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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q

(Mark one)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2002

OR

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________________ to _________________

Commission File Number 0-22446

DECKERS OUTDOOR CORPORATION

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Indicate the number of shares outstanding of the issuer’s class of common stock, as of the latest practicable date.

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DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Table of Contents

						Page
Part I. Financial Information
Item 1.				Condensed Consolidated Financial Statements (Unaudited):
				Condensed Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001			1
				Condensed Consolidated Statements of Operations for the Three-Month Periods Ended September 30, 2002 and 2001			2
				Condensed Consolidated Statements of Operations for the Nine-Month Periods Ended September 30, 2002 and 2001			3
				Condensed Consolidated Statements of Cash Flows for the Nine-Month Periods Ended September 30, 2002 and 2001			4
				Notes to Condensed Consolidated Financial Statements			6
Item 2.				Management’s Discussion and Analysis of Financial Condition and Results of Operations			18
Item 3.				Quantitative and Qualitative Disclosures About Market Risk			27
Item 4.				Disclosure Controls and Procedures			27
Part II. Other Information
Item 1.				Legal Proceedings			28
Item 2.				Changes in Securities			28
Item 3.				Defaults upon Senior Securities			28
Item 4.				Submission of Matters to a Vote of Security Holders			28
Item 5.				Other Information			28
Item 6.				Exhibits and Reports on Form 8-K			28
Signature							29
Certification of Chief Executive Officer							30
Certification of Chief Financial Officer							31

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DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)

					September 30,				December 31,
					2002				2001
Assets
Current assets:
	Cash and cash equivalents				$	20,491,000				16,689,000
	Trade accounts receivable, less allowance for doubtful accounts of $2,478,000 and $2,014,000 as of September 30, 2002 and December 31, 2001, respectively					15,783,000				20,395,000
	Inventories					18,058,000				18,425,000
	Prepaid expenses and other current assets					1,283,000				1,694,000
	Refundable and deferred tax assets					4,070,000				4,155,000
			Total current assets			59,685,000				61,358,000
Property and equipment, at cost, net						3,592,000				3,857,000
Intangible assets, less accumulated amortization						9,169,000				19,941,000
Other assets, net						448,000				728,000
					$	72,894,000				85,884,000
Liabilities and Stockholders’ Equity
Current liabilities:
	Notes payable and current installments of long-term debt				$	156,000				290,000
	Trade accounts payable					6,897,000				13,915,000
	Accrued expenses					7,864,000				4,988,000
			Total current liabilities			14,917,000				19,193,000
Long-term debt, less current installments						41,000				159,000
Stockholders’ equity:
	Preferred stock, $.01 par value. Authorized 5,000,000 shares; none issued					—				—
	Common stock, $.01 par value. Authorized 20,000,000 shares; issued 10,316,710 shares and outstanding 9,343,758 shares at September 30, 2002; issued 10,297,309 shares and outstanding 9,324,357 shares at December 31, 2001					93,000				93,000
	Additional paid-in capital					25,486,000				25,689,000
	Retained earnings					32,535,000				41,251,000
	Accumulated other comprehensive income (loss)					(178,000	)			123,000
						57,936,000				67,156,000
	Less note receivable from stockholder/former officer					—				(624,000	)
			Total stockholders’ equity			57,936,000				66,532,000
					$	72,894,000				85,884,000

See accompanying notes to condensed consolidated financial statements.

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DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)

				Three-month period ended
				September 30,
				2002				2001
Net sales				$	17,727,000				14,023,000
Cost of sales					11,029,000				9,275,000
		Gross profit			6,698,000				4,748,000
Selling, general and administrative expenses					7,489,000				6,165,000
Litigation costs					3,518,000				2,180,000
		Loss from operations			(4,309,000	)			(3,597,000	)
Other expense (income):
	Interest, net				(31,000	)			(140,000	)
	Other				45,000				11,000
		Loss before income tax benefit			(4,323,000	)			(3,468,000	)
Income tax benefit					(1,776,000	)			(1,370,000	)
		Net loss		$	(2,547,000	)			(2,098,000	)
Net loss per share:
	Basic and diluted			$	(0.27	)			(0.23	)
Weighted-average shares:
	Basic and diluted				9,339,000				9,286,000

See accompanying notes to condensed consolidated financial statements.

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DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)

				Nine-month period ended
				September 30,
				2002				2001
Net sales				$	73,355,000				70,520,000
Cost of sales					41,472,000				40,441,000
		Gross profit			31,883,000				30,079,000
Selling, general and administrative expenses					27,856,000				26,066,000
Litigation costs					3,518,000				2,180,000
		Income from operations			509,000				1,833,000
Other expense (income):
	Interest, net				(58,000	)			(254,000	)
	Other				73,000				(176,000	)
		Income before income taxes and cumulative effect of accounting change			494,000				2,263,000
Income taxes					237,000				1,143,000
		Income before cumulative effect of accounting change			257,000				1,120,000
Cumulative effect of accounting change, net of $843,000 income tax benefit					(8,973,000	)			—
		Net income (loss)		$	(8,716,000	)			1,120,000
Basic income per common share before cumulative effect of accounting change				$	0.03				0.12
Cumulative effect of accounting change					(0.97	)			—
Basic net income (loss) per common share				$	(0.94	)			0.12
Average basic common shares					9,307,000				9,226,000
Diluted income per common share before cumulative effect of accounting change				$	0.03				0.12
Cumulative effect of accounting change					(0.93	)			—
Diluted net income (loss) per common share				$	(0.90	)			0.12
Average diluted common shares					9,642,000				9,620,000

See accompanying notes to condensed consolidated financial statements.

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DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)

						Nine-month period ended
						September 30,
						2002				2001
Cash flows from operating activities:
		Net income (loss)				$	(8,716,000	)			1,120,000
		Adjustments to reconcile net income (loss) to net cash provided by operating activities:
			Cumulative effect of accounting change, net of tax				8,973,000				—
			Depreciation and amortization				2,113,000				2,674,000
			Provision for doubtful accounts				1,792,000				1,197,000
			Gain on sale of Heirlooms subsidiary				—				(185,000	)
			Loss on disposal of assets				10,000				10,000
			Non-cash stock compensation				138,000				178,000
			Loss on foreign currency hedging				73,000				—
			Cumulative foreign currency translation adjustment				88,000				—
			Changes in assets and liabilities (net of effects of disposition of Heirlooms subsidiary):
				(Increase) decrease in:
				Trade accounts receivable			2,820,000				9,226,000
				Inventories			367,000				4,638,000
				Prepaid expenses and other current assets			288,000				(35,000	)
				Refundable income taxes			928,000				(1,417,000	)
				Other assets			280,000				271,000
			Increase (decrease) in:
				Trade accounts payable			(7,018,000	)			(1,541,000	)
				Accrued expenses			2,537,000				1,804,000
				Net cash provided by operating activities			4,673,000				17,940,000
Cash flows from investing activities:
		Cash paid for extension of Teva purchase option					—				(1,566,000	)
		Net proceeds from sale of Heirlooms subsidiary					—				599,000
		Purchase of property and equipment					(902,000	)			(1,942,000	)
		Proceeds from sale of property and equipment					—				18,000
				Net cash used in investing activities			(902,000	)			(2,891,000	)

(Continued)

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DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows, Continued
(Unaudited)

						Nine-month period ended
						September 30,
						2002				2001
Cash flows from financing activities:
		Repayments of long-term debt					(252,000	)			(299,000	)
		Cash received from issuances of common stock					283,000				358,000
				Net cash provided by financing activities			31,000				59,000
				Net increase in cash and cash equivalents			3,802,000				15,108,000
Cash and cash equivalents at beginning of period							16,689,000				9,057,000
Cash and cash equivalents at end of period						$	20,491,000				24,165,000
Supplemental disclosure of cash flow information:
	Cash paid during the period for:
			Interest			$	44,000				91,000
			Income taxes				832,000				3,273,000

See accompanying notes to condensed consolidated financial statements.

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DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)

(1)		General
		The unaudited condensed consolidated financial statements have been prepared on the same basis as the annual audited consolidated financial statements and, in the opinion of management, reflect all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation for each of the periods presented. The results of operations for interim periods are not necessarily indicative of results to be achieved for full fiscal years.
		As contemplated by the Securities and Exchange Commission (SEC) under Rule 10-01 of Regulation S-X, the accompanying condensed consolidated financial statements and related footnotes have been condensed and do not contain certain information that will be included in the Company’s annual consolidated financial statements and footnotes thereto. For further information, refer to the consolidated financial statements and related footnotes for the year ended December 31, 2001 included in the Company’s Annual Report on Form 10-K.
		The preparation of the Company’s consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in these financial statements and accompanying notes. The significant areas requiring the use of management’s estimates related to provisions for lower of cost or market inventory writedowns, doubtful accounts receivables, sales returns, deferred taxes and estimated losses on outstanding litigation. Although these estimates are based on management’s knowledge of current events and actions management may undertake in the future, actual results may ultimately differ from those estimates.
(2)		Comprehensive Income (Loss)
		Comprehensive income (loss) is the total of net income (loss) and all other nonowner changes in equity. Accumulated other comprehensive income at December 31, 2001 consisted entirely of unrealized gains on foreign currency hedging derivatives. At September 30, 2002, accumulated other comprehensive loss of $178,000 included unrealized losses on foreign currency hedging derivatives of $266,000 partially offset by a cumulative foreign currency translation adjustment of $88,000. Foreign currency translation adjustments in the prior year were not significant. The Company does not have any other transactions or other economic events that qualify as comprehensive income (loss) as defined under SFAS No. 130.

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DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)

(2)		Comprehensive Income (Loss) — Continued
		Comprehensive income (loss) is determined as follows:

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DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)

(3)		Income (Loss) per Share
		Basic income (loss) per share represents net income (loss) divided by the weighted-average number of common shares outstanding for the period. Diluted income (loss) per share represents net income (loss) divided by the weighted-average number of common shares outstanding, inclusive of the dilutive impact of common stock equivalents. During the three-month periods ended September 30, 2002 and 2001, the Company had a net loss and accordingly, the inclusion of stock options would be anti-dilutive. As a result, the impact of stock options was not included in the computations for these periods and the resulting weighted-average number of shares used in the basic computation and the diluted computation are the same. For the nine-month periods ended September 30, 2002 and 2001, the difference between the weighted-average number of shares used in the basic computation compared to that used in the diluted computation was due to the dilutive impact of options to purchase common stock. The Company utilized the diluted weighted-average shares for both the cumulative effect of accounting change and the net loss for the nine months ended September 30, 2002 since, in accordance with SFAS 128, the determination of the anti-dilution test is based upon income from continuing operations, in which the inclusion of the dilutive securities is dilutive.
		The reconciliations of basic to diluted weighted-average shares are as follows for the nine-month periods ended September 30, 2002 and 2001:

		Options to purchase 1,846,000 shares of common stock at prices ranging from $1.56 to $9.88 were outstanding during the three months ended September 30, 2002 and options to purchase 1,320,000 shares of common stock at prices ranging from $1.56 to $9.88 were outstanding during the three months ended September 30, 2001, but were not included in the computation of diluted loss per share because the options were anti-dilutive, as the Company incurred a net loss.
		Options to purchase 286,000 shares of common stock at prices ranging from $4.80 to $9.88 were outstanding during the nine months ended September 30, 2002 and options to purchase 282,000 shares of common stock at prices ranging from $5.25 to $9.88 were outstanding during the nine months ended September 30, 2001, but were not included in the computation of diluted income (loss) per share because the options’ exercise prices were greater than the average market price of the common stock during the period and, therefore, were anti-dilutive.

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DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)

(4)		Credit Facility
		At December 31, 2001, the Company had a credit facility (“the Facility”) providing for a maximum availability of $50,000,000, subject to a borrowing base of up to 85% of eligible accounts receivable, as defined, and 65% of eligible inventory, as defined. The Facility was secured by substantially all assets of the Company.
		On February 22, 2002, the Facility expired and was replaced with a new revolving credit facility with Comerica Bank (the “New Facility”). The New Facility expires June 1, 2004 and provides for a maximum availability of $20,000,000, subject to a borrowing base only when outstanding borrowings, including outstanding letters of credit and foreign currency forward contracts, exceed $10 million. In general, the borrowing base is currently equal to 75% of eligible accounts receivable, as defined, and 50% of eligible inventory, as defined. The accounts receivable advance rate can increase or decrease depending on the Company’s accounts receivable dilution, which is calculated periodically based on the Company’s bad debts, sales returns and allowances. Up to $10 million of borrowings may be in the form of letters of credit. The New Facility bears interest at the bank’s prime rate (4.75% at September 30, 2002) minus 0.5%, or at the Company’s option, at LIBOR plus 1.375% to 1.625%, depending on the Company’s ratio of liabilities to effective tangible net worth, and is secured by substantially all assets of the Company’s domestic operations. The New Facility includes an annual commitment fee equal to 0.125% of the average unused line amount. The agreement underlying the New Facility includes several financial covenants including a quick ratio requirement, a requirement for liabilities to effective tangible net worth ratio, a requirement for year-to-date profit before cumulative effect of change in accounting principle and, when borrowings exceed $10 million, a minimum inventory turnover requirement. The Company was in compliance with all covenants of the New Facility at September 30, 2002. At September 30, 2002, the Company had no outstanding borrowings under the Facility and had outstanding letters of credit aggregating $619,000. The Company had credit availability under the Facility of $8,612,000 at September 30, 2002. The Company is currently renegotiating the New Facility and adding additional credit facilities to fund the Teva acquisition described in note 10.
(5)		Income Taxes
		Income taxes for the interim periods were computed using the effective tax rate estimated to be applicable for the full fiscal year, which is subject to ongoing review and evaluation by management. For the three months ended September 30, 2002, the Company recorded an income tax benefit of $1,776,000, representing an effective income tax rate of 41.1%. For the three months ended September 30, 2001, the Company recorded an income tax benefit of $1,370,000, representing an effective income tax rate of 39.5%. For the nine months ended September 30, 2002, the Company recorded income tax expense of $237,000, representing an effective income tax rate of 48.0%. For the nine months ended September 30, 2001, the Company recorded income tax expense of $1,143,000, representing an effective income tax rate of 50.5%.

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DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)

(6)		New Accounting Pronouncements
		In July 2001, The Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 142 (“SFAS 142”), “Goodwill and Other Intangible Assets.” SFAS 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized to earnings but instead be reviewed periodically for impairment. The Company implemented this new accounting standard on January 1, 2002, resulting in a goodwill impairment charge of $8,973,000 (net of the related income tax benefit of $843,000), or $0.93 per diluted share, during the nine-month period ended September 30, 2002. This non-cash impairment charge included a write down of approximately $1.2 million, on an after tax basis, for Simple goodwill and approximately $7.8 million for Ugg goodwill. As a result of these write downs, Simple has no remaining goodwill and Ugg has approximately $6.1 million of goodwill remaining at September 30, 2002, which has been included in intangible assets in the accompanying condensed consolidated balance sheet at September 30, 2002. The impairment charge has been recorded as a cumulative effect of a change in accounting principle in the Company’s statement of operations for the nine months ended September 30, 2002. In addition, SFAS 142 provides that goodwill no longer be amortized, and as a result the Company recorded no goodwill amortization during the three and nine-month periods ended September 30, 2002, whereas the Company had recorded approximately $202,000 and $607,000, respectively, of goodwill amortization during the three and nine-month periods ended September 30, 2001. For comparative purposes, the following schedules reconcile reported net income (loss) to adjusted net income (loss) for the three and nine-month periods ended September 30, 2001, adjusted to exclude goodwill amortization, along with comparative information for the three and nine months ended September 30, 2002.

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DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)

(6)

New Accounting Pronouncements (Continued)

Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 144 (“SFAS 144”), “Accounting for the Impairment or Disposal of Long-Lived Assets,” which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While SFAS 144 supersedes Statement of Financial Accounting Standards No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,” it retains many of the fundamental provisions of that statement. The adoption of this standard did not have a material impact on the Company’s financial position or results from operations.

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DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)

(6)		New Accounting Pronouncements (Continued)
		In November 2001, the Emerging Issues Task Force (“EITF”) issued EITF 01-9, “Accounting for Consideration Given by a Vendor to a Customer,” which became effective for the first quarter beginning after December 31, 2001. EITF 01-9 requires certain consideration given by and to vendors or a customer be presented as a reduction of revenue rather than as a cost or an expense. The adoption of EITF 01-9 did not have a material impact on the Company’s financial position or results from operations.
		On July 30, 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 146 (“SFAS 146”), “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS 146 nullifies EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” It requires that a liability be recognized for those costs only when the liability is incurred, that is, when it meets the definition of a liability in the FASB’s conceptual framework. SFAS No. 146 also establishes fair value as the objective for initial measurement of liabilities related to exit or disposal activities. SFAS 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The Company does not expect that the adoption of SFAS 146 will have a material impact on its financial position or results from operations.
(7)		Derivatives
		The Company uses foreign currency forward contracts to hedge the foreign currency exposure associated with a portion of its forecasted transactions in foreign currency. These forward contracts are designated as foreign currency cash flow hedges and are recorded at fair value in the accompanying balance sheet. The effective portion of gains and losses resulting from recording forward contracts at fair value are deferred in accumulated other comprehensive income (loss) in the accompanying balance sheet until the underlying forecasted foreign currency transaction occurs. When the transaction occurs, the effective portion of the gain or loss from the derivative designated as a hedge of the transaction is reclassified from accumulated other comprehensive income (loss) to the same income statement line item affected by the hedged forecasted transaction due to foreign currency fluctuations.
		Because the amounts and the maturities of the derivatives approximate those of the forecasted transactions, changes in the fair value of the derivatives are expected to be highly effective in offsetting changes in the cash flows of the hedged items. Any ineffective portion of gains and losses resulting from changes in the fair value of the derivatives is recognized in current earnings. The ineffective portion of these gains and losses, which results primarily from the time value component of gains and losses on forward contracts, was immaterial for all periods presented.
		As of September 30, 2002, the Company had outstanding forward contracts for approximately 8.0 million euros expiring through March 31, 2003.

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DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)

(8)		Business Segments
		Management of the Company has determined its reportable segments are its three strategic business units, the Teva, Simple and Ugg brands. The Company evaluates performance based on net sales and profit or loss from operations. The Company’s reportable segments are strategic business units responsible for the worldwide operations of each of its brands. They are managed separately because each business requires different marketing, research and development, design, sourcing, and sales strategies. At December 31, 2001, the Company revised the structure for reporting the income (loss) from operations for each of the segments, removing the allocations of corporate overhead from each of the brands. The income (loss) from operations for each of the segments now includes only those costs which are specifically related to each brand, which consist primarily of cost of sales, costs for research and development, design, marketing, sales, commissions, royalties, bad debts, depreciation, amortization and the costs of employees directly related to the brands. Previously, corporate overhead costs were allocated to each segment based on each segment’s sales in relation to total net sales of all segments. The unallocated corporate overhead costs are the shared costs of the organization and include, among others, the following costs: costs of the distribution center, information technology, human resources, accounting and finance, credit and collections, executive compensation and facilities costs. All amounts for the three and nine-month periods ended September 30, 2001 have been restated to conform to the new presentation.
		Net sales and operating income (loss) by business segment for the three and nine-month periods ended September 30, 2002 and 2001 is summarized as follows:

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DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)

(8)

Business Segments (Continued)

		Three months ended								Nine months ended
		September 30,								September 30,
		2002				2001				2002				2001
Income (loss) from operations:
Teva		$	(1,061,000	)			(297,000	)			10,895,000				11,597,000
Simple			111,000				211,000				741,000				600,000
Ugg			3,257,000				1,439,000				2,453,000				741,000
Other (primarily unallocated overhead and litigation costs)			(6,616,000	)			(4,950,000	)			(13,580,000	)			(11,105,000	)
		$	(4,309,000	)			(3,597,000	)			509,000				1,833,000

Business segment asset information as of September 30, 2002 and December 31, 2001 is summarized as follows:

The assets allocable to each reporting segment generally include accounts receivable, inventories, intangible assets, and certain other assets which are specifically identifiable with one of the Company’s three brands — Teva, Simple and Ugg. Unallocated corporate assets are the assets not specifically related to one of the brands and generally include the Company’s cash, refundable and deferred tax assets and various other assets shared by the Company’s brands.

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DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)

(8)		Business Segments (Continued)
		Reconciliations of total assets from reportable segments to the condensed consolidated balance sheets at September 30, 2002 and December 31, 2001 are as follows:

(9)		Contingencies
		An action was brought against the Company in Montana in 1995 by Molly Strong-Butts and Yetti by Molly, Ltd. (collectively, “Molly”) which alleged, among other things, that the Company violated a certain nondisclosure agreement and obtained purported trade secrets regarding a line of winter footwear which Deckers stopped producing in 1994. A jury verdict was obtained against the Company in district court in March 1999 aggregating $1,785,000 for the two plaintiffs. In August 2001 the United States Court of Appeals for the Ninth Circuit affirmed the district court’s decision for a judgment against the Company, resulting in a payment of approximately $2.0 million, including interest, which the Company paid in November 2001. In addition, the court of appeals reversed the district court’s refusal to consider an award of exemplary damages or attorney fees and remanded to the district court for further proceedings. On September 30, 2002, the federal district judge ruled that the Company must pay an additional $4,290,000 to the plaintiffs, including $2,450,000 of exemplary damages and $1,840,000 to cover plaintiff’s attorney fees. The Company is currently in settlement negotiations with the plaintiffs. In the event that a settlement is not achieved, the Company expects it will appeal the decision. The Company recorded charges for this litigation of approximately $3,518,000 during the three-month period ended September 30, 2002 and approximately $2,180,000 during the three-month period ended Setember 30, 2001. At September 30, 2002 the Company has an accrual of $4,290,000 for this matter.
		The Company is a defendant in litigation in the Netherlands with a former European distributor (the “Distributor”), alleging breach of contract related to the Company’s termination of the previous distributor arrangement. The Company denies the allegations and has filed a countersuit against the Distributor for breach of contract. In the event that the Company is not successful in this matter, the Company believes it would have a maximum potential exposure beyond the amounts provided for in the financial statements of up to $500,000, based on advice from legal counsel.

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DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)

(9)		Contingencies (Continued)
		The European Commission has enacted antidumping duties of 49.2% on certain types of footwear imported into Europe from China and Indonesia. Dutch Customs has issued an opinion to the Company that certain popular Teva styles are covered by this antidumping duty legislation, which the Company has appealed. The Commission added explanatory language that more clearly identified shoe types which would be subject to antidumping duties. The Company believes that based on the new language it is probable that the Company will not prevail in its appeal. Therefore, the Company has provided a reserve of $500,000 which is the Company’s estimate of its maximum exposure for antidumping levies. If Customs determines that these styles are covered by the revised legislation, the duty amounts could cause such products to be too costly to import into Europe from China in the future. As a precautionary measure, the Company has obtained, and is using, alternative sourcing for the potentially impacted products from sources outside of China in an effort to reduce the potential risk in the future.
		In July 2002, the Company guaranteed up to $1,000,000 of a bank loan of an officer of the Company. As of September 30, 2002, approximately $750,000 was outstanding under the officer’s loan from the bank.
		The Company is currently involved in various other legal claims arising from the ordinary course of business. Management does not believe that the disposition of these matters will have a material effect on the Company’s financial position or results of operations.
(10)		Teva Acquisition
		On October 10, 2002, the Company signed a definitive agreement to acquire Teva from Mark Thatcher, the inventor of the Teva sport sandal and owner of the Teva patents and trademarks, in a cash and stock transaction expected to be completed prior to December 31, 2002. As a result of the acquisition, the Company will own virtually all of the Teva worldwide assets, including all patents, tradenames, trademarks and all other intellectual property, as well as Teva’s existing catalog and internet retailing business.
		The acquisition price is approximately $62.0 million. The Company will pay cash of approximately $43.0 million and will issue to Mr. Thatcher subordinated notes of $13.0 million, preferred stock of $5.5 million, 100,000 shares of common stock and options to purchase 100,000 shares of common stock. The $13.0 million of subordinated notes will carry a coupon interest rate of 7%, payable monthly, and an additional 2% interest which is to be accrued and paid at the maturity date in 2008. The $5.5 million of preferred stock pays no dividends unless dividends are declared and paid on the Company’s common stock, is callable by the Company within the next three years at face amount plus an additional 10% per year and is convertible into common stock by the holder after three years, if it is still outstanding, at a conversion price which approximates the fair market value at the closing date. In addition, the preferred stock provides the holder with the right to designate one member of the Company’s Board of Directors.

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Notes to Condensed Consolidated Financial Statements
(Unaudited)

(10)		Teva Acquisition (Continued)
		The Company intends to finance the $43.0 million cash component of the acquisition price through the use of existing cash on hand, senior debt provided by Comerica Bank and the issuance of $14 million of senior subordinated notes to an unaffiliated third party lender. The senior debt provided by Comerica Bank includes a $20 million revolving credit facility a $7 million term loan due in installments over two years. The senior subordinated notes will include a 12% coupon interest rate, payable monthly, an additional 4.75% annual interest amount which is to be accrued and paid at the maturity date in 2008 and investment banking and closing fees of approximately $840,000 due at closing.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

		The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto, as well as our Annual Report on Form 10-K for the year ended December 31, 2001. This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 that involve risk and uncertainty, such as forward-looking statements relating to sales and earnings per share expectations, expectations for incremental earnings to be provided by the Teva acquisition, expectations regarding the Company’s liquidity, the potential impact of certain litigation and the impact of seasonality on the Company’s operations. Actual results may vary. Some of the factors that could cause actual results to differ materially from those in the forward-looking statements are identified in the accompanying “Outlook” section of this Quarterly Report on Form 10-Q.
		Three Months Ended September 30, 2002 Compared to Three Months Ended September 30, 2001
		Net sales increased by $3,704,000, or 26.4%, to $17,727,000 from the comparable three months ended September 30, 2001 of $14,023,000. Sales of the Teva brand increased 27.2% to $5,661,000 for the three months ended September 30, 2002 from $4,451,000 for the three months ended September 30, 2001. The increase is largely attributable to sales of the newly introduced Fall 2002 line of closed toed rugged outdoor footwear combined with the continued strength of the Teva sandal offering and an increase in sales in the international markets. Net sales of footwear under the Simple product line decreased 19.9% to $2,250,000 from $2,809,000 for the comparable three months ended September 30, 2001 as a result of continued difficulties in the international markets for the Simple brand. Net sales of Ugg footwear increased 47.3% to $9,816,000 for the three months ended September 30, 2002, compared to net sales of $6,663,000 for the three months ended September 30, 2001 as a result of continued geographical expansion across the United States, the success of its third quarter delivery program, the introduction of several new styles of casual footwear and strong early retail sell-through for the brand. Overall, international sales for all of the Company’s products increased 23.6% for the quarter to $2,502,000 from $2,025,000, representing 14.1% of net sales in 2002 and 14.4% in 2001. The volume of footwear sold increased 17.3% to 563,000 pairs during the three months ended September 30, 2002 from 480,000 pairs during the three months ended September 30, 2001, for the reasons discussed above.
		The weighted-average wholesale price per pair sold during the three months ended September 30, 2002 for all brands combined increased 9.5% to $31.46 from $28.73 for the three months ended September 30, 2001. The increase was primarily due to a significant increase in sales of Ugg footwear, which have a higher average wholesale price than Teva and Simple footwear, and a reduction in the proportion of closeout sales compared to last year. The increase was partially offset by an increase in the volume of international sales, which generally have lower average selling prices than sales in the domestic market. In addition, the Company introduced several new styles at lower price points since September 30, 2001.
		Cost of sales increased by $1,754,000 or 18.9%, to $11,029,000 for the three months ended September 30, 2002, compared with $9,275,000 for the three months ended September 30, 2001 and decreased as a percentage of net sales to 62.2% from 66.1%. Gross profit increased by $1,950,000, or 41.1%, to $6,698,000 for the three months ended September 30, 2002 from $4,748,000 for the three months ended September 30, 2001 and increased as a percentage of net sales to 37.8% from 33.9%. The increase in gross margin was primarily due to a reduction of both inventory write-

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		downs and returns, as well as a decreased impact of closeout sales during the period. In addition, the Company had a slightly greater proportion of domestic sales which generally have a higher gross margin than sales in its international markets.
		The Company carries its inventories at the lower of cost or market, using a reserve for writedowns for inventory obsolescence to adjust the carrying values to market where necessary based on ongoing reviews of estimated net realizable values of its inventories. For the three months ended September 30, 2002, the Company had a net decrease to the reserve for write-downs for inventory obsolescence of approximately $225,000 primarily due to the sale of domestic inventory of Simple and Ugg product for which a write-down had previously been recorded. For the three months ended September 30, 2001, the Company had a net decrease to the reserve for write-downs for inventory obsolescence of approximately $70,000 primarily due to the sale of domestic inventory of Teva and Simple product for which a write-down had previously been recorded.
		Selling, general and administrative expenses increased by $1,324,000, or 21.5%, to $7,489,000 for the three months ended September 30, 2002, compared with the three months ended September 30, 2001 of $6,165,000, and decreased as a percentage of net sales to 42.2% in 2002 from 44.0% in 2001. The increase in selling, general and administrative expenses for the quarter was primarily due to an increase in marketing costs, bad debt expense, costs related to a new Enterprise Resource Planning (“ERP”) computer system, and increased sales commissions as a result of the increased sales volume during the quarter. These increases were partially offset by the elimination of goodwill amortization of $202,000 in accordance with SFAS 142. Despite the overall increase in dollar amounts, the selling, general and administrative expenses as a percentage of net sales declined for the three months ended September 30, 2002 compared to the three months ended September 30, 2001 as certain operating costs are fixed and did not increase in proportion to the increase in consolidated net sales for the period.
		The Company recorded special litigation charges of $3,518,000 during the three-month period ended Setember 30, 2002 and $2,180,000 during the three-month period ended September 30, 2001 related to a federal court’s decisions in a lawsuit filed against the Company in Montana in 1995. For further discussion, see note 9 to the accompanying condensed consolidated financial statements.
		The loss from operations for the Teva brand was $1,061,000 for the three months ended September 30, 2002 compared to $297,000 for the three months ended September 30 2001. The increase in the loss was due to increases in bad debt expense and marketing costs, partially offset by the increase in sales for the quarter. Income from operations for the Simple brand decreased to $111,000 for the three months ended September 30, 2001 from $211,000 for the three months ended September 30, 2001 primarily as a result of decreased sales volume, increased advertising and marketing costs and increased bad debt expense during the quarter. These increases were partially offset by the elimination of goodwill amortization resulting from the Company’s adoption of SFAS 142 during the quarter. Income from operations for the Ugg brand increased to $3,257,000 for the three months ended September 30, 2002 compared to $1,439,000 for the three months ended September 30, 2001 reflecting significantly higher sales volumes, a reduced impact of sales returns, lower bad debt expense and the elimination of goodwill amortization resulting from the Company’s adoption of SFAS 142.

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		For the three months ended September 30, 2002 the Company had income tax benefit of $1,776,000, representing an effective income tax rate of 41.1%. For the three months ended September 30, 2001, the Company had income tax benefit of $1,370,000, representing an effective income tax rate of 39.5%. Income taxes for interim periods are computed using the effective tax rate estimated to be applicable for the full fiscal year, which is subject to ongoing review and evaluation by the Company.
		Excluding the special litigation charges, the pro forma net loss for the three month period ended September 30, 2002 was $430,000, or $0.05 per share — diluted, compared to a pro forma net loss of $822,000, or $0.09 per share — diluted, for the three months ended September 30, 2001. Including the special litigation charges, the Company had a net loss of $2,547,000, or $0.27 per share — diluted, for the three months ended September 30, 2002 versus a net loss of $2,098,000, or $0.23 per share — diluted, for the three months ended September 30, 2001 due to the reasons discussed above.
		Nine Months Ended September 30, 2002 Compared to Nine Months Ended September 30, 2001
		Net sales increased by $2,835,000, or 4.0%, to $73,355,000 for the nine months ended September 30, 2002 compared to $70,520,000 for the nine months ended September 30, 2001. Sales of the Teva brand increased 1.4% to $54,398,000 for the nine months ended September 30, 2002 from $53,661,000 for the nine months ended September 30, 2001 and represented 74.2% and 76.1% of net sales in the nine months ended September 30, 2002 and 2001, respectively. The increase was largely attributable to an improvement in retail sell-through, strength in sales of the Company’s sport sandals and the introduction of the new Fall 2002 line of closed toed rugged outdoor footwear. Net sales of footwear under the Simple product line decreased 9.2% to $8,425,000 from $9,274,000 for the comparable nine months ended September 30, 2001, which decline was attributed to a shortfall in the international markets. This international decline was partially offset by an increase in the volume of discounted sales in the domestic market as well as strength in the brand’s sneakers and women’s sandal business. Net sales of Ugg footwear increased 41.7% to $10,532,000 for the nine months ended September 30, 2002, compared to net sales of $7,433,000 for the nine months ended September 30, 2001 as a result of continued geographical expansion across the United States, the success of its third quarter delivery program, the introduction of several new styles of casual footwear and strong early retail sell-through for the brand. Overall, international sales for all of the Company’s products decreased 10.9% year-to-date to $16,385,000 from $18,388,000, representing 22.3% of net sales in 2002 and 26.1% in 2001. The volume of footwear sold increased 6.2% to 3,198,000 pairs during the nine months ended September 30, 2002 from 3,012,000 pairs during the nine months ended September 30, 2001, for the reasons discussed above.
		The weighted-average wholesale price per pair sold during the nine months ended September 30, 2002 for all brands combined decreased 1.8% to $22.71 from $23.13 for the nine months ended September 30, 2001. The decrease was primarily due to an increase in the volume of discounted sales during the nine months ended September 30, 2002, as well as the introduction of several new styles at lower price points.
		Cost of sales increased by $1,031,000 or 2.5%, to $41,472,000 for the nine months ended September 30, 2002, compared with $40,441,000 for the nine months ended September 30, 2001 and decreased

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		as a percentage of net sales to 56.5% from 57.3%. Gross profit increased by $1,804,000, or 6.0%, to $31,883,000 for the nine months ended September 30, 2002 from $30,079,000 for the nine months ended September 30, 2001 and increased as a percentage of net sales to 43.5% from 42.7%. The increase in gross margin was due to a combination of factors including the negotiation and receipt of a $300,000 chargeback from a factory in the first quarter of 2002 related to a dispute which arose in 2001. In addition, the Company experienced a reduction in inventory write-downs and a change in the sales mix, resulting in a relatively greater percentage of domestic sales, which generally have higher gross margins than sales in the international markets. The resulting increase in gross margin was partially offset by an increase in discounted sales during the period at lower than normal margins.
		The Company carries its inventories at the lower of cost or market, using a reserve for write-downs for inventory obsolescence to adjust the carrying values to market where necessary based on ongoing reviews of estimated net realizable values of its inventories. For the nine months ended September 30, 2002, the Company had a net decrease to the reserve for write-downs for inventory obsolescence of approximately $335,000 primarily due to the sale of domestic Simple and Teva inventory for which a write-down had previously been recorded, which was partially offset by inventory write-downs for all three brands in order to write-down discontinued and slow-moving styles to net realizable value. For the nine months ended September 30, 2001, the Company had a net decrease to the reserve for write-downs for inventory obsolescence of approximately $335,000 primarily due to the sale of domestic inventory of Teva and Simple product for which a write-down had previously been recorded, as well as the sale of the Company’s remaining Canadian inventory, for which a write-down had also previously been recorded, in connection with the Company’s transition to a distributor in the Canadian market. Also, the elimination of approximately $36,000 of reserve for write-downs occurred in connection with the Company’s sale of its Heirlooms subsidiary during the nine month period ended September 30, 2001.
		Selling, general and administrative expenses increased by $1,790,000, or 6.9%, to $27,856,000 for the nine months ended September 30, 2002, compared with the nine months ended September 30, 2001 of $26,066,000, and increased as a percentage of net sales to 38.0% in 2002 from 37.0% in 2001. The increase in selling, general and administrative expenses was primarily due to an increase in marketing and distribution costs, costs related to a new ERP computer system, and an increase in bad debt expense during the nine months ended September 30, 2002. These increases were partially offset by the elimination of approximately $607,000 of goodwill amortization resulting from the Company’s implementation of SFAS 142 on January 1, 2002.
		The Company recorded special litigation charges of $3,518,000 during the nine-month period ended Setember 30, 2002 and $2,180,000 during the nine-month period ended September 30, 2001 related to a federal court’s decisions in a lawsuit filed against the Company in Montana in 1995. For further discussion, see note 9 to the accompanying condensed consolidated financial statements.
		Income from operations for the Teva brand was $10,895,000 for the nine months ended September 30, 2002 compared to $11,597,000 for the nine months ended September 30 2001. The decrease was largely due to the increases in marketing expenditures, bad debt expense and royalty expense, partially offset by the increased sales volume and a reduction in sales commissions during the current year. Income from operations for the Simple brand increased to $741,000 for the nine months ended September 30, 2002 from $600,000 for the nine months ended September

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		30, 2001 as a result of lower bad debt expense and the elimination of goodwill amortization resulting from the Company’s adoption of SFAS 142 during the current year. These decreases were partially offset by the impact of the sales decline in the international markets and the reduction in gross margin from the increased volume of discounted sales during the nine months ended September 30, 2002. Income from operations for the Ugg brand increased to $2,453,000 for the nine months ended September 30, 2002 from $741,000 for the nine months ended September 30, 2001 reflecting the significant increase in sales volume, the decreased impact of sales returns, the increase in gross margin from the factory chargeback and the elimination of goodwill amortization resulting from the Company’s adoption of SFAS 142 during the year, partially offset by increases in marketing costs and bad debt expense.
		For the nine months ended September 30, 2002, the Company had $73,000 of other expense primarily representing the ineffective portion attributed to the Company’s foreign currency hedging activity during the period. For the nine months ended September 30, 2001, the Company had other income of $176,000 which consisted primarily of the gain on disposition of the Company’s 50% interest in its Heirlooms subsidiary.
		For the nine months ended September 30, 2002 the Company had income tax expense of $237,000, representing an effective income tax rate of 48.0%. For the nine months ended September 30, 2001, the Company had income tax expense of $1,143,000, representing an effective income tax rate of 50.5%. Income taxes for interim periods are computed using the effective tax rate estimated to be applicable for the full fiscal year, which is subject to ongoing review and evaluation by the Company.
		The Company implemented SFAS 142, Goodwill and Other Intangible Assets, on January 1, 2002, resulting in a goodwill impairment charge of $8,973,000 (net of the related income tax benefit of $843,000), or $0.93 per diluted share, during the nine months ended September 30, 2002. This non-cash impairment charge included a write down of approximately $1.2 million, on an after tax basis, for Simple goodwill and approximately $7.8 million for Ugg goodwill. The impairment charge has been recorded as a cumulative effect of a change in accounting principle in the Company’s condensed consolidated statement of operations for the nine months ended September 30, 2002.
		The Company experienced net earnings before cumulative effect of accounting change of $257,000, or $0.03 per diluted share, for the nine months ended September 30, 2002 and a net loss after the cumulative effect of accounting change of $8,716,000, or $0.90 per diluted share. For the nine months ended September 30, 2001, the Company had net earnings of $1,120,000, or $0.12 per diluted share. The decrease in earnings and earnings per diluted share occurred for the reasons discussed above.
		Outlook
		This “Outlook” section, the discussion under “Liquidity and Capital Resources” including the first and last paragraphs and the paragraphs regarding the Teva acquisition, the discussion under “Seasonality” and other statements in this Form 10-Q contain a number of forward-looking statements including forward-looking statements relating to sales and earnings per share expectations, expectations regarding the incremental net earnings in 2003 expected to result from the Teva acquisition, expectations regarding the Company’s liquidity, the potential impact of