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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark one)

For the quarterly period ended September 30, 2003

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 (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.

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

See accompanying notes to condensed consolidated financial statements.

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

See accompanying notes to condensed consolidated financial statements.

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

See accompanying notes to condensed consolidated financial statements.

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

(Continued)

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

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

	(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.

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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.

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

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DECKERS OUTDOOR CORPORATION
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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:

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DECKERS OUTDOOR CORPORATION
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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:

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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%.

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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.

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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.

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DECKERS OUTDOOR CORPORATION
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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:

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DECKERS OUTDOOR CORPORATION
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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:

		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:

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(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.

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

(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.