Deckers Outdoor Corporation

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes o No x

Aggregate market value of the Common Stock of the registrant held by non-affiliates of the registrant on June 30, 2003 based on the closing price of the Common Stock on the NASDAQ National Market System on such date was $37,438,285.

The number of shares of the registrant’s Common Stock outstanding at March 24, 2004 was 9,787,541.

Portions of registrant’s definitive proxy statement relating to registrant’s 2004 annual meeting of shareholders, which will be filed pursuant to Regulation 14A within 120 days after the end of registrant’s fiscal year ended December 31, 2003, are incorporated by reference in Part III of this Form 10-K.

We are a leading designer, producer and brand manager of innovative, high-quality footwear and the category creator in the sport sandal and luxury sheepskin footwear segments. Our footwear is distinctive and appeals broadly to men, women and children. We sell our products through quality domestic retailers and international distributors and directly to end-user consumers through our websites and catalogs. Our primary objective is to build our footwear lines into global lifestyle brands with market leadership positions.

Teva. Teva is our outdoor lifestyle brand and the category creator of the outdoor sport sandal segment. Teva was created in the 1980’s to serve the demanding footwear needs of the professional river guide community, and this authentic outdoor heritage and commitment to function and performance remain core elements of the Teva brand. We have expanded Teva’s sports sandal line to include casual open-toe footwear, as well as hiking boots, trail running shoes, amphibious footwear and other rugged outdoor footwear styles.

UGG. UGG is our luxury brand and the category creator in luxury sheepskin footwear. Our UGG line has enjoyed several years of strong growth and positive consumer receptivity, driven by consistent introductions of new styles, introductions of UGG products in the fall and spring seasons and geographic expansion of distribution. We carefully manage the distribution of our UGG line within high-end specialty and department store retailers in order to best reach our target consumers, preserve UGG’s retail channel positioning and maintain UGG’s position as a mid- to upper-price luxury brand.

Simple. Simple is our moderately priced “anti-brand,” serving the needs of a youthful, irreverent consumer base seeking the comfort of athletic footwear but the styling of more traditional, understated, “back-to-basics” footwear. We have recently revised the Simple line to focus on its successful legacy categories, including sandals, clogs and casual athletic footwear. In addition, Simple enables us to selectively leverage our core footwear design and production competencies in channels of distribution not served by Teva or UGG.

We believe our ability to continue to grow our future sales, earnings and market share has been significantly enhanced through achievement of three key recent initiatives:

Teva Rights Acquisition. From 1985 until November 2002, we sold our Teva products under a licensing arrangement with Teva’s founder, Mark Thatcher. In November 2002, we acquired all of the Teva Rights from Mr. Thatcher and his wholly-owned corporation, Teva Sport Sandals, Inc. The acquisition enabled us to gain ownership of the Teva Internet and catalog business and allowed our brand managers to broaden the Teva line into attractive casual open-toe lines and rugged outdoor closed-toe footwear. This expansion of the Teva product line has increased the appeal of the brand and expanded overall retail placement. The acquisition also enabled us to:


	•	eliminate significant royalties and other license costs;

	•	eliminate product line expansion constraints under our former license agreement;

	•	realize license opportunities for the Teva brand into additional brand-appropriate outdoor categories; and

	•	enhance our ability to recruit and retain key senior management.

Organizational Restructuring. In the last several years, we have reorganized our management infrastructure and developed a decentralized approach that gives our brand managers greater control over product development, marketing, and distribution for their respective brands. This approach strengthens our product development efforts and enables each brand manager to react quickly to important market trends and concentrate on the footwear demands of our customers and consumers. Our brand teams are highly focused on

developing new products and marketing programs that drive strong sales growth but that remain true to each brand’s heritage. As a result, we have generated gross margins in excess of 41.8% in each of the past three years and achieved compound annual sales growth of approximately 15% in this period, while increasing our inventory levels by only 5% over the same period. Our central management team provides important expertise in disciplines common to each of our brands, including sourcing, time-to-market, quality control, credit, information systems technology and overall management of our capital resources.

UGG Repositioning. UGG gained brand recognition in the U.S. beginning in 1979 and was adopted as a favored brand by the California surf community. We acquired UGG in 1995 and have carefully re-positioned the brand as the luxury sheepskin collection sold through high-end retailers. While our sales have grown steadily over the past six years, over the past two years UGG has benefited from significant national media attention and celebrity endorsement through our marketing programs and product seeding activities, further raising the profile of UGG as a luxury sheepskin brand. We intend to maintain UGG’s market positioning by carefully expanding the selection of styles available in order to build consumer interest in our UGG collection. We also remain committed to limiting distribution of UGG through high-end retail channels.

Largely as a result of these three initiatives, our net sales have increased by 22.1%, from $99,107,000 in 2002 to $121,055,000 in 2003 and our income from operations has increased by 480.6% from $3,348,000 in 2002 to $19,438,000 in 2003. For 2003, wholesale shipments of Teva, UGG and Simple represented 60.1%, 28.5% and 6.0% of our total net sales, respectively. Sales of our brands through our Internet and catalog division are incremental to our wholesale shipments and generated 5.4% of total net sales in 2003.

We were co-founded by Doug Otto in 1973 as a domestic manufacturer of sandals. We originally manufactured a single line of sandals under the Deckers’ brand name in a small factory in Carpinteria, California. Since then, we have grown through the development and licensing of proprietary technology, targeted marketing and selective acquisitions. In 1985, we entered into our first licensing agreement for Teva sport sandals with Teva’s founder, Mark Thatcher. In 1986, we developed the Universal Strapping System, establishing Teva as the sport sandal category-creator and generating significant national attention for the Teva brand.

We experienced a period of rapid growth during the late 1980’s and completed our initial public offering in 1993. As our sales grew, we terminated our manufacturing operations in the U.S., Mexico and Costa Rica, and today all of our footwear products are manufactured for us by independent manufacturers in the Far East, Australia and New Zealand. We maintain our own offices in China and Macau to monitor the operations of our Far East manufacturers.

In order to diversify our sales and leverage our product development and sourcing capabilities, we completed the acquisition of Simple from its founder in a series of transactions between 1993 and 1996. In 1995, we acquired UGG from its founders. After our acquisition of UGG, we initiated a re-positioning of the line, focusing on comfort, luxury and premium distribution channels and developing products that appeal to consumers in a variety of climates.

From 1985 until November 2002, we sold our Teva products under a licensing arrangement with Teva’s founder, Mark Thatcher. In November 2002, we acquired all of the Teva Rights from Mr. Thatcher and his wholly owned corporation, Teva Sport Sandals, Inc.

We seek to differentiate our brands by offering diverse lines that emphasize authenticity, functionality, quality and comfort and products tailored to a variety of activities and demographic groups. Key elements of our business strategies are:

Build Leading Global Brands. Our mission is to build niche footwear lines into global brands with market leadership positions. Our Teva and UGG brands began as footwear lines appealing to a narrow core enthusiast market. We have since built these lines into substantial global lifestyle brands with significant

potential for further growth and line extension. Across our brands, our styles remain true to the brands’ heritage but have been selectively extended over time to broaden our appeal to men, women and children seeking high quality, comfortable styles for everyday use. Furthermore, we actively manage our brands to ensure that we reach brand appropriate retail distribution channels. We believe that building our domestic and international brand image is best accomplished through a decentralized management structure that empowers a single brand manager to coordinate all aspects of brand image, from product development to marketing and retail channel management.

Sustain Brand Authenticity. We believe our ability to grow our brands, sustain strong gross margins and maintain strong market share results, in part, from consumer loyalty to the heritage of our brands. We believe Teva consumers are passionate and serious about the outdoors, and our marketing programs feature national advertising in outdoor-oriented media as well as grass roots marketing through sponsorship of outdoor events and professional athletes. These marketing efforts reinforce the river-guide heritage of Teva and Teva’s positioning as a highly technical, performance-oriented footwear leader. Our UGG marketing strategy highlights the brand’s positioning as functional footwear, but also as a premium, luxury collection. UGG is primarily marketed through national print advertising in major women’s magazines and through our retailers and their catalogs and advertising. We promote our Simple brand by emphasizing Simple’s heritage sneaker and clog businesses in marketing targeted to youth-oriented markets in major U.S. cities. In 2004, our key marketing objective for Simple is to reintroduce the brand to the marketplace using a grass roots approach in our marketing and media plan. We will focus our advertising on our “we clog” and “we sneaker” campaigns in alternative weekly publications and other non-mainstream media.

Drive Demand Through Innovation and Technical Leadership. We believe our reputation for innovation and technical leadership distinguishes our Teva and UGG products from those of our competitors and provides us with significant competitive advantages. Our proprietary Universal Strapping System launched Teva’s popularity in the mid-1980’s. Recent technical advances in our Teva footwear include our Liquid Frame Technology and our Wraptor technology, all designed to provide maximum stability, support and comfort under rugged usage. We recently introduced closed-toe footwear, which currently represents approximately 14.1% of Teva’s net sales. We anticipate introducing new styles for fall 2004 that incorporate Vibram® soles and Gore-Tex® fabrics. We continue to develop innovative styles, products and product categories for our UGG collection in order to support UGG’s positioning as a functional lifestyle brand. UGG has benefited from expansion into non-boot casuals and other sheepskin-trimmed footwear, designed to expand our market share in new categories and increase our sales in the fall and spring.

Maintain Efficient Production Process. We believe our product development processes enable us to produce leading edge products on a timely and a cost effective basis. We design our products domestically. We maintain an on-site supervisory office in Pan Yu City, China that serves as a local link to our independent manufacturers in the Far East, enabling us to carefully monitor the production process, from receipt of the design brief to production of interim and final samples and shipment of finished product. We believe this local presence provides greater predictability of material availability, product flow and adherence to final design specifications than we could otherwise achieve through an agency arrangement.

Our growth will depend upon our broadening of the products offered under each brand, expanding domestic and international distribution, licensing our brand names and developing or acquiring new brands. Specifically, we intend to:

Introduce New Categories and Styles under Existing Brands. We intend to increase our sales by developing and introducing additional footwear products under our existing brands that meet our high standards of performance, practicality, authenticity, comfort and quality. We have expanded Teva’s open-toe footwear category by launching new casual styles. We also have introduced several closed-toe lines under the Teva brand, including amphibious footwear, hikers, trail runners and other rugged outdoor footwear. We plan further expansion into the hiking, trail running and rugged outdoor arenas, where the aggregate market is considerably greater than the market size for Teva’s core sport sandals. We have expanded our UGG

collection to incorporate additional styles and fabrications in order to further penetrate the fall, spring and winter seasons. We expect to grow our Simple brand by re-introducing our heritage clog and sneaker categories for both men and women. Simple has introduced “comfy” sandals, leveraging one of our core competencies. We have also introduced suede, fleece-lined footwear under the Simple brand to reach retail distribution not currently offered by UGG.

Expand Domestic Distribution. We believe that we have significant opportunities to increase our sales by expanding domestic distribution of our products. Our Teva brand has generally been distributed through the outdoor specialty and sporting goods retail channels. We have identified the potential for expansion into additional retail channels through the development of special make-up styles for retailers who have limited store overlap with our core specialty outdoor and sporting goods customers. UGG has historically realized a substantial portion of its sales in California. Over the past four years we have experienced increasing demand for UGG distribution outside California, and we expect to capitalize on significant demand in the Midwest and East Coast markets. For Simple, we are repositioning the brand by focusing on our legacy styles in order to re-connect with our consumer base and by broadening the appeal of Simple to new channels of distribution. The legacy products are primarily clogs, athletic-inspired footwear and comfort sandals. We have also introduced a Simple suede, fleece-lined product line to access retail channels that are precluded from selling our UGG product line.

Expand International Distribution. In 2003, our international net sales totaled $22,345,000, representing approximately 18.5% of total net sales. We believe significant opportunities exist to market our products abroad, and we intend to selectively expand their distribution worldwide. We entered into an agency arrangement with a firm in the United Kingdom for the coordination of our sales, distribution, marketing and advertising efforts in the European markets. In addition, in 2003 we entered into an agency agreement with a U.S. firm to coordinate our sales and marketing efforts in Asia.

Pursue Licensing of Brands in Complementary Product Lines. We are pursuing selective licensing of our brand names in product categories beyond footwear. We have signed an agreement with an agency to assist in coordinating the efforts for the licensing of products that complement our trademark protected products. In July 2003, we initiated a domestic Teva licensing program, consisting of U.S. licenses for men’s sportswear, headwear, eyewear and timepieces. We have also signed a license agreement for UGG handbags and related small leather goods and have several UGG related licensing opportunities under consideration, including outerwear and accessories. We are developing additional licensing programs carefully to ensure that licensed goods remain consistent with our brands’ heritage. We have only recently initiated the licensing strategy and, as a result of the lead times required to bring products to market, we have not realized revenue from these licensing initiatives.

Build New Brands. We intend to continue to focus on identifying, developing or acquiring, and building new brands. We have been successful previously in identifying entrepreneurial concepts for innovative, fashionable footwear targeted at niche markets and building these concepts into viable brands utilizing our expertise in product development, production and marketing. We intend to continue to identify and build new brands with the potential for significant future growth.

Teva Sport Sandals and Footwear. “The brand of choice for the new outdoor athlete.” We believe there has been a general shift in consumer preferences and lifestyles to include more outdoor recreational activities, including hiking, trail running, bouldering, kayaking, kite boarding and whitewater river rafting. These consumers typically seek footwear specifically designed with the same quality and high performance attributes they have come to expect from traditional athletic footwear. The first Teva sport sandal was developed in the 1980’s to meet the demanding needs of professional rafting guides navigating the Colorado River and the rugged Grand Canyon terrain. As our core consumers’ pursuits have evolved, we have retained our outdoor heritage while adding new products to our line, including slides, thongs, amphibious footwear, trail running shoes, hiking boots and rugged closed-toe footwear. Our brand remains popular among professional and


	*Originals.* The Originals Series is a collection of sandals and thongs utilizing Teva’s classic rugged architecture. This Series leverages the Teva brand heritage as the inventor of the sport sandal and remains a distinctive choice for both performance-oriented users and casual buyers. Our Originals feature our proprietary Universal Strapping System or Wraptor technology as well as cellular rubber, molded EVA or polyurethane soles and high-quality nylon webbing or leather designed to hold the foot firmly in place. Our U.S. patent on our Universal Strapping System, which we use in most of our Teva sandals, expires in September 2007.

	*Hydro.* The Hydro Series builds upon our legacy as the category leader in whitewater-designed footwear. Hydro consists of sandals and closed-toe amphibious footwear built for high performance and rugged outdoor use. This series includes men’s and women’s sport sandals and other outdoor footwear ideal for professional and amateur outdoor enthusiasts and adventurers. Our Hydro Series incorporates many proprietary technologies including our Wraptor or Liquid Frame technologies as well as quick draining monofilament mesh, specially formulated sticky rubber outsoles designed to adhere to slippery rocks, form fitting neoprene and water-repelling leathers.

	*Terrain.* The Terrain Series is a line of sandals and closed-toe footwear designed with Teva technologies applied to a performance terrain product for use in rugged outdoor environments such as hiking trails and canyons. The Terrain Series includes performance walking sandals and running sandals, as well as hiking boots and trail running shoes. To meet our consumers’ expanded needs and to provide them with the best product possible, we have partnered with many of the world’s leading providers of footwear technology for specialty component materials, including Vibram®, Five Ten® and Gore-Tex®.

	*Nomadic.* Our Nomadic Series represents a collection of leather casual sandals and closed-toe footwear true to Teva’s performance-oriented outdoor heritage but designed for more casual use. The Nomadic Series consists of men’s and women’s leather and suede sandals, closed-toe shoes, slides and clogs featuring rugged, contemporary styles for the traveler and adventurer.

	*Sun and Moon.* Our Sun and Moon Series features fun, youthful and colorful slides and thongs in a variety of materials including waterproof leather, nylon, suede and air mesh. The Sun and Moon Series is designed to leverage our sandal making capabilities and to appeal to fashion-oriented consumers seeking pre-activity and post-activity footwear alternatives that express a casual lifestyle and individual spirit.

	*Kids and Infants.* Our children’s series is an assortment of sandals incorporating a variety of materials including leather, waterproof suede, nylon, neoprene and mesh, as well as slip-on water shoes, hikers and other styles of amphibious footwear. In addition, for the 2004 season, we have expanded our product offering with a variety of styles of sandals and closed-toe footwear, including an assortment of styles that are reflective of our adult offerings.

We intend to continue to build upon Teva’s broad and deep line of performance and casual footwear. Our 2004 line features over 100 different product styles with domestic manufacturer’s suggested retail prices for adult sizes ranging from $20.00 to $120.00.

UGG Footwear. “The premier brand in luxury and comfort sheepskin.” Beginning in 1979, UGG gained brand recognition in the U.S. for sheepskin boots and slippers and was later adopted as a favored brand by the California surf community. We acquired the brand in 1995 and expanded the collection, offering consumers a luxurious and distinctive look in sheepskin fabrications.


	*Classic Collection.* We offer a complete line of sheepskin boots built on the heritage and distinctive look of our first product, the Classic Sheepskin boot. Our classic collection products are distinctive in styling, featuring earth tones and pastels.


	*Ultra Collection.* The Ultra Collection builds upon the heritage of our original Classic. These boots are designed with our comfort system, featuring a multi-surfaced lugged bottom with a heel-cushioning insert that offers enhanced traction, support and comfort. Our Ultra Collection also features a three-part insole designed to provide all-day comfort and support and a reflective barrier that captures body heat to create a natural foot warming mechanism. Our sheepskin products are naturally thermostatic, keeping feet comfortable across a wide range of temperatures.

	*Fall Collection.* This collection features a more modern and refined look with sheepskin combined with smooth leather uppers in distinctive patterns and styles. This collection features a variety of shoes, clogs and boots and provides UGG consumers with the versatility to utilize sheepskin styling for a wider variety of occasions and outfits.

	*Adirondack Collection.* This collection is designed for consumers seeking more rugged styling. The Adirondack line features seam-sealed rugged outsoles and waterproof leathers designed to withstand colder, wetter climates.

	*Fluff Momma Collection.* This is our most playful and distinctive assortment. The Fluff Momma features untrimmed and colored sheepskin fleece exposed on the entire boot.

	*Slipper Collection.* Our popular Slipper Collection builds upon the UGG heritage of foot comfort and warmth.

We have expanded our UGG collection from the Classic Sheepskin boot to a broad sheepskin footwear line for men, women and children in a variety of styles and colors, designed for wear in a variety of climates and occasions. Line expansion strategies have resulted in significantly increased exposure for our UGG collection and have contributed to the growth of UGG’s first, second and third quarter business, in addition to our well developed fourth quarter business. The domestic manufacturer’s suggested retail prices for adult sizes for the UGG line range from $50.00 to $275.00.

Simple Casual Footwear. “The brand of choice for a simple, uncomplicated lifestyle.” The Simple line of casual shoes combines the comfort of athletic footwear construction with the simple, understated styling of “back-to-basics” casual footwear. The line was launched in the early 1990s as an “anti-brand” catering to irreverent 17 to 30 year old consumers unhappy with the trend toward flashy footwear produced by national athletic brands. The brand has expanded to a line of casual clogs, sneakers, sandals and suede, fleece-lined footwear, and remains an important brand for retailers seeking to attract young consumers desiring practical, expressive styling.


	*Sneakers.* Our sneaker line features stylish yet understated footwear designed to be both functional and expressive. Our sneakers feature performance-oriented construction including EVA insoles, non-marking, durable rubber outsoles and performance leather and suede uppers.

	*Clogs.* Building on the heritage of our original clogs, our current clog series features comfortable insoles and fashionable uppers.

	*Sandals.* We offer a wide variety of casual sandals for men and women plus a newly introduced line of fun and colorful sandals designed principally for young female consumers.

	*Suede, Fleece-Lined Boots.* We have introduced a casual line incorporating fleece lining and suede uppers.

We have revised the Simple line in order to return our focus on male and female consumers between the ages of 17 and 30. We have refined the line and added several new styles of clogs, sandals, sneakers and leather casuals to our offerings, including several athletically inspired styles for men and women. We also offer suede, fleece-lined footwear, which enables us to leverage our sheepskin production capabilities and sell this footwear at lower price points than our UGG brand into distribution channels that are precluded from offering our UGG brand. The domestic manufacturer’s suggested retail prices for adult sizes of Simple products range from $30.00 to $88.00.

To capitalize on the strength of our brands, we are pursuing the licensing of our brand names in product categories beyond footwear. As part of this approach, in 2002, we signed agency agreements with BHPC Global Licensing, Inc., our licensing agency, to assist us in identifying license candidates and coordinating the efforts for the licensing of the Teva, UGG and Simple trademarks on products ranging from sportswear and outerwear to bags, packs and other accessories.

In July 2003, we initiated a Teva licensing program with strategic partners, which currently consists of U.S. licenses for men’s sportswear, headwear, eyewear and timepieces. We are selectively developing additional licensing programs to ensure that licensed goods remain consistent with the Teva brand’s heritage. In addition, we have signed a license agreement for UGG handbags and related small leather goods and have several other UGG related licensing opportunities under consideration, including outerwear and accessories.

BHPC is a full-service licensing agency that has substantial experience in product licensing. We pay BHPC a commission on royalty income that we receive. To date, we have not recorded any royalty income or any related commissions expense. BHPC is owned by one of our directors, Daniel L. Terheggen.

Products made under license will be sold primarily through the same retail channels as our footwear product offering. Products sold under license are currently under development and are expected to be sold at retail beginning in the fourth quarter of 2004. Our licensing agreements generally give us the right to terminate the license if specified sales targets are not achieved.

We distribute our products in the U.S. through a dedicated network of approximately 37 independent sales representatives. Our sales representatives are organized geographically and visit retail stores to communicate the features, look and technology of our products. In addition, we have five in-house sales representatives who serve as key account executives for several of our largest customers.

Our sales force is divided into two teams, one for Teva and one for UGG and Simple, as the UGG and Simple brands are generally sold through non-outdoor specialty and non-sporting goods distribution channels and are targeted toward a different customer than our Teva brand. Our sales manager for each brand recruits and manages his or her networks of sales representatives and coordinates sales to national accounts. We believe this approach for the U.S. market maximizes the selling efforts to our national retail account base on a cost-effective basis.

Internationally, we distribute our products through 32 independent distributors. Shipments to Europe are primarily facilitated through third party distribution in the Netherlands. All other international shipments are made directly from our independent manufacturers.

Our principal customers include specialty retailers, selected department stores, outdoor retailers, sporting goods retailers and shoe stores. Our five largest customers accounted for approximately 20.5% of our net sales for 2003, compared to 23.1% for 2002. No single customer accounted for more than 9.0% of our net sales for 2002 or 2003.

Teva. We sell our Teva products primarily through specialty outdoor and sporting goods retailers such as REI, Eastern Mountain Sports, L.L. Bean, Dick’s Sporting Goods and The Sports Authority. We believe this retail channel is the first choice for athletes, enthusiasts and adventurers seeking technical and performance-oriented footwear. Furthermore, we believe that our Teva products are best sold by retailers who appreciate and can fully market the technical attributes of our products to the consumer. We also sell special make-up Teva products in selected retailers in order to reach consumers who are less outdoor-oriented but who seek out our products due to their durability, comfort and fit.

UGG. We sell our UGG products primarily through independent specialty retailers such as Fred Segal, David Z. and Sport Chalet and high-end department stores such as Nordstrom, Marshall Field’s and Neiman Marcus. We believe these retailers support the luxury positioning of our brand and are the destination shopping choice for the consumer who appreciates the fashion and functional elements of our UGG products.

Simple. We market our Simple products primarily to independent specialty retailers such as J. Jill and Steve’s Shoes and selected department stores such as Nordstrom, targeting consumers seeking understated styling and “back-to-basics” looks. Our Simple products are broadly distributed in order to attract our target demographic, men and women between the ages of 17 and 30.

We distribute products sold in the U.S. through our 126,000 square foot distribution center in Ventura, California. The distribution center features an inventory management system that enables us to efficiently pick and pack products for direct shipment to retailers across the country. For certain customers requiring special handling, each shipment is pre-labeled and packed to the retailer’s specifications, enabling the retailer to easily unpack our product and immediately display it on the sales floor. All incoming and outgoing shipments must meet a rigorous quality inspection.

We acquired the Internet and catalog businesses as part of the acquisition of the Teva Rights. The consumer direct business enables us to reach consumers through our Internet business under the Teva.com, UGGs.com, UGGAustralia.com and SimpleShoes.com Internet addresses and through direct mailings. Our mailing list includes approximately 300,000 consumers who have purchased at least once in the past 36 months. We currently average approximately 450 direct orders daily and have recently reorganized our order fulfillment operations from Flagstaff, Arizona to our distribution center in Ventura, California in order to reduce the cost of order cancellation, minimize out of stock positions and further leverage our distribution center occupancy costs. We generally sell our products through our direct channels at the manufacturer’s suggested retail price, enabling us to capture the full retail margin on each direct transaction.

Our brands are generally advertised and promoted through a variety of consumer print advertising campaigns. We benefit from highly visible editorial coverage in both consumer and trade publications. Each brand’s dedicated marketing team works closely with targeted accounts to maximize advertising and promotional effectiveness. We incurred approximately $6,087,000, $7,456,000 and $6,594,000 in advertising, marketing and promotion expenses in 2001, 2002 and 2003, respectively.

Teva. We use several marketing methods to promote the Teva brand, including:


	•	a targeted print advertising campaign;

	•	promotions at a variety of festivals, events and competitions;

	•	sponsorship of local athletes and national athletes such as the Teva Whitewater Team, the Teva U.S. Mountain Running Team and the SOBE Headshock Mountain Bike Team;

	•	discount programs to professional river guides, kayakers, mountain bikers and rock climbers;

	•	product seeding with professional athletes; and

	•	in-store promotions.

We advertise the Teva brand through the placement of print advertisements in leading outdoor magazines such as Backpacker, Outside, National Geographic Adventurer, Hooked on the Outdoors and Paddler. As we have added new product categories to the Teva brand, we have broadened our advertising presence to reach new consumers. To support our introduction of Teva trail running shoes, we advertise in Trail Runner, Runner’s World and Running Times, among other publications. We also advertise in more mainstream publications such as Men’s Journal in order to support our casual footwear lines.

The Teva brand is closely associated with outdoor lifestyle pursuits such as river rafting, kayaking, mountain biking, hiking and trail running. We sponsor outdoor events in the U.S. including the Teva Mountain Games at Vail, the Teva Vail Trail Running Series, the Santa Cruz Surf Kayak Festival in Santa Cruz, California, the Telluride Bluegrass Festival in Telluride, Colorado and the Reggae on the River event in Garberville, California, among others. We believe our sponsorship of these events further links our Teva brand

with its outdoor heritage and generates increased product exposure and brand awareness. Internationally, we sponsor outdoor events in France, Switzerland and Italy in order to increase our brand visibility to the core European outdoor consumer.

We sponsor some of the world’s best male and female professional and amateur athletes across several sports. Our Teva promotional team attends events across the U.S. in dedicated, state-of-the-art promotional vehicles prominently featuring our Teva logo. The promotions team showcases Teva products at events and provides consumers with the opportunity to see and sample our latest styles. We recently initiated a partnership with Volkswagen whereby the Teva technical representatives are outfitted in Teva branded Volkswagen Eurovans and Touaregs for travels across the U.S. We believe by outfitting and sponsoring these highly visible athletes and teams, we create brand and product awareness among our targeted consumers at a relatively low cost.

UGG. We seek to build upon the success of our UGG national print advertising campaign. We currently advertise in upscale national magazines such as Vogue, Elle, and O Magazine. We believe such advertising is an effective means to target our intended consumers and to convey the high quality and luxurious appeal of UGG products. We also benefit from editorial coverage of the UGG product. Articles have appeared in such magazines as Glamour, InStyle, Cosmopolitan, Marie Claire, People, US Weekly, Maxim, Shape, Self, O Magazine and Real Simple. In 2003, UGG was awarded “Brand of the Year” by Footwear News, a leading industry trade publication.

We also actively seek to place UGG products at selected events. During the 2002 Winter Olympic Games we outfitted all of the children in the Children of the Light performance with UGG boots. During the Medal Ceremonies, Olympic staff presenting medals to the Olympic athletes also wore UGG boots. We believe this product placement further strengthened the consumer’s image of UGG products as high quality, luxurious sheepskin goods well-suited for use in cold weather.

We also have improved visibility of the UGG brand through placement of the product in selected television shows and feature films. UGGs have appeared on numerous shows, including Sex and the City, Judging Amy, The King of Queens, Still Standing, Will and Grace, Cedric the Entertainer Presents, Dawson’s Creek, Everwood, Friends and Saturday Night Live. Our marketing efforts have also resulted in UGG product appearances in the following recent and upcoming feature films: Eternal Sunshine of the Spotless Mind starring Kate Winslet and Jim Carrey, Haunted Mansion starring Eddie Murphy, Raising Helen starring Kate Hudson, Surviving Christmas starring Ben Affleck and Christina Applegate and Wicker Park starring Josh Hartnett. In addition, UGG has been embraced by Hollywood celebrities, who are often seen and photographed in UGG boots. This celebrity exposure for UGG has been the subject of recent publicity including articles in US Weekly, USA Today, People and People.com. UGG boots have been a featured item on the Oprah Winfrey gift show in 2000 and 2003. We believe our targeted consumers identify with celebrities and that greater exposure further heightens awareness of the brand and stimulates sales.

Simple. The Simple consumer identifies with a certain irreverent culture, and we seek to reach that consumer through a focused grassroots marketing approach that will introduce the brand to influential communities around the country. These marketing efforts will focus on the following major cities: Los Angeles, San Francisco, New York City, Chicago, Boulder, Austin and Nashville. In support of our grassroots initiatives, we will focus on advertising in alternative weekly publications, which will provide us with the opportunity to reach a large number of people through a cost efficient, non-mainstream medium. Publications will include New York City’s Time Out, Los Angeles Weekly, San Francisco Bay Guardian, New City (Chicago), Boulder Weekly, Nashville Scene and Austin Insite. We will identify our key customers in these advertisements to drive store traffic.

Simple will continue to work with its public relations agency to get editorial placement of key styles in youth and trend magazines, television shows, independent films and with cutting-edge influential artists and musicians. Our efforts have resulted in publication appearances in Teen People, Maxim, Nylon, Lucky and Surfing Girl, and television appearances on VH1 and MTV.

The design and product development staff for each of our brands creates and introduces new innovative footwear products that combine our standards of high quality, comfort and functionality. The design function for all of our brands is performed by a combination of our internal design and development staff plus outside design firms. By introducing outside firms to the design process, we believe we are able to review a variety of different design perspectives on a cost-efficient basis and anticipate color and style trends more quickly.

To ensure that Teva’s high performance technical products continue to satisfy the requirements of our historical consumer base of performance-oriented “core enthusiasts,” our design staff solicits comments and feedback from our Team Teva whitewater athletes, the Teva U.S. Mountain Running Team and other professional outdoorsmen, as well as several of our retailers, including REI, Eastern Mountain Sports, Galyan’s and L.L. Bean. We add new innovations, components and styles to our product line regularly based on their input. We recently designed and introduced a new line of trail runner shoes incorporating our patented Liquid Frame Technology, a technology designed to provide a precise running fit based on input from our trail running team. We have also incorporated our proprietary Wraptor technology into performance running sandals, an assortment of hikers and certain styles of our high performance guide sport sandals specifically targeted at professional outdoorsmen and adventurers. In addition, for added traction and durability, we have incorporated various materials in our Teva sandals, including Spider Rubber — a sticky, non-slip rubber outsole material for use across wet and dry terrain, Traction Rubber — a highly durable and abrasion resistant material designed specifically for the extra rigors of land use, and River Rubber — a non-slip material designed to offer superior grip on smooth wet surfaces such as rocks, fiberglass and raft rubber.

Our UGG and Simple products are designed to appeal to consumers seeking our distinctive and innovative styling. We strive to be a leader in product uniqueness and appearance by regularly updating our UGG and Simple lines, which also generates further awareness and interest in the UGG and Simple collections. We believe our ability to incorporate up-to-date styles without deviating from UGG’s classic look, combined with performance-oriented features consumers have come to expect, results in continued enthusiasm for our brand in the marketplace.

In order to ensure quality, consistency and efficiency in our design and product development process, we continually evaluate the availability and cost of raw materials, the capabilities and capacity of our independent contract manufacturers and the target retail price of new models and lines. The design and development staff works closely with brand management to develop new styles of footwear for their various product lines. We develop detailed drawings and prototypes of our new products to aid in the conceptualization and to ensure our contemplated new products meet the standards for innovation and performance our consumers demand. Throughout the development process, members of the design staff coordinate internally and with our domestic and overseas product development, manufacturing and sourcing personnel toward a common goal of developing and producing a high quality product to be delivered on a timely basis.

We are not involved in the direct manufacture of footwear. We outsource the manufacturing of our Teva and Simple footwear and a portion of our UGG footwear to independent manufacturers in the Far East. We also outsource the manufacturing of the remaining UGG footwear to independent manufacturers in Australia and New Zealand. We have no long-term contracts with our manufacturers. As we grow, we expect to continue to rely exclusively on independent manufacturers for our sourcing needs.

The production of footwear by our independent manufacturers is performed in accordance with our detailed specifications and is subject to our quality control standards. To ensure the production of high quality products, many of the materials and components used in production are purchased from independent suppliers designated by us. Excluding sheepskin, we believe that substantially all the various raw materials and components used in the manufacture of the footwear, including rubber, leather and nylon webbing are generally available from multiple sources at competitive prices. We outsource our manufacturing requirements on the basis of individual purchase orders rather than maintaining long-term purchase commitments with our manufacturers.

At our direction, our manufacturers currently purchase the majority of our sheepskin used in our products from two tanneries in New Zealand and China. We maintain a constant dialog with the tanneries to monitor the supply of sufficient high quality sheepskin available for our UGG footwear production. To ensure adequate supplies for our manufacturers, we forecast our usage of top grade sheepskin one year in advance at a forward price. We believe supplies are sufficient to meet our needs in the near future but we continue to search for alternate suppliers in order to accommodate any unexpected future growth.

We have instituted pre-production and post-production inspections to meet or exceed the high quality demanded by consumers of our products. Our quality assurance program includes on-site inspectors at our independent manufacturers who oversee the production process and perform quality assurance inspections. We also inspect our products upon arrival at our U.S. distribution center.

We now hold 16 U.S. patents, two Australian patents and one patent in each of New Zealand, China, South Korea, Germany, France, Japan and the United Kingdom for Teva footwear. In addition, we have pending patent applications in Australia, Canada, China, Hong Kong, Mexico and the U.S. Our U.S. patent for the Teva Universal Strapping System, which is used in most of our Teva sandals, expires in 2007. As a result of the expiration of the applicable period during which foreign patent applications were required to have been filed by the former licensor, we do not and cannot hold certain patent rights for Teva footwear in certain countries. We also currently hold Teva trademark registrations in the U.S. and in many other countries, including France, Germany, the United Kingdom, Japan and Australia. We regard our proprietary rights as valuable assets and vigorously protect such rights against infringement by third parties. Prior to the Teva Rights acquisition, Mark Thatcher successfully enforced his patent and trademark rights in all 20 concluded lawsuits brought against such third parties.

We own the UGG and Simple trademarks and have applied for or received registrations for them in the U.S. and in many foreign countries. We have selectively registered style category names and marketing slogans. In addition, we hold two design patents for our Simple footwear products.

Historically, we have encouraged our customers to place, and we have received, a significant portion of orders as pre-season orders, generally four to eight months prior to shipment date. We provide customers with incentives to participate in such pre-season programs to enable us to better plan our production schedule, inventory and shipping needs. Unfilled customer orders as of any date, which we refer to as backlog, represent orders scheduled to be shipped at a future date and do not represent firm orders. The backlog as of a particular date is affected by a number of factors, including seasonality and the scheduling of manufacture and shipment of products as well as variations in the quarter to quarter and year to year preseason incentive program. The mix of future and immediate delivery orders can vary significantly from quarter to quarter and year to year. As a result, comparisons of the backlog from period to period may be misleading.

The casual, outdoor, athletic and fashion footwear markets are highly competitive. We compete with numerous domestic and foreign footwear designers, manufacturers and marketers. Our Teva footwear line primarily competes with Nike, adidas-Salomon, Timberland, Merrell and Columbia Sportswear. Our UGG footwear line primarily competes with Merrell, Acorn, Aussie Dogs, LB Evans and Timberland, as well as retailers’ private label footwear. In addition, due to the popularity of our UGG products, we face increasing competition from a significant number of competitors selling “knock-off” products. Our Simple footwear line primarily competes with Steve Madden, Dr. Marten, Camper, Kenneth Cole, Skechers, Diesel, Guess? and Puma. Some of our competitors are significantly larger and have significantly greater resources than we do.

Our three footwear lines compete primarily on the basis of brand recognition and authenticity, product quality and design, functionality and performance, fashion appeal and price. Our ability to successfully compete depends on our ability to:


	•	shape and stimulate consumer tastes and preferences by offering innovative, attractive and exciting products;

	•	anticipate and respond to changing consumer demands in a timely manner;

	•	maintain brand authenticity;

	•	develop high quality products that appeal to consumers;

	•	appropriately price our products;

	•	provide strong and effective marketing support; and

	•	ensure product availability.

We believe we are particularly well positioned to compete in the footwear industry. Our diversified portfolio of footwear brands and products allows us to operate a business that does not depend on any one demographic group, merchandise preference or product trend. We have developed a portfolio of brands that appeals to a broad spectrum of consumers. We continually look to acquire or develop more footwear brands to complement our existing portfolio and grow our existing consumer base.

At December 31, 2003, we employed approximately 134 full-time employees in our U.S. facilities and 29 full-time employees located in China and Macau, none of whom is represented by a union. We believe our relationships with our employees are good.

We lease, rather than own, all of our facilities. Our corporate headquarters is located in Goleta, California. We have a distribution center in Ventura, California, and our Internet and catalog operations are located in Flagstaff, Arizona. We also have small offices in Macau and in China to oversee the quality and manufacturing standards of our products. We have no manufacturing facilities since all of our products are manufactured by independent manufacturers in the Far East, Australia and New Zealand. All of our facilities are leased from unrelated parties. We consider our facilities to be suitable for our needs.

The following table reflects the location, use and approximate size of our significant real properties:

We are involved in routine litigation arising in the ordinary course of business. Such routine matters, if decided adversely to us, would not, in the opinion of management, have a material adverse effect on our financial condition or results of operations. Additionally, we have many pending disputes in the U.S. Patent and Trademark Office, foreign trademark offices and U.S. federal and foreign courts regarding unauthorized

use or registration of our Teva, UGG and Simple trademarks. We also are aware of many instances throughout the world in which a third party is using our UGG trademark within its Internet domain name, and we have discovered and are investigating several manufacturers and distributors of counterfeit Teva and UGG products. We have contacted a majority of these unauthorized users and counterfeiters and in some instances may have to escalate the enforcement of our rights by filing suit against the unauthorized users and counterfeiters. Any decision or settlement in any of these matters that allowed a third party to continue to use our Teva, UGG or Simple trademarks or a domain name with our UGG trademark in connection with the sale of products similar to our products or to continue to manufacture or distribute counterfeit products could have an adverse effect on our sales and on our intellectual property, which could have a material adverse effect on our results of operations and financial condition.

We were recently notified by a governmental agency that we have improperly shipped certain water repellant and a cleaning solution for our footwear manufactured by one of our suppliers that is listed as a hazardous material in federal regulations. We are reporting to the agency directly and have discontinued shipping the product. The agency might assert sanctions against us which could range from a nominal amount to a larger amount which might have a material adverse effect on our results of operations and financial condition.

Our common stock is traded on the Nasdaq National Market under the symbol “DECK.” The following table shows the range of low and high closing sale prices per share of our common stock as reported by the Nasdaq National Market for the periods indicated.

As of March 1, 2004, there were approximately 132 record holders of our common stock.

We have not declared or paid any cash dividends on our common stock since our inception. We currently anticipate that we will retain all of our earnings for the continued development and expansion of our business and do not anticipate declaring or paying any cash dividends in the foreseeable future. Moreover, our debt facilities contain covenants expressly prohibiting us from paying cash dividends.

We derived the following selected consolidated financial data from our consolidated financial statements, which have been audited by KPMG LLP, independent auditors. Historical results are not necessarily indicative of the results to be expected in the future. You should read the following consolidated financial information together with our consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained or incorporated by reference herein.


⁽¹⁾	The litigation costs relate to a lawsuit filed against us in Montana in 1995 which we settled and paid in full in the fourth quarter of 2002.

⁽²⁾	Our adoption of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, on January 1, 2002 resulted in a goodwill impairment charge of $8,973,000 (net of the related income tax benefit of $843,000), or $0.92 per diluted share, during 2002.

This report and the information incorporated by reference in this report contain forward-looking statements. We sometimes use words such as “anticipate,” “believe,” “continue,” “estimate,” “expect,” “intend,” “may,” “project,” “will” and similar expressions, as they relate to us, our management and our industry, to identify forward-looking statements. Forward-looking statements relate to our expectations, beliefs, plans, strategies, prospects, future performance, anticipated trends and other future events. Specifically, this report and the information incorporated by reference in this report contain forward-looking statements relating to, among other things:


	•	our business, growth, operating and financing strategies;

	•	our product mix;

	•	the success of new products;

	•	the incremental earnings and benefits of the Teva acquisition;

	•	our licensing strategy;

	•	the impact of seasonality on our operations;

	•	expectations regarding our net sales and earnings growth;

	•	expectations regarding our liquidity;

	•	our future financing plans; and

	•	trends affecting our financial condition or results of operations.

We have based our forward-looking statements largely on our current expectations and projections about future events and financial trends affecting our business. Actual results may differ materially. Some of the risks, uncertainties and assumptions that may cause actual results to differ from these forward-looking statements are described in “Risk Factors.” In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this report and the information incorporated by reference in this report might not happen.

You should read this report, the documents that we filed as exhibits to this report and the documents that we incorporate by reference in this report completely and with the understanding that our future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. The forward-looking statements included or incorporated by reference herein are only made as of the date such statements are made and, except as required by law, we assume no obligation to update such forward-looking statements publicly for any reason, or to update the reasons actual results could differ materially from those anticipated in such forward-looking statements, even if new information becomes available in the future.

We are a leading producer and brand manager of innovative high-quality footwear and the category creator in the sport sandal and luxury sheepskin footwear segments. Our products are marketed under three recognized brand names that we own:


	•	Teva: High performance sport sandals and rugged outdoor footwear;

	•	UGG: Authentic luxury sheepskin boots and other footwear; and

	•	Simple: Innovative shoes that combine the comfort elements of athletic footwear with casual styling.

We sell our three brands through our customers and directly to our consumers through our Internet and catalog retailing business. We sell our footwear in both the domestic market and the international markets. Independent third parties manufacture all of our footwear.

Our business has been impacted by several important trends affecting our end markets:


	•	The markets for casual, outdoor and athletic footwear have grown significantly during the last decade. We believe this growth is a result of the trend toward casual dress in the workplace, increasingly active outdoor lifestyles and a growing emphasis on comfort.

	•	Consumers are more often seeking footwear designed to address a broader array of activities with the same quality and high performance attributes they have come to expect from traditional athletic footwear.

	•	Our retailers have narrowed their footwear product breadth, focusing on brands with a rich heritage and authenticity as market creators and leaders.

By emphasizing our brand image and our focus on comfort, performance and authenticity, we believe we can better maintain a loyal consumer following that is less susceptible to fluctuations caused by changing fashions and changes in consumer preferences.

Set forth below is an overview of the various components of our business, including some of the important factors that affect each business and some of our strategies for growing each business.

Our Teva lines experienced strong market acceptance in 2003. Teva’s products have benefited recently from several factors, but most prominently a general shift in consumer preferences and lifestyles to include more outdoor recreational activities. At the same time, our consumers are increasingly purchasing our Teva products for everyday wear, and our Teva brand now includes several closed-toe footwear lines. As a result, our brand remains popular among professional and amateur outdoorsmen seeking authentic, performance-oriented footwear, as well as general footwear consumers seeking high quality, durable and comfortable styles for everyday use.

To capitalize on the growth of outdoor recreational activities and the acceptance of certain footwear products for everyday use, we have selectively expanded the distribution of our Teva product lines outside our core outdoor specialty and sporting goods channels. Through effective channel management, we believe we can continue to expand into new distribution channels without diluting our outdoor heritage and our appeal to outdoor enthusiasts. Through channel appropriate product line expansion, we plan to continue to broaden our product offerings beyond sport sandals to new products that meet the style and functional needs of our consumers.

In the latter half of 2003, our UGG brand received increased publicity and experienced heightened demand that was ahead of our expectations. As a result of the rapid growth in demand, we sold out of key UGG product early in the season, and given the long lead times required to replenish our inventory levels, we were unable to fill many retailer reorders and many direct Internet and catalog orders. Continuing a strategy utilized with our UGG casual line, we have begun shifting a portion of our UGG sheepskin boot production from factories in Australia to a factory in China where the production capacity is much greater and quality standards are comparable. We expect to receive our first deliveries of sheepskin boots from the China factory in March 2004.

UGG has been a well-known brand in California for many years and has only recently become a recognized brand across the remainder of the country. We believe that a portion of UGG’s increased demand is due to our continued geographical expansion across the U.S., which has increased consumer awareness of the quality, comfort and usefulness of the products offered by our luxury brand. In addition, in order to satisfy

virtually untapped international demand, we will expand our distribution and marketing overseas. We believe the international markets represent an attractive opportunity to build upon UGG’s broad U.S. appeal.

We also recognize that a portion of the increased demand is a result of a current fashion trend, particularly with respect to the new colors recently added to our UGG boot line. Recognizing that there is a fashion element to this increasing demand, our strategy seeks to prolong the longevity of the trend by offering a broader product line of luxurious and distinctive sheepskin fabrications suitable for wear in a variety of climates and occasions and by limiting distribution to selected higher-end retailers. We have expanded our product line from 52 models in 2002 to 69 models in 2004.

After three consecutive years of net sales declines in our Simple product line, we recently implemented a strategy to improve Simple’s results of operations and generate renewed interest in the Simple brand. We began a process of repositioning our Simple product line by focusing on our successful legacy collections and narrowing the number of styles. In addition, we have begun to implement a strategy whereby we leverage our Teva and UGG expertise to produce Simple branded sandals and suede, fleece-lined products. The Simple products will be sold at price points lower than our Teva and UGG brands and through distribution channels that are precluded from offering our Teva and UGG brands. We expect our Simple brand to experience growth as we successfully implement our product line rationalization and channel management strategies.

We acquired our Internet and catalog retailing business in November 2002; accordingly, 2003 was our first full year of operation of this consumer direct business. Our Internet and catalog retailing business, which today sells all three of our brands, enables us to meet the growing demand for all of these products and also provides us with an opportunity to add significant incremental contribution margin. Managing our Internet business requires us to focus on generating Internet traffic to our websites, effectively converting website visits into orders and maximizing average order sizes. To drive our catalog order business, we distribute approximately 300,000 catalogs semi-annually. Overall, our consumer direct business benefits from the strength of our brands and, as we grow our brands over time, we expect our Internet and catalog retailing business to benefit.

In 2003 we embarked on a strategy to license our well-known and respected footwear brands to complementary products outside of footwear, generally in the apparel and accessories categories. To date, we have entered into four licensing agreements for Teva, including domestic licenses for men’s sportswear, timepieces, eyewear and headwear, and one domestic licensing arrangement for UGG handbags and other small leather goods. We are pursuing additional licensing opportunities for our brands both in the U.S. and abroad. This licensing strategy is in its early stages, and due to the lead times required to bring the products to market, we have received no sales from licensing to date and we do not expect significant incremental net sales and profits from licensing in the near future. However, we believe licensing opportunities for our brands may become a more significant portion of our net sales and profits over time. The minimum net annual royalties that we will receive under the five existing licensing agreements, assuming renewal options are exercised, are $216,000 in 2004, $325,000 in 2005, $649,000 in 2006, $850,000 in 2007 and $850,000 in 2008.

Our business is seasonal, with the highest percentage of Teva net sales occurring in the first and second quarters of each year and the highest percentage of UGG net sales occurring in the third and fourth quarters, while the quarter with the highest percentage of annual net sales for Simple has varied from year to year.

In previous years we have experienced our 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. However, in 2003, as a result of the continued growth in UGG and the introduction of the fall closed-toe Teva offering, the first and fourth quarters had comparable sales volumes and the second and third quarters had comparable sales volumes. Given our expectations for each of our brands in 2004, we currently expect this trend to continue and anticipate that net sales in the last half of 2004 will likely exceed net sales during the first half of 2004. Nonetheless, actual results could differ materially depending upon consumer preferences, availability of product, competition and our customers continuing to carry and promote our various product lines, among other risks and uncertainties. See “Risk Factors.”

The following table sets forth certain operating data for the periods indicated.


⁽¹⁾	Net sales from discontinued brand.

⁽²⁾	Primarily unallocated overhead.

The following table sets forth certain operating data as a percentage of net sales for the periods indicated.

Overview. In 2003, we had net sales of $121,055,000 and income from operations of $19,438,000 compared to net sales of $99,107,000 and income from operations of $3,348,000 in 2002. These results were due in part to increased demand for our Teva and UGG product lines, partially offset by a decline in net sales of our Simple product line. In addition, 2003 was the first full year of operations following our acquisition in November 2002 of the Teva Rights, which resulted in the elimination of royalty and other license costs of $4,495,000 and resulted in net sales of $6,501,000 attributed to our Internet and catalog retailing business that was a part of the Teva Rights acquisition. The acquisition of the Teva Rights resulted in significant new borrowings and incremental interest expense in 2003 of $4,557,000.

Net Sales. Net sales increased by $21,948,000, or 22.1%, from $99,107,000 in 2002 to $121,055,000 in 2003. Net sales increased in 2003 due primarily to: (1) an increase in the number of units sold of Teva and UGG offset in part by a decline in the number of units sold of Simple, resulting in a 22.9% overall increase in the volume of footwear sold from 4,120,000 pairs in 2002 to 5,063,000 pairs in 2003, and (2) the inclusion of

the Internet and catalog retailing business obtained as part of the Teva Rights acquisition. These increases in net sales resulted from increased unit sales volume, partially offset by a 2.7% decline in average selling price per unit from $23.66 in 2002 to $23.03 in 2003.

Net wholesale sales of Teva increased by $7,934,000, or 12.2%, from $64,849,000 in 2002 to $72,783,000 in 2003. This increase was primarily due to an increasing sales volume of sport sandals resulting from an improvement in retail sell-through, the favorable impact of the strong Euro on European sales, selective addition of new distribution channels in our domestic market, increased sales volume of thongs and slides and increased sales volume of certain styles of the recently introduced closed-toe footwear offerings. See “— Overview — Teva Overview” above.

Net wholesale sales of UGG increased by $11,070,000, or 47.1%, from $23,491,000 in 2002 to $34,561,000 in 2003. This was largely as a result of heightened demand in 2003 caused by the growing popularity of the brand, significantly increased brand awareness and considerable celebrity exposure. The UGG sales volume increase was also due to strong retail sell-through, expansion of the product line to include more casual footwear styles and continued geographical expansion across the U.S. See “— Overview — UGG Overview” above.

Net wholesale sales of Simple decreased by $2,949,000, or 29.0%, from $10,159,000 in 2002 to $7,210,000 in 2003. This decline was caused by a variety of factors, including competition in the casual footwear market and a $668,000 decline in sales volume in the international markets. These volume declines were partially offset by a $469,000 increase in sales volume of the moderately priced Simple suede, fleece-lined boot, which we introduced in the fourth quarter of 2003. See “— Overview — Simple Overview” above.

For the period from the November 25, 2002 acquisition date through December 31, 2002, net sales of the Internet and catalog retailing business totaled $608,000, including retail sales of Teva of $255,000, UGG of $310,000 and Simple of $43,000. In 2003, net sales of the Internet and catalog retailing business aggregated $6,501,000, including retail sales of Teva of $3,687,000, UGG of $2,300,000 and Simple of $514,000. See “— Overview — Internet and Catalog Retailing Overview” above.

International sales for all of our products increased by $1,516,000, or 7.3%, from $20,829,000 in 2002 to $22,345,000 in 2003, representing 21.0% of net sales in 2002 and 18.5% of net sales in 2003. The higher dollar amount of international sales resulted from our international expansion strategy in 2003 combined with the favorable impact of the strong Euro while the lower percentage of international sales to net sales for 2003 reflects the growth of our domestic business.

Gross Profit. Gross profit increased by $9,815,000, or 23.6%, from $41,530,000 in 2002 to $51,345,000 in 2003. As a percentage of net sales, gross profit margin increased from 41.9% in 2002 to 42.4% in 2003. The increase in gross margin was due to several factors, including an above average gross margin at the newly acquired Internet and catalog retailing business, the favorable impact of the strong Euro and lower production overhead costs per pair, partially offset by an increase in close-out sales.

Selling, General and Administrative Expenses. Selling, general and administrative expenses, or SG&A, decreased by $3,047,000, or 8.7%, from $34,954,000 in 2002 to $31,907,000 in 2003. As a percentage of net sales, SG&A decreased from 35.3% in 2002 to 26.4% in 2003. The decrease in the dollar amount of SG&A expenses was primarily due to the elimination of Teva royalty expenses and related Teva license cost amortization of $4,495,000. We also experienced a reduction in overall advertising expenses of $862,000 and bad debt expense of $1,281,000. These cost reductions were partially offset by increased operating expenses related to the newly acquired Internet and catalog retailing business of $1,715,000. SG&A expenses as a percentage of net sales decreased in 2003 due to the overall reduction in SG&A expenses as discussed above as well as the leverage of our fixed costs over a larger revenue base.

Litigation Costs. In 2002, we recorded special litigation charges of $3,228,000 related to a lawsuit filed against us in the state of Montana in 1995. The case was settled and paid in full in November 2002.

Income from Operations. Income from operations increased by $16,090,000, or 480.6%, from $3,348,000 in 2002 to $19,438,000 in 2003. This was due primarily to: (1) increased margin on sales volume of

$9,815,000, (2) elimination of the Teva royalty expenses and related Teva license cost amortization of $4,495,000, (3) the non-recurrence of the 2002 litigation costs of $3,228,000 and (4) improved profitability resulting from the acquisition of the Internet and catalog retailing business in November 2002 of approximately $954,000.

Income from operations of Teva wholesale increased by $9,728,000, or 81.0%, from $12,011,000 in 2002 to $21,739,000 in 2003. This increase was largely due to the $7,934,000 increase in net sales, the elimination of $3,739,000 of Teva royalty expense and $756,000 of Teva license cost amortization, a decrease in Teva advertising and marketing costs, and a reduction in bad debt expense of $965,000. These were partially offset by increases in Teva selling commissions on the higher sales volume and increased payroll costs of $783,000.

Income from operations of UGG wholesale increased by $3,413,000, or 51.8%, from $6,589,000 in 2002 to $10,002,000 in 2003. This was largely due to the $11,070,000 increase in net sales, partially offset by an increase in sales commissions on the higher sales volume of $583,000, increased payroll costs of $232,000, increased advertising and marketing costs and the non-recurrence of a $300,000 chargeback received from a factory in 2002.

Income from operations of Simple wholesale decreased by $1,455,000 from income from operations of $279,000 in 2002 to a loss from operations of $1,176,000 in 2003. This was primarily due to a $2,949,000 decline in net sales during the period attributed to both the domestic and international markets. In addition, the Simple brand was negatively affected by the increased impact of closeout sales and increased payroll costs in 2003.

Income from operations of our Internet and catalog business increased by $954,000, or 491.8%, from $194,000 for the period from the November 25, 2002 acquisition date through December 31, 2002 to $1,148,000 in 2003. This was largely due to the full year impact during 2003 and the general continued growth in popularity of online sales.

Income from operations included unallocated overhead costs, which decreased by $3,450,000, or 21.9%, from $15,725,000 in 2002 to $12,275,000 in 2003. This was largely due to the litigation charges of $3,228,000 incurred in 2002.

Other Expense (Income). Net interest expense was $406,000 in 2002 compared with a net interest expense of $4,557,000 in 2003. This was primarily due to our significantly increased borrowings in order to finance our purchase of the Teva Rights in November 2002. In addition, in connection with early repayments of $2,000,000 of subordinated notes in June 2003 and $2,000,000 in December 2003, we incurred approximately $380,000 of expenses, including prepayment penalties and the write-off of a pro rata share of the previously capitalized loan costs. Other expense (income) exclusive of interest expense (income) was not material in either year.

Income Taxes. In 2002, income tax expense was $1,224,000, representing an effective income tax rate of 43.0%. In 2003, income tax expense was $5,730,000 representing an effective income tax rate of 38.5%. The decrease in the effective tax rate was primarily due to two factors. First, the rate reduction occurred as certain non-deductible Teva license amortization costs were eliminated in connection with the Teva Rights acquisition. Second, we restructured our international operations which resulted in a reduced effective tax rate.

Net Income. On January 1, 2002, we implemented Statement of Financial Accounting Standards, or SFAS, No. 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 No. 142 resulted in a goodwill impairment charge of $8,973,000 (net of the related income tax benefit of $843,000), or $0.92 per diluted share, during 2002. This non-cash impairment charge included a write down of approximately $1,200,000, on an after tax basis, for Simple goodwill and approximately $7,800,000 for UGG goodwill. We recorded the impairment charge as a cumulative effect of a change in accounting principle in the accompanying consolidated statement of operations for 2002. In 2002, net income before cumulative effect of a change in accounting principle was $1,620,000, or $0.17 per diluted share, and the net loss after the cumulative effect of a change in accounting principle was $7,353,000, or $0.75 per diluted share. In 2003, net income was $9,154,000, or $0.77 per diluted share.

Overview. In 2002, we had sales of $99,107,000 and income from operations of $3,348,000 compared to net sales of $91,461,000 and income from operations of $2,338,000 in 2001. These results were due in part to increased demand for our Teva and UGG product lines, partially offset by a slight decline in net sales of our Simple product line. In addition, we acquired the Teva Rights in November 2002, which added $608,000 in net sales from the Internet and catalog business, and we settled the Montana lawsuit for $3,228,000 in November 2002.

Net Sales. Net sales increased by $7,646,000, or 8.4%, from $91,461,000 in 2001 to $99,107,000 in 2002. This was largely due to an increase in the number of units sold, primarily in the domestic Teva and UGG brands, but offset by a decrease in the number of Simple units sold, which contributed to an overall increase of 11.2% in the volume of footwear sold from 3,705,000 pairs in 2001 to 4,120,000 in 2002. The increase also resulted from the addition of net sales from the Internet and catalog retailing business of $608,000 which was acquired in November 2002. These net sales increases were partially offset by a 2.5% decline in average selling price per unit from $24.26 in 2001 to $23.66 in 2002.

Net wholesale sales of Teva increased by $3,628,000, or 5.9%, from $61,221,000 in 2001 to $64,849,000 in 2002. This increase was largely attributable to an improvement in retail sell-through, increasing sales volume of our sport sandals and the introduction of our new fall 2002 line of closed-toe rugged outdoor footwear. Also, certain European distributors purchased $1,600,000 more of the upcoming spring season’s product in the fourth quarter of 2002 than they did in the fourth quarter of 2001, a portion of which was a shift in volume between the fourth quarter of 2002 and the first quarter of 2003.

Net wholesale sales of UGG increased by $4,306,000, or 22.4%, from $19,185,000 for 2001 to $23,491,000 in 2002. This was as a result of continued geographical expansion across the U.S., the introduction of several new styles of casual footwear and strong retail sell-through for the brand.

Net wholesale sales of Simple decreased by $694,000, or 6.4%, from $10,853,000 for 2001 to $10,159,000 in 2002. This was attributed to a decline in international sales of $1,326,000. This international volume decline was partially offset by increased sales volume in the domestic market of $632,000 resulting primarily from an increase in the volume of discounted sales.

Net sales of the Internet and catalog retailing business for the period from the November 25, 2002 acquisition date through December 31, 2002 aggregated $608,000, including retail sales of Teva of $255,000, UGG of $310,000 and Simple of $43,000. The Teva Rights acquisition did not have a significant impact upon operations in 2002 due to its close proximity to year-end.

International sales for all brands decreased slightly from $21,096,000 in 2001 to $20,829,000 in 2002, representing 23.1% of net sales in 2001 and 21.0% in 2002.

Gross Profit. Gross profit increased by $2,972,000, or 7.7%, from $38,558,000 in 2001 to $41,530,000 in 2002. As a percentage of net sales, gross profit margin decreased slightly from 42.2% in 2001 to 41.9% in 2002. The decrease in gross margin was due to several factors including an increased impact of closeout volume, particularly for the Simple brand. In addition, the gross margin in 2002 was negatively impacted by a $260,000 factory charge for tooling costs in 2002. The impact of these items was partially offset by a $262,000 reduction in inventory write-downs in 2002 compared to 2001, gross margin improvement as a result of a shift in UGG’s sales mix toward higher margin styles sourced from the Far East and the negotiation and receipt of a $300,000 chargeback from a factory in the first quarter of 2002 related to the settlement of a dispute that arose in 2001.

Selling, General and Administrative Expenses. SG&A increased by $914,000, or 2.7%, from $34,040,000 in 2001 to $34,954,000 in 2002. As a percentage of net sales, SG&A decreased from 37.2% in 2001 to 35.3% in 2002. The increase in SG&A expenses was primarily due to an increase in personnel costs of $1,568,000, increased marketing expenses of $1,435,000 and increased costs related to a new computer system of $625,000 during 2002. These increases were partially offset by the elimination of approximately $809,000 of goodwill amortization resulting from the implementation of SFAS 142 on January 1, 2002, a net reduction in warehousing costs of $516,000 resulting from bringing this function in-house, the net reductions in royalty and

other expenses of $479,000 caused by our acquisition of the Teva Rights during the fourth quarter of 2002, reduced sales commissions of $384,000 paid to our independent sales force as a result of bringing more accounts in-house and a $206,000 reduction in bank fees resulting from our move to a new bank in 2002, among other cost reductions. Despite the overall increase in dollar amount, SG&A expenses as a percentage of net sales decreased from 2001 to 2002 as certain operating costs are fixed and did not increase in proportion to the increase in net sales.

Litigation Costs. We recorded litigation charges of $2,180,000 in 2001 and $3,228,000 in 2002 related to the lawsuit filed against us in Montana in 1995. The matter was settled and paid in full during the fourth quarter of 2002.

Income from Operations. Income from operations increased by $1,010,000, or 43.2%, from $2,338,000 in 2001 to $3,348,000 in 2002. This was due primarily to the increased margin on sales volume of $2,972,000 and the elimination of $809,000 of goodwill amortization resulting from the adoption of SFAS 142 in 2002, partially offset by increases in certain operating costs and increased litigation costs of $1,048,000.

Income from wholesale operations of Teva decreased by $396,000, or 3.2%, from $12,407,000 in 2001 to $12,011,000 in 2002. This slight decrease was largely due to increased marketing costs of $906,000, the addition of European sales agency commissions of $618,000, increased bad debt expense of $261,000, slightly lower gross margins on our newly introduced closed-toe footwear line and the $260,000 factory charge for tooling costs in 2002. These factors were partially offset by the increase in sales in both the domestic and international markets, lower royalty and other costs of $479,000 resulting from the purchase of the Teva Rights during the fourth quarter of 2002 and reduced domestic sales commissions of $293,000 paid to our independent sales force as a result of bringing more accounts in-house.

Income from wholesale operations of UGG increased by $2,915,000, or 79.3%, from $3,674,000 in 2001 to $6,589,000 for 2002. This was largely due to the increase in sales, gross margin improvement as a result of a shift in sales mix toward higher margin styles sourced from the Far East, an increase in gross margin from the receipt of the factory credit of $300,000 in 2002 and the elimination of goodwill amortization of $590,000 resulting from the adoption of SFAS No. 142 in 2002, partially offset by a $420,000 increase in marketing expense.

Income from wholesale operations of Simple increased by $38,000, or 15.8%, from $241,000 in 2001 to $279,000 in 2002. This increase was due primarily to a decrease in inventory write-downs of $202,000, a reduction in bad debt expense of $345,000 and the elimination of goodwill amortization of $167,000 resulting from the adoption of SFAS No. 142 during 2002, among other cost reductions. These improvements were nearly offset by a $694,000 decrease in net sales, an increase in the proportion of closeout sales compared to regular full margin sales and a slight increase in marketing and promotional costs of $88,000.

Income from operations of our Internet and catalog retailing business was $194,000 in 2002, representing the operating earnings attributed to this newly acquired business for the period from the November 25, 2002 acquisition date through December 31, 2002.

Income from operations included unallocated overhead costs, which increased by $1,741,000, or 12.4%, from $13,984,000 in 2001 to $15,725,000 in 2002. This was largely due to an increase of $1,048,000 in litigation charges in 2002.

Other Expense (Income). Net interest income was $308,000 in 2001 compared with net interest expense of $406,000 in 2002. This was primarily due to the significantly increased borrowings in order to finance the purchase of the Teva Rights in 2002, as well as lower interest rates earned on invested cash in 2002. Other expense (income) exclusive of interest expense (income) was not material in either year.

Income Taxes. In 2001, income tax expense was $1,185,000, representing an effective income tax rate of 42.2%. In 2002, income tax expense was $1,224,000, representing an effective income tax rate of 43.0%. The increase was due to minor fluctuations in the treatment of various financial statement and taxable basis differences.

Net Income (Loss). In 2001, we had net income of $1,626,000, or $0.17 per diluted share. Our adoption of SFAS No. 142 on January 1, 2002 resulted in a goodwill impairment charge of $8,973,000 (net of the related income tax benefit of $843,000), or $0.92 per diluted share, during 2002. We experienced net income before cumulative effect of a change in accounting principle of $1,620,000, or $0.17 per diluted share, in 2002 and a net loss after the cumulative effect of a change in accounting principle of $7,353,000, or $0.75 per diluted share.

We have no off-balance sheet arrangements other than operating leases. See “— Contractual Obligations” below. We do not believe that these operating leases are material to our current or future financial condition, results of operations, liquidity, capital resources or capital expenditures.

Prior to the acquisition of the Teva Rights, we financed our capital and operating needs using a combination of the cash generated from operations and the credit availability under our $20,000,000 revolving credit facility. In addition to these sources of financing, in connection with the acquisition of the Teva Rights in 2002, we obtained approximately $34,000,000 of incremental financing from additional senior and subordinated debt arrangements. This additional financing was used solely to fund the Teva acquisition, whereas the cash from operations and the available credit under the revolving credit facility continue to provide the cash required for our capital and operating needs.

The seasonality of our business requires us to build inventory levels in anticipation of the sales for the coming season. Teva generally begins to build inventory levels beginning in the fourth quarter and first quarter in anticipation of the spring selling season that occurs in the first and second quarters, whereas UGG begins to build its inventories in the second quarter and third quarter to support sales for the fall and winter selling seasons, which historically occur during the third and fourth quarters. However, given the currently increased demand for UGG products, we also expect to build additional UGG inventories during the first quarter of 2004 for deliveries that will begin in the second quarter. Our Simple product line is less seasonal than our Teva and UGG lines and has significantly fewer inventory fluctuations.

Our cash flow cycle includes the purchase of these inventories, the subsequent sale of the inventories and the eventual collection of the resulting accounts receivable. As a result, our working capital requirements begin when we purchase the inventories and continue until we ultimately collect the resulting receivables. Given the seasonality of our Teva and UGG brands, our working capital requirements fluctuate significantly throughout the year. The cash required to fund these working capital fluctuations is generally provided using a combination of our internal cash flows and borrowings under our revolving credit facility. During 2003, the net borrowings under our line of credit, net of cash balances, fluctuated by approximately $9,935,000 between our highest net cash position in December 2003 and our peak borrowing period in September 2003.

Cash from Operating Activities. Net cash provided by operating activities increased from $7,441,000 in 2002 to $16,781,000 in 2003. Net cash provided by operating activities in 2003 was largely due to an improvement in net earnings (exclusive of the cumulative effect of the change in accounting principle in 2002) of $7,534,000 and an improvement in cash collections of $2,106,000 in 2003 as compared to 2002. Working capital remained essentially the same from 2002 to 2003.

Cash from Investing Activities. In 2002, net cash used in investing activities was $44,731,000, including $43,254,000 of cash paid in conjunction with the acquisition of the Teva Rights, plus approximately $1,477,000 of capital expenditures. In 2003, net cash used in investing activities was $705,000, which was comprised almost entirely of cash used for capital expenditures. In 2002, our capital expenditures were greater than in 2003 because in 2002 we completed the implementation of our Enterprise Resource Planning (“ERP”) computer system and we incurred most of the costs related to the expansion of our distribution facility that we began in September 2002 and completed in March 2003.

Cash from Financing Activities. In 2002, net cash provided by financing activities was $24,542,000, largely due to the proceeds from the various sources of financing obtained to finance the acquisition of the Teva Rights. In 2003, net cash used in financing activities aggregated $14,091,000, including the repayment of long-term debt of $8,934,000 and the repurchase of all outstanding convertible preferred stock for $5,938,000, offset by proceeds from stock issuances of $781,000.

Our liquidity consists primarily of cash, trade accounts receivable, inventories and a revolving credit facility. At December 31, 2003, working capital was $22,803,000 including $6,662,000 of cash. Cash provided by operating activities aggregated $16,781,000 in 2003. Trade accounts receivable decreased by 10.1% from $20,851,000 at December 31, 2002 to $18,745,000 at December 31, 2003 notwithstanding net sales having increased 38.7% during the fourth quarter ended December 31, 2003 over the comparable prior period. Accounts receivable turnover improved from 4.8 times in 2002 to 6.1 times in 2003. This improvement resulted from the hiring of more qualified credit and collections staff, the improvement in collections policies and procedures and the non-recurrence of the fiscal 2002 collections difficulties encountered during the initial stages of the implementation of the new ERP system.

During the same period, inventories increased by 5.5% from $17,067,000 at December 31, 2002 to $18,004,000 at December 31, 2003, reflecting a $4,486,000 increase in Teva inventory, a $1,921,000 decrease in UGG inventory and a $1,628,000 decrease in Simple inventory at year end. Overall, inventory turnover improved from 3.2 times in 2002 to 4.0 times in 2003. The $4,486,000 increase in Teva inventory occurred because the factories delivered more Teva products in 2003 for the 2004 season than they did in 2002 for the 2003 season, due to our efforts to improve our on-time deliveries to our customers and to enable us to better deliver complete orders to our customers earlier for the 2004 spring season. The increase in Teva inventory was also needed to support an expected increase in Teva sales for the first quarter of 2004 compared to actual sales for the first quarter of 2003. The $1,921,000 decrease in UGG inventory at December 31, 2003 was due to the heightened demand experienced in the latter part of 2003, which significantly depleted our year-end inventory levels for many of the most popular UGG styles. The $1,628,000 decrease in Simple inventory at December 31, 2003 reflects our continuing efforts to reduce the levels of our closeout inventories and to bring our Simple inventory into stock closer to when it is expected to be shipped to our customers.

Our revolving credit facility with Comerica Bank-California 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. Up to $10,000,000 of borrowings may be in the form of letters of credit. The facility bears interest at the lender’s prime rate (4.00% at December 31, 2003) or, at our option, at LIBOR (1.12% at December 31, 2003) plus 1.00% to 2.50%, depending on our ratio of liabilities to earnings before interest, taxes, depreciation and amortization, (termed “EBITDA”) and is secured by substantially all of our assets. The facility included an upfront fee of $230,000 and includes subsequent annual commitment fees of $100,000. The facility expires on June 1, 2005. At December 31, 2003, we had no outstanding borrowings under the facility, no foreign currency reserves for outstanding forward contracts and no outstanding letters of credit. We had credit availability under the facility of $19,283,000 at December 31, 2003.

On November 25, 2002, we completed the acquisition of the Teva Rights from Mark Thatcher and his wholly-owned company, Teva Sport Sandals, Inc., for approximately $62,300,000, including transaction costs of approximately $300,000. We paid cash in the amount of $43,000,000 and issued to Mr. Thatcher a junior subordinated note in the principal amount of $13,000,000, convertible preferred stock of $5,500,000, 100,000 shares of common stock valued at approximately $368,000 and options to purchase 100,000 shares of common stock valued at approximately $187,000. The $13,000,000 of junior subordinated note includes a coupon interest rate of 7.00% and an additional interest rate of 2.00%, which is to be accrued and paid at the maturity date in 2008. The note may be prepaid without penalty. Concurrent with the acquisition, we entered into an employment agreement for advice on Teva matters with Mr. Thatcher through November 2007, which provides for an annual base salary of $276,875, and we received a non-compete agreement from Mr. Thatcher, which expires two years after termination of employment.

In connection with the Teva Rights acquisition, we entered into two additional financing arrangements, including a $7,000,000 term loan from Comerica Bank-California and a $14,000,000 subordinated note from an unrelated party. Based on intercreditor agreements between the various parties, we generally were not permitted to repay the subordinated note or the junior subordinated note or repurchase the convertible preferred stock without the prior approval and consent of Comerica Bank-California. Likewise, we generally were not permitted to repay the junior subordinated note or repurchase the convertible preferred stock without the prior approval and consent of both Comerica Bank-California and the holder of the subordinated notes.

Since initially entering into these financing arrangements, we have taken several steps to improve our capital structure. After obtaining the requisite approvals discussed above, we made the following changes:


	•	During 2003, we prepaid $4,000,000 of the $14,000,000 subordinated note, consisting of a $2,000,000 prepayment in June 2003 and another $2,000,000 in December 2003. In connection with the prepayments in 2003, we incurred prepayment penalties of $100,000 and wrote off approximately $280,000 of previously capitalized loan origination costs. These costs have been included in interest expense in the accompanying consolidated statement of operations for the year ended December 31, 2003. Additionally, we prepaid $3,000,000 of the subordinated note in January 2004, bringing the total prepayments to an aggregate of $7,000,000 since inception. As a result of the prepayments, the balance of the subordinated note outstanding at December 31, 2003 was $10,000,000 and the balance outstanding at January 31, 2004 was $7,000,000. By making these prepayments, replacing $7,000,000 of the subordinated note with lower cost financing, we expect to save more than $750,000 in annual interest costs for each of the next five years.

	•	In December 2003, we repurchased all of the outstanding convertible preferred stock for $5,500,000. In connection with the repurchase, we paid the holder a premium of approximately $438,000, which is treated as a capital transaction and accordingly had no impact on net income in 2003, although the repayment reduced income (loss) per share applicable to common stockholders. Going forward, the transaction is expected to eliminate approximately 1,514,000 shares from the weighted average diluted shares outstanding calculation beginning in 2004.

	•	During 2003, we paid $3,500,000 of the term loan in accordance with the scheduled payment terms. In December 2003, we renegotiated with the lender and reset the term loan to $7,000,000. We used the $3,500,000 of additional proceeds in conjunction with cash generated from operations to fund the repayment of the subordinated notes and to repurchase the convertible preferred stock discussed above to take advantage of lower interest rates.

The renegotiated $7,000,000 term loan is secured by all of our assets and bears interest at the prime rate (4.00% at December 31, 2003) plus 2.50%, or, at our option, at LIBOR (1.12% at December 31, 2003) plus 3.25%. In accordance with the amended payment terms, interest is payable monthly, an initial principal payment of $1,750,000 is payable May 31, 2004 and the remaining principal is payable in monthly installments of approximately $292,000 from June 2004 to November 2005. We incurred a fee of $35,000 in connection with the increase in term loan borrowings in December 2003.

The remaining $10,000,000 of the subordinated note outstanding at December 31, 2003 ($7,000,000 at January 31, 2004) is secured by a secondary security position in all assets, with principal payable in quarterly installments of $1,500,000 beginning in November 2007 and the balance due in full in November 2008. The subordinated note bears interest at 16.75%, of which 12.00% is payable monthly and 4.75% can be deferred at our option and compounds monthly until the 2008 maturity date. During 2003, we elected not to defer any interest costs and as a result paid all interest as it was incurred. In the event that we decide to prepay all or a portion of the subordinated note, we will be required to pay prepayment penalties of 4.00% of the portion prepaid prior to November 25, 2004, with no penalties for prepayments thereafter. In connection with the issuance of the subordinated note, we incurred costs of approximately $1,000,000, including investment banking fees, loan commitment fees and legal costs. These origination costs are included in other assets in the accompanying consolidated financial statements and are being amortized over the term of the loan.

The $13,000,000 junior subordinated note is due in November 2008. The junior subordinated note bears interest at 9.00%, of which 7.00% is payable annually and 2.00% may be deferred at our option and compounds annually until the 2008 maturity date. During 2003, we elected to defer payment of the 2.00% deferred interest component. The junior subordinated note is unsecured and subordinated to the subordinated note, the term loan and the bank credit facility and does not have prepayment penalties. The junior subordinated note provides the holder with the right to designate one member of our board of directors. At December 31, 2003, the outstanding balance on the junior subordinated note was $13,000,000, plus the deferred interest of $287,000.

In accordance with its terms, the convertible preferred stock was callable by us through November 25, 2005 at face amount plus an additional 10.00% per year and was convertible into common stock by the holder after November 25, 2005, if not previously called, at a conversion price of $3.632 per share (the fair market value of the common stock on the issue date). As noted above, we repurchased the convertible preferred stock in its entirety in December 2003, thus eliminating the potential for any future conversion into common stock.

The agreements underlying the bank credit facility, the term loan and the subordinated note contain several financial covenants including a quick ratio requirement, profitability requirements and cash flow coverage requirements, among others, as well as a prohibition on the payment of dividends. We were in compliance with all covenants at December 31, 2003 and remain so as of the date of this report.

We have announced that we have filed a registration statement with the Securities and Exchange Commission to sell up to 1,500,000 shares of our Common Stock and up to 2,000,000 shares of Common Stock held by selling stockholders (not counting any exercise of the over-allotment option to purchase up to 525,000 shares of Common Stock granted by the selling stockholders to the underwriters).

We expect to pay off the remaining $7,000,000 of the term loan, $7,000,000 of the subordinated note and $13,000,000 of the junior subordinated note from the proceeds of the potential offering. Upon the completion of the potential offering and repayment of our outstanding debt, the borrowing availability under our revolving credit facility will be the full $20,000,000 amount of the facility, subject to the borrowing base lending requirements.

Capital expenditures totaled $663,000 in 2003 and related primarily to the replacement of certain computer equipment, the expansion and new racking at our distribution center and costs related to new Teva promotional vehicles. We currently have no material commitments for future capital expenditures but estimate that the capital expenditures for 2004 will range from $700,000 to $1,000,000 and will include an upgrade of the distribution center computer system, new trade show booths and replacements and upgrades of certain other computer equipment. The actual amount of capital expenditures for 2004 may differ from this estimate, largely depending on any unforeseen needs to replace existing assets.

Contractual Obligations. The following table summarizes our contractual obligations at December 31, 2003 and the effects such obligations are expected to have on liquidity and cash flow in future periods.

Additionally, we have significant interest payment requirements on the long-term debt obligations discussed above. Assuming we continue to pay both the current interest portion (12.00%) and the deferred interest portion (4.75%) of the subordinated note on a monthly basis and assuming we continue to pay

annually only the current interest portion (7.00%) while deferring the deferred interest portion (2.00%) of the junior subordinated note, the annual interest payment requirements for our long-term debt obligations are as follows, after giving effect to the $3,000,000 prepayment of the subordinated note in January 2004:

The above table does not include interest on the bank credit facility, as the outstanding borrowings on the facility are variable. While there were no outstanding borrowings under the facility at December 31, 2003, we anticipate that we may borrow under the facility in 2004 in order to meet our seasonal working capital needs. In 2003, the average outstanding borrowings under the facility were $2,136,000 and the aggregate interest costs under the facility were $103,000.

In February 2002, we agreed to guarantee up to $1,000,000 of a bank loan of Doug Otto, our Chairman of the Board, Chief Executive Officer and President, which matures June 1, 2004. The guarantee is through the maturity date of the loan, and we would have to pay under the guarantee should Mr. Otto default on the loan. As of December 31, 2003, approximately $1,000,000 was outstanding under the loan. The fair value of the guarantee was immaterial at December 31, 2003.

We believe that internally generated funds, the available borrowings under our existing credit facilities, cash on hand and the net proceeds of the potential offering will provide sufficient liquidity to enable us to meet our current and foreseeable working capital requirements. However, risks and uncertainties that could impact our ability to maintain our cash position include our growth rate, the continued strength of our brands, our ability to respond to changes in consumer preferences, our ability to collect our receivables in a timely manner, our ability to effectively manage our inventories and the volume of letters of credit used to purchase product, among others. We have demonstrated our strong liquidity by the debt prepayments and the convertible preferred stock redemption in 2003 totaling $14,872,000. See “Risk Factors” for a discussion of additional factors that may affect our working capital position.

We believe that the relatively moderate rates of inflation in recent years have not had a significant impact on our net sales or profitability.

The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures about contingent liabilities and the reported amounts of net sales and expenses during the reporting period. Management bases these estimates and assumptions upon historical experience, existing, known circumstances, authoritative accounting pronouncements and other factors that management believes to be reasonable under the circumstances. Management reasonably could use different estimates and assumptions, and changes in estimates and assumptions could occur from period to period, with the result in each case being a potential material change in the financial statement presentation of our financial condition or results of operations. We have historically been accurate in our estimates used for the reserves and allowances below. We believe that the estimates and assumptions below are among those most important to an understanding of our consolidated financial statements contained in this report.

Allowance for Doubtful Accounts. We provide a reserve against trade accounts receivable for estimated losses that may result from customers’ inability to pay. We determine the amount of the reserve by analyzing known uncollectible accounts, aged trade accounts receivables, economic conditions, historical experience and the customers’ credit-worthiness. Trade accounts receivable that are subsequently determined to be uncollectible are charged or written off against this reserve. The reserve includes specific reserves for accounts which

are identified as potentially uncollectible, plus a general reserve for the balance of accounts. Reserves have been fully established for all expected or probable losses of this nature. The gross trade accounts receivable balance was $20,871,000 and the allowance for doubtful accounts was $1,581,000 at December 31, 2003. Our use of different estimates and assumptions could produce different financial results. For example, a 1.0% change in the rate used to estimate the reserve for the accounts not specifically identified as uncollectible would change the allowance for doubtful accounts by $174,000.

Reserve for Sales Discounts. A significant portion of our domestic net sales and resulting trade accounts receivable reflects a discount that the customers may take, generally based upon meeting certain order, shipment and payment timelines. We estimate the amount of the discounts that are expected to be taken against the period-end trade accounts receivable and we record a corresponding reserve for sales discounts. We determine the amount of the reserve for sales discounts considering the amounts of available discounts in the period-end accounts receivable aging and historical discount experience, among other factors. At December 31, 2003 the reserve for sales discounts was approximately $545,000. Our use of different estimates and assumptions could produce different financial results. For example a 10.0% change in the estimate of the percentage of accounts that will ultimately take their discount would change the reserve for sales discounts by $50,000.

Allowance for Estimated Returns. We record an allowance for anticipated future returns of goods shipped prior to period-end. In general, we accept returns for damaged or defective products but discourage returns for other reasons. We base the amount of the allowance on any approved customer requests for returns, historical returns experience and any recent events that could result in a change in historical returns rates, among other factors. The allowance for returns at December 31, 2003 was $1,245,000. Our use of different estimates and assumptions could produce different financial results. For example, a 1.0% change in the rate used to estimate the percentage of sales expected to ultimately be returned would change the reserve for returns by approximately $300,000.

Inventory Write-Downs. Inventories are stated at lower of cost or market. We review the various items in inventory on a regular basis for excess, obsolete and impaired inventory. In doing so, we write the inventory down to the lower of cost or estimated future net selling prices. Inventories were stated at $18,004,000, net of inventory write-downs of $882,000 at December 31, 2003. Our use of different estimates and assumptions could produce different financial results. For example, a 10.0% change in the estimated selling prices of our potentially obsolete inventory would change the inventory write-down amount by approximately $204,000.

Valuation of Goodwill, Intangible and Other Long-Lived Assets. We periodically assess the impairment of goodwill, intangible and other long-lived assets based on assumptions and judgments regarding the carrying value of these assets. We consider the assets to be impaired if we determine that the carrying value may not be recoverable. Among other considerations, we consider the following factors:


	•	the assets’ ability to continue to generate income from operations and positive cash flow in future periods;

	•	our future plans regarding utilization of the assets;

	•	any changes in legal ownership of rights to the assets; and

	•	changes in consumer demand or acceptance of the related brand names, products or features associated with the assets.

If we consider the assets to be impaired, we recognize an impairment loss equal to the amount by which the carrying value of the assets exceeds the estimated fair value of the assets. In addition, as it relates to long-lived assets, we base the useful lives and related amortization or depreciation expense on the estimate of the period that the assets will generate sales or otherwise be used by us.

In 2002, SFAS No. 142, “Goodwill and Other Intangible Assets,” became effective and as a result, we recorded a goodwill impairment charge in the first quarter of 2002. See note 13 to the accompanying consolidated financial statements.

In June 2001, the Financial Accounting Standards Board, or FASB, issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 requires us to record the fair value of an asset retirement obligation as a liability in the period in which we incur 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. We also record a corresponding asset that is depreciated over the life of the asset. Subsequent to 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. We adopted SFAS No. 143 on January 1, 2003. The adoption of SFAS No. 143 did not have a material effect on our consolidated financial position or results from operations.

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

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS No. 145 amends existing guidance on reporting gains and losses on the extinguishment of debt to prohibit the classification of the gain or loss as extraordinary, as the use of such extinguishments have become part of the risk management strategy of many companies. SFAS No. 145 also amends SFAS No. 13 to require sale-leaseback accounting for certain lease modifications that have economic effects similar to sale-leaseback transactions. The provisions of the Statement related to the rescission of Statement No. 4 is applied in fiscal years beginning after May 15, 2002. We adopted SFAS No. 143 on January 1, 2003. The adoption of SFAS No. 145 did not have a material effect on our consolidated financial position or results from operations.

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 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 our consolidated financial position or results from operations.

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 initial recognition and measurement provisions of the Interpretation are applicable to guarantees issued or modified after December 31, 2002 and are not expected to have a material effect on our consolidated financial position or results from operations. The disclosure requirements are effective for financial statements of interim and annual periods ending after December 31, 2002 and are included in the notes to our consolidated financial statements.

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 in both annual and interim financial statements. Certain of the disclosure modifications are

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 generally 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 our consolidated financial statements. In December 2003, the FASB revised FIN 46 to exempt certain entities from its requirements and to clarify certain issues arising during the implementation of FIN 46. The adoption of this revised interpretation in the first quarter of 2004 is not expected to have any impact on our consolidated 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 generally 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 our consolidated financial statements.

Our short- and long-term success is subject to many factors beyond our control. Shareholders and potential shareholders should carefully consider the following risk factors in addition to the other information contained in this report and the information incorporated by reference in this report. If any of the following risks occur, our business, financial condition or results of operations could be adversely affected. In that case, the value of our common stock could decline and shareholders and potential shareholders may lose all or part of their investment.

Our success depends largely on the continued strength of our Teva, UGG and Simple brands and on our ability to anticipate, understand and react to the rapidly changing fashion tastes of footwear consumers and to provide appealing merchandise in a timely manner. Our products must appeal to a broad range of consumers whose preferences cannot be predicted with certainty and are subject to rapid change. We are also dependent on customer receptivity to our products and marketing strategy. There can be no assurance that consumers will continue to prefer our brands, that we will respond quickly enough to changes in consumer preferences or that we will successfully introduce new models and styles of footwear. Achieving market acceptance for new products also will likely require us to exert substantial marketing and product development efforts and expend significant funds to create consumer demand. The failure to introduce new products that gain market acceptance will erode our competitive position, which will reduce our profits and could adversely affect the image of our brands, resulting in long-term harm to our business.

Our UGG brand may not continue to grow at the same rate it has experienced in the recent past.

Our UGG brand has experienced strong growth over the past two years, with net wholesale sales of UGG products having increased from $19,185,000 in 2001 to $34,561,000 in 2003, representing a compound annual growth rate of 34.2%. UGG may be a fashion item that could go out of style at any time. UGG represents a significant portion of our business, and if UGG sales fail to increase in the future our overall financial performance likely will not continue its current pace of growth.

We may experience shortages of top grade sheepskin, which could interrupt product manufacturing and increase product costs.

We depend on a limited number of key resources for sheepskin, the principal raw material for our UGG products. In 2003, two suppliers provided all of the sheepskin purchased by our independent manufacturers. The top grade sheepskin used in UGG footwear is in high demand and limited supply. In addition, sheep are susceptible to hoof and mouth disease, which can result in the extermination of the infected herd and could have a material adverse effect on the availability of sheepskin for our products. Our potential inability to obtain top grade sheepskin for UGG products could impair our ability to meet our production requirements for UGG in a timely manner and could lead to inventory shortages, which can result in potential lost sales, delays in shipments to customers, strain on our relationships with customers and diminished brand loyalty. Additionally, there have been significant increases in the prices of footwear quality sheepskin as the demand for this material has increased. Any further price increases will likely raise our costs, increase our costs of sales and decrease our profitability unless we are able to pass higher prices on to our customers.

If we do not accurately forecast consumer demand, we may have excess inventory to liquidate or have difficulty filling our customers’ orders.

Because the footwear industry has relatively long lead times for design and production, we must commit to production tooling and production volumes many months before consumer tastes become apparent. The footwear industry is subject to fashion risks and rapid changes in consumer preferences, as well as the effects of weather, general market conditions and other factors affecting demand. Our large number of models, colors

and sizes in our three product lines exacerbates these risks. As a result, we may fail to accurately forecast styles and features that will be in demand. If we overestimate demand for our products, we may be forced to liquidate excess inventories at a discount to customers, resulting in higher markdowns and lower gross margins. Further, the excess inventories may prolong our cash flow cycle, resulting in reduced cash flow and increased liquidity risks. Conversely, if we underestimate consumer demand, we could have inventory shortages, which can result in lost potential sales, delays in shipments to customers, strains on our relationships with customers and diminished brand loyalty. This may be particularly true with regard to our UGG product line, which continues to experience strong consumer demand and rapid sales growth.

As part of our growth strategy, we seek to enhance the positioning of our brands, extend our brands into complementary product categories and markets through licensing, expand geographically and improve our operational performance. Another element of our growth strategy includes our licensing initiatives. We may not be able to successfully implement any or all of these strategies. If we fail to do so, our rate of growth may slow or our results of operations may decline, which in turn could have a negative effect on the value of our stock.

Our financial success is directly related to the success of our customers and the willingness of our customers to continue to buy our products. We do not have long-term contracts with any of our customers. Sales to our customers are generally on an order-by-order basis and are subject to rights of cancellation and rescheduling by our customers. If we cannot fill our customers’ orders in a timely manner, our relationships with our customers may suffer, and this could have a material adverse effect on us. Furthermore, if any of our major customers experiences a significant downturn in its business, or fails to remain committed to our products or brands, then these customers may reduce or discontinue purchases from us, which could have a material adverse effect on our business, results of operations and financial condition.

Establishing and protecting our trademarks, patents and other intellectual property is costly and may be difficult outside the U.S. If our efforts to do so are unsuccessful, the value of our brands could suffer.

We believe that our trade names, copyrights, trade secrets, trademarks, patents, trade dress and designs are of value and are integral to our success and our competitive position. Some countries’ laws do not protect proprietary intellectual property rights to the same extent as do U.S. laws. From time to time, we discover products in the marketplace that infringe upon our trade name, trademark, patent, trade dress and design rights. If we are unsuccessful in challenging a third party’s products on the basis of patent and trade dress rights, continued sales of such competing products by third parties could adversely impact our business, financial condition and results of operations. Furthermore, our efforts to enforce our trademark and other intellectual property rights are typically met with defenses and counterclaims attacking the validity and enforceability of our trademark and other intellectual property rights. Similarly, from time to time we may be the subject of litigation challenging our ownership of intellectual property. Loss of our Teva, UGG or Simple trade name, trademark, patent or trade dress rights could have a material adverse effect on our business.

We face particularly strong challenges to our UGG trademark in Australia. There can be no assurance that we will prevail in such challenges. Many Australian manufacturers sell competitive footwear on the Internet. The loss of our UGG trademark in Australia could cause us to lose significant sales and could harm the integrity of our brand by association with inferior products.

We may lose pending litigation and the rights to certain of our intellectual property.

We are currently involved in several informal disputes, disputes in the U.S. Patent and Trademark Office and foreign trademark offices, and disputes in U.S. federal and foreign court litigation regarding infringement by third parties of our trade names, trademarks, trade dress, copyrights and other intellectual property. Any decision or settlement in any of these disputes that allows a third party to continue to use our intellectual

property in connection with products that are similar to ours could have an adverse effect on our sales and on our intellectual property, which could have a material adverse effect on our results of operations and financial condition.

Our brands and designs are constantly at risk for counterfeiting and infringement of our intellectual property rights, and we frequently find counterfeit products and products that infringe on our intellectual property rights in our markets. We have not always been successful, particularly in some foreign countries, in combating counterfeit products and stopping infringing uses of our products. Counterfeit and infringing products not only cause us to lose significant sales, they also can harm the integrity of our brands by associating our trademarks or designs with lesser quality or defective goods.

We are also experiencing more infringers of our UGG trademark and more counterfeit products seeking to benefit from the consumer demand for our UGG products. We expect this trend to continue, which could result in the loss of sales for UGG products and a diminution of the brand’s reputation for quality if it is associated with inferior counterfeit goods.

As our patents expire, our competitors will be able to copy our technology or incorporate it in their products without paying royalties.

Patents generally have a life of 20 years from filing, and some of our patents will expire in the next ten years. For example, the patent for our Universal Strapping System used in Teva sandals will expire in September 2007. Our Universal Strapping System is currently used in most of our Teva sandals. Once patent protection has expired, our competitors can copy our products or incorporate our innovations in their products without paying royalties. To combat this, we must continually create new designs and technology, obtain patent protection and incorporate the new technology or design in our footwear. We cannot provide assurance that we will be able to do so. Sales of our Teva sandals may decline significantly if we incorporate substitute technologies in lieu of our Universal Strapping System for our Teva sandals.

Because we depend on independent manufacturers, we face challenges in maintaining a continuous supply of goods that meet our quality standards.

We use independent manufacturers to produce all of our products, with almost all of the production occurring among four manufacturers in China. We depend on these manufacturers’ ability to finance the production of goods ordered and to maintain manufacturing capacity. The manufacturers in turn depend upon their suppliers of raw materials. We do not exert direct control over either the independent manufacturers or their raw materials suppliers, so we may be unable to obtain timely delivery of acceptable products.

In addition, we do not have long-term contracts with these independent manufacturers, and any of them may unilaterally terminate their relationship with us at any time or seek to increase the prices they charge us. As a result, we are not assured of an uninterrupted supply of products of an acceptable quality from our independent manufacturers. If there is an interruption, we may not be able to substitute suitable alternative manufacturers because substitutes may not be available or they may not be able to provide us with products or services of a comparable quality, at an acceptable price or on a timely basis. If a change in our independent manufacturers becomes necessary, we would likely experience increased costs, as well as substantial disruption of our business and a resulting loss of sales.

Similarly, if we experience a significant increase in demand and a manufacturer is unable to ship orders of our products in accordance with our timing demands and our quality standards, we could miss customer delivery date requirements. This in turn could result in cancellation of orders, customer refusals of shipments or a reduction in purchase prices, any of which could have a material adverse effect on our sales and financial condition. We compete with other companies for the production capacity and the import quota capacity of our manufacturers. Accordingly, our independent manufacturers may not produce and ship some or all of any orders placed by us.

If raw materials do not meet our specifications or if the prices of raw materials increase, we could experience a high return rate, a loss of sales or a reduction in our gross margins.

Our independent manufacturers use various raw materials in the manufacture of our footwear that must meet our specifications generally and, in some cases, additional technical requirements for performance footwear. If these raw materials and the end product do not perform to our specifications or consumer satisfaction, we could experience a higher rate of customer returns and a diminution in the image of our brands, which could have a material adverse effect on our business, financial condition and results of operations.

There may be significant increases in the prices of the raw materials used in our footwear, which would increase the cost of our products from our independent manufacturers. Our gross profit margins are adversely affected to the extent that the selling prices of our products do not increase proportionately with increases in their costs. Any significant unanticipated increase in the prices of raw materials could materially affect our results of operations. No assurances can be given that we will be protected from future changes in the prices of such raw materials.

Our independent manufacturers are located outside the U.S., where we are subject to the risks of international commerce.

All of our third party manufacturers are in the Far East, Australia and New Zealand, with the vast majority of production performed by four manufacturers in China. Foreign manufacturing is subject to numerous risks, including the following:


	•	tariffs, import and export controls and other non-tariff barriers such as quotas and local content rules;

	•	increasing transportation costs due to energy prices or other factors;

	•	poor infrastructure and shortages of equipment, which can delay or interrupt transportation and utilities;

	•	foreign currency fluctuations;

	•	restrictions on the transfer of funds;

	•	changing economic conditions;

	•	changes in governmental policies;

	•	environmental regulation;

	•	labor unrest, which can lead to work stoppages and interruptions in transportation or supply;

	•	political unrest, which can interrupt commerce and make travel dangerous; and

	•	expropriation and nationalization.

In particular, because most of our products are manufactured in China, adverse change in trade or political relations with China or political instability in the Far East could severely interfere with the manufacture of our products and could materially adversely affect our results of operations. Uncertainty regarding the short-term and long-term effects of the severe acute respiratory syndrome, or SARS, and the outbreak of avian influenza in China and elsewhere in the Far East could disrupt the manufacture and transportation of our products, which would harm our results of operations.

We are also subject to general risks associated with managing operations effectively and efficiently from the U.S. and understanding and complying with local laws, regulations and customs. These factors and the failure to properly respond to them could make it difficult to obtain adequate supplies of quality products when we need them, resulting in reduced sales and harm to our business.

Our business could suffer if our independent manufacturers, their suppliers or our licensees violate labor laws or fail to conform to our ethical standards.

We require our independent contract manufacturers, their suppliers and our licensees to meet our standards for working conditions, environmental protection and other matters before we are willing to place business with them. As a result, we do not always obtain the lowest cost production. We do not control our independent manufacturers, their suppliers or their respective labor practices. If one of our independent contract manufacturers or one of their suppliers violates our labor standards by, for example, using convicted, forced or indentured labor or child labor, fails to pay compensation in accordance with local law or fails to operate its factories in compliance with local safety regulations, we likely would immediately cease dealing with that manufacturer (or, in the case of a supplier, we would likely require our manufacturer to immediately cease using that supplier), and we could suffer an interruption in our product supply. In addition, the manufacturers’ or their suppliers’ actions could damage our reputation and the value of our brands, resulting in negative publicity and discouraging customers and consumers from buying our products.

Similarly, we do not control our licensees or any of their suppliers or their respective labor practices. If one of our licensees violates our labor standards or local laws, we would immediately terminate the license agreement, which would reduce our license revenue. In addition, the licensee’s actions could damage our reputation and the value of our brands. We also may not be able to replace the licensee.

If our licensing partners are unable to meet our expectations regarding the quality of their products or the conduct of their business, the value of our brands could suffer.

One element of our growth strategy depends on our ability to successfully enter into and maintain license agreements with manufacturers and distributors of products in complementary categories. Although we have not received any material license revenue to date, we will be relying on our licensees to maintain our standards with their manufacturers in the future, and any failure to do so could harm our reputation and the value of the licensed brand. The interruption of the business of any one of our material licensing partners due to any of the factors discussed immediately below could also adversely affect our future licensing sales and net income. The risks associated with our own products will also apply to our licensed products in addition to any number of possible risks specific to a licensing partner’s business, including, for example, risks associated with a particular licensing partner’s ability to:


	•	obtain capital;

	•	manage manufacturing and product sourcing activities;

	•	manage labor relations;

	•	maintain relationships with suppliers;

	•	manage credit risk effectively; and

	•	maintain relationships with customers.

Our licensing agreements generally do not preclude our licensing partners from offering, under other brands, products similar to those covered by their license agreements with us. If we cannot replace existing licensing partners who fail to perform adequately, our net sales, both directly from reduced licensing revenue and indirectly from reduced sales of our other products, will suffer.

If our brand managers cannot properly manage the licensees of their respective brands, our growth strategy could be impaired.

Our growth strategy and future profits depend upon each of our brand managers finding and successfully managing licensees for each of their respective brands. Our brand managers may not be able to successfully implement the licensing aspect of our growth strategy and to develop and manage profitable license arrangements. We compete for opportunities to license our brands with other companies who have greater resources than we do and who may have more valuable brands and more licensing experience than we do. As a result, even if we do identify a suitable licensee, we may lose the opportunity to a competitor. Our brand managers’ failure to execute our licensing strategy successfully could negatively impact our results from operations.

We may be unable to successfully identify, develop or acquire, and build new brands.

We intend to continue to focus on identifying, developing or acquiring and building new brands. Our search may not yield any complementary brands, and even if we do find a suitable brand we may not be able to obtain sufficient financing to fund the development or acquisition of the brand. We may not be able to successfully integrate the management of a new brand into our existing operations, and we cannot assure you that any developed or acquired brand will achieve the results we expect. We compete with other companies who have greater resources than we do for the opportunities to license brands or buy other brands. As a result, even if we do identify a suitable license or acquisition, we may lose the opportunity to a competitor who offers a more attractive price. In such event, we may incur significant costs in pursuing a license or an acquisition without success.

Our quarterly sales and operating results may fluctuate in future periods, and if we fail to meet expectations the price of our common stock may decline.

Our quarterly sales and operating results have fluctuated significantly in the past and are likely to do so in the future due to a number of factors, many of which are not within our control. If our quarterly sales or operating results fall below the expectations of investors or securities analysts, the price of our common stock could decline substantially. Factors that might cause quarterly fluctuations in our sales and operating results include the following:


	•	variation in demand for our products, including variation due to changing consumer tastes and seasonality;

	•	our ability to develop, introduce, market and gain market acceptance of new products and product enhancements in a timely manner;

	•	our ability to manage inventories, accounts receivable and cash flows;

	•	our ability to control costs;

	•	the size, timing, rescheduling or cancellation of orders from customers;

	•	the introduction of new products by competitors;

	•	the availability and reliability of raw materials used to manufacture our products;

	•	changes in our pricing policies or those of our independent manufacturers and competitors, as well as increased price competition in general;

	•	the mix of our domestic and international sales, and the risks and uncertainties associated with our international business;

	•	our ability to forecast future sales and operating results and subsequently attain them;

	•	developments concerning the protection of our intellectual property rights; and

	•	general global economic and political conditions, including international conflicts and acts of terrorism.

In addition, our expenses depend, in part, on our expectations regarding future sales. In particular, we expect to continue incurring substantial expenses relating to the marketing and promotion of our products. Since many of our costs are fixed in the short term, if we have a shortfall in sales, we may be unable to reduce expenses quickly enough to avoid losses. Accordingly, you should not rely on quarter-to-quarter comparisons of our operating results as an indication of our future performance.

Loss of the services of our key personnel could adversely affect our business.

Our future success and growth depend on the continued services of Doug Otto, our Chairman of the Board, Chief Executive Officer and President, Scott Ash, our Chief Financial Officer, Bob Orlando, the President of the Teva Division, Connie Rishwain, the President of the UGG and Simple Divisions, and Pat Devaney, Senior Vice President of Global Sourcing, Production and Development, as well as other key officers and employees. The loss of the services of any of these individuals or any other key employee could materially affect our business. Our future success also depends on our ability to identify, attract and retain additional qualified personnel. Competition for employees in our industry is intense and we may not be successful in attracting or retaining them.

We conduct business outside the U.S., which exposes us to foreign currency and other risks.

Our products are manufactured outside the U.S., and our independent manufacturers procure most of their supplies outside the U.S. We sell our products in the U.S. and internationally. Although we pay for the purchase and manufacture of our products primarily in U.S. dollars and we sell our products primarily in U.S. dollars, we are routinely subject to currency rate movements on non-U.S. denominated assets, liabilities and income since our foreign distributors sell in local currencies, which impacts the price to foreign customers. We currently do not use currency hedges since substantially all our transactions are in U.S. dollars. Future changes in foreign currency exchange rates may cause changes in the dollar value of our purchases or sales and materially affect our results of operations.

Our most popular products are seasonal, and our sales are sensitive to weather conditions.

Sales of our products, particularly those under the Teva and UGG brands, are highly seasonal and are sensitive to weather conditions. Extended periods of unusually cold weather during the spring and summer can reduce demand for Teva footwear. Likewise, unseasonably warm weather during the fall and winter months may reduce demand for our UGG products. The effect of favorable or unfavorable weather on sales can be significant enough to affect our quarterly results, with a resulting effect on our common stock price.

We depend on independent distributors to sell our products in international markets.

We sell our products in international markets through independent distributors. If a distributor fails to meet annual sales goals, it may be difficult and costly to locate an acceptable substitute distributor. If a change in our distributors becomes necessary, we may experience increased costs, as well as substantial disruption and a resulting loss of sales.

Our sales in international markets are subject to a variety of laws and political and economic risks that may adversely impact our sales and results of operations in certain regions.

Our ability to capitalize on growth in new international markets and to maintain the current level of operations in our existing international markets is subject to risks associated with international sales operations. These include:


	•	changes in currency exchange rates which impact the price to international consumers;

	•	the burdens of complying with a variety of foreign laws and regulations;

	•	unexpected changes in regulatory requirements; and

	•	the difficulties associated with promoting products in unfamiliar cultures.

We are also subject to general political and economic risks in connection with our international sales operations, including:


	•	political instability;

	•	changes in diplomatic and trade relationships; and

	•	general economic fluctuations in specific countries or markets.

Any of the abovementioned factors could adversely affect our sales and results of operations in international markets.

International trade regulations may impose unexpected duty costs or other non-tariff barriers to markets while the increasing number of free trade agreements have the potential to stimulate increased competition.

Products manufactured overseas and imported into the U.S. and other countries are subject to import duties. While we have implemented internal measures to comply with applicable customs regulations and to properly calculate the import duties applicable to imported products, customs authorities may disagree with our claimed tariff treatment for certain products, resulting in unexpected costs that may not have been factored into the sales price of the products.

We cannot predict whether future domestic laws, regulations or trade remedy actions or international agreements may impose additional duties or other restrictions on the importation of products from one or more of our sourcing venues. Such changes could increase the cost of our products, require us to withdraw from certain restricted markets or change our business methods, and could generally make it difficult to obtain products of our customary quality at a desired price. Meanwhile, the continued negotiation of bilateral and multilateral free trade agreements by the U.S. and our other market countries with countries other than our principal sourcing venues may stimulate competition from manufacturers in these other sourcing venues, which now export, or may seek to export, footwear to our market countries at preferred rates of duty, though we are uncertain precisely what effect these new agreements may have on our operations.

Finally, the increased threat of terrorist activity and the law enforcement responses to this threat have required greater levels of inspection of imported goods and have caused delays in bringing imported goods to market. Any tightening of security procedures, for example, in the aftermath of a terrorist incident, could worsen these delays.

We extensively utilize computer and communications systems to operate our Internet and catalog business and manage our internal operations. Any interruption of this service from power loss, telecommunications failure, failure of our computer system, failure due to weather, natural disasters or any similar event could disrupt our operations and result in lost sales. In addition, hackers and computer viruses have disrupted operations at many major companies. We may be vulnerable to similar acts of sabotage, which could have a material adverse effect on our business and operations.

We rely on our management information systems to operate our business and to track our operating results. Our management information systems will require modification and refinement as we grow and our business needs change. If we experience a significant system failure or if we are unable to modify our management information systems to respond to changes in our business needs, then our ability to properly run our business could be adversely affected.

Because the footwear market is sensitive to decreased consumer spending and slow economic cycles, if general economic conditions deteriorate many of our customers may significantly reduce their purchases from us or may not be able to pay for our products when due.

The footwear industry historically has been subject to cyclical variation and decline in performance when consumer spending decreases or softness appears in the retail market. Many factors affect the level of consumer spending in the footwear industry, including:


	•	general business conditions;

	•	interest rates;

	•	the availability of consumer credit;

	•	weather;

	•	taxation; and

	•	consumer confidence in future economic conditions.

Consumer purchases of discretionary items, including our products, may decline during recessionary periods and also may decline at other times when disposable income is lower. A downturn in economies where we or our licensing partners sell products, whether in the U.S. or abroad, may reduce sales.

In addition, we extend credit to our customers based on an evaluation of each customer’s financial condition. Many retailers, including some of our customers, have experienced financial difficulties during the past several years, thereby increasing the risk that such customers may not be able to pay for our products in a timely manner. Our bad debt expense may increase relative to net sales in the future. Any significant increase in our bad debt expense relative to net sales would adversely impact our net income and cash flow and could affect our ability to pay our own obligations as they become due.

We face intense competition, including competition from companies with significantly greater resources than ours, and if we are unable to compete effectively with these companies, our market share may decline and our business could be harmed.

The footwear industry is highly competitive, and the recent growth in the market for sport sandals, casual footwear and other products manufactured by our licensees has encouraged the entry of many new competitors into the marketplace as well as increased competition from established companies. A number of our competitors have significantly greater financial, technological, engineering, manufacturing, marketing and distribution resources than we do, as well as greater brand awareness in the footwear market. Our competitors include athletic and footwear companies, branded apparel companies and retailers with their own private labels. Their greater capabilities in these areas may enable them to better withstand periodic downturns in the footwear industry, compete more effectively on the basis of price and production and more quickly develop new products. In addition, access to offshore manufacturing has made it easier for new companies to enter the markets in which we compete, further increasing competition in the footwear industry.

Additionally, efforts by our competitors to dispose of their excess inventories may significantly reduce prices that we can expect to receive for the sale of our competing products and may cause our customers to shift their purchases away from our products.

We believe that our ability to compete successfully depends on a number of factors, including the quality, style and authenticity of our products and the strength of our brands, as well as many factors beyond our control. Maintaining our competitiveness depends on our ability to defend our products from infringement, our continued ability to anticipate and react to consumer tastes and our continued ability to deliver quality products at an acceptable price. If we fail to compete successfully in the future, our sales and profits will decline, as will the value of our business, financial condition and common stock.

Consolidations, restructurings and other ownership changes in the retail industry could affect the ability of our wholesale customers to purchase and market our products.

In the future, retailers in the U.S. and in foreign markets may undergo changes that could decrease the number of stores that carry our products or increase the concentration of ownership within the retail industry, including:


	•	consolidating their operations;

	•	undergoing restructurings;

	•	undergoing reorganizations; or

	•	realigning their affiliations.

These consolidations could result in a shift of bargaining power to the retail industry and in fewer outlets for our products. Further consolidations could result in price and other competition that could reduce our margins and our net sales.

Terrorism, government response to terrorism and other world events could affect our ability to do business.

We market and sell our products and services throughout the world. The September 11, 2001 terrorist attacks disrupted commerce across the U.S. and in many other parts of the world. World events, including the threat of similar attacks in the future, and the impact of the U.S.’s military campaigns may cause significant disruption to commerce throughout the world. We are unable to predict whether the threat of new attacks or the resulting response will result in any long-term commercial disruptions or do long-term harm to our business, results of operations or financial condition. To the extent that future disruptions further slow the global economy or, more particularly, result in delays or cancellations of purchase orders for our products or delays in shipping, our business and results of operations could suffer material damage.

Members of management own sufficient shares to substantially control our company.

At February 29, 2004, Doug Otto beneficially owned approximately 33.3% of our common stock and all of our executive officers and directors as a group beneficially owned approximately 41.1%. These ownership percentages will be reduced to 18.1% and 22.3% if the offering discussed in the following page occurs. The ownership positions of Mr. Otto and our executive officers as a group, together with the anti-takeover effects of the Delaware General Corporation Law and provisions of our certificate of incorporation, our bylaws and our stockholder rights plan, would likely delay, defer or prevent a change in control of our company, may deprive our stockholders of an opportunity to receive a premium for their common stock as part of a change in control and could have a negative effect on the market price of our common stock.

Our common stock price has been volatile, which could result in substantial losses for stockholders.

Our common stock is traded on the Nasdaq National Market. While our average daily trading volume for the 52-week period ended February 27, 2004 was approximately 98,710 shares, we have experienced more limited volume in the past and may do so in the future. The trading price of our common stock has been and may continue to be volatile. The closing sale prices of our common stock, as reported by the Nasdaq National Market, have ranged from $3.96 to $26.87 for the 52-week period ended February 27, 2004. The trading price of our common stock could be affected by a number of factors, including, but not limited to the following:


	•	changes in expectations of our future performance;

	•	changes in estimates by securities analysts (or failure to meet such estimates);

	•	quarterly fluctuations in our sales and financial results;


	•	broad market fluctuations in volume and price; and

	•	a variety of risk factors, including the ones described elsewhere in this report.

Accordingly, the price of our common stock is volatile and any investment in our securities is subject to risk of loss.

On March 3, 2004 we filed a registration statement with the Securities and Exchange Commission to sell up to 1,500,000 newly issued shares of Common Stock and up to 2,000,000 shares of Common Stock held by selling stockholders (not including the overallotment option granted by the selling stockholders to the underwriters). There are no assurances that this offering will be completed or at what price these shares will be sold.

Future sales of substantial amounts of shares of our common stock in the public market, or the perception that these sales could occur, may cause the market price of our common stock to decline. In addition, we may be required to issue additional shares upon exercise of previously granted options that are currently outstanding.

Anti-takeover provisions of our certificate of incorporation, bylaws, stockholder rights plan and Delaware law could prevent or delay a change in control of our company, even if such a change of control would benefit our stockholders.

Provisions of our certificate of incorporation and bylaws, as well as provisions of Delaware law, could discourage, delay or prevent a merger, acquisition or other change in control of our company, even if such a change in control might benefit our stockholders. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors and take other corporate actions. As a result, these provisions could limit the price that investors are willing to pay in the future for shares of our common stock. These provisions might also discourage a potential acquisition proposal or tender offer, even if the acquisition proposal or tender offer is at a price above the then current market price for our common stock. These provisions include the following:


	•	a board of directors that is classified so that only one-third of directors stand for election each year;

	•	authorization of “blank check” preferred stock, which our board of directors could issue with provisions designed to thwart a takeover attempt;

	•	limitations on the ability of stockholders to call special meetings of stockholders;

	•	a prohibition against stockholder action by written consent and a requirement that all stockholder actions be taken at a meeting of our stockholders; and

	•	advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings.

We adopted a stockholder rights plan in 1998 under a stockholder rights agreement intended to protect stockholders against unsolicited attempts to acquire control of our company that do not offer what our board of directors believes to be an adequate price to all stockholders or that our board of directors otherwise opposes. As part of the plan, our board of directors declared a dividend that resulted in the issuance of one preferred share purchase right for each outstanding share of our common stock for a period of ten years. If a bidder proceeds with an unsolicited attempt to purchase our stock and acquires 20% or more (or announces its intention to acquire 20% or more) of our outstanding stock, and the board of directors does not redeem the preferred stock purchase right, the right will become exercisable at a price that significantly dilutes the interest of the bidder in our common stock.

The effect of the stockholder rights plan is to make it more difficult to acquire our company without negotiating with the board of directors. However, the stockholder rights plan could discourage offers even if made at a premium over the market price of our common stock, and even if the stockholders might believe the transaction would benefit them.

In addition, we are subject to Section 203 of the Delaware General Corporation Law, which limits business combination transactions with 15% or greater stockholders that our board of directors has not approved. These provisions and other similar provisions make it more difficult for a third party to acquire us without negotiation. These provisions apply even if some stockholders would consider the transaction beneficial.

Derivative Instruments. Although we have used foreign currency hedges in the past, we no longer utilize forward contracts or other derivative instruments to mitigate exposure to fluctuations in the foreign currency exchange rate as all of our purchases and sales for the foreseeable future will be denominated in U.S. currency.

Although our sales are denominated in U.S. currency, our sales may be impacted by fluctuations in the exchange rates between the U.S. dollar and the local currencies in the international markets where our products are sold. If the United States dollar strengthens, it may result in increased pricing pressure on our distributors, which may have a negative impact on our net sales. We are unable to estimate the amount of any impact on sales attributed to pricing pressures caused by fluctuations in exchange rates.

Market Risk. Our market risk exposure with respect to financial instruments is to changes in the “prime rate” in the U.S. and changes in LIBOR. Our revolving line of credit and our term loan provide for interest on outstanding borrowings at rates tied to the prime rate or at our election tied to LIBOR. At December 31, 2003, we had no outstanding borrowings under the revolving line of credit and $7,000,000 outstanding borrowings under the term loan. A 1.00% increase in interest rates on our current borrowings would have a $70,000 impact on income (loss) before income taxes.

See Item 15(a) and page 48 for an index to the consolidated financial statements and supplementary information included herein.

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.

All other schedules are omitted because they are not applicable or the required information is shown in the Company’s consolidated financial statements or the related notes thereto.

We have audited the accompanying consolidated financial statements of Deckers Outdoor Corporation and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Deckers Outdoor Corporation and subsidiaries as of December 31, 2002 and 2003, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in note 13 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, on January 1, 2002.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)

In 2002, the Company issued to the seller 1,375,000 shares of Series A preferred stock with a value of $5,500,000, 100,000 shares of common stock with a value of $368,000, options to purchase 100,000 shares of common stock with a value of $187,000 and $13,000,000 of long-term debt in connection with the acquisition of Teva.

The consolidated financial statements include the accounts of Deckers Outdoor Corporation and its wholly owned subsidiaries (collectively referred to as the “Company”). All intercompany balances and transactions have been eliminated in consolidation.

The Company builds niche products into global lifestyle brands by designing and marketing innovative, functional and fashion-oriented footwear, developed for both high performance outdoor activities and everyday casual lifestyle use.

Inventories, principally finished goods, are stated at the lower of cost (first-in, first-out) or market (net realizable value). Market values are determined by historical experience with discounted sales, industry trends and the retail environment.

The Company recognizes revenue when products are shipped and the customer takes title and assumes risk of loss, collection of relevant receivable is probable, persuasive evidence of an arrangement exists, and the sales price is fixed or determinable. Allowances for estimated returns, discounts, and bad debts are provided for when related revenue is recorded. Amounts billed for shipping and handling costs are recorded as a component of net sales, totaling $1,116,000, $993,000, and $2,041,000 for the years ended December 31, 2001, 2002, and 2003, respectively. Related costs paid to third-party shipping companies are recorded as a cost of sales, totaling $983,000, $1,124,000, and $2,057,000 for the years ended December 31, 2001, 2002, and 2003, respectively.

Intangible assets consist primarily of goodwill, trademarks, patents, and noncompete covenants arising from the application of purchase accounting. On January 1, 2002, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets (“SFAS 142”). Accordingly, goodwill and intangible assets with indefinite useful lives are no longer amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values and reviewed for impairment in accordance with SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets (“SFAS 144”).

In connection with the implementation of SFAS 142, a goodwill impairment charge of $8,973,000 (net of related income tax benefit of $843,000) was recorded for the year ended December 31, 2002.

SFAS 144 provides a single accounting model for long-lived assets to be disposed of. SFAS 144 also changes the criteria for classifying an asset as held for sale and broadens the scope of businesses to be disposed of that qualify for reporting as discontinued operations and changes the timing of recognizing losses on such operations. The Company adopted SFAS 144 on January 1, 2002. The adoption of SFAS 144 did not have a significant impact on the Company’s consolidated financial statements.

In accordance with SFAS 144, long-lived assets, such as property, plant, and equipment, and purchased intangibles subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset.

Prior to the adoption of SFAS No. 144, the Company accounted for long-lived assets in accordance with SFAS No. 121, Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.

Depreciation of property and equipment is computed using the straight-line method based on estimated useful lives ranging from one to seven years. Leasehold improvements are amortized on the straight-line basis over their estimated economic useful lives or the lease term, whichever is shorter.

The fair values of the Company’s cash equivalents, trade accounts receivable, prepaid expenses and other current assets, refundable income taxes, trade accounts payable, and accrued expenses approximate the carrying values due to the relatively short maturities of these instruments.

The fair value of the Company’s revolving credit line approximates the carrying value due to variable interest rates associated with the credit line.

The fair values of the Company’s other notes payable are estimated by discounting future cash flows of each instrument at rates currently available to the Company for similar debt instruments of comparable maturities by the Company’s bankers. The fair values of these notes approximate the carrying value.

The fair value of the guarantee of officer’s debt is estimated based on the expected present value (see note 8).

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”), as amended by SFAS 148. Under the provisions of SFAS 123 and SFAS 148, 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 and SFAS 148. The Company applies the fair value techniques of SFAS 123 and SFAS 148 to measure compensation cost for options/warrants granted to nonemployees.

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

Management of the Company has made a number of estimates and assumptions relating to the reporting of assets, liabilities, net sales, and expenses and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with accounting principles generally accepted in the U.S. Significant areas requiring the use of management estimates relate to inventory reserves, allowances for bad debts, returns and discounts, impairment assessments and charges, deferred taxes, depreciation and amortization, litigation reserves, fair value of financial instruments, fair value of acquired intangibles, assets and liabilities, and hedging activities. Actual results could differ from these estimates.

Research and development costs are charged to expense as incurred. Such costs amounted to $1,034,000, $1,092,000, and $1,099,000 in 2001, 2002, and 2003, respectively.

Advertising production costs are expensed the first time the advertisement is run. All other costs of advertising, marketing and promotion are expensed as incurred. These expenses charged to operations for the years ended 2001, 2002, and 2003 were $6,087,000, $7,456,000, and $6,594,000, respectively. Included in prepaid and other current assets at December 31, 2002 and 2003 were $403,000 and $221,000, respectively, related to prepaid advertising and promotion expenses for programs to take place after December 31, 2002 and 2003, respectively.

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date.

Basic income (loss) per share (“EPS”) is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution from securities that could share in the earnings of the Company. Antidilutive securities are excluded from diluted EPS.

The dilutive effect of convertible preferred stock above relates to preferred stock that was outstanding between November 25, 2002 and December 3, 2003. The Company repurchased all of the outstanding preferred stock on December 3, 2003.

Options to purchase 282,000, 286,000 and 217,000 shares of common stock at prices ranging from $5.25 to $9.88, $4.80 to $9.88 and $9.88 to $19.00, were outstanding during 2001, 2002 and 2003, respectively, but were not included in the computation of diluted earnings per share because the options’ exercise price was greater than the average market price of the common shares during the respective periods, and therefore their inclusion would be antidilutive.

The Company considers the U.S. dollar as the functional currency. Assets and liabilities of the foreign operations denominated in local currencies are translated at the rate of exchange at the balance sheet date. Net sales and expenses are translated at the weighted average rate of exchange during the period.

The Company may enter into foreign currency forward contracts in the ordinary course of business to mitigate the risk associated with foreign exchange rate fluctuations related to sales of goods in Eurodollars.

Derivative financial instruments are not used for speculative purposes. At December 31, 2003, the Company had no foreign currency forward contracts.

In accordance with Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, these foreign currency cash flow hedges are recorded at fair value in the accompanying balance sheet with unrealized gains and losses on outstanding foreign currency forward contracts recorded in the financial statements as a component of other comprehensive income, net of deferred taxes, to the extent they are effective hedges. 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 to the same statement of operations line item affected by the hedged forecasted transaction due to foreign currency fluctuations. Any terminated derivatives or 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.

Comprehensive income is the total of net earnings (loss) and all other nonowner changes in equity. Except for net income (loss), foreign currency translation adjustments, and unrealized gains and losses as a result of hedging activities, the Company does not have any transactions and other economic events that qualify as comprehensive income as defined under SFAS No. 130.

Management of the Company has determined its reportable segments are strategic business units. The four reportable segments are the Teva, UGG and Simple wholesale divisions and the Company’s Internet and catalog retailing business. Information related to these segments is summarized in note 10.

Certain reclassifications have been made to the 2001 and 2002 balances to conform to the 2003 presentation.

In June 2001, Financial Accounting Standards Board, or 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 it 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. Subsequent to 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 consolidated financial position or results from operations.

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

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS No. 145 amends existing guidance on reporting gains and losses on the extinguishment of debt to prohibit the classification of the gain or loss as extraordinary, as the use of such extinguishments have become part of the risk management strategy of many companies. SFAS No. 145 also amends SFAS No. 13 to require sale-leaseback accounting for certain lease modifications that have economic effects similar to sale-leaseback transactions. The provisions of the Statement related to the rescission of Statement No. 4 is applied in fiscal years beginning after May 15, 2002. The Company adopted SFAS No. 145 on January 1, 2003. The adoption of SFAS No. 145 did not have a material effect on the Company’s consolidated financial position or results from operations.

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 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 consolidated financial position or results from operations.

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 initial recognition and measurement provisions of the Interpretation are applicable to guarantees issued or modified after December 31, 2002 and are not expected to have a material effect on the Company’s consolidated financial position or results from operations. The disclosure requirements are effective for financial statements of interim and annual periods ending after December 31, 2002 and are included in the notes to these consolidated 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 generally 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 consolidated financial position or results of operation. In December 2003, the FASB revised FIN 46 to exempt certain entities from its requirements and to clarify certain issues arising during the implementation of FIN 46. The adoption of this revised interpretation in the first quarter of 2004 is not expected to have any impact on our consolidated 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 generally 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 consolidated financial position or results of operation.

Effective August 1, 1992, the Company established a 401(k) defined contribution plan. Substantially all employees are eligible to participate in the plan through tax-deferred contributions. The Company matches 50% of an employee’s contribution up to $1,200 per year. Matching contributions totaled $67,000, $90,000 and $67,000 during 2001, 2002 and 2003, respectively. In addition, the Company may also make discretionary profit sharing contributions to the plan. The Company did not make profit sharing contributions for the years ended December 31, 2001, 2002 or 2003.

During 2003, the Company wrote-off certain fully depreciated assets with an original cost of $3,402,000.

The aggregate maturities of long-term debt as of December 31, 2003 are as follows:

We amended the Facility with Comerica Bank-California (the “Bank”) in November 2003. As amended, the Facility expires June 1, 2005 and provides for a maximum availability of $20,000,000 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 our 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 December 31, 2003) or at our option, at LIBOR plus 1.00% to 2.50%, depending on our ratio of liabilities to earnings before interest, taxes, depreciation and amortization (“EBITDA”), and is secured by substantially all assets. The Facility included an upfront fee of $230,000 and includes subsequent annual commitment fees of $100,000. At December 31, 2003, the Company had no outstanding borrowings under the Facility, no foreign currency reserves for outstanding forward contracts and no outstanding letters of credit. We had credit availability under the Facility of $19,283,000 at December 31, 2003.

The agreements underlying the Facility, the Term Loan, and the Subordinated Note contain several financial covenants including a quick ratio requirement, profitability requirements and cash flow coverage requirements, among others. The Company was in compliance with all covenants at December 31, 2003.

The unsecured junior subordinated note payable to the seller of Teva is payable to a current stockholder of the Company, Mark Thatcher. This note provides the holder with the right to designate one member of the Board of Directors.

Foreign income tax expenses (primarily current) were $289,000, $522,000 and $1,452,000 during the years ended December 31, 2001, 2002 and 2003, respectively, and are included in federal current tax expenses above.

Actual income taxes differed from that obtained by applying the statutory federal income tax rate to earnings before income taxes as follows:

The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities at December 31, 2002 and 2003 are presented below:

Management believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize the net deferred tax assets.

The Company is authorized to issue 5,000,000 shares of preferred stock with a par value of $0.01, of which 1,375,000 shares are designated as Series A Preferred Stock. The 1,375,000 shares of Series A Preferred Stock were issued to Mark Thatcher in connection with the acquisition of Teva (note 12). In December 2003, the Company redeemed all of the outstanding Preferred Stock. In connection with the redemption, the Company paid Mr. Thatcher a premium of approximately $438,000, which was recorded as a reduction of additional paid-in capital. The premium reduced income (loss) applicable to common stockholders and, therefore is reflected in the income (loss) per share calculations.

In February 2001, the Company amended the 1993 Stock Incentive Plan (the “1993 Plan”). Under the terms of the amended 1993 Plan, 3,000,000 shares of common stock are reserved for issuance to officers, directors, employees, and consultants of the Company. Awards to 1993 Plan participants are not restricted to any specified form and may include stock options, securities convertible into or redeemable for stock, stock appreciation rights, stock purchase warrants, or other rights to acquire stock. Under the 1993 Plan, 162,344, 124,896 and 262,577 shares of common stock were issued to employees in 2001, 2002, and 2003, respectively. In 1997, 100,000 shares of common stock were issued under the 1993 plan to a former officer of the Company, which was financed through the issuance of a note receivable of $624,000 to such officer (bearing interest at 6.39%, secured by the underlying Company stock, with principal and interest due April 18, 2002). The former officer returned the Company’s common stock and the note receivable was reversed in 2002.

Common stock option activity under the 1993 Plan for the years ended December 31, 2001, 2002 and 2003 is as follows:

The per share weighted average fair value of stock options granted during 2001, 2002, and 2003 was $2.13, $2.25, and $10.83, respectively, on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: 2001 — expected dividend yield of 0%, stock volatility of 49.56%, risk-free interest rate of 3.30%, and an expected life of seven years; 2002 — expected dividend yield of 0%, stock volatility of 48.46%, risk-free interest rate of 3.70%, and an expected life of seven years; 2003 — expected dividend yield of 0%, stock volatility of 51.70%, risk-free interest rate of 3.70%, and an expected life of seven years.

The following table summarizes information about stock options outstanding and exercisable at December 31, 2003.

In August 1995, the Company adopted the 1995 Employee Stock Purchase Plan (the “1995 Plan”). The 1995 Plan is intended to qualify as an Employee Stock Purchase Plan under Section 423 of the Internal Revenue Code. Under the terms of the 1995 Plan, as amended, 300,000 shares of common stock are reserved for issuance to employees who have been employed by the Company for at least six months. The 1995 Plan provides for employees to purchase the Company’s common stock at a discount below market value, as defined by the 1995 Plan. Under the 1995 Plan, 26,036, 11,870 and 6,781 shares were issued in 2001, 2002, and 2003, respectively. Consistent with the application of APB Opinion No. 25, no compensation has been recorded for stock purchases.

The Company adopted a stockholder rights plan in 1998 to protect stockholders against unsolicited attempts to acquire control of the Company that do not offer what the Company believes to be an adequate price to all stockholders. As part of the plan, the board of directors of the Company declared a dividend of one preferred share purchase right (a “Right”) for each outstanding share of common stock, par value $0.01 per share (the “Common Shares”), of the Company. The dividend was payable to stockholders of record on December 1, 1998 (the “Record Date”). In addition, one Right shall be issued with each Common Share that becomes outstanding (i) between the Record Date and the earliest of the Distribution Date, the Redemption Date, and the Final Expiration Date (as such terms are defined in the Rights Agreement) or (ii) following the Distribution Date and prior to the Redemption Date or Final Expiration Date, pursuant to the exercise of stock options or under any employee plan or arrangement or upon the exercise, conversion, or exchange of other securities of the Company, which options or securities were outstanding prior to the Distribution Date, in each case upon the issuance of the Company’s common stock in connection with any of the foregoing. Each right entitles the registered holder to purchase from the Company one one-hundredth of a share of Series B Junior Participating Preferred Stock, par value $0.01 per share (the “Preferred Shares”), of the Company, at a price of $50.00, subject to adjustment.

The rights have no voting power and expire on November 11, 2008. The rights may be redeemed by the Company for $0.01 per right until the right becomes exercisable.

As discussed in note 12, on November 25, 2002, the Company acquired the worldwide Teva patents, trademarks and other assets. Prior to the acquisition, the Company had been selling its Teva line of sport

sandals and other footwear since 1985, pursuant to various license arrangements with Mark Thatcher, the inventor of the Teva sports sandal and previous holder of the Teva patents and trademarks.

In 1999, the Company signed a new license agreement (the “License Agreement”) for Teva, which was effective January 1, 2000. Under the License Agreement, the Company received the exclusive worldwide rights for the manufacture and distribution of Teva footwear through 2004. In connection with the License Agreement, the Company paid the licensor a licensing fee of $1,000,000 and issued the licensor 428,743 shares of its previously unissued common stock with a fair value of $1,608,000. The Company recorded the license as an intangible asset for the value of the cash and common stock issued pursuant to the License Agreement. The shares are subject to various contractual and other holding period requirements. In addition, the Company agreed to grant the licensor not less than 50,000 stock options on the Company’s common stock annually, with an exercise price at the market value on the date of grant. The fair value of options granted under the License Agreement aggregated $152,000 and $111,000 in 2001 and 2002, respectively.

In connection with the 1999 Teva license renewal, the Company received an option to buy Teva from Mr. Thatcher, which was subsequently renegotiated in 2001. On November 25, 2002, the Company completed the acquisition of Teva.

The License Agreement provided for royalties using a sliding scale ranging from 5.0% to 6.5% of annual sales, depending upon sales levels, and included minimum annual royalties ranging from $4,400,000 in 2002 to $7,600,000 in 2011. The agreement also required minimum advertising and promotional expenditures of 5.0% of annual sales for domestic sales and 6.5% for international sales. In addition to the minimum advertising and promotional costs, the Company and the licensor had agreed to each contribute annually 0.5% of annual sales toward the promotion of the Teva brand and trademark, with or without particular reference to individual styles.

Royalty expense related to Teva sales is included in selling, general, and administrative expenses in the accompanying consolidated financial statements and was $4,194,000 and $3,739,000 during the years ended December 31, 2001 and 2002, respectively.

Subsequent to acquiring Teva on November 25, 2002, the Company ceased granting stock options and paying royalties on Teva footwear sales and owns all Teva rights and assets worldwide.

The Company leases office facilities under operating lease agreements, which expire through December 2007:

Total rent expense for the years ended December 31, 2001, 2002, and 2003 was approximately $1,074,000, $1,188,000, and $1,271,000, respectively.

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 December 31, 2003, approximately $1,000,000 was outstanding under the officer’s loan from the bank. The fair value of the guarantee was immaterial at December 31, 2003.

An action was brought against the Company in 1995 by Molly Strong-Butts and Yeti by Molly, Ltd. (collectively, Molly) which alleged, among other things, that the Company violated a certain nondisclosure agreement and obtained purported trade secrets regarding a line of winter footwear which Deckers stopped producing in 1994. A jury verdict was obtained against the Company in district court in March 1999 aggregating $1,785,000 for the two plaintiffs. In August 2001 the U.S. Court of Appeals for the Ninth Circuit affirmed the district court’s decision for a judgment against the Company, resulting in a settlement of approximately $2,000,000, including interest, which the Company paid in November 2001. In addition, the court of appeals reversed the district court’s refusal to consider an award of exemplary damages or attorney fees and remanded to the district court for further proceedings. On September 30, 2002, a federal judge ruled that the Company must pay an additional $4,290,000 to Molly, including $2,450,000 of exemplary damages and $1,840,000 to cover the plaintiff’s attorney fees. Deckers and Molly agreed to settle without going to appeal for the total sum of $4,000,000. This was paid prior to December 31, 2002. The Company recorded these litigation costs in the accompanying consolidated statement of operations in 2001 and 2002, respectively.

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 May 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 June 2003, which is reflected as a reduction of selling, general and administrative expenses in the accompanying consolidated statement of operations for the year ended December 31, 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.

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 consolidated balance sheet. The effective portion of gains and losses resulting from recording forward contracts at fair value are deferred in accumulated other comprehensive income in the accompanying consolidated 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 to the same statement of earnings 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 terminated derivatives or 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.

The Company’s accounting policies of the segments below are the same as those described in the summary of significant accounting policies, except that the Company does not allocate interest, income taxes, or unusual items to segments. The Company evaluates performance based on net sales and profit or loss from operations. The Company’s reportable segments are strategic business units responsible for the worldwide operations of each of its brands. They are managed separately because each business requires different marketing, research and development, design, sourcing and sales strategies. The earnings 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, facilities costs and the 2001 and 2002 litigation costs. Business segment information is summarized as follows:

The assets allocable to each reporting segment generally include accounts receivable, inventory, 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 brands.

Reconciliations of total assets from reportable segments to the consolidated financial statements are as follows:

The Company sells its footwear products principally to customers throughout the U.S. The Company also sells its footwear products to foreign customers located in Europe, Canada, Australia, and Asia, among other regions. International sales to unaffiliated customers were 23.1%, 21.0%, and 18.5% of net sales for the years ended December 31, 2001, 2002, and 2003, respectively. The Company does not consider international operations a separate segment. Such operations are not reviewed by the Chief Operating Decision Maker separately, but rather in the aggregate with the aforementioned segments. Management performs regular evaluations concerning the ability of its customers to satisfy their obligations and records a provision for doubtful accounts based upon these evaluations. For the years ended December 31, 2001, 2002, and 2003, the Company had no single customer exceeding 10.0% of consolidated net sales. As of December 31, 2002, the Company had one customer representing 14.4% of net trade accounts receivable. As of December 31, 2003, the Company had one customer representing 13.8% of net trade accounts receivable.

The Company’s production and sourcing is concentrated primarily in the Far East, with the vast majority being produced at four independent contractor factories in China. The Company’s operations are subject to the customary risks of doing business abroad, including, but not limited to, currency fluctuations, customs duties, and related fees, various import controls and other nontariff barriers, restrictions on the transfer of funds, labor unrest and strikes and, in certain parts of the world, political instability.

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 and his wholly-owned corporation, Teva Sport Sandals, Inc., the owner of the Teva Internet and catalog business. 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 it’s redemption value, and 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 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:


⁽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 fully deductible for income tax purposes but is not amortizable for financial reporting 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 table summarizes supplemental statement of income (loss) information on a pro forma basis as if the acquisition had occurred on January 1, 2001.

In July 2001, The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 142 (SFAS 142), Goodwill and Other Intangible Assets. SFAS 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized to earnings but instead be reviewed periodically for impairment, including an annual test performed on December 31. The Company implemented this accounting standard on January 1, 2002, resulting in a goodwill impairment charge of $8,973,000 (net of the related income tax benefit of $843,000) during the year ended December 31, 2002. This noncash impairment charge included a write-down of approximately $7,800,000 for UGG goodwill and approximately $1,200,000 on an after-tax basis for Simple goodwill. As a result of these write-downs, UGG has approximately $6,100,000 of goodwill remaining at December 31, 2002 and Simple has no remaining goodwill, which has been included in intangible assets in the accompanying consolidated balance sheets. The

impairment charge has been recorded as a cumulative effect of a change in accounting principle in the Company’s consolidated statement of operations for the year ended December 31, 2002.

In addition, SFAS 142 provides that goodwill no longer be amortized, and as a result the Company recorded approximately $809,000 of goodwill amortization during the year ended December 31, 2001, whereas the Company had recorded no goodwill amortization during the years ended December 31, 2002 and 2003. For comparative purposes, the following schedule reconciles reported net income (loss) to adjusted net income (loss) for the year ended December 31, 2001, adjusted to exclude goodwill amortization, along with comparative information for the years ended December 31, 2002 and 2003.

Aggregate amortization expense for amortizable intangible assets for the year ended December 31, 2003 was $276,000. Estimated amortization expense for the next five years is: $253,000 in 2004, $253,000 in 2005, $253,000 in 2006, $210,000 in 2007, and $71,000 in 2008.

The changes in the carrying amount of goodwill for the year ended December 31, 2003 are as follows:

We have adopted a written code of ethics that applies to our principal executive officer, principal financial and accounting officer, controller and persons performing similar functions. Our code of ethics is designed to meet the requirements of Section 406 of the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder. To the extent required by law, any amendments to, or waivers from, any provision of the code will be promptly disclosed publicly either on a report on Form 8-K or on our website at www.deckers.com.

All additional information required by this item, including information relating to Directors and Executive Officers of the Registrant, is set forth in the Company’s definitive proxy statement relating to the Registrant’s 2004 annual meeting of shareholders, which will be filed pursuant to Regulation 14A within 120 days after the end of the Company’s fiscal year ended December 31, 2003, and such information is incorporated herein by reference.

Information relating to Executive Compensation is set forth in the Company’s definitive proxy statement relating to the Registrant’s 2004 annual meeting of shareholders, which will be filed pursuant to Regulation 14A within 120 days after the end of the Company’s fiscal year ended December 31, 2003, and such information is incorporated herein by reference.

Information relating to Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters is set forth in the Company’s definitive proxy statement relating to the Registrant’s 2004 annual meeting of shareholders, which will be filed pursuant to Regulation 14A within 120 days after the end of the Company’s fiscal year ended December 31, 2003, and such information is incorporated herein by reference.

Information relating to Certain Relationships and Related Transactions is set forth in the Company’s definitive proxy statement relating to the Registrant’s 2004 annual meeting of shareholders, which will be filed pursuant to Regulation 14A within 120 days after the end of the Company’s fiscal year ended December 31, 2003, and such information is incorporated herein by reference.

Information relating to Principal Accountant Fees and Services is set forth in the Company’s definitive proxy statement relating to the Registrant’s 2004 annual meeting of shareholders, which will be filed pursuant to Regulation 14A within 120 days after the end of the Company’s fiscal year ended December 31, 2003, and such information is incorporated herein by reference.

(a) Consolidated Financial Statements and Schedules required to be filed hereunder are indexed on page 48 hereof.


+	Certain information in this Exhibit was omitted and filed separately with the Securities and Exchange Commission pursuant to a confidential treatment request as to the omitted portions of the Exhibit.

#	Management contract or compensatory plan or arrangement.

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	DECKERS OUTDOOR CORPORATION
	(Registrant)

	/s/ DOUGLAS B. OTTO

	Douglas B. Otto
	Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

80 EX-10.27 3 v97221exv10w27.txt EXHIBIT 10.27 EXHIBIT 10.27 AMENDMENT NUMBER FOUR TO AMENDED AND RESTATED CREDIT AGREEMENT This AMENDMENT NUMBER FOUR TO AMENDED AND RESTATED CREDIT AGREEMENT (this "Amendment"), dated as of November 13, 2003, is entered into among DECKERS OUTDOOR CORPORATION, a Delaware corporation ("Parent"), and UGG Holdings, Inc., a California corporation ("UGG") (collectively, referred to herein as "Borrowers" and individually as a "Borrower"), on the one hand, and COMERICA BANK, a Michigan banking corporation, successor by merger to Comerica Bank-California, a California banking corporation ("Bank"), on the other hand, with reference to the following facts: A. Borrowers and Bank previously entered into that certain Amended and Restated Credit Agreement, dated as of November 25, 2002, as amended by that certain Amendment Number One to Amended and Restated Credit Agreement, dated as of April 29, 2003, that certain Amendment Number Two to Amended and Restated Credit Agreement, dated as of June 27, 2003, and that certain Amendment Number Three to Amended and Restated Credit Agreement, dated as of August 6, 2003 (as so amended, the "Agreement"); and B. Borrowers and Bank desire to further amend the Agreement in accordance with the terms of this Amendment. NOW, THEREFORE, in consideration of the foregoing, the parties hereto hereby agree as follows: 1. Defined Terms. All initially capitalized terms used but not defined herein shall have the meanings assigned to such terms in the Agreement. 2. Amendments to Section 1.1. (a) The definitions of "Inventory Sublimit Increase Period," "Overadvance Limit" and "Overadvance Period" set forth in Section 1.1 of the Agreement are hereby deleted. (b) The following new definitions are hereby added to Section 1.1 of the Agreement in appropriate alphabetical order: "'Permitted Payments' means the following but without duplication: (i) payments by Parent to repay up to $2,000,000 in Subordinated Debt under the Subordination Agreement (Peninsula), (ii) payments by Parent to redeem up to $5,500,000 of Parent's preferred stock issued to Thatcher so long as such redemption is permitted under the terms of the Note Purchase Agreement, and (iii) premium payments of $425,000 associated with the repurchase of up to $5,500,000 of Parent's preferred stock." 1 "'Term Loan Readvance Notice' means an irrevocable written notice from Borrowers to Bank of Borrowers' request to have Bank make a new $7,000,000 term loan to Borrowers to be used to refinance the prior term loan made by Bank and for Permitted Payments." (c) The definitions of "Applicable LIBOR Lending Rate Margin," "Borrowing Base," "Inventory Sublimit," and "Revolving Credit Commitment" set forth in Section 1.1 of the Agreement are hereby amended in their entirety as follows: "'Applicable LIBOR Lending Rate Margin' means the margin set forth below opposite the applicable Consolidated Total Liabilities to Consolidated EBITDA Ratio disclosed in the latest Compliance Certificate delivered pursuant to Section 6.3(c), subject to Section 2.4(d); provided that until Bank's receipt of Borrowers' audited Financial Statements for the fiscal year ending December 31, 2003, the margin will be as set forth opposite Pricing Level V:

"*Provided, however, upon receipt by Bank of the Term Loan Readvance Notice and a Replacement Secured Promissory Note (Term Loan) in the form of Exhibit A attached hereto, duly executed by Borrowers, and fulfillment of the condition described in Section 12 hereinbelow, the Applicable LIBOR Lending Rate Margin for the Term Loan shall be automatically amended to mean 325 basis points without further action required by any party." "'Borrowing Base' means, as of the date of determination, the lesser of (a) the Revolving Credit Commitment or (b) (i) the Eligible Accounts 2 times the Applicable A/R Advance Rate, plus (ii) the lesser of (x) 50% of the Eligible Inventory or (y) the Inventory Sublimit; less the amount of outstanding Obligations (other than Obligations in respect of the Term Loan) and less the Foreign Exchange Reserve; provided, however, Bank may reduce the advance rates or create additional reserves against the Eligible Accounts and/or the Eligible Inventory, in its sole and absolute discretion, without declaring an Event of Default if it reasonably determines that there has occurred a Material Adverse Effect." "'Inventory Sublimit' means Twelve Million Five Hundred Thousand Dollars ($12,500,000)." "'Revolving Credit Commitment' means Twenty Million Dollars ($20,000.000)." (d) Upon receipt by Bank of the Term Loan Readvance Notice and a Replacement Secured Promissory Note (Term Loan) in the form of Exhibit A attached hereto, duly executed by Borrowers, and fulfillment of the condition described in Section 12 hereinbelow, the definition of "Term Loan Maturity Date" set forth in Section 1.1 of the Agreement shall be automatically amended in its entirety as follows without further action required by any party: "'Term Loan Maturity Date' means November 25, 2005." 3. Amendments to Sections 2.1 and 2.2. Sections 2.1 and 2.2 of the Agreement are hereby amended in their entirety as follows: "2.1 Revolving Loans. Provided that no Event of Default or Unmatured Event of Default has occurred and is continuing, and subject to the other terms and conditions hereof, Bank agrees to make revolving loans ("Revolving Loans") to Borrowers, upon notice in accordance with Section 2.5(b), from the Closing Date up to but not including the Revolving Loans Maturity Date, the proceeds of which shall be used only for the purposes allowed in Section 7.1(a), subject to the following conditions and limitations: "(a) The outstanding Obligations (other than Obligations in respect of the Term Loan) after giving effect to any proposed Borrowing shall not exceed the Borrowing Base; "(b) Borrowers shall not be permitted to borrow, and Bank shall not be obligated to make, any Revolving Loans to Borrowers, unless and until all of the conditions for a Borrowing set forth in Section 4.2 have been met to the reasonable satisfaction of Bank; and "(c) Except as otherwise provided in clause (d) of this Section 2.1, if, at any time or for any reason, the amount of the Obligations exceeds the Borrowing Base (an "Overadvance"), Borrowers shall immediately 3 pay to Bank, upon Bank's election and demand, in cash, the amount of such Overadvance to be used by Bank to repay outstanding Borrowings." "Borrowers may repay and, subject to the terms and conditions hereof, reborrow Revolving Loans. All such repayments shall be without penalty or premium except as otherwise required by Section 2.7 with respect to repayments of LIBOR Lending Rate Portions. Borrowers shall give Bank at least three (3) LIBOR Business Days' prior written notice of any repayment of a LIBOR Lending Rate Portion. On the Revolving Loans Maturity Date, Borrowers shall pay to Bank the entire unpaid principal balance of the Revolving Loans together with all accrued but unpaid interest thereon." "2.2 Foreign Exchange Forward Contracts. Provided that no Event of Default or Unmatured Event of Default has occurred and is continuing, and subject to the other terms and conditions of this Agreement and the Foreign Exchange Agreement, Parent may incur Currency Obligations from time to time from the Closing Date up to but not including the Revolving Loans Maturity Date, subject to the following conditions and limitations: "(a) Tenors for Parent's Currency Obligations shall not exceed the lesser of 365 days and the Revolving Loans Maturity Date; "(b) The aggregate amount of Parent's Currency Obligations outstanding at any one time after giving effect to any proposed incurrence of a Currency Obligation by Parent shall not exceed the Foreign Exchange Sublimit; "(c) The outstanding Obligations after giving effect to any proposed incurrence of a Currency Obligation by Parent shall not exceed the Borrowing Base; "(d) The Currency Obligations shall be incurred by Parent only for international transactions incurred in the ordinary course of business; and "(e) In connection with all Currency Obligations, Borrowers shall pay all amounts due to Bank, including all fees, charges and expenses, in accordance with the terms of the Foreign Exchange Agreement." 4. Amendment to Section 2.3. Upon receipt by Bank of the Term Loan Readvance Notice and a Replacement Secured Promissory Note (Term Loan) in the form of Exhibit A attached hereto, duly executed by Borrowers, and fulfillment of the condition described in Section 12 hereinbelow, Section 2.3 of the Agreement shall be automatically amended in its entirety as follows without further action required from any party: 4 "2.3 Term Loan. "(a) Term Loan. Subject to the terms and conditions hereof, Bank agrees to make a term loan ("Term Loan") to Borrowers on the Business Day following Bank's receipt of the Term Loan Readvance Notice and a Replacement Secured Promissory Note (Term Loan) in form and substance satisfactory to Bank, in an amount equal to Seven Million Dollars ($7,000,000). The proceeds of the Term Loan shall be used solely for the purposes allowed in Section 7.1(b). "(b) Amortization. Borrowers shall pay monthly principal reduction payments on the Term Loan, each in the amounts and on the dates set forth in the table below opposite the due date in which such payment is due:

"(c) On the Term Loan Maturity Date, the outstanding principal balance of and all accrued but unpaid interest on the Term Loan shall be due and payable in full. Borrowers may prepay the Term Loan at any time, in whole or in part, without penalty or premium except as otherwise required by Section 2.7(a) with respect to repayments of LIBOR Lending Rate Portions. All principal amounts so repaid or prepaid may not be reborrowed. Borrowers shall give Bank at least three (3) Business Days' prior written notice of any prepayment of a Base Lending Rate Portion and at least three (3) LIBOR Business Days' prior written notice of any prepayment of a LIBOR Lending Rate Portion. All prepayments shall be applied toward scheduled principal reductions payments owing under this Section 2.3 in inverse order of maturity." 5. Amendment to Section 3.1. Section 3.1 of the Agreement is hereby amended in its entirety as follows: "3.1 Letters of Credit. "(a) Provided that no Event of Default or Unmatured Event of Default is continuing and subject to the other terms and conditions hereof, Bank agrees to issue standby and sight and usance commercial letters of 5 credit ("Letters of Credit") for the account of Borrowers in such form as may be approved from time to time by Bank, subject to the following limitations: "(i) The face amount of the Letter of Credit requested, if and when issued, must not cause the Obligations to exceed the Borrowing Base; "(ii) The face amount of the Letter of Credit requested if and when issued must not cause the Letter of Credit Usage to exceed the Letter of Credit Sublimit; "(iii) Standby Letters of Credit may not have an expiry date or draw period which extends beyond the earlier of (x) 365 days following the date of issuance, or (y) the date which is ten (10) days prior to the Revolving Loans Maturity Date; "(iv) Commercial Letters of Credit may not have an expiry date or draw period which extends beyond the earlier of (x) 180 days following the date of issuance, or (y) the date which is ten (10) days prior to the Revolving Loans Maturity Date; and "(v) The conditions specified in Section 4.2 shall have been satisfied on the date of issuance of such Letter of Credit. "(b) Each Letter of Credit shall (i) be denominated in Dollars or other currency acceptable to Bank, and (ii) be a standby or commercial letter of credit issued to support obligations of a Borrower, contingent or otherwise, in the ordinary course of business. "(c) Each Letter of Credit shall be subject to the Uniform Customs or the ISP, as determined by Bank, in its sole discretion, and, to the extent not inconsistent therewith, the laws of the State of California. "(d) Bank shall not at any time be obligated to issue any Letter of Credit hereunder if such issuance would conflict with, or cause the Bank to exceed any limits imposed by its organizational or governing documents or by any applicable law, rule, regulation or treaty or determination of an arbitrator or a court or other governmental authority to which Bank is subject." 6. Amendment to Section 7.1(a). Section 7.1(a) of the Agreement is hereby amended in its entirety as follows: "(a) Use any proceeds of the Revolving Loans for any purpose other than (i) for working capital, (ii) for general corporate purposes, and (iii) for Permitted Payments." 6 7. Amendment to Section 7.1(b). Upon receipt by Bank of the Term Loan Readvance Notice and a Replacement Secured Promissory Note (Term Loan) in the form of Exhibit A attached hereto, duly executed by Borrowers, and fulfillment of the condition described in Section 12 hereinbelow, Section 7.1(b) of the Agreement shall be automatically amended in its entirety as follows without further action required from any party: "(b) Use any proceeds of the Term Loan for any purpose other than (i) to repay in full all Obligations owing by Borrowers under the term loan made by Bank to Borrowers on the Closing Date, and (ii) for Permitted Payments; or" 8. Amendments to Section 7.15. (a) Clause (a) of Section 7.15 of the Agreement is hereby amended in its entirety as follows: "(a) the Quick Ratio, measured as of the end of each fiscal quarter of Parent, at any time to be less than the ratio set forth in the table below opposite the applicable test date:

(b) Clause (g) of Section 7.15 of the Agreement is hereby amended in its entirety as follows: "(g) The Consolidated Total Liabilities to Consolidated Effective Tangible Net Worth Ratio at any time, tested at the end of each fiscal quarter of Parent, to be greater than the ratio set forth in the table below opposite the applicable fiscal quarter: 7

9. Replacement of Exhibit 1.1B. Exhibit 1.1 B attached to the Agreement is hereby replaced with Exhibit 1.1B attached hereto. 10. Representations and Warranties. In order to induce Bank to enter into this Amendment, Borrowers hereby represent and warrant to Bank that: (a) No Event of Default or Unmatured Event of Default is continuing; (b) All of the representations and warranties set forth in the Agreement and the Loan Documents are true, complete and accurate in all respects (except for representations and warranties which are expressly stated to be true and correct as of the Closing Date); and (c) This Amendment has been duly executed and delivered by the Borrowers, and after giving effect to this Amendment, the Agreement and the Loan Documents continue to constitute the legal, valid and binding agreements and obligations of the Borrowers, enforceable in accordance with their terms, except as enforceability may be limited by bankruptcy, insolvency, and similar laws and equitable principles affecting the enforcement of creditors' rights generally. 11. Conditions Precedent to Effectiveness of Amendment. The effectiveness of this Amendment is subject to and contingent upon the fulfillment of each and every one of the following conditions: (a) Bank shall have received this Amendment, duly executed by the Borrowers and Bank, together with the Acknowledgement and Agreement of Subordinate Creditor attached hereto, duly executed by the Peninsula Fund III Limited Partnership; (b) Bank shall have received an upfront fee in the amount of $35,000; 8 (c) No Event of Default, Unmatured Event of Default or Material Adverse Effect shall have occurred and be continuing; and (d) All of the representations and warranties set forth herein, in the Loan Documents and in the Agreement shall be true, complete and accurate in all respects as of the date hereof (except for representations and warranties which are expressly stated to be true and correct as of the Closing Date). 12. Additional Condition to New Term Loan. The obligation of Bank to make a new Term Loan to Borrowers, as set forth in Section 4 hereinabove, is further subject to and contingent upon the receipt by Bank of the Acknowledgement and Agreement of Subordinate Creditor attached hereto, duly executed by Mark Thatcher. 13. Counterparts; Telefacsimile Execution. This Amendment may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and the same Amendment. Delivery of an executed counterpart of this Amendment by telefacsimile shall be equally as effective as delivery of a manually executed counterpart of this Amendment. Any party delivering an executed counterpart of this Amendment by telefacsimile also shall deliver a manually executed counterpart of this Amendment but the failure to deliver a manually executed counterpart shall not affect the validity, enforceability, and binding effect of this Amendment. 14. Integration. The Agreement as amended by this Amendment constitutes the entire agreement and understanding between the parties hereto with respect to the subject matter hereof and thereof, and supersedes any and all prior agreements and understandings, oral or written, relating to the subject matter hereof and thereof. 15. Reaffirmation of the Agreement. The Agreement as amended hereby and the other Loan Documents remain in full force and effect. [remainder of page intentionally left blank; signatures to follow] 9 IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Amendment as of the date first hereinabove written. DECKERS OUTDOOR CORPORATION, a Delaware corporation By /s/ M. SCOTT ASH -------------------------------------------- Name: M. Scott Ash Title: Chief Financial Officer UGG HOLDINGS, INC., a California corporation By /s/ M. SCOTT ASH -------------------------------------------- Name: M. Scott Ash Title: Chief Financial Officer COMERICA BANK, a Michigan banking corporation, successor by merger to Comerica Bank-California, a California banking corporation By: /s/ JASON D. BROWN ------------------------------------------- Name: Jason D. Brown Title: Vice President-Western Division 10 Exhibit 1.1B To Amendment Number Four to Amended and Restated Revolving Credit Agreement Form of Borrowing Base Certificate Exhibit 1.1B BORROWING BASE CERTIFICATE To: Comerica Bank 15303 Ventura Blvd. Sherman Oaks, CA 91403 Attn: Jason D. Brown Initially capitalized terms used but not defined in this Borrowing Base Certificate shall have the meanings given to such terms in the Amended and Restated Credit Agreement.

- -------- (1) May not exceed $5,000,000. Exhibit 1.1B 1 5. Less: Accounts with respect to which goods are placed on consignment, guaranteed sale, sale or return, sale on approval, bill and hold, or other terms by reason of which the payment by the Account Debtor may be conditional: $_____________ 6. Less: Accounts that are not payable in Dollars or with respect to which the Account Debtor: (i) does not maintain its chief executive office in the United States, or (ii) is not organized under the laws of the United States or any State thereof, or (iii) is the government of any foreign country or sovereign state, or of any state, province, municipality, or other political subdivision thereof, or of any department, agency, public corporation, or other instrumentality thereof, unless (y) the Account is supported by an irrevocable letter of credit reasonably satisfactory to Bank (as to form, substance, and issuer or domestic confirming bank) that must be directly drawn upon Bank, or (z) the Account is covered by credit insurance in form and amount, and by an insurer, reasonably satisfactory to Bank: $_____________ 7. Less: Accounts with respect to which the Account Debtor is either (i) the United States or any department, agency, or instrumentality of the United States (exclusive, however, of Accounts with respect to which the applicable Borrower has complied, to the reasonable satisfaction of Bank, with the Assignment of Claims Act, 31 USCss.3727), or (ii) any state of the United States (exclusive, however, of (y) Accounts owed by any state that does not have a statutory counterpart to the Assignment of Claims Act, or (z) Accounts owed by any state that does have a statutory counterpart to the Assignment of Claims Act as to which the applicable Borrower has complied to Bank's reasonable satisfaction): $_____________ 8. Less: Accounts with respect to which the Account Debtor is a creditor of any Borrower, and either has or has asserted a right of setoff, has disputed its liability, or has made any claim with respect to the Account, to the extent of such setoff, dispute or claim: $_____________

Exhibit 1.1B 2 9. Less: Accounts with respect to an Account Debtor whose total obligations owing to any Borrower exceed 20% of all Eligible Accounts, to the extent of the obligations owing by such Account Debtor in excess of such percentage: $_____________ 10. Less: Accounts with respect to which the Account Debtor is subject to an Insolvency Proceeding, is not Solvent, has gone out of business, or as to which any Borrower has received notice of an imminent Insolvency Proceeding or a material impairment of the financial condition of such Account Debtor, or whose credit standing is reasonably unacceptable to Bank and Bank has so notified Borrower: $_____________ 11. Less: Accounts the collection of which Bank, in its reasonable credit judgment, believes to be doubtful by reason of the Account Debtor's financial condition: $_____________ 12. Less: Accounts which are in default or collection: $_____________ 13. Less: Accounts on C.O.D. terms: $_____________ 14. Less: Accounts with respect to which the goods giving rise to such Account have not been shipped and billed to the Account Debtor, the services giving rise to such Account have not been performed and accepted by the Account Debtor, or the Account otherwise does not represent a final sale: $_____________ 15. Less: Accounts that are not subject to a valid and perfected first priority Lien in favor of Bank: $_____________ 16. Less: Accounts with respect to which the Account Debtor is located in the states of New Jersey, Minnesota, Indiana, or West Virginia (or any other state that requires a creditor to file a Business Activity Report or similar document in order to bring suit or otherwise enforce its remedies against such Account Debtor in the courts or through any judicial process of such state), unless the applicable Borrower has qualified to do business in New Jersey, Minnesota, Indiana, West Virginia, or such other states, or has filed a Notice of Business Activities Report with the applicable division of taxation, the department of revenue, or with such other state offices, as

Exhibit 1.1B 3 appropriate, for the then-current year, or is exempt from such filing requirement: $_____________ 17. Less: Accounts that represent progress payments or other advance billings that are due prior to the completion of performance by the applicable Borrower of the subject contract for goods or services: $_____________ 18. Total ineligible Accounts (sum of lines 2 through 17): $_____________ 19. Total Eligible Accounts (line 1 minus line 18): $_____________ II. CALCULATION OF ELIGIBLE INVENTORY 20. Total Inventory consisting of shoes, footwear and apparel finished goods held for sale in the ordinary course of any Borrower's business located at one of any Borrower's business locations set forth on Schedule 1.1E (or in-transit between any such locations) to the Revolving Credit Agreement, that complies with each of the representations and warranties respecting Eligible Inventory made by Borrowers in the Loan Documents, valued at the lower of cost or market on a basis consistent with Borrowers' historical accounting practices: $_____________ 21. Less: Inventory that a Borrower does not have good, valid, and marketable title thereto: $_____________ 22. Less: Inventory not located at one of the locations in the United States set forth on Schedule 1.1E to the Revolving Credit Agreement or in transit from one such location to another such location: $_____________ 23. Less: Inventory located on real property leased by a Borrower or in a contract warehouse, in each case, unless it is subject to a Collateral Access Agreement executed by the lessor, warehouseman, or other third party, as the case may be, and unless it is segregated or otherwise separately identifiable from goods of others, if any, stored on the premises: $_____________ 24. Less: Inventory not subject to a valid and perfected first priority Lien in favor of Bank: $_____________

Exhibit 1.1B 4 25. Less: Goods returned or rejected by the applicable Borrower's customers: $_____________ 26. Less: Goods that are (x) obsolete or not in the following season's line and more than six (6) months old, (y) restrictive or custom items, work-in-process, or raw materials, or (z) goods that constitute spare parts, packaging and shipping materials, supplies used or consumed in a Borrower's business, bill and hold goods, defective goods, "seconds," or Inventory acquired on consignment: $_____________ 27. Total ineligible Inventory (sum of lines 21 through 25): $_____________ 28. Total Eligible Inventory (line 20 minus line 27): $_____________ III. CALCULATION OF BORROWING BASE AND AVAILABILITY 29. Availability from Eligible Accounts (____%(2) of line 19): $_____________ 30. (a) 50% of line 28: $_____________ (b) $12,500,000 Availability from Eligible Inventory (the lesser of lines 30(a) or (b): $_____________ 31. Sum of lines 29 and 30: $_____________ 32. Revolving Credit Commitment: $20,000,000 33. The lesser of lines 31 and 32: $_____________ 34. Less: the outstanding Obligations in respect of Revolving Loans: $_____________ 35. Less: the Foreign Exchange Reserve: $_____________ 36. Less: other reserves established by Bank: $_____________ 37. Availability (line 33 minus lines 34, 35 and 36) $_____________

- --------- (2) Enter the Applicable A/R Advance Rate. Exhibit 1.1B 5 Each of the undersigned hereby represents and warrants to Comerica Bank - California that the information set forth above is true and correct as of the date set forth hereinbelow, and based upon the information set forth in Borrowers' books and records. Dated:_______________, 20__ DECKERS OUTDOOR CORPORATION By ---------------------------------------- Name: ------------------------------------- Title: ------------------------------------ UGG HOLDINGS, INC. By ---------------------------------------- Name: --------------------------------- Title: --------------------------------- Exhibit 1.1B 6 Exhibit A To Amendment Number Four to Amended and Restated Revolving Credit Agreement Form of Replacement Secured Promissory Note (Term Loan) Exhibit A REPLACEMENT SECURED PROMISSORY NOTE (TERM LOAN) $7,000,000 Los Angeles, California November __, 2003 1. FOR VALUE RECEIVED, DECKERS OUTDOOR CORPORATION, a Delaware corporation ("Deckers") and UGG HOLDINGS, INC., a California corporation ("UGG", and together with Deckers, the "Makers"), jointly and severally promise to pay to the order of COMERICA BANK, a Michigan banking corporation ("Payee"), on or before the Term Loan Maturity Date, the principal sum of Seven Million Dollars ($7,000,000), or such lesser sum as shall equal the aggregate outstanding principal amount of the Term Loan made by Payee to Makers pursuant to the Agreement (as defined below). 2. Makers promise to make principal reduction payments on the outstanding principal balance hereof in the amounts and on the dates specified in the Agreement. Makers further promise to pay interest from the date of this Replacement Secured Promissory Note (this "Note"), in like money, on the aggregate outstanding principal amount hereof at the rates and on the dates provided in the Agreement. All computations of interest shall be in accordance with the provisions of the Agreement. 3. Makers hereby authorize Payee to record in its books and records the date, type and amount of the Term Loan, and of each continuation, conversion and payment of principal made by Makers, and Makers agree that all such notations shall, in the absence of manifest error, be conclusive as to the matters so noted; provided, however, any failure by Payee to make such notation with respect to the Term Loan or continuation, conversion, or payment thereof shall not limit or otherwise affect Makers' obligations under the Agreement or this Note. 4. Upon the occurrence and during the continuance of an Event of Default, in addition to and not in substitution of any of Payee's other rights and remedies with respect to such Event of Default, the entire unpaid principal balance of the Term Loan shall bear interest at the otherwise applicable rate plus three hundred (300) basis points. In addition, interest, Expenses, the Fees, and other amounts due hereunder not paid when due shall bear interest at the Base Lending Rate plus three hundred (300) basis points until such overdue payment is paid in full. 5. If any payment due hereunder, whether for principal, interest, or otherwise, is not paid on or before the tenth (10th) day after the date such payment is due, in addition to and not in substitution of any of Payee's other rights and remedies with respect to such nonpayment, Makers shall pay to Payee, a late payment fee ("Late Payment Fee") equal to five percent (5%) of the amount of such overdue payment. The Late Payment Fee shall be due and payable on the eleventh (11th) day after the due date of the overdue payment with respect thereto. 6. Makers shall make all payments hereunder in lawful money of the United States of America and in immediately available funds to Payee at Payee's office located at 15303 Ventura Boulevard, Sherman Oaks, California 91403, Attention: Jason D. Brown; or to such other Exhibit A 1 address as Payee may from time to time specify by notice to Makers in accordance with the terms of the Agreement. 7. In no event shall the interest rate and other charges hereunder exceed the highest rate permissible under any law which a court of competent jurisdiction shall, in a final determination, deem applicable hereto. In the event that such a court determines that Payee has received interest and other charges hereunder in excess of the highest rate applicable hereto, such excess shall be deemed received on account of, and shall automatically be applied to reduce, the principal balance hereof, and the provisions hereof shall be deemed amended to provide for the highest permissible rate. If there is no principal balance outstanding, Payee shall refund to Makers such excess. 8. This Note is the "Term Loan Note" issued pursuant to that certain Amendment Number Four to Amended and Restated Credit Agreement, dated as of even date herewith (the "Amendment"), by and among Makers, as Borrowers, and Payee, and is governed by the terms of the Agreement (as defined in the Amendment). Initially capitalized terms used but not defined herein shall have the meanings assigned to such terms in the Agreement. The Agreement, among other things, contains provisions for acceleration of the maturity of this Note upon the happening of certain stated events and also for prepayments on account of principal of this Note prior to the maturity hereof upon the terms and conditions specified in the Agreement. This Note and the Term Loan evidenced hereby may be assigned or otherwise transferred in whole or in part by Payee pursuant to the terms of the Agreement. 9. This Note is secured by the Liens granted to Payee under the Loan Documents. 10. Makers hereby waive presentment for payment, notice of dishonor, protest and notice of protest. 11. (a) THE VALIDITY OF THIS NOTE, THE CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT HEREOF, AND THE RIGHTS OF THE PARTIES HERETO WITH RESPECT TO ALL MATTERS ARISING HEREUNDER OR RELATED HERETO SHALL BE DETERMINED UNDER, GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF CALIFORNIA, WITHOUT REGARD FOR PRINCIPLES OF CONFLICTS OF LAWS. (B) THE PARTIES AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS NOTE SHALL BE TRIED AND LITIGATED ONLY IN THE STATE AND FEDERAL COURTS LOCATED IN THE COUNTY OF LOS ANGELES, STATE OF CALIFORNIA; PROVIDED, HOWEVER, THAT ANY SUIT SEEKING ENFORCEMENT AGAINST ANY COLLATERAL OR OTHER PROPERTY MAY BE BROUGHT, AT PAYEE'S OPTION, IN THE COURTS OF ANY JURISDICTION WHERE PAYEE ELECTS TO BRING SUCH ACTION OR WHERE SUCH COLLATERAL OR OTHER PROPERTY MAY BE FOUND. MAKERS AND PAYEE WAIVE, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, ANY RIGHT EACH MAY HAVE TO ASSERT THE DOCTRINE OF FORUM NON Exhibit A 2 CONVENIENS OR TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION 11. (C) MAKERS AND PAYEE HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS NOTE OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. MAKERS AND PAYEE REPRESENT THAT EACH HAS REVIEWED THIS WAIVER AND EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. IN WITNESS WHEREOF, each Maker has duly executed this Note as of the date first above written. DECKERS OUTDOOR CORPORATION, a Delaware corporation By /s/ M. Scott Ash ---------------------------------------- Name: M. Scott Ash Title: Chief Financial Officer UGG HOLDINGS, INC., a California corporation By /s/ M. Scott Ash ---------------------------------------- Name: M. Scott Ash Title: Chief Financial Officer Exhibit A 3 ACKNOWLEDGMENT AND AGREEMENT OF SUBORDINATE CREDITOR The undersigned, a subordinate creditor of Deckers Outdoor Corporation and Ugg Holdings, Inc. ("Borrowers") to Comerica Bank ("Bank") pursuant to a Senior Subordination Agreement, dated as of November 25, 2002, as amended by that certain Amendment Number One to Senior Subordination Agreement, dated as of April 29, 2003, that certain Amendment Number Two to Senior Subordination Agreement, dated as of June 27, 2003, and that certain Amendment Number Three to Senior Subordination Agreement, dated as of November 13, 2003 (as so amended, the "Subordination Agreement"), hereby (i) acknowledges receipt of the foregoing Amendment Number Four to Amended and Restated Credit Agreement between Borrowers and Bank (the "Amendment"), (ii) consents to the terms and execution thereof, and (iii) acknowledges that the Subordination Agreement remains in full force and effect. Without limiting the generality of the foregoing, the undersigned hereby consents to the making of the Term Loan (as defined in the Amendment) and agrees that the Term Loan shall constitute Senior Debt (as defined in the Subordination Agreement). The undersigned further acknowledges that Bank may amend, restate, extend, renew or otherwise modify the Senior Loan Documents (as defined in the Subordination Agreement) and any indebtedness or agreement of Borrowers, or enter into any agreement or extend additional or other credit accommodations, without notifying or obtaining the consent of the undersigned and without impairing the obligations of the undersigned under the Subordination Agreement, to the extent set forth in the Subordination Agreement, and no obligation to notify or seek the consent of the undersigned shall be implied by the execution of this Acknowledgement and Agreement. THE PENINSULA FUND III LIMITED PARTNERSHIP, a Delaware limited partnership By: Peninsula Capital Partners, L.L.C. Its: General Partner By /s/ Scott A. Reilly ------------------------------------------ Name: Scott A. Reilly Title: President and Chief Investment Officer ACKNOWLEDGMENT AND AGREEMENT OF SUBORDINATE CREDITOR The undersigned, a subordinate creditor of Deckers Outdoor Corporation ("Borrower") to Comerica Bank ("Bank") pursuant to a Subordination Agreement, dated as of November 25, 2002 (the "Subordination Agreement"), hereby (i) acknowledges receipt of the foregoing Amendment Number Four to Amended and Restated Credit Agreement between Borrower, UGG Holdings, Inc. and Bank (the "Amendment"), (ii) consents to the terms and execution thereof, and (iii) acknowledges that the Subordination Agreement remains in full force and effect. The undersigned further acknowledges that Bank may amend, restate, extend, renew or otherwise modify the Senior Debt (as defined in the Subordination Agreement) and any indebtedness or agreement of the Borrower, or enter into any agreement or extend additional or other credit accommodations, without notifying or obtaining the consent of the undersigned and without impairing the obligations of the undersigned under the Subordination Agreement, to the extent set forth in the Subordination Agreement, and no obligation to notify or seek the consent of the undersigned shall be implied by the execution of this Acknowledgement and Agreement. /s/ Mark Thatcher -------------------------------------------- MARK THATCHER EX-10.28 4 v97221exv10w28.txt EXHIBIT 10.28 EXHIBIT 10.28 AMENDMENT NUMBER THREE TO SENIOR SUBORDINATION AGREEMENT This AMENDMENT NUMBER THREE TO SENIOR SUBORDINATION AGREEMENT (this "Amendment"), dated as of November 13, 2003, is entered into among COMERICA BANK-CALIFORNIA, a California banking corporation ("Senior Lender"), THE PENINSULA FUND III LIMITED PARTNERSHIP, a Delaware limited partnership ("Subordinate Lender"), DECKERS OUTDOOR CORPORATION, a Delaware corporation ("Parent"), and UGG Holdings, Inc., a California corporation ("UGG") (Parent and UGG are collectively sometimes referred to herein as "Borrowers" and individually as a "Borrower"), with reference to the following facts: A. Senior Lender, Subordinate Lender and the Borrowers previously entered into that certain Senior Subordination Agreement, dated as of November 25, 2002, as amended by that certain Amendment Number One to Senior Subordination Agreement, dated as of April 29, 2003, and that certain Amendment Number Two to Senior Subordination Agreement, dated as of June 27, 2003 (as so amended, the "Agreement"); and B. Senior Lender, Subordinate Lender and the Borrowers desire to amend the Agreement in accordance with the terms of this Amendment. NOW, THEREFORE, in consideration of the foregoing, the parties hereto hereby agree as follows: 1. Defined Terms. All initially capitalized terms used but not defined herein shall have the meanings assigned to such terms in the Agreement. 2. Permitted Payment. The definition of "Permitted Payment" set forth in Section 1 of the Agreement is hereby amended in its entirety as follows: "PERMITTED PAYMENT" means (i) monthly interest payments owing on the Senior Subordinated Note (as defined in the Note Purchase Agreement) at the per annum rate not to exceed 12% (or $140,000 per month), (ii) quarterly payments of principal owing on the Senior Subordinated Note in accordance with Section 2.1(a) of the Note Purchase Agreement, as in effect on the date hereof, (iii) Deferred Interest Payments, provided in each case that the conditions set forth in Section 3(c)(2)(i) and (ii) hereof have been met, (iv) a principal prepayment on the Senior Subordinated Note in an amount not to exceed $2,000,000, together with a prepayment fee in the amount of $100,000, during the month of June 2003, and (v) an additional principal prepayment on the Senior Subordinated Note in an amount not to exceed $2,000,000, during the month of November or December 2003. 1 3. Conditions Precedent to Effectiveness of Amendment. The effectiveness of this Amendment is subject to and contingent upon the fulfillment of each and every one of the following conditions: (a) Senior Lender shall have received this Amendment, duly executed by Subordinate Lender, the Borrowers and Senior Lender; (b) Senior Lender shall have received that certain Amendment Number Four to Amended and Restated Revolving Credit Agreement, dated as of even date herewith ("Credit Agreement Amendment"), duly executed by the Borrowers and Senior Lender; (c) No Senior Event of Default shall have occurred and be continuing; and (d) All of the representations and warranties set forth herein and in the Agreement shall be true, complete and accurate in all respects as of the date hereof (except for representations and warranties which are expressly stated to be true and correct as of date of the Agreement). 4. Representations and Warranties. In order to induce Senior Lender to enter into this Amendment, Borrowers and Subordinate Lender hereby represent and warrant to Senior Lender that: (a) No Senior Event of Default is continuing; (b) All of the representations and warranties set forth in the Agreement are true, complete and accurate in all respects (except for representations and warranties which are expressly stated to be true and correct as of the date of the Agreement); and (c) This Amendment has been duly executed and delivered by the Borrowers and the Subordinate Lender, and after giving effect to this Amendment, the Agreement continues to constitute the legal, valid and binding agreements and obligations of the Borrowers and the Subordinate Lender, enforceable in accordance with their terms, except as enforceability may be limited by bankruptcy, insolvency, and similar laws and equitable principles affecting the enforcement of creditors' rights generally. 5. Counterparts; Telefacsimile Execution. This Amendment may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and the same Amendment. Delivery of an executed counterpart of this Amendment by telefacsimile shall be equally as effective as delivery of a manually executed counterpart of this Amendment. Any party delivering an executed counterpart of this Amendment by telefacsimile also shall deliver a manually executed counterpart of this Amendment but the failure to deliver a manually executed counterpart shall not affect the validity, enforceability, and binding effect of this Amendment. 2 6. Integration. The Agreement as amended by this Amendment constitutes the entire agreement and understanding between the parties hereto with respect to the subject matter hereof and thereof, and supersedes any and all prior agreements and understandings, oral or written, relating to the subject matter hereof and thereof. 7. Reaffirmation of the Agreement. The Agreement as amended hereby remains in full force and effect. [remainder of page intentionally left blank] 3 IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Amendment as of the date first hereinabove written. DECKERS OUTDOOR CORPORATION, a Delaware corporation By /s/ M. SCOTT ASH -------------------------------------------- Name: M. Scott Ash Title: Chief Financial Officer UGG HOLDINGS, INC., a California corporation By /s/ M. SCOTT ASH -------------------------------------------- Name: M. Scott Ash Title: Chief Financial Officer THE PENINSULA FUND III LIMITED PARTNERSHIP, a Delaware limited partnership By: Peninsula Capital Partners, L.L.C. Its: General Partner By /s/ SCOTT A. REILLY ------------------------------------- Name: Scott A. Reilly Title: President and Chief Investment Officer COMERICA BANK - CALIFORNIA, a California banking corporation By: /s/ JASON D. BROWN ------------------------------------------- Name: Jason D. Brown Title: Vice President 4 EX-10.29 5 v97221exv10w29.txt EXHIBIT 10.29 EXHIBIT 10.29 AMENDED AND RESTATED EMPLOYMENT AGREEMENT THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (the "Amendment") is to be effective as of January 1, 2004 by and between DECKERS OUTDOOR CORPORATION, a Delaware corporation (the "Company"), and DOUGLAS B. OTTO (the "Executive"). ARTICLE I DUTIES AND TERM 1.1 EMPLOYMENT. In consideration of their mutual covenants, the Executive's continued employment with the Company and other good and valuable consideration, the receipt, adequacy and sufficiency of which is hereby acknowledged, the Company agrees to enter into this Amendment with the Executive, who is currently an employee of the Company on an "at will" basis, and the Executive agrees to enter into this Amendment and remain in the employ of the Company upon the terms and conditions herein provided and in accordance with all applicable employment rules of the Company. This Amendment was prepared after consultation with the Company's compensation consultant, The Frederick W. Cook & Company, Inc., and with the approval of the Compensation Committee of the Board of Directors of the Company (the "Compensation Committee"). 1.2 POSITION AND RESPONSIBILITIES. The Executive will continue to serve in the Executive's current position as Chief Executive Officer and President, and will continue to report to the Company's Board of Directors. 1.3 TERM. The term of the Executive's employment under this Amendment will commence on the effective date of this Amendment as first written above and will continue, unless sooner terminated, until December 31, 2007. The Employment of the Executive is at will and will continue until such time as written notice of termination is given by the Company or written notice is given by the Executive. 1.4 AT-WILL EMPLOYMENT. The Executive will continue to be employed as an at-will employee of the Company. Subject to the provisions of ARTICLES III and IV below, as an at-will employee, the Executive is free to terminate his employment with the Company at any time, for any reason, and the Company has the similar right to terminate the Executive's employment at any time, for any reason. Although the Company may choose to terminate the Executive's employment for cause, the Executive's employment is at-will and cause is not required. 1.5 REVIEW OF AGREEMENT. It is the parties' intention that the terms of this Amendment will be reviewed prior to December 31, 2007 to determine whether any modifications are appropriate. This review of the Amendment terms may occur at an earlier or later date, is not mandatory and does not impose any binding obligations on either party. ARTICLE II COMPENSATION For all services rendered by the Executive in any capacity during the Executive's employment under this Amendment, the Company will compensate the Executive as follows: 2.1 BASE SALARY. Effective as of January 1, 2004, and for a period of two (2) years thereafter, the Company will pay to the Executive an annual base salary of THREE HUNDRED FORTY FIVE THOUSAND DOLLARS ($345,000), to be paid in equal installments in accordance with the Company's general payment policies in effect during the term hereof (the "Base Salary"). The Executive's Base Salary may be reviewed prior to December 31, 2006 and appropriate adjustments to salary implemented. If the Executive's Base Salary is not revised effective January 1, 2007, his existing salary will continue on a monthly basis until changed. This provision does not alter the at-will nature of the Executive's employment or the provisions of ARTICLES III and IV below. 2.2 INCENTIVE BONUS. The Executive shall be eligible to receive a targeted annual bonus based on performance criteria established annually by the Compensation Committee (the "Incentive Bonus"). The Incentive Bonus for 2004 is attached hereto as EXHIBIT A. 2.3 STOCK OPTIONS. The Executive may be granted options to purchase shares of Company's Common Stock pursuant to the Company's Stock Option Plan. Any stock option must be approved by the Compensation Committee. 2.4 ADDITIONAL BENEFITS. The Executive will be entitled to participate in all benefit and welfare programs, plans and arrangements that are, from time to time, made available to the Company's like-level executive employees. ARTICLE III TERMINATION OF EMPLOYMENT 3.1 GENERAL. While the Executive is an at-will employee as provided at Section 1.3 above, the follow conditions for termination of employment are set forth in order to determine the nature of the Executive's compensation entitlement upon termination of employment as discussed in ARTICLE IV below. Neither the provisions of ARTICLE III or ARTICLE IV of this Amendment shall alter the at-will nature of the Executive's employment with the Company. 3.2 DEATH OR RETIREMENT OF EXECUTIVE. The Executive's employment under this Amendment will automatically terminate upon the death or Retirement (as defined in Section 6.1 hereof) of the Executive. 3.3 BY EXECUTIVE. The Executive may terminate the Executive's employment under this Amendment by giving Notice of Termination (as defined in Section 6.1 hereof) to the Company: (a) for Good Reason (as defined in Section 6.1 hereof); and -2- (b) at any time without Good Reason. 3.4 BY COMPANY. The Company may terminate the Executive's employment under this Amendment by giving Notice of Termination to the Executive: (a) in the event of Executive's Total Disability (as defined in Section 6.1 hereof); (b) for Cause (as defined in Section 6.1 hereof); and (c) at any time without Cause. ARTICLE IV COMPENSATION UPON TERMINATION OF EMPLOYMENT If the Executive's employment hereunder is terminated, in accordance with the provisions of ARTICLE III hereof, and except for any other rights or benefits specifically provided for herein to be effective following the Executive's period of employment, the Company will provide compensation and benefits to the Executive only as follows: 4.1 UPON TERMINATION FOR DEATH OR DISABILITY. If the Executive's employment hereunder is terminated by reason of the Executive's death or Total Disability, as hereinafter defined, the Company will: (a) pay the Executive (or the Executive's estate) or beneficiaries any Base Salary that has accrued but was not paid as of the termination date (the "Accrued Base Salary"); (b) pay the Executive (or the Executive's estate) or beneficiaries for unused vacation days accrued as of the termination date in an amount equal to the Executive's Base Salary multiplied by a fraction, the numerator of which is the number of accrued unused vacation days and the denominator of which is two hundred and sixty (260) (the "Accrued Vacation Payment"); (c) reimburse the Executive (or the Executive's estate) or beneficiaries for expenses incurred by him prior to the date of termination that are subject to reimbursement pursuant to this Amendment (the "Accrued Reimbursable Expenses"); (d) provide to the Executive (or the Executive's estate) or beneficiaries any accrued and vested benefits required to be provided by the terms of any Company-sponsored benefit plans or programs (the "Accrued Benefits"), together with any benefits required to be paid or provided in the event of the Executive's death or Total Disability under applicable law; (e) pay the Executive (or the Executive's estate) or beneficiaries any Incentive Bonus with respect to a prior fiscal year that has accrued but has not been paid (the "Accrued Incentive Bonus"); -3- (f) pay the Executive severance of three (3) times the Executive's annual Base Salary in effect immediately prior to the time such termination occurs, plus the greater of (x) three (3) times the targeted Incentive Bonus immediately prior to the time such termination occurs or (y) three (3) times the average actual Incentive Bonus for the previous three (3) years, whichever is greater. The severance payment required under this subsection shall be conditioned upon the Executive confirming the release in Section 5.2 hereof; (g) maintain in full force and effect, for the Executive's and the Executive's eligible beneficiaries, until the first to occur of (x) the Executive's attainment of alternative employment if such employment includes health insurance benefits or (y) the three (3) year anniversary of the termination of employment, the benefits provided pursuant to Company-sponsored benefit plans, programs, or other arrangements in which the Executive was entitled to participate as a full-time employee immediately prior to such termination in accordance with Section 2.4 hereof, subject to the terms and conditions of participation as provided under the general terms and provisions of such plans, programs, and arrangements, or in the alternate, the Company will arrange to provide the Executive with continued benefits substantially similar to those which the Executive would have been entitled to receive under such plans, programs, and arrangements; (h) any such payments will be grossed up for Internal Revenue Code Section 280G excise tax penalty on "excess parachute payments;" and (i) the Executive (or the Executive's estate) or beneficiaries shall have the right to exercise all vested unexercised stock options and warrants outstanding at the termination date in accordance with terms of the plans and agreements pursuant to which such options or warrants were issued. 4.2 UPON TERMINATION BY COMPANY FOR CAUSE OR BY EXECUTIVE WITHOUT GOOD REASON. If the Executive's employment is terminated by the Company for Cause, or if the Executive terminates the Executive's employment with the Company other than (x) upon the Executive's death or Total Disability or (y) for Good Reason, the Company will: (a) pay the Executive the Accrued Base Salary; (b) pay the Executive the Accrued Vacation Payment; (c) pay the Executive the Accrued Reimbursable Expenses; (d) pay the Executive the Accrued Benefits, together with any benefits required to be paid or provided under applicable law; (e) pay the Executive any Accrued Incentive Bonus; (f) pay the Executive severance of three (3) times Executive's Annual Base Salary in effect immediately prior to the time such termination occurs, plus the -4- greater of (x) three (3) times the targeted Incentive Bonus immediately prior to the time such termination occurs or (y) three (3) times the average actual Incentive Bonus for the previous three (3) years, whichever is greater. The severance payment required under this subsection shall be conditioned upon the Executive confirming the release in Section 5.2 hereof; (g) maintain in full force and effect, for the Executive's and the Executive's eligible beneficiaries, until the first to occur of (x) the Executive's attainment of alternative employment if such employment includes health insurance benefits or (y) the three (3) year anniversary of the termination of employment, the benefits provided pursuant to Company-sponsored benefit plans, programs, or other arrangements in which the Executive was entitled to participate as a full-time employee immediately prior to such termination in accordance with Section 2.4 hereof, subject to the terms and conditions of participation as provided under the general terms and provisions of such plans, programs, and arrangements, or in the alternate, the Company will arrange to provide the Executive with continued benefits substantially similar to those which the Executive would have been entitled to receive under such plans, programs, and arrangements; (h) any such payments will be grossed up for Internal Revenue Code Section 280G excise tax penalty on "excess parachute payments;" and (i) the Executive will have the right to exercise vested options and warrants in accordance with Section 4.1(i) hereof. 4.3 UPON TERMINATION BY THE COMPANY WITHOUT CAUSE OR BY EXECUTIVE FOR GOOD REASON. If the Executive's employment is terminated by the Company without Cause or by the Executive for Good Reason, the Company will: (a) pay the Executive the Accrued Base Salary; (b) pay the Executive the Accrued Vacation Payment; (c) pay the Executive the Accrued Reimbursable Expenses; (d) pay the Executive the Accrued Benefits, together with any benefits required to be paid or provided under applicable law; (e) pay the Executive any Accrued Incentive Bonus; (f) pay the Executive severance of three (3) times Executive's Annual Base Salary in effect immediately prior to the time such termination occurs, plus the greater of (x) three (3) times the targeted Incentive Bonus immediately prior to the time such termination occurs or (y) three (3) times the average actual Incentive Bonus for the previous three (3) years, whichever is greater. The severance payment required under this subsection shall be conditioned upon the Executive confirming the release in Section 5.2 hereof; -5- (g) maintain in full force and effect, for the Executive's and the Executive's eligible beneficiaries, until the first to occur of (x) the Executive's attainment of alternative employment if such employment includes health insurance benefits or (y) the three (3) year anniversary of the termination of employment, the benefits provided pursuant to Company-sponsored benefit plans, programs, or other arrangements in which the Executive was entitled to participate as a full-time employee immediately prior to such termination in accordance with Section 2.4 hereof, subject to the terms and conditions of participation as provided under the general terms and provisions of such plans, programs, and arrangements, or in the alternate, the Company will arrange to provide the Executive with continued benefits substantially similar to those which the Executive would have been entitled to receive under such plans, programs, and arrangements; (h) any such payments will be grossed up for Internal Revenue Code Section 280G excise tax penalty on "excess parachute payments;" and (i) the Executive shall have the right to exercise vested options and warrants in accordance with Section 4.1(i). 4.4 UPON CHANGE OF CONTROL AND TERMINATION BY THE COMPANY WITHOUT CAUSE OR BY EXECUTIVE FOR GOOD REASON. If the Executive's employment is terminated within two (2) years of a Change of Control by the Company without Cause or by the Executive for Good Reason, the Company will: (a) pay the Executive the Accrued Base Salary; (b) pay the Executive the Accrued Vacation Payment; (c) pay the Executive the Accrued Reimbursable Expenses; (d) pay the Executive the Accrued Benefits, together with any benefits required to be paid or provided under applicable law; (e) pay the Executive any Accrued Incentive Bonus; plus the pro-rata Incentive Bonus based on actual performance for the year of termination. (f) pay the Executive severance of three (3) times Executive's Annual Base Salary in effect immediately prior to the time such termination occurs, plus the greater of (x) three (3) times the targeted Incentive Bonus immediately prior to the time such termination occurs or (y) three (3) times the average actual Incentive Bonus for the previous three (3) years, whichever is greater. The severance payment required under this subsection shall be conditioned upon the Executive confirming the release in Section 5.2 hereof; (g) maintain in full force and effect, for the Executive's and the Executive's eligible beneficiaries, until the first to occur of (x) the Executive's attainment of alternative employment if such employment includes health insurance benefits or (y) the three (3) year anniversary of the termination of employment, the benefits provided -6- pursuant to Company-sponsored benefit plans, programs, or other arrangements in which the Executive was entitled to participate as a full-time employee immediately prior to such termination in accordance with Section 2.4 hereof, subject to the terms and conditions of participation as provided under the general terms and provisions of such plans, programs, and arrangements, or in the alternate, the Company will arrange to provide the Executive with continued benefits substantially similar to those which the Executive would have been entitled to receive under such plans, programs, and arrangements; (h) any such payments will be grossed up for Internal Revenue Code Section 280G excise tax penalty on "excess parachute payments;" and (i) the Executive shall have the right to exercise vested options and warrants in accordance with Section 4.1(i). ARTICLE V ADDITIONAL AGREEMENTS 5.1 OTHER AGREEMENTS. As further material consideration for the Company entering into this Amendment, the Executive will also execute the Company's standard employee confidentially agreement, inventions assignment agreement, and any other agreements required to be executed by all like level executives of the Company. 5.2 EMPLOYEE'S RESTRICTIVE COVENANTS UPON TERMINATION. If the Executive's employment is terminated for any reason, the Executive agrees: (a) To keep all of the Company's Confidential Information confidential in perpetuity in accordance with the Company's policy; (b) To not hire or solicit for hire or consultation employees of the Company for a period of three (3) years after termination of employment; and (c) To release the Company from any and all claims, whether known or unknown, except for those based upon this Amendment. Such release shall include the rights of Section 1542 of the California Civil Code, which provides: "A general release does not extend to claims which the creditor does not know or suspect to exist in the Executive's favor at the time of executing the release, which if known by him must have materially affected the Executive's settlement with the debtor." ARTICLE VI MISCELLANEOUS 6.1 DEFINITIONS. For purposes of this Amendment, the following terms will have the following meanings: (a) "Accrued Base Salary" - as defined in Section 4.1(a) hereof. -7- (b) "Accrued Benefits" - as defined in Section 4.1(d) hereof. (c) "Accrued Incentive Bonus" - as defined in Section 4.1(e) hereof. (d) "Accrued Reimbursable Expenses" - as defined in Section 4.1(c) hereof. (e) "Accrued Vacation Payment" - as defined in Section 4.1(b) hereof. (f) "Affiliate" of a Person means a Person that directly or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, the first Person. "Control" (including the terms "controlled by" and "under common control with") means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ownership of voting securities, by contract or credit arrangement, as trustee or executor, or otherwise. (g) "Incentive Bonus" as defined in Section 2.2 hereof. (h) "Base Salary" as defined in Section 2.1 hereof. (i) "Cause" will mean any willful breach of duty by the Executive in the course of the Executive's employment, continued violation of written Company employment policies after written notice of such violation, violation of the Company's Insider Trading Policies, conviction of a felony or any crime involving fraud, theft, embezzlement, dishonesty or moral turpitude, engaging in activities which materially defame the Company, engaging in conduct which is material injurious to the Company or its Affiliates, or any of their respective customer or supplier relationships, financially or otherwise, or the Executive's gross negligence or continued failure to Executive's duties or his continued incapacity to perform such duties. (j) "Change of Control" will mean if there is a merger, consolidation, sale of all or a major portion of the assets of the Company (or a successor organization) or similar transaction or circumstance where any person or group (other than Douglas B. Otto) acquires or obtains the right to acquire, in one or more transactions, beneficial ownership of more than Fifty Percent (50%) of the outstanding shares of any class of voting stock of the Company (or a successor organization). (k) "Compensation Committee" means the Compensation Committee of the Company's Board of Directors. (l) "Continued Benefits" as defined in Section 4.3(g) hereof. (m) "Good Reason" will mean the occurrence of material breach of this Amendment by the Company, which breach is not cured within fifteen (15) calendar days after written notice thereof is received by the Company, or in the event of a Change of Control, a reduction of total compensation, benefits, and perquisites, relocation greater than fifty (50) miles, or material change in position or duties. -8- (n) "Notice of Termination" will mean a notice which shall indicate the specific termination provision of this Amendment relied upon and shall generally set forth the basis for termination of the Executive's employment under the provision so indicated. (o) "Person" means any natural person, firm, partnership, association, corporation, company, limited liability company, limited partnership, trust, business trust, governmental authority, or other entity. (p) "Retirement" will mean normal retirement at age 65. (q) "Severance" will mean payments after termination of Executive's employment. (r) "Total Disability" will mean the Executive's failure substantially to perform the Executive's duties hereunder on a full-time basis for a period exceeding one hundred eighty (180) consecutive days or for periods aggregating more than one hundred eighty (180) days during any twelve (12) month period as a result of incapacity due to physical or mental illness. If there is a dispute as to whether the Executive is or was physically or mentally unable to perform the Executive's duties under this Amendment, such dispute will be submitted for resolution to a licensed physician agreed upon by the Company and the Executive, or if an agreement cannot be promptly reached, the Company and the Executive will promptly each select a physician, and if these physicians cannot agree, the physicians will promptly select a third physician whose decision will be binding on all parties. If such a dispute arises, the Executive will submit to such examinations and will provide such information as such physician(s) may request, and the determination of the physician(s) as to the Executive's physical or mental condition will be binding and conclusive. Notwithstanding the foregoing, if the Executive participates in any group disability plan provided by the Company, which offers long-term disability benefits, "Total Disability" will mean total disability as defined therein. 6.2 KEY MAN INSURANCE. The Company will have the right, in its sole discretion, to purchase "key man" insurance on the life of the Executive. The Company shall be the owner and beneficiary of any such policy. If the Company elects to purchase such a policy, the Executive will take such physical examinations and supply such information as may be reasonably requested by the insurer. This does not apply to any existing split dollar insurance coverage in effect. 6.3 SUCCESSORS; BINDING AGREEMENT. This Amendment will be binding upon any successor to the Company and will inure to the benefit of and be enforceable by the Executive's personal or legal representatives, beneficiaries, designees, executors, administrators, heirs, distributees, devisees and legatees. 6.4 MODIFICATION; NO WAIVER. This Amendment may not be modified or amended except by an instrument in writing signed by the parties hereto. No term or condition of this Amendment will be deemed to have been waived, nor will there be any estoppel -9- against the enforcement of any provision of this Amendment, except by written instrument by the party charged with such waiver or estoppel. No such written waiver will be deemed a continuing waiver unless specifically stated therein, and each such waiver will operate only as to the specific term or condition waived and will not constitute a waiver of such term or condition for the future or as to any other term or condition. 6.5 SEVERABILITY. The covenants and agreements contained herein are separate and severable and the invalidity or unenforceability of any one or more of such covenants or agreements, if not material to the employment arrangement that is the basis for this Amendment, will not affect the validity or enforceability of any other covenant or agreement contained herein. 6.6 FORM OF NOTICE TO PARTIES. All notices, requests, demands, waivers and other communications required or permitted to be given under this Amendment shall be in writing and shall be deemed to have been duly given if (a) delivered personally, (b) mailed by first-class, registered or certified mail, return receipt requested, postage prepaid, or (c) sent by next-day or overnight mail or delivery or (d) sent by telecopy or telegram, to the following address: If to Executive: Douglas B. Otto 6762 Breakers Way Ventura, CA 93001 If to Company: Deckers Outdoor Corporation 495-A South Fairview Avenue Goleta, CA 93117 Attn: W. Scott Ash, Chief Financial Officer Facsimile #805-967-7862 or, in each case, at such other address as may be specified in writing to the other parties hereto. All such notices, requests, demands, waivers and other communications shall be deemed to have been received (w) if by personal delivery on the day after such delivery, (x) if by certified or registered mail, on the seventh business day after the mailing thereof, (y) if by next-day or overnight mail or delivery, on the day delivered, (z) if by telecopy or telegram, on the next day following the day on which such telecopy or telegram was sent, provided that a copy is also sent by certified or registered mail. 6.7 ASSIGNMENT. This Amendment and any rights hereunder will not be assignable by either party without the prior written consent of the other party except as otherwise specifically provided for herein. 6.8 ENTIRE UNDERSTANDING. This Amendment constitutes the entire understanding between the parties hereto and no agreement, representation, warranty or covenant has been made by either party except as expressly set forth herein. -10- 6.9 EXECUTIVE'S REPRESENTATIONS. The Executive represents and warrants that neither the execution and delivery of this Amendment nor the performance of the Executive's duties hereunder violates the provisions of any other agreement to which he is a party or by which he is bound. 6.10 GOVERNING LAW. This Amendment will be construed in accordance with the laws of the State of California, without regard to the conflict of laws provisions thereof, with venue proper only in the County of Santa Barbara, California. 6.11 ARBITRATION. (a) Except as provided in Section 6.11(c) below, the parties hereto agree that any dispute or controversy arising out of, relating to, or in connection with this Amendment, or the interpretation, validity, construction, performance, breach, or termination thereof, shall be finally settled by binding arbitration, unless otherwise required by law, to be held in Santa Barbara, California under the National Rules for the Resolution of Employment Disputes of the American Arbitration Association as then in effect (the "Rules"). The arbitrator(s) may grant injunctions or other relief in such dispute or controversy. The decision of the arbitrator(s) shall be final, conclusive and binding on the parties to the arbitration, and judgment may be entered on the decision of the arbitrator(s) in any court having jurisdiction. (b) The arbitrator(s) shall apply California law to the merits of any dispute or claim, without reference to rules of conflicts of law. (c) The parties may apply to any court of competent jurisdiction for a temporary restraining order, preliminary injunction, or other interim or conservatory relief, as necessary, without breach of this arbitration agreement and without abridgement of the powers of the arbitrator. (d) EMPLOYEE HAS READ AND UNDERSTANDS THIS SECTION, WHICH DISCUSSES ARBITRATION. EMPLOYEE UNDERSTANDS THAT BY SIGNING THIS AMENDMENT, EMPLOYEE AGREES TO SUBMIT ANY CLAIMS ARISING OUT OF, RELATING TO, OR IN CONNECTION WITH THIS AMENDMENT, OR THE INTERPRETATION, VALIDITY, CONSTRUCTION, PERFORMANCE, BREACH OR TERMINATION THEREOF TO BINDING ARBITRATION, UNLESS OTHERWISE REQUIRED BY LAW, AND THAT THIS ARBITRATION CLAUSE CONSTITUTES A WAIVER OF EMPLOYEE'S RIGHT TO A JURY TRIAL AND RELATES TO THE RESOLUTION OF ALL DISPUTES RELATING TO EMPLOYEE'S RELATIONSHIP WITH THE COMPANY, INCLUDING BUT NOT LIMITED TO, CLAIMS OF HARASSMENT, DISCRIMINATION, WRONGFUL TERMINATION AND ANY STATUTORY CLAIMS. [Signatures on next page] -11- IN WITNESS WHEREOF, the parties hereto have duly executed this Amendment effective as of the day and year first above written. COMPANY: DECKERS OUTDOOR CORPORATION By: /s/ M. Scott Ash ----------------------------------- Name: M. Scott Ash Date: Title: Chief Financial Officer EXECUTIVE: /s/ Douglas B. Otto --------------------------------------- Name: Douglas B. Otto Date: Title: Chief Executive Officer -12- EXHIBIT A TO SENIOR EXECUTIVE EMPLOYMENT AGREEMENT INCENTIVE BONUS Executive: Douglas B. Otto Target Bonus: $207,000 @ 100% level
Good Very Good Excellent ---- --------- --------- 75% Based on Topline Performance Sales + Backlog Percentage Increase 10% 15% 20% 25% Based on Earnings Performance Earnings Per Share as Calculated to Above Sales Increases * * * Bonus level 100% 200% 400%
* To be inserted when 2003 sales are confirmed Bonus to be paid in accordance with method used in 2003. EX-10.30 6 v97221exv10w30.txt EXHIBIT 10.30 EXHIBIT 10.30 SENIOR EXECUTIVE EMPLOYMENT AGREEMENT THIS SENIOR EXECUTIVE EMPLOYMENT AGREEMENT (the "Agreement") is to be effective as of January 1, 2004 by and between DECKERS OUTDOOR CORPORATION, a Delaware corporation (the "Company"), and SCOTT ASH (the "Executive"). ARTICLE I DUTIES AND TERM 1.1 EMPLOYMENT. In consideration of their mutual covenants, Executive's continued employment with the Company and other good and valuable consideration, the receipt, adequacy, and sufficiency of which is hereby acknowledged, the Company agrees to enter into this Agreement with the Executive, who is currently an employee of the Company on an "at will" basis, and the Executive agrees to enter into this Agreement and remain in the employ of the Company upon the terms and conditions herein provided and in accordance with all applicable employment rules of the Company. This Agreement was prepared after consultation with the Company's compensation consultant, Frederick W. Cook & Company, Inc. 1.2 POSITION AND RESPONSIBILITIES. The Executive will continue to serve in the Executive's current position as CHIEF FINANCIAL OFFICER, and continue to report to the Executive's current supervisor. 1.3 TERM. The term of the Executive's employment under this Agreement will commence on the effective date of this Agreement as first written above and will continue, unless sooner terminated, until December 31, 2005. Employment of the Executive is at will and will continue until such time as written notice of termination is given by the Company or written notice is given by the Executive. 1.4 AT-WILL EMPLOYMENT. Executive will continue to be employed as an at-will employee of the Company. Subject to the provisions of Articles III and IV, as an at-will employee, Executive is free to terminate his/her employment with the Company at any time, for any reason, and the Company has the similar right to terminate Executive's employment at any time, for any reason. Although the Company may choose to terminate Executive's employment for cause, Executive's employment is at-will and cause is not required. 1.5 REVIEW OF AGREEMENT. It is the parties intention that the terms of this Agreement will be reviewed prior to December 31, 2005 to determine whether any modifications are appropriate. This review of the Agreement terms may occur at an earlier or later date, is not mandatory and does not impose any binding obligations on either party. ARTICLE II COMPENSATION For all services rendered by the Executive in any capacity during the Executive's employment under this Agreement, the Company will compensate the Executive as follows: -1- 2.1 BASE SALARY. Effective as of January 1, 2004, and for a period of two (2) years thereafter, the Company will pay to the Executive an annual base salary of ONE HUNDRED SIXTY FIVE THOUSAND DOLLARS ($165,000) to be paid in equal installments in accordance with the Company's general payment policies in effect during the term hereof (the "Base Salary"). Executive's annual base salary may be reviewed prior to December 31, 2005 and appropriate adjustments to salary implemented. If Executive's annual base salary is not revised effective January 1, 2006, his/her existing salary will continue on a monthly basis until changed. This provision does not alter the at-will nature of Executive's employment or the provisions of ARTICLES III and IV below. 2.2 INCENTIVE BONUS. The Executive shall be eligible to receive a targeted annual bonus based on performance criteria established annually by the Compensation Committee (the "Incentive Bonus"). The Incentive Bonus criteria for the year ending December 31, 2004 is set forth on Exhibit A hereto. 2.3 STOCK OPTIONS. Executive may be granted options to purchase shares of Company Common Stock pursuant to the Company's Stock Option Plan. Any stock option must be approved by the Compensation Committee. 2.4 ADDITIONAL BENEFITS. The Executive will be entitled to participate in all benefit and welfare programs, plans, and arrangements that are from time to time made available to the Company's like-level executive employees. ARTICLE III TERMINATION OF EMPLOYMENT 3.1 GENERAL. While Executive is an at-will employee as provided at Section 1.3 above, the follow conditions for termination of employment are set forth in order to determine the nature of Executive compensation entitlement upon termination of employment as discussed in Article IV below. Neither the provisions of Article III or Article IV of this Agreement shall alter the at-will nature of Executive's employment with the Company. 3.2 DEATH OR RETIREMENT OF EXECUTIVE. The Executive's employment under this Agreement will automatically terminate upon the death or Retirement (as defined in Section 6.1) of the Executive. 3.3 BY EXECUTIVE. The Executive may terminate the Executive's employment under this Agreement by giving Notice of Termination (as defined in Section 6.1 hereof) to the Company: (a) for Good Reason (as defined in Section 6.1 hereof); and (b) at any time without Good Reason. 3.4 BY COMPANY. The Company may terminate the Executive's employment under this Agreement by giving Notice of Termination to the Executive: -2- (a) in the event of Executive's Total Disability (as defined in Section 6.1 hereof); (b) for Cause (as defined in Section 6.1 hereof); and (c) at any time without Cause. ARTICLE IV COMPENSATION UPON TERMINATION OF EMPLOYMENT If the Executive's employment hereunder is terminated, in accordance with the provisions of Article III hereof, and except for any other rights or benefits specifically provided for herein to be effective following the Executive's period of employment, the Company will provide compensation and benefits to the Executive only as follows: 4.1 UPON TERMINATION FOR DEATH OR DISABILITY. If the Executive's employment hereunder is terminated by reason of the Executive's death or Total Disability, the Company will: (a) pay the Executive (or the Executive's estate) or beneficiaries any Base Salary that has accrued but was not paid as of the termination date (the "Accrued Base Salary"); (b) pay the Executive (or the Executive's estate) or beneficiaries for unused vacation days accrued as of the termination date in an amount equal to the Executive's Base Salary multiplied by a fraction the numerator of which is the number of accrued unused vacation days and the denominator of which is 260 (the "Accrued Vacation Payment"); (c) reimburse the Executive (or the Executive's estate) or beneficiaries for expenses incurred by him prior to the date of termination that are subject to reimbursement pursuant to this Agreement (the "Accrued Reimbursable Expenses"); (d) provide to the Executive (or the Executive's estate) or beneficiaries any accrued and vested benefits required to be provided by the terms of any Company-sponsored benefit plans or programs (the "Accrued Benefits"), together with any benefits required to be paid or provided in the event of the Executive's death or Total Disability under applicable law; (e) pay the Executive (or the Executive's estate) or beneficiaries any Incentive Bonus with respect to a prior fiscal year that has accrued but has not been paid (the "Accrued Incentive Bonus"); and (f) the Executive (or the Executive's estate) or beneficiaries shall have the right to exercise all vested unexercised stock options and warrants outstanding at the termination date in accordance with terms of the plans and agreements pursuant to which such options or warrants were issued. -3- 4.2 UPON TERMINATION BY COMPANY FOR CAUSE OR BY EXECUTIVE WITHOUT GOOD REASON. If the Executive's employment is terminated by the Company for Cause, or if the Executive terminates the Executive's employment with the Company other than (x) upon the Executive's death or Total Disability or (y) for Good Reason, the Company will: (a) pay the Executive the Accrued Base Salary; (b) pay the Executive the Accrued Vacation Payment; (c) pay the Executive the Accrued Reimbursable Expenses; (d) pay the Executive the Accrued Benefits, together with any benefits required to be paid or provided under applicable law; (e) pay the Executive any Accrued Incentive Bonus; and (f) the Executive will have the right to exercise vested options and warrants in accordance with Section 4.1(f) hereof. 4.3 UPON TERMINATION BY THE COMPANY WITHOUT CAUSE OR BY EXECUTIVE FOR GOOD REASON. If the Executive's employment is terminated by the Company without Cause or by the Executive for Good Reason, the Company will: (a) pay the Executive the Accrued Base Salary; (b) pay the Executive the Accrued Vacation Payment; (c) pay the Executive the Accrued Reimbursable Expenses; (d) pay the Executive the Accrued Benefits, together with any benefits required to be paid or provided under applicable law; (e) pay the Executive any Accrued Incentive Bonus; (f) pay the Executive severance, commencing on the thirtieth (30th) day following the termination date, of six (6) monthly payments equal to one-twelfth (1/12th) of the Executive's Annual Base Salary in effect immediately prior to the time such termination occurs. Severance will be mitigated on a dollar for dollar basis for any income received by Executive for duties performed for Company or any third party during the six (6) months following termination. The severance payment required under this subsection shall be conditioned upon the Executive confirming the release in Section 5.2 hereof; and (g) maintain in full force and effect, for the Executive's and the Executive's eligible beneficiaries, until the first to occur of (x) the Executive's attainment of alternative employment if such employment includes health insurance benefits or (y) the three (3) month anniversary of termination of employment, the benefits provided -4- pursuant to Company-sponsored benefit plans, programs, or other arrangements in which the Executive was entitled to participate as a full-time employee immediately prior to such termination in accordance with Section 2.4 hereof, subject to the terms and conditions of participation as provided under the general terms and provisions of such plans, programs, and arrangements, or in the alternate, the Company will arrange to provide the Executive with continued benefits substantially similar to those which the Executive would have been entitled to receive under such plans, programs, and arrangements; (h) the Executive shall have the right to exercise vested options and warrants in accordance with Section 4.1(f). 4.4 UPON CHANGE OF CONTROL AND TERMINATION BY THE COMPANY WITHOUT CAUSE OR BY EXECUTIVE FOR GOOD REASON. If the Executive's employment is terminated within two (2) years of a Change of Control by the Company without Cause or by the Executive for Good Reason, the Company will: (a) pay the Executive the Accrued Base Salary; (b) pay the Executive the Accrued Vacation Payment; (c) pay the Executive the Accrued Reimbursable Expenses; (d) pay the Executive the Accrued Benefits, together with any benefits required to be paid or provided under applicable law; (e) pay the Executive any Accrued Incentive Bonus; plus the pro-rata Incentive Bonus based on actual performance for the year of termination. (f) pay the Executive severance of one and one-half (1.5) times Executive's Annual Base Salary in effect immediately prior to the time such termination occurs plus the greater of (x) one and one-half (1.5) times the targeted Incentive Bonus immediately prior to the time such termination occurs or (y) one and one-half (1.5) times the average actual Incentive Bonus for the previous three (3) years, whichever is greater. The severance payment required under this subsection shall be conditioned upon the Executive confirming the release in Section 5.2 hereof; (g) maintain in full force and effect, for the Executive's and the Executive's eligible beneficiaries, until the first to occur of (x) the Executive's attainment of alternative employment if such employment includes health insurance benefits or (y) the eighteen (18) month anniversary of termination, the benefits provided pursuant to Company-sponsored benefit plans, programs, or other arrangements in which the Executive was entitled to participate as a full-time employee immediately prior to such termination in accordance with Section 2.4 hereof, subject to the terms and conditions of participation as provided under the general terms and provisions of such plans, programs, and arrangements, or in the alternate, the Company will arrange to provide the Executive with continued benefits substantially similar to those which the Executive would have been entitled to receive under such plans, programs, and arrangements; -5- (h) any payments will be grossed up for Internal Revenue Code Section 280G excise tax penalty on "excess parachute payments;" and (i) the Executive shall have the right to exercise vested options and warrants in accordance with Section 4.1(f). ARTICLE V ADDITIONAL AGREEMENTS 5.1 OTHER AGREEMENTS. As further material consideration for the Company entering into this Agreement, the Executive will also execute the Company's standard employee confidentially agreement, inventions assignment agreement, and any other agreements required to be executed by all like level executives of the Company. 5.2 EMPLOYEE'S RESTRICTIVE COVENANTS UPON TERMINATION. If the Executive's employment is terminated for any reason, Executive agrees: (a) To keep all of the Company's Confidential Information confidential in perpetuity in accordance with the Company's policy; (b) To not hire or solicit for hire or consultation employees of the Company for a period of one and one-half (1 1/2) years after termination of employment; and (c) To release the Company from any and all claims, whether known or unknown, except for those based upon this Agreement. Such release shall include the rights of Section 1542 of the California Civil Code, which provides: "A general release does not extend to claims which the creditor does not know or suspect to exist in the Executive's favor at the time of executing the release, which if known by him must have materially affected the Executive's settlement with the debtor." ARTICLE VI MISCELLANEOUS 6.1 DEFINITIONS. For purposes of this Agreement, the following terms will have the following meanings: (a) "Accrued Base Salary" - as defined in Section 4.1(a) hereof. (b) "Accrued Benefits" - as defined in Section 4.1(d) hereof. (c) "Accrued Incentive Bonus" - as defined in Section 4.1(e) hereof. (d) "Accrued Reimbursable Expenses" - as defined in Section 4.1(c) hereof. -6- (e) "Accrued Vacation Payment" - as defined in Section 4.1(b) hereof. (f) "Affiliate" of a Person means a Person that directly or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, the first Person. "Control" (including the terms "controlled by" and "under common control with") means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ownership of voting securities, by contract or credit arrangement, as trustee or executor, or otherwise. (g) "Incentive Bonus" as defined in Section 2.2 hereof. (h) "Base Salary" as defined in Section 2.1 hereof. (i) "Cause" will mean any willful breach of duty by the Executive in the course of the Executive's employment, continued violation of written Company employment policies after written notice of such violation, violation of the Company's Insider Trading Policies, conviction of a felony or any crime involving fraud, theft, embezzlement, dishonesty or moral turpitude, engaging in activities which materially defame the Company, engaging in conduct which is material injurious to the Company or its Affiliates, or any of their respective customer or supplier relationships, financially or otherwise, or the Executive's gross negligence or continued failure to perform Executive's duties or his/her continued incapacity to perform such duties. (j) "Change of Control" will mean if there is a merger, consolidation, sale of all or a major portion of the assets of the Company (or a successor organization) or similar transaction or circumstance where any person or group (other than Douglas B. Otto) acquires or obtains the right to acquire, in one or more transactions, beneficial ownership of more than Fifty Percent (50%) of the outstanding shares of any class of voting stock of the Company (or a successor organization) at any date subsequent to September 30, 2003. (k) "Compensation Committee" means the Compensation Committee of the Company's Board of Directors. (l) "Continued Benefits" as defined in Section 4.3(g) hereof. (m) "Good Reason" will mean the occurrence of material breach of this Agreement by the Company, which breach is not cured within fifteen (15) calendar days after written notice thereof is received by the Company, or in the event of a Change of Control, a reduction of total compensation, benefits, and perquisites, relocation greater than 50 miles, or material change in position or duties. (n) "Notice of Termination" will mean a notice which shall indicate the specific termination provision of this Agreement relied upon and shall generally set forth the basis for termination of the Executive's employment under the provision so indicated. -7- (o) "Person" means any natural person, firm, partnership, association, corporation, company, limited liability company, limited partnership, trust, business trust, governmental authority, or other entity. (p) "Retirement" will mean normal retirement at age 65. (q) "Severance" will mean payments after termination of Executive's employment. (r) "Total Disability" will mean the Executive's failure substantially to perform the Executive's duties hereunder on a full-time basis for a period exceeding one hundred eighty (180) consecutive days or for periods aggregating more than one hundred eighty (180) days during any twelve (12) month period as a result of incapacity due to physical or mental illness. If there is a dispute as to whether the Executive is or was physically or mentally unable to perform the Executive's duties under this Agreement, such dispute will be submitted for resolution to a licensed physician agreed upon by the Company and the Executive, or if an agreement cannot be promptly reached, the Company and the Executive will promptly each select a physician, and if these physicians cannot agree, the physicians will promptly select a third physician whose decision will be binding on all parties. If such a dispute arises, the Executive will submit to such examinations and will provide such information as such physician(s) may request, and the determination of the physician(s) as to the Executive's physical or mental condition will be binding and conclusive. Notwithstanding the foregoing, if the Executive participates in any group disability plan provided by the Company, which offers long-term disability benefits, "Total Disability" will mean total disability as defined therein. 6.2 KEY MAN INSURANCE. The Company will have the right, in its sole discretion, to purchase "key man" insurance on the life of the Executive. The Company shall be the owner and beneficiary of any such policy. If the Company elects to purchase such a policy, the Executive will take such physical examinations and supply such information as may be reasonably requested by the insurer. 6.3 SUCCESSORS; BINDING AGREEMENT. This Agreement will be binding upon any successor to the Company and will inure to the benefit of and be enforceable by the Executive's personal or legal representatives, beneficiaries, designees, executors, administrators, heirs, distributees, devisees and legatees. 6.4 MODIFICATION; NO WAIVER. This Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto. No term or condition of this Agreement will be deemed to have been waived, nor will there be any estoppel against the enforcement of any provision of this Agreement, except by written instrument by the party charged with such waiver or estoppel. No such written waiver will be deemed a continuing waiver unless specifically stated therein, and each such waiver will operate only as to the specific term or condition waived and will not constitute a waiver of such term or condition for the future or as to any other term or condition. -8- 6.5 SEVERABILITY. The covenants and agreements contained herein are separate and severable and the invalidity or unenforceability of any one or more of such covenants or agreements, if not material to the employment arrangement that is the basis for this Agreement, will not affect the validity or enforceability of any other covenant or agreement contained herein. 6.6 FORM OF NOTICE TO PARTIES. All notices, requests, demands, waivers and other communications required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given if (a) delivered personally, (b) mailed by first-class, registered or certified mail, return receipt requested, postage prepaid, or (c) sent by next-day or overnight mail or delivery or (d) sent by telecopy or telegram, to the following address: If to Executive: ______________________ ______________________ ______________________ If to Company: Deckers Outdoor Corporation 495-A South Fairview Avenue Goleta, CA 93117 Attn: Douglas B. Otto Facsimile #805-967-7862 or, in each case, at such other address as may be specified in writing to the other parties hereto. All such notices, requests, demands, waivers and other communications shall be deemed to have been received (w) if by personal delivery on the day after such delivery, (x) if by certified or registered mail, on the seventh business day after the mailing thereof, (y) if by next-day or overnight mail or delivery, on the day delivered, (z) if by telecopy or telegram, on the next day following the day on which such telecopy or telegram was sent, provided that a copy is also sent by certified or registered mail. 6.7 ASSIGNMENT. This Agreement and any rights hereunder will not be assignable by either party without the prior written consent of the other party except as otherwise specifically provided for herein. 6.8 ENTIRE UNDERSTANDING. This Agreement constitutes the entire understanding between the parties hereto and no agreement, representation, warranty or covenant has been made by either party except as expressly set forth herein. 6.9 EXECUTIVE'S REPRESENTATIONS. The Executive represents and warrants that neither the execution and delivery of this Agreement nor the performance of the Executive's duties hereunder violates the provisions of any other agreement to which he is a party or by which he is bound. -9- 6.10 GOVERNING LAW. This Agreement will be construed in accordance with the laws of the State of California, without regard to the conflict of laws provisions thereof, with venue proper only in the County of Santa Barbara, California. 6.11 ARBITRATION. (a) Except as provided in Section 6.11(c) below, the parties hereto agree that any dispute or controversy arising out of, relating to, or in connection with this Agreement, or the interpretation, validity, construction, performance, breach, or termination thereof, shall be finally settled by binding arbitration, unless otherwise required by law, to be held in Santa Barbara, California under the National Rules for the Resolution of Employment Disputes of the American Arbitration Association as then in effect (the "Rules"). The arbitrator(s) may grant injunctions or other relief in such dispute or controversy. The decision of the arbitrator(s) shall be final, conclusive and binding on the parties to the arbitration, and judgment may be entered on the decision of the arbitrator(s) in any court having jurisdiction. (b) The arbitrator(s) shall apply California law to the merits of any dispute or claim, without reference to rules of conflicts of law. (c) The parties may apply to any court of competent jurisdiction for a temporary restraining order, preliminary injunction, or other interim or conservatory relief, as necessary, without breach of this arbitration agreement and without abridgement of the powers of the arbitrator. (d) EMPLOYEE HAS READ AND UNDERSTANDS THIS SECTION, WHICH DISCUSSES ARBITRATION. EMPLOYEE UNDERSTANDS THAT BY SIGNING THIS AGREEMENT, EMPLOYEE AGREES TO SUBMIT ANY CLAIMS ARISING OUT OF, RELATING TO, OR IN CONNECTION WITH THIS AGREEMENT, OR THE INTERPRETATION, VALIDITY, CONSTRUCTION, PERFORMANCE, BREACH OR TERMINATION THEREOF TO BINDING ARBITRATION, UNLESS OTHERWISE REQUIRED BY LAW, AND THAT THIS ARBITRATION CLAUSE CONSTITUTES A WAIVER OF EMPLOYEE'S RIGHT TO A JURY TRIAL AND RELATES TO THE RESOLUTION OF ALL DISPUTES RELATING TO EMPLOYEE'S RELATIONSHIP WITH THE COMPANY, INCLUDING BUT NOT LIMITED TO, CLAIMS OF HARASSMENT, DISCRIMINATION, WRONGFUL TERMINATION AND ANY STATUTORY CLAIMS. -10- IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. COMPANY: DECKERS OUTDOOR CORPORATION By: /s/ Douglas B. Otto --------------------------------- Name: Douglas B. Otto Date Title: Chief Executive Officer EXECUTIVE: /s/ Scott Ash ----------------------------------------- Scott Ash Date -11- EXHIBIT A SENIOR EXECUTIVE EMPLOYMENT AGREEMENT 2004 INCENTIVE BONUS CRITERIA EXECUTIVE: SCOTT ASH TARGET BONUS: $58,000 @ 100% LEVEL
Good Very Good Excellent 75% BASED ON TOPLINE PERFORMANCE Sales + Backlog Percentage Increase 10% 15% 20% 25% BASED ON EARNINGS PERFORMANCE Earnings Per Share as Calculated to Above Sales Increases * * * -- -- -- BONUS LEVEL 100% 200% 400%
* To be inserted when 2003 sales are confirmed. Bonus to be paid in accordance to method used in 2003. -12- EX-10.31 7 v97221exv10w31.txt EXHIBIT 10.31 EXHIBIT 10.31 SENIOR EXECUTIVE EMPLOYMENT AGREEMENT THIS SENIOR EXECUTIVE EMPLOYMENT AGREEMENT (the "Agreement") is to be effective as of January 1, 2004 by and between DECKERS OUTDOOR CORPORATION, a Delaware corporation (the "Company"), and PAT DEVANEY (the "Executive"). ARTICLE I DUTIES AND TERM 1.1 EMPLOYMENT. In consideration of their mutual covenants, Executive's continued employment with the Company and other good and valuable consideration, the receipt, adequacy, and sufficiency of which is hereby acknowledged, the Company agrees to enter into this Agreement with the Executive, who is currently an employee of the Company on an "at will" basis, and the Executive agrees to enter into this Agreement and remain in the employ of the Company upon the terms and conditions herein provided and in accordance with all applicable employment rules of the Company. This Agreement was prepared after consultation with the Company's compensation consultant, Frederick W. Cook & Company, Inc. 1.2 POSITION AND RESPONSIBILITIES. The Executive will continue to serve in the Executive's current position as SENIOR VICE PRESIDENT, PRODUCTION AND DEVELOPMENT, and continue to report to the Executive's current supervisor. 1.3 TERM. The term of the Executive's employment under this Agreement will commence on the effective date of this Agreement as first written above and will continue, unless sooner terminated, until December 31, 2005. Employment of the Executive is at will and will continue until such time as written notice of termination is given by the Company or written notice is given by the Executive. 1.4 AT-WILL EMPLOYMENT. Executive will continue to be employed as an at-will employee of the Company. Subject to the provisions of Articles III and IV, as an at-will employee, Executive is free to terminate his/her employment with the Company at any time, for any reason, and the Company has the similar right to terminate Executive's employment at any time, for any reason. Although the Company may choose to terminate Executive's employment for cause, Executive's employment is at-will and cause is not required. 1.5 REVIEW OF AGREEMENT. It is the parties intention that the terms of this Agreement will be reviewed prior to December 31, 2005 to determine whether any modifications are appropriate. This review of the Agreement terms may occur at an earlier or later date, is not mandatory and does not impose any binding obligations on either party. ARTICLE II COMPENSATION For all services rendered by the Executive in any capacity during the Executive's employment under this Agreement, the Company will compensate the Executive as follows: -1- 2.1 BASE SALARY. Effective as of January 1, 2004, and for a period of two (2) years thereafter, the Company will pay to the Executive an annual base salary of ONE HUNDRED SIXTY SEVEN THOUSAND ($167,000) to be paid in equal installments in accordance with the Company's general payment policies in effect during the term hereof (the "Base Salary"). Executive's annual base salary may be reviewed prior to December 31, 2005 and appropriate adjustments to salary implemented. If Executive's annual base salary is not revised effective January 1, 2006, his/her existing salary will continue on a monthly basis until changed. This provision does not alter the at-will nature of Executive's employment or the provisions of ARTICLES III and IV below. 2.2 INCENTIVE BONUS. The Executive shall be eligible to receive a targeted annual bonus based on performance criteria established annually by the Compensation Committee (the "Incentive Bonus"). The Incentive Bonus criteria for the year ending December 31, 2004 is set forth on Exhibit A hereto. 2.3 STOCK OPTIONS. Executive may be granted options to purchase shares of Company Common Stock pursuant to the Company's Stock Option Plan. Any stock option must be approved by the Compensation Committee. 2.4 ADDITIONAL BENEFITS. The Executive will be entitled to participate in all benefit and welfare programs, plans, and arrangements that are from time to time made available to the Company's like-level executive employees. ARTICLE III TERMINATION OF EMPLOYMENT 3.1 GENERAL. While Executive is an at-will employee as provided at Section 1.3 above, the follow conditions for termination of employment are set forth in order to determine the nature of Executive compensation entitlement upon termination of employment as discussed in Article IV below. Neither the provisions of Article III or Article IV of this Agreement shall alter the at-will nature of Executive's employment with the Company. 3.2 DEATH OR RETIREMENT OF EXECUTIVE. The Executive's employment under this Agreement will automatically terminate upon the death or Retirement (as defined in Section 6.1) of the Executive. 3.3 BY EXECUTIVE. The Executive may terminate the Executive's employment under this Agreement by giving Notice of Termination (as defined in Section 6.1 hereof) to the Company: (a) for Good Reason (as defined in Section 6.1 hereof); and (b) at any time without Good Reason. 3.4 BY COMPANY. The Company may terminate the Executive's employment under this Agreement by giving Notice of Termination to the Executive: -2- (a) in the event of Executive's Total Disability (as defined in Section 6.1 hereof); (b) for Cause (as defined in Section 6.1 hereof); and (c) at any time without Cause. ARTICLE IV COMPENSATION UPON TERMINATION OF EMPLOYMENT If the Executive's employment hereunder is terminated, in accordance with the provisions of Article III hereof, and except for any other rights or benefits specifically provided for herein to be effective following the Executive's period of employment, the Company will provide compensation and benefits to the Executive only as follows: 4.1 UPON TERMINATION FOR DEATH OR DISABILITY. If the Executive's employment hereunder is terminated by reason of the Executive's death or Total Disability, the Company will: (a) pay the Executive (or the Executive's estate) or beneficiaries any Base Salary that has accrued but was not paid as of the termination date (the "Accrued Base Salary"); (b) pay the Executive (or the Executive's estate) or beneficiaries for unused vacation days accrued as of the termination date in an amount equal to the Executive's Base Salary multiplied by a fraction the numerator of which is the number of accrued unused vacation days and the denominator of which is 260 (the "Accrued Vacation Payment"); (c) reimburse the Executive (or the Executive's estate) or beneficiaries for expenses incurred by him prior to the date of termination that are subject to reimbursement pursuant to this Agreement (the "Accrued Reimbursable Expenses"); (d) provide to the Executive (or the Executive's estate) or beneficiaries any accrued and vested benefits required to be provided by the terms of any Company-sponsored benefit plans or programs (the "Accrued Benefits"), together with any benefits required to be paid or provided in the event of the Executive's death or Total Disability under applicable law; (e) pay the Executive (or the Executive's estate) or beneficiaries any Incentive Bonus with respect to a prior fiscal year that has accrued but has not been paid (the "Accrued Incentive Bonus"); and (f) the Executive (or the Executive's estate) or beneficiaries shall have the right to exercise all vested unexercised stock options and warrants outstanding at the termination date in accordance with terms of the plans and agreements pursuant to which such options or warrants were issued. -3- 4.2 UPON TERMINATION BY COMPANY FOR CAUSE OR BY EXECUTIVE WITHOUT GOOD REASON. If the Executive's employment is terminated by the Company for Cause, or if the Executive terminates the Executive's employment with the Company other than (x) upon the Executive's death or Total Disability or (y) for Good Reason, the Company will: (a) pay the Executive the Accrued Base Salary; (b) pay the Executive the Accrued Vacation Payment; (c) pay the Executive the Accrued Reimbursable Expenses; (d) pay the Executive the Accrued Benefits, together with any benefits required to be paid or provided under applicable law; (e) pay the Executive any Accrued Incentive Bonus; and (f) the Executive will have the right to exercise vested options and warrants in accordance with Section 4.1(f) hereof. 4.3 UPON TERMINATION BY THE COMPANY WITHOUT CAUSE OR BY EXECUTIVE FOR GOOD REASON. If the Executive's employment is terminated by the Company without Cause or by the Executive for Good Reason, the Company will: (a) pay the Executive the Accrued Base Salary; (b) pay the Executive the Accrued Vacation Payment; (c) pay the Executive the Accrued Reimbursable Expenses; (d) pay the Executive the Accrued Benefits, together with any benefits required to be paid or provided under applicable law; (e) pay the Executive any Accrued Incentive Bonus; (f) pay the Executive severance, commencing on the thirtieth (30th) day following the termination date, of six (6) monthly payments equal to one-twelfth (1/12th) of the Executive's Annual Base Salary in effect immediately prior to the time such termination occurs. Severance will be mitigated on a dollar for dollar basis for any income received by Executive for duties performed for Company or any third party during the six (6) months following termination. The severance payment required under this subsection shall be conditioned upon the Executive confirming the release in Section 5.2 hereof; and (g) maintain in full force and effect, for the Executive's and the Executive's eligible beneficiaries, until the first to occur of (x) the Executive's attainment of alternative employment if such employment includes health insurance benefits or (y) the three (3) month anniversary of this Agreement, the benefits provided pursuant to -4- Company-sponsored benefit plans, programs, or other arrangements in which the Executive was entitled to participate as a full-time employee immediately prior to such termination in accordance with Section 2.4 hereof, subject to the terms and conditions of participation as provided under the general terms and provisions of such plans, programs, and arrangements, or in the alternate, the Company will arrange to provide the Executive with continued benefits substantially similar to those which the Executive would have been entitled to receive under such plans, programs, and arrangements; (h) the Executive shall have the right to exercise vested options and warrants in accordance with Section 4.1(f). 4.4 UPON CHANGE OF CONTROL AND TERMINATION BY THE COMPANY WITHOUT CAUSE OR BY EXECUTIVE FOR GOOD REASON. If the Executive's employment is terminated within two (2) years of a Change of Control by the Company without Cause or by the Executive for Good Reason, the Company will: (a) pay the Executive the Accrued Base Salary; (b) pay the Executive the Accrued Vacation Payment; (c) pay the Executive the Accrued Reimbursable Expenses; (d) pay the Executive the Accrued Benefits, together with any benefits required to be paid or provided under applicable law; (e) pay the Executive any Accrued Incentive Bonus; plus the pro-rata Incentive Bonus based on actual performance for the year of termination. (f) pay the Executive severance of one and one-half (1.5) times Executive's Annual Base Salary in effect immediately prior to the time such termination occurs plus the greater of (x) one and one-half (1.5) times the targeted Incentive Bonus immediately prior to the time such termination occurs or (y) one and one-half (1.5) times the average actual Incentive Bonus for the previous three (3) years, whichever is greater. The severance payment required under this subsection shall be conditioned upon the Executive confirming the release in Section 5.2 hereof; (g) maintain in full force and effect, for the Executive's and the Executive's eligible beneficiaries, until the first to occur of (x) the Executive's attainment of alternative employment if such employment includes health insurance benefits or (y) the eighteen (18) month anniversary of this Agreement, the benefits provided pursuant to Company-sponsored benefit plans, programs, or other arrangements in which the Executive was entitled to participate as a full-time employee immediately prior to such termination in accordance with Section 2.4 hereof, subject to the terms and conditions of participation as provided under the general terms and provisions of such plans, programs, and arrangements, or in the alternate, the Company will arrange to provide the Executive with continued benefits substantially similar to those which the Executive would have been entitled to receive under such plans, programs, and arrangements; -5- (h) any payments will be grossed up for Internal Revenue Code Section 280G excise tax penalty on "excess parachute payments;" and (i) the Executive shall have the right to exercise vested options and warrants in accordance with Section 4.1(f). ARTICLE V ADDITIONAL AGREEMENTS 5.1 OTHER AGREEMENTS. As further material consideration for the Company entering into this Agreement, the Executive will also execute the Company's standard employee confidentially agreement, inventions assignment agreement, and any other agreements required to be executed by all like level executives of the Company. 5.2 EMPLOYEE'S RESTRICTIVE COVENANTS UPON TERMINATION. If the Executive's employment is terminated for any reason, Executive agrees: (a) To keep all of the Company's Confidential Information confidential in perpetuity in accordance with the Company's policy; (b) To not hire or solicit for hire or consultation employees of the Company for a period of one and one-half (1 1/2) years after termination of employment; and (c) To release the Company from any and all claims, whether known or unknown, except for those based upon this Agreement. Such release shall include the rights of Section 1542 of the California Civil Code, which provides: "A general release does not extend to claims which the creditor does not know or suspect to exist in the Executive's favor at the time of executing the release, which if known by him must have materially affected the Executive's settlement with the debtor." ARTICLE VI MISCELLANEOUS 6.1 DEFINITIONS. For purposes of this Agreement, the following terms will have the following meanings: (a) "Accrued Base Salary" - as defined in Section 4.1(a) hereof. (b) "Accrued Benefits" - as defined in Section 4.1(d) hereof. (c) "Accrued Incentive Bonus" - as defined in Section 4.1(e) hereof. (d) "Accrued Reimbursable Expenses" - as defined in Section 4.1(c) hereof. -6- (e) "Accrued Vacation Payment" - as defined in Section 4.1(b) hereof. (f) "Affiliate" of a Person means a Person that directly or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, the first Person. "Control" (including the terms "controlled by" and "under common control with") means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ownership of voting securities, by contract or credit arrangement, as trustee or executor, or otherwise. (g) "Incentive Bonus" as defined in Section 2.2 hereof. (h) "Base Salary" as defined in Section 2.1 hereof. (i) "Cause" will mean any willful breach of duty by the Executive in the course of the Executive's employment, continued violation of written Company employment policies after written notice of such violation, violation of the Company's Insider Trading Policies, conviction of a felony or any crime involving fraud, theft, embezzlement, dishonesty or moral turpitude, engaging in activities which materially defame the Company, engaging in conduct which is material injurious to the Company or its Affiliates, or any of their respective customer or supplier relationships, financially or otherwise, or the Executive's gross negligence or continued failure to perform Executive's duties or his/her continued incapacity to perform such duties. (j) "Change of Control" will mean if there is a merger, consolidation, sale of all or a major portion of the assets of the Company (or a successor organization) or similar transaction or circumstance where any person or group (other than Douglas B. Otto) acquires or obtains the right to acquire, in one or more transactions, beneficial ownership of more than Fifty Percent (50%) of the outstanding shares of any class of voting stock of the Company (or a successor organization) at any date subsequent to September 30, 2003. (k) "Compensation Committee" means the Compensation Committee of the Company's Board of Directors. (l) "Continued Benefits" as defined in Section 4.3(g) hereof. (m) "Good Reason" will mean the occurrence of material breach of this Agreement by the Company, which breach is not cured within fifteen (15) calendar days after written notice thereof is received by the Company, or in the event of a Change of Control, a reduction of total compensation, benefits, and perquisites, relocation greater than 50 miles, or material change in position or duties. (n) "Notice of Termination" will mean a notice which shall indicate the specific termination provision of this Agreement relied upon and shall generally set forth the basis for termination of the Executive's employment under the provision so indicated. -7- (o) "Person" means any natural person, firm, partnership, association, corporation, company, limited liability company, limited partnership, trust, business trust, governmental authority, or other entity. (p) "Retirement" will mean normal retirement at age 65. (q) "Severance" will mean payments after termination of Executive's employment. (r) "Total Disability" will mean the Executive's failure substantially to perform the Executive's duties hereunder on a full-time basis for a period exceeding one hundred eighty (180) consecutive days or for periods aggregating more than one hundred eighty (180) days during any twelve (12) month period as a result of incapacity due to physical or mental illness. If there is a dispute as to whether the Executive is or was physically or mentally unable to perform the Executive's duties under this Agreement, such dispute will be submitted for resolution to a licensed physician agreed upon by the Company and the Executive, or if an agreement cannot be promptly reached, the Company and the Executive will promptly each select a physician, and if these physicians cannot agree, the physicians will promptly select a third physician whose decision will be binding on all parties. If such a dispute arises, the Executive will submit to such examinations and will provide such information as such physician(s) may request, and the determination of the physician(s) as to the Executive's physical or mental condition will be binding and conclusive. Notwithstanding the foregoing, if the Executive participates in any group disability plan provided by the Company, which offers long-term disability benefits, "Total Disability" will mean total disability as defined therein. 6.2 KEY MAN INSURANCE. The Company will have the right, in its sole discretion, to purchase "key man" insurance on the life of the Executive. The Company shall be the owner and beneficiary of any such policy. If the Company elects to purchase such a policy, the Executive will take such physical examinations and supply such information as may be reasonably requested by the insurer. 6.3 SUCCESSORS; BINDING AGREEMENT. This Agreement will be binding upon any successor to the Company and will inure to the benefit of and be enforceable by the Executive's personal or legal representatives, beneficiaries, designees, executors, administrators, heirs, distributees, devisees and legatees. 6.4 MODIFICATION; NO WAIVER. This Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto. No term or condition of this Agreement will be deemed to have been waived, nor will there be any estoppel against the enforcement of any provision of this Agreement, except by written instrument by the party charged with such waiver or estoppel. No such written waiver will be deemed a continuing waiver unless specifically stated therein, and each such waiver will operate only as to the specific term or condition waived and will not constitute a waiver of such term or condition for the future or as to any other term or condition. -8- 6.5 SEVERABILITY. The covenants and agreements contained herein are separate and severable and the invalidity or unenforceability of any one or more of such covenants or agreements, if not material to the employment arrangement that is the basis for this Agreement, will not affect the validity or enforceability of any other covenant or agreement contained herein. 6.6 FORM OF NOTICE TO PARTIES. All notices, requests, demands, waivers and other communications required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given if (a) delivered personally, (b) mailed by first-class, registered or certified mail, return receipt requested, postage prepaid, or (c) sent by next-day or overnight mail or delivery or (d) sent by telecopy or telegram, to the following address: If to Executive: ______________________ ______________________ ______________________ If to Company: Deckers Outdoor Corporation 495-A South Fairview Avenue Goleta, CA 93117 Attn: Douglas B. Otto Facsimile #805-967-7862 or, in each case, at such other address as may be specified in writing to the other parties hereto. All such notices, requests, demands, waivers and other communications shall be deemed to have been received (w) if by personal delivery on the day after such delivery, (x) if by certified or registered mail, on the seventh business day after the mailing thereof, (y) if by next-day or overnight mail or delivery, on the day delivered, (z) if by telecopy or telegram, on the next day following the day on which such telecopy or telegram was sent, provided that a copy is also sent by certified or registered mail. 6.7 ASSIGNMENT. This Agreement and any rights hereunder will not be assignable by either party without the prior written consent of the other party except as otherwise specifically provided for herein. 6.8 ENTIRE UNDERSTANDING. This Agreement constitutes the entire understanding between the parties hereto and no agreement, representation, warranty or covenant has been made by either party except as expressly set forth herein. 6.9 EXECUTIVE'S REPRESENTATIONS. The Executive represents and warrants that neither the execution and delivery of this Agreement nor the performance of the Executive's duties hereunder violates the provisions of any other agreement to which he is a party or by which he is bound. -9- 6.10 GOVERNING LAW. This Agreement will be construed in accordance with the laws of the State of California, without regard to the conflict of laws provisions thereof, with venue proper only in the County of Santa Barbara, California. 6.11 ARBITRATION. (a) Except as provided in Section 6.11(c) below, the parties hereto agree that any dispute or controversy arising out of, relating to, or in connection with this Agreement, or the interpretation, validity, construction, performance, breach, or termination thereof, shall be finally settled by binding arbitration, unless otherwise required by law, to be held in Santa Barbara, California under the National Rules for the Resolution of Employment Disputes of the American Arbitration Association as then in effect (the "Rules"). The arbitrator(s) may grant injunctions or other relief in such dispute or controversy. The decision of the arbitrator(s) shall be final, conclusive and binding on the parties to the arbitration, and judgment may be entered on the decision of the arbitrator(s) in any court having jurisdiction. (b) The arbitrator(s) shall apply California law to the merits of any dispute or claim, without reference to rules of conflicts of law. (c) The parties may apply to any court of competent jurisdiction for a temporary restraining order, preliminary injunction, or other interim or conservatory relief, as necessary, without breach of this arbitration agreement and without abridgement of the powers of the arbitrator. (d) EMPLOYEE HAS READ AND UNDERSTANDS THIS SECTION, WHICH DISCUSSES ARBITRATION. EMPLOYEE UNDERSTANDS THAT BY SIGNING THIS AGREEMENT, EMPLOYEE AGREES TO SUBMIT ANY CLAIMS ARISING OUT OF, RELATING TO, OR IN CONNECTION WITH THIS AGREEMENT, OR THE INTERPRETATION, VALIDITY, CONSTRUCTION, PERFORMANCE, BREACH OR TERMINATION THEREOF TO BINDING ARBITRATION, UNLESS OTHERWISE REQUIRED BY LAW, AND THAT THIS ARBITRATION CLAUSE CONSTITUTES A WAIVER OF EMPLOYEE'S RIGHT TO A JURY TRIAL AND RELATES TO THE RESOLUTION OF ALL DISPUTES RELATING TO EMPLOYEE'S RELATIONSHIP WITH THE COMPANY, INCLUDING BUT NOT LIMITED TO, CLAIMS OF HARASSMENT, DISCRIMINATION, WRONGFUL TERMINATION AND ANY STATUTORY CLAIMS. -10- IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. COMPANY: DECKERS OUTDOOR CORPORATION By: /s/ Douglas B. Otto ------------------------------- Name: Douglas B. Otto Date Title: Chief Executive Officer EXECUTIVE: /s/ Pat Devaney ----------------------------------- Pat Devaney, Senior Vice President, Date Production and Development -11- EXHIBIT A SENIOR EXECUTIVE EMPLOYMENT AGREEMENT 2004 INCENTIVE BONUS CRITERIA EXECUTIVE: PAT DEVANEY TARGET BONUS: $50,000 @ 100% LEVEL
Good Very Good Excellent 75% BASED ON TOPLINE PERFORMANCE Sales + Backlog Percentage Increase 10% 15% 20% 25% BASED ON EARNINGS PERFORMANCE Earnings Per Share as Calculated to Above Sales Increases * * * --- --- --- BONUS LEVEL 100% 200% 400%
* To be inserted when 2003 sales are confirmed. Bonus to be paid in accordance to method used in 2003. -12- EX-10.32 8 v97221exv10w32.txt EXHIBIT 10.32 EXHIBIT 10.32 SENIOR EXECUTIVE EMPLOYMENT AGREEMENT THIS SENIOR EXECUTIVE EMPLOYMENT AGREEMENT (the "Agreement") is to be effective as of January 1, 2004 by and between DECKERS OUTDOOR CORPORATION, a Delaware corporation (the "Company"), and CONNIE RISHWAIN (the "Executive"). ARTICLE I DUTIES AND TERM 1.1 EMPLOYMENT. In consideration of their mutual covenants, Executive's continued employment with the Company and other good and valuable consideration, the receipt, adequacy, and sufficiency of which is hereby acknowledged, the Company agrees to enter into this Agreement with the Executive, who is currently an employee of the Company on an "at will" basis, and the Executive agrees to enter into this Agreement and remain in the employ of the Company upon the terms and conditions herein provided and in accordance with all applicable employment rules of the Company. This Agreement was prepared after consultation with the Company's compensation consultant, Frederick W. Cook & Company, Inc. 1.2 POSITION AND RESPONSIBILITIES. The Executive will continue to serve in the Executive's current position as PRESIDENT, SIMPLE AND UGG, and continue to report to the Executive's current supervisor. 1.3 TERM. The term of the Executive's employment under this Agreement will commence on the effective date of this Agreement as first written above and will continue, unless sooner terminated, until December 31, 2005. Employment of the Executive is at will and will continue until such time as written notice of termination is given by the Company or written notice is given by the Executive. 1.4 AT-WILL EMPLOYMENT. Executive will continue to be employed as an at-will employee of the Company. Subject to the provisions of Articles III and IV, as an at-will employee, Executive is free to terminate his/her employment with the Company at any time, for any reason, and the Company has the similar right to terminate Executive's employment at any time, for any reason. Although the Company may choose to terminate Executive's employment for cause, Executive's employment is at-will and cause is not required. 1.5 REVIEW OF AGREEMENT. It is the parties intention that the terms of this Agreement will be reviewed prior to December 31, 2005 to determine whether any modifications are appropriate. This review of the Agreement terms may occur at an earlier or later date, is not mandatory and does not impose any binding obligations on either party. ARTICLE II COMPENSATION For all services rendered by the Executive in any capacity during the Executive's employment under this Agreement, the Company will compensate the Executive as follows: -1- 2.1 BASE SALARY. Effective as of January 1, 2004, and for a period of two (2) years thereafter, the Company will pay to the Executive an annual base salary of ONE HUNDRED SIXTY THOUSAND ($160,000) to be paid in equal installments in accordance with the Company's general payment policies in effect during the term hereof (the "Base Salary"). Executive's annual base salary may be reviewed prior to December 31, 2005 and appropriate adjustments to salary implemented. If Executive's annual base salary is not revised effective January 1, 2006, his/her existing salary will continue on a monthly basis until changed. This provision does not alter the at-will nature of Executive's employment or the provisions of ARTICLES III and IV below. 2.2 INCENTIVE BONUS. The Executive shall be eligible to receive a targeted annual bonus based on performance criteria established annually by the Compensation Committee (the "Incentive Bonus"). The Incentive Bonus criteria for the year ending December 31, 2004 is set forth on Exhibit A hereto. 2.3 STOCK OPTIONS. Executive may be granted options to purchase shares of Company Common Stock pursuant to the Company's Stock Option Plan. Any stock option must be approved by the Compensation Committee. 2.4 ADDITIONAL BENEFITS. The Executive will be entitled to participate in all benefit and welfare programs, plans, and arrangements that are from time to time made available to the Company's like-level executive employees. ARTICLE III TERMINATION OF EMPLOYMENT 3.1 GENERAL. While Executive is an at-will employee as provided at Section 1.3 above, the follow conditions for termination of employment are set forth in order to determine the nature of Executive compensation entitlement upon termination of employment as discussed in Article IV below. Neither the provisions of Article III or Article IV of this Agreement shall alter the at-will nature of Executive's employment with the Company. 3.2 DEATH OR RETIREMENT OF EXECUTIVE. The Executive's employment under this Agreement will automatically terminate upon the death or Retirement (as defined in Section 6.1) of the Executive. 3.3 BY EXECUTIVE. The Executive may terminate the Executive's employment under this Agreement by giving Notice of Termination (as defined in Section 6.1 hereof) to the Company: (a) for Good Reason (as defined in Section 6.1 hereof); and (b) at any time without Good Reason. 3.4 BY COMPANY. The Company may terminate the Executive's employment under this Agreement by giving Notice of Termination to the Executive: -2- (a) in the event of Executive's Total Disability (as defined in Section 6.1 hereof); (b) for Cause (as defined in Section 6.1 hereof); and (c) at any time without Cause. ARTICLE IV COMPENSATION UPON TERMINATION OF EMPLOYMENT If the Executive's employment hereunder is terminated, in accordance with the provisions of Article III hereof, and except for any other rights or benefits specifically provided for herein to be effective following the Executive's period of employment, the Company will provide compensation and benefits to the Executive only as follows: 4.1 UPON TERMINATION FOR DEATH OR DISABILITY. If the Executive's employment hereunder is terminated by reason of the Executive's death or Total Disability, the Company will: (a) pay the Executive (or the Executive's estate) or beneficiaries any Base Salary that has accrued but was not paid as of the termination date (the "Accrued Base Salary"); (b) pay the Executive (or the Executive's estate) or beneficiaries for unused vacation days accrued as of the termination date in an amount equal to the Executive's Base Salary multiplied by a fraction the numerator of which is the number of accrued unused vacation days and the denominator of which is 260 (the "Accrued Vacation Payment"); (c) reimburse the Executive (or the Executive's estate) or beneficiaries for expenses incurred by him prior to the date of termination that are subject to reimbursement pursuant to this Agreement (the "Accrued Reimbursable Expenses"); (d) provide to the Executive (or the Executive's estate) or beneficiaries any accrued and vested benefits required to be provided by the terms of any Company-sponsored benefit plans or programs (the "Accrued Benefits"), together with any benefits required to be paid or provided in the event of the Executive's death or Total Disability under applicable law; (e) pay the Executive (or the Executive's estate) or beneficiaries any Incentive Bonus with respect to a prior fiscal year that has accrued but has not been paid (the "Accrued Incentive Bonus"); and (f) the Executive (or the Executive's estate) or beneficiaries shall have the right to exercise all vested unexercised stock options and warrants outstanding at the termination date in accordance with terms of the plans and agreements pursuant to which such options or warrants were issued. -3- 4.2 UPON TERMINATION BY COMPANY FOR CAUSE OR BY EXECUTIVE WITHOUT GOOD REASON. If the Executive's employment is terminated by the Company for Cause, or if the Executive terminates the Executive's employment with the Company other than (x) upon the Executive's death or Total Disability or (y) for Good Reason, the Company will: (a) pay the Executive the Accrued Base Salary; (b) pay the Executive the Accrued Vacation Payment; (c) pay the Executive the Accrued Reimbursable Expenses; (d) pay the Executive the Accrued Benefits, together with any benefits required to be paid or provided under applicable law; (e) pay the Executive any Accrued Incentive Bonus; and (f) the Executive will have the right to exercise vested options and warrants in accordance with Section 4.1(f) hereof. 4.3 UPON TERMINATION BY THE COMPANY WITHOUT CAUSE OR BY EXECUTIVE FOR GOOD REASON. If the Executive's employment is terminated by the Company without Cause or by the Executive for Good Reason, the Company will: (a) pay the Executive the Accrued Base Salary; (b) pay the Executive the Accrued Vacation Payment; (c) pay the Executive the Accrued Reimbursable Expenses; (d) pay the Executive the Accrued Benefits, together with any benefits required to be paid or provided under applicable law; (e) pay the Executive any Accrued Incentive Bonus; (f) pay the Executive severance, commencing on the thirtieth (30th) day following the termination date, of six (6) monthly payments equal to one-twelfth (1/12th) of the Executive's Annual Base Salary in effect immediately prior to the time such termination occurs. Severance will be mitigated on a dollar for dollar basis for any income received by Executive for duties performed for Company or any third party during the six (6) months following termination. The severance payment required under this subsection shall be conditioned upon the Executive confirming the release in Section 5.2 hereof; and (g) maintain in full force and effect, for the Executive's and the Executive's eligible beneficiaries, until the first to occur of (x) the Executive's attainment of alternative employment if such employment includes health insurance benefits or (y) the three (3) month anniversary of termination of employment, the benefits provided -4- pursuant to Company-sponsored benefit plans, programs, or other arrangements in which the Executive was entitled to participate as a full-time employee immediately prior to such termination in accordance with Section 2.4 hereof, subject to the terms and conditions of participation as provided under the general terms and provisions of such plans, programs, and arrangements, or in the alternate, the Company will arrange to provide the Executive with continued benefits substantially similar to those which the Executive would have been entitled to receive under such plans, programs, and arrangements; (h) the Executive shall have the right to exercise vested options and warrants in accordance with Section 4.1(f). 4.4 UPON CHANGE OF CONTROL AND TERMINATION BY THE COMPANY WITHOUT CAUSE OR BY EXECUTIVE FOR GOOD REASON. If the Executive's employment is terminated within two (2) years of a Change of Control by the Company without Cause or by the Executive for Good Reason, the Company will: (a) pay the Executive the Accrued Base Salary; (b) pay the Executive the Accrued Vacation Payment; (c) pay the Executive the Accrued Reimbursable Expenses; (d) pay the Executive the Accrued Benefits, together with any benefits required to be paid or provided under applicable law; (e) pay the Executive any Accrued Incentive Bonus; plus the pro-rata Incentive Bonus based on actual performance for the year of termination. (f) pay the Executive severance of one and one-half (1.5) times Executive's Annual Base Salary in effect immediately prior to the time such termination occurs plus the greater of (x) one and one-half (1.5) times the targeted Incentive Bonus immediately prior to the time such termination occurs or (y) one and one-half (1.5) times the average actual Incentive Bonus for the previous three (3) years, whichever is greater. The severance payment required under this subsection shall be conditioned upon the Executive confirming the release in Section 5.2 hereof; (g) maintain in full force and effect, for the Executive's and the Executive's eligible beneficiaries, until the first to occur of (x) the Executive's attainment of alternative employment if such employment includes health insurance benefits or (y) the eighteen (18) month anniversary of termination, the benefits provided pursuant to Company-sponsored benefit plans, programs, or other arrangements in which the Executive was entitled to participate as a full-time employee immediately prior to such termination in accordance with Section 2.4 hereof, subject to the terms and conditions of participation as provided under the general terms and provisions of such plans, programs, and arrangements, or in the alternate, the Company will arrange to provide the Executive with continued benefits substantially similar to those which the Executive would have been entitled to receive under such plans, programs, and arrangements; -5- (h) any payments will be grossed up for Internal Revenue Code Section 280G excise tax penalty on "excess parachute payments;" and (i) the Executive shall have the right to exercise vested options and warrants in accordance with Section 4.1(f). ARTICLE V ADDITIONAL AGREEMENTS 5.1 OTHER AGREEMENTS. As further material consideration for the Company entering into this Agreement, the Executive will also execute the Company's standard employee confidentially agreement, inventions assignment agreement, and any other agreements required to be executed by all like level executives of the Company. 5.2 EMPLOYEE'S RESTRICTIVE COVENANTS UPON TERMINATION. If the Executive's employment is terminated for any reason, Executive agrees: (a) To keep all of the Company's Confidential Information confidential in perpetuity in accordance with the Company's policy; (b) To not hire or solicit for hire or consultation employees of the Company for a period of one and one-half (1 1/2) years after termination of employment; and (c) To release the Company from any and all claims, whether known or unknown, except for those based upon this Agreement. Such release shall include the rights of Section 1542 of the California Civil Code, which provides: "A general release does not extend to claims which the creditor does not know or suspect to exist in the Executive's favor at the time of executing the release, which if known by him must have materially affected the Executive's settlement with the debtor." ARTICLE VI MISCELLANEOUS 6.1 DEFINITIONS. For purposes of this Agreement, the following terms will have the following meanings: (a) "Accrued Base Salary" - as defined in Section 4.1(a) hereof. (b) "Accrued Benefits" - as defined in Section 4.1(d) hereof. (c) "Accrued Incentive Bonus" - as defined in Section 4.1(e) hereof. (d) "Accrued Reimbursable Expenses" - as defined in Section 4.1(c) hereof. -6- (e) "Accrued Vacation Payment" - as defined in Section 4.1(b) hereof. (f) "Affiliate" of a Person means a Person that directly or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, the first Person. "Control" (including the terms "controlled by" and "under common control with") means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ownership of voting securities, by contract or credit arrangement, as trustee or executor, or otherwise. (g) "Incentive Bonus" as defined in Section 2.2 hereof. (h) "Base Salary" as defined in Section 2.1 hereof. (i) "Cause" will mean any willful breach of duty by the Executive in the course of the Executive's employment, continued violation of written Company employment policies after written notice of such violation, violation of the Company's Insider Trading Policies, conviction of a felony or any crime involving fraud, theft, embezzlement, dishonesty or moral turpitude, engaging in activities which materially defame the Company, engaging in conduct which is material injurious to the Company or its Affiliates, or any of their respective customer or supplier relationships, financially or otherwise, or the Executive's gross negligence or continued failure to perform Executive's duties or his/her continued incapacity to perform such duties. (j) "Change of Control" will mean if there is a merger, consolidation, sale of all or a major portion of the assets of the Company (or a successor organization) or similar transaction or circumstance where any person or group (other than Douglas B. Otto) acquires or obtains the right to acquire, in one or more transactions, beneficial ownership of more than Fifty Percent (50%) of the outstanding shares of any class of voting stock of the Company (or a successor organization) at any date subsequent to September 30, 2003. (k) "Compensation Committee" means the Compensation Committee of the Company's Board of Directors. (l) "Continued Benefits" as defined in Section 4.3(g) hereof. (m) "Good Reason" will mean the occurrence of material breach of this Agreement by the Company, which breach is not cured within fifteen (15) calendar days after written notice thereof is received by the Company, or in the event of a Change of Control, a reduction of total compensation, benefits, and perquisites, relocation greater than 50 miles, or material change in position or duties. (n) "Notice of Termination" will mean a notice which shall indicate the specific termination provision of this Agreement relied upon and shall generally set forth the basis for termination of the Executive's employment under the provision so indicated. -7- (o) "Person" means any natural person, firm, partnership, association, corporation, company, limited liability company, limited partnership, trust, business trust, governmental authority, or other entity. (p) "Retirement" will mean normal retirement at age 65. (q) "Severance" will mean payments after termination of Executive's employment. (r) "Total Disability" will mean the Executive's failure substantially to perform the Executive's duties hereunder on a full-time basis for a period exceeding one hundred eighty (180) consecutive days or for periods aggregating more than one hundred eighty (180) days during any twelve (12) month period as a result of incapacity due to physical or mental illness. If there is a dispute as to whether the Executive is or was physically or mentally unable to perform the Executive's duties under this Agreement, such dispute will be submitted for resolution to a licensed physician agreed upon by the Company and the Executive, or if an agreement cannot be promptly reached, the Company and the Executive will promptly each select a physician, and if these physicians cannot agree, the physicians will promptly select a third physician whose decision will be binding on all parties. If such a dispute arises, the Executive will submit to such examinations and will provide such information as such physician(s) may request, and the determination of the physician(s) as to the Executive's physical or mental condition will be binding and conclusive. Notwithstanding the foregoing, if the Executive participates in any group disability plan provided by the Company, which offers long-term disability benefits, "Total Disability" will mean total disability as defined therein. 6.2 KEY MAN INSURANCE. The Company will have the right, in its sole discretion, to purchase "key man" insurance on the life of the Executive. The Company shall be the owner and beneficiary of any such policy. If the Company elects to purchase such a policy, the Executive will take such physical examinations and supply such information as may be reasonably requested by the insurer. 6.3 SUCCESSORS; BINDING AGREEMENT. This Agreement will be binding upon any successor to the Company and will inure to the benefit of and be enforceable by the Executive's personal or legal representatives, beneficiaries, designees, executors, administrators, heirs, distributees, devisees and legatees. 6.4 MODIFICATION; NO WAIVER. This Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto. No term or condition of this Agreement will be deemed to have been waived, nor will there be any estoppel against the enforcement of any provision of this Agreement, except by written instrument by the party charged with such waiver or estoppel. No such written waiver will be deemed a continuing waiver unless specifically stated therein, and each such waiver will operate only as to the specific term or condition waived and will not constitute a waiver of such term or condition for the future or as to any other term or condition. -8- 6.5 SEVERABILITY. The covenants and agreements contained herein are separate and severable and the invalidity or unenforceability of any one or more of such covenants or agreements, if not material to the employment arrangement that is the basis for this Agreement, will not affect the validity or enforceability of any other covenant or agreement contained herein. 6.6 FORM OF NOTICE TO PARTIES. All notices, requests, demands, waivers and other communications required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given if (a) delivered personally, (b) mailed by first-class, registered or certified mail, return receipt requested, postage prepaid, or (c) sent by next-day or overnight mail or delivery or (d) sent by telecopy or telegram, to the following address: If to Executive: ______________________ ______________________ ______________________ If to Company: Deckers Outdoor Corporation 495-A South Fairview Avenue Goleta, CA 93117 Attn: Douglas B. Otto Facsimile #805-967-7862 or, in each case, at such other address as may be specified in writing to the other parties hereto. All such notices, requests, demands, waivers and other communications shall be deemed to have been received (w) if by personal delivery on the day after such delivery, (x) if by certified or registered mail, on the seventh business day after the mailing thereof, (y) if by next-day or overnight mail or delivery, on the day delivered, (z) if by telecopy or telegram, on the next day following the day on which such telecopy or telegram was sent, provided that a copy is also sent by certified or registered mail. 6.7 ASSIGNMENT. This Agreement and any rights hereunder will not be assignable by either party without the prior written consent of the other party except as otherwise specifically provided for herein. 6.8 ENTIRE UNDERSTANDING. This Agreement constitutes the entire understanding between the parties hereto and no agreement, representation, warranty or covenant has been made by either party except as expressly set forth herein. 6.9 EXECUTIVE'S REPRESENTATIONS. The Executive represents and warrants that neither the execution and delivery of this Agreement nor the performance of the Executive's duties hereunder violates the provisions of any other agreement to which he is a party or by which he is bound. -9- 6.10 GOVERNING LAW. This Agreement will be construed in accordance with the laws of the State of California, without regard to the conflict of laws provisions thereof, with venue proper only in the County of Santa Barbara, California. 6.11 ARBITRATION. (a) Except as provided in Section 6.11(c) below, the parties hereto agree that any dispute or controversy arising out of, relating to, or in connection with this Agreement, or the interpretation, validity, construction, performance, breach, or termination thereof, shall be finally settled by binding arbitration, unless otherwise required by law, to be held in Santa Barbara, California under the National Rules for the Resolution of Employment Disputes of the American Arbitration Association as then in effect (the "Rules"). The arbitrator(s) may grant injunctions or other relief in such dispute or controversy. The decision of the arbitrator(s) shall be final, conclusive and binding on the parties to the arbitration, and judgment may be entered on the decision of the arbitrator(s) in any court having jurisdiction. (b) The arbitrator(s) shall apply California law to the merits of any dispute or claim, without reference to rules of conflicts of law. (c) The parties may apply to any court of competent jurisdiction for a temporary restraining order, preliminary injunction, or other interim or conservatory relief, as necessary, without breach of this arbitration agreement and without abridgement of the powers of the arbitrator. (d) EMPLOYEE HAS READ AND UNDERSTANDS THIS SECTION, WHICH DISCUSSES ARBITRATION. EMPLOYEE UNDERSTANDS THAT BY SIGNING THIS AGREEMENT, EMPLOYEE AGREES TO SUBMIT ANY CLAIMS ARISING OUT OF, RELATING TO, OR IN CONNECTION WITH THIS AGREEMENT, OR THE INTERPRETATION, VALIDITY, CONSTRUCTION, PERFORMANCE, BREACH OR TERMINATION THEREOF TO BINDING ARBITRATION, UNLESS OTHERWISE REQUIRED BY LAW, AND THAT THIS ARBITRATION CLAUSE CONSTITUTES A WAIVER OF EMPLOYEE'S RIGHT TO A JURY TRIAL AND RELATES TO THE RESOLUTION OF ALL DISPUTES RELATING TO EMPLOYEE'S RELATIONSHIP WITH THE COMPANY, INCLUDING BUT NOT LIMITED TO, CLAIMS OF HARASSMENT, DISCRIMINATION, WRONGFUL TERMINATION AND ANY STATUTORY CLAIMS. -10- IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. COMPANY: DECKERS OUTDOOR CORPORATION By: /s/ Douglas B. Otto ------------------------------------- Name: Douglas B. Otto Date Title: Chief Executive Officer EXECUTIVE: /s/ Connie Rishwain --------------------------------------------- Connie Rishwain Date President, SIMPLE and UGG -11- EXHIBIT A SENIOR EXECUTIVE EMPLOYMENT AGREEMENT 2004 INCENTIVE BONUS CRITERIA EXECUTIVE: CONNIE RISHWAIN TARGET BONUS: $56,000 @ 100% LEVEL
Good Very Good Excellent 75% BASED ON TOPLINE PERFORMANCE Sales + Backlog Percentage Increase 10% 15% 20% 25% BASED ON EARNINGS PERFORMANCE Brand Contribution as Calculated to Above Sales Increases * * * --- --- ---- BONUS LEVEL 100% 200% 400%
* To be inserted when 2003 sales are confirmed. Bonus to be paid in accordance to method used in 2003. -12- EX-10.33 9 v97221exv10w33.txt EXHIBIT 10.33 EXHIBIT 10.33 SENIOR EXECUTIVE EMPLOYMENT AGREEMENT THIS SENIOR EXECUTIVE EMPLOYMENT AGREEMENT (the "Agreement") is to be effective as of January 1, 2004 by and between DECKERS OUTDOOR CORPORATION, a Delaware corporation (the "Company"), and BOB ORLANDO (the "Executive"). ARTICLE I DUTIES AND TERM 1.1 EMPLOYMENT. In consideration of their mutual covenants, Executive's continued employment with the Company and other good and valuable consideration, the receipt, adequacy, and sufficiency of which is hereby acknowledged, the Company agrees to enter into this Agreement with the Executive, who is currently an employee of the Company on an "at will" basis, and the Executive agrees to enter into this Agreement and remain in the employ of the Company upon the terms and conditions herein provided and in accordance with all applicable employment rules of the Company. This Agreement was prepared after consultation with the Company's compensation consultant, Frederick W. Cook & Company, Inc. 1.2 POSITION AND RESPONSIBILITIES. The Executive will continue to serve in the Executive's current position as PRESIDENT, TEVA, and continue to report to the Executive's current supervisor. 1.3 TERM. The term of the Executive's employment under this Agreement will commence on the effective date of this Agreement as first written above and will continue, unless sooner terminated, until December 31, 2005. Employment of the Executive is at will and will continue until such time as written notice of termination is given by the Company or written notice is given by the Executive. 1.4 AT-WILL EMPLOYMENT. Executive will continue to be employed as an at-will employee of the Company. Subject to the provisions of Articles III and IV, as an at-will employee, Executive is free to terminate his/her employment with the Company at any time, for any reason, and the Company has the similar right to terminate Executive's employment at any time, for any reason. Although the Company may choose to terminate Executive's employment for cause, Executive's employment is at-will and cause is not required. 1.5 REVIEW OF AGREEMENT. It is the parties intention that the terms of this Agreement will be reviewed prior to December 31, 2005 to determine whether any modifications are appropriate. This review of the Agreement terms may occur at an earlier or later date, is not mandatory and does not impose any binding obligations on either party. ARTICLE II COMPENSATION For all services rendered by the Executive in any capacity during the Executive's employment under this Agreement, the Company will compensate the Executive as follows: -1- 2.1 BASE SALARY. Effective as of January 1, 2004, and for a period of two (2) years thereafter, the Company will pay to the Executive an annual base salary of ONE HUNDRED SIXTY EIGHT THOUSAND ($168,000) to be paid in equal installments in accordance with the Company's general payment policies in effect during the term hereof (the "Base Salary"). Executive's annual base salary may be reviewed prior to December 31, 2005 and appropriate adjustments to salary implemented. If Executive's annual base salary is not revised effective January 1, 2006, his/her existing salary will continue on a monthly basis until changed. This provision does not alter the at-will nature of Executive's employment or the provisions of ARTICLES III and IV below. 2.2 INCENTIVE BONUS. The Executive shall be eligible to receive a targeted annual bonus based on performance criteria established annually by the Compensation Committee (the "Incentive Bonus"). The Incentive Bonus criteria for the year ending December 31, 2004 is set forth on Exhibit A hereto. 2.3 STOCK OPTIONS. Executive may be granted options to purchase shares of Company Common Stock pursuant to the Company's Stock Option Plan. Any stock option must be approved by the Compensation Committee. 2.4 ADDITIONAL BENEFITS. The Executive will be entitled to participate in all benefit and welfare programs, plans, and arrangements that are from time to time made available to the Company's like-level executive employees. ARTICLE III TERMINATION OF EMPLOYMENT 3.1 GENERAL. While Executive is an at-will employee as provided at Section 1.3 above, the follow conditions for termination of employment are set forth in order to determine the nature of Executive compensation entitlement upon termination of employment as discussed in Article IV below. Neither the provisions of Article III or Article IV of this Agreement shall alter the at-will nature of Executive's employment with the Company. 3.2 DEATH OR RETIREMENT OF EXECUTIVE. The Executive's employment under this Agreement will automatically terminate upon the death or Retirement (as defined in Section 6.1) of the Executive. 3.3 BY EXECUTIVE. The Executive may terminate the Executive's employment under this Agreement by giving Notice of Termination (as defined in Section 6.1 hereof) to the Company: (a) for Good Reason (as defined in Section 6.1 hereof); and (b) at any time without Good Reason. 3.4 BY COMPANY. The Company may terminate the Executive's employment under this Agreement by giving Notice of Termination to the Executive: -2- (a) in the event of Executive's Total Disability (as defined in Section 6.1 hereof); (b) for Cause (as defined in Section 6.1 hereof); and (c) at any time without Cause. ARTICLE IV COMPENSATION UPON TERMINATION OF EMPLOYMENT If the Executive's employment hereunder is terminated, in accordance with the provisions of Article III hereof, and except for any other rights or benefits specifically provided for herein to be effective following the Executive's period of employment, the Company will provide compensation and benefits to the Executive only as follows: 4.1 UPON TERMINATION FOR DEATH OR DISABILITY. If the Executive's employment hereunder is terminated by reason of the Executive's death or Total Disability, the Company will: (a) pay the Executive (or the Executive's estate) or beneficiaries any Base Salary that has accrued but was not paid as of the termination date (the "Accrued Base Salary"); (b) pay the Executive (or the Executive's estate) or beneficiaries for unused vacation days accrued as of the termination date in an amount equal to the Executive's Base Salary multiplied by a fraction the numerator of which is the number of accrued unused vacation days and the denominator of which is 260 (the "Accrued Vacation Payment"); (c) reimburse the Executive (or the Executive's estate) or beneficiaries for expenses incurred by him prior to the date of termination that are subject to reimbursement pursuant to this Agreement (the "Accrued Reimbursable Expenses"); (d) provide to the Executive (or the Executive's estate) or beneficiaries any accrued and vested benefits required to be provided by the terms of any Company-sponsored benefit plans or programs (the "Accrued Benefits"), together with any benefits required to be paid or provided in the event of the Executive's death or Total Disability under applicable law; (e) pay the Executive (or the Executive's estate) or beneficiaries any Incentive Bonus with respect to a prior fiscal year that has accrued but has not been paid (the "Accrued Incentive Bonus"); and (f) the Executive (or the Executive's estate) or beneficiaries shall have the right to exercise all vested unexercised stock options and warrants outstanding at the termination date in accordance with terms of the plans and agreements pursuant to which such options or warrants were issued. -3- 4.2 UPON TERMINATION BY COMPANY FOR CAUSE OR BY EXECUTIVE WITHOUT GOOD REASON. If the Executive's employment is terminated by the Company for Cause, or if the Executive terminates the Executive's employment with the Company other than (x) upon the Executive's death or Total Disability or (y) for Good Reason, the Company will: (a) pay the Executive the Accrued Base Salary; (b) pay the Executive the Accrued Vacation Payment; (c) pay the Executive the Accrued Reimbursable Expenses; (d) pay the Executive the Accrued Benefits, together with any benefits required to be paid or provided under applicable law; (e) pay the Executive any Accrued Incentive Bonus; and (f) the Executive will have the right to exercise vested options and warrants in accordance with Section 4.1(f) hereof. 4.3 UPON TERMINATION BY THE COMPANY WITHOUT CAUSE OR BY EXECUTIVE FOR GOOD REASON. If the Executive's employment is terminated by the Company without Cause or by the Executive for Good Reason, the Company will: (a) pay the Executive the Accrued Base Salary; (b) pay the Executive the Accrued Vacation Payment; (c) pay the Executive the Accrued Reimbursable Expenses; (d) pay the Executive the Accrued Benefits, together with any benefits required to be paid or provided under applicable law; (e) pay the Executive any Accrued Incentive Bonus; (f) pay the Executive severance, commencing on the thirtieth (30th) day following the termination date, of six (6) monthly payments equal to one-twelfth (1/12th) of the Executive's Annual Base Salary in effect immediately prior to the time such termination occurs. Severance will be mitigated on a dollar for dollar basis for any income received by Executive for duties performed for Company or any third party during the six (6) months following termination. The severance payment required under this subsection shall be conditioned upon the Executive confirming the release in Section 5.2 hereof; and (g) maintain in full force and effect, for the Executive's and the Executive's eligible beneficiaries, until the first to occur of (x) the Executive's attainment of alternative employment if such employment includes health insurance benefits or (y) the three (3) month anniversary of termination of the employment, the benefits provided -4- pursuant to Company-sponsored benefit plans, programs, or other arrangements in which the Executive was entitled to participate as a full-time employee immediately prior to such termination in accordance with Section 2.4 hereof, subject to the terms and conditions of participation as provided under the general terms and provisions of such plans, programs, and arrangements, or in the alternate, the Company will arrange to provide the Executive with continued benefits substantially similar to those which the Executive would have been entitled to receive under such plans, programs, and arrangements; (h) the Executive shall have the right to exercise vested options and warrants in accordance with Section 4.1(f). 4.4 UPON CHANGE OF CONTROL AND TERMINATION BY THE COMPANY WITHOUT CAUSE OR BY EXECUTIVE FOR GOOD REASON. If the Executive's employment is terminated within two (2) years of a Change of Control by the Company without Cause or by the Executive for Good Reason, the Company will: (a) pay the Executive the Accrued Base Salary; (b) pay the Executive the Accrued Vacation Payment; (c) pay the Executive the Accrued Reimbursable Expenses; (d) pay the Executive the Accrued Benefits, together with any benefits required to be paid or provided under applicable law; (e) pay the Executive any Accrued Incentive Bonus; plus the pro-rata Incentive Bonus based on actual performance for the year of termination. (f) pay the Executive severance of one and one-half (1.5) times Executive's Annual Base Salary in effect immediately prior to the time such termination occurs plus the greater of (x) one and one-half (1.5) times the targeted Incentive Bonus immediately prior to the time such termination occurs or (y) one and one-half (1.5) times the average actual Incentive Bonus for the previous three (3) years, whichever is greater. The severance payment required under this subsection shall be conditioned upon the Executive confirming the release in Section 5.2 hereof; (g) maintain in full force and effect, for the Executive's and the Executive's eligible beneficiaries, until the first to occur of (x) the Executive's attainment of alternative employment if such employment includes health insurance benefits or (y) the eighteen (18) month anniversary of termination, the benefits provided pursuant to Company-sponsored benefit plans, programs, or other arrangements in which the Executive was entitled to participate as a full-time employee immediately prior to such termination in accordance with Section 2.4 hereof, subject to the terms and conditions of participation as provided under the general terms and provisions of such plans, programs, and arrangements, or in the alternate, the Company will arrange to provide the Executive with continued benefits substantially similar to those which the Executive would have been entitled to receive under such plans, programs, and arrangements; -5- (h) any payments will be grossed up for Internal Revenue Code Section 280G excise tax penalty on "excess parachute payments;" and (i) the Executive shall have the right to exercise vested options and warrants in accordance with Section 4.1(f). ARTICLE V ADDITIONAL AGREEMENTS 5.1 OTHER AGREEMENTS. As further material consideration for the Company entering into this Agreement, the Executive will also execute the Company's standard employee confidentially agreement, inventions assignment agreement, and any other agreements required to be executed by all like level executives of the Company. 5.2 EMPLOYEE'S RESTRICTIVE COVENANTS UPON TERMINATION. If the Executive's employment is terminated for any reason, Executive agrees: (a) To keep all of the Company's Confidential Information confidential in perpetuity in accordance with the Company's policy; (b) To not hire or solicit for hire or consultation employees of the Company for a period of one and one-half (1 1/2) years after termination of employment; and (c) To release the Company from any and all claims, whether known or unknown, except for those based upon this Agreement. Such release shall include the rights of Section 1542 of the California Civil Code, which provides: "A general release does not extend to claims which the creditor does not know or suspect to exist in the Executive's favor at the time of executing the release, which if known by him must have materially affected the Executive's settlement with the debtor." ARTICLE VI MISCELLANEOUS 6.1 DEFINITIONS. For purposes of this Agreement, the following terms will have the following meanings: (a) "Accrued Base Salary" - as defined in Section 4.1(a) hereof. (b) "Accrued Benefits" - as defined in Section 4.1(d) hereof. (c) "Accrued Incentive Bonus" - as defined in Section 4.1(e) hereof. (d) "Accrued Reimbursable Expenses" - as defined in Section 4.1(c) hereof. -6- (e) "Accrued Vacation Payment" - as defined in Section 4.1(b) hereof. (f) "Affiliate" of a Person means a Person that directly or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, the first Person. "Control" (including the terms "controlled by" and "under common control with") means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ownership of voting securities, by contract or credit arrangement, as trustee or executor, or otherwise. (g) "Incentive Bonus" as defined in Section 2.2 hereof. (h) "Base Salary" as defined in Section 2.1 hereof. (i) "Cause" will mean any willful breach of duty by the Executive in the course of the Executive's employment, continued violation of written Company employment policies after written notice of such violation, violation of the Company's Insider Trading Policies, conviction of a felony or any crime involving fraud, theft, embezzlement, dishonesty or moral turpitude, engaging in activities which materially defame the Company, engaging in conduct which is material injurious to the Company or its Affiliates, or any of their respective customer or supplier relationships, financially or otherwise, or the Executive's gross negligence or continued failure to perform Executive's duties or his/her continued incapacity to perform such duties. (j) "Change of Control" will mean if there is a merger, consolidation, sale of all or a major portion of the assets of the Company (or a successor organization) or similar transaction or circumstance where any person or group (other than Douglas B. Otto) acquires or obtains the right to acquire, in one or more transactions, beneficial ownership of more than Fifty Percent (50%) of the outstanding shares of any class of voting stock of the Company (or a successor organization) at any date subsequent to September 30, 2003.. (k) "Compensation Committee" means the Compensation Committee of the Company's Board of Directors. (l) "Continued Benefits" as defined in Section 4.3(g) hereof. (m) "Good Reason" will mean the occurrence of material breach of this Agreement by the Company, which breach is not cured within fifteen (15) calendar days after written notice thereof is received by the Company, or in the event of a Change of Control, a reduction of total compensation, benefits, and perquisites, relocation greater than 50 miles, or material change in position or duties. (n) "Notice of Termination" will mean a notice which shall indicate the specific termination provision of this Agreement relied upon and shall generally set forth the basis for termination of the Executive's employment under the provision so indicated. -7- (o) "Person" means any natural person, firm, partnership, association, corporation, company, limited liability company, limited partnership, trust, business trust, governmental authority, or other entity. (p) "Retirement" will mean normal retirement at age 65. (q) "Severance" will mean payments after termination of Executive's employment. (r) "Total Disability" will mean the Executive's failure substantially to perform the Executive's duties hereunder on a full-time basis for a period exceeding one hundred eighty (180) consecutive days or for periods aggregating more than one hundred eighty (180) days during any twelve (12) month period as a result of incapacity due to physical or mental illness. If there is a dispute as to whether the Executive is or was physically or mentally unable to perform the Executive's duties under this Agreement, such dispute will be submitted for resolution to a licensed physician agreed upon by the Company and the Executive, or if an agreement cannot be promptly reached, the Company and the Executive will promptly each select a physician, and if these physicians cannot agree, the physicians will promptly select a third physician whose decision will be binding on all parties. If such a dispute arises, the Executive will submit to such examinations and will provide such information as such physician(s) may request, and the determination of the physician(s) as to the Executive's physical or mental condition will be binding and conclusive. Notwithstanding the foregoing, if the Executive participates in any group disability plan provided by the Company, which offers long-term disability benefits, "Total Disability" will mean total disability as defined therein. 6.2 KEY MAN INSURANCE. The Company will have the right, in its sole discretion, to purchase "key man" insurance on the life of the Executive. The Company shall be the owner and beneficiary of any such policy. If the Company elects to purchase such a policy, the Executive will take such physical examinations and supply such information as may be reasonably requested by the insurer. 6.3 SUCCESSORS; BINDING AGREEMENT. This Agreement will be binding upon any successor to the Company and will inure to the benefit of and be enforceable by the Executive's personal or legal representatives, beneficiaries, designees, executors, administrators, heirs, distributees, devisees and legatees. 6.4 MODIFICATION; NO WAIVER. This Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto. No term or condition of this Agreement will be deemed to have been waived, nor will there be any estoppel against the enforcement of any provision of this Agreement, except by written instrument by the party charged with such waiver or estoppel. No such written waiver will be deemed a continuing waiver unless specifically stated therein, and each such waiver will operate only as to the specific term or condition waived and will not constitute a waiver of such term or condition for the future or as to any other term or condition. -8- 6.5 SEVERABILITY. The covenants and agreements contained herein are separate and severable and the invalidity or unenforceability of any one or more of such covenants or agreements, if not material to the employment arrangement that is the basis for this Agreement, will not affect the validity or enforceability of any other covenant or agreement contained herein. 6.6 FORM OF NOTICE TO PARTIES. All notices, requests, demands, waivers and other communications required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given if (a) delivered personally, (b) mailed by first-class, registered or certified mail, return receipt requested, postage prepaid, or (c) sent by next-day or overnight mail or delivery or (d) sent by telecopy or telegram, to the following address: If to Executive: ______________________ ______________________ ______________________ If to Company: Deckers Outdoor Corporation 495-A South Fairview Avenue Goleta, CA 93117 Attn: Douglas B. Otto Facsimile #805-967-7862 or, in each case, at such other address as may be specified in writing to the other parties hereto. All such notices, requests, demands, waivers and other communications shall be deemed to have been received (w) if by personal delivery on the day after such delivery, (x) if by certified or registered mail, on the seventh business day after the mailing thereof, (y) if by next-day or overnight mail or delivery, on the day delivered, (z) if by telecopy or telegram, on the next day following the day on which such telecopy or telegram was sent, provided that a copy is also sent by certified or registered mail. 6.7 ASSIGNMENT. This Agreement and any rights hereunder will not be assignable by either party without the prior written consent of the other party except as otherwise specifically provided for herein. 6.8 ENTIRE UNDERSTANDING. This Agreement constitutes the entire understanding between the parties hereto and no agreement, representation, warranty or covenant has been made by either party except as expressly set forth herein. 6.9 EXECUTIVE'S REPRESENTATIONS. The Executive represents and warrants that neither the execution and delivery of this Agreement nor the performance of the Executive's duties hereunder violates the provisions of any other agreement to which he is a party or by which he is bound. -9- 6.10 GOVERNING LAW. This Agreement will be construed in accordance with the laws of the State of California, without regard to the conflict of laws provisions thereof, with venue proper only in the County of Santa Barbara, California. 6.11 ARBITRATION. (a) Except as provided in Section 6.11(c) below, the parties hereto agree that any dispute or controversy arising out of, relating to, or in connection with this Agreement, or the interpretation, validity, construction, performance, breach, or termination thereof, shall be finally settled by binding arbitration, unless otherwise required by law, to be held in Santa Barbara, California under the National Rules for the Resolution of Employment Disputes of the American Arbitration Association as then in effect (the "Rules"). The arbitrator(s) may grant injunctions or other relief in such dispute or controversy. The decision of the arbitrator(s) shall be final, conclusive and binding on the parties to the arbitration, and judgment may be entered on the decision of the arbitrator(s) in any court having jurisdiction. (b) The arbitrator(s) shall apply California law to the merits of any dispute or claim, without reference to rules of conflicts of law. (c) The parties may apply to any court of competent jurisdiction for a temporary restraining order, preliminary injunction, or other interim or conservatory relief, as necessary, without breach of this arbitration agreement and without abridgement of the powers of the arbitrator. (d) EMPLOYEE HAS READ AND UNDERSTANDS THIS SECTION, WHICH DISCUSSES ARBITRATION. EMPLOYEE UNDERSTANDS THAT BY SIGNING THIS AGREEMENT, EMPLOYEE AGREES TO SUBMIT ANY CLAIMS ARISING OUT OF, RELATING TO, OR IN CONNECTION WITH THIS AGREEMENT, OR THE INTERPRETATION, VALIDITY, CONSTRUCTION, PERFORMANCE, BREACH OR TERMINATION THEREOF TO BINDING ARBITRATION, UNLESS OTHERWISE REQUIRED BY LAW, AND THAT THIS ARBITRATION CLAUSE CONSTITUTES A WAIVER OF EMPLOYEE'S RIGHT TO A JURY TRIAL AND RELATES TO THE RESOLUTION OF ALL DISPUTES RELATING TO EMPLOYEE'S RELATIONSHIP WITH THE COMPANY, INCLUDING BUT NOT LIMITED TO, CLAIMS OF HARASSMENT, DISCRIMINATION, WRONGFUL TERMINATION AND ANY STATUTORY CLAIMS. -10- IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. COMPANY: DECKERS OUTDOOR CORPORATION By: /s/ Douglas B. Otto ------------------------- Name: Douglas B. Otto Date Title: Chief Executive Officer EXECUTIVE: /s/ Bob Orlando --------------------------------- Bob Orlando, President, TEVA Date -11- EXHIBIT A SENIOR EXECUTIVE EMPLOYMENT AGREEMENT 2004 INCENTIVE BONUS CRITERIA EXECUTIVE: BOB ORLANDO TARGET BONUS: $59,000 @ 100% LEVEL
Good Very Good Excellent 75% BASED ON TOPLINE PERFORMANCE Sales + Backlog Percentage Increase 10% 15% 20% 25% BASED ON EARNINGS PERFORMANCE Brand Contribution as Calculated to Above Sales Increases * * * --- --- --- BONUS LEVEL 100% 200% 400%
* To be inserted when 2003 sales are confirmed. Bonus to be paid in accordance to method used in 2003. -12- EX-10.34 10 v97221exv10w34.txt EXHIBIT 10.34 [LOGO] STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE - NET AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION 1. Basic Provisions ("Basic Provisions"). 1.1 Parties: This Lease ("Lease") dated for reference purposes only November 1, 2003, is made by and between Ampersand Aviation, LLC ("Lessor") and Deckers Outdoor Corporation ("Lessee"), (collectively the "Parties", or individually a "Party") 1.2(a) Premises: That certain portion of the Project (as defined below), including all improvements therein or to be provided by Lessor under the terms of this Lease, commonly known by the street address of 495 A South Fairview Avenue located in the City of Goleta, County of Santa Barbara, State of California, with zip code 93117, as outlined on Exhibit A attached hereto ("Premises") and generally described as (describe briefly the nature of the Premises) See Exhibit A. In addition to Lessee's rights to use and occupy the Premises as hereinafter specified, Lessee shall have non-exclusive rights to the Common Areas (as defined in Paragraph 2.7 below) as hereinafter specified, but shall not have any rights to the roof, exterior walls or utility raceways of the building containing the Premises ("Building") or to any other buildings in the Project. The Premises, the Building, the Common Areas, the land upon which they are located, along with all other buildings and improvements thereon, are herein collectively referred to as the "Project." (See also Paragraph 2) 1.2(b) Parking: SEE ADDENDUM unreserved vehicle parking spaces ("Unreserved Parking Spaces"), and reserved vehicle parking spaces ("Reserved Parking Spaces"). (See also Paragraph 28) 1.3 Term: Four years and -0- months ("Original Term") commencing November 1, 2003 ("Commencement Date") and ending October 31, 2007 ("Expiration Date"). (See also paragraph 3) 1.4 Early Possession: N/A ("Early Possession Date") (See also Paragraphs 3.2 and 3.3) 1.5 Base Rent: $SEE ADDENDUM per month ("Base Rent"), payable on the First day of each month commencing November 1, 2003. (See also Paragraph 4) |X| If this box is checked, there are provisions In this Lease for the Base Rent to be adjusted. 1.6 Lessee's Share of Common Area Operating Expanses: N/A percent (N/A %) ("Lessee's Share"). 1.7 Base Rent and Other Monies Paid Upon Execution: (a) Base Rent: $37,800 for the period November 2003. (b) Common Area Operating Expenses: $N/A for the period N/A. (c) Security Deposit: $33,633.33 ("Security Deposit"). (See also Paragraph 5) (d) Other: $__________ for __________________________________________. (e) Total Due Upon Execution of this Lease: $71,433.33. 1.8 Agreed Use: See Addendum. (See also Paragraph 6) 1.9 Insuring Party. Lessor is the "Insuring Party" (See also Paragraph 8) Page 1 of 15 1.11 Guarantor. The obligations of the Lessee under this Lease are to be guaranteed by __________________________________________________________________ _______________________________________ ("Guarantor"). (See also Paragraph 37) 1.12 Addenda and Exhibits. Attached hereto is an Addendum or Addenda consisting of Paragraphs 1.2(b) through 56 and Exhibits A through B, all of which constitute a part of this Lease. 2 Premises. 2.1 Letting. Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the Promises, for the term, at the rental, and upon all of the terms, covenants and conditions set forth in this Lease. Unless otherwise provided herein, any statement of size set forth in this Lease, or that may have been used in calculating Rent, is an approximation which the Parties agree is reasonable and any payments based thereon are not subject to revision whether or not the actual size is more or less. 2.2 Condition. Lessee is, as of the Commencement Date, in possession of that portion of the Premises contained within the Building ("Unit") pursuant to an expired lease agreement, and is therefore familiar with and, except as expressly set forth herein and on the Addendum, satisfied with, the condition of the Premises. As used herein, Commencement Date shall be defined as the ("Start Date") and the heating, ventilating and air conditioning systems as the ("HVAC"). 2.3 Compliance. Lessor warrants that the improvements on the Premises and the Common Areas comply with the building codes that were in effect at the time that each such improvement, or portion thereof, was constructed, and also with all applicable laws, covenants or restrictions of record, regulations, and ordinances in effect on the Start Date ("Applicable Requirements"). Said warranty does not apply to the use to which Lessee will put the Premises or to any Alterations or Utility Installations (as defined in Paragraph 7.3(a)) made or to be made by Lessee. NOTE: Lessee is responsible for determining whether or not the Applicable Requirements, and especially the zoning, are appropriate for Lessee's intended use, and acknowledges that past uses of the Premises may no longer be allowed. If the Premises do not comply with said warranty, Lessor shall, except as otherwise provided, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify the same at Lessor's expense. If Lessee does not give Lessor written notice of a non-compliance with this warranty within 6 months following the Start Date, correction of that non-compliance shall be the obligation of Lessee at Lessee's sole cost and expense. If the Applicable Requirements are hereafter changed so as to require during the term of this Lease the construction of an addition to or an alteration of the Unit, Premises and/or Building, the remediation of any Hazardous Substance, or the reinforcement or other physical modification of the Unit, Premises and/or Building ("Capital Expenditure"), Lessor and Lessee shall allocate the cost of such work as follows. (a) Subject to Paragraph 2.3(c) below, if such Capital Expenditures are required as a result of the specific and unique use of the Premises by Lessee as compared with uses by tenants in general, Lessee shall be fully responsible for the cost thereof, provided, however that if such Capital Expenditure is required during the last 2 years of this Lease and the cost thereof exceeds 6 months' Base Rent, Lessee may instead terminate this Lease unless Lessor notifies Lessee, in writing, within 10 days after receipt of Lessee's termination notice that Lessor has elected to pay the difference between the actual cost thereof and the amount equal to 6 months' Base Rent. If Lessee elects termination. Lessee shall immediately cease the use of the Premises which requires such Capital Expenditure and deliver to Lessor written notice specifying a termination date at least 90 days thereafter. Such termination date shall, however, in no event be earlier than the last day that Lessee could legally utilize the Premises without commencing such Capital Expenditure. (b) If such Capital Expenditure is not the result of the specific and unique use of the Premises by Lessee (such as, governmentally mandated seismic modifications), then Lessor and Lessee shall allocate the obligation to pay for the portion of such costs reasonably attributable to the Premises pursuant to the formula set out in Paragraph 7.1(d). provided, however, that if such Capital Expenditure is required during the last 2 years of this Lease or if Lessor reasonably determines that it is not economically feasible to pay its share thereof. Lessor shall have the option to terminate this Lease upon 90 days prior written notice to Lessee unless Lessee notifies Lessor, in writing, within 10 days after receipt of Lessor's termination notice that Lessee will pay for such Capital Expenditure. If Lessor does not elect to terminate, and fails to tender its share of any such Capital Expenditure, Lessee may advance such funds and deduct same, with Interest, from Rent until Lessor's share of such costs have been fully paid. If Lessee is unable to finance Lessor's share, or if the balance of the Rent due and payable for the remainder of this Lease is not sufficient to fully reimburse Lessee on an offset basis, Lessee shall have the right to terminate this Lease upon 30 days written notice to Lessor. (c) Notwithstanding the above, the provisions concerning Capital Expenditures are intended to apply only to non-voluntary, unexpected, and new Applicable Requirements. If the Capital Expenditures are instead triggered by Lessee as a result of an actual or proposed change in use, change in intensity of use, or modification to the Promises then, and in that event, Lessee Shall be fully responsible for the cost thereof, and Lessee shall not have any right to terminate this Lease. 2.4 Acknowledgements. Lessee acknowledges that, (a) it has been advised by Lessor to satisfy itself with respect to the condition of the Premises (including but not limited to the electrical, HVAC and fire sprinkler systems, security, environmental aspects, and compliance with Applicable Requirements and the Americans with Disabilities Act), and their suitability for Lessee's intended use, (b) Lessee has made such investigation as it deems necessary with reference to such matters and assumes all responsibility therefor as the same relate to its occupancy of the Premises, and (c) neither Lessor, nor Lessor's agents have made any oral or written representations or warranties with respect to said matters other than as set forth in this Lease In addition, Lessor acknowledges it is Lessor's sole responsibility to investigate the financial capability and/or suitability of all proposed tenants. SEE ADDENDUM 2.5 Lessee as Prior Owner/Occupant. The warranties made by Lessor in Paragraph 2 shall be of no force or effect if immediately prior to the Start Date Lessee was the owner or occupant of the Premises. In such event, Lessee shall be responsible for any necessary corrective work. 2.6 Vehicle Parking. Lessee shall be entitled to use the number of Unreserved Parking Spaces and Reserves Parking Spaces specified in Paragraph 1.2(b) on those portions of the Common Areas designated from time to time by Lessor for parking. Lessee shall not use more parking spaces Page 2 of 15 than said number. Said parking spaces shall be used for parking by vehicles no larger than full-size passenger automobiles or pick-up trucks, herein called "Permitted Size Vehicles." Lessor may regulate the loading and unloading of vehicles by adopting Rules and Regulations as provided in Paragraph 2.9. No vehicles other than Permitted Size Vehicles may be parked in the Common Area without the prior written permission of Lessor. (a) Lessee shall not permit or allow any vehicles that belong to or are controlled by Lessee or Lessee's employees, suppliers, shippers, customers, contractors or invitees to be loaded, unloaded, or parked in areas other than those designated by Lessor for such activities. (b) Lessee shall not service or store any vehicles in the Common Areas. (c) If Lessee permits or allows any of the prohibited activities described in this Paragraph 2.6, then Lessor shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove or tow away the vehicle involved and charge the cost to Lessee, which cost shall be immediately payable upon demand by Lessor. SEE ADDENDUM 2.7 Common Areas - Definition. The Term "Common Areas" is defined as all areas and facilities outside the Premises and within the exterior boundary line of the Project and interior utility raceways and installations within the Unit that are provided and designated by the Lessor from time to time for the general non-exclusive use of Lessor, Lessee and other tenants of the Project and their respective employees, suppliers, shippers, customers, contractors and invitees, including parking areas, loading and unloading areas, trash areas, roadways, walkways, driveways and landscaped areas. 2.8 Common Areas - Lessee's Rights. Lessor grants to Lessee, for the benefit of Lessee and its employees, suppliers, shippers, contractors, customers and invitees, during the term of this Lease, the non-exclusive right to use, in common with others entitled to such use, the Common Areas as they exist from time to time, subject to any rights, powers, and privileges reserved by Lessor under the terms hereof or under the terms of any rules and regulations or restrictions governing the use of the Project. Under no circumstances shall the right herein granted to use the Common Areas be deemed to include the right to store any property, temporarily or permanently, in the Common Areas. Any such storage shall be permitted only by the prior written consent of Lessor or Lessor's designated agent, which consent may be revoked at any time, in the event that any unauthorized storage shall occur then Lessor shall have the right, without notice. In addition to such other rights and remedies that it may have, to remove the property and charge the cost to Lessee, which cost shall be immediately payable upon demand by Lessor. 2.9 Common Areas - Rules and Regulations. Lessor or such other person(s) as Lessor may appoint shall have the exclusive control and management of the Common Areas and shall have the right, from time to time, to establish, modify, amend and enforce reasonable rules and regulations ("Rules and Regulations ") for the management, safety, care, and cleanliness of the grounds, the parking and unloading of vehicles and the preservation of good order, as well as for the convenience of other occupants or tenants of the Building and the Project and their invitees. Lessee agrees to abide by and conform to all such Rules and Regulations, and to cause its employees, suppliers, shippers, customers, contractors and invitees to so abide and conform. Lessor shall not be responsible to Lessee for the non-compliance with said Rules and Regulations by other tenants of the Project. 2.10 Common Areas - Changes. Lessor shall have the right, in Lessor's sole discretion, from time to time; (a) To make changes to the Common Areas, including, without limitation, changes in the location, size, shape and number of driveways, entrances, parking spaces, parking areas, loading and unloading areas, ingress, egress, direction of traffic, landscaped areas, walkways and utility raceways; (b) To close temporarily any of the Common Areas for maintenance purposes so long as reasonable access to the Premises remains available; (c) To designate other land outside the boundaries of the Project to be a part of the Common Areas; (d) To add additional buildings and improvements to the Common Areas; (e) To use the Common Areas while engaged in making additional improvements, repairs or alterations to the Project, or any portion thereof, and (f) To do and perform such other acts and make such other changes in, to or with respect to the Common Areas and Project as Lessor may, in the exercise of sound business judgment, deem to be appropriate. 3. Term. 3.1 Term. The Commencement Date, Expiration Date and Original Term of this Lease are as specified in Paragraph 1.3. 3.4 Lessee Compliance. Lessor shall not be required to tender possession of the Premises to Lessee until Lessee complies with its obligation to provide evidence of insurance (Paragraph 8.5). Pending delivery of such evidence, Lessee shall be required to perform all of its obligations under this Lease from and after the Start Date, including the payment of Rent, notwithstanding Lessor's election to withhold possession pending receipt of such evidence of insurance. Further, if Lessee is required to perform any other conditions prior to or concurrent with the Start Date, the Start Date shall occur but Lessor may elect to withhold possession until such conditions are satisfied. 4. Rent. 4.1 Rent Defined All monetary obligations of Lessee to Lessor under the terms of this Lease (except for the Security Deposit) are deemed to be rent ("Rent"). Page 3 of 15 4.3 Payment. Lessee Shall cause payment of Rent to be received by Lessor in lawful money of the United States, without offset or deduction (except as specifically permitted in this Lease, including its Addendum), on or before the day on which it is due. Rent for any period during the term hereof which is for less than one full calendar month shall be prorated based upon the actual number of days of said month. Payment of Rent shall be made to Lessor at its address stated herein or to such other persons or place as Lessor may from time to time designate in writing. Acceptance of a payment which is less than the amount then due shall not be a waiver of Lessor's rights to the balance of such Rent, regardless of Lessor's endorsement of any check so stating. In the event that any check, draft, or other instrument of payment given by Lessee to Lessor is dishonored for any reason, Lessee agrees to pay to Lessor the sum of $25 in addition to any late charges which may be due. 5. Security Deposit. Lessee shall deposit with Lessor upon execution hereof the Security Deposit as security for Lessee's faithful performance of its obligations under this Lease. If Lessee fails to pay Rent for otherwise Defaults under this Lease, Lessor may use, apply or retain all or any portion of said Security Deposit for the payment of any amount due Lessor or to reimburse or compensate Lessor for any liability, expense, loss or damage which Lessor may suffer or incur by reason thereof. If Lessor uses or applies all or any portion of the Security Deposit, Lessee shall within 10 days after written request therefor deposit monies with Lessor sufficient to restore said Security Deposit to me full amount required by this Lease. If the Base Rent increases during the term of this Lease, Lessee shall, deposit additional monies with Lessor so that the total amount of the Security Deposit shall at all times bear the same proportion to the increased Base Rent as the initial Security Deposit bore to the initial Base Rent Should the Agreed Use be amended to accommodate a material change in the business of Lessee or to accommodate a sublessee or assignee. Lessor shall have the right to increase the Security Deposit to the extent necessary, in Lessor's reasonable judgment, to account for any increased wear and tear that the Premises may suffer as a result thereof. If a change in control of Lessee occurs during this Lease and following such change the financial condition of Lessee is, in Lessor's reasonable judgment, significantly reduced, Lessee shall deposit such additional monies with Lessor as shall be sufficient to cause the Security Deposit to be at a commercially reasonable level based on such change in financial condition. Lessor shall not be required to keep the Security Deposit separate from its general accounts. Within 14 days after the expiration or termination of this Lease, if Lessor elects to apply the Security Deposit only to unpaid Rent, and otherwise within 30 days after the Premises have been vacated pursuant to Paragraph 7.4(c) below, Lessor shall return that portion of the Security Deposit not used or applied by Lessor. No part of the Security Deposit shall be considered to be held in trust, to bear interest or to be prepayment for any monies to be paid by Lessee under this Lease. 6. Use. 6.1 Use. Lessee shall use and occupy the Premises only for the Agreed Use, or any other legal use which is reasonably comparable thereto, and for no other purpose. Lessee shall not use or permit the use of the Premises in a manner that is unlawful, creates damage, waste or a nuisance, or that disturbs occupants of or causes damage to neighboring premises or properties. Lessor shall not unreasonably withhold or delay its consent to any written request for a modification of the Agreed Use, so long as the same will not impair the structural integrity of the improvements on the Premises or the mechanical or electrical systems therein, and/or is not significantly more burdensome to the Premises. If Lessor elects to withhold consent. Lessor shall within 7 days after such request give written notification of same, which notice shall include an explanation of Lessor's objections to the change in the Agreed Use. 6.2 Hazardous Substances. (a) Reportable Uses Require Consent. The Term "Hazardous Substance" as used in this Lease shall mean any product, substance, or waste whose presence, use, manufacture, disposal, transportation or release, either by itself or in combination with other materials expected to be on the Premises, is either, (i) potentially injurious to the public health, safety or welfare, the environment or the Premises, (ii) regulated or monitored by any governmental authority, or (iii) a basis for potential liability of Lessor to any governmental agency or third party under any applicable statute or common law theory. Hazardous Substances shall include, but not be limited to, hydrocarbons, petroleum, gasoline, and/or crude oil or any products, by-products or fractions thereof. Lessee shall not engage in any activity in or on the Premises which constitutes a Reportable use of Hazardous Substances without the express prior written consent of Lessor and timely compliance (at Lessee's expense) will all Applicable Requirements. "Reportable Use" shall mean (i) the installation or use of any above or below ground storage tank, (ii) the generation, possession, storage, use, transportation, or disposal of a Hazardous Substance that requires a permit from, or with respect to which a report, notice, registration or business plan is required to be filed with, any governmental authority, and/or (iii) the presence at the Premises of a Hazardous Substance with respect to which any Applicable Requirements requires that a notice be given to persons entering or occupying the Premises or neighboring properties. Notwithstanding the foregoing. Lessee may use any ordinary and customary materials reasonably required to be used in the normal course of the Agreed Use, so long as such use is in compliance with all Applicable Requirements, is Page 4 of 15 not a Reportable Use, and does not expose the Premises or neighboring property to any meaningful risk of contamination or damage or expose Lessor to any liability therefor. In addition, Lessor may condition its consent to any Reportable Use upon receiving such additional assurances as Lessor reasonably deems necessary to protect itself, the public, the Premises and/or the environment against damage, contamination, injury and/or liability, including, but not limited to, the installation (and removal on or before Lease expiration or termination) of protective modifications (such as concrete encasements) and/or increasing the Security Deposit. (b) Duty to Inform Lessor. SEE ADDENDUM (c) Lessee Remediation. Lessee shall not cause or permit any Hazardous Substance to be spilled or released in, on, under, or about the Premises (including through the plumbing or sanitary sewer system) and shall promptly, at Lessee's expense, take all investigatory and/or remedial action reasonably recommended, whether or not formally ordered or required, for the cleanup of any contamination of, and for the maintenance, security and/or monitoring of the Premises or neighboring properties, that was caused or materially contributed to by Lessee, or pertaining to or involving any Hazardous Substance brought onto the Premises during the term of this Lease, by or for Lessee, or any third party. (d) Lessee Indemnification. Lessee shall indemnify, defend and hold Lessor, its agents, employees, lenders and ground lessor, if any, harmless from and against any and all loss of rents and/or damages, liabilities, judgments, claims, expenses, penalties, and attorneys' and consultants' fees arising out of or involving any Hazardous Substance brought onto the Premises by or for Lessee, or any third party (provided, however, that Lessee shall have no liability under this Lease with respect to underground migration of any Hazardous Substance under the Premises from areas outside of the Project) Lessee's obligations shall include, but not be limited to, the effects of any contamination or injury to person, property or the environment created or suffered by Lessee or anyone under Lessee's control, and the cost of investigation, removal, remediation, restoration and/or abatement, and shall survive the expiration or termination of this Lease. No termination, cancellation or release agreement entered into by Lessor and Lessee shall release Lessee from its obligations under this Lease with respect to Hazardous Substances, unless specifically so agreed by Lessor in writing at the time of such agreement. (e) Lessor Indemnification. Lessor and its successors and assigns shall indemnify, defend, reimburse and hold Lessee, its employees and lenders, harmless from and against any and all environmental damages, including the cost of remediation, which existed as a result of Hazardous Substances on the Premises prior to the Start Date or which are caused by the gross negligence or willful misconduct of Lessor, its agents or employees. Lessors obligations, as and when required by the Applicable Requirements, shall include, but not be limited to, the cost of investigation, removal, remediation, restoration and/or abatement, and shall survive the expiration or termination of this Lease. (f) Investigations and Remediations. Lessor shall retain the responsibility and pay for any investigations or remediation measures required by governmental entities having jurisdiction with respect to the existence of Hazardous Substances on the Premises prior to the Start Date, unless such remediation measure is required as a result of Lessee's use (including "Alterations", as defined in paragraph 7.3(a) below) of the Premises, in which event Lessee shall be responsible for such payment. Lessee shall cooperate fully in any, such activities at the request of Lessor, including allowing Lessor and Lessor's agents to have reasonable access to the Premises at reasonable times in order to carry out Lessor's investigative and remedial responsibilities (g) Lessor Termination Option. If a hazardous Substance Condition (see Paragraph 9.1(e)) occurs during the term of this Lease, unless Lessee is legally responsible therefor (in which case Lessee shall make the investigation and remediation thereof required by the Applicable Requirements and this Lease shall continue in full force and effect, but subject to Lessor's rights under Paragraph 6.2(d) anti Paragraph 13), Lessor may, at Lessor's option, either (i) investigate and remediate such Hazardous Substance Condition, if required, as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) if the estimated cost to remediate such condition exceeds 12 times the then monthly Base Rent or $100,000, whichever is greater, give written notice to Lessee, within 30 days after receipt by Lessor of knowledge of the occurrence of such Hazardous Substance Condition, of Lessor's desire to terminate this Lease as of the date 60 days following the date of such notice. In the event Lessor elects to give a termination notice, Lessee may, within 10 days thereafter, give written notice to Lessor of Lessee's commitment to pay the amount by which the cost of the remediation of such Hazardous Substance Condition exceeds an amount equal to 12 times the then monthly Base Rent or $100,000, whichever is greater. Lessee shall provide Lessor with said funds or satisfactory assurance thereof within 30 days following such commitment. In such event, this Lease shall continue in full force and effect, and Lessor shall proceed to make such remediation as soon as reasonably possible after the required funds are available. If Lessee does not give such notice and provide the required funds or assurance thereof within the time provided, this Lease shall terminate as of the date specified in Lessor's notice of termination. 6.3 Lessee's Compliance with Applicable Requirements. Except as otherwise provided in this Lease, Lessee shall, at Lessee's sole expense, fully, diligently and in a timely manner, materially comply with all Applicable Requirements, the requirements of any applicable fire insurance underwriter or rating bureau, and the recommendations of Lessor's engineers and/or consultants which relate in any manner to the Premises, without regard to whether said requirements are now in effect or become effective after the Start Date. Lessee shall, within 10 days after receipt of Lessor's written request, provide Lessor with copies of all permits and other documents, and other information evidencing Lessee's compliance with any Applicable Requirements specified by Lessor, and shall immediately upon receipt, notify Lessor in writing (with copies of any documents involved) of any threatened or actual claim, notice, citation, warning, complaint or report pertaining to or involving the failure of Lessee or the Premises to comply with any Applicable Requirements. SEE ADDENDUM 6.4 Inspection; Compliance. Lessor and Lessor's "Lender" (as defined in Paragraph 30) and consultants shall have the right to enter into Premises at any time, in the case of an emergency, and otherwise at reasonable times, for the purpose of inspecting the condition of the Premises and for verifying compliance by Lessee with this Lease. The cost of any such inspections shall be paid by Lessor, unless a violation of Applicable Requirements, or a contamination is found to exist or be imminent, or the inspection is requested or ordered by a governmental authority. In such case, Lessee shall upon request reimburse Lessor for the cost of such inspection, so long as such inspection is reasonably related to the violation or contamination. 7 Maintenance; Repairs, Utility Installations; Trade Fixtures and Alterations. 7.1 Lessee's Obligations. (a) In General. Subject to the provisions of Paragraph 2 .2 (Condition), 2.3 (Compliance), 6.3 (Lessee's Compliance with Applicable Requirements), 7.2 (Lessor's Obligations), 9 (Damage or Destruction), and 14 (Condemnation), Lessee shall, at Lessee's sole expense, keep the Premises. Utility Installations (intended for Lessee's exclusive use, no matter where located), and Alterations in good order, condition and repair (whether or not the portion of the Premises requiring repairs, or the means of repairing the same, are reasonably or readily accessible to Lessee, and whether or not the need for such repairs occurs as a result of Lessee's use, any prior use, the elements or the age of such portion of the Premises), including, but not limited to, all equipment or facilities, such as plumbing, HVAC equipment, electrical, lighting facilities, boilers, pressure vessels, fixtures, interior walls, interior surfaces of exterior walls, ceilings, floors, windows, doors, plate glass, and skylights but excluding any items which are the responsibility of Lessor pursuant to Paragraph 7.2. Lessee, in Keeping the Premises in good order, condition and repair, shall exercise and perform good maintenance practices, specifically including the procurement and maintenance of the service contracts required by Paragraph 7.1(b) below. Lessee's obligations shall include restorations, replacements or renewals when necessary to Keep the Premises and all improvements thereon or a part thereof in good order, condition and state of repair. (b) Page 5 of 15 (c) Failure to Perform. If Lessee fails to perform Lessee's obligations under this Paragraph 7.1, Lessor may enter upon the Premises after 10 days' prior written notice to Lessee (except in the case of an emergency, in which case no notice shall be required), perform such obligations on Lessee's behalf, and put the Premises in good order, condition and repair, and Lessee shall promptly reimburse Lessor for the cost thereof. (d) Replacement. Subject to Lessee's indemnification of Lessor as set forth in Paragraph 8.7 below, and without relieving Lessee of liability resulting from Lessee's failure to exercise and perform good maintenance practices, if an item described in Paragraph 7.1(b) cannot be repaired other than at a cost which is in excess of 50% of the cost of replacing such item, then such item shall be replaced by Lessor, and the cost thereof shall be prorated between the Parties and Lessee shall only be obligated to pay, each month during the remainder of the term of this Lease, on the date on which Base Rent is due, an amount equal to the product of multiplying the cost of such replacement by a fraction, the numerator of which is one, and the denominator of which is 144 (i.e. 1/144th of the cost per month) Lessee shall pay interest on the unamortized balance at a rate that is commercially reasonable in the judgment of Lessor's accountants. Lessee may, however, prepay its obligation at any time. 7.2 Lessor's Obligations. Subject to the provisions of Paragraphs 2.2 (Condition), 2.3 (Compliance), 4.2 (Common Area Operating Expenses), 6 (Use), 7.1 (Lessees's Obligations), 9 (Damage or Destruction) and 14 (Condemnation), Lessor, subject to reimbursement pursuant to Paragraph 4.2, shall keep in good order, condition and repair the foundations, exterior walls, structural condition of interior bearing walls, exterior roof, fire sprinkler system, Common Area fire alarm and/or smoke detection systems, fire hydrants, parking lots, walkways, parkways, driveways, landscaping, fences, signs and utility systems serving the Common Areas and all parts thereof, as well as providing the services for which there is a Common Area Operating Expense pursuant to Paragraph 4.2. Lessor shall not be obligated to paint the common areas, nor the apron nor approach areas, nor interior surfaces of exterior walls nor shall Lessor be obligated to maintain, repair or replace windows, doors or plate glass of the Premises. Lessee expressly waives the benefit of any statute now or hereafter in effect to the extent it is inconsistent with the terms of this Lease. SEE ADDENDUM 7.3 Utility Installations; Trade Fixtures; Alterations. SEE ADDENDUM (a) Definitions. The term "Utility Installations" refers to all floor and window coverings, air lines, power panels, electrical distribution, security and fire protection systems, communication systems, lighting fixtures, HVAC equipment, plumbing and fencing in or on the Premises. The term "Trade Fixtures" shall mean Lessee's machinery and equipment that can be removed without doing material damage to the Premises. The term "Alterations" shall mean any modification of the improvements, other than Utility Installations or Trade Fixtures, whether by addition or deletion. "Lessee Owned Alterations and/or Utility Installations" are defined as Alterations and/or Utility Installations made by Lessee that are not yet owned by Lessor pursuant to Paragraph 7.4(a). (b) Consent. Lessee shall not make any Alterations or Utility Installations to the Premises without Lessor's prior written consent. Lessee may, however, make non-structural Utility Installations to the interior of the Premises (excluding the roof) without such consent but upon notice to Lessor, as long as they are not visible from the outside, do not involve puncturing, relocating or removing the roof or any existing walls, and the cumulative cost thereof during this Lease as extended does not exceed a sum equal to 3 month's Base Rent in the aggregate or a sum equal to one month's Base Rent in any one year. Notwithstanding the foregoing, Lessee shall not make or permit any roof penetrations and/or install anything on the roof without the prior written approval of Lessor. Lessor may, as a precondition to granting such approval, require Lessee to utilize a contractor chosen and/or approved by Lessor. Any Alterations or Utility Installations that Lessee shall desire to make and which require the consent of the Lessor shall be presented to Lessor in written form with detailed plans. Consent shall be deemed conditioned upon Lessee's; (i) acquiring all applicable governmental permits, (ii) furnishing Lessor with copies of both the permits and the plans and specifications prior to commencement of the work, and (iii) compliance with all conditions of said permits and other Applicable Requirements in a prompt and expeditious manner. Any Alterations or Utility Installations shall be performed in a workmanlike manner with good and sufficient materials. Lessee shall promptly upon completion furnish Lessor with as-built plans and specifications. For work which costs an amount in excess of one month's Base Rent, Lessor may condition its consent upon Lessee providing a lien and completion bond in an amount equal to 150% of the estimated cost of such Alteration or Utility Installation and/or upon Lessee's posting an additional Security Deposit with Lessor (c) Indemnification. Lessee shall pay, when due, all claims for labor or materialman's furnished or alleged to have been furnished to or for Lessee at or for use on the Premises, which claims are or may be secured by any mechanic's or materialman's lien against the Premises or any interest therein. Lessee shall give Lessor not less than 10 days notice prior to the commencement of any work in, on or about the Premises, and Lessor shall have the right to post notices of non-responsibility. If Lessee shall contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense defend and protect itself, Lessor and the Premises against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof. If Lessor shall require, Lessee shall furnish a surety bond in an amount equal to 150% of the amount of such contested lien, claim or demand, indemnifying Lessor against liability for the same . If Lessor elects to participate in any such action, Lessee shall pay Lessor's attorneys' fees and costs. 7.4 Ownership; Removal; Surrender; and Restoration. (a) Ownership. Subject to Lessor's right to require removal or elect ownership as hereinafter provided, all Alterations and Utility Installations made by Lessee shall be the property of Lessee, but considered a part of the Premises. Lessor may, at any time, elect in writing to be the owner of all or any specified part of the Lessee Owned Alterations and Utility Installations. Unless otherwise instructed per paragraph 7.4(b) hereof, all Lessee Owned Alterations and Utility Installations shall, at the expiration or termination of this Lease, become the property of Lessor and be surrendered by Lessee with the Premises. (b) Removal. By delivery to Lessee of written notice from Lessor not earlier than 90 and not later than 30 days prior to the end of the term of this Lessee, Lessor may require that any or all Lessee Owned Alterations or Utility Installations be removed by the expiration or termination of this Lease. Lessor may require the removal at any time of all or any part of any Lessee Owned Alterations or Utility Installations made without the required consent. (c) Surrender; Restoration Lessee shall surrender the Premises by the Expiration Date or any earlier termination date, with all of the improvements, parts and surfaces thereof broom clean and free of debris, and in good operating order, condition and state of repair, ordinary wear and tear excepted. "Ordinary wear and tear" shall not include any damage or deterioration that would have been prevented by good maintenance practice. Notwithstanding the foregoing, if this Lease is for 12 months or less, then Lessee shall surrender the Premises in the same condition as delivered to Lessee on the Start Date with NO allowance for ordinary wear and tear. Lessee shall repair any damage occasioned by the installation, maintenance or removal of Trade Fixtures, Lessee owned Alterations and/or Utility Installations, furnishings, and equipment as well as the removal of any storage tank installed by or for Lessee. Lessee shall also completely remove from the Premises any and all Hazardous Substances brought onto the Premises by or for Lessee, or any third party (except Hazardous Substances which were deposited via underground migration from areas outside of the Project) even if such removal would require Lessee to perform or pay for work that exceeds statutory requirements. Trade Fixtures shall remain the property of Lessee and shall be removed by Lessee. The failure by Lessee to timely vacate the Premises pursuant to this Paragraph 7.4(c) without the express written consent of Lessor shall constitute a holdover under the provisions of Paragraph 26 below. SEE ADDENDUM 8. Insurance; Indemnity. 8.1 Page 6 of 15 8.2 Liability Insurance. (a) Carried by Lessee. Lessee shall obtain and keep in force a Commercial General Liability policy of insurance protecting Lessee and Lessor as an additional insured against claims for bodily injury, personal injury and property damage based upon or arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. Such insurance shall be on an occurrence basis providing single limit coverage in an amount not less than $3,000 000 per occurrence with an annual aggregate of not less than $3,000,000, an "Additional Insured-Managers or Lessors of Premises Endorsement" and contain the "Amendment of the Pollution Exclusion Endorsement" for damage caused by heat, smoke or fumes from a hostile fire. The policy shall not contain any intra-insured exclusions as between insured persons or organizations, but shall include coverage for liability assumed under this Lease as an "Insured contract" for the performance of Lessee's indemnity obligations under this Lease. The limits of said insurance shall not, however, limit the liability of Lessee nor relieve Lessee of any obligation hereunder. All insurance carried by Lessee shall be primary to and not contributory with any similar insurance carried by Lessor, whose insurance shall be considered excess insurance only SEE ADDENDUM (b) Carried by Lessor Lessor shall maintain liability insurance as described in Paragraph 8.2(a), in addition to, and not in lieu of, the insurance required to be maintained by Lessee. Lessee shall not be named as an additional insured therein. 8.3 Property Insurance - Building, Improvements and Rental Value. (a) Building and Improvements. Lessor shall obtain and keep in force a policy or policies of insurance in the name of Lessor, with loss payable to Lessor, any ground-lessor and to any Lender insuring loss or damage to the Premises. The amount of such insurance shall be equal to the full replacement cost of the Premises as the same shall exist from time to time, or the amount required by any Lender, but in no event more than the commercially reasonable and available insurable value thereof. Lessee Owned Alterations and Utility Installations, Trade Fixtures, and Lessee's personal property shall be insured by Lessee under Paragraph 8.4. If the coverage is available and commercially appropriate, such policy or policies shall insure against all risks of direct physical loss or damage (except the perils of flood and/or earthquake unless required by a Lender), including coverage for debris removal and the enforcement of any Applicable Requirements requiring the upgrading, demolition, reconstruction or replacement of any portion of the Premises as the result of a covered loss. Said policy or policies shall also contain an agreed valuation provision in lieu of any coinsurance clause, waiver of subrogation, and inflation guard protection causing an increase in the annual property insurance coverage amount by a factor of not less than the adjusted U.S. Department of Labor Consumer Price Index for All Urban Consumers for the city nearest to where the Premises are located. If such insurance coverage has a deductible clause, the deductible amount shall not exceed 50,000 per occurrence. (b) Rental Value. Lessor shall also obtain and keep in force a policy or policies in the name of Lessor with loss payable to Lessor and any Lender, insuring the loss of the full Rent for one year with an extended period of indemnity for an additional 180 days ("Rental Value Insurance"). Said insurance shall contain an agreed valuation provision in lieu of any coinsurance clause, and the amount of coverage shall be adjusted annually to reflect the projected Rent otherwise payable by Lessee, for the next 12 month period. (c) Adjacent Premises. Lessee shall pay for any increase in the premiums for the property insurance of the Building and for the Common Areas or other buildings in the Project if said increase is caused by Lessee's acts, omissions, change in use or occupancy of the Premises. (d) Lessee's Improvements. Since Lessor is the Insuring Party, Lessor shall not be required to insure Lessee Owned Alterations and Utility Installations unless the item in question has become the property of Lessor under the terms of this Lease. 8.4 Lessee's Property; Business Interruption Insurance. (a) Property Damage. Lessee shall obtain and maintain insurance coverage on all of Lessee's personal property. Trade Fixtures, and Lessee Owned Alterations and Utility Installations. Such insurance shall be full replacement cost coverage with a deductible of not to exceed $50,000 per occurrence. The proceeds from any such insurance shall be used by Lessee for the replacement of personal property, Trade Fixtures and Lessee Owned Alterations and Utility Installations. Lessee shall provide Lessor with written evidence that such insurance is in force. (b) Business Interruption. Lessee shall obtain and maintain loss of income and extra expense insurance in amounts as will reimburse Lessee for direct or indirect loss of earnings attributable to all perils commonly insured against by prudent lessees in the business of Lessee or attributable to prevention of access to the Premises as a result of such perils. (c) No Representation of Adequate Coverage. Lessor makes no representation that the limits or forms of coverage of insurance specified herein are adequate to cover Lessee's property, business operations or obligations under this Lease. 8.5 Insurance Policies. Insurance required herein shall be by companies duly licensed or admitted to transact business in the state where the Premises are located, and maintaining during the policy term a "General Policyholders Rating" of at least B+, V, as set forth in the most current issue of "Best's Insurance Guide", or such other rating as may be required by a Lender. Lessee shall not do or permit to be done anything which invalidates the required insurance policies. Lessee shall, prior to the Start Date, deliver to Lessor certified copies of policies of such insurance or certificates evidencing the existence and amounts of the required insurance. No such policy shall be cancelable or subject to modification except after 30 days prior written notice to Lessor. Lessee shall, at least 30 days prior to the expiration of such policies, furnish Lessor with evidence of renewals or "insurance binders" evidencing renewal thereof, or Lessor may, after ten (10) days notice to Lessee, order such insurance and charge the cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon demand. Such policies shall be for a term of at least one year, or the length of the remaining term of this Lease, whichever is less. If either Party shall fail to procure and maintain the insurance required to be carried by it, the other Party may, but shall not be required to, procure and maintain the same. 8.6 Waiver of Subrogation. Without affecting any other rights or remedies, Lessee and Lessor each hereby release and relieve the other, and waive their entire right to recover damages against the other, for loss of or damage to its property arising out of or incident to the perils required to be insured against herein. The effect of such releases and waivers is not limited by the amount of insurance carried or required, or by any deductibles applicable hereto. The Parties agree to have their respective property damage insurance carriers waive any right to subrogation that such companies may have against Lessor or Lessee, as the case may be, so long as the insurance is not invalidated thereby. 8.7 Indemnity. Except for Lessor's gross negligence or willful misconduct, Lessee shall indemnify, protect, defend and hold harmless the Premises, Lessor and its agents, Lessor's master or ground lessor, partners and Lenders, from and against any and all claims, loss of rents and/or damages, liens, judgments, penalties, attorneys' and consultants' fees, expenses and/or liabilities arising out of, involving, or in connection with, the use and/or occupancy of the Premises by Lessee. If any action or proceeding is brought against Lessor by reason of any of the foregoing matters, Lessee shall upon notice defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to be defended or indemnified. 8.8 Exemption of Lessor from Liability. Lessor shall not be liable for injury or damage to the person or goods, wares, merchandise or other property of Lessee, Lessee's employees, contractors invitees, customers, or any other person in or about the Premises, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, fire sprinklers, wires, appliances, plumbing, HVAC or lighting fixtures, or from any other cause, whether the said injury or damage results from conditions arising upon the Premises or upon other portions of the Building, or from other sources or places. Lessor shall not be liable for any damages arising from any act or neglect of any other tenant of Lessor nor from the failure of Lessor to enforce the provisions of any other lease in the Project. Notwithstanding Lessor's negligence or breach of this Lease, Lessor shall under no circumstances be liable for injury to Lessee's business or for any loss of income or profit therefrom. 9. Damage or Destruction Page 7 of 15 9.1 Definitions (a) "Premises Partial Damage" shall mean damage or destruction to the improvements on the Premises, other than Lessee Owned Alterations and Utility installations, which can reasonably be repaired in 3 months or less from the date of the damage or destruction, and the cost thereof does not exceed a sum equal to 6 month's Base Rent. Lessor shall notify Lessee in writing within 30 days from the date of the damage or destruction as to whether or not the damage is Partial or Total. (b) "Premises Total Destruction" shall mean damage or destruction to the improvements on the Premises, other than Lessee Owned Alterations and Utility Installations and Trade Fixtures, which cannot reasonably be repaired in 3 months or less from the date of the damage or destruction and/or the cost thereof exceeds a sum equal to 6 month's Base Rent. Lessor shall notify Lessee in writing within 30 days from the date of the damage or destruction as to whether or not the damage is Partial or Total. (c) "Insured Loss" shall mean damage or destruction to improvements on the Premises, other than Lessee Owned Alterations and Utility Installations and Trade Fixtures, which was caused by an event required to be covered by the insurance described in Paragraph 8.3(a), irrespective of any deductible amounts or coverage limits involved. (d) "Replacement Cost" shall mean the cost to repair or rebuild the improvements owned by Lessor at the time of the occurrence to their condition existing immediately prior thereto, including demolition, debris removal and upgrading required by the operation of Applicable Requirements, and without deduction for depreciation. (e) "Hazardous Substance Condition" shall mean the occurrence or discovery of a condition involving the presence of, or a contamination by, a Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the Premises. 9.2 Partial Damage - Insured Loss. If a Premises Partial Damage that is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility Installations) as soon as reasonably possible and this Lease shall continue in full force and effect, provided, however, that Lessee shall, at Lessor's election, make the repair of any damage or destruction the total cost to repair of which is $5,000 or less, and, in such event, Lessor shall make any applicable insurance proceeds available to Lessee on a reasonable basis for that purpose. Notwithstanding the foregoing. If the required insurance was not in force or the insurance proceeds are not sufficient to effect such repair, the Insuring Party shall promptly contribute the shortage in proceeds as and when required to complete said repairs. In the event, however, such shortage was due to the fact that, by reason of the unique nature of the improvements, full replacement cost insurance coverage was not commercially reasonable and available, Lessor shall have no obligation to pay for the shortage in insurance proceeds or to fully restore the unique aspects of the Premises unless Lessee provides Lessor with the funds to cover same, or adequate assurance thereof, within 10 days following receipt of written notice of such shortage and request therefor. If Lessor receives said funds or adequate assurance thereof within said 10 day period, the party responsible for making the repairs shall complete them as soon as reasonably possible and this Lease shall remain in full force and effect. If such funds or assurance are not received, Lessor may nevertheless elect by written notice to Lessee within 10 days thereafter to: (i) make such restoration and repair as is commercially reasonable with Lessor paying any shortage in proceeds, in which case this Lease shall remain in full force and effect, or (ii) have this Lease terminate 30 days thereafter. Lessee shall not be entitled to reimbursement of any funds contributed by Lessee to repair any such damage or destruction. Premises Partial Damage due to flood or earthquake shall be subject to Paragraph 9.3, notwithstanding that there may be some insurance coverage, but the net proceeds of any such insurance shall be made available for the repairs if made by either Party. 9.3 Partial Damage - Uninsured Loss. If a Premises Partial Damage that is not an Insured Loss occurs, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee's expense), Lessor may either (i) repair such damage as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) terminate this Lease by giving written notice to Lessee within 30 days after receipt by Lessor of knowledge of the occurrence of such damage. Such termination shall be effective 60 days following the date of such notice. In the event Lessor elects to terminate this Lease, Lessee shall have the right within 10 days after receipt of the termination notice to give written notice to Lessor of Lessee's commitment to pay for the repair of such damage without reimbursement from Lessor. Lessee shall provide Lessor with said funds or satisfactory assurance thereof within 30 days after making such commitment. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such repairs as soon as reasonably possible after the required funds are available. If Lessee does not make me required commitment, this Lease shall terminate as of the date specified in the termination notice. 9.4 Total Destruction Notwithstanding any other provision hereof, if a Premises Total Destruction occurs, this Lease shall terminate 60 days following such Destruction. If the damage or destruction was caused by the gross negligence or willful misconduct of Lessee, Lessor shall have the right to recover Lessor's damages from Lessee, except as provided in Paragraph 8.6. 9.5 Damage Near End of Term. If at any time during the last 6 months of this Lease there is damage for which the cost to repair exceeds one month's Base Rent, whether or not an Insured Loss, Lessor may terminate this Lease effective __ days following the date of occurrence of such damage by giving a written termination notice to Lessee within 30 days after the date of occurrence of such damage. Notwithstanding the foregoing, if Lessee at that time has an exercisable option to extend this Lease or to purchase the Premises, then Lessee may preserve this Lease by, (a) exercising such option and (b) providing Lessor with any shortage in insurance proceeds (or adequate assurance thereof) needed to make the repairs on or before the earlier of (i) the date which is 10 days after Lessee's receipt of Lessor's written notice purporting to terminate this Lease, or (ii) the day prior to the date upon which such option expires. If Lessee duly exercises such option during such period and provides Lessor with funds (or adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor shall, at Lessor's commercially reasonable expense, repair such damage as soon as reasonably possible and this Lease shall continue in full force and effect. If Lessee fails to exercise such option and provide such funds or assurance during such period, then this Lease shall terminate on the date specified in the termination notice and Lessee's option shall be extinguished. 9.6 Abatement of Rent; Lessee's Remedies (a) Abatement. In the event of Premises Partial Damage or Premises Total Destruction or a Hazardous Substance Condition for which Lessee is not responsible under this Lease, the Rent payable by Lessee for the period required for the repair, remediation or restoration of such damage shall be abated in proportion to the degree to which Lessee's use of the Premises is impaired. All other obligations of Lessee hereunder shall be performed by Lessee, and Lessor shall have no liability for any such damage, destruction, remediation, repair or restoration except as provided herein. (b) Remedies. If Lessor shall be obligated to repair or restore the Premises and does not commence, in a substantial and meaningful way, such repair or restoration within __ days after such obligation shall accrue, Lessee may, at any time prior to the commencement of such repair or restoration, give written notice to Lessor and to any Lenders of which Lessee has actual notice, of Lessee's election to terminate this Lease on a date not less than __ days following the giving of such notice. If Lessee gives such notice and such repair or restoration is not commenced within 30 days thereafter, this Lease shall terminate as of the date specified in said notice. If the repair or restoration is commenced within such 30 days, this Lease shall continue in full force and effect. "Commence" shall mean either the unconditional authorization of the preparation of the required plans, or the beginning of the actual work on the Premises, whichever first occurs. 9.7 Termination; Advance Payments. Upon termination of this Lease pursuant to Paragraph 6.2(g) or Paragraph 9, an equitable adjustment shall be made concerning advance Base Rent and any other advance payments made by Lessee to Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's Security Deposit as has not been, or is not then required to be, used by Lessor. 9.8 Waive Statutes Lessor and Lessee agree that the terms of this Lease shall govern the effect of any damage to or destruction of the Premises with respect to the termination of this Lease and hereby waive the provisions of any present or future statute to the extent inconsistent herewith. 10. Real Property Taxes. Page 8 of 15 10.1 Definition. As used herein, the term "Real Property Taxes" shall include any form of assessment; real estate, general, special, ordinary or extraordinary, or rental levy or tax (other than inheritance, personal income or estate taxes); improvement bond; and/or license fee imposed upon or levied against any legal or equitable interest of Lessor in the Project, Lessor's right to other income therefrom, and/or Lessor's business of leasing, by any authority having the direct or indirect power to tax and where the funds are generated with reference to the Project address and where the proceeds so generated are to be applied by the city, county or other local taxing authority of a jurisdiction within which the Project is located. The term "Real Property Taxes" shall also include any tax, fee, levy, assessment or charge, or any increase therein, imposed by reason of events occurring during the term of this Lease, including but not limited to, a change in the ownership of the Project or any portion thereof or a change in the improvements thereon. In calculating Real Property Taxes for any calendar year, the Real Property Taxes for any real estate tax year shall be included in the calculation of Real Property Taxes for such calendar year based upon the number of days which such calendar year and tax year have in common. 10.2 Payment of Taxes. Lessor shall pay the Real Property Taxes applicable to the Project. 10.3 Additional Improvements. Notwithstanding Paragraph 10.2 hereof, Lessee shall, pay to Lessor the entirety of any increase in Real Property Taxes if assessed solely by reason of Alterations. Trade Fixtures or Utility Installations placed upon the Premises by Lessee or at Lessee's request. 10.5 Personal Property Taxes. Lessee shall pay prior to delinquency all taxes assessed against and levied upon Lessee Owned Alterations and Utility Installations. Trade Fixtures, furnishings, equipment and all personal property of Lessee contained in the Premises. When possible, Lessee shall cause its Lessee Owned Alterations and Utility Installations. Trade Fixtures, furnishings, equipment and all other personal property to be assessed and billed separately from the real property of Lessor. If any of Lessee's said property shall be assessed with Lessor's real property, Lessee shall pay Lessor the taxes attributable to Lessee's property within 10 days after receipt of a written statement setting forth the taxes applicable to Lessee's property. 11 Utilities. Lessee shall pay for all water, gas, heat, light, power, telephone, trash disposal and other utilities and services supplied to the Premises, together with any taxes thereon. Notwithstanding the provisions of Paragraph 4.2, if at any time in Lessor's sole judgment, Lessor determines that Lessee is using a disproportionate amount of water, electricity or other commonly metered utilities, or that Lessee is generating such a large volume of trash as to require an increase in the size of the dumpster and/or an increase in the number of times per month that the dumpster is emptied, then Lessor may increase Lessee's Base Rent by an amount equal to such increased costs. 12 Assignment and Subletting. 12.1 Lessor's Consent Required. (a) Lessee shall not voluntarily or by operation of law assign, transfer, mortgage or encumber (collectively, "assign or assignment") or sublet all or any part of Lessee's interest in this Lease or in the Premises without Lessor's prior written consent which may be withheld in Lessor's sole and absolute discretion. SEE ADDENDUM. (d) An assignment or subletting without consent shall, at Lessor's option, be a Default curable after notice per Paragraph 13.1(c), or a noncurable Breach without the necessity of any notice and grace period. If Lessor elects to treat such unapproved assignment or subletting as a noncurable Breach, Lessor may either: (i) terminate this Lease, or (ii) upon 30 days written notice, increase the monthly Base Rent to 110% of the Base Rent then in effect. Further, in the event of such Breach and rental adjustment, (i) the purchase price of any option to purchase the Premises held by Lessee shall be subject to similar adjustment to 110% of the price previously in effect and (ii) all fixed and non-fixed rental adjustments scheduled during the remainder of the Lease term shall be increased to 110% of the scheduled adjusted rent. (e) Lessee's remedy for any breach of Paragraph 12.1 by Lessor shall be limited to compensatory damages and/or injunctive relief. 12.2 Terms and Conditions Applicable to Assignment and Subletting. (a) Regardless of Lessor's consent, no assignment or subletting shall: (i) be effective without the express written assumption by such assignee or sublessee of the obligations of Lessee under this Lease, (ii) release Lessee of any obligations hereunder, or (iii) alter the primary liability of Lessee for the payment of Rent or for the performance of any other obligations to be performed by Lessee. SEE ADDENDUM (b) Lessor may accept Rent or performance of Lessee's obligations from any person other than Lessee pending approval or disapproval of an assignment. Neither a delay in the approval or disapproval of such assignment nor the acceptance of Rent or performance shall constitute a waiver or estoppel of Lessor's right to exercise its remedies for Lessee's Default or Breach. (c) Lessor's consent to any assignment or subletting shall not constitute a consent to any subsequent assignment or subletting. (d) In the event of any Default or Breach by Lessee, Lessor may proceed directly against Lessee, any Guarantors or anyone else responsible for the performance of Lessee's obligations under this Lease, including any assignee or sublessee. Without first exhausting Lessor's remedies against any other person or entity responsible therefore to Lessor, or any security held by Lessor. (e) Each request for consent to an assignment or subletting shall be in writing, accompanied by information relevant to Lessor's determination as to the financial and operational responsibility and appropriateness of the proposed assignee or sublessee, including but not limited to the intended use and/or required modification of the Premises, if any, together with a fee of $1,000 or 10% of the current monthly Base Rent applicable to the portion of the Premises which is the subject of the proposed assignment or sublease, whichever is greater, as consideration for Lessor's considering and processing said request. Lessee agrees to provide Lessor with such other or additional information and/or documentation as may be reasonably requested. (f) Any assignee of, or sublessee under, this Lease shall, by reason of accepting such assignment or entering into such sublease, be deemed to have assumed and agreed to conform and comply with each and every term, covenant, condition and obligation herein to be observed or performed by Lessee during the term of said assignment or sublease, other than such obligations as are contrary to or inconsistent with provisions of an assignment or sublease to which Lessor has specifically consented to in writing. (g) Lessor's consent to any assignment or subletting shall not transfer to the assignee or sublessee any Option granted to the original Lessee by this Lease unless such transfer is specifically consented to by Lessor in writing. (See Paragraph 39.2) 12.3 Additional Terms and Conditions Applicable to Subletting. The following terms and conditions shall apply to any subletting by Page 9 of 15 Lessee of all or any part of the Premises and shall be deemed included in all subleases under this Lease whether or not expressly incorporated therein; (a) Lessee hereby assigns and transfers to Lessor all of Lessee's interest in all Rent payable on any sublease, and Lessor may collect such Rent and apply same toward Lessee's obligations under this Lease; provided, however, that until a Breach shall occur in the performance of Lessee's obligations, Lessee may collect said Rent. Lessor shall not, by reason of the foregoing or any assignment of such sublease, nor by reason of the collection of Rent, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee's obligations to such sublessee. Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written notice from Lessor stating that a Breach exists in the performance of Lessee's obligations under this Lease, to pay to Lessor all Rent due and to become due under the sublease. Sublessee shall rely upon any such notice from Lessor and shall pay all Rents to Lessor without any obligation or right to inquire as to whether such Breach exists, notwithstanding any claim from Lessee to the contrary. (b) In the event of a Breach by Lessee, Lessor may, at its option, require sublessee to attorn to Lessor, in which event Lessor shall undertake the obligations of the sublessor under such sublease from the time of the exercise of said option to the expiration of such sublease; provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sublessee to such sublessor or for any prior Defaults or Breaches of such sublessor. (c) Any matter requiring the consent of the sublessor under a sublease shall also require the consent of Lessor. (d) No sublessee shall further assign or sublet all or any part of the Premises without Lessor's prior written consent (e) Lessor shall deliver a copy of any notice of Default or Breach by Lessee to the sublessee, who shall have the right to cure the Default of Lessee within the grace period, if any, specified in such notice. The sublessee shall have a right of reimbursement and offset from and against Lessee for any such Defaults cured by the sublessee. 13. Default; Breach; Remedies SEE ADDENDUM 13.1 Default; Breach. A "Default" is defined as a failure by the Lessee to comply with or perform any of the terms, covenants, conditions or Rules and Regulations under this Lease. A "Breach" is defined as the occurrence of one or more of the following Defaults, and the failure of Lessee to cure such Default within any applicable grace period; (a) The abandonment of the Premises, or the vacating of the Premises without providing a commercially reasonable level of security, or where the coverage of the property insurance described in Paragraph 8.3 is jeopardized as a result thereof, or without providing reasonable assurances to minimize potential vandalism. (b) The failure of Lessee to make any payment of Rent or any Security Deposit required to be made by Lessee hereunder, whether to Lessor or to a third party, when due, to provide reasonable evidence of insurance or surety bond, or to fulfill any obligation under this Lease which endangers or threatens life or property, where such failure continues for a period of fifteen (15) days following written notice to Lessee (c) The failure by Lessee to provide (i) reasonable written evidence of compliance with Applicable Requirements, (ii) the service contracts, (iii) the rescission of an unauthorized assignment or subletting, (iv) an Estoppel Certificate, (v) a requested subordination, (vi) evidence concerning any guaranty and/or Guarantor, (vii) any document requested under Paragraph 41 (easements), or (viii) any other documentation or information which Lessor may reasonably require of Lessee under the terms of this Lease, where any such failure continues for a period of 10 days following written notice to Lessee. (d) A Default by Lessee as to the terms, covenants, conditions or provisions of this Lease, or of the rules adopted under Paragraph 2.9 hereof, other than those described in subparagraphs 13.1(a), (b) or (c), above, where such Default continues for a period of 30 days after written notice; provided, however, that if the nature of Lessee's Default is such that more than 30 days are reasonably required for its cure, then it shall not be deemed to be a Breach if Lessee commences such cure within said 30 day period and thereafter diligently prosecutes such cure to completion. (e) The occurrence of any of the following events: (i) the making of any general arrangement or assignment for the benefit of creditors; (ii) becoming a "debtor" as defined in 11 U S C Section 101 or any successor statute thereto (unless ,in the case of a petition filed against Lessee, the same is dismissed within 60 days; (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where possession is not restored to Lessee within 30 days; or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not discharged within 30 days; provided, however, in the event that any provision of this subparagraph (e) is contrary to any applicable law, such provision shall be of no force or effect, and not affect the validity of the remaining provisions. (f) The discovery that any financial statement of Lessee or of any Guarantor given to Lessor was materially false. (g) If the performance of Lessee's obligations under this Lease is guaranteed (i) the death of a Guarantor, (ii) the termination of a Guarantor's liability with respect to this Lease other than in accordance with the terms of such guaranty. (iii) a Guarantor's becoming insolvent or the subject of a bankruptcy filing, (iv) a Guarantor's refusal to honor the guaranty, or (v) a Guarantor's breach of its guaranty obligation on an anticipatory basis, and Lessee's failure, within 60 days following written notice of any such event, to provide written alternative assurance or security, which, when coupled with the then existing resources of Lessee, equals or exceeds the combined financial resources of Lessee and the Guarantors that existed at the time of execution of this Lease. 13.2 Remedies. If Lessee fails to perform any of its affirmative duties or obligations, within 10 days after written notice (or in case of an emergency, without notice). Lessor may, at its option, perform such duty or obligation on Lessee's behalf, including but not limited to the obtaining of reasonably required bonds, insurance policies, or governmental licenses, permits or approvals. The costs and expenses of any such performance by Lessor shall be due and payable by Lessee upon receipt of invoice therefor. If any check given to Lessor by Lessee shall not be honored by the bank upon which it is drawn, Lessor, at its option, may require all future payments to be made by Lessee to be by cashier's check. In the event of a Breach, Lessor may, with or without further notice or demand, and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such Breach. (a) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease shall terminate and Lessee shall immediately surrender possession to Lessor. In such event Lessor shall be entitled to recover from Lessee: (i) the unpaid Rent which had been earned at the time of termination; (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided; (iii) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the Lessee proves could be reasonably avoided; and (iv) any other amount necessary to compensate Lessor for all the detriment proximately caused by the Lessee's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including but not limited to the cost of recovering possession of the Premises, expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorney's fees, and that portion of any leasing commission paid by Lessor in connection with this Lease applicable to the unexpired term of this Lease. The worth at the time of award of the amount referred to in provision (iii) of the immediately preceding sentence shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of the District within which the Premises are located at the time of award plus one percent. Efforts by Lessor to mitigate damages caused by Lessee's Breach of this Lease shall not waive Lessor's right to recover damages under Paragraph 12. If termination of this Lease is obtained through the provisional remedy of unlawful detainer, Lessor shall have the right to recover in such proceeding any unpaid Rant and damages as are recoverable therein, or Lessor may reserve the right to recover all or any part thereof in a separate suit. If a notice and grace period required under Paragraph 13.1 was not previously given, a notice to pay rent or quit, or to perform or quit given to Lessee under the unlawful detainer statute shall also constitute the notice required by Paragraph 13.1. In such case, the applicable grace period required by Paragraph 13.1 and the unlawful detainer statute shall run concurrently, and the failure of Lessee to cure the Default within the greater of the two such grace periods shall constitute both an unlawful detainer and a Breach of this Lease entitling Lessor to the remedies provided for in this Lease and/or by said statute. Page 10 of 15 (b) Continue the Lease and Lessee's right to possession and recover the Rent as it becomes due, in which event Lessee may sublet or assign, subject only to reasonable limitations. Acts of maintenance, efforts to relet, and/or the appointment of a receiver to protect the Lessor's interests, shall not constitute a termination of the Lessee's right to possession. (c) Pursue any other remedy now or hereafter available under the laws or judicial decisions of the state wherein the Premises are located. The expiration or termination of this Lease and/or the termination of Lessee's right to possession shall not relieve Lessee from liability under any indemnity provisions of this Lease as to matters occurring or accruing during the term hereof or by reason of Lessee's occupancy of the Premises. 13.3 Inducement Recapture. Any agreement for free or abated rent or other charges, or for the giving or paying by Lessor to or for Lessee of any cash or other bonus, inducement or consideration for Lessee's entering into this Lease, all of which concessions are hereinafter referred to as "Inducement Provisions", shall be deemed conditioned upon Lessee's full and faithful performance of all of the terms, covenants and conditions of this Lease. Upon Breach of this Lease by Lessee, any such Inducement Provision shall automatically be deemed deleted from this Lease and of no further force or effect, and any rent, other charge, bonus, inducement or consideration theretofore abated, given or paid by Lessor under such an Inducement Provision shall be immediately due and payable by Lessee to Lessor, notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by Lessor of rent or the cure of the Breach which initiated the operation of this paragraph shall not be deemed a waiver by Lessor of the provisions of this paragraph unless specifically so stated in writing by Lessor at the time of such acceptance. 13.4 Late Charges. Lessee hereby acknowledges that late payment by Lessee of Rent will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed upon Lessor by any Lender. Accordingly, if any Rent shall not be received by Lessor within 5 days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a one-time late charge equal to 5% of each such overdue amount or $100, whichever is greater. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of such late payment. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's Default or Breach with respect to such overdue amount, nor prevent the exercise of any of the other rights and remedies granted hereunder. In the event that a late charge is payable hereunder, whether or not collected, for 3 consecutive installments of Base Rent, then notwithstanding any provision of this Lease to the contrary, Base Rent shall, at Lessor's option, become due and payable quarterly in advance. 13.5 Interest. Any monetary payment due Lessor hereunder, other than late charges, not received by Lessor, when due as to scheduled payments (such as Base Rent) or within 30 days following the date on which it was due for non-scheduled payment, shall bear interest from the date when due, as to scheduled payments, or the 31st day after it was due as to non-scheduled payments. The interest ("Interest") charged shall be as set out in the Addendum. Interest is payable in addition to the potential late charge provided for in Paragraph 13.4 13.6 Breach by Lessor. (a) Notice of Breach. Lessor shall not be deemed in breach of this Lease unless Lessor fails within a reasonable time to perform an obligation required to be performed by Lessor. For purposes of this Paragraph, a reasonable time shall in no event be less than 30 days after receipt by Lessor, and any Lender whose name and address shall have been furnished Lessee in writing for such purpose, of written notice specifying wherein such obligation of Lessor has not been performed; provided, however, that if the nature of Lessor's obligation is such that more than 30 days are reasonably required for its performance, then Lessor shall not be in breach if performance is commenced within such 30 day period and thereafter diligently pursued to completion. (b) Performance by Lessee on Behalf of Lessor. In the event that neither Lessor nor Lender cures said breach within 30 days after receipt of said notice, or if having commenced said cure they do not diligently pursue it to completion, then Lessee may elect to cure said breach at Lessee's expense and offset from Rent an amount equal to the greater of one month's Base Rent or the Security Deposit, and to pay an excess of such expense under protest, reserving Lessee's right to reimbursement from Lessor. Lessee shall document the cost of said cure and supply said documentation to Lessor. 14. Condemnation. If the Premises or any portion thereof are taken under the power of eminent domain or sold under the threat of the exercise of said power (collectively "Condemnation"), this Lease shall terminate as to the part taken as of the date the condemning authority takes title or possession, whichever first occurs. If more than 10% of the floor area of the Unit, or more than 25% of Lessee's Reserved Parking Spaces, is taken by Condemnation, Lessee may, at Lessee's option, to be exercised in writing within 10 days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within 10 days after the condemning authority shall have taken possession) terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the Base Rent shall be reduced in proportion to the reduction in utility of the Premises caused by such Condemnation. Condemnation awards and/or payments shall be the property of Lessor, whether such award shall be made as compensation for diminution in value of the leasehold, the value of the part taken, or for severance damages; provided, however, that Lessee shall be entitled to any compensation for Lessee's relocation expenses, loss of business goodwill and/or Trade Fixtures, without regard to whether or not this Lease is terminated pursuant to the provisions of this Paragraph. All Alterations and Utility Installations made to the Premises by Lessee, for purposes of Condemnation only, shall be considered the property of the Lessee and Lessee shall be entitled to any and all compensation which is payable therefor. In the event that this Lease is not terminated by reason of the Condemnation, Lessor shall repair any damage to the Premises caused by such Condemnation. 15. Brokerage Fees. 15.3 Representations and Indemnities of Broker Relationships. Lessee and Lessor each represent and warrant to the other that it has had no dealings with any person, firm, broker or finder (other than the Brokers, if any) in connection with this Lease, and that no one other than said named Brokers is entitled to any commission or finder's fee in connection herewith. Lessee and Lessor do each hereby agree to indemnify, protect, defend and hold the other harmless from and against liability for compensation or charges which may be claimed by any such unnamed broker, finder or other similar party by reason of any dealings or actions of the Indemnifying Party, including any costs, expenses, attorneys' fees reasonably incurred with respect thereto. 16. Estoppel Certificates. (a) Each Party (as "Responding Party") shall within 10 days after written notice from the other Party (the "Requesting Party") Page 11 of 15 execute, acknowledge and deliver to the Requesting Party a statement in writing in form similar to the then most current "Estoppel Certificate" form published by the American Industrial Real Estate Association, plus such additional information, confirmation and/or statements as may be reasonably requested by the Requesting Party. (b) If the Responding Party shall fail to execute or deliver the Estoppel Certificate within such 10 day period, the Requesting Party may execute an Estoppel Certificate stating that: (i) the Lease is in full force and effect without modification except as may be represented by the Requesting Party, (ii) there are no uncured defaults in the Requesting Party's performance, and (iii) if Lessor is the Requesting Party, not more than one month's rent has been paid in advance. Prospective purchasers and encumbrances may rely upon the Requesting Party's Estoppel Certificate, and the Responding Party shall be estopped from denying the truth of the facts contained in said Certificate. (c) If Lessor desires to finance, refinance, or sell the Premises, or any part thereof. Lessee and all Guarantors shall deliver to any potential lender or purchaser designated by Lessor such financial statements as may be reasonably required by such lender or purchaser, including but not limited to Lessee's financial statements for the past 3 years. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth. 17. Definition of Lessor. The term "Lessor" as used herein shall mean the Master Lessor at the time in question of the leasehold estate under the Master Lease to the Premises, or, if this is a sublease, of the Lessee's interest in the prior lease. In the event of a transfer of Lessor's title or interest in the Premises or this Lease, Lessor shall deliver to the transferee or assignee (in cash or by credit) any unused Security Deposit held by Lessor. Except as provided in Paragraph 15, upon such transfer or assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor shall be relieved of all liability with respect to the obligations and/or covenants under this Lease thereafter to be performed by the Lessor. Subject to the foregoing, the obligations and/or covenants in this Lease to be performed by the Lessor shall be binding only upon the Lessor as hereinabove defined. Notwithstanding the above, and subject to the provisions of Paragraph 20 below, the original Lessor under this Lease, and all subsequent holders of the Lessor's interest in this Lease shall remain liable and responsible with regard to the potential duties and liabilities of Lessor pertaining to Hazardous Substances as outlined in Paragraph 6.2 above. 18. Severability. The invalidity of any provision of this Lease, as determined by a court of competent jurisdiction, shall in no way affect the validity of any other provision hereof. 19. Days. Unless otherwise specifically indicated to the contrary, the word "days" as used in this Lease shall mean and refer to calendar days. 20. Limitation on Liability. Subject to the provisions of Paragraph 17 above, the obligations of Lessor under this Lease shall not constitute personal obligations of Lessor, the individual partners of Lessor or its or their individual partners, directors, officers or shareholders, and Lessee shall look to the Premises, and to no other assets of Lessor, for the satisfaction of any liability of Lessor with respect to this Lease, and shall not seek recourse against the individual partners of Lessor, or its or their individual partners, directors, officers or shareholders, or any of their personal assets for such satisfaction. 21. Time of Essence. Time is of the essence with respect to the performance of all obligations to be performed or observed by the Parties under this Lease. 22. No Prior or Other Agreements; Broker Disclaimer. This Lease contains all agreements between the Parties with respect to any matter mentioned herein, and no other prior or contemporaneous agreement or understanding shall be effective. Lessor and Lessee each represents and warrants that it has made, and is relying solely upon, its own investigation as to the nature, quality, character and financial responsibility of the other Party to this Lease and as to the use, nature, quality and character of the Premises. 23. Notices. 23.1 Notice Requirements. All notices required or permitted by this Lease or applicable law shall be in writing and may be delivered in person (by hand or by courier) or may be sent by regular, certified or registered mail or U.S. Postal Service Express Mail, with postage prepaid, or by facsimile transmission, and shall be deemed sufficiently given if served in a manner specified in this Paragraph 23. The addresses noted adjacent to a Party's signature on this Lease shall be that Party's address for delivery or mailing of notices. Either Party may by written notice to the other specify a different address for notice, except that upon Lessee's taking possession of the Premises, the Premises shall constitute Lessee's address for notice. A copy of all notices to Lessor shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate in writing. 23.2 Date of Notice. Any notice sent by registered or certified mail, return receipt requested, shall be deemed given on the date of delivery shown on the receipt card, or if no delivery date is shown, the postmark thereon. If sent by regular mail the notice shall be deemed given 48 hours after the same is addressed as required herein and mailed with postage prepaid. Notices delivered by United States Express Mail or overnight courier that guarantee next day delivery shall be deemed given 24 hours after delivery of the same to the Postal Service or courier. Notices transmitted by facsimile transmission or similar means shall be deemed delivered upon telephone confirmation of receipt (confirmation report from fax machine is sufficient), provided a copy is also delivered via delivery or mail. If notice is received on a Saturday, Sunday or legal holiday, it shall be deemed received on the next business day. 24. Waivers. No waiver by Lessor of the Default or Breach of any term, covenant or condition hereof by Lessee, shall be deemed a waiver of any other term, covenant or condition hereof, or of any subsequent Default or Breach by Lessee of the same or of any other term, covenant or condition hereof. Lessor's consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of Lessor's consent to, or approval of, any subsequent or similar act by Lessee, or be construed as the basis of an estoppel to enforce the provision or provisions of this Lease requiring such consent. The acceptance of Rent by Lessor shall not be a waiver of any Default or Breach by Lessee. Any payment by Lessee may be accepted by Lessor on account of moneys or damages due Lessor, notwithstanding any qualifying statements or conditions made by Lessee in connection therewith, which such statements and/or conditions shall be of no force or effect whatsoever unless specifically agreed to in writing by Lessor at or before the time of deposit of such payment. Page 12 of 15 26. No Right To Holdover. Lessee has no right to retain possession of the Premises or any part thereof beyond the expiration or termination of this Lease. In the event that Lessee holds over, then the Base Rent shall be increased to 150% of the Base Rent applicable immediately preceding the expiration or termination. Nothing contained herein shall be construed as consent by Lessor to any holding over by Lessee. 27. Cumulative Remedies. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity. 28. Covenants and Conditions; Construction of Agreement. All provisions of this Lease to be observed or performed by Lessee are both covenants and conditions. In construing this Lease all headings and titles are for the convenience of the Parties only and shall not be considered a part of this Lease. Whenever required by the context, the singular shall include the plural and vice versa. This Lease shall not be construed as if prepared by one of the Parties, but rather according to its fair meaning as a whole, as if both Parties had prepared it. 29. Binding Effect; Choice of Law. This Lease shall be binding upon the parties, their personal representatives, successors and assigns and be governed by the laws of the State in which the Premises are located. Any litigation between the Parties hereto concerning this Lease shall be initiated in the county in which the Premises are located. 30. Subordination; Attornment; Non-Disturbance. 30.1 Subordination. This Lease and any Option granted hereby shall be subject and subordinate to any ground lease, mortgage, deed of trust, or other hypothecation or security device (collectively, "Security Device"), now or hereafter placed upon the Premises, to any and all advances made on the security thereof and to all renewals, modifications, and extensions thereof. Lessee agrees that the holders of any such Security devices (in this Lease together referred to as "Lender") shall have no liability or obligation to perform any of the obligations of Lessor under this Lease. Any Lender may elect to have this Lease and/or any Option granted hereby superior to the lien of its Security Device by giving written notice thereof to Lessee, whereupon this Lease and such Options shall be deemed prior to such Security Device, notwithstanding the relative dates of the documentation or recordation thereof. 30.2 Attornment. In the event that Lessor transfers title to the Premises, or the Premises are acquired by another upon the foreclosure or termination of a Security Device to which this Lease is subordinated (i) Lessee shall, subject to the non-disturbance provisions of Paragraph 30.3, attorn to such new owner, and upon request, enter into a new lease, containing all of the terms and provisions of this Lease, with such new owner for the remainder of the term hereof, or, at the election of such new owner, this Lease shall automatically become a new Lease between Lessee and such new owner, upon all of the terms and conditions hereof, for the remainder of the term hereof, and (ii) Lessor shall thereafter be relieved of any further obligations hereunder and such new owner shall assume all of Lessor's obligations hereunder, except that such new owner shall not (a) be liable for any act or omission of any prior lessor or with respect to events occurring prior to acquisition of ownership; (b) be subject to any offsets or defenses which Lessee might have against any prior lessor, (c) be bound by prepayment of more than one month's rent, or (d) be liable for the return of any security deposit paid to any prior lessor. 30.3 Non-Disturbance. With respect to Security Devices entered into by Lessor after the execution of this Lease, Lessee's subordination of this Lease shall be subject to receiving a commercially reasonable non-disturbance agreement (a "Non-Disturbance Agreement") from the Lender which Non-Disturbance Agreement provides that Lessee's possession of the Premises, and this Lease, including any options to extend the term hereof, will not be disturbed so long as Lessee is not in Breach hereof and attorns to the record owner of the Premises. Further, within 60 days after the execution of this Lease, Lessor shall use its commercially reasonable efforts to obtain a Non-Disturbance Agreement from the holder of any pre-existing Security Device which is secured by the Premises. In the event that Lesser is unable to provide the Non-Disturbance Agreement within said 60 days, then Lessee may, at Lessee's option, directly contact Lender and attempt to negotiate for the execution and delivery of a Non-Disturbance Agreement. 30.4 Self-Executing. The agreements contained in this Paragraph 30 shall be effective without the execution of any further documents; provided, however, that, upon written request from Lessor or a Lender in connection with a sale, financing or refinancing of the Premises, Lessee and Lessor shall execute such further writings as may be reasonably required to separately document any subordination, attornment and/or Non-Disturbance Agreement provided for herein. 31. Attorneys' Fees. If any Party brings an action or proceeding involving the Premises whether founded in tort, contract or equity, or to declare rights hereunder, the Prevailing Party (as hereafter defined) in any such proceeding, action, or appeal thereon, shall be entitled to reasonable attorneys' fees. Such fees may be awarded in the same suit or recovered in a separate suit, whether or not such action or proceeding is pursued to decision or judgment The term "Prevailing Party" shall include, without limitation, a Party who substantially obtains or defeats the relief sought, as the case may be, whether by compromise, settlement, judgment, or the abandonment by the other Party of its claim or defense. The attorneys' fees award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorneys' fees reasonably incurred. In addition, Lessor shall be entitled to attorneys' fees, costs and expenses incurred in the preparation and service of notices of Default and consultations in connection therewith, whether or not a legal action is subsequently commenced in connection with such Default or resulting Breach ($200 is a reasonable minimum per occurrence for such services and consultation). 32. Lessor's Access; Showing Premises; Repairs. Lessor and Lessor's agents shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times for the purpose of showing the same to prospective purchasers, lenders, or tenants, and making such alterations, repairs, improvements or additions to the Premises as Lessor may deem necessary. All such activities shall be without abatement of rent or liability to Lessee. Lessor may at any time place on the Premises any ordinary "For Sale" signs and Lessor may during the last 6 months of the term hereof place on the Premises any ordinary "For Lease" signs. Lessee may at any time place on the Premises any ordinary "For Sublease" sign. 33. Auctions. Lessee shall not conduct, nor permit to be conducted, any auction upon the Premises without Lessor's prior written consent. Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to permit an auction. 34. Signs. Except for ordinary "For Sublease" signs which may be placed only on the Premises, Lessee shall not place any Sign upon the Project without Lessor's prior written consent. All signs must comply with all Applicable Requirements. 35. Termination; Merger. Unless specifically stated otherwise in writing by Lessor, the voluntary or other surrender of this Lease by Lessee, the Page 13 of 15 mutual termination or cancellation hereof, or a termination hereof by Lessor for Breach by Lessee, shall automatically terminate any sublease or lesser estate in the Premises; provided, however, that Lessor may elect to continue any one or all existing subtenancies. Lessor's failure within 10 days following any such event to elect to the contrary by written notice to the holder of any such lesser interest, shall constitute Lessor's election to have such event constitute the termination of such interest. 36. Consents. Except as otherwise provided herein, wherever in this Lease the consent of a Party is required to an act by or for the other Party, such consent shall not be unreasonably withheld or delayed. Lessor's actual reasonable costs and expenses (including but not limited to architects', attorneys', engineers' and other consultants' fees) incurred in the consideration of, or response to, a request by Lessee for any Lessor consent, including but not limited to consents to an assignment, a subletting or the presence or use of a Hazardous Substance, shall be paid by Lessee upon receipt of an invoice and supporting documentation therefor. Lessor's consent to any act, assignment or subletting shall not constitute an acknowledgment that no Default or Breach by Lessee of this Lease exists, nor shall such consent be deemed a waiver of any then existing Default or Breach, except as may be otherwise specifically stated in writing by Lessor at the time of such consent. The failure to specify herein any particular condition to Lessor's consent shall not preclude the imposition by Lessor at the time of consent of such further or other conditions as are then reasonable with reference to the particular matter for which consent is being given. In the event that either Party disagrees with any determination made by the other hereunder and reasonably requests the reasons for such determination, the determining party shall furnish its reasons in writing and in reasonable detail within 10 business days following such request. 37. Guarantor. 37.1 Execution. The Guarantors, if any, shall each execute a guaranty in the form most recently published by the American Industrial Real Estate Association, and each such Guarantor shall have the same obligations as Lessee under this Lease. 37.2 Default. It shall constitute a Default of the Lessee if any Guarantor fails or refuses, upon request to provide: (a) evidence of the execution of the guaranty, including the authority of the party signing on Guarantor's behalf to obligate Guarantor, and in the case of a corporate Guarantor, a certified copy of a resolution of its board of directors authorizing the making of such guaranty, (b) current financial statements, (c) an Estoppel Certificate, or (d) written confirmation that the guaranty is still in effect. 38. Quiet Possession. Subject to payment by Lessee of the Rent and performance of all of the covenants, conditions and provisions on Lessee's part to be observed and performed under this Lease, Lessee shall have quiet possession and quiet enjoyment of the Premises during the term hereof. 39. Options. If Lessee is granted an option, as defined below, then the following provisions shall apply. 39.1 Definition. "Option" shall mean: (a) the right to extend the term of or renew this Lease or to extend or renew any lease that Lessee has on other property of Lessor, (b) the right of first refusal or first offer to lease either the Premises or other property of Lessor, (c) the right to purchase or the right of first refusal to purchase the Premises or other property of Lessor. 39.2 Options Personal To Original Lessee. Any Option granted to Lessee in this Lease is personal to the original Lessee, and cannot be assigned or exercised by anyone other than said original Lessee and only while the original Lessee is in full possession of the Premises and, if requested by Lessor, with Lessee certifying that Lessee has no intention of thereafter assigning or subletting. 39.3 Multiple Options. In the event that Lessee has any multiple Options to extend or renew this Lease, a later Option cannot be exercised unless the prior Options have been validly exercised. 39.4 Effect of Default on Options. (a) Lessee shall have no right to exercise an Option: (i) during the period commencing with the giving of any notice of Default and continuing until said Default is cured, (ii) during the period of time any Rent is unpaid (without regard to whether notice thereof is given Lessee), (iii) during the time Lessee is in Breach of this Lease, or (iv) in the event that Lessee has been given 3 or more notices of separate Default, whether or not the Defaults are cured, during the 12 month period immediately preceding the exercise of the Option. (b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee's inability to exercise an Option because of the provisions of Paragraph 39.4(a). (c) An Option shall terminate and be of no further force or effect, notwithstanding Lessee's due and timely exercise of the Option, if, after such exercise and prior to the commencement of the extended term, (i) Lessee fails to pay Rent for a period of 30 days after such Rent becomes due (without any necessity of Lessor to give notice thereof), (ii) Lessor gives to Lessee 3 or more notices of separate Default during any 12 month period, whether or not the Defaults are cured, or (iii) if Lessee commits a Breach of this Lease. 40. Security Measures. Lessee hereby acknowledges that the Rent payable to Lessor hereunder does not include the cost of guard service or other security measures, and that Lessor shall have no obligation whatsoever to provide same. Lessee assumes all responsibility for the protection of the Premises, Lessee, its agents and invitees and their property from the acts of third parties. 41. Reservations. Lessor reserves the right: (i) to grant, without the consent or joinder of Lessee, such easements, rights and dedications that Lessor deems necessary, (ii) to cause the recordation of parcel maps and restrictions, and (iii) to create and /or install new utility raceways, so long as such easements, rights, dedications, maps, restrictions, and utility raceways do not unreasonably interfere with the use of the Premises by Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to effectuate such rights. 42. Performance Under Protest. If at any time a dispute shall arise as to any amount or sum of money to be paid by one Party to the other under the provisions hereof, the Party against whom the obligation to pay the money is asserted shall have the right to make payment "under protest" and such payment shall not be regarded as a voluntary payment and there shall survive the right on the part of said Party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said Party to pay such sum or any part thereof, said Party shall be entitled to recover such sum or so much thereof as it was not legally required to pay. 43. Authority. If either Party hereto is a corporation, trust, limited liability company, partnership, or similar entity, each individual executing this Lease on behalf of such entity represents and warrants that he or she is duly authorized to execute and deliver this Lease on its behalf. Each party shall, within 30 days after request, deliver to the other party satisfactory evidence of such authority. 44. Conflict. Any conflict between the printed provisions of this Lease and the typewritten or handwritten provisions shall be controlled by the typewritten or handwritten provisions. 45. Offer. Preparation of this Lease by either party or their agent and submission of same to the other Party shall not be deemed an offer to lease to the other Party. This Lease is not intended to be binding until executed and delivered by all Parties hereto. 46. Amendments. This Lease may be modified only in writing, signed by the Parties in interest at the time of the modification. As long as they do not materially change Lessee's obligations hereunder, Lessee agrees to make such reasonable non-monetary modifications to this Lease as may be reasonably required by a Lender in connection with the obtaining of normal financing or refinancing of the Premises. 47. Multiple Parties. If more than one person or entity is named herein as either Lessor or Lessee, such multiple Parties shall have joint and several responsibility to comply with the terms of this Lease. 48. Waiver of Jury Trial. The Parties hereby waive their respective rights to trial by jury in any action or proceeding involving the Property or arising out of this Agreement. 49. Mediation and Arbitration of Disputes. An Addendum requiring the Mediation and/or the Arbitration of all disputes between the Parties and/or Brokers arising out of this Lease | | is |X| is not attached to this Lease. LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE Page 14 of 15 TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES. ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY ANY BROKER AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES. THE PARTIES ARE URGED TO: 1. SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. 2. RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION OF THE PREMISES. SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED TO: THE POSSIBLE PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING OF THE PREMISES, THE STRUCTURAL INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, COMPLIANCE WITH THE AMERICANS WITH DISABILITIES ACT AND THE SUITABILITY OF THE PREMISES FOR LESSEE'S INTENDED USE. WARNING: IF THE PREMISES ARE LOCATED IN A STATE OTHER THAN CALIFORNIA, CERTAIN PROVISIONS OF THE LEASE MAY NEED TO BE REVISED TO COMPLY WITH THE LAWS OF THE STATE IN WHICH THE PREMISES ARE LOCATED. The parties hereto have executed this Lease at the place and on the dates specified above their respective signatures. Executed at Santa Barbara, CA Executed at: Santa Barbara, CA ----------------------------- on: 1.16.04 on January 28, 2004 -------------------------------------- By LESSOR: By LESSEE Ampersand Aviation, LLC Deckers Outdoor Corporation By: /s/ Joseph L. Cole By: /s/ SCOTT ASH ------------------------------------------ -------------------------------------- Name Printed. Joseph L. Cole Name Printed: Scott Ash Title Corp. Secretary and General Counsel ---------------------------- Title: Chief Financial Officer ----------------------------------- By By ------------------------------------------ -------------------------------------- Name Printed: Name Printed: -------------------------------- ---------------------------- Title: Title: --------------------------------------- ----------------------------------- Address: P.O. Box 939 Address: 495-A South Fairview Ave. Santa Barbara, CA 93102 --------------------------------- Goleta, CA 93117 - ---------------------------------------------- ------------------------------------------ ------------------------------------------ Telephone (____) ___________________________ Telephone. (____)_________________________ Facsimile (____) ___________________________ Facsimile: (____)_________________________ Federal ID No._______________________________ Federal ID No.____________________________

These forms are often modified to meet changing requirements of law and needs of the Industry. Always write or call to make sure you are utilizing the most current form: American Industrial Real Estate Association, 700 South Flower Street, Suite 600, Los Angeles, CA 90017. (213) 687-8777. (C)Copyright 1999 By American Industrial Real Estate Association. All rights reserved. No part of these works may be reproduced in any form without permission in writing. Page 15 of 15 Execution Original ADDENDUM TO LEASE THIS ADDENDUM TO LEASE ("Addendum") is intended to and shall supplement, modify and/or replace the provisions of that certain Standard Industrial Commercial Multi-Tenant Lease dated as of November 1, 2003 for reference purposes ("Lease"), between AMPERSAND AVIATION, LLC ("Lessor") and DECKERS OUTDOOR CORPORATION ("Lessee"). In the event of any conflict between the terms of this Addendum and the Lease, the terms of this Addendum shall govern. 1.2(b) Parking Lessee shall be entitled to use those parking spaces immediately in front of the Premises, and those parking spaces on the north side of the Premises, subject in both cases to Paragraph 2.6 of the Lease. Lessee's parking shall at all times comply with Applicable Laws (defined below). Lessee may use such parking spaces for the parking of Lessee-owned or Lessee-leased vehicles used for business purposes, including, without limitation, for trade shows and the like, without restriction by Lessor, provided, however, that such parking at all times shall comply with Applicable Laws, including, without limitation, any rules, regulations, Master Lease restrictions, city ordinances, or the like as may be imposed from time to time by the City of Santa Barbara. 1.5 Base Rent The total initial monthly Base Rent shall be $37,800.00; provided that Lessee shall receive credit toward each monthly payment of Base Rent in the amount of the Monthly Credit as such term is defined and described in Paragraph 7.5 of this Addendum below. 1.8 Use Lessee shall be entitled to use the Premises for all uses permitted under the Master Lease (defined in Paragraph 52). Notwithstanding any other provisions of this Lease or the Master Lease, Lessee shall not use the Premises for any uses that are not covered by the insurance required to be maintained by Lessee under this Lease. 1.13 Existing Master Lease Lessor is the lessee of the Premises by virtue of the leases (collectively, the "Existing Master Lease") described in Exhibit B attached hereto, wherein the City of Santa Barbara, a municipal corporation is the lessor, hereinafter "Master Lessor." Except as described in Paragraphs 1.13 (a) through (e) below, Lessee agrees to be bound by and perform all applicable terms and conditions of the Master Lease insofar as such applicable terms and conditions govern the lease of the Premises by Lessor from Master Lessor, as if Lessor were the landlord thereunder and lessee the tenant thereunder. The following provisions shall be deemed deleted from the Existing Master Lease for the purpose of incorporation herein: (a) Original Master Lease: 1, 2, 3, 6, 7, 8, 9, 10, 12, 15, 18, 22, 24, 32; (b) North Ramp/Aircraft Parking Ramp Lease: 1, 2, 4, 5, 6, 7, 8, 9, 11, 20, 21, 22, 28; -1- Execution Original (c) Vehicle Parking Lease: 1, 2, 4, 5, 6, 7, 8, 9, 11, 20, 21, 22,28; (d) South Ramp Lease: 1, 2, 3, 5, 7, 8, 9, 10, 12, 22, 23, 24, 29; and (e) Facilities Lease: 1, 2, 4, 5, 6, 7, 8, 9, 11, 20, 21, 22, 29. Lessor covenants and agrees that it will fully and punctually pay all rent, additional rent, operating costs and all other charges, costs and expenses due and payable, and uphold each and every promise, covenant and obligation required of Lessor under the Master Lease (subject to notice and all applicable cure periods provided for in the Master Lease and This Lease). 2.4 Acknowledgements. As of the Commencement Date, Lessee agrees to accept possession of the Premises "AS IS" and subject to all maters of record and to all applicable zoning, municipal, county, state and federal laws, ordinances, and regulations governing and regulating the use of the Premises, the Building and the Project, including, without limitation, the Americans with Disabilities Act (collectively, "Applicable Laws"), and all amendments and modifications thereto. Lessee acknowledges that neither Lessor nor Lessor's agents has made any representation or warranty as to such matters of record, or as to Applicable Laws, or as to the condition of the Premises or the suitability of the Premises for the conduct of Lessee's business. Lessee does not rely on the fact, nor does Lessor represent, that any specific tenant or number of tenants shall occupy any space in the Building or the Project during the Term. 4.1.1 Base Rent Increase. The monthly Base Rent shall be subject to adjustment as follows: (a) Each year on the anniversary date of the Commencement Date during the Term of this Lease, Base Rent payable under Paragraph 1 .5 shall be adjusted by an amount that is an increase of not less than zero percent (0%) nor more than six percent (6%) of the Base Rent in effect immediately before such adjustment, by the change in the Consumer Price Index - All Items Index for All Urban Consumers for Los Angeles-Anaheim-Riverside, California, as published by the Bureau of Labor Statistics of the U.S. Department of Labor with a 1982-1984=100 base, herein referred to as "CPI," calculated as set forth below. (b) The Base Rent payable pursuant to Paragraph 4.1.1 shall be calculated as follows, subject however to the minimum and maximum annual increase provisions of subparagraph (a) above: (A) the Base Rent payable for the first month of the Term, as set forth in Paragraph 4.1 of the Lease, shall be multiplied by (B) a fraction, the numerator of which shall be the CPI of the calendar month three (3) months prior to the month during which the adjustment is to take effect, and the denominator of which shall be the CPI for the calendar month three (3) months prior to the Commencement Date. The sum so calculated shall constitute the new Base Rent hereunder. (c) In the event the compilation and/or publication of the CPI shall be transferred to any other governmental department or bureau or agency or shall be discontinued, then the index most nearly the same as the CPI shall be used to make such calculations. In the event that Lessor and Lessee cannot agree on such alternative index, then the matter shall be submitted for decision to the American Arbitration Association in the county in which the Premises are located, in accordance with the then commercial arbitration rules of said association and the decision of the arbitrators shall be binding upon the parties, notwithstanding one party failing to appear after due notice of proceeding. The cost of said Arbitrators shall be paid equally by Lessor and Lessee. -2- Execution Original (d) Lessee shall continue to pay the Base Rent at the rate previously in effect until the increase, if any, is determined. Within ten (10) days following receipt of notice of the amount of the increase, Lessee shall make such payment to Lessor as will bring the increased Base Rent current, commencing with the effective date of such increase through the date of any Base Rent installments then due. Thereafter the Base Rent shall be paid at the increased rate. (e) At such time as the amount of any change in Base Rent required by this Lease is known or determined, Lessor and Lessee shall execute an amendment to this Lease setting forth such change, but the failure to do so shall not invalidate the Base Rent increase so determined. 6.2 Hazardous Substances (a) Reportable Uses Require Consent. On or before the Commencement Date, Lessee shall obtain and at all times thereafter during the Term of this Lease shall maintain in effect all permits, licenses and approvals required by all Applicable Requirements in connection with Lessee's use and operations of the Premises, including, without limitation, the following: (i) a Sewage Discharge Permit from the Goleta Sanitary District, and (ii) if required, a Hazardous Substances Permit issued by the County of Santa Barbara Fire Department. Promptly after the issuance to Lessee of said permits, licenses and approvals, Lessee shall deliver to Lessor a copy thereof. (b) Duty to Inform Lessor. If Lessee knows, or has reasonable cause to believe, that a Hazardous Substance has come to be located in, on, under or about the Premises, other than as previously consented to by Lessor, Lessee shall immediately give written notice of such fact to Lessor, and provide Lessor with a copy of any report, notice, claim or other documentation which it has concerning the presence of such Hazardous Substance. Lessee shall not cause or permit any Hazardous Substance to be spilled or released in, on, under or about the Premises (including, without limitation, through the plumbing or sanitary sewer system). 7.2 Lessor's Obligations. Any damage caused by Lessee shall be repaired at Lessee's expense. 7.3(b) Utility Installations, Trade Fixtures and Alterations. Notwithstanding any other provisions of this Lease, Lessee shall not have the right to construct or install any Utility Installations, Trade Fixtures or Alterations within the Premises without Lessor's prior written approval, which may be withheld in Lessor's sole and absolute discretion. All permits and fees required in connection with the construction or installation of any and all Utility Installations, Trade Fixtures or Alterations and Lessee's operations shall be obtained and paid for by Lessee prior to the commencement of installation thereof. All costs and expenses incurred in connection with the construction or installation of any and all Lessor approved Utility Installations, Trade Fixtures or Alterations shall be paid by Lessee on or before the due date thereof. 7.5 Roof Replacement; Rent Credit Lessor and Lessee agree that the roof at the Premises shall be replaced through the installation of a new roof in the manner set forth in this Paragraph. (a) Promptly after the execution of this Lease, the parties shall work together to obtain not fewer than three (3) competitive proposal bids from licensed contractors with experience in -3- Execution Original roofing structures such as the Building and the Premises for the cost to perform all materials and labor to install a new roof at the Premises, the specific content requirements of such proposals as to quality and nature of materials, to be at Lessor's reasonable discretion (the "Bids"); (b) Upon receipt of the Bids, Lessor shall, after consultation with Lessee, select from among the Bids in Lessor's reasonable discretion, and Lessee shall thereafter contract with the selected contractor to perform the work described in the selected Bid for the installation of a new roof. Lessee shall have the authority and responsibility to communicate with and direct the contractor's performance of the work of the roof installation and otherwise to administer such contract. Lessee shall cause the contractor to commence and thereafter to diligently complete the work of such contract and the installation of the new roof. Lessor shall have no liability or obligation to Lessee or any third party with regard to the work of such contract, the administration thereof, or for payment to the contractor or otherwise; (c) Lessee shall pay the entire cost of the installation of the new roof and the entire cost of any all matters directly associated therewith by making payment directly to the contractor (with evidence of such payment copied to Lessor) not later than the due date for such payment; (d) Lessee shall be entitled to recover the actual out-of-pocket cost of the installation of the new roof (and any of the additional improvements described in Paragraph 7.3(f) below) through a credit to Base Rent in an aggregate amount not to exceed Two Hundred Thousand Dollars ($200,000) amortized over the 48-month Term through a monthly credit amount of Four Thousand One Hundred Sixty-Six Dollars and Sixty-Seven Cents ($4,166.67) (the "Monthly Credit"). The Monthly Credit amount shall be credited against monthly Base Rent due, commencing on the first calendar month of the Term. The Monthly Credit shall not, however, otherwise effect the definition or calculation of Base Rent as such term is used in the Lease. The Monthly Credit shall not be subject to adjustment pursuant to Paragraph 4.1.1 of this Addendum or otherwise. If the actual out-of-pocket cost of the installation of the new roof (and any restroom upgrade or mutually agreed improvements as described in Paragraph 7.3(f) below) aggregate less than Two Hundred Thousand Dollars ($200,000), then such Monthly Credit shall be eliminated to the extent necessary to make the total of the respective Monthly Credits equal to the aggregate actual out-of-pocket costs for the improvements described in this Paragraph 7.3. By way of illustration only, if the total actual out-of-pocket costs aggregate $150,000 (rather than the projected $200,000) for installing the new roof, upgrading restrooms, or for making any further mutually agreeable improvements (or any combination thereof), then the Monthly Credit of $4,166.67 would reduce the monthly rent that would otherwise be due under this Lease solely for a total of 36 months (thereby having the $150,000 in total credits equal the $150,000 in aggregate actual costs) rather than reducing such rent by such Monthly Credit amount for the 48 month term of this Lease (equaling the projected $200,000 in total credits); (e) Paragraph 7.3 of the Lease shall apply to the roof replacement Alteration, except that: (a) Lessor's written consent shall be deemed granted concurrently with its selection of the contractor and Bid for the project as contemplated in subparagraph (b) of this Paragraph; and (b) Lessor shall not require a lien and completion bond as contemplated in the last sentence of subparagraph (b) of such Paragraph 7.3; -4- Execution Original (f) In the event the actual out-of-pocket cost of the roof replacement project is less than $200,000, and the difference between $200,000 and such actual cost permit further improvements to the Premises, Lessee shall, at its own cost and expense but subject to the provisions of Paragraph 7.3 of the Lease, apply such difference to further improvements to the Premises, first as to upgrades to the restrooms and, thereafter, for such improvements as agreed upon between Lessor and Lessee. In such case, Lessee shall pay the entire cost of the upgrades to the restrooms or any other mutually agreed improvements and the entire cost of any all matters directly associated therewith by making payment directly to the contractor (with evidence of such payment copied to Lessor) not later than the due date for such payment. Lessee shall cause the contractor to commence and thereafter to diligently complete the work of such contract and the installation of the new roof; and (g) Notwithstanding any other provision of this Lease, Lessee shall be solely responsible for, and shall immediately fund, any amounts over $200,000. Once commenced, Lessee agrees to promptly complete any of the improvements or upgrades described in this Paragraph 7.3. 8.2(a) Insurance. The Commercial General Liability insurance required to be maintained by Lessee under this Paragraph in the amount of Three Million Dollars ($3,000,000) per occurrence shall include coverage for personal injury, and contractual liability for indemnity obligations under this Lease. Said insurance shall name Lessor and the City of Santa Barbara as additional insureds. All insurance provided by Lessee shall be primary and not excess or contributory to any insurance maintained by Lessor. 12.1(a) Lessor's Consent Required. Lessee understands and acknowledges Section XIV ("Assignment and Subletting") of the "Original Master Lease" between the City of Santa Barbara and Lessor described above at Paragraph 1.13 contains various provisions and prohibitions relating to assignments and subletting, including, without limitation, the following: Ampersand Aviation LLC "may sublet the leased premises or any portion thereof provided that such subletting shall be to tenants whose operations are airport oriented or related to the aero space industry, and which operations are not in conflict with fixed base operations situated at the Santa Barbara Municipal Airport under lease from the City of Santa Barbara." Since the operations of Lessee hereunder are not strictly "airport oriented or related to the aero space industry" Lessee understands that the consent to this lease by the City of Santa Barbara is required. Lessee further understands and acknowledges that the City of Santa Barbara may take the position that any assignment or subletting under this Lease by Lessee will also require the consent of the City of Santa Barbara and Lessee therefore agrees that, subject to applicable law, it shall not voluntarily or by operation of law assign, transfer, mortgage, encumber or sublet all or any part of Lessee's interest in this Lease or in the Premises without the prior written consent of the City of Santa Barbara. 13.5 Interest on Past-Due Obligations. The rate of Interest shall be equal to the greater of (a) ten percent (10%) per annum, or (b) five percent (5%) per annum plus the discount rate established by the Federal Reserve Bank of San Francisco on advances to member bank under Section 13 or 13(a) of the Federal Reserve Act as in effect on the twenty-fifth (25(th)) day of the month preceding the date the payment was due, from the date due until fully paid, but shall in no event exceed the maximum rate allowed by law. Payment of such interest shall not excuse or cure any default by Lessee under this Lease. 14. Condemnation. In line 8 after "Base Rent" add "and the utility costs under Paragraph 11". -5- Execution Original 17. Definition of Lessor. If Lessor desires to finance, refinance or sell its leasehold interest in the Premises or the Building, or any part thereof, Lessee agrees to cooperate with Lessor in those efforts. 20. Limitation on Liability. The provisions of this Paragraph do not limit or deny to Lessee any remedy which does not involve personal liability. If Lessor impermissibly withholds, denies or delays any consent which Lessee is required to obtain, Lessee may seek specific performance, but shall not be entitled to damages therefore. Lessee's review, supervision, comments upon on or approval of any aspect of work to be done by or for Lessee are solely for Lessor's protection and, except as otherwise expressly provided, create no warranties or duties to Lessee or to any third party. 50. Substitution Space. Lessor may at anytime substitute, for the Premises, other space in the Building ("Substitution Space") substantially comparable to the original Premises in size and improvements. Lessor shall give to Lessee at least sixty (60) days' prior written notice specifying the Substitution Date (defined below). From and after the Substitution Date, (a) the Substitution Space, for all intents and purposes, shall be the Premises, and all of the terms, covenants, conditions, provisions and agreements of this Lease shall continue in full force and effect and apply to the Substitution Space, except that, if the rentable area of the Substitution Space differs from that in the then present Premises, the Base Rent shall be adjusted proportionately (but any resulting increase attributable to such substitution shall not exceed five percent (5%) of the Base Rent in effect immediately prior to the Substitution Date, and (b) at Lessor's cost as provided below, Lessee shall move from the then present Premises into the Substitution Space and shall surrender the then present Premises, as if an expiration of this Lease had occurred as to the then present Premises. The "Substitution Date" shall be the date of the later of (i) the date on which Lessor delivers to Lessee the Substitution Space in the condition required hereunder, or such earlier date as such delivery would have occurred but for delays caused by Lessee, or (ii) the date specified in Lessor's notice of substitution (which shall in no event be earlier than sixty (60) days following the delivery to Lessee of Lessor's notice of substitution). Lessor shall reimburse Lessee's reasonable out-of-pocket expenses for moving Lessee's furniture, equipment, supplies, telephones, telephone equipment, and Lessor-approved tenant improvements installed by Lessee from the then present Premises to the Substitution Space and for reprinting, if necessary, Lessee's stationery, invoices, forms and advertising of the same quality and quantity as Lessee's stationery supply on hand immediately prior to Lessor's notice to Lessee of the exercise of the substitution right. 51. Consent of Master Lessor. In the event that the Master Lease requires that Lessor obtain the consent of the Master Lessor to any subletting by Lessor, then this Lease shall not be effective unless, within ninety (90) days of the date hereof, Master Lessor signs a Consent to this Lease. Master Lessor's consent shall not release Lessor of its obligations or alter the primary liability of Lessor to pay the Rent and perform and comply with all of the obligations of Lessor to be performed under the Master Lease. Lessor shall use its reasonable efforts to secure such consent. Lessee agrees to cooperate reasonably with Lessor in the obtaining of such consent. 52. New Lease. The City and Lessor are currently in the process of negotiating a new Lease ("New Lease") covering the Master Premises which would supercede and replace the Existing Master Lease (the Existing Master Lease and New Lease are sometimes referred to herein individually and collectively, as the "Master Lease"). Lessor and Lessee each consent to and agree -6- Execution Original to be bound by the terms of the New Lease from and after the effective date thereof, and agree to execute any and all amendments to this Lease or other documents as may be required by the City of Santa Barbara or the Lessor, provided that neither the New Lease nor any such amendment or other document relating thereto shall adversely affect any rights of the Lessee under this Lease or in or to the Premises. 53. Federal Aviation Administration Requirements. In addition to the foregoing terms, covenants and conditions of the Lease, the following covenants and agreements are hereby made an integral part of the Lease by reason of the requirements of the Federal Aviation Administration: (a) Lessee for itself, its successors in interest, and assigns, as part of the consideration hereof, does hereby covenant and agree that in the event facilities are constructed, maintained, or otherwise operated on the Premises, for a purpose for which a DOT program or activity is extended or for another purpose involving the provision of similar services or benefits, Lessee shall maintain and operate such facilities and services in compliance with all other requirements imposed pursuant to Title 49, Code of Federal Regulations, DOT, Subtitle A, Office of the Secretary, Part 21, Nondiscrimination in Federally-Assisted Programs of the Department of Transportation-Effectuation of Title VI of the Civil Rights Act of 1964, and as said Regulations may be amended. (b) Lessee, for its successors in interest, and assigns, as a part of the consideration hereof, does hereby covenant and agree that: (1) no person on the grounds or race, color, or national origin shall be excluded in participation in, denied the benefits of, or be otherwise subjected to discrimination in the use of said facilities, (2) that in the construction of any improvements on, over, or under the Premises and the furnishing of services thereon, no person on the grounds of race, color, or national origin shall be excluded from participation in, denied the benefits of, or otherwise be subject to discrimination, (3) that Lessee shall use the Premises in compliance with all other requirements imposed by or pursuant to Title 49, Code of Federal Regulations, Department of Transportation, Subtitle A, Office of the Secretary, Part 21, Nondiscrimination in Federally-Assisted Programs of the Department of Transportation-Effectuation of Title VI of the Civil Rights Act of 1964, and as said Regulations may be amended. (c) In the event of breach of any of the above nondiscrimination covenants, the Master Lessor shall have the right to terminate the Lease and to reenter and repossess the Premises and the facilities thereon, and hold the same as if the Lease had never been made or issued. This provision does not become effective until the procedures of 49 CFR Part 21 are followed and completed including expiration of appeal rights. (d) Lessee shall furnish its accommodations and/or services on a fair, equal and not unjustly discriminatory basis to all users thereof and it shall charge fair, reasonable and not unjustly discriminatory prices for each unit or service; PROVIDED THAT Lessee may be allowed to make reasonable and nondiscriminatory discounts, rebates or other similar type of price reductions to volume purchasers. (e) Non-compliance with subparagraph (d) above shall constitute a material breach thereof and in the event of such non-compliance Master Lessor shall have the right to terminate the Lease and the estate hereby created without liability therefore or at the election of Master Lessor or -7- Execution Original the United States either or both said governmental authorities shall have the right to judicially enforce those provisions. (f) Lessee agrees that it shall insert the above provisions (a) through (e) in any lease agreement, contract, etc. by which said Lessee grants a right or privilege to any person, firm or corporation to render accommodations and/or services to the public on the Premises. 54. Airport Operations. (a) Master Lessor reserves unto itself the right to take any action which it considers necessary to protect the aerial approaches of the Airport against obstruction, together with the right to prevent Lessee from erecting, or permitting to be erected, any building or other structure on the Airport which, in the opinion of Master Lessor, would limit the usefulness of the Airport or constitute a hazard to aircraft. (b) There is hereby reserved to the Master Lessor, its successors and assigns, for the use and benefit of the public, a right of flight for the passage of aircraft in the airspace above the surface of the Premises hereby leased, together with the right to cause in said airspace such noise as may be inherent in the operation of aircraft, now known or hereafter used for navigation of or flight in the air, using said airspace or landing at, taking off from, or operating on the Santa Barbara Airport. (c) Lessee by accepting the Lease expressly agrees for itself, its successors and assigns, that it will not erect nor permit the erection of any structure or object nor permit the growth of any tree on the land leased hereunder above the mean sea level elevation as indicated on the chart marked Exhibit B attached to the Master Lease and made a part hereof. In the event the aforesaid covenant is breached, Lessor reserves the right to enter upon the land leased hereunder and to remove the offending structure or object, and to cut the offending tree, all of which shall be at the expense of Lessee. (d) Lessee by accepting the Lease expressly agrees for itself, its successors and assigns, that it will not make use of the Premises in any manner which might interfere with the landing and taking off of aircraft from the Santa Barbara Airport or otherwise constitute a hazard. In the event the aforesaid covenant is breached, Master Lessor reserves the right to enter upon the Premises hereby leased and cause the abatement of such interference at the expense of Lessee. (e) The Lease and all of the provisions hereof shall be subject and subordinate at all times to all of the terms and conditions of the instruments and documents under which the Master Lessor acquired the Premises from the United States of America and shall be given only such effect as will not conflict or be inconsistent with such terms and conditions. 55. Subordination. The Lease shall be subordinate to the provisions of any existing or future agreement between the Master Lessor and the United States of America relative to the operation or maintenance of the Airport. It is understood and agreed that Lessee accepts all of the terms of the Lease subject to whatever right the United States Government now has or in the future may have or acquire, affecting the control, operation, regulation or taking over of the Airport. -8- Execution Original 56. Execution of Lease. Execution of the Lease by Lessee and delivery of same to Lessor shall constitute an offer to lease, which offer may be accepted or rejected by Lessor in its sole and absolute discretion. The Lease shall be of no force or effect until it is executed by Lessor. -9- Execution Original IN WITNESS WHEREOF, the parties have executed this Addendum as of the date of this Lease. "Lessor" AMPERSAND AVIATION, LLC By: /s/ Joseph L. Cole ----------------------------------------- Joseph L. Cole Corporate Secretary and General Counsel "Lessee" DECKERS OUTDOOR CORPORATION By: /s/ SCOTT ASH ------------------------------------------ Name: Scott Ash ---------------------------------------- Title: Chief Financial Officer --------------------------------------- -10- Execution Original EXHIBIT A Premises The Premises consist of an approximately 30,240 square foot building, more or less, located at 495 A South Fairview Avenue in the City and County of Santa Barbara. -A-1- Execution Original EXHIBIT B Existing Master Lease Lease Agreement No. 5375 dated as of April 2, 1968 between the City of Santa Barbara (the "City") and Aero Spacelines, Inc., a corporation, as amended on April 23, 1968, May 14, 1968, July 7, 1970, January 1, 1973 (by Lease No. 16,757), November 10, 1992, and on May 11, 1993 (by Agreement No. 16,963), as was assigned to Tracor Aviation, Inc. ("Tracor") and further assigned to Lucas Aviation, Inc. ("Lucas") by action of the United States Bankruptcy Court Order dated May 29, 1991, and consented to by action of the City Council of the City on June 18, 1991. Lease Agreement No. 13,552 dated as of August 12, 1986 between the City and Tracor, as amended on November 21, 1989 (by Lease No. 15,234), and on November 10, 1992 (by Agreement No. 16,756). Lease Agreement No. 12,876 dated as of May 7, 1985 between the City and Lucas. Lease Agreement No. 13,206 dated as of November 12, 1985 between the City and Lucas. Lease Agreement No. 13,812 dated as of January 27, 1987 between the City and Lucas. The Master Lease is attached hereto. -B-1- EX-10.35 11 v97221exv10w35.txt EXHIBIT 10.35 EXHIBIT 10.35 EXCLUSIVE INDEPENDENT CONTRACTOR REPRESENTATION AGREEMENT THIS AGREEMENT, made as of the 1ST day of January, 2003, between Deckers Outdoor Corporation a corporation organized and existing under the laws of the state of California, with offices at 495-A S. Fairview Ave., Goleta, CA 93117 (hereinafter referred to as "LICENSOR") and BHPC Marketing, Inc., a corporation organized and existing under the laws of the state of California, with offices at 27129 Calle Arroyo, Suite 1821, San Juan Capistrano, California, 92675, United States of America (hereinafter referred to as "CONTRACTOR"). WITNESSETH: WHEREAS, LICENSOR is the owner with the right to grant licenses of the TEVA logo (the "Trademark"); WHEREAS, LICENSOR desires to grant licenses for the use of the Trademark; WHEREAS, LICENSOR wishes to appoint CONTRACTOR as its exclusive agent in order to effectuate the licensing of the Trademark worldwide (the "Territory"); WHEREAS, CONTRACTOR has had extensive experience in merchandising a variety of products and wishes to assist in the development and exploitation of the Trademark in association with high quality reputable products. NOW, THEREFORE, in consideration of the premises and the mutual promises hereinafter set forth, the parties agree as follows: 1. RIGHT TO REPRESENT A. LICENSOR hereby grants to CONTRACTOR, for the term of this Agreement, the exclusive right to represent LICENSOR in the Territory in the securing and implementation of a plan to utilize third party licensees (the "Licensee(s)") to design, manufacture, import, distribute, advertise, promote, ship and sell various products in the Territory which bear or otherwise incorporate the Trademark (the "Licensed Product(s)") for Products not produced by the LICENSOR. B. Nothing contained in this Agreement shall be construed as an assignment or grant to CONTRACTOR of any right, title or interest in or to the Trademark, it being understood that all rights relating to the Trademark are expressly reserved by LICENSOR. 1 2. TERM A. This Agreement shall commence upon the date hereof and shall terminate and expire on December 31, 2004, unless terminated sooner pursuant to the provisions of this Agreement. B. If no renewal term is entered into, in writing, by said expiration date, then this Agreement will be considered terminated. 3. DUTIES OF CONTRACTOR A. CONTRACTOR shall use its best efforts during the 1st Contract Year of January 1, 2003 through December 31, 2003 to find and submit to LICENSOR for its approval six (6) qualified potential Licensees with signed "Deal Memos" in the following categories: men's wear, women's wear, hosiery, eyewear, watches and luggage/soft bags. If CONTRACTOR does not produce six (6) qualified Licensees as described above, then CONTRACTOR agrees to represent LICENSOR on a non-exclusive basis. B. Subject to the conditions herein specified, the CONTRACTOR shall use its best efforts during the term of this Agreement to find and conclude business arrangements with the Licensees which are deemed advantageous by LICENSOR. CONTRACTOR shall exercise the rights granted hereunder as an independent contractor and shall maintain an office and active organization at its sole expense to carry out CONTRACTOR's duties and obligations hereunder. C. CONTRACTOR shall submit each proposed Licensee to LICENSOR for LICENSOR's prior express written approval. CONTRACTOR shall also submit to LICENSOR such information regarding the financial condition of the proposed Licensee as shall be reasonably requested by LICENSOR, including, but not limited to, annual reports of the proposed Licensee, as well as catalogs or products manufactured and sold by the proposed Licensee. LICENSOR may withhold its approval of any proposed Licensee, or License Agreement, or any other arrangement in its absolute and sole discretion, for any reason. If LICENSOR shall approve of a proposed Licensee and License Agreement, the form of such License Agreement shall be subject to any changes LICENSOR may require. LICENSOR shall be a party to all such License Agreements. Each such License Agreement shall require a signature on behalf of LICENSOR. No License Agreement shall be binding upon LICENSOR, or be of any legal effect whatsoever, until it has been executed on behalf 2 of LICENSOR by a duly elected and authorized officer of LICENSOR. With respect thereto, CONTRACTOR shall advise each proposed Licensee that it may not commence the use of the Trademark until the proposed Licensee has received a fully executed copy of the License Agreement between LICENSOR and the proposed Licensee. D. It is understood and agreed by LICENSOR that CONTRACTOR may render other and similar services on behalf of other clients or with respect to its own trademarks and nothing contained in this Agreement shall preclude CONTRACTOR from rendering such services. E. In furtherance of CONTRACTOR's duties and obligations as herein specified, CONTRACTOR agrees to and will: i. Seek out potential Licensees for the Trademark qualified in terms of financing, manufacturing, and marketing quality Licensed Products in the product and geographic areas for which a license will be granted. This includes an in-depth review of the proposed Licensee's position in the industry involved. ii. Negotiate on behalf of LICENSOR the business terms and conditions of a License Agreement ("License Agreement") which is subject to the LICENSOR'S approval in its sole and absolute discretion. iii. Monitor and oversee the licensing program with the Licensees to insure that the Licensee's royalties, minimums, sales reports and other required documentation are being promptly submitted. iv. Review each of the Licensee's Licensed Products, advertisements and promotional materials relating to the Licensed Products to insure that the quality control provisions and Trademark usage provisions of the respective License Agreement are being observed; and to insure that the Licensee's promotional, advertising and sales programs are being carried out in compliance with the respective License Agreement. v. If necessary, with the express prior written authorization of LICENSOR, conduct a personal visit to the Licensee's manufacturing facilities to insure that the provisions of the License Agreement are being observed; and to submit to LICENSOR a written report after each of said visits. vi. Conduct a comprehensive review of the product categories and markets to determine the appropriate mix of Licensed Products and a targeted approach for market entry. vii. Develop proposed standard license agreement forms and other forms for the efficient administration of the licensing program. F. CONTRACTOR shall not use the Trademark, in any manner, directly or indirectly, or 3 in whole or in part, except to the manner and to the extent consistent and necessary to complete the goals and objectives of this Agreement. For any other use, CONTRACTOR shall obtain LICENSOR's specific consent in writing. Upon termination of this Agreement, CONTRACTOR shall discontinue all use of the Trademark and shall return to LICENSOR all facsimiles of any products manufactured or distributed under any such Trademark. G. CONTRACTOR shall provide LICENSOR with a monthly report listing existing and potential license agreements, and all contacts and discussions relating to potential new license agreements. 4. COMPENSATION TO CONTRACTOR A. In full consideration of services rendered to this Agreement, CONTRACTOR shall be entitled to a commission equal to twenty-five percent (25%) of royalties received by LICENSOR pursuant to the License Agreements negotiated on behalf of LICENSOR by CONTRACTOR. LICENSOR shall not be liable to CONTRACTOR for any commission or other compensation on royalties earned by LICENSOR but not received from licensee, or any future royalties under a license agreement(s) which are not collected due to any reason including breach of license agreement by licensee resulting in a termination of license agreement or any other dispute between LICENSOR and licensee resulting in licensee not paying royalties which would otherwise be due under the respective license agreement. B. LICENSOR currently has licenses in the United States for webbing copyrights with Dunlop Musical Accessories and Bison Designs, LLC. This agreement does not cover such licenses and CONTRACTOR has no duties to service such licenses and will receive no compensation from such licenses. C. LICENSOR has a trademark license for the Japanese territory with Itochu which expires on December 31st, 2003. For the remainder of the Itochu license term, CONTRACTOR has no duties to service such license and will receive no compensation from such license. If LICENSOR renews its agreement with Itochu the provisions of paragraph 4(D) shall apply to CONTRACTOR. D. LICENSOR has other contractors that represent LICENSOR outside the United States with respect to distribution of LICENSOR'S footwear. These contractors may from time-to-time bring forth potential Licensees in these markets. If LICENSOR enters into a license agreement with a Licensee brought forth by other contractors, CONTRACTOR shall service such licensees through the initial term and any renewal terms, etc. and will receive fifteen (15%) compensation from such licensees. E. In the event that this Agreement is terminated for any reason by LICENSOR or CONTRACTOR, CONTRACTOR shall receive fifteen percent (15%) of royalties received by LICENSOR for each License pursuant to the executed License Agreements negotiated on behalf of LICENSOR by CONTRACTOR for the balance of the term of any such License and any renewal terms. 4 5. ROYALTIES ACCOUNT/PAYMENT A. LICENSOR shall collect all royalties and shall provide CONTRACTOR with copies of statements for the royalty account ("royalty account"), along with copies of any supporting documentation including copies of all checks deposited to the royalty account by the 20th day of the month following the end of the calendar quarter (namely: April 20th, July 20th, October 20th, and January 20th. B. LICENSOR shall remit to CONTRACTOR its share of any royalties by the 20th day of the month following the end of the calendar quarter (namely: April 20th, July 20th, October 20th, and January 20th. 6. ASSIGNABILITY This Agreement is personal to the parties. CONTRACTOR shall not have the right to assign its respective rights and/or obligations in this Agreement. LICENSOR retains the right to assign its respective rights and/or obligations in this Agreement without consent of CONTRACTOR. 7. TERMINATION A. Anything to the contrary notwithstanding, this Agreement may be terminated in advance of the expiration of its initial term, or any renewal thereof, by either party, upon thirty (30) days written notice to the other. B. In the event that either party files a petition of bankruptcy or is adjudicated a bankrupt or insolvent; or makes an assignment for the benefit of creditors, or an arrangement pursuant to any bankruptcy law; or if a party discontinues its business; or if a receiver is appointed for the party or its business who is not discharged within thirty (30) days, the rights granted hereunder shall automatically be terminated forthwith upon written notice from the other party. C. After the expiration or termination of this Agreement, all rights granted to CONTRACTOR shall forthwith revert to LICENSOR. Further, CONTRACTOR shall refrain from further efforts to commercialize the Trademark or any further reference to it, direct or indirect. D. Within thirty (30) days after termination or expiration of this Agreement, CONTRACTOR shall deliver to LICENSOR a report indicating the number and description of all Licensed Agreements which have been entered into by LICENSOR 5 through the efforts of the CONTRACTOR and a copy of each and every such License Agreement. Also, within thirty (30) days after expiration or termination of the Agreement, CONTRACTOR will submit a list of potential licensees with whom it has been in discussions and a report of the status of such discussions. Said list will be mutually agreed upon by LICENSOR and CONTRACTOR to avoid any future dispute. Said list shall be consistent with the monthly report as referenced in Subparagraph 3.G. E. Notwithstanding termination or expiration of this Agreement, LICENSOR shall continue to pay commissions to CONTRACTOR on all third party License Agreements either entered during the term of this Agreement, or entered within three months thereafter with Licensees with whom CONTRACTOR had initiated discussions, identified pursuant to the previous paragraph. Payments of commissions on such licenses shall continue until their termination or expiration, including renewals, and including licenses assigned, transferred or granted to persons affiliated with Licensees. In the event of termination of this Agreement, LICENSOR shall continue to pay commissions to CONTRACTOR on all License Agreements entered into pursuant to this Agreement, as described above, until the expiration of the initial term of the License Agreement and any specific renewal periods provided for in the respective License Agreement. 8. LEGAL EXPENSES A. LICENSOR will be responsible for all legal fees as they pertain to registration and protection of the Trademark. LICENSOR will hold CONTRACTOR harmless from and indemnify CONTRACTOR for all expenses or damages associated with any third party claim that the Trademark infringes another mark. B. The parties shall consult with each other prior to LICENSOR initiating any audit of any Licensee or pursuit of legal remedies against any Licensee for breach of contract, non-payment or underpayment of royalties. CONTRACTOR may, but is not required to, contribute to legal or accounting expenses therefor, and if it does, will contribute twenty five percent (25%) of such expenses up to the total amounts of commissions previously received by it attributable to such Licensee, and shall be entitled to collect twenty five percent (25%) of the Net Royalties collected as a consequence of such activity after deduction of all such expenses. If CONTRACTOR elects not to participate, all expenses shall be borne by and all proceeds shall be retained by LICENSOR. C. CONTRACTOR will indemnify LICENSOR for any and all reasonable expenses and legal fees and other damages sustained by LICENSOR as a result of litigation due to CONTRACTOR's breach of this Agreement, provided LICENSOR is the prevailing 6 party in such litigation. LICENSOR will indemnify CONTRACTOR for any and all reasonable expenses and legal fees and other damages sustained by CONTRACTOR as a result of litigation due to LICENSOR's breach of this Agreement, provided CONTRACTOR is the prevailing party in such litigation. D. Notwithstanding anything contained herein, LICENSOR or the CONTRACTOR shall have the right to bring an action in any court to obtain an injunction against the other party to prevent any future harm which shall be sustained arising out of a breach of this Agreement. 9. CONFIDENTIALITY CONTRACTOR agrees (and shall instruct its partners, officers, directors and other persons to whom disclosure is made) to keep strictly confidential all designs, manufacturing instructions, and other information relating to the License Agreements and the Licensed Products produced, sold and distributed thereunder that are not otherwise available to the public, whether furnished by LICENSOR to the CONTRACTOR or in any way acquired by the CONTRACTOR; and the same shall be used by CONTRACTOR solely under this Agreement and for the purpose of securing License Agreements hereunder. 10. NOTICES All notices or other communications required or desired to be sent to either party shall be in writing sent by certified mail, postage pre-paid, return receipt requested, as follows: The address for LICENSOR shall be: DECKERS OUTDOOR CORPORATION 495-A S. Fairview Ave. Goleta, CA 93117 The address for CONTRACTOR shall be: BHPC MARKETING, INC. 27129 Calle Arroyo, Suite 1821 San Juan Capistrano, CA 92675 Either party may change such address by notice in writing to the other party. 11. NO AGENCY, JOINT VENTURE, PARTNERSHIP The parties hereby agree that no agency, joint venture or partnership is created by this 7 Agreement, and that neither party shall incur any obligation in the name of the other without the other's prior written consent. 12. CONSTRUCTION; VENUE This Agreement shall be construed in accordance with the laws of the state of California, U.S.A., and the parties agree that it is executed and delivered in that state. 13. ARBITRATION Any controversy or claim arising out of or relating to this Agreement of the breach thereof will be settled by arbitration before a single arbitrator according to the Rules of the American Arbitration Association then in effect, and judgment upon the award rendered by the arbitrator may be rendered in any court having jurisdiction. Any such arbitration shall be conducted in Santa Barbara, California. The arbitrator shall have the discretion to order a pre-hearing exchange of information by the parties, including, without limitation, production of requested documents, exchange of summaries of testimony of proposed witnesses, and examination by deposition of parties. The prevailing party in an arbitration shall be entitled to an award of reasonable attorney's fees and costs. 14. CAPTIONS The captions used in connection with the paragraphs of this Agreement are inserted only for purposes of references. Such captions shall not be deemed to govern, limit, modify, or in any other manner affect the scope, meaning or intent of the provisions of this Agreement or any part thereof nor shall such captions otherwise be given any legal effect. 15. MODIFICATION; WAIVER No modification of any of the terms or provisions of this Agreement shall be valid unless contained in a writing signed by the parties. No waiver by either party of a breach or a default hereunder shall be deemed a waiver by such party of a subsequent breach of a like or similar nature. Resort by LICENSOR to any remedies referred to in this Agreement, or arising by reason of a breach of this Agreement by CONTRACTOR, shall not be construed as a waiver by LICENSOR of its right to resort to any and all legal and equitable remedies available to LICENSOR. 16. SURVIVAL OF THE RIGHTS Notwithstanding anything to the contrary contained herein, such obligations which remain executory after expiration of the term or termination of this Agreement shall remain in full force and effect until discharged by performance and such rights as pertained thereto shall remain enforced until their expiration. 8 17. ENTIRE AGREEMENT This Agreement contains the entire understanding of the parties and there are no representations, warranties, promises or undertakings other than those contained herein. This Agreement supersedes and cancels all previous agreements between the parties hereto. 18. BINDING EFFECT This Agreement shall be binding on the parties and their successors and assigns so long as the Agreement is assigned pursuant to the provisions and conditions of this Agreement. IN WITNESS WHEREOF, the parties hereto agree that this Agreement shall take effect as of the date and year first above written. LICENSOR: CONTRACTOR: DECKERS OUTDOOR CORPORATION BHPC MARKETING, INC. a California corporation a California corporation /s/ Douglas B. Otto /s/ Don Garrison - ---------------------------- ------------------------------- Douglas B. Otto Don Garrison Chief Executive Officer President /s/ Roger Tomlinson -------------------------------- Roger Tomlinson Treasurer/Director Date: April 9, 2003 Date: April 14, 2003 9 EX-14.1 12 v97221exv14w1.txt EXHIBIT 14.1 EXHIBIT 14.1 CODE OF FINANCIAL ETHICS This Code of Financial Ethics has been adopted by the Board of Directors of DECKERS OUTDOOR CORPORATION (the "Company") as a supplement to the existing codes and policies of the Company. 1. Scope. This Code applies to the Company's principal executive officer, principal financial officer, principal accounting officer, controller and persons performing similar functions (each, a "Covered Person"), and is intended to deter wrongdoing and to promote the conduct specified in Sections 2 through 6. 2. Ethical Conduct. Each Covered Person shall promote honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships by, among other things: - Acting as a role model for employees under such Covered Person's supervision by acting in an honest and ethical way. - Referring all actual or apparent conflicts of interest to one of the Compliance Officers referred to below. - Preventing retaliation against any employee for good faith reporting of violations of this Code or for participating in any investigation relating to a reported violation of this Code. 3. Disclosure. Each Covered Person shall promote full, fair, accurate, timely and understandable disclosure in reports and documents that the Company files with, or submits to, the Securities and Exchange Commission and in other public communications made by the Company by, among other things: - Becoming familiar with the disclosure requirements applicable to the Company as well as the business and financial operations of the Company. - Providing a system for the careful review of all such reports, documents and communications. - Adequately supervising the preparation of the financial disclosure in the periodic reports required to be filed by the Company, including reviewing and analyzing the financial information to be disclosed. - Consulting, when appropriate, with professional advisors for advice with respect to such reports, documents and communications. -1- 4. Compliance. Each Covered Person shall promote compliance with applicable governmental laws, rules and regulations by, among other things: - Becoming familiar with such laws, rules and regulations. - Consulting professional advisors with respect to such laws, rules and regulations. - Training applicable employees with respect to such laws, rules and regulations. 5. Prompt Internal Reporting. Each Covered Person shall promote prompt internal reporting of violations of this Code to the Chairman of the Board of Directors of the Company or the Chairman of the Audit Committee of the Board of Directors of the Company (each, a "Compliance Officer")1 by, among other things: - Reporting all violations to a Compliance Officer. - Encouraging employees to report violations to a Compliance Officer. - Providing a procedure by which employees may maintain anonymity in making such reports. 6. Accountability. Each Covered Person shall promote accountability for adherence to this Code by, among other things: - Distributing copies of this Code annually to all employees. - Supporting appropriate sanctions for violations of this Code. 7. Waiver. If the Company approves any material departure from the provisions of this Code, or if the Company fails to take action within a reasonable period of time regarding a material departure from any provision of this Code, the Company shall, within five business days of such event, report such event on a Form 8-K or post notice thereof to its website. 8. Amendment. Any amendment to this Code must be approved by the Board of Directors of the Company, and the Company shall, within five business days of such amendment (other than a technical, administrative or other non-substantive amendment), report such amendment on a Form 8-K or disclose such amendment on the Company's website. 9. Certification. Each Covered Person shall, at least annually and whenever requested by a Compliance Officer, certify in writing that such Covered Person is in full compliance with this Code and that, to the best knowledge of such Covered Person, all other Covered Persons are in compliance with this Code. - -------- (1) A matter should not be reported to a person involved in the matter. Each Compliance Officer should have sufficient status within the Company to engender respect for this Code and the authority to adequately deal with the persons subject to this Code regardless of their status in the Company. -2- 10. Sanctions. If a Compliance Officer determines that a Covered Person may have violated any provision of this Code, the violation shall be reported to the Board of Directors of the Company. If the Board of Directors determines that a violation has occurred, it may, among other things: - Terminate the employment relationship with such Covered Person. - Place such Covered Person on a leave of absence. - Counsel such Covered Person. - Authorize such other action as it deems appropriate. 11. Employment Agreements. Any termination of a Covered Person under Section 10 shall be deemed to be "for cause" within the meaning of any employment agreement with the Covered Person. 12. Interpretation. All questions concerning interpretation of this Code shall be referred to, and conclusively determined by, the two Compliance Officers acting together. -3- EX-21.1 13 v97221exv21w1.txt EXHIBIT 21.1 EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT Holbrook Limited (Hong Kong) Phillipsburg Limited (Hong Kong) Ugg Holdings, Inc. (California) Deckers Europe B.V. (The Netherlands) EX-23.1 14 v97221exv23w1.txt EXHIBIT 23.1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT The Board of Directors Deckers Outdoor Corporation: We consent to the incorporation by reference in the registration statement (No. 333-82538) on Form S-8 of Deckers Outdoor Corporation of our report dated February 26, 2004, with respect to the consolidated balance sheets of Deckers Outdoor Corporation and subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of operations, stockholders' equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ended December 31, 2003, and the related financial statement schedule, which report appears in the December 31, 2003 annual report on Form 10-K of Deckers Outdoor Corporation. Our report refers to the adoption of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, on January 1, 2002. /s/ KPMG LLP Los Angeles, California March 18, 2004 EX-31.1 15 v97221exv31w1.txt EXHIBIT 31.1 EXHIBIT 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER I, Douglas B. Otto certify that: 1. I have reviewed this annual report on Form 10-K of Deckers Outdoor Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 26, 2004 /s/ Douglas B. Otto -------------------- Douglas B. Otto Chief Executive Officer Deckers Outdoor Corporation EX-31.2 16 v97221exv31w2.txt EXHIBIT 31.2 EXHIBIT 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER I, M. Scott Ash certify that: 1. I have reviewed this annual report on Form 10-K of Deckers Outdoor Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 26, 2004 /s/ M. Scott Ash ----------------- M. Scott Ash Chief Financial Officer Deckers Outdoor Corporation EX-32.1 17 v97221exv32w1.txt EXHIBIT 32.1 EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 The undersigned hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to their knowledge, the Annual Report on Form 10-K for the annual period ended December 31, 2003 of Deckers Outdoor Corporation (the "Company") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that the information contained in such periodic report fairly presents, in all material respects, the financial condition and results of operations of the Company as of, and for, the periods presented in such report. Very truly yours, Douglas B. Otto /s/ Douglas B. Otto - -------------------- Chief Executive Officer M. Scott Ash /s/ M. Scott Ash - ----------------- Chief Financial Officer Dated: March 26, 2004 *A signed original of this written statement required by Section 906 has been provided to the Registrant and will be retained by the Registrant and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----


Delaware		95-3015862
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

495-A South Fairview Avenue, Goleta, California		93117
(Address of principal executive offices)		(Zip Code)


Title of each class		Name of each exchange on which registered

None		None


Item 1. Business
DIVIDEND POLICY
Item 6. Selected Consolidated Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
RISK FACTORS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
PART III
	Item 10.Directors and Executive Officers of the Registrant
	Item 11.Executive Compensation
	Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
	Item 13.Certain Relationships and Related Transactions
	Item 14.Principal Accountant Fees and Services
	Item 15.Exhibits, Financial Statement Schedules and Reports on Form 8-K
SIGNATURES
Exhibit 10.27
Exhibit 10.28
Exhibit 10.29
Exhibit 10.30
Exhibit 10.31
Exhibit 10.32
Exhibit 10.33
Exhibit 10.34
Exhibit 10.35
Exhibit 14.1
Exhibit 21.1
Exhibit 23.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1


		Page

PART I
Item 1.	Business		3
Item 2.	Properties		14
Item 3.	Legal Proceedings		14
Item 4.	Submission of Matters to a Vote of Security Holders		15
PART II
Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters		16
Item 6.	Selected Financial Data		17
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		19
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk		47
Item 8.	Financial Statements and Supplementary Data		47
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		47
Item 9A.	Controls and Procedures		47
PART III
Item 10.	Directors and Executive Officers of the Registrant		76
Item 11.	Executive Compensation		76
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		76
Item 13.	Certain Relationships and Related Transactions		76
Item 14.	Principal Accountant Fees and Services		76
PART IV
Item 15.	Exhibits, Financial Statement Schedules and Reports on Form 8-K		76
Signatures			80


		Approximate
Facility Location	Description	Square Footage

Ventura, California	Warehouse Facility		126,000
Goleta, California	Corporate Offices		30,000
China	Office Facility		4,200
Flagstaff, Arizona	Internet/ Catalog Vacant Warehouse		3,000
Flagstaff, Arizona	Internet/ Catalog Office Facility		2,400
Macau	Office Facility		2,000


	o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE


Item 4.	*Submission of Matters to a Vote of Security Holders*


Item 5.	*Market for Registrant’s Common Equity and Related Stockholder Matters*



		Common Stock
		Price Per Share

		Low		High

Year ended December 31, 2002:
	First Quarter	$	4.02	$	5.25
	Second Quarter	$	4.28	$	5.52
	Third Quarter	$	3.75	$	5.00
	Fourth Quarter	$	2.83	$	4.48
Year ended December 31, 2003:
	First Quarter	$	3.45	$	4.99
	Second Quarter	$	4.20	$	6.69
	Third Quarter	$	6.40	$	10.13
	Fourth Quarter	$	10.00	$	20.81



		Years Ended December 31,

		1999		2000		2001			2002			2003


		(In thousands, except per share data)
Statement of Operations Data:
Net sales:
	Teva wholesale	$	80,963	$	79,732	$	61,221		$	64,849		$	72,783
	UGG wholesale		12,104		15,310		19,185			23,491			34,561
	Simple wholesale		15,529		16,328		10,853			10,159			7,210
	Internet/ catalog		—		—		—			608			6,501
	Other		2,503		2,368		202			—			—

Total net sales			111,099		113,738		91,461			99,107			121,055
Cost of sales			66,051		63,540		52,903			57,577			69,710

	Gross profit		45,048		50,198		38,558			41,530			51,345
Selling, general and administrative expenses			38,298		37,568		34,040			34,954			31,907
Litigation costs⁽¹⁾			—		—		2,180			3,228			—

	Income from operations		6,750		12,630		2,338			3,348			19,438
Other expense (income)			1,508		295		(473	)		504			4,554

	Income before income taxes and cumulative effect of a change in accounting principle		5,242		12,335		2,811			2,844			14,884
Income taxes			2,358		5,320		1,185			1,224			5,730

	Income before cumulative effect of a change in accounting principle		2,884		7,015		1,626			1,620			9,154
Cumulative effect of a change in accounting principle, net of income tax benefit⁽²⁾			—		—		—			(8,973	)		—

	Net income (loss)	$	2,884	$	7,015	$	1,626		$	(7,353	)	$	9,154

Per common share:
Basic net income before cumulative effect of a change in accounting principle		$	0.33	$	0.77	$	0.18		$	0.17		$	0.91
Cumulative effect of a change in accounting principle ⁽²⁾			—		—		—			(0.96	)		—

	Basic net income (loss)	$	0.33	$	0.77	$	0.18		$	(0.79	)	$	0.91

Diluted net income before cumulative effect of change in accounting principle		$	0.32	$	0.74	$	0.17		$	0.17		$	0.77
Cumulative effect of a change in accounting principle ⁽²⁾			—		—		—			(0.92	)		—

	Diluted net income (loss)	$	0.32	$	0.74	$	0.17		$	(0.75	)	$	0.77

Weighted average common shares outstanding:
	Basic		8,834		9,093		9,247			9,328			9,610
	Diluted		8,981		9,476		9,661			9,806			11,880



	As of December 31,

	1999		2000		2001		2002		2003


	(In thousands)
Balance Sheet Data:
Cash and cash equivalents	$	1,633	$	9,057	$	16,689	$	3,941	$	6,662
Working capital	$	38,658	$	40,482	$	41,387	$	22,453	$	22,803
Total assets	$	73,482	$	77,712	$	85,884	$	122,412	$	121,026
Long-term debt, including current installments	$	6,401	$	1,495	$	449	$	39,028	$	30,287
Total stockholders’ equity	$	56,820	$	64,095	$	66,532	$	65,227	$	70,524


Item 7.	*Management’s Discussion and Analysis of Financial Condition and Results of Operations*



	2002

	First Quarter		Second Quarter		Third Quarter			Fourth Quarter


	(In thousands)
Net sales	$	33,259	$	22,369	$	17,727		$	25,752
Income (loss) from operations	$	3,714	$	1,104	$	(4,309	)	$	2,839



		Years Ended December 31,									Percent Increase (Decrease)

		2001			2002			2003			2001 to 2002			2002 to 2003

Net sales			100.0	%		100.0	%		100.0	%		8.4	%		22.1	%
Cost of sales			57.8			58.1			57.6			8.8			21.1

	Gross profit		42.2			41.9			42.4			7.7			23.6
Selling, general and administrative expenses			37.2			35.3			26.4			2.7			(8.7	)
Litigation costs			2.4			3.2			—			48.1			NM

	Income from operations		2.6			3.4			16.0			43.2			480.6
Interest expense (income) and other			(0.5	)		0.5			3.7			NM			803.6

	Income before income taxes and cumulative effect of a change in accounting principle		3.1			2.9			12.3			1.2			423.3
Income taxes			1.3			1.2			4.7			3.3			368.1

	Income before cumulative effect of a change in accounting principle		1.8			1.7			7.6			(0.4	)		465.1
Cumulative effect of a change in accounting principle			—			(9.1	)		—			NM			NM

	Net income (loss)		1.8	%		(7.4	)%		7.6	%		NM			NM


	*Year Ended December 31, 2001 Compared to Year Ended December 31, 2002*


Item 1.	*Business*


Item 2.	*Properties*


Item 3.	*Legal Proceedings*


	*Teva Overview*



		Payments Due by Period

										More than
		Total		Less than 1 Year		1-3 Years		3-5 Years		5 Years

Long-term debt obligations		$	30,287,000	$	3,792,000	$	3,208,000	$	23,287,000		—
Operating lease obligations			3,804,000		1,176,000		2,250,000		378,000		—

	Total	$	34,091,000	$	4,968,000	$	5,458,000	$	23,665,000		—



	Payments Due by Period

			Less than						More than
	Total		1 Year		1-3 Years		3-5 Years		5 Years

Interest payments	$	11,922,000	$	2,397,000	$	4,343,000	$	5,182,000		—


Item 7A.	*Quantitative and Qualitative Disclosures About Market Risk*


Item 8.	*Financial Statements and Supplementary Data*


Item 9.	*Changes in and Disagreements With Accountants on Accounting and Financial Disclosure*


	Page

Consolidated Financial Statements
Independent Auditors’ Report		49
Consolidated Balance Sheets as of December 31, 2002 and 2003		50
Consolidated Statements of Operations for each of the years in the three years ended December 31, 2003		51
Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss) for each of the years in the three years ended December 31, 2003		52
Consolidated Statements of Cash Flows for each of the years in the three years ended December 31, 2003		53
Notes to Consolidated Financial Statements		54

Consolidated Financial Statement Schedule
Valuation and Qualifying Accounts		75


			2002			2003

Assets
Current assets:
	Cash and cash equivalents		$	3,941,000		$	6,662,000
	Trade accounts receivable, less allowance for doubtful accounts and sales discounts of $2,635,000 and $2,126,000 as of December 31, 2002 and 2003, respectively			20,851,000			18,745,000
	Inventories			17,067,000			18,004,000
	Prepaid expenses and other current assets			783,000			694,000
	Deferred tax assets			1,919,000			2,137,000

		Total current assets		44,561,000			46,242,000
Property and equipment, at cost, net				3,864,000			2,969,000
Trademarks, net				51,152,000			51,152,000
Goodwill				17,955,000			18,030,000
Intangible assets				1,666,000			1,390,000
Deferred tax assets				1,428,000			—
Other assets, net				1,786,000			1,243,000

			$	122,412,000		$	121,026,000

Liabilities and Stockholders’ Equity
Current liabilities:
	Notes payable and current installments of long-term debt		$	3,951,000		$	3,792,000
	Trade accounts payable			12,916,000			11,220,000
	Reserve for returns			1,255,000			1,245,000
	Accrued sales commissions			434,000			623,000
	Accrued payroll			1,908,000			2,657,000
	Other accrued expenses			912,000			434,000
	Income tax payable			732,000			3,468,000

		Total current liabilities		22,108,000			23,439,000

Long-term debt, less current installments				35,077,000			26,495,000
Deferred tax liabilities				—			568,000
Commitments and contingencies
Stockholders’ equity:
	Series A preferred stock at liquidation preference, $0.01 par value. Authorized 5,000,000 shares (1,375,000 designated as Series A); issued and outstanding 1,375,000 shares at December 31, 2002; no shares issued and outstanding at December 31, 2003			5,500,000			—
	Common stock, $0.01 par value. Authorized 20,000,000 shares; issued 10,434,075 shares and outstanding 9,461,123 shares at December 31, 2002; issued 10,703,433 shares and outstanding 9,730,481 shares at December 31, 2003			95,000			97,000
	Additional paid-in capital			26,210,000			27,115,000
	Retained earnings			33,898,000			43,052,000
	Accumulated other comprehensive income (loss)			(476,000	)		260,000

		Total stockholders’ equity		65,227,000			70,524,000

			$	122,412,000		$	121,026,000


																							Note
																				Accumulated			Receivable
		Preferred Stock						Common Stock						Additional						Other			from			Total			Comprehensive
														Paid-in			Retained			Comprehensive			Stockholder/			Stockholders’			Income
		Shares			Amount			Shares			Amount			Capital			Earnings			Income			Former Officer			Equity			(Loss)

Balance at December 31, 2000			—			—			9,135,977		$	91,000		$	25,003,000		$	39,625,000			—		$	(624,000	)	$	64,095,000
Fair value of options issued under Teva license agreement (note 7)			—			—			—			—			152,000			—			—			—			152,000
Common stock issued under stock incentive plan			—			—			162,344			2,000			475,000			—			—			—			477,000
Common stock issued under the employee stock purchase plan			—			—			26,036			—			59,000			—			—			—			59,000
Net earnings			—			—			—			—			—			1,626,000			—			—			1,626,000		$	1,626,000
Unrealized gains on hedging derivatives			—			—			—			—			—			—			123,000			—			123,000			123,000

	Total comprehensive income																												$	1,749,000

Balance at December 31, 2001			—			—			9,324,357			93,000			25,689,000			41,251,000			123,000			(624,000	)		66,532,000
Fair value of equity issued as consideration in the acquisition of Teva (note 12)			1,375,000		$	5,500,000			100,000			1,000			554,000			—			—			—			6,055,000
Fair value of options issued under Teva license agreement (note 7)			—			—			—			—			111,000			—			—			—			111,000
Common stock issued under stock incentive plan			—			—			124,896			2,000			442,000			—			—			—			444,000
Common stock issued under the employee stock purchase plan			—			—			11,870			—			37,000			—			—			—			37,000
Net loss			—			—			—			—			—			(7,353,000	)		—			—			(7,353,000	)	$	(7,353,000	)
Write off of note receivable from stockholder/former officer			—			—			(100,000	)		(1,000	)		(623,000	)		—			—			624,000			—
Foreign currency translation adjustment			—			—			—			—			—			—			130,000			—			130,000			130,000
Unrealized losses on hedging derivatives			—			—			—			—			—			—			(729,000	)		—			(729,000	)		(729,000	)

	Total comprehensive loss																												$	(7,952,000	)

Balance at December 31, 2002			1,375,000			5,500,000			9,461,123			95,000			26,210,000			33,898,000			(476,000	)		—			65,227,000
Repurchase preferred stock (note 6)			(1,375,000	)		(5,500,000	)		—			—			(438,000	)		—			—			—			(5,938,000	)
Common stock issued under stock incentive plan			—			—			262,577			2,000			874,000			—			—			—			876,000
Tax benefit attributable to stock options			—			—			—			—			445,000			—			—			—			445,000
Common stock issued under the employee stock purchase plan			—			—			6,781			—			24,000			—			—			—			24,000
Net income			—			—			—			—			—			9,154,000			—			—			9,154,000		$	9,154,000
Foreign currency translation adjustment and reversal of unrealized hedging losses			—			—			—			—			—			—			736,000			—			736,000			736,000

	Total comprehensive income																												$	9,890,000

Balance at December 31, 2003			—		$	—			9,730,481		$	97,000		$	27,115,000		$	43,052,000		$	260,000			—		$	70,524,000


(1)	The Company and Summary of Significant Accounting Policies


		2002		2003

Machinery and equipment		$	7,609,000	$	5,602,000
Furniture and fixtures			1,031,000		663,000
Leasehold improvements			1,087,000		724,000

			9,727,000		6,989,000
Less accumulated depreciation and amortization			5,863,000		4,020,000

	Net property and equipment	$	3,864,000	$	2,969,000


	2002		2003

Revolving line of credit with Comerica Bank (described below)	$	4,775,000	$	—
Term loan with Comerica Bank, secured by all assets of the Company, interest (4.37% at December 31, 2003) at Bank’s base rate or LIBOR plus a margin, as defined, principal payment of $1,750,000 due on May 31, 2004 with equal monthly payments of $292,000 beginning June 30, 2004, with final payment due on November 25, 2005		7,000,000		7,000,000


	2002		2003

Secured subordinated note, payable in quarterly principal installments of $1,500,000 beginning November 2007, interest at a rate of 16.75%, of which 12.00% is payable monthly and 4.75% is payable at maturity, compounded monthly, due November 2008. A prepayment penalty ranging from 4.00% to 5.00% is incurred for any portion repaid prior to November 2004		14,068,000		10,000,000
Unsecured junior subordinated 9.00% note payable to the seller of Teva, interest payable in annual installments at a rate of 7.00% through November 2008. Principal and additional interest of 2.00% are due in November 2008, compounded annually		13,026,000		13,287,000
Unsecured note payable in quarterly installments of $49,200, including interest at a rate of 7.93%, due December 2003		159,000		—

		39,028,000		30,287,000
Less current installments		3,951,000		3,792,000

	$	35,077,000	$	26,495,000


2004		$	3,792,000
2005			3,208,000
2006			—
2007			1,500,000
2008			21,787,000

	Total	$	30,287,000


		Federal			State			Total

2001:
	Current	$	1,392,000		$	394,000		$	1,786,000
	Deferred		(465,000	)		(136,000	)		(601,000	)

		$	927,000		$	258,000		$	1,185,000

2002:
	Current	$	575,000		$	(7,000	)	$	568,000
	Deferred		493,000			163,000			656,000

		$	1,068,000		$	156,000		$	1,224,000

2003:
	Current	$	3,495,000		$	483,000		$	3,978,000
	Deferred		1,334,000			418,000			1,752,000

		$	4,829,000		$	901,000		$	5,730,000


				2002			2003

Deferred tax assets, current:
	Uniform capitalization adjustment to inventory			$	448,000		$	483,000
	Bad debt and other reserves				1,580,000			1,576,000
	State taxes				(171,000	)		78,000
	Other				62,000			—

		Total deferred tax assets, current			1,919,000			2,137,000

Deferred tax assets, noncurrent:
	Amortization of intangible assets				956,000			—
	Depreciation of property and equipment				472,000			—

		Total deferred tax assets, noncurrent			1,428,000			—

Deferred tax liabilities, noncurrent:
	Amortization of intangible assets				—			(224,000	)
	Depreciation of property and equipment				—			(344,000	)

		Total deferred tax liabilities, noncurrent			—			(568,000	)

			Net deferred tax assets	$	3,347,000		$	1,569,000


				Weighted
				Average
				Exercise
	Shares			Price

Outstanding at December 31, 2000		1,278,900		$	3.66
Granted		584,800			3.90
Exercised		(147,500	)		2.24
Canceled		(135,400	)		4.61

Outstanding at December 31, 2001		1,580,800			3.80
Granted		624,400			4.13
Exercised		(107,900	)		2.32
Canceled		(165,300	)		3.26

Outstanding at December 31, 2002		1,932,000			4.04
Granted		206,000			18.75
Exercised		(238,100	)		3.19
Canceled		(125,400	)		7.51

Outstanding at December 31, 2003		1,774,500			5.62

Options exercisable at December 31, 2001		854,000			4.17
Options exercisable at December 31, 2002		1,245,900			4.07
Options exercisable at December 31, 2003		1,168,800			4.36



	Options Outstanding						Options Exercisable

			Weighted		Weighted				Weighted
	Number		Average		Average		Number		Average
Range of	Outstanding		Remaining		Exercise		Exercisable at		Exercise
Exercise Price	December 31, 2003		Contractual Life		Price		December 31, 2003		Price

$1.56 to $3.19		391,000		5.13 years	$	2.24		391,000	$	2.24
$3.50 to $3.76		401,500		7.93 years		3.61		269,200		3.60
$4.03 to $4.80		585,000		8.12 years		4.23		273,200		4.21
$5.25 to $9.88		195,000		4.37 years		6.83		195,000		6.83
$19.00		202,000		9.92 years		19.00		40,400		19.00

		1,774,500		7.21 years		5.62		1,168,800		4.36


Year ending December 31:
	2004	$	1,176,000
	2005		1,156,000
	2006		1,094,000
	2007		378,000

		$	3,804,000


(10)	Business Segments, Concentration of Business, and Credit Risk and Significant Customers


		2002		2003

Total assets for reportable segments		$	110,956,000	$	108,195,000
Elimination of intersegment payables			29,000		34,000
Unallocated refundable income taxes and deferred tax assets			3,100,000		2,107,000
Other unallocated corporate assets			8,327,000		10,690,000

	Consolidated total assets	$	122,412,000	$	121,026,000