates of duty, which may have an effect on our sales and operations. +Additionally, the increased threat of terrorist activity and 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 and increase our costs. +Our revolving credit facility provides our lenders with a first-priority lien against substantially all of our assets and contains financial covenants and other restrictions on our actions. +From time to time, we have financed our liquidity needs in part from borrowing made under a revolving credit facility. Our credit facility provides for a committed revolving credit line of up to $400,000. Our obligations under the agreement are guaranteed by our existing and future domestic subsidiaries, other than certain immaterial subsidiaries and foreign subsidiaries, and are secured by a first priority security interest in substantially all of our assets and our subsidiaries' assets, including a portion of the equity interests of certain of our domestic and foreign subsidiaries. The agreement for our credit facility also contains a number of customary financial covenants and restrictions, which may restrict our ability to engage in transactions that would otherwise be in our best interests. Failure to comply with any of the covenants under the credit agreement could result in a default. A default under the credit agreement could cause the lenders to accelerate the timing of payments and exercise their lien on essentially all of our assets, which would have a material adverse effect on our business, operations, financial condition and liquidity. In addition, because borrowings under the revolving credit facility bear interest at variable interest rates, which we do not anticipate hedging against, increases in interest rates would increase our cost of borrowing, resulting in a decline in our net income and cash flow. There were no outstanding borrowings under our committed revolving credit facility as of December 31, 2013 . In addition, we have a credit facility in China (China Credit Facility), which provides for an uncommitted revolving line of credit of up to CNY 60,000, or approximately $10,000. At December 31, 2013, the Company had approximately $10,000 of outstanding borrowings under the China Credit Facility. +The tax laws applicable to our business are very complex and we may be subject to additional tax liabilities as a result of audits by various taxing authorities or changes in tax laws applicable to our business. +We conduct our operations through subsidiaries in several countries including the US, the UK, Japan, China, Hong Kong, Macau, the Netherlands, Bermuda, France, and Canada. As a result, we are subject to tax laws and regulations in each of those jurisdictions, and to tax treaties between the US and other nations. These tax laws are highly complex, and significant judgment and specialized expertise is required in evaluating and estimating our worldwide provision for income taxes. +We are subject to audits in each of the various jurisdictions where we conduct business, and any of these jurisdictions may assess additional taxes against us as a result of their audits. Although we believe our tax estimates are reasonable, and we undertake to prepare our tax filings in accordance with all applicable tax laws, the final determination with respect to any tax audits, and any related litigation, could be materially different from our estimates or from our historical tax provisions and accruals. The results of an audit or litigation could have a material effect on our operating results or cash flows in the periods for which that determination is made and may require a restatement of prior financial reports at a material cost. In addition, future period earnings may be adversely impacted by litigation costs, settlements, penalties, or interest assessments. +We are also subject to constant changes in tax laws, regulations and treaties in and between the nations in which we operate. Our tax expense is based upon our interpretation of the tax laws in effect in various countries at the time that the expense was incurred. A change in these tax laws, treaties or regulations, including those in and involving the US, or in the interpretation thereof, could result in a materially higher tax expense or a higher effective tax rate on our worldwide earnings. It is possible that tax proposals could result in changes to the existing US tax laws that affect us. We are unable to predict whether any proposals will ultimately be enacted. Any such changes could increase our income tax liability and adversely affect our net income and long term effective tax rates. +14 +Table of Contents +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 many new competitors have entered into the marketplace. We believe that some of these competitors have entered the market place in response to the success of our brands and that such competitors have targeted or intend to target our products with their product offerings. Additionally, we have experienced 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 and accessory markets. Our competitors include fashion, 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 develop new products more quickly. 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 and accessory industries. +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 consumers to shift their purchases away from our products. If we fail to compete successfully in the future, our sales and earnings will decline, as will the value of our business, financial condition, and common stock price. +The disruption, expense, and potential liability associated with existing and future litigation. +We are involved in various claims, litigations and other legal and regulatory proceedings and governmental investigations that arise from time to time in the ordinary course of our business. Due to inherent uncertainties of litigation and other such proceedings and investigations, we cannot predict with accuracy the ultimate outcome of any such matters. An unfavorable outcome could have an adverse impact on our business, financial position, and results of operations. The amount of insurance coverage we maintain to address such matters may be inadequate to cover these or other claims. In addition, any significant litigation, investigation, or proceeding, regardless of its merits, could divert financial and management resources that would otherwise be used to benefit our operations or could negatively impact our reputation in the marketplace. +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 14, 2014 was approximately 1,180,000 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, have ranged from $ 40.35 to $ 88.56 for the 52-week period ended February 14, 2014 . 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, whether realized or perceived; +• +changes in estimates by securities analysts or failure to meet such estimates; +• +published research and opinions by securities analysts and other market forecasters; +• +changes in our credit ratings; +• +the financial results and liquidity of our customers; +• +shift of revenue recognition as a result of changes in our distribution model, delivery of merchandise, or entering into agreements with related parties; +• +claims brought against us by a regulatory agency or our stockholders; +• +quarterly fluctuations in our sales, expenses, and financial results; +• +general equity market conditions and investor sentiment; +• +economic conditions and consumer confidence; +• +broad market fluctuations in volume and price; +• +increasing short sales of our stock; +15 +Table of Contents +• +announcements to repurchase our stock; +• +the declaration of stock or cash dividends; 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. +In addition, the stock market in general has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of individual companies. Accordingly, the price of our common stock is volatile and any investment in our stock is subject to risk of loss. These broad market and industry factors and other general macroeconomic conditions unrelated to our financial performance may also affect our common stock price. +The loss, theft or misuse of sensitive customer or company information, or the failure or interruption of key information technology and resource planning systems, could materially adversely affect our business . +Our business involves the storage and transmission of sensitive information including the personal information of our customers, credit card information, employee information, data relating to consumer preferences, and proprietary company financial and strategic data. The protection of our customer, employee and company data is vitally important to us as the loss, theft or misuse of such information could lead to significant reputational or competitive harm, litigation and potential liability. As a result, we believe that our future success and growth depends, in part, on the ability of our key business processes, including our information and global communication systems, to prevent the theft, loss or misuse of this sensitive information. However, as with many businesses, we are subject to numerous security and cybersecurity risks which may prevent us from maintaining the privacy of sensitive information and require us to expend significant resources attempting to secure such information. +As has been well documented in the media, hackers and computer viruses have disrupted operations at many major companies, and we may be vulnerable to similar security breaches. While we have expended, and will continue to expend, resources to protect our customers and ourselves against these breaches and to ensure an effective response to a security or cybersecurity breach, we cannot be certain that we will be able to adequately defend against any such breach. Techniques used to obtain unauthorized access to or attack our systems are constantly evolving and, in some cases, becoming more sophisticated and harder to detect. Despite our efforts, we may be unable to anticipate these techniques or implement adequate preventive measures in response, and any breaches that we do not detect may remain undetected for some period. In addition, measures that we do take to prevent risks of fraud and security breaches have the potential to harm relations with our customers or suppliers, or decrease activity on our websites by making them more difficult to use or restricting the ability to meet our customers' expectations in terms of their online shopping experience. We are also subject to payment card association rules and obligations under our contracts with payment card processors. Under these rules and obligations, if information is compromised, we could be liable to payment card issuers for associated expenses and penalties. In addition, if we fail to follow payment card industry security standards, even if no customer information is compromised, we could incur significant fines or experience a significant increase in payment card transaction costs. +In addition, we rely on certain information technology management and enterprise resource planning systems to prepare sales forecasts, track our financial and operating results, and otherwise operate our business. As our business grows and we expand into additional distribution channels and geographic regions, these systems may require expansion or modification. We may experience difficulties expanding these information technology and resource planning systems or transitioning to new or upgraded systems, which may result in loss of data or unreliable data, decreases in productivity as our personnel become familiar with the new systems, and increased costs for the implementation of the new or upgraded systems. If we are unable to modify our information technology or resource planning systems to respond to changes in our business needs, or if we experience a failure or interruption in these systems, our ability to accurately forecast sales, report our financial and operating results, or otherwise operate our business could be adversely affected. +Changes in economic conditions may adversely affect our financial condition and results of operations. +Volatile economic conditions and general changes in the market have affected, and will likely continue to affect consumer spending generally and the buying habits and preferences of our customers and end-user consumers in particular. A significant portion of the products we sell, especially those sold under the UGG brand, are considered to be luxury retail products. The purchase of these products by consumers is largely discretionary, and is therefore highly dependent upon the level of consumer spending, particularly among affluent consumers. Sales of these products may be adversely affected by a continuation or worsening of recent economic conditions, increases in consumer debt levels, uncertainties regarding future economic prospects, or a decline in consumer confidence. During an actual or perceived economic downturn, fewer consumers may shop for our products and those who do shop may limit the amounts of their purchases. As a result, we could be required to reduce the price we can charge for our products or increase our marketing and promotional expenses in response to lower than anticipated levels of demand for our products. In either case, these changes, or other similar changes in our marketing strategy, would reduce our revenues and profit margins and could have a material adverse effect on our financial condition and results of operations. +16 +Table of Contents +We sell our products through higher-end specialty and department store retailers. These retailer customers may be impacted by continuing economic uncertainty, reduced customer demand for luxury products, and a significant decrease in available credit. If reduced consumer spending, lower demand for luxury products, or credit pressures result in financial difficulties or insolvency for these customers, it would adversely impact our estimated allowances and reserves as well as our overall financial results. Also, economic factors such as increased transportation costs, inflation, higher costs of labor, and higher insurance and healthcare costs may increase our cost of sales and our operating expenses, and otherwise adversely affect our financial condition, results of operations, and cash flows. Our business, access to credit, and trading price of common stock could be materially and adversely affected if the current economic conditions do not improve or worsen. +Our financial success is influenced by the success of our customers . +Much of our financial success is directly related to the success of our retailers and distributor partners to market and sell our brands through to the consumer. If a retailer fails to meet annual sales goals, it may be difficult to locate an acceptable substitute retailer. If a distributor fails to meet annual sales goals, it may be difficult and costly to either locate an acceptable substitute distributor or convert to a wholesale direct model. If a change becomes necessary, we may experience increased costs, loss of customers, increased credit risk, and increased inventory risk, as well as substantial disruption to operations and a potential loss of sales. +We currently do not have long-term contracts with any of our retailers. We do have contracts with our distributors with terms ranging up to five-years, however, while these contracts may have annual purchase minimums which must be met in order to retain the distribution rights, the distributors are not otherwise obligated to purchase product. Sales to our retailers and distributors are generally on an order-by-order basis and are subject to rights of cancellation and rescheduling by our wholesale customers. We use the timing of delivery dates in our wholesale customer orders to forecast our sales and earnings for future periods. If any of our major customers, including independent distributors, experience a significant downturn in business or fail to remain committed to our products or brands, then these customers could postpone, reduce, or discontinue purchases from us. As a result, we could experience a decline in sales or gross margins, write downs of excess inventory, increased discounts or extended credit terms to our customers, which could have a material adverse effect on our business, results of operations, financial condition, cash flows, and our common stock price. +Our five largest customers accounted for approximately 23.0 % of worldwide net sales in 2013 and 22.8% of worldwide net sales in 2012 . Any loss of a key customer, the financial collapse or bankruptcy of a key customer, or a significant reduction in purchases from a key customer could have a material adverse effect on our business, results of operations, and financial condition. +Item 1B. Unresolved Staff Comments. +None. +Item 2. Properties. +Our corporate headquarters are located in Goleta, California. We have two US distribution centers, both in California, and international distribution centers in the Netherlands, the UK, China, and Japan. We are in the early stages of opening a new distribution center in Moreno Valley, California. Our E-Commerce operations are in Arizona, the UK, China, and Japan. We also have offices in China and Vietnam to oversee the quality and manufacturing standards of our products, an office in Macau to coordinate logistics, an office in Hong Kong to coordinate sales and marketing efforts, and offices in the UK and the Netherlands to oversee European operations and administration. As of December 31, 2013 , we had 40 retail stores in the US ranging from approximately 2,000 to 7,000 square feet. Internationally, we had 77 retail stores in the UK, China, Japan, France, Belgium, Canada, the Netherlands and Hong Kong. We have no manufacturing facilities, as all of our products are manufactured by independent manufacturers. We also utilize third-party managed distribution centers in certain international countries. In 2011, we purchased approximately fourteen acres of land to build new corporate headquarters in Goleta, California. The construction of the headquarters was substantially completed in January 2014 , although additional construction continues. Other than our new corporate headquarters, we lease, rather than own, our facilities from unrelated parties. With the exception of our E-Commerce and retail store facilities, our facilities are attributable to multiple segments of our business and are not allocated to the reportable 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. We may utilize additional third-party managed distribution centers internationally, as we continue converting selective international distributor businesses into wholesale businesses. +The following table reflects the location, use, segment, and approximate size of our significant physical properties as of December 31, 2013 : +17 +Table of Contents +Facility Location +Description +Business Segment +Approximate Square Footage +Camarillo, California +Warehouse Facility +Unallocated +723,000 +Goleta California +Corporate Offices +Unallocated +91,000 +Item 3. Legal Proceedings. +On May 31, 2012, a purported shareholder class action lawsuit was filed in the United States District Court for the Central District of California against the Company and certain of its officers. On August 1, 2012, a similar purported shareholder class action lawsuit was filed in the United States District Court for the District of Delaware against the Company and certain of its officers. These actions alleged violations of the federal securities laws and were purportedly brought on behalf of purchasers of the Company's publicly traded securities between October 27, 2011 and April 26, 2012. Both cases were dismissed with prejudice, and no appeal was taken from either dismissal. +On July 17, 2012 and July 26, 2012, two purported shareholder derivative lawsuits were filed in the California Superior Court for the County of Santa Barbara against our Board of Directors and several of our officers. The Company is named as nominal defendant. Plaintiffs in the state derivative actions allege, among other things, that the Board allowed certain officers to make allegedly false and misleading statements. The complaints include claims for breach of fiduciary duties, insider trading, unjust enrichment, and violations of the California Corporations Code. The complaints seek compensatory damages, disgorgement, and other relief. The actions were consolidated on September 13, 2012, and the Plaintiffs filed a consolidated complaint on November 20, 2012. On March 21, 2013, the Company’s demurrer to the consolidated complaint was sustained with leave to amend. The Plaintiffs did not timely amend the consolidated complaint and a final judgment and order of dismissal with prejudice was entered on May 6, 2013. The Plaintiffs filed an appeal on May 22, 2013, which is still pending. +As part of our policing program for our intellectual property rights, from time to time, we file lawsuits in the US and abroad alleging acts of trademark counterfeiting, trademark infringement, patent infringement, trade dress infringement, trademark dilution, and state or foreign law claims. At any given point in time, we may have a number of such actions pending. These actions often result in seizure of counterfeit merchandise or out of court settlements with defendants or both. From time to time, we are subject to claims where plaintiffs will raise, or defendants will raise, either as affirmative defenses or as counterclaims, the invalidity or unenforceability of certain of our intellectual properties, including our trademark registration for UGG Australia. We also are aware of many instances throughout the world in which a third party is using our UGG trademarks within its internet domain name, and we have discovered and are investigating several manufacturers and distributors of counterfeit Teva, UGG, and Sanuk products. +Although we are subject to other routine legal proceedings from time to time in the ordinary course of business, including employment, intellectual property and product liability claims, we believe that the outcome of all pending legal proceedings in the aggregate will not have a material adverse effect on our business or consolidated financial statements. +Item 4. Mine Safety Disclosures. +Not applicable. +18 +Table of Contents +PART II +Item 5. Market for Registrant's 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, 2013 +First Quarter +$ +36.12 +$ +55.69 +Second Quarter +$ +47.35 +$ +59.69 +Third Quarter +$ +51.07 +$ +66.09 +Fourth Quarter +$ +57.84 +$ +86.09 +Year ended December 31, 2012 +First Quarter +$ +62.90 +$ +90.21 +Second Quarter +$ +43.25 +$ +69.46 +Third Quarter +$ +34.99 +$ +51.21 +Fourth Quarter +$ +28.63 +$ +42.76 +As of February 14, 2014 , we had approximately 58 stockholders of record based upon the records of our transfer agent, which does not include beneficial owners of our common stock whose shares are held in the names of various securities brokers, dealers and registered clearing agencies. +We did not sell any equity securities during the year ended December 31, 2013 that were not registered under the Securities Act of 1933, as amended. +STOCK PERFORMANCE GRAPH +Below is a graph comparing the percentage change in the cumulative total stockholder return on the Company's common stock against the cumulative total return of the NASDAQ Market Index, a peer group index and the S&P 500 Apparel, Accessories & Luxury Goods Index for the five-year period commencing December 31, 2008 and ending December 31, 2013 . The data represented below assumes one hundred dollars invested in each of the Company's common stock, the NASDAQ Market Index, the peer group index and the S&P 500 Apparel, Accessories & Luxury Goods Index on January 1, 2009 . +Beginning in 2013, we are using the S&P 500 Apparel, Accessories & Luxury Goods Index as our industry index rather than the peer group index that we used in prior years. We believe that the S&P 500 Apparel, Accessories & Luxury Goods Index provides a more representative average of the market performance of the companies in our industry versus the peer group index. For this annual report, we have included both the peer group index and the S&P 500 Apparel, Accessories & Luxury Goods Index . +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. Total return assumes reinvestment of dividends; we have paid no dividends on our common stock and have not done so since our inception. +19 +Table of Contents +COMPARISON OF CUMULATIVE TOTAL RETURN +ASSUMES $100 INVESTED ON JAN. 01, 2009 +ASSUMES DIVIDEND REINVESTED +December 31, +2008 +2009 +2010 +2011 +2012 +2013 +Deckers Outdoor Corporation +$ +100.0 +$ +127.4 +$ +299.6 +$ +283.9 +$ +151.3 +$ +317.3 +NASDAQ Market Index# +100.0 +145.3 +171.7 +170.3 +200.6 +281.1 +S&P 500 Apparel, Accessories & Luxury Goods Index +100.0 +162.7 +229.8 +285.7 +293.1 +366.2 +Peer Group Index* +100.0 +186.7 +242.4 +238.0 +279.6 +406.3 +# +The NASDAQ Market Index is the same NASDAQ Index used in our 2012 Form 10-K. +* +The Peer Group Index consists of Steven Madden, Ltd.; Wolverine World Wide, Inc.; Crocs, Inc.; and Skechers USA, Inc. In our 2012 Form 10-K the peer group also included K-Swiss Inc., LaCrosse Footwear, Inc. and Kenneth Cole Productions which are not included in the current presentation because K-Swiss Inc. was acquired in January 2013 and LaCrosse Footwear, Inc. and Kenneth Cole Productions became private companies during 2012. +DIVIDEND POLICY +We have not declared or paid any cash dividends on our common stock since our inception. We currently do not anticipate declaring or paying any cash dividends in the foreseeable future. Our current credit agreement allows us to make cash dividends, provided that no event of default has occurred or is continuing and provided that we have a minimum amount of cash plus unused credit of $150,000 during the quarters ended March 31, June 30 and December 31, and cash plus unused credit of $75,000 during the quarter ended September 30. +STOCK REPURCHASE PROGRAM +In February 2012, our Board of Directors approved a stock repurchase program to repurchase up to $100,000 of our common stock in the open market or in privately negotiated transactions, subject to market conditions, applicable legal requirements, and +20 +Table of Contents +other factors. The program did not obligate us to acquire any particular amount of common stock and the program could have been suspended at any time at our discretion. As of June 30, 2012, the Company repurchased approximately 1,749,000 shares under this program, for approximately $100,000, or an average price of $57.16. As of June 30, 2012, the Company had repurchased the full amount authorized under this program. The purchases made under this program were funded from available working capital. +In June 2012, the Company approved a new stock repurchase program to repurchase up to $200,000 of the Company's common stock in the open market or in privately negotiated transactions, subject to market conditions, applicable legal requirements, and other factors. The program does not obligate the Company to acquire any particular amount of common stock and the program may be suspended at any time at the Company's discretion. As of December 31, 2013 , the Company had repurchased approximately 2,765,000 shares under this program, for approximately $120,700, or an average price of $43.66, leaving the remaining approved amount at $79,300. There were no stock repurchases during the year ended December 31, 2013. +Item 6. Selected Financial Data. +We derived the following selected consolidated financial data from our consolidated financial statements. Historical results are not necessarily indicative of the results to be expected in the future. You should read the following consolidated financial information together with our consolidated financial statements and the related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in Part II, Item 7 of this annual report. +21 +Table of Contents +Years ended December 31, +2013 +2012 +2011 +2010 +2009 +(In thousands, except per share data) +Statements of operations data +Net sales: +UGG wholesale +$ +818,377 +$ +819,256 +$ +915,203 +$ +663,854 +$ +566,964 +Teva wholesale +109,334 +108,591 +118,742 +96,207 +71,952 +Sanuk wholesale +94,420 +89,804 +26,039 +— +— +Other brands wholesale +38,276 +20,194 +21,801 +23,476 +19,644 +E-Commerce +169,534 +130,592 +106,498 +91,808 +75,666 +Retail stores +326,677 +245,961 +189,000 +125,644 +78,951 +1,556,618 +1,414,398 +1,377,283 +1,000,989 +813,177 +Cost of sales +820,135 +782,244 +698,288 +498,051 +442,087 +Gross profit +736,483 +632,154 +678,995 +502,938 +371,090 +Selling, general and administrative expenses +528,586 +445,206 +394,157 +253,850 +189,843 +Income from operations +207,897 +186,948 +284,838 +249,088 +181,247 +Other expense (income), net +2,340 +2,830 +(424 +) +(1,021 +) +(1,976 +) +Income before income taxes +205,557 +184,118 +285,262 +250,109 +183,223 +Income taxes +59,868 +55,104 +83,404 +89,732 +66,304 +Net income +145,689 +129,014 +201,858 +160,377 +116,919 +Net income attributable to noncontrolling interest +— +(148 +) +(2,806 +) +(2,142 +) +(133 +) +Net income attributable to Deckers Outdoor Corporation +$ +145,689 +$ +128,866 +$ +199,052 +$ +158,235 +$ +116,786 +Net income per share attributable to Deckers Outdoor Corporation common stockholders: +Basic +$ +4.23 +$ +3.49 +$ +5.16 +$ +4.10 +$ +2.99 +Diluted +$ +4.18 +$ +3.45 +$ +5.07 +$ +4.03 +$ +2.96 +Weighted-average common shares outstanding: +Basic +34,473 +36,879 +38,605 +38,615 +39,024 +Diluted +34,829 +37,334 +39,265 +39,292 +39,393 +As of December 31, +2013 +2012 +2011 +2010 +2009 +(In thousands) +Balance sheet data +Cash and cash equivalents +$ +237,125 +$ +110,247 +$ +263,606 +$ +445,226 +$ +315,862 +Working capital +508,786 +424,569 +585,823 +570,869 +420,117 +Total assets +1,259,729 +1,068,064 +1,146,196 +808,994 +599,043 +Long-term liabilities +51,092 +62,246 +72,687 +8,456 +6,269 +Total Deckers Outdoor Corporation stockholders' equity +888,119 +738,801 +835,936 +652,987 +491,358 +22 +Table of Contents +Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation. +References to "Deckers," "we," "us," "our," or similar terms refer to Deckers Outdoor Corporation together with its consolidated subsidiaries. Unless otherwise specifically indicated, all amounts herein are expressed in thousands, except for share quantity, per share data, and selling prices. The following discussion of our financial condition and results of operations should be read together with our consolidated financial statements and the accompanying notes to those statements included elsewhere in this annual report. +Overview +We are a global leader in designing, marketing and distributing innovative footwear, apparel and accessories developed for both everyday casual lifestyle use and high performance activities. We market our products primarily under three proprietary brands: +• +UGG®: Premier brand in luxurious comfort footwear, handbags, apparel, and cold weather accessories; +• +Teva®: Born from the outdoors, active lifestyle footwear for the adventurous spirit; and +• +Sanuk®: Innovative action sport footwear brand rooted in the surf community. +Our financial condition and results of operations include the operations of Sanuk beginning July 1, 2011 and Hoka One One® (Hoka) beginning September 27, 2012, the acquisition dates. In addition to our primary brands, our other brands include TSUBO®, a line of mid and high-end dress and dress casual footwear that incorporates style, function and maximum comfort; Ahnu®, a line of outdoor performance and lifestyle footwear; MOZO®, a line of footwear crafted for culinary professionals that redefines the industry dress code; Hoka, a line of footwear for all capacities of runner designed with a unique performance midsole geometry, oversized midsole volume and active foot frame; and Simple®, a line for which we ceased distribution effective December 31, 2011. +We sell our brands through higher-end domestic retailers and international distributors and retailers, as well as directly to our end-user consumers through our E-Commerce business and our retail stores. Independent third parties manufacture all of our products. +Our business has been impacted by, what we believe are, several important trends and we expect that it will continue to be impacted: +• +Sales of our products are highly seasonal and are sensitive to weather conditions, which are beyond our control. Even though we are creating more year-round styles for our brands, the effect of favorable or unfavorable weather on sales can be significant. +• +Continuing uncertainty surrounding US and global economic conditions has adversely impacted businesses worldwide. Some of our customers have been, and more may be, adversely affected, which in turn has, and may continue to, adversely impact our financial results. +• +The sheepskin used in certain UGG products is in high demand and limited supply, and there have been significant fluctuations in the price of sheepskin as the demand from competitors for this material has changed. However, our sheepskin costs decreased in 2013 compared to 2012 due to lower pricing negotiated for our Fall 2013 product costs, as well as the use of UGGpure, real wool woven into a durable backing used as an alternative to table grade sheepskin, in select linings and foot beds. +• +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. +• +Consumers have narrowed their footwear product breadth, focusing on brands with a rich heritage and authenticity as market category creators and leaders. +23 +Table of Contents +• +Consumers have become increasingly focused on luxury and comfort, seeking out products and brands that are fashionable while still comfortable. +• +There is an emerging sustainable lifestyle movement happening all around the world, and consumers are demanding that brands and companies become more environmentally responsible. +• +Consumers are following a recent trend of buy now, wear now. This trend entails the consumer waiting to purchase shoes until they will actually wear them, contrasted with a tendency in the past to purchase shoes they did not plan to wear until later. +By emphasizing our brands' images and our focus on comfort, performance and authenticity, we believe we can continue to maintain a loyal consumer following that is less susceptible to fluctuations caused by changing fashions and changes in consumer preferences. We have also responded to consumer focus on sustainability by establishing objectives, policies, and procedures to help us drive key sustainability initiatives around human rights, environmental sustainability, and community affairs. +We have experienced significant cost fluctuations, most over the past several years, notably with respect to sheepskin. We attempt to cover the full amount of our sheepskin purchases under fixed price contracts. We continually strive to contain our material costs through increasing the mix of non-sheepskin products, exploring new footwear materials and new production technologies, and utilizing lower cost production, including in the US from where we began sourcing products in 2012. Also, refer to Item 7A. Quantitative and Qualitative Disclosures about Market Risk for further discussion of our commodity price risk. +Below is an overview of the various components of our business, including some key factors that affect each business and some of our strategies for growing each business. +UGG Brand Overview +The UGG brand is one of the most iconic and recognized brands in the global footwear industry and highlights the Company’s successful track record of building niche brands into lifestyle market leaders. With loyal consumers around the world the UGG brand has proven to be a highly resilient line of premium footwear, with an expanding product offering and a growing global audience that attracts women, men and children. UGG brand footwear continually earns media exposure from numerous outlets both organically and from strategic public relations efforts, including an increasing amount of exposure internationally. The UGG brand has invested in creating holistic, impactful integrated campaigns across paid, earned and owned media channels, including digital, social, out-of-home (OOH) and print, which are globally scalable, contributing to broader public awareness of the brand. +We believe the increased global media focus and demand for UGG products has been driven by the following: +• +High consumer brand loyalty, due to over 35 years of delivering quality and luxuriously comfortable UGG footwear; +• +Continued innovation of new product categories and styles, including those beyond footwear such as loungewear, handbags, cold-weather accessories and a new home offering; +• +A more robust footwear offering, including transitional collections to better bridge the gap between late summer and the start of the holiday season; +• +Expanded slipper category showing incremental growth with added styles for both women and men; +• +Growing Direct-to-Consumer platform and enhanced omni-channel capabilities that enable us to increasingly engage existing and prospective consumers in a more connected environment to introduce our evolving product lines; +• +Product customization with our UGG by You program allows for deeper connection with brand and products; +• +Focus on mobile consumers with responsive site design providing shoppers access to the brand from their mobile device; +• +Year-round holistic paid advertising approach for women, men and kids in targeted high-end print, OOH, digital and social media; +• +Holiday focused advertising campaign to drive important seasonal sales; +24 +Table of Contents +• +Continued creation of targeted UGG for Men campaigns featuring brand ambassador Tom Brady; +• +Targeted E-Commerce based marketing to existing and prospective consumers through integrated outreach including email blasts, interactive site design and search engine optimization based content; +• +Successful targeting of higher-end distribution; +• +Expanded product assortments from existing accounts; +• +Adoption by high-profile celebrities as a favored footwear brand; +• +Continued media attention that has enabled us to introduce the brand to consumers much faster than we would have otherwise been able to; +• +Increased exposure to the brand driven by our concept stores that showcase all of our product offerings; +• +Continued expansion of worldwide retail through new UGG stores; and +• +Continued geographic expansion through our UGG concept and outlet stores globally. +We believe the luxurious comfort 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 presenting UGG as a global, premium lifestyle brand and limiting distribution to selected higher-end retailers. As part of this strategy, we have increased our product offering, including a growing transitional collections and spring line, an expanded men’s line, a fall line that consists of a range of luxurious collections for both genders, an expanded kids’ line, as well as home, handbags, cold weather accessories, and apparel. We have also recently expanded our marketing and promotional efforts, which we believe has contributed, and will continue to contribute, to our growth. We believe that the evolution of the UGG brand and our strategy of product diversification will also help decrease our reliance on sheepskin, which is in high demand and subject to price volatility. Nonetheless, we cannot assure investors that our efforts will continue to provide UGG brand growth. +Teva Brand Overview +For 30 years Teva has fueled the adventure lifestyle around the globe. Teva pioneered the sport sandal category in 1984 and today our mission remains steadfast: to enable spontaneous adventure with versatile, utility-centered footwear for active consumers. By designing simple, functional footwear, Teva is driving growth by extending our established global platforms in sandals and water-related products and by leveraging our authenticity with active lifestyle consumers. +We believe that Teva’s Originals product line will be a key platform in driving market penetration for the brand. In the US, we believe the line will continue to bolster our leadership position in sandals and grow our market share through casual category extensions. Globally, we expect that the Originals line will establish Teva’s position across the warm-weather climates of Asia and Latin America, setting the foundation to support core lifestyle collections within these regions. +Within the US, Teva maintains its position as a market leader within the sport sandal category. Growth opportunities within our current core channels of distribution - outdoor specialty and sporting goods - will be pursued through deepening penetration with evolved and expanded product offerings. Teva plans to support its channel expansion beyond present distribution with focused investments in targeted, solution-driven marketing programs in order to attract new lifestyle consumers to the brand. However, we cannot assure investors that these efforts will be successful. +Sanuk Brand Overview +The Sanuk brand was founded 15 years ago, and from its origins in the Southern California surf culture, has grown into a global brand with an expanding consumer audience and growing presence in the casual canvas and sandals categories. The Sanuk brand’s use of unexpected materials and unconventional constructions combined with its fun and funky branding has contributed to the brand’s identity and growth since its inception, and led to successful products such as the Yoga Mat TM sandal collection and the patented SIDEWALK SURFERS®. We believe that the Sanuk brand provides substantial growth opportunities, especially within the casual canvas markets, supporting our strategic initiatives spanning new product launches, and Direct-to-Consumer channel development and global expansion. However, we cannot assure investors that our efforts to grow the brand will be successful. +Other Brands Overview +25 +Table of Contents +Our other brands consist of TSUBO, Ahnu, MOZO, and Hoka. Our other brands are all sold through most of our distribution channels, with the majority sold through wholesale channels. +TSUBO, meaning pressure point in Japanese, is marketed as high-end casual footwear for men and women. The brand is the synthesis of ergonomics and style, with a full line of sport and dress casuals, boots, sandals and heels constructed to provide consumers with contemporary footwear that incorporates style, function, and maximum comfort. We are positioning the TSUBO brand as the premium footwear solution for people in the city. We are continuing to create products to address consumers' unique needs of all-day comfort, innovative style, and superior quality. +The Ahnu brand is an outdoor performance and lifestyle footwear brand for men and women. The name Ahnu is derived from the Celtic goddess representing the balance of well-being and prosperity. The brand focuses primarily on women consumers offering style and comfort for active women on both trails and pavement. The product goal is to achieve uncompromising footwear performance by developing footwear that will provide the appropriate balance of traction, grip, flexibility, cushioning, and durability for a variety of outdoor activities — whether on trails, beaches, or sidewalks. +MOZO creates footwear for culinary professionals that redefines the industry dress code. Crafted for the most discerning of palates, MOZO shoes blend function, performance, and style. Each product is lightweight, durable, comfortable, and easy to clean. MOZO footwear is designed for casual, every day wear and built to challenge any culinary environment so you never have to compromise your personal style to perform at your very best. MOZO shoes are sold through food service equipment and supply distributors and online at Zappos.com and Amazon.com. Beginning in 2014, we expect that MOZO products will be available at footwear retailers nationwide. +The Hoka brand focuses on designing shoes with a unique performance midsole geometry, oversized midsole volume and an active foot frame. Runners from around the world are experiencing the benefits of Hoka brand products. These shoes are used by marathon runners, and even ultra-marathon runners as well as every day runners to enjoy running. +We expect to leverage our design, marketing, and distribution capabilities to grow our other brands over the next several years, consistent with our mission to build niche brands into global market leaders. Nevertheless, we cannot assure investors that our efforts to grow these brands will be successful. +E-Commerce Overview +Our E-Commerce business, which sells all of our brands except Mozo, allows us to build our relationship with the consumer. E-Commerce enables us to meet the growing demand for our products, sell the products at retail prices, and provide significant incremental operating income. The E-Commerce business provides us an opportunity to communicate to the consumer with a consistent brand message that is in line with our brands' promises, drives awareness of key brand initiatives, and offers targeted information to specific consumer segments. Our websites also drive wholesale and distributor sales through brand awareness and directing consumers to retailers that carry our brands, including our own retail stores. In recent years, our E-Commerce business has had significant revenue growth, much of which occurred as the UGG brand gained popularity and as consumers continued to increase internet usage for footwear and other purchases. +Managing our E-Commerce business requires us to focus on the latest trends and techniques for web design and marketing, to generate internet traffic to our websites, to effectively convert website visits into orders, and to maximize average order sizes. We plan to continue to grow our E-Commerce business through improved website features and performance, increased marketing, expansion into more international markets, and utilization of mobile and tablet technology. Nevertheless, we cannot assure investors that revenue from our E-Commerce business will continue to grow. +Retail Stores Overview +Our retail stores are predominantly UGG concept stores and UGG outlet stores. In 2013 we expanded our fleet and opened our first Sanuk (two concept, one outlet) and Teva (one outlet) stores. Our retail stores enable us to directly impact our customers' experience, meet the growing demand for these products, sell the products at retail prices and generate strong annual operating income. In addition, our UGG concept stores allow us to showcase our entire product line including footwear, accessories, handbags, home, outerwear, lounge and retail exclusive items; whereas, a wholesale account may not represent all of these categories. Through our outlet stores, we sell some of our discontinued styles from prior seasons, plus products made specifically for the outlet stores. +As of December 31, 2013 , we had a total of 117 retail stores worldwide. These stores are company-owned and operated and include our China stores, which prior to April 2, 2012 were owned and operated with our joint venture partner. On April 2, 2012, we purchased the remaining interest in our Chinese joint venture. During 2014, we plan to open additional retail stores worldwide. +Seasonality +26 +Table of Contents +Our business is seasonal, with the highest percentage of UGG brand net sales occurring in the quarters ending September 30 and December 31 and the highest percentage of Teva and Sanuk brand net sales occurring in the quarters ending March 31 and June 30 of each year. Our financial results include the Sanuk brand beginning July 1, 2011. Our other brands do not have a significant seasonal impact. +Subsequent to December 31, 2013, our Board of Directors approved a change in the Company's fiscal year end from December 31 to March 31. The change is intended to better align our planning, financial and reporting functions with the seasonality of our business. Under the applicable rules of the Securities and Exchange Commission, the Company intends to file a transition report on Form 10-QT for the quarter ending March 31, 2014. +2013 +First +Quarter +Second +Quarter +Third +Quarter +Fourth +Quarter +Net sales +$ +263,760 +$ +170,085 +$ +386,725 +$ +736,048 +Income (loss) from operations +$ +2,652 +$ +(42,751 +) +$ +46,497 +$ +201,499 +2012 +First +Quarter +Second +Quarter +Third +Quarter +Fourth +Quarter +Net sales +$ +246,306 +$ +174,436 +$ +376,392 +$ +617,264 +Income (loss) from operations +$ +11,933 +$ +(28,708 +) +$ +59,609 +$ +144,114 +With the level of UGG brand net sales over the past several years, net sales in the last half of the calendar year have exceeded net sales for the first half of the calendar year. Given our expectations for our brands, we currently expect this trend to continue. Nonetheless, actual results could differ materially depending upon consumer preferences, availability of product, competition, and our wholesale and distributor customers continuing to carry and promote our various product lines, among other risks and uncertainties. See Part I, Item 1A, "Risk Factors." +Results of Operations +Year ended December 31, 2013 Compared to Year ended December 31, 2012 +The following table summarizes our results of operations: +Years ended December 31, +2013 +2012 +Change +Amount +% +Amount +% +Amount +% +Net sales +$ +1,556,618 +100.0 +% +$ +1,414,398 +100.0 +% +$ +142,220 +10.1 +% +Cost of sales +820,135 +52.7 +782,244 +55.3 +37,891 +4.8 +Gross profit +736,483 +47.3 +632,154 +44.7 +104,329 +16.5 +Selling, general and administrative expenses +528,586 +33.9 +445,206 +31.5 +83,380 +18.7 +Income from operations +207,897 +13.4 +186,948 +13.2 +20,949 +11.2 +Other expense, net +2,340 +0.2 +2,830 +0.2 +(490 +) +(17.3 +) +Income before income taxes +205,557 +13.2 +184,118 +13.0 +21,439 +11.6 +Income taxes +59,868 +3.8 +55,104 +3.9 +4,764 +8.6 +Net income +145,689 +9.4 +129,014 +9.1 +16,675 +12.9 +Net income attributable to the noncontrolling interest +— +— +(148 +) +— +148 +* +Net income attributable to Deckers Outdoor Corporation +$ +145,689 +9.4 +% +$ +128,866 +9.1 +% +$ +16,823 +13.1 +% +* Calculation of percentage change is not meaningful. +Overview. The increase in net sales was primarily due to increased UGG brand sales through our retail stores and E-Commerce sites. In addition, net sales increased from our other brands, Sanuk brand and Teva brand sales through our wholesale +27 +Table of Contents +channel, and increased Sanuk brand sales through our E-Commerce sites and retail stores. The increase in income from operations resulted from increased sales and gross margin, partially offset by higher selling, general and administrative expenses (SG&A). +Net Sales. The following table summarizes net sales by location and net sales by brand and distribution channel: +Years Ended December 31, +Change +2013 +2012 +Amount +% +Net sales by location: +US +$ +1,042,274 +$ +972,987 +$ +69,287 +7.1 +% +International +514,344 +441,411 +72,933 +16.5 +Total +$ +1,556,618 +$ +1,414,398 +$ +142,220 +10.1 +% +Net sales by brand and distribution channel: +UGG: +Wholesale +$ +818,377 +$ +819,256 +$ +(879 +) +(0.1 +)% +E-Commerce +155,635 +118,886 +36,749 +30.9 +Retail stores +324,868 +245,397 +79,471 +32.4 +Total +1,298,880 +1,183,539 +115,341 +9.7 +Teva: +Wholesale +109,334 +108,591 +743 +0.7 +E-Commerce +6,627 +6,578 +49 +0.7 +Retail stores +426 +347 +79 +22.8 +Total +116,387 +115,516 +871 +0.8 +Sanuk: +Wholesale +94,420 +89,804 +4,616 +5.1 +E-Commerce +6,077 +4,172 +1,905 +45.7 +Retail stores +1,183 +20 +1,163 +5,815.0 +Total +101,680 +93,996 +7,684 +8.2 +Other brands: +Wholesale +38,276 +20,194 +18,082 +89.5 +E-Commerce +1,195 +956 +239 +25.0 +Retail stores +200 +197 +3 +1.5 +Total +39,671 +21,347 +18,324 +85.8 +Total +$ +1,556,618 +$ +1,414,398 +$ +142,220 +10.1 +% +Total E-Commerce +$ +169,534 +$ +130,592 +$ +38,942 +29.8 +% +Total Retail stores +$ +326,677 +$ +245,961 +$ +80,716 +32.8 +% +In order to provide a framework for assessing how our underlying businesses performed, excluding the effect of foreign currency rate fluctuations, we provide certain financial information on a “constant currency basis”, which is in addition to the actual financial information presented. In order to calculate our constant currency information, we translate the current period financial information using the foreign currency exchange rates that were in effect during the previous comparable period. However, constant currency measures should not be considered in isolation or as an alternative to U.S. dollar measures that reflect current period exchange rates, or to other financial measures calculated and presented in accordance with U.S. generally accepted accounting principles. +The increase in net sales was primarily due to increased UGG brand sales through our retail stores and E-Commerce sites. In addition, net sales increased from our other brands, Sanuk brand and Teva brand sales through our wholesale channel and increased Sanuk brand sales through our E-Commerce sites and retail stores. On a constant currency basis, net sales increased by 11.1% to approximately $1,571,000. We experienced an increase in the number of pairs sold in all segments. This resulted in a 10.1% overall increase in the volume of footwear sold for all brands and channels to approximately 26.1 million pairs for the year ended December 31, 2013 compared to approximately 23.7 million pairs for 2012 . Our weighted-average wholesale selling price per pair decreased to $46.87 for the year ended December 31, 2013 from $49.17 for 2012 . The decreased average selling price +28 +Table of Contents +was primarily due to our UGG, Teva and Sanuk wholesale segments, partially offset by an increase in the average selling price in our other brands wholesale segment. Our overall weighted-average selling price per pair across all channels decreased to $59.63 for the year ended December 31, 2013 from $60.12 for 2012. The decrease in overall average selling price per pair was primarily due to the decreased weighted-average wholesale selling price per pair, partially offset by the increased mix of Direct-to-Consumer sales which carry higher price points. +Wholesale net sales of our UGG brand decreased primarily due to a decrease in the weighted-average wholesale selling price per pair as well as the negative impact of foreign currency exchange rate fluctuations, partially offset by an increase in the volume of pairs sold. On a constant currency basis, wholesale sales of our UGG brand increased by 0.6% to approximately $824,000. The decrease in average selling price was primarily due to increased closeout sales at a lower price, as well as the negative impact of foreign currency exchange rate fluctuations. For UGG wholesale net sales, the decrease in average selling price had an estimated impact of approximately $28,000, including approximately $6,000 related to the negative impact of foreign currency exchange rate fluctuations, partially offset by an increase in volume of approximately $27,000. +Wholesale net sales of our Teva brand increased primarily due to an increase in the volume of pairs sold, partially offset by a decrease in the weighted-average wholesale selling price per pair. The decrease in average selling price was largely due to a higher proportion of the sales coming from sandals which carry lower average selling prices. For Teva wholesale net sales, the increase in volume had an estimated impact of approximately $4,000 and the decrease in average selling price had an estimated impact of approximately $3,000. +Wholesale net sales of our Sanuk brand increased primarily due to an increase in the volume of pairs sold, partially offset by a decrease in the weighted-average wholesale selling price per pair. The decrease in average selling price was primarily due to an increased impact of closeout sales. For Sanuk wholesale net sales, the increase in volume had an estimated impact of approximately $10,000 and the decrease in average selling price had an estimated impact of approximately $5,000. +Wholesale net sales of our other brands increased due to an increase in the weighted-average wholesale selling price per pair, as well as an increase in the volume of pairs sold. The increase in average selling price was primarily due to the addition of the Hoka brand, which carries higher average selling prices than the other brands included in this segment. The increase in volume of pairs sold was primarily due to the addition of the Hoka brand. Hoka sales are included from our acquisition date of September 27, 2012 and, therefore, comparable sales amounts are not included in the sales for the year ended December 31, 2012. Excluding the Hoka brand, our other brands’ wholesale net sales increased by approximately $4,000 due to an increase in sales of approximately $5,000 from an increase in the volume of pairs sold, partially offset by a decrease in sales of approximately $1,000 due to a decrease in the average selling price. The decrease in average selling price was primarily due to the increased impact of closeout sales. +Net sales of our E-Commerce business increased due to an increase in the volume of pairs sold primarily attributable to the UGG brand. For E-Commerce net sales, the increase in volume had an impact of approximately $39,000. The change in average selling price had no material impact on net sales. +Net sales of our retail store business, which are primarily UGG brand sales, increased largely due to the addition of 40 new stores opened since December 31, 2012 , partially offset by the negative impact of foreign currency exchange rate fluctuations. On a constant currency basis, net sales of our retail store business increased by 36.4% to approximately $335,000. Over half of the new stores were in Asia, primarily in China and Japan, with the remaining new stores in the US and Europe. Same store sales for the 52 weeks ending December 29, 2013 increased 2.8% compared to the same period in 2012. For retail same store sales, we experienced an increase in volume of approximately $4,500 partially offset by a decrease in weighted-average selling price of approximately $500. As we continue to increase the number of retail stores, each new store will have less significant impact on our growth rate. +International sales, which are included in the segment sales above, for all of our products combined increased by 16.5% for the year ended December 31, 2013 as compared to the year ended December 31, 2012 , partially offset by the negative impact of foreign currency exchange rate fluctuations. On a constant currency basis, international sales increased by 19.9% to approximately $529,000. International sales represented 33.0% and 31.2% of worldwide net sales for the year ended December 31, 2013 and 2012 , respectively. The increase in international sales as a percentage of worldwide net sales was largely due to the continued growth in our UGG brand's international retail and E-Commerce business of approximately $65,000, as well as increased sales to our distributors throughout Asia and Latin America of approximately $8,000 and wholesale customers in France of approximately $7,000, partially offset by decreased sales to our distributors in Canada and Europe of approximately $11,000. +Foreign income before income taxes was $60,851 and $51,409, and worldwide income before income taxes was $205,557 and $184,118 for the year ended December 31, 2013 and 2012 , respectively. Foreign income before income taxes represented 29.6% and 27.9% of worldwide income before income taxes for the year ended December 31, 2013 and 2012 , respectively. The increase in foreign income before income taxes as a percentage of worldwide income before income taxes was primarily due to +29 +Table of Contents +a 16.5% international sales growth rate compared to a 7.1% US sales growth rate, as well as an increase in gross margin earned on foreign sales. These increases were primarily related to the increase in international retail and E-Commerce sales which generally carry higher margins than wholesale sales. +We expect that our foreign income before income taxes will continue to fluctuate from year to year based on several factors, including our expansion initiatives. In addition, we believe that the continued evolution and geographic scope of the UGG brand and our continuing strategy of enhancing product diversification will contribute to growth in our international retail and E-Commerce business in future years. +Gross Profit. As a percentage of net sales, gross margin increased compared to the same period in 2012. Gross profit increased by approximately 1.5 percentage points due to reduced sheepskin costs and increased use of UGGpure, real wool woven into a durable backing used as an alternative to table grade sheepskin in select linings and foot beds, as well as an increased mix of retail and E-Commerce sales, which generally carry higher margins than our wholesale segments, of approximately 1.2 percentage points. These increases were partially offset by the negative impact of foreign currency exchange rate fluctuations of approximately 30 basis points. The change in sales between our wholesale customers and distributors is immaterial to gross margin. Our gross margins fluctuate based on several factors, and we expect our gross margin to increase for the full year 2014 compared to 2013, primarily due to realizing a full year of reduced sheepskin prices, the increased use of UGGpure and an increase in the proportion of direct-to-consumer (DTC) sales which generally carry higher margins. +Selling, General and Administrative Expenses. SG&A increased primarily from: +• +increased retail costs of approximately $53,000 largely related to 40 new retail stores that were not open as of December 31, 2012 and related corporate infrastructure; +• +increased recognition of performance-based compensation of approximately $17,000; +• +increased E-Commerce expenses of approximately $13,000 largely related to increased marketing and advertising; +• +increased expenses of approximately $9,000 for the Hoka brand which we acquired on September 27, 2012; partially offset by +• +decreased expense related to the fair value of the Sanuk contingent consideration liability of approximately $8,000 primarily due to changes made during 2012 to the brand's forecast of sales and gross profit through 2015, which increased the expense in 2012 without a comparable increase in 2013. +Performance-Based Compensation +As noted above, the recognition of performance-based compensation increased by approximately $17,000 over the prior year period. As of December 31, 2013, the target level of the performance objectives relating to our 2013 performance-based cash awards was achieved, and we have recognized the expense accordingly. In contrast, as of December 31, 2012, we did not achieve the same level of the performance objectives relating to our 2012 performance-based cash awards and we recognized expense for those 2012 awards accordingly at that time. +At the beginning of each year, our Compensation Committee reviews our operating results from the prior fiscal year, as well as the financial and strategic plan for the next fiscal year and for subsequent years. The Committee then establishes specific annual Company financial goals and specific strategic goals for each executive. Performance-based cash compensation awards for the fiscal year ended December 31, 2012 were only partially earned, and performance-based cash compensation awards for the fiscal year ended December 31, 2013 were earned at higher levels, based on our achievement of certain targets for annual earnings before interest, taxes, depreciation and amortization (EBITDA), as well as achievement of pre-determined individual financial and non-financial performance goals that are tailored to individual employees based on their role and responsibilities at the Company. The performance objectives and goals, as well as the targets, differ each year and are based upon many factors, including the Company’s current business stage and strategies, recent Company financial and operating performance, expected growth rates over prior year’s performance, business and general economic conditions and market and peer group analysis. For example, in evaluating targets for the 2012 fiscal year, our Compensation Committee reviewed, among other things, our EBITDA for the fiscal year ended December 31, 2011, which was approximately $314.6 million, and, in evaluating targets for the 2013 fiscal year, our Compensation Committee reviewed, among other things, our EBITDA for the fiscal year ended December 31, 2012, which was approximately $229.7 million. Performance objectives for the 2013 fiscal year were based, in part, upon the expected achievement of growth in the Company’s EBITDA for the fiscal year ended December 31, 2013 as compared to the Company’s EBITDA for the fiscal year ended December 31, 2012. While +30 +Table of Contents +expected growth rates over prior year performance were not reduced, the Company’s lower EBITDA for the fiscal year ended December 31, 2012 as compared to the fiscal year ended December 31, 2011 resulted in 2013 EBITDA targets that were lower than the 2012 EBITDA targets. +In accordance with applicable accounting guidance, we recognize performance-based compensation expenses when it is deemed probable that the applicable performance-based goal will be met. We evaluate the probability of achieving performance-based goals on a quarterly basis. Our assessment of the probability of achieving specified goals can fluctuate from quarter to quarter as we assess our projected achievement as compared to specified performance targets. As a result, the compensation expense we recognize may also fluctuate from period to period. +Income (Loss) from Operations. Refer to note 8 to our accompanying consolidated financial statements for a discussion of our reportable segments. The following table summarizes operating income (loss) by segment: +Years Ended December 31, +Change +2013 +2012 +Amount +% +UGG wholesale +$ +224,736 +$ +206,039 +$ +18,697 +9.1 +% +Teva wholesale +9,165 +9,228 +(63 +) +(0.7 +) +Sanuk wholesale +20,591 +14,398 +6,193 +43.0 +Other brands wholesale +(9,807 +) +(4,523 +) +(5,284 +) +(116.8 +) +E-Commerce +66,819 +56,190 +10,629 +18.9 +Retail stores +65,716 +63,306 +2,410 +3.8 +Unallocated overhead costs +(169,323 +) +(157,690 +) +(11,633 +) +(7.4 +) +Total +$ +207,897 +$ +186,948 +$ +20,949 +11.2 +% +Income from operations increased due to the increase in sales and gross margin, partially offset by higher SG&A expenses and the negative impact of foreign currency exchange rate fluctuations. On a constant currency basis, income from operations increased by 13.7% to approximately $213,000. Beginning January 1, 2013, all gross profit derived from the sales to third parties of the E-Commerce and retail stores segments is reported in income from operations of the E-Commerce and retail stores segments, respectively. In prior periods, the gross profit derived from the sales to third parties of the E-Commerce and retail stores segments was separated into two components: (i) the wholesale profit was included in the related operating income or loss of each wholesale segment, and represented the difference between the Company’s cost and the Company’s wholesale selling price, and (ii) the retail profit was included in the operating income of the E-Commerce and retail stores segments, and represented the difference between the Company’s wholesale selling price and the Company’s retail selling price. Each of the wholesale segments charged the E-Commerce and retail segments the same price that they charged third party retail customers, with the resulting profit from inter-segment sales included in income (loss) from operations of each respective wholesale segment. Inter-segment sales and cost of sales are eliminated upon consolidation. These changes in reporting only changed the presentation within the table above and did not impact the Company’s consolidated financial statements for any periods. We believe that these changes better align with how we view the business, which is that sales of the E-Commerce and retail stores segments each generate a cash flow of their own and the wholesale segments are not active in generating those cash flows. The income from operations information for the year ended December 31, 2012 has been adjusted retrospectively to conform to the current period presentation. +The increase in income from operations of UGG brand wholesale was primarily the result of a 2.1 percentage point increase in gross margin primarily related to decreased sheepskin costs of approximately $18,000, as well as reduced operating expenses of approximately $2,000, partially offset by the negative impact of foreign currency exchange rate fluctuations. On a constant currency basis, income from operations of UGG brand wholesale increased 11.0% to approximately $229,000. We expect gross margin to continue to increase in 2014 due to a full year of reduced sheepskin costs as well as increased use of UGGpure. +Income from operations of Teva brand wholesale was comparable to the same period in 2012. +The increase in income from operations of Sanuk brand wholesale was primarily the result of decreased expense related to the fair value of the Sanuk contingent consideration liability of approximately $8,000, which was primarily due to changes made during 2012 to the brand's forecast of sales and gross profit through 2015, which increased the expense in 2012 without a comparable increase in 2013. In addition, income from operations increased due to the increase in net sales, partially offset by +31 +Table of Contents +a 1.4 percentage point decrease in gross margin due to increased closeout sales as well as an increase in sales expenses of approximately $2,000. +The increase in loss from operations of our other brands wholesale was primarily the result of the activity of our Hoka brand, which we purchased on September 27, 2012, and includes initial costs to expand the brand. +The increase in income from operations of our E-Commerce business was primarily the result of the increase in net sales and resulting gross profit, partially offset by increased operating expenses of approximately $15,000. The increased operating expenses were largely due to increased marketing and advertising costs. +Income from operations of our retail store business, which primarily involves the UGG brand, increased due to the increase in net sales, largely offset by increased operating expenses of approximately $53,000 primarily attributable to 40 new stores opened during the year as well as the negative impact of foreign currency exchange rate fluctuations. On a constant currency basis, income from operations of our retail store business increased 7.9% to approximately $68,000. +The increase in unallocated overhead costs resulted most significantly from an increase of approximately $8,000 in the recognition of performance-based compensation that was not allocated to any of our reportable segments. +Other Expense, Net. Other expense, net decreased primarily due to a decrease in interest expense related to our short-term borrowings. +Income Taxes. Income tax expense and effective income tax rates were as follows: +Years Ended December 31, +2013 +2012 +Income tax expense +$ +59,868 +$ +55,104 +Effective income tax rate +29.1 +% +29.9 +% +The decrease in the effective tax rate was primarily due to the increase in our annual foreign pre-tax income as a percentage of worldwide pre-tax income, as income generated in the foreign jurisdictions is taxed at significantly lower rates than the US. For the full year 2013 , we generated approximately 11.0 % of our pre-tax earnings from a country which does not impose a corporate income tax. Unremitted earnings of non-US subsidiaries are expected to be reinvested outside of the US indefinitely. Such earnings would become taxable upon the sale or liquidation of these subsidiaries or upon the remittance of dividends. As of December 31, 2013 , we had approximately $95,000 of cash and cash equivalents outside the US that would be subject to additional income taxes if it were to be repatriated. We have no plans to repatriate any of our foreign cash. +Net Income Attributable to the Noncontrolling Interest. Prior to April 2, 2012, we owned 51% of a joint venture with an affiliate of Stella International Holdings Limited (Stella International) for the primary purpose of opening and operating retail stores for the UGG brand in China. Stella International is also one of our major manufacturers in China. On April 2, 2012, we purchased, for a total purchase price of $20,000, the 49% noncontrolling interest owned by Stella International. Prior to this purchase, we already had a controlling interest in this entity, and therefore, the subsidiary had been and will continue to be consolidated with our operations. +Net Income Attributable to Deckers Outdoor Corporation. Our net income increased as a result of the items discussed above. Our diluted earnings per share increased primarily as a result of the increase in net income, as well as by a reduced number of diluted weighted-average common shares outstanding. The reduction in the diluted weighted-average common shares outstanding was the result of our share repurchases which commenced during the year ended December 31, 2012. The weighted-average impact of the share repurchases was a reduction of approximately 2,600,000 shares. +Year ended December 31, 2012 Compared to Year ended December 31, 2011 +32 +Table of Contents +The following table summarizes our results of operations: +Years Ended December 31, +2012 +2011 +Change +Amount +% +Amount +% +Amount +% +Net sales +$ +1,414,398 +100.0 +% +$ +1,377,283 +100.0 +% +$ +37,115 +2.7 +% +Cost of sales +782,244 +55.3 +698,288 +50.7 +83,956 +12.0 +Gross profit +632,154 +44.7 +678,995 +49.3 +(46,841 +) +(6.9 +) +Selling, general and administrative expenses +445,206 +31.5 +394,157 +28.6 +51,049 +13.0 +Income from operations +186,948 +13.2 +284,838 +20.7 +(97,890 +) +(34.4 +) +Other expense (income), net +2,830 +0.2 +(424 +) +— +3,254 +767.5 +Income before income taxes +184,118 +13.0 +285,262 +20.7 +(101,144 +) +(35.5 +) +Income taxes +55,104 +3.9 +83,404 +6.1 +(28,300 +) +(33.9 +) +Net income +129,014 +9.1 +201,858 +14.7 +(72,844 +) +(36.1 +) +Net income attributable to the noncontrolling interest +(148 +) +— +(2,806 +) +(0.2 +) +2,658 +94.7 +Net income attributable to Deckers Outdoor Corporation +$ +128,866 +9.1 +% +$ +199,052 +14.5 +% +$ +(70,186 +) +(35.3 +)% +Overview. The Sanuk brand operations are included in our results of operations effective upon the acquisition date of July 1, 2011. The increase in net sales was primarily due to the addition of the Sanuk brand as well as increased UGG brand sales through our retail stores and E-Commerce sites, partially offset by decreased UGG, Teva and other brands product sales through our wholesale channel. The decrease in income from operations resulted from higher SG&A expenses and lower gross margin. +Net Sales. The following table summarizes net sales by location and net sales by brand and distribution channel: +33 +Table of Contents +Years Ended December 31, +Change +2012 +2011 +Amount +% +Net sales by location: +US +$ +972,987 +$ +945,109 +$ +27,878 +2.9 +% +International +441,411 +432,174 +9,237 +2.1 +Total +$ +1,414,398 +$ +1,377,283 +$ +37,115 +2.7 +% +Net sales by brand and distribution channel: +UGG: +Wholesale +$ +819,256 +$ +915,203 +$ +(95,947 +) +(10.5 +)% +E-Commerce +118,886 +98,256 +20,630 +21.0 +Retail stores +245,397 +188,377 +57,020 +30.3 +Total +1,183,539 +1,201,836 +(18,297 +) +(1.5 +) +Teva: +Wholesale +108,591 +118,742 +(10,151 +) +(8.5 +) +E-Commerce +6,578 +5,571 +1,007 +18.1 +Retail stores +347 +452 +(105 +) +(23.2 +) +Total +115,516 +124,765 +(9,249 +) +(7.4 +) +Sanuk: +Wholesale +89,804 +26,039 +63,765 +244.9 +E-Commerce +4,172 +539 +3,633 +674.0 +Retail stores +20 +— +20 +* +Total +93,996 +26,578 +67,418 +253.7 +Other brands: +Wholesale +20,194 +21,801 +(1,607 +) +(7.4 +) +E-Commerce +956 +2,132 +(1,176 +) +(55.2 +) +Retail stores +197 +171 +26 +15.2 +Total +21,347 +24,104 +(2,757 +) +(11.4 +) +Total +$ +1,414,398 +$ +1,377,283 +$ +37,115 +2.7 +% +Total E-Commerce +$ +130,592 +$ +106,498 +$ +24,094 +22.6 +% +Total Retail stores +$ +245,961 +$ +189,000 +$ +56,961 +30.1 +% +*Calculation of percentage change is not meaningful. +The increase in net sales was primarily driven by the addition of the Sanuk brand as well as increased UGG brand sales through our retail stores and E-Commerce sites, partially offset by decreased UGG, Teva and other brands wholesale sales. We experienced an increase in the number of pairs sold primarily through our Sanuk wholesale channel and continued retail and E-Commerce growth, partially offset by a decrease in pairs sold in our UGG, Teva, and other brands wholesale segments. This resulted in a 3.9% overall increase in the volume of footwear sold for all brands and channels to approximately 23.7 million pairs for the year ended December 31, 2012 compared to approximately 22.8 million pairs for 2011. Our weighted-average wholesale selling price per pair decreased to $49.17 for the year ended December 31, 2012 from $52.38 for 2011. The decreased average selling price was primarily due to our Sanuk wholesale segment, which has lower overall average selling prices due to the nature of the brand. We experienced an increase in the average selling price in all other wholesale segments. +Wholesale net sales of our UGG brand decreased primarily due to the volume of pairs sold, partially offset by an increase in the average selling price. For UGG wholesale net sales, the decrease in volume had an estimated impact of approximately $103,000 and the increase in weighted-average wholesale selling price per pair had an estimated impact of approximately $7,000. We believe the decline was partially due to reduced orders for the fall season caused by our customers' increased carryover inventory levels resulting from the warm winter in the prior year, a new trend of on-demand purchasing whereby consumers shift the timing of their purchases to when they plan to actually wear the shoes, as well as recessionary conditions in Europe. +34 +Table of Contents +Wholesale net sales of our Teva brand decreased primarily due to a decrease in the volume of pairs sold, partially offset by an increase in the weighted-average wholesale selling price per pair. For Teva wholesale net sales, the decrease in volume had an estimated impact of approximately $24,000 and the increase in average selling price had an estimated impact of approximately $14,000. +Wholesale net sales of our Sanuk brand were $89,804 for the fiscal year ending December 31, 2012, compared to $26,039 for the six months commencing on July 1, 2011, the acquisition date, and ending on December 31, 2011. +Wholesale net sales of our other brands decreased due to a decrease in the volume of pairs sold, partially offset by an increase in the average selling price. The decrease in volume of pairs sold was due to ceasing distribution of the Simple brand as of December 31, 2011. Excluding the Simple brand, our other brands experienced an increase in both average selling price and volume of pairs sold. +Net sales of our E-Commerce business increased due to an increase in the volume of pairs sold primarily attributable to the UGG brand, partially offset by a decrease in the average selling price. The decrease in the average selling price was primarily due to the addition of Sanuk brand sales which carry lower average selling prices. +Net sales of our retail store business, which are primarily UGG brand sales, increased largely due to the addition of 30 new stores opened since December 31, 2011. For those stores that were open for the full 52 weeks ending December 30, 2012 compared to the 52 weeks ending January 1, 2012, same store sales decreased by 3.4%. +International sales, which are included in the segment sales above, for all of our products combined increased by 2.1% for the year ended December 31, 2012 as compared to the year ended December 31, 2011. International sales represented 31.2% and 31.4% of worldwide net sales for the year ended December 31, 2012 and 2011, respectively. The slight decrease in international sales as a percentage of worldwide net sales was largely due to decreased sales to our wholesale customers in Benelux and the UK and distributors in Europe, partially offset by increased sales to our retail, E-Commerce and Japan wholesale customers. +Foreign income before income taxes was $51,409 and $108,738, and worldwide income before income taxes was $184,118 and $285,262 for the year ended December 31, 2012 and 2011, respectively. Foreign income before income taxes represented 27.9% and 38.1% of worldwide income before income taxes for the year ended December 31, 2012 and 2011, respectively. The increase in foreign income before income taxes as a percentage of worldwide income before income taxes was primarily due to an increase in the gross margin on foreign sales. The increase in gross margin was primarily related to the expansion of our international retail and E-Commerce business which generally carry higher margins than wholesale sales. +Gross Profit. As a percentage of net sales, gross margin decreased primarily due to increased sheepskin and other material costs as well as an increased impact of discounted and closeout sales for our UGG and Teva brands. Our sheepskin costs in 2012 were approximately 40% higher than our 2011 costs. These decreases to gross margin were partially offset by the contribution of the Sanuk brand, which generally carries higher margins, and increased gross profits for our E-Commerce and retail stores segments. +Selling, General and Administrative Expenses. SG&A increased primarily from: +• +increased retail costs of approximately $36,000 largely related to 30 new retail stores that were not open as of December 31, 2011; +• +approximately $25,000 of expenses for our Sanuk brand, including an increase of approximately $9,000 to the fair value of the contingent consideration liability from the Company's purchase of the brand; +• +increased marketing expenses of approximately $14,000 largely related to our new UGG women's prospects, UGG Men's and Classic campaigns; +• +increased E-Commerce expenses of approximately $7,000 largely related to increased marketing and advertising; partially offset by +• +decreased performance-based cash compensation of approximately $16,000; +• +decreased legal expense of approximately $10,000, due to having fewer litigation costs in the current year, a decrease in anti-counterfeiting expenses, as well as receiving increased judgments and collections in the current year from our website litigation; +• +decreased sales commissions of approximately $5,000 primarily due to the decrease in wholesale sales; and +35 +Table of Contents +• +decreased UGG amortization expense of approximately $4,000 primarily related to order books we acquired from our distributor conversions in Europe being fully amortized in 2011. +Income (Loss) from Operations. Beginning January 1, 2013, all gross profit derived from the sales to third parties of the E-Commerce and retail stores segments is reported in income from operations of the E-Commerce and retail stores segments, respectively. For the years ended December 31, 2012 and 2011, the gross profit derived from the sales to third parties of the E-Commerce and retail stores segments was separated into two components: (i) the wholesale profit was included in the related operating income or loss of each wholesale segment, and represented the difference between the Company’s cost and the Company’s wholesale selling price, and (ii) the retail profit was included in the operating income of the E-Commerce and retail stores segments, and represented the difference between the Company’s wholesale selling price and the Company’s retail selling price. Each of the wholesale segments charged the E-Commerce and retail segments the same price that they charged third party retail customers, with the resulting profit from inter-segment sales included in income (loss) from operations of each respective wholesale segment. These changes in segment reporting only changed the presentation within the table below and did not impact the Company’s consolidated financial statements for any periods. The Company believes that these changes better depict how management views the business, which is that sales of the E-Commerce and retail stores segments each generate a cash flow of their own and the wholesale segments are not active in generating those cash flows. The segment information for the years ended December 31, 2012 and 2011 have been adjusted retrospectively to conform to the current period presentation. +Inter-segment sales and cost of sales are eliminated upon consolidation. The following table summarizes operating income (loss) by segment: +Years Ended December 31, +Change +2012 +2011 +Amount +% +UGG wholesale +$ +206,039 +$ +339,665 +$ +(133,626 +) +(39.3 +)% +Teva wholesale +9,228 +19,265 +(10,037 +) +(52.1 +) +Sanuk wholesale +14,398 +798 +13,600 +1,704.3 +Other brands wholesale +(4,523 +) +(9,993 +) +5,470 +54.7 +E-Commerce +56,190 +47,244 +8,946 +18.9 +Retail stores +63,306 +58,552 +4,754 +8.1 +Unallocated overhead costs +(157,690 +) +(170,693 +) +13,003 +7.6 +Total +$ +186,948 +$ +284,838 +$ +(97,890 +) +(34.4 +)% +Income from operations as a percentage of sales decreased due to increased SG&A and decreased gross margin, partially offset by increased sales. +The decrease in income from operations of UGG brand wholesale was primarily the result of the decrease in net sales and a 10.5 percentage point decrease in gross margin primarily related to increased sheepskin and other material costs of approximately $16,000 as well as an increase in the impact of closeout sales in the US and lower sales in Europe, which generally carry higher margins. We also experienced increases in marketing and promotional expenses of approximately $10,000 and increased international sales expenses of approximately $3,000. These increases to expenses were partially offset by decreased sales commissions of approximately $7,000 and decreased amortization expenses, primarily related to order books we acquired from our distributor conversions in Europe being fully amortized in 2011, of approximately $4,000. +The decrease in income from operations of Teva brand wholesale was primarily the result of the decrease in net sales and a 4.1 percentage point decrease in gross margin primarily due to lower sales in Europe, which generally carry higher margins, and an increased impact of closeout sales. In addition, we recognized increased marketing and promotional expenses and other divisional expenses totaling approximately $2,000. +The income from operations of our Sanuk brand, which we acquired in July 2011, was $14,398. +The loss from operations of our other brands wholesale decreased primarily due to an increase in gross profit of approximately $2,500 as well as a decrease in operating expenses of approximately $3,000 primarily due to ceasing of the Simple brand operations as of December 31, 2011. Gross profit increased despite the decrease in net sales because sales of Simple brand products in fiscal year 2011 had significantly lower gross margins. +The increase in income from operations of our E-Commerce business was primarily the result of the increase in net sales, partially offset by increased operating expenses of approximately $7,000. +36 +Table of Contents +Income from operations of our retail store business, which primarily involves the UGG brand, decreased due to an increase in operating expenses of approximately $36,000 largely attributable to 30 new stores opened during the year, partially offset by an increase in gross profit of approximately $40,000 due primarily to the increase in net sales. +The decrease in unallocated overhead costs resulted most significantly from a decrease in legal expenses of approximately $10,000 due to having fewer litigation costs in the current year, a decrease in anti-counterfeiting expenses, as well as receiving increased judgments and collections in the current year from our website litigation. We also experienced a decrease in performance-based cash compensation of approximately $9,000 and the positive impact of currency exchange rate fluctuations of approximately $2,000, partially offset by an increase in international expenses of approximately $7,000. +Other Expense (Income), Net. Other expense, net for the twelve months ended December 31, 2012 was $2,830 compared to other income, net for the twelve months ended December 31, 2011 of $424. In fiscal year 2012, we had an increase in interest expense related to increases in our short-term borrowings, partially offset by income primarily related to expired E-Commerce website customer credits. +Income Taxes. Income tax expense and effective income tax rates were as follows: +Years Ended December 31, +2012 +2011 +Income tax expense +$ +55,104 +$ +83,404 +Effective income tax rate +29.9 +% +29.2 +% +The increase in the effective tax rate was primarily due to the increase in our annual US pre-tax income as a percentage of worldwide pre-tax income, as income generated in the US is taxed at significantly higher rates than most of our foreign jurisdictions. For the full year 2012, we generated approximately 21.0% of our pre-tax earnings from a country which does not impose a corporate income tax. Unremitted earnings of non-US subsidiaries are expected to be reinvested outside of the US indefinitely. Such earnings would become taxable upon the sale or liquidation of these subsidiaries or upon the remittance of dividends. As of December 31, 2012, we had approximately $37,000 of cash and cash equivalents outside the US that would be subject to additional income taxes if it were to be repatriated. We have no plans to repatriate any of our foreign cash. +Net Income Attributable to the Noncontrolling Interest. On April 2, 2012, we purchased the remaining 49% noncontrolling interest in our joint venture with Stella International. Prior to this purchase, we already had a controlling interest in this entity, and therefore, the subsidiary had been and will continue to be consolidated with our operations. For the twelve months ended December 31, 2012, net income attributable to the noncontrolling interest was $148, which represents the noncontrolling interest's share of income prior to April 2, 2012. +Net Income Attributable to Deckers Outdoor Corporation. Our net income decreased as a result of the items discussed above. Our diluted earnings per share decreased primarily as a result of the decrease in net income, partially offset by a reduced number of diluted weighted-average common shares outstanding due to share repurchases we made under our stock repurchase program. +Off-Balance Sheet Arrangements +We have off-balance sheet arrangements consisting of guarantee contracts. See "Contractual Obligations" below. +Liquidity and Capital Resources +We finance our working capital and operating needs using a combination of our cash and cash equivalents balances, cash generated from operations, and as needed, the credit available under our credit agreement. In an economic recession or under other adverse economic conditions, our cash generated from operations may decline, and we may be unable to realize a return on our cash and cash equivalents, secure additional credit on favorable terms, or renew or access our existing credit. These factors may impact our working capital reserves and have a material adverse effect on our business. +Our cash flow cycle includes the purchase of or deposits for raw materials, the purchase of inventories, the subsequent sale of the inventories, and the eventual collection of the resulting accounts receivables. As a result, our working capital requirements begin when we purchase, or make deposits on, raw materials and inventories and continue until we ultimately collect the resulting receivables. The seasonality of our UGG brand business requires us to build fall and winter inventories in the quarters ending June 30 and September 30 to support sales for the UGG brand’s major selling seasons, which historically occur during the quarters ending September 30 and December 31; whereas, the Teva and Sanuk brands build inventory levels beginning in the quarters ending December 31 and March 31 in anticipation of the spring selling season that occurs in the quarters ending March 31 and +37 +Table of Contents +June 30. Given the seasonality of our UGG, Teva, and Sanuk brands, our working capital requirements fluctuate significantly throughout the year. The cash required to fund these working capital fluctuations has been provided using our internal cash flows and short-term borrowings. As needed, we borrow funds under our credit agreement. +The following table summarizes our cash flows and working capital: +Year Ended December 31, +2013 +2012 +2011 +Net cash provided by operating activities +$ +262,125 +$ +163,906 +$ +30,091 +Net cash used in investing activities +$ +(85,197 +) +$ +(75,362 +) +$ +(184,766 +) +Net cash used in financing activities +$ +(50,513 +) +$ +(242,621 +) +$ +(27,160 +) +Cash and cash equivalents +$ +237,125 +$ +110,247 +$ +263,606 +Trade accounts receivable +184,013 +190,756 +193,375 +Inventories +260,791 +300,173 +253,270 +Prepaids and other current assets +147,375 +90,410 +107,651 +Total current assets +$ +829,304 +$ +691,586 +$ +817,902 +Trade accounts payable +$ +151,037 +$ +133,457 +$ +110,853 +Other current liabilities +169,481 +133,560 +121,226 +Total current liabilities +$ +320,518 +$ +267,017 +$ +232,079 +Net working capital +$ +508,786 +$ +424,569 +$ +585,823 +Cash from Operating Activities. Net cash provided by operating activities increased primarily due to reduced inventory purchases and increases in accrued payroll and income taxes payable. The change in inventory was primarily related to efforts to manage inventory levels relative to expected future sales and the timing of our inventory purchases and payments. The change in accrued payroll was primarily due to larger payroll accruals, including performance-based compensation, during the year ended December 31, 2013 versus 2012, as well as decreased performance-based compensation accrued for at December 31, 2012 and paid during the first quarter of 2013 versus performance-based compensation accrued for at December 31, 2011 and paid during the first quarter of 2012. The increase in income taxes payable was due to the increase in earnings. These increases in operating cash flows were partially offset by prepaids and other current assets increasing during the year ended December 31, 2013 compared to a decrease during the year ended December 31, 2012. The change in prepaids and other current assets was due to less refunds of deposits received in accordance with our contracts to purchase sheepskin. Net working capital increased as of December 31, 2013 from December 31, 2012, primarily as a result of increased cash and prepaid and other current assets. These increases to working capital were partially offset by higher other current liabilities, lower inventory and higher accounts payable. Changes in working capital are due to the items discussed above, as well as our normal seasonality and timing of cash receipts and cash payments. +Net cash provided by operating activities for the year ended December 31, 2012 increased compared to the year ended December 31, 2011 primarily due to the differences in yearly changes in prepaid expenses and other current assets, inventories and trade accounts receivable. Prepaid expenses and other current assets decreased in fiscal year 2012, adding to net cash provided by operating activities, while they increased in fiscal year 2011. Inventories increased by less in fiscal year 2012 than they did in fiscal year 2011, resulting in less cash used in operating activities. Trade accounts receivable decreased slightly in fiscal year 2012, while they increased in fiscal year 2011. The change in prepaid expenses and other current assets was due to refunds of deposits received in accordance with our contracts to purchase sheepskin in fiscal year 2012 compared to deposits paid in fiscal year 2011. The smaller increase in inventory was primarily due to the international expansion that occurred in fiscal year 2011 and did not repeat in fiscal year 2012. The change in accounts receivable was primarily due to decreased wholesale sales as well as increased cash collections in fiscal year 2012 versus fiscal year 2011. These increases in operating cash flows were partially offset by a smaller increase in accounts payable, which increased less in fiscal year 2012 versus fiscal year 2011. Accounts payable increased less primarily due to our decreased inventory purchases. Net working capital decreased as of December 31, 2012 from December 31, 2011, primarily as a result of decreased cash and prepaid and other current assets, and an increase in our short-term borrowings and accounts payable. These decreases to working capital were partially offset by higher inventory. Changes in working capital are due to the items discussed above, as well as our normal seasonality and timing of cash receipts and cash payments. +Wholesale accounts receivable turnover increased to 6.6 times in the twelve months ended December 31, 2013 from 6.1 times for the twelve months ended December 31, 2012, primarily due to lower average accounts receivable balances, as well as +38 +Table of Contents +increased wholesale sales for the twelve months ended December 31, 2013 compared to the twelve months ended December 31, 2012. The lower average accounts receivable balances were primarily due to improved cash collections. +Inventory turnover was consistent at 2.5 times for the twelve months ended December 31, 2013 compared to 2.4 times for the twelve months ended December 31, 2012. We anticipate the trend of inventory turns to remain consistent or improve in the future as certain material costs are expected to decrease. +Cash from Investing Activities. Net cash used in investing activities for the year ended December 31, 2013 resulted primarily from the purchases of property and equipment. The capital expenditures include the build out of our new corporate facilities and retail stores, and purchases of computer hardware and software. The new corporate facilities will replace several leased spaces and we plan to finance a portion of the facilities cost. +For the year ended December 31, 2012, net cash used in investing activities resulted primarily from the purchases of property and equipment, as well as our acquisitions of the Hoka brand and an intangible asset for lease rights for a retail store location in France. Capital expenditures in fiscal year 2012 included the build out of new retail stores and our corporate facilities. +For the year ended December 31, 2011, net cash used in investing activities resulted primarily from our acquisition of the Sanuk brand and purchases of property and equipment. Capital expenditures in fiscal year 2011 included the purchase of land for our new corporate headquarters and the build out of new retail stores. In November 2011, we made a cash payment of approximately $20,000 for approximately fourteen acres of land for our new headquarters facility in Goleta, California. +As of December 31, 2013, we had approximately $4,000 of material commitments for future capital expenditures primarily related to the build out of new retail stores. We estimate that the capital expenditures for 2014 including the aforementioned commitments will range from approximately $95,000 to $100,000. We anticipate these expenditures will primarily include equipment costs of our new distribution center, build out of our new retail stores and upgrade of our enterprise resource planning system. The actual amount of capital expenditures for the year may differ from this estimate, largely depending on the timing of new store openings or any unforeseen needs to replace existing assets and the timing of other expenditures. +Cash from Financing Activities. For the year ended December 31, 2013, net cash used in financing activities was comprised primarily of repayments of short-term borrowings, as well as contingent consideration paid related to our Sanuk acquisition. The cash used was partially offset by cash from our short-term borrowings, leaving approximately a $10,000 balance for borrowings as of December 31, 2013. +For the year ended December 31, 2012, net cash used in financing activities was comprised primarily of repayments of short-term borrowings and repurchases of our common stock, as well as contingent consideration paid related to our Sanuk acquisition, and the purchase of the remaining 49% noncontrolling interest in our joint venture with Stella International. The cash used was partially offset by cash from our short-term borrowings, leaving a $33,000 balance for borrowings as of December 31, 2012. +For the year ended December 31, 2011, net cash used in financing activities was comprised primarily of repayments of short-term borrowings, cash paid for shares withheld for taxes from employee stock unit vesting and for repurchases of our common stock. The cash used was partially offset by cash from our short-term borrowings and excess tax benefits from stock compensation. +In February 2012, our Board of Directors approved a stock repurchase program to repurchase up to $100,000 of our common stock in the open market or in privately negotiated transactions, subject to market conditions, applicable legal requirements, and other factors. The program did not obligate us to acquire any particular amount of common stock and the program could have been suspended at any time at our discretion. As of June 30, 2012, the Company repurchased approximately 1,749,000 shares under this program, for approximately $100,000, or an average price of $57.16. As of June 30, 2012, the Company had repurchased the full amount authorized under this program. The purchases were funded from available working capital. +In June 2012, the Company approved a new stock repurchase program to repurchase up to $200,000 of the Company's common stock in the open market or in privately negotiated transactions, subject to market conditions, applicable legal requirements, and other factors. The program does not obligate the Company to acquire any particular amount of common stock and the program may be suspended at any time at the Company's discretion. As of December 31, 2013, the Company had repurchased approximately 2,765,000 shares under this program, for approximately $120,700, or an average price of $43.66, leaving the remaining approved amount at $79,300. +In August 2011, we entered into a Credit Agreement (the Credit Agreement) with JPMorgan Chase Bank, National Association as the administrative agent, Comerica Bank and HSBC Bank USA, National Association, as syndication agents, and the lenders party thereto. In August 2012 we amended and restated in its entirety the Credit Agreement (Amended and Restated Credit Agreement). The Amended and Restated Credit Agreement is a five-year, $400,000 secured revolving credit facility. In June 2013 we amended the Amended and Restated Credit Agreement to permit additional borrowings in China of $12,500 and revised +39 +Table of Contents +certain financial covenants including an increase in the maximum amount permitted to be spent on the headquarters building from $75,000 to $80,000 and revised the terms of the total adjusted leverage ratio to not exceed 3.25 to 1.00 for the quarter ending September 30, from 2.75 to 1.00. In August 2013 one of the Company’s subsidiaries entered into a new credit agreement in China (China Credit Facility). Refer to Note 3 to our accompanying consolidated financial statements for further information on our Amended and Restated Credit Agreement and China Credit Facility. At December 31, 2013, we had no outstanding borrowings under the Amended and Restated Credit Agreement and outstanding letters of credit of approximately $200, leaving an unused balance of approximately $399,800 under the Amended and Restated Credit Agreement. As of December 31, 2013, we were in compliance with all covenants and we remain in compliance as of March 3, 2014. +Contractual Obligations. The following table summarizes our contractual obligations at December 31, 2013 and the effects such obligations are expected to have on liquidity and cash flow in future periods. +Payments Due by Period +Total +Less than +1 Year +1-3 Years +3-5 Years +More than +5 Years +Operating lease obligations(1) +$ +322,630 +$ +46,060 +$ +87,630 +$ +72,347 +$ +116,593 +Purchase obligations(2) +245,168 +245,168 +— +— +— +Total +$ +567,798 +$ +291,228 +$ +87,630 +$ +72,347 +$ +116,593 +(1) +Our operating lease obligations consist primarily of building leases for our retail locations, distribution centers, and regional offices. The majority of other long-term liabilities on our consolidated balance sheets, with the exception of our Sanuk contingent consideration liability discussed below, are related to deferred rents, of which the cash lease payments are included in operating lease obligations in this table. +(2) +Our purchase obligations consist mostly of open purchase orders. They also include capital expenditures, promotional expenses and service contracts. Outstanding purchase orders are primarily with our third party manufacturers and are expected to be paid within one year. These are outstanding open orders and not minimum purchase obligations. Our promotional expenditures and service contracts are due periodically through 2014. +We have also entered into minimum purchase commitments with certain suppliers (see Note 7 to our accompanying consolidated financial statements). Certain of the agreements require that we advance specified minimum payment amounts. We have included the total remaining cash commitments under these agreements, net of deposits, as of December 31, 2013 in this table. We expect sheepskin purchases by third party factories supplying UGG product to us will eventually exceed the minimum commitment levels; therefore we believe the deposits will become fully refundable, and thus, we believe this will not materially affect our results of operations, as it is in the normal course of our business. +Commitments and Contingencies. The following reflect the additional commitments and contingent liabilities that may have a material impact on liquidity and cash flow in future periods. +The purchase price for the Sanuk brand also includes contingent consideration over the next three years as follows: +• +36.0% of the Sanuk brand gross profit in 2013, which was approximately $18,600 , and +• +40.0% of the Sanuk brand gross profit in 2015. +There is no maximum to the contingent consideration payments for 2013 and 2015. Estimated contingent consideration payments of approximately $ 46,200 are included within other accrued expenses and long-term liabilities in the consolidated balance sheet as of December 31, 2013, and are not included in the table above. See Note 1 to our accompanying consolidated financial statements. +The purchase price for the Hoka brand also includes contingent consideration through 2017, with a maximum of $2,000. Estimated contingent consideration payments of approximately $ 1,800 are included within other accrued expenses and long-term liabilities in the consolidated balance sheet as of December 31, 2013, and are not included in the table above. See Note 1 to our accompanying consolidated financial statements. +We believe that cash generated from operations, the available borrowings under our existing Amended and Restated Credit Agreement, and our cash and cash equivalents will provide sufficient liquidity to enable us to meet our working capital requirements for at least the next 12 months and the foreseeable future. However, risks and uncertainties that could impact our ability to maintain or grow our cash position include our earnings 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, +40 +Table of Contents +our ability to generate returns on our acquisitions of businesses, and market volatility, among others. See Part I, Item 1A, "Risk Factors" for a discussion of additional factors that may affect our cash 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 requirements, we may seek to sell debt securities or additional equity securities or to obtain a new credit agreement or draw on our existing Amended and Restated Credit Agreement. 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 other material present understandings, commitments or agreements with respect to the acquisition of any other businesses, we may evaluate acquisitions of other businesses or brands. +Impact of Inflation +We believe that the rates of inflation in the three most recent fiscal years have not had a significant impact on our net sales or profitability. +Critical Accounting Policies and Estimates +Refer to Note 1 to our accompanying consolidated financial statements for a discussion of our significant accounting policies. Those policies and estimates that we believe are most critical to the understanding of our consolidated financial statements contained in this report are revenue recognition; use of estimates, which includes the below reserves and allowances; inventories; accounting for long-lived assets; goodwill and other intangible assets; fair value of contingent consideration; and stock compensation. +Use of Estimates. The preparation of financial statements in conformity with US generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts during the reporting period. Management reasonably could use different 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 materially accurate in our estimates used for the reserves and allowances below. +The following table summarizes data related to the critical accounting estimates for accounts receivable allowances and reserves, which are discussed below: +December 31, 2013 +December 31, 2012 +Amount +% of Gross +Trade Accounts +Receivable +Amount +% of Gross +Trade Accounts +Receivable +Gross trade accounts receivable +$ +209,081 +$ +215,842 +Allowance for doubtful accounts +$ +2,039 +1.0 +% +$ +2,782 +1.3 +% +Allowance for sales discounts +$ +3,540 +1.7 +% +$ +3,836 +1.8 +% +Allowance for estimated chargebacks +$ +4,935 +2.4 +% +$ +5,563 +2.6 +% +Amount +% of Net Sales +Amount +% of Net Sales +Net sales for the three months ended +$ +736,048 +$ +617,264 +Allowance for estimated returns +$ +14,554 +2.0 +% +$ +12,905 +2.1 +% +Estimated returns liability +$ +10,144 +1.4 +% +$ +6,471 +1.0 +% +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 and forecasts, 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 all or a portion of are identified as potentially uncollectible, plus a non-specific reserve for the balance of accounts based on our historical loss experience. Reserves have been established for all projected losses of this nature. 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 we consider to have credit risk and are not specifically identified as uncollectible would change the allowance for doubtful accounts at December 31, 2013 by approximately $ 1,000 . +41 +Table of Contents +Allowance for Sales Discounts. A significant portion of our wholesale sales and resulting trade accounts receivable reflects a discount that our customers may take, generally based upon meeting certain order, shipment and payment timelines. We use the amount of the discounts that are available to be taken against the period-end trade accounts receivable to estimate and record a corresponding reserve for sales discounts. +Allowance for Estimated Chargebacks. When our wholesale customers pay their invoices, they often take deductions for chargebacks against their invoices, which are often valid. Therefore, we record an allowance for the balance of chargebacks that are outstanding in our accounts receivable balance as of the end of each period, along with an estimated reserve for chargebacks that have not yet been taken against outstanding accounts receivable balances. This estimate is based on historical trends of the timing and amount of chargebacks taken against invoices. +Allowance for Estimated Returns and Estimated Returns Liability. We record an allowance for anticipated future returns of goods shipped prior to period-end and a liability for anticipated returns of goods sold direct to consumers. In general, we accept returns for damaged or defective products. We also have a policy whereby we accept returns from our retail and E-Commerce customers for a thirty day period. We base the amounts of the allowance and liability on any approved customer requests for returns, historical returns experience, and any recent events that could result in a change from historical returns rates, among other factors. The allowance for estimated returns as a percentage of net sales was comparable to the same period in the prior year. 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 allowance and liability reserves for returns in total at December 31, 2013 by approximately $ 6,000 . Our historical estimates for returns have been reasonably accurate. +Inventory Write-Downs. 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 expected future net selling prices. At December 31, 2013 , inventories were stated at $ 260,791 , net of inventory write-downs of $ 6,142 . At December 31, 2012 , inventories were stated at $300,173 net of inventory write-downs of $3,645. The amount of inventory write-downs as a percentage of inventory were 2.4 and 1.2 as of December 31, 2013 and 2012 , respectively. The increase in inventory write-downs was primarily due to write-downs of certain UGG, Teva and other brands styles that are not being continued. 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, 2013 by approximately $ 1,000 . +Valuation of Goodwill, Intangible and Other Long-Lived Assets. We assess the impairment of goodwill, intangible, and other long-lived assets on a separate asset basis based on assumptions and judgments regarding the carrying amount of these assets individually. +We performed our 2013 annual impairment tests for goodwill and nonamortizable intangible assets. We evaluated our UGG, Sanuk and other brands' goodwill and our Teva trademarks. Based on the carrying amounts of the UGG, Teva, Sanuk and other brands' goodwill, trademarks, and net assets, the brands' 2013 sales and operating results, and the brands' long-term forecasts of sales and operating results as of their evaluation dates, we concluded that the carrying amounts of the UGG, Sanuk and other brands' goodwill, as well as the Teva trademarks, were not impaired. Our Teva trademarks were evaluated under ASU, Testing Indefinite-Lived Intangible Assets for Impairment , and we concluded, based on an evaluation of all relevant qualitative factors, including macroeconomic conditions, industry and market considerations, cost factors, financial performance, entity-specific events, and legal, regulatory, contractual, political, business, or other factors, that it is not more likely than not that the fair value of the Teva trademarks is less than its carrying amount, and accordingly we did not perform a quantitative impairment test for the Teva trademarks. Our goodwill balance at December 31, 2013 represents goodwill in the UGG, Sanuk and other brands' reporting units. We believe that it is not more likely than not that the fair value of the UGG reporting unit's fair value and the other brands' reporting unit's fair value are less than their respective carrying values. The UGG and other brands' goodwill was evaluated based on qualitative analyses. +We performed a quantitative analysis of the Sanuk reporting unit's fair value as of October 31, 2013, and concluded that the fair value exceeded its carrying value by 37.4%, which management believes is substantially in excess of carrying value and, therefore, no additional sensitivity analysis was performed. The Sanuk brand's goodwill was evaluated based on Level 3 inputs. +We also evaluated amortizable long-lived assets, including intangible assets as of December 31, 2013 and 2012 . As of December 31, 2013 we recorded immaterial impairment losses for three of our retail stores for which the fair values did not exceed their carrying values. As of December 31, 2012 we recorded immaterial impairment losses for one of our retail stores for which the fair values did not exceed their carrying values. We recorded certain amortizable intangible assets related to our Hoka acquisition (see Note 10 to our accompanying consolidated financial statements for the valuation methodologies used). Our other valuation methodologies used as of December 31, 2013 did not change from the prior year. +Fair Value of Contingent Consideration. We have entered into contingent consideration arrangements when we acquired brands. The fair value of our Sanuk brand contingent consideration is material and highly subjective. It is based on estimated +42 +Table of Contents +future sales and gross profits, and discount rates, among other variables and estimates, and certain years have no maximum payment (see Note 1 to our accompanying consolidated financial statements). These are evaluated each reporting period and the contingent consideration is adjusted accordingly. Our estimated revenue forecasts include a compound annual growth rate of 22.0 % from fiscal year 2013 through fiscal year 2015. Our use of different estimates and assumptions could produce different financial results. For example, a 5.0% change in the estimated compound annual growth rate would change the total liability balance at December 31, 2013 by approximately $ 5,000 . +Item 7A. Quantitative and Qualitative Disclosures about Market Risk. +Commodity Price Risk. We purchase certain materials that are affected by commodity prices, the most significant of which is sheepskin. The supply of sheepskin used in certain UGG products is in high demand and there are a limited number of suppliers able to meet our expectations for the quantity and quality of sheepskin required. There have been significant fluctuations in the price of sheepskin in recent years as the demand from us and our competitors for this commodity has varied. We experienced an increase in sheepskin costs in 2012 compared to 2011, and a decrease in sheepskin costs in 2013 compared to 2012. We expect a decrease in sheepskin costs in 2014 compared to 2013 due to realizing a full year of reduced sheepskin prices and the increased use of UGGpure. Other significant factors affecting the price of sheepskin include weather patterns, harvesting decisions, global economic conditions, and other factors which are not considered predictable or within our control. We use purchasing contracts, pricing arrangements, and refundable deposits to attempt to reduce the impact of price volatility as an alternative to hedging commodity prices. The purchasing contracts and pricing arrangements we use may result in unconditional purchase obligations, which are not reflected in our consolidated balance sheets. In the event of significant commodity cost increases, we will likely not be able to adjust our selling prices sufficiently to mitigate the impact on our margins. +Foreign Currency Exchange Rate Risk. We face market risk to the extent that changes in foreign currency exchange rates affect our foreign assets, liabilities, revenues and expenses. We hedge certain foreign currency forecasted transactions and exposures from existing assets and liabilities. Other than an increasing amount of sales, expenses, and financial positions denominated in foreign currencies, we do not believe that there has been a material change in the nature of our primary market risk exposures, including the categories of market risk to which we are exposed and the particular markets that present the primary risk of loss. As of the date of this Annual Report on Form 10-K, we do not know of or expect there to be any material change in the general nature of our primary market risk exposure in the near term. +We currently utilize forward contracts and other derivative instruments to mitigate exposure to fluctuations in the foreign currency exchange rate, for a portion of the amounts we expect to purchase and sell in foreign currencies. As our international operations grow and we increase purchases and sales in foreign currencies, we will evaluate and may utilize additional derivative instruments, as needed, to hedge our foreign currency exposures. We do not use foreign currency contracts for trading purposes. As of December 31, 2013 , our designated derivative contracts had notional amounts totaling approximately $ 77,000 . These contracts were held by four counterparties and were expected to mature over the next 12 months. Based upon sensitivity analysis as of December 31, 2013 , a 10.0% change in foreign exchange rates would cause the fair value of our financial instruments to increase or decrease by approximately $ 8,000 . +Although the majority of our sales and inventory purchases are denominated in US currency, these sales and inventory purchases may be impacted by fluctuations in the exchange rates between the US dollar and the local currencies in the international markets where our products are sold and manufactured. Our foreign currency exposure is generated primarily from our Asian and European operations. Approximately $ 395,000 , or 25.4 %, of our total net sales for the year ended December 31, 2013 were denominated in foreign currencies. Certain of our foreign subsidiaries' local currency is their designated functional currency. As we begin to hold more cash and other monetary assets and liabilities in currencies other than our subsidiary's functional currency, we are exposed to financial statement transaction gains and losses as a result of remeasuring the operating results and financial positions into their functional currency. We remeasure these monetary assets and liabilities using the exchange rate as of the end of the reporting period. In addition, we translate assets and liabilities of subsidiaries with reporting currencies other than US dollars into US dollars using the exchange rates at of the end of the reporting period, which results in financial statement translation gains and losses in other comprehensive income. Changes in foreign exchange rates affect our reported profits and can distort comparisons from year to year. In addition, if the US dollar strengthens, it may result in increased pricing pressure on our foreign distributors, and retailers, which may have a negative impact on our net sales and gross margins. +Interest Rate Risk. Our market risk exposure with respect to financial instruments is tied to changes in the prime rate in the US and changes in the London Interbank Offered Rate (LIBOR). Our Amended and Restated Credit Agreement provides for interest on outstanding borrowings at rates tied to the prime rate or, at our election, tied to LIBOR. At December 31, 2013 , we had no outstanding borrowings under the credit agreement. A 1.0% increase in interest rates on our borrowings during the current period would not have a material impact on income before income taxes. +Item 8. Financial Statements and Supplementary Data. +43 +Table of Contents +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. +Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. +None. +Item 9A. Controls and Procedures. +(a) Disclosure Controls and Procedures. +The Company maintains a system of disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) which are designed to provide reasonable assurance that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. These disclosure controls and procedures include, among other processes, controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is accumulated and communicated to management, including the principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognized that any system of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. +The Company carried out an evaluation, under the supervision and with the participation of management, including the principal executive officer and the principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2013 pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the principal executive officer and the principal financial officer concluded that the Company's disclosure controls and procedures were effective at the reasonable assurance level as of the end of the period covered by this annual report to ensure that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and to ensure that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including the principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. +(b) Management's Report on Internal Control over Financial Reporting. +Management is responsible for establishing and maintaining adequate internal control over financial reporting at the Company. Our internal control over financial reporting is a process designed under the supervision of the Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company's financial statements for external reporting purposes in accordance with US generally accepted accounting principles (GAAP). A company's internal control over financial reporting includes those policies and procedures that: +• +pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; +• +provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and the directors of the company; and +• +provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements. +Because of 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 Company's internal control over financial reporting as of December 31, 2013 . Management based this assessment on criteria for effective internal control over financial reporting described in Internal Control — Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management's assessment included an evaluation of the design of the Company's 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. +44 +Table of Contents +Based on this assessment, management determined that, as of December 31, 2013 , the Company maintained effective internal control over financial reporting. The registered public accounting firm that audited the consolidated financial statements included in this Annual Report has issued an attestation report on the Company's internal control over financial reporting. The Reports of our Independent Registered Public Accounting Firm are filed with this annual report in a separate section following Part IV, as shown on the index under Item 15 of this Annual Report. +(c) Changes in Internal Control over Financial Reporting. +There was no change in our internal control over financial reporting that occurred during the quarter ended December 31, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. +Item 9B. Other Information. +None. +45 +Table of Contents +PART III +Item 10. Directors, Executive Officers and Corporate Governance. +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 and is posted on our website at www.deckers.com. Our code of ethics is designed to meet the requirements of Section 406 of Regulation S-K 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 Company's definitive proxy statement relating to the Registrant's 2014 annual meeting of stockholders, which will be filed pursuant to Regulation 14A within 120 days after the end of the Company's fiscal year ended December 31, 2013 , and such information is incorporated herein by reference. +Item 11. Executive Compensation. +Information relating to Executive Compensation is set forth under "Proposal No. 1-Election of Directors" in the Company's definitive proxy statement relating to the Registrant's 2014 annual meeting of stockholders, which will be filed pursuant to Regulation 14A within 120 days after the end of the Company's fiscal year ended December 31, 2013 , and such information is incorporated herein by reference. +Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. +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 Company's definitive proxy statement relating to the Registrant's 2014 annual meeting of stockholders, which will be filed pursuant to Regulation 14A within 120 days after the end of the Company's fiscal year ended December 31, 2013 , and such information is incorporated herein by reference. +Item 13. Certain Relationships and Related Transactions, and Director Independence. +Information relating to Certain Relationships and Related Transactions is set forth under "Proposal No. 1-Election of Directors" in the Company's definitive proxy statement relating to the Registrant's 2014 annual meeting of stockholders, which will be filed pursuant to Regulation 14A within 120 days after the end of the Company's fiscal year ended December 31, 2013 , and such information is incorporated herein by reference. +Item 14. Principal Accounting Fees and Services. +Information relating to Principal Accountant Fees and Services is set forth under "Proposal No. 2-Independent Registered Public Accounting Firm" in the Company's definitive proxy statement relating to the Registrant's 2014 annual meeting of stockholders, which will be filed pursuant to Regulation 14A within 120 days after the end of the Company's fiscal year ended December 31, 2013 , and such information is incorporated herein by reference. +46 +Table of Contents +PART IV +Item 15. Exhibits, Financial Statement Schedules +Consolidated Financial Statements and Schedules required to be filed hereunder are indexed on Page F-1 hereof. +Exhibit +Number +Description of Exhibit +3.1 +Amended and Restated Certificate of Incorporation of Deckers Outdoor Corporation as amended through May 27, 2010 (Exhibit 3.1 to the Registrant's Form 10-Q for the quarterly period ended June 30, 2010 and incorporated by reference herein) +*3.2 +Restated Bylaws of Deckers Outdoor Corporation +10.1 +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 Registrant's Form 10-K for the period ended December 31, 2003 and incorporated by reference herein) +10.2 +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 Registrant's Form 10-K for the period ended December 31, 2004 and incorporated by reference herein) +10.3 +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 Registrant's Form 10-K for the period ended December 31, 2004 and incorporated by reference herein) +10.4 +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 September 1, 2011 (Exhibit 10.23 to the Registrant's Form 10-K filed on February 29, 2012 and incorporated by reference herein) +10.5 +Amendment to Lease Agreement between 450 N. Baldwin Park Associates, LLC and Deckers Outdoor Corporation for distribution center at 3175 Mission Oaks Blvd., Camarillo, CA 93012, dated September 1, 2011 (Exhibit 10.24 to the Registrant's Form 10-K filed on February 29, 2012 and incorporated by reference herein) +*10.6 +Lease Agreement between Deckers Outdoor Corporation and Moreno Knox, LLC dated as of December 5, 2013 +#10.7 +Deckers Outdoor Corporation 2006 Equity Incentive Plan (incorporated herein by reference to Appendix A to the Registrant's Definitive Proxy Statement dated April 21, 2006 in connection with its 2006 Annual Meeting of Stockholders) +#10.8 +First Amendment to Deckers Outdoor Corporation 2006 Equity Incentive Plan (incorporated herein by reference to Appendix A to the Registrant's Definitive Proxy Statement dated April 9, 2007 in connection with its 2007 Annual Meeting of Stockholders) +#10.9 +Deckers Outdoor Corporation Amended and Restated Deferred Stock Unit Compensation Plan, a Sub Plan under the Deckers Outdoor Corporation 2006 Equity Incentive Plan, adopted by the Board of Directors on December 14, 2010 (Exhibit 10.24 to the Registrant's Form 10-K filed on March 1, 2011 and incorporated by reference herein) +*#10.10 +Deckers Outdoor Corporation Amended and Restated Deferred Compensation Plan effective as of August 1, 2013 +#10.11 +Form of Deckers Outdoor Corporation Management Incentive Program under the 2006 Equity Incentive Plan (Exhibit 10.28 to the Registrant’s Form 10-K filed on March 1, 2013 and incorporated by reference herein) +#10.12 +Form of Restricted Stock Unit Award Agreement (Level 2) Under 2006 Equity Incentive Plan (Exhibit 10.3 to the Registrant's Form 8-K filed on May 11, 2007 and incorporated by reference herein) +#10.13 +Form of Restricted Stock Unit Award Agreement (Level III) Under 2006 Equity Incentive Plan adopted on June 22, 2011 (Exhibit 10.1 to the Registrant's Form 8-K filed on June 28, 2011 and incorporated by reference herein) +#10.14 +Form of Stock Appreciation Rights Award Agreement (Level 2) Under 2006 Equity Incentive Plan (Exhibit 10.5 to the Registrant's Form 8-K filed on May 11, 2007 and incorporated by reference herein) +#10.15 +Form of Restricted Stock Unit Award Agreement (2012 LTIP) Under 2006 Equity Incentive Plan (Exhibit 10.1 to the Registrant's Form 8-K filed on May 31, 2012 and incorporated by reference herein +47 +Table of Contents +Exhibit +Number +Description of Exhibit +#10.16 +Form of Restricted Stock Unit Award Agreement (2013 LTIP) Under 2006 Equity Incentive Plan (Exhibit 10.1 to the Registrant's Form 8-K filed on December 19, 2013 and incorporated by reference herein) +#10.17 +Form of Stock Unit Award Agreement under the Deckers Outdoor Corporation 2006 Equity Incentive Plan (Exhibit 10.27 to the Registrant’s Form 10-K filed on March 1, 2013 and incorporated by reference herein) +#10.18 +Form of Indemnification Agreement (Exhibit 10.1 to the Registrant's Form 8-K filed on June 2, 2008 and incorporated by reference herein) +#10.19 +Change of Control and Severance Agreement with Deckers Outdoor Corporation for Angel Martinez on December 22, 2009 (Exhibit 10.33 to the Registrant's Form 10-K filed on March 1, 2010 and incorporated by reference herein) +#10.20 +Change of Control and Severance Agreement with Deckers Outdoor Corporation for Zohar Ziv on December 22, 2009 (Exhibit 10.34 to the Registrant's Form 10-K filed on March 1, 2010 and incorporated by reference herein) +#10.21 +Change of Control and Severance Agreement with Deckers Outdoor Corporation for Thomas George on December 22, 2009 (Exhibit 10.35 to the Registrant's Form 10-K filed on March 1, 2010 and incorporated by reference herein) +#10.22 +Change of Control and Severance Agreement with Deckers Outdoor Corporation for Constance Rishwain on December 22, 2009 (Exhibit 10.36 to the Registrant's Form 10-K filed on March 1, 2010 and incorporated by reference herein) +*#10.23 +Employment Agreement with Deckers Europe Limited for Stephen Murray dated February 28, 2011 +10.24 +Asset Purchase Agreement, dated as of May 19, 2011 by and among Deckers Outdoor Corporation, Deckers Acquisition, Inc., Deckers International Limited, Sanuk USA, LLC, Thomas J. Kelley, Ian L. Kessler, C&C Partners, Ltd., Donald A. Clark and Paul Carr (Exhibit 10.1 to the Registrant's Form 8-K filed on May 19, 2011 and incorporated herein by reference) +10.25 +Amendment No. 1 to Asset Purchase Agreement, dated as of July 1, 2011, by and among Deckers Outdoor Corporation, Deckers Acquisition, Inc., Deckers International Limited, Sanuk USA, LLC, Thomas J. Kelley, Ian L. Kessler, C&C Partners, Ltd., Donald A. Clark and Paul Carr (Exhibit 10.1 to the Registrant's Form 8-K filed on July 6, 2011 and incorporated by reference herein) +10.26 +Amended and Restated Credit Agreement, dated as of August 10, 2012, by and among Deckers Outdoor Corporation, as Borrower, JPMorgan Chase Bank, National Association, as Administrative Agent, Comerica Bank and HSBC Bank USA, National Association, as Co-Syndication Agents, and the lenders from time to time party thereto (Exhibit 10.1 to the Registrant's Form 8-K filed on August 16, 2012 and incorporated by reference herein) +*10.27 +Amendment No. 1 to Amended and Restated Credit Agreement, dated as of June 24, 2013, by and among Deckers Outdoor Corporation, as Borrower, and the Lenders party thereto +*10.28 +Form of Stock Unit Award Agreement under the Deckers Outdoor Corporation 2006 Equity Incentive Plan +*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 USC. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 +*101.1 +The following materials from the Company's Annual Report on Form 10-K for the annual period ended December 31, 2013, formatted in XBRL (eXtensible Business Reporting Language); (i) Consolidated Balance Sheets as of December 31, 2013 and 2012; (ii) Consolidated Statements of Comprehensive Income for the years ended December 31, 2013, 2012, and 2011; (iii) Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2012, and 2011, and (iv) Notes to Consolidated Financial Statements. +* Filed herewith. +** Furnished herewith +# Management contract or compensatory plan or arrangement. +48 +Table of Contents +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) +/s/ ANGEL R. MARTINEZ +Angel R. Martinez +Chief Executive Officer +Date: March 3, 2014 +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/ ANGEL R. MARTINEZ +Chairman of the Board, +President and Chief Executive +Officer (Principal Executive Officer) +March 3, 2014 +Angel R. Martinez +/s/ THOMAS A. GEORGE +Chief Financial Officer +(Principal Financial and Accounting Officer) +March 3, 2014 +Thomas A. George +/s/ KARYN O. BARSA +Director +March 3, 2014 +Karyn O. Barsa +/s/ MAUREEN CONNERS +Director +March 3, 2014 +Maureen Conners +/s/ MICHAEL DEVINE +Director +March 3, 2014 +Michael Devine +/s/ JOHN M. GIBBONS +Director +March 3, 2014 +John M. Gibbons +/s/ REX A. LICKLIDER +Director +March 3, 2014 +Rex A. Licklider +/s/ JOHN G. PERENCHIO +Director +March 3, 2014 +John G. Perenchio +/s/ JAMES QUINN +Director +March 3, 2014 +James Quinn +/s/ LAURI SHANAHAN +Director +March 3, 2014 +Lauri Shanahan +49 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +INDEX TO CONSOLIDATED FINANCIAL STATEMENTS +AND FINANCIAL STATEMENT SCHEDULE +Page +Consolidated Financial Statements +Reports of Independent Registered Public Accounting Firm +F-2 +Consolidated Balance Sheets as of December 31, 2013 and 201 2 +F-4 +Consolidated Statements of Comprehensive Income for each of the years in the three-year period ended December 31, 201 3 +F-5 +Consolidated Statements of Stockholders' Equity for each of the years in the three-year period ended December 31, 20 13 +F-6 +Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 201 3 +F-7 +Notes to Consolidated Financial Statements +F-8 +Consolidated Financial Statement Schedule +Valuation and Qualifying Accounts for each of the years in the three-year period ended December 31, 201 3 +F-33 +All other schedules are omitted because they are not applicable or the required information is shown in the Company's consolidated financial statements or the related notes thereto. +F-1 +Table of Contents +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 consolidated financial statement schedule as listed in the accompanying index. These consolidated financial statements and consolidated financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and the consolidated 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, 2013 and 2012, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2013, 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. +We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the internal control over financial reporting of Deckers Outdoor Corporation as of December 31, 2013, based on criteria established in Internal Control — Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 3, 2014 expressed an unqualified opinion on the effectiveness of the internal control over financial reporting of Deckers Outdoor Corporation. +/s/ KPMG LLP +Los Angeles, California +March 3, 2014 +F-2 +Table of Contents +Report of Independent Registered Public Accounting Firm +The Board of Directors and Stockholders +Deckers Outdoor Corporation: +We have audited the internal control over financial reporting of Deckers Outdoor Corporation as of December 31, 2013 based on criteria established in Internal Control — Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting in Item 9A(b). Our responsibility is to express an opinion on the Company's 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, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. +A company's 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 company's 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 company's 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, Deckers Outdoor Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control — Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. +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, 2013 and 2012, and the related consolidated statements of comprehensive income, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2013 and our report dated March 3, 2014 expressed an unqualified opinion on those consolidated financial statements. +/s/ KPMG LLP +Los Angeles, California +March 3, 2014 +F-3 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +CONSOLIDATED BALANCE SHEETS +(amounts in thousands, except par value) +December 31, +2013 +2012 +ASSETS +Current assets: +Cash and cash equivalents +$ +237,125 +$ +110,247 +Trade accounts receivable, net of allowances of $25,068 and $25,086 as of December 31, 2013 and December 31, 2012, respectively +184,013 +190,756 +Inventories +260,791 +300,173 +Prepaid expenses +14,980 +14,092 +Other current assets +112,514 +59,028 +Deferred tax assets +19,881 +17,290 +Total current assets +829,304 +691,586 +Property and equipment, net of accumulated depreciation of $99,473 and $69,580 as of December 31, 2013 and December 31, 2012, respectively +174,066 +125,370 +Goodwill +128,725 +128,725 +Other intangible assets, net of accumulated amortization of $24,140 and $16,164 as of December 31, 2013 and December 31, 2012, respectively +93,278 +95,965 +Deferred tax assets +15,751 +13,372 +Other assets +18,605 +13,046 +Total assets +$ +1,259,729 +$ +1,068,064 +LIABILITIES AND STOCKHOLDERS' EQUITY +Current liabilities: +Short-term borrowings +$ +9,728 +$ +33,000 +Trade accounts payable +151,037 +133,457 +Accrued payroll +35,725 +15,896 +Other accrued expenses +45,301 +43,858 +Income taxes payable +49,453 +25,067 +Value added tax (VAT) payable +29,274 +15,739 +Total current liabilities +320,518 +267,017 +Long-term liabilities +51,092 +62,246 +Commitments and contingencies (note7) +Stockholders' equity: +Deckers Outdoor Corporation stockholders' equity: +Common stock, $0.01 par value; authorized 125,000 shares; issued and outstanding 34,618 and 34,400 shares for 2013 and 2012, respectively +346 +344 +Additional paid-in capital +143,916 +139,046 +Retained earnings +746,500 +600,811 +Accumulated other comprehensive loss +(2,643 +) +(1,400 +) +Total stockholders' equity +888,119 +738,801 +Total liabilities and equity +$ +1,259,729 +$ +1,068,064 +See accompanying notes to consolidated financial statements. +F-4 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME +(amounts in thousands, except per share data) +Years Ended December 31, +2013 +2012 +2011 +Net sales +$ +1,556,618 +$ +1,414,398 +$ +1,377,283 +Cost of sales +820,135 +782,244 +698,288 +Gross profit +736,483 +632,154 +678,995 +Selling, general and administrative expenses +528,586 +445,206 +394,157 +Income from operations +207,897 +186,948 +284,838 +Other expense (income), net: +Interest income +(60 +) +(217 +) +(180 +) +Interest expense +3,079 +3,840 +249 +Other, net +(679 +) +(793 +) +(493 +) +2,340 +2,830 +(424 +) +Income before income taxes +205,557 +184,118 +285,262 +Income taxes +59,868 +55,104 +83,404 +Net income +145,689 +129,014 +201,858 +Other comprehensive (loss) income, net of tax: +Unrealized loss on foreign currency hedging +(486 +) +(633 +) +(931 +) +Foreign currency translation adjustment +(757 +) +963 +(1,952 +) +Total other comprehensive (loss) income +(1,243 +) +330 +(2,883 +) +Comprehensive income +$ +144,446 +$ +129,344 +$ +198,975 +Net income attributable to: +Deckers Outdoor Corporation +$ +145,689 +$ +128,866 +$ +199,052 +Noncontrolling interest +— +148 +2,806 +$ +145,689 +$ +129,014 +$ +201,858 +Comprehensive income attributable to: +Deckers Outdoor Corporation +$ +144,446 +$ +129,196 +$ +196,169 +Noncontrolling interest +— +148 +2,806 +$ +144,446 +$ +129,344 +$ +198,975 +Net income per share attributable to Deckers Outdoor Corporation common stockholders: +Basic +$ +4.23 +$ +3.49 +$ +5.16 +Diluted +$ +4.18 +$ +3.45 +$ +5.07 +Weighted-average common shares outstanding: +Basic +34,473 +36,879 +38,605 +Diluted +34,829 +37,334 +39,265 +See accompanying notes to consolidated financial statements. +F-5 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY +(amounts in thousands) +Years Ended December 31, 2011, 2012 and 2013 +Common Stock +Additional +Paid-in +Capital +Retained +Earnings +Accumulated +Other +Comprehensive +Income (Loss) +Total Deckers +Outdoor Corp. +Stockholders' +Equity +Non-controlling Interest +Total Stockholders' +Equity +Shares +Amount +Balance December 31, 2010 +38,581 +$ +386 +$ +137,989 +$ +513,459 +$ +1,153 +$ +652,987 +$ +2,688 +$ +655,675 +Stock compensation expense +10 +— +14,803 +— +— +14,803 +— +14,803 +Exercise of stock options +12 +— +62 +— +— +62 +— +62 +Shares issued upon vesting +334 +3 +(3 +) +— +— +— +— +— +Excess tax benefit from stock compensation +— +— +15,330 +— +— +15,330 +— +15,330 +Shares withheld for taxes +— +— +(23,497 +) +— +— +(23,497 +) +— +(23,497 +) +Stock repurchase +(245 +) +(2 +) +— +(19,916 +) +— +(19,918 +) +— +(19,918 +) +Net income +— +— +— +199,052 +— +199,052 +2,806 +201,858 +Total other comprehensive loss +— +— +— +— +(2,883 +) +(2,883 +) +— +(2,883 +) +Balance December 31, 2011 +38,692 +$ +387 +$ +144,684 +$ +692,595 +$ +(1,730 +) +$ +835,936 +$ +5,494 +$ +841,430 +Stock compensation expense +19 +— +14,661 +— +— +14,661 +— +14,661 +Exercise of stock options +4 +— +9 +— +— +9 +— +9 +Shares issued upon vesting +199 +2 +(2 +) +— +— +— +— +— +Deficient tax benefit from stock compensation +— +— +(381 +) +— +— +(381 +) +— +(381 +) +Shares withheld for taxes +— +— +(5,888 +) +— +— +(5,888 +) +— +(5,888 +) +Stock repurchase +(4,514 +) +(45 +) +— +(220,650 +) +— +(220,695 +) +— +(220,695 +) +Net income +— +— +— +128,866 +— +128,866 +148 +129,014 +Acquisition of noncontrolling interest +— +— +(14,037 +) +— +— +(14,037 +) +(5,642 +) +(19,679 +) +Total other comprehensive income +— +— +— +— +330 +330 +— +330 +Balance December 31, 2012 +34,400 +$ +344 +$ +139,046 +$ +600,811 +$ +(1,400 +) +$ +738,801 +$ +— +$ +738,801 +Stock compensation expense +15 +— +13,136 +— +— +13,136 +— +13,136 +Exercise of stock options +8 +— +52 +— +— +52 +— +52 +Shares issued upon vesting +195 +2 +(2 +) +— +— +— +— +— +Excess tax benefit from stock compensation +— +— +319 +— +— +319 +— +319 +Shares withheld for taxes +— +— +(8,635 +) +— +— +(8,635 +) +— +(8,635 +) +Net income +— +— +— +145,689 +— +145,689 +— +145,689 +Total other comprehensive loss +— +— +— +— +(1,243 +) +(1,243 +) +(1,243 +) +Balance, December 31, 2013 +34,618 +$ +346 +$ +143,916 +$ +746,500 +$ +(2,643 +) +$ +888,119 +$ +— +$ +888,119 +See accompanying notes to consolidated financial statements. +F-6 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +CONSOLIDATED STATEMENTS OF CASH FLOWS +(amounts in thousands) +Years Ended December 31, +2013 +2012 +2011 +Cash flows from operating activities: +Net income +$ +145,689 +$ +129,014 +$ +201,858 +Adjustments to reconcile net income to net cash provided by operating activities: +Depreciation, amortization, and accretion +41,439 +33,367 +28,977 +Change in fair value of contingent consideration +1,815 +8,659 +— +Provision for (recovery of) doubtful accounts, net +125 +2,128 +(704 +) +Deferred tax provision +(4,092 +) +(5,657 +) +(67 +) +Stock compensation +13,136 +14,661 +14,803 +Other +1,306 +1,229 +2,735 +Changes in operating assets and liabilities, net of assets and +liabilities acquired in the acquisition of businesses: +Trade accounts receivable +6,618 +491 +(63,199 +) +Inventories +40,580 +(46,903 +) +(120,730 +) +Prepaid expenses and other current assets +(58,554 +) +23,511 +(75,525 +) +Other assets +(4,290 +) +(3,028 +) +(5,385 +) +Trade accounts payable +21,251 +18,932 +38,237 +Contingent consideration +(6,458 +) +(959 +) +— +Accrued expenses +33,556 +(9,983 +) +850 +Income taxes payable +24,386 +(5,820 +) +5,722 +Long-term liabilities +5,618 +4,264 +2,519 +Net cash provided by operating activities +262,125 +163,906 +30,091 +Cash flows from investing activities: +Purchases of property and equipment +(79,829 +) +(61,575 +) +(55,538 +) +Acquisitions of businesses and equity method investment +— +(8,829 +) +(125,203 +) +Purchases of intangible assets +(5,368 +) +(4,958 +) +(4,025 +) +Net cash used in investing activities +(85,197 +) +(75,362 +) +(184,766 +) +Cash flows from financing activities: +Proceeds from issuance of short-term borrowings +320,728 +307,000 +45,000 +Repayments of short-term borrowings +(344,000 +) +(274,000 +) +(45,000 +) +Cash paid for shares withheld for taxes +(6,736 +) +(6,535 +) +(22,634 +) +Excess tax benefit from stock compensation +2,071 +2,457 +15,330 +Cash received from issuances of common stock +52 +— +62 +Loan origination costs on short-term borrowings +— +(1,807 +) +— +Contingent consideration paid +(22,628 +) +(29,041 +) +— +Cash paid for noncontrolling interest +— +(20,000 +) +— +Cash paid for repurchases of common stock +— +(220,695 +) +(19,918 +) +Net cash used in financing activities +(50,513 +) +(242,621 +) +(27,160 +) +Effect of exchange rates on cash +463 +718 +215 +Net change in cash and cash equivalents +126,878 +(153,359 +) +(181,620 +) +Cash and cash equivalents at beginning of year +110,247 +263,606 +445,226 +Cash and cash equivalents at end of year +$ +237,125 +$ +110,247 +$ +263,606 +Supplemental disclosure of cash flow information: +Cash paid during the year for: +Income taxes +$ +39,122 +$ +66,899 +$ +62,405 +Interest +$ +2,586 +$ +3,338 +$ +88 +Non-cash investing and financing activity: +Deferred purchase payments for acquisition of business +$ +— +$ +3,671 +$ +— +Accruals for purchases of property and equipment +$ +2,283 +$ +489 +$ +3,268 +Contingent consideration arrangement for acquisition of business +$ +— +$ +1,128 +$ +88,100 +Accruals for asset retirement obligations +$ +1,936 +$ +526 +$ +236 +Accruals for shares withheld for taxes +$ +3,702 +$ +1,804 +$ +2,460 +Write-off for shares exercised with a tax deficit +$ +1,752 +$ +2,838 +$ +— +See accompanying notes to consolidated financial statements. +F-7 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements +(amounts in thousands, except share quantity and per share data) +(1) The Company and Summary of Significant Accounting Policies +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). Accordingly, all references herein to Deckers Outdoor Corporation or Deckers include the consolidated results of the Company and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. +Deckers Outdoor Corporation is a global leader in designing, marketing and distributing innovative footwear, apparel and accessories developed for both everyday casual lifestyle use and high performance activities. The Company's business is seasonal, with the highest percentage of UGG® brand net sales occurring in the quarters ending September 30 and December 31 and the highest percentage of Teva® and Sanuk® brand net sales occurring in the quarters ending March 31 and June 30 of each year. The other brands do not have a significant seasonal impact on the Company. +Prior to April 2, 2012, the Company owned 51% of a joint venture with an affiliate of Stella International Holdings Limited (Stella International) for the primary purpose of opening and operating retail stores for the UGG brand in China. Stella International is also one of the Company's major manufacturers in China. On April 2, 2012, the Company purchased, for a total purchase price of approximately $20,000 , the 49% noncontrolling interest owned by Stella International. The Company accounted for this transaction as an acquisition of the remaining interest of an entity that had already been majority-owned by the Company. The purchase resulted in a reduction to additional paid in capital of $14,037 representing excess purchase price over the carrying amount of the noncontrolling interest. Prior to this purchase, the Company already had a controlling interest in this entity, and therefore, the subsidiary had been and will continue to be consolidated with the Company's operations. +On May 19, 2011, the Company entered into an asset purchase agreement with Sanuk USA LLC, C&C Partners, Ltd., and the equity holders of both entities (collectively referred to as Sanuk or the Sanuk brand). On July 1, 2011, the Company completed the acquisition of the purchased assets and the assumption of the assumed liabilities of the Sanuk brand. Deckers Outdoor Corporation's consolidated financial statements include the operations of Sanuk beginning July 1, 2011. +In May 2012, the Company purchased a noncontrolling interest in the Hoka One One® (Hoka) brand, a privately held footwear company, which was accounted for as an equity method investment. In September 2012, the Company acquired the remaining ownership interest in Hoka. The acquisition of Hoka was not material to the Company’s consolidated financial statements and did not have a significant seasonal impact on the Company in 2013. +Subsequent to December 31, 2013, our Board of Directors approved a change in the Company's fiscal year end from December 31 to March 31. The change is intended to better align our planning, financial and reporting functions with the seasonality of our business. Under the applicable rules of the Securities and Exchange Commission, the Company intends to file a transition report on Form 10-QT for the quarter ending March 31, 2014. +We sell our brands through our quality domestic retailers and international distributors and retailers, as well as directly to our end-user consumers through our E-Commerce business and our retail stores. Independent third parties manufacture all of our products. +Inventories +Inventories, principally finished goods, are stated at the lower of cost (first-in, first-out) or market (net realizable value). Cost includes initial molds and tooling that are amortized over the life of the mold in cost of sales. Cost also includes shipping and handling fees and costs, which are subsequently expensed to cost of sales. Market values are determined by historical experience with discounted sales, industry trends, and the retail environment. +Revenue Recognition +The Company recognizes wholesale, E-Commerce, and international distributor revenue when products are shipped and retail revenue at the point of sale. All sales are recognized when the customer takes title and assumes risk of loss, collection of the related receivable is reasonably assured, persuasive evidence of an arrangement exists, and the sales price is fixed or determinable. For wholesale and international distributor sales, allowances for estimated returns, discounts, chargebacks, and bad debts are provided for when related revenue is recorded. For E-Commerce sales, allowances for estimated returns and bad debts +F-8 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +are provided for when related revenue is recorded. For retail sales, allowances for estimated returns 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. The Company presents revenue net of taxes collected from customers and remitted to governmental authorities. +Accounting for Long-Lived Assets +Other long-lived assets, such as machinery and equipment, leasehold improvements, 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. Intangible assets subject to amortization are amortized over their respective estimated useful lives to their estimated residual values. The Company uses the straight-line method for depreciation and amortization of long-lived assets, except for certain intangible assets where the Company can reliably determine the pattern in which the economic benefits of the assets will be consumed. +At least quarterly, the Company evaluates whether any impairment triggering events, including the following, have occurred which would require such asset groups to be tested for impairment: +• +A significant decrease in the market price of a long-lived asset group; +• +a significant adverse change in the extent or manner in which a long-lived asset group is being used or in its physical condition; +• +a significant adverse change in legal factors or in business climate that could affect the value of a long-lived asset group, including an adverse action or assessment by a regulator; +• +an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset group; +• +a current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset group; or +• +a current expectation that, more likely than not, a long-lived asset group will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. +When an impairment triggering event has occurred, the Company tests for recoverability of the asset group's carrying value using estimates of undiscounted future cash flows based on the existing service potential of the applicable asset group. In determining the service potential of a long-lived asset group, the Company considers its remaining useful life, cash-flow generating capacity, and physical output capacity. These estimates include the undiscounted cash flows associated with future expenditures necessary to maintain the existing service potential. Long-lived assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. The Company assesses potential impairment of its retail group long-lived assets by comparing trailing twelve month (TTM) store cash flows to the current carrying value of the store's long-lived assets. Stores that have been opened for more than one year, or have otherwise been identified by management as having one or more indicators of impairment, with TTM cash flows less than the current carrying amount of the store's long-lived assets are then reviewed to determine if an impairment exists. An impairment loss, if any, would only reduce the carrying amount of long-lived assets in the group based on the fair value of the group assets. +Goodwill and Other Intangible Assets +Intangible assets consist primarily of goodwill, trademarks, customer and distributor relationships, patents, lease rights, and non-compete agreements arising from the application of purchase accounting. Intangible assets with estimable useful lives are amortized and reviewed for impairment. Goodwill and intangible assets with indefinite useful lives are not amortized, but are tested for impairment at least annually, as of December 31, except for the Teva trademarks and Sanuk goodwill, which are tested as of October 31. +F-9 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +The assessment of goodwill impairment involves valuing the Company's reporting units that carry goodwill. Currently, the Company's reporting units are the same as the Company's operating segments. The Company first assesses qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. The Company does not calculate the fair value of the reporting unit unless the Company determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. If the Company determines this, then the first quantitative step is a comparison of the fair value of the reporting unit with its carrying amount. If the fair value exceeds the carrying amount, the goodwill is not impaired. If the fair value of the reporting unit is below the carrying amount, then a second step is performed to measure the amount of the impairment, if any. 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 also evaluates the fair values of other intangible assets with indefinite useful lives in relation to their carrying values. The Company first assesses qualitative factors to determine whether it is necessary to perform a quantitative assessment of the indefinite life intangible asset. The Company does not calculate the fair value of the indefinite life intangible unless the Company determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. If the Company concludes that it is more likely than not that its fair value is less than its carrying amount, then the Company compares the fair value of the indefinite life intangible to its carrying amount, and if the fair value of the indefinite life intangible exceeds its carrying amount, no impairment charge will be recognized. If the fair value of the indefinite life intangible is less than the carrying amount, the Company will record an impairment charge to write-down the intangible asset to its fair value. +Determining fair value of goodwill and other intangible assets is highly subjective and requires the use of estimates and assumptions. The Company uses estimates including future revenues, royalty rates, discount rates, attrition rates, and market multiples, among others. The Company also considers the following factors: +• +the assets' ability to continue to generate income from operations and positive cash flow in future periods; +• +changes in consumer demand or acceptance of the related brand names, products, or features associated with the assets; and +• +other considerations that could affect fair value or otherwise indicate potential impairment. +In addition, facts and circumstances could change, including further deterioration of general economic conditions or the retail environment, customers reducing orders in response to such conditions, and increased competition. These or other factors could result in changes to the calculation of fair value which could result in impairment of the Company's remaining goodwill and other intangible assets. Changes in any one or more of these estimates and assumptions could produce different financial results. +Property and Equipment, Depreciation and Amortization +Property and equipment has a useful life expectancy of at least one year. Property and equipment includes tangible, non-consumable items owned by the Company valued at or above $3 , certain computer software costs and internal or external computer system consulting work valued at or above $3 as defined below, and portable electronic devices valued at or above $1.5 . Tangible, non-consumable items below these amounts are expensed. The value includes the purchase price, as well as costs to acquire (shipping and handling), install (excluding site preparation costs), secure, and prepare the item for its intended use. +Depreciation of property and equipment is calculated using the straight-line method based on estimated useful lives. Machinery and equipment has estimated useful lives ranging from two to ten years, and furniture and fixtures has estimated useful lives ranging from three to five years. Capitalized website costs, which are included in the machinery & equipment category, are immaterial to the Company's consolidated financial statements. Leasehold improvements are amortized to their residual value on the straight-line basis over their estimated economic useful lives or the lease term, whichever is shorter. Leasehold improvement lives range from one to fifteen years. The Company allocates depreciation and amortization of property, plant, and equipment to cost of sales and selling, general and administrative expenses (SG&A). The majority of the Company's depreciation and amortization is included in SG&A due to the nature of its operations. Most of the Company's depreciation and amortization is from its warehouses and its retail stores. The Company outsources all manufacturing; therefore, the amount allocated to cost of sales is not material. +Fair Value Measurements +F-10 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +The fair values of the Company's cash and cash equivalents, trade accounts receivable, prepaid expenses, and other current assets, short-term borrowings, trade accounts payable, accrued payroll, accrued expenses, income taxes payable and VAT payable approximate the carrying values due to the relatively short maturities of these instruments. The fair values of the Company's long-term liabilities, other than contingent consideration, recalculated using current interest rates, would not significantly differ from the recorded amounts. The fair value of the contingent consideration related to acquisitions and of the Company's derivatives are measured and recorded at fair value on a recurring basis. Changes in fair value resulting from either accretion or changes in discount rates or in the expectations of achieving the performance targets are recorded in SG&A. The Company records the fair value of assets or liabilities associated with derivative instruments and hedging activities in other current assets or other current liabilities, respectively, in the consolidated balance sheets. +The inputs used in measuring fair value are prioritized into the following hierarchy: +• +Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities. +• +Level 2: Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable. +• +Level 3: Unobservable inputs in which little or no market activity exists, therefore requiring an entity to develop its own assumptions about the assumptions that market participants would use in pricing. +The tables below summarize the Company's financial liabilities and assets that are measured on a recurring basis at fair value: +Fair Value at December 31, 2013 +Fair Value Measurement Using +Level 1 +Level 2 +Level 3 +Assets (Liabilities) at fair value +Nonqualified deferred compensation asset +$ +4,410 +$ +4,410 +Nonqualified deferred compensation liability +$ +(4,410 +) +$ +(4,410 +) +Designated derivatives liability +$ +(550 +) +$ +(550 +) +Contingent consideration for acquisition of business +$ +(48,000 +) +$ +— +$ +— +$ +(48,000 +) +Fair Value at December 31, 2012 +Fair Value Measurement Using +Level 1 +Level 2 +Level 3 +Assets (Liabilities) at fair value +Nonqualified deferred compensation asset +$ +3,653 +$ +3,653 +$ +— +$ +— +Nonqualified deferred compensation liability +$ +(3,653 +) +$ +(3,653 +) +$ +— +$ +— +Non-designated derivatives asset +$ +839 +$ +— +$ +839 +$ +— +Non-designated derivatives liability +$ +(336 +) +$ +— +$ +(336 +) +$ +— +Contingent consideration for acquisition of business +$ +(71,500 +) +$ +— +$ +— +$ +(71,500 +) +The Level 2 inputs consist of forward spot rates at the end of the reporting period (see Note 9). +The fair value of the contingent consideration is based on subjective assumptions. It is reasonably possible the estimated fair value of the contingent consideration could change in the near-term and the effect of the change could be material. The estimated fair value of the contingent consideration attributable to our Sanuk brand acquisition is based on the Sanuk brand's estimated future gross profits, using a probability weighted average sales forecast to determine a best estimate of gross profits. Estimated contingent consideration payments of approximately $46,200 are included within other accrued expenses and long-term liabilities in the consolidated balance sheet as of December 31, 2013 . The estimated sales forecasts include a compound annual growth rate (CAGR) of 22.0% from fiscal year 2013 through fiscal year 2015. The gross profit forecasts for fiscal years 2013 through 2015 range from approximately $52,000 to $80,000 , which are then used to apply the contingent consideration percentages in accordance with the applicable agreement (see Note 7). The total estimated contingent consideration is then +F-11 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +discounted to the present value with a discount rate of 7.0% . The Company's use of different estimates and assumptions could produce different estimates of the value of the contingent consideration. For example, a 5.0% change in the estimated CAGR would change the total liability balance at December 31, 2013 by approximately $5,000 . +In connection with the Company's acquisition of the Hoka brand, the purchase price includes contingent consideration which is based on the Hoka brand's estimated net sales for each year from 2013 through 2017, with a total maximum payout of $2,000 . The Company uses a probability weighted average sales forecast to determine a best estimate. Estimated contingent consideration payments of approximately $1,800 are included within other accrued expenses and long-term liabilities in the consolidated balance sheet as of December 31, 2013 . The Company's use of different estimates and assumptions would not have a material impact to the value of the contingent consideration. +Refer to Note 7 for further information on the contingent consideration arrangements. +The following table presents a reconciliation of the approximate beginning and ending amounts related to the fair value for contingent consideration for acquisition of business, categorized as Level 3: +Beginning balance, January 1, 2012 +$ +91,600 +Payments +(30,000 +) +Hoka acquisition contingent consideration +1,100 +Change in fair value +8,800 +Balance, December 31, 2012 +$ +71,500 +Payments +(25,400 +) +Change in fair value +1,900 +Balance, December 31, 2013 +$ +48,000 +Stock Compensation +All of the Company's stock compensation issuances are classified within stockholders' equity. Stock compensation cost is measured at the grant date based on the value of the award and is expensed ratably over the vesting period. The Company recognizes expense only for those awards that management deems probable of achieving the performance and service objectives. Determining the expense of share-based awards requires judgment, including estimating the percentage of awards that will be forfeited and probabilities of meeting the awards' performance criteria. If actual forfeitures differ significantly from the estimates or if probabilities change during a period, stock compensation expense and the Company's results of operations could be materially impacted. +Nonqualified Deferred Compensation +In 2010, the Company established a nonqualified deferred compensation program (referred to as the Plan). The Plan permits a select group of management employees, designated by the Plan Committee, to defer earnings to a future date on a nonqualified basis. For each plan year, on behalf of the Company, the Board may, but is not required to, contribute any amount it desires to any participant under the Plan. The Company's contribution will be determined by the Board annually in the fourth quarter. No such contribution has been approved as of December 31, 2013 . All amounts deferred under this plan are presented in long-term liabilities in the consolidated balance sheets. The value of the deferred compensation is recognized based on the fair value of the participants' accounts. The Company has established a rabbi trust as a reserve for the benefits payable under the Plan. +Use of Estimates +The preparation of the Company's consolidated financial statements in accordance with US generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in these consolidated financial statements and accompanying notes. Management bases these estimates and assumptions upon historical experience, existing and known circumstances, authoritative accounting pronouncements and other factors that management believes to be reasonable. Significant areas requiring the use of management estimates relate to inventory write-downs, accounts receivable reserves, returns liabilities, stock compensation, impairment assessments, depreciation and amortization, income tax liabilities and uncertain tax positions, fair value of financial instruments, and fair values of acquired intangibles, assets and liabilities, including estimated contingent consideration payments. Actual results could differ materially from these estimates. +F-12 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +Research and Development Costs +All research and development costs are expensed as incurred. Such costs amounted to $19,257 , $15,617 and $14,160 in 2013 , 2012 and 2011 , respectively, and are included in SG&A in the consolidated statements of comprehensive income. +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 2013 , 2012 and 2011 were $86,510 , $78,528 and $57,259 , respectively. Included in prepaid and other current assets at December 31, 2013 and 2012 were $212 and $119 , respectively, related to prepaid advertising, marketing, and promotion expenses for programs to take place after December 31, 2013 and 2012 , respectively. +Income Taxes +Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary 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. +The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company accounts for interest and penalties generated by income tax contingencies as interest expense and SG&A, respectively in the consolidated statements of comprehensive income. +Net Income per Share Attributable to Deckers Outdoor Corporation Common Stockholders +Basic net income per share represents net income attributable to Deckers Outdoor Corporation divided by the weighted-average number of common shares outstanding for the period. Diluted net income per share represents net income attributable to Deckers Outdoor Corporation 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, 2013 , 2012 and 2011 , the difference between the weighted-average number of basic and diluted common shares resulted from the dilutive impact of nonvested stock units (NSUs), restricted stock units (RSUs), stock appreciation rights (SARs), and options to purchase common stock. The reconciliations of basic to diluted weighted-average common shares outstanding were as follows: +Year Ended December 31, +2013 +2012 +2011 +Weighted-average shares used in basic computation +34,473,000 +36,879,000 +38,605,000 +Dilutive effect of stock-based awards* +356,000 +455,000 +660,000 +Weighted-average shares used for diluted computation +34,829,000 +37,334,000 +39,265,000 +*Excluded NSUs as of December 31, 2013, 2012, and 2011 +— +200,000 +— +*Excluded RSUs as of December 31, 2013, 2012, and 2011 +795,000 +671,000 +319,000 +*Excluded SARs as of December 31, 2013, 2012, and 2011 +525,000 +525,000 +525,000 +The share-based awards that were excluded from the dilutive effect were excluded because the necessary conditions had not been satisfied for the shares to be issuable based on the Company's performance through December 31, 2013 , 2012 and 2011 , +F-13 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +respectively. As of December 31, 2013 , the excluded RSUs include the maximum amount of the Level III, 2012 and 2013 Long-Term Incentive Plan (LTIP) Awards. As of December 31, 2012 , the excluded RSUs included the maximum amount of the Level III and 2012 LTIP Awards (see Note 5). +Foreign Currency Translation +The Company considers the US dollar as its functional currency. The Company has certain wholly-owned foreign subsidiaries with functional currencies other than the US dollar. Certain of the Company's foreign subsidiaries' local currency is their designated functional currency. The Company holds a portion of its cash and other monetary assets and liabilities in currencies other than its subsidiary's functional currency, and is exposed to financial statement transaction gains and losses as a result of remeasuring the operating results and financial positions into their functional currency. The Company remeasures these monetary assets and liabilities using the exchange rate as of the end of the reporting period, which results in gains and losses that are included in SG&A in the results of operations as incurred, except for gains and losses arising on intercompany foreign currency transactions that are of a long-term investment nature. In addition, the Company translates assets and liabilities of subsidiaries with reporting currencies other than US dollars into US dollars using the exchange rates at of the end of the reporting period, which results in financial statement translation gains and losses in other comprehensive income. +Derivative Instruments and Hedging Activities +The Company transacts business in various foreign currencies and has international sales and expenses denominated in foreign currencies, subjecting the Company to foreign currency risk. The Company may enter into foreign currency forward or option contracts, generally with maturities of 15 months or less, to reduce the volatility of cash flows primarily related to forecasted revenue denominated in certain foreign currencies. In addition, the Company utilizes foreign exchange forward and option contracts to mitigate foreign currency exchange rate risk associated with foreign currency-denominated assets and liabilities, primarily intercompany balances. The Company does not use foreign currency contracts for speculative or trading purposes. +Certain of the Company's foreign currency forward contracts are designated cash flow hedges of forecasted intercompany sales and are subject to foreign currency exposures. These contracts allow the Company to sell Euros, British Pounds and Yen in exchange for US dollars at specified contract rates. Forward contracts are used to hedge forecasted intercompany sales over specific quarters. Changes in the fair value of these forward contracts designated as cash flow hedges are recorded as a component of accumulated other comprehensive (loss) income within stockholders' equity, and are recognized in the consolidated statements of comprehensive income during the period which approximates the time the corresponding third-party sales occur. The Company may also enter into foreign exchange contracts that are not designated as hedging instruments for financial accounting purposes. These contracts are generally entered into to offset the gains and losses on certain intercompany balances until the expected time of repayment. Accordingly, any gains or losses resulting from changes in the fair value of the non-designated contracts are reported in SG&A in the consolidated statements of comprehensive income. The gains and losses on these contracts generally offset the gains and losses associated with the underlying foreign currency-denominated balances, which are also reported in SG&A. See Note 9 for the impact of derivative instruments and hedging activities on the Company's consolidated financial statements. +The Company records the assets or liabilities associated with derivative instruments and hedging activities at fair value based on Level 2 inputs in other current assets or other current liabilities, respectively, in the consolidated balance sheets. The Level 2 inputs consist of forward spot rates at the end of the reporting period. The accounting for gains and losses resulting from changes in fair value depends on the use of the derivative and whether it is designated and qualifies for hedge accounting. +For all hedging relationships, the Company formally documents the hedging relationship and its risk management objective and strategy for undertaking the hedge, the hedging instrument, the hedged transaction, the nature of the risk being hedged, how the hedging instrument's effectiveness in offsetting the hedged risk will be assessed prospectively and retrospectively, and a description of the method used to measure ineffectiveness. The Company factors the nonperformance risk of the Company and the counterparty into the fair value measurements of its derivatives. The Company also formally assesses, both at the inception of the hedging relationship and on an ongoing basis, whether the derivatives that are used in hedging relationships are highly effective in offsetting changes in cash flows of hedged transactions. The Company assesses hedge effectiveness and measures hedge ineffectiveness at least quarterly. For derivative instruments that are designated and qualify as part of a cash flow hedging relationship, the effective portion of the gain or loss on the derivative is reported in other comprehensive income (OCI) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. +F-14 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +The Company discontinues hedge accounting prospectively when it determines that the derivative is no longer effective in offsetting cash flows attributable to the hedged risk, the derivative expires or is sold, terminated, or exercised, the cash flow hedge is dedesignated because a forecasted transaction is not probable of occurring, or management determines to remove the designation of the cash flow hedge. In all situations in which hedge accounting is discontinued and the derivative remains outstanding, the Company continues to carry the derivative at its fair value on the balance sheet and recognizes any subsequent changes in its fair value in earnings. When it is probable that a forecasted transaction will not occur, the Company discontinues hedge accounting and recognizes immediately in earnings gains and losses that were accumulated in OCI related to the hedging relationship. +Comprehensive Income +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 cash flow hedges, the Company does not have any transactions and other economic events that qualify as comprehensive income. +Business Segment Reporting +Management of the Company has determined its reportable segments are its strategic business units and it is by these segments that information is reported to the Chief Operating Decision Maker (CODM). The six reportable segments are the UGG, Teva, Sanuk and other brands wholesale divisions, the E-Commerce business, and the retail store business. The CODM is the Principal Executive Officer. The Company performs an annual analysis of the appropriateness of its reportable segments. Information related to the Company's business segments is summarized in Note 8. +Cash Equivalents +The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Cash and cash equivalents include $154,105 and $52,650 of money market funds at December 31, 2013 and 2012 , respectively. +Retirement Plan +The Company provides a 401(k) defined contribution plan that eligible US employees may elect to participate in through tax-deferred contributions. The Company matches 50% of each eligible participant's tax-deferred contributions on up to 6% of eligible compensation on a per payroll period basis, with a true-up contribution if such eligible participant is employed by the Company on the last day of the calendar year. Internationally, the Company has various defined contribution plans. Certain international locations require mandatory contributions under social programs, and the Company contributes at least the statutory minimums. Domestic 401(k) matching contributions totaled $1,386 , $1,066 and $1,710 during 2013 , 2012 and 2011 , respectively. In addition, the Company may also make discretionary profit sharing contributions to the plan. However, the Company did not make any profit sharing contributions for the years ended December 31, 2013 , 2012 or 2011 . +Recent Accounting Pronouncements +In July 2012, the FASB issued ASU, Testing Indefinite - Lived Intangible Assets for Impairment , which allows an entity to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset, other than goodwill is impaired. If an entity concludes, based on an evaluation of all relevant qualitative factors, that it is not more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount, it will not be required to perform a quantitative impairment test for that asset. Entities are required to test indefinite-lived assets for impairment at least annually and more frequently if indicators of impairment exist. This ASU is effective for the Company January 1, 2013, with early adoption permitted. As permitted, the Company early adopted this update with its December 31, 2012 reporting period. +(2) Property and Equipment +Property and equipment is summarized as follows: +F-15 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +December 31, +2013 +2012 +Land +$ +19,954 +$ +19,954 +Machinery and equipment +84,941 +67,582 +Furniture and fixtures +25,961 +22,280 +Leasehold improvements +142,683 +85,134 +273,539 +194,950 +Less accumulated depreciation and amortization +99,473 +69,580 +Net property and equipment +$ +174,066 +$ +125,370 +(3) Notes Payable and Long-Term Debt +In August 2011, the Company entered into a Credit Agreement (the Credit Agreement) with JPMorgan Chase Bank, National Association as the administrative agent, Comerica Bank and HSBC Bank USA, National Association as syndication agents, and the lenders party thereto. In August 2012, the Company amended and restated in its entirety the Credit Agreement (Amended and Restated Credit Agreement). The Amended and Restated Credit Agreement is a five -year, $400,000 secured revolving credit facility that contains a $75,000 sublimit for the issuance of letters of credit and a $5,000 sublimit for swingline loans and matures on August 30, 2017. Subject to customary conditions and the approval of any lender whose commitment would be increased, the Company has the option to increase the maximum principal amount available under the Amended and Restated Credit Agreement by up to an additional $100,000 . None of the lenders under the Amended and Restated Credit Agreement has committed at this time or is obligated to provide any such increase in the commitments. At the Company's option, revolving loans issued under the Amended and Restated Credit Agreement will bear interest at either the adjusted London Interbank Offered Rate (LIBOR) for 30 days ( 0.17% at December 31, 2013 ) plus 1.75% per annum, in the case of LIBOR borrowings, or at the alternate base rate plus 0.75% per annum, and thereafter the interest rate will fluctuate between adjusted LIBOR plus 1.50% per annum and adjusted LIBOR plus 2.25% per annum (or between the alternate base rate plus 0.50% per annum and the alternate base rate plus 1.25% per annum), based upon the Company's total adjusted leverage ratio at such time. In addition, the Company will initially be required to pay fees of 0.25% per annum on the daily unused amount of the revolving credit facility, and thereafter the fee rate will fluctuate between 0.20% and 0.35% per annum, based upon the Company's total adjusted leverage ratio. +The Company's obligations under the Amended and Restated Credit Agreement are guaranteed by the Company's existing and future domestic subsidiaries, other than certain immaterial subsidiaries, and foreign subsidiaries (the Guarantors), and is secured by a first-priority security interest in substantially all of the assets of the Company and the Guarantors, including all or a portion of the equity interests of certain of the Company's domestic and foreign subsidiaries. +The Amended and Restated Credit Agreement contains financial covenants which include: the asset coverage ratio must be greater than 1.10 to 1.00 ; the sum of the consolidated annual earnings before interest, taxes, depreciation, and amortization (EBITDA) and annual rental expense, divided by the sum of the annual interest expense and the annual rental expense must be greater than 2.25 to 1.00 ; and other customary limitations. The Amended and Restated Credit Agreement contains certain other covenants which include: the maximum additional secured debt related to a capital asset may not exceed $65,000 per year, excluding $75,000 for the Company's new corporate headquarters, the maximum additional unsecured debt may not exceed $200,000 ; the maximum secured debt not related to a capital asset may not exceed $5,000 , a judgment may not exceed $10,000 ; maximum ERISA event of $10,000 in one year, $20,000 in all years; the Company may not have a change of control (as defined in the Amended and Restated Credit Agreement); acquisitions may not exceed $100,000 , if the total adjusted leverage ratio does not exceed 2.75 to 1.00 and the Company must have a minimum amount of cash plus unused credit of $75,000 . There is no restriction on dividends or share repurchases if the minimum amount of cash and unused credit is $150,000 for the quarters ending March 31, June 30 and December 31 and $75,000 for the quarter ending September 30 and the total adjusted leverage ratio does not exceed 2.75 to 1.00 . +In June 2013, the Company amended the Amended and Restated Credit Agreement to permit additional borrowings in China of $12,500 and revised certain financial covenants including an increase in the maximum amount permitted to be spent on the headquarters building from $75,000 to $80,000 and revised the terms of the total adjusted leverage ratio to not exceed 3.25 to 1.00 for the quarter ending September 30, from 2.75 to 1.00 . +F-16 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +In August 2013, Deckers (Beijing) Trading Co., LTD, a fully owned subsidiary, entered into a credit facility in China (China Credit Facility) that provides for an uncommitted revolving line of credit of up to CNY 60,000 , or approximately $10,000 , in the quarters ending September 30 and December 31 and CNY 20,000 , or approximately $3,300 , in the quarters ending March 31 and June 30. Interest is based on the People’s Bank of China rate, which was 6.0% at December 31, 2013. The China Credit Facility is on demand and subject to annual review and renewal. The obligations under the China Credit Agreement are guaranteed by the Company for 110% of the facility amount in USD. In December 2013, the China Credit Facility was amended to provide for the uncommitted revolving line of credit of up to CNY 60,000 to be extended to the entire year. At December 31, 2013 , the Company had approximately $10,000 of outstanding borrowings under the China Credit Facility. +At December 31, 2013 , the Company had no outstanding borrowings under the Amended and Restated Credit Agreement and outstanding letters of credit of approximately $200 . As a result, the unused balance under the Amended and Restated Credit Agreement was approximately $ 399,800 at December 31, 2013 . After applying the asset coverage ratio and adjusted leverage ratio, the amount available to borrow at December 31, 2013 was approximately $ 251,800 . In 2012 the Company incurred approximately $1,800 of deferred financing costs which are included in prepaid expenses and are amortized over the term of the Amended and Restated Credit Agreement using the straight-line method. +(4) Income Taxes +Components of income tax expense (benefit) are as follows: +Federal +State +Foreign +Total +2013: +Current +$ +51,058 +$ +6,252 +$ +6,650 +$ +63,960 +Deferred +(2,580 +) +(209 +) +(1,303 +) +(4,092 +) +$ +48,478 +$ +6,043 +$ +5,347 +$ +59,868 +2012: +Current +$ +50,911 +$ +6,482 +$ +3,368 +$ +60,761 +Deferred +(6,083 +) +414 +12 +(5,657 +) +$ +44,828 +$ +6,896 +$ +3,380 +$ +55,104 +2011: +Current +$ +63,758 +$ +12,226 +$ +7,487 +$ +83,471 +Deferred +1,003 +(1,067 +) +(3 +) +(67 +) +$ +64,761 +$ +11,159 +$ +7,484 +$ +83,404 +Foreign income before income taxes was $60,851 , $51,409 and $108,738 during the years ended December 31, 2013 , 2012 and 2011 , respectively. +Actual income taxes differed from that obtained by applying the statutory federal income tax rate to income before income taxes as follows: +Years Ended December 31, +2013 +2012 +2011 +Computed expected income taxes +$ +71,945 +$ +64,282 +$ +99,842 +State income taxes, net of federal income tax benefit +4,435 +3,562 +6,912 +Foreign rate differential +(16,399 +) +(12,908 +) +(24,783 +) +Other +(113 +) +168 +1,433 +$ +59,868 +$ +55,104 +$ +83,404 +The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities are presented below: +F-17 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +2013 +2012 +Deferred tax assets (liabilities), current: +Uniform capitalization adjustment to inventory +$ +5,492 +$ +6,870 +Bad debt and other reserves +10,655 +11,582 +State taxes +508 +799 +Prepaid expenses +(2,193 +) +(1,961 +) +Accrued bonus +5,071 +— +Foreign currency hedge +348 +— +Total deferred tax assets, current +19,881 +17,290 +Deferred tax assets (liabilities), noncurrent: +Amortization and impairment of intangible assets +4,603 +5,312 +Depreciation of property and equipment +(6,034 +) +(8,524 +) +Share-based compensation +11,226 +11,906 +Foreign currency translation +667 +244 +Deferred rent +4,028 +3,247 +Acquisition costs +755 +834 +Other +— +111 +Net operating loss carryforwards +506 +242 +Total deferred tax assets, noncurrent +15,751 +13,372 +Net deferred tax assets +$ +35,632 +$ +30,662 +In order to fully realize the deferred tax assets, the Company will need to generate future taxable income of approximately $94,000 . The deferred tax assets are primarily related to the Company's domestic operations. The change in net deferred tax assets between December 31, 2013 and December 31, 2012 includes approximately $500 attributable to OCI and approximately $400 attributable to goodwill. Domestic taxable income for the years ended December 31, 2013 and 2012 was $ 151,204 and $141,660 , respectively. 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 was recorded in 2013 or 2012 . +As of December 31, 2013 , withholding and US taxes have not been provided on approximately $ 271,000 of unremitted earnings of non-US subsidiaries because the earnings are expected to be reinvested outside of the US indefinitely. Repatriation of all foreign earnings would result in approximately $ 80,000 of US income tax. Such earnings would become taxable upon the sale or liquidation of these subsidiaries or upon the remittance of dividends. As of December 31, 2013 , the Company had approximately $ 95,000 of cash and cash equivalents outside the US that would be subject to additional income taxes if it were to be repatriated. If the Company were to repatriate foreign cash, the Company would record the US tax liability net of any foreign income taxes previously paid on this cash. The Company has no plans to repatriate any of its foreign cash. For the full year 2013 , the Company generated approximately 11.0% of its pre-tax earnings from a country which does not impose a corporate income tax. +When tax returns are filed, some positions taken are subject to uncertainty about the merits of the position taken or the amount that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which management believes it is more likely than not that the position will be sustained upon examination. Tax positions that meet the more likely than not recognition threshold are measured as the largest amount of tax benefit that is more than 50% likely of being realized upon settlement. A reconciliation of the beginning and ending amounts of total unrecognized tax benefits is as follows: +F-18 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +Balance at January 1, 2012 +$ +3,271 +Gross decrease related to prior years' tax positions +— +Settlements +(3,271 +) +Balance at December 31, 2012 +$ +— +Gross change related to current and prior years' tax positions +— +Balance at December 31, 2013 +$ +— +As of December 31, 2013 and 2012 , interest of $360 and $452 , respectively, was accrued in the consolidated balance sheets resulting from outstanding state liabilities as a result of resolved Federal examinations. +The Company files income tax returns in the US federal jurisdiction and various state, local, and foreign jurisdictions. With few exceptions, the Company is no longer subject to US federal, state, local, or non-US income tax examinations by tax authorities for years before 2008. +Although the Company believes its tax estimates are reasonable and prepares its tax filings in accordance with all applicable tax laws, the final determination with respect to any tax audits, and any related litigation, could be materially different from the Company's estimates or from its historical income tax provisions and accruals. The results of an audit or litigation could have a material effect on operating results or cash flows in the periods for which that determination is made. In addition, future period earnings may be adversely impacted by litigation costs, settlements, penalties, or interest assessments. +The Company has on-going income tax examinations under various state tax jurisdictions. It is the opinion of management that these audits and inquiries will not have a material impact on the Company's consolidated financial statements. +(5) Stockholders' Equity +In May 2006, the Company adopted the 2006 Equity Incentive Plan (the 2006 Plan), which was amended May 9, 2007. The primary purpose of the 2006 Plan is to encourage ownership in the Company by key personnel, whose long-term service is considered essential to the Company's continued success. The 2006 Plan provides for 6,000,000 shares of the Company's 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 4,500,000 . Pursuant to the Deferred Stock Unit Compensation Plan, a Sub Plan under the 2006 Plan, a participant may elect to defer settlement of their outstanding unvested awards until such time as elected by the participant. +The Company grants NSUs annually to key personnel. The NSUs granted entitle the employee recipients to receive shares of common stock in the Company upon vesting of the NSUs. The vesting of most NSUs is subject to achievement of certain performance targets, with the remaining NSUs subject only to time restrictions. For NSUs granted prior to 2011, these awards vest in quarterly increments between the third and fourth anniversary of the grant. For the majority of NSUs granted in 2011 and after, if the performance goals are achieved, these awards vest in equal one-third installments at the end of each of the three years after the performance goals are achieved. For NSUs granted in 2012, the performance target was not met and, therefore, the awards will not vest. +The Company also has long-term incentive award agreements under the 2006 Plan for issuance of SAR awards and RSU awards to the Company's current and future executive officers. These awards vest subject to certain long-term performance objectives and certain long-term service conditions. One-half of the SAR and RSU awards vested 80% on December 31, 2010 and 20% on December 31, 2011, and, provided that the conditions are met, one-half of the SAR and RSU awards vest 80% on December 31, 2015 and 20% on December 31, 2016. The Company considers achievement of the remaining performance conditions as probable and is recognizing such compensation cost over the service period. +In June 2011, the Board of Directors of the Company adopted a long-term incentive award under its 2006 Equity Incentive Plan (Level III Awards). The shares under these awards will be available for issuance to current and future members of the Company's management team, including the Company's named executive officers. Each recipient will receive a specified maximum number of RSUs, each of which will represent the right to receive one share of the Company's common stock. These awards vest subject to certain long-term performance objectives and certain long-term service conditions. The awards will vest on December 31, 2014 only if the Company meets certain revenue targets ranging between $1,850,000 and $2,500,000 and certain diluted earnings per share targets ranging between $7.00 and $9.60 for the year ended December 31, 2014. No vesting of any Level III Award will +F-19 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +occur if either of the threshold performance criteria is not met for the year ending December 31, 2014. To the extent financial performance is achieved above the threshold levels, the number of RSUs that will vest will increase up to the maximum number of units granted under the award. Under this program, the Company granted a maximum amount of 275,000 RSUs during the year ended December 31, 2011. The grant date fair value of these RSUs was $82.09 per share. As of December 31, 2013, 2012 and 2011, the Company did not believe that the achievement of the performance objectives for the Level III Awards was probable, and therefore the Company did not recognize compensation expense for these awards. If the performance objectives become probable, the Company will then begin recording an expense for the Level III Awards and would recognize a cumulative catch-up adjustment in the period they become probable. As of December 31, 2013 , the cumulative amount would be approximately $14,000 based on the maximum number of units if the performance objectives were probable. +In May 2012, the Board of Directors of the Company adopted a long-term incentive award under its 2006 Equity Incentive Plan (2012 LTIP Awards). The shares under these awards will be available for issuance to current and future members of the Company's management team, including the Company's named executive officers. Each recipient will receive a specified maximum number of RSUs, each of which will represent the right to receive one share of the Company's common stock. These awards vest subject to certain long-term performance objectives and certain long-term service conditions. The awards will vest on December 31, 2015 only if the Company meets certain revenue targets ranging between $2,200,000 and $2,900,000 and certain diluted earnings per share targets ranging between $7.00 and $10.50 for the year ended December 31, 2015. No vesting of any 2012 LTIP Awards will occur if either of the threshold performance criteria is not met for the year ending December 31, 2015. To the extent financial performance is achieved above the threshold levels, the number of RSUs that will vest will increase up to the maximum number of units granted under the award. Under this program, the Company granted awards that contain a maximum amount of 352,000 RSUs during the year ended December 31, 2012. The grant date fair value of these RSUs was $56.12 per share. As of December 31, 2013 and 2012, the Company did not believe that the achievement of the performance objectives of these awards was probable, and therefore the Company did not recognize compensation expense for these awards. If the performance objectives become probable, the Company will then begin recording an expense for the 2012 LTIP Awards and would recognize a cumulative catch-up adjustment in the period they become probable. As of December 31, 2013 , the cumulative amount would be approximately $8,000 based on the maximum number of units if the performance objectives were probable. +In December 2013, the Board of Directors of the Company adopted a long-term incentive award under its 2006 Equity Incentive Plan (2013 LTIP Awards). The shares under these awards will be available for issuance to current and future members of the Company's management team, including the Company's named executive officers. Each recipient will receive a specified maximum number of RSUs, each of which will represent the right to receive one share of the Company's common stock. These awards vest subject to certain long-term performance objectives and certain long-term service conditions. The recipients of these awards are divided into two participant groups, revenue generating and non-revenue generating. The awards for the non-revenue generating participants will vest on March 31, 2016 only if the Company meets certain revenue targets ranging between $2,290,000 and $2,558,000 and certain EBITDA targets ranging between $372,000 and $415,000 for the fiscal year ending March 31, 2016. The awards for the revenue generating participants will vest on March 31, 2016 only if the Company achieves EBITDA of $350,000 and the respective revenue by brand and channel managed by each participant meets certain revenue targets that are tailored to each brand and channel for the fiscal year ending March 31, 2016. No vesting of any 2013 LTIP Awards will occur if either of the threshold performance criteria is not met for the year ending March 31, 2016. To the extent financial performance is achieved above the threshold levels, the number of RSUs that will vest will increase up to the maximum number of units granted under the award. Under this new program, the Company granted awards that contain a maximum amount of 156,000 RSUs during the year ended December 31, 2013 . The grant date fair value of these RSUs was $84.52 per share. As of December 31, 2013 , as a result of the Company's current long-range forecast, the Company believed that the achievement of at least the threshold performance objectives of these awards was probable, and therefore the Company recognized compensation expense accordingly. The amount recognized was immaterial to the Company's consolidated financial statements. +In February 2012, the Company approved a stock repurchase program to repurchase up to $100,000 of the Company's common stock in the open market or in privately negotiated transactions, subject to market conditions, applicable legal requirements, and other factors. The program did not obligate the Company to acquire any particular amount of common stock and the program could have been suspended at any time at the Company's discretion. During the six months ended June 30, 2012, the Company repurchased approximately 1,749,000 shares under this program, for approximately $100,000 , or an average price of $57.16 . As of June 30, 2012, the Company had repurchased the full amount authorized under this program. The purchases were funded from available working capital. +In June 2012, the Company approved a new stock repurchase program to repurchase up to $200,000 of the Company's common stock in the open market or in privately negotiated transactions, subject to market conditions, applicable legal requirements, +F-20 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +and other factors. The program does not obligate the Company to acquire any particular amount of common stock and the program may be suspended at any time at the Company's discretion. As of December 31, 2013 and 2012, the Company had repurchased approximately 2,765,000 shares under this program, for approximately $120,700 , or an average price of $43.66 , leaving the remaining approved amount at $79,300 . +On a quarterly basis, the Company grants fully-vested shares of its common stock to each of its outside directors. The fair value of such shares is expensed on the date of issuance. +The table below summarizes stock compensation amounts recognized in the consolidated statements of comprehensive income: +Year Ended December 31, +2013 +2012 +2011 +Compensation expense recorded for: +NSUs +$ +10,545 +$ +11,849 +$ +11,719 +SARs +1,302 +1,501 +1,813 +RSUs +287 +231 +305 +Directors' shares +1,002 +1,080 +966 +Total compensation expense +13,136 +14,661 +14,803 +Income tax benefit recognized +(4,950 +) +(5,573 +) +(5,788 +) +Net compensation expense +$ +8,186 +$ +9,088 +$ +9,015 +The table below summarizes the total remaining unrecognized compensation cost related to nonvested awards that are considered probable of vesting as of December 31, 2013 , and the weighted-average period over which the cost is expected to be recognized as of December 31, 2013 : +Unrecognized +Compensation +Cost +Weighted-Average +Remaining +Vesting Period (Years) +NSUs +$ +12,427 +1.8 +SARs +3,582 +2.2 +RSUs +4,859 +2.2 +Total +$ +20,868 +The unrecognized compensation cost excludes a maximum of $19,825 and $18,445 of compensation cost on the Level III Awards and 2012 LTIP Awards, respectively, as achievement of the performance conditions are not considered probable. +F-21 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +Nonvested Stock Units Issued Under the 2006 Plan +Number of +Shares +Weighted- +Average +Grant-Date +Fair Value +Nonvested at January 1, 2011 +798,000 +$ +35.61 +Granted +199,000 +87.50 +Vested +(263,000 +) +40.31 +Forfeited +(57,000 +) +46.61 +Nonvested at December 31, 2011 +677,000 +$ +48.14 +Granted +209,000 +63.18 +Vested +(297,000 +) +35.90 +Forfeited +(18,000 +) +63.68 +Cancelled* +(200,000 +) +62.17 +Nonvested at December 31, 2012 +371,000 +$ +58.51 +Granted +304,000 +57.30 +Vested +(315,000 +) +53.19 +Forfeited +(20,000 +) +61.08 +Nonvested at December 31, 2013 +340,000 +$ +62.23 +_______________________________________________________________________________ +* Nonvested Stock Units cancelled during the period represent awards granted whose performance criteria were not met. +Stock Appreciation Rights Issued Under the 2006 Plan +Number of +SARs +Weighted- +Average +Exercise +Price +Weighted- +Average +Remaining +Contractual +Term +(Years) +Aggregate +Intrinsic +Value +Outstanding at January 1, 2011 +1,125,000 +$ +26.73 +8.7 +$ +59,636 +Granted +— +— +Exercised +(365,000 +) +26.73 +Forfeited +— +— +Outstanding at December 31, 2011 +760,000 +$ +26.73 +8.8 +$ +37,118 +Granted +— +— +Exercised +(15,000 +) +26.73 +Forfeited +— +— +Outstanding at December 31, 2012 +745,000 +$ +26.73 +7.9 +$ +10,087 +Granted +— +— +Exercised +(15,000 +) +26.73 +Forfeited +— +— +Outstanding at December 31, 2013 +730,000 +$ +26.73 +6.9 +$ +42,143 +Exercisable at December 31, 2013 +205,000 +$ +26.73 +3.4 +$ +11,835 +Expected to vest and exercisable at December 31, 2013 +694,817 +$ +26.73 +6.9 +$ +40,112 +F-22 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +The maximum contractual term is 10 and 15 years from the date of grant for those SARs with final vesting dates of December 31, 2011 and December 31, 2016, respectively. The number of SARs expected to vest is based on the probability of achieving certain performance conditions and is also reduced by estimated forfeitures. The difference between the amount outstanding and the amount expected to vest and exercisable at December 31, 2013 was estimated forfeitures for estimated failure to meet the long-term service conditions. On February 29, 2012, 120,000 SARs that vested on December 31, 2011 became exercisable. +Restricted Stock Units Issued Under the 2006 Plan +Number of +Shares +Weighted- +Average +Grant-Date +Fair Value +Nonvested at January 1, 2011 +85,000 +$ +26.73 +Granted +275,000 +82.09 +Vested +(16,000 +) +26.73 +Forfeited +(25,000 +) +82.09 +Nonvested at December 31, 2011 +319,000 +$ +70.15 +Granted +352,000 +56.12 +Vested +— +— +Forfeited +— +— +Nonvested at December 31, 2012 +671,000 +$ +62.80 +Granted +156,000 +84.52 +Vested +— +— +Forfeited +(32,000 +) +63.69 +Nonvested at December 31, 2013 +795,000 +$ +67.03 +The amounts granted in 2011, 2012 and 2013 are the maximum amount under the Level III Awards, 2012 LTIP Awards and 2013 LTIP Awards, respectively. +(6) Accumulated Other Comprehensive Loss +Accumulated balances of the components within accumulated other comprehensive loss are as follows: +December 31, +2013 +2012 +Cumulative foreign currency translation adjustment +$ +(2,157 +) +$ +(1,400 +) +Unrealized loss on foreign currency hedging, net of tax +(486 +) +— +Accumulated other comprehensive loss +$ +(2,643 +) +$ +(1,400 +) +F-23 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +(7) Commitments and Contingencies +The Company leases office, distribution, retail facilities, and automobiles, under operating lease agreements, which expire through 2028 . Some of the leases contain renewal options for approximately one to fifteen years. Future minimum commitments under the lease agreements are as follows: +Year ending December 31: +2014 +$ +46,060 +2015 +45,194 +2016 +42,436 +2017 +39,129 +2018 +33,218 +Thereafter +116,593 +$ +322,630 +Rent expense is recorded using the straight-line method to account for scheduled rental increases or rent holidays. Lease incentives for tenant improvement allowances are recorded as reductions of rent expense over the lease term. The rental payments under some of our retail store leases are based on a minimum rental plus a percentage of the store's sales in excess of stipulated amounts. The following schedule shows the composition of total rental expense. +Years Ended December 31, +2013 +2012 +2011 +Minimum rentals +$ +47,871 +$ +37,270 +$ +26,645 +Contingent rentals +12,318 +9,366 +6,085 +$ +60,189 +$ +46,636 +$ +32,730 +Purchase Obligations. The Company had $ 238,947 of outstanding purchase orders with its manufacturers as of December 31, 2013 . In addition, the Company entered into agreements for the build out of new retail stores, promotional activities and other services. Future commitments under these purchase orders and other agreements for the year ending December 31, 2014 total $245,168 . Included in the 2014 amount are remaining commitments, net of deposits, that are also unconditional purchase obligations relating to sheepskin contracts. The Company enters into contracts requiring minimum purchase commitments of sheepskin that Deckers' affiliates, manufacturers, factories, and other agents (each or collectively, a Buyer) must make on or before a specified target date. Under certain contracts, the Company may pay an advance deposit that shall be repaid to the Company as Buyers purchase goods under the terms of these agreements. Included in other current assets on the consolidated balance sheets is approximately $67,000 and $39,000 of advance deposits as of December 31, 2013 and 2012 , respectively. In the event that a Buyer does not purchase certain minimum commitments on or before certain target dates, the supplier may retain a portion of the advance deposit until the amounts of the commitments are fulfilled. These agreements may result in unconditional purchase obligations if a Buyer does not meet the minimum purchase requirements. In the event that a Buyer does not purchase such minimum commitments by the target dates, the Company shall be responsible for compliance with any and all minimum purchase commitments under these contracts, and the Company would make additional deposit payments towards the purchase of the remaining minimum commitments and such additional deposits would be returned as the Buyers purchase the remaining minimum commitments. The contracts do not permit net settlement. Minimum commitments for these contracts as of December 31, 2013 were as follows: +F-24 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +Contract +Effective Date +Final +Target Date +Advance +Deposit +Total +Minimum +Commitment +Remaining +Deposit +Remaining +Commitment, +Net of Deposit +October 2011 +September 2014 +$50,000 +$286,000 +$38,273 +$13,034 +October 2012 +September 2013 +— +$83,000 +— +$3,265 +April 2013 +September 2014 +$28,931 +$42,800 +$28,931 +$13,869 +September 2013 +September 2014 +— +$50,730 +— +$39,958 +Subsequent to December 31, 2013 the Company entered into an amendment to the sheepskin contract effective April 2013 for an additional commitment of $21,400 . The Company also entered into two new contracts with a final target date of September 30, 2014. One of these contracts requires a minimum purchase commitment of sheepskin of $8,550 and the other contract requires a minimum purchase commitment of UGGpure of $27,600 . In the event that the minimum commitment has not been reached by September 30, 2014 the Company will advance funds to cover the remaining commitment under the contract, with such advanced amounts to be refunded upon the future purchase of the minimum purchase commitment by a Buyer. +Indemnification and Legal Contingencies. 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 Company's financial position or results of operations. In addition, the Company has agreed to indemnify certain of its licensees, distributors, and promotional partners in connection with claims related to the use of the Company's intellectual property. The terms of such agreements range up to 5 years initially and generally do not provide for a limitation on the maximum potential future payments. Management believes the likelihood of any payments is remote and would be immaterial. The Company determined the risk was low based on a prior history of insignificant claims. The Company is not currently involved in any indemnification matters in regards to its intellectual property. +Contingent Consideration. In July 2011, the Company acquired the Sanuk brand, and the total purchase price included contingent consideration payments. As of December 31, 2013 , the remaining contingent consideration payments, which have no maximum, are as follows: +• +36.0% of the Sanuk brand gross profit in 2013, which was approximately $18,600 , and +• +40.0% of the Sanuk brand gross profit in 2015. +As of December 31, 2013 and 2012 , contingent consideration for the acquisition of the Sanuk brand of approximately $ 46,200 and $70,400 , respectively, are included within other accrued expenses (approximately $18,600 and $25,400 at December 31, 2013 and 2012 , respectively) and long-term liabilities (approximately $27,600 and $45,000 at December 31, 2013 and 2012 , respectively) in the consolidated balance sheets. +In September 2012, the Company acquired Hoka, and the total purchase price included contingent consideration payments with a maximum of $2,000 . Based on current projections as of December 31, 2013 , contingent consideration for the acquisition of the Hoka brand of approximately $1,800 is included within other accrued expenses and long-term liabilities in the consolidated balance sheets. +(8) Business Segments, Concentration of Business, and Credit Risk and Significant Customers +The Company's accounting policies of the segments below are the same as those described in the summary of significant accounting policies (see Note 1), except that the Company does not allocate corporate overhead costs or non-operating income and expenses to segments. The Company evaluates segment performance primarily based on net sales and income or loss from operations. The Company's reportable segments include the strategic business units for the worldwide wholesale operations of the UGG brand, Teva brand, Sanuk brand, and its other brands, its E-Commerce business and its retail store business. The wholesale operations of each brand are managed separately because each requires different marketing, research and development, design, sourcing, and sales strategies. The E-Commerce and retail store segments are managed separately because they are Direct-to- +F-25 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +Consumer sales, while the brand segments are wholesale sales. The income or loss 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, selling and marketing, depreciation, amortization, and the costs of employees and their respective expenses that are directly related to each business segment. The unallocated corporate overhead costs include the following: costs of the distribution centers, certain executive and stock compensation, accounting and finance, legal, information technology, human resources, and facilities costs, among others. Beginning January 1, 2013, all gross profit derived from the sales to third parties of the E-Commerce and retail stores segments is reported in income from operations of the E-Commerce and retail stores segments, respectively. In prior periods, the gross profit derived from the sales to third parties of the E-Commerce and retail stores segments was separated into two components: (i) the wholesale profit was included in the related operating income or loss of each wholesale segment, and represented the difference between the Company’s cost and the Company’s wholesale selling price, and (ii) the retail profit was included in the operating income of the E-Commerce and retail stores segments, and represented the difference between the Company’s wholesale selling price and the Company’s retail selling price. Each of the wholesale segments charged the E-Commerce and retail segments the same price that they charged third party retail customers, with the resulting profit from inter-segment sales included in income (loss) from operations of each respective wholesale segment. Inter-segment sales and cost of sales are eliminated upon consolidation. These changes in segment reporting only changed the presentation within the table below and did not impact th e Company’s consolidated financial statements for any periods. The Company believes that these changes better align with how management views the business, which is that sales of the E-Commerce and retail stores segments each generate a cash flow of their own and the wholesale segments are not active in generating those cash flows. The segment information for the years ended December 31, 2012 and 2011 have been adjusted retrospectively to conform to the current period presentation. +The Company's other brands include Simple®, TSUBO®, Ahnu®, MOZO®, and Hoka. The Company ceased distribution of the Simple brand effective December 31, 2011. The results of operations for Hoka are included in the other brands segments beginning from the acquisition date of September 27, 2012. The wholesale operations of the Company's other brands are included as one reportable segment, other wholesale, presented in the figures below. The Sanuk brand operations are included in the Company's segment reporting effective upon the acquisition date of July 1, 2011. Business segment information is summarized as follows: +F-26 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +Years Ended December 31, +2013 +2012 +2011 +Net sales to external customers: +UGG wholesale +$ +818,377 +$ +819,256 +$ +915,203 +Teva wholesale +109,334 +108,591 +118,742 +Sanuk wholesale +94,420 +89,804 +26,039 +Other brands wholesale +38,276 +20,194 +21,801 +E-Commerce +169,534 +130,592 +106,498 +Retail stores +326,677 +245,961 +189,000 +$ +1,556,618 +$ +1,414,398 +$ +1,377,283 +Income (loss) from operations: +UGG wholesale +$ +224,736 +$ +206,039 +$ +339,665 +Teva wholesale +9,165 +9,228 +19,265 +Sanuk wholesale +20,591 +14,398 +798 +Other brands wholesale +(9,807 +) +(4,523 +) +(9,993 +) +E-Commerce +66,819 +56,190 +47,244 +Retail stores +65,716 +63,306 +58,552 +Unallocated overhead +(169,323 +) +(157,690 +) +(170,693 +) +$ +207,897 +$ +186,948 +$ +284,838 +Depreciation and amortization: +UGG wholesale +$ +641 +$ +622 +$ +4,375 +Teva wholesale +641 +515 +587 +Sanuk wholesale +7,761 +8,838 +5,125 +Other brands wholesale +507 +1,622 +533 +E-Commerce +744 +839 +540 +Retail stores +21,117 +12,073 +6,082 +Unallocated overhead +9,959 +8,911 +8,185 +$ +41,370 +$ +33,420 +$ +25,427 +Capital expenditures: +UGG wholesale +$ +313 +$ +314 +$ +706 +Teva wholesale +63 +326 +305 +Sanuk wholesale +91 +448 +1,778 +Other brands wholesale +477 +197 +198 +E-Commerce +676 +347 +1,419 +Retail stores +34,993 +34,004 +22,297 +Unallocated overhead +43,217 +25,966 +29,083 +$ +79,830 +$ +61,602 +$ +55,786 +Total assets from reportable segments: +UGG wholesale +$ +314,122 +$ +377,997 +$ +347,213 +Teva wholesale +54,868 +59,641 +61,893 +Sanuk wholesale +208,669 +209,861 +217,936 +Other brands wholesale +34,315 +29,446 +10,690 +E-Commerce +7,331 +5,058 +5,964 +Retail stores +182,491 +134,804 +80,514 +$ +801,796 +$ +816,807 +$ +724,210 +F-27 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +Inter-segment sales from the Company’s wholesale segments to the Company’s E-Commerce and retail stores segments are at the Company’s cost, and there is no inter-segment profit on these inter-segment sales. Income (loss) from operations of the wholesale segments does not include any inter-segment gross profit from sales to the E-Commerce and retail stores segments.The assets allocable to each segment generally include accounts receivable, inventory, fixed assets, intangible assets, and certain other assets that are specifically identifiable with one of the Company's segments. Unallocated assets are the assets not specifically related to the segments and include cash and cash equivalents, deferred tax assets, and various other assets shared by the Company's segments. Reconciliations of total assets from reportable segments to the consolidated balance sheets are as follows: +December 31, +2013 +2012 +Total assets from reportable segments +$ +801,796 +$ +816,807 +Unallocated cash and cash equivalents +237,125 +110,247 +Unallocated deferred tax assets +35,632 +30,662 +Other unallocated corporate assets +185,176 +110,348 +Consolidated total assets +$ +1,259,729 +$ +1,068,064 +The Company does not consider international operations a separate segment, as management reviews such operations in the aggregate with the aforementioned segments. Long-lived assets, which consist of property and equipment, in the US and all other countries combined were as follows: +December 31, +2013 +2012 +US +$ +136,726 +$ +89,423 +All other countries* +37,340 +35,947 +Total +$ +174,066 +$ +125,370 +* No other country's long-lived assets comprised more than 10% of total long-lived assets as of December 31, 2013 and 2012 . +The Company sells its products to customers throughout the US and to foreign customers located in Europe, Canada, Australia, Asia, and Latin America, among other regions. International sales were 33.0% , 31.2% and 31.4% , of the Company's total net sales for the years ended December 31, 2013 , 2012 and 2011 , respectively. For the years ended December 31, 2013 and 2012 , no single foreign country comprised more than 10% of total sales. +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. No single customer accounted for more than 10% of net sales in the years ended December 31, 2013 and 2012 . As of December 31, 2013 and 2012 the Company had one customer representing 19.7% and 18.8% of net trade accounts receivable, respectively. At December 31, 2013 the Company had a second customer representing 11.4% of net trade accounts receivable. +The Company's production is concentrated at a limited number of independent contractor factories. Sheepskin is the principal raw material for certain UGG products and the majority of sheepskin is purchased from two tanneries in China, which is sourced primarily from Australia, Europe and the US. The source for other materials used by the Company is concentrated in Australia and China. The Company's operations are subject to the customary risks of doing business abroad, including, but not limited to, currency fluctuations, customs duties and related fees, various import controls and other nontariff barriers, restrictions on the transfer of funds, labor unrest and strikes and, in certain parts of the world, political instability. The supply of sheepskin can be adversely impacted by weather conditions, disease, and harvesting decisions that are completely outside the Company's control. Further, the price of sheepskin is impacted by demand, industry, and competitors. +A portion of the Company's cash and cash equivalents are held as cash in operating accounts that are with third party financial institutions. These balances, at times, exceed the Federal Deposit Insurance Corporation (FDIC) insurance limits. While the Company regularly monitors the cash balances in its operating accounts and adjusts the balances as appropriate, these cash balances +F-28 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +could be impacted if the underlying financial institutions fail or are subject to other adverse conditions in the financial markets. As of December 31, 2013 , the Company had experienced no loss or lack of access to cash in its operating accounts. +The remainder of the Company's cash equivalents is invested in interest bearing funds managed by third party investment management institutions. These investments can include US treasury bonds and securities, money market funds, and municipal bonds, among other investments. Certain of these investments are subject to general credit, liquidity, market, and interest rate risks. Investment risk has been and may further be exacerbated by US mortgage defaults, credit and liquidity issues, and sovereign debt concerns in Europe, which have affected various sectors of the financial markets. As of December 31, 2013 , the Company had experienced no loss or lack of access to its invested cash and cash equivalents. +The Company's cash and cash equivalents are as follows: +December 31, +2013 +2012 +Money market fund accounts +$ +154,105 +$ +52,650 +Cash +83,020 +57,597 +Total cash and cash equivalents +$ +237,125 +$ +110,247 +(9) Foreign Currency Exchange Contracts and Hedging +As of December 31, 2013 , the Company had foreign currency forward contracts designated as cash-flow hedges with notional amounts totaling approximately $77,000 . These contracts were held by four counterparties and were expected to mature over the next 12 months . At December 31, 2012 , the Company had non-designated derivative contracts with notional amounts totaling approximately $19,000 , which were comprised of offsetting contracts with the same counterparty and expired in March 2013. +The nonperformance risk of the Company and the counterparties did not have a material impact on the fair value of the derivatives. During the year ended December 31, 2013 , the ineffective portion relating to these hedges was immaterial and the hedges remained effective as of December 31, 2013 . The effective portion of the gain or loss on the derivative is reported in other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. As of December 31, 2013 , the total amount in accumulated other comprehensive loss (see Note 6) was expected to be reclassified into income within the next 15 months . +As of December 31, 2013 , the Company had no outstanding non-designated hedges. +The following tables summarize the effect of derivative instruments on the consolidated financial statements: +For the Year Ended December 31, +Derivatives in +Designated +Cash Flow +Hedging +Relationships +Amount of +Gain (Loss) +Recognized in +OCI on +Derivative +(Effective +Portion) +Location of +Gain (Loss) +Reclassified +from +Accumulated +OCI into +Income +(Effective +Portion) +Amount of +Gain (Loss) +Reclassified +from +Accumulated +OCI into +Income +(Effective +Portion) +Location of +Amount +Excluded from +Effectiveness +Testing +Gain (Loss) +from Amount +Excluded from +Effectiveness +Testing +2013 +Foreign Exchange Contracts +$(779) +Net Sales +$17 +SG&A +$(11) +2012 +Foreign Exchange Contracts +$(1,191) +Net Sales +$617 +SG&A +$26 +F-29 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +For the Year Ended December 31, +Derivatives Not Designated +as Hedging Instruments +Location of Gain (Loss) +Recognized in Income on +Derivatives +Amount of Gain (Loss) +Recognized in Income on +Derivatives +2013 +Foreign Exchange Contracts +SG&A +$728 +2012 +Foreign Exchange Contracts +SG&A +$1,030 +(10) Goodwill and Other Intangible Assets +Most of the Company's goodwill is related to the Sanuk reportable segment, with the remaining related to the UGG and other brands reportable segments. The Company's goodwill and other intangible assets are summarized as follows: +Gross +Carrying +Amount +Weighted- +Average +Amortization +Period +Accumulated +Amortization +Net Carrying +Amount +As of December 31, 2013 +Intangibles subject to amortization +$ +101,963 +14 years +$ +24,140 +$ +77,823 +Intangibles not subject to amortization: +Goodwill +128,725 +Trademarks +15,455 +Total goodwill and other intangible assets +$ +222,003 +As of December 31, 2012 +Intangibles subject to amortization +$ +96,674 +* +14 years +$ +16,164 +$ +80,510 +* +Intangibles not subject to amortization: +Goodwill +128,725 +* +Trademarks +15,455 +Total goodwill and other intangible assets +$ +224,690 +Changes in the Company's goodwill are summarized as follows: +Goodwill, +Gross +Accumulated +Impairment +Goodwill, Net +Balance at January 1, 2012 +$ +135,876 +$ +(15,831 +) +$ +120,045 +Additions through acquisitions +8,680 +* +— +8,680 +* +Impairment loss +— +— +— +Balance at December 31, 2012 +$ +144,556 +* +$ +(15,831 +) +$ +128,725 +* +Additions through acquisitions +— +— +— +Impairment loss +— +— +— +Balance at December 31, 2013 +$ +144,556 +$ +(15,831 +) +$ +128,725 +The additions to goodwill through acquisitions were attributable to the other brands reportable segments (see Note 8). +As of December 31, 2013 and 2012 , the Company performed its annual impairment tests and evaluated its UGG and other brands' goodwill. As of October 31, 2013 and 2012 , the Company performed its annual impairment tests and evaluated its Teva trademarks and Sanuk goodwill. Based on the carrying amounts of the UGG, Teva, Sanuk, and other brands' goodwill, trademarks, and net assets, the brands' 2013 and 2012 sales and operating results, and the brands' long-term forecasts of sales and operating results as of their evaluation dates, the Company concluded that the carrying amounts of the UGG, Sanuk and other brands' goodwill, as well as the Teva trademarks, were not impaired. The Sanuk brand goodwill was evaluated based on qualitative +F-30 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +analyses as of October 31, 2012 and based on Level 3 inputs as of October 31, 2013. As of December 31, 2013 and 2012 , and as of October 31, 2013 and 2012 , all goodwill other than the Sanuk brand goodwill and all other nonamortizable intangibles were evaluated based on qualitative analyses. +As of December 31, 2013 and 2012 , total goodwill by segment is as follows: +As of December 31, +2013 +2012 +UGG brand +$ +6,101 +$ +6,101 +Sanuk brand +113,944 +113,944 +Other brands +8,680 +8,680 +* +Total +$ +128,725 +$ +128,725 +* +*The above tables, as well as the Consolidated Balance Sheet at December 31, 2012, have been retrospectively adjusted to reflect adjustments to the purchase price allocation from our prior year acquisition. Goodwill was increased and other intangible assets were decreased by $2,458 . The adjustments to amortization expense as a result of these changes was immaterial. +Aggregate amortization expense for amortizable intangible assets for the years ended December 31, 2013 , 2012 and 2011 , was $7,975 , $9,312 and $9,599 , respectively. The following table summarizes the expected amortization expense on existing intangible assets, excluding indefinite-lived intangible assets of $10,237 , for the next five years : +Year ending December 31 +2014 +$ +7,524 +2015 +7,024 +2016 +5,789 +2017 +5,620 +2018 +5,620 +Thereafter +36,009 +$ +67,586 +(11) Quarterly Summary of Information (Unaudited) +Summarized unaudited quarterly financial data are as follows: +2013 +March 31 +June 30 +September 30 +December 31 +Net sales +$ +263,760 +$ +170,085 +$ +386,725 +$ +736,048 +Gross profit +123,559 +69,832 +166,892 +376,200 +Net income (loss) attributable to Deckers Outdoor Corporation +1,007 +(29,275 +) +33,060 +140,897 +Net income (loss) per share attributable to Deckers Outdoor Corporation common stockholders: +Basic +$ +0.03 +$ +(0.85 +) +$ +0.96 +$ +4.08 +Diluted +$ +0.03 +$ +(0.85 +) +$ +0.95 +$ +4.04 +F-31 +Table of Contents +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +Notes to Consolidated Financial Statements — (Continued) +(amounts in thousands, except share quantity and per share data) +2012 +March 31 +June 30 +September 30 +December 31 +Net sales +$ +246,306 +$ +174,436 +$ +376,392 +$ +617,264 +Gross profit +113,288 +73,579 +159,293 +285,994 +Net income (loss) attributable to Deckers Outdoor Corporation +7,887 +(20,139 +) +43,061 +98,057 +Net income (loss) per share attributable to Deckers Outdoor Corporation common stockholders: +Basic +$ +0.20 +$ +(0.53 +) +$ +1.19 +$ +2.81 +Diluted +$ +0.20 +$ +(0.53 +) +$ +1.18 +$ +2.77 +F-32 +Table of Contents +Schedule II +DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES +VALUATION AND QUALIFYING ACCOUNTS +Three Years Ended December 31, 2013, 2012 and 2011 +Balance at +Beginning of +Year +Additions +Deductions +Balance at +End of Year +Year ended December 31, 2013 +Allowance for doubtful accounts(1) +$ +2,782 +$ +125 +$ +868 +$ +2,039 +Allowance for sales discounts(2) +3,836 +46,989 +47,285 +3,540 +Allowance for sales returns(3) +12,905 +67,800 +66,151 +14,554 +Chargeback allowance(4) +5,563 +187 +815 +4,935 +Year ended December 31, 2012 +Allowance for doubtful accounts(1) +$ +1,719 +$ +2,128 +$ +1,065 +$ +2,782 +Allowance for sales discounts(2) +4,629 +35,759 +36,552 +3,836 +Allowance for sales returns(3) +11,313 +53,165 +51,573 +12,905 +Chargeback allowance(4) +4,031 +5,879 +4,347 +5,563 +Year ended December 31, 2011 +Allowance for doubtful accounts(1) +$ +1,379 +$ +642 +$ +302 +$ +1,719 +Allowance for sales discounts(2) +5,819 +36,254 +37,444 +4,629 +Allowance for sales returns(3) +4,039 +37,355 +30,081 +11,313 +Chargeback allowance(4) +2,535 +1,744 +248 +4,031 +_______________________________________________________________________________ +(1) +The additions to the allowance for doubtful accounts represent the estimates of our bad debt expense based upon the factors for which we evaluate the collectability of our accounts receivable, with actual recoveries netted into additions. Deductions are the actual write offs of the receivables. +(2) +The additions to the allowance for sales discounts represent estimates of discounts to be taken by our customers based upon the amount of available outstanding terms discounts in the year-end aging. Deductions are the actual discounts taken by our customers. +(3) +The additions to the allowance for returns represent estimates of returns based upon our historical returns experience. Deductions are the actual returns of products. +(4) +The additions to the chargeback allowance represent chargebacks taken in the respective year as well as an estimate of chargebacks related to sales in the respective reporting period that will be taken subsequent to the respective reporting period. Deductions are the actual chargebacks written off against outstanding accounts receivable. The Company has estimated the additions and deductions by netting each quarter's change and summing the four quarters for the respective year. +See accompanying report of independent registered public accounting firm. +F-33 \ No newline at end of file diff --git a/raw/filings/0000910521/2013/0001445305-14-000820/filing_metadata.csv b/raw/filings/0000910521/2013/0001445305-14-000820/filing_metadata.csv new file mode 100644 index 0000000000000000000000000000000000000000..b00450fbe802e1eefd16852269ab81029a77e0a2 --- /dev/null +++ b/raw/filings/0000910521/2013/0001445305-14-000820/filing_metadata.csv @@ -0,0 +1,2 @@ +cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing +0000910521,DECK,DECKERS OUTDOOR CORP,10-K,2014-03-03,2013-12-31,2014-03-03T20:58:44.000Z,0001445305-14-000820,deck-20131231x10k.htm,10-K,15196070,1,0,https://www.sec.gov/Archives/edgar/data/910521/000144530514000820/deck-20131231x10k.htm,https://www.sec.gov/Archives/edgar/data/910521/000144530514000820/,2013,2013,1 diff --git a/raw/filings/0000910521/2013/0001445305-14-000820/item1.txt b/raw/filings/0000910521/2013/0001445305-14-000820/item1.txt new file mode 100644 index 0000000000000000000000000000000000000000..e07435dfef8b2d6607ce933a98d5814fd11ccb54 --- /dev/null +++ b/raw/filings/0000910521/2013/0001445305-14-000820/item1.txt @@ -0,0 +1,75 @@ +Item 1. Business. +Unless otherwise specifically indicated, all amounts in Item 1. and Item 1A. herein are expressed in thousands, except for employees, share quantity, per share data, and selling prices. +General +Deckers Outdoor Corporation was incorporated in 1975 under the laws of the State of California and, in 1993, reincorporated under the laws of the State of Delaware. We are a global leader in designing, marketing and distributing innovative footwear, apparel and accessories developed for both everyday casual lifestyle use and high performance activities. We believe that our footwear is distinctive and appeals broadly to men, women and children. We sell our products, including accessories such as handbags and loungewear, through quality domestic and international retailers, international distributors, and directly to end-user consumers both domestically and internationally, through our websites, call centers, and retail stores. Our primary objective is to build our footwear lines into global lifestyle brands with market leadership positions. We seek to differentiate our brands and products by offering diverse lines that emphasize authenticity, functionality, quality, and comfort and products tailored to a variety of activities, seasons, and demographic groups. All of our products are currently manufactured by independent contractors primarily in Asia. Our continued growth will depend upon the broadening of our products offered under each brand, the appeal of our products to our consumers, expanding domestic and international distribution, successfully opening new retail stores, increasing sales to consumers, and developing or acquiring new brands. +Products +We market our products primarily under three proprietary brands: +UGG. The UGG brand is one of the most iconic and recognized brands in the global footwear industry and highlights the Company’s successful track record of building niche brands into lifestyle market leaders. With loyal consumers around the world, the UGG brand has proven to be a highly resilient line of premium footwear, with an expanding product offering and a growing global audience that attracts women, men and children. UGG brand footwear continually earns media exposure from numerous outlets both organically and from strategic public relations efforts, including an increasing amount of exposure internationally. +Teva. Teva is our active lifestyle brand, born from the outdoors and rooted in adventure. Originator of the original sport sandal, today the Teva product line includes casual sandals, shoes, boots and amphibious footwear built for ultimate versatility. +We are focused on regaining our leadership position in the sandal market, and continuing to expand our casual and women’s offering to appeal to a wider range of consumers through utility driven design, color and premium materials. +Sanuk. Sanuk is our fun lifestyle footwear brand rooted in surf culture but embraced by an eclectic mix of style-savvy optimists. The Sanuk brand is probably best known for the patented SIDEWALK SURFERS® shoe which effectively introduced the hanging deconstructed footwear movement. Other primary offerings include the Beer Cozy TM and Yoga Mat TM sandal collections made from real yoga mat material. The brand has a history of innovation, product invention, foot-friendly comfort, unexpected materials and clever branding. +The brand's SIDEWALK SURFERS are marketed with the hand-crafted, humor driven "Cut&Paste" ad campaign and the slogan "THESE ARE NOT SHOES, THEY'RE SANDALS®" which references the patented sandal construction. We plan to build on the Sanuk brand's authentic position in the surf and outdoor markets through its relationships with prominent professional athletes and ambassadors, including surfers, rock climbers, photographers, artists, and musicians known as much for their unique personal styles and charisma as for their specialized talents. +In addition to our primary brands, our other brands include TSUBO, a line of mid and high-end dress and dress casual footwear that incorporates style, function, and maximum comfort; Ahnu, a line of outdoor performance and lifestyle footwear; MOZO, a line of footwear crafted for culinary professionals that redefines the industry dress code; Hoka, a line of footwear for all capacities of runners designed with a unique performance midsole geometry, oversize midsole volume and active footframe. +Sales and Distribution +3 +Table of Contents +At the wholesale level, we distribute our products in the US through sales representatives, who are organized geographically and by brand. In addition to our wholesale business, we also sell products directly to consumers through our websites and retail stores. Our brands are generally advertised and promoted through a variety of consumer media campaigns. We benefit from editorial coverage in both consumer and trade publications. Each brand's dedicated marketing team works closely with targeted accounts to maximize advertising and promotional effectiveness. We also manage brand marketing on a global basis to ensure consistent consumer communications in all regions and channels. We determine our global communication plans based on brand strategies, consumer insights, and return on investment measures. +Our sales force is generally separated by brand, as each brand generally has certain specialty consumers; however, there is overlap between the sales teams and customers. We have aligned our brands' sales forces to position them for the future of the brands. Each brand's respective sales manager recruits and manages their network of sales representatives. We believe this approach for the US market maximizes the selling efforts to our national retail accounts on a cost-effective basis. +We distribute products sold in the US through our distribution centers in Camarillo and Ventura, California. Our distribution centers feature a warehouse management system that enables us to efficiently pick and pack products for direct shipment to customers. We are also in the early stages of opening a new distribution center in Moreno Valley, California. For certain customers requiring special handling, each shipment is pre-labeled and packed to the retailer's 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 quality inspection process. +Internationally, we distribute our products through independent distributors and retailers in many countries, including throughout Europe, Asia Pacific, Canada, and Latin America, among others. In addition, as we do in the US, in certain countries, we sell products directly to international consumers through our websites and our retail stores. For our wholesale and Direct-to-Consumer businesses, we operate distribution centers in certain international locations and utilize third-party distribution companies in other countries. We may also work with trading companies for importation, as needed. Our principal wholesale customers include specialty retailers, selected department stores, outdoor retailers, sporting goods retailers, shoe stores, and online retailers. +Our five largest customers accounted for approximately 23.0 % of worldwide net sales for 2013 , compared to 22.8% for 2012 . No single customer accounted for greater than 10% of our consolidated net sales in 2013 . +UGG. We sell our UGG footwear and accessories primarily through higher-end department stores such as Nordstrom, Neiman Marcus and Bloomingdale's, as well as independent specialty retailers such as Journey's, and online retailers such as Zappos.com. 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. +Teva. We sell our Teva footwear primarily through specialty outdoor and sporting goods retailers such as REI, L.L. Bean, Dick's Sporting Goods, and The Sports Authority as well as online retailers such as Zappos.com. Our brand strength in casual and women’s has also expanded our business to a wider distribution of department store and mall channels including Nordstrom, Dillard’s and Journey’s, as well as family footwear with DSW and Famous Footwear. We believe distribution that services active lifestyle consumers with premium assortments, merchandising and customer experience will continue to be areas of growth for the brand. +Sanuk. We sell our Sanuk footwear primarily through independent action sports retailers including specialty surf and skate shops, outdoor retailers such as REI and Bass Pro Shops, specialty footwear retailers and larger national retail chains including Nordstrom, Journey's, Dillard's, DSW, and The Buckle. We believe these retailers showcase the brand's creativity, fun, and comfort and allow us to effectively reach our target consumers for the brand. +Other brands. Our other brands are sold primarily at better department stores, outdoor specialty accounts, independent specialty retailers, and with online retailers that support our brand ideals of comfort, style, and quality. Key accounts of our other brands include Nordstrom, Dillard's, Hanigs, REI, and Zappos.com. +E-Commerce. Our E-Commerce business enables us to market, communicate and build our relationships with the consumer. E-Commerce enables us to meet the growing demand for our products, sell the products at retail prices, and provide significant incremental operating income. The E-Commerce business provides us an opportunity to communicate to the consumer with a consistent brand message that is in line with our brands' promises, drives awareness of key brand initiatives, and offers targeted information to specific consumer segments. We operate our E-Commerce business through the Uggaustralia.com, Teva.com, Sanuk.com, Tsubo.com, Ahnu.com, and Hokaoneone.com websites. Our websites also drive wholesale and distributor sales through brand awareness and by directing consumers to retailers that carry our brands, including our own retail stores. In recent years, our E-Commerce business has had significant revenue growth, much of which occurred as the UGG brand gained popularity and as consumers continued to increase internet usage for footwear and other purchases. +4 +Table of Contents +We have expanded our international capabilities by developing sites to service certain international markets. These sites are translated into the local language, may provide product through local distribution centers and price the products in the consumers' local currency. In 2012, we launched additional sites in the US for our Sanuk brand and launched mobile sites for several of our brands in the US, Europe and Japan. Our E-Commerce business sells products directly to consumers throughout the world, including the US, the United Kingdom, Japan and China. In order to reduce the cost of order fulfillment, minimize out of stock positions, and further leverage our distribution centers' operations, order fulfillment is performed by our distribution centers in California, the UK, the Netherlands, China, and Japan. Products sold through our E-Commerce business are sold at prices which approximate retail prices, enabling us to capture the full retail margin on each Direct-to-Consumer transaction. +Retail Stores. Our retail stores are predominantly UGG concept stores and UGG outlet stores. In 2013 we expanded our fleet and opened our first Sanuk (two concept, one outlet) and Teva (one outlet) stores. Our retail stores enable us to directly impact our customers' experience, meet the growing demand for these products, sell the products at retail prices and generate strong annual operating income. In addition, our UGG concept stores allow us to showcase our entire product line including footwear, accessories, handbags, home, outerwear, lounge, and retail exclusive items; whereas, a wholesale account may not represent all of these categories. Through our outlet stores, we sell some of our discontinued styles from prior seasons, plus products made specifically for the outlet stores. +In 2013 , we opened 14 stores in the US and 26 internationally. As of December 31, 2013 , we had a total of 80 UGG concept stores and 33 UGG outlet stores worldwide. During 2014 , we plan to open additional retail stores in the US and internationally. +Product Design and Development +The design and product development staff for each of our brands creates 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 freelance designers. By utilizing outside designers, 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. Refer to Note 1 to our accompanying consolidated financial statements for a discussion of our research and development costs for the last three years. +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 and accessories for our various product lines. We develop detailed drawings and prototypes of our new products to aid in conceptualization and to ensure our contemplated new products meet the standards for innovation and performance that our consumers demand. Throughout the development process, we have multiple design and development reviews, which we then coordinate with our independent manufacturers. This ensures that we are addressing the needs of our consumers and are working toward a common goal of developing and producing a high quality product to be delivered on a timely basis. +Manufacturing and Supply Chain +We do not manufacture our products; we outsource the production of our brand footwear to independent manufacturers primarily in Asia. We require our independent contract manufacturers and designated suppliers to adopt our Supplier Code of Conduct, which specifies that they comply with all local laws and regulations governing human rights, working conditions, and environmental compliance before we are willing to conduct business with them. We also require our manufacturing partners and licensees to comply with our Restricted Substances policy as a condition of doing business with our company. 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. We maintain an on-site supervisory office in Pan Yu City, China that serves as a local link 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. To ensure the production of high quality products, the majority 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 to manufacture our footwear, including wool, rubber, leather, and nylon webbing are generally available from multiple sources at competitive prices. Beginning in 2013, in some of our UGG products we used a new raw material, UGGpure, which is wool woven into a durable backing. We generally outsource our manufacturing requirements on the basis of individual purchase orders or short-term purchase commitments rather than maintaining long-term purchase commitments with our independent manufacturers. +5 +Table of Contents +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 for our products primarily from Australia, Europe, and the US. We maintain communication with the tanneries to monitor the supply of sufficient high quality sheepskin available for our projected UGG brand production. To ensure adequate supplies for our manufacturers, we forecast our usage of sheepskin in advance at a forward price. We have also entered into minimum purchase commitments with certain sheepskin suppliers (see Note 7 to our accompanying consolidated financial statements.) We believe current supplies are sufficient to meet our needs in the near future, but we continue to investigate our options to accommodate any unexpected future growth. +We have instituted pre-production, in-line, and post-production inspections to meet or exceed the high quality demanded by us and consumers of our products. Our quality assurance program includes our own employee 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 distribution centers. +Patents and Trademarks +We utilize trademarks on virtually all of our products and believe that having distinctive marks that are readily identifiable is an important factor in creating a market for our goods, toward identifying the Company, and in distinguishing our goods from the goods of others. We currently hold trademark registrations for UGG, Teva, Sanuk, TSUBO, Ahnu, MOZO, Hoka One One, and other marks in the US and in many other countries, including the countries of the European Union, Canada, China, Japan and Korea. We now hold more than 160 utility and design patent registrations in the US and abroad and have filed more than 20 new patent applications which are currently pending. These patents expire at various times. We regard our proprietary rights as valuable assets and vigorously protect such rights against infringement by third parties. No single patent is critical to our business, and no group of patents expiring in the same year is critical to our business. +Seasonality +Our business is seasonal, with the highest percentage of UGG brand net sales occurring in the quarters ending September 30 and December 31 and the highest percentage of Teva and Sanuk brand net sales occurring in the quarters ending March 31 and June 30 of each year. Our financial results include the Sanuk brand beginning July 1, 2011 and the Hoka brand beginning September 27, 2012. Historically, our total net sales in the quarters ending September 30 and December 31 have exceeded total net sales for the quarters ending March 31 and June 30 of each year, and we expect this trend to continue. Our other brands do not have a significant seasonal impact on our business. Nonetheless, actual results could differ materially depending upon consumer preferences, availability of product, competition, and our wholesale and distributor customers continuing to carry and promote our various product lines, among other risks and uncertainties. See Part I, Item 1A, "Risk Factors." For further discussion on our working capital and inventory management, see Item 7 of Part II, "Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources." +Backlog +Historically, we have encouraged our wholesale and distributor customers to place, and we have received, a significant portion of orders as preseason orders, generally four to eight months prior to the anticipated shipment date. We work with our wholesale customers through preseason 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, which can be cancelled prior to shipment. The backlog as of a particular date is affected by a number of factors, including seasonality, manufacturing schedule, and the timing of product shipments 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. +At December 31, 2013 , our backlog of orders from our wholesale customers and distributors was approximately $ 401,000 compared to approximately $ 323,000 at December 31, 2012 . While all orders in the backlog are subject to cancellation by customers, we expect that the majority of such orders will be filled in 2014 . We believe that backlog at year-end is an imprecise indicator of total revenue that may be achieved for the full year for several reasons. Backlog only relates to wholesale and distributor orders for the next season and current season fill-in orders, and excludes potential sales in our E-Commerce business and retail stores during the year. Backlog also is affected by the timing of customers' orders and product availability. +Competition +The casual, outdoor, athletic, fashion, and formal footwear markets are highly competitive. Our competitors include athletic and footwear companies, branded apparel companies, and retailers with their own private labels. Although the footwear industry is fragmented to a certain degree, many of our competitors are larger and have substantially greater resources than us, including athletic shoe companies, several of which compete directly with some of our 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 +6 +Table of Contents +and accessory industries. In particular, in part due to the popularity of our UGG products, we face increasing competition from a significant number of competitors selling products designed to compete directly or indirectly with our UGG products. +We believe that our footwear lines and other product lines compete primarily on the basis of brand recognition and authenticity, product quality and design, functionality, performance, comfort, fashion appeal, and price. Our ability to successfully compete depends on our ability to: +• +shape and stimulate consumer tastes and preferences by offering innovative, attractive, and exciting products; +• +anticipate and respond to changing consumer demands in a timely manner; +• +maintain brand authenticity; +• +develop high quality products that appeal to consumers; +• +price our products suitably; +• +provide strong and effective marketing support; and +• +ensure product availability. +We believe we are well positioned to compete in the footwear industry. 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, 2013 , we employed approximately 3,200 employees in the US, Europe, and Asia, none of whom were represented by a union. This figure includes approximately 2,000 employees in our retail stores worldwide, which includes part-time and seasonal employees. The increase in employees during the year was primarily related to increased expansion efforts. We intend to increase our employee count further in 2014 primarily related to the opening of new retail stores and our other expansion initiatives. We believe our relationships with our employees are good. +Financial Information about Segments and Geographic Areas +Our six reportable business segments include the strategic business units responsible for the worldwide operations of our brands' (UGG, Teva, Sanuk and other brands) wholesale divisions, as well as our E-Commerce and retail store businesses. The majority of our sales and long-lived assets are in the US. Refer to Note 8 to our accompanying consolidated financial statements for further discussion of our business segment data. Refer to Item 1A of this Part I for a discussion of the risks related to our foreign operations. +Compliance with federal, state, and local environmental regulations has not had, nor is it expected to have, any material effect on our capital expenditures, earnings, or competitive position based on information and circumstances known to us at this time. +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 SEC: annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, Proxy Statements, and any amendments 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 SEC's Public Reference Room at 100 F Street, NE, 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 at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. \ No newline at end of file diff --git a/raw/filings/0000910521/2013/0001445305-14-000820/item13.txt b/raw/filings/0000910521/2013/0001445305-14-000820/item13.txt new file mode 100644 index 0000000000000000000000000000000000000000..e61c811945220d0c2fcaf930cbfc25f1511cb948 --- /dev/null +++ b/raw/filings/0000910521/2013/0001445305-14-000820/item13.txt @@ -0,0 +1,2 @@ +Item 13. Certain Relationships and Related Transactions, and Director Independence. +Information relating to Certain Relationships and Related Transactions is set forth under "Proposal No. 1-Election of Directors" in the Company's definitive proxy statement relating to the Registrant's 2014 annual meeting of stockholders, which will be filed pursuant to Regulation 14A within 120 days after the end of the Company's fiscal year ended December 31, 2013 , and such information is incorporated herein by reference. \ No newline at end of file diff --git a/raw/filings/0000910521/2013/0001445305-14-000820/item9a.txt b/raw/filings/0000910521/2013/0001445305-14-000820/item9a.txt new file mode 100644 index 0000000000000000000000000000000000000000..a94e85aeaadfe1a293bee1c2571b9d53c0cce284 --- /dev/null +++ b/raw/filings/0000910521/2013/0001445305-14-000820/item9a.txt @@ -0,0 +1,19 @@ +Item 9A. Controls and Procedures. +(a) Disclosure Controls and Procedures. +The Company maintains a system of disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) which are designed to provide reasonable assurance that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. These disclosure controls and procedures include, among other processes, controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is accumulated and communicated to management, including the principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognized that any system of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. +The Company carried out an evaluation, under the supervision and with the participation of management, including the principal executive officer and the principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2013 pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the principal executive officer and the principal financial officer concluded that the Company's disclosure controls and procedures were effective at the reasonable assurance level as of the end of the period covered by this annual report to ensure that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and to ensure that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including the principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. +(b) Management's Report on Internal Control over Financial Reporting. +Management is responsible for establishing and maintaining adequate internal control over financial reporting at the Company. Our internal control over financial reporting is a process designed under the supervision of the Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company's financial statements for external reporting purposes in accordance with US generally accepted accounting principles (GAAP). A company's internal control over financial reporting includes those policies and procedures that: +• +pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; +• +provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and the directors of the company; and +• +provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements. +Because of 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 Company's internal control over financial reporting as of December 31, 2013 . Management based this assessment on criteria for effective internal control over financial reporting described in Internal Control — Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management's assessment included an evaluation of the design of the Company's 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. +44 +Table of Contents +Based on this assessment, management determined that, as of December 31, 2013 , the Company maintained effective internal control over financial reporting. The registered public accounting firm that audited the consolidated financial statements included in this Annual Report has issued an attestation report on the Company's internal control over financial reporting. The Reports of our Independent Registered Public Accounting Firm are filed with this annual report in a separate section following Part IV, as shown on the index under Item 15 of this Annual Report. +(c) Changes in Internal Control over Financial Reporting. +There was no change in our internal control over financial reporting that occurred during the quarter ended December 31, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. \ No newline at end of file diff --git a/raw/filings/0000910521/2013/0001445305-14-000820/rp_note.txt b/raw/filings/0000910521/2013/0001445305-14-000820/rp_note.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69de29bb2d1d6434b8b29ae775ad8c2e48c5391 diff --git a/raw/filings/0000910521/2013/0001445305-14-000820/rpt_disclosure.txt b/raw/filings/0000910521/2013/0001445305-14-000820/rpt_disclosure.txt new file mode 100644 index 0000000000000000000000000000000000000000..13917be47b681a44b0ec0c80577f77fa3b361ef3 --- /dev/null +++ b/raw/filings/0000910521/2013/0001445305-14-000820/rpt_disclosure.txt @@ -0,0 +1,11 @@ +Certain Relationships and Related Person Transactions +Our Company's legal department is primarily responsible for identifying and reviewing relationships and transactions in which our Company and our directors, executive officers, certain of our stockholders or their immediate family members are participants to determine whether any of these related persons had or will have a direct or indirect material interest. In order to identify potential related person transactions, our Company's legal department annually prepares and distributes to all directors and executive officers a written questionnaire which includes questions intended to elicit information about any related person transactions. In addition, our Company's Code of Ethics addresses conflicts of interest where an individual's private interests interfere or conflict with the interests of our Company, including relationships with suppliers, customers or competitors. Conflicts of interest which might impair or appear to impair the exercise of judgment solely for the benefit of our Company are prohibited. In general, such conflicts must be approved by the legal department, the employee's supervisor or, in the case of directors, the Audit Committee. Information regarding potential conflicts of interests in violation of our Company's Code of Ethics may be reported to our Company's anonymous reporting hotline and may be subsequently obtained by the Chair of the Audit Committee, the Chair of our Board of Directors and the highest ranking manager of internal audit. +If a related person transaction is identified by the legal department as one which must be reported in our Company's Proxy Statement pursuant to applicable SEC regulations, the Audit Committee is responsible for reviewing and approving or ratifying any such related person transactions. In evaluating related person transactions, the Audit Committee members apply the same standards of good faith and fiduciary duty they apply to their general responsibilities as the Audit Committee and as individual directors. The Audit Committee may approve a related person transaction when, in its good faith judgment, the transaction is in the best interests of our Company. +There were no disclosable transactions with related persons under Item 404 of Regulation S-K during the fiscal year ended December 31, 2013 nor are any such transactions currently proposed. +Limitation of Liability and Indemnification of Directors and Officers +Our Certificate of Incorporation and Bylaws provide that we shall indemnify directors and executive officers to the fullest extent now or hereafter permitted by the Delaware General Corporation Law (DGCL). In addition, we have entered into indemnification agreements with our directors and executive officers in which we agree to indemnify such persons to the fullest extent now or hereafter permitted by the DGCL. +We have obtained a liability policy for our directors and officers as permitted by the DGCL which extends to, among other things, liability arising under the Securities Act of 1933, as amended. +We maintain an insurance policy pursuant to which our directors and officers are insured, within the limits and subject to the limitations of the policy, against specified expenses in connection with the defense of claims, actions, suits or proceedings, +67 +Table of Contents +and liabilities which might be imposed as a result of such claims, actions, suits or proceedings, that may be brought against them by reason of their being or having been directors or officers. \ No newline at end of file