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 June 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 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the registrant is an accelerated filer.

Yes o 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	August 5, 2003
Common stock, $.01 par value		9,647,519

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 31
EXHIBIT 32
EXHIBIT 10.1
EXHIBIT 10.2
EXHIBIT 10.3
EXHIBIT 10.4

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 June 30, 2003 and December 31, 2002		1
		Condensed Consolidated Statements of Operations for the Three-Month Periods Ended June 30, 2003 and 2002		2
		Condensed Consolidated Statements of Operations for the Six-Month Periods Ended June 30, 2003 and 2002		3
		Condensed Consolidated Statements of Cash Flows for the Six-Month Periods Ended June 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			19
	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			29
	Signatures			30

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

			June 30,		December 31,
			2003		2002
Assets
Current assets:
	Cash and cash equivalents		$	2,212,000		3,941,000
	Trade accounts receivable, less allowance for doubtful accounts and sales discounts of $2,515,000 and $2,635,000 as of June 30, 2003 and December 31, 2002, respectively			15,822,000		20,851,000
	Inventories			22,957,000		17,067,000
	Prepaid expenses and other current assets			685,000		783,000
	Deferred tax assets			1,919,000		1,919,000
		Total current assets		43,595,000		44,561,000
Property and equipment, at cost, net				3,397,000		3,864,000
Intangible assets				70,710,000		70,773,000
Deferred tax assets				1,428,000		1,428,000
Other assets, net				1,485,000		1,786,000
			$	120,615,000		122,412,000
Liabilities and Stockholders’ Equity
Current liabilities:
	Notes payable and current installments of long-term debt		$	3,620,000		3,951,000
	Trade accounts payable			8,351,000		12,916,000
	Accrued expenses			3,433,000		4,509,000
	Income taxes payable			3,782,000		732,000
		Total current liabilities		19,186,000		22,108,000
Long-term debt, less current installments				28,774,000		35,077,000
Stockholders’ equity:
	Series A preferred stock at liquidation preference, $.01 par value. Preferred stock, 5,000,000 shares (1,375,000 Series A); issued and outstanding 1,375,000 shares at June 30, 2003 and December 31, 2002			5,500,000		5,500,000
	Common stock, $.01 par value. Authorized 20,000,000 shares; issued 10,618,471 shares and outstanding 9,645,519 shares at June 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			26,761,000		26,210,000
	Retained earnings			40,107,000		33,898,000
	Accumulated other comprehensive income (loss)			191,000		(476,000	)
		Total stockholders’ equity		72,655,000		65,227,000
			$	120,615,000		122,412,000

See accompanying notes to condensed consolidated financial statements.

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

			Three-month period ended
			June 30,
			2003		2002
Net sales			$	24,342,000		22,369,000
Cost of sales				12,510,000		12,298,000
		Gross profit		11,832,000		10,071,000
Selling, general and administrative expenses				7,154,000		8,967,000
		Income from operations		4,678,000		1,104,000
Other expense (income):
	Interest, net			1,334,000		(10,000	)
	Other			1,000		11,000
		Income before income taxes		3,343,000		1,103,000
Income taxes				1,337,000		461,000
		Net income	$	2,006,000		642,000
Net income per share:
	Basic		$	0.21		0.07
	Diluted			0.17		0.07
Weighted-average shares:
	Basic			9,536,000		9,307,000
	Diluted			11,611,000		9,732,000

See accompanying notes to condensed consolidated financial statements.

2

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

			Six-month period ended
			June 30,
			2003			2002
Net sales			$	60,444,000			55,628,000
Cost of sales				32,372,000			30,443,000
		Gross profit		28,072,000			25,185,000
Selling, general and administrative expenses				15,307,000			20,367,000
		Income from operations		12,765,000			4,818,000
Other expense (income):
	Interest, net			2,431,000			(27,000	)
	Other			(14,000	)		28,000
		Income before income taxes and cumulative effect of accounting change		10,348,000			4,817,000
Income taxes				4,139,000			2,013,000
		Income before cumulative effect of accounting change		6,209,000			2,804,000
Cumulative effect of accounting change, net of $843,000 income tax benefit				—			(8,973,000	)
		Net income (loss)	$	6,209,000			(6,169,000	)
Basic income per common share before cumulative effect of accounting change			$	0.65			0.30
Cumulative effect of accounting change per common share				—			(0.96	)
Basic net income (loss) per common share			$	0.65			(0.66	)
Average basic common shares				9,545,000			9,326,000
Diluted income per common share before cumulative effect of accounting change			$	0.54			0.29
Cumulative effect of accounting change per common share				—			(0.93	)
Diluted net income (loss) per common share			$	0.54			(0.64	)
Average diluted common shares				11,487,000			9,665,000

See accompanying notes to condensed consolidated financial statements.

3

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

				Six-month period ended
				June 30,
				2003			2002
Cash flows from operating activities:
	Net income (loss)			$	6,209,000			(6,169,000	)
	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			853,000			1,443,000
		Provision for doubtful accounts			609,000			1,466,000
		Write-down of inventories			558,000			523,000
		Loss on disposal of assets			3,000			10,000
		Non-cash stock compensation			20,000			129,000
		Loss on foreign currency hedging			—			28,000
		Changes in assets and liabilities:
			(Increase) decrease in:
			Trade accounts receivable		4,420,000			1,515,000
			Inventories		(6,448,000	)		1,127,000
			Prepaid expenses and other current assets		98,000			432,000
			Refundable income taxes		—			1,843,000
			Other assets		301,000			227,000
			Increase (decrease) in:
			Trade accounts payable		(4,565,000	)		(5,765,000	)
			Accrued expenses		(347,000	)		(520,000	)
			Income taxes payable		3,050,000			854,000
			Net cash provided by operating activities		4,761,000			6,116,000
Cash flows from investing activities:
	Teva acquisition costs				(75,000	)		—
	Purchase of property and equipment				(253,000	)		(855,000	)
	Proceeds from sale of property and equipment				2,000			—
			Net cash used in investing activities		(326,000	)		(855,000	)

(Continued)

4

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

					Six-month period ended
					June 30,
					2003			2002
Cash flows from financing activities:
		Repayments of long-term debt				(6,696,000	)		(215,000	)
		Cash received from issuances of common stock				532,000			261,000
				Net cash provided by (used in) financing activities		(6,164,000	)		46,000
				Net increase (decrease) in cash and cash equivalents		(1,729,000	)		5,307,000
Cash and cash equivalents at beginning of period						3,941,000			16,689,000
Cash and cash equivalents at end of period					$	2,212,000			21,996,000
Supplemental disclosure of cash flow information:
	Cash paid during the period for:
			Interest		$	1,484,000			32,000
			Income taxes			1,607,000			832,000

See accompanying notes to condensed consolidated financial statements.

5

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

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
			June 30,
			2003			2002
Net income, as reported			$	2,006,000			642,000
Add stock-based employee compensation expense included in reported net income, net of tax				7,000			6,000
Deduct total stock-based employee compensation expense under fair value-based method for all awards, net of tax				(71,000	)		(42,000	)
		Pro forma net income	$	1,942,000			606,000
Pro forma net income per share:
	Basic		$	0.20			0.07
	Diluted			0.17			0.06

			Six-month period ended
			June 30,
			2003			2002
Net income (loss), as reported			$	6,209,000			(6,169,000	)
Add stock-based employee compensation expense included in reported net income, net of tax				12,000			75,000
Deduct total stock-based employee compensation expense under fair value-based method for all awards, net of tax				(147,000	)		(176,000	)
		Pro forma net income (loss)	$	6,074,000			(6,270,000	)
Pro forma net income (loss) per share:
	Basic		$	0.64			(0.67	)
	Diluted			0.54			(0.66	)

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

7

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 June 30, 2003, accumulated other comprehensive income of $191,000 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
	June 30,
	2003		2002
Net income	$	2,006,000		642,000
Unrealized loss on foreign currency hedging		—		(247,000	)
Cumulative foreign currency translation adjustment		35,000		91,000
Total comprehensive income	$	2,041,000		486,000

	Six-month period ended
	June 30,
	2003		2002
Net income (loss)	$	6,209,000		(6,169,000	)
Realized loss (gain) on foreign currency hedging included in net income (loss)		606,000		(123,000	)
Unrealized loss on foreign currency hedging		—		(247,000	)
Cumulative foreign currency translation adjustment		61,000		91,000
Total comprehensive income (loss)	$	6,876,000		(6,448,000	)

8

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, inclusive of 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 three and six-month periods ended June 30, 2002 resulted from the dilutive impact of options to purchase common stock, and for the three and six-month periods ended June 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 2002.
	The reconciliations of basic to diluted weighted-average shares are as follows for the three and six-month periods ended June 30, 2003 and 2002:

		Three-month period ended
		June 30,
		2003		2002
Weighted-average shares used in basic computation			9,536,000		9,307,000
Dilutive impact of stock options			561,000		425,000
Dilutive impact of convertible preferred stock			1,514,000		—
	Weighted-average shares used for diluted computation		11,611,000		9,732,000

		Six-month period ended
		June 30,
		2003		2002
Weighted-average shares used in basic computation			9,545,000		9,326,000
Dilutive impact of stock options			428,000		339,000
Dilutive impact of convertible preferred stock			1,514,000		—
	Weighted-average shares used for diluted computation		11,487,000		9,665,000

Options to purchase 125,000 shares of common stock at prices ranging from $5.75 to $9.88 were outstanding during the three months ended June 30, 2003 and options to purchase 282,000 shares of common stock at prices ranging from $5.25 to $9.88 were outstanding during the three months ended June 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, were anti-dilutive.

9

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

(3)	Income (Loss) per Share - Continued
	Options to purchase 195,000 shares of common stock at prices ranging from $5.25 to $9.88 were outstanding during the six months ended June 30, 2003 and options to purchase 286,000 shares of common stock at prices ranging from $5.25 to $9.88 were outstanding during the six months ended June 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, were anti-dilutive.
(4)	Credit Facility
	The Company has a revolving credit facility (the “Facility”), which expires June 1, 2005 and provides for a maximum availability of $20,000,000 from November 1 through April 30 and $18,000,000 from May 1 through October 31 of each year, 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 June 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 June 30, 2003, the Company had outstanding borrowings under the Facility of $2,162,000, no foreign currency reserves for outstanding forward contracts and no outstanding letters of credit. The Company had credit availability under the Facility of $11,483,000 at June 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 June 30, 2003, the Company recorded an income tax expense of $1,337,000, representing an effective income tax rate of 40.0%. For the three months ended June 30, 2002, the Company recorded an income tax expense of $461,000, representing an effective income tax rate of 41.8%. For the six months ended June 30, 2003, the Company recorded an income tax expense of $4,139,000, representing an effective income tax rate of 40.0%. For the six months ended June 30, 2002, the Company recorded an income tax expense of $2,013,000, representing an effective income tax rate of 41.8%.

10

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

(6)	New Accounting Pronouncements
	In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 requires the Company to record the fair value of an asset retirement obligation as a liability in the period in which the Company incurs a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development, and/or normal use of the assets. The Company also records a corresponding asset that is depreciated over the life of the asset. After the initial measurement of the asset retirement obligation, the obligation will be adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation. The Company adopted SFAS No. 143 on January 1, 2003. The adoption of SFAS No. 143 did not have a material effect on the Company’s financial statements.
	In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The adoption of SFAS No. 146 did not have a material effect on the Company’s financial statements.
	In November 2002, the 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.

11

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

(6)	New Accounting Pronouncements - Continued
	In December 2002, the FASB issued 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 application of this Interpretation did not have a material effect on the Company’s financial statements.
	In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150, (“SFAS 150”), “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS 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 SFAS 150 is not expected to have a material impact on the Company’s financial statements.
(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.

12

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

(7)	Derivatives (Continued)
	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 June 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 catalog and internet 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 six months ended June 30, 2002 have been restated to conform to the 2003 presentation.
	Net sales and operating income (loss) by business segment for the three and six months ended June 30, 2003 and 2002 is summarized as follows:

	Three months ended June 30,				Six months ended June 30,
	2003		2002		2003		2002
Net sales to external customers:
Teva wholesale	$	21,129,000		19,478,000		52,218,000		48,737,000
Simple wholesale		1,340,000		2,574,000		4,052,000		6,175,000
Ugg wholesale		344,000		317,000		1,541,000		716,000
Catalog/internet retail		1,529,000		—		2,633,000		—
	$	24,342,000		22,369,000		60,444,000		55,628,000

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Notes to Condensed Consolidated Financial Statements
(Unaudited)

(8) Business Segments (Continued)

	Three months ended June 30,						Six months ended June 30,
	2003			2002			2003			2002
Income (loss) from operations:
Teva wholesale	$	7,025,000			4,772,000			18,030,000			11,513,000
Simple wholesale		(316,000	)		199,000			(181,000	)		633,000
Ugg wholesale		124,000			(559,000	)		(33,000	)		(805,000	)
Catalog/internet retail		372,000			—			485,000			—
Other (primarily unallocated overhead)		(2,527,000	)		(3,308,000	)		(5,536,000	)		(6,523,000	)
	$	4,678,000			1,104,000			12,765,000			4,818,000

Business segment asset information as of June 30, 2003 and December 31, 2002 is summarized as follows:

		June 30,		December 31,
		2003		2002
Total assets for reportable segments:
	Teva wholesale	$	85,869,000		83,168,000
	Simple wholesale		4,916,000		5,708,000
	Ugg wholesale		18,748,000		20,904,000
	Catalog/Internet retail		944,000		1,176,000
		$	110,477,000		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 June 30, 2003 and December 31, 2002 are as follows:

	June 30,		December 31,
	2003		2002
Total assets for reportable segments	$	110,477,000		110,956,000
Elimination of intersegment payables		209,000		29,000
Unallocated deferred tax assets		3,100,000		3,100,000
Other unallocated corporate assets		6,829,000		8,327,000
Consolidated total assets	$	120,615,000		122,412,000

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Notes to Condensed Consolidated Financial Statements
(Unaudited)

(9)	Contingencies
	In February 2002, the Company agreed to guarantee up to $1,000,000 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 June 30, 2003, approximately $1,800,000 was outstanding under the officer’s loan from the bank, of which $1,000,000 was guaranteed by the Company. The fair value of the guarantee was immaterial at June 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 June 30, 2003.
	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 three and six months ended June 30, 2003.
	The Company is currently involved in various other legal claims arising from the ordinary course of business. Management does not believe that the disposition of these matters will have a material effect on the Company’s financial position or results of operations.

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Notes to Condensed Consolidated Financial Statements
(Unaudited)

(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 catalog and internet 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.
	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 subject to amortization. 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 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.

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Notes to Condensed Consolidated Financial Statements
(Unaudited)

(10)	Acquisition of Teva (Continued)
	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
			June 30,
			2003		2002
Reported net sales			$	24,342,000		22,369,000
	Add: Catalog/Internet sales			—		1,194,000
	Less: Sales to Catalog/Internet retail business			—		(742,000	)
Pro forma net sales			$	24,342,000		22,821,000
Reported net income			$	2,006,000		642,000
		Add: Net income of Catalog/Internet retail business		—		257,000
		Add back: Royalty, license costs and related expenses, net of tax		—		937,000
		Less: Additional interest expense, net of tax		—		(732,000	)
Pro forma net income			$	2,006,000		1,104,000
Pro forma basic income (loss) per share:			$	0.21		0.12
Pro forma diluted income (loss) per share:			$	0.17		0.10

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Notes to Condensed Consolidated Financial Statements
(Unaudited)

(10) Acquisition of Teva (Continued)

			Six months ended
			June 30,
			2003		2002
Reported net sales			$	60,444,000		55,628,000
	Add: Catalog/Internet sales			—		1,881,000
	Less: Sales to Catalog/Internet retail business			—		(1,151,000	)
Pro forma net sales			$	60,444,000		56,358,000
Reported net income before cumulative effect of a change in accounting principle			$	6,209,000		2,804,000
		Add: Net income of Catalog/Internet retail business		—		289,000
		Add back: Royalty, license costs and related expenses, net of tax		—		2,374,000
		Less: Additional interest expense, net of tax		—		(1,462,000	)
Pro forma net income before cumulative effect of a change in accounting principle				6,209,000		4,005,000
Cumulative effect of a change in accounting principle, net of $843,000 income tax benefit				—		(8,973,000	)
Pro forma net income (loss)			$	6,209,000		(4,968,000	)
Pro forma basic income (loss) per share:
	Pro forma net income before cumulative effect of a change in accounting principle		$	0.65		0.42
	Cumulative effect of a change in accounting principle			—		(0.95	)
	Pro forma net income (loss) per share			0.65		(0.53	)
Pro forma diluted income (loss) per share:
	Pro forma net income before cumulative effect of a change in accounting principle		$	0.54		0.35
	Cumulative effect of a change in accounting principle			—		(0.79	)
	Pro forma net income (loss) per share			0.54		(0.44	)

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

The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto, as well as our Annual Report on Form 10-K for the year ended December 31, 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.

Three Months Ended June 30, 2003 Compared to Three Months Ended June 30, 2002

The Company operates its business in four distinct operating segments: Teva, Simple and Ugg wholesale divisions and its newly acquired catalog and internet retailing business.

Total net sales increased by $1,973,000, or 8.8%, to $24,342,000 from $22,369,000 for the comparable three months ended June 30, 2002. Aggregate wholesale sales of Teva increased 8.5% to $21,129,000 for the three months ended June 30, 2003 from $19,478,000 for the three months ended June 30, 2002. Teva wholesale sales represented 86.8% and 87.1% of net sales in the three months ended June 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, partially due to the favorable impact of the strong Euro. Net wholesale sales of footwear under the Simple product line decreased 47.9% to $1,340,000 from $2,574,000 for the three months ended June 30, 2002 caused by a variety of factors including the current retail environment, competition in the casual footwear market and weakness in the brand’s spring men’s business. Net wholesale sales of Ugg increased 8.5% to $344,000 for the three months ended June 30, 2002 from $317,000 for the three months ended June 30, 2002. Due to the highly seasonal nature of Ugg’s business, the second quarter is generally a low-volume quarter for Ugg’s sales. As part of the Company’s acquisition of Teva in November 2002, the Company acquired the catalog and internet retailing footwear business, which sells the Company’s Teva, Simple and Ugg brands directly to consumers. For the second quarter of 2003, net sales of the catalog and internet retailing business aggregated $1,529,000, including retail sales of Teva of $1,310,000, Simple of $124,000, and Ugg of $95,000. Overall, international sales for all of the Company’s products increased 125.4% to $3,021,000 from $1,340,000, representing 12.4% of net sales in 2003 and 6.0% in 2002, reflecting an increase in the number of pairs shipped internationally during the quarter as well as increased sales resulting from the foreign currency impact of the stronger Euro. The volume of footwear sold worldwide increased 4.5% to 1,123,000 pairs during the three months ended June 30, 2003 from 1,075,000 pairs during the three months ended June 30, 2002, for the reasons discussed above.

The weighted-average wholesale price per pair sold during the three months ended June 30, 2003 increased 0.7% to $20.59 from $20.44 for the three months ended June 30, 2002 due to several offsetting factors. The slight increase was attributed to increased European selling prices resulting from the strength of the Euro (approximately $400,000) and a decrease in the volume of closeout sales. These factors were partially offset by the increased proportion of international sales, which generally have lower selling prices than domestic sales, the introduction of several new styles at lower price points to facilitate market penetration

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and increased sales of slides and thongs, which generally have lower average selling prices than the Company’s other products.

Cost of sales increased by $212,000, or 1.7%, to $12,510,000 for the three months ended June 30, 2003, compared with $12,298,000 for the three months ended June 30, 2002. Gross profit increased by $1,761,000, or 17.5%, to $11,832,000 for the three months ended June 30, 2003 from $10,071,000 for the three months ended June 30, 2002 while gross margin increased to 48.6% from 45.0%. This was largely due to above average margins at the newly acquired internet and catalog retail sales operation, the favorable impact of the strong Euro of approximately $400,000, and a reduced impact of closeout sales during the period. This was partially offset by an increase in inventory write-downs during the quarter.

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 June 30, 2003, the Company had a net increase in the reserve for write-downs for inventory obsolescence of approximately $214,000, reflecting increased Teva write-downs on certain styles of its remaining fall 2002 inventory and increased write-downs for Simple caused, in part, by the recent slowdown in sales of this brand. During the three months ended June 30, 2002, the Company had a net decrease in the reserve for inventory obsolescence of approximately $251,000, primarily due to the sale of domestic inventory of Teva and Simple product, for which a write-down had previously been recorded.

Selling, general and administrative expenses decreased by $1,813,000, or 20.2%, to $7,154,000 for the three months ended June 30, 2003, compared with $8,967,000 for the three months ended June 30, 2002, and decreased as a percentage of net sales to 29.4% in 2003 from 40.1% in 2002. The decrease was due to a variety of factors including the favorable impact of the recent Teva acquisition, which eliminated $1,287,000 of Teva royalties and $236,000 of Teva license cost amortization. In addition, selling, general and administrative expenses decreased as a result of the $500,000 favorable resolution of the anti-dumping duties matter and a $533,000 decrease in bad debt expense. These decreases were partially offset by a $132,000 increase in sales commissions on the increased sales levels, increased marketing expenditures of $136,000 and the addition of the operating costs of the newly acquired Internet and catalog retailing business of $312,000.

Income from operations for the Teva wholesale division was $7,025,000 for the three months ended June 30, 2003 compared to $4,772,000 for three months ended June 30, 2002. The increase was largely due to the $1,651,000 increase in sales, increased gross margin including the favorable impact of the strength of the Euro and the elimination of $1,523,000 of Teva royalty expense and related license cost amortization. The Simple wholesale division experienced a loss from operations of $316,000 for the three months ended June 30, 2003 compared to income from operations of $199,000 for the three months ended June 30, 2002. The decrease was primarily due to the $1,234,000 decrease in net sales and increases in marketing costs and inventory write-downs during the period. The Ugg wholesale division experienced income from operations of $124,000 for the three months ended June 30, 2003 compared to a loss from operations of $559,000 for the three months ended June 30, 2002 largely due to the decrease in bad debt expense of $477,000 and an increase in sales. Income from operations of the Catalog/Internet retailing business acquired as part of the Teva acquisition was $372,000 in 2003, representing the operating earnings attributed to this newly acquired operating segment.

Net interest expense was $1,334,000 for the three months ended June 30, 2003 compared with net interest income of $10,000 for the three months ended June 30, 2002, primarily due to the Company’s significantly increased borrowings in order to finance the purchase of Teva in 2002. In addition, in connection with the early repayment of $2,000,000 of subordinated debt during the quarter ended June 30, 2003, the Company

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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 period.

For the three months ended June 30, 2003, income tax expense was $1,337,000, representing an effective income tax rate of 40.0%. For the three months ended June 30, 2002, income tax expense was $461,000, representing an effective income tax rate of 41.8%. 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 $2,006,000, or $0.17 per diluted share, for the three months ended June 30, 2003 versus net income of $642,000, or $0.07 per diluted share for the three months ended June 30, 2002.

Six Months Ended June 30, 2003 Compared to Six Months Ended June 30, 2002

Total net sales increased by $4,816,000, or 8.7%, to $60,444,000 from the comparable six months ended June 30, 2002 of $55,628,000. Aggregate wholesale sales of Teva increased to $52,218,000 for the six months ended June 30, 2003 from $48,737,000 for the six months ended June 30, 2002, a 7.1% increase. Teva wholesale sales represented 86.4% and 87.6% of net sales in the six months ended June 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 34.4% to $4,052,000 from $6,175,000 for the six months ended June 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 and weakness in the brand’s spring men’s business. Net wholesale sales of Ugg increased 115.2% to $1,541,000 for the six months ended June 30, 2002 from $716,000 for the six months ended June 30, 2002. While the first half of the year is generally a seasonally low volume period for Ugg sales, demand continued beyond the historically strong holiday selling season this year, fueled in part by heightened consumer awareness of the brand, increased celebrity exposure, continued brand strength and increased product availability. As part of the Company’s acquisition of Teva in November 2002, the Company acquired the catalog and internet retailing footwear business, which sells the Company’s Teva, Simple and Ugg brands directly to consumers. For the first six months of 2003, net sales of the catalog and internet retailing business aggregated $2,633,000, including retail sales of Teva of $1,921,000, Simple of $234,000, and Ugg of $478,000. Overall, international sales for all of the Company’s products decreased slightly to $13,640,000 from $13,883,000, representing 22.6% of net sales in 2003 and 25.0% in 2002. The volume of footwear sold worldwide increased 10.9% to 2,923,000 pairs during the six months ended June 30, 2003 from 2,635,000 pairs during the six months ended June 30, 2002, for the reasons discussed above.

The weighted-average wholesale price per pair sold during the six months ended June 30, 2003 decreased 3.3% to $20.15 from $20.84 for the six months ended June 30, 2002. The decrease was primarily due to an increase in the volume of discounted sales during the six months ended June 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

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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 $1,929,000, or 6.3%, to $32,372,000 for the six months ended June 30, 2003, compared with $30,443,000 for the six months ended June 30, 2002. Gross profit increased by $2,887,000, or 11.5%, to $28,072,000 for the six months ended June 30, 2003 from $25,185,000 for the six months ended June 30, 2002 while gross margin increased to 46.4% from 45.3%. This increase was largely due to above average margins at the newly acquired internet and catalog retail sales operation and the favorable impact of the strong Euro. This was partially offset by an increase in the volume of discounted sales 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 six months ended June 30, 2003, the Company had a net decrease in the reserve for write-downs for inventory obsolescence of approximately $51,000, primarily due to the sale of domestic inventory for Teva and Simple product for which a write-down had previously been recorded, partially offset by write-downs of certain remaining Teva fall 2002 styles and write-downs for Simple to address certain slow-moving styles. During the six months ended June 30, 2002, the Company had a net decrease in the reserve for inventory obsolescence of approximately $110,000, primarily due to the sale of domestic inventory of Teva and Simple product for which a write-down had previously been recorded, 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 $5,060,000, or 24.8%, to $15,307,000 for the six months ended June 30, 2003, compared with $20,367,000 for the six months ended June 30, 2002, and decreased as a percentage of net sales to 25.3% in 2003 from 36.6% in 2002. The decrease was primarily due to the elimination of $3,847,000 of Teva royalty expense and related license costs as a result of the recent Teva acquisition. The Company also had a $943,000 reduction in the marketing costs for the first half of the year, a portion of which occurred as the timing of marketing programs is expected to occur later in the year in 2003 than in 2002. In addition, for the first six months of 2003 the Company experienced an $857,000 reduction in bad debt expense compared to that of the year ago period and a $500,000 reduction in expenses related to the reversal of the accrual for anti-dumping duties based on the favorable final ruling received during the period. These decreases were partially offset by the addition of $708,000 of operating expenses related to newly acquired catalog and internet retailing business and a $402,000 increase in sales commission expense on the increased sales levels.

Income from operations for the Teva wholesale division was $18,030,000 for the six months ended June 30, 2003 compared to $11,513,000 for six months ended June 30, 2002. The increase was largely due to a $3,481,000 increase in sales, the elimination of $3,847,000 of Teva royalty expense and related license costs, a decrease in marketing costs of $636,000 and reduced bad debt expense of $127,000. The Simple wholesale division experienced a loss from operations of $181,000 for the six months ended June 30, 2003 compared to income from operations of $633,000 for the six months ended June 30, 2002. The decrease was primarily due to a $2,123,000 decrease in net sales and a lower gross margin, due in part to an increase in inventory write-downs of $176,000. This was partially offset by a $228,000 decrease in marketing costs. The Ugg wholesale division experienced a loss from operations of $33,000 for the six months ended June 30, 2003 compared to a loss from operations of $805,000 for the six months ended June 30, 2002 largely due to the $825,000 increase in sales, a decrease in bad debt expense of $513,000 and a decrease in marketing costs of $79,000, partially offset by the non-recurrence of a $300,000 supplier rebate received in 2002 and an increase in sales commissions expense of $99,000 due to the higher sales levels. Income from

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operations of the Catalog/Internet retailing business acquired as part of the Teva acquisition was $485,000 in 2003, representing the operating earnings attributed to this newly acquired operating segment.

Net interest expense was $2,431,000 for the six months ended June 30, 2003 compared with net interest income of $27,000 for the six months ended June 30, 2002, primarily due to the Company’s significantly increased borrowings in order to finance the purchase of Teva in 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 six months ended June 30, 2003.

For the six months ended June 30, 2003, income tax expense was $4,139,000, representing an effective income tax rate of 40.0%. For the six months ended June 30, 2002, income tax expense was $2,013,000, representing an effective income tax rate of 41.8%. 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.

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 six months ended June 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 six months ended June 30, 2002.

The Company experienced net income of $6,209,000, or $0.54 per diluted share, for the six months ended June 30, 2003. For the six months ended June 30, 2002, the Company experienced net income before cumulative effect of accounting change of $2,804,000, or $0.29 per diluted share and a net loss after the cumulative effect of accounting change of $6,169,000, or $0.64 per diluted share.

Outlook

This “Outlook” section, the discussion in the first and last paragraphs 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 regarding the Company’s liquidity, 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 August 8, 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.

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Currently, the Company anticipates sales for fiscal year 2003 to range from $104 million to $108 million and expects diluted earnings per share to range from $0.57 to $0.59. The Company currently expects third quarter of 2003 sales to range from $19 million to $20 million and diluted loss per share to range from ($0.04) to ($0.05) per share. The Company expects its fiscal 2003 Teva sales to be $70 million to $72 million, Simple sales to be $9 million to $10 million and Ugg sales to be $25 million to $26 million.

All of the Company’s forward-looking statements represent the Company’s current analysis of trends and information. Actual results could vary as a result of numerous factors. For example, the Company’s results are directly dependent 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 is also dependent 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.

Liquidity and Capital Resources

The Company’s liquidity consists primarily of cash, trade accounts receivable, inventories and a revolving credit facility. At June 30, 2003, working capital was $24,409,000 including $2,212,000 of cash and cash equivalents. Cash provided by operating activities aggregated $4,761,000 for the six months ended June 30, 2003. Trade accounts receivable decreased 24.1% since December 31, 2002 due to normal seasonality and improved collections. Inventories increased $5.9 million, or 34.5%, since December 31, 2002, reflecting an increase for Ugg of $8.2 million, a decrease for Teva of $1.3 million and a decrease for Simple of $1.0 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 Ugg sales in general, and more particularly, the further expansion of Ugg business in the third quarter. In addition, the Company anticipates an increase in Teva’s fall closed toe shoe business while at the same time it appears that retailers are carrying Teva’s basic sport sandal models year round. As a result, the Company has brought in its fall inventories earlier in the year and has increased the depth of inventory for the fall season. During the six months ended June 30, 2003, the Company used cash flows from operations of approximately $4.8 million to repay approximately $6.6 million of long-term debt and decrease its cash balance by approximately $1.7 million.

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The Company has a revolving credit facility (the “Facility”), which expires June 1, 2005 and provides for a maximum availability of $20,000,000 from November 1 through April 30 and $18,000,000 from May 1 through October 31 of each year, 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 June 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 June 30, 2003, the Company had outstanding borrowings under the Facility of $2,162,000, no foreign currency reserves for outstanding forward contracts and no outstanding letters of credit. The Company had credit availability under the Facility of $11,483,000 at June 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 three and six-month periods ended June 30, 2003. By replacing this debt with a lower interest-bearing advance on its line of credit, the Company estimates it has eliminated annual interest costs of approximately $200,000 to $250,000 for each of the next five years.

Capital expenditures totaled $253,000 for the six months ended June 30, 2003. The Company’s capital expenditures related primarily to the expansion and new racking at the distribution center, the replacement of certain computer equipment 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 $800,000. 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 $1,000,000 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 June 30, 2003, approximately $1,800,000 was outstanding under the officer’s loan from the bank, of which $1,000,000 was guaranteed by the Company. The fair value of the guarantee was immaterial at June 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 June 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 related borrowings to repurchase common stock. Under this program, the Company repurchased

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approximately 973,000 shares for aggregate cash consideration of approximately $7,499,000 prior to 1999. No shares have been repurchased since that time. At June 30, 2003, approximately 1,227,000 shares remain available for repurchase under the program.

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 to changes in consumer preferences, its ability to collect its receivables in a timely manner, its ability to effectively manage its inventory, 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 others.

Seasonality

Financial results for the outdoor and footwear industries are generally seasonal. Sales of each of the Company’s different product lines have historically been higher in different seasons with the highest percentage of Teva sales occurring in the first and second quarter of each year and the highest percentage of Ugg sales occurring in the fourth quarter, while the quarter with the highest percentage of annual sales for Simple has varied from year to year.

Historically, the Company 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.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Derivative Instruments

A substantial portion of the Company’s European sales for the year ending December 31, 2003 is denominated in Euros. The majority of these sales occur in the first quarter of the year, with lesser amounts in the remainder of the year. To reduce its risk to foreign currency fluctuations between the U.S. dollar and the Euro, the Company enters into forward contracts from time to time. As of June 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 June 30, 2003, the Company had outstanding borrowings aggregating $7,119,000 under these two credit facilities. A 1% increase in interest rates on current borrowings would have a $71,000 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.

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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 three and six months ended June 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.

On May 19, 2003, the Company held its Annual Meeting of Stockholders. At the meeting, John M. Gibbons and Daniel L. Terheggen were each re-elected as Class I Directors until the Annual Meeting of Stockholders to be held in 2006, until such director’s successor has been duly elected and qualified or until such director has otherwise ceased to serve as a director. For John M. Gibbons, 8,283,032 votes were cast in favor and 667,532 votes were withheld. For Daniel L. Terheggen, 8,283,832 votes were cast in favor and 666,732 votes were withheld. There were no broker non-votes. The preferred stock does not vote on the election of or removal of directors, other than the director elected by the holders of the preferred stock pursuant to Section 2(b) of the Company’s Preferred Stock Certificate of Designation.

The stockholders also ratified the selection of KPMG LLP as the Company’s independent auditors. Of the common stock votes, 8,901,564 votes were cast in favor of the ratification; 4,700 were voted against; and 8,500 abstained. There were 35,800 broker non-votes. Of the preferred stock votes, 1,375,000 votes (100% of the votes) were cast in favor of the ratification.

Item 5. Other Information. Not applicable

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

(a) Exhibits.

31	Certification of Chief Executive Officer and Chief Financial Officer, 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
10.1	Amendment Number One to Amended and Restated Revolving Credit Agreement dated April 29, 2003
10.2	Amendment Number Two to Amended and Restated Revolving Credit Agreement dated June 27, 2003
10.3	Amendment Number One to Senior Subordination Agreement dated April 29, 2003
10.4	Amendment Number Two to Senior Subordination Agreement dated June 27, 2003

(b) Reports on Form 8-K. None.

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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: August 8, 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)

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