UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2007
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission
file number:
000-51382
Volcom, Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
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33-0466919
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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1740 Monrovia Avenue
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92627
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Costa Mesa, California
(Address of principal
executive offices)
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(Zip Code)
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(949) 646-2175
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common stock, $0.001 par value
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The NASDAQ Global Select Market
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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
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No
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Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes
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No
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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 requirements for the past
90 days. Yes
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No
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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 the registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K.
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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. (Check one):
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Large accelerated
filer
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Accelerated
filer
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Non-accelerated
filer
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Smaller reporting
company
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(Do not check if a smaller reporting
company)
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes
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No
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The aggregate market value of Common Stock held by
non-affiliates of the registrant as of June 30, 2007, the
end of the most recently completed second quarter, was
approximately $751.1 million.
As of February 15, 2008, there were 24,349,520 shares
of the registrants common stock, par value $0.001,
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Part III incorporates information by reference from the
registrants definitive proxy statement (the Proxy
Statement) for the 2008 Annual Meeting of Stockholders,
which will be held on May 6, 2008.
Cautionary
Note Regarding Forward-Looking Statements
This annual report on
Form 10-K
and other documents we file with the Securities and Exchange
Commission, or SEC, contain forward-looking
statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Exchange Act,
and we intend that such forward-looking statements be subject to
the safe harbors created thereby. These statements relate to
future events or our future financial performance. We have
attempted to identify forward-looking statements with
terminology including anticipate,
believe, can, continue,
could, estimate, expect,
intend, may, plan,
potential, predict, should
or will or similar expressions as they relate to us
and our business, industry, markets, retailers, licensees,
manufacturers and consumers. Such forward-looking statements,
including but not limited to statements relating to expected
growth and strategies, future operating and financial results,
financial expectations and current business indicators, are
based upon current information and expectations, and are subject
to change based on factors beyond our control.
Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee
future results, levels of activity, performance or achievements.
Actual results could differ materially from these
forward-looking statements as a result of numerous factors, some
of which are described herein under Item 1A Risk
Factors. We are not under any duty to update any of the
forward-looking statements after the date of this
Form 10-K
to conform these statements to actual results, unless required
by law.
PART I
We are an innovative designer, marketer and distributor of
premium quality young mens and young womens clothing, footwear,
accessories and related products under the Volcom brand name. We
believe that we have one of the worlds leading brands in
the action sports industry, built upon our history in the
boardsports of skateboarding, snowboarding and surfing. Our
position as a premier brand in these three boardsports
differentiates us from many of our competitors within the
broader action sports industry and has enabled us to generate
strong growth in revenues and operating income.
Our products, which include t-shirts, fleece, bottoms, tops,
jackets, boardshorts, denim, outerwear, sandals, girls swimwear
and a complete collection of kids clothing for young boys
ages 4 to 7 years, combines fashion, functionality and
athletic performance. Our designs are infused with artistic
elements that we believe differentiate our products from those
of our competitors. We develop and introduce products that we
believe set the industry standard for style and quality in each
of our product categories. We seek to offer products that appeal
to both boardsport participants and those who affiliate
themselves with the broader action sports youth lifestyle.
For our Spring 2007 line, we launched new product extensions to
complement our current product offerings. These new product
extensions include a complete line of sandals and slip-on
footwear, branded Creedlers; a complete collection of kids
clothing for young boys ages 4 to 7 years; and a girls
swimwear line. The Creedlers and kids line began shipping in
December 2006, and the girls swimwear line began shipping in
February 2007.
The Volcom brand, symbolized by The Volcom Stone
![(STONE GRAPHIC)](http://content.edgar-online.com/edgar_conv_img/2008/02/29/0000950137-08-003097_A38575A3857502.GIF)
, is
athlete-driven, innovative and creative. We have consistently
followed our motto of youth against establishment,
and our brand is inspired by the energy of youth culture. We
reinforce our brand image through the sponsorship of world-class
athletes, targeted grassroots marketing events, distinctive
advertising, and by producing and selling music under our Volcom
Entertainment label and boardsports-influenced films through
Veeco Productions, our film division. We believe our
multi-faceted marketing approach integrates our brand image with
the lifestyles and aspirations of our consumers.
We seek to enhance our brand image by controlling the
distribution of our products. We sell to retailers that we
believe merchandise our products in an environment that supports
and reinforces our brand and that provide a superior in-store
experience. This strategy has enabled us to develop strong
relationships with key boardsport and youth lifestyle retailers
that share our focus. As of December 31, 2007, our customer
base of retailers included approximately 2,250 accounts that
operated approximately 4,800 store locations (of which
approximately 1,150 accounts that operated approximately 2,950
stores are located in the United States) and 37 distributors in
countries not serviced by our licensees. Our retail customers
are primarily comprised of specialty boardsports retailers and
several retail chains. Some of these include 17th Street
Surf, Becker Surfboards, Froghouse, Hotline, Huntington
Surf & Sport, IG Performance, K5 Board Shop, Laguna
Surf & Sport, Macys, Nordstrom, Pacific Sunwear,
Snowboard Connection, Sun Diego, Surfside Sports, Tillys,
Val Surf, West Beach and Zumiez. Our products are sold over the
Internet through selected authorized online retailers. At
December 31, 2007, we operated six full-price Volcom
branded retail stores located in California and Hawaii, where we
are able to present our brand message directly to our target
market.
Volcom branded products are currently sold throughout the United
States and in over 40 countries internationally by either us or
international licensees. We serve the United States, Europe,
Canada, Latin America, Asia Pacific and Puerto Rico through our
in-house sales personnel, independent sales representatives and
distributors. Our product revenues in the United States were
$174.3 million, $157.6 million and $128.2 million
for 2007, 2006 and 2005, respectively. Revenues from our
European operations were $40.1 million, $4.5 million
and $0.3 million for 2007, 2006, and 2005, respectively.
The increase in revenues from our European operations in 2007
was generally a result of the transition of our European
operations from a licensee model to a direct control model.
Product revenues from operations other than those generated in
the United States or Europe were $50.8 million,
$39.1 million and $28.2 million for 2007, 2006 and
2005, respectively. We also license our brand in other areas of
the world, including Australia, Indonesia, South Africa and
Brazil, to entities that we believe have valuable local market
insight and strong relationships with retailers in their
respective territories. We receive royalties on the sales of
Volcom branded products sold by our licensees. Our license
agreement with our European licensee terminated on
December 31, 2006. Pursuant to an agreement between us and
Volcom Europe (our former European licensee), Volcom Europe
produced and distributed the Spring 2007 Volcom line in Europe
and paid us our same royalty rate as required under the license
agreement. In anticipation of the expiration of our license
agreement with Volcom Europe, we have established our own
operations in Europe and have taken direct control of the Volcom
brand in Europe. As a result, we will continue to experience a
decrease in our licensing revenues and an increase in our
selling, general and administrative expense while we continue to
build the necessary infrastructure and hire employees to further
establish and support our own operations in Europe. However, our
product revenues have increased in Europe as we now recognize
revenue from the direct sale of our products in this territory.
As part of our strategy to take direct control of our European
operations, we constructed a new European headquarters in
Anglet, France, which was completed in February 2007, and
delivered our first full season product line during the third
quarter of 2007. We continue to build the necessary
infrastructure to support these European operations. Our current
European team consists of approximately 86 employees made
up of design, production, sales, information technology and
management positions.
On January 17, 2008, we acquired all of the outstanding
membership interests of Electric Visual Evolution LLC, or
Electric, for $25.3 million. Known for its volt logo,
Electric is a core action sports lifestyle brand. The
companys growing product line includes sunglasses,
goggles, t-shirts, bags, hats, belts and other accessories.
Electric has an established global platform which we believe
will serve as the foundation for further growth. The company was
founded in 2000 by industry veterans Kip Arnette and Bruce Beach
and is headquartered in Orange County, California.
We were founded in 1991 by Richard Woolcott and Tucker Hall in
Orange County, California, the epicenter of boardsports culture.
We reincorporated in Delaware in April 2005. We believe we were
the first major apparel company founded on the boardsports of
skateboarding, snowboarding and surfing. Our founders set out to
build a company that combined their passion for these sports
with their love of art, music and film. Since that time, Richard
has led a committed, talented management team to create one of
the leading action sports brands in the world. Stockholders may
obtain a copy of our SEC reports, free of charge, from the
SECs website at
www.sec.gov
or from our website at
www.volcom.com
, or by writing to Investor Relations,
Volcom, Inc., 1740 Monrovia Avenue, Costa Mesa, California
92627. Information contained on our website is not incorporated
by reference herein.
Products
We design and distribute an innovative collection of young mens
and young womens clothing, footwear and accessories inspired by
the boardsports of skateboarding, snowboarding and surfing. Our
products are created for participants in
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these sports, as well as those who affiliate themselves with the
broader action sports lifestyle. All of our clothes and
accessories are sold under the Volcom brand and typically retail
at premium prices.
We have six primary product categories: mens, girls, boys,
footwear, girls swim and snow. The principal products sold
within these categories are:
T-Shirts and Fleece.
We believe our prints and
designs distinguish our t-shirts and fleece from those of our
competitors and are staple items for our consumers. The majority
of these items display a distinctive art style, utilizing unique
treatments, placements of screened images, designs and
embroideries. On some of our t-shirts and fleece, we promote our
Featured Artist Series, a program in which we work closely with
boardsports athletes and relevant artists associated with our
target market to design certain products. Most pieces
prominently display the Volcom name or the Volcom Stone logo.
The typical U.S. retail price for our t-shirts ranges from
approximately $19 to $32, and from approximately $36 to $86 for
our fleece.
Tops and Jackets.
Our knit and woven tops and
casual jackets are recognizable for their bold and creative
styling. Many of our designs are built on traditional fashions,
with a distinctive Volcom image or style feature that creates a
distinguishing look our consumers have come to expect. The
typical U.S. retail price for these items ranges from
approximately $29 to $64 for knit and woven tops and
approximately $60 to $150 for a casual jacket.
Bottoms.
We design a variety of casual and
dress pants, shorts and skirts. Our bottoms are generally made
using cotton or cotton-blend fabrics. Our bottoms are designed
to be both functional and distinctive and generally have one or
more elements that provide a unique Volcom look. The typical
U.S. retail price for our bottoms ranges from approximately
$42 to $58 for shorts or skirts and approximately $50 to $64 for
casual dress pants.
Denim.
We first introduced our Volcom brand
jeans in 1993 and they have become one of our most popular
product lines. The design and construction of our denim products
is directly influenced by our skateboard team. We offer denim
products in a variety of washes and fits to suit individual
preferences for appearance and functionality. The typical
U.S. retail price for our denim products ranges from
approximately $60 to $152.
Boardshorts.
We introduced our boardshorts
line in 1992. Our boardshorts are designed with input from our
surf team and incorporate technical features such as mesh
paneling and enhanced waterproof zipper fly technology. Our
boardshorts are known for their art inspired prints and unique
embellishments. The typical U.S. retail price for our
boardshorts ranges from approximately $48 to $64.
Outerwear.
Our outerwear products, which were
introduced in 2000, consist of technically advanced jackets and
pants that are designed to meet the demands of snowboarding. Our
outerwear is designed with a number of technical features and
fabrics and includes significant input from our snowboard team.
Some of the technical aspects of our outerwear include
Gore-Tex
®
fabrics, taped and welded seam construction, waterproof zippers
and our patent pending Zip-Tech jacket/pant connection system.
We believe that our outerwear provides consumers with a
distinctive mix of fashion and technical performance, which
distinguishes it from many of our competitors products.
The typical U.S. retail price for our outerwear ranges from
approximately $100 to $440 for pants and approximately $90 to
$500 for jackets.
Accessories.
We also sell a variety of
accessories such as hats, wallets, ties, belts and bags to
complement our clothing lines. The typical U.S. retail
price for our accessories ranges from approximately $20 for hats
to approximately $200 for large bags.
Creedlers.
We recently introduced a complete
line of sandals, slippers and vulcanized slip-on footwear,
branded Creedlers. These products are sold year round and are
offered in our mens, boys and girls categories. They are
generally distributed within our existing customer base. The
typical U.S. retail price for the Creedlers ranges from
approximately $12 to $44 for sandals, $36 to $40 for slippers
and $42 to $110 for vulcanized slip-on footwear. We are
currently shifting away from our vulcanized slip-on category to
concentrate primarily on the sandal and slipper categories.
Swim.
Our newest product launch is a girls
swimwear line. The swimwear product complements our existing
girls business and is merchandised with the girls sportswear,
Creedlers and accessories. Our swimwear is generally distributed
within our existing customer base. The typical U.S. retail
price for the swimwear ranges from approximately $34 to $42 for
swimwear tops and approximately $34 to $40 for swimwear bottoms.
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V.co-Operative.
We also partner with our team
riders to design certain signature product styles, called
V.co-Operative,
such as those designed in conjunction with team riders Bruce
Irons, Mark Appleyard, Ozzie Wright, Ryan Sheckler, Dean
Morrison, Bjorn Leines, Geoff Rowley and Dustin Dollin.
Music and Film.
We also generate revenues from
the sale of music produced by our label, Volcom Entertainment,
and films produced by Veeco Productions, our film production
division.
Electric.
With our acquisition of Electric in
January 2008, we now also offer a full line of sunglasses and
goggles under the Electric brand name. We also offer t-shirts,
fleece and accessories under the Electric brand name.
Product
Design
We believe that our reputation for creativity and innovation
enables us to design products that continuously evolve in style
and functionality while remaining attractive to consumers in our
target market and to our retail accounts. We have put in place
design processes that we believe allow us to respond quickly to
changing consumer tastes and preferences.
We employ design and product development teams located in our
Orange County, California headquarters and our European
headquarters. These teams are organized into groups that
separately focus on our mens, girls, boys, snow, Creedler and
girls swimwear categories. In addition to our in-house design
team, each of our international licensees employs designers and
merchandisers to create products that reflect local trends,
while maintaining our brand image. Our in-house design team and
designers from our international licensees generally meet
several times each year to collaboratively develop designs that
reflect fashion trends from around the world. Additionally,
design teams for each product category participate in at least
three trips per year to locations known for their influence on
fashion and style, such as New York, Paris, London, Sydney and
Tokyo. Our domestic designers and those of our international
licensees share the majority of our seasonal styles, resulting
in a consistent look for Volcom products sold worldwide. We also
involve our team riders and core retail accounts in the design
process. We believe that team rider input adds to the style and
functionality of our products and reinforces the credibility and
authenticity of our brand. We also believe that involving our
retailers provides us with additional insight into consumer
preferences.
Our design calendar is typically organized around four major
seasons: spring/summer, fall, snow and holiday. As a result of
the feedback gathered from our sponsored athletes and core
retailers, we are able to incorporate new looks and features
into each seasons product line. These changes range from
evolutions within our basic product lines to new fashion-forward
styles.
Manufacturing
and Sourcing
We generally contract for the manufacture of each of our product
lines separately based on our fabric and design requirements. We
do not own or operate any manufacturing facilities, and source
our products from independently-owned manufacturers. Our apparel
and accessories are generally purchased or imported as finished
goods, and we purchase only a limited amount of raw materials.
Our manufacturers operate facilities using advanced machinery
and equipment, and we believe these manufacturers represent some
of the strongest in their industry. In 2007, we imported over
85% of our products from China and Mexico, with Asian
manufacturers producing the majority of our imported products.
Our t-shirts are screen-printed in the United States, which has
resulted in short lead times and has enabled us to react quickly
to reorder demand from our retailers and distributors.
We have developed a sourcing process that allows us to maintain
production flexibility and to avoid the capital expenditures and
ongoing costs of operating an in-house manufacturing function.
During 2007, we contracted for the manufacture of our products
with approximately 45 foreign manufacturers. Approximately 72%
and 13% of our total product costs during 2007 and approximately
61% and 13% of our total product costs during 2006 were derived
from manufacturing operations in China and Mexico, respectively.
We also contract with several domestic screen printers. Other
than Dragon Crowd and Ningbo Jehson Textiles, two of our
manufacturers located in China that accounted for 19% and 14% of
our product costs during 2007, respectively, and for 15% and 12%
of our product costs during 2006, respectively, no single
manufacturer of finished goods accounted for more than 10% of
our production expenditures during 2007 or 2006. We do not have
any long-term contracts with our manufacturers, choosing instead
to retain the flexibility to re-evaluate our sourcing and
manufacturing decisions. We evaluate our
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vendors primarily on the quality of their work, ability to
deliver on time and cost. Representatives from our design and
production staff visit and formally assess our foreign contract
manufacturers multiple times per year. We also use the services
of third parties to assist us in quality control and to ensure
that our manufacturers are in compliance with applicable labor
practices. These third parties generally perform periodic social
compliance audits, provide regular quality inspections, monitor
delivery deadlines and assess overall vendor performance. We
believe that our commitment to quality control and our
monitoring procedures are an important and effective means of
maintaining the quality of our products and our reputation among
consumers.
We work directly with local sourcing agents aligned with foreign
contract manufacturers to direct our production needs to
factories that meet our quality and timing needs. We typically
choose our manufacturers based on their expertise in specific
product lines. Many of our manufacturers specialize in multiple
product lines, allowing us to reallocate orders, if necessary,
to manufacturers with whom we have established relationships. We
believe this enhances the efficiency and consistency of our
sourcing operations. In addition, we maintain relationships with
numerous qualified manufacturers that are available to provide
additional capacity on an as-needed basis. We regularly
research, test and add alternate and
back-up
manufacturers to our network to ensure that we maintain a
constant flow of products in order to meet the needs of our
retailers and distributors. In addition, we source products with
multiple vendors allowing for competitive pricing and
manufacturing flexibility. Based on our historical experience
with a wide range of manufacturers, we believe alternate
manufacturing sources are available at comparable costs.
We arrange for the production of a majority of our products
primarily based on orders received. We have traditionally
received a significant portion of our customer orders prior to
placement of our initial manufacturing orders. We use these
early season orders, and our experience, to project overall
demand for our products in order to secure manufacturing
capacity and to enable our manufacturers to order sufficient raw
materials. We believe that our ability to effectively forecast
seasonal orders, combined with our flexible sourcing model,
limits our sourcing risk, increases our ability to deliver our
products to our customers on time, helps us better manage our
inventory and contributes to our overall profitability.
Imports
and Import Restrictions
Our independent buying agents, primarily in China, Hong Kong,
India and, to a lesser extent, in other foreign countries,
assist us in selecting and overseeing the majority of our
independent third-party manufacturing and sourcing. These agents
also monitor quota and other trade regulations in addition to
facilitating our quality control function.
Our products manufactured abroad are subject to
U.S. customs laws, which impose tariffs as well as import
quota restrictions for textiles and apparel. Quota represents
the right, pursuant to bilateral or other international trade
arrangements, to export amounts of certain categories of
merchandise into a country or territory pursuant to a visa or
license. Pursuant to the Agreement on Textiles and Clothing,
quota on textile and apparel products was eliminated for World
Trade Organization, or WTO, member countries, on January 1,
2005. Notwithstanding quota elimination, Chinas accession
agreement for membership in the WTO provides that WTO member
countries (including the United States, Canada and European
countries) may re-impose quotas on specific categories of
products in the event it is determined that imports from China
have surged and are threatening to create a market disruption
for such categories of products (so called safeguard quota
provisions).
During 2005, the United States and China agreed to a new quota
arrangement, which will impose quotas on certain textile
products through the end of 2008. The United States may also
unilaterally impose additional duties in response to a
particular product being imported (from China or other
countries) in such increased quantities as to cause (or
threaten) serious damage to the relevant domestic industry
(generally known as anti-dumping actions). We do not
expect the limitations on imports from China to materially
affect our operations because we believe we will be able to meet
our needs from countries not affected by the restrictions or
tariffs or from domestic sources. We intend to closely monitor
our sourcing in China to avoid disruptions. The United States
and other countries in which our products are manufactured and
sold may, from time to time, impose new duties, tariffs,
surcharges or other import controls or restrictions, including
the imposition of safeguard quota, or adjust
presently prevailing duty or
5
tariff rates or levels. In an effort to minimize our potential
exposure to import risk, we actively monitor import restrictions
and quota fill rates and, if needed, can shift production to
other countries or manufacturers.
Additionally, China offers a rebate tax on exports, which has
recently been reduced due to pressures from the United States
and other countries to control the amount of exports from China,
which has increased costs. These cost increases, along with the
rising currency and labor shortages in China, will have an
impact on our business. While we do not believe the limitations
on imports from China will have a material effect on our
operations, there will be increased pressure on costs and we
intend to closely monitor our sourcing in China to avoid
disruptions.
Distribution
and Sales
We seek to enhance our brand image by controlling the
distribution of our products and selling to retailers that we
believe merchandise our products in an environment that supports
and reinforces our brand image. Our customer base as of
December 31, 2007, included approximately 2,250 retail
accounts that operate approximately 4,800 store locations (of
which approximately 1,150 accounts that operated approximately
2,950 stores are located in the United States) and 37
distributors in countries not serviced by our licensees. Our
retail customers are primarily comprised of specialty
boardsports retailers and several retail chains. Some of these
include 17th Street Surf, Becker Surfboards, Froghouse,
Hotline, Huntington Surf & Sport, IG Performance, K5
Board Shop, Laguna Surf & Sport, Macys,
Nordstrom, Pacific Sunwear, Snowboard Connection, Sun Diego,
Surfside Sports, Tillys, Utility, Val Surf, West Beach and
Zumiez. We encourage our retailers to maintain specific
merchandise presentation standards. Our products are offered
over the Internet through selected authorized online retailers.
At December 31, 2007, we operated six full-price Volcom
branded retail stores located in California and Hawaii. We are
currently evaluating opening approximately four additional
full-price Volcom branded retail stores during 2008 to be
located in strategic markets across the United States where we
believe we can best present our brand message directly to the
consumer. In addition to our retail accounts, we sell to
distributors in Latin America, Asia Pacific and other developing
markets throughout the world. We distribute our products
directly in Canada.
Our specialty retailers attract skateboarders, snowboarders and
surfers who we believe have influence over fashion trends and
demand for boardsports products. We focus on our relationships
with these specialty retailers, as we believe they represent the
foundation of the boardsports market. We collaborate with our
specialty retailers by providing in-store marketing displays,
which include racks, wall units and point-of-purchase materials
that promote our brand image. We believe that these programs
have enabled us to grow our sales within these accounts and will
enable us to increase our floor space going forward. We also
sponsor events and programs at our retailers such as autograph
signings and boardsport demonstrations with our team riders. We
believe that our relationships with our retailers are a critical
element of our success.
We maintain a national sales force of independent sales
representatives. These representatives are compensated on a
commission basis, which we believe provides them with strong
incentives to promote our products. We are typically the
exclusive apparel brand sold by these representatives, who may
also sell complementary products from other companies. For
certain of our larger retail accounts and distributors, we
manage the sales relationship in-house rather than using
independent sales representatives.
We employ an in-house sales team to serve major national
accounts, such as Zumiez, Pacific Sunwear, Nordstrom,
Macys, Tillys and Dillards. We currently have six
employees dedicated to our major accounts. We also employ an
in-house sales team to serve international territories not
represented by one of our international licensees, such as
Canada, Asia Pacific and Latin America. We currently have three
employees dedicated to this effort who build and maintain
relationships in those markets.
In order to maintain sufficient inventories to meet the demands
of our retailers, we typically pre-book orders in advance of
delivery. None of our sales agreements with any of our customers
provides for any rights of return. As is customary in our
industry, we do approve returns on a
case-by-case
basis at our sole discretion to protect our brand and our image.
We inspect, sort, pack and ship substantially all of our
products, other than those sold by our licensees or in Canada,
from our distribution center at our headquarters and our offsite
distribution warehouse, both located in Orange County,
California. We distribute our products sold in Canada through a
third-party distribution center
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located in Kamloops, British Columbia. All products received
into these distribution centers are subject to our strict
quality control standards, which include cross-referencing each
style back to the pre-production and fit comments, which were
made throughout the production cycle, reviewing design comments
against product shipments, overall shipment inspection for water
or other damage by our receiving department, and garment
inspection and specification measurements by our quality control
department.
Licensing
We serve Australia, Brazil, South Africa and Indonesia through
license agreements with four independent licensees. Our license
agreement with our European licensee terminated on
December 31, 2006. Pursuant to an agreement between us and
Volcom Europe (our former European licensee), Volcom Europe
produced and distributed the Spring 2007 Volcom line in Europe
and paid us our same royalty rate as required under the license
agreement. As part of our international strategy, we have
established our own operations in Europe in order to take direct
control of the Volcom brand in Europe. We have a 13.5% ownership
interest in our Australian licensee, Volcom Australia. As of
December 31, 2007, Volcom branded products sold by our
licensees can be found in over 600 store locations in Australia,
over 460 store locations in Brazil, approximately 100 store
locations in South Africa and approximately 90 store locations
in Indonesia.
Our international license agreements grant our licensees
exclusive, non-transferable rights to produce and sell specified
Volcom branded products in their respective geographic areas.
Our licensees pay us a specified royalty rate on their sales of
these products. The license agreements require the licensee to
follow our quality and design standards so that all products
sold by licensees are consistent with the style, image, design
and quality of other products we sell. We retain the right to
require each licensee to discontinue selling any product that we
believe does not meet our quality and design requirements. Each
licensee is also required to provide us with samples of the
Volcom branded products it intends to sell.
Our international license agreements expire as follows:
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Licensee
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Expiration Date
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Extension Termination Date
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Australia
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June 30, 2012
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N/A
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Brazil
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December 31, 2008
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December 31, 2013
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South Africa
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December 31, 2011
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N/A
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Indonesia
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December 31, 2009
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December 31, 2014
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In the future, we may assume responsibility for serving
territories that are currently represented by our licensees in
order to better control our international distribution and
branding. We may accomplish this by acquiring some of our
licensees or by establishing our operations abroad in
anticipation of the expiration of our license agreements. We
believe directly controlling our international distribution will
result in increased international revenues and profitability.
Certain of our license agreements may be extended at the option
of the licensee for an additional five-year term after the
initial expiration of the agreement. Pursuant to our
international growth strategy, we established our own operations
in Europe in anticipation of the expiration of our licensing
agreement with our European licensee on December 31, 2006.
We recently completed the construction of our European
headquarters in Anglet, France and delivered our first full
season of product line during the third quarter of 2007. In
addition, we continue to build the necessary infrastructure to
support these European operations.
Advertising
and Promotion
Our brand message blends elements of boardsports, fashion, art,
music and film. We employ a multi-faceted advertising and
promotion strategy. We do not generally use outside marketing
agencies, preferring instead to utilize our internal marketing
and art departments to create our advertisements and manage our
various grassroots programs. Our advertising and promotional
strategy consists of athlete sponsorship, Volcom branded events,
print advertisements, music, film, our featured artist series,
our Volcom branded retail stores and online marketing programs.
7
Athlete
Sponsorship
We believe that sponsoring high-profile skateboarding,
snowboarding and surfing athletes, as well as supporting
emerging talents, is an essential promotional tool to continue
building our brand. We believe our association with top athletes
builds brand equity and authenticity, and strengthens the link
between our products and our target consumers. We seek
credibility in our target market by maintaining a strong
sponsorship presence in our three boardsports in order to
differentiate us from our competitors.
We sponsor domestic and international teams of leading athletes
that wear our apparel, use our products and prominently display
the Volcom brand and the Volcom Stone logo in competitions and
other public appearances. We also produce films featuring our
athletes, and support contests and other events in which our
athletes promote our products. Some of our best-known athletes
in each of our three boardsports include the following:
Skateboarding
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Geoff Rowley Geoff won the prestigious Thrasher
Skater of the Year in 2001 and has been on the cover of many
major skateboard publications. He remains one of the highest
profile skateboarders at the core level on our team.
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Mark Appleyard Mark was named the Transworld Street
Skater of the Year in 2007 and 2003. Mark was also the Thrasher
Skater of the Year in 2003 and won the Transworld Readers
Choice Award for 2004.
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Ryan Sheckler Ryan turned professional in 2003 at
the age of thirteen. Since turning professional, he has been
crowned the overall winner of the Dew Action Sports Tour in the
skateboard park event and the athlete of the year for the entire
tour in 2007, 2006 and 2005, placed first at the Vans Triple
Crown in 2005, the Slam City Jam in Vancouver, Canada in 2003,
the 2003 X Games Park Final, the Gravity Games in 2003 and the
LG Action Sports Contest in 2004. He also placed second at the
2005 World Globe Cup. Ryan is featured in the most recent
version of Tony Hawks video game Project 8. In
addition, Ryan won the 2006 Champion of Globes Global
Assault skateboard contest in Australia. Ryan was also selected
as one of Sport Illustrateds Top 10 Crowd Pleasers of
2005. Fuel TV crowned Ryan the 2006 Skateboarder and Rider of
the Year at the Arbys Action Sports Awards. Ryan also
stars in his own hit TV show on MTV called Life of
Ryan.
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Rune Glifberg Rune won a total of seven contests in
2007 and was quoted by World Cup Skateboardings website as
the undisputed King of concrete comps. His victories
include Bondi
Bowl-A-Rama
in Australia; Vans Pro-tec Pool Party in Orange County,
California; Quiksilver Bowlriders in Malmo, Sweden; The
Copenhagen Pro in Denmark; the 2007 Vert World Championship in
Germany; Oregons Trifecta; and Volcom Stones Mini
Ramp Big Gig in Orlando, Florida.
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Snowboarding
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Terje Haakonsen Terjes championships include,
among others, two-time Air & Style Champion,
three-time U.S. Open Half-Pipe Champion, three-time
International Snowboard Federation World Half-Pipe Champion,
six-time Mt. Baker Banked Slalom Champion and five-time European
Half-Pipe Champion. Recently, Terje set the world record (9.8
meters) for the biggest backside 360 at the 2007 Arctic
Challenge. In 2008, Terje released a television show on Fuel TV
featuring six episodes of his travels around the globe.
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Bjorn Leines Bjorn placed fourth in Slopestyle at
the 2005 X Games, won the 2003 Red Bull Heavy Metal, has twice
been ranked second by Snowboarder magazine for Rider of the
Year, is a featured rider in Xbox games Amped and Amped 2 and
has been a Transworld Snowboarding Magazine Readers Choice
Award nominee.
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Kevin Pearce Kevin won his first major international
event during the 2006/2007 season at the Toyota Big Air in
Sapporo, Japan. Also during the 2006/2007 season, he went on to
win the Nippon Open Slopestyle, The Artic Challenge quarter-pipe
contest, and received second place at the Abominable Snow Jam in
both half-pipe and quarter-pipe. Kevin finished the 2006/2007
season ranked 4th in the Ticket To Ride (TTR) world
rankings for the 2006/2007 season. In the 2007/2008 season,
Kevin won the worlds largest snowboard
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event, The Munich Air and Style, landing a cab 1260 in front of
30,000 fans. Kevin has also landed 3rd on the podium at the
X-Trial quarter-pipe in Tokyo, Japan, and won the European Open
half-pipe in Laax, Switzerland. At the 2008 Winter X-Games in
Aspen, Colorado, Kevin earned 2nd in Big Air, 2nd in
Slopestyle and 3rd in Super-Pipe. Kevin also won the Air
and Style quarter-pipe contest in Innsbruck, Austria, as well as
the 2008 Arctic Challenge in Norway. He is currently ranked
1st in the world on the TTR World Snowboard Tour.
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Janna Meyen Janna is a 2006, 2005 and 2004 X Games
gold medalist and was crowned the 2004 Womens Rider of the
Year by Transworld Snowboarding Magazine. Her abilities range
from big mountain riding to halfpipe, slopestyle and handrails.
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Elena Hight Elena was the youngest member of the
2006 U.S. Winter Olympic Snowboarding team and placed sixth
at the Winter Olympic Halfpipe event. Elena won the Vans Cup
snowboard halfpipe competition in 2007. She also won the Overall
Burton Abominable Snow Jam in 2006, placed second at the first
two Grand Prix of Snowboarding events of the 2006/2007 season
and placed third at the Winter X Games in 2007. She was voted
Womens 2006 Rookie of the Year by Transworld Snowboarding
Magazine and the 2006 Grom of the Year at the Fuel Action Sports
TV Awards.
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Surfing
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Bruce Irons Bruce is beginning his fifth year of the
Association of Surfing Professionals, or ASP, World Championship
Tour, or WCT. Bruce won the 2005 Eddie Aikau Big Wave
Invitational at Waimea Bay in Hawaii and the Mr. Price Pro,
a six-star WQS event. Bruce has also won the prestigious WCT
Pipemasters event, held at the Banzai Pipeline on the North
Shore of Oahu. Bruce was voted ASP Rookie of the Year for the
2004 WCT season and finished in fifth place in the 2007 Surfer
Magazine Readers Choice Poll. In 2008, he finished a close
second in the prestigious Backdoor Shootout in massive surf at
Pipeline.
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Dean Morrison Dean is one of the top surfers in the
world and is a major player on ASPs WCT. Dean finished
second at the WCT Pipemasters event in December 2007. This
massive result rocketed him into ninth place on ASPs WCT
tour in 2007. Dean also received his first cover of Surfer
Magazine in 2007. He won the WCT event at his home break at
Snapper Rock, Australia in 2003.
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Ozzie Wright Ozzie is one of the worlds most
unique and talented free surfers. The combination of his talent,
including surfing, art and music, has proven that he is one of
the most marketable athletes in the sport. Ozzie pushes the
sport of surfing with his innovative and progressive approach.
In 2007, he was featured on the cover of Surfing Magazine. Most
recently, he is at the forefront of pushing some of
surfings newest tricks, including a kickflip, which is a
skateboard maneuver that has never been completed on a surfboard.
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We sponsor additional high-profile boardsport athletes. Some of
these athletes include Dustin Dollin, Darrell Stanton, Caswell
Berry, Wille Yli-Luoma, Seth Huot, Gigi Ruf, and Gavin Beschen.
In 2007, we also entered into sponsorship agreements with
selected motocross athletes.
We have contractual relationships with our sponsored athletes
whereby we compensate them for promoting our products.
Sponsorship arrangements are typically structured to give our
athletes financial incentives to maintain a highly visible
profile. Our contracts typically grant us an unlimited license
for the use of the athletes names and likenesses, and
typically require the athletes to maintain exclusive association
with our apparel. In turn, we agree to make cash payments to the
athletes for various public appearances, magazine exposure and
competitive victories while wearing our products. In addition to
cash payments, we also generally provide limited free products
for the athletes use, and fund some travel expenses
incurred by sponsored athletes in conjunction with promoting our
products.
Volcom
Branded Events
An important aspect of our marketing platform is our creation
and support of grassroots skateboard, snowboard and surfing
events in markets worldwide. We describe the driving philosophy
behind many of these events as Let The Kids Ride
Free, which we believe embodies our anti-establishment
brand image. We believe that these events
9
help our brand reach a wide audience within our target market.
Hundreds of competitors and spectators typically attend these
events.
We run a separate contest series for each of skateboarding,
snowboarding and surfing. These contests include the Wild in the
Parks Skate Series, the Peanut Butter and Rail Jam Snow Series
and the Totally Crustaceous Surf Series. These contests are held
around the world both by us and by our international licensees.
At these events, we emphasize fun and excitement for
participants and spectators. The contests are open on a
first-come, first-served basis and entry is free, so amateurs
and first time competitors can compete alongside professionals.
Additionally, free beverages and food are often provided, along
with giveaways from us and other companies. We have recently
created a global championship event for each series where we
invite the top qualifiers from each event to compete.
We organize, produce and manage these events through our
internal marketing department, which is responsible for choosing
venues, arranging sponsored athlete attendance, marketing and
working at each contest. By promoting Volcom branded events
throughout the year, we are able to collect consumer feedback
and insight that, we believe, allows us to keep our brand
connected to our target market and enables us to keep our
products fresh and relevant.
Print
Advertisements
We place the majority of our print advertisements in boardsports
magazines such as Thrasher, Transworld Skateboarding and
Snowboarding, Snowboarder, Surfing and Surfer. We also advertise
in fashion lifestyle magazines such as Anthem, Vice and Swindle.
We combine athletes, lifestyle, innovative visual designs and
our unique style into our advertisements. Our internal art
department designs all of our advertisements, including most of
those placed in international publications to support our
licensees. We do not generally use outside advertising agencies.
By maintaining complete creative control of our advertisements,
we are able to ensure that our brand image remains consistent
with our heritage and passion for action sports.
Music
We operate our own music label, Volcom Entertainment, which
identifies and signs musical artists and produces and
distributes recordings in the form of CDs, digital downloads,
vinyl LPs and wireless media worldwide through our retail
accounts, music retailers and online distribution channels. Some
of our best-known artists include Year Long Disaster, a rock
band from Los Angeles; Valient Thorr, a rock band from Chapel
Hill, North Carolina; Riverboat Gamblers, a rock band from
Austin, Texas; ASG, a rock band from Wilmington, North Carolina;
Totimoshi, a rock band from Oakland, California; and Birds Of
Avalon, a rock band from Raleigh, North Carolina. We believe
that this component of our marketing platform provides us with a
creative and artistic medium to connect with our target market
and differentiates us from our competitors. As of
December 31, 2007, our music label had distributed over 50
titles and sold over 300,000 units worldwide.
While we currently generate modest revenues from sales of music,
these products reinforce our brand image. During 2007, we
launched The Volcom Tour, a company branded
international music tour featuring our artists. We also operate
and sponsor an annual music competition for unsigned rock bands
called the Band Joust. Additionally, our bands play
at tradeshows, account demonstrations and other Volcom events.
We have entered into a distribution arrangement with WEA Rock
LLC, pursuant to which ADA, a music distribution company owned
by Warner Music Group, distributes our music. This arrangement
provides us with a greater array of worldwide distribution
options for our bands. We intend to continue to promote Volcom
Entertainment as an enhancement to our brand.
Film
We produce skateboarding, snowboarding and surfing films that
feature our sponsored athletes through Veeco Productions, our
film production division. We started this division in 1993, and
believe that our films, like our music, are an integral part of
our marketing and branding efforts.
Veeco has produced over 15 films including
Alive We Ride, The
Garden, Subjekt: Haakonsen, Magnaplasm, Chichagof
and
The
Bruce Movie.
In 2007, we produced
The Dawn of the Stone
Age
, which is an animated cartoon
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based on the high profile athletes on our surf team. Also in
2007, our Australian licensee produced
Lets Live,
a
skateboard movie starring the Volcom Australia skateboard team
as well as other international Volcom riders. In 2006, we
released our newest snowboarding movie
Escramble.
Our
films have been critically acclaimed and have won awards such as
Best Core Film at the
X-Dance
Film
Festival, Best Cinematography for a Snow Movie at the Unvailed
Band and Board Event, Surfer Magazines Video of the Year
and Surfer Magazines Video Award for Best Performance by a
Male Surfer (Bruce Irons twice). In our films, we
feature Volcom team riders such as Geoff Rowley, Terje Haakonsen
and Bruce Irons wearing Volcom branded products, which
emphasizes our boardsports heritage and close association with
leading boardsports athletes. Our films are distributed to our
retail customers, as well as music and video stores and rental
chains. We have typically produced and distributed approximately
one to two new films per year.
Featured
Artist Series
In 1995, we introduced the Volcom Featured Artist Series. This
series was developed to showcase the artistic depth of our
brand. We produce t-shirts and other products featuring the
artwork of team riders, employees and other talented artists
affiliated with us and the action sports community. The art
created by our featured artists has been shown in art shows
around the world, including exclusive exhibits at some of our
company-owned retail stores. The Volcom Featured Artist Series
is important to our brand and differentiates us from our
competition.
Retail
We currently operate six full-price Volcom branded retail stores
located in California and Hawaii. We believe that operating
company-owned, branded retail stores is an effective way for us
to promote our products, athletes and brand image. The Volcom
stores are stocked with much of our product line, as well as
limited edition goods only available in our stores. Our Volcom
stores regularly host events with our athletes, Volcom featured
artists and musicians, which attract consumers and enable us to
showcase our brand. The design and layout of the stores, which
include an assortment of our apparel, art presentations, a music
listening station with Volcom Entertainment titles and a Veeco
Productions section with all of our film titles, exemplifies our
philosophy of change and youth culture. We are evaluating a
limited number of markets for future Volcom stores. We are
currently evaluating opening approximately four Volcom branded
retail stores during 2008 to be located in strategic markets
across the United States where we believe we can best present
our brand message directly to the consumer. Our licensees
currently operate Volcom branded retail stores in such places as
Japan, Brazil, South Africa and Thailand. We also license 3
Volcom outlet stores, located in California and Nevada.
The
Volcom Pipehouse
In February 2007, we purchased one of the most famous houses in
surfing history directly in front of the Pipeline surf break on
the North Shore of Oahu, Hawaii, commonly referred to as the
Pipehouse. This house is our second residence in front of the
world renowned Pipeline surf break. This home will be the
headquarters for top Volcom team riders and will also be used as
a research and development center for product design and testing
and retailer roundtables. The original Volcom house will
continue to accommodate the majority of Volcoms domestic
and international
up-and-coming
team riders and serve as a marketing location throughout the
year. We believe these two properties provide Volcom with a
unique global marketing platform.
Online
Marketing
Our website, located at
www.volcom.com
, serves as an
additional medium for us to communicate our brand message.
Visitors to our website are able to view our line of apparel and
accessories, read news releases, learn about our team riders and
view information about our Volcom branded events. Our website
offers a directory of our traditional, store-based retailers and
we sell our films and music direct to consumers on our website.
We do not generally sell apparel on our website, other than
certain Volcom Entertainment products, but we do provide links
to select online retailers. As a means to further connect with
our core consumers, we allow visitors to
sign-up
for
email distribution of periodic news releases as well as updates
on our product line, team riders and Volcom branded events.
Information contained on our website does not constitute part
of, nor is it incorporated into, this
Form 10-K.
11
Competition
We compete globally with companies of various size and scale,
many of whom are significantly larger than we are and have
substantially greater resources than we have. We believe our
most significant direct competitors currently include Quiksilver
Inc., including the Quiksilver, Roxy and DC brands; Billabong
International Limited, including the Billabong and Element
brands; and Burton. We also compete with smaller companies that
focus on one or more boardsport segments. The boardsports market
is susceptible to rapid changes in consumer preferences, which
could affect acceptance of our products.
We compete primarily on the basis of successful brand management
and recognition, marketing and product design, style,
performance and quality. We believe that we compete favorably
with our competitors on these bases, although because several of
our competitors are public companies with greater resources than
we have, they have been able to allocate these resources toward
brand building and marketing programs that are greater in scope
and size than ours. In order to further our success and
continued growth we believe it will be necessary to:
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maintain our reputation as a popular lifestyle brand among the
skateboarding, snowboarding and surfing community and others who
associate themselves with the action sports youth lifestyle;
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continue to develop and respond to global fashion and lifestyle
trends in our target market;
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advance our brand as an authentic,
anti-establishment brand while continuing to grow as
a global business;
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design stylish, high-quality products at appropriate prices for
our target market; and
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continue to convey our lifestyle message to our target market
worldwide.
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Principal
Customers
As of December 31, 2007, our customer base included
approximately 2,250 accounts that operated approximately 4,800
store locations (of which approximately 1,150 accounts that
operated approximately 2,950 stores are located in the United
States) and 37 distributors in international territories not
serviced by one of our licensees. In 2007, 2006 and 2005, 33%,
44% and 47%, respectively, of our product revenues were derived
from our five largest customers. Other than Pacific Sunwear,
which accounted for 18%, 26% and 29% of our product revenues in
2007, 2006 and 2005, respectively, no single customer accounted
for more than 10% of our product revenues during 2007, 2006 or
2005. We believe that revenues from our five largest accounts,
including Pacific Sunwear, will continue to decrease as a
percentage of our overall revenues as we continue to diversify
our account base and experience a full year of contribution from
our recently established European operations.
Credit
and Collection
We extend credit to our customers based on an assessment of a
customers financial condition, generally without requiring
collateral. To assist in the scheduling of production and the
shipping of products within our snow category, consistent with
industry practice, we offer customers discounts for placing
pre-season orders and extended payment terms for taking delivery
before the peak shipping season. These extended payment terms
increase our exposure to the risk of uncollectible receivables.
However, throughout the year, we perform credit evaluations of
our customers, and we adjust credit limits based on payment
history and the customers creditworthiness. We continually
monitor our collections and maintain a reserve for estimated
credit losses based on our historical experience and any
specific customer collections issues that are identified. While
such credit losses have historically been within our
expectations and reserves, we cannot assure you that we will
continue to experience the same credit loss rates we have
experienced in the past.
Trademarks
We own the Volcom and Volcom Stone Design trademarks and various
combinations of these marks in approximately 100 countries
around the world. We also own the Electric and Electric Volt
logo in approximately 20 countries around the world. Our
trademarks, many of which are registered or subject to pending
applications in the United States and other nations, are mainly
for use on apparel and related accessories and for retail
services. We also apply for and register our Volcom
Entertainment and Veeco Productions trademarks in the United
States and
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internationally mainly for use with our music and film products.
We believe our trademarks and our other intellectual property
are crucial to the successful marketing and sale of our
products, and we attempt to vigorously prosecute and defend our
rights throughout the world. Each trademark registered with the
U.S. Patent and Trademark Office has a duration of ten
years and is subject to an indefinite number of renewals for a
like period upon appropriate application. Trademarks registered
outside of the United States typically have a duration of
between seven and fourteen years depending upon the jurisdiction
and are also generally subject to an indefinite number of
renewals for a like period upon appropriate application.
Government
Regulation
Our products are subject to governmental health safety
regulations in most countries where they are sold, including the
United States, the European Union and Australia, as well as
import duties and tariffs on products being imported into
countries outside of the United States. In addition, we are
subject to various state and Federal regulations generally
applicable to similar businesses. We regularly inspect our
production techniques and standards for compliance with
applicable requirements including the Customs Trade Partnership
Act Against Terrorism.
Management
Information Systems
We use an integrated software package for substantially all of
our operations. The software package is specifically designed
for apparel distributors and producers. This software package is
used for stock keeping unit, or SKU, management and
classification inventory tracking, purchase order management,
merchandise distribution, automated ticket generation, general
ledger functions, sales auditing, accounts payable management
and integrated financial management. The system provides summary
data for all departments and a daily executive summary report
used by management to observe business and financial trends.
Employees
We believe our employees are among our most valuable resources
and have been an important part of our success. As of
December 31, 2007, we had a total of 337 full-time
European and domestic employees, including 102 in sales, art and
marketing, 66 in general and administration, 49 in design and
development, 45 in manufacturing support and 75 in warehousing
operations. We are not party to any labor agreements and none of
our employees is represented by a labor union. We consider our
relationship with our employees to be excellent and have never
experienced a work stoppage.
Before deciding to purchase, hold or sell our common stock,
you should carefully consider the risks described below in
addition to the other cautionary statements and risks described
elsewhere, and the other information contained, in this Report
and in our other filings with the SEC, including our subsequent
reports on
Forms 10-Q
and
8-K.
The
risks and uncertainties described below are not the only ones we
face. Additional risks and uncertainties not presently known to
us or that we currently deem immaterial may also affect our
business. If any of these known or unknown risks or
uncertainties actually occurs with material adverse effects on
us, our business, financial condition and results of operations
could be seriously harmed. In that event, the market price for
our common stock will likely decline, and you may lose all or
part of your investment.
One
retail customer represents a material amount of our revenues,
and the loss of this retail customer or reduced purchases from
this retail customer may have a material adverse effect on our
operating results.
Pacific Sunwear accounted for approximately 18% of our product
revenues in 2007 and approximately 26% in 2006. We do not have a
long-term contract with Pacific Sunwear, and all of its
purchases from us have historically been on a purchase order
basis. Sales to Pacific Sunwear decreased 9%, or
$4.7 million, for 2007 compared to 2006. We currently
project that Pacific Sunwear sales will be down approximately
10% in 2008 compared to 2007 and will be down approximately 40%
in the first quarter of 2008 compared to the first quarter of
2007. We may see sales to Pacific Sunwear decline even beyond
these projected amounts. It is unclear where our sales to
Pacific Sunwear will
13
trend in the longer term, as Pacific Sunwear appears to be
increasing its private label business and lessening overall
inventories. We recognize that any customer concentration
creates risks and we are, therefore, assessing strategies to
lessen our concentration with Pacific Sunwear. We cannot predict
whether such strategies will reduce, in whole or in part, our
sales concentration with Pacific Sunwear in the near or long
term. Because Pacific Sunwear has represented such a significant
amount of our product revenues, our results of operations are
likely to be adversely affected by any Pacific Sunwear decision
to decrease its rate of purchases of our products. A continuing
decrease in its purchases of our products, a cancellation of
orders of our products or a change in the timing of its orders
will have an additional adverse affect on our operating results.
The
current uncertainty surrounding the United States economy
coupled with cyclical economic trends in apparel retailing could
have a material adverse effect on our results of
operations.
The apparel industry historically has been subject to
substantial cyclicality. As the economic conditions in the
United States change, the trends in discretionary consumer
spending become unpredictable and discretionary consumer
spending could be reduced due to uncertainties about the future.
When discretionary consumer spending is reduced, purchases of
premium apparel and related products may decline. Due to the
current uncertainty surrounding the United States economy, we
have noticed a higher level of caution from our customers than
in past years. This caution may result in lower than expected
orders and increased inventory controls by some of our
customers. A recession in the general economy or continued
uncertainties regarding future economic prospects could have a
material adverse effect on our results of operations.
If we
are unable to successfully implement our new distribution center
and warehouse management system, our financial condition could
be materially affected.
In January 2007, we announced the lease of an approximate
164,000 square foot distribution center located in Irvine,
California. We are also currently implementing a more automated
warehouse management system in the new distribution center than
what exists in our current distribution center. We began
shipment of our boys, girls swim and Creedlers product lines in
the fourth quarter of 2007 and plan to ship all product lines
from the new warehouse beginning with the Fall 2008 product
line. The move from our current distribution center located at
our headquarters to our new off-site distribution center and the
implementation of the new warehouse management system could
affect our ability to make on-time deliveries of the correct
product to retailers during 2008. If we are unable to deliver
the correct products on-time to our retailers, our financial
results could be materially affected.
If the
United States continues to impose tariffs and import quota
restrictions on products manufactured in China and we are unable
to obtain sufficient product from countries other than China or
from domestic sources, or if the products we obtain from these
other countries or domestic sources are of insufficient quality,
it could materially affect our gross margin and financial
performance.
Quota represents the right, pursuant to bilateral or other
international trade arrangements, to export amounts of certain
categories of merchandise into a country or territory pursuant
to a visa or license. Pursuant to the Agreement on Textiles and
Clothing, quota on textile and apparel products was eliminated
for World Trade Organization, or WTO, member countries on
January 1, 2005. Notwithstanding quota elimination,
Chinas accession agreement for membership into the WTO
provides that WTO member countries (including the United States,
Canada and European countries) may re-impose quotas on specific
categories of products in the event it is determined that
imports from China have surged and are threatening to create a
market disruption for such categories of products (so called
safeguard quota provisions). In June 2005, safeguard
quota provisions were implemented on certain apparel categories
to restrict the amount of apparel being imported into the United
States by China. These safeguard quota provisions will remain
intact until the end of 2008. Virtually all of our merchandise
imported into the United States is subject to duties. The United
States may also unilaterally impose additional duties in
response to a particular product being imported (from China or
other countries) in such increased quantities as to cause (or
threaten) serious damage to the relevant domestic industry
(generally known as anti-dumping actions). Beginning
January 1, 2008, our imports from China to Europe are
quota-free. The United States and other countries in which our
products are manufactured and sold may, from time to time,
impose new duties, tariffs, surcharges or other import controls
or restrictions, including the imposition of safeguard
quota, or adjust presently prevailing duty or
14
tariff rates or levels. The establishment of these quotas or
additional quotas or duties could cause disruption in our supply
chain and could materially adversely affect our gross margin and
financial performance.
Additionally, China offers a rebate tax on exports, which has
recently been reduced due to pressures from the United States
and other countries to control the amount of exports from China,
which has increased costs. These cost increases, along with the
rising currency and labor shortages in China, will have an
impact on our business. While we do not believe the limitations
on imports from China will have a material effect on our
operations, there will be increased pressure on cost and we
intend to closely monitor our sourcing in China to avoid
disruptions.
If we
are required to establish new manufacturing relationships due to
the termination of current key manufacturing relationships with
large contractors such as Ningbo Jehson Textiles and Dragon
Crowd, we would likely experience increased costs, disruptions
in the manufacture and shipment of our products and a loss of
revenue.
Our manufacturers could cease to provide products to us with
little or no notice. Two contractors, Dragon Crowd and Ningbo
Jehson Textiles, accounted for 19% and 14%, respectively, of our
product costs in 2007, and 15% and 12%, respectively, of our
product costs in 2006. A loss of either or both of these
manufacturers or other key manufacturers may result in delayed
deliveries to our retailers, could adversely impact our revenues
in a given season and may require the establishment of new
manufacturing relationships, which involves numerous
uncertainties, such as whether the new manufacturers will
perform to our expectations and produce quality products in a
timely, cost-efficient manner on a consistent basis, either of
which could make it difficult for us to meet our retailers
orders on satisfactory commercial terms. If we are required to
establish new manufacturing relationships, we would likely
experience increased costs in seeking out such relationships,
disruptions in the manufacture and shipment of our products
while seeking alternative manufacturing sources and a
corresponding loss of revenues.
If our
new product initiatives are not accepted by our customers or if
we are unable to maintain our margins, it could materially
affect our financial performance.
We are currently in the process of introducing several new
product lines, including our Creedlers sandals, girls swimwear
and kids lines. These categories are subject to intense
competition in the marketplace. As is typical with new products,
market acceptance of these new lines is uncertain and achieving
market acceptance may require substantial marketing efforts and
expenditures. We also cannot assure you that these new products
will have the same or better margins than our current products.
The failure of the new product lines to gain market acceptance
or our inability to maintain our current product margins with
the new lines could adversely affect our business, financial
performance and brand image.
If our
marketing efforts do not effectively maintain and expand our
brand name recognition, we may not be able to achieve our growth
strategy.
We believe that broader recognition and favorable perception of
our brand by consumers in our target market is essential to our
future success. To increase brand recognition, we believe we
must continue to devote significant amounts of time and
resources to advertising and promotions. These expenditures,
however, may not result in an increase in favorable recognition
of our brand or a sufficient increase in revenues to cover such
advertising and promotional expenses. In addition, even if our
brand recognition increases, our consumer base and our revenues
may not increase, and may in fact decline, either of which could
harm our business.
If we
are unable to continue to develop innovative and stylish
products, demand for our products may decrease and our brand
image may be harmed.
The boardsports apparel industry is subject to constantly and
rapidly changing consumer preferences based on fashion trends
and performance features. Our success depends largely on our
ability to anticipate, gauge and respond to these changing
consumer demands and fashion trends in a timely manner while
preserving the relevancy and authenticity of our brand. In
addition, we generally make decisions regarding product designs
several months in advance of the time when consumer acceptance
can be measured.
15
Our success is largely dependent upon our ability to continue to
develop innovative and stylish products. As is typical with new
products, market acceptance of new designs and products we may
introduce is subject to uncertainty. We cannot assure you that
our efforts will be successful. The failure of new product
designs or new product lines to gain market acceptance could
adversely affect our business and our brand image. Achieving
market acceptance for new products may also require substantial
marketing efforts and expenditures to expand consumer demand.
These requirements could strain our management, financial and
operational resources. If we do not continue to develop stylish
and innovative products that provide better design and
performance attributes than the products of our competitors and
that are accepted by consumers, we may lose consumer loyalty,
which could result in a decline in our revenues and market share.
Changes
in the mix of retailers to whom we distribute our products could
impact our gross margin and brand image, which could have a
material adverse effect on our results of
operations.
We sell our products through a mix of retailers, including
specialty boardsports retailers and several retail chains.
Although we do not currently anticipate material changes in the
mix of our retail customers, any such changes could adversely
affect our gross margin and could negatively affect both our
brand image and our reputation with our consumers. A negative
change in our gross margin or our brand image and acceptance
could have a material adverse effect on our results of
operations and financial condition.
If we
are unable to successfully integrate the operations of Electric,
our business and earnings may be negatively
affected.
The acquisition of Electric will involve significant integration
efforts. Successful integration of the operations of Electric
will depend primarily on our ability to consolidate operations,
systems, procedures, properties and personnel. The acquisition
will also pose other risks commonly associated with similar
transactions, including unanticipated liabilities, unexpected
costs and the diversion of managements attention to the
integration of the operations of us and Electric. We cannot
assure you that we will be able to integrate Electrics
operations without encountering difficulties including, but not
limited to, the loss of key employees, the disruption of its
respective ongoing businesses or possible inconsistencies in
standards, controls, procedures and policies. If we have
difficulties with the integration, we might not achieve the
economic benefits we expect to result from the acquisition, and
this may hurt our business and earnings. In addition, we may
experience greater than expected costs or difficulties relating
to the integration of the business of Electric and may not
realize expected benefits from the acquisition within the
expected time frame, if at all.
As a
result of our acquisition of Electric, we face greater
challenges in managing an additional brand and related
products.
While we believe that we have significant experience in managing
our clothing, accessories and related products with the Volcom
brand name and their respective channels of distribution, with
our acquisition of Electric, we have further penetrated the
action sports industry and have added a second brand and
additional product categories. If we are unable to effectively
manage our multiple product lines, our profitability and cash
flow may be reduced and our brand image and reputation could be
harmed.
We may
be unable to sustain our past growth or manage our future
growth, which may have a material adverse effect on our future
operating results.
We have experienced rapid growth since our inception, and have
increased our revenues from $76.3 million in 2003 to
$268.6 million in 2007. We anticipate our rate of growth in
the future will depend upon, among other things, the success of
our growth strategies, which we cannot assure you will be
successful. In addition, we may have more difficulty maintaining
our prior rate of growth of revenues and profitability. Our
future success will depend upon various factors, including the
strength of our brand image, the market success of our current
and future products, competitive conditions and our ability to
manage increased revenues, if any, or implement our growth
strategy. In addition, we anticipate significantly expanding our
infrastructure and adding personnel in connection with our
anticipated growth, which we expect will cause our selling,
general and administrative expenses to increase in absolute
dollars and which may cause our selling, general and
administrative expenses to increase as a percentage of
16
revenue. Because these expenses are generally fixed,
particularly in the short-term, operating results may be
adversely impacted if we do not achieve our anticipated growth.
Future growth may place a significant strain on our management
and operations. If we continue to experience growth in our
operations, our operational, administrative, financial and legal
procedures and controls may need to be expanded. As a result, we
may need to train and manage an increasing number of employees,
which could distract our management team from our business. Our
future success will depend substantially on the ability of our
management team to manage our anticipated growth. If we are
unable to anticipate or manage our growth effectively, our
operating results could be adversely affected.
Our
business could be harmed if we fail to maintain proper inventory
levels.
We have traditionally received a substantial portion of our
customer orders prior to placement of our initial manufacturing
orders. However, we also maintain an inventory of selected core
products that we anticipate will be in high demand, such as
t-shirts. We may be unable to sell the products we have ordered
in advance from manufacturers or that we have in our inventory.
Inventory levels in excess of customer demand may result in
inventory write-downs, or the sale of excess inventory at
discounted or close-out prices, all of which could adversely
affect our gross margins. These events could significantly harm
our operating results and impair our brand image. Conversely, if
we underestimate consumer demand for our products or if our
manufacturers fail to supply quality products in a timely
manner, we may experience inventory shortages. Inventory
shortages might result in unfilled orders, negatively impact
retailer relationships, diminish brand loyalty and result in
lost revenues, any of which could harm our business.
Fluctuations
in foreign currency exchange rates could harm our results of
operations.
We purchase finished goods from foreign manufacturers and sell
our products in transactions denominated in U.S. dollars,
except for in Europe and Canada, where our sales are denominated
primarily in Euros and Canadian dollars, respectively. As a
result, if the U.S. dollar were to weaken against foreign
currencies, our cost of goods sold could increase substantially.
We also receive royalty payments from certain of our licensees,
whose sales are denominated in their local currencies. While our
licensees pay us royalty payments in U.S. dollars, if the
U.S. dollar were to strengthen significantly against the
local currencies in which our licensees sell our products, our
licensing revenues would decrease, which could harm our results
of operations.
If we
are unable to maintain and expand our endorsements by
professional athletes, our ability to market and sell our
products may be harmed.
A key element of our marketing strategy has been to obtain
endorsements from prominent boardsports athletes, which
contributes to our authenticity and brand image. We believe that
this strategy has been an effective means of gaining brand
exposure worldwide and creating broad appeal for our products.
We cannot assure you that we will be able to maintain our
existing relationships with these individuals in the future or
that we will be able to attract new athletes to endorse our
products. Larger companies with greater access to capital for
athlete sponsorship may in the future increase the cost of
sponsorship for these athletes to levels we may choose not to
match. If this were to occur, our sponsored athletes may
terminate their relationships with us and endorse the products
of our competitors and we may be unable to obtain endorsements
from other comparable athletes.
We also are subject to risks related to the selection of
athletes to endorse our products. We may select athletes who are
unable to perform at expected levels or who are not sufficiently
marketable. In addition, negative publicity concerning any of
our athletes could harm our brand and adversely impact our
business. If we are unable in the future to secure prominent
athletes and arrange athlete endorsements of our products on
terms we deem to be reasonable, we may be required to modify our
marketing platform and to rely more heavily on other forms of
marketing and promotion, which may not prove to be as effective.
17
If we
fail to secure or protect our intellectual property rights,
counterfeiters may be able to copy and sell imitations of our
products and competitors may be able to use our designs, each of
which could harm our reputation, reduce our revenues and
increase our costs.
We rely on intellectual property laws to protect our proprietary
rights with respect to our trademarks and pending patent. We are
susceptible to injury from the counterfeiting of our products,
which may harm our reputation for producing high-quality
products or force us to incur additional expense in enforcing
our rights. It is difficult and expensive to detect and prevent
counterfeiting. Despite our efforts to protect our intellectual
property, counterfeiters may continue to violate our
intellectual property rights by using our trademarks and
imitating our products, which could potentially harm our brand,
reputation and financial condition.
Since our products are sold internationally, we are also
dependent on the laws of foreign countries to protect our
intellectual property. These laws may not protect intellectual
property rights to the same extent or in the same manner as the
laws of the United States. We cannot be certain that our efforts
to protect our intellectual property will be successful or that
the costs associated with protecting our rights abroad will not
negatively impact our results of operations. We may face
significant expenses and liability in connection with the
protection of our intellectual property rights both inside and
outside of the United States. Infringement claims and lawsuits
likely would be expensive to resolve and would require
substantial management time and resources. Any adverse
determination in litigation could subject us to the loss of our
rights to a particular trademark, which could prevent us from
manufacturing, selling or using certain aspects of our products
or could subject us to substantial liability, any of which would
harm our results of operations. Aside from infringement claims
against us, if we fail to secure or protect our intellectual
property rights, our competitors may be able to use our designs.
If we are unable to successfully protect our intellectual
property rights or resolve any conflicts, our results of
operations may be harmed.
Our
current executive officers and management personnel are critical
to our success, and the loss of these individuals could harm our
business, brand and image.
We are heavily dependent on our current executive officers and
management. The loss of any executive officers or management
personnel, or the inability to attract or retain qualified
personnel, could delay the development and introduction of, and
harm our ability to sell, our products and damage our brand
image. We believe that our future success is highly dependent on
the contributions, talents and leadership of Richard Woolcott,
our President, Chief Executive Officer and founder. While our
other key executive officers have substantial experience and
have made significant contributions to our business, Richard
remains a driving force behind our brand image and philosophy.
We have not entered into an employment agreement with Richard
and we cannot be certain that he will stay with us.
Richards services would be very difficult to replace. We
do not carry key man insurance and do not expect to carry such
insurance in the future. We may not be able to retain our
current executive officers and management personnel, which could
have a material adverse effect on our results of operations.
Our
ability to attract and retain qualified design and sales and
marketing personnel is critical to our success, and any
inability to attract and retain such personnel could harm our
business.
Our future success may also depend on our ability to attract and
retain additional qualified design and sales and marketing
personnel. We face competition for these individuals worldwide,
and there is a significant concentration of boardsports apparel
and action sports companies based in and around our headquarters
in Orange County, California. We may not be able to attract or
retain these employees, which could have a material adverse
effect on our results of operations and financial condition.
We do
not have long-term contracts with any of our retailers, and the
loss of orders for our products from our retailers may have a
material adverse effect on our operating results.
We do not maintain long-term contracts with any of our
retailers, and retailers generally purchase products from us on
a purchase order basis. As a result, our retailers generally
may, with little or no notice or penalty, decide to cease
ordering and selling our products, or could materially reduce
their orders in any period. If certain retailers, individually
or in the aggregate, choose to no longer sell our products, it
may be difficult for us to change our
18
distribution to other retailers in a timely manner, which could
have a material adverse effect on our financial condition and
results of operations.
Any
inability to receive timely deliveries from our manufacturers
could harm our business.
We face the risk that the manufacturers with whom we contract to
produce our products may not produce and deliver our products on
a timely basis or at all. Our products are generally produced by
independent, foreign manufacturers. We cannot be certain that we
will not experience operational difficulties with our
manufacturers, such as reductions in the availability of
production capacity, errors in complying with product
specifications, insufficient quality control, failures to meet
production deadlines or increases in manufacturing costs. The
failure of any manufacturer to perform to our expectations could
result in supply shortages or untimely deliveries of certain
products, either of which could harm our business.
Any
shortage of raw materials could impair our ability to ship
orders of our products in a cost-efficient manner or could cause
us to miss the delivery requirements of our customers, which
could harm our business.
The capacity of our manufacturers to manufacture our products is
dependent, in part, upon the availability of raw materials. Our
manufacturers may experience shortages of raw materials, which
could result in delays in deliveries of our products by our
manufacturers or in increased costs to us. Any shortage of raw
materials or inability to control costs associated with
manufacturing could increase the costs for our products or
impair our ability to ship orders of our products in a
cost-efficient manner and could cause us to miss the delivery
requirements of our customers. As a result, we could experience
cancellation of orders, refusal to accept deliveries or a
reduction in our prices and margins, any of which could harm our
financial performance and results of operations.
Our
business could suffer if any of our or our licensees key
manufacturers fails to use acceptable labor
practices.
It is difficult to monitor and control the labor practices of
our independent manufacturers. The violation of labor or other
laws by an independent manufacturer utilized by us or a licensee
of ours, or the divergence of an independent manufacturers
or licensing partners labor practices from those generally
accepted as ethical in the United States, could damage our
reputation or interrupt, or otherwise disrupt the shipment of
finished products to us or our licensees if such manufacturer is
ordered to cease its manufacturing operations due to violations
of laws or if such manufacturers operations are adversely
affected by such failure to use acceptable labor practices. If
this were to occur, it could have a material adverse effect on
our financial condition and results of operations.
We may
not be able to compete effectively, which could cause our
revenues and market share to decline.
The boardsports apparel industry, and the apparel industry in
general, is highly competitive. We compete with numerous
domestic and foreign designers, distributors, marketers and
manufacturers of apparel, accessories and other related
products, some of which are significantly larger and have
greater resources than we do. We believe that in order to
compete effectively, we must continue to maintain our brand
image and reputation, be flexible and innovative in responding
to rapidly changing market demands and consumer preferences, and
offer consumers a wide variety of high-quality apparel at
premium prices. We compete primarily on the basis of brand
image, style, performance and quality.
The purchasing decisions of consumers are highly subjective and
can be influenced by many factors, such as brand image,
marketing programs and product design. Several of our
competitors enjoy substantial competitive advantages, including
greater brand recognition, longer operating histories, more
comprehensive product lines and greater financial resources for
competitive activities, such as sales and marketing and
strategic acquisitions. The number of our direct competitors and
the intensity of competition may increase as we expand into
other product lines or as other companies expand into our
product lines. Our competitors may enter into business
combinations or alliances that strengthen their competitive
positions or prevent us from taking advantage of such
combinations or alliances. Our competitors also may be able to
respond more quickly and effectively than we can to new or
changing opportunities, standards or consumer preferences, which
could result in a decline in our revenues and market share.
19
We may
be adversely affected by the financial condition of our
retailers.
Some of our retailers have experienced financial difficulties in
the past. A retailer experiencing such difficulties will
generally not purchase and sell as many of our products as it
would under normal circumstances and may cancel orders. In
addition, a retailer experiencing financial difficulties
generally increases our exposure to the risk of uncollectible
receivables. We extend credit to our retailers based on our
assessment of the retailers financial condition, generally
without requiring collateral. While such credit losses have
historically been within our expectations and reserves, we
cannot assure you that this will continue. Financial
difficulties on the part of our retailers could have a material
adverse effect on our results of operations and financial
condition.
Our
revenues and operating income fluctuate on a seasonal basis and
decreases in sales or margins during our peak seasons could have
a disproportionate effect on our overall financial condition and
results of operations.
Historically, our operating results have been subject to
seasonal trends when measured on a quarterly basis. In the past,
we have experienced greater revenues in the second half of the
year than those in the first half due to a concentration of
shopping around the fall and holiday seasons, and pricing
differences between our products sold during the first and
second half of the year, as products we sell in the fall and
holiday seasons generally have higher prices per unit than
products we sell in the spring and summer seasons. We typically
sell more of our summer products (boardshorts and t-shirts) in
the first half of the year and a majority of our winter products
(pants, long sleeve shirts, sweaters, fleece, jackets and
outerwear) in the second half of the year. We anticipate that
this seasonal impact on our revenues is likely to continue.
Because a substantial portion of our operating income is derived
from our third and fourth quarter revenues, a shortfall in
expected third and fourth quarter revenues would cause our
annual operating results to suffer significantly.
We
face business, political, operational, financial and economic
risks because a portion of our revenues are from international
customers, substantially all of our products are sourced
overseas and our licensees operate outside of the United
States.
We and our international licensees are subject to risks inherent
in international business, many of which are beyond our and our
licensees control, including:
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difficulties obtaining domestic and foreign export, import and
other governmental approvals, permits and licenses, and
compliance with foreign laws, which could halt, interrupt or
delay our operations if we cannot obtain such approvals, permits
and licenses;
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difficulties encountered by our international licensees or us in
staffing and managing foreign operations or international sales;
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transportation delays and difficulties of managing international
distribution channels;
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longer payment cycles for, and greater difficulty collecting,
accounts receivable and royalty payments;
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trade restrictions, higher tariffs, currency fluctuations or the
imposition of additional regulations relating to import or
export of our products, especially in China, where a large
portion of our products are manufactured, which could force us
to seek alternate manufacturing sources or increase our expenses;
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unexpected changes in regulatory requirements, royalties and
withholding taxes that restrict the repatriation of earnings and
effects on our effective income tax rate due to profits
generated or lost in foreign countries;
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political and economic instability, including wars, terrorism,
political unrest, boycotts, curtailment of trade and other
business restrictions; and
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natural disasters.
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Any of these factors could reduce our revenues, decrease our
gross margins or increase our expenses and could materially
adversely affect our revenues and results of operations. To the
extent that we establish our own operations in international
territories where we currently utilize a licensee, such as in
Europe, we will increasingly become subject to risks associated
with operating outside of the United States.
20
If the
ownership of our common stock continues to be highly
concentrated, it may prevent you and other stockholders from
influencing significant corporate decisions and may result in
conflicts of interest that could cause our stock price to
decline.
As of December 31, 2007, our executive officers, directors
and their affiliates beneficially own or control approximately
23.4% of the outstanding shares of our common stock, of which
René Woolcott and Richard Woolcott own approximately 8.9%
and 14.5%, respectively, of the 24,349,520 outstanding shares.
Accordingly, our current executive officers, directors and their
affiliates, acting as a group, will have substantial control
over the outcome of corporate actions requiring stockholder
approval, including the election of directors, any merger,
consolidation or sale of all or substantially all of our assets
or any other significant corporate transactions. These
stockholders may also delay or prevent a change of control of
us, even if such a change of control would benefit our other
stockholders. The significant concentration of stock ownership
may adversely affect the trading price of our common stock due
to investors perception that conflicts of interest may
exist or arise.
The
market price of our common stock is highly volatile and may
result in investors selling shares of our common stock at a
loss.
The trading price of our common stock is highly volatile and
subject to wide fluctuations in price in response to various
factors, many of which are beyond our control, including:
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actual or anticipated variations in quarterly operating results;
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changes in financial estimates by securities analysts;
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conditions or trends in the fashion and boardsports
industries; and
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changes in the market valuations of similar companies.
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In addition, the stock market in general and the NASDAQ in
particular have experienced extreme price and volume
fluctuations that have often been unrelated or disproportionate
to the operating performance of listed companies. Industry
factors may seriously harm the market price of our common stock,
regardless of our operating performance. In the past, following
periods of volatility in the market, securities
class-action
litigation has often been instituted against companies. Such
litigation, if instituted against us, could result in
substantial costs and diversion of managements attention
and resources and could further a decline in the market price of
our common stock. Stock price volatility may result in investors
selling shares of our common stock at a loss.
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ITEM 1B.
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UNRESOLVED
STAFF COMMENTS
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None
Our principle executive, administrative, warehousing and
distribution offices are located in Costa Mesa, California. We
entered into an agreement to lease an additional distribution
facility in Irvine, California, which became operational in the
fourth quarter of 2007. As a result of the existing and planned
improvements to our current headquarters and the additional
Irvine distribution facility, we believe our current facilities
will be adequate to meet our needs for the next twelve months.
The location, general use, approximate size and lease renewal
date of our material properties as of December 31, 2007,
none of which is owned by us, except for the building in Anglet,
France, are set forth below:
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Location
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Use
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Term
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Square Feet
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Costa Mesa, California
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Global headquarters
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July 2014
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104,000
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Irvine, California
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Distribution center
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September 2017
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164,000
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Anglet,
France
(1)
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European headquarters
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May 2036
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34,000
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(1)
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We own the facilities located on
the leased land in Anglet, France.
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21
As of December 31, 2007, we also operated six retail stores
in California and Hawaii on leased premises. We anticipate that
we will be able to extend those leases that expire in the near
future on terms satisfactory to us, or, if necessary, locate
substitute facilities on acceptable terms.
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ITEM 3.
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LEGAL
PROCEEDINGS
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We are subject to various claims, complaints and legal actions
in the normal course of business from time to time. We do not
believe we have any currently pending litigation of which the
outcome will have a material adverse effect on our operations or
financial position.
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ITEM 4.
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SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
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No matters were submitted to a vote of security holders during
the quarter ended December 31, 2007.
PART II
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ITEM 5.
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MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
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Market
Information and Holders
Our common stock has traded on the NASDAQ National Market and
NASDAQ Global Select Market under the symbol VLCM
since June 30, 2005. Prior to that time there was no public
market for our common stock. The following table sets forth, for
the periods indicated, the high and low closing sale prices for
our common stock as reported on the NASDAQ National Market and
NASDAQ Global Select Market, as applicable:
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Price Range of
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Common Stock
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High
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Low
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Year Ended December 31, 2007
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First Quarter (March 31, 2007)
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|
$
|
37.55
|
|
|
$
|
28.13
|
|
Second Quarter (June 30, 2007)
|
|
$
|
51.00
|
|
|
$
|
34.14
|
|
Third Quarter (September 30, 2007)
|
|
$
|
50.64
|
|
|
$
|
33.83
|
|
Fourth Quarter (December 31, 2007)
|
|
$
|
45.00
|
|
|
$
|
21.51
|
|
Year Ended December 31, 2006
|
|
|
|
|
|
|
|
|
First Quarter (March 31, 2006)
|
|
$
|
40.71
|
|
|
$
|
31.80
|
|
Second Quarter (June 30, 2006)
|
|
$
|
37.78
|
|
|
$
|
27.13
|
|
Third Quarter (September 30, 2006)
|
|
$
|
32.16
|
|
|
$
|
18.52
|
|
Fourth Quarter (December 31, 2006)
|
|
$
|
33.25
|
|
|
$
|
23.91
|
|
The approximate number of holders of record of our common stock
as of February 15, 2008 was 43.
On February 25, 2008, the last reported sale price of our
common stock on the NASDAQ Global Select Market was $20.84 per
share.
Dividend
Policy
We have never declared or paid any dividends on our common stock
since our initial public offering. We do not currently
anticipate paying any cash dividends in the foreseeable future.
Any future determination to pay cash dividends will be at the
discretion of our board of directors and will depend upon our
financial condition, operating results, capital requirements and
such other factors as our board of directors deems relevant.
Unregistered
Sale of Equity Securities and Issuer Purchases of Equity
Securities
We did not sell any unregistered equity securities or purchase
any of our securities during the period ended December 31,
2007.
22
Equity
Compensation Plans
The following table summarizes information about our common
stock that may be issued upon the exercise of options, warrants
and rights under all of our compensation plans as of
December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
|
|
|
|
|
|
Remaining Available
|
|
|
|
Number of Securities
|
|
|
|
|
|
for Future Issuance
|
|
|
|
to be Issued upon
|
|
|
Weighted Average
|
|
|
under Equity
|
|
|
|
Exercise of
|
|
|
Exercise Price of
|
|
|
Compensation Plans
|
|
|
|
Outstanding Options,
|
|
|
Outstanding Options,
|
|
|
(Excluding Securities
|
|
|
|
Warrants and Rights
|
|
|
Warrants and Rights
|
|
|
Reflected in Column (a))
|
|
Plan Category
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
Equity compensation plans approved by security holders
|
|
|
442,400
|
|
|
$
|
19.52
|
|
|
|
2,638,665
|
|
Equity compensation plans not approved by security holders
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
442,400
|
|
|
$
|
19.52
|
|
|
|
2,638,665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We do not maintain any equity-based compensation plan that has
not been approved by our stockholders or any employee stock
purchase plan.
Use of
Proceeds
We affected the initial public offering of our common stock
pursuant to a Registration Statement on
Form S-1
(File
No. 333-124498)
that was declared effective by the Securities and Exchange
Commission on June 29, 2005. To date, we have used
$20.0 million of the net proceeds from the offering to
distribute our estimated undistributed S corporation
earnings to our S corporation stockholders,
$1.5 million to acquire all of the outstanding common stock
of Welcom Distribution SARL, the sole distributor of Volcom
branded products in Switzerland, approximately
$25.2 million for developing our infrastructure and
European headquarters in Europe, and $25.3 million to
acquire all of the outstanding membership interests in Electric
Visual Evolution, LLC. We intend to use the remaining net
proceeds for the continual development of our infrastructure in
Europe, any earn-out payments to the shareholders of Electric,
facility upgrades, marketing and advertising, enhancing and
deploying our in-store marketing displays for our retailers, and
working capital and other general corporate purposes. In
addition, we may use a portion of the remaining proceeds to
acquire products or businesses that are complementary to our own.
23
Performance
Graph
1
The following graph shows a comparison of cumulative total
returns for Volcom, the NASDAQ Stock Market Index and the
Standard & Poors Apparel, Accessories and Luxury
Goods Index during the period commencing on June 30, 2005
(the date of our first day of trading) and ending on
December 31, 2007. The comparison assumes $100 was invested
on June 30, 2005 in each of our common stock (at the
initial offering price), the NASDAQ Stock Market Composite Index
and the Standard & Poors Apparel, Accessories
and Luxury Goods Index and assumes the reinvestment of all
dividends, if any. The comparisons in the table are required by
the SEC and are not intended to forecast or be indicative of
possible future performance of our common stock.
Annual
Percentage Return
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
06/29/05
|
|
|
12/31/05
|
|
|
12/31/06
|
|
|
12/31/07
|
Volcom, Inc
|
|
|
|
100.00
|
|
|
|
|
179.00
|
|
|
|
|
155.63
|
|
|
|
|
115.95
|
|
NASDAQ Composite
|
|
|
|
100.00
|
|
|
|
|
107.89
|
|
|
|
|
120.20
|
|
|
|
|
131.33
|
|
S&P Apparel, Accessories & Luxury Goods
|
|
|
|
100.00
|
|
|
|
|
105.53
|
|
|
|
|
136.92
|
|
|
|
|
95.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
This
section is not soliciting material, is not deemed
filed with the SEC and is not to be incorporated by
reference in any of our filings under the Securities Act or the
Exchange Act whether made before or after the date hereof and
irrespective of any general incorporation language in any such
filing.
24
|
|
ITEM 6.
|
SELECTED
FINANCIAL DATA
|
The following selected consolidated financial data should be
read in conjunction with Managements Discussion and
Analysis of Financial Condition and Results of Operations
and our consolidated financial statements and the related notes
to those statements included elsewhere in this
Form 10-K.
The consolidated statements of operations data for the years
ended December 31, 2007, 2006 and 2005 and the balance
sheet data as of December 31, 2007 and 2006 are derived
from our audited consolidated financial statements included
elsewhere in this
Form 10-K.
The consolidated statements of operations data for the years
ended December 31, 2004 and 2003 and the balance sheet data
as of December 31, 2005, 2004 and 2003 are derived from our
audited consolidated financial statements not included herein.
Historical results are not necessarily indicative of the results
to be expected in the future, and the results for the years
presented should not be considered indicative of our future
results of operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands, except share and per share data)
|
|
|
Consolidated Statements of Operations Data:
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenues
|
|
$
|
265,193
|
|
|
$
|
201,186
|
|
|
$
|
156,716
|
|
|
$
|
110,601
|
|
|
$
|
74,389
|
|
Licensing revenues
|
|
|
3,420
|
|
|
|
4,072
|
|
|
|
3,235
|
|
|
|
2,574
|
|
|
|
1,877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
268,613
|
|
|
|
205,258
|
|
|
|
159,951
|
|
|
|
113,175
|
|
|
|
76,266
|
|
Cost of goods sold
|
|
|
138,570
|
|
|
|
103,237
|
|
|
|
78,632
|
|
|
|
58,205
|
|
|
|
39,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
130,043
|
|
|
|
102,021
|
|
|
|
81,319
|
|
|
|
54,970
|
|
|
|
36,882
|
|
Selling, general and administrative expenses
|
|
|
79,411
|
|
|
|
58,417
|
|
|
|
42,939
|
|
|
|
30,585
|
|
|
|
22,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
50,632
|
|
|
|
43,604
|
|
|
|
38,380
|
|
|
|
24,385
|
|
|
|
13,963
|
|
Other income (expense)
|
|
|
4,374
|
|
|
|
4,069
|
|
|
|
1,101
|
|
|
|
(6
|
)
|
|
|
106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
55,006
|
|
|
|
47,673
|
|
|
|
39,481
|
|
|
|
24,379
|
|
|
|
14,069
|
|
Provision for income taxes(1)
|
|
|
21,671
|
|
|
|
18,920
|
|
|
|
10,475
|
|
|
|
374
|
|
|
|
214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before equity in earnings of investee
|
|
|
33,335
|
|
|
|
28,753
|
|
|
|
29,006
|
|
|
|
24,005
|
|
|
|
13,855
|
|
Equity in earnings of investee
|
|
|
|
|
|
|
|
|
|
|
331
|
|
|
|
588
|
|
|
|
407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
33,335
|
|
|
$
|
28,753
|
|
|
$
|
29,337
|
|
|
$
|
24,593
|
|
|
$
|
14,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.37
|
|
|
$
|
1.19
|
|
|
$
|
1.36
|
|
|
$
|
1.28
|
|
|
$
|
0.75
|
|
Diluted
|
|
$
|
1.37
|
|
|
$
|
1.18
|
|
|
$
|
1.34
|
|
|
$
|
1.26
|
|
|
$
|
0.73
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
24,302,893
|
|
|
|
24,227,845
|
|
|
|
21,627,821
|
|
|
|
19,142,275
|
|
|
|
19,054,109
|
|
Diluted
|
|
|
24,419,802
|
|
|
|
24,304,627
|
|
|
|
21,839,626
|
|
|
|
19,534,945
|
|
|
|
19,530,873
|
|
|
|
|
(1)
|
|
For Federal and state income tax
purposes we had elected to be treated as an S corporation from
January 1, 2002 until our initial public offering on
June 29, 2005, and during that period we were not subject
to Federal or state income taxes, other than California
franchise taxes of 1.5% on our corporate income. For all periods
from and after June 29, 2005, we have become subject to the
Federal and state income taxes applicable to a C corporation. As
a result, our provision for income taxes, net income and net
income per share data for 2004, and 2003 are not comparable to
our provision for income taxes, net income and net income per
share data for 2007, 2006 and 2005.
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands, except per share data)
|
|
|
Pro Forma Net Income Data(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes, as reported
|
|
$
|
39,481
|
|
|
$
|
24,379
|
|
|
$
|
14,069
|
|
Pro forma provision for income taxes
|
|
|
16,223
|
|
|
|
10,178
|
|
|
|
5,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma income before equity in earnings of investee
|
|
|
23,258
|
|
|
|
14,201
|
|
|
|
8,160
|
|
Equity in earnings of investee
|
|
|
331
|
|
|
|
588
|
|
|
|
407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$
|
23,589
|
|
|
$
|
14,789
|
|
|
$
|
8,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.09
|
|
|
$
|
0.77
|
|
|
|
|
|
Diluted
|
|
$
|
1.08
|
|
|
$
|
0.76
|
|
|
|
|
|
Pro forma weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
21,627,821
|
|
|
|
19,142,275
|
|
|
|
|
|
Diluted
|
|
|
21,839,626
|
|
|
|
19,534,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
92,962
|
|
|
$
|
85,414
|
|
|
$
|
71,712
|
|
|
$
|
10,359
|
|
|
$
|
5,079
|
|
Working capital
|
|
|
147,347
|
|
|
|
121,069
|
|
|
|
98,470
|
|
|
|
27,041
|
|
|
|
16,595
|
|
Total assets
|
|
|
202,494
|
|
|
|
149,748
|
|
|
|
111,381
|
|
|
|
35,886
|
|
|
|
22,601
|
|
Long-term capital lease obligations, less current portion
|
|
|
33
|
|
|
|
106
|
|
|
|
183
|
|
|
|
256
|
|
|
|
160
|
|
Total stockholders equity
|
|
|
172,855
|
|
|
|
133,997
|
|
|
|
102,680
|
|
|
|
29,502
|
|
|
|
18,044
|
|
|
|
|
(1)
|
|
Pro forma net income data reflects
the provision for income taxes that would have been recorded had
we been subject to Federal and state income taxes as a C
corporation, and not been exempt from paying income taxes other
than California franchise taxes due to our S corporation
election, from January 1, 2002 to June 29, 2005.
|
26
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The following discussion of our financial condition and
results of operations should be read in conjunction with our
consolidated financial statements and related notes included
elsewhere in this
Form 10-K.
This discussion contains forward-looking statements that involve
risks and uncertainties. Our actual results may differ
materially from those anticipated in these forward-looking
statements due to known and unknown risks, uncertainties and
other factors, including those risks discussed in Item 1A.
Risk Factors and elsewhere in this
Form 10-K.
Those risk factors expressly qualify all subsequent oral and
written forward-looking statements attributable to us or persons
acting on our behalf. We do not have any intention or obligation
to update forward-looking statements included in this
Form 10-K
after the date of this
Form 10-K,
except as required by law.
Overview
We are an innovative designer, marketer and distributor of
premium quality young mens and young womens clothing, footwear,
accessories and related products under the Volcom brand name. We
seek to offer products that appeal to participants in
skateboarding, snowboarding and surfing, and those who affiliate
themselves with the broader action sports lifestyle. Our
products, which include t-shirts, fleece, bottoms, tops,
jackets, boardshorts, denim, outerwear, sandals, girls swimwear
and a complete collection of kids clothing for young boys
ages 4 to 7 years, combines fashion, functionality and
athletic performance. Our designs are infused with an artistic
and creative element that we believe differentiates our products
from those of many of our competitors. We develop and introduce
products that we believe set the industry standard for style and
quality in each of our product categories.
On January 17, 2008, we acquired all of the outstanding
membership interests of Electric Visual Evolution LLC, or
Electric, for $25.3 million. Known for its volt logo,
Electric is a core action sports lifestyle brand. The
companys growing product line includes sunglasses,
goggles, t-shirts, bags, hats, belts and other accessories.
Electric has an established global platform which we believe
will serve as the foundation for further growth. The company was
founded in 2000 by industry veterans Kip Arnette and Bruce Beach
and is headquartered in Orange County, California.
Volcom branded products are currently sold throughout the United
States and in over 40 countries internationally by either us or
international licensees. We serve the United States, Europe,
Canada, Latin America, Asia Pacific and Puerto Rico through our
in-house sales personnel, independent sales representatives and
distributors. In these areas, Volcom branded products are sold
to retailers that we believe merchandise our products in an
environment that supports and reinforces our brand image and
provide a superior in-store experience. As of December 31,
2007, our customer base of retailers included approximately
2,250 accounts that operated approximately 4,800 store locations
(of which approximately 1,150 accounts that operated
approximately 2,950 stores are located in the United States) and
37 distributors in countries not serviced by our licensees. Our
retail customers are primarily specialty boardsports retailers
and several retail chains. Except for sales made in Canada and
Europe, all of our sales are denominated in U.S. dollars.
In Australia, Indonesia, South Africa and Brazil, we have
licensing agreements with entities that we believe have local
market insight and strong relationships with retailers in their
respective territories. Products sold by our licensees can be
found in approximately 600 store locations in Australia, over
460 store locations in Brazil, approximately 100 store locations
in South Africa and approximately 90 store locations in
Indonesia. We receive royalties on the sales of Volcom branded
products sold by our licensees. Our license agreements specify
design and quality standards for the Volcom branded products
distributed by our licensees. Our licensees are not controlled
and operated by us, and the amount of our licensing revenues
could decrease in the future. As these license agreements
expire, we may assume direct responsibility for serving these
licensed territories. We have established our own operations in
Europe in anticipation of the expiration of the licensing
agreement with our European licensee on December 31, 2006.
Pursuant to an agreement between us and Volcom Europe (our
former European licensee), Volcom Europe produced and
distributed the Spring 2007 Volcom line in Europe and paid us
our same royalty rate as required under the license agreement.
As a result, we will continue to experience a decrease in our
licensing revenues and an increase in our selling, general and
administrative expense while we continue to build the necessary
infrastructure and hire employees to further establish and
support our own operations in Europe. However, our
27
product revenues have increased in Europe as we now recognize
revenue from the direct sale of our products in this territory.
As part of our strategy to take direct control of our European
operations, we constructed a new European headquarters in
Anglet, France, and delivered our first full season product line
during the third quarter of 2007. We continue to build the
necessary infrastructure to support these European operations.
Our current European team consists of approximately
86 employees including design, production, sales and
information technology management positions. We completed the
construction of our European headquarters in Anglet, France, in
February 2007. The construction contract called for the
construction of an approximate 3,150 square meter (or
approximately 34,000 square foot) office and distribution
facility for 4.6 million Euros. We have applied for and
received approval to obtain local government grants totaling
approximately 800,000 Euros (approximately $1.2 million
based on a 1 Euro to $1.4729 U.S. dollar exchange rate as
of December 31, 2007). Such grants will be paid to us at
various times during and after our European headquarters
construction period and generally require us to maintain and
operate our European headquarters for five years. As of
December 31, 2007, we have received approximately 489,000
Euros (approximately $720,000 based on a 1 Euro to $1.4729
U.S. dollar exchange rate as of December 31,
2007) with respect to such grants. We also acquired Welcom
Distribution SARL, or Welcom, the distributor of Volcom branded
products in Switzerland, during October 2005. We purchased all
of the outstanding capital stock of Welcom for a purchase price
of $1.5 million in cash, excluding transaction costs. The
acquisition was effective on October 25, 2005, and we have
included the operations of Welcom in our financial results from
October 26, 2005 going forward.
Our revenues increased from $76.3 million in 2003 to
$268.6 million in 2007. In June 2007, we began direct
distribution of our product in Europe, which has contributed to
our increase in sales. Additionally, based upon our experience
and consumer reaction to our products and brand image, we
believe that the increase in our revenues during these periods
resulted primarily from increased brand recognition and growing
acceptance of our products at existing retail accounts. We
believe that our marketing programs, product designs and product
quality, and our relationships with our retailers contributed to
this increased demand and market penetration. In addition, the
increase in our revenues can be attributed to sales of our
recently introduced Creedlers and girls swim product, as well as
additional distribution. Further, several of our largest
retailers have opened additional stores and those store openings
likely have contributed to an increase in our product revenues;
however, period-over-period increases in our product revenues as
judged solely by additional store openings by our largest
retailers may not be a useful or accurate measure of revenue
increases because our products may not be carried in every new
store. Growth of our revenues will depend in part on the demand
for our products by consumers, our ability to effectively
distribute our products and our ability to design products
consistent with the changing fashion interests of boardsports
participants and those who affiliate themselves with the broader
action sports youth lifestyle.
Sales to Pacific Sunwear decreased 9%, or $4.7 million, for
2007 compared to 2006. We may continue to see sales to Pacific
Sunwear decline, and we currently project an approximate 10%
decrease in sales to Pacific Sunwear for 2008 compared to 2007
and an approximate 40% decrease in the first quarter of 2008
compared to the first quarter of 2007. It is unclear where our
sales to Pacific Sunwear will trend in the longer term. Pacific
Sunwear remains an important customer for us and we are working
both internally and with Pacific Sunwear to maximize our
business with them. We believe our brand continues to be an
important part of the Pacific Sunwear business. We also
recognize that any customer concentration creates risks and we
are, therefore, assessing strategies to lessen our concentration
with Pacific Sunwear.
Our gross margins are affected by our ability to accurately
forecast demand and avoid excess inventory by matching purchases
of finished goods to pre-season orders, which decreases our
percentage of sales at discount or close-out prices. Gross
margins are also impacted by our ability to control our sourcing
costs and, to a lesser extent, by changes in our product mix. If
we misjudge forecasting inventory levels or our sourcing costs
increase and we are unable to raise our prices, our gross
margins may decline.
We currently source the substantial majority of our products
from third-party manufacturers located primarily in China and
Mexico. As a result, we may be adversely affected by the
disruption of trade with these countries, the imposition of new
regulations related to imports, duties, taxes and other charges
on imports, and significant decreases in the value of the
U.S. dollar against foreign currencies. We seek to mitigate
the possible disruption in product flow by diversifying our
manufacturing across numerous manufacturers and by using
manufacturers in
28
countries that we believe to be politically stable. We do not
enter into long-term contracts with our third-party
manufacturers. Rather, we typically enter into contracts with
each manufacturer to produce one or more product lines for a
particular selling season. This strategy has enabled us to
maintain flexibility in our sourcing.
Our products manufactured abroad are subject to
U.S. customs laws, which impose tariffs as well as import
quota restrictions for textiles and apparel. Quota represents
the right, pursuant to bilateral or other international trade
arrangements, to export amounts of certain categories of
merchandise into a country or territory pursuant to a visa or
license. Pursuant to the Agreement on Textiles and Clothing,
quota on textile and apparel products was eliminated for World
Trade Organization, or WTO, member countries, including the
United States, Canada and European countries, on January 1,
2005. As a result of the eliminated quotas, we experienced lower
costs on our imports of finished goods, which increased our
gross margin as a percentage of revenues and our profitability
for the year ended December 31, 2005. During 2005, the
United States and China agreed to a new quota arrangement, which
will impose quotas on certain textile products that will impact
our business through 2008. Additionally, China offers a rebate
tax on exports. China has reduced this rebate due to pressures
from the United States and other countries to control the amount
of exports from China, which has increased costs. These cost
increases, along with the rising currency and labor shortages in
China, will have an impact on our business. While we do not
believe the limitations on imports from China will have a
material effect on our operations, there will be increased
pressure on costs and we intend to closely monitor our sourcing
in China to avoid disruptions.
Over the past five years, our selling, general and
administrative expenses have increased on an absolute dollar
basis as we have increased our spending on marketing,
advertising and promotions, strengthened our management team and
hired additional personnel. As a percentage of revenues,
however, our selling, general and administrative expenses have
decreased from 30.1% in 2003 to 29.6% in 2007. This was largely
because some of our expenses were fixed and did not increase at
the same rate as that of our revenues. However, selling, general
and administrative expenses as a percentage of revenues have
increased from 28.5% in 2006 to 29.6% in 2007. This increase was
primarily due to the hiring of additional personnel as we
continue to develop our infrastructure domestically and abroad,
and costs related to the transition of our European operations
from a licensee model to a direct control model without having a
full-year of revenue to offset or leverage the additional
expenses in Europe.
Critical
Accounting Policies
Our consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the
United States of America. To prepare these financial statements,
we must make estimates and assumptions that affect the reported
amounts of assets and liabilities. These estimates also affect
our reported revenues and expenses. Judgments must also be made
about the disclosure of contingent liabilities. Actual results
could be significantly different from these estimates. We
believe that the following discussion addresses the accounting
policies that are necessary to understand and evaluate our
reported financial results.
Revenue
Recognition
Revenues are recognized upon shipment, at which time transfer of
title occurs and risk of ownership passes to the customer.
Generally, we extend credit to our customers and do not require
collateral. Our payment terms are typically net-30 with terms up
to net-120 for snow category products. None of our sales
agreements with any of our customers provides for any rights of
return. However, we do approve returns on a
case-by-case
basis at our sole discretion to protect our brand and our image.
Allowances for estimated returns are provided when product
revenues are recorded based on historical experience and are
reported as reductions in product revenues. Allowances for
doubtful accounts are reported as a component of selling,
general and administrative expenses.
Licensing revenues are recorded when earned based on a stated
percentage of the licensees sales of Volcom branded
products.
Accounts
Receivable
Throughout the year, we perform credit evaluations of our
customers, and we adjust credit limits based on payment history
and the customers current creditworthiness. We
continuously monitor our collections and maintain an allowance
for doubtful accounts based on our historical experience and any
specific customer
29
collection issues that have been identified. Historically, our
losses associated with uncollectible accounts have been
consistent with our estimates, but we cannot assure you that we
will continue to experience the same credit loss rates that we
have experienced in the past. Unforeseen, material financial
difficulties of our customers could have an adverse impact on
our profits.
Inventories
We value inventories at the lower of the cost or the current
estimated market value of the inventory. We regularly review our
inventory quantities on hand and adjust inventory values for
excess and obsolete inventory based primarily on estimated
forecasts of product demand and market value. Demand for our
products could fluctuate significantly. The demand for our
products could be negatively affected by many factors, including
the following:
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changes in consumer preferences;
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buying patterns of our retailers;
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unseasonable weather; and
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weakened economic conditions.
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Some events, including terrorist acts or threats and trade
restrictions and safeguards, could also interrupt the production
and importation of our products or otherwise increase the cost
of our products. As a result, our operations and financial
performance could be negatively affected. Additionally, our
estimates of product demand and market value could be
inaccurate, which could result in excess and obsolete inventory.
Goodwill
and Intangible Assets
We account for goodwill and intangible assets in accordance with
Statement of Financial Accounting Standard (SFAS)
No. 142,
Goodwill and Intangible Assets.
Under
SFAS No. 142, goodwill and intangible assets with
indefinite lives are not amortized but are tested for impairment
annually and also in the event of an impairment indicator. As
required by SFAS No. 142, we evaluate the
recoverability of goodwill based on a two-step impairment test.
The first step compares the fair value of each reporting unit
with its carrying amount, including goodwill. If the carrying
amount exceeds the fair value, then the second step of the
impairment test is performed to measure the amount of any
impairment loss. Fair value is determined based on estimated
future cash flows, discounted at a rate that approximates our
cost of capital. Such estimates are subject to change and we may
be required to recognize an impairment loss in the future. Any
impairment losses will be reflected in operating income. In
2007, we recorded a $0.2 million impairment loss for the
goodwill associated with our October 2005 acquisition of Welcom
Distribution SARL, the sole distributor of Volcom branded
products in Switzerland. See Note 6 to the Consolidated
Financial Statements.
Long-Lived
Assets
We acquire assets in the normal course of our business. We
evaluate the recoverability of the carrying amount of these
long-lived assets (including fixed assets) whenever events or
changes in circumstances indicate that the carrying value of an
asset may not be recoverable. An impairment loss would be
recognized when the carrying value exceeds the undiscounted
future cash flows estimated to result from the use and eventual
disposition of the asset. Impairments, if any, would be
recognized in operating earnings. We continually use judgment
when applying these impairment rules to determine the timing of
the impairment tests, the undiscounted cash flows used to assess
impairments and the fair value of a potentially impaired asset.
The reasonableness of our judgment could significantly affect
the carrying value of our long-lived assets.
Investments
in Unconsolidated Investees
We account for our investments in unconsolidated investees using
the cost method if we do not have the ability to exercise
significant influence over the operating and financial policies
of the investee. We assess such investments for impairment when
there are events or changes in circumstances that may have a
significant adverse effect on the fair value of the investment.
If, and when, an event or change in circumstances that may have
a
30
significant adverse effect on the fair value of the investment
is identified, we estimate the fair value of the investment and,
if the reduction in value is determined to be other than
temporary, we record an impairment loss on the investment.
We account for our investments in unconsolidated investees using
the equity method of accounting if we have the ability to
exercise significant influence over the operating and financial
policies of the investee. We evaluate such investments for
impairment if an event or change in circumstances occurs that
may have a significant adverse effect on the fair value of the
investment. If, and when, an event is identified, we estimate
the fair value of the investment and, if the reduction in value
is determined to be other than temporary, we record an
impairment loss on the investment.
On April 1, 2005, we sold our 34% investment in Volcom
Europe, our European licensee, for $1.4 million. Under the
terms of the sale agreement, Volcom Europe continued to function
as our licensee until the expiration of its license agreement on
December 31, 2006 and through the distribution of the
Volcom European Spring 2007 line. During 2005, we recorded
$0.3 million of earnings attributable to this equity method
investee, which reflects our share of Volcom Europes
earnings of $0.6 million, offset by an impairment charge of
$0.3 million to reduce the carrying amount of our
investment in Volcom Europe to $1.6 million as of
March 31, 2005. After consideration of the effects of the
accumulated foreign currency translation adjustments related to
our investment in Volcom Europe of $0.2 million, we
recorded no gain or loss on the sale of our investment in Volcom
Europe in April 2005.
Athlete
Sponsorships
We establish relationships with professional athletes in order
to promote our products and brand. We have entered into
endorsement agreements with professional skateboarding,
snowboarding and surfing athletes. Many of these contracts
provide incentives for magazine exposure and competitive
victories while wearing or using our products. It is not
possible to determine the precise amounts we will be required to
pay under these agreements, as they are subject to many
variables. The actual amounts paid under these agreements may be
higher or lower than expected due to the variable nature of
these obligations. We expense these amounts as they are incurred.
Income
Taxes
On June 29, 2005 we changed our tax status from an
S corporation to a C corporation. For Federal and state
income tax purposes we had elected to be treated as an
S corporation under Subchapter S of the Internal Revenue
Code of 1986 and comparable state laws from January 1, 2002
until our initial public offering on June 29, 2005.
Therefore, no provision or liability for Federal or state income
tax has been included in our consolidated financial statements
for 2004, 2003 and the period from January 1, 2005 to
June 29, 2005, except that we were subject to California
franchise taxes of 1.5% on our corporate income and a provision
for these taxes was included in our consolidated financial
statements for those periods. Subsequent to June 29, 2005,
we recorded a provision and liability for Federal and state
income taxes using an annual effective tax rate. Upon the change
in our tax status, we established and recorded our deferred
income taxes at our C corporation effective tax rate.
We record a provision and liability for Federal and state income
taxes using an annual effective tax rate. Deferred income taxes
are recorded at our effective tax rate. Managements
judgment is required in assessing the realizability of our
deferred tax assets. We consider future taxable income and
ongoing prudent and feasible tax planning strategies in
assessing the value of our deferred tax assets. If we determine
that it is more likely than not that these assets will not be
realized, we would reduce the value of these assets to their
expected realizable value, thereby decreasing net income.
Evaluating the value of these assets is necessarily based on our
judgment. If we subsequently determined that the deferred tax
assets that had been written down would, in our judgment, be
realized in the future, the value of the deferred tax assets
would be increased, thereby increasing net income in the period
when that determination was made.
We adopted the provisions of Financial Accounting Standards
Board Interpretation No. 48 (FIN No. 48),
Accounting for Uncertainty in Income Taxes
, on
January 1, 2007. FIN No. 48 prescribes a
recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. Under
FIN No. 48, we must recognize the tax benefit from an
uncertain tax position only if it is more likely than not that
the tax position will be sustained on examination by the taxing
authorities, based on
31
the technical merits of the position. The tax benefits
recognized in the financial statements from such a position are
measured based on the largest benefit that has a greater than
fifty percent likelihood of being realized upon ultimate
resolution. As a result of the implementation of
FIN No. 48, we recognized a $0.1 million increase
in the liability for unrecognized tax benefits, which was
accounted for as a reduction to the January 1, 2007 balance
of retained earnings. See Note 13 to the Consolidated
Financial Statements for further discussion.
Stock-Based
Compensation
Since January 1, 2006, we have accounted for stock-based
compensation in accordance with SFAS No. 123 (revised
2004),
Share-Based Payment.
SFAS No. 123R
requires that we account for all stock-based compensation
transactions using a fair-value method and recognize the fair
value of each award as an expense over the service period. The
fair value of restricted stock awards is based upon the market
price of our common stock at the grant date. We estimate the
fair value of stock option awards, as of the grant date, using
the Black-Scholes option-pricing model. The use of the
Black-Scholes model requires that we make a number of estimates,
including the expected option term, the expected volatility in
the price of our common stock, the risk-free rate of interest
and the dividend yield on our common stock. If our expected
option term and stock-price volatility assumptions were
different, the resulting determination of the fair value of
stock option awards could be materially different. In addition,
judgment is also required in estimating the number of
share-based awards that we expect will ultimately vest upon the
fulfillment of service conditions (such as time-based vesting).
If the actual number of awards that ultimately vest differs
significantly from these estimates, stock-based compensation
expense and our results of operations could be materially
impacted.
Foreign
Currency Translation
We own subsidiaries in Switzerland and France, which operate
with the Swiss Franc and Euro as their functional currency,
respectively. Our international subsidiaries generate revenues
and collect receivables at future dates in the customers
local currencies, and purchase inventory primarily in
U.S. dollars. Accordingly, we are exposed to gains and
losses that result from the effect of changes in foreign
currency exchange rates on foreign currency denominated
transactions. Our assets and liabilities that are denominated in
foreign currencies are translated at the rate of exchange on the
balance sheet date. Revenues and expenses are translated using
the average exchange rate for the period. Gains and losses from
translation of foreign subsidiary financial statements are
included in accumulated other comprehensive income or loss.
A portion of our sales are made in Canadian dollars. As a
result, we are exposed to transaction gains and losses that
result from movements in foreign currency exchange rates. As our
Canadian sales, accounts receivable, accounts payable and
Canadian cash balances have historically been a small portion of
our revenues, assets and liabilities, we do not generally hedge
our exposure to foreign currency rate fluctuations, and
therefore we are exposed to foreign currency risk. Changes in
our assets and liabilities that are denominated in Canadian
dollars are translated into U.S. dollars at the rate of
exchange on the balance sheet date, and are reflected in our
statement of operations.
General
Our revenues consist of both our product revenues and our
licensing revenues. Our product revenues are derived primarily
from the sale of young mens and young womens clothing,
accessories and related products under the Volcom brand name. We
offer apparel and accessory products in six main categories:
mens, girls, boys, footwear, girls swim and snow. Product
revenues also include revenues from music and film sales.
Amounts billed to customers for shipping and handling are
included in product revenues. Licensing revenues consist of
royalties on product sales by our international licensees in
Europe (through delivery of our Spring 2007 line), Australia,
Indonesia, South Africa and Brazil.
Our cost of goods sold consists primarily of product costs,
retail packaging, freight costs associated with shipping goods
to customers, quality control and inventory shrinkage. There are
no cost of goods sold associated with our licensing revenues.
32
Our selling, general and administrative expenses consist
primarily of wages and related payroll and employee benefit
costs, handling costs, sales and marketing expenses, advertising
costs, legal and accounting professional fees, insurance,
utilities and other facility related costs, such as rent and
depreciation.
Results
of Operations
The following table sets forth selected items in our
consolidated statements of operations for the periods presented,
expressed as a percentage of revenues:
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Year Ended December 31,
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2007
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2006
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2005
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Revenues
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100.0
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%
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100.0
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%
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100.0
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%
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Cost of goods sold
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51.6
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50.3
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49.2
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Gross profit
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48.4
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49.7
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50.8
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Selling, general and administrative expenses
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29.6
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28.5
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26.8
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Operating income
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18.8
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21.2
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24.0
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Other income (expense)
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1.7
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2.0
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0.7
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Income before provision for income taxes
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20.5
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23.2
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24.7
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Provision for income taxes
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8.1
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9.2
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6.5
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Income before equity in earnings of investee
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12.4
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14.0
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18.2
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Equity in earnings of investee
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0.0
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0.0
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0.1
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Net income
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12.4
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%
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14.0
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%
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18.3
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%
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Year
Ended December 31, 2007 Compared to Year Ended
December 31, 2006
Revenues
Revenues in 2007 were $268.6 million, an increase of
$63.3 million, or 30.9%, compared to $205.3 million in
2006. Revenues from our European operations were
$40.1 million in 2007, an increase of $35.6 million,
compared to $4.5 million in 2006. The increase in revenues
from our European operations was a result of the transition of
the European operations from a licensee model to a direct
control model. Revenues from our top five customers were
$88.8 million in 2007, which was flat compared to
$88.8 million in 2006. Excluding revenues from Pacific
Sunwear, which decreased $4.7 million, or 8.8%, to
$48.6 million, total revenues from our remaining top five
customers increased $4.7 million, or 13.3%, to
$40.2 million in 2007 from $35.5 million in 2006. We
believe the decrease in revenues from Pacific Sunwear was
generally due to a change in Pacific Sunwears product mix
and Pacific Sunwears effort to reduce their overall
inventory levels, which caused Pacific Sunwears purchases
of our product to slow. It is unclear where our sales to Pacific
Sunwear will trend in the longer term. We believe our overall
domestic revenue growth was driven primarily by the increasing
popularity of our brand across our target markets and increasing
acceptance of our products at retail as a result of marketing
and advertising programs that effectively promoted our brand, a
compelling product offering, high-quality standards and strong
relationships with our retailers. In addition, the increase in
revenues can be attributed to sales of our recently introduced
Creedlers, girls swim and kids product, as well as additional
distribution. Further, several of our largest retailers have
opened additional stores over the last year and those store
openings likely have contributed to an increase in our product
revenues; however, period-over-period increases in our product
revenues as judged solely by additional store openings by our
largest retailers may not be a useful or accurate measure of
revenue increases because our products may not be carried in
every new store.
Product revenues increased $64.0 million, or 31.8%, in 2007
to $265.2 million from $201.2 million in 2006. Of the
$64.0 million increase in product revenues, increases in
mens products and girls products accounted for $40.4 million of
that increase. Revenues from mens products increased
$30.4 million, or 29.5%, to $133.1 million in 2007,
compared to $102.7 million in 2006, and revenues from girls
products increased $10.0 million, or 15.0%, to
$77.3 million in 2007 compared to $67.3 million in
2006. Revenues from boys products, which includes our new
33
line of kids clothing for young boys ages 4 to 7, increased
$8.1 million, or 68.8%, to $20.0 million in 2007
compared to $11.9 million in 2006. Revenues from snow
products increased $6.8 million, or 44.4%, to
$22.2 million in 2007 compared to $15.4 million in
2006. Revenues from our recently introduced Creedler footwear
line increased $4.5 million or 267.9%, to $6.1 million
in 2007 compared to $1.6 million in 2006. Revenues from our
recently introduced girls swim line were $3.7 million in
2007. There were no sales of this product line in 2006.
Licensing revenues decreased 16.0% to $3.4 million in 2007
from $4.1 million in 2006. The decrease in licensing
revenues was a result of the transition of our European
operations from a licensee model to a direct control model.
Product revenues in the United States were $174.3 million,
or 65.7% of our product revenues, and $157.6 million, or
78.3% of our product revenues, in 2007 and 2006, respectively.
Product revenues in Europe were $40.1 million, or 15.1% of
our product revenues, and $4.5 million, or 2.2% of our
product revenues, in 2007 and 2006, respectively. Product
revenues in the rest of the world consist primarily of product
revenues from sales in Canada and Japan and do not include sales
by our international licensees. Such product revenues in the
rest of the world were $50.8 million, or 19.2% of our
product revenues, and $39.1 million, or 19.5% of our
product revenues, in 2007 and 2006, respectively.
Gross
Profit
In 2007, gross profit increased $28.0 million, or 27.5%, to
$130.0 million compared to $102.0 million in 2006.
Gross profit as a percentage of revenues, or gross margin,
decreased 1.3% to 48.4% in 2007 compared to 49.7% in 2006. Gross
margin related specifically to product revenues decreased 1.0%
to 47.7% in 2007 compared to 48.7% in 2006. The gross margin
decreased primarily due to larger than expected inventory
liquidations and shipping samples to the European sales teams
and distributors at very low gross margins. These margin
pressures were partially offset by strong full-price sell
through and foreign currency gains associated with our European
operations shipping their first full season of product in the
third quarter of 2007.
Selling,
General and Administrative Expenses
In 2007, selling, general and administrative expenses increased
$21.0 million, or 35.9%, to $79.4 million compared to
$58.4 million in 2006. The increase in absolute dollars was
due primarily to increased expenses of $11.2 million
related to the transition of our European operations from a
licensee model to a direct control model. We also had increased
payroll and payroll-related expenses of $3.8 million due to
expenditures on infrastructure and personnel, increased
advertising and marketing expenses of $2.1 million,
increased rent expense of $1.3 million due to our
additional retail store leases and Irvine warehouse location,
increased depreciation and amortization expense of
$1.0 million, increased sales commission expenses of
$0.7 million resulting from our increased product revenues,
and an increase of $0.9 million in various other expense
categories. As a percentage of revenues, selling, general and
administrative expenses increased to 29.6% in 2007 from 28.5% in
2006. The 1.1% increase in selling, general and administrative
expenses as a percentage of revenues was due primarily to the
factors mentioned above.
Operating
Income
As a result of the factors above, operating income in 2007
increased $7.0 million to $50.6 million compared to
$43.6 million in 2006. Operating income as a percentage of
revenues decreased to 18.8% in 2007 from 21.2% in 2006.
Other
Income
Other income primarily includes net interest income and foreign
currency gains and losses. Interest income in 2007 was
$4.0 million compared to $3.8 million in 2006. This
increase in interest income was due to higher returns on
invested cash. Foreign currency gain increased to
$0.4 million in 2007 compared to $0.2 million in 2006
due primarily to the effect of changes in foreign currency
exchange rates on foreign currency denominated transactions.
34
Provision
for Income Taxes
We adopted the provisions of FIN No. 48 on
January 1, 2007. As a result of the implementation of
FIN No. 48, we recognized a $0.1 million increase
in the liability for unrecognized tax benefits, which was
accounted for as a reduction to the January 1, 2007 balance
of retained earnings. See Note 13 to the Consolidated
Financial Statements for further discussion.
We computed our provision for income taxes for 2007 using an
annual effective tax rate of 39.4%. The provision for income
taxes increased $2.8 million to $21.7 million in 2007
compared to $18.9 million in 2006.
Net
Income
As a result of the factors above, net income increased
$4.5 million, or 15.9%, to $33.3 million in 2007 from
$28.8 million in 2006.
Year
Ended December 31, 2006 Compared to Year Ended
December 31, 2005
Revenues
Revenues in 2006 were $205.3 million, an increase of
$45.3 million, or 28.3%, compared to $160.0 million in
2005. Revenues from our top five customers were
$88.8 million in 2006, an increase of $15.2 million,
or 20.6%, compared to $73.6 million in 2005, with Pacific
Sunwear accounting for $8.3 million of the
$15.2 million increase. We believe our 2006 revenue growth
was driven primarily by the increasing popularity of our brand
across our target markets and increasing acceptance of our
products at retail as a result of marketing and advertising
programs that effectively promoted our brand, a compelling
product offering, high-quality standards and strong
relationships with our retailers. In addition, several of our
largest retailers have opened additional stores in recent years
and those store openings likely have contributed to an increase
in our product revenues; however, period-over-period increases
in our product revenues as judged solely by additional store
openings by our largest retailers may not be a useful or
accurate measure of revenue increases because our products may
not be carried in every new store.
Product revenues increased $44.5 million, or 28.4%, in 2006
to $201.2 million from $156.7 million in 2005. Of the
$44.5 million increase in product revenues, increases in
mens products and girls products accounted for
$31.2 million of that increase. Revenues from mens products
increased $15.4 million, or 17.7%, to $102.7 million
in 2006, compared to $87.3 million in 2005, and revenues
from girls products increased $15.8 million, or 30.7%, to
$67.3 million in 2006 compared to $51.5 million in
2005.
Licensing revenues increased 25.9% to $4.1 million in 2006
from $3.2 million in 2005. The increase in licensing
revenues was a result of increased sales by our international
licensees, particularly those in Europe and Australia.
Product revenues in the United States were $157.6 million,
or 78.3% of our product revenues, and $128.2 million, or
81.8% of our product revenues, in 2006 and 2005, respectively.
Product revenues in the rest of the world consist primarily of
product revenues from sales in Canada and Japan and do not
include sales by our international licensees. Such product
revenues in the rest of the world were $43.6 million, or
21.7% of our product revenues, and $28.5 million, or 18.2%
of our product revenues, in 2006 and 2005, respectively.
Gross
Profit
In 2006, gross profit increased $20.7 million, or 25.5%, to
$102.0 million compared to $81.3 million in 2005.
Gross profit as a percentage of revenues, or gross margin, in
2006 decreased 1.1% to 49.7% compared to 50.8% in 2005. Gross
margin related specifically to product revenues decreased 1.1%
to 48.7% in 2006 compared to 49.8% in 2005. The gross margin
decrease was generally due to increased costs of goods sold
resulting primarily from the United States imposing a series of
quotas on November 8, 2005. These quotas are expected to
remain in effect through December 31, 2008. Gross margin
during 2005 was especially high due to the lack of quotas and
safeguards on imports from China during that period. While we do
not believe the current limitations on imports from China will
have a material effect on our operations, we intend to closely
monitor our sourcing in China to avoid disruptions.
35
Selling,
General and Administrative Expenses
In 2006, selling, general and administrative expenses increased
$15.5 million, or 36.0%, to $58.4 million compared to
$42.9 million in 2005. The increase in absolute dollars was
due primarily to increased payroll and payroll-related expenses
of $4.2 million, increased expenses of $2.3 million
related to the transition of our European operations from a
licensee model to direct control, additional advertising and
marketing expenses of $2.0 million, increased sales
commission expenses of $1.5 million resulting from our
increased product revenues, increased depreciation and
amortization expenses of $0.8 million, additional expenses
of $0.7 million associated with operating as a public
company, such as certain legal and accounting compliance costs,
and an increase in compensation expense of $0.6 million
associated with stock awards as required under
SFAS No. 123R. The remaining $3.4 million
increase in selling, general and administrative expenses was due
to increases in various other expense categories. As a
percentage of revenues, selling, general and administrative
expenses increased to 28.5% in 2006 from 26.8% in 2005. The 1.7%
increase in selling, general and administrative expenses as a
percentage of revenues was due primarily to the factors
mentioned above.
Operating
Income
As a result of the factors above, operating income in 2006
increased $5.2 million to $43.6 million compared to
$38.4 million in 2005. Operating income as a percentage of
revenues decreased to 21.2% in 2006 from 24.0% in 2005.
Other
Income
Other income primarily includes net interest income and foreign
currency gains and losses. Interest income in 2006 was
$3.8 million compared to $1.0 million in 2005. This
increase in interest income was due to the significant increase
in our cash and cash equivalent balances as a result of the
proceeds from our initial public offering, which closed in July
2005, as well as our cash flows from operating activities of
$21.0 million in 2006. Foreign currency gain increased to
$0.2 million in 2006 compared to a $0.1 million gain
in 2005 due primarily to fluctuations in the Canadian dollar
exchange rate.
Provision
for Income Taxes
On June 29, 2005, we changed our tax status from an
S corporation to a C corporation. For the period from
January 1, 2002 to June 29, 2005, for Federal and
state income tax purposes, we had elected to be treated as an
S corporation under Subchapter S of the Internal Revenue
Code of 1986 and comparable state laws. Therefore, no provision
or liability for Federal or state income tax had been included
in our consolidated financial statements for that period, except
that we were subject to California franchise taxes of 1.5% on
our corporate income and a provision for these taxes was
included in our consolidated financial statements for that
period.
Subsequent to June 29, 2005, we recorded a provision and
liability for Federal and state income taxes as
a C corporation. Upon the change in our tax status, we
established and recorded our deferred income taxes at our
C corporation effective tax rate. We computed our provision
for income taxes for 2005 using an annual effective tax rate of
26.5%.
We computed our provision for income taxes for 2006 using an
annual effective tax rate of 39.7%. As a result of this change
in tax status, our provision for income taxes increased
$8.4 million to $18.9 million in 2006 compared to
$10.5 million in 2005. On a pro forma basis, using an
estimated annual effective tax rate of 40.8%, our provision for
income taxes would have been $16.2 million in 2005.
Net
Income
As a result of the factors above, net income decreased
$0.5 million, or 2.0%, to $28.8 million in 2006 from
$29.3 million in 2005.
36
Liquidity
and Capital Resources
Our primary cash needs are working capital and capital
expenditures. These sources of liquidity may be impacted by
fluctuations in demand for our products, ongoing investments in
our infrastructure and expenditures on marketing and advertising.
The following table sets forth, for the periods indicated, our
beginning balance of cash and cash equivalents, net cash flows
from operating, investing and financing activities and our
ending balance of cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Cash and cash equivalents at beginning of period
|
|
$
|
85,414
|
|
|
$
|
71,712
|
|
|
$
|
10,359
|
|
Cash flow from operating activities
|
|
|
19,279
|
|
|
|
20,956
|
|
|
|
22,985
|
|
Cash flow from investing activities
|
|
|
(14,973
|
)
|
|
|
(9,229
|
)
|
|
|
(2,657
|
)
|
Cash flow from financing activities
|
|
|
1,623
|
|
|
|
1,703
|
|
|
|
41,041
|
|
Effect of exchange rate changes on cash
|
|
|
1,619
|
|
|
|
272
|
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
92,962
|
|
|
$
|
85,414
|
|
|
$
|
71,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007, we had $93.0 million in cash
and cash equivalents compared to $85.4 million in cash and
cash equivalents as of December 31, 2006.
Cash from operating activities consists primarily of net income
adjusted for certain non-cash items including depreciation,
deferred income taxes, equity in earnings of investee, provision
for doubtful accounts, tax benefits related to the exercise of
stock options, loss on disposal of property and equipment,
stock-based compensation and the effect of changes in working
capital and other activities. In 2007 and 2006, cash from
operating activities was $19.3 million and
$21.0 million, respectively. The $1.7 million decrease
in cash from operating activities between the periods was
attributable to the following:
|
|
|
|
|
(In thousands)
|
|
|
Attributable to
|
|
$
|
(10,488
|
)
|
|
Decrease in cash flows from accounts receivable due to increased
sales and timing of collections and increased sales volumes and
corresponding accounts receivable balances as a result of the
direct distribution of product in Europe beginning in 2007
|
|
(4,454
|
)
|
|
Decrease in cash flows from inventory due to higher inventory
levels in Europe as a result of the direct distribution of
product beginning in 2007
|
|
(1,525
|
)
|
|
Increase in cash flows from income tax receivable/payable due to
timing of payments made for income taxes
|
|
7,298
|
|
|
Increase in cash flows from accounts payable and accrued
expenses due to timing of payments and increased payroll
accruals and other liabilities
|
|
4,582
|
|
|
Increase in net income
|
|
3,629
|
|
|
Increase in non-cash depreciation, provision for doubtful
accounts, stock-based compensation and deferred income taxes
|
|
(719
|
)
|
|
Net decrease in cash flows from all other operating activities
|
|
|
|
|
|
$
|
(1,677
|
)
|
|
Total
|
|
|
|
|
|
Cash from investing activities was a use of cash of
$15.0 million and $9.2 million in 2007 and 2006,
respectively. During 2007, the cash used in investing activities
was primarily for the completion of construction of our European
headquarters in Anglet, France, the purchase of real property on
the North Shore of Oahu, or the Pipe House, for
$4.2 million, capital expenditures pertaining to our new
off-site distribution center and the implementation of the new
warehouse management system, and the ongoing purchase of
investments in computer equipment, warehouse equipment,
marketing initiatives and in-store buildouts at customer retail
locations. During 2006, the cash used in investing activities
was primarily for the construction of our European headquarters,
along with the
37
ongoing purchase of investments in computer equipment, warehouse
equipment, marketing initiatives and in-store buildouts at
customer retail locations.
Cash from financing activities was $1.6 million and
$1.7 million in 2007 and 2006, respectively, and is
primarily due to the proceeds and excess tax benefits related to
the exercise of stock options, principal payment on capital
lease obligations and cash received from government grants.
We currently have no material cash commitments, except our
normal recurring trade payables, expense accruals, operating
leases, capital leases and athlete endorsement agreements. We
believe that our cash and cash equivalents, cash received from
our initial public offering, cash flow from operating activities
and available borrowings under our credit facility will be
sufficient to meet our capital requirements for at least the
next twelve months.
Credit
Facilities
In July 2006, we entered into a $20.0 million unsecured
credit agreement with Bank of the West (which includes a line of
credit, foreign exchange facility and letter of credit
sub-facilities). The credit agreement, which expires on
August 31, 2008, may be used to fund our working capital
requirements. Borrowings under this agreement bear interest, at
our option, either at the banks prime rate (7.25% at
December 31, 2007) or LIBOR plus 1.50%. Under this
credit facility, we had $1.4 million outstanding in letters
of credit at December 31, 2007. At December 31, 2007
there were no outstanding borrowings under this credit facility,
and $18.6 million was available under the credit facility.
The new credit agreement requires compliance with conditions
precedent that must be satisfied prior to any borrowing, as well
as ongoing compliance with specified affirmative and negative
covenants, including covenants related to our financial
condition, including requirements that we maintain a minimum net
profit after tax and a minimum effective tangible net worth. At
December 31, 2007 we were in compliance with all
restrictive covenants.
Contractual
Obligations and Commitments
We did not have any off-balance sheet arrangements or
outstanding balances on our credit facility as of
December 31, 2007. The following table summarizes, as of
December 31, 2007, the total amount of future payments due
in various future periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
Total
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
Thereafter
|
|
|
|
(In thousands)
|
|
|
Operating lease obligations
|
|
$
|
18,805
|
|
|
$
|
3,552
|
|
|
$
|
2,936
|
|
|
$
|
2,732
|
|
|
$
|
2,554
|
|
|
$
|
1,846
|
|
|
$
|
5,185
|
|
Capital lease obligations
|
|
|
109
|
|
|
|
75
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional athlete sponsorships
|
|
|
9,859
|
|
|
|
4,743
|
|
|
|
3,073
|
|
|
|
1,793
|
|
|
|
130
|
|
|
|
120
|
|
|
|
|
|
Contractual letters of credit
|
|
|
1,377
|
|
|
|
1,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
30,150
|
|
|
$
|
9,747
|
|
|
$
|
6,043
|
|
|
$
|
4,525
|
|
|
$
|
2,684
|
|
|
$
|
1,966
|
|
|
$
|
5,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We lease certain land and buildings under non-cancelable
operating leases. The leases expire at various dates through
2018, excluding extensions at our option, and contain provisions
for rental adjustments, including in certain cases, adjustments
based on increases in the Consumer Price Index. The leases
generally contain renewal provisions for varying periods of time.
We lease computer and office equipment pursuant to capital lease
obligations. These leases bear interest at rates ranging from
3.4% to 13.7% per year, and expire at various dates through
October 2009.
We establish relationships with professional athletes in order
to promote our products and brand. We have entered into
endorsement agreements with professional skateboarding,
snowboarding and surfing athletes. Many of these contracts
provide incentives for magazine exposure and competitive
victories while wearing or using our
38
products. It is not possible to determine the precise amounts
that we will be required to pay under these agreements as they
are subject to many variables. The amounts listed above are the
approximate amounts of the minimum obligations required to be
paid under these contracts. The additional estimated maximum
amount that could be paid under our existing contracts, assuming
that all bonuses, victories and similar incentives are achieved
during the five year period ending December 31, 2012, is
approximately $3.1 million. The actual amounts paid under
these agreements may be higher or lower than the amounts
discussed above as a result of the variable nature of these
obligations.
Our contractual letters of credit have maturity dates of less
than one year. We use these letters of credit to purchase
finished goods.
We adopted the provisions of FIN No. 48 on
January 1, 2007. At December 31, 2007, we had $91,000
of total unrecognized tax benefits recorded as liabilities in
accordance with FIN No. 48 and we are uncertain as to
if or when such amounts may be settled.
Seasonality
Historically, we have experienced greater revenue in the second
half of the year than in the first half due to a concentration
of shopping around the fall and holiday seasons and pricing
differences between our products sold during the first and
second half of the year, as products we sell in the fall and
holiday seasons generally have higher prices per unit than
products we sell in the spring and summer seasons. We typically
sell more of our summer products (boardshorts and t-shirts) in
the first half of the year and a majority of our winter products
(pants, long sleeve shirts, sweaters, fleece, jackets and
outerwear) in the second half of the year. We anticipate that
this seasonal impact on our revenues is likely to continue. In
addition, our direct European operations began shipping product
during the second half of 2007 which caused a slightly higher
concentration of revenues in the second half of 2007 over
historical levels. During the two-year period ended
December 31, 2007, approximately 59% of our revenues, 57%
of our gross profit and 65% of our operating income were
generated in the second half of the year, with the third quarter
generally generating most of our operating income due to fall,
holiday and snow shipments. Accordingly, our results of
operations for the first and second quarters of any year are not
indicative of the results we expect for the full year.
As a result of the effects of seasonality, particularly in
preparation for the fall and holiday shopping seasons, our
inventory levels and other working capital requirements
generally begin to increase during the second quarter and into
the third quarter of each year. Based on our current cash
position, we do not anticipate borrowing under our credit
facility in the near term.
Backlog
We typically receive the bulk of our orders for each of our
seasons up to four months prior to the date the products are
shipped to customers. Generally, these orders are not subject to
cancellation prior to the date of shipment. At December 31,
2007, our order backlog was approximately $65.0 million,
compared to approximately $53.7 million at
December 31, 2006. For a variety of reasons, including the
timing of release dates for our seasonal product collections,
the timing of shipments, timing of order deadlines, timing of
receipt of orders, product mix of customer orders and the amount
of in-season orders, backlog may not be a reliable measure of
future sales for any succeeding period. For these reasons,
backlog figures in one year may not be directly comparable to
backlog figures in another year when measured at the same date.
Inflation
We do not believe inflation has had a material impact on our
results of operations in the past. There can be no assurance
that our business will not be affected by inflation in the
future.
Vulnerability
Due to Concentrations
As of December 31, 2007, our customer base of retailers
located in the United States, Europe, Canada and South America
included approximately 2,250 accounts that operate approximately
4,800 store locations and
39
37 distributors in international territories not serviced
by one of our licensees. One customer, Pacific Sunwear,
accounted for approximately 18% and 26% of our product revenues
in 2007 and 2006, respectively. No other customer accounted for
more than 10% of our product revenues in 2007 or 2006.
Sales to Pacific Sunwear decreased 9%, or $4.7 million, for
2007 compared to 2006. We may continue to see sales to Pacific
Sunwear decline, and we currently expect an approximate 10%
decrease in sales to Pacific Sunwear for 2008 compared to 2007
and an approximate 40% decrease in the first quarter of 2008
compared to the first quarter of 2007. It is unclear where our
sales to Pacific Sunwear will trend in the longer term. Pacific
Sunwear remains an important customer for us and we are working
both internally and with Pacific Sunwear to maximize our
business with them. We believe our brand continues to be an
important part of the Pacific Sunwear business. We also
recognize that any customer concentration creates risks and we
are, therefore, assessing strategies to lessen our concentration
with Pacific Sunwear.
We do not own or operate any manufacturing facilities and source
our products from independently-owned manufacturers. During
2007, we contracted for the manufacture of our products with
approximately 45 foreign manufacturers and four domestic screen
printers. Purchases from Dragon Crowd and Ningbo Jehson Textiles
totaled approximately 19% and 14%, respectively, of our product
costs in 2007, and 15% and 12%, respectively, of our product
costs in 2006.
Recent
Accounting Pronouncements
In June 2006, the FASB issued Interpretation (FIN)
No. 48,
Accounting for Uncertainty in Income
Taxes an interpretation of FASB Statement
No. 109.
FIN No. 48 prescribes a recognition
threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected
to be taken in a tax return, and provides guidance on
derecognition, classification, interest and penalties,
accounting in interim periods, disclosure, and transition.
FIN No. 48 is effective for fiscal years beginning
after December 15, 2006. As a result of the implementation
of FIN No. 48, we recognized a $0.1 million
increase in the liability for unrecognized tax benefits, which
was accounted for as a reduction to the January 1, 2007
balance of retained earnings. See Note 13 to the
Consolidated Financial Statements.
In June 2006, the FASB ratified the consensus reached on
Emerging Issues Task Force (EITF) Issue
No. 06-03,
How Taxes Collected from Customers and Remitted to
Governmental Authorities Should Be Presented in the Income
Statement (that is, Gross versus Net Presentation).
The EITF
reached a consensus that the presentation of taxes on either a
gross or net basis is an accounting policy decision that
requires disclosure.
EITF 06-03
is effective for the first interim or annual reporting period
beginning after December 15, 2006. Taxes collected from our
customers are and have been recorded on a net basis. We have no
intention of modifying this accounting policy. As such, the
adoption of
EITF 06-03
did not have an effect on our consolidated financial position or
results of operations.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements.
SFAS No. 157 defines
fair value, establishes framework for measuring fair value in
accordance with generally accepted accounting principles and
expands disclosures about fair value measurements.
SFAS No. 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007
and interim periods within those fiscal years. We are currently
evaluating the impact the adoption of SFAS No. 157
will have on our consolidated financial position or results of
operations.
In February 2007, the FASB issued SFAS No. 159,
The
Fair Value Option for Financial Assets and Financial Liabilities
Including an Amendment of
SFAS No. 115
. SFAS No. 159 provides
reporting entities an option to measure certain financial assets
and liabilities and other eligible items at fair value on an
instrument-by-instrument
basis. Unrealized gains and losses on items for which the fair
value option has been elected are reported in earnings at each
subsequent reporting date. SFAS No. 159 is effective
for fiscal years beginning after November 15, 2007. We are
currently evaluating the impact the adoption of
SFAS No. 159 will have on our consolidated financial
position or results of operations.
In December 2007, the FASB issued SFAS No. 141(R),
Business Combinations
. SFAS No. 141(R) requires
reporting entities to record fair value estimates of contingent
consideration and certain other potential liabilities
40
during the original purchase price allocation, expense
acquisition costs as incurred and does not permit certain
restructuring activities previously allowed under
EITF 95-3
to be recorded as a component of purchase accounting.
SFAS No. 141(R) is effective for fiscal periods
beginning after December 15, 2008 and should be applied
prospectively for all business acquisitions entered into after
the date of adoption. We are currently evaluating the impact the
adoption of SFAS No. 141(R) will have on our
consolidated financial position or results of operations.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interest in Consolidated Financial
Statements
an amendment of ARB
No. 51
. SFAS No. 160 requires (i) that
noncontrolling (minority) interests be reported as a component
of shareholders equity, (ii) that net income
attributable to the parent and to the noncontrolling interest be
separately identified in the consolidated statement of
operations, (iii) that changes in a parents ownership
interest while the parent retains its controlling interest be
accounted for as equity transactions, (iv) that any
retained noncontrolling equity investment upon the
deconsolidation of a subsidiary be initially measured at fair
value, and (v) that sufficient disclosures are provided
that clearly identify and distinguish between the interests of
the parent and the interests of the noncontrolling owners.
SFAS No. 160 is effective for fiscal periods beginning
after December 15, 2008. We are currently evaluating the
impact the adoption of SFAS No. 160 will have on our
consolidated financial position or results of operations.
|
|
ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
Foreign
Currency Risk
We own subsidiaries in Switzerland and France, which operate
with the Swiss Franc and Euro as their functional currency,
respectively. Our international subsidiaries generate revenues
and collect receivables at future dates in the customers
local currencies, and purchase inventory primarily in
U.S. dollars. Accordingly, we are exposed to gains and
losses that result from the effect of changes in foreign
currency exchange rates on foreign currency denominated
transactions. Our assets and liabilities that are denominated in
foreign currencies are translated at the rate of exchange on the
balance sheet date. Revenues and expenses are translated using
the average exchange rate for the period. Gains and losses from
translation of foreign subsidiary financial statements are
included in accumulated other comprehensive income or loss.
A portion of our sales are made in Canadian dollars. In 2007,
2006 and 2005, we derived 11.7%, 11.9% and 10.1% of our product
revenues, respectively, from sales in Canada. As a result, we
are exposed to fluctuations in the value of Canadian dollar
denominated receivables and payables, foreign currency
investments, primarily consisting of Canadian dollar deposits,
and cash flows related to repatriation of those investments. A
weakening of the Canadian dollar relative to the
U.S. dollar could negatively impact the profitability of
our products sold in Canada and the value of our Canadian
receivables, as well as the value of repatriated funds we may
bring back to the United States from Canada. Account
balances denominated in Canadian dollars are marked-to-market
every period using current exchange rates and the resulting
changes in the account balance are included in our income
statement as other income. We do not believe that a 10% movement
in all applicable foreign currency exchange rates would have a
material effect on our financial position.
As our directly controlled European operations have been just
recently established, and our Canadian accounts receivable,
accounts payable and cash balances represent a small portion of
our total assets and liabilities, we do not generally hedge our
exposure to foreign currency rate fluctuations. We may enter
into future transactions in order to hedge our exposure to
foreign currencies.
We generally purchase finished goods from our manufacturers in
U.S. dollars. However, we source substantially all of these
finished goods abroad and their cost may be affected by changes
in the value of the relevant currencies. Price increases caused
by currency exchange rate fluctuations could increase our costs.
If we are unable to increase our prices to a level sufficient to
cover the increased costs, it could adversely affect our margins
and we may become less price competitive with companies who
manufacture their products in the United States.
Interest
Rate Risk
We maintain a $20.0 million unsecured credit agreement
(which includes a line of credit, foreign exchange facility and
letter of credit sub-facilities) with no balance outstanding at
December 31, 2007. The credit agreement,
41
which expires on August 31, 2008, may be used to fund our
working capital requirements. Borrowings under this agreement
bear interest, at our option, either at the banks prime
rate (7.25% at December 31, 2007) or LIBOR plus 1.50%.
Based on the average interest rate on our credit facility during
2007, and to the extent that borrowings were outstanding, we do
not believe that a 10% change in interest rates would have a
material effect on our results of operations or financial
condition.
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
Information with respect to this item is set forth in
Index to Consolidated Financial Statements under
Part IV, Item 15 of this report.
|
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
None
|
|
ITEM 9A.
|
CONTROLS
AND PROCEDURES
|
Disclosure
Controls and Procedures
We maintain disclosure controls and procedures that are designed
to ensure that information required to be disclosed in our
Exchange Act reports is recorded, processed, summarized and
reported within the time periods specified in the Securities and
Exchange Commissions rules and forms, and that such
information is accumulated and communicated to our management,
including our Chief Executive Officer and our Chief Financial
Officer, as appropriate, to allow timely decisions regarding
required disclosures. Our management, including our Chief
Executive Officer and our Chief Financial Officer, does not
expect that our disclosure controls or procedures will prevent
all error and all fraud. A control system, no matter how well
conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system
are met. Further, the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in
all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of
fraud, if any, within Volcom have been detected. These inherent
limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur
because of simple error or mistake. Additionally, controls can
be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of
the control. The design of any system of controls is also based
in part upon certain assumptions about the likelihood of future
events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future
conditions. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or
fraud may occur and not be detected.
We carried out an evaluation, under the supervision and with the
participation of our management, including our Chief Executive
Officer and our Chief Financial Officer, of the effectiveness of
the design and operation of our disclosure controls and
procedures as of December 31, 2007, the end of the annual
period covered by this report. The evaluation of our disclosure
controls and procedures included a review of the disclosure
controls and procedures objectives, design,
implementation and the effect of the controls and procedures on
the information generated for use in this report. In the course
of our evaluation, we sought to identify data errors, control
problems or acts of fraud and to confirm the appropriate
corrective actions, including process improvements, were being
undertaken.
Based on the foregoing, our Chief Executive Officer and our
Chief Financial Officer concluded that, as of the end of the
period covered by this report, our disclosure controls and
procedures were effective and were operating at the reasonable
assurance level.
Internal
Control Over Financial Reporting
There has been no change in the Companys internal controls
over financial reporting (as such term is defined in
Rules 13a-15(f)
and
15d-15(f)
under the Exchange Act) during the Companys most recent
fiscal quarter that has materially affected, or is reasonably
likely to materially affect, the Companys internal
controls over financial reporting.
42
Managements
Report on Internal Control Over Financial Reporting
The Companys management is responsible for establishing
and maintaining adequate internal control over financial
reporting, as such term is defined in Exchange Act
Rules 13a-15(f)
and
15d-15(f).
Under the supervision and with the participation of the
Companys management, including the Companys Chief
Executive Officer and Chief Financial Officer, the Company has
conducted an evaluation of the effectiveness of its internal
control over financial reporting as of December 31, 2007,
based on the framework in
Internal Control
Integrated Framework
issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on
managements evaluation under the framework in
Internal
Control Integrated Framework
, management
concluded that the Companys internal control over
financial reporting was effective as of December 31, 2007.
The Companys independent registered public accounting firm
that audited the financial statements included in the annual
report containing the disclosure required by this Item has
issued an attestation report on managements assessment of
the Companys internal control over financial reporting.
This report appears under the Report of Independent Registered
Public Accounting Firm On Internal Control Over Financial
Reporting, which is included below.
Richard R. Woolcott
President and Chief Executive Officer
(Principal Executive Officer)
Douglas P. Collier
Chief Financial Officer, Secretary and Treasurer
(Principal Financial Officer)
February 29, 2008
43
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Board of Directors and Stockholders
Volcom, Inc.
We have audited the internal control over financial reporting of
Volcom, Inc. and subsidiaries (the Company) as of
December 31, 2007, based on the criteria established in
Internal Control Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway
Commission. The Companys 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
Managements Report on Internal Control Over Financial
Reporting
. Our responsibility is to express an opinion on
the Companys internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed by, or under the supervision of, the
companys principal executive and principal financial
officers, or persons performing similar functions, and effected
by the companys Board of Directors, management, and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become inadequate because of the 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, 2007, based on the criteria established in
Internal Control Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated financial statements as of and for the year ended
December 31, 2007 of the Company, and our report dated
February 29, 2008, expressed an unqualified opinion on
those financial statements.
/s/ Deloitte &
Touche LLP
Costa Mesa, California
February 29, 2008
44
|
|
ITEM 9B.
|
OTHER
INFORMATION
|
None
PART III
|
|
ITEM 10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
Information with respect to this item is incorporated by
reference from our definitive Proxy Statement.
|
|
ITEM 11.
|
EXECUTIVE
COMPENSATION
|
Information with respect to this item is incorporated by
reference from our definitive Proxy Statement.
|
|
ITEM 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
|
Information with respect to this item is incorporated by
reference from our definitive Proxy Statement.
|
|
ITEM 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
Information with respect to this item is incorporated by
reference from our definitive Proxy Statement.
|
|
ITEM 14.
|
PRINCIPAL
ACCOUNTING FEES AND SERVICES
|
Information with respect to this item is incorporated by
reference from our definitive Proxy Statement.
PART IV
|
|
ITEM 15.
|
EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
|
(a) 1. The financial statements listed in the Index
to Consolidated Financial Statements at
page F-1
are filed as a part of this report.
2. Financial statement schedules are omitted because they
are not applicable or the required information is shown in the
financial statements or notes thereto.
3. Exhibits included or incorporated herein. See
Exhibit Index.
45
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
Notes to Consolidated Financial Statements
|
|
|
F-8
|
|
F-1
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Volcom, Inc.
We have audited the accompanying consolidated balance sheets of
Volcom, Inc. and subsidiaries (the Company) as of
December 31, 2007 and 2006, and the related consolidated
statements of operations, stockholders equity and
comprehensive income, and cash flows for each of the three years
in the period ended December 31, 2007. These consolidated
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on the consolidated financial statements 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 consolidated financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of the
Company as of December 31, 2007 and 2006, and the results
of its operations and its cash flows for each of the three years
in the period ended December 31, 2007, in conformity with
accounting principles generally accepted in the United States of
America.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of the Companys internal control over
financial reporting as of December 31, 2007, based on the
criteria established in
Internal Control
Integrated Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated
February 29, 2008, expressed an unqualified opinion on the
effectiveness of the Companys internal control over
financial reporting.
/s/ Deloitte &
Touche LLP
February 29, 2008
Costa Mesa, California
F-2
VOLCOM,
INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except share data)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
92,962
|
|
|
$
|
85,414
|
|
Accounts receivable net of allowances of $2,783
(2007) and $1,323 (2006)
|
|
|
58,270
|
|
|
|
34,175
|
|
Inventories
|
|
|
20,440
|
|
|
|
13,185
|
|
Prepaid expenses and other current assets
|
|
|
1,720
|
|
|
|
1,383
|
|
Income taxes receivable
|
|
|
326
|
|
|
|
|
|
Deferred income taxes
|
|
|
2,956
|
|
|
|
2,353
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
176,674
|
|
|
|
136,510
|
|
|
|
|
|
|
|
|
|
|
Property and equipment net
|
|
|
24,427
|
|
|
|
11,527
|
|
Investments in unconsolidated investees
|
|
|
298
|
|
|
|
298
|
|
Deferred income taxes
|
|
|
268
|
|
|
|
660
|
|
Intangible assets net
|
|
|
363
|
|
|
|
386
|
|
Goodwill
|
|
|
|
|
|
|
158
|
|
Other assets
|
|
|
464
|
|
|
|
209
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
202,494
|
|
|
$
|
149,748
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
18,694
|
|
|
$
|
8,764
|
|
Accrued expenses and other current liabilities
|
|
|
10,561
|
|
|
|
6,175
|
|
Income taxes payable
|
|
|
|
|
|
|
424
|
|
Current portion of capital lease obligations
|
|
|
72
|
|
|
|
78
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
29,327
|
|
|
|
15,441
|
|
|
|
|
|
|
|
|
|
|
Long-term capital lease obligations
|
|
|
33
|
|
|
|
106
|
|
Other long-term liabilities
|
|
|
190
|
|
|
|
204
|
|
Income taxes payable non-current
|
|
|
89
|
|
|
|
|
|
Commitments and contingencies (Note 9)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock, $.001 par value
60,000,000 shares authorized; 24,349,520 (2007) and
24,295,420 (2006) shares issued and outstanding
|
|
|
24
|
|
|
|
24
|
|
Additional paid-in capital
|
|
|
89,185
|
|
|
|
86,773
|
|
Retained earnings
|
|
|
80,226
|
|
|
|
47,019
|
|
Accumulated other comprehensive income
|
|
|
3,420
|
|
|
|
181
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
172,855
|
|
|
|
133,997
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
202,494
|
|
|
$
|
149,748
|
|
|
|
|
|
|
|
|
|
|
See the accompanying notes to consolidated financial statements.
F-3
VOLCOM,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except share and per share data)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenues
|
|
$
|
265,193
|
|
|
$
|
201,186
|
|
|
$
|
156,716
|
|
Licensing revenues
|
|
|
3,420
|
|
|
|
4,072
|
|
|
|
3,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
268,613
|
|
|
|
205,258
|
|
|
|
159,951
|
|
Cost of goods sold
|
|
|
138,570
|
|
|
|
103,237
|
|
|
|
78,632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
130,043
|
|
|
|
102,021
|
|
|
|
81,319
|
|
Selling, general and administrative expenses
|
|
|
79,411
|
|
|
|
58,417
|
|
|
|
42,939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
50,632
|
|
|
|
43,604
|
|
|
|
38,380
|
|
Other income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income, net
|
|
|
3,973
|
|
|
|
3,833
|
|
|
|
1,036
|
|
Dividend income from cost method investee
|
|
|
|
|
|
|
3
|
|
|
|
11
|
|
Foreign currency gain
|
|
|
401
|
|
|
|
233
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
4,374
|
|
|
|
4,069
|
|
|
|
1,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes and equity in earnings
of investee
|
|
|
55,006
|
|
|
|
47,673
|
|
|
|
39,481
|
|
Provision for income taxes
|
|
|
21,671
|
|
|
|
18,920
|
|
|
|
10,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before equity in earnings of investee
|
|
|
33,335
|
|
|
|
28,753
|
|
|
|
29,006
|
|
Equity in earnings of investee
|
|
|
|
|
|
|
|
|
|
|
331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
33,335
|
|
|
$
|
28,753
|
|
|
$
|
29,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.37
|
|
|
$
|
1.19
|
|
|
$
|
1.36
|
|
Diluted
|
|
$
|
1.37
|
|
|
$
|
1.18
|
|
|
$
|
1.34
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
24,302,893
|
|
|
|
24,227,845
|
|
|
|
21,627,821
|
|
Diluted
|
|
|
24,419,802
|
|
|
|
24,304,627
|
|
|
|
21,839,626
|
|
Pro forma net income data (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes and equity in earnings
of investee, as reported
|
|
|
|
|
|
|
|
|
|
$
|
39,481
|
|
Pro forma provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
16,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma income before equity in earnings of investee
|
|
|
|
|
|
|
|
|
|
|
23,258
|
|
Equity in earnings of investee
|
|
|
|
|
|
|
|
|
|
|
331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
|
|
|
|
|
|
|
|
$
|
23,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income per share (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
$
|
1.09
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
$
|
1.08
|
|
Pro forma weighted average shares outstanding (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
21,627,821
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
21,839,626
|
|
See the accompanying notes to consolidated financial statements.
F-4
VOLCOM,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE
INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Income
|
|
|
Income
|
|
|
Total
|
|
|
|
(In thousands, except share data)
|
|
|
Balance at January 1, 2005
|
|
|
19,170,705
|
|
|
$
|
19
|
|
|
$
|
1,081
|
|
|
$
|
28,133
|
|
|
$
|
269
|
|
|
|
|
|
|
$
|
29,502
|
|
Initial public offering, net of offering costs
|
|
|
4,640,625
|
|
|
|
4
|
|
|
|
80,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80,131
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
178
|
|
Issuance of restricted stock
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
382,790
|
|
|
|
1
|
|
|
|
199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
200
|
|
Tax benefits related to exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
2,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,833
|
|
Distributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(39,204
|
)
|
|
|
|
|
|
|
|
|
|
|
(39,204
|
)
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,337
|
|
|
|
|
|
|
$
|
29,337
|
|
|
|
29,337
|
|
Foreign currency translation of equity method investee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(269
|
)
|
|
|
(269
|
)
|
|
|
(269
|
)
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28
|
)
|
|
|
(28
|
)
|
|
|
(28
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
29,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
24,214,120
|
|
|
|
24
|
|
|
|
84,418
|
|
|
|
18,266
|
|
|
|
(28
|
)
|
|
|
|
|
|
|
102,680
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
812
|
|
Issuance of restricted stock
|
|
|
15,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
66,300
|
|
|
|
|
|
|
|
1,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,261
|
|
Tax benefits related to exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
282
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,753
|
|
|
|
|
|
|
$
|
28,753
|
|
|
|
28,753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
209
|
|
|
|
209
|
|
|
|
209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
28,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
24,295,420
|
|
|
|
24
|
|
|
|
86,773
|
|
|
|
47,019
|
|
|
|
181
|
|
|
|
|
|
|
|
133,997
|
|
FIN No. 48 Adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(128
|
)
|
|
|
|
|
|
|
|
|
|
|
(128
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
934
|
|
Issuance of restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
54,100
|
|
|
|
|
|
|
|
1,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,028
|
|
Tax benefits related to exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
450
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,335
|
|
|
|
|
|
|
$
|
33,335
|
|
|
|
33,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,239
|
|
|
|
3,239
|
|
|
|
3,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
36,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
24,349,520
|
|
|
$
|
24
|
|
|
$
|
89,185
|
|
|
$
|
80,226
|
|
|
$
|
3,420
|
|
|
|
|
|
|
$
|
172,855
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See the accompanying notes to consolidated financial statements.
F-5
VOLCOM,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
33,335
|
|
|
$
|
28,753
|
|
|
$
|
29,337
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
2,895
|
|
|
|
1,423
|
|
|
|
623
|
|
Equity in earnings of investee, net of dividends received
|
|
|
|
|
|
|
|
|
|
|
(331
|
)
|
Provision for doubtful accounts
|
|
|
831
|
|
|
|
588
|
|
|
|
68
|
|
Loss on disposal of property and equipment
|
|
|
24
|
|
|
|
64
|
|
|
|
30
|
|
Asset impairment
|
|
|
161
|
|
|
|
|
|
|
|
|
|
Excess tax benefits related to exercise of stock options
|
|
|
(444
|
)
|
|
|
(303
|
)
|
|
|
2,833
|
|
Stock-based compensation
|
|
|
934
|
|
|
|
812
|
|
|
|
178
|
|
Deferred income taxes
|
|
|
(191
|
)
|
|
|
(1,983
|
)
|
|
|
(1,150
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(23,736
|
)
|
|
|
(13,248
|
)
|
|
|
(4,219
|
)
|
Inventories
|
|
|
(6,789
|
)
|
|
|
(2,335
|
)
|
|
|
(5,025
|
)
|
Prepaid expenses and other current assets
|
|
|
(311
|
)
|
|
|
12
|
|
|
|
(867
|
)
|
Income taxes receivable/payable
|
|
|
(339
|
)
|
|
|
1,186
|
|
|
|
(479
|
)
|
Other assets
|
|
|
(242
|
)
|
|
|
(97
|
)
|
|
|
(54
|
)
|
Accounts payable
|
|
|
9,396
|
|
|
|
2,912
|
|
|
|
799
|
|
Accrued expenses
|
|
|
3,791
|
|
|
|
2,977
|
|
|
|
1,242
|
|
Other long-term liabilities
|
|
|
(36
|
)
|
|
|
195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
19,279
|
|
|
|
20,956
|
|
|
|
22,985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(14,989
|
)
|
|
|
(9,063
|
)
|
|
|
(2,933
|
)
|
Proceeds from sale of property and equipment
|
|
|
16
|
|
|
|
2
|
|
|
|
|
|
Proceeds from sale of equity method investee
|
|
|
|
|
|
|
|
|
|
|
1,391
|
|
Business acquisition, net of cash acquired
|
|
|
|
|
|
|
(168
|
)
|
|
|
(1,115
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(14,973
|
)
|
|
|
(9,229
|
)
|
|
|
(2,657
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal payments on capital lease obligations
|
|
|
(78
|
)
|
|
|
(71
|
)
|
|
|
(86
|
)
|
Proceeds from government grants
|
|
|
229
|
|
|
|
210
|
|
|
|
|
|
Proceeds from initial public offering, net of offering costs
|
|
|
|
|
|
|
|
|
|
|
80,131
|
|
Proceeds from the exercise of stock options
|
|
|
1,028
|
|
|
|
1,261
|
|
|
|
200
|
|
Excess tax benefits related to exercise of stock options
|
|
|
444
|
|
|
|
303
|
|
|
|
|
|
Distributions to stockholders
|
|
|
|
|
|
|
|
|
|
|
(39,204
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
1,623
|
|
|
|
1,703
|
|
|
|
41,041
|
|
Effect of exchange rate changes on cash
|
|
|
1,619
|
|
|
|
272
|
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
7,548
|
|
|
|
13,702
|
|
|
|
61,353
|
|
Cash and cash equivalents
Beginning of period
|
|
|
85,414
|
|
|
|
71,712
|
|
|
|
10,359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
End of period
|
|
$
|
92,962
|
|
|
$
|
85,414
|
|
|
$
|
71,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
35
|
|
|
$
|
14
|
|
|
$
|
21
|
|
Income taxes
|
|
|
22,799
|
|
|
|
19,619
|
|
|
|
9,274
|
|
See the accompanying notes to consolidated financial statements.
F-6
Supplemental
disclosures of noncash investing and financing
activities:
At December 31, 2007, the Company accrued for $266,000 of
property and equipment purchases.
Upon adoption of Financial Accounting Standards Board
Interpretation No. 48,
Accounting for Uncertainty in
Income Taxes
, on January 1, 2007, the Company recorded
a $128,000 increase to income taxes payable and a reduction to
retained earnings.
During the year ended December 31, 2005, the Company
recognized ($102,000) in foreign currency translation
adjustments related to an equity method investee.
During the year ended December 31, 2005, the Company
recognized a deferred tax liability of $111,000 related to
goodwill associated with a business acquisition.
F-7
VOLCOM,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
1.
|
Organization
and Summary of Significant Accounting Policies
|
Volcom, Inc. and subsidiaries (the Company or
Volcom) is a designer, marketer and distributor of
young mens and womens clothing, footwear, accessories and
related products under the Volcom brand name. The Company
initially incorporated in the state of California in 1991 as
Stone Boardwear, Inc. and has been doing business as Volcom
since June 1991. The Company was reincorporated in Delaware in
April 2005 and changed its name to Volcom, Inc. The Company is
based in Costa Mesa, California, and operates six retail stores
located in California and Hawaii.
Volcom Entertainment (Entertainment), a wholly-owned
subsidiary of the Company, was formed in California in April
1999. Entertainment operates the Companys music label
which identifies and signs musical artists and produces and
distributes CDs through its existing record retail and online
distribution channels.
Volcom International, a wholly-owned subsidiary of the Company,
was formed in 2006 and holds the European license for the
Companys products. Volcom International distributes Volcom
branded products throughout Europe and to Volcom SAS and Welcom
Distribution SARL.
Volcom SAS, a wholly-owned subsidiary of Volcom International,
was formed in 2006 and distributes Volcom branded products in
France. Volcom SAS also provides design and marketing services
to Volcom International.
Welcom Distribution SARL, a wholly-owned subsidiary of Volcom
International, was acquired in October 2005. Welcom Distribution
SARL is the sole distributor of Volcom branded products in
Switzerland.
Principles of Consolidation
The accompanying
consolidated financial statements include the accounts of
Volcom, Inc. and its wholly owned subsidiaries. All intercompany
accounts and transactions have been eliminated. Intercompany
profits and losses on transactions with the Companys
former equity method investee were eliminated until realized.
Basis of Presentation
The accompanying
consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the
United States of America.
Initial Public Offering
On July 6, 2005,
the Company announced the completion of its initial public
offering of 4,687,500 shares of common stock at a price of
$19.00 per share and the simultaneous close of the
underwriters over-allotment option to purchase an
additional 703,125 shares of common stock at the initial
public offering price. The Company sold 4,187,500 shares in
the offering and 453,125 shares pursuant to the
underwriters over-allotment option. Certain selling
stockholders of the Company sold the remaining
500,000 shares in the offering and 250,000 shares
pursuant to the underwriters over-allotment option. Upon
the closing of the offering, the Company received net proceeds,
after deducting underwriting discounts and commissions and
estimated offering expenses, of approximately
$80.1 million, of which the Company used $20.0 million
to distribute its estimated undistributed S corporation
earnings to its stockholders of record prior to the initial
public offering.
Cash and Cash Equivalents
The Company
considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Concentration of Credit Risks
The Company is
subject to significant concentrations of credit risk, primarily
from its cash and cash equivalents and accounts receivable. The
Company invests its cash equivalents with financial institutions
with high credit standing. At December 31, 2007 and 2006,
the majority of the Companys cash and cash equivalents
were held at financial institutions in the United States that
are insured by the Federal Deposit Insurance Corporation up to
$100,000. Uninsured balances aggregate approximately
$92.9 million (including foreign accounts) as of
December 31, 2007.
The Company performs ongoing credit evaluations of its customers
and adjusts credit limits based upon payment history and the
customers current creditworthiness. The Company
continually monitors customer collections and maintains an
allowance for estimated credit losses based on historical
experience and any specific customer collection issues that have
been identified. Historically, such credit losses have generally
been within the
F-8
VOLCOM,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Companys estimates. At December 31, 2007, the Company
had one customer whose outstanding accounts receivable balance
was approximately 12% of the Companys total outstanding
accounts receivable. At December 31, 2006, approximately
22% and 11% of the Companys total outstanding accounts
receivable balance was concentrated among two customers.
Inventories
Inventories are stated at the
lower of cost
(first-in,
first-out) or market. The Company regularly reviews inventory
quantities on hand and adjusts inventory values for excess and
obsolete inventory based primarily on estimated forecasts of
product demand and net realizable value.
Property and Equipment
The Companys
property and equipment are stated at cost and depreciated on a
straight-line basis over their estimated useful lives, which
generally range from three to thirty years. Leasehold
improvements are depreciated over the shorter of the estimated
useful life of the asset or the lease term. Maintenance and
repairs on the Companys property and equipment are charged
to operations when incurred. Depreciable lives by fixed asset
category are as follows:
|
|
|
Furniture and fixtures
|
|
3 to 5 years
|
Office equipment
|
|
3 to 5 years
|
Computer equipment
|
|
3 years
|
Leasehold improvements
|
|
3 to 10 years
|
Building
|
|
15 to 30 years
|
Investments in Unconsolidated Investees
The
Company accounts for its investments in unconsolidated investees
using the cost method if the Company does not have the ability
to exercise significant influence over the operating and
financial policies of the investee. The Company assesses such
investments for impairment when there are events or changes in
circumstances that may have a significant adverse effect on the
fair value of the investment. If, and when, an event or change
in circumstances that may have a significant adverse effect on
the fair value of the investment is identified, the Company
estimates the fair value of the investment and, if the reduction
in value is determined to be other than temporary, records an
impairment loss on the investment.
The Company accounts for its investments in unconsolidated
investees using the equity method of accounting if the Company
has the ability to exercise significant influence over the
operating and financial policies of the investee. The Company
evaluates such investments for impairment if an event or change
in circumstances occurs that may have a significant adverse
effect on the fair value of the investment. If, and when, an
event is identified, the Company estimates the fair value of the
investment and, if the reduction in value is determined to be
other than temporary, records an impairment loss on the
investment.
Long-Lived Assets
The Company accounts for
the impairment and disposition of long-lived assets in
accordance with Statement of Financial Accounting Standards
(SFAS) No. 144,
Accounting for the
Impairment or Disposition of Long-Lived Assets.
In
accordance with SFAS No. 144, the Company assesses its
long-lived assets for potential impairment whenever events or
changes in circumstances indicate that the assets carrying
value may not be recoverable. The carrying amount of a
long-lived asset (asset group) is not recoverable if it exceeds
the sum of the undiscounted cash flows expected to result from
the use and eventual disposition of the asset (asset group).
Once the carrying amount of a long-lived asset (asset group) is
deemed to no longer be recoverable, an impairment loss would be
recognized equal to the difference between the current carrying
amount and the fair value of the long-lived asset (asset group).
The Company determined that there was no impairment loss as of
December 31, 2007.
Goodwill and Intangible Assets
The Company
accounts for goodwill and intangible assets in accordance with
SFAS No. 142,
Goodwill and Intangible Assets.
Under SFAS No. 142, goodwill and intangible assets
with indefinite lives are not amortized but are tested for
impairment annually and also in the event of an impairment
indicator. As required by SFAS No. 142, the Company
evaluates the recoverability of goodwill based on a two-step
impairment test. The first step compares the fair value of each
reporting unit with its carrying amount, including goodwill. If
the carrying amount exceeds the fair value, then the second step
of the impairment test is performed to
F-9
VOLCOM,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
measure the amount of any impairment loss. Fair value is
determined based on estimated future cash flows, discounted at a
rate that approximates the Companys cost of capital. Such
estimates are subject to change and the Company may be required
to recognize an impairment loss in the future. Any impairment
losses will be reflected in operating income. The Company
determined that the goodwill associated with its subsidiary,
Welcom Distribution SARL, was impaired as of December 31,
2007. Accordingly, a $161,000 impairment loss was recorded in
2007. See Note 6 to the Consolidated Financial Statements
for further discussion.
Fair Value of Financial Instruments
SFAS No. 107,
Disclosures about Fair Value of
Financial Instruments,
requires management to disclose the
estimated fair value of certain assets and liabilities defined
by SFAS No. 107 as financial instruments. At
December 31, 2007, the Company believes that the carrying
amount of cash and cash equivalents, accounts receivable and
accounts payable approximate fair value because of the short
maturity of these financial instruments.
Revenue Recognition
Product revenues are
recognized upon shipment, at which time transfer of title
occurs, risk of ownership passes to the customer and
collectibility is reasonably assured. Taxes collected from the
Companys customers are and have been recorded on a net
basis. Allowances for estimated returns are provided when
product revenues are recorded based on historical experience and
are reported as reductions in product revenues. Allowances for
doubtful accounts are reported as a component of selling,
general and administrative expenses.
Licensing revenues are recorded when earned based on a stated
percentage of the licensees sales of Company branded
products.
Shipping and Handling
Amounts billed to
customers for shipping and handling are recorded as revenues.
Freight costs associated with shipping goods to customers are
included in cost of sales. Handling costs of $4.7 million,
$3.3 million and $2.4 million are included in selling,
general and administrative expenses for the years ended
December 31, 2007, 2006 and 2005, respectively.
Significant Concentrations
During the years
ended December 31, 2007, 2006 and 2005, sales to a single
customer totaled approximately 18%, 26% and 29%, respectively,
of product revenues. No other single customer represented over
10% of product revenues.
During each of the years ended December 31, 2007, 2006 and
2005, the Company made purchases from two suppliers that totaled
more than 10% of total product costs. For the years ended
December 31, 2007, 2006 and 2005, purchases from those two
suppliers were approximately 33%, 27% and 20% of total product
costs, respectively.
Advertising and Promotion
The Companys
promotion and advertising programs include athlete sponsorships,
Volcom branded events, print advertisements, music, films and
online marketing. Costs of advertising, promotion and
point-of-sale materials are expensed as incurred and included in
selling, general and administrative expenses. For the years
ended December 31, 2007, 2006 and 2005, these expenses
totaled $14.5 million, $12.4 million and
$9.9 million, respectively. As of December 31, 2007,
2006 and 2005, the Company had no deferred advertising costs.
Income Taxes
On June 29, 2005 the
Company changed its tax status from an S corporation to a
C corporation. For the period from January 1, 2002
until the Companys initial public offering on
June 29, 2005, for Federal and state income tax purposes
the Company had elected to be treated as an S corporation
under Subchapter S of the Internal Revenue Code of 1986 and
comparable state laws. Therefore, no provision or liability for
Federal or state income tax has been included in the
Companys consolidated financial statements for the period
from January 1, 2005 to June 29, 2005, except that the
Company was subject to California franchise taxes of 1.5% on its
corporate income and a provision for these taxes was included in
our consolidated financial statements for that period.
Subsequent to June 29, 2005, the Company recorded a
provision and liability for Federal and state income taxes using
an annual effective tax rate. Upon the change in the
Companys tax status, the Company established and recorded
its deferred income taxes at its C corporation effective tax
rate.
F-10
VOLCOM,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The Company records a provision and liability for Federal and
state income taxes using an annual effective tax rate. Deferred
income taxes are recorded at the Companys effective tax
rate. Managements judgment is required in assessing the
realizability of its deferred tax assets. The Company considers
future taxable income and ongoing prudent and feasible tax
planning strategies in assessing the value of the Companys
deferred tax assets. If the Company determines that it is more
likely than not that these assets will not be realized, the
Company would reduce the value of these assets to their expected
realizable value, thereby decreasing net income. As of
December 31, 2007 and 2006, the Company determined that no
valuation allowance was required.
The Company adopted the provisions of Financial Accounting
Standards Board Interpretation No. 48
(FIN No. 48),
Accounting for Uncertainty in Income
Taxes
, on January 1, 2007. FIN No. 48
prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. Under
FIN No. 48, the Company must recognize the tax benefit
from an uncertain tax position only if it is more likely than
not that the tax position will be sustained on examination by
the taxing authorities, based on the technical merits of the
position. The tax benefits recognized in the financial
statements from such a position are measured based on the
largest benefit that has a greater than fifty percent likelihood
of being realized upon ultimate resolution. As a result of the
implementation of FIN No. 48, the Company recognized a
$128,000 increase in the liability for unrecognized tax
benefits, which was accounted for as a reduction to the
January 1, 2007 balance of retained earnings. See
Note 13 for further discussion.
Foreign Currency Translation
The Company owns
subsidiaries in Switzerland and France, which operate with the
Swiss Franc and Euro as their functional currency, respectively.
The Companys international subsidiaries generate revenues
and collect receivables at future dates in the customers
local currencies, and purchase inventory primarily in
U.S. dollars. Accordingly, the Company is exposed to gains
and losses that result from the effect of changes in foreign
currency exchange rates on foreign currency denominated
transactions. The Companys assets and liabilities that are
denominated in foreign currencies are translated at the rate of
exchange on the balance sheet date. Revenues and expenses are
translated using the average exchange rate for the period. Gains
and losses from translation of foreign subsidiary financial
statements are included in accumulated other comprehensive
income or loss.
A portion of the Companys sales are made in Canadian
dollars. As a result, the Company is exposed to transaction
gains and losses that result from movements in foreign currency
exchange rates between the local Canadian currency and the
U.S. dollar. As the Companys Canadian sales, accounts
receivable, accounts payable and Canadian cash balance are a
small portion of its consolidated revenues, assets and
liabilities, the Company does not generally hedge its exposure
to foreign currency rate fluctuations, therefore the Company is
exposed to foreign currency risk. Changes in the Companys
assets and liabilities that are denominated in Canadian dollars
are translated into U.S. dollars at the rate of exchange on
the balance sheet date, and are reflected in the Companys
statement of operations.
S Corporation Distributions
The Company
has paid cash distributions to its stockholders of
$39.2 million for the year ended December 31, 2005. In
connection with the initial public offering of its common stock,
the Company distributed to its existing stockholders its
estimated undistributed S corporation earnings.
Comprehensive Income
Comprehensive income
represents the results of operations adjusted to reflect all
items recognized under accounting standards as components of
comprehensive earnings.
For the years ended December 31, 2007 and 2006, the
components of comprehensive income for the Company include net
income and foreign currency adjustments that arise from the
translation of the Companys international subsidiaries
financial statements into U.S. dollars. For the year ended
December 31, 2007, the income tax effect related to the
foreign currency adjustment component of other comprehensive
income was $392,000.
Net Income Per Share
The Company calculates
net income per share in accordance with SFAS No. 128,
Earnings Per Share.
Under SFAS No. 128,
basic net income per common share is calculated by dividing net
income by the weighted-average number of common shares
outstanding during the reporting period. Diluted net income per
F-11
VOLCOM,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
common share reflects the effects of potentially dilutive
securities, which consists solely of restricted stock and stock
options using the treasury stock method. A reconciliation of the
numerator and denominator used in the calculation of basic and
diluted net income per share is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except share data)
|
|
|
Numerator Net income applicable to common
stockholders
|
|
$
|
33,335
|
|
|
$
|
28,753
|
|
|
$
|
29,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common stock outstanding for basic earnings per
share
|
|
|
24,302,893
|
|
|
|
24,227,845
|
|
|
|
21,627,821
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and restricted stock
|
|
|
116,909
|
|
|
|
76,782
|
|
|
|
211,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted weighted average common stock and assumed conversions
for diluted earnings per share
|
|
|
24,419,802
|
|
|
|
24,304,627
|
|
|
|
21,839,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2007, stock options of
10,000 were excluded from the weighted-average number of shares
outstanding because their effect would be antidilutive.
Stock-Based Compensation
The Company accounts
for stock-based compensation under the fair value recognition
provisions of SFAS No. 123 (revised 2004),
Share-Based Payment
(SFAS No. 123R).
SFAS No. 123R requires that the Company account for
all stock-based compensation using a fair-value method and
recognize the fair value of each award as an expense over the
service period. See Note 10 to the Consolidated Financial
Statements for further discussion.
Related-Party Transactions
The Companys
Chairman previously provided business and management services to
the Company on a consulting basis. For the year ended
December 31, 2005, these consulting expenses totaled
$176,000.
Use of Estimates in the Preparation of the Financial
Statements
The preparation of financial
statements in conformity with accounting principles generally
accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Recent Accounting Pronouncements
In June
2006, the FASB issued Interpretation (FIN)
No. 48,
Accounting for Uncertainty in Income
Taxes an interpretation of FASB Statement
No. 109.
FIN No. 48 prescribes a recognition
threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected
to be taken in a tax return, and provides guidance on
derecognition, classification, interest and penalties,
accounting in interim periods, disclosure, and transition.
FIN No. 48 is effective for fiscal years beginning
after December 15, 2006. As a result of the implementation
of FIN No. 48, the Company recognized a $128,000
increase in the liability for unrecognized tax benefits, which
was accounted for as a reduction to the January 1, 2007
balance of retained earnings. See Note 13 to the
Consolidated Financial Statements.
In June 2006, the FASB ratified the consensus reached on
Emerging Issues Task Force (EITF) Issue
No. 06-03,
How Taxes Collected from Customers and Remitted to
Governmental Authorities Should Be Presented in the Income
Statement (that is, Gross versus Net Presentation).
The EITF
reached a consensus that the presentation of taxes on either a
gross or net basis is an accounting policy decision that
requires disclosure.
EITF 06-03
is effective for the first interim or annual reporting period
beginning after December 15, 2006. Taxes collected from
F-12
VOLCOM,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
the Companys customers are and have been recorded on a net
basis. The Company has no intention of modifying this accounting
policy. As such, the adoption of
EITF 06-03
did not have an effect on the Companys consolidated
financial position or results of operations.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements.
SFAS No. 157 defines
fair value, establishes a framework for measuring fair value in
accordance with generally accepted accounting principles and
expands disclosures about fair value measurements.
SFAS No. 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007
and interim periods within those fiscal years. The Company is
currently evaluating the impact the adoption of
SFAS No. 157 will have on its consolidated financial
position or results of operations.
In February 2007, the FASB issued SFAS No. 159,
The
Fair Value Option for Financial Assets and Financial Liabilities
Including an Amendment of
SFAS No. 115
. SFAS No. 159 provides
reporting entities an option to measure certain financial assets
and liabilities and other eligible items at fair value on an
instrument-by-instrument
basis. Unrealized gains and losses on items for which the fair
value option has been elected are reported in earnings at each
subsequent reporting date. SFAS No. 159 is effective
for fiscal years beginning after November 15, 2007. The
Company is currently evaluating the impact the adoption of
SFAS No. 159 will have on its consolidated financial
position or results of operations.
In December 2007, the FASB issued SFAS No. 141(R),
Business Combinations
. SFAS No. 141(R) requires
reporting entities to record fair value estimates of contingent
consideration and certain other potential liabilities during the
original purchase price allocation, expense acquisition costs as
incurred and does not permit certain restructuring activities
previously allowed under
EITF 95-3
to be recorded as a component of purchase accounting.
SFAS No. 141(R) is effective for fiscal periods
beginning after December 15, 2008 and should be applied
prospectively for all business acquisitions entered into after
the date of adoption. The Company is currently evaluating the
impact the adoption of SFAS No. 141(R) will have on
its consolidated financial position or results of operations.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interest in Consolidated Financial
Statements
an amendment of ARB
No. 51
. SFAS No. 160 requires (i) that
noncontrolling (minority) interests be reported as a component
of shareholders equity, (ii) that net income
attributable to the parent and to the noncontrolling interest be
separately identified in the consolidated statement of
operations, (iii) that changes in a parents ownership
interest while the parent retains its controlling interest be
accounted for as equity transactions, (iv) that any
retained noncontrolling equity investment upon the
deconsolidation of a subsidiary by initially measured at fair
value, and (v) that sufficient disclosures are provided
that clearly identify and distinguish between the interests of
the parent and the interests of the noncontrolling owners.
SFAS No. 160 is effective for fiscal periods beginning
after December 15, 2008. The Company is currently
evaluating the impact the adoption of SFAS No. 160
will have on its consolidated financial position or results of
operations.
F-13
VOLCOM,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
2.
|
Allowances
for Doubtful Accounts and Product Returns
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for
|
|
|
Allowance for
|
|
|
|
|
|
|
Doubtful Accounts
|
|
|
Product Returns
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Balance, January 1, 2005
|
|
$
|
146
|
|
|
$
|
232
|
|
|
$
|
378
|
|
Provision
|
|
|
68
|
|
|
|
2,139
|
|
|
|
|
|
Deductions
|
|
|
(24
|
)
|
|
|
(1,831
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005
|
|
|
190
|
|
|
|
540
|
|
|
|
730
|
|
Provision
|
|
|
588
|
|
|
|
4,196
|
|
|
|
|
|
Deductions
|
|
|
(283
|
)
|
|
|
(3,908
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
|
495
|
|
|
|
828
|
|
|
|
1,323
|
|
Provision
|
|
|
831
|
|
|
|
5,903
|
|
|
|
|
|
Deductions
|
|
|
(67
|
)
|
|
|
(5,207
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
$
|
1,259
|
|
|
$
|
1,524
|
|
|
$
|
2,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The provision for doubtful accounts represents charges to
selling, general and administrative expenses for estimated bad
debts, whereas the provision for product returns is reported as
a direct reduction of revenues.
Inventories are as follows:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Finished goods
|
|
$
|
19,849
|
|
|
$
|
12,959
|
|
Work-in-process
|
|
|
214
|
|
|
|
41
|
|
Raw materials
|
|
|
377
|
|
|
|
185
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20,440
|
|
|
$
|
13,185
|
|
|
|
|
|
|
|
|
|
|
Included in finished goods inventory at December 31, 2007
and 2006, is approximately $945,000 and $1.2 million,
respectively, of inventory located in Canada. Included in
finished goods inventory at December 31, 2007 and 2006, is
approximately $6.5 million and $219,000, respectively, of
inventory located in Europe.
F-14
VOLCOM,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
4.
|
Property
and Equipment
|
Property and equipment are as follows:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Furniture and fixtures
|
|
$
|
3,547
|
|
|
$
|
1,869
|
|
Office equipment
|
|
|
1,724
|
|
|
|
1,180
|
|
Computer equipment
|
|
|
4,959
|
|
|
|
2,173
|
|
Leasehold improvements
|
|
|
7,379
|
|
|
|
1,241
|
|
Building
|
|
|
7,489
|
|
|
|
254
|
|
Land
|
|
|
4,723
|
|
|
|
1,750
|
|
Construction in progress
|
|
|
30
|
|
|
|
5,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,851
|
|
|
|
14,176
|
|
Less accumulated depreciation
|
|
|
(5,424
|
)
|
|
|
(2,649
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment net
|
|
$
|
24,427
|
|
|
$
|
11,527
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense related to property and
equipment was approximately $2.8 million, $1.3 million
and $567,000 for the years ended December 31, 2007, 2006
and 2005, respectively.
In May 2007, the Company completed the construction of its
European headquarters in Anglet, France. Costs incurred related
to such construction totaled approximately 4.6 million
Euros (approximately $6.8 million based on a 1 to 1.4729
exchange rate as of December 31, 2007).
The Company has applied for and received local government grants
totaling approximately 800,000 Euros (approximately
$1.2 million based on a 1 Euro to 1.4729 U.S. dollar
exchange rate as of December 31, 2007). Such grants will be
paid to the Company at various times during and after the
European headquarters construction period and generally require
the Company to maintain and operate the European headquarters
for five years. To the extent that the Company does not maintain
and operate the European headquarters for a five year period,
certain amounts of the grants will have to be repaid to the
local government at that time. As of December 31, 2007, the
Company has received approximately 489,000 Euros (approximately
$720,000 based on a 1 Euro to 1.4729 U.S. dollar exchange
rate as of December 31, 2007) with respect to such
grants. The Company has recorded $493,000 of the cash received
for these grants against property and equipment, as these grants
support the construction of the European headquarters and will
offset depreciation expense over the estimated useful life of
the European headquarters, and $227,000 as an other long-term
liability, as this grant relates to the Companys
employment requirements over the next five years, and will be
amortized against operating expenses on a straight-line basis
over the five-year period of the employment requirements.
|
|
5.
|
Investment
in Unconsolidated Investees
|
Volcom Europe
During 1997, the Company
obtained a 49% ownership interest in the common stock of Volcom
Europe, a licensee of the Companys products located in
France, which was subsequently reduced to a 34% ownership
interest in 2002 upon the issuance of additional stock by Volcom
Europe. On April 1, 2005, the Company sold its 34%
investment in Volcom Europe for $1.4 million. The
Companys investment was accounted for under the equity
method in 2005 because the Company maintained the ability to
exert significant influence over the financial and operating
policies of the investee. For the year ended December 31,
2005, the Company recorded $331,000 of earnings attributable to
this equity method investee, which reflects its share of Volcom
Europes earnings of $609,000 offset by an impairment
charge of $278,000 to reduce the carrying amount of the
Companys investment in Volcom Europe to $1.6 million
as of March 31, 2005. After consideration of the effects of
the accumulated
F-15
VOLCOM,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
foreign currency translation adjustments related to the
Companys investment in Volcom Europe of $167,000, the
Company recorded no gain or loss on the sale of its investment
in Volcom Europe in April 2005.
Concurrent with its investment in Volcom Europe, the Company
entered into a licensing agreement with this entity for the use
of the Companys trademark and designs on products
manufactured and distributed in certain European countries and
territories. This license agreement expired in December 2006.
Pursuant to an agreement between the Company and Volcom Europe,
Volcom Europe produced and distributed the Spring 2007 Volcom
line in Europe and paid the Company its same royalty rate as
required under the license agreement. Included in licensing
revenues is $1.2 million, $2.3 million and
$1.7 million from Volcom Europe for the years ended
December 31, 2007, 2006 and 2005, respectively.
Volcom Australia
During 1998, the Company
obtained an 8.7% ownership interest in the common stock of
Volcom Australia, a licensee of the Companys products
located in Australia, for $37,000. In March 2004, the Company
purchased an additional 4.8% ownership interest in Volcom
Australia for $261,000, which brought the Companys total
ownership interest to 13.5%. The investment is accounted for
under the cost method, as the Company does not have the ability
to exercise significant influence over the financial and
operating policies of the investee. At December 31, 2007
and 2006, the Companys investment in Volcom Australia was
$298,000.
In June 1997, the Company entered into a licensing agreement
with this entity for the use of the Companys trademark and
designs on products manufactured and distributed in Australia
and New Zealand. The agreement expires June 2012. Included in
licensing revenues is $1.2 million, $1.0 million and
$893,000 from Volcom Australia for the years ended
December 31, 2007, 2006 and 2005, respectively.
|
|
6.
|
Goodwill
and Intangible Assets
|
On October 25, 2005, the Company acquired Welcom
Distribution SARL, the sole distributor of Volcom branded
products in Switzerland. As a result of the acquisition, the
Company recorded $158,000 in goodwill in accordance with the
purchase method of accounting. The Company has included the
operations of Welcom Distribution SARL in its financial results
beginning on October 26, 2005.
As part of the Companys annual goodwill impairment test in
accordance with SFAS No. 142, it was determined that
the goodwill associated with Welcom Distribution SARL was
impaired as of December 31, 2007, as the fair value of the
reporting unit, including goodwill, exceeded the carrying amount
of the reporting unit. Fair value was determined based on
estimated future cash flows, discounted at a rate that
approximates the Companys cost of capital. The Company
recorded a $161,000 impairment loss as a result of the goodwill
impairment, which is reflected in selling, general and
administrative expenses. The difference between the impairment
loss and the original amount of goodwill recorded is due to the
effect of changes in foreign currency exchange rates.
A summary of intangible assets is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007
|
|
|
As of December 31, 2006
|
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amortization
|
|
|
|
(In thousands)
|
|
|
Customer relationships
|
|
$
|
336
|
|
|
$
|
73
|
|
|
$
|
310
|
|
|
$
|
36
|
|
Non-compete agreements
|
|
|
43
|
|
|
|
9
|
|
|
|
40
|
|
|
|
5
|
|
Reacquired license rights
|
|
|
84
|
|
|
|
18
|
|
|
|
84
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
463
|
|
|
$
|
100
|
|
|
$
|
434
|
|
|
$
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets other than goodwill will continue to be
amortized by the Company using estimated useful lives of 8 to
10 years with no residual values. Fluctuations in the gross
carrying amounts of intangible assets are due to the effect of
changes in foreign currency exchange rates. Intangible
amortization expense for the years ended December 31, 2007,
2006 and 2005, was approximately $47,000, $148,000 and $59,000,
respectively.
F-16
VOLCOM,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Annual estimated amortization expense, based on the
Companys intangible assets at December 31, 2007, is
estimated to be approximately $46,000 in the fiscal years ending
December 31, 2008 through 2012.
|
|
7.
|
Accrued
Expenses and Other Current Liabilities
|
Accrued expenses and other current liabilities consist of the
following:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Payroll and related accruals
|
|
$
|
4,000
|
|
|
$
|
3,785
|
|
Other
|
|
|
6,561
|
|
|
|
2,390
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
10,561
|
|
|
$
|
6,175
|
|
|
|
|
|
|
|
|
|
|
In July 2006, the Company entered into a $20.0 million
unsecured credit agreement with Bank of the West (which includes
a line of credit, foreign exchange facility and letter of credit
sub-facilities). The credit agreement, which expires on
August 31, 2008, may be used to fund the Companys
working capital requirements. Borrowings under this agreement
bear interest, at the Companys option, either at the
banks prime rate (7.25% at December 31, 2007) or
LIBOR plus 1.50%. Under this credit facility, the Company had
$1.4 million outstanding in letters of credit at
December 31, 2007. At December 31, 2007 there were no
outstanding borrowings under this credit facility, and
$18.6 million was available under the credit facility. The
credit agreement requires compliance with conditions precedent
that must be satisfied prior to any borrowing, as well as
ongoing compliance with specified affirmative and negative
covenants, including covenants related to the Companys
financial condition, including requirements that the Company
maintain a minimum net profit after tax and a minimum effective
tangible net worth. At December 31, 2007 the Company was in
compliance with all restrictive covenants.
|
|
9.
|
Commitments
and Contingencies
|
Operating Leases
The Company leases certain
office, warehouse and retail facilities under long-term
operating lease agreements. Total rent expense for the years
ended December 31, 2007, 2006 and 2005, was
$2.4 million, $1.1 million and $746,000, respectively.
The following is a schedule of future minimum lease payments
required under such leases as of December 31, 2007 (in
thousands):
|
|
|
|
|
Year Ending December 31,
|
|
|
|
|
2008
|
|
|
3,552
|
|
2009
|
|
|
2,936
|
|
2010
|
|
|
2,732
|
|
2011
|
|
|
2,554
|
|
2012
|
|
|
1,846
|
|
Thereafter
|
|
|
5,185
|
|
|
|
|
|
|
|
|
$
|
18,805
|
|
|
|
|
|
|
In December 2006, the Company entered into a lease agreement for
an approximately 164,000 square foot distribution center
located in Irvine, California. Pursuant to the terms of the
lease agreement, the Company has agreed to lease the
distribution center for an initial term of sixty months
commencing in September 2007. In addition, the Company has an
option, subject to certain customary requirements, to renew the
lease agreement for an
F-17
VOLCOM,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
additional sixty months. During the first thirty months and the
last thirty months of the initial term, the base rental rate for
the distribution center shall be approximately $94,000 and
$110,000 per month, respectively. The base rental rate during
the option term, if exercised, shall be at the fair market
value, as agreed upon by the parties. In addition, the Company
shall be responsible for its pro-rata share of certain operating
expenses, including such items as property taxes, insurance and
repairs, relating to the office project in which the
distribution center is located.
Capital Leases
The Company has leased
computer and office equipment pursuant to capital lease
obligations. These leases bear interest at rates ranging from
3.4% to 13.7% per year, and expire at various dates through
October 2009. The gross amount of capital lease assets was
$483,000 at December 31, 2007 and 2006, and accumulated
amortization was $388,000 and $314,000 at December 31, 2007
and 2006, respectively. Future commitments under capital lease
obligations at December 31, 2007 are as follows (in
thousands):
|
|
|
|
|
Year Ending December 31,
|
|
|
|
|
2008
|
|
|
75
|
|
2009
|
|
|
34
|
|
|
|
|
|
|
Total payments including interest
|
|
|
109
|
|
Less interest portion
|
|
|
(4
|
)
|
|
|
|
|
|
Total principal payments remaining at December 31, 2007
|
|
$
|
105
|
|
|
|
|
|
|
Current portion of capital lease obligation
|
|
$
|
72
|
|
Long-term portion of capital lease obligation
|
|
|
33
|
|
|
|
|
|
|
Total capital lease obligation at December 31, 2007
|
|
$
|
105
|
|
|
|
|
|
|
Professional Athlete Sponsorships
The Company
establishes relationships with professional athletes in order to
promote its products and brands. The Company has entered into
endorsement agreements with professional athletes in
skateboarding, snowboarding and surfing. Many of these contracts
provide incentives for magazine exposure and competitive
victories while wearing or using the Companys products.
Such expenses are an ordinary part of the Companys
operations and are expensed as incurred. The following is a
schedule of future estimated minimum payments required under
such endorsement agreements as of December 31, 2007 (in
thousands):
|
|
|
|
|
Year Ending December 31,
|
|
|
|
|
2008
|
|
$
|
4,743
|
|
2009
|
|
|
3,073
|
|
2010
|
|
|
1,793
|
|
2011
|
|
|
130
|
|
2012
|
|
|
120
|
|
|
|
|
|
|
|
|
$
|
9,859
|
|
|
|
|
|
|
The amounts listed above are the approximate amounts of the
minimum obligations required to be paid under these contracts.
The additional estimated maximum amount that could be paid under
the Companys existing contracts, assuming that all
bonuses, victories and similar incentives are achieved during
the three-year period ending December 31, 2010, is
approximately $3.1 million. The actual amounts paid under
these agreements may be higher or lower than the amounts
discussed above as a result of the variable nature of these
obligations.
Litigation
The Company is involved from time
to time in litigation incidental to its business. In the opinion
of management, the resolution of any such matter currently
pending will not have a material adverse effect on the
Companys consolidated financial position or results of
operations.
F-18
VOLCOM,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Indemnities and Guarantees
During its normal
course of business, the Company has made certain indemnities and
guarantees under which it may be required to make payments in
relation to certain transactions. These include
(i) intellectual property indemnities to the Companys
customers and licensees in connection with the use, sale and
license of Company products, (ii) indemnities to various
lessors in connection with facility leases for certain claims
arising from such facility or lease, (iii) indemnities to
vendors and service providers pertaining to claims based on the
negligence or willful misconduct of the Company, and
(iv) indemnities involving the accuracy of representations
and warranties in certain contracts. The duration of these
indemnities, commitments and guarantees varies, and in certain
cases, may be indefinite. The majority of these indemnities,
commitments and guarantees do not provide for any limitation on
the maximum potential future payments the Company could be
obligated to make. The Company has not been required to record
nor has it recorded any liability for these indemnities,
commitments and guarantees in the accompanying consolidated
balance sheets.
The Company accounts for stock-based compensation under the fair
value recognition provisions of SFAS No. 123R.
SFAS No. 123R requires that the Company account for
all stock-based compensation using a fair-value method and
recognize the fair value of each award as an expense over the
service period. Prior to January 1, 2006, the Company had
accounted for stock-based awards to employees using the
intrinsic value method in accordance with Accounting Principles
Board Opinion No. 25,
Accounting for Stock Issued to
Employees
(APB No. 25) and related
interpretations and followed the disclosure requirements of
SFAS No. 123, Accounting for Stock-Based Compensation
(SFAS No. 123), as amended by
SFAS No. 148,
Accounting for Stock-Based
Compensation Transition and Disclosure
an amendment of FASB Statement No. 123
(SFAS No. 148). Under the intrinsic
value method required by APB No. 25, no compensation
expense had been recognized related to employee stock options,
as all options granted to employees had an exercise price equal
to the fair market value of the underlying common stock on the
date of grant.
The Company adopted SFAS No. 123R using the
modified prospective method. Under that method,
compensation expense includes the amortization of the fair value
of any unvested awards outstanding at January 1, 2006 and
any new awards granted subsequent to January 1, 2006. The
consolidated financial statements for periods prior to the
adoption of SFAS No. 123R have not been restated to
reflect the fair value method of accounting for stock-based
compensation. Stock-based compensation expense for fiscal year
2005 and earlier years represents the cost of stock-based awards
granted to nonemployees at fair value in accordance with the
provisions of SFAS No. 123, and the cost of restricted
stock awards determined in accordance with APB No. 25. The
Company elected to use the simplified alternative method
available under FSP
No. 123R-3,
which provides for calculating historical excess tax benefits
(the APIC pool) under SFAS No. 123R for stock-based
compensation awards.
The Company is using the Black-Scholes option-pricing model to
value compensation expense. Forfeitures are estimated at the
date of grant based on historical employee turnover rates and
reduce the compensation expense recognized. For periods prior to
January 1, 2006, the Companys pro forma information
required under SFAS No. 123 accounted for forfeitures
as they occurred. The expected option term is estimated based
upon historical industry data on employee exercises and
managements expectation of exercise behavior. For options
granted concurrently with the Companys initial public
offering of common stock, the expected volatility of the
Companys stock price was based upon the historical
volatility of similar entities whose share prices were publicly
available. For options granted subsequent to the Companys
offering, expected volatility is based on the historical
volatility of the Companys stock. The risk-free interest
rate is based upon the current yield on U.S. Treasury
securities having a term similar to the expected option term.
Dividend yield is estimated at zero because the Company does not
anticipate paying dividends in the foreseeable future. The fair
value of employee stock-based awards is amortized using the
straight-line method over the vesting period.
During the years ended December 31, 2007, 2006 and 2005,
the Company recognized approximately $934,000, or
$566,000 net of tax, $812,000, or $490,000 net of tax,
and $178,000 or $131,000 net of tax,
F-19
VOLCOM,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
respectively, in stock-based compensation expense which includes
the impact of all stock-based awards and is included in selling,
general and administrative expenses. The adoption of
SFAS No. 123R resulted in incremental stock-based
compensation expense of $629,000 for the year ended
December 31, 2006. The incremental stock-based compensation
expense caused income before provision for income taxes to
decrease by $629,000, net income to decrease by $379,000, and
basic and diluted earnings per share to decrease by $0.02 per
share.
In accordance with SFAS No. 123 as amended by
SFAS No. 148, the Company is required to disclose pro
forma net income and net income per share information as if the
Company accounted for stock-based compensation awarded to
employees using the fair value method. If the computed fair
values of all stock-based compensation awards had been amortized
to expense over the vesting period of the awards, net income and
earnings per share for the year ended December 31, 2005
would have been reduced to the pro forma amounts shown in the
table below:
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31, 2005
|
|
|
|
(In thousands,
|
|
|
|
except per share data)
|
|
|
Net income:
|
|
|
|
|
As reported
|
|
$
|
29,337
|
|
Add: Stock-based employee compensation expense included in
reported net income, net of related tax effects
|
|
|
33
|
|
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards, net of
related tax effects
|
|
|
(849
|
)
|
|
|
|
|
|
Pro forma
|
|
$
|
28,521
|
|
Basic net income per share:
|
|
|
|
|
As reported
|
|
$
|
1.36
|
|
Pro forma
|
|
$
|
1.32
|
|
Diluted net income per share:
|
|
|
|
|
As reported
|
|
$
|
1.34
|
|
Pro forma
|
|
$
|
1.31
|
|
Prior to the adoption of SFAS No. 123R, the Company
presented all tax benefits resulting from the exercise of stock
options as operating cash flows in its consolidated statement of
cash flows. For the year ended December 31, 2005, excess
tax benefits of $2.8 million were generated from option
exercises and increased cash provided from operating activities.
SFAS No. 123R requires the cash flows resulting from
the tax benefits from tax deductions in excess of deferred tax
assets recorded for stock-based compensation costs to be
classified as financing cash flows. For the years ended
December 31, 2007 and 2006, excess tax benefits of $444,000
and $303,000, respectively, were generated from option exercises
and increased cash provided from financing activities.
Stock Compensation Plans
In 1996, the Company
adopted the 1996 Stock Option Plan (the 1996 Plan),
which authorized the Company to grant or issue options to
purchase up to a total of 4,663,838 shares of the
Companys common stock. In June 2005, the Companys
Board of Directors and stockholders approved the 2005 Incentive
Award Plan (the Incentive Plan), as amended in
February 2007. A total of 2,300,000 shares of common stock
are initially authorized and reserved for issuance under the
Incentive Plan for incentives such as stock options, stock
appreciation rights, restricted stock awards, restricted stock
units, performance shares and deferred stock awards. The actual
number of awards reserved for issuance under the Incentive Plan
automatically increases on the first trading day in January of
each calendar year by an amount equal to 2% of the total number
of shares of common stock outstanding on the last trading day in
December of the preceding calendar year, but in no event will
any such annual increase exceed 750,000 shares. As of
December 31, 2007, there were 2,638,665 shares
available for issuance pursuant to new stock option grants or
other equity awards. Under the Incentive Plan, stock options
have been granted at an exercise price equal to the fair market
value of the Companys stock at the time of grant. The
vesting period for stock options is determined by the Board of
Directors or the Compensation Committee of the
F-20
VOLCOM,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Board of Directors, as applicable, and the stock options
generally expire ten years from the date of grant or
90 days after employment or services are terminated.
Stock Option Awards
In June 2005, the
Companys Board of Directors approved the grant of 586,526
options to purchase the Companys common stock. The Company
granted these options under the Incentive Plan at the effective
date of the Companys initial public offering at an
exercise price of $19.00, which was equal to the initial public
offering price. The stock options have vesting terms whereby
10,526 options vested immediately, 210,000 options vested on
December 15, 2005 and the remaining 366,000 options vest
20% per annum over 5 years. The fair value of these awards
was calculated through the use of the Black-Scholes
option-pricing model assuming an exercise price equal to the
fair market value of the Companys stock and the following
additional significant weighted average assumptions: expected
life of 4.2 years; volatility of 47.5%; risk-free interest
rate of 3.73%; and no dividends during the expected term.
In May 2007, the Companys Board of Directors approved the
grant of 2,000 options to purchase the Companys common
stock to each independent member of the Companys Board of
Directors (10,000 options in total). The Company granted these
options at the fair market value of the Companys common
stock on the date of grant. The stock options vest one year from
the date of grant. The fair value of these awards was calculated
through the use of the Black-Scholes option-pricing model
assuming an exercise price equal to the fair market value of the
Companys stock and the following additional significant
weighted average assumptions: expected life of 2.0 years;
volatility of 55.7%; risk-free interest rate of 4.68%; and no
dividends during the expected term.
A summary of the Companys stock option activity under the
Incentive Plan is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Number of
|
|
|
Exercise
|
|
|
Number of
|
|
|
Exercise
|
|
|
|
Options
|
|
|
Price
|
|
|
Options
|
|
|
Price
|
|
|
Options
|
|
|
Price
|
|
|
Outstanding, beginning of year
|
|
|
487,700
|
|
|
$
|
19.00
|
|
|
|
576,000
|
|
|
$
|
19.00
|
|
|
|
|
|
|
$
|
|
|
Granted
|
|
|
10,000
|
|
|
|
42.07
|
|
|
|
|
|
|
|
|
|
|
|
586,526
|
|
|
|
19.00
|
|
Exercised
|
|
|
(54,100
|
)
|
|
|
19.00
|
|
|
|
(66,300
|
)
|
|
|
19.00
|
|
|
|
(10,526
|
)
|
|
|
19.00
|
|
Canceled or forfeited
|
|
|
(1,200
|
)
|
|
|
19.00
|
|
|
|
(22,000
|
)
|
|
|
19.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, end of year
|
|
|
442,400
|
|
|
$
|
19.52
|
|
|
|
487,700
|
|
|
$
|
19.00
|
|
|
|
576,000
|
|
|
$
|
19.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable, end of year
|
|
|
228,700
|
|
|
$
|
19.00
|
|
|
|
214,900
|
|
|
$
|
19.00
|
|
|
|
185,000
|
|
|
$
|
19.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value of options granted during the year
|
|
|
|
|
|
$
|
14.25
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
7.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional information regarding stock options outstanding as of
December 31, 2007, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted-
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Remaining
|
|
|
Exercise
|
|
|
Number of
|
|
|
Exercise
|
|
|
|
Options
|
|
|
Life (yrs)
|
|
|
Price
|
|
|
Options
|
|
|
Price
|
|
|
$19.00
|
|
|
432,400
|
|
|
|
7.5
|
|
|
$
|
19.00
|
|
|
|
228,700
|
|
|
$
|
19.00
|
|
$42.07
|
|
|
10,000
|
|
|
|
9.4
|
|
|
$
|
42.07
|
|
|
|
|
|
|
$
|
42.07
|
|
As of December 31, 2007, there was unrecognized
compensation expense of $1.6 million related to unvested
stock options, which the Company expects to recognize over a
weighted-average period of 2.4 years. The aggregate
intrinsic value of options exercised during the years ended
December 31, 2007, 2006 and 2005 was $1.1 million,
$765,000 and zero, respectively. The aggregate intrinsic value
of options outstanding and options exercisable as of
F-21
VOLCOM,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
December 31, 2007 was $1.3 million and $693,000,
respectively. Cash received from the exercise of stock options
totaled $1.0 million, $1.3 million and $200,000 for
the years ended December 31, 2007, 2006 and 2005
respectively. The Company issues new shares upon the exercise of
options or granting of restricted stock.
Further information regarding stock options outstanding is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Grant-Date
|
|
|
|
Options
|
|
|
Fair Value
|
|
|
Unvested at January 1, 2007
|
|
|
272,800
|
|
|
$
|
9.14
|
|
Granted
|
|
|
10,000
|
|
|
|
14.25
|
|
Vested
|
|
|
(67,900
|
)
|
|
|
9.14
|
|
Canceled or forfeited
|
|
|
(1,200
|
)
|
|
|
9.14
|
|
|
|
|
|
|
|
|
|
|
Unvested at December 31, 2007
|
|
|
213,700
|
|
|
$
|
9.38
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007 the total number of outstanding
options vested or expected to vest (based on anticipated
forfeitures) was 430,178 which had a weighted-average exercise
price of $19.54. The remaining average remaining life of these
options was 7.5 years and the aggregate intrinsic value was
$1.3 million at December 31, 2007.
Restricted Stock Awards
The Companys
stock compensation plan provides for awards of restricted shares
of common stock. Restricted stock awards have time-based vesting
and are subject to forfeiture if employment terminates prior to
the end of the service period. Restricted stock awards are
valued at the grant date based upon the market price of the
Companys common stock and the fair value of each award is
charged to expense over the service period.
In 2005, the Company granted a total of 20,000 shares of
restricted stock to employees. The restricted stock awards have
a purchase price of $.001 per share and vest 20% per year over a
five-year period. The total fair value of the restricted stock
awards is $660,000, of which $132,000, $132,000 and $55,000 was
amortized to expense during the years ended December 31,
2007 and 2006, and 2005, respectively.
In 2006, the Company granted a total of 15,000 shares of
restricted stock to employees. The restricted stock awards have
a purchase price of $.001 per share and vest 20% per year over a
5 year period. The total value of the restricted stock
awards is $405,000, of which $81,000 and $55,000 was amortized
to expense during the years ended December 31, 2007 and
2006, respectively.
Restricted stock activity for the year ended December 31,
2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
Shares of
|
|
|
Grant-Date
|
|
|
|
Restricted Stock
|
|
|
Fair Value
|
|
|
Outstanding restricted stock at January 1, 2007
|
|
|
31,000
|
|
|
$
|
30.09
|
|
Granted
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(7,000
|
)
|
|
|
30.43
|
|
Canceled or forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding restricted stock at December 31, 2007
|
|
|
24,000
|
|
|
$
|
30.00
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007, there was unrecognized
compensation expense of $610,000 related to all unvested
restricted stock awards, which the Company expects to recognize
on a straight-line basis over a weighted average period of
approximately 2.9 years.
F-22
VOLCOM,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Nonemployee Share-Based Compensation
In
December 1999, the Company redeemed 373,107 shares held by
a shareholder and current service provider at a price of $0.04
per share. On January 1, 2000, the Company issued a fully
vested and non-forfeitable option to the same service provider
to purchase 373,107 shares of the Companys common
stock. The terms of the option provided the service provider
with the right to purchase shares of the Companys common
stock at $0.04 per share at any time after January 1, 2010,
the tenth anniversary of the grant date. Alternatively, in the
event of (i) a change in control, (ii) an initial
public offering, or (iii) the liquidation or dissolution of
the Company, the option would automatically be converted into
shares of common stock of the Company on a net settlement basis.
The Company has accounted for the transactions as a modification
(exchange transaction). Because the option was fully vested and
non-forfeitable, the measurement date for the option was the
date of the modification (exchange transaction), and the
incremental amount of compensation received by the service
provider over the fair value of the shares redeemed, which
equaled the cash amount paid, was recorded as compensation
expense in 1999. The dilutive effect of this option has been
reflected in diluted net income per share for the year ended
December 31, 2005 using the treasury stock method. On
June 29, 2005, in conjunction with the Companys
initial public offering, the service provider exercised the
option that was automatically converted into 372,264 shares
of common stock on a net settlement basis. A tax benefit of
$2.8 million for the excess tax deduction the Company
received related to this award was recognized as additional
paid-in capital.
In January 2004, the Company entered into a contractual
agreement with a service provider in exchange for services to be
rendered over a five-year period. Under the terms of the
contractual agreement, the service provider would receive the
right to purchase $200,000 of the Companys common stock at
the initial public offering (IPO) price for a period
of five years after an IPO. In accordance with EITF
No. 96-18,
Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services
, due to the fact that a sufficient
disincentive for nonperformance did not exist, and because the
service providers performance was not complete, no
measurement date existed for the award at that time. The Company
was recording share-based compensation expense related to this
award over the five-year vesting period based on the current
fair value of the award as of each reporting period. The fair
value of the award is calculated through the use of the
Black-Scholes option-pricing model assuming an exercise price
equal to the fair market value of the Companys stock. On
June 29, 2005, in conjunction with the Companys
initial public offering, the service provider exercised the
option and received 10,526 shares of the Companys
common stock. On June 29, 2005, upon the exercise of the
award, the Company recorded $116,000 of share-based compensation
which represented the unamortized portion of the fair value of
the award.
Additionally, as part of the same agreement, the Company granted
the service provider rights to receive a 25% ownership interest
in the Volcom related entity that would own and operate a new
retail store for the Company in Hawaii, if and when one is
opened. As no plans existed to open a store in Hawaii and the
award of the ownership interest was not probable, the Company
did not record any compensation expense related to this right
for the year ended December 31, 2005. In December 2006, as
the Company began working to open a retail store in Hawaii, it
became probable that this ownership award would occur. As such,
the Company recorded a liability and compensation expense of
$159,000 related to the fair value of this 25% ownership
interest. In February 2007, this contractual agreement was
amended whereby the grant to receive a 25% ownership interest in
a Volcom related entity that would own and operate a new retail
store in Hawaii was replaced in its entirety in exchange for a
royalty on net sales of a specific retail store located in
Waikiki, Hawaii, which is expected to open in 2008. The Company
will reduce the liability recorded as future royalties are
earned. To the extent that future royalties under the new
agreement exceed the amount of the liability recorded to date,
the Company will record royalty expense on the new agreement in
the period that it is incurred.
|
|
11.
|
Retirement
Savings Plan
|
The Company has a 401(k) profit sharing plan (the 401(k)
Plan) covering all eligible full-time employees over
age 21 with six months of service. The Companys
contributions to the 401(k) Plan are made at the discretion of
F-23
VOLCOM,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
management. Contributions by the Company amounted to $82,000,
$67,000 and $46,000 for the years ended December 31, 2007,
2006 and 2005, respectively.
In addition to the Companys licensing arrangements with
investees in Europe and Australia described in Note 5, the
Company has entered into licensing arrangements with independent
licensees in Brazil, South Africa and Indonesia. Pursuant to the
license agreements, the Company is paid a royalty based on a
stated percentage of the net sales of its licensees.
The Companys license agreement with its European licensee
expired on December 31, 2006. Pursuant to an arrangement
between the Company and its European licensee, the European
licensee produced and distributed the Spring 2007 Volcom line in
Europe and paid the Company its same royalty rate as required
under the license agreement. In anticipation of the expiration
of this license agreement, the Company has established its own
operations in Europe in order to take direct control of the
Volcom brand in Europe.
Certain of the Companys existing license agreements may be
extended at the option of the licensee for an additional
five-year term after the initial expiration of the agreement.
The Companys international license agreements expire as
follows:
|
|
|
|
|
|
|
|
|
Licensee
|
|
Expiration Date
|
|
|
Extension Termination Date
|
|
|
Europe
|
|
|
December 31, 2006
|
|
|
|
N/A
|
|
Australia
|
|
|
June 30, 2012
|
|
|
|
N/A
|
|
Brazil
|
|
|
December 31, 2008
|
|
|
|
December 31, 2013
|
|
South Africa
|
|
|
December 31, 2011
|
|
|
|
N/A
|
|
Indonesia
|
|
|
December 31, 2009
|
|
|
|
December 31, 2014
|
|
On June 29, 2005, the Company changed its tax status from
an S corporation to a C corporation. For the period from
January 1, 2002 until the Companys initial public
offering on June 29, 2005, for Federal and state income tax
purposes the Company had elected to be treated as an
S corporation under Subchapter S of the Internal Revenue
Code of 1986 and comparable state laws. Therefore, no provision
or liability for Federal or state income tax has been included
in the Companys consolidated financial statements for the
period from January 1, 2005 to June 29, 2005, except
for the provision related to California franchise taxes of 1.5%
on its corporate income. Subsequent to June 29, 2005, and
for the years ended December 31, 2005, 2006 and 2007, the
Company recorded a provision and liability for Federal and state
income taxes as a C corporation. Upon the change in the
Companys tax status, the Company also established and
recorded a net deferred tax asset of $0.4 million to
reflect its deferred income taxes at the Companys C
corporation effective tax rate.
The Company and its subsidiaries file tax returns in the
U.S. Federal jurisdiction and in many state and foreign
jurisdictions. The Company is no longer subject to
U.S. Federal income tax examinations for years before 2004
and is no longer subject to state and local or foreign income
tax examinations by tax authorities for years before 2003. The
Company is currently not undergoing an audit in any jurisdiction
that would result in a material adjustment to the consolidated
financial statements.
F-24
VOLCOM,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The provision for income taxes consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Current
|
|
$
|
21,882
|
|
|
$
|
20,903
|
|
|
$
|
11,625
|
|
Deferred
|
|
|
(211
|
)
|
|
|
(1,983
|
)
|
|
|
(1,150
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
21,671
|
|
|
$
|
18,920
|
|
|
$
|
10,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of income tax expense computed at
U.S. Federal statutory rates to income tax expense for the
years ended December 31, 2007, 2006 and 2005 is shown below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Provision for taxes at U.S. Federal statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State income taxes, net of Federal income tax benefit
|
|
|
4.2
|
|
|
|
4.8
|
|
|
|
4.1
|
|
Effect of S corporation tax status
|
|
|
|
|
|
|
|
|
|
|
(11.8
|
)
|
Equity in earnings of investee
|
|
|
|
|
|
|
|
|
|
|
0.3
|
|
Foreign tax credit
|
|
|
(0.4
|
)
|
|
|
(0.7
|
)
|
|
|
|
|
Other
|
|
|
0.6
|
|
|
|
0.6
|
|
|
|
(1.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
39.4
|
%
|
|
|
39.7
|
%
|
|
|
26.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of deferred tax assets and liabilities are as
follows at December 31:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Accrued liabilities
|
|
$
|
475
|
|
|
$
|
301
|
|
State income taxes
|
|
|
1,062
|
|
|
|
1,198
|
|
Allowances for doubtful accounts and product returns
|
|
|
795
|
|
|
|
517
|
|
Foreign net operating losses
|
|
|
107
|
|
|
|
700
|
|
Stock based compensation
|
|
|
597
|
|
|
|
309
|
|
Other
|
|
|
243
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
3,279
|
|
|
|
3,080
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
(55
|
)
|
|
|
(67
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
3,224
|
|
|
$
|
3,013
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2007 and 2006, excess tax
benefits from the exercise of stock options of $450,000 and
$282,000, respectively, were recorded as an addition to paid-in
capital.
The Company has a foreign net operating loss of approximately
$581,000 of which $371,000 expires in 2012 and the remaining
$210,000 does not expire as it carries forward indefinitely. The
Company does not provide for U.S. Federal, state or
additional foreign taxes on certain foreign earnings that
management intends to permanently reinvest.
The Company adopted the provisions of FIN No. 48 on
January 1, 2007. Upon the adoption of FIN No. 48,
the Company recognized a $128,000 increase in the liability for
unrecognized tax benefits, which was accounted for as a
reduction to the January 1, 2007 balance of retained
earnings.
F-25
VOLCOM,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
At December 31, 2007, the Company has $91,000 of total
unrecognized tax benefits, all of which, if recognized, would
favorably affect the effective income tax rate in any future
periods. It is reasonably possible that a change in the
unrecognized tax benefits could occur within the next
12 months. However, the Company anticipates that any change
would not be significant and would not have a material impact on
the consolidated statement of operations or consolidated balance
sheet.
The Company recognizes interest
and/or
penalties related to unrecognized tax benefits in income tax
expense. As of the date of adoption, the Company recorded $2,000
of interest and penalties, which is included in the $128,000
liability for unrecognized tax benefits noted above. During the
year ended December 31, 2007, the Company recognized
approximately $6,000 of interest and penalties associated with
uncertain tax positions.
At December 31, 2007, the Company had $8,000 accrued for
interest and penalties. To the extent interest and penalties are
not assessed with respect to uncertain tax positions, amounts
accrued will be reduced and reflected as a reduction of the
overall income tax provision.
The following is a tabular reconciliation of the total amounts
of unrecognized tax benefits (excluding the liability for
interest and penalties) for the year:
|
|
|
|
|
Unrecognized tax benefits balance at January 1, 2007
|
|
$
|
126,000
|
|
Gross increases tax positions in prior years
|
|
|
23,000
|
|
Gross decreases tax positions in prior years
|
|
|
(66,000
|
)
|
|
|
|
|
|
Unrecognized tax benefits balance at December 31, 2007
|
|
$
|
83,000
|
|
|
|
|
|
|
Operating segments are defined as components of an enterprise
about which separate financial information is available that is
evaluated regularly by the chief operating decision maker, in
deciding how to allocate resources and in assessing performance.
The Company operates exclusively in the consumer products
industry in which the Company designs, produces and distributes
clothing, accessories and related products. The Companys
license agreement with Volcom Europe, the licensee of the
Companys products in France, expired on December 31,
2006. In anticipation of the expiration of this license
agreement, the Company established subsidiaries in France and
Switzerland in order to take direct control of its European
operations. Based on the nature of the financial information
that is received by the chief operating decision maker, the
Company now operates in two operating and reportable segments,
the United States and Europe. The United States segment
primarily includes revenues generated from customers in the
United States, Canada, Asia Pacific, Central America and South
America that are served by the Companys United States
operations, while the European segment primarily includes
revenues generated from customers in Europe that are served by
the Companys European operations. All intercompany
revenues and expenses are eliminated in consolidation and are
not reviewed when evaluating segment performance. Each
segments performance is evaluated based on revenues, gross
profit and operating income. The accounting policies of the
segments are the same as those described in the summary of
significant accounting policies in Note 1.
F-26
VOLCOM,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Information related to the Companys operating segments is
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Total revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
228,494
|
|
|
$
|
200,735
|
|
|
$
|
159,684
|
|
Europe
|
|
|
40,119
|
|
|
|
4,523
|
|
|
|
267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
268,613
|
|
|
$
|
205,258
|
|
|
$
|
159,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
110,412
|
|
|
$
|
100,879
|
|
|
$
|
81,254
|
|
Europe
|
|
|
19,631
|
|
|
|
1,142
|
|
|
|
65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
130,043
|
|
|
$
|
102,021
|
|
|
$
|
81,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
45,790
|
|
|
$
|
45,918
|
|
|
$
|
38,420
|
|
Europe
|
|
|
4,842
|
|
|
|
(2,314
|
)
|
|
|
(40
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
50,632
|
|
|
$
|
43,604
|
|
|
$
|
38,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
187,780
|
|
|
$
|
137,581
|
|
|
$
|
110,137
|
|
Europe
|
|
|
14,714
|
|
|
|
12,167
|
|
|
|
1,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
202,494
|
|
|
$
|
149,748
|
|
|
$
|
111,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Although the Company operates within two reportable segments, it
has several different product categories within the segments,
for which the revenues attributable to the each product category
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Mens
|
|
$
|
133,073
|
|
|
$
|
102,734
|
|
|
$
|
87,254
|
|
Girls
|
|
|
77,326
|
|
|
|
67,250
|
|
|
|
51,463
|
|
Snow
|
|
|
22,243
|
|
|
|
15,408
|
|
|
|
9,455
|
|
Boys
|
|
|
20,023
|
|
|
|
11,860
|
|
|
|
7,133
|
|
Footwear
|
|
|
6,127
|
|
|
|
1,573
|
|
|
|
|
|
Girls swim
|
|
|
3,734
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
2,667
|
|
|
|
2,361
|
|
|
|
1,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal product categories
|
|
|
265,193
|
|
|
|
201,186
|
|
|
|
156,716
|
|
Licensing revenues
|
|
|
3,420
|
|
|
|
4,072
|
|
|
|
3,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated revenues
|
|
$
|
268,613
|
|
|
$
|
205,258
|
|
|
$
|
159,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other includes revenues primarily relate to the Companys
Volcom Entertainment division, films and related accessories.
F-27
VOLCOM,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The table below summarizes product revenues by geographic
regions attributed by customer location:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
United States
|
|
$
|
174,254
|
|
|
$
|
157,581
|
|
|
$
|
128,159
|
|
Canada
|
|
|
31,041
|
|
|
|
23,925
|
|
|
|
15,774
|
|
Asia Pacific
|
|
|
8,434
|
|
|
|
7,230
|
|
|
|
6,622
|
|
Europe
|
|
|
40,119
|
|
|
|
4,523
|
|
|
|
267
|
|
Other
|
|
|
11,345
|
|
|
|
7,927
|
|
|
|
5,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
265,193
|
|
|
$
|
201,186
|
|
|
$
|
156,716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15.
|
Subsequent
Event (Unaudited)
|
Effective January 17, 2008, pursuant to the terms of an
Agreement of Purchase and Sale dated as of January 15, 2008
(the Purchase Agreement), the Company acquired all
of the outstanding membership interests of Electric Visual
Evolution, LLC (Electric), a core action sports
lifestyle brand with growing product lines including sunglasses,
goggles, t-shirts, bags, hats, belts and other accessories.
Under the Purchase Agreement, the Company paid to the members of
Electric $25.3 million in cash upon the closing of the
transaction, subject to certain indemnities and post-closing
adjustments. The members will also be eligible to earn up to an
additional $21.0 million over the next three years upon
achieving certain financial milestones.
|
|
16.
|
Pro Forma
Information (Unaudited)
|
The pro forma unaudited income tax adjustments presented
represent the estimated taxes which would have been reported had
the Company been subject to Federal and state income taxes as a
C corporation for all of 2005. The pro forma provision for
income taxes differs from the statutory income tax rate due to
the following:
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31, 2005
|
|
|
|
(In thousands)
|
|
|
Federal income taxes at the statutory rate
|
|
$
|
13,818
|
|
State income taxes net of Federal benefit
|
|
|
2,268
|
|
Equity in earnings of investee
|
|
|
116
|
|
Other
|
|
|
21
|
|
|
|
|
|
|
Total pro forma income tax provision
|
|
$
|
16,223
|
|
|
|
|
|
|
F-28
VOLCOM,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
17. Quarterly
Financial Data (Unaudited)
A summary of quarterly financial data (unaudited) is as follows
(in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
Year ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
50,818
|
|
|
$
|
57,681
|
|
|
$
|
91,045
|
|
|
$
|
69,069
|
|
Gross profit
|
|
|
26,407
|
|
|
|
27,793
|
|
|
|
45,867
|
|
|
|
29,976
|
|
Operating income
|
|
|
8,062
|
|
|
|
8,849
|
|
|
|
23,027
|
|
|
|
10,694
|
|
Net income
|
|
|
5,482
|
|
|
|
6,220
|
|
|
|
14,518
|
|
|
|
7,115
|
|
Net income per share, basic
|
|
$
|
0.23
|
|
|
$
|
0.25
|
|
|
$
|
0.60
|
|
|
$
|
0.29
|
|
Net income per share, diluted
|
|
$
|
0.22
|
|
|
$
|
0.25
|
|
|
$
|
0.59
|
|
|
$
|
0.29
|
|
Year ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
41,596
|
|
|
$
|
46,051
|
|
|
$
|
61,049
|
|
|
$
|
56,562
|
|
Gross profit
|
|
|
21,522
|
|
|
|
22,914
|
|
|
|
30,908
|
|
|
|
26,677
|
|
Operating income
|
|
|
6,686
|
|
|
|
9,690
|
|
|
|
15,560
|
|
|
|
11,668
|
|
Net income
|
|
|
4,426
|
|
|
|
6,532
|
|
|
|
10,163
|
|
|
|
7,632
|
|
Net income per share, basic
|
|
$
|
0.18
|
|
|
$
|
0.27
|
|
|
$
|
0.42
|
|
|
$
|
0.31
|
|
Net income per share, diluted
|
|
$
|
0.18
|
|
|
$
|
0.27
|
|
|
$
|
0.42
|
|
|
$
|
0.31
|
|
Earnings per basic and diluted share are computed independently
for each of the quarters presented based on diluted shares
outstanding per quarter and, therefore, may not sum to the
totals for the year.
F-29
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.
VOLCOM, INC.
|
|
|
|
By:
|
/s/ Richard
R. Woolcott
|
Richard R. Woolcott
President and Chief Executive Officer
Date: February 29, 2008
Pursuant to the requirement 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.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Richard
R. Woolcott
Richard
R. Woolcott
|
|
Chief Executive Officer
(Principal Executive Officer)
|
|
February 29, 2008
|
|
|
|
|
|
/s/ Douglas
P. Collier
Douglas
P. Collier
|
|
Chief Financial Officer
(Principal Financial Officer)
|
|
February 29, 2008
|
|
|
|
|
|
/s/ René
R. Woolcott
René
R. Woolcott
|
|
Chairman of Board of Directors
|
|
February 29, 2008
|
|
|
|
|
|
/s/ Douglas
S. Ingram
Douglas
S. Ingram
|
|
Director
|
|
February 29, 2008
|
|
|
|
|
|
/s/ Anthony
M. Palma
Anthony
M. Palma
|
|
Director
|
|
February 29, 2008
|
|
|
|
|
|
/s/ Joseph
B. Tyson
Joseph
B. Tyson
|
|
Director
|
|
February 29, 2008
|
|
|
|
|
|
/s/ Carl
W. Womack
Carl
W. Womack
|
|
Director
|
|
February 29, 2008
|
|
|
|
|
|
/s/ Kevin
G. Wulff
Kevin
G. Wulff
|
|
Director
|
|
February 29, 2008
|
F-30
EXHIBIT INDEX
|
|
|
|
|
Number
|
|
Description
|
|
|
2
|
.1
|
|
Agreement of Purchase and Sale, dated as of January 15, 2008, by
and among Volcom, Inc., a Delaware corporation, Skelly
Acquisition Corp., a Delaware corporation and a wholly--owned
subsidiary of Volcom, Inc., Electric Visual Evolution LLC, a
California limited liability company, and each of the members of
Electric Visual Evolution LLC (incorporated herein by reference
to the Companys Current Report on Form 8-K filed on
January 18, 2008).
|
|
3
|
.1*
|
|
Restated Certificate of Incorporation of Volcom, Inc.
|
|
3
|
.2*
|
|
Amended and Restated Bylaws of Volcom, Inc.
|
|
3
|
.3*
|
|
Certificate of Amendment of Restated Certificate of
Incorporation of Volcom, Inc.
|
|
4
|
.1*
|
|
Specimen Common Stock certificate.
|
|
10
|
.1*
|
|
Form of Indemnification Agreement between Volcom and each of its
directors and officers.
|
|
10
|
.2
|
|
Credit Agreement by and between Bank of the West and Volcom,
Inc., dated as of July 20, 2006 (incorporated by reference in
the Companys Current Report on Form 8-K filed on July 24,
2006).
|
|
10
|
.3*
|
|
Lease dated as of May 19, 1999 by and between Griswold
Industries and Stone Boardwear, Inc. (the predecessor entity to
Volcom, Inc.) for the real property known as 1740 Monrovia
Avenue, Costa Mesa.
|
|
10
|
.4*
|
|
Form of 2005 Incentive Award Plan.
|
|
10
|
.5*
|
|
Form of Restricted Stock Award Grant Notice and Agreement.
|
|
10
|
.6*
|
|
Form of Stock Option Grant Notice and Agreement.
|
|
10
|
.7*
|
|
Software License Agreement by and between Innovative Systems,
LLC and Volcom Stone Board Wear, Inc., made and effective
September 1, 2002.
|
|
10
|
.8
|
|
Real Estate Development Agreement dated May 5, 2006 between
Volcom SAS and Société dEquipement des Pays de
lAdour (English Translation) (incorporated by reference in
the Companys Current Report on Form 8-K filed on May 9,
2006).
|
|
10
|
.9
|
|
Amended and Restated 2005 Incentive Award Plan (incorporated by
reference in the Companys Annual Report on Form 10-K filed
on March 14, 2007).
|
|
21
|
.1
|
|
Subsidiaries of Volcom, Inc.
|
|
23
|
.1
|
|
Consent of Independent Registered Public Accounting Firm
(Deloitte & Touche LLP).
|
|
31
|
.1
|
|
Certification of the Principal Executive Officer, as required
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
31
|
.2
|
|
Certification of the Principal Financial Officer, as required
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
32
|
|
|
Certifications of the Principal Executive Officer and Principal
Financial Officer, as required pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
*
|
|
Incorporated by reference to Volcom, Inc.s Registration
Statement on Form S-1 (File Number: 333-124498)
|
|
|
|
All current directors and executive officers of Volcom, Inc.
have entered into the Indemnity Agreement with Volcom, Inc.
|
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