Back to GetFilings.com



Table of Contents

UNITED STATES
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, 2003

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


(Exact name of registrant as specified in its charter)
     
Delaware   95-3015862

 
(State or other jurisdiction of incorporation or organization)   (IRS Employer Identification)
         
495-A South Fairview Avenue, Goleta, California     93117  

   
 
(Address of principal executive offices)     (zip code)  
         
(Registrant’s telephone number, including area code)     (805) 967-7611  

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

     Yes  [X]    No  [  ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

     Yes  [  ]    No  [X]

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

         
    Outstanding at
Class   November 3, 2003

 
Common stock, $.01 par value
    9,675,833  


TABLE OF CONTENTS

Condensed Consolidated Balance Sheets
Condensed Consolidated Statements of Operations
Condensed Consolidated Statements of Operations
Condensed Consolidated Statements of Cash Flows
Notes to Condensed Consolidated Financial Statements
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Disclosure Controls and Procedures
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
EXHIBIT 10.1
EXHIBIT 31
EXHIBIT 32


Table of Contents

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, 2003 and December 31, 2002   1
        Condensed Consolidated Statements of Operations for the Three-Month Periods Ended September 30, 2003 and 2002   2
        Condensed Consolidated Statements of Operations for the Nine-Month Periods Ended September 30, 2003 and 2002   3
        Condensed Consolidated Statements of Cash Flows for the Nine-Month Periods Ended September 30, 2003 and 2002   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
Signatures       29


Table of Contents

DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES

Condensed Consolidated Balance Sheets
(Unaudited)

                     
        September 30,   December 31,
        2003   2002
       
 
Assets
               
Current assets:
               
 
Cash and cash equivalents
  $ 1,941,000       3,941,000  
 
Trade accounts receivable, less allowance for doubtful accounts and sales discounts of $2,145,000 and $2,635,000 as of September 30, 2003 and December 31, 2002, respectively
    18,014,000       20,851,000  
 
Inventories
    22,432,000       17,067,000  
 
Prepaid expenses and other current assets
    566,000       783,000  
 
Deferred tax assets
    1,919,000       1,919,000  
 
 
   
     
 
   
Total current assets
    44,872,000       44,561,000  
Property and equipment, at cost, net
    3,222,000       3,864,000  
Intangible assets
    70,641,000       70,773,000  
Deferred tax assets
    1,428,000       1,428,000  
Other assets, net
    1,407,000       1,786,000  
 
 
   
     
 
 
  $ 121,570,000       122,412,000  
 
 
   
     
 
Liabilities and Stockholders’ Equity
               
Current liabilities:
               
 
Notes payable and current installments of long-term debt
  $ 3,541,000       3,951,000  
 
Trade accounts payable
    5,818,000       12,916,000  
 
Accrued expenses
    3,761,000       4,509,000  
 
Income taxes payable
    4,215,000       732,000  
 
 
   
     
 
   
Total current liabilities
    17,335,000       22,108,000  
 
 
   
     
 
Long-term debt, less current installments
    31,015,000       35,077,000  
Stockholders’ equity:
               
 
Series A preferred stock at liquidation preference, $.01 par value. Authorized, 5,000,000 shares (1,375,000 Series A); issued and outstanding 1,375,000 shares at September 30, 2003 and December 31, 2002
    5,500,000       5,500,000  
 
Common stock, $.01 par value. Authorized 20,000,000 shares; issued 10,636,261 shares and outstanding 9,663,309 shares at September 30, 2003; issued 10,434,075 shares and outstanding 9,461,123 shares at December 31, 2002
    96,000       95,000  
 
Additional paid-in capital
    26,836,000       26,210,000  
 
Retained earnings
    40,588,000       33,898,000  
 
Accumulated other comprehensive income (loss)
    200,000       (476,000 )
 
 
   
     
 
   
Total stockholders’ equity
    73,220,000       65,227,000  
 
 
   
     
 
 
  $ 121,570,000       122,412,000  
 
 
   
     
 

See accompanying notes to condensed consolidated financial statements.

 


Table of Contents

DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES

Condensed Consolidated Statements of Operations
(Unaudited)

                     
        Three-month period ended
        September 30,
       
        2003   2002
       
 
Net sales
  $ 24,894,000       17,727,000  
Cost of sales
    15,392,000       11,029,000  
 
   
     
 
   
Gross profit
    9,502,000       6,698,000  
Selling, general and administrative expenses
    7,720,000       7,489,000  
Litigation costs
          3,518,000  
 
   
     
 
   
Income (loss) from operations
    1,782,000       (4,309,000 )
Other expense (income):
               
 
Interest, net
    981,000       (31,000 )
 
Other
    (1,000 )     45,000  
 
   
     
 
   
Income (loss) before income taxes
    802,000       (4,323,000 )
Income taxes (benefit)
    321,000       (1,776,000 )
 
   
     
 
   
Net income (loss)
  $ 481,000       (2,547,000 )
 
   
     
 
Net income (loss) per share:
               
 
Basic
  $ 0.05       (0.27 )
 
Diluted
    0.04       (0.27 )
 
   
     
 
Weighted-average shares:
               
 
Basic
    9,657,000       9,339,000  
 
Diluted
    12,037,000       9,339,000  
 
   
     
 

See accompanying notes to condensed consolidated financial statements.

2


Table of Contents

DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES

Condensed Consolidated Statements of Operations
(Unaudited)

                     
        Nine-month period ended
        September 30,
       
        2003   2002
       
 
Net sales
  $ 85,338,000       73,355,000  
Cost of sales
    47,764,000       41,472,000  
 
   
     
 
   
Gross profit
    37,574,000       31,883,000  
Selling, general and administrative expenses
    23,027,000       27,856,000  
Litigation costs
          3,518,000  
 
   
     
 
   
Income from operations
    14,547,000       509,000  
Other expense (income):
               
 
Interest, net
    3,412,000       (58,000 )
 
Other
    (15,000 )     73,000  
 
   
     
 
   
Income before income taxes and cumulative effect of accounting change
    11,150,000       494,000  
Income taxes
    4,460,000       237,000  
 
   
     
 
   
Income before cumulative effect of accounting change
    6,690,000       257,000  
Cumulative effect of accounting change, net of $843,000 income tax benefit
          (8,973,000 )
 
   
     
 
   
Net income (loss)
  $ 6,690,000       (8,716,000 )
 
   
     
 
Basic income per common share before cumulative effect of accounting change
  $ 0.70       0.03  
Cumulative effect of accounting change per common share
          (0.97 )
 
   
     
 
Basic net income (loss) per common share
  $ 0.70       (0.94 )
 
   
     
 
Average basic common shares
    9,582,000       9,307,000  
 
   
     
 
Diluted income per common share before cumulative effect of accounting change
  $ 0.57       0.03  
Cumulative effect of accounting change per common share
          (0.93 )
 
   
     
 
Diluted net income (loss) per common share
  $ 0.57       (0.90 )
 
   
     
 
Average diluted common shares
    11,716,000       9,642,000  
 
   
     
 

See accompanying notes to condensed consolidated financial statements.

3


Table of Contents

DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows
(Unaudited)

                         
            Nine-month period ended
            September 30,
           
            2003   2002
           
 
Cash flows from operating activities:
               
   
Net income (loss)
  $ 6,690,000       (8,716,000 )
   
 
   
     
 
   
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
    1,297,000       2,113,000  
     
Provision for doubtful accounts
    428,000       1,792,000  
     
Write-down of inventories
    1,060,000       554,000  
     
Loss on disposal of assets
    3,000       10,000  
     
Non-cash stock compensation
    34,000       138,000  
     
Loss on foreign currency hedging
          73,000  
     
Cumulative foreign currency translation adjustment
          88,000  
     
Changes in assets and liabilities:
               
       
(Increase) decrease in:
               
       
     Trade accounts receivable
    2,409,000       2,820,000  
       
     Inventories
    (6,425,000 )     (187,000 )
       
     Prepaid expenses and other current assets
    217,000       288,000  
       
     Refundable income taxes
          928,000  
       
     Other assets
    379,000       280,000  
       
Increase (decrease) in:
               
       
     Trade accounts payable
    (7,098,000 )     (7,018,000 )
       
     Accrued expenses
    55,000       2,537,000  
       
     Income taxes payable
    3,483,000        
   
 
   
     
 
       
          Net cash provided by operating activities
    2,532,000       4,673,000  
   
 
   
     
 
Cash flows from investing activities:
               
 
Teva acquisition costs
    (75,000 )      
 
Purchase of property and equipment
    (453,000 )     (902,000 )
 
Proceeds from sale of property and equipment
    2,000        
   
 
   
     
 
       
          Net cash used in investing activities
    (526,000 )     (902,000 )
   
 
   
     
 

(Continued)

4


Table of Contents

DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows, Continued
(Unaudited)

                         
            Nine-month period ended
September 30,
           
            2003   2002
           
 
Cash flows from financing activities:
               
   
Repayments of long-term debt
    (4,599,000 )     (252,000 )
   
Cash received from issuances of common stock
    593,000       283,000  
   
 
   
     
 
       
Net cash provided by (used in) financing activities
    (4,006,000 )     31,000  
   
 
   
     
 
       
Net increase (decrease) in cash and cash equivalents
    (2,000,000 )     3,802,000  
Cash and cash equivalents at beginning of period
    3,941,000       16,689,000  
   
 
   
     
 
Cash and cash equivalents at end of period
  $ 1,941,000       20,491,000  
   
 
   
     
 
Supplemental disclosure of cash flow information:
               
 
Cash paid during the period for:
               
     
Interest
  $ 2,116,000       44,000  
     
Income taxes
    1,607,000       832,000  
   
 
   
     
 

See accompanying notes to condensed consolidated financial statements.

5


Table of Contents

DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements
(Unaudited)

(1)   General

  (a)   Basis of Presentation
 
      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, 2002 included in the Company’s Annual Report on Form 10-K.
 
  (b)   Use of Estimates
 
      The preparation of the Company’s condensed 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.
 
  (c)   Stock Compensation
 
      The Company accounts for stock-based compensation under the provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123). Under the provisions of SFAS 123, the Company has elected to continue to measure compensation cost for employees and nonemployee directors of the Company under the intrinsic value method of APB No. 25 and comply with the pro forma disclosure requirements under SFAS 123. The Company applies the fair value techniques of SFAS 123 to measure compensation cost for options/warrants granted to nonemployees.

6


Table of Contents

DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements
(Unaudited)

(1)   General (Continued)

      The following tables illustrate the effects on net income (loss) if the fair value-based method had been applied to all outstanding and unvested awards in each period.

                     
        Three-month period ended
        September 30,
       
        2003   2002
       
 
Net income (loss), as reported
  $ 481,000       (2,547,000 )
Add (deduct) stock-based employee compensation expense included in reported net income, net of tax effect
    8,000       (3,000 )
Deduct total stock-based employee compensation expense under fair value-based method for all awards, net of tax
    (80,000 )     (64,000 )
 
   
     
 
   
Pro forma net income (loss)
  $ 409,000       (2,614,000 )
 
   
     
 
Pro forma net (loss) income per share:
               
 
Basic
  $ 0.04       (0.28 )
 
Diluted
    0.03       (0.28 )
                     
        Nine-month period ended
        September 30,
       
        2003   2002
       
 
Net income (loss), as reported
  $ 6,690,000       (8,716,000 )
Add stock-based employee compensation expense included in reported net income, net of tax
    20,000       72,000  
Deduct total stock-based employee compensation expense under fair value-based method for all awards, net of tax
    (227,000 )     (240,000 )
 
   
     
 
   
Pro forma net income (loss)
  $ 6,483,000       (8,884,000 )
 
   
     
 
Pro forma net income (loss) per share:
               
 
Basic
  $ 0.68       (0.95 )
 
Diluted
    0.56       (0.93 )

  (d)   Reclassifications
 
      Certain reclassifications have been made to the 2002 balances to conform to the 2003 presentation.

7


Table of Contents

DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements
(Unaudited)

(2)   Comprehensive Income (Loss)
 
    Comprehensive income (loss) is the total of net income (loss) and all other nonowner changes in equity. Accumulated other comprehensive loss at December 31, 2002 of $476,000 included unrealized losses on foreign currency hedging derivatives of $606,000, partially offset by $130,000 of cumulative foreign currency translation adjustment. At September 30, 2003, accumulated other comprehensive income of $200,000 consisted entirely of cumulative foreign currency translation adjustment. The Company does not have any other transactions or other economic events that qualify as comprehensive income (loss) as defined under SFAS No. 130.
 
    Comprehensive income (loss) is determined as follows:

                 
    Three-month period ended
    September 30,
   
    2003   2002
   
 
Net income (loss)
  $ 481,000       (2,547,000 )
Realized loss on foreign currency hedging included in net loss
          22,000  
Unrealized loss on foreign currency hedging
          (41,000 )
Cumulative foreign currency translation adjustment
    9,000       (3,000 )
 
   
     
 
Total comprehensive income (loss)
  $ 490,000       (2,569,000 )
 
   
     
 
                 
    Nine-month period ended
    September 30,
   
    2003   2002
   
 
Net income (loss)
  $ 6,690,000       (8,716,000 )
Realized loss (gain) on foreign currency hedging included in net income (loss)
    606,000       (101,000 )
Unrealized loss on foreign currency hedging
          (288,000 )
Cumulative foreign currency translation adjustment
    70,000       88,000  
 
   
     
 
Total comprehensive income (loss)
  $ 7,366,000       (9,017,000 )
 
   
     
 

8


Table of Contents

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 shares outstanding, including the dilutive impact of potential issuances of common stock. The difference between the weighted-average number of shares used in the basic computation and that used in the diluted computation for the nine-month period ended September 30, 2002, resulted from the dilutive impact of options to purchase common stock, and for the three and nine-month periods ended September 30, 2003 resulted from the dilutive impact of options to purchase common stock, as well as the dilutive impact of convertible preferred stock. Under FAS 128, when an entity reports the cumulative effect of an accounting change, it shall use net income (loss) before cumulative effect of accounting change in its determination of the potential dilutive impact of securities. Accordingly, the Company utilized the diluted weighted-average shares to calculate both the cumulative effect of accounting change per diluted share and the net loss per diluted share for the nine months ended September 30, 2002.
 
    The reconciliations of basic to diluted weighted-average shares are as follows for the three and nine-month periods ended September 30, 2003 and 2002:

                   
      Three-month period ended
      September 30,
     
      2003   2002
     
 
Weighted-average shares used in basic computation
    9,657,000       9,339,000  
Dilutive impact of stock options
    866,000        
Dilutive impact of convertible preferred stock
    1,514,000        
 
   
     
 
 
Weighted-average shares used for diluted computation
    12,037,000       9,339,000  
 
   
     
 
                   
      Nine-month period ended
      September 30,
     
      2003   2002
     
 
Weighted-average shares used in basic computation
    9,582,000       9,307,000  
Dilutive impact of stock options
    620,000       335,000  
Dilutive impact of convertible preferred stock
    1,514,000        
 
   
     
 
 
Weighted-average shares used for diluted computation
    11,716,000       9,642,000  
 
   
     
 

9


Table of Contents

DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements
(Unaudited)

(3)   Income (Loss) per Share - Continued
 
    Options to purchase 45,000 shares of common stock at prices ranging from $8.50 to $9.88 were outstanding during the three months ended September 30, 2003, but were not included in the computation of diluted income per share because the options’ exercise prices were greater than the average market price of the common stock during the period and, therefore, the options were anti-dilutive. 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, 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 119,000 shares of common stock at prices ranging from $6.21 to $9.88 were outstanding during the nine months ended September 30, 2003 and 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, 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, the options were anti-dilutive.
 
(4)   Credit Facility
 
    The Company amended its revolving credit facility (the “Facility”) in November 2003. As amended, the Facility expires June 1, 2005 and provides for a maximum availability of $20,000,000 subject to a borrowing base. In general, the borrowing base is equal to 75% of eligible accounts receivable, as defined, and 50% of eligible inventory, as defined. The accounts receivable advance rate can increase or decrease depending on the Company’s accounts receivable dilution, which is calculated periodically. Up to $10,000,000 of borrowings may be in the form of letters of credit. The Facility bears interest at the bank’s prime rate (4.00% at September 30, 2003) or at the Company’s option, at LIBOR plus 1.0% to 2.5%, depending on the Company’s ratio of liabilities to earnings before interest, taxes, depreciation and amortization (“EBITDA”), and is secured by substantially all assets of the Company. The Facility included an upfront fee of $230,000 and includes subsequent annual commitment fees of $100,000. At September 30, 2003, the Company had outstanding borrowings under the Facility of $5,215,000, no foreign currency reserves for outstanding forward contracts and no outstanding letters of credit. The Company had credit availability under the Facility of $14,785,000 at September 30, 2003.
 
(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, 2003, the Company recorded an income tax expense of $321,000, representing an effective income tax rate of 40.0%. 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 nine months ended September 30, 2003, the Company recorded an income tax expense of $4,460,000, representing an effective income tax rate of 40.0%. For the nine months ended September 30, 2002, the Company recorded an income tax expense of $237,000, representing an effective income tax rate of 48.0%.

10


Table of Contents

DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements
(Unaudited)

(6)   New Accounting Pronouncements
 
    In November 2002, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57, and 107 and a rescission of FASB Interpretation No. 34. This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. The Interpretation also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The Company adopted the initial recognition and measurement provisions of the Interpretation on January 1, 2003. The adoption of this Interpretation did not have a material effect on the Company’s financial statements.
 
    In December 2002, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure, an amendment of FASB Statement No. 123. This Statement amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement No. 123 to require prominent disclosures of the effect of the fair value method in both annual and interim financial statements. The Company adopted this Statement on January 1, 2003 and included the disclosure modifications in these condensed consolidated financial statements. The adoption of this Statement did not have a material effect on the Company’s financial statements.
 
    In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of ARB No. 51. This Interpretation addresses the consolidation by business enterprises of variable interest entities as defined in the Interpretation. The Interpretation applies immediately to variable interests in variable interest entities created after January 31, 2003 and to variable interests in variable interest entities obtained after January 31, 2003. The implementation for entities that hold a variable interest in entities created before February 1, 2003 has been delayed to the first interim or annual period ending after December 15, 2003. The adoption of this Interpretation is not expected to have a material impact on the Company’s financial statements.
 
    In May 2003, the FASB issued SFAS No. 150 “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 establishes standards for how a company classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that companies classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. The provisions of this Statement are effective for financial instruments entered into or modified after May 31, 2003, and otherwise are effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this Statement did not have a material effect on the Company’s financial statements.

11


Table of Contents

DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements
(Unaudited)

(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, 2003, the Company had no remaining outstanding forward contracts.
 
(8)   Business Segments
 
    Management of the Company has determined its reportable segments are strategic business units. The four reportable business segments are the Teva, Simple and Ugg wholesale divisions and the Company’s newly acquired Internet and catalog retailing business. The Company evaluates performance based on net sales and income 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. The income from operations for each of the segments 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. 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. Beginning January 1, 2003, the Company revised the reporting classification for the costs of its international sales agencies, which costs are now included within the income (loss) from operations of the Teva, Simple and Ugg segments. Previously, these agency costs were included in the unallocated corporate overhead costs. All amounts for the three and nine months ended September 30, 2002 have been restated to conform to the 2003 presentation.

12


Table of Contents

DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements
(Unaudited)

(8)   Business Segments (Continued)
 
    Net sales and operating income (loss) by business segment for the three and nine months ended September 30, 2003 and 2002 are summarized as follows:

                                 
    Three months ended   Nine months ended
    September 30,   September 30,
   
 
    2003   2002   2003   2002
   
 
 
 
Net sales to external customers:
                               
Teva wholesale
  $ 7,905,000       5,661,000       60,123,000       54,398,000  
Simple wholesale
    1,626,000       2,250,000       5,678,000       8,425,000  
Ugg wholesale
    13,778,000       9,816,000       15,319,000       10,532,000  
Internet/catalog retail
    1,585,000             4,218,000        
 
   
     
     
     
 
 
  $ 24,894,000       17,727,000       85,338,000       73,355,000  
 
   
     
     
     
 
                                 
    Three months ended   Nine months ended
    September 30,   September 30,
   
 
    2003   2002   2003   2002
   
 
 
 
Income (loss) from operations:
                               
Teva wholesale
  $ 647,000       (1,113,000 )     18,677,000       10,400,000  
Simple wholesale
    (258,000 )     108,000       (439,000 )     741,000  
Ugg wholesale
    4,555,000       3,258,000       4,522,000       2,453,000  
Internet/catalog retail
    212,000             697,000        
Other (primarily unallocated overhead and litigation costs)
    (3,374,000 )     (6,562,000 )     (8,910,000 )     (13,085,000 )
 
   
     
     
     
 
 
  $ 1,782,000       (4,309,000 )     14,547,000       509,000  
 
   
     
     
     
 

13


Table of Contents

DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements
(Unaudited)

(8)   Business Segments (Continued)
 
    Business segment asset information as of September 30, 2003 and December 31, 2002 is summarized as follows:

                   
      September 30,   December 31,
      2003   2002
     
 
Total assets for reportable segments:
               
 
Teva wholesale
  $ 77,201,000       83,168,000  
 
Simple wholesale
    4,262,000       5,708,000  
 
Ugg wholesale
    29,488,000       20,904,000  
 
Internet/catalog retail
    935,000       1,176,000  
 
 
   
     
 
 
  $ 111,886,000       110,956,000  
 
 
   
     
 

    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 business segments. Unallocated corporate assets are the assets not specifically related to one of the segments and generally include the Company’s cash, refundable and deferred tax assets and various other assets shared by the Company’s segments.
 
    Reconciliations of total assets from reportable segments to the condensed consolidated balance sheets at September 30, 2003 and December 31, 2002 are as follows:

                 
    September 30,   December 31,
    2003   2002
   
 
Total assets for reportable segments
  $ 111,886,000       110,956,000  
Elimination of intersegment payables
    256,000       29,000  
Unallocated deferred tax assets
    3,125,000       3,100,000  
Other unallocated corporate assets
    6,303,000       8,327,000  
 
   
     
 
Consolidated total assets
  $ 121,570,000       122,412,000  
 
   
     
 

14


Table of Contents

DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements
(Unaudited)

(9)   Contingencies
 
    In February 2002, the Company agreed to guarantee up to $1 million of a bank loan of an officer of the Company, which matures June 1, 2004. The guarantee is through the maturity date of the officer’s loan and the Company would have to pay under the guarantee should the officer default on the loan. As of September 30, 2003, approximately $1 million was outstanding under the officer’s loan from the bank, of which the entire amount was guaranteed by the Company. The fair value of the guarantee was immaterial at September 30, 2003.
 
    In November 2002, the Company guaranteed on behalf of a third-party manufacturing factory up to $450,000 of its payables with a key supplier related to purchases through September 30, 2003. In prior years, the Company had provided a letter of credit, which was used by the factory to obtain credit at its suppliers for the production of Ugg inventory. The Company entered into this guarantee arrangement to avoid providing a letter of credit, and thereby, avoid using a portion of the Company’s credit availability under its revolving credit facility. The Company received a corresponding personal guarantee of the related debt from the owner of the factory. The fair value of the guarantee was immaterial at September 30, 2003.
 
    The Company is currently involved in various legal claims arising from the ordinary course of business. Management does not believe that the disposition of these matters will have a material effect on the Company’s financial position or results of operations.
 
(10)   Acquisition of Teva
 
    On November 25, 2002, the Company completed an acquisition of the worldwide Teva patents, trademarks, and other assets from Mark Thatcher, the Company’s former licensor and the holder of the Teva patents and trademarks. As a result of the acquisition, the Company now owns all of the Teva worldwide assets including all patents, tradenames, trademarks and all other intellectual property, as well as Teva’s existing Internet and catalog retailing business, which includes the operations of Teva Sport Sandals, Inc. As a result of the acquisition, the Company will experience cost savings by not having to pay royalties and is able to control and build the Teva brand.
 
    The aggregate purchase price was approximately $62,300,000. The Company paid cash in the amount of $43,300,000, including transaction costs of $300,000, and issued junior subordinated notes of $13,000,000, preferred stock with a fair value of $5,500,000, 100,000 shares of common stock valued at approximately $300,000 and options to purchase 100,000 shares of common stock valued at approximately $200,000. The preferred stock was valued based on its redemption value, and the stock options were valued based on the Black-Scholes valuation model.
 
    The results of the operations of Teva Sport Sandals, Inc. are included in the condensed consolidated statement of operations from the acquisition date.

15


Table of Contents

DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements
(Unaudited)

(10)   Acquisition of Teva (Continued)
 
    The following table summarizes the fair value of the assets and liabilities assumed at the date of acquisition:

                 
Net current assets
  $ 357,000          
Property and equipment
    88,000          
Trademarks
    51,000,000          
Intangible assets
    1,580,000          
Goodwill
    11,174,000          
 
   
         
 
  $ 64,199,000  (1)        
 
   
         

(1)      Includes $1,899,000 of amounts previously capitalized, primarily for payments to Mark Thatcher for contract extensions of the option to purchase the Teva patents and trademarks.

    Intangibles of $51,000,000 were assigned to registered trademarks that are not amortized for financial reporting purposes, but are expected to be amortized and fully deductible for income tax reporting purposes. The remaining $1,580,000 of acquired intangible assets consists primarily of patents and have a weighted-average useful life of approximately seven years. The $11,174,000 of goodwill is expected to be amortized and fully deductible for income tax purposes, but is not amortizable for financial accounting purposes. The entire goodwill balance was recorded to the Teva segment. Such allocations were based upon an independent appraisal of the assets acquired in accordance with SFAS No. 141, Business Combinations.
 
    The following tables summarize supplemental statement of income (loss) information on a pro forma basis as if the acquisition had occurred on January 1, 2002.

                     
        Three months ended
        September 30,
       
        2003   2002
       
 
Reported net sales
  $ 24,894,000       17,727,000  
 
Add: Internet and catalog sales
          1,575,000  
 
Less: Sales to Internet and catalog retail business
          (492,000 )
 
   
     
 
Pro forma net sales
  $ 24,894,000       18,810,000  
 
   
     
 
Reported net income (loss)
  $ 481,000       (2,547,000 )
 
Add: Net loss of Internet and catalog retail business
          (557,000 )
 
Add back: Royalty, license costs and related expenses, net of tax
          20,000  
 
Less: Additional interest expense, net of tax
          (573,000 )
 
   
     
 
Pro forma net income (loss)
  $ 481,000       (3,657,000 )
 
   
     
 
Pro forma basic income (loss) per share:
  $ 0.05       (0.39 )
Pro forma diluted income (loss) per share:
  $ 0.04       (0.39 )

16


Table of Contents

DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements
(Unaudited)

(10)   Acquisition of Teva (Continued)

                   
      Nine months ended
      September 30,
     
      2003   2002
     
 
Reported net sales
  $ 85,338,000       73,355,000  
 
Add: Internet and catalog sales
          3,456,000  
 
Less: Sales to Internet and catalog retail business
          (1,643,000 )
 
   
     
 
Pro forma net sales
  $ 85,338,000       75,168,000  
 
   
     
 
Reported net income before cumulative effect of a change in accounting principle
  $ 6,690,000       257,000  
 
Less: Net loss of Internet and catalog retail business
          (268,000 )
 
Add back: Royalty, license costs and related expenses, net of tax
          2,394,000  
 
Less: Additional interest expense, net of tax
          (2,035,000 )
 
   
     
 
Pro forma net income before cumulative effect of a change in accounting principle
    6,690,000       348,000  
Cumulative effect of a change in accounting principle, net of $843,000 income tax benefit
          (8,973,000 )
 
   
     
 
Pro forma net income (loss)
  $ 6,690,000       (8,625,000 )
 
   
     
 
Pro forma basic income (loss) per share:
               
 
Pro forma net income before cumulative effect of a change in accounting principle
  $ 0.70       0.04  
 
Cumulative effect of a change in accounting principle
          (0.96 )
 
   
     
 
 
Pro forma net income (loss) per share
  $ 0.70       (0.92 )
 
   
     
 
Pro forma diluted income (loss) per share:
               
 
Pro forma net income before cumulative effect of a change in accounting principle
  $ 0.57       0.03  
 
Cumulative effect of a change in accounting principle
          (0.80 )
 
   
     
 
 
Pro forma net income (loss) per share
  $ 0.57       (0.77 )
 
   
     
 

17


Table of Contents

DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES

Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
    The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto, as well as our Annual Report on Form 10-K for the year ended December 31, 2002. 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 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. We disclaim any obligation to update our forward looking statements.
 
    Three Months Ended September 30, 2003 Compared to Three Months Ended September 30, 2002
 
    The Company operates its business in four distinct operating segments: Teva, Simple and Ugg wholesale divisions and its newly acquired Internet and catalog footwear retailing business.
 
    Total net sales increased by $7,167,000, or 40.4%, to $24,894,000 from $17,727,000 for the comparable three months ended September 30, 2002. Aggregate wholesale sales of Teva increased 39.6% to $7,905,000 for the three months ended September 30, 2003 from $5,661,000 for the three months ended September 30, 2002. Teva wholesale sales represented 31.8% and 31.9% of net sales in the three months ended September 30, 2003 and 2002, respectively. The increase in Teva wholesale sales was primarily due to an improvement in retail sell-through, continued strength in sales of the Company’s sport sandals, increased sales of thongs, slides and certain styles of the newly introduced closed toe product offering and increased sales in the international markets. Net wholesale sales of footwear under the Simple product line decreased 27.7% to $1,626,000 from $2,250,000 for the three months ended September 30, 2002 caused by a variety of factors including the current retail environment, competition in the casual footwear market, weakness in the brand’s men’s fall business and a decline in international sales. Net wholesale sales of Ugg increased 40.4% to $13,778,000 for the three months ended September 30, 2003 from $9,816,000 for the three months ended September 30, 2002 as Ugg continues to expand from its historically strong fourth quarter business into a solid third quarter business as well, caused in part by the expansion of the product offering to include more fall casual footwear styles. In addition, Ugg’s strength is attributed to a strong early retail sell-through, improved brand awareness and popularity, increased editorial and celebrity exposure, and continued domestic and international geographic expansion. As part of the Company’s acquisition of Teva in November 2002, the Company acquired an Internet and catalog footwear retailing business, which sells the Company’s Teva, Simple and Ugg brands directly to consumers. For the third quarter of 2003, net sales of the Internet and catalog retailing business aggregated $1,585,000, including retail sales of Teva of $1,106,000, Simple of $118,000, and Ugg of $361,000. Overall, for the three months ended September 30, 2003, net sales by brand, including sales from the wholesale divisions as well as the Internet and catalog footwear retailing business, aggregated $9,011,000 for Teva, $1,744,000 for Simple and $14,139,000 for Ugg. International sales for all of the Company’s products increased 16.0% to $2,903,000 from $2,502,000, representing 11.7% of net sales in 2003 and 14.1% in 2002, reflecting an increase in the number of pairs shipped internationally during the quarter as well as increased sales revenue resulting from the $147,000 foreign currency impact of the stronger Euro. The volume of footwear sold worldwide increased 39.1% to 783,000 pairs during the three months ended September 30, 2003 from 563,000 pairs during the three months ended September 30, 2002, for the reasons discussed above.
 
    The weighted-average wholesale price per pair sold during the three months ended September 30, 2003 decreased 3.3% to $30.42 from $31.46 for the three months ended September 30, 2002 due to several factors including an increased impact of closeout sales, the introduction of several new styles at lower price

18


Table of Contents

DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES

    points to facilitate market penetration and increased sales of slides and thongs, which generally have lower average selling prices than the Company’s other products. In addition, the sales mix shifted slightly in the third quarter of 2003, causing a slight increase in Teva sales as a percentage of total third quarter sales, and Teva wholesale selling prices are generally lower than those for Ugg products.
 
    Cost of sales increased by $4,363,000, or 39.6%, to $15,392,000 for the three months ended September 30, 2003, compared with $11,029,000 for the three months ended September 30, 2002. Gross profit increased by $2,804,000, or 41.9%, to $9,502,000 for the three months ended September 30, 2003 from $6,698,000 for the three months ended September 30, 2002 while gross margin increased to 38.2% from 37.8%. This was largely due to above average margins at the newly acquired Internet and catalog retail sales operation and lower overhead costs per pair which occurred as the Company’s overhead costs did not increase in proportion to the increase in sales volume for the quarter. The effects of these items were partially offset by an increased impact of closeout sales and inventory write-downs during the three months ended September 30, 2003.
 
    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. During the three months ended September 30, 2003, the Company had a net increase in the reserve for write-downs for inventory obsolescence of approximately $196,000, reflecting increased Teva write-downs, including write-downs on certain styles of its remaining fall 2003 inventory, as well as increased write-downs for Simple caused, in part, by the recent slow down in sales of this brand. During the three months ended September 30, 2002, the Company had a net decrease in the reserve 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.
 
    Selling, general and administrative expenses increased by $231,000, or 3.1%, to $7,720,000 for the three months ended September 30, 2003, compared with $7,489,000 for the three months ended September 30, 2002, and decreased as a percentage of net sales to 31.0% in 2003 from 42.2% in 2002. The increase was due to a variety of factors including increased payroll and incentive compensation costs resulting from the improved financial results, increased sales commissions on the higher sales volume and the addition of the operating costs of the newly acquired Internet and catalog business. These increases were partially offset by decreases in bad debt expense and the favorable impact of the recent Teva acquisition, which eliminated $246,000 of Teva royalties and $234,000 of Teva license cost amortization.
 
    The Company recorded special litigation charges of $3,518,000 during the three-month period ended September 30, 2002 related to a federal court’s decisions in a lawsuit filed against the Company in Montana in 1995. The case was subsequently settled in full in November 2002.
 
    Income from operations for the Teva wholesale division was $647,000 for the three months ended September 30, 2003 compared to a loss from operations of $1,113,000 for three months ended September 30, 2002. The improvement was largely due to the $2,244,000 increase in sales, a $744,000 decrease in bad debt expense, and the elimination of $480,000 of Teva royalty expense and related license cost amortization, partially offset by a decrease in gross margin caused by increased inventory write-downs and closeout sales, and an increase in sales commission on the higher sales volume. The Simple wholesale division experienced a loss from operations of $258,000 for the three months ended September 30, 2003 compared to income from operations of $108,000 for the three months ended September 30, 2002. The decrease was primarily due to the $624,000 decrease in net sales and a decrease in gross margin resulting from an increase in inventory write-downs. The Ugg wholesale division experienced income from operations of $4,555,000 for the three months ended September 30, 2003 compared to $3,258,000 for the three months ended September 30, 2002 largely due to the increase in sales during the period, partially

19


Table of Contents

DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES

    offset by increased bad debt expense and increased sales commissions on the higher sales volume. Income from operations of the Internet and catalog retailing business acquired as part of the Teva acquisition was $212,000 in 2003, representing the operating earnings attributed to this newly acquired operating segment.
 
    Net interest expense was $981,000 for the three months ended September 30, 2003 compared with net interest income of $31,000 for the three months ended September 30, 2002, primarily due to the Company’s significantly increased borrowings in order to finance the purchase of Teva in November 2002.
 
    For the three months ended September 30, 2003, income tax expense was $321,000, representing an effective income tax rate of 40.0%. For the three months ended September 30, 2002, income tax benefit was $1,776,000, representing an effective income tax rate of 41.1%. The slight decrease in the effective tax rate occurred as certain non-deductible Teva license amortization costs were eliminated in connection with the Teva acquisition. 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 experienced net income of $481,000, or $0.04 per diluted share, for the three months ended September 30, 2003 versus a net loss of $2,547,000, or $0.27 per diluted share for the three months ended September 30, 2002.
 
    Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30, 2002
 
    Total net sales increased by $11,983,000, or 16.3%, to $85,338,000 from the comparable nine months ended September 30, 2002 of $73,355,000. Aggregate wholesale sales of Teva increased to $60,123,000 for the nine months ended September 30, 2003 from $54,398,000 for the nine months ended September 30, 2002, a 10.5% increase. Teva wholesale sales represented 70.5% and 74.2% of net sales in the nine months ended September 30, 2003 and 2002, respectively. The increase in Teva wholesale sales was primarily due to an improvement in retail sell-through resulting from continued strength in sales of the Company’s sport sandals, the favorable impact of the strong Euro, increased sales of thongs and slides and increased sales of certain styles of its newly introduced closed toe footwear offering. Net wholesale sales of footwear under the Simple product line decreased 32.6% to $5,678,000 from $8,425,000 for the nine months ended September 30, 2002, which decline was due to a shortfall in both the domestic and international sales, caused by a variety of factors including the current retail environment, competition in the casual footwear market, weakness in the brand’s spring and fall men’s business and a decline in sales in the international markets. Net wholesale sales of Ugg increased 45.5% to $15,319,000 for the nine months ended September 30, 2003 from $10,532,000 for the nine months ended September 30, 2002 as Ugg continues to expand from its historically strong fourth quarter business into a solid third quarter business as well, caused in part by the expansion of the product offering to include more fall casual footwear styles. In addition, Ugg’s strength is attributed to a strong early retail sell-through, improved brand awareness and popularity, increased editorial and celebrity exposure, and continued domestic and international geographic expansion. As part of the Company’s acquisition of Teva in November 2002, the Company acquired an Internet and catalog footwear retailing business, which sells the Company’s Teva, Simple and Ugg brands directly to consumers. For the first nine months of 2003, net sales of the Internet and catalog retailing business aggregated $4,218,000, including retail sales of Teva of $3,027,000, Simple of $352,000, and Ugg of $839,000. Overall, for the nine months ended September 30, 2003, net sales by brand, including sales from the wholesale divisions as well as the Internet and catalog retailing business, aggregated $63,150,000 for Teva, $6,030,000 for Simple and $16,158,000 for Ugg. International sales for all of the Company’s products increased slightly to $16,544,000 from $16,385,000, representing 19.4% of net sales in 2003 and 22.3% in 2002. The volume of footwear sold worldwide increased 15.9% to 3,706,000 pairs during the nine months ended September 30, 2003 from 3,198,000 pairs during the nine months ended September 30, 2002, for the reasons discussed above.

20


Table of Contents

DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES

    The weighted-average wholesale price per pair sold during the nine months ended September 30, 2003 decreased 1.8% to $22.29 from $22.71 for the nine months ended September 30, 2002. The decrease was primarily due to an increase in the volume of discounted sales during the nine months ended September 30, 2003, the introduction of several new styles at lower price points to facilitate market penetration and increased sales of slides and thongs, which generally have lower average selling prices than the Company’s other products. These factors were partially offset by an increase in the proportion of Ugg sales to total sales, as the average selling price of the Ugg products is generally more than twice that of the Company’s Teva and Simple products.
 
    Cost of sales increased by $6,292,000, or 15.2%, to $47,764,000 for the nine months ended September 30, 2003, compared with $41,472,000 for the nine months ended September 30, 2002. Gross profit increased by $5,691,000, or 17.8%, to $37,574,000 for the nine months ended September 30, 2003 from $31,883,000 for the nine months ended September 30, 2002 while gross margin increased to 44.0% from 43.5%. This increase was largely due to above average margins at the newly acquired Internet and catalog retail sales operation, the favorable impact of the strong Euro, and lower overhead costs per pair which occurred as the Company’s overhead costs did not increase in proportion to the increase in sales volume for the period. This was partially offset by an increase in the volume of discounted sales, an increase in inventory write-downs and the non-recurrence of a $300,000 supplier rebate received in 2002.
 
    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. During the nine months ended September 30, 2003, the Company had a net increase in the reserve for write-downs for inventory obsolescence of approximately $145,000, primarily due to write-downs of certain Teva fall styles and write-downs for Simple to address certain slow-moving styles, partially offset by to the sale of domestic inventory for Teva and Simple product for which a write-down had previously been recorded. During the nine months ended September 30, 2002, the Company had a net decrease in the reserve 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.
 
    Selling, general and administrative expenses decreased by $4,829,000, or 17.3 %, to $23,027,000 for the nine months ended September 30, 2003, compared with $27,856,000 for the nine months ended September 30, 2002, and decreased as a percentage of net sales to 27.0% in 2003 from 38.0% in 2002. The decrease was primarily due to the elimination of $4,321,000 of Teva royalty expense and related license costs as a result of the recent Teva acquisition. The Company also had a $1,365,000 decrease in bad debt expense, a $968,000 reduction in the marketing costs, a $500,000 reduction in expenses as a result of the favorable final resolution of its European anti-dumping duties matter, as well as other general expense reductions. These decreases were partially offset by the addition of $1,208,000 of operating expenses related to the newly acquired Internet and catalog retailing business, an increase of approximately $1,200,000 of payroll costs including incentive compensation costs associated with the significantly improved financial results, and increased sales commissions of approximately $700,000 on the increased sales volume for the period.
 
    The Company recorded special litigation charges of $3,518,000 during the nine-month period ended September 30, 2002 related to a federal court’s decisions in a lawsuit filed against the Company in Montana in 1995. The case was subsequently settled in full in November 2002.
 
    Income from operations for the Teva wholesale division was $18,677,000 for the nine months ended September 30, 2003 compared to $10,400,000 for nine months ended September 30, 2002. The increase

21


Table of Contents

DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES

    was largely due to a $5,725,000 increase in sales, the elimination of $4,321,000 of Teva royalty expense and related license costs, a decrease in marketing costs of $659,000 and reduced bad debt expense of $871,000, among other factors. The Simple wholesale division experienced a loss from operations of $439,000 for the nine months ended September 30, 2003 compared to income from operations of $741,000 for the nine months ended September 30, 2002. The decrease was primarily due to a $2,747,000 decrease in net sales, lower gross margin due in part to an increase in inventory write-downs, partially offset by lower marketing costs. The Ugg wholesale division experienced income from operations of $4,522,000 for the nine months ended September 30, 2003 compared to $2,453,000 for the nine months ended September 30, 2002 largely due to the $4,787,000 increase in sales, a decrease in bad debt expense of $233,000 and a decrease in marketing costs of $164,000, partially offset by the non-recurrence of a $300,000 supplier rebate received in 2002 and an increase in sales commissions expense of $295,000 due to the higher sales levels. Income from operations of the Internet and catalog retailing business acquired as part of the Teva acquisition was $697,000 for the nine months ended September 30, 2003, representing the operating earnings attributed to this newly acquired operating segment.
 
    Net interest expense was $3,412,000 for the nine months ended September 30, 2003 compared with net interest income of $58,000 for the nine months ended September 30, 2002, primarily due to the Company’s significantly increased borrowings in order to finance the purchase of Teva in November 2002. In addition, in connection with the early repayment of $2,000,000 of subordinated debt in June 2003, the Company incurred a $100,000 prepayment fee and wrote off a $100,000 pro rata share of the previously capitalized loan costs. These aggregate costs of $200,000 are included in interest expense for the nine months ended September 30, 2003.
 
    For the nine months ended September 30, 2003, income tax expense was $4,460,000, representing an effective income tax rate of 40.0%. For the nine months ended September 30, 2002, income tax expense was $237,000, representing an effective income tax rate of 48.0%. The decrease in the effective tax rate occurred as certain non-deductible Teva license amortization costs were eliminated in connection with the Teva acquisition. 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.
 
    On January 1, 2002, the Company implemented SFAS 142, Goodwill and Other Intangible Assets, which requires that goodwill and intangible assets with indefinite useful lives no longer be amortized to earnings but instead be reviewed periodically for impairment. The implementation of SFAS 142 resulted 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 earned net income of $6,690,000, or $0.57 per diluted share, for the nine months ended September 30, 2003. For the nine months ended September 30, 2002, the Company earned net income before cumulative effect of accounting change of $257,000, or $0.03 per diluted share and a net loss after the cumulative effect of accounting change of $8,716,000, or $0.90 per diluted share.
 
    Outlook
 
    This “Outlook” section, the discussion under “Liquidity and Capital Resources,” the discussion under “Seasonality” and other statements in this Form 10-Q contain a number of forward-looking statements including forward-looking statements relating to sales and earnings per share expectations, expectations

22


Table of Contents

DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES

    regarding the Company’s liquidity, expectations regarding repayments of subordinated debt and repurchases of preferred stock, the potential impact of certain litigation, and the impact of seasonality on the Company’s operations. These forward-looking statements are based on the Company’s expectations as of November 14, 2003. No one should assume that any forward-looking statement made by the Company will remain consistent with the Company’s expectations after the date the forward-looking statement is made. The Company disclaims any obligation to update any such factors or to publicly announce the results of any revisions to any of the forward-looking statements contained in this Quarterly Report on Form 10-Q. All of the forward-looking statements are based on management’s current expectations, estimates and assumptions and are inherently uncertain. Actual results will likely differ, and the differences may be material, for a variety of reasons, including the reasons discussed below. Given these uncertainties, prospective investors are cautioned not to place undue reliance on such forward-looking statements.
 
    Among the numerous factors that could cause actual results to vary is the fact that the Company’s results directly depend on consumer preferences, which are difficult to assess and can shift rapidly. Any shift in consumer preferences away from one or more of the Company’s product lines could result in lower sales as well as increases in obsolete inventory and the necessity of selling products at significantly reduced selling prices, all of which would adversely affect the Company’s results of operations, financial condition and cash flows. The Company also depends on its customers’ continuing to carry and promote its various lines. The Company’s sales can also be adversely impacted by the ability of the Company’s suppliers to manufacture and deliver products in time for the Company to meet its customers’ orders.
 
    Sales of the Company’s products, particularly those under the Teva and Ugg lines, are very sensitive to weather conditions. Cooler conditions during the spring and summer could adversely impact demand for the Company’s Teva line. Likewise, unseasonably warm weather during the fall and winter months could adversely impact demand for the Company’s Ugg product line.
 
    In addition, the Company’s results of operations, financial condition and cash flows are subject to risks and uncertainties with respect to the following: overall economic and market conditions; world events; competition; demographic changes; the loss of significant customers or suppliers; the performance and reliability of the Company’s products; customer service; the Company’s ability to secure and maintain intellectual property rights; the Company’s ability to secure and maintain adequate financing; the Company’s ability to forecast and subsequently achieve those forecasts; its ability to attract and retain key employees; the effectiveness of the Company’s newly implemented ERP computer system; and the general risks associated with doing international business including foreign exchange risks, duties, quotas and political instability.
 
    Currently, the Company anticipates sales for fiscal year 2003 to range from $113 million to $115 million and expects diluted earnings per share to range from $0.62 to $0.64. The Company currently expects fourth quarter of 2003 sales to range from $28 million to $30 million and diluted earnings per share to range from $0.06 to $0.08 per share. Including sales from the wholesale divisions and the Internet and catalog retail division, the Company expects its fiscal 2003 Teva sales to be $74 million to $75 million, Simple sales to be approximately $8 million and Ugg sales to be $31 million to $32 million.
 
    With respect to fiscal 2004, the Company currently anticipates its fiscal 2004 sales to be in the range of $126 million to $132 million. Including sales from the wholesale divisions and the Internet and catalog retail division, the Company expects fiscal 2004 net sales to be $82 to $84 million for Teva, $9 to $11 million for Simple and $35 to $37 million for Ugg. The Company currently expects its diluted earnings per share for fiscal 2004 to range from $0.92 to $0.96.

23


Table of Contents

DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES

    Liquidity and Capital Resources
 
    The Company’s liquidity consists primarily of cash, trade accounts receivable, inventories and a revolving credit facility. At September 30, 2003, working capital was $27.5 million including $1.9 million of cash and cash equivalents. Cash provided by operating activities aggregated $2.5 million for the nine months ended September 30, 2003. Trade accounts receivable decreased 13.6% since December 31, 2002 due to normal seasonality and improved collections. Inventories increased $5.4 million, or 31.4%, since December 31, 2002, reflecting an increase for Ugg of $7.4 million, a decrease for Teva of $0.7 million and a decrease for Simple of $1.3 million. The inventory changes resulted primarily from normal seasonality and to a lesser degree reflected a continuing change in the business, which includes the increase in sales of Teva and Ugg products in the last half of the year. In addition, the Company anticipates an increase in Teva sales during the fourth quarter and into spring of 2004. As a result of these expected increases in sales, the Company has brought in its holiday inventories earlier in the year and has increased the depth of inventory for the holiday season. During the nine months ended September 30, 2003, the Company used cash flows from operations of approximately $2.5 million plus approximately $2.0 million of its December 31, 2002 cash balance to repay approximately $4.5 million of long-term debt.
 
    The Company amended its revolving credit facility (the “Facility”) with Comerica Bank-California (the “Bank”) in November 2003. As amended, the Facility expires June 1, 2005 and provides for a maximum availability of $20 million subject to a borrowing base. In general, the borrowing base is equal to 75% of eligible accounts receivable, as defined, and 50% of eligible inventory, as defined. The accounts receivable advance rate can increase or decrease depending on the Company’s accounts receivable dilution, which is calculated periodically. Up to $10 million of borrowings may be in the form of letters of credit. The Facility bears interest at the Bank’s prime rate (4.00% at September 30, 2003) or at the Company’s option, at LIBOR plus 1.0% to 2.5%, depending on the Company’s ratio of liabilities to earnings before interest, taxes, depreciation and amortization (“EBITDA”), and is secured by substantially all assets of the Company. The Facility included an upfront fee of $230,000 and includes subsequent annual commitment fees of $100,000. At September 30, 2003, the Company had outstanding borrowings under the Facility of $5.2 million, no foreign currency reserves for outstanding forward contracts and no outstanding letters of credit. The Company had credit availability under the Facility of $14.8 million at September 30, 2003.
 
    In June 2003, the Company made a $2 million early repayment of a portion of its outstanding subordinated debt which was otherwise not due until 2008. In connection with the repayment, the Company incurred a $100,000 pre-payment fee and recorded an additional $100,000 charge to write off a pro rata share of the related loan costs. These aggregate costs of $200,000 are included in interest expense for the nine-month period ended September 30, 2003. In addition, the Company currently expects to make another $2 million early repayment of a portion of the outstanding subordinated debt during the fourth quarter of 2003. In connection with this expected second repayment, the Company will not incur a pre-payment fee but will record a $100,000 charge to write off a pro rata share of the related loan costs during the fourth quarter of 2003. By replacing this $4 million of higher interest-bearing subordinated debt with lower interest-bearing senior debt, the Company expects to save approximately $400,000 to $500,000 of interest costs over each of the next five years.
 
    During the fourth quarter of 2003, the Company also expects to repurchase the entire $5.5 million of preferred stock previously issued to Mark Thatcher in connection with the acquisition of the Teva worldwide assets. In connection with the repurchase, the Company will pay Mr. Thatcher a premium of approximately $425,000, which is treated as a capital transaction and accordingly will have no impact on the Company’s net earnings for 2003. However, in accordance with Generally Accepted Accounting Principles (GAAP), the premium will reduce earnings available for common shareholders and, therefore, is

24


Table of Contents

DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES

    expected to negatively impact the fourth quarter earnings per share by approximately $0.04 per share (which is already included in the guidance discussed under “Outlook” above). However, going forward, the transaction is expected to eliminate approximately 1.5 million shares from the Company’s average diluted shares outstanding calculation beginning in 2004, effectively eliminating approximately 13% of the dilution from the earnings per share calculation.
 
    The Company intends to complete the subordinated debt repayment and preferred stock repurchase transactions using a combination of the Company’s cash flows, borrowing availability under its line of credit and a $3.5 million increase in its senior term debt. The Company’s agreement with its senior lender for the $3.5 million increase in senior term debt is subject to receipt of the consent of Mark Thatcher as the holder of the Company’s junior subordinated notes. If it is unable to do so, the Company may seek other sources of borrowing or renegotiate the term loan which may result in terms less favorable to the Company. In total, the transactions are expected to reduce earnings per diluted share in the fourth quarter of 2003 by approximately $0.04, but should provide an improvement of approximately $0.12 per diluted share in 2004 and each year thereafter. These diluted earnings per share impacts are already included in the earnings per share guidance provided in the “Outlook” section above. All per share estimates are based upon the estimated weighted average outstanding shares. Changes in stock prices and other stock transactions would impact those estimates.
 
    The Company’s ability to repurchase the preferred stock and repay its subordinated debt is subject to the Company’s available cash flows and borrowing availability, which are highly dependent on factors including the Company’s growth rate, the continued strength of the Company’s brands, its ability to respond timely to changes in consumer preferences, its ability to collect its receivables in a timely manner, its ability to effectively manage its inventory, the timing and extent of credit terms received from its vendors including its overseas factories, the volume of letters of credit used to purchase product, and the Company’s ability to forecast its future sales, inventory needs and cash flows and to subsequently achieve those forecasts, among other risk factors. In addition, the Company’s ability to secure the $3.5 million increase in senior term debt is subject to completion of the post-closing item discussed above.
 
    Capital expenditures totaled $453,000 for the nine months ended September 30, 2003. The Company’s capital expenditures related primarily to the replacement of certain computer equipment, the expansion and new racking at the distribution center, and costs related to the Company’s new Teva promotional vehicles. The Company currently has no material future commitments for capital expenditures and currently expects capital expenditures for 2003 will likely range from $600,000 to $700,000. The actual amount of capital expenditures may differ from this estimate, largely depending on any unforeseen needs to replace existing assets.
 
    In February 2002, the Company agreed to guarantee up to $1 million of a bank loan of an officer of the Company, which matures June 1, 2004. The guarantee is through the maturity date of the officer’s loan and the Company would have to pay under the guarantee should the officer default on the loan. As of September 30, 2003, approximately $1 million was outstanding under the officer’s loan from the bank, of which the entire amount was guaranteed by the Company. The fair value of the guarantee was immaterial at September 30, 2003.
 
    In November 2002, the Company guaranteed on behalf of a third-party manufacturing factory up to $450,000 of its payables with a key supplier related to purchases through September 30, 2003. In prior years, the Company had provided a letter of credit, which was used by the factory to obtain credit at its suppliers for the production of Ugg inventory. The Company entered into this guarantee arrangement to avoid providing a letter of credit, and thereby avoid using a portion of the Company’s credit availability under its revolving credit facility. The Company received a corresponding personal guarantee of the related debt from the owner of the factory. The fair value of the guarantee was immaterial at September 30, 2003.
 
    The Company’s Board of Directors has authorized the repurchase of up to 2,200,000 shares of common stock under a stock repurchase program. Such repurchases are authorized to be made from time to time in open market or in privately negotiated transactions, subject to price and market conditions, the Company’s cash availability and the terms of the Company’s new revolving credit facility, which prohibits the use of

25


Table of Contents

DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES

    related borrowings to repurchase common stock. Under this program, the Company repurchased approximately 973,000 shares for aggregate cash consideration of approximately $7.5 million prior to 1999. No shares have been repurchased since that time. At September 30, 2003, approximately 1,227,000 shares remain available for repurchase under the program. The Company does not currently have plans to repurchase additional shares in the foreseeable future.
 
    The Company believes that internally generated funds, the available borrowings under its existing credit facilities, and the cash on hand will provide sufficient liquidity to enable it to meet its current and foreseeable working capital requirements. However, risks and uncertainties that could impact the Company’s ability to maintain its cash position include the Company’s growth rate, the continued strength of the Company’s brands, its ability to respond timely to changes in consumer preferences, its ability to collect its receivables in a timely manner, its ability to effectively manage its inventory, the timing and extent of credit terms received from its vendors including its overseas factories, the volume of letters of credit used to purchase product, and the Company’s ability to forecast its future sales, inventory needs and cash flows and to subsequently achieve those forecasts, among other risk factors.
 
    Seasonality
 
    Financial results for the outdoor and footwear industries are generally seasonal. Sales of each of the Company’s different product lines have historically been higher in different seasons with the highest percentage of Teva sales occurring in the first and second quarter of each year and the highest percentage of Ugg sales occurring in the fourth quarter, while the quarter with the highest percentage of annual sales for Simple has varied from year to year.
 
    Historically, the Company has experienced its highest sales level in the first quarter, which has been Teva’s strongest selling season, while the third quarter has historically had the lowest sales volume. In 2002, as a result of the continued growth in Ugg and the introduction of the fall closed toe Teva offering, the fourth quarter was the quarter with the second highest sales volume. Given the Company’s expectations for each of its brands in 2003, the Company currently expects this seasonal pattern to continue in 2003. The actual results could differ materially depending upon consumer preferences, availability of product, competition, and the Company’s customers continuing to carry and promote its various product lines, among other risks and uncertainties.
 
    Impact of Inflation
 
    The Company believes that the relatively moderate rates of inflation in recent years have not had a significant impact on its net sales or profitability.

26


Table of Contents

DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES

Item 3.   Quantitative and Qualitative Disclosures About Market Risk
 
    Derivative Instruments
 
    A substantial portion of the Company’s European sales for the nine month period ended September 30, 2003 was denominated in Euros. The majority of these sales occurred in the first quarter of the year, with lesser amounts in the remainder of the period. To reduce its risk to foreign currency fluctuations between the U.S. dollar and the Euro, the Company entered into forward contracts from time to time. However, beginning with the spring 2004 season, which begins to ship in the fourth quarter of 2003, the Company expects to transition from Euro denominated sales transactions in the European market to U.S. dollar denominated sales transactions. As of September 30, 2003, the Company had no outstanding forward contracts for Euros.
 
    Market Risk
 
    The Company’s market risk exposure with respect to financial instruments is to changes in the “prime rate” in the United States and changes in the Eurodollar rate. The Company’s revolving line of credit and senior term debt provide for interest on outstanding borrowings at rates tied to prime rate, or at the Company’s election tied to the Eurodollar rate. At September 30, 2003, the Company had outstanding borrowings aggregating $9.3 million under these two credit facilities. A 1% increase in interest rates on current borrowings would have a $93,000 impact on income (loss) before income taxes.

Item 4.   Disclosure Controls and Procedures
 
    The Company’s Chief Executive Officer, Douglas B. Otto, and Chief Financial Officer, M. Scott Ash, with the participation of the Company’s management, carried out an evaluation of the effectiveness of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e). Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer believe that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures are effective in making known to them material information relating to the Company (including its consolidated subsidiaries) required to be included in this report.
 
    Disclosure controls and procedures, no matter how well designed and implemented, can provide only reasonable assurance of achieving an entity’s disclosure objectives. The likelihood of achieving such objectives is affected by limitations inherent in disclosure controls and procedures. These include the fact that human judgment in decision-making can be faulty and that breakdowns in internal control can occur because of human failures such as simple errors, mistakes or intentional circumvention of the established processes.
 
    There was no change in the Company’s internal control over financial reporting, known to the Chief Executive Officer or the Chief Financial Officer, that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

27


Table of Contents

DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES

Part II. OTHER INFORMATION

Item 1.   Legal Proceedings.
 
    The Company was a party to litigation in the Netherlands with a former European distributor (the “Distributor”), alleging breach of contract related to the Company’s termination of the previous distributor arrangement. During the quarter ended June 30, 2003, the Company settled this matter out of court, paying the distributor $200,000 as full and final settlement. The settlement amount approximated the previously recorded accrual for this matter and, as a result, did not have a significant impact on the results of operations for the period.
 
    In 1997, the European Commission enacted anti-dumping duties of 49.2% on certain types of footwear imported into Europe from China and Indonesia. Dutch Customs had issued an opinion to the Company that certain popular Teva styles were covered by this anti-dumping duty legislation. Based on this opinion, Dutch Customs sought anti-dumping duties of approximately $500,000 from the Company, which the Company had appealed. In March 2003, an appeals court ruled that the duties were not levied by the appropriate governing body and ordered The Ministry of Economic Affairs (the “Ministry”) to determine the portion of the duties that was improperly levied and to nullify that portion. In May 2003, the Ministry completed its analysis and nullified the entire claim. As a result of this favorable final ruling, the Company reversed the previously established $500,000 accrual during the three months ended June 30, 2003, which is reflected as a reduction of selling, general and administrative expenses in the accompanying condensed consolidated statement of operations for the nine months ended September 30, 2003.

Item 2.   Changes in Securities. Not applicable

Item 3.   Defaults upon Senior Securities. Not applicable

Item 4.   Submission of Matters to a Vote of Security Holders. Not applicable

Item 5.   Other Information. Not applicable

Item 6.   Exhibits and Reports on Form 8-K.

  (a)   Exhibits.

     
10.1   Amendment Number Three to Amended and Restated Revolving Credit Agreement between the Company and Comerica Bank-California dated as of August 6, 2003
     
31   Certifications of Chief Executive Officer and Chief Financial Officer, Pursuant to Rule 13a-14(a) under the Exchange Act, Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
32   Certification Pursuant to 18 U.S.C. 1350, Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

  (b)   Reports on Form 8-K. None.

28


Table of Contents

DECKERS OUTDOOR CORPORATION
AND SUBSIDIARIES

Signatures

    Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

         
        Deckers Outdoor Corporation
         
    Date: November 14, 2003   /s/ M. Scott Ash
       
        M. Scott Ash, Chief Financial Officer
         
        (Duly Authorized Officer on Behalf of the
        Registrant and Principal Financial and
        Accounting Officer)

29