Form 10-K - 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, 2002 based on the closing price of the Common Stock on the NASDAQ National Market System on such date was $23,873,217.

The number of shares of the registrant’s Common Stock outstanding at February 28, 2003 was 9,463,843.

Portions of registrant’s definitive proxy statement relating to registrant’s 2003 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, 2002, are incorporated by reference in Part III of this Form 10-K.

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. Currently, the Company offers three primary product lines under the following recognized brand names: Teva® — high-performance sports sandals and rugged outdoor footwear; Simple® — innovative shoes that combine the comfort elements of athletic footwear with casual styling; and Ugg® — authentic sheepskin boots and other footwear. In November 2002, the Company acquired all of the Teva worldwide assets, including all trademarks, tradenames and all other intellectual property (“Teva Rights”). From 1985 until November 2002, the Company had sold its Teva products under a licensing arrangement. Teva, Simple and Ugg are registered trademarks of the Company and its subsidiaries. All of the Company’s footwear possess the common features of high quality with a primary focus on functionality and comfort. In 2002, the Company sold approximately 4,120,000 pairs of footwear. Revenues from wholesale sales (domestic and international) of Teva products have been $64,849,000, $61,221,000 and $79,732,000 during 2002, 2001 and 2000, representing 65.4%, 66.9% and 70.1% of net sales, respectively. For financial information regarding the Company’s industry segments, see note 10 to the accompanying consolidated financial statements.

The casual, outdoor and athletic footwear market is comprised of footwear worn for casual everyday use and for outdoor and athletic activities such as hiking, boating, basketball, tennis, fitness and jogging. The market for such footwear has grown significantly during the last decade. The Company believes that the principal reasons for the growth in sales of such footwear have been the growing acceptance of athletic footwear as casual wear and the growing acceptance of casual wear, in general, including the trend toward casual dress in the workplace, increasingly active consumer lifestyles and the growing emphasis on comfort.

Over the last few years the overall footwear market has seen significant growth of the outdoor segment as well as the growing emphasis on comfort. Outdoor footwear includes shoes, boots and sandals for outdoor recreational activities such as hiking, river rafting, camping and casual wear. Companies engaged in the outdoor footwear market include Nike, Adidas, Timberland, Columbia and Salomon. The Company believes that the growth in outdoor footwear is driven by several factors including a general shift in consumer preferences and lifestyles to include more outdoor, sports and recreational activities such as hiking and camping. In addition, the increasing popularity of extreme sports, including skateboarding, snowboarding, kayaking and river rafting, among others, has created an additional emphasis and awareness of outdoor activities and lifestyles. As consumers engage in outdoor activities, they typically desire footwear specifically designed for these purposes, yet they demand the same level of quality and high performance that they have come to expect from traditional athletic footwear. In addition, more consumers are turning to an emphasis on casual and comfortable footwear and apparel, as evidenced by the trend toward casual workplaces in recent years. The Company believes that its products have benefited from this growing trend and that its footwear addresses consumers’ demands for highly functional footwear that is durable as well as comfortable and fashionable.

The casual, outdoor and athletic footwear markets are generally characterized by a high level of recognition of brand names, logos and trademarks. Unique and identifying features create brand awareness among consumers and allow a favorable reputation to be transferred to new products. The manufacture of casual, outdoor and athletic footwear is typically conducted overseas through independent manufacturers. Casual and athletic footwear is distributed through athletic footwear stores, department stores and specialty retailers. Outdoor footwear is generally distributed through these channels as well but is to a large extent distributed through outdoor specialty retailers. Retailers may purchase footwear on a “futures” basis (orders placed at a discount in advance of a season) or an “at once” basis (orders placed and filled immediately). Futures orders allow the Company to more accurately predict its manufacturing and sourcing needs. By

This Annual Report on Form 10-K contains a variety of forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including forward-looking statements in this “Risk Factors” section, the “Outlook” section, the last paragraph under “Liquidity and Capital Resources”, the “Teva Acquisition” section, the discussion under “Seasonality” and other statements in this Annual Report. Forward-looking statements relating to sales, earnings per share, and the Company’s liquidity may be significantly impacted by future developments such as certain litigation, economic factors and world events, the Company’s dependence on foreign manufacturers, competition, the Company’s dependence upon key personnel, weather conditions, and the impact of seasonality on the Company’s operations, among others. These forward-looking statements are based on the Company’s expectations as of March 2003. No one should assume that any forward-looking statement made by the Company will remain consistent with the Company’s expectations after the date the forward-looking statement is made. The Company disclaims any obligation to update any such factors or to publicly announce the results of any revisions to any of the forward-looking statements contained in this Annual Report on Form 10-K. These forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievement of the Company, or industry results, to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. The factors listed below represent certain important factors the Company believes could cause such results to differ. These factors are not intended to represent a complete list of the general or specific risks that may affect the Company. Other risks may be significant, presently or in the future, and the risks set forth below may affect the Company to a greater extent than indicated.

The Company’s success is largely dependent on the continued strength of the Teva, Simple and Ugg brands (collectively, “Deckers Brands”) and on its ability to anticipate the rapidly changing fashion tastes of footwear customers and to provide merchandise that appeals to their preferences in a timely manner. There can be no assurance that consumers will continue to prefer the Deckers Brands or that the Company will respond in a timely manner to changes in consumer preferences or that the Company will successfully introduce new models and styles of footwear. Achieving market acceptance for new products will also likely require substantial marketing and product development efforts and the expenditure of significant funds to create consumer demand. Decisions with respect to product designs often need to be made many months in advance of the time when consumer acceptance can be determined. As a result, the Company’s failure to anticipate, identify or react appropriately to changes in styles and features could lead to, among other things, excess inventories and higher markdowns and lower gross margins due to the necessity of providing discounts to retailers. Conversely, failure by the Company to anticipate consumer demand could result in inventory shortages, which can adversely affect the timing of shipments to customers, negatively impacting retailer and distributor relationships and diminishing brand loyalty. The failure to introduce new products that gain market acceptance would have a material adverse effect on the Company’s business, financial condition and results of operations, and could adversely affect the image of the Deckers Brands.

The footwear industry has relatively long lead times for design and production of product and, thus, the Company must commit to production tooling and to production in advance of orders. In addition, the industry is highly subject to fashion risks and changes in consumer preferences. This risk is exacerbated by the large number of models, colors and sizes in the Company’s three product lines. If the Company fails to accurately forecast consumer demand, or if there are changes in consumer preference or market demand after the Company has made such production commitments, the Company may encounter difficulty in filling customer

At December 31, 2002, the Company had $39,028,000 of long-term and short-term debt, largely due to the Teva acquisition, and is obligated to make periodic principal and interest payments. The Company believes that its cash on hand, internally generated funds and the borrowing availability under its existing line of credit will enable the Company to pay its obligations as they come due. However, risks and uncertainties which could impact the Company’s ability to maintain its cash position include the Company’s growth rate, the continued strength of the Company’s brands, its ability to respond to changes in consumer preferences, its ability to collect its receivables in a timely manner, its ability to effectively manage its inventory, and the volume of letters of credit used to purchase product, among others. Any inability to meet these contractual requirements could have a material adverse effect on the Company’s business, financial condition and results of operations.

In response to consumer demand, the Company also uses certain specialized materials in its footwear. The failure of products using such materials to perform to the Company’s specifications or customer satisfaction could result in a higher rate of customer returns and could adversely affect the image of the Deckers Brands, which could have a material adverse effect on the Company’s business, financial condition and results of operations.

The footwear industry historically has been subject to cyclical variation and can be negatively impacted by decreased consumer spending or softness in the retail market. This cyclicality could adversely affect the Company’s business. In addition, various retailers, including some of the Company’s customers, have experienced financial difficulties during the past several years, thereby increasing the risk that such retailers may not be able to pay for the Company’s products in a timely manner. No assurance can be given that the Company’s bad debt expense will not increase relative to net sales in the future. Any significant increase in the Company’s bad debt expense relative to net sales would adversely impact the Company’s net income and cash flow and could affect the Company’s ability to pay its obligations as they become due.

Virtually all of the Deckers footwear products are manufactured by third party suppliers in the Far East, Australia and New Zealand, with the vast majority of production occurring at four suppliers in China. There can be no assurance that the Company will not experience difficulties with such manufacturers, including reduction in the availability of production capacity, errors in complying with product specifications, inability to obtain sufficient raw materials, insufficient quality control, failure to meet production and delivery deadlines or increases in manufacturing costs. In addition, if the Company’s relationship with any of its manufacturers were to be interrupted or terminated, alternative manufacturing sources will have to be located. The establishment of new manufacturing relationships involves numerous uncertainties, and there can be no assurance that the Company would be able to obtain alternative manufacturing sources on terms satisfactory to it. If a change in its suppliers becomes necessary, the Company would likely experience increased costs, as well as substantial disruption and a resulting loss of sales.

Foreign manufacturing is subject to a number of risks, including work stoppage, transportation delays and interruptions, political instability, foreign currency fluctuations, changing economic conditions, expropriation, nationalization, imposition of tariffs, import and export controls and other non-tariff barriers (including quotas), restrictions on the transfer of funds, environmental regulation and other changes in governmental policies. The Company may also experience general risks associated with managing operations effectively and efficiently from a far distance and understanding and complying with local laws, regulations and customs.

Products manufactured overseas and imported into the United States and other countries are subject to duties collected by the Customs Service in the applicable country. Customs information submitted by the Company is subject to review by the Customs Service. The Company is unable to predict whether additional customs duties, quotas or restrictions may be imposed on the importation of its products in the future. The enactment of any such duties, quotas or restrictions could result in increases in the cost of such products generally and might adversely affect the sales or profitability of the Company.

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 has issued an opinion to the Company that certain popular Teva styles are covered by this anti-dumping duty legislation, which the Company has appealed. As a precautionary measure, the Company obtained and has been using alternative sourcing for the potentially impacted products from sources outside of China in an effort to avoid potential risk on future imports. In 2001, the European Commission added additional explanatory language that more clearly identified the types of footwear subject to anti-dumping duties. The Company believes that based on the new language, it is probable that the Company will not prevail in its appeal. Therefore, the Company has established a reserve of $500,000, which is the Company’s estimate of its exposure for anti-dumping levies. In 2002, the European Commission repealed the anti-dumping duties on future footwear imports beginning November 1, 2002. While this recent repeal of the legislation allows for future imports from China without anti-dumping duties, it does not eliminate the potential liability for past imports.

The outdoor and footwear industries are both highly competitive, and the recent growth in the markets for sports sandals and casual footwear has encouraged the entry of many new competitors into the marketplace as well as increased competition from established companies. Most of the Company’s competitors have substantially greater financial, distribution and marketing resources, as well as greater brand awareness in the footwear market, than the Company. In addition, the general availability of offshore manufacturing capacity allows rapid expansion by competitors and new market entrants. The Company believes that it has been able to compete successfully because of the brand recognition, quality and selective distribution of its products. From time to time, the Company discovers products in the marketplace that infringe upon its patent and trademark rights. Historically, the Company and its former Teva licensor have successfully defended their intellectual property from potential infringements. The Company intends to continue to vigorously defend its intellectual property following discovery. However, if the Company is unsuccessful in challenging a third party’s products on the basis of patent and trademark infringement, continued sales of such competing products by third parties could adversely impact the Company’s business, financial condition and results of operations. See “Business — Competition” and “Business — Legal Proceedings.”

The Company’s continued success will depend substantially upon its ability to retain Douglas B. Otto, its Chairman of the Board, President and Chief Executive Officer, and a core group of key executive officers and employees. The Company believes that its future success will depend in large part on its ability to attract and retain highly skilled personnel. Competition for such personnel is intense, and there can be no assurance that the Company will be successful in attracting and retaining such personnel. The loss of certain key employees or the Company’s inability to attract and retain other qualified employees could have an adverse impact on the Company’s business.

The Company believes that its trademarks, technologies and designs are of great value. From time to time, the Company may be the subject of litigation challenging its ownership of certain intellectual property. Loss of the Company’s Teva, Simple or Ugg trademark rights could have a serious impact on the Company’s

The Company’s business is subject to economic conditions in its major markets, including, without limitation, recession, inflation, general weakness in retail markets and changes in consumer purchasing power and preferences. Adverse changes in such economic factors could have a negative effect on the Company’s business.

In addition, the Company’s results, and the domestic and international economies in general, may be further negatively impacted by world events including potential future terrorist activities as well as the impact of the United States’ war efforts. The overall negative impact of these activities, including the effect on the economy and commerce in general, cannot currently be determined but could have a material adverse effect on the Company’s business, financial condition and results of operations.

Sales of the Company’s products, particularly those under the Teva and Ugg lines, are very sensitive to weather conditions. Extended periods of unusually cold weather during the spring and summer could adversely impact demand for the Company’s Teva line. Likewise, unseasonably warm weather during the fall and winter months could adversely impact demand for the Company’s Ugg product line.

The Company adopted a shareholder rights plan in 1998 pursuant to a shareholder rights agreement (the “Rights Agreement”) to protect stockholders against unsolicited attempts to acquire control of the Company that do not offer what the Board of Directors of 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 so that one preferred share purchase right was and will be issued for each outstanding share of Common Stock of the Company until the expiration date of the Rights Agreement.

At December 31, 2002, Douglas B. Otto and all executive officers and directors of the Company, as a group, owned approximately 32.0% and 40.7%, respectively, of the outstanding shares of the Company’s Common Stock. The ownership positions of Mr. Otto and the executive officers of the Company, as a group, together with the anti-takeover effects of certain provisions in the Delaware General Corporation Law (the “DGCL”), in the Company’s Certificate of Incorporation and Bylaws and in the Company’s shareholder rights plan would likely have the effect of delaying, deferring or preventing a change in control of the Company and could have a negative effect on the market price of the Company’s Common Stock.

In the first quarter of 2002, the Company completed an implementation of a new Enterprise Resource Planning (“ERP”) computer system to replace its legacy system. In connection with this conversion, the Company initially encountered various difficulties. The effectiveness of the ERP system’s operation can impact the Company’s ability to receive and accept orders, monitor its inventory levels, and coordinate the shipment of products to customers, among other activities. In the event that significant difficulties are encountered in the future, the Company may experience lower sales and increased expenses, which would negatively impact the Company’s results of operations and cash flows.

The Company’s results of operations, financial condition and cash flows are also subject to risks and uncertainties with respect to the Company’s ability to secure and maintain adequate financing, to forecast its future sales, inventory needs and cash flows and to subsequently achieve those forecasts.

Management’s mission is to build niche products into global brands and its business strategy is to offer diverse lines of footwear that emphasize functionality, quality, comfort and technical performance tailored to a variety of activities and demographic groups. Specifically, the Company’s business strategy emphasizes the following elements:

Introduce New Categories and Styles under Existing Brands. The Company intends to leverage consumer recognition of its existing brands by developing and introducing additional innovative footwear products that satisfy the Company’s high standards of practicality, comfort and quality. The Company believes the introduction of additional products at a variety of price points, such as the range of new models in its Teva, Simple and Ugg lines being offered in the Company’s 2003 product offerings, have broadened the Company’s customer base, further diversified the Company’s product lines, and helped reduce the effects of seasonality on the Company’s sales. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Seasonality.” In recent years, the Teva product offering has been greatly expanded to include a variety of new sport sandal styles at a variety of price points and incorporating a range of new uppers and technologies. In addition, the Company has begun to leverage the success of the Teva brand in the outdoor markets by launching into several new categories of footwear, including amphibious footwear, hikers, trailrunners, cold-weather boots, and other rugged outdoor footwear. The Spring 2003 and Fall 2003 Teva product lines include a significant redesign and the introduction of several new styles and categories. One of the features prevalent in the Spring 2003 line is the use of the Wraptor technology, a patented 360 degree continuous strapping system that simultaneously secures the instep and arch shank to the foot. Following on the success of this feature in the Company’s running sandals, the Company has also designed a line of hikers around this technology and has added it to certain styles of the Company’s high performance Guide offering for professional paddlers and adventurers. The Company continues to expand into the hiking, trailrunning and rugged outdoor arenas, where the aggregate market size is considerably greater than the market for sport sandals, the area in which the Teva brand was initially founded. By launching into these new areas of closed footwear, the Company hopes to increase sales while at the same time reducing the impact of seasonality on the Company’s business. The 2003 line also includes athletically inspired styles aimed directly at the athletic distribution channels, another significant area where the Company hopes to gain distribution along with its historically strong outdoor market.

In addition to these new categories for the brand, Teva has also re-designed its core sport sandal offering by adding many new features and styles, incorporating the latest technologies and innovations. The Company continues to use the knowledge and experience of Team Teva, an elite group of the world’s best male and female whitewater athletes, to enhance the development of future technical offerings in this category. As the Company moves to the future, it plans to strengthen existing categories and further expand into new channels of distribution.

The 2003 Simple product line includes a re-emphasis on the men’s footwear business, an area where the brand had been very successful several years ago, as well as a focus on athletically inspired designs. The 2003 Simple line also includes a collection of women’s casual styles featuring low profiles. The Simple line targets consumers in the seventeen to thirty year old age group. The line focuses on lifestyle comfort based products such as clogs, sandals, casuals and non-performance sneakers that are priced affordably. In 2003, the Company’s Ugg product offering continues to include its heritage boots and slippers, as well as an expanded women’s Fall Collection of casual, fashionable boots and clogs and the Adirondack Collection of rugged cold-weather footwear featuring seam sealed lugged outsoles and waterproof leathers combined with sheepskin linings.

Pursue Licensing of Brands. Given the strength of the Company’s brands, the Company is also pursuing the licensing of its brand names to other ancillary products, beyond the Company’s existing core footwear products. Through this type of brand extension, the Company hopes to generate additional revenues in the form of royalty income; to further increase awareness for the Company’s brands and their related products, and thereby increase sales of its footwear; and to build the long-term value of the brands. As part of this approach, the Company has signed agency agreements with BHPC Global Licensing, Inc., whose chief

executive officer is a member of the Company’s board of directors, to assist in identifying candidates and coordinating the efforts for the licensing of the Ugg and Simple trademarks on various products ranging from sportswear and outerwear to housewares and accessories. In addition, with the recent acquisition of Teva Rights, the pursuit of licensing arrangements for the Teva brand has been added to the long-term strategy for this brand as well. Because the Company is currently in the early stages of pursuing licensing opportunities for its brands it cannot yet provide any assurances regarding how successful its efforts will be or how significant the market size will be.

Pursue Additional Market Opportunities. Management intends to continue to consider new markets for its existing line of products. For the years ended December 31, 2002, 2001 and 2000 international net sales totaled $20,829,000, $21,096,000 and $31,135,000, representing 21.0%, 23.1% and 27.4% of net sales, respectively. Management believes that significant opportunities exist to market its products abroad and intends to selectively expand its distribution worldwide. To bolster these efforts, the Company entered into an agency arrangement in 2002 with a firm in the United Kingdom for the coordination of the sales, distribution, marketing and advertising efforts in the European markets. In addition, to strengthen sales efforts in the Asian markets, the Company recently entered into a similar arrangement effective January 1, 2003 with a firm headed by Peter Benjamin, the Company’s former President, who has redirected his efforts to developing the Company’s sales in the Asian markets, a responsibility he previously held from July 1997 to March 1999.

The Company believes significant opportunities exist to expand distribution domestically too. For example, the Company’s Teva brand has had its roots in the outdoor market where it has successfully distributed its products for many years. The Company sees the potential for expansion into the athletic retail distribution channel as a significant opportunity for the Teva brand in future years. The Company intends to pursue this channel of distribution going forward and has recently designed product targeted at this market and has added sales personnel with significant experience in this market. In addition, the Ugg brand has historically been popular in California for many years. The Company believes that significant opportunities exist to expand distribution for this brand throughout the United States, especially in light of its suitability to a variety of climates. In recent years, the Company has been successful in expanding outside of California and expects to continue to pursue this expansion in the future.

With the recent acquisition of the Teva Rights, the Company acquired the direct to consumer catalog and internet retailing business from the previous Teva licensor. In addition to providing additional sales opportunities, this distribution channel provides the Company with improved gross margins and direct access to the Company’s consumers, thereby providing immediate feedback on product. The previous licensor had experienced significant growth in sales from this business in recent years and the Company believes that continued opportunities for growth and expansion of this business exist. For further discussion of the Teva acquisition, see note 12 to the accompanying consolidated financial statements.

Acquire or Develop New Brands. The Company intends to continue to focus on identifying and building new brands for growth. The Company has been successful in the past in taking the concepts of entrepreneurs for innovative, fashionable footwear targeted at niche markets and building the products into viable brands and intends to continue to identify concepts for potential future niche products which have the potential of developing into successful brands or product lines.

The Company currently offers three primary product lines: (1) Teva sport sandals and footwear; (2) Simple casual footwear; and (3) Ugg sheepskin footwear. Each of these lines, as well as individual models within these lines, is designed to appeal to various demographic groups. The Company’s footwear products emphasize function, comfort and technical performance and are suitable for a variety of demanding outdoor and athletic activities, as well as casual and everyday use. The Company’s products are designed and marketed to promote a high level of brand name recognition and consumer appeal by combining functional and creative designs with quality materials and construction. The Teva and Simple footwear lines are generally previewed twice per year, once in the summer for deliveries that commence in the fall and once in the winter for the following back to school and fall season. The Ugg line of sheepskin footwear is generally previewed in the

Teva Sport Sandals and Footwear. The Teva sport sandal was one of the first sport sandals to be developed and remains popular among outdoor enthusiasts and the general public. Certain styles of the Teva sport sandal incorporate a variety of proprietary strapping configurations ideally suited for outdoor activities such as hiking, boating and river rafting. These strapping systems generally consist of high-quality nylon webbing or leather, are fully adjustable, and hold the foot firmly to the sandal’s durable cellular rubber, molded EVA, polyurethane or leather footbed. Teva sport sandals are extremely durable, with many styles designed specifically for performance in and around the water. In addition, the Company has recently leveraged the brand’s success in the outdoor markets by launching into various natural progressions for the brand including hiking boots, trailrunning shoes, amphibious footwear and other rugged outdoor footwear styles. For Spring 2003, the Teva line has been redesigned to include numerous new styles, categories and features and now includes 103 different models spread across various categories and designed for a variety of uses. The Hydro Series, a category of sandals and other amphibious footwear built for high performance and rugged outdoor use, includes men’s and women’s styles of sport sandals, neoprene and quick draining monofilament mesh watershoes and other outdoor footwear ideal for professional outdoorsmen and adventurers. The Terrain Series is a line of sandals and hiking boots primarily designed for use on land that includes performance walking sandals and convertible sandals with removable heel straps that allow the sandal to be worn as a slide, as well as hiking boots and running sandals incorporating the patented Wraptor technology, an upper which encircles the instep and continually adjusts to the movement of the foot to provide a consistently secure fit. The Originals Series is a collection of sandals and thongs that combine the elements of performance with casual everyday use and includes several of the most popular styles as well as models with retro-1970’s inspired colors and stylings. Continuing on the success of recent years, the Spring 2003 line consists of men’s and women’s leather casuals under the Nomadic Series, including a variety of sandals, slides and clogs. The Sun and Moon Series has slides and thongs in a variety of materials including waterproof leather, nylon, suede and airmesh. The Spring 2003 Children’s category is an assortment of sandals incorporating a variety of materials including leather, waterproof suede, nylon, neoprene and mesh as well as slip-on watershoes, hikers and other styles of amphibious footwear. In addition, for the Fall 2003 season, the Company has significantly expanded its Fall product offering with a variety of different types of closed footwear, including hiking boots, cold weather boots, trailrunners and an assortment of other rugged outdoor styles. The domestic manufacturer’s suggested retail prices for adult sizes of Spring and Fall 2003 Teva footwear products range from $20.00 to $120.00.

Simple Casual Footwear. The Simple line consists of casual shoes that combine the comfort and function of athletic footwear construction with the simple, understated styling of “back-to-basics,” casual lifestyle footwear. The Simple product line includes a variety of comfortable, fashionable, basic shoes for men and women including sneakers, sandals, slides, clogs and leather casuals. The Spring 2003 collection reflects the Company’s emphasis on a target consumer in the seventeen to thirty year old age group. For the 2003 line, the Company has added several new styles of clogs, sandals, sneakers and leather casuals to its offerings including several athletically inspired styles for men and women as well as a re-emphasis on the men’s footwear business, an area where the Company had considerable success in the past. The 2003 Simple line also includes a series of innovative styles of women’s footwear featuring models with low profiles. For Spring 2003, Simple is offering a variety of styles for men and women, including an assortment of sneakers, sandals, thongs, leather casuals and clogs in a variety of colors. The domestic manufacturer’s suggested retail prices for adult sizes for the Spring 2003 line range from $40.00 to $88.00.

Ugg Sheepskin Footwear. Ugg is a line of authentic sheepskin footwear, popularized in Australia in the 1960’s and 1970’s. These sheepskin boots, slippers and other footwear styles have high-grade sheepskin linings which act as a natural insulator, keeping feet warm and comfortable. The 2003 Ugg line offers a range of casual, fashionable and streetwise styles in various colors, including several new styles of shoes and boots for men and women. The 2003 line includes several styles with new innovative fashionable uppers and several styles with water resistant leather treatments to address more inclement and cold weather conditions. The 2003 line continues the tradition of the highly successful Classic and Ultra boots, as well as the Home/Spa

Collection of slippers and other comfort footwear. In addition, for 2003, the line includes an expanded Fall collection of men’s and women’s casual footwear, including the men’s Boston and Cambridge styles, the women’s Midtown styles, and the women’s Brooks styles featuring lug bottoms for traction combined with sleek profiles. The 2003 line also includes an Adirondack Collection of rugged cold-weather footwear featuring seam sealed lugged outsoles and waterproof leathers combined with sheepskin linings to prevent water from coming in and to prevent warmth from escaping. The domestic manufacturer’s suggested retail prices for adult sizes for the Ugg line range from $50.00 to $275.00.

The Company’s products are currently distributed throughout the United States by a network of approximately 37 independent sales representatives, organized geographically, who make sales, visit retail stores to train personnel and review sales of the Company’s footwear on a periodic basis. In addition, the Company has five in-house sales representatives that serve as key account executives for several of the Company’s larger customers. The Company has two separate dedicated sales forces, one for Teva and one for Simple and Ugg, as the Simple and Ugg brands are generally sold through different distribution channels and are targeted toward a different consumer than the Company’s Teva brand. The Company’s sales managers for each brand manage their networks of representatives, recruit experienced sales representatives in the industry and coordinate sales to national accounts. The Company currently sells its products internationally through 34 independent distributors. The Company’s goal is to promote retail sales of its products at attractive profit margins for its accounts through selective distribution and marketing, targeted toward distinct groups of consumers. As a result of this approach, the Company’s accounts have a strong incentive to devote greater selling space to the Company’s products, and the Company is better able to assess consumer preferences, the future ordering needs of its customers and inventory requirements.

The Company’s principal domestic customers include specialty retailers, upscale department stores, outdoor retailers, sporting goods retailers and shoe stores which market products consistent with the Company’s standards. The Company’s five largest customers accounted for approximately 23.1% of the Company’s net sales for the year ended December 31, 2002, compared to 20.6% for the year ended December 31, 2001. No single customer accounted for more than 8% of the Company’s net sales for the years ended December 31, 2002 and 2001.

In order to encourage accounts to place orders early in the season the Company offers a preseason discount program under which accounts are provided discounts on preseason orders placed. The Company’s strategy is to emphasize this “futures” program, as compared to “at once” sales, in order to stabilize its supply arrangements, determine which styles to take an inventory position in, reduce the risk of customer cancellations and to benefit from the significant positive impact of the program on the Company’s inventory costs, sourcing schedule and allocation of marketing resources. Consistent with prior years, the Company offered an early delivery program for the spring 2003 season which was delivered the fourth quarter of 2002. This early delivery program allows the Company to reduce the impact of peak warehouse inventory levels during the spring and provides retailers the opportunity to have earlier sell through, lengthen the retail selling season and increase the potential for inventory turns at retail.

Domestic deliveries generally originate from the Company’s 126,000 square foot warehouse facility in Ventura County, California. European deliveries generally originate from a distribution center in the Netherlands, while all other international deliveries originate from offshore factories.

The acquisition of the Teva Rights included the licensor’s catalog and internet retailing business located in Flagstaff, Arizona. The Company expects to continue to pursue expansion opportunities in this “direct-to-consumer” distribution channel and contemplates eventually opening its own retail stores.

The Company attempts to maximize the impact of its advertising, public relations and promotional expenditures by utilizing media that provide high visibility within targeted market segments. The Company’s brand names are generally advertised and promoted through a variety of consumer print advertising campaigns

in addition to highly visible editorial coverage in both consumer and trade publications. Retail presence and “point of purchase” materials along with production packaging provide additional visible brand support. The Company’s in-house marketing departments for each brand work closely with targeted accounts in many aspects of these activities.

The Company advertises its Teva brand through a national print advertising campaign targeted at various different demographic groups. For its core outdoor market, Teva advertises in several outdoor-related magazines, including Backpacker, Outside, National Geographic Adventurer, Paddler, Blue and Dandelion, among others. In addition, to promote its trailrunner offering, Teva is advertising in Trail Runner, Runner’s World Regional and Running Times, among other publications. With the broadened appeal of the Teva offerings, including the leather casual models, the Company has also focused its print advertising toward more mainstream print publications, including Men’s Journal and Organic Style. The success of The Teva Mountain Games has warranted a media push in local publications such as Rocky Mountain Sports and national publications such as Sports Illustrated. In addition, with the recent expansion of the Teva fall product offering, an increased proportion of Teva advertising will occur in the fall and winter months compared to prior years.

In order to maintain the Company’s history of high visibility among core outdoor enthusiasts such as professional river rafters, kayakers, mountain bikers and rock climbers, Teva products are given or sold at professional discounts to members of this group. In order to further bolster the loyalty of these individuals, the Company offers categories called “Hydro” and “Terrain,” incorporating the latest technological developments and highest quality materials. The Company actively sponsors a group of the world’s best male and female whitewater athletes called Team Teva. Teva also sponsors teams from other outdoor disciplines including the Teva US Mountain Running Team and the SOBE Cannondale Mountain Bike Team. By outfitting and sponsoring these highly visible athletes and teams, the Company creates awareness among targeted consumers at relatively low cost. In addition, the Company has traveling promotional and technical representatives who represent the Teva brand at a wide variety of festivals, outdoor sporting events and competitions. Teva is sponsoring approximately fifty events in 2003. Internationally, the Company also sponsors events in France, Switzerland and Italy. Teva sponsors and promotes these events in order to increase the Company’s visibility for its core outdoor consumer, in addition to the significant marketing available to the more mainstream public with the increasing popularity of viewing these extreme sports. The Teva promotional team also attends and sponsors other events including the Teva Mountain Games at Vail, Teva Vail Trail Running Series, Santa Cruz Surf Kayak Festival in Santa Cruz, California, the Telluride Bluegrass Festival in Telluride, Colorado and Reggae on the River in Garberville, California, among others.

The Teva mobile promotions team attends the events in dedicated state of the art promotional vehicles where they showcase Teva products and provide consumers with the opportunity to see and try on the latest styles. The Teva brand has also recently initiated a partnership with Volkswagen whereby the Teva Technical Representatives are outfitted in Teva branded Volkswagen Eurovans throughout the United States.

With respect to the Simple product line, the Company has continued its national print advertising campaign. Simple print advertisements will appear in mainstream, youth-oriented consumer fashion magazines such as InStyle, Jane and Nylon. In addition, the marketing effort focuses around grass roots advertising and includes a consumer focused direct mail campaign, retailer events and product endorsement by high profile young artists and musicians. Recent public relations coverage has appeared in Footwear News, Teen People, Nylon, YM, Footwear Plus, W Magazine, Lucky, Shuz, Shape, and Surfing Girl. These public relations efforts have also resulted in Simple products appearing on television shows such as Friends, Dawson’s Creek, and MTV.

Simple’s marketing efforts are performed internally by an in-house Simple marketing team which works to promote the Simple brand positioning of being “simple” and “down to earth”.

In 2003, the Company plans to continue to build on the success of Ugg’s national print advertising campaign. The Company continues to target its Ugg products toward luxury consumers who seek high quality, luxurious and fashionable products for cold weather. The Company expects to advertise Fall 2003 Ugg products in upscale publications such as Vogue, InStyle and O Magazine. In February 2002, Ugg’s were featured in the Opening and Closing Ceremonies of the 2002 Winter Olympic Games. 1,000 Ugg boots were

used to outfit both the children in the Children of Light performances and the individuals presenting medals to athletes at all the events. Both the children and adults were outfitted in Ultra Short Ugg boots. Ugg also received Olympic exposure on the Today Show with Katie Couric the day after the opening ceremonies.

In addition to this national advertising campaign, the Ugg brand is being supported by national public relations and product placement efforts. In-house marketing personnel work closely with a public relations firm and a product placement agency to gain brand visibility in popular magazines, television shows and feature films. Recent editorial coverage includes articles in magazines such as Glamour, InStyle, Cosmopolitan, Marie Claire, People, US Weekly, Maxim, Shape, Self, O Magazine and Real Simple. Television coverage of Ugg product includes shows such as Judging Amy, The King of Queens, Still Standing, Will and Grace, AUSA, Cedric the Entertainer Presents, Dawson’s Creek, Everwood and Friends. These public relations 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 their Ugg boots. This celebrity exposure for Ugg has been the subject of recent publicity including articles in Us Weekly, USA Today and People.com.

In 2002, 2001 and 2000, the Company incurred $7,456,000, $6,087,000 and $7,108,000, respectively, for advertising, marketing and promotional expenses. In addition to these expenditures, the Company’s 34 international distributors spend additional amounts for marketing the Company’s brands within their respective territories.

The design and product development staff for each of the Company’s brands creates and introduces new innovative footwear products that are consistent with the Company’s standards of high quality, combined with comfort and functionality. The Company’s design function is performed by a combination of its internal design and development staff plus outside design firms. By introducing outside firms to the design process, the Company is able to see a variety of different design perspectives at a low cost. Total research and development costs aggregated $1,092,000, $1,034,000 and $1,076,000 in 2002, 2001 and 2000.

With respect to Teva, in order to ensure that the Company’s high performance technical products continue to satisfy the requirements of its historical customer base of performance-oriented “core enthusiasts,” the Company’s design staff solicits comments and feedback from its Team Teva whitewater athletes, the Teva US Mountain Running Team and other professional outdoorsmen, as well as several of its retailers, including REI, EMS, Galyans and L.L. Bean. Certain models are modified and technical innovations are developed in response to such comments and feedback. The Company adds new innovations, components and styles to its product line continually. For example, the Company recently designed and introduced a new line of trailrunners incorporating the patented Liquid Frame technology and has incorporated its newly developed Wraptor technology into performance running sandals, an assortment of hikers and certain styles of its high performance Guide sport sandals specifically targeted at professional outdoorsmen and adventurers. In addition, for added traction and durability, the Company has incorporated various materials in its 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.

While Teva continues to develop high performance sport sandals and other rugged outdoor footwear by continually updating and designing new styles for these categories, the Company also continues to increase its focus on the casual footwear market through its Teva, Simple and Ugg brands. The Company continues to introduce and offer new styles of leather and other casual footwear for men and women and has added new styles to its Teva children’s offering of hikers, sport sandals, slip-ons and other shoes for Spring 2003. Simple has also added several new styles of clogs, sandals, sneakers and leather casuals to its offerings for 2003 including several athletically inspired styles for men and women as well as a re-emphasis on the men’s

footwear business, an area where the Company had considerable success in the past. By monitoring changes in consumer lifestyles and preferences and then focusing first on function and practicality, the Company develops footwear designed to appeal to quality-minded consumers seeking comfortable casual footwear.

In recent years, the Company has taken steps to take Ugg’s longtime success in the Southern California market and duplicate that success across the United States. In support of this effort, the Company has taken steps in recent years to update the Ugg products in order to make them more functional for use in cold and wet climates. For example, the 2003 line includes the Adirondack Collection of cold weather boots, shoes and clogs featuring seam sealed lugged outsoles and waterproof leathers combined with sheepskin linings for high functionality and comfort. In addition, the Company has added a new Brooks Series to its women’s Ugg Fall Collection, featuring styles with a lugged outsole, contemporary styling and wool fleece linings which are designed to keep feet dry and comfortable in both warm and cold climates. The Ugg brand continues to design and offer more fashionable and unique upper styles to help differentiate Ugg from the low cost imitation brands.

Integral factors in the design and product development process include an evaluation of the availability and cost of raw materials, the capabilities of the factories that will manufacture products 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 and components for their various product lines. Drawings and prototypes are utilized to produce samples of proposed new concepts. Throughout the development process, members of the design staff coordinate closely with each other and with the Company’s product development, manufacturing and sourcing personnel toward a common goal of developing and sourcing a high-quality product that will be delivered on a timely basis. The Company endeavors to minimize the risk of changing fashion trends by offering a diverse line of functional products and closely monitoring sales to its accounts after introduction.

The Company currently sources all of its Teva and Simple footwear and a portion of its Ugg footwear from independent contract manufacturers in the Far East. The Company imports the remainder of its Ugg footwear from independent contract manufacturers in Australia and New Zealand. The Company is not involved in the direct manufacture of footwear, but rather sources completed footwear, produced to required specifications, directly from these independent contractors. As the Company grows, it expects to continue to rely heavily on its independent contractors for its sourcing needs.

The manufacturing of footwear by the Company’s independent contractors is performed in accordance with detailed specifications provided by the Company and is subject to quality control standards and applicable safety requirements. In efforts to ensure the production of high quality products, many of the materials and components used in production are purchased from independent suppliers designated by the Company. The Company believes that its completed footwear as well as the various raw materials and components used in the manufacture of the footwear, including rubber, leather, nylon webbing and sheepskin, are generally available from multiple sources at competitive prices.

The Company generally does not have any long-term agreements with the manufacturers or suppliers of its products, but does business based on individual purchase orders.

The Company has instituted inspections and other procedures to satisfy the high quality demanded by users of the Company’s products. The Company’s quality assurance program includes inspection procedures at the factory level as well as a final inspection upon arrival of product at the Company’s distribution center. The Company uses on-site inspectors at its independent suppliers who oversee the production process and perform quality assurance inspections. In addition, the products undergo further inspection procedures prior to being accepted at the Company’s domestic distribution center.

In connection with the 1999 Teva license renewal, the Company received an option to buy the Teva Rights from Mr. Thatcher, the founder and owner of Teva, which was subsequently renegotiated in 2001. On November 25, 2002, the Company completed the acquisition 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 for an acquisition price of approximately $62.3 million, including transaction costs of approximately $0.3 million.

The Company paid cash in the amount of $43.0 million and issued to Mr. Thatcher subordinated notes of $13.0 million, Preferred Stock of $5.5 million, 100,000 shares of common stock valued at approximately $0.3 million and options to purchase 100,000 shares of common stock valued at approximately $0.2 million. The $13.0 million of subordinated notes include a coupon interest rate of 7% and an additional 2% interest, which is to be accrued and paid at the maturity date in 2008. The $5.5 million of Preferred Stock pays no dividends unless dividends are declared and paid on the Company’s common stock, is callable by the Company through November 25, 2005 at face amount plus an additional 10% per year and is convertible into common stock by the holder after November 25, 2005, if it is still outstanding, at a conversion price of $3.632 per share. In addition, the Preferred Stock provides the holder with the right to designate one member of the Company’s Board of Directors.

Concurrent with the acquisition, the Company entered into an employment agreement with Mr. Thatcher through November 2007, which provides for an annual base salary of $276,875, and received a non-compete agreement from Mr. Thatcher, which expires two years after termination of employment.

The Company currently expects the acquisition to be accretive to its fiscal 2003 earnings by approximately $1 million, or $0.03 per diluted share, primarily as a result of the elimination of approximately $5 million of minimum annual royalties under the previous Teva license agreement, offset by the interest costs associated with financing the transaction. In addition, The Company plans to further develop the acquired catalog and internet retailing business which had sales in excess of $4 million in 2002. Longer term, the Company believes it will be able to leverage the strong Teva brand name by selectively expanding into apparel, accessories, and other outdoor-related products, which the Company expects to accomplish primarily through licensing arrangements.

Teva License. Prior to the acquisition of the Teva Rights on November 25, 2002, the Company had been operating its Teva footwear business since 1985 pursuant to license agreements with Mr. Thatcher, the Company’s former licensor for Teva.

Under the previous license agreement, the Company had the exclusive license to the worldwide rights for the manufacture and distribution of Teva footwear through 2004, which was automatically renewable through 2008 and through 2011 under two renewal options, provided that minimum required sales levels were achieved. Whereas the recent Teva acquisition includes all rights to all footwear, apparel and all other potential products, the previous licensing arrangement was for footwear only.

The previous license agreement provided for a sliding scale of royalty rates, depending on sales levels, and included guaranteed minimum annual royalty amounts. The previous agreement also required the Company to grant the licensor 50,000 stock options on the Company’s common stock annually, at an exercise price equal to the market value on the date of grant for the duration of the license term. Additionally, the previous license agreement included minimum spending levels for marketing and research and development, required the previous licensor’s approval of product, marketing, distribution and customers to whom the company could sell, restricted the volume of closeouts and seconds which the Company could sell and prohibited the transfer of substantially all of the Company’s property or stock to other parties. The previous license agreement also prohibited the Company from introducing and selling non-Teva sandals or other competing footwear products for the duration of the license term plus two years following termination of the license. Because the Company’s primary business is the design, marketing and sale of sandals and other footwear, these previous

non-competition provisions significantly impaired the Company’s ability to compete and expand outside of Teva and severely restricted the Company’s future footwear business in the event that the Company was not able to renew its Teva license agreement beyond 2004. The recent Teva acquisition terminated these requirements and restrictions.

The Company and Bob Eason, the designer and founder of Picante clothing, were parties to an agreement pursuant to which the Company owned 50% of Heirlooms, Inc. (“Heirlooms”), the manufacturer and distributor of Picante clothing. In January 2001, the Company sold its 50% interest in Heirlooms back to Mr. Eason for cash of approximately $1,200,000 and a note receivable of approximately $420,000, which is secured by a secondary security interest in the assets of Heirlooms. The selling price was for an amount that approximated the net carrying value of the underlying assets and, accordingly, the resulting gain on the sale was not significant. Mr. Eason is currently in default on payment of the $420,000 note receivable, which was due March 31, 2002. The Company has recorded a bad debt reserve for the entire amount at December 31, 2002 and is currently in negotiations with Mr. Eason to endeavor to collect the amount due.

As a result of the Teva acquisition, the Company now holds thirteen United States patents and one patent in each of Canada, Australia, New Zealand, South Korea, Germany, France, China, Japan and the United Kingdom for Teva footwear. 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, the Company does not and cannot hold certain patent rights in certain countries. The Company also currently holds Teva trademark rights in the United States and in several other countries, including, among others, France, Germany, the United Kingdom, Japan and Australia. The Company regards its proprietary rights as valuable assets and vigorously protects such rights against infringement by third parties. Prior to the Teva acquisition, Mr. Thatcher successfully enforced his patent and trademark rights in all 20 concluded lawsuits brought against such third parties.

The Company owns the Simple and Ugg trademarks and has applied for or received registrations for them in the United States and in many foreign countries. The Company has selectively registered style category names and marketing slogans. In addition, the Company holds two design patents for its footwear products.

In 1995, the Company acquired the patent and trademarks for Alp® sport sandals, and has also registered the Deckers® trademark.

Historically, the Company has encouraged and has received a significant portion of its orders as preseason orders, which are generally placed by customers approximately four to eight months prior to shipment date. As discussed above, the Company has emphasized this “futures” business, as compared to “at once” sales, as it allows the Company to better forecast its inventory requirements and assists with the Company’s sourcing schedule. As a result, the Company provides its customers with incentives to participate in such preseason programs. Unfilled customer orders (“backlog”), as of any date, represent orders scheduled to be shipped at a future date and do not represent firm sales. The mix of future and immediate delivery orders can vary significantly from quarter to quarter and year to year. 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 programs. As a result, comparisons of backlog from period to period are not meaningful and the Company’s backlog at any given time is generally not indicative of sales levels expected to be achieved in the future.

The casual, outdoor and athletic footwear markets are highly competitive. The Company believes that currently its largest competitors of the Teva line are Nike, Adidas, Timberland, Merrell, Columbia and

Salomon. The principal competitors of Simple’s casual line include Steve Madden, Dr. Marten, Camper, and Kenneth Cole and of Simple’s sneaker/sandal line include Skechers, Diesel, Steve Madden, Puma and Guess. Ugg’s competitors include Merrell, Acorn, Aussie Dogs, LB Evans and Timberland, as well as retailers’ private label footwear.

Competition in the Company’s footwear is primarily based on brand awareness, product quality, design, price points, fashion appeal, marketing, distribution, performance and brand positioning. The Company’s Teva line of footwear competes primarily on the basis of its authenticity as a recognized brand in the outdoor market, its consumer brand recognition as one of the first sandals of its kind, as well as its high performance nature and its diversity of styles offered. In addition, several of the most popular styles employ a distinctive patented strapping system, which contributes to performance and the brand’s consumer recognition. The Company competes through its Simple line as an alternative brand offering a diversity of simple, back-to-basics styles designed for a variety of recreational and leisure activities. Ugg competes primarily on the basis of its authenticity as well as its brand name recognition as a high quality premium luxury brand, identifiable with the United States sheepskin footwear market. The Company believes its business strategy has resulted in increased awareness for its brands. However, no assurance can be given that in the future the Company will be able to maintain or further increase its brand awareness, maintain or increase its market share or respond to changing consumer preferences.

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 non-tariff barriers (e.g., quotas), the cost of transportation, restrictions on the transfer of funds, labor unrest and strikes, and in certain parts of the world, political instability. Countries where the Company’s products are manufactured and sold may, from time to time, seek to increase customs duties or impose quotas, all of which have the potential to affect the Company’s operations and its ability to maintain or increase the current level of importation of the Company’s products. The Company is unable to predict the likelihood or frequency of the occurrence of any of these events.

The products imported by the Company into the United States are subject to various duty rates which are established by law. At the present time these duties range between 8.5% and 12.5% of the entered value of footwear with uppers made principally of leather or sheepskin, and 6.0% and 37.5%, plus $.90 per pair, of the entered value of footwear with uppers made principally of synthetic textiles or plastic. “Entered value” means the value taken into account for purposes of determining the amount of any customs duties or any other duties which may be imposed on the importation of any property. In general, the entered value is normally based on the price paid or payable by the Company to the seller of the imported merchandise.

From time to time, the Company may be subject to claims for additional duties arising as a result of the United States Customs Service, or similar agencies of foreign countries, disagreeing with the classification and/or valuation used by the Company to enter various styles of footwear.

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 has issued an opinion to the Company that certain popular Teva styles are covered by this anti-dumping duty legislation, which the Company has appealed. As a precautionary measure, the Company obtained and has been using alternative sourcing for the potentially impacted products from sources outside of China in an effort to avoid potential risk on future imports. In 2001, the European Commission added additional explanatory language that more clearly identified the types of footwear subject to anti-dumping duties. The Company believes that based on the new language, it is probable that the Company will not prevail in its appeal. Therefore, the Company has provided a reserve of $500,000, which is the Company’s estimate of its exposure for anti-dumping levies. In 2002, the European Commission repealed the anti-dumping duties on future footwear imports beginning November 1, 2002. While this recent repeal of the legislation allows for future imports from China without anti-dumping duties, it does not eliminate the potential liability for past imports.

The European communities also impose quantitative limits on imports from China of certain leather upper and textile upper footwear. The Company is unable to predict the future extent of import quota restrictions or any changes in the scope or severity of such restrictions.

At December 31, 2002, the Company employed approximately 133 full-time employees in its U.S. facilities and 29 at its Hong Kong subsidiaries, none of whom is represented by a union. The Company believes its relationship with its employees is good.

The Company leases approximately 30,000 square feet for its corporate offices in Goleta, California and approximately 126,000 square feet for its warehouse facility in Ventura County, California. The Company also leases approximately 2,000 square feet of office space in Macau, 2,600 square feet in China for its Far East staff, approximately 2,400 square feet in Flagstaff, Arizona for the catalog/internet business offices and approximately 3,000 square feet for the catalog/internet business’s related warehouse. The Company paid approximately $1,188,000 in rent for all of its facilities in 2002. The term of the lease for the Company’s corporate office is currently on a month to month basis with a six-month termination notice required. The lease for the Company’s Ventura County warehouse expires in December 2006 with a three year option to extend at that time, the lease for the Company’s Macau office space expires in August 2003, the lease for the Company’s China office expires in June 2003, the lease for the Company’s catalog/internet business offices expires in November 2005 and the lease for the catalog/internet business’s warehouse expires in October 2005. The Company believes that its existing corporate, manufacturing and warehousing space will be adequate to meet its current and foreseeable requirements, or that suitable additional or alternative space for the Company’s corporate office will be available as needed on commercially reasonable terms.

An action was brought against the Company in Montana 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 United States Court of Appeals for the Ninth Circuit affirmed the district court’s decision for a judgment against the Company, resulting in a payment of approximately $2.0 million, including interest, which the Company paid in November 2001. In addition, the court of appeals reversed the district court’s refusal to consider an award of exemplary damages or attorney fees and remanded to the district court for further proceedings. On September 30, 2002, the federal district judge ruled that the Company must pay an additional $4,290,000 to the plaintiffs to cover exemplary damages and plaintiff’s attorney fees. In November 2002, the Company negotiated and paid in full a final settlement of the litigation for $4,000,000. The Company recorded charges for this litigation of approximately $3,228,000 during 2002 and approximately $2,180,000 during 2001.

The Company is 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. The Company denies the allegations and has filed a countersuit against the Distributor for breach of contract. In the event that the Company is not successful in this matter, the Company believes it would have a maximum exposure of $550,000 beyond the amounts provided for in the financial statements.

The Company is also involved in routine litigation arising in the ordinary course of business. Such routine matters, if decided adversely to the Company, would not, in the opinion of management, have a material adverse effect on the financial condition or results of operations of the Company. From time to time, the Company is also involved in other legal proceedings to protect the Company’s various patents and trademarks from infringement by third parties. Any decision or settlement in any such infringement proceeding which allowed a third party to continue to manufacture and sell the products at issue could have an adverse effect on

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

The Company’s Common Stock is traded in the National Market System of the NASDAQ stock market (the “NMS”) under the symbol “DECK.”

As of February 28, 2003, the number of holders of record of the Common Stock was 155 and the number of beneficial owners was approximately 2,000.

The Company has never declared or paid cash dividends on its Common Stock and currently intends to retain any income for use in its business and does not anticipate paying any cash dividends in the foreseeable future. Payment of dividends is within the discretion of the Company’s Board of Directors and will depend upon, among other factors, dividend restrictions within the Company’s credit facilities, the Company’s earnings, financial condition and capital requirements. The Company’s credit facility currently prohibits the issuance of dividends. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”

The following tables set forth selected consolidated financial data of the Company as of and for each of the years in the five-year period ended December 31, 2002.

The following discussion should be read in conjunction with the consolidated financial statements and notes thereto. This Annual Report on Form 10-K includes forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 that involve risk and uncertainty, such as forward-looking statements relating to expectations regarding sales and income per share, expectations regarding the incremental earnings and benefits of the Teva acquisition, expectations regarding the Company’s liquidity, the potential impact of certain litigation and the impact of seasonality on the Company’s operations. Actual results may vary. Some of the factors that could cause actual results to differ materially from those in the forward-looking statements are identified in the accompanying “Risk Factors” section, the last paragraph under “Liquidity and Capital Resources”, the discussion under “Seasonality” and other sections of this Annual Report on Form 10-K. These forward-looking statements are based on the Company’s expectations as of March 2003. No one should assume that any forward-looking statement made by the Company will remain consistent with the Company’s expectations after the date the forward-looking statement is made. The Company disclaims any obligation to update any such factors or to publicly announce the results of any revisions to any of the forward-looking statements contained in this Annual Report on Form 10-K.

The following table is derived from the Company’s statement of operations and sets forth, for the periods indicated, certain operating data as a percentage of net sales.

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

Total net sales increased by $7,646,000, or 8.4%, between the years ended December 31, 2002 and 2001. Aggregate wholesale sales of Teva increased to $64,849,000 for the year ended December 31, 2002 from $61,221,000 for the year ended December 31, 2001, a 5.9% increase. Teva wholesale sales represented 65.4% and 66.9% of net sales in the years ended December 31, 2002 and 2001, respectively. The increase in Teva wholesale sales was largely attributable to an improvement in retail sell-through, strength in sales of the Company’s sport sandals and the introduction of the new Fall 2002 line of closed toe rugged outdoor footwear. Also, certain European distributors brought in $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 is likely a shift in sales between the fourth quarter of 2002 and the first quarter of 2003. This shift in quarterly sales is expected to result in reduced European deliveries in the first quarter of 2003 compared to 2002. Net wholesale sales of footwear under the Simple product line decreased 6.4% to $10,159,000 from $10,853,000 for the year ended December 31, 2001, which decline was attributed to a shortfall in the international markets of $1,326,000.

This international decline was partially offset by increased sales in the domestic market of $632,000 resulting primarily from an increase in the volume of discounted sales. Net wholesale sales of Ugg increased 22.4% to a record $23,491,000 for the year ended December 31, 2002 from $19,185,000 for the year ended December 31, 2001 as a result of continued geographical expansion across the United States, the success of its third quarter delivery program, the introduction of several new styles of casual footwear and strong retail sell-through for the brand. As part of the Company’s acquisition of Teva in November 2002, the Company acquired the catalog and internet retailing footwear business which sells the Company’s Teva, Simple and Ugg brands directly to consumers. For the period from the November 25, 2002 acquisition date through December 31, 2002, net sales of the catalog and internet retailing business aggregated $608,000, including retail sales of Teva of $255,000, Simple of $43,000, and Ugg of $310,000. The Teva acquisition did not have a significant impact upon operations for 2002 due to its close proximity to year-end. Overall, international sales for all of the Company’s products decreased 1.3% to $20,829,000 from $21,096,000, representing 21.0% of net sales in 2002 and 23.1% in 2001. The volume of footwear sold increased 11.2% to 4,120,000 pairs during the year ended December 31, 2002 from 3,705,000 pairs during the year ended December 31, 2001, for the reasons discussed above.

The weighted-average wholesale price per pair sold during the year ended December 31, 2002 decreased 2.5% to $23.66 from $24.26 for the year ended December 31, 2001. The decrease was primarily due to a $1,445,000 increase in the volume of discounted sales during the year ended December 31, 2002, as well as the introduction of several new styles at lower price points to facilitate market penetration. These factors were partially offset by an increase in the proportion of Ugg sales to total sales, as the average selling price of the Ugg products is generally more than twice that of the Company’s Teva and Simple products.

Cost of sales increased by $4,674,000, or 8.8%, to $57,577,000 for the year ended December 31, 2002, compared with $52,903,000 for the year ended December 31, 2001. Gross profit increased by $2,972,000, or 7.7%, to $41,530,000 for the year ended December 31, 2002 from $38,558,000 for the year ended December 31, 2001 while gross margin decreased slightly to 41.9% from 42.2%. The decrease in gross margin was due to several factors including an increased impact of closeout sales, particularly for the Simple brand. As a result of the lowered net sales of Simple in recent years, the sales volume for some of Simple’s models is now below the purchase minimums imposed by the Company’s third party manufacturing factories. Accordingly, Simple is occasionally faced with buying more inventory of certain styles than it desires in order to meet factory production minimums. This ultimately results in a greater proportion of closeout sales for Simple than that of the Company’s other brands and contributed to a $1,445,000 increase in closeout sales for all brands in 2002 compared to 2001. In addition, the gross margin for 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 a dispute which arose in 2001.

The Company carries its inventories at the lower of cost or market, using a reserve for write-downs for inventory obsolescence to adjust the carrying values to market where necessary based on ongoing reviews of estimated net realizable values of its inventories. During the year ended December 31, 2002, the Company had a net increase in the reserve for write-downs for inventory obsolescence of approximately $67,000 in order to write-down inventory to net realizable value on certain discontinued and slow-moving styles of Simple and Teva. During the year ended December 31, 2001, the Company had a net decrease in the reserve for inventory obsolescence of approximately $321,000, primarily due to the sale of domestic inventory for Teva and Simple product for which a write-down had previously been recorded, as well as the sale of the Company’s remaining Canadian inventory, for which a write-down had also previously been recorded in connection with the Company’s transition to a distributor in the Canadian market.

Selling, general and administrative expenses increased by $914,000, or 2.7%, to $34,954,000 for the year ended December 31, 2002, compared with $34,040,000 for the year ended December 31, 2001, and decreased as a percentage of net sales to 35.3% in 2002 from 37.2% in 2001. The increase in selling, general and administrative expenses was primarily due to an increase in personnel costs of $1,568,000, increased marketing spending of $1,435,000 and increased costs related to a new ERP computer system of $625,000 during the year

ended December 31, 2002. These increases were partially offset by the elimination of approximately $809,000 of goodwill amortization resulting from the Company’s 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 caused by the Company’s acquisition of Teva during the fourth quarter of 2002 of $479,000, reduced sales commissions of $384,000 paid to the Company’s independent sales force as a result of bringing more accounts in-house, and a $206,000 reduction in bank fees resulting from the Company’s move to a new bank in 2002, among other cost reductions. Despite the overall increase in dollar amounts, the selling, general and administrative expenses as a percentage of net sales decreased for the year ended December 31, 2002 compared to the year ended December 31, 2001 as certain operating costs are fixed and did not increase in proportion to the increase in consolidated net sales.

The Company recorded litigation charges of $3,228,000 during the year ended December 31, 2002 and $2,180,000 during the year ended December 31, 2001 related to a lawsuit filed against the Company in Montana in 1995. The matter was settled in full and paid in full during the fourth quarter of 2002. For further discussion, see Note 8 to the accompanying consolidated financial statements.

Income from operations for the Teva brand was $12,622,000 for the year ended December 31, 2002 compared to $12,407,000 for year ended December 31, 2001. The increase was largely due to the increase in sales in both the domestic and international markets, lower royalty and other costs resulting from the purchase of Teva during the fourth quarter of 2002 of $479,000 and reduced sales commissions of $319,000 paid to the Company’s independent sales force as a result of bringing more accounts in-house. These factors were partially offset by several factors including increased marketing costs of $906,000, increased bad debt expense of $261,000, slightly lower gross margins on the Company’s newly introduced closed toe footwear line and a $260,000 factory charge for tooling costs in 2002. The Simple brand experienced income from operations of $285,000 for the year ended December 31, 2002 compared to $241,000 for the year ended December 31, 2001, reflecting several offsetting factors. Income from operations for Simple was positively impacted by 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 Company’s adoption of SFAS 142 during the current year, among other cost reductions. These improvements were nearly offset by a decrease in sales, an increase in the proportion of closeout sales to regular full margin sales and a slight increase in marketing and promotional costs of $88,000. Income from operations for the Ugg brand was $6,589,000 for the year ended December 31, 2002 compared to $3,674,000 for the year ended December 31, 2001 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 a factory chargeback of $300,000 in 2002 and the elimination of goodwill amortization of $590,000 resulting from the Company’s adoption of SFAS 142 during the current year, partially offset by a $420,000 increase in marketing spending. Income from operations of the Catalog/Internet retailing business acquired as part of the Teva acquisition was $194,000 in 2002, representing the operating earnings attributed to this newly acquired operating segment for the period from the November 25, 2002 acquisition date through December 31, 2002.

Net interest expense was $406,000 for the year ended December 31, 2002 compared with net interest income of $308,000 for the year ended December 31, 2001, primarily due to the Company’s significantly increased borrowings in order to finance the purchase of Teva in 2002, as well as lower interest rates earned on invested cash in 2002.

For the year ended December 31, 2002, income tax expense was $1,224,000, representing an effective income tax rate of 43.0%. For the year ended December 31, 2001, income tax expense was $1,185,000, representing an effective income tax rate of 42.2%. The effective income tax rate was slightly lower in 2001 due to the elimination of a previously existing valuation allowance against deferred tax assets in 2001 related to net operating loss and other income tax credit carryforwards being fully utilized. This was partially offset by the favorable impact of the elimination of the non-deductible goodwill amortization in 2002 resulting from the implementation of SFAS 142.

On January 1, 2002, the Company implemented SFAS 142, Goodwill and Other Intangible Assets, which requires that goodwill and intangible assets with indefinite useful lives no longer be amortized to earnings but

instead be reviewed periodically for impairment. The implementation of SFAS 142 resulted in a goodwill impairment charge of $8,973,000 (net of the related income tax benefit of $843,000), or $0.92 per diluted share, during the year ended December 31, 2002. This non-cash impairment charge included a write down of approximately $1.2 million, on an after tax basis, for Simple goodwill and approximately $7.8 million for Ugg goodwill. The impairment charge has been recorded as a cumulative effect of a change in accounting principle in the Company’s consolidated statement of operations for the year ended December 31, 2002.

The Company experienced net income before cumulative effect of accounting change of $1,620,000, or $0.17 per diluted share, for the year ended December 31, 2002 and a net loss after the cumulative effect of accounting change of $7,353,000, or $0.75 per diluted share. For the year ended December 31, 2001, the Company had net income of $1,626,000, or $0.17 per diluted share.

In 2001, the Company operated its business in three distinct operating segments: the Teva, Simple and Ugg wholesale divisions.

Total net sales decreased by $22,277,000, or 19.6%, between the years ended December 31, 2001 and 2000. The decrease is largely attributable to the weakness in the domestic economy, the softness in the retail environment, the reduction in international sales, an overall decrease in demand for sandals in 2001, delays in new product introductions for Teva, the colder weather during Spring 2001 in the Company’s key markets for Teva sandals and a $3,126,000 reduction in sales to Track ‘n Trail, one of the Company’s largest customers, which filed for bankruptcy in April 2001. In addition, in January 2001, the Company sold its interest in Heirlooms, Inc., the distributor of Picante brand apparel, and approximately $2,316,000 of the decrease in sales is due to the exclusion of sales resulting from the Company’s sale of this brand. Aggregate net sales of Teva decreased to $61,221,000 for the year ended December 31, 2001 from $79,732,000 for the year ended December 31, 2000, a 23.2% decrease. Net sales of Teva represented 66.9% and 70.1% of net sales in the years ended December 31, 2001 and 2000, respectively. Net sales of footwear under the Simple product line decreased 33.5% to $10,853,000 from $16,328,000 from the year ended December 31, 2000. Net sales of Ugg increased 25.3% to a record $19,185,000 for the year ended December 31, 2001 from $15,310,000 for the year ended December 31, 2000 resulting from continued strength in the brand’s historically strong California market, a continuing expansion outside California, an overall increase in the popularity of the Ugg brand and the introduction of several new Ugg styles in 2001. Overall, international sales for all of the Company’s products decreased 32.2% to $21,096,000 from $31,135,000, representing 23.1% of net sales in 2001 and 27.4% in 2000. The volume of footwear sold decreased 13.1% to 3,705,000 pairs during the year ended December 31, 2001 from 4,265,000 pairs during the year ended December 31, 2000, for the reasons discussed above.

The weighted-average wholesale price per pair sold during the year ended December 31, 2001 decreased 4.9% to $24.26 from $25.51 for the year ended December 31, 2000. The decrease was primarily due to a $527,000 increase in the sales volume of closeouts and discounted products during 2001 compared to 2000. In addition, the Company experienced a change in sales mix away from certain higher priced styles, including the leather casuals, and toward styles with lower average selling prices, including thongs and several styles introduced in 2001 at lower price points. This was partially offset by the impact of a shift in sales mix toward domestic sales, which generally had a 20% higher average selling price than sales in the international markets, and an increase in the sales of Ugg products in proportion to total sales, as the average selling price of the Ugg products is generally more than twice that of Company’s Teva and Simple products.

Cost of sales decreased by $10,637,000, or 16.7%, to $52,903,000 for the year ended December 31, 2001, compared with $63,540,000 for the year ended December 31, 2000. Gross profit decreased by $11,640,000, or 23.2%, to $38,558,000 for the year ended December 31, 2001 from $50,198,000 for the year ended December 31, 2000 and gross margin decreased to 42.2% from 44.1%. The decrease in gross margin was primarily due to an increased impact of closeout sales, as well as lower margins in the pricing of the 2001 product line compared to the 2000 line in response to competitive pressures, partially offset by a reduction in inventory write-downs of $446,000.

The Company carries its inventories at the lower of cost or market, using a reserve for inventory obsolescence to adjust the carrying values to market where necessary based on ongoing reviews of estimated net realizable values of its inventories. For the year ended December 31, 2001, the Company had a net decrease in the reserve for inventory obsolescence of approximately $321,000, primarily due to the sale of domestic inventory for Teva and Simple product for which a write-down had previously been recorded, as well as the sale of the Company’s remaining Canadian inventory, for which a write-down had also previously been recorded in connection with the Company’s transition to a distributor in the Canadian market. For the year ended December 31, 2000, the Company had net additions to the reserve for inventory obsolescence of approximately $435,000, reflecting inventory write-downs to estimated market values for Teva and Simple in the United States and write-downs of Canadian Teva and Simple inventory in connection with the shift to a distributor for that territory.

Selling, general and administrative expenses decreased by $3,528,000, or 9.4%, to $34,040,000 for the year ended December 31, 2001, compared with $37,568,000 the year ended December 31, 2000, and increased as a percentage of net sales to 37.2% in 2001 from 33.0% in 2000. The decrease in selling, general and administrative expenses was primarily due to reductions in marketing costs of $978,000, lower commissions and royalty expense of an aggregate amount of $973,000 on the lower sales levels, the elimination of selling, general and administrative expenses associated with the Company’s former Heirlooms subsidiary of $860,000, reduced payroll costs of $679,000 and decreased bad debt expense of $311,000. In addition, during 2000 the Company had a non-recurring charge of approximately $400,000 for European anti-dumping duties dating back to 1997. These reductions were partially offset by increases in other areas, including additional amortization expense in 2001 of $522,000 resulting from the Company’s $1,600,000 payment for an extension of the option term for the Company’s option to acquire Teva, which was being amortized over the three year option term. Despite the overall decrease in dollar amounts, the selling, general and administrative expenses as a percentage of net sales increased for the year ended December 31, 2001 compared to the year ended December 31, 2000 as certain operating costs are fixed and did not decrease in proportion to the decrease in consolidated net sales.

During the year ended December 31, 2001, the United States Court of Appeals affirmed the March 17, 1999 judgment against the Company in connection with a case brought in Montana. As a result, the Company recorded a charge of $2,180,000 related to this litigation in 2001. The matter was settled in full and paid in full during the fourth quarter of 2002. For further discussion, see Note 8 to the accompanying consolidated financial statements.

Income from operations for the Teva brand were $12,407,000 for the year ended December 31, 2001 compared to $19,953,000 for year ended December 31, 2000. The decrease was largely due to the decrease in sales in both the domestic and international markets, an increased impact of closeout sales, lower gross margins in the pricing of the 2001 line compared to the 2000 line and increased amortization costs of $522,000 related to the $1,600,000 extension of the Teva purchase option, partially offset by a reduced impact of inventory write-downs of $376,000 and lower marketing costs of $566,000. The Simple brand experienced income from operations of $241,000 for the year ended December 31, 2001 compared to $2,501,000 for the year ended December 31, 2000 as a result of the decrease in sales, the increased impact of closeout sales during the period, lower gross margins on certain newly introduced styles and the bad debt write-off for Track ‘n Trail of $257,000. Income from operations for the Ugg brand was $3,674,000 for the year ended December 31, 2001 compared to income from operations of $2,863,000 for the year ended December 31, 2000 largely due to the increase in sales, partially offset by the related increase in sales commissions of $211,000 and an increase in bad debt expense of $288,000, partially due to the Track ‘n Trail bankruptcy. Additionally, the income from operations for the Teva and Simple segments decreased versus that experienced in the year ago period as certain costs are fixed and did not decrease in proportion to the decrease in consolidated net sales.

Net interest income was $308,000 for the year ended December 31, 2001 compared with net interest expense of $67,000 for the year ended December 31, 2000, primarily due to the Company’s significantly improved cash position in 2001.

For the year ended December 31, 2001, income tax expense was $1,185,000, representing an effective income tax rate of 42.2%. For the year ended December 31, 2000, income tax expense was $5,320,000, representing an effective income tax rate of 43.1%. The decrease in the effective income tax rate in 2001 is largely attributed to the elimination of a previously existing valuation allowance against deferred tax assets in 2001 related to net operating loss and other income tax credit carryforwards being fully utilized, partially offset by the increased impact of non-deductible goodwill amortization in 2001.

For the year ended December 31, 2001, the Company’s net income decreased 76.8%, to $1,626,000 from $7,015,000 for the year ended December 31, 2000, for the reasons discussed above.

Other than operating leases discussed in Note 8 to the accompanying consolidated financial statements, the Company has no off-balance sheet arrangements.

Sales and Earnings per Share Expectations. For the year ending December 31, 2003, the Company currently expects net sales to range from $101 million to $106 million and diluted earnings per share to range from $0.41 to $0.46. For the calendar year 2003, including sales from the wholesale divisions and the newly acquired catalog and internet retailing business combined, the Company currently expects sales of its Teva product line to range from $67 million to $69 million; Simple to range from $11 million to $12 million; and Ugg to range from $23 million to $25 million.

The Company’s liquidity consists primarily of cash, trade accounts receivable, inventories and a revolving credit facility. At December 31, 2002, working capital was $22,453,000 including $3,941,000 of cash. Cash provided by operating activities aggregated $7,441,000 for the year ended December 31, 2002, which reflects the Company’s payment in 2002 of a $4,000,000 litigation settlement. Through improvements in cash collections efforts, trade accounts receivable increased only 2% to $20,851,000 at December 31, 2002 compared to $20,395,000 at the end of 2001 while net sales during the fourth quarter ended December 31, 2002 increased 23% as compared to the fourth quarter ended December 31, 2001. During the same period, the Company also reduced its inventories by 7% from $18,425,000 at December 31, 2001 to $17,067,000 at December 31, 2002, reflecting a $3,617,000 decrease in Teva inventory, a $2,081,000 increase in Ugg inventory and a $178,000 increase in Simple inventory at year end.

In February 2002, the Company obtained a new revolving credit facility with Comerica Bank, which was subsequently amended in November 2002 in connection with the financing of the Teva acquisition (“the Facility”). The Facility expires June 1, 2004 and provides for a maximum availability of $20,000,000 including $18,000,000 of borrowing availability which is subject to a borrowing base, plus an additional $2,000,000 of availability beyond the borrowing base during the period from November 1, 2002 through April 30, 2003 and from December 1, 2003 to April 30, 2004. In general, the borrowing base is equal to 75% of eligible accounts receivable, as defined, and 50% of eligible inventory, as defined. The accounts receivable advance rate can increase or decrease depending on the Company’s accounts receivable dilution, which is calculated periodically. Up to $10,000,000 of borrowings may be in the form of letters of credit. The Facility bears interest at the bank’s prime rate (4.25% at December 31, 2002) or at the Company’s option, at LIBOR plus 1.0% to 2.5%, depending on the Company’s ratio of liabilities to earnings before interest, taxes, depreciation and amortization (“EBITDA”), and is secured by substantially all assets of the Company. The Facility included an upfront fee of $230,000 when it was amended in November 2002 and a subsequent annual commitment fee of $100,000 on November 25, 2003. At December 31, 2002, the Company had outstanding borrowings under the Facility of $4,775,000, a foreign currency reserve of approximately $800,000 for outstanding forward contracts

In November 2002, in order to finance the Teva acquisition the Company entered into several additional financing arrangements including a $7,000,000 term loan from Comerica Bank (“the Term Loan”), $14,000,000 of subordinated debt from an unrelated party (“the Subordinated Debt”), $13,000,000 of junior subordinated notes from the Teva seller (“the Seller’s Notes”) and $5.5 million of preferred stock issued to the Teva seller (“the Preferred Stock”). Based on intercreditor agreements between the various parties, the Company is generally not permitted to repay the Subordinated Debt or the Seller’s Notes or repurchase (“call”) the Preferred Stock without the prior approval and consent of Comerica Bank, the senior lender. Likewise, the Company is generally not permitted to repay the Seller’s Notes or call the Preferred Stock without the prior approval and consent of both Comerica Bank and the holder of the Subordinated Notes.

The $7,000,000 Term Loan is secured by all assets of the Company and bears interest at the prime rate (4.25% at December 31, 2002) plus 2.5%, or at the Company’s option at LIBOR plus 4.0%, depending on the Company’s ratio of liabilities to EBITDA. Interest is payable monthly, an initial principal payment of $1,750,000 is payable May 31, 2003 and the remaining principal is payable in monthly installments of approximately $292,000 from June 2003 to November 2004.

The $14,000,000 of Subordinated Debt is secured by a secondary security position in all of the Company’s assets, with principal payable in quarterly installments of $1,500,000 beginning November 2007 and the balance is due in full in November 2008. The Subordinated Debt bears interest at 16.75% of which 12% is payable monthly and 4.75% is deferred (at the Company’s option) and compounds monthly until the 2008 maturity date. Except for certain limited exceptions, in the event that the Company decides to prepay all or a portion of the Subordinated Debt, it will be required to pay prepayment penalties ranging from 4% to 5% of the portion prepaid prior to November 2004, with no penalties for prepayments thereafter. In connection with arranging the Subordinated Debt, the Company 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 financial statements and are being amortized over the term of the loan.

The $13,000,000 of Seller’s Notes are unsecured and are due in November 2008. The Seller’s Notes bear interest at 9% of which 7% is payable annually and 2% is deferred (at the Company’s option) and compounds annually until the 2008 maturity date. The Seller’s Notes are subordinated to the Subordinated Debt, the Term Loan and the Facility and do not have prepayment penalties.

The $5,500,000 of Preferred Stock pays no dividends unless dividends are declared and paid on the Company’s common stock, is callable by the Company through November 25, 2005 at face amount plus an additional 10% per year and is convertible into common stock by the holder after November 25, 2005, if it is still outstanding, at a conversion price of $3.632 per share. In addition, the preferred stock provides the holder with the right to designate one member of the Company’s Board of Directors. The Preferred Stock also votes on an as converted to common stock basis regarding other matters excluding the election of directors.

The agreements underlying the Facility, the Term Loan, and the Subordinated Debt 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, 2002.

Capital expenditures totaled $1,477,000 for the year ended December 31, 2002. The Company’s capital expenditures related primarily to costs associated with the Company’s implementation of a new computer system that was completed in 2002 as well as improvements to the racking system at the Company’s distribution center. The Company currently has no material commitments for future capital expenditures and estimates that capital expenditures for 2003 will likely range from $700,000 to $1,000,000. The actual amount of capital expenditures for 2003 may differ from this estimate, largely depending on any unforeseen needs to replace existing assets.

In February 2002, the Company agreed to guarantee up to $1,000,000 of a home construction bank loan of an officer of the Company, which matures June 1, 2004. As of December 31, 2002, approximately $1,200,000 was outstanding under the officer’s loan from the bank. The guarantee, which was approved by the

In November 2002, the Company guaranteed on behalf of a third party manufacturing factory up to $450,000 of its payables with a key supplier related to purchases through September 30, 2003. In prior years, the Company had provided a letter of credit, which the factory had used to obtain credit at its suppliers for the production of the Company’s Ugg inventory. The Company entered into this guarantee arrangement to avoid providing a letter of credit and thereby using a portion of the Company’s credit availability under its revolving credit facility. The Company received a corresponding personal guarantee of the related debt from the owner of the factory. The fair value of the guarantee was immaterial at December 31, 2002.

The following table summarizes the Company’s contractual obligations at December 31, 2002 and the effects such obligations are expected to have on liquidity and cash flow in future periods.

The Company’s Board of Directors has authorized the repurchase of up to 2,200,000 shares of common stock under a stock repurchase program. Such repurchases are authorized to be made from time to time in open market or in privately negotiated transactions, subject to price and market conditions, the Company’s cash availability and the terms of the Company’s new revolving credit facility, which provides that the proceeds from the Facility cannot be used for stock buy-back purposes. Under this program, the Company repurchased approximately 973,000 shares for aggregate cash consideration of approximately $7,499,000 prior to 1999. No shares were repurchased during or subsequent to the year ended December 31, 1999. At December 31, 2002, approximately 1,227,000 shares remain available for repurchase under the program.

The Company believes that internally generated funds, the available borrowings under its existing credit facilities, and the cash on hand will provide sufficient liquidity to enable it to meet its current and foreseeable working capital requirements. However, risks and uncertainties which could impact the Company’s ability to maintain its cash position include the Company’s growth rate, the continued strength of the Company’s brands, its ability to respond to changes in consumer preferences, its ability to collect its receivables in a timely manner, its ability to effectively manage its inventory, and the volume of letters of credit used to purchase product, among others.

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

Historically, the Company has experienced its highest sales level in the first quarter, which has been Teva’s strongest selling season, while the third quarter has historically had the lowest sales volume. In 2002, as a result of the continued growth in Ugg and the introduction of the Fall closed toe Teva offering, the fourth quarter was the quarter with the second highest sales volume. Given the Company’s expectations for each of its brands in 2003, the Company currently expects this seasonal pattern to continue in 2003. The actual results could differ materially depending upon consumer preferences, availability of product, competition, and the Company’s customers continuing to carry and promote its various product lines, among other risks and uncertainties. See also the discussion regarding forward-looking statements under “Risk Factors”.

The Company believes that the relatively moderate rates of inflation in recent years have not had a significant impact on its net sales or profitability.

Revenue Recognition. The Company derives its revenue from the sale of its products. In general, revenue is recognized upon shipment of the merchandise. Domestically, goods are shipped directly from the Company’s domestic distribution center in California, and revenue is recognized upon shipment from the distribution center (FOB shipping point). For certain European accounts, product is shipped from the independent factories on a delivered duty paid basis (“DDP”) whereby the goods are delivered from the independent factories to a third party warehouse in the Netherlands where the goods are custom cleared and transferred to the distributors. In accordance with the DDP terms, the related revenue is recognized upon customs clearance. For virtually all other international accounts, the goods are delivered directly from the independent factories to the distributors on an FOB shipping point basis and revenue is recognized upon shipment from the factory. In all of the above cases, each of the following conditions have been met prior to revenue recognition: persuasive evidence of an arrangement exists, delivery has occurred, price is fixed and determinable and collectibility is reasonably assured.

Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 revenues and expenses during the reporting period. The Company bases these estimates and assumptions upon historical experience and existing, known circumstances. Actual results could differ from those estimates. Specifically, management must make estimates in the following areas:


	Allowance for doubtful accounts. The Company provides a reserve against receivables for estimated losses that may result from its customers’ inability to pay. The Company determines the amount of the reserve by analyzing known uncollectible accounts, aged receivables, economic conditions, historical experience and the customers’ credit-worthiness. Receivables which are subsequently determined to be uncollectible are charged or written off against this reserve. Reserves have been fully established for all expected or probable losses of this nature. The gross trade accounts receivable balance was $23.5 million and the allowance for doubtful accounts was $2.0 million at December 31, 2002.

	Reserve for sales discounts. A significant portion of the Company’s domestic net sales and resulting accounts receivable have an associated discount which the customers may take, generally based upon meeting certain order, shipment and payment timelines. The Company estimates the amount of discounts, which are expected to be taken against the period-end accounts receivable, and records a corresponding reserve for sales discounts. The Company determines 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, 2002 the reserve for sales discounts was approximately $0.7 million.

	Allowance for estimated returns. The Company records an allowance for anticipated future returns of goods shipped prior to period-end. In general, the Company accepts returns for damaged or defective products, but discourages returns for other reasons. The amount of the allowance is determined based upon any approved customer requests for returns, historical returns experience, and any recent events which could result in a change in historical returns rates, among other factors. The allowance for returns at December 31, 2002 was $1.3 million.

	Inventory write-downs. Inventories are stated at lower of cost or market. The Company reviews the various items in inventory on a regular basis for excess, obsolete and impaired inventory. In doing so, the Company writes the inventory down to estimated future net selling prices. Inventories were stated at $17.1 million, net of a reserve for inventory write-downs of $0.9 million at December 31, 2002.

Valuation of goodwill, intangible and other long-lived assets. The Company periodically assesses the impairment of goodwill, intangible and other long-lived assets based on assumptions and judgments regarding the carrying value of these assets. The assets are considered to be impaired if the Company determines that the carrying value may not be recoverable. Among other considerations, the following factors are considered:


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

	•	the Company’s future plans regarding utilization of the asset;

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

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


	If the assets are considered to be impaired, an impairment loss is recognized equal to the amount by which the carrying value of the assets exceeds the fair value of the assets. In addition, as it relates to long-lived assets, the Company bases the useful lives and related amortization or depreciation expense on the estimate of the period that the assets will generate revenues or otherwise be used by the Company.

	In 2002, Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” became effective and as a result, the Company recorded a goodwill impairment charge in the first quarter of 2002. See full discussion under “Recently Issued Pronouncements”.

	Litigation reserves. Estimated amounts for claims that are probable and that can be reasonably estimated are recorded as liabilities in the consolidated balance sheets. The likelihood of a material change in these estimated reserves would be dependent on new claims as they may arise and the favorable or unfavorable outcome of the particular litigation.

	Valuation of deferred income taxes. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. The likelihood of a material change in the expected realization of these assets depends on future taxable income, the ability to deduct tax loss carryforwards against future taxable income, and the effectiveness of the Company’s tax planning.

Derivatives. 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 Euros. Derivative financial instruments are not used for speculative purposes. At December 31, 2002, the Company had foreign currency forward contracts to purchase approximately $7.5 million U.S. dollars for approximately 8.0 million Euros.

In July 2001, the FASB issued Statement of Financial Accounting Standards No. 141 (“SFAS 141”), Business Combinations, and Statement of Financial Accounting Standards No. 142 (“SFAS 142”), Goodwill and Other Intangible Assets. SFAS 141 requires that the purchase method be used for all business combinations initiated after June 30, 2001. SFAS 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized to earnings, but instead be reviewed for impairment in accordance with the provisions of SFAS 142. The amortization of goodwill and intangible assets with indefinite useful lives ceases upon adoption of SFAS 142, which became effective for fiscal years starting after December 15, 2001. The Company implemented SFAS 142 as of January 1, 2002, resulting in a goodwill impairment charge of $8,973,000 (net of the related income tax benefit of $843,000), or $0.92 per diluted

share, during the year ended December 31, 2002. This non-cash impairment charge included a write down of approximately $1.2 million, on an after tax basis, for Simple goodwill and approximately $7.8 million for Ugg goodwill. As a result of these write downs, Simple has no remaining goodwill and Ugg has approximately $6.1 million of goodwill remaining at December 31, 2002, which has been included in intangible assets in the accompanying consolidated balance sheet at December 31, 2002. The impairment charge has been recorded as a cumulative effect of a change in accounting principle in the Company’s statement of operations for the year ended December 31, 2002. In addition, SFAS 142 provides that goodwill no longer be amortized, and as a result the Company recorded no goodwill amortization during the year ended December 31, 2002, whereas the Company had recorded approximately $809,000 and $811,000 for fiscal years ended December 31, 2001 and 2000, respectively.

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

In June 2001, 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 will adopt SFAS No. 143 on January 1, 2003. The adoption of SFAS No. 143 is not expected to have a material effect on the Company’s financial statements.

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. Earlier application of these provisions is encouraged. The provisions of the Statement related to Statement No. 13 were effective for transactions occurring after May 15, 2002, with early application encouraged. The adoption of SFAS No. 145 is not expected to have a material effect on the Company’s financial statements.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The adoption of SFAS No. 146 is not expected to have a material effect on the Company’s financial statements.

In November 2002, the FASB issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34. This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. The Interpretation also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The 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 financial statements. 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 the accompanying 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 required for fiscal years ending after December 15, 2002 and are included in the notes to the accompanying 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 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 is not expected to have a material effect on the Company’s financial statements.

Derivative Instruments. A substantial portion of the Company’s European sales for the year ending December 31, 2003 will be denominated in Euros. In order to mitigate the Company’s exposure to fluctuations in the foreign currency exchange rate, the Company has entered into forward contracts for approximately 8.0 million Euros. See Note 9 to the accompanying consolidated financial statements.

Market Risk. The Company’s market risk exposure with respect to financial instruments is to changes in the “prime rate” in the United States and changes in the Eurodollar rate. The Company’s revolving line of credit and senior term debt provide for interest on outstanding borrowings at rates tied to prime rate, or at the Company’s election tied to the Eurodollar rate. At December 31, 2002, the Company had outstanding borrowings aggregating $11,775,000 under these two credit facilities. A 1% increase in interest rates on current borrowings would have a $118,000 impact on income (loss) before income taxes.

See Item 15(a) and page 34 for an index to the consolidated financial statements and supplementary information included herein.

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

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 2001 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002 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 implemented Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, on January 1, 2002.


	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.

	In 2000, the Company incurred $715,000 of long-term debt in connection with the acquisition of $568,000 of property and equipment and $147,000 of prepaid expenses.

The consolidated financial statements include the accounts of Deckers Outdoor Corporation and its wholly owned subsidiaries (collectively referred to as the “Company”). All significant 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).

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 $993,000, $1,116,000, and $1,399,000 for the years ended December 31, 2002, 2001, and 2000, respectively. Related costs paid to third-party shipping companies are recorded as a cost of sales, totaling $1,124,000, $983,000, and $1,244,000 for the years ended December 31, 2002, 2001, and 2000, 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 No. 142 (SFAS 142), Goodwill and Other Intangible Assets. 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 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 144, Accounting for Impairment or Disposal of Long-Lived Assets.

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 No. 144 provides a single accounting model for long-lived assets to be disposed of. SFAS No. 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 No. 144 on January 1, 2002. The adoption of SFAS No. 144 did not affect the Company’s financial statements.

In accordance with SFAS No. 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 values of the guarantees of officer’s debt and factory debt are estimated based on their expected present values (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). Under the provisions of SFAS 123, the Company has elected to continue to measure compensation cost for employees and nonemployee directors of the Company under the intrinsic value method of APB No. 25 and comply with the pro forma disclosure requirements under SFAS 123. The Company applies the fair value techniques of SFAS 123 to measure compensation cost for options/warrants granted to nonemployees.

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, revenues, 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 United States of America. 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 $1,092,000, $1,034,000, and $1,076,000 in 2002, 2001, and 2000, 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 2002, 2001, and 2000 were $7,456,000, $6,087,000, and $7,108,000, respectively. Included in prepaid and other current assets at December 31, 2002 and 2001 were $403,000 and $714,000, respectively, related to prepaid advertising and promotion expenses for programs that take place after December 31, 2002 and 2001, 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 earnings 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.

Options to purchase 286,000, 282,000, and 267,000 shares of common stock at prices ranging from $4.80 to $9.88, $5.25 to $9.88, and $5.50 to $13.75 were outstanding during 2002, 2001, and 2000, 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. Revenues 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, 2002, the Company had foreign currency forward contracts to purchase $7,482,000 U.S. dollars for approximately 8,000,000 Eurodollars.

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 earnings 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 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 significant reportable business segments are the Teva, Simple, and Ugg wholesale divisions and the Company’s newly acquired internet and catalog retailing business. Information related to these segments is summarized in note 10.

Certain reclassifications have been made to the 2001 and 2000 balances to conform to the 2002 presentation.

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

In June 2001, 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 will adopt SFAS No. 143 on January 1, 2003. The adoption of SFAS No. 143 is not expected to have a material effect on the Company’s financial statements.

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. Earlier application of these provisions is encouraged. The provisions of the Statement related to Statement

No. 13 were effective for transactions occurring after May 15, 2002, with early application encouraged. The adoption of SFAS No. 145 is not expected to have a material effect on the Company’s financial statements.

In November 2002, the FASB issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57, and 107 and a rescission of FASB Interpretation No. 34. This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. The Interpretation also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The 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 financial statements. 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 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 required for fiscal years ending after December 15, 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 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 is not expected to have a material effect on the Company’s financial statements.

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 $90,000, $67,000, and $73,000 during 2002, 2001, and 2000, 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, 2002, 2001, and 2000.

The aggregate maturities of long-term debt as of December 31, 2002 are as follows:

In February 2002, the Company obtained a new revolving credit facility with Comercia Bank, which was subsequently amended in November 2002 in connection with the financing of the Teva acquisition (the “Facility”). The Facility expires June 1, 2004 and provides for a maximum availability of $20,000,000 including $18,000,000 of borrowing availability which is subject to a borrowing base, plus an additional $2,000,000 of availability beyond the borrowing base during the period from November 1, 2002 through April 30, 2003 and from December 1, 2003 to April 30, 2004. In general, the borrowing base is equal to 75% of eligible accounts receivable, as defined, and 50% of eligible inventory, as defined. The accounts receivable advance rate can increase or decrease depending on the Company’s accounts receivable dilution, which is calculated periodically. Up to $10,000,000 of borrowings may be in the form of letters of credit. The Facility bears interest at the bank’s prime rate (4.25% at December 31, 2002) or at the Company’s option, at LIBOR plus 1.0% to 2.5%, depending on the Company’s ratio of liabilities to earnings before interest, taxes, depreciation and amortization (EBITDA), and is secured by substantially all assets of the Company. The Facility included an upfront fee of $230,000 when it was amended in November 2002 and a subsequent annual commitment fee of $100,000 on November 25, 2003. At December 31, 2002, the Company had outstanding borrowings under the Facility of $4,775,000, a foreign currency reserve of approximately $800,000 for outstanding forward contracts and had no outstanding letters of credit. The Company had credit availability under the Facility of $14,425,000 at December 31, 2002.

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, 2002.

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 2001 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.

Refundable income taxes as of December 31, 2001 arise primarily from the overpayment of estimated taxes.

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). The Series A Preferred Stock has voting rights equal to common stock (on a pre-conversion basis) and dividend rights equal to common stock (on a post-conversion basis). Subject to the approval of the Company’s board of directors, the Series A Preferred Stockholders may elect one director. A majority vote of the Series A Preferred Stock holders is required prior to the Company: creating additional classes or series of stock ranking above or in parity with the Series A Preferred Stock, amending the Certificate of Incorporation, changing the authorized shares of Series A Preferred Stock, or increasing the number of directors. Until November 25, 2005, the Company may redeem the Series A Preferred stock for $4.00 per share plus 10%, compounded annually. After November 25, 2005, each share of Series A Preferred Stock is convertible to 1.1013215 shares of common stock.

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, 124,896, 162,344, and 40,671 shares of common stock were issued to employees in 2002, 2001, and 2000, 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 Company has secured the return of the Company’s common stock and the note receivable has been reversed.

Common stock option activity under the 1993 Plan for the years ended December 31, 2002, 2001, and 2000 is as follows:

The per share weighted average fair value of stock options granted during 2002, 2001, and 2000 was $2.25, $2.13, and $1.95, respectively, on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: 2002 — expected dividend yield of 0%, stock volatility of 48.46%, risk-free interest rate of 3.7%, and an expected life of seven years; 2001 — expected dividend yield of 0%, stock volatility of 49.56%, risk-free interest rate of 3.3%, and an expected life of seven years; 2000 — expected dividend yield of 0%, stock volatility of 50.47%, risk-free interest rate of 5.8%, and an expected life of seven years.

The following table summarizes information about stock options outstanding and exercisable at December 31, 2002.

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, 11,870, 26,036, and 30,301 shares were issued in 2002, 2001, and 2000, 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.

The Company’s board of directors has authorized the repurchase of up to 2,200,000 shares of common stock under a stock repurchase program subject to the terms of the Company’s new credit facility, which provides that the proceeds from the facility cannot be used for stock buy-back purposes. There were no shares repurchased under this program in 2002, 2001, and 2000. At December 31, 2002, approximately 1,227,000 shares remained available for repurchase under the program.

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 $111,000 and $152,000 in 2002 and 2001, 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 $3,739,000, $4,194,000, and $4,307,000 during the years ended December 31, 2002, 2001, and 2000, respectively. Advertising expense, which is included in selling, general, and administrative expenses in the accompanying consolidated financial statements, related to

Teva sales was $5,178,000, $4,313,000, and $4,829,000 during the years ended December 31, 2002, 2001, and 2000, 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 2006:

Total rent expense for the years ended December 31, 2002, 2001, and 2000 was approximately $1,188,000, $1,074,000, and $1,072,000, 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, 2002, approximately $1,200,000 was outstanding under the officer’s loan from the bank. The fair value of the guarantee was immaterial at December 31, 2002.

In November 2002, the Company guaranteed on behalf of a third-party manufacturing factory up to $450,000 of its payables with a key supplier related to purchases through September 30, 2003. In prior years, the Company had provided a letter of credit, which was used by the factory to obtain credit at its suppliers for the production of Ugg inventory. The Company entered into this guarantee arrangement to avoid providing a letter of credit, and thereby, using a portion of the Company’s credit availability under its revolving credit facility. The Company received a corresponding personal guarantee of the related debt from the owner of the factory. The fair value of the guarantee was immaterial at December 31, 2002.

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 United States 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 is 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. The Company denies the allegations and has filed a countersuit against the Distributor for breach of contract. In the event that the Company is not successful in this matter, the Company believes it would have a maximum exposure of $550,000 beyond the amounts provided for in the financial statements, based on advice from legal counsel.

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.

At December 31, 2002, the Company had foreign currency forward contracts to purchase $7,482,000 U.S. dollars for approximately 8,000,000 Eurodollars, expiring through March 2003. An unrealized loss of $606,000 has been recorded as of December 31, 2002 as a component of accumulated other comprehensive income.

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

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 United States. 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 21.0%, 23.1%, and 27.4% of net sales

for the years ended December 31, 2002, 2001, and 2000, respectively. The Company does not consider international sales a separate segment. Such sales 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, 2002, 2001, and 2000, the Company had no single customer exceeding 10% 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, 2001, the Company had one customer representing 16.4% 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. 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:

Intangibles of $51,000,000 were assigned to registered trademarks that are not subject to amortization. The remaining $1,580,000 of acquired intangible assets consists primarily of patents and have a weighted average useful life of approximately seven years. The $11,174,000 of goodwill is expected to be fully deductible for income tax purposes. 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 new accounting standard on January 1, 2002, resulting in a goodwill impairment charge of $8,973,000 (net of the related income tax benefit of $843,000) during the year ended December 31, 2002. This noncash 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. As a result of these write-downs, Simple has no remaining goodwill and Ugg has approximately $6,100,000 of goodwill remaining at December 31, 2002, 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 no goodwill amortization during the year ended December 31, 2002, whereas the Company had recorded approximately $809,000 and $811,000 of goodwill amortization during the years ended December 31, 2001 and 2000, respectively. For comparative purposes, the following schedule reconciles reported net income (loss) to adjusted net income (loss) for the years ended December 31, 2001 and 2000, adjusted to exclude goodwill amortization, along with comparative information for the year ended December 31, 2002.

Aggregate amortization expense for amortizable intangible assets for the year ended December 31, 2002 was $1,049,000. Estimated amortization expense for the next five years is: $265,000 in 2003, $242,000 in 2004, $242,000 in 2005, $242,000 in 2006, and $242,000 in 2007.

The changes in the carrying amount of goodwill for the year ended December 31, 2002 are as follows:

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 2003 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, 2002, 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 2003 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, 2002, 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 2003 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, 2002, 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 2003 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, 2002, and such information is incorporated herein by reference.

Within the 90 days prior to the filing date of this report, the Chief Executive Officer and the Chief Financial Officer of the Company, 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-14. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer believe that, as of the date of the evaluation, 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 or mistakes or intentional circumvention of the established process.

There were no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls, known to the Chief Executive Officer or the Chief Financial Officer, subsequent to the date of the evaluation.

(a) Consolidated Financial Statements and Schedules required to be filed hereunder are indexed on page 34 hereof.

A report on Form 8-K was dated and filed on October 4, 2002 by the Company reporting on Item 5 that a federal judge had ruled that the Company must pay a $4.29 million award for a lawsuit filed against the Company in Montana in 1995.

A report on Form 8-K was dated and filed October 15, 2002 by the Company reporting on Item 5 that the Company entered into a definitive agreement to acquire Teva in a cash and stock transaction valued at approximately $62.0 million.

A report on Form 8-K dated November 8, 2002 was filed on November 12, 2002 by the Company reporting on Item 5 that Peter Benjamin, President and Chief Operating Officer, will be resigning in order to return to his role of directing Asian sales operations effective January 1, 2003.

A report on Form 8-K was dated and filed December 9, 2002 by the Company reporting on Item 5 that the Company completed the acquisition of the worldwide Teva patents, trademarks and other assets from Mark Thatcher, the Company’s former licensor and the inventor of the Teva patents.

A report on Form 8-K/A was dated and filed February 7, 2003 by the Company amending the report on Form 8-K filed December 9, 2002 by reporting under Item 7 certain required pro forma financial information required as a result of the acquisition of the worldwide Teva patents, trademarks and other assets from Mark Thatcher.

A report on Form 8-K dated February 27, 2003 was filed on March 3, 2003 by the Company reporting on Item 5 the announcement of the Company’s fourth quarter and fiscal 2002 financial results.


+	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.

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.

1. I have reviewed this annual report on Form 10-K of Deckers Outdoor Corporation;

2. Based on my knowledge, this annual 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 annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:


	a) Designed such disclosure controls and procedures 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 annual report is being prepared;

	b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

	c) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, 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 in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

	b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.


	/s/ DOUGLAS B. OTTO

	Douglas B. Otto
	Chief Executive Officer
	Deckers Outdoor Corporation

1. I have reviewed this annual report on Form 10-K of Deckers Outdoor Corporation;


	a) Designed such disclosure controls and procedures 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 annual report is being prepared;

	b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

	c) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;


	a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

	b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and


	/s/ M. SCOTT ASH

	M. Scott Ash
	Chief Financial Officer
	Deckers Outdoor Corporation

67 EX-10.17 3 v88494exv10w17.txt EXHIBIT 10.17 EXHIBIT 10.17 DECKERS OUTDOOR CORPORATION 495-A South Fairview Avenue Goleta, CA 93117 August 20, 2002 PERSONAL AND CONFIDENTIAL Mr. Peter C. Benjamin Deckers Outdoor Corporation 495-A South Fairview Avenue Goleta, CA 93117 Re: Deckers Outdoor Corporation ("Deckers") Dear Peter: On behalf of Deckers, I am pleased to offer you this employment agreement (the "Employment Agreement"). The terms and conditions of this offer are as follows: 1. POSITIONS AND TITLES: - Title: Consultant to the CEO - You will report to the Chief Executive Officer (the "CEO"). - You will be responsible for special projects and other areas as directed by the CEO, generally not to exceed 5 hours a week, or 21 hours a month unless mutually agreed otherwise. We acknowledge that you may continue to be involved in your own investments and businesses, so long as they do not interfere with the performance of your accepted duties. 2. COMPENSATION: - For the year ending December 31, 2003, you will receive a salary of FORTY SIX THOUSAND DOLLARS ($46,000) per annum, payable bi-weekly. - You will be given your current laptop computer (Sony PCG-R505DCK) as of the effective date of this Agreement, January 1, 2003. - You will retain your current Deckers credit cards and have an annual T&E budget amount of THREE THOUSAND DOLLARS ($3,000). Should your charged amount exceed this sum you will be responsible for any balance owed. Should your charged amount be less you will receive the difference after reconciliation of you total expenses through the end of 2003. 4. TERMINATION: - Employment is at will. In the event that termination occurs for reasons other than: (i) cause or (ii) your voluntary termination, you will be paid the remaining balance of your annual salary as severance. - For purposes of this Employment Agreement, the term "cause" will be defined as contemplated by Section 2924 of the California Labor Code (a copy of which is in effect as of the date hereof and attached to this Employment Agreement as Exhibit A, and made a part hereof by this reference). 5. OTHER: - You are to receive insurance, medical and health benefits currently available pursuant to existing Deckers policies. - You will be subject to the policies and terms outlined in Deckers' human resources policy manual. - You will be subject to Deckers' Confidentiality Agreements and Trade Secret Agreements. - As of December 31, 2002, the termination date of your current Employment Agreement with Deckers, you will resign from your positions as President, Chief Operating Officer, and an executive officer of Deckers, and any of its subsidiaries, and return all unvested option rights to Deckers. You will retain all rights in options that are vested as of December 31, 2002 and be allowed to sell your existing shares and the shares subject to those vested options throughout 2003. - You agree not to sell any shares of Deckers stock from September 1, 2002 through December 31, 2002 and no more than 30,000 shares per quarter in 2003. - You agree to execute any documents required to effect any terms contained herein. 6. EFFECTIVE DATE: - The effective date of this Employment Agreement is January 1, 2003 through December 31, 2003, unless terminated earlier under point 4 of this Agreement (the "Effective Date"). 7. ARBITRATION: - Any claim or controversy arising out of or related to this Employment Agreement, the employment relationship or the subject matter hereof, shall be settled by binding arbitration before one arbitrator in Santa Barbara, California, in accordance with the Commercial Arbitration Rules of the American Arbitration Association; and judgment upon any award rendered by the arbitrator may be entered as a judgment in any court having competent jurisdiction. The parties shall have rights to discovery as provided in Section 1 283.05 of the California Code of Civil Procedure, which is incorporated herein by this reference. The prevailing party in any such dispute shall be awarded all of its costs and expenses, including reasonable attorneys' fees. Very truly yours, DECKERS OUTDOOR CORPORATION /s/ Douglas B. Otto ------------------- DOUGLAS B. OTTO, Chairman of the Board and Chief Executive Officer Please acknowledge your acceptance of the terms and conditions of this Employment Agreement by signing and returning one copy of this Employment Agreement. I agree to the terms and conditions of this Employment Agreement. /s/ Peter C. Benjamin September 26, 2002 --------------------- ------------------ Peter C. Benjamin Date EX-10.20 4 v88494exv10w20.txt EXHIBIT 10.20 EXHIBIT 10.20 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as of November 25, 2002, by and between DECKERS OUTDOOR CORPORATION, a Delaware corporation (the "Company"), and JOHN KALINICH (the "Executive"). ARTICLE I DUTIES AND TERM 1.1 Employment. In consideration of their mutual covenants and other good and valuable consideration, the receipt, adequacy, and sufficiency of which is hereby acknowledged, the Company agrees to hire the Executive, and the Executive agrees to remain in the employ of the Company, upon the terms and conditions herein provided. 1.2 Position and Responsibilities. The Executive will serve as Vice President and Director of Teva retail and licensing, reporting directly to the Chief Executive Officer. As Vice President and Director of Teva retail and licensing, the Executive shall perform the following duties: mail order, Internet and retail operations, licensing programs and intellectual property development and protection. 1.3 Term. The term of the Executive's employment under this Agreement will commence on the date first written above and will continue, unless sooner terminated, until November 24, 2007. Commencing on November 25, 2007, the Executive's term of employment shall automatically be extended without further action by the Company or the Executive on a month-to-month basis until such time as thirty (30) calendar days' written notice of termination is given by the Company or written notice is given by the Executive. 1.4 Location. During the period of his employment under this Agreement, the Executive shall not be required, except with his prior written consent, to relocate his principal place of employment outside of Flagstaff, Arizona. Required travel on the Company's business shall not be deemed a relocation so long as the Executive is not required to provide his services hereunder outside of Flagstaff, Arizona, for more than twenty percent (20%) of his working days during any consecutive six (6) month period. ARTICLE II COMPENSATION For all services rendered by the Executive in any capacity during his employment under this Agreement, the Company will compensate the Executive as follows: 2.1 Base Salary. The Company will pay to the Executive an annual base salary of not less than ONE HUNDRED SIXTY SIX THOUSAND ONE HUNDRED TWENTY FIVE DOLLARS ($166,125), 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 Board or a committee thereof will annually review the Base Salary, and shall, in its discretion, increase the Base Salary based on the Executive's performance, the Company's performance, and increases in the cost of living. 2.2 Incentive Bonus. The Executive shall be eligible to receive an annual bonus of $30,000 to $60,000 based on mutually agreed performance criteria established annually (the "Incentive Bonus"). 2.3 Stock Options. At the commencement of Executive's employment hereunder, Executive will be granted options to purchase 50,000 shares of Company Common Stock pursuant to the Company's Stock Option Plan. Commencing in calendar year 2003, and annually as long as Executive is an employee of the Company, Executive will be granted additional options to purchase 10,000 shares of Common Stock pursuant to the Company's Stock Option Plan. 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 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. 3.2 By Executive. The Executive will be entitled to terminate his 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. 3.3 By Company. The Company will be entitled to terminate the Executive's employment under this Agreement 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, except for any other rights or benefits specifically provided for herein 2 following his period of employment, the Company will be obligated to 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 his death or Total Disability, the Company will: (a) pay the Executive (or his estate) or beneficiaries any Base Salary that has accrued but not paid as of the termination date (the "Accrued Base Salary"); (b) pay the Executive (or his estate) or beneficiaries for unused vacation days accrued as of the termination date in an amount equal to his 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 his 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 his 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 his 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 his 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 his 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 3 (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 commencing on the thirtieth (30th) day following the termination date twelve (12) monthly payments equal to one-twelfth (1/12th) of the sum of (A) the Executive's Annual Base Salary in effect immediately prior to the time such termination occurs multiplied by five (5), less (B) Base Salary payments made to the Executive during the first five (5) years following the date of this Agreement; (g) maintain in full force and effect, for the Executive's and his eligible beneficiaries' continued benefit, until the first to occur of (x) his attainment of alternative employment or (y) the fifth 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 2.3 hereof, subject to the terms and conditions of such plans and programs (the "Continued Benefits"). If the Executive's continued participation is not permitted under the general terms and provisions of such plans, programs, and arrangements, 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; and (h) the Executive shall have the right to exercise vested options and warrants in accordance with Section 4.1(f). ARTICLE V ADDITIONAL AGREEMENTS The Executive's employment shall be subject to the Executive executing 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. 4 ARTICLE VI MISCELLANEOUS 6.1 Definitions. For purposes of this Agreement, the following terms will have the following meanings: "Accrued Base Salary" - as defined in Section 4.1(a) hereof. "Accrued Benefits" - as defined in Section 4.1(d) hereof. "Accrued Incentive Bonus" - as defined in Section 4.1(e) hereof. "Accrued Reimbursable Expenses" - as defined in Section 4.1(c) hereof. "Accrued Vacation Payment" - as defined in Section 4.1(b) hereof. "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. "Incentive Bonus" - as defined in Section 2.2 hereof. "Base Salary" - as defined in Section 2.1 hereof. "Board" - means the Company's Board of Directors. "Cause" will mean any willful breach of duty by the employee in the course of his employment, continued violation of written Company employment policies after written notice of such violation, conviction of a felony, engaging in illegal activities which defame the Company, or in case of his habitual neglect of his duty or continued incapacity to perform it. "Continued Benefits" - as defined in Section 4.3(g) hereof. "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. "Notice of Termination" will mean a notice which shall indicate the specific termination provision of this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. 5 "Person" - means any natural person, firm, partnership, association, corporation, company, limited liability company, limited partnership, trust, business trust, governmental authority, or other entity. "Retirement" will mean normal retirement at age 65. "Total Disability" will mean the Executive's failure substantially to perform his 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 his 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 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. 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 6.6 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: John Kalinich 3133 North Meadow Brook Flagstaff, AZ 86004 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 his 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 Agreement will be construed in accordance with the laws of the State of California, without regard to the conflict of laws provisions thereof. 7 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 Title: Chief Executive Officer EXECUTIVE: /s/ John Kalinich ----------------------------------- John Kalinich 8 EX-10.21 5 v88494exv10w21.txt EXHIBIT 10.21 EXHIBIT 10.21 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as of November 25, 2002, by and between DECKERS OUTDOOR CORPORATION, a Delaware corporation (the "Company"), and MARK THATCHER (the "Executive"). ARTICLE I DUTIES AND TERM 1.1 Employment. In consideration of their mutual covenants and other good and valuable consideration, the receipt, adequacy and sufficiency of which is hereby acknowledged, the Company agrees to hire the Executive, and the Executive agrees to remain in the employ of the Company, upon the terms and conditions herein provided. 1.2 Position and Responsibilities. The Executive will serve as Chief Technical Officer, reporting directly to the Chief Executive Officer. As Chief Technical Officer, the Executive shall perform the following duties: brand positioning and direction, core consumer relations, marketing and advertising direction, product review, and founder associated activities. 1.3 Term. The term of the Executive's employment under this Agreement will commence on the date first written above and will continue, unless sooner terminated, until November 24, 2007. Commencing on November 25, 2007, the Executive's term of employment shall automatically be extended without further action by the Company or the Executive on a month-to-month basis until such time as thirty (30) calendar days' written notice of termination is given by the Company or written notice is given by the Executive. 1.4 Location. During the period of his employment under this Agreement, the Executive shall not be required, except with his prior written consent, to relocate his principal place of employment outside of Flagstaff, Arizona. Required travel on the Company's business shall not be deemed a relocation so long as the Executive is not required to provide his services hereunder outside of Flagstaff, Arizona, for more than Ten Percent (10%) of his working days during any consecutive six (6) month period. ARTICLE II COMPENSATION For all services rendered by the Executive in any capacity during his employment under this Agreement, the Company will compensate the Executive as follows: 2.1 Base Salary. The Company will pay to the Executive an annual base salary of not less than TWO HUNDRED SEVENTY SIX THOUSAND EIGHT HUNDRED SEVENTY FIVE DOLLARS ($276,875), 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 Board or a committee thereof will annually review the Base Salary, and shall, in its discretion, increase the Base Salary based on the Executive's performance, the Company's performance, and increases in the cost of living. 2.2 Incentive Bonus. The Executive shall be included in any Company general incentive plan for a like-level executive in place during the Executive's term of employment with the Company (the "Incentive Bonus"). 2.3 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 employees. Without affecting the generality of the foregoing, and without limitation, the Company, at its expense (including any travel expenses associated with Section 2.3 (c) below), shall provide the Executive with the following: (a) A window office at the Company's headquarters, for a like-level executive, with all furnishings and office equipment made available to the Company's like-level executives; (b) A window office at the Company's location at 515 Beaver Street, Flagstaff, Arizona, with all furnishings and office equipment made available to the Company's like-level executives; and (c) The opportunity to attend (i) design and marketing meetings, (ii) product meetings in China and (iii) industry-related trade shows. The Company shall also provide to the Executive an annual marketing budget of SIX THOUSAND DOLLARS ($6,000), which may be used by the Executive for any Company footwear giveaways relating to brand building and promotion, as may be deemed appropriate at the Executive's sole discretion (such footwear to be priced at the Company's landed cost). Furthermore, for any period after termination of this Employment Agreement, the Company shall grant to the Executive the right to purchase an unlimited number of Company footwear at the Company's wholesale price. ARTICLE III TERMINATION OF EMPLOYMENT 3.1 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 hereof) of the Executive. 3.2 By Executive. The Executive will be entitled to terminate his 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. 2 3.3 By Company. The Company will be entitled to terminate the Executive's employment under this Agreement by giving Notice of Termination to the Executive: (a) in the event of the 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, except for any other rights or benefits specifically provided for herein following his period of employment, the Company will be obligated to 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 his death or Total Disability, the Company will: (a) pay the Executive (or his estate) or beneficiaries any Base Salary that has accrued but not paid as of the termination date (the "Accrued Base Salary"); (b) pay the Executive (or his estate) or beneficiaries for unused vacation days accrued as of the termination date in an amount equal to his 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 his 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 his 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 his 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 his 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 his 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). 4.3 Upon Termination by the Company Without Cause or by Executive for Good Reason. During the first five (5) years hereof, 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 commencing on the thirtieth (30th) day following the termination date twelve (12) monthly payments equal to one-twelfth (1/12th) of the sum of (A) the Executive's Annual Base Salary in effect immediately prior to the time such termination occurs multiplied by five (5), less (B) Base Salary payments made to the Executive during the first five (5) years following the date of this Agreement; (g) maintain in full force and effect, for the Executive's and his eligible beneficiaries' continued benefit, until the first to occur of (x) his attainment of alternative employment or (y) the fifth 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 2.3 hereof, subject to the terms and conditions of such plans and programs (the "Continued Benefits"). If the Executive's continued participation is not permitted under the general terms and provisions of such plans, 4 programs, and arrangements, 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; and (h) the Executive shall have the right to exercise vested options and warrants in accordance with Section 4.1(f). (i) If termination occurs after five (5) years, the Executive will only be entitled to the payments specified in subparagraphs (a) through (e) and (h) above. ARTICLE V ADDITIONAL AGREEMENTS The Executive's employment shall be subject to the Executive executing the Company's standard employee confidentiality agreement, inventions assignment agreement, and any other agreements required to be executed by all like-level executives of the Company. ARTICLE VI MISCELLANEOUS 6.1 Definitions. For purposes of this Agreement, the following terms will have the following meanings: "Accrued Base Salary" - as defined in Section 4.1(a) hereof. "Accrued Benefits" - as defined in Section 4.1(d) hereof. "Accrued Incentive Bonus" - as defined in Section 4.1(e) hereof. "Accrued Reimbursable Expenses" - as defined in Section 4.1(c) hereof. "Accrued Vacation Payment" - as defined in Section 4.1(b) hereof. "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. "Incentive Bonus" - as defined in Section 2.2 hereof. "Base Salary" - as defined in Section 2.1 hereof. "Board" - means the Company's Board of Directors. "Cause" will mean any willful breach of duty by the employee in the course of his employment, continued violation of written Company employment policies after written notice of such violation, conviction of a felony, engaging in illegal activities which 5 defame the Company, or in case of his habitual neglect of his duty or continued incapacity to perform it. "Continued Benefits" - as defined in Section 4.3(g) hereof. "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. "Notice of Termination" will mean a notice which shall indicate the specific termination provision of this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated. "Person" - means any natural person, firm, partnership, association, corporation, company, limited liability company, limited partnership, trust, business trust, governmental authority, or other entity. "Retirement" will mean normal retirement at age 65. "Total Disability" will mean the Executive's failure substantially to perform his 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 his 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 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 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. 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: Mark Thatcher 1245 Cochran Flagstaff, AZ 86001 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. 7 6.9 Executive's Representations. The Executive represents and warrants that neither the execution and delivery of this Agreement nor the performance of his 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 Agreement will be construed in accordance with the laws of the State of California, without regard to the conflict of laws provisions thereof. 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 Title: Chief Executive Officer EXECUTIVE: /s/ Mark Thatcher ----------------------------------- Mark Thatcher 8 EX-10.22 6 v88494exv10w22.txt EXHIBIT 10.22 EXHIBIT 10.22 THIS UNSECURED SUBORDINATED PROMISSORY NOTE IS SUBORDINATED IN RIGHT OF PAYMENT, AS SET FORTH IN THAT CERTAIN SUBORDINATION AGREEMENT ("SUBORDINATION AGREEMENT"), DATED AS OF THE DATE HEREOF, AMONG HOLDER, MAKER, COMERICA BANK-CALIFORNIA, AND THE PENINSULA FUND III, L.P, AS AT ANY TIME AMENDED, SUPPLEMENTED OR OTHERWISE MODIFIED OR RESTATED. IN THE EVENT OF A CONFLICT BETWEEN THE TERMS OF THIS UNSECURED SUBORDINATED PROMISSORY NOTE AND THE TERMS OF THE SUBORDINATION AGREEMENT, THE TERMS OF THE SUBORDINATION AGREEMENT SHALL GOVERN AND CONTROL. UNSECURED SUBORDINATED PROMISSORY NOTE ("Note") $13,000,000 November 25, 2002 FOR VALUE RECEIVED, DECKERS OUTDOOR CORPORATION, a Delaware corporation ("Maker"), promises to pay to Mark Thatcher or order ("Holder"), in lawful money of the United States, the principal sum of Thirteen Million Dollars ($13,000,000), together with interest in arrears on the unpaid principal balance at an annual rate equal to Nine Percent (9%) in the manner provided below. Interest shall be calculated on the basis of a year of 365 or 366 days, as applicable, and charged for the actual number of days elapsed. 1. Payments. 1.1 Interest. Interest only at the rate of Seven Percent (7%) per annum on the unpaid balance of this Note (including, without limitation, amounts compounded and added to the principal balance, pursuant to the next sentence) shall be due and payable annually, one (1) year from the date of this Note, commencing on the same day of each year thereafter. Interest at the rate of Two Percent (2%) per annum (the "Deferred Interest") will be compounded annually on the anniversary date of this Note and added to the outstanding principal balance and be accrued until due and payable on [November 25], 2008 (the "Final Maturity Date"). 1.2 Principal. The principal amount of this Note together with all accrued and unpaid interest and other charges shall be due and payable upon the Final Maturity Date. 1.3 Prohibited Payments of Interest and Principal. Notwithstanding anything to the contrary in this Note, Maker shall not pay and Holder shall not collect or receive payment upon any of the obligations owed by Maker to Holder hereunder including, without limitation, any principal, interest, costs, charges or other liabilities or obligations, to the extent such payment is prohibited by the Subordination Agreement (defined herein). 1.4 Manner of Payment. All payments of principal and interest on this Note shall be made by wire transfer of immediately available funds to an account designated by Holder in writing. If any payment of principal or interest on this Note is due on a day which is not a Business Day, such payment shall be due on the next succeeding Business Day and such extension of time shall be taken into account in calculating the amount of interest payable under this Note. "Business Day" means any day other than a Saturday, Sunday or legal holiday in the State of Arizona. 1.5 Prepayment. Maker may, without premium or penalty, at any time and from time to time, prepay all or any portion of the outstanding principal balance due under this Note, provided that each such prepayment is accompanied by accrued interest (including, without limitation, any Deferred Interest) on the amount of principal prepaid calculated to the date of such prepayment and further provided that the Maker shall not make any such prepayment and Holder shall not collect or receive any such prepayment to the extent such prepayment is prohibited by the Subordination Agreement, as hereinafter defined in Section 4. 2. Defaults. 2.1 Events of Default. The occurrence of any one or more of the following events with respect to Maker shall constitute an event of default hereunder ("Event of Default"): (a) If Maker shall fail to pay when due any payment of principal or interest on this Note and such failure continues for ten (10) days. (b) The aggregate term debt constituting part of the Senior Debt exceeds Thirty Million Dollars ($30,000,000) without Holder's prior written consent. (c) If, pursuant to or within the meaning of the United States Bankruptcy Code or any other federal or state law relating to insolvency or relief of debtors (a "Bankruptcy Law"), Maker shall (i) commence a voluntary case or proceeding; (ii) consent to the entry of an order for relief against it in an involuntary case; (iii) consent to the appointment of a trustee, receiver, assignee, liquidator or similar official; (iv) make an assignment for the benefit of its creditors; or (v) admit in writing its inability to pay its debts as they become due. -2- (d) If a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that (i) is for relief against Maker in an involuntary case, (ii) appoints a trustee, receiver, assignee, liquidator or similar official for Maker or substantially all of Maker's properties, or (iii) orders the liquidation of Maker, and in each case the order or decree is not dismissed within 90 days. (e) All or any part of the property of Maker valued in the aggregate in excess of Five Hundred Thousand Dollars ($500,000) is attached, levied upon, or otherwise seized by legal process, and such attachment, levy, or seizure is not quashed, stayed, released or bonded pending appeal within 30 days of the date thereof. (f) The occurrence of any default, event of default or similar event or condition leading to the acceleration of the Senior Debt (as defined in the Subordination Agreement). 2.2 Remedies. Upon the occurrence of an Event of Default hereunder (unless all Events of Default have been cured or waived by Holder in Holder's sole and absolute discretion), Holder may, at its option, (i) by written notice to Maker, declare the entire unpaid principal balance of this Note, together with all accrued interest thereon, immediately due and payable regardless of any prior forbearance, and (ii) exercise any and all rights and remedies available to it under applicable law, including, without limitation, the right to collect from Maker all sums due under this Note including reasonable attorney's fees, provided that Holder shall not exercise any such rights or remedies to the extent the exercise of any such right or remedy would be prohibited by the Subordination Agreement (defined herein). 3. Default Interest. If any payment of interest and/or principal is not received by the holder hereof when such payment is due or if any Event of Default occurs, then the principal hereof shall bear interest at the rate of Eleven Percent (11%) per annum, which interest shall be due and payable upon demand. 4. Subordination. The indebtedness evidenced by this Note is subordinated to the indebtedness of the Maker pursuant to the Subordination Agreement, dated November 25, 2002 (the "Subordination Agreement"), entered into by and among Maker, the Holder, Comerica Bank-California, and Peninsula. The terms and conditions of the Subordination Agreement are incorporated herein by reference. Capitalized terms used in this Note but defined herein shall have the definitions as set forth in the Subordination Agreement. 5. Reliance of Subordination. The terms and conditions of the Subordination Agreement shall constitute a continuing offer to all persons or entities who, in reliance upon such provisions, become a holder of, or continue to hold Senior Debt, and such provisions are made for the benefit of the holders of Senior Debt, and -3- each such holder is made an obligee hereunder and they or each of them may enforce such provisions. 6. Further Assurances. The holder of this Note shall give, execute and deliver any notice, statement, instrument, document, agreement or other papers, and shall permit the holders of Senior Debt, upon request to make any notation or endorsement upon any promissory note or other instrument or documents evidencing or securing the indebtedness of this Note, that may be necessary or desirable, or that the holders of Senior Debt may request in order to create, preserve or validate the rights of the holders of Senior Debt to exercise or enforce their rights hereunder, or otherwise to effect the purposes of this Note. 7. Application of Payments. All payments shall be applied first to accrued interest and costs of collection and the remainder, if any, to principal. All payments hereunder shall be paid without demand, counterclaim, reduction or setoff. 8. Relative Rights. This Section defines the relative rights of the Holder of this Note and the holders of Senior Debt pursuant to the Subordination Agreement. Nothing in this Note shall: (a) impair, as between Maker and the holder of this Note, the obligation of Maker, which is absolute and unconditional, to pay principal of or interest on this Note in accordance with its terms; (b) affect the relative rights of the holder of this Note and other creditors of Maker other than the holders of Senior Debt; or (c) prevent the holder of this Note from exercising its available remedies upon a default hereunder, subject to the rights of the holders of the Senior Debt otherwise payable to the holder of this Note. 9. Miscellaneous. 9.1 Waiver. The rights and remedies of Holder under this Note shall be cumulative and not alternative. No waiver by Holder of any right or remedy under this Note shall be effective unless in a writing signed by Holder. Neither the failure nor any delay in exercising any right, power or privilege under this Note will operate as a waiver of such right, power or privilege and no single or partial exercise of any such right, power or privilege by Holder will preclude any other or further exercise of such right, power or privilege or the exercise of any other right, power or privilege. To the maximum extent permitted by applicable law, (a) no claim or right of Holder arising out of this Note can be discharged by Holder, in whole or in part, by a waiver or renunciation of the claim or right unless in a writing, signed by Holder; (b) no waiver that may be given by Holder will be applicable except in the specific instance for which it is -4- given; and (c) no notice to or demand on Maker will be deemed to be a waiver of any obligation of Maker or of the right of Holder to take further action without notice or demand as provided in this Note. Maker hereby waives presentment, demand, protest and notice of dishonor and protest. 9.2 Notices. Any notice required or permitted to be given hereunder shall be given in accordance with the Subordination Agreement. Maker shall promptly notify the holder of this Note of any facts known to cause Maker a payment that would cause a payment of principal or interest in this Note to violate the terms of the Subordination Agreement, but failure to give such notice shall not affect the Subordination of this Note to Senior Debt provided for under the Subordination Agreement. 9.3 Severability. If any provision in this Note is held invalid or unenforceable by any court of competent jurisdiction, the other provisions of this Note will remain in full force and effect. Any provision of this Note held invalid or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid or unenforceable. 9.4 Governing Law. This Note will be governed by the laws of the State of Arizona without regard to conflicts of laws principles. 9.5 Parties In Interest. This Note shall bind Maker and its successors and assigns. This Note shall not be assigned or transferred by Holder without the express prior written consent of Maker (which shall not be unreasonably withheld), except by will or the laws of descent. 9.6 Section Headings, Construction. The headings of Sections in this Note are provided for convenience only and will not affect its construction or interpretation. All references to "Section" or "Sections" refer to the corresponding Section or Sections of this Note unless otherwise specified. All words used in this Note will be construed to be of such gender or number as the circumstances require. Unless otherwise expressly provided, the words "hereof" and "hereunder" and similar references refer to this Note in its entirety and not to any specific section or subsection hereof. 9.7 Costs of Collection. In the event any holder hereof utilizes the services of an attorney in attempting to collect the amounts due hereunder or to enforce the terms hereof or of any agreements related to this indebtedness, or if any holder hereof becomes party plaintiff or defendant in any legal proceeding in relation to the property described in any instrument securing this Note or for the recovery or protection of the indebtedness evidenced hereby, Maker, its successors and assigns, shall repay to such holder hereof, on demand, all costs and expenses so incurred, including reasonable attorney's fees, including those costs, expenses and attorney's fees incurred after the filing by or against the Maker of any proceeding under any chapter of the -5- Bankruptcy Law, or similar federal or state statute, and whether incurred in connection with the involvement of any holder hereof as creditor in such proceedings or otherwise. 9.8 Waivers. Subject to the Subordination Agreement, the Maker and all sureties, endorsers and guarantors of this Note waive demand, presentment for payment, notice of nonpayment, protest, notice of protest and all other notice, filing of suit and diligence in collecting this Note or the release of any part primarily or secondarily liable hereon and further agree that it will not be necessary for any holder hereof, in order to enforce payment of this Note by any of them, to first institute suit or exhaust its remedies against any maker or others liable herefor, and consent to any extension or postponement of time or payment of this Note or any other indulgence with respect hereto without notice thereof to any of them. 9.9 Rate of Interest. Notwithstanding any provision contained herein to the contrary, the effective interest rate under this Note shall include the applicable interest rate described herein plus any compensating balance requirement and any additional charges, costs and fees incident to the loan evidenced hereby to the extent they are deemed to be interest under applicable Arizona law. Should the interest rate as calculated under this Note at any time exceed that allowed by law, the applicable rate hereunder will be the maximum rate of interest allowed by applicable Arizona law to be charged on any contracts. 9.10 Submission to Jurisdiction. THE COURTS OF ARIZONA, FEDERAL OR STATE, SHALL HAVE EXCLUSIVE JURISDICTION OF ALL LEGAL ACTIONS ARISING OUT OF THIS NOTE. BY EXECUTING THIS NOTE, THE UNDERSIGNED SUBMITS TO THE JURISDICTION OF THE FEDERAL AND STATE COURTS OF ARIZONA. 9.11 Replacement of Senior Debt. The Maker of this Note may, at any time, without the consent of the Holder, replace, substitute or exchange any provider of Senior Debt with any new primary lender for a revolving credit agreement or asset based loan agreement for any amount and up to $30,000,000 in term loans from either a primary lender or a senior subordinated lender provided that any new lender agrees to the subordination provisions set forth in this Note and the Subordination Agreement or otherwise agrees to subordination terms acceptable to the Holder and the other parties. [Remainder of Page Intentionally Left Blank] -6- IN WITNESS WHEREOF, Maker has executed and delivered this Note as of the date first stated above. DECKERS OUTDOOR CORPORATION, a Delaware corporation By: /s/ Douglas B. Otto ------------------------------------- Douglas B. Otto, Chairman and Chief Executive Officer -7- EX-10.23 7 v88494exv10w23.txt EXHIBIT 10.23 EXHIBIT 10.23 NOTE PURCHASE AGREEMENT TABLE OF CONTENTS

iii

ANNEX, SCHEDULES AND EXHIBITS Annex I Information Concerning Purchaser Schedule 4.2 Material Adverse Change Schedule 4.3 Defaults Under Existing Agreements Schedule 4.4 Authorizations, Approvals, Consents and Filings Schedule 4.5 Environmental Condition of Property Schedule 4.7 Litigation and Judgments Schedule 4.10 Indebtedness Schedule 4.16 Subsidiaries and Capitalization Schedule 4.17 Current Locations Schedule 4.22 Brokers Schedule 4.25 Conduct of Business Exhibit A Form of Senior Subordinated Note Exhibit B Form of Covenant Compliance Certificate Exhibit C Trailing Twelve Month Financial Information vi NOTE PURCHASE AGREEMENT This NOTE PURCHASE AGREEMENT (this "Agreement"), dated as of November 25, 2002, is by and among DECKERS OUTDOOR CORPORATION, a Delaware corporation (the "Company"), and THE PENINSULA FUND III LIMITED PARTNERSHIP, a Delaware limited partnership (the "Purchaser"). Capitalized terms used in this Agreement are defined in Section 11.1. To induce Purchaser to purchase the Senior Subordinated Note from the Company, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, agree as follows: ARTICLE 1. DESCRIPTION OF SENIOR SUBORDINATED NOTE AND COMMITMENT 1.1 Description of Senior Subordinated Note. The Company will authorize the issuance and sale of its Senior Subordinated Note which shall be dated as of the Closing Date, shall be in the aggregate original principal amount of $14,000,000, and shall bear interest at the fixed rate of sixteen and three quarters percent (16.75%) per annum; provided, however, that upon the occurrence of an Event of Default and during the continuance thereof, the unpaid principal amount of the Senior Subordinated Note shall bear interest at the rate of 18.75% per annum. Interest on the Senior Subordinated Note shall be computed on the basis of the actual number of days elapsed over a 365 or 366 day year, as the case may be. The Senior Subordinated Note shall be substantially in the form attached hereto as Exhibit A-1. 1.2 Commitment; Funding. Subject to the terms and conditions hereof and on the basis of the representations and warranties hereinafter set forth, the Company agrees to issue and sell to Purchaser and Purchaser agrees to purchase from the Company, the Senior Subordinated Note in the principal amount of $14,000,000 at a price of one hundred percent (100%) of such principal amount. The Senior Subordinated Note will be delivered to Purchaser, and shall be issued in its name or the name of its nominee, provided that such nominee is a Holder. 1.3 Origination Points. The Company shall pay to Purchaser origination points in the amount of 2.0% of the principal amount of the Senior Subordinated Note in immediately available funds, which shall be paid on or prior to the Closing Date. All origination points paid under this Section 1.3 are fully earned and nonrefundable. 1.4 Use of Proceeds. The proceeds from the sale of the Senior Subordinated Note shall be used solely (a) to finance the Acquisition, (b) to pay all fees, costs and expenses payable pursuant to this Agreement and the Other Agreements, and (c) prior to such proceeds being used for the purposes set forth in the preceding clauses (a) and (b), for Permitted Investments on a temporary basis. ARTICLE 2. PAYMENT AND PREPAYMENT OF SENIOR SUBORDINATED NOTE 2.1 Principal and Interest Payments. 2.1.1. Unless otherwise accelerated pursuant to the terms hereof, principal and interest on the Senior Subordinated Note shall be due and payable as follows: (a) Principal shall be due and payable in quarterly payments on the last day of the quarter each in the amount of $1,500,000 commencing on the earlier of (i) the last day of the month which is six months after payment in full of the Senior Term Debt, and (ii) November 30, 2007, and continuing until the Maturity Date, when the outstanding principal amount of the Senior Subordinated Note shall be due and payable. (b) Interest shall be due and payable (i) monthly in arrears on each Interest Payment Date, commencing in December, 2002, and (ii) on the Maturity Date. (c) At the Company's sole option, the Company may elect, on any Interest Payment Date with respect to the interest payment then due on the Senior Subordinated Note, by giving notice to Purchaser on such Interest Payment Date, to pay in cash a portion of such interest payment at a rate not less than twelve percent (12%) per annum, and to defer the remaining portion of the accrued but unpaid interest then due (the "Partial Deferral"). If the Company elects to defer a portion of the interest then due, the Company will execute and deliver to Purchaser a note, in the form attached hereto as Exhibit A-2 (together with any and all notes issued in replacement or substitution therefor, the "Deferral Note"), which note will be in the amount of the deferred interest, will bear interest at the rate of 16.75% per annum prior to an Event of Default and 18.75% subsequent to and during the continuance of an Event of Default, payable monthly on each Interest Payment Date, and will be due and payable on the Maturity Date. On each succeeding Interest Payment Date, the Company, at its sole option, will be entitled to elect a Partial Deferral for the interest payment then due on the Senior Subordinated Note, and to elect to either pay the interest then due on the Deferral Note in cash or to defer the payment of such interest (a "Subsequent Interest Deferral"). On any Interest Payment Date that the Company elects a Partial Deferral, a Subsequent Interest Deferral or both, the Company will execute and deliver a replacement Deferral Note in the new principal amount equal to the principal amount of the then existing Deferral Note, plus the interest deferred on the Senior Subordinated Note pursuant to the then-elected Partial Deferral, if any, plus the interest deferred pursuant to the then-elected Subsequent Interest Deferral, if any. The outstanding principal amount of the Deferral Note, together with all accrued and unpaid interest thereon, shall be due and payable on the Maturity Date. 2 2.1.2. If any payment of principal is not received by Purchaser on or before its due date, or any payment of interest and or other amounts payable hereunder is not received by Purchaser on or before the second day after such payment is due, the Company shall pay a late fee equal to the greater of (a) $1,000 or (b) five percent (5%) of the amount due. 2.2 Optional Prepayments. 2.2.1. At the Company's option, upon notice given as provided below and subject to the terms of the Senior Subordination Agreement, the Company may, at any time and from time to time on the last Business Day of any month, prepay all or any part of the principal of the Senior Subordinated Note, by payment to Purchaser of an amount equal to (a) the principal amount to be prepaid, plus (b) accrued unpaid interest on the principal amount so prepaid, plus (c) any expense or indemnification amounts for which Purchaser may be entitled to receive payment or reimbursement hereunder or, if the Senior Subordinated Note is being prepaid in full, the aggregate amount of all other Senior Subordinated Obligations (including without limitation any Deferral Note outstanding), plus (d) a premium equal to the percentage of the principal amount so prepaid which is applicable in accordance with the following table based on the date on which such prepayment is made (a "Prepayment Fee"):

Notwithstanding the foregoing, no Prepayment Fee shall be payable with respect to (a) prepayments made by the Company with the prior consent of the Senior Lender and the Purchaser (which consent by the Purchaser shall not be unreasonably withheld) during the period between November 25, 2003 through November 24, 2004 to the extent such prepayments do not exceed $2,000,000 (the "Two Million Dollar Prepayment Limit"), or (b) prepayments of any principal of and interest on any Deferral Note. The amount of any prepayment on any Deferral Note during this period between November 25, 2003 through November 24, 2004 shall not be included in the Two Million Dollar Prepayment Limit. 2.2.2. Each partial prepayment under this Section 2.2 shall be made on the last Business Day of a month in a principal amount of not less than $1,000,000 or, if greater than $1,000,000, then in integral multiples of $250,000. Each prepayment under this Section 2.2 shall be applied first to accrued interest on the principal amount prepaid, second to the Deferral Note, if any, third to the Prepayment Fee, fourth to any expenses to which Purchaser may be entitled, fifth to installments of principal in the inverse order of their maturities, and sixth if the Senior Subordinated Note is being prepaid in full, the aggregate amount of all other Senior Subordinated Obligations. The amount of any such prepayment or any prepayment under Section 2.3 may not be reborrowed from the Purchaser by the Company. The Company shall give notice of any optional prepayment to Purchaser not less than thirty (30) days nor more than sixty (60) days before the date for prepayment, specifying in each such notice the date upon which prepayment is to be made (which must be the last Business Day of a month) and the principal 3 amount of the Senior Subordinated Note (together with accrued interest and any applicable Prepayment Fee) to be prepaid on such date. Notice of prepayment having been so given, the applicable prepayment amount shall become due and payable on the specified prepayment date. The Company shall have no right to prepay the Senior Subordinated Note except as provided in this Section 2.2 or in Section 2.3. No Prepayment Fee shall apply to any scheduled principal payment under Section 2.1.1(a). 2.3 Mandatory Prepayments. The Company shall, subject to the terms of and to the extent permitted by the Senior Subordination Agreement and subject to Purchaser's right in its sole discretion to waive such prepayments, make mandatory prepayments in each of the following circumstances: 2.3.1. Intentionally omitted. 2.3.2. If during any fiscal year the Company or its Subsidiaries shall sell or otherwise dispose of (other than as permitted by Section 6.9 or Section 7.3) any property or properties, then the Company shall prepay the Senior Subordinated Obligations in an amount equal to the lesser of (i) the aggregate Net Cash Proceeds of such sales or other dispositions or (ii) the aggregate amount of all Senior Subordinated Obligations (including any Prepayment Fee), such prepayment to be made within five (5) Business Days of receipt of such Net Cash Proceeds, all subject to the terms of and to the extent permitted by the Senior Subordination Agreement. 2.3.3. Intentionally omitted. 2.3.4. In the event of any collection of or realization by the Purchaser upon any Collateral following an Event of Default, the Company shall prepay the Senior Subordinated Obligations in an amount equal to the lesser of (i) the aggregate Net Cash Proceeds of all collections or other realizations of Collateral by Purchaser or (ii) the aggregate amount of all Senior Subordinated Obligations (including any Prepayment Fee), such prepayment to be made within five (5) Business Days of receipt of such Net Cash Proceeds, all subject to the terms of and to the extent permitted by the Senior Subordination Agreement. 2.3.5. In the event of any sale or other disposition of all or substantially all of the stock or assets of the Company or any Subsidiary of the Company in a single transaction or series of transactions (other than as permitted by Section 6.9 or Section 7.3), the Company shall prepay the Senior Subordinated Obligations in an amount equal to the lesser of (i) the aggregate Net Cash Proceeds of such sales or dispositions or (ii) the aggregate amount of all Senior Subordinated Obligations (including any Prepayment Fee), prepayment to be made within five (5) Business Days of receipt of such net proceeds, all subject to the terms of and to the extent permitted by the Senior Subordination Agreement. Any prepayment under this Section 2.3 made prior to November 24, 2004 shall be subject to payment of a Prepayment Fee, and shall be applied first to accrued interest on the Senior Subordinated Note, second to the Deferral Note, if any, third to any Prepayment Fee, fourth to any expenses for which Purchaser may be entitled, fifth to installments of principal in the inverse 4 order of their maturities on the Senior Subordinated Note, and sixth if the Senior Subordinated Note is being prepaid in full, the aggregate amount of all other Senior Subordinated Obligations. The amount of any such mandatory prepayment may not be reborrowed by the Company from the Purchaser. 2.4 Reasonableness of Prepayment Fee. The Company agrees and acknowledges that any Prepayment Fee payable pursuant to Section 2.2 or Section 2.3 is the product of arm's length negotiation between the parties and the amount thereof constitutes reasonable compensation for loss by the Purchaser of the opportunity to recover loan origination expenses and profits over the balance of the term of this Agreement, and is not a penalty. 2.5 Additional Payments. Unless otherwise provided herein or in the Other Agreements, all Senior Subordinated Obligations, other than principal and interest on the Senior Subordinated Note and the Deferral Note, if any, shall be payable by the Company to the Holder thereof, on demand, and shall bear interest from the date of demand until paid at the rate of interest then applicable under Section 1.1. Payment of fees and expenses due and payable on the Closing Date to Purchaser and the reasonable fees and expenses of Purchaser's legal counsel shall be paid in full on the Closing Date. 2.6 Direct Payment. The Company will pay all sums becoming due hereunder and on the Senior Subordinated Note and the Deferral Note to Purchaser at the address specified for Purchaser on Annex I hereto, by wire transfer in U.S. Dollars of Federal Reserve or other immediately available funds, to the account specified for Purchaser on Annex I or at such other address or in such other form as Purchaser shall have designated by notice to the Company at least five Business Days prior to the date of any payment, in each case without presentment and without notations being made thereon. All payments by the Company shall be made without defense, set-off or counterclaim. Any wire transfer shall identify such payment as "Deckers Outdoor Corporation 16.75% Senior Subordinated Note" and shall identify the payment as principal, premium, interest and/or reimbursement of costs and expenses, together with the applicable date or period to which it relates. 2.7 Payments Payable on Business Days. Payments of all amounts due hereunder or under the Senior Subordinated Note or Deferral Note shall be made on a Business Day. Any payment due on a day that is not a Business Day shall be made on the immediately preceding Business Day, together with all interest (if any) accrued to and including such preceding Business Day. 5 2.8 Interest Laws. 2.8.1. Notwithstanding any provision to the contrary contained in this Agreement or any Other Agreement, the Company shall not be required to pay, and Purchaser shall not be permitted to contract for, take, reserve, charge or receive, any compensation which constitutes interest under applicable law in excess of the maximum amount of interest permitted by law ("Excess Interest"). If any Excess Interest is provided for or determined by a court of competent jurisdiction to have been provided for in this Agreement or in any Other Agreement or otherwise contracted for, taken, reserved, charged or received, then in such event: (i) the provisions of this Section 2.8 shall govern and control; (ii) the Company shall not be obligated to pay any Excess Interest; (iii) any Excess Interest that Purchaser may have contracted for, taken, reserved, charged or received hereunder shall be, at Purchaser's option, (A) applied as a credit against the outstanding principal balance of the Senior Subordinated Obligations or accrued and unpaid interest (not to exceed the maximum amount permitted by law), (B) refunded to the payor thereof, or (C) any combination of the foregoing; (iv) the interest provided for shall be automatically reduced to the maximum lawful rate allowed from time to time under applicable law (the "Maximum Rate"), and this Agreement and the Other Agreements shall be deemed to have been, and shall be, reformed and modified to reflect such reduction; and (v) the Company shall have no action against Purchaser for any damages arising due to any Excess Interest. 2.8.2. Notwithstanding the foregoing, if for any period of time interest on any Senior Subordinated Obligations is calculated at the Maximum Rate rather than the applicable rate under this Agreement, and thereafter such applicable rate becomes less than the Maximum Rate, the rate of interest payable on such Senior Subordinated Obligations thereafter shall remain at the Maximum Rate until Purchaser shall have received the amount of interest which Purchaser would have received during such period on such Senior Subordinated Obligations had the rate of interest not been limited to the Maximum Rate during such period. All sums paid or agreed to be paid hereunder or under the Other Agreements for the use, forbearance or detention of sums due shall, to the extent permitted by applicable law, be amortized, pro-rated, allocated and spread throughout the full term of the Senior Subordinated Obligations until payment in full so that the rate or amounts of interest on account of the Senior Subordinated Obligations does not exceed the Maximum Rate. The terms of this Section 2.8 shall be deemed incorporated into each Other Agreement and any other document or instrument between the Company and Purchaser or directed to the Company by Purchaser, whether or not specific reference to this Section 2.8 is made. ARTICLE 3. REPRESENTATIONS AND WARRANTIES OF PURCHASER Purchaser represents and warrants to the Company as follows: 3.1 Existence. It is a Delaware limited partnership duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization. 6 3.2 Authority. It has the partnership right and power and authority to enter into, execute, deliver and perform its obligations under this Agreement and the agreements, documents and instruments contemplated hereby to which the Purchaser is a party and its partners, officers or agents executing and delivering this Agreement are duly authorized to do so. This Agreement and the agreements, documents and instruments contemplated hereby to which the Purchaser is a party have been duly and validly executed and delivered and constitutes the legal, valid and binding obligation of Purchaser, 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. 3.3 Investor Status. It (i) is an "accredited investor," as that term is defined in Regulation D under the Securities Act of 1933, as amended, and (ii) has such knowledge, skill, sophistication and experience in business and financial matters, based on actual participation, that it is capable of evaluating the merits and risks of the purchase of the Senior Subordinated Notes from the Company and the suitability thereof for Purchaser. It has had an opportunity to ask such questions of Company management and obtain such information about the Company and the Subsidiaries as it has deemed necessary or advisable. 3.4 Investment for own Account. It is acquiring the Senior Subordinated Note for investment for its own account and not with a view to any distribution thereof in violation of applicable securities laws. 3.5 Legend on Note. It agrees that the Senior Subordinated Note will bear the appropriate legends referencing restrictions on transfer and will not be offered, sold or transferred in the absence of registration or exemption under applicable securities laws. 3.6 Licensed Lender. Purchaser holds a license issued by the California Commissioner of Corporations to engage in the business of a finance lender, and such license is in full force and effect. 3.7 Brokers. Neither Purchaser nor any of its representatives, directly or indirectly, has dealt with any broker, finder, commission agent or other Person in connection with transactions referenced in or contemplated by this Agreement or the Other Agreements, nor are any of them under any obligation to pay any broker's fee or commission in connection with such transactions, except as set forth on Schedule 3.7. 7 ARTICLE 4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY To induce Purchaser to enter into this Agreement, the Company represents and warrants to Purchaser that, after giving effect to the transactions contemplated by the Acquisition Documents, Senior Loan Documents, this Agreement and the Other Agreements: 4.1 Corporate Existence and Authority. Each of the Company and Guarantors (a) is a corporation duly organized, validly existing, and in good standing under the laws of its state of incorporation, (b) has all requisite power and authority to own its respective assets and carry on its respective business as now conducted; and (c) is qualified to do business in all jurisdictions in which the nature of its business makes such qualification necessary and where failure to so qualify would have a Material Adverse Effect. Each of the Company and its Subsidiaries has the power and authority to execute, deliver, and perform its obligations under this Agreement, the Acquisition Documents, the Senior Loan Documents, and all Other Agreements to which it is, or in connection with the transactions contemplated hereby may become, a party. 4.2 Financial Statements. The Company has delivered to Purchaser (a) audited consolidated financial statements of the Company and its Subsidiaries as at and for the fiscal years ended December 31, 1999, 2000, and 2001, unaudited financial statements of the Company for the nine-month period ended September 30, 2002, and (b) cash flow projections of the Company and its Subsidiaries for the five-year period following the Closing Date together with a written statement of the assumptions underlying them. The financial statements referred to in clause (a) of this Section 4.2 are true and correct in all material respects, have been prepared in accordance with GAAP (except as otherwise noted therein), and fairly and accurately present in all material respects the financial condition of the Company and its Subsidiaries as of the respective dates indicated therein and the results of the Company's and its Subsidiaries' operations for the respective periods indicated therein. The cash flow projections referred to in clause (b) of this Section 4.2 have been prepared in good faith and are based on what the Company believes to be a reasonable assessment of the future performance of the Company, subject to general business conditions, world events, and economic factors which may be beyond its control or other unanticipated future events which could have an unforeseen impact on the performance or condition of the Company. The projections involve known and unknown risks, uncertainties and other factors, including those outlined in the risk factors section of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001, that may cause the actual results, performance or achievements of the Company, or industry results, to differ materially from any future results, performance or achievements expressed or implied in the projections. At December 31, 2001 and September 30, 2002, neither the Company nor any of its Subsidiaries had any liabilities or obligations (absolute, accrued, contingent or otherwise) of a nature required by GAAP to be reflected in such financial statements which are, individually or in the aggregate, material to the financial condition or operations of the Company as of that date which are not reflected on such financial statements. There has been no material adverse change in the financial condition or operations of the Company or any of its Subsidiaries since September 30, 2002, nor has there otherwise occurred a Material Adverse Effect. The representations and warranties contained in 8 this Section 4.2 are qualified by reference to the $4,290,000 award that has been entered against the Company in the Yeti Action. 4.3 Default. Except as disclosed on Schedule 4.3, and except to the extent that such defaults would not in the aggregate have a Material Adverse Effect, neither the Company nor any of the Guarantors is in default under any loan agreement, indenture, mortgage, security agreement, lease, franchise, permit, license or other agreement or obligation to which it is a party or by which any of its properties may be bound. The Company and the Guarantors are paying their debts as they become due. 4.4 Authorization and Compliance with Laws and Material Agreements. The execution, delivery and performance by the Company and the Guarantors of this Agreement, the Acquisition Documents, the Senior Loan Documents and the Other Agreements to which they are or may in connection with the transactions contemplated hereby become a party, have been or prior to the consummation of such transactions will be duly authorized by all requisite action on the part of the Company and the Guarantors and do not and will not violate in any material respect their respective Certificate of Incorporation or Bylaws or any law or any order of any court, governmental authority or arbitrator, and do not and will not upon the consummation of the transactions contemplated hereby conflict with, result in a breach in any material respect of, or constitute a default in any material respect under, or result in the imposition of any Lien (except Permitted Liens) upon any assets of the Company or any of the Guarantors pursuant to the provisions of any loan agreement, indenture, mortgage, security agreement, franchise, permit, license or other instrument or agreement by which the Company, any of the Guarantors, or any of their properties are bound. Except as set forth on Schedule 4.4, no authorization, approval or consent of, and no filing or registration with, any court, governmental authority or third Person is or will be necessary for the execution, delivery or performance by the Company and the Guarantors of this Agreement, the Acquisition Documents, the Senior Loan Documents, and the Other Agreements to which it is a party or the validity or enforceability thereof. All such authorizations, approvals, consents, filings and registrations described in Schedule 4.4 have been obtained. Neither the Company nor the Guarantors is in violation of any term of its respective Certificate of Incorporation or Bylaws, any material contract, agreement, judgment or decree and is in material compliance with all applicable laws, regulations and rules. 4.5 Environmental Condition of the Property. Except as disclosed on Schedule 4.5: 4.5.1. The location, construction, occupancy, operation and use of the Property do not violate in any material respect any applicable law, statute, ordinance, rule, regulation, order or determination of any governmental authority or other body exercising similar functions, or any restrictive covenant or deed restriction (recorded or otherwise) affecting the Property, including, without limitation, all applicable zoning ordinances and building codes, flood disaster, 9 occupational health and safety laws and Environmental Laws and regulations (as referred to in this Section 4.5, collectively, "applicable laws"); 4.5.2. Without limitation of Subsection 4.5.1, neither the Company, any of its Subsidiaries (other than Foreign Subsidiaries), nor the Property is subject to any existing, pending or to the Knowledge of the Company, threatened investigation or inquiry by any governmental authority or subject to any remedial obligations due to violations in any material respect of applicable laws; 4.5.3. The Company is not subject to any liability or obligation in excess of $100,000 relating to (i) the environmental conditions on, under or about the Property, including, without limitation, the soil and ground water conditions at the Property, or (ii) the use, management, handling, transport, treatment, generation, storage, disposal, release or discharge of any Hazardous Substance; 4.5.4. There is no Hazardous Substance or other substance that may pose any material risk to safety, health or the environment on, under or about any Property. 4.5.5. The Company and its Subsidiaries (other than the Foreign Subsidiaries) have taken reasonable steps to determine and hereby represent and warrant that no Hazardous Substances have been disposed of or otherwise released on, onto, into, or from the Property, and the use which the Company and its Subsidiaries make and intend to make of the Property does not and will not result in the disposal or other release of any Hazardous Substances on, onto, into or from the Property in violation of any applicable laws; except for such releases and violations which would not in the aggregate have a Material Adverse Effect; and 4.5.6. The Company and its Subsidiaries (other than the Foreign Subsidiaries) have been issued all required federal, state and local licenses, certificates or permits relating to, and the Property, the Company and their facilities, business, assets, leaseholds and equipment are all in compliance in all material respects with all applicable federal, state and local laws, rules and regulations relating to, air emissions, water discharge, noise emissions, solid or liquid waste disposal, Hazardous Substances, or other environmental, health or safety matters. 4.6 Solvency. After giving effect to the transactions contemplated by the Acquisition Documents, Senior Loan Documents, this Agreement and the Other Agreements, the Company and each of its Subsidiaries (other than the Foreign Subsidiaries) will be solvent, able to pay its debts as they mature, have capital sufficient to carry on its respective business and all businesses in which it is about to engage, and: 4.6.1. the assets of the Company and each of its Subsidiaries (other than the Foreign Subsidiaries), at a fair valuation, exceed the total liabilities (including contingent, subordinated, unmatured and unliquidated liabilities) of the Company or such Subsidiary; 10 4.6.2. current projections which are based on underlying assumptions which provide a reasonable basis for the projections and which reflect the Company's judgment based on present circumstances, the most likely set of conditions and the Company's and each of its Subsidiaries (other than the Foreign Subsidiaries) most likely course of action for the period projected, demonstrate that the Company and each of its Subsidiaries will have sufficient cash flow to enable it to pay its debts as they mature; and 4.6.3. the Company and each of its Subsidiaries (other than the Foreign Subsidiaries) does not have an unreasonably small capital base with which to engage in its anticipated business. For purposes of Subsection 4.6.1, the "fair valuation" of the assets of the Company and each of its Subsidiaries shall be determined on the basis of the amount which may be realized within a reasonable time, either through collection or sale of such assets at market value, deeming the latter as the amount which could be obtained for the property in question within such period by a capable and diligent businessperson from an interested buyer who is willing to purchase as a going concern under ordinary selling conditions. 4.7 Litigation and Judgments. Except for the Yeti Action and the other matters disclosed on Schedule 4.7, (i), there is no action, suit, proceeding or investigation before any court, governmental authority or arbitrator pending, or to the Knowledge of the Company threatened, against or affecting the Company or any of its Subsidiaries (other than the Foreign Subsidiaries), or the transactions contemplated by this Agreement, the Acquisition Documents, the Senior Loan Documents and/or any of the Other Agreements which is likely to have a Material Adverse Effect, and (ii) there are no outstanding judgments against the Company or any of its Subsidiaries. None of the matters listed on Schedule 4.7 are reasonably expected to have, either individually or in the aggregate, a Material Adverse Effect; provided, that no such representation and warranty is made with respect to the Yeti Action. 4.8 Rights in Properties; Liens. The Company and each of the Guarantors have good and indefeasible title to all properties and assets reflected on its balance sheets, and none of such properties or assets is subject to any Liens, except for Permitted Liens. The Company and each of the Guarantors enjoy peaceful and undisturbed possession under all leases necessary for the operation of its other properties, assets, and businesses and all such leases are valid and subsisting and are in full force and effect. There exists no default under any provision of any lease which would permit the lessor thereunder to terminate any such lease or to exercise any rights under such lease which, individually or together with all other such defaults, could reasonably have a Material Adverse Effect. Except as set forth on Schedule 4.8, (i) the Company and each of its Subsidiaries have the right to use all of the Intellectual Property necessary to its business as presently conducted, and (ii) the Company's and each of its Subsidiaries' use of the Intellectual Property do not infringe on the rights of any other Person, except for such infringement that would not have a Material Adverse Effect. To the Company's Knowledge, no other Person is 11 infringing the rights of the Company in any of the Intellectual Property. Neither the Company nor any of its Subsidiaries owes any royalties, honoraria or fees to any Person by reason of its use of the Intellectual Property. The foregoing representations and warranties are qualified by reference to the matters disclosed in writing by the Company to the Purchaser at Closing. 4.9 Enforceability. This Agreement, the Senior Loan Documents, the Acquisition Documents and the Other Agreements to which the Company and the Guarantors are a party, when delivered, shall constitute the legal, valid and binding obligations of the Company and the Guarantors, as the case may be, enforceable against the Company and the Guarantors, as the case may be, in accordance with their respective terms, except as enforceability may be limited by bankruptcy, insolvency, and similar laws and equitable principles affecting the enforcement of creditors' rights generally. 4.10 Indebtedness. Neither the Company nor any of its Subsidiaries (other than the Foreign Subsidiaries) has any Indebtedness, except for Permitted Indebtedness. All Indebtedness of the Company and its Subsidiaries (other than the Foreign Subsidiaries) existing as of the Closing Date is disclosed on Schedule 4.10. All Indebtedness owed by the Company or any of its Subsidiaries to any Affiliate is disclosed as a separate category on Schedule 4.10. 4.11 Taxes. The Company and each of its Subsidiaries (other than the Foreign Subsidiaries) have filed all tax returns (federal, state, and local) required to be filed, including, without limitation, all income, franchise, employment, property, and sales taxes, and has paid all of its tax liabilities when due and payable, other than deferred taxes and other than immaterial amounts and taxes that are being contested by the Company or such Subsidiary in good faith by appropriate actions or proceedings diligently pursued, and for which adequate reserves in conformity with GAAP with respect thereto have been established. To the Knowledge of the Company there is no pending investigation of the Company or any of its Subsidiaries (other than the Foreign Subsidiaries) by any taxing authority or pending but unassessed tax liability of the Company or any of its Subsidiaries. Neither the Company nor any of its Subsidiaries (other than the Foreign Subsidiaries) has made presently effective waiver of any applicable statute of limitations or request for an extension of time to file a tax return, and neither the Company nor any of its Subsidiaries (other than the Foreign Subsidiaries) is a party to any tax-sharing agreement. The foregoing representations and warranties are qualified by reference to the fact that the Company is being audited by the Internal Revenue Service and its Netherlands Subsidiary is being audited by The Inland Revenue. 12 4.12 Use of Proceeds; Margin Securities. The Company is not engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulations T, U or X of the Board of Governors of the Federal Reserve System), and no part of the proceeds of any extension of credit under this Agreement will be used to purchase or carry any such margin stock or to extend credit to others for the purpose of purchasing or carrying margin stock. Neither the Company nor any Person acting on its behalf has taken any action that might cause the transactions contemplated by this Agreement, the Senior Loan Documents, the Acquisition Documents or any of the Other Agreements to violate Regulations T, U or X or to violate the Exchange Act. 4.13 ERISA. All members of any Controlled Group have complied in all material respects with all applicable minimum funding requirements and all other applicable and material requirements of ERISA and the Code, applicable to the Employee Benefit Plans it or they sponsor or maintain, and there are no existing conditions that would give rise to material liability thereunder. With respect to any Employee Benefit Plan, all members of any Controlled Group have made all material contributions or payments to or under each Employee Benefit Plan required by law, by the terms of such Employee Benefit Plan and the terms of any contract or agreement. No Termination Event has occurred in connection with any Pension Plan, and there are no unfunded benefit liabilities, as defined in Section 4001(a)(18) of ERISA, with respect to any Pension Plan which pose a risk of causing a Lien to be created on the assets of the Company or any of its Subsidiaries or which will result in the occurrence of a Reportable Event. No member of any Controlled Group has been required to contribute to a multiemployer plan, as defined in Section 4001(a)(3) of ERISA. No material liability to the Pension Benefit Guaranty Corporation has been, or is expected to be, incurred by any member of a Controlled Group. The term as referred to in this Section 4.13, includes any joint and several liability. No prohibited transaction under ERISA or the Code has occurred with respect to any Employee Benefit Plan which reasonably could have a Material Adverse Effect or a material adverse effect on the condition (financial or otherwise), of an Employee Benefit Plan. 4.14 Delivery of Senior Loan Documents and Acquisition Documents. Purchaser has received complete copies of the Senior Loan Documents, the Acquisition Documents and all amendments thereto, waivers relating thereto, and other side letters or agreements affecting the terms thereof. The Senior Loan Documents and the Acquisition Documents are in full force and effect. None of such documents and agreements has been amended or supplemented, nor have any of the provisions thereof been waived, except pursuant to a written agreement or instrument which has heretofore been delivered to Purchaser. 4.15 Disclosure. No representation or warranty made by the Company or its Subsidiaries in this Agreement, the Senior Loan Documents, the Acquisition Documents or any Other Agreement to 13 which the Company or its Subsidiaries is a party contains any untrue fact or omits to state any material fact necessary to make the statements herein or therein not materially misleading in light of the circumstances under which such representations and warranties are made. There is no fact known to the Company or its Subsidiaries which the Company or its Subsidiaries has determined has a Material Adverse Effect, or which the Company or its Subsidiaries has determined is reasonably likely to have a Material Adverse Effect, that has not been disclosed in writing to Purchaser. 4.16 Subsidiaries and Capitalization. Except as set forth on Schedule 4.16, the Company has no Subsidiaries. All the issued and outstanding shares of capital stock of the Company are duly authorized, validly issued, fully paid and nonassessable. The capitalization of the Company and its Subsidiaries on the Closing Date, including ownership of the preferred stock of the Company, is set forth on Schedule 4.16. 4.17 Current Locations. Schedule 4.17 identifies (a) the Company's and each of its Subsidiaries' principal place of business and chief executive office, (b) all the locations where the Company or any of its Subsidiaries maintains any books or records relating to any of its assets, (c) all other locations where the Company or any of its Subsidiaries has a place of business, and (d) each address where any of the Company's or any of its Subsidiaries' assets are located. Schedule 4.17 accurately indicates whether each such location is owned or leased, and, if leased, identifies the owner of such location. No Person other than the Company or any of its Subsidiaries has possession of any material amount of the assets of the Company or any of its Subsidiaries except as disclosed on Schedule 4.17. 4.18 Investment Company Act. Neither the Company nor any company controlling the Company is required to be registered as an "investment company" within the meaning of the Investment Company Act of 1940, as amended. 4.19 Public Utility Holding Company Act. The Company is not a "holding company" or a "subsidiary company" of a "holding company" or an "affiliate" of a "holding company" or a "public utility" within the meaning of the Public Utility Holding Company Act of 1935, as amended. 4.20 Securities Laws. The Company has complied with or is exempt from the registration and/or qualification requirements of all federal and state securities or blue sky laws applicable to the issuance or sale of the Senior Subordinated Note. The foregoing representation and warranty is 14 made in reliance on the representations and warranties of Purchaser set forth in Sections 3.3, 3.4 and 3.5. 4.21 No Labor Disputes. Neither the Company nor any of its Subsidiaries is involved in any material labor dispute. There are no strikes or walkouts or union organization of any of the Company's or any of its Subsidiaries' employees in existence or, to the Knowledge of the Company, threatened, and no labor contract is scheduled to expire during the term of this Agreement. 4.22 Brokers. Neither the Company, any of its Subsidiaries, nor any of their shareholders has dealt with any broker, finder, commission agent or other Person in connection with transactions referenced in or contemplated by this Agreement or the Other Agreements, nor is the Company, any of its Subsidiaries, or any of their shareholders under any obligation to pay any broker's fee or commission in connection with such transactions, except as set forth on Schedule 4.22. 4.23 Liens. Purchaser's Liens attaching to the Collateral will constitute at all times valid, perfected (but only to the extent perfection can be obtained by the filing of a financing statement) and enforceable Liens, subject to no prior or superior Lien except for Permitted Liens. Before purchase of the Senior Subordinated Note, the Company will have taken or caused to be taken, or will have participated with Purchaser in taking, all necessary action (including making all necessary filings) to provide Purchaser with perfected Liens in the Collateral under the laws of all applicable jurisdictions (but only to the extent perfection can be obtained by the filing of a financing statement). 4.24 Insurance. The amount and types of insurance carried by the Company and its Subsidiaries, and the terms and conditions thereof, are substantially similar to the coverage maintained by companies in the same or similar business as the Company and its Subsidiaries and similarly situated. 4.25 Conduct of Business. On the Closing Date, the Company and its Subsidiaries are engaged only in the business of sourcing, marketing and distributing apparel and related products. 4.26 Officers, Directors, Etc. To the Knowledge of the Company, none of the Company's or its Subsidiaries' (other than the Foreign Subsidiaries) officers, directors, or executive employees have been 15 convicted of a felony or been the subject of a criminal, regulatory or governmental investigation or proceeding. ARTICLE 5. CONDITIONS PRECEDENT TO OBLIGATIONS OF PURCHASER Purchaser's obligations hereunder shall be subject to (a) the performance by the Company of its obligations hereunder which by the terms hereof are to be performed at or prior to delivery of the Senior Subordinated Note, and (b) the satisfaction of the following conditions on or before the Closing Date: 5.1 Effectiveness of Senior Loan Documents. The Senior Loan Documents shall be in full force and effect and shall be on terms and conditions satisfactory to Purchaser. All conditions precedent to the making of the Senior Loans shall have been satisfied or waived with Purchaser's consent. 5.2 Effectiveness of Senior Subordination Agreement. The Senior Subordination Agreement shall have been duly executed and delivered by the parties thereto, and shall be on terms and conditions which are reasonably satisfactory to Purchaser. 5.3 Minimum Availability. The Company shall have available cash and immediately accessible availability (net of standby letters of credit which may be issued under the Senior Loan Documents) under the Senior Loans in an aggregate amount equal to not less than $4,000,000 on the Closing Date after giving effect to the payment of (a) the purchase price under the Acquisition Documents, (b) all fees payable to Purchaser under the terms of this Agreement and the Other Agreements, and (c) all costs and expenses arising as a result of the transactions contemplated by this Agreement, the Acquisition Documents, the Senior Loan Documents and the Other Agreements to which the Company or its Subsidiaries is a party, and Purchaser shall have received satisfactory evidence thereof, including a completed borrowing base certificate in the form required under the Senior Loan Documents. 5.4 Acquisition Documents. The Acquisition Documents, including without limitation the subordination agreement with respect to the Seller Debt, shall be in full force and effect. The Acquisition shall be consummated contemporaneously with the funding of the Senior Subordinated Obligations, in accordance with the terms of the Acquisition Documents. 16 5.5 No Litigation; Consummation of Transactions. No injunction, preliminary injunction, or temporary restraining order shall be threatened or shall exist which prohibits or may prohibit the transactions contemplated herein or any other related transaction, and except as disclosed on Schedule 4.7, no litigation or similar proceeding (including, without limitation, any litigation or other proceeding seeking injunctive or similar relief) shall be threatened or shall exist or any development with respect to any pending litigation shall occur, with respect to the Company, its Subsidiaries or the transactions contemplated herein, which, if adversely determined, could in the reasonable judgment of Purchaser have a Material Adverse Effect. 5.6 Documents. Purchaser shall have received the following, each in form and substance reasonably satisfactory to Purchaser: 5.6.1. Senior Subordinated Note. The Senior Subordinated Note issued in the name of Purchaser, duly executed by the Company; 5.6.2. Security Documents and Other Agreements. The Security Documents and Other Agreements, duly executed by the parties thereto; 5.6.3. Insurance. Certified copies of all insurance policies and endorsements thereto (or other evidence thereof reasonably satisfactory to Purchaser) required by Section 6.13; 5.6.4. Approvals and Consents. Copies, certified by the Company, of all consents, authorizations, filings, licenses and approvals, if any, required as of the Closing Date in connection with the execution, delivery and performance by the Company or its Subsidiaries, or the validity and enforceability of, this Agreement, the Senior Loan Documents, the Acquisition Documents or the Other Agreements to which the Company or its Subsidiaries is a party; 5.6.5. Opinion of Counsel to the Company. The written legal opinion of Sheppard Mullin Richter & Hampton, LLP, legal counsel to the Company and its Subsidiaries, with respect to matters relating to the Company, its Subsidiaries and their shareholders in the form of Exhibit C; 5.6.6. General Certificate of the Company's and each Subsidiary's Secretary. A certificate of the Secretary of the Company and each Guarantor together with true, correct and complete copies of the following: (a) Certificate of Incorporation. The Certificate of Incorporation or other charter documents of the Company and each Guarantor, including all amendments thereto, certified by the Secretary of State (or other appropriate office) of the state of its incorporation and dated within thirty (30) days prior to the Closing Date; 17 (b) Bylaws. The Bylaws of the Company and each Guarantor, including all amendments thereto; (c) Resolutions. The resolutions of the Board of Directors of the Company and each Guarantor authorizing the execution, delivery and performance of this Agreement and the Other Agreements to which the Company and each Guarantor is a party; (d) Existence and Good Standing Certificates. Certificates of the appropriate government officials of the state of incorporation or organization of the Company and each Guarantor as to its existence and good standing, and certificates of the appropriate government officials in each state where the Company or each Guarantor does business and where failure to qualify as a foreign company would have a Material Adverse Effect, as to its good standing and due qualification to do business in such state, each dated within thirty (30) days prior to the Closing Date; and (e) Incumbency. The names of the officers of the Company and each Guarantor authorized to sign this Agreement, the Acquisition Documents, the Senior Loan Documents and the Other Agreements to be executed by the Company and each Guarantor, together with a sample of the true signature of each such officer; 5.6.7. Senior Loan Documents. Copies of the Senior Loan Documents and all documents and opinions relating thereto, and a certificate of the Chief Executive Officer and Chief Financial Officer of the Company certifying that such copies are true, correct and complete; 5.6.8. Acquisition Documents. Copies of the Acquisition Documents and all documents and opinions relating thereto, and a certificate of the Chief Executive Officer and Chief Financial Officer of the Company certifying that such copies are true, correct and complete; 5.6.9. Solvency Certificate. A certificate regarding the solvency of the Company and each of its Subsidiaries, which includes a pro forma balance sheet and cash flow projections for the Company and each of its Subsidiaries on a consolidated basis, executed by the Chief Executive Officer and Chief Financial Officer of the Company and such Subsidiary; 5.6.10. Sources and Uses Certificate. A certificate executed by the Chief Executive Officer and Chief Financial Officer of the Company, setting forth in reasonable detail the sources and uses of funds in the transactions contemplated hereby and by the Other Agreements; 5.6.11. Pro Forma Covenant Compliance Certificate. A certificate executed by the Chief Executive Officer and Chief Financial Officer of the Company, setting forth in 18 reasonable detail compliance by the Company with the covenants set forth in Sections 7.9, 7.10, and 7.11 and in the Senior Loan Agreement, as of the month end preceding the Closing Date and after taking into account the transactions contemplated by this Agreement, the Other Agreements, the Acquisition Documents and the Senior Loan Documents, in form and substance reasonably satisfactory to Purchaser; 5.6.12. Trailing Twelve Month Financial Information. Monthly financial information of the Company, including without limitation Capital Expenditures, calculation of EBITDA, and working capital summary, for the trailing twelve months ending immediately prior to the Closing Date, in the form attached hereto as Exhibit D; 5.6.13. Communication with Accountants. Purchaser shall have received a copy of a letter from the Company addressed to its accountants authorizing such accountants to disclose to Purchaser, but only to the extent permitted by Section 6.4, any and all financial information concerning the Company and its Subsidiaries requested by Purchaser in determining compliance with any of the financial covenants set forth in Sections 7.9, 7.10 and 7.11 and as otherwise contemplated by Section 6.4; 5.6.14. Transaction Certificate. A certificate of the Chief Executive Officer and Chief Financial Officer of the Company that, to the best of their knowledge after due investigation, all conditions precedent to the effectiveness of this Agreement have been satisfied or waived; 5.6.15. Additional Information, Other Documents and Agreements. Such other information, documents, agreements, commitments and undertakings as Purchaser or Purchaser's counsel may reasonably request. 5.7 Material Adverse Change. For the period from September 30, 2002 to the Closing Date, and except for the transactions contemplated by this Agreement, the Other Agreements, the Acquisition Documents and the Senior Loan Documents and except for the existence and consequences of the Yeti Action, there shall have been no occurrence or event which, in Purchaser's reasonable opinion, has or will have a Material Adverse Effect. 5.8 Origination Points; Other Expenses. Origination points in the aggregate amount set forth in Section 1.3 shall have been paid to Purchaser. All other fees then payable pursuant to this Agreement (including the fees, expenses and disbursements of the Purchaser's counsel) shall have been paid to Purchaser (or such counsel, as applicable). 5.9 No Default or Event of Default. No Default or Event of Default shall have occurred and be continuing. 19 5.10 Representations and Warranties. All representations and warranties contained in this Agreement, the Acquisition Documents, the Senior Loan Documents and the Other Agreements shall be true and correct in all material respects on the Closing Date. 5.11 Due Diligence. The Purchaser shall have completed to its reasonable satisfaction its business and legal due diligence with respect to the Company and its Subsidiaries. ARTICLE 6. AFFIRMATIVE COVENANTS The Company covenants and agrees that, from the date hereof and until all of the Senior Subordinated Obligations have been finally and irrevocably paid in full in accordance with the terms hereof and thereof (unless waived in writing by Purchaser at its sole discretion): 6.1 Financial Statements. 6.1.1. The Company will furnish to Purchaser: (a) As soon as available, and in any event within one hundred five (105) days after the end of each fiscal year of the Company, beginning with the fiscal year ending December 31, 2002, a copy of the annual audit report of the Company and its Subsidiaries for such fiscal year containing consolidated balance sheets, statements of income, statements of stockholders' equity, and statements of cash flows as at the end of such fiscal year and for the fiscal year then ended, in each case setting forth in comparative form the figures for the preceding fiscal year, all in reasonable detail and audited and certified by KPMG LLP or other independent certified public accountants of recognized national standing selected by the Company and consented to by Purchaser to the effect that such report has been prepared in accordance with GAAP. The annual audit report required hereby shall not be qualified or limited. (b) As soon as available, and in any event within thirty (30) days after the end of each calendar month, (i) a copy of an unaudited financial report of the Company as of the end of such calendar month and for the portion of the fiscal year then ended, containing a consolidated balance sheet, statement of income, and statement of cash flows for each of the Company and its Subsidiaries, in each case setting forth in comparative form the figures for the corresponding period of the preceding fiscal year, and (ii) copies of borrowing base certificates and covenant compliance certificates delivered to the Senior Lender and copies of all other documents or information required to be delivered by the Company and/or its Subsidiaries to the Senior Lender under the Senior Loan Documents. (c) Copies of all annual budgets, business plans, projected consolidated and consolidating balance sheets, income statements, and cash flow statements, and all revisions 20 thereto and other financial models prepared from time to time by the Company for the audit committee of the Board of Directors. 6.2 Certificates; Other Information. 6.2.1. The Company will furnish to Purchaser all of the following: (a) Concurrently with the delivery of each of the financial statements referred to in Section 6.1.1 (a) and Section 6.1.1 (b), a certificate of an authorized officer of the Company in the form of the Covenant Compliance Certificate attached hereto as Exhibit B, (i) stating that no Default or Event of Default has occurred and is continuing or, if such officer has knowledge of a Default or Event of Default, the nature thereof and specifying the steps taken or proposed to remedy such matter, (ii) showing in reasonable detail the calculations showing compliance with Sections 7.9, 7.10, and 7.11, and (iii) stating that the financial statements attached have been prepared in accordance with GAAP and fairly and accurately present (subject to normal year-end audit adjustments, for the annual certificates) the financial condition and results of operations of the Company and its Subsidiaries at the date and for the period indicated therein. (b) Upon the reasonable request of the Purchaser, the Company shall deliver to the Purchaser a certificate of an authorized officer of the Company (i) containing summary details of revenues by product(s) or part(s), (ii) containing a schedule of the outstanding Indebtedness for borrowed money of the Company and its Subsidiaries describing in reasonable detail each such debt issue or loan outstanding and the principal amount and amount of accrued and unpaid interest with respect to each such debt issue or loan, (iii) containing management's discussion and analysis of the business and affairs of the Company and its Subsidiaries which includes, but is not limited to, a discussion of the results of operations compared to those originally budgeted for such period, and (iv) a report detailing (A) all matters materially affecting the value, enforceability or collectability of any material portion of its assets including, without limitation, the Company's or any of its Subsidiaries' reclamation or repossession of, or the return to the Company or any of its Subsidiaries of, a material amount of goods and material claims or disputes asserted by any customer or other obligor, and (B) any material adverse change in the relationship between the Company or any of its Subsidiaries and any of their suppliers, franchisees, or customers. (c) As soon as available, (i) a copy of each financial statement, report, notice or proxy statement sent by the Company or any of its Subsidiaries to its shareholders in their capacity as shareholders, (ii) a copy of each regular, periodic or special report, registration statement, or prospectus filed by the Company or any of its Subsidiaries with the Commission, any securities exchange or the Commission or any successor agency, including without limitation all reports filed on Form 10Q and Form 10K, (iii) any material order issued by any court, governmental authority, or arbitrator in any material proceeding to which the Company or any of its Subsidiaries is a party, (iv) copies of all press releases and other statements made available generally by the Company or any of its Subsidiaries to the public generally concerning material developments in the Company's or any of its Subsidiaries' business, and (v) copies of all material correspondence to or from the Senior Lender. 21 (d) Promptly, such additional information concerning the Company or any of its Subsidiaries as Purchaser may reasonably request. 6.3 Books and Records. The Company and its Subsidiaries will keep (a) proper books of record and account in which full, true and correct entries will be made of all dealings or transactions of or in relation to its business and affairs; (b) set up on its books accruals with respect to all taxes, assessments, charges, levies and claims; and (c) on a reasonably current basis set up on its books from its earnings allowances against doubtful receivables, advances and investments and all other proper accruals (including, without limitation, accruals for premiums, if any, due on required payments and accruals for depreciation, obsolescence, or amortization of properties), which should be set aside from such earnings in connection with its business. All determinations pursuant to this subsection shall be made in accordance with, or as required by, GAAP. 6.4 Financial Disclosure. The Company hereby irrevocably authorizes and directs, and agrees to cause its Subsidiaries to irrevocably authorize and direct all accountants and auditors employed by it (a) at any time during the term of this Agreement (regardless of whether an Event of Default has occurred) to disclose to Purchaser any and all financial information concerning the Company and its Subsidiaries reasonably requested by Purchaser in determining compliance with any of the financial covenants set forth in Sections 7.4.2, 7.9, 7.10 and 7.11 and answer Purchaser's questions from time to time about the Company and its financial condition, and (b) during the continuance of any Event of Default, in addition to clause (a), to exhibit and deliver to Purchaser copies of any of the Company's or any of its Subsidiaries' financial statements, trial balances, work papers or other accounting records of any sort in the accountant's or auditor's possession and to disclose to Purchaser any information they may have concerning the Company's or any of its Subsidiaries' financial status and business operations. On the Closing Date by letter in form and substance satisfactory to the Purchaser, the Company shall advise its current accountants of the provisions of this Section 6.4 and in such letter and thereafter in connection with each audit of the Company, the Company shall advise such accountants in writing that the audit of the financial statements of the Company and its Subsidiaries shall be delivered to the Senior Lender and the Purchaser and such parties shall be entitled to rely thereon. The Company hereby irrevocably authorizes and agrees to cause its Subsidiaries to irrevocably authorize all federal, state and municipal authorities to furnish to Purchaser copies of reports or examinations relating to the Company, whether made by the Company or otherwise. 6.5 Accountants. The Company will retain, and cause each of its Subsidiaries to retain, independent public accountants who will certify the consolidated and consolidating financial statements of the Company and its Subsidiaries at the end of each fiscal year, and in the event that the services of the independent public accountants so selected, or any firm of independent public accounts hereafter employed by Company or its Subsidiaries, are terminated, the Company will promptly thereafter notify Purchaser and upon Purchaser's request, the Company will request or cause to 22 be requested the firm of independent public accountants whose services are terminated to deliver (without liability to such firm) to Purchaser a letter from such firm setting forth the reasons for the termination of their services and in its notice to Purchaser the Company will state whether the change of accountants was recommended or approved by the board of directors of the Company or its Subsidiaries or any committee thereof. 6.6 Disclosure of Material Matters. The Company will, as soon as practicable after learning thereof, report to Purchaser (a) all matters materially affecting the value, enforceability or collectability of any material portion of the Collateral or its other assets including, without limitation, changes to significant contracts, schedules of equipment, changes of significant equipment or real property, the reclamation or repossession of, or the return to the Company of, a material amount of goods and material claims or disputes asserted by any customer or other obligor, and (b) any material adverse change in the relationship between the Company and any of its suppliers or customers. 6.7 Performance of Obligations. The Company will duly and punctually pay and/or perform, and will cause its Subsidiaries to duly punctually pay and/or perform, its obligations under this Agreement, the Senior Loan Documents and the Other Agreements to which it is a party. 6.8 Preservation of Existence and Conduct of Business. The Company will and will cause each of its Subsidiaries (other than the Immaterial Foreign Subsidiaries) to preserve and maintain its corporate existence and all of its leases, privileges, franchises, qualifications and rights that are necessary or useful in the ordinary conduct of its business, and conduct its business as presently conducted in an orderly and efficient manner in accordance with good business practices. 6.9 Maintenance of Properties. The Company will and will cause each of its Subsidiaries (other than the Immaterial Foreign Subsidiaries) to operate and maintain in good condition and repair (ordinary wear and tear excepted) and replace as necessary, all of its assets and properties which are necessary or useful in accordance with sound business practices in the proper conduct of its business so that the value and operating efficiency of its assets and properties are maintained and preserved. The Company will and will cause each of its Subsidiaries (other than the Immaterial Foreign Subsidiaries) to at all times maintain the Intellectual Property in full force and effect, and will defend and protect the Intellectual Property against all material adverse claims. 6.10 Payment of Taxes and Claims. The Company will and will cause each of its Subsidiaries (other than the Immaterial Foreign Subsidiaries) to pay or discharge, at or before maturity or before becoming delinquent (a) all taxes, levies, assessments, vault, water and sewer rents, rates, charges, levies, 23 permits, inspection and license fees and other governmental and quasi-governmental charges and any penalties or interest for nonpayment thereof, heretofore or hereafter imposed or which may become a Lien upon any property owned by the Company or any of its Subsidiaries or arising with respect to the occupancy, use, possession or leasing thereof (collectively the "Impositions") and (b) all lawful claims for labor, material, and supplies, which, if unpaid, might become a Lien upon any of its property; provided, however, neither the Company nor any of its Subsidiaries will be required to pay or discharge any claim for labor, material, or supplies or any Imposition which is being contested in good faith by appropriate actions or proceedings diligently pursued, and for which adequate reserves in conformity with GAAP with respect thereto have been established to the reasonable satisfaction of Purchaser. 6.11 Compliance with Laws. The Company will and will cause each of its Subsidiaries (other than the Immaterial Foreign Subsidiaries) to comply with all acts, rules, regulations and orders of any legislative, administrative or judicial body or official applicable to the operation of the Company's or any of such Subsidiaries' business if noncompliance with such acts, rules, regulations or orders could reasonably have a Material Adverse Effect; provided, however, the Company and each of its Subsidiaries may contest or dispute any acts, rules, regulations, orders and directions of those bodies or officials by appropriate actions or proceedings diligently pursued, if adequate reserves in conformity with GAAP with respect thereto are established to the reasonable satisfaction of Purchaser. 6.12 Payment of Leasehold Obligations. The Company will and will cause each of its Subsidiaries (other than the Immaterial Foreign Subsidiaries) to at all times pay, when and as due, its rental obligations under all leases under which it is a tenant or lessee, and shall otherwise comply, in all material respects, with all other terms of such leases and keep them in full force and effect and, at Purchaser's request, will provide evidence of its having done so; provided, however, the Company and each of its Subsidiaries may contest or dispute its obligations under such leases by appropriate actions or proceedings diligently pursued if adequate reserves in conformity with GAAP with respect thereto are established to the reasonable satisfaction of Purchaser. 6.13 Insurance. The Company will and will cause each of its Subsidiaries to maintain, with financially sound, reputable and solvent companies, insurance policies (a) insuring its assets against loss by fire, explosion, theft and other risks and casualties as are customarily insured against by companies engaged in the same or a similar business, (b) insuring it against liability for personal injury and property damages relating to its assets, such policies to be in such amounts and covering such risks as are usually insured against by companies engaged in the same or a similar business, and insuring such other matters as may from time to time be requested by Purchaser and (c) insuring the life of Douglas Otto in the amount of $4,000,000. All general liability policies shall be endorsed in favor of Purchaser as an additional insured. The Company shall provide copies of all such insurance policies to Purchaser and copies of 24 comparable policies to the Senior Lender (all in a form consistent with the collateral priorities set forth in the Senior Subordination Agreement and acceptable to Purchaser) within ten (10) days following Purchaser's request for the same. The Company shall (i) deliver all such policies to Purchaser immediately upon the Company's or any of its Subsidiaries' receipt thereof, (ii) pay, or cause to be paid, all premiums for such insurance at least thirty (30) days before such premiums become due, (iii) furnish to Purchaser satisfactory proof of the timely making of such payments, (iv) deliver to Purchaser evidence satisfactory to Purchaser of insurance renewal as soon as practicable before the expiration date of each expiring policy, and deliver all renewal binders and renewal policies to Purchaser as soon as available to the Company, (v) cause such policies to require the insurer to give notice to Purchaser of termination of any such policy at least thirty (30) days before such termination is to be effective, and (vi) immediately deliver written notice to the Purchaser of any casualty loss affecting the Collateral. If the Company or any of its Subsidiaries fails to provide and pay for any such insurance, Purchaser may, at its option, but shall not be required to, pay the same and charge the Company therefor. Notwithstanding the foregoing, the Company shall have ninety (90) days from the Closing Date to procure the insurance described in subclause (c) above. 6.14 Inspection Rights. At any reasonable time and from time to time, the Company will and will cause each of its Subsidiaries to permit representatives of Purchaser to examine and make copies of the books and records of, and visit and inspect the properties of, the Company and its Subsidiaries, and to discuss the business, operations, and financial condition of the Company and its Subsidiaries with its respective officers and employees and with its independent certified public accountants. Such examinations and inspections may include, but are not limited to, audits of the application of proceeds from the Senior Subordinated Note. In accordance with and subject to the terms of Section 12.1 hereof, the Company will promptly reimburse Purchaser for all expenses incurred by representatives of Purchaser in connection with such inspections. 6.15 Notices. The Company will promptly, but in any event within two (2) Business Days after first becoming aware thereof, notify Purchaser in writing of: (a) the commencement of any event, including but not limited to, any action, suit, or proceeding against the Company or any of its Subsidiaries, that could reasonably have a Material Adverse Effect, which notice shall specify the nature of such event and what action the Company or such Subsidiary has taken or is taking or proposes to take with respect thereto; (b) the occurrence of an event of default, or an event which with the passage of time or giving of notice or both constitutes an event of default under the Senior Loan Documents or under any instrument or agreement evidencing any other Indebtedness of the Company or any of its Subsidiaries in principal amount of $500,000 or more, which notice shall specify the nature of such event, condition or default and what action the Company or such Subsidiary has taken or is taking or proposes to take with respect thereto; or 25 (c) The occurrence of a Default or an Event of Default, which notice shall specify the nature of such event, condition or default and what action the Company has taken or is taking or proposes to take with respect thereto. Any notification required by this Section 6.15 shall be accompanied by a certificate of the Chief Executive Officer or Chief Financial Officer setting forth the details of the specified events and the action which the Company or any of its Subsidiaries proposes to take with respect thereto. 6.16 Senior Loan Document Amendments. The Company shall promptly provide Purchaser with copies of all proposed amendments to the Senior Loan Documents and of all other agreements evidencing or relating to Indebtedness in principal amount of $500,000 or more to which the Company is a party. 6.17 Further Assurances. The Company shall execute and deliver, and shall cause to be executed and delivered, to Purchaser from time to time, upon demand, such supplemental agreements, statements, assignments and transfers, or instructions or documents as Purchaser may request, in order that the full intent of this Agreement and the Other Agreements may be carried into effect. 6.18 Compliance with ERISA and the Code. The Company will comply, and will cause each other member of any Controlled Group to comply, with all minimum funding requirements, and all other material requirements, of ERISA and the Code, if applicable, to any Employee Benefit Plan it or they sponsor or maintain, so as not to give rise to any liability thereunder. The Company will pay and will cause each other member of any Controlled Group to pay when due any amount payable by it to the Pension Benefit Guaranty Corporation. Promptly after the filing thereof, the Company shall furnish to Purchaser with regard to each Employee Benefit Plan, copies of each annual report required to be filed pursuant to Section 104 of ERISA in connection with each such plan for each plan year. 6.19 Compliance with Regulations, T, U and X. Neither the Company nor any Person acting on its behalf will take any action which might cause this Agreement, the Senior Subordinated Note, the Senior Loan Documents or any Other Agreements to violate, and the Company will take all actions necessary to cause compliance with, Regulations T, U and X of the Board of Governors of the Federal Reserve System and the Exchange Act, in each case as now in effect or as the same may hereafter be in effect. 6.20 Fiscal Year. The Company will cause and will cause its Subsidiaries to cause their fiscal year to be the twelve month period ending on December 31 of each year. 26 6.21 Environmental Costs. (a) The Company hereby indemnifies and holds Purchaser harmless from and against any liability, loss, damage, suit, action or proceeding pertaining to solid or hazardous waste materials or other waste-like or toxic substances, including, but not limited to, claims of any federal, state or municipal government or quasi-governmental agency or any third person, whether arising under any federal, state or municipal law or regulation, or tort, contract or common law that relates to the Company or any of its Subsidiaries. (b) To the extent the laws of the United States or any state in which the Company or any of its Subsidiaries leases or owns property provide that a Lien upon the property of the Company or any of its Subsidiaries may be obtained for the removal of Hazardous Substances which have been released, then no later than sixty (60) days after notice is given by Purchaser to the Company, the Company shall deliver to Purchaser a report issued by a qualified, third party environmental consultant selected by the Company and approved by Purchaser as to the existence of any Hazardous Substances located upon or beneath the specified property, leased or owned by the Company or any of its Subsidiaries. To the extent any such Hazardous Substance is located therein or thereunder that either (i) subjects the property to Lien or (ii) requires removal to safeguard the health of any Person, the Company shall remove, or cause to be removed, such Lien and such Hazardous Substance at the Company's expense. 6.22 Board Observation Rights. The Company will afford any representative designated by Purchaser (subject to such representative's execution of a customary non-disclosure agreement in favor of the Company) (a) not less than three (3) Business Days' actual notice of all regular and one (1) Business Day actual notice of all special meetings of the Company's Board of Directors, (b) the opportunity to attend all such meetings of the Company Board of Directors for the purpose of observing same, and (c) copies of all materials and information distributed at or prior to such meetings or otherwise to the directors of the Company. 6.23 Guarantors. Cause UGG and each and every now existing or hereafter acquired or formed Subsidiary (other than Foreign Subsidiaries) to execute and deliver to Purchaser a guaranty and security agreement in form and substance satisfactory to Purchaser. ARTICLE 7. NEGATIVE COVENANTS The Company covenants and agrees that from the date hereof until all of the Senior Subordinated Obligations have been finally and irrevocably paid in full in accordance with the terms hereof and thereof (unless waived in writing by Purchaser at its sole discretion): 27 7.1 Indebtedness. Neither the Company nor any of its Subsidiaries will create, incur, issue, assume, guarantee or otherwise become liable for any Indebtedness, except Permitted Indebtedness. Any Permitted Indebtedness which consists of royalties or other contingent deferred purchase price payments to sellers in connection with future acquisitions shall be subordinated to the Senior Subordinated Obligations on terms satisfactory to Purchaser. 7.2 Limitation on Liens. Neither the Company nor any of its Subsidiaries will incur, create, assume, or permit to exist any Lien upon any of its property, assets, or revenues, including, but not limited to, its shares of capital stock of each of its Subsidiaries, whether now owned or hereafter acquired, except for Permitted Liens. 7.3 Merger, Acquisition, Dissolution and Sale of Assets. Neither the Company nor any of its Subsidiaries will (a) become a party to a merger or consolidation, (b) purchase or otherwise acquire all or a substantial part of the assets of any Person or any shares or other evidence of beneficial ownership of any Person, (c) dissolve or liquidate, (d) form, acquire or permit the existence of any Subsidiary or Subsidiaries or acquire any equity interest or make any investment in or loan to any other Person, or (e) sell, lease, assign, transfer or otherwise convey, assign or transfer any of its assets, including without limitation the stock of any Subsidiary except (i) inventory in the ordinary course of business, (ii) assets reasonably and in good faith determined by the Company or such Subsidiary to be obsolete or no longer necessary to the Company's or such Subsidiary's business, (iii) assets generating aggregate Net Cash Proceeds of no more than $500,000 in any fiscal year, (iv) sale of marketable securities, and (v) licensing of intellectual property in the ordinary course of business. 7.4 Restricted Payments. 7.4.1. Neither the Company nor any of its Subsidiaries will at any time make or become obligated to make, directly or indirectly, (a) any declaration of any dividend on, or any other payment or distribution in respect of (including any redemption), any shares of the Company or such Subsidiary, other than (i) dividends by a Subsidiary payable solely to the Company, (ii) redemption of Company stock in exchange for equity securities or other non-cash consideration, (iii) purchases pursuant to the Company's stock buyback program and (iv) as provided in Section 7.4.2; (b) any professional fees, consulting fees, management fees, or any other payments to any shareholders or affiliates of the Company or its Subsidiaries, other than in the ordinary course of business on terms no more favorable than in a comparable arms-length transaction; or (c) payment or distribution on account of the purchase, repurchase, redemption, put, call or other retirement of any shares of the Company or of any warrant, option or other right to acquire such shares; or (d) payment or distribution on account of any Indebtedness of the Company or such Subsidiary which is subordinate to the Senior Subordinated Note pursuant to a subordination agreement satisfactory to the Purchaser. 28 7.4.2. Anything herein to the contrary notwithstanding, the Company may at any time prior to November 25, 2005, redeem for cash shares of preferred stock issued to Mark Thatcher (a) from cash sources other than proceeds from the issuance of common stock so long as (i) no Default or Event of Default has occurred and is continuing; (ii) no Default or Event of Default will occur as a result of or after giving effect to such redemption; (iii) after giving effect to such redemption, the Company will have minimum revolving credit availability under the Senior Loan Agreement of not less than $7,500,000; and (iv) the Company shall have been in compliance with the following tests during the sixth months immediately preceding such redemption: (A) annual EBITDA of not less than $12,000,000, and (B) Leverage to Cash Flow ratio of (I) 3:00 to 1:00 during the period from Closing through November 25, 2003, (II) 2.50 to 1.00 during the period from November 26, 2003 through November 25, 2004, and (III) 2.00 to 1.00 during the period from November 26, 2004 through November 25, 2005, or (b) solely with proceeds from the issuance of common stock without regard to satisfaction of the foregoing conditions. 7.5 Loans and Investments. Except for Permitted Investments, Permitted Indebtedness and as set forth below, neither the Company nor any Subsidiaries will make any advance, loan, extension of credit, or capital contribution to or investment in, or purchase any stock, bonds, notes, debentures, or other securities of any Person. Notwithstanding the foregoing, the Company may acquire, or form any new Subsidiary to acquire the assets of another Person, provided that (i) the acquisition costs for all such acquisitions (including the total consideration paid to the seller(s), taxes, fees and other transaction costs) does not exceed One Million Five Hundred Thousand Dollars ($1,500,000) in any single transaction and Three Million Dollars ($3,000,000) in the aggregate, (ii) such acquisition is of a business engaged in the manufacture, design, marketing, distribution and/or sale (wholesale or retail) of apparel and related products, and/or outdoor sporting goods, and (iii) the acquisition is not hostile. In addition, the Company shall be permitted to make loans and advances (x) to its employees, provided that such loans and advances do not exceed Two Hundred Thousand Dollars ($200,000) in the aggregate outstanding at any time and are made in accordance with applicable law, and (y) to any Guarantor, which loans and advances may be repaid from time to time by any Guarantor to the Company, and (z) any Foreign Subsidiary, provided such loans and advances to Foreign Subsidiaries do not exceed One Million Dollars ($l,000,000) in the aggregate outstanding at any time, which loans and advances may be repaid from time to time by any Foreign Subsidiary to the Company. 7.6 Transactions with Affiliates. Except (a) as contemplated by this Agreement and the Other Agreements, (b) the guaranty issued by the Company in favor of the Senior Lender guaranteeing the indebtedness of Douglas B. Otto to the Senior Lender (which indebtedness is in the principal amount of $[1,000,000]), and (c) the transfer to Holbrook of the foreign intellectual property assets acquired in the Acquisition and the payment of the purchase price therefor by Holbrook to the Company, neither the Company nor any of its Subsidiaries will enter into any transaction with any director, officer, employee, shareholder, or Affiliate of the Company or such Subsidiary except 29 transactions upon terms which are fair and reasonable and which shall be at least as favorable as would result in a comparable arm's-length transaction with a Person not a director, officer, employee, shareholder or Affiliate of the Company or such Subsidiary. 7.7 Nature of Business. Neither the Company or such Subsidiary will engage in any business other than the businesses set forth in Section 4.25, or any business reasonably related thereto; provided that the Company and any Subsidiary may directly or indirectly engage in the retail sale of apparel and related products and in the licensing of intellectual property to be used in connection with the sale of consumer goods. 7.8 Modification of Senior Loan Documents. The Company will not agree or consent to any modification, amendment or waiver of any of the terms or provisions of its Certificate of Incorporation relating to the Company's preferred stock, in effect on the date hereof, without Purchaser's prior written consent. The provisions of the Senior Loan Documents may not be amended or modified in any manner that increases the revolving credit commitment thereunder by greater than $4,000,000, increases interest rates, fees or margins, increases any pricing matrix or method of making margin adjustments, accelerates the amortization or maturity dates of any payments of principal or other amounts, changes any other repayment provisions in a manner which makes such repayment provisions more restrictive, changes any financial covenant ratio in a manner which makes such financial covenant ratio more restrictive, or provides for any additional collateral, guaranty or pledge without the prior written consent of the Purchaser. Notwithstanding the foregoing, the Company may, without the prior written consent of Purchaser, replace the Senior Debt with a new senior debt facility on substantially the same or more favorable terms provided the replacement senior lender enters into a subordination agreement with Purchaser on substantially the same terms as the subordination agreement entered into on the Closing Date by Senior Lender and the Purchaser. 7.9 Capital Expenditures. Neither the Company nor any of its Subsidiaries will make any Capital Expenditures if, as a result thereof, the Capital Expenditures of the Company and its Subsidiaries in the aggregate would, as a result thereof, exceed $2,000,000 annually. In the event that the Company or any of its Subsidiaries enters into a capital lease with respect to fixed assets, for purposes of calculating Capital Expenditures under this Section 7.9, the lesser of (a) the aggregate amount of the present value of all minimum payments (excluding executory costs) due for the entire term of such capital lease, or (b) the cost of such fixed asset at the inception of such capital lease shall be considered expended in full on the date that the Company or such Subsidiary enters into such capital lease. 30 7.10 Financial Covenants. (a) Interest Coverage Ratio. The Company will not permit the Interest Coverage Ratio of the Company on a consolidated basis at any time during the fiscal quarter(s) ending as set forth below to be less than the ratio set forth below for such quarter:

(b) Fixed Charge Coverage Ratio. The Company will not permit the Fixed Charge Coverage Ratio of the Company on a consolidated basis at any time during the fiscal quarter(s) ending as set forth below to be less than the ratio set forth below for such quarter:

31 (c) Leverage to Cash Flow Ratio. The Company will not permit the Leverage to Cash Flow Ratio of the Company on a consolidated basis at any time during the fiscal quarter(s) ending as set forth below to be greater than the ratio set forth below for such quarter:

7.11 Remuneration. Neither the Company nor any of its Subsidiaries will permit the aggregate amount of salary and other direct and indirect remuneration (including, but not limited to, employee benefits and professional, consulting and management fees and expenses) paid by the Company during any fiscal year to Douglas Otto to exceed at any time $1,500,000 in the aggregate. 7.12 Use of Proceeds. The Company will not use the proceeds of the sale of the Senior Subordinated Note for any other purpose except as set forth in Section 1.4. ARTICLE 8. EVENTS OF DEFAULT AND REMEDIES 8.1 Events of Default. The occurrence of any one or more of the following events shall constitute an "Event of Default": 8.1.1. The Company shall fail to pay, when due (whether upon acceleration or otherwise), any principal, interest or other sums payable under the Senior Subordinated Note, any Deferral Note or this Agreement, or shall fail to pay, when due (whether upon acceleration or otherwise), any other Senior Subordinated Obligations; 8.1.2. The Company or any of its Subsidiaries shall fail to pay when due, or shall breach any other obligation or covenant or create any default or event of default under (after passage of any applicable notice and cure periods, whether upon acceleration or otherwise), any Indebtedness having an outstanding principal amount equal to or greater than $500,000 or pursuant to which the Company has incurred a liability equal to or greater than $500,000 other than the Senior Debt; 32 8.1.3. The Company shall fail to perform or observe any other agreement, covenant, term or condition contained in this Agreement or in the Senior Subordinated Note, the Deferral Note or the Other Agreements for a period of thirty (30) days after notice thereof to the Company; 8.1.4. The Company or its Subsidiaries shall fail to comply with any agreement or contract binding on it or affecting its property or business and imposing liability on the Company of $500,000 or more per year, which continues beyond the grace period, if any, provided therein; 8.1.5. Any event or condition occurs that results in the acceleration of the Senior Debt; 8.1.6. Any representation, warranty, statement of fact or certification made by the Company or its Subsidiaries in this Agreement, the Senior Subordinated Note, the Other Agreements, any disclosure schedule or letter, exhibit, certificate, financial statement or other document delivered pursuant to this Agreement or the Other Agreements was incorrect or misleading in any material respect when made; 8.1.7. The Company, any of its Subsidiaries other than Foreign Subsidiaries, or any Guarantor shall become subject to an Event of Bankruptcy; 8.1.8. Any Foreign Subsidiary shall, without the prior consent of Purchaser, become subject to an Event of Bankruptcy. 8.1.9. Any judgment or order for payment of money shall be rendered against the Company or any of its Subsidiaries which exceeds $500,000 and either (a) enforcement proceedings shall have been commenced by any creditor upon such judgment or order, or (b) there shall be a period of thirty (30) consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; 8.1.10. The occurrence of an adverse change in the financial condition, organization, operations or fixed assets of the Company or its Subsidiaries, which, in Purchaser's reasonable opinion, has or could have a Material Adverse Effect. 8.2 Remedies of Holders upon Occurrence of Event of Default. When any Event of Default described in Section 8.1 above, other than any Event of Default described Subsection 8.1.7 thereof, has occurred and is continuing, Purchaser may (in addition to any other right, power or remedy permitted to Purchaser by law) declare the entire amount of the Senior Subordinated Obligations, including, without limitation, the entire principal, Prepayment Fee (if any) and all interest accrued then outstanding under the Senior Subordinated Note and the Deferral Note, to be, and the same shall thereupon become, forthwith due and payable, without any presentment, demand, protest, notice of default, notice of intention to accelerate, notice of acceleration or other notice of any kind, all of which are hereby expressly waived, and in such event the Company shall (subject to the terms of the Senior Subordination 33 Agreement) forthwith pay to Purchaser an amount equal to one hundred percent (100%) of the amount thereof. When any Event of Default described in Subsection 8.1.7 above shall occur, all of the Senior Subordinated Obligations, including, without limitation, the entire principal, Prepayment Fee (if any), and all accrued interest then outstanding under the Senior Subordinated Note, the Deferral Note and all other Senior Subordinated Obligations, shall thereupon be forthwith due and payable without any presentment, demand, protest, notice of default, notice of intention to accelerate, notice of acceleration or other notice of any kind (including any notice by the Holders of the Senior Subordinated Note), all of which are hereby expressly waived by the Company, and the Company will (subject to the terms of the Senior Subordination Agreement) forthwith pay all such amounts to Purchaser. 8.3 Annulment of Acceleration. The provisions of the foregoing Section 8.2 are subject to the condition that, if all or any part of the Senior Subordinated Obligations have been declared or have otherwise become immediately due and payable by reason of the occurrence of any Event of Default, Purchaser may, by written instrument delivered to the Company (an "Annulment Notice"), rescind and amend such declaration and the consequences thereof as to the Senior Subordinated Note and Deferral Note, provided that (a) at the time such Annulment Notice is delivered no judgment or decree has been entered for the payment of any monies due pursuant to such Senior Subordinated Obligations in connection therewith, and (b) all arrears of interest and all other sums payable on such Senior Subordinated Obligations in connection therewith (except any principal, interest or Prepayment Fee which has become due and payable solely by reason of such declaration under Section 8.2 hereof) shall have been duly paid or deferred by the Holder of the Senior Subordinated Obligations agreeing to such rescission and annulment; and, provided that no such rescission and annulment shall extend to or affect any subsequent default or Event of Default or impair any right consequent thereto, and shall not be deemed a waiver of the Event of Default giving rise to the acceleration unless specifically waived in writing by Purchaser. 8.4 Payment of Senior Subordinated Obligations. Subject to the terms of the Senior Subordination Agreement, Purchaser shall have the right, which is absolute and unconditional, to receive payment of the principal of and interest on the Senior Subordinated Note and payment of all other Senior Subordinated Obligations on the date when due and, upon the occurrence and continuance of an Event of Default, to institute suit against the Company for the enforcement of any such payment. Such rights shall not be impaired without Purchaser's prior written consent. 8.5 Remedies. Subject to the terms of the Senior Subordination Agreement, if any Event of Default shall occur and be continuing, each and every Holder may exercise any right or remedy it has at law, in equity or under this Agreement or any Other Agreement. No right or remedy conferred upon or reserved to Purchaser under this Agreement or any Other Agreement is intended to be exclusive of any other right or remedy, and every right and remedy shall be cumulative and in addition to every other right or remedy given hereunder or now or hereafter 34 existing under any applicable law. Every right and remedy given by this Agreement or by applicable law to Purchaser may be exercised from time to time and as often as may be deemed expedient by Purchaser. 8.6 Conduct No Waiver. No course of dealing on the part of Purchaser, nor any delay or failure on the part of Purchaser to exercise any of its rights, shall operate as a waiver of such right or otherwise prejudice Purchaser's rights, powers and remedies. If the Company fails to pay, when due, the principal of, Prepayment Fee (if any) or the interest on, the Senior Subordinated Note, the Deferral Note or any other portion of the Senior Subordinated Obligations, or fails to comply with any other provision of this Agreement, the Company shall pay to the Holder, to the extent permitted by law, on demand, such further amounts as shall be sufficient to cover the cost and expenses, including, but not limited to, reasonable attorneys' fees, incurred by Purchaser in collecting any sums due on the Senior Subordinated Note and the Deferral Note or in otherwise enforcing any of Purchaser's rights. ARTICLE 9. SUBORDINATION Notwithstanding any provision in this Agreement to the contrary, the Indebtedness evidenced by the Senior Subordinated Note and the Deferral Note (if any) shall be subordinate in right of payment to all Senior Debt, including without limitation regularly scheduled payments of principal and interest with respect to Senior Debt, and Purchaser's rights and remedies hereunder shall be subordinate to the rights and remedies of the Senior Lender, in accordance with the terms and only to the extent of the Senior Subordination Agreement. Nothing contained in this Article 9 or elsewhere in this Agreement, the Senior Subordinated Note, the Deferral Note or the Senior Subordination Agreement is intended to or shall impair, as between the Company and Purchaser, the obligations of the Company, which are absolute and unconditional, to pay to Purchaser the principal of, Prepayment Fee (if any) and interest on the Senior Subordinated Note and the Deferral Note and all other Senior Subordinated Obligations as and when the same shall become due and payable in accordance with their terms, or is intended to or shall affect the relative rights of Purchaser and creditors of the Company other than the holders of the Senior Debt, nor shall anything herein or therein prevent Purchaser from exercising all remedies otherwise permitted by applicable law upon a Default or an Event of Default under this Agreement. ARTICLE 10. FORM OF SENIOR SUBORDINATED NOTE; REGISTRATION, TRANSFER AND REPLACEMENT 10.1 Form of Senior Subordinated Note. The Senior Subordinated Note initially delivered under this Agreement will be a note registered on the books of the Company in accordance with Section 10.2. The Senior Subordinated Note is issuable only in fully registered form, in denominations of at least $1,000,000 (or the then-remaining outstanding balance thereof, if less than $1,000,000). Any Senior Subordinated Note issued hereunder, including any replacement notes, will contain the following legend: 35 THIS INSTRUMENT AND THE OBLIGATIONS EVIDENCED HEREBY ARE SUBORDINATED, IN THE MANNER AND TO THE EXTENT SET FORTH IN A SENIOR SUBORDINATION AGREEMENT (THE "SUBORDINATION AGREEMENT") DATED AS OF NOVEMBER 25, 2002, BY AND AMONG THE MAKER OF THIS INSTRUMENT, COMERICA BANK-CALIFORNIA ("BANK"), AND THE PAYEE OF THIS INSTRUMENT, AND EACH HOLDER OF THIS INSTRUMENT, BY ITS ACCEPTANCE HEREOF, AGREES (i) TO BE BOUND BY THE TERMS OF THE SUBORDINATION AGREEMENT AND (ii) THE EVENT THAT ANY CONFLICT EXISTS BETWEEN THE TERMS OF THIS INSTRUMENT, ANY DOCUMENT EXECUTED IN CONNECTION WITH THE DELIVERY OF THIS INSTRUMENT AND THE TERMS OF THE SUBORDINATION AGREEMENT, THE TERMS OF THE SUBORDINATION AGREEMENT SHALL GOVERN AND BE CONTROLLING. 10.2 Senior Subordinated Note Register. The Company shall cause to be kept at the principal office a register for the registration and transfer of the Senior Subordinated Note. The names and addresses of the Holder of the Senior Subordinated Note, the transfer thereof and the name and address of the transferee of the Senior Subordinated Note shall be recorded in such register. 10.3 Issuance of New Senior Subordinated Note upon Exchange or Transfer. Upon surrender for exchange or registration of transfer of the Senior Subordinated Note at the office of the Company designated for notices in accordance with Section 12.3 hereof, the Company shall execute and deliver, at its expense, one or more new Senior Subordinated Note of any authorized denomination requested by the Holder of the surrendered Senior Subordinated Note each dated the date to which interest has been paid on the Senior Subordinated Note so surrendered (or, if no interest has been paid, the date of the surrendered Senior Subordinated Note) but in the same aggregate unpaid principal amount as the surrendered Senior Subordinated Note and registered in the name of such Person or Persons as shall be designated in writing by such Holder. Every Senior Subordinated Note surrendered for registration of transfer shall be duly endorsed, or be accompanied by a written instrument of transfer duly executed, by the Holder of such Senior Subordinated Note or by its attorney duly authorized in writing. 10.4 Replacement of Senior Subordinated Note. Upon receipt of evidence satisfactory to the Company of the loss, theft, mutilation or destruction of the Senior Subordinated Note and, in the case of any such loss, theft or destruction, upon delivery of a bond of indemnity in such form and amount as shall be reasonably satisfactory to the Company or, in the event of such mutilation upon surrender and cancellation of the Senior Subordinated Note the Company, without charge to the Holder thereof, 36 will make and deliver a new Senior Subordinated Note of like tenor and the same series in lieu of such lost, stolen, destroyed or mutilated Senior Subordinated Note. If any such lost, stolen or destroyed Senior Subordinated Note is owned by Purchaser or any other institutional Holder, then the affidavit of an authorized officer of such owner setting forth the fact of loss, theft or destruction and of its ownership of the Senior Subordinated Note at the time of such loss, theft or destruction shall be accepted as satisfactory evidence thereof, and no further indemnity shall be required as a condition to the execution and delivery of a new Senior Subordinated Note other than a written indemnification agreement of such owner (in form reasonably satisfactory to the Company and its counsel). 10.5 Deferral Note. The provisions of Article 10 shall also apply to any Deferral Note issued by the Company as provided herein. ARTICLE 11. INTERPRETATION OF AGREEMENT 11.1 Certain Terms Defined. Terms used in this Agreement and not defined shall have the meanings ascribed thereto below. Acquisition. This term means the acquisition of the assets of Seller pursuant to the Acquisition Documents. Acquisition Documents. This term means the Asset Purchase Agreement dated as of October 9, 2002 by and among Seller and the Company, as amended, all exhibits and schedules thereto, and all documents, agreements, and opinions executed and delivered in connection therewith. Affiliate. This term means any Person directly or indirectly controlling, controlled by, or under common control with, the Person in question. A Person shall be deemed to control a corporation if such Person possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of such corporation, whether through the ownership of voting securities, by contract, or otherwise. Agreement. This term means this Note Purchase Agreement, including all amendments, modifications and supplements thereto. Annulment Notice. This term is defined in Section 8.3 hereof. Assignment of Life Insurance. This term means the Assignment of Life Insurance by the Company in favor of the Purchaser on the life of Douglas Otto, as amended or modified from time to time. Business Day. This term means each day of the week except Saturdays, Sundays, and days on which banking institutions are authorized by law to close in the State of Michigan or California. 37 Capital Lease. This term means, with respect to any Person, any lease which is or should be capitalized on the balance sheet of such Person in accordance with GAAP. Capital Expenditures. This term means expenditures made and liabilities or commitments incurred for the acquisition of any fixed assets or improvements, replacements, substitutions or additions thereto which have a useful life of more than one (1) year, including, but not limited to, the direct or indirect acquisition of such assets or incurrence of such expenses by way of increased product or service charges, offset items or otherwise and payments with respect to capitalized lease obligations. Capital Stock. This term means, as to any Person, its common stock and any other capital stock of such Person authorized from time to time, and any other shares, options, interests, participations, or other equivalents (however designated) of or in such Person, whether voting or nonvoting, including, without limitation, common stock, options, warrants, preferred stock, phantom stock, stock appreciation rights, preferred stock, convertible notes or debentures, stock purchase rights, and all agreements, instruments, documents, and securities convertible, exercisable, or exchangeable, in whole or in part, into any one or more of the foregoing. Closing. This term means the consummation of the transactions contemplated by the Note Agreement and the Other Agreements, in accordance with the terms thereof or with such amendments or waivers thereto as are acceptable to Purchaser in its sole discretion. Closing Date. This term means the date on which all of the conditions stated in Article 5 hereof have been met or waived to Purchaser's satisfaction and the purchase price for the Senior Subordinated Note has been paid. Code. This term means the Internal Revenue Code of 1986, as amended and in effect from time to time, and the regulations promulgated thereunder. Collateral. This term is defined in the Security Documents, and shall include all assets of the Company and its Subsidiaries on or in which the Senior Lender has a Lien to secure the Senior Debt. Common Stock. This term means all common stock of the Company issued from time to time. Commission. This term means the Securities and Exchange Commission and any successor federal agency having similar powers. Company. This term means Deckers Outdoor Corporation, a Delaware corporation. Controlled Group. This term means any group of organizations within the meaning of Section 414(b), (c), (m) or (o) of the Code of which the Company is a member. Current Interest Expense. This term means, for any period, cash interest paid or accrued by the Company and its Subsidiaries during such period, on a consolidated basis, on all outstanding Indebtedness of the Company and its Subsidiaries. 38 Default. This term means the occurrence of any condition or event which, with the passage of time or giving of notice or both, would constitute an Event of Default. Deferral Note. This term is defined in Section 2.1.1(c) hereof. EBITDA. This term means the Company's earnings before interest, income tax, depreciation and amortization, plus Extraordinary Expenses less Extraordinary Income, for the last full 12-month period immediately preceding the date of determination determined in accordance with GAAP. Employee Benefit Plan. This term means any employee benefit plan, as defined in Section 3(3) of ERISA, which is, previously has been or will be established or maintained by any member of a Controlled Group. Environmental Laws. This term means all federal, state, or local laws, ordinances, rules, regulations, interpretations, directives and orders of courts or administrative agencies or authorities relating to pollution or protection of the environment (including, without limitation, ambient air, surface water, ground water, land surface, and subsurface strata), and/or workplace health and safety and other laws, ordinances, rules, regulations, interpretations, directives and orders of courts or administrative agencies or authorities relating to (a) Hazardous Substances or (b) the manufacture, processing, distribution, use, treatment, handling, storage, disposal, or transportation of Hazardous Substances. ERISA. This term means the Employee Retirement Income Security Act of 1974, as amended and in effect from time to time, and the regulations promulgated thereunder. Event of Bankruptcy. This term means any of (a) the filing by a Person of a voluntary petition in bankruptcy under any provision of any bankruptcy law or a petition to take advantage of any insolvency act, (b) the admission in writing by a Person of its inability to pay its debts generally as they become due, (c) the appointment of a receiver or receivers for all or a material part of a Person's assets with the consent of such Person, (d) the filing of any bankruptcy, arrangement or reorganization petition by or, with the consent of a Person, against such Person under any provision of any bankruptcy law, (e) a receiver, liquidator or trustee of a Person or a substantial part of its assets shall be appointed pursuant to the Federal Bankruptcy Code by the order of a court of competent jurisdiction which shall not be dismissed or stayed within forty-five (45) days, or (f) an involuntary petition to reorganize or liquidate a Person pursuant to the Federal Bankruptcy Code shall be filed against such Person and shall not be dismissed or stayed within 45 days. Event of Default. This term is defined in Section 8.1 hereof. Excess Interest. This term is defined in Section 2.8 hereof. Exchange Act. This term means the Securities Exchange Act of 1934, as amended, and the regulations thereunder. 39 Extraordinary Expense. This term means items of expense outside the ordinary course of the Company's business. Extraordinary Income. This term means items of income outside the ordinary course of the Company's business. Fiscal Year. This term means the Company's fiscal year of January 1 through December 31. Fixed Charge Coverage Ratio. This term means the ratio of (a) EBITDA less Capital Expenditures, to (b) the sum of Current Interest Expense plus Scheduled Debt Amortization of the Company. Foreign Subsidiaries. This term means all Subsidiaries of the Company that are not organized under the laws of any state or any territory of the United States of America. GAAP. This term means generally accepted accounting principles, applied on a consistent basis, as set forth in Opinions of the Accounting Principles Board of the American Institute of Certified Public Accountants and/or in statements of the Financial Accounting Standards Board and/or their respective successors and which are applicable in the circumstances as of the date in question; provided that the Company nor its Subsidiaries may change the use or application of any accounting method, practice or principle with the prior written consent of Purchaser, which consent may require that an adjustment be made to certain of the covenants set forth herein. Accounting principles are applied on a consistent basis when the accounting principles observed in a current period are comparable in all material respects to those accounting principles applied in a preceding period. Guarantors. This term means UGG Holdings, Inc., a California corporation, and any Subsidiary of the Company which, from time to time, delivers a guaranty to Purchaser as provided herein, and "Guarantor" means any of the Guarantors. Hazardous Substances. This term means all pollutants, contaminants, chemicals, or industrial, toxic or hazardous substances or wastes and shall include, without limitation, any flammable explosives, radioactive materials, oil, hazardous materials, hazardous or solid wastes, hazardous or toxic substances or related materials defined in the Comprehensive Environmental Response, Compensation and Liability Act of 1980, the Superfund Amendments and Reauthorization Act of 1986, the Resource Conservation and Recovery Act of 1976, the Hazardous and Solid Waste Amendments of 1984, and the Hazardous Materials Transportation Act, as any of the same are hereafter amended, and in the regulations adopted and publications promulgated thereto; provided, in the event any of the foregoing Environmental Laws is amended so as to broaden the meaning of any term defined thereby, such broader meaning shall apply subsequent to the effective date of such amendment and, provided, further, to the extent that the applicable laws of any state establish a meaning for "hazardous substance," "hazardous waste," "hazardous material," "solid waste," or "toxic substance" which is broader than that specified in any of the foregoing Environmental Laws, such broader meaning shall apply. 40 Holbrook. This term means Holbrook, LTD, a Hong Kong corporation and wholly-owned Subsidiary of the Company. Holder. This term means, when used in reference to the Senior Subordinated Notes and/or the Senior Subordinated Obligations, the Person or Persons who, at the time of determination, is the lawful owner of all or a portion of the Senior Subordinated Notes or an obligee or payee of all or a portion of the Senior Subordinated Obligations. Notwithstanding the foregoing, in no event may a Holder be any person to whom a Transfer has been made otherwise than in accordance with Section 12.5 hereof. Immaterial Foreign Subsidiary. This term means any Foreign Subsidiary which has net assets of less than $1,000,000. Impositions. This term is defined in Section 6.10 hereof. Indebtedness. This term means for any Person: (a) all indebtedness, whether or not represented by bonds, debentures, notes, securities, or other evidences of indebtedness, for the repayment of money borrowed, (b) all indebtedness representing deferred payment of the purchase price of property or assets, (c) all indebtedness under any lease which, in conformity with GAAP, is required to be capitalized for balance sheet purposes and leases of property or assets made as a part of any sale and lease-back transaction if required to be capitalized, (d) all indebtedness under guaranties, endorsements, assumptions, or other contractual obligations, including any letters of credit, or the obligations in respect of, or to purchase or otherwise acquire, indebtedness of others, but excluding any endorsements of negotiable instruments, drafts, checks and other similar instruments made in the ordinary course of business, (e) all indebtedness secured by a Lien existing on property owned, subject to such Lien, whether or not the indebtedness secured thereby shall have been assumed by the owner thereof, (f) trade accounts payable more than ninety (90) days past due, excluding trade accounts payable in an aggregate principal amount at any time outstanding of $100,000 which are being contested in good faith, (g) all amendments, renewals, extensions, modifications and refundings of any indebtedness or obligations referred to in clauses (a), (c), (d) or (e), excluding trade accounts payable in the ordinary course of business. Intellectual Property. This term means all patents, patent rights, patent applications, licenses, inventions, trade secrets, know-how, proprietary techniques (including processes and substances), trademarks, service marks, trade names, copyrights and other intangible proprietary rights. Interest Coverage Ratio. This term means the ratio of EBITDA of the Company and its Subsidiaries to Current Interest Expense of the Company and its Subsidiaries. Interest Payment Date. This term means the last Business Day of each month. Knowledge of the Company. This term means to the actual knowledge of the chief executive officer, chief operating officer, chief financial officer, controller, treasurer, president, senior vice president or other executive officer of the Company. 41 Leverage to Cash Flow Ratio. This term means, on any date, the ratio obtained by dividing (a) the aggregate principal amount of the Net Funded Debt of the Company and its Subsidiaries outstanding on such date, to (b) EBITDA of the Company and its Subsidiaries less Capital Expenditures. Lien. This term means any lien, mortgage, security interest, tax lien, pledge, encumbrance, financing statement, or conditional sale or title retention agreement, or any other interest in property designed to secure the repayment of Indebtedness or any other obligation, whether arising by agreement, operation of law, or otherwise. Material Adverse Effect. This term means (a) a material adverse effect upon the business, operations, properties, assets or condition (financial or otherwise) of the Company or any of its Subsidiaries or (b) a material adverse effect on the ability of the Company or its Subsidiaries to perform their obligations under the Note Agreement or any of the Other Agreements to which it is a party or (c) a material adverse effect on the ability of Purchaser to enforce or collect any of the Senior Subordinated Obligations which was not caused by any action or inaction of Purchaser. In determining whether any individual event would result in a Material Adverse Effect, notwithstanding that such event does not of itself have such effect, a Material Adverse Effect shall be deemed to have occurred if the cumulative effect of such event and all other then existing events would result in a Material Adverse Effect. Purchaser agrees that for purposes of this Agreement, the $4,290,000 award entered against the Company in the Yeti Action shall not be deemed to constitute a Material Adverse Effect. Maturity Date. This term means the earliest to occur of (a) November 25, 2008, (b) the date on which the Senior Subordinated Note and any Deferral Note is accelerated pursuant to Article 8 hereof, or (c) the date on which the Senior Subordinated Obligations are paid in full. Maximum Rate. This term is defined in Section 2.8 hereof. Net Cash Proceeds. This term means the cash proceeds from such sale or disposition, less any proceeds used to replace the asset which is the subject of the sale or disposition and net of (i) attorneys' fees, accountants' fees, investment banking fees, brokerage commissions and amounts required to be applied to the repayment of any portion of the debt secured by a lien not prohibited hereunder on any asset which is the subject of such sale or disposition, (ii) other customary fees, expenses and commissions incurred in connection with the sale or disposition, and (iii) taxes paid or reasonably estimated to be payable as a result of such sale or disposition. Net Funded Debt. This term means, on any date, the sum of the principal amount of Senior Debt outstanding on such date, plus the principal amount of Senior Subordinated Obligations outstanding on such date, plus the principal amount of Seller Debt outstanding on such date, less cash-on-hand of the Company and its Subsidiaries. Non-Recurring Charges. This term means those extraordinary losses, charges and expenses that may be incurred by the Company from time to time, as may be acceptable to the Purchaser. 42 Note Agreement. This term means this Note Purchase Agreement and all documents evidencing indebtedness hereunder, as the same may be amended from time to time, and any refinancing, refunding, or replacements of the indebtedness under this Note Purchase Agreement. Other Agreements. This term means the Senior Subordinated Note, the Deferral Note, the Security Documents and all other agreements, instruments and documents (including, without limitation, notes, guarantees, powers of attorney, consents, assignments, contracts, notices, subordination agreements and all other written matter) executed or delivered in connection with this Agreement and the Senior Subordinated Note, and all renewals, modifications and extensions thereof, whether now or hereafter executed by or on behalf of the Company, any of its Subsidiaries, any guarantor or any other Person and delivered to and for the benefit of Purchaser or any Person participating with Purchaser in the Senior Subordinated Note with respect to the Note Agreement or any of the transactions contemplated by the Note Agreement. Partial Deferral. This term is defined in Section 2.1.1(c) hereof. Pension Plan. This term means any employee pension benefit plan, as defined in Section 3(2) of ERISA, which is, was or will be established or maintained by any member of the Controlled Group. Permitted Indebtedness. This term means (a) any Indebtedness in favor of the Senior Lender under the Senior Loan Agreement and created pursuant thereto, (b) any Indebtedness in favor of Purchaser under the Note Agreement and/or the Other Agreements and created pursuant thereto, (c) Indebtedness constituting Seller Debt, (d) presently existing or hereafter arising purchase money Indebtedness incurred by the Company to finance the acquisition of capital assets by the Company, subject to the limitations placed on Capital Expenditures in Section 7.9 hereof, (e) the Indebtedness as of the Closing Date, set forth on Schedule 4.10 hereto, (f) Indebtedness up to a maximum aggregate amount of Five Hundred Thousand Dollars ($500,000) outstanding at any one time incurred in the ordinary course of business, (g) trade obligations and normal accruals in the ordinary course of business not yet due and payable, (h) intercompany Indebtedness, (i) royalties payable on licensing agreements, (j) the guaranty issued by the Company in favor of the Senior Lender guaranteeing the indebtedness of Douglas B. Otto to the Senior Lender (which indebtedness is in the principal amount of $[1,000,000]), (k) guaranties issued by the Company on behalf of an Australian supplier in an aggregate amount not to exceed $500,000 from time to time. Permitted Investments. This term means the following: (a) securities issued or directly and fully guaranteed or insured by the United States Government or any agency or instrumentality thereof (provided that the full faith and credit of the United States Government is pledged in support thereof), having maturates of not more than twelve (12) months from the date of acquisition; (b) time deposits and certificates of deposit (i) of any commercial bank incorporated in the United States of recognized standing having capital and surplus in excess of $100,000,000 with maturities of not more than twelve months from the date of 43 acquisition or (ii) which are fully insured by the Bank Insurance Fund or Savings Association Insurance Fund with maturities of not more than twelve (12) months from the date of acquisition; (c) commercial paper issued by any Person incorporated in the United States rated at least A-1 or the equivalent thereof by Standard & Poor's Corporation or at least P-1 or the equivalent thereof by Moody's Investors Service, Inc. or an equivalent rating by a nationally recognized rating agency reasonably acceptable to the Purchaser, and in each case maturing not more than twelve (12) months after the date of acquisition; (d) investments in money market funds substantially all of whose assets are comprised of securities of the types described in clauses (a) through (c) above; or (e) forward contracts for forward currency hedging. Permitted Liens. This term means (a) Liens in favor of the Senior Lender under the Senior Loan Documents, (b) Liens in favor of Purchaser under the Security Documents, (c) Liens securing purchase money Indebtedness or capital leases incurred to finance the acquisition of capital assets by the Company, subject to the limitations placed on Capital Expenditures in Section 7.9 hereof, but only so long as (i) such Lien attaches only to the asset so financed, (ii) the Indebtedness secured by such Lien does not exceed one hundred percent (100%) of the purchase price, including installation and freight, of the asset so financed and (iii) no Default or Event of Default has occurred and is continuing, (d) Liens for taxes that are not delinquent or that are being diligently contested in good faith and by appropriate proceedings and adequate reserves with respect thereto are maintained on the books of the Company, (e) statutory liens, such as inchoate mechanics', inchoate materialmen's, landlord's, warehousemen's, and carriers' liens, and other similar liens, arising in the ordinary course of business with respect to obligations which are not delinquent or are being contested in good faith by appropriate proceedings, and (f) judgment Liens that do not constitute an Event of Default. Permitted Transferees. This terms means, with respect to any Person, (i) any trust which is controlled and revocable by such Person acting alone, (ii) the spouse and lineal descendants of such Person, or (iii) a trust for the benefit of the spouse or lineal descendants of such Person. Person. This term means any individual, sole proprietorship, corporation, business trust, unincorporated organization, association, company, partnership, joint venture, governmental authority (whether a national, federal, state, county, municipality or otherwise, and shall include without limitation any instrumentality, division, agency, body or department thereof), or other entity. Prepayment Fee. This term is defined in Section 2.2 hereof and includes any Prepayment Fee arising as a result of Purchaser's exercise of its rights and remedies under Section 8.2 hereof. Property. This term means all real property owned, leased or operated by the Company or any of its Subsidiaries. 44 Purchaser. This term means The Peninsula Fund III Limited Partnership, a Delaware limited partnership, together with all of its transferees, successors and assigns (in accordance with Section 12.5 hereof) of all or any portion of the Senior Subordinated Note or the Senior Subordinated Obligations and any nominees on whose behalf any of the foregoing purchase or otherwise acquire, in accordance with Section 12.5 hereof, any of such Indebtedness of the Company, and shall include, but not be limited to, each and every "Holder" as defined herein. Reportable Event. This term means (i) any of the events set forth in Sections 4043(b) (other than a merger, consolidation or transfer of assets in which no Pension Plan involved has any unfunded benefit liabilities), 4068(f) or 4063(a) of ERISA, (ii) any event requiring any member of the Controlled Group to provide security under Section 401(a)(29) of the Code, or (iii) any failure to make payments required by Section 412(m) of the Code. Scheduled Debt Amortization. This term means actual principal payments made on Senior Debt, Senior Subordinated Obligations and Seller Debt of the Company. Securities Act. This term means the Securities Act of 1933, as amended, and the rules and regulations thereunder. Security Documents. This term means all security agreements, pledge agreements, collateral assignments of life insurance (including the Assignment of Life Insurance), the guarantees, mortgage, deeds of trust and other documents executed in connection with the Note Agreement and granting to Purchaser liens and security interests in the Collateral, second in priority only to the liens and security interests of the Senior Lender under and only to the extent provided by the Senior Loan Agreement, all renewals, modifications or extensions of such documents, and any such documents hereafter executed in favor of Purchaser to secure payment of all or any part of the Senior subordinated Obligations, together with all financing statements and other documents necessary to record or perfect the liens granted by any of the foregoing. Seller. This term means, together, Mark Thatcher and Teva Sport Sandals, Inc. Seller Debt. This term means the Indebtedness of the Company to Mark Thatcher in the aggregate original principal amount of $13,000,000 pursuant to that certain secured promissory note dated November 25, 2002, maturing on November 25, 2008. Senior Debt. This term means, at any given time, the Indebtedness (whether now outstanding or hereafter incurred) of the Company in respect of the Senior Loan Agreement, in a principal amount not to exceed $20,000,000 in revolving credit and $7,000,000 in Senior Term Debt (less the aggregate amount of principal payments made by the Company or its Subsidiaries to the Senior Lender under such term loan), plus interest, fees, expenses, indemnities and all other amounts payable under the Senior Loan Agreement and any notes, security documents, guaranties or other loan documents referred to therein or pursuant thereto, secured by all assets of the Company or its Subsidiaries. 45 Senior Lender. This term means Comerica Bank-California, and its successors and assigns, and any Person who replaces or refinances the Senior Loans under the terms set forth in Section 7.1(c) of the Note Agreement. Senior Loan Agreement. This term means the Amended and Restated Credit Agreement among the Company, UGG and Comerica Bank-California, dated as of November 25, 2002, as amended, modified and supplemented from time to time, and all documents and instruments delivered pursuant thereto in connection with the loans and advances made thereunder. Senior Loan Documents. This term means the Senior Loan Agreement and the agreements, documents and instruments executed in connection therewith or contemplated thereby, as amended, modified and supplemented from time to time. Senior Subordinated Note. This term means a term promissory note in the principal amount of $14,000,000 issued to Purchaser pursuant to the Note Agreement, together with all renewals, modifications, extensions, substitutions and replacements thereof. Senior Subordinated Obligations. This term means and includes any and all Indebtedness and/or liabilities of the Company and its Subsidiaries to Purchaser of every kind, nature and description, direct or indirect, secured or unsecured, joint, several, joint and several, absolute or contingent, due or to become due, now existing or hereafter arising, under the Note Agreement, the Senior Subordinated Note, the Deferral Note or any Other Agreement (regardless of how such Indebtedness or liabilities arise or by what agreement or instrument they may be evidenced or whether or not evidenced by any agreement or instrument) and all obligations of the Company to Purchaser to perform acts or refrain from taking any action under any of the aforementioned documents, together with all renewals, modifications, extensions, increases, substitutions or replacements of any of such Indebtedness and/or liabilities. Senior Subordination Agreement. This term means that certain Senior Subordination Agreement of even date herewith executed by the Company, Senior Lender, and Purchaser pursuant to which the relative priorities of the Senior Lender and Purchaser with respect to the repayment of Senior Debt and the Senior Subordinated Obligations are established, and all amendments and modifications thereto. Senior Term Debt. This term means the term loan in the original principal amount of $7,000,000 made by Senior Lender to the Company pursuant to the Senior Loan Documents, maturing on November 25, 2004 and repayable pursuant to a two year amortization schedule. Subsequent Interest Deferral. This term is defined in Section 2.1.1(c) hereof. Subsidiary. This term means each Person of which or in which the Company or its other Subsidiaries own directly or indirectly more than fifty percent (50%) of (i) the combined voting power of all classes of stock having general voting power under ordinary circumstances to elect a majority of the board of directors or equivalent body of such Person, if it is a corporation or similar person; (ii) the capital interest or profits interest of such Person, if it is a partnership, joint 46 venture, or similar entity; or (iii) the beneficial interest of such Person, if it is a trust, association, or other unincorporated organization. Termination Event. This term means (a) a Reportable Event, (b) the termination of a Pension Plan which has unfunded benefit liabilities (including an involuntary termination under Section 4042 of ERISA), (c) the filing of a Notice of Intent to Terminate a Pension Plan, (d) the initiation of proceedings to terminate a Pension Plan under Section 4042 of ERISA, or (e) the appointment of a trustee to administer a Pension Plan under Section 4042 of ERISA. Transfer. This term is defined in Section 12.5 hereof. Transferee. This term means any Person to whom a Transfer is made. UGG. This terms means UGG Holdings, Inc., a California corporation. Yeti Action. This term means that certain action styled Yeti by Molly Ltd. v. Deckers Outdoor Corp., pending in the United States District Court for the District of Montana, Case No. CV 95-27-M-CCL. 11.2 Other Terms. 11.2.1. Terms which are defined in other Sections of this Agreement shall have the meanings specified therein. All other terms contained in this Agreement shall have, when the context so indicates, the meanings provided for by the Uniform Commercial Code as adopted and in force in the State of Michigan, as from time to time in effect. 11.2.2. For purposes of the definitions of Interest Coverage Ratio, Cash Flow Coverage Ratio and Leverage to Cash Flow Ratio only, the following four covenant variables, EBITDA, Current Interest Expense, Capital Expenditures, and Scheduled Debt Amortization, are calculated as follows: (a) if the Senior Subordinated Obligations have been outstanding less than twelve months: (i) for determining Current Interest Expense and Scheduled Debt Amortization, by: (A) using the latest available internally prepared, GAAP compliant, financial statements; (B) calculating Current Interest Expense and Scheduled Debt Amortization from the date of funding of the Senior Subordinated Obligations through the date of the internally prepared statements; 47 (C) dividing each of the resulting variables in (B) by the number of months since the funding of the Senior Subordinated Obligations; (D) multiplying the results from (C) by 12 (which in effect annualizes the Current Interest Expense and principal payments from the date of funding of the Senior Subordinated Obligations); (ii) for determining EBITDA and Capital Expenditures, by: (A) using the latest available internally prepared, GAAP compliant, financial statements; (B) calculating EBITDA and Capital Expenditures for the trailing twelve month period through the date of the internally prepared statements, using the EBITDA and Capital Expenditures figures for the months in such trailing twelve month period which ended prior to the Closing Date which are set forth on Exhibit C attached hereto; (b) if the Senior Subordinated Obligations have been outstanding twelve months or longer, by: (i) using the latest available internally prepared, GAAP compliant, financial statements; (ii) calculating EBITDA, Current Interest Expense, Capital Expenditures, and principal payments for the trailing twelve month (TTM) period through the date of the internally prepared statements. 11.3 Accounting Principles. Where the character or amount of any asset or liability or item of income or expense is required to be determined or any consolidation or other accounting computation is required to be made for the purposes of this Agreement, the same shall be done, unless specified otherwise, in accordance GAAP, except where such principles are inconsistent with the requirements of this Agreement. 11.4 Directly or Indirectly. Where any provision in this Agreement refers to action to be taken by any Person, or which such Person is prohibited from taking, such provision shall be applicable whether the action in question is taken directly or indirectly by such Person. 48 ARTICLE 12. MISCELLANEOUS 12.1 Expenses. The Company agrees to pay (a) all reasonable out-of-pocket expenses of Purchaser (including reasonable fees, expenses and disbursements of Purchaser's counsel) in connection with the preparation, negotiation, enforcement, operation and administration of this Agreement, the Senior Subordinated Note, the Other Agreements, or any documents executed in connection therewith, or any waiver, modification or amendment of any provision hereof or thereof; (b) annual loan monitoring fees of Purchaser, which fees will not exceed $10,000 per year prior to the occurrence of an Event of Default; and (c) if an Event of Default occurs, all court costs and costs of collection, including, without limitation, reasonable fees, expenses and disbursements of counsel employed in connection with any and all collection efforts. The attorneys' fees arising from such services, including those of any appellate proceedings, and all expenses, costs, charges and other fees incurred by such counsel or Purchaser in any way or respect arising in connection with or relating to any of the events or actions described in this Article 12 shall be payable by the Company to Purchaser, on demand, and shall be additional Senior Subordinated Obligations secured under this Agreement and the Other Agreements. Without limiting the generality of the foregoing, such expenses, costs, charges and fees may include: recording costs, appraisal costs, paralegal fees, costs and expenses; accountants' fees, costs and expenses; court costs and expenses; photocopying and duplicating expenses; court reporter fees, costs and expenses; long distance telephone charges; air express charges, telegram charges; facsimile charges; secretarial overtime charges; and expenses for travel, lodging and food paid or incurred in connection with the performance of such legal services. The Company agrees to indemnify Purchaser from and hold it harmless against any documentary taxes, assessments or charges made by any governmental authority by reason of the execution and delivery by the Company or any other Person of this Agreement, the Other Agreements, and any documents executed in connection therewith; provided that such taxes, assessments or charges do not arise from Purchaser's violation of law, gross negligence, breach of this Agreement or willful misconduct. 12.2 Indemnification. IN ADDITION TO AND NOT IN LIMITATION OF THE OTHER INDEMNITIES PROVIDED FOR HEREIN OR IN ANY OTHER AGREEMENTS, THE COMPANY HEREBY INDEMNIFIES AND HOLDS HARMLESS PURCHASER AND ANY OTHER HOLDERS, AND EVERY AFFILIATE OF ANY OF THE FOREGOING, AND THEIR RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS, FROM ANY CLAIMS, ACTIONS, DAMAGES, COSTS, ATTORNEYS' FEES AND EXPENSES (INCLUDING ANY OF THE SAME ARISING OUT OF THE SOLE, COMPARATIVE OR CONTRIBUTORY NEGLIGENCE OF THE PERSON TO BE INDEMNIFIED) TO WHICH ANY OF THEM MAY BECOME SUBJECT, INSOFAR AS SUCH LOSSES, LIABILITIES, CLAIMS, ACTIONS, DAMAGES, COSTS AND EXPENSES ARISE FROM OR RELATE TO THIS AGREEMENT OR THE OTHER AGREEMENTS, OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREBY, OR FROM ANY INVESTIGATION, LITIGATION, OR OTHER PROCEEDING, INCLUDING, WITHOUT LIMITATION, ANY THREATENED 49 INVESTIGATION, LITIGATION OR OTHER PROCEEDING RELATING TO ANY OF THE FOREGOING, OR FROM ANY VIOLATION OR CLAIM OF VIOLATION OF ANY APPLICABLE ENVIRONMENTAL LAWS WITH RESPECT TO ANY REAL OR PERSONAL PROPERTY, OR FROM ANY GOVERNMENTAL OR JUDICIAL CLAIM, ORDER OR JUDGMENT WITH RESPECT TO ANY REAL OR PERSONAL PROPERTY OF THE COMPANY, OR FROM ANY BREACH OF THE WARRANTIES, REPRESENTATIONS OR COVENANTS CONTAINED IN THIS AGREEMENT OR THE OTHER AGREEMENTS. THE FOREGOING INDEMNIFICATION INCLUDES ANY SUCH CLAIMS, ACTIONS, DAMAGES, COSTS, AND EXPENSES INCURRED BY REASON OF THE SOLE, COMPARATIVE OR CONTRIBUTORY NEGLIGENCE OF THE PERSON TO BE INDEMNIFIED, BUT EXCLUDES ANY OF THE SAME INCURRED BY REASON OF SUCH PERSON'S VIOLATION OF LAW, GROSS NEGLIGENCE OR WILLFUL MISCONDUCT AS DETERMINED BY A FINAL AND NONAPPEALABLE JUDGMENT OF A COURT OF COMPETENT JURISDICTION. 12.3 Notices. Except as otherwise expressly provided herein, all communications provided for hereunder shall be in writing and delivered or mailed by the United States mails, certified mail, return receipt requested, (a) if to Purchaser, addressed to Purchaser at the address specified on Annex I hereto or to such other address as Purchaser may in writing designate, (b) if to any other Holder, addressed to such Holder at such address as such Holder may in writing designate, and (c) if to the Company, addressed to the Company at the address set forth next to its name on the signature pages hereto or to such other address as the Company may in writing designate. Notices shall be deemed to have been validly served, given or delivered, and "the date of such notice" or words of similar effect shall mean the date five (5) days after deposit in the United States mails, certified mail, return receipt requested, with proper postage prepaid, or upon actual receipt thereof (whether by noncertified mail, telecopy, telegram, facsimile, express delivery or otherwise), whichever is earlier. 50 12.4 Reproduction of Documents. This Agreement and all documents relating hereto, including, without limitation (a) consents, waivers and modifications which may hereafter be executed, (b) documents received by Purchaser at the closing of the purchase of the Senior Subordinated Notes, and (c) financial statements, certificates and other information previously or hereafter furnished to Purchaser, may be reproduced by Purchaser by any photographic, photostatic, microfilm, microcard, miniature photographic or other similar process and Purchaser may destroy any original document so reproduced. The Company agrees and stipulates that any such reproduction which is legible shall be admissible in evidence as the original itself in any judicial or administrative proceeding (whether or not the original is in existence and whether or not such reproduction was made by you in the regular course of business) and that any enlargement, facsimile or further reproduction of such reproduction shall likewise be admissible in evidence; provided that nothing herein contained shall preclude the Company from objecting to the admission of any reproduction on the basis that such reproduction is not accurate, has been altered, is otherwise incomplete or is otherwise inadmissible. 12.5 Assignment; Sale of Interest. The Company may not sell, assign or transfer and shall not permit its Subsidiaries to sell, assign or transfer this Agreement or any of the Other Agreements or any portion thereof, including, without limitation, the Company's or its Subsidiaries' rights, title, interests, remedies, powers and/or duties hereunder or thereunder. The Company hereby consents to Purchaser's participation, sale, assignment, transfer or other disposition (collectively, a "Transfer"), at any time or times hereafter, of this Agreement, or the Other Agreements to which the Company or its Subsidiaries is a party, or of any portion hereof or thereof, including, without limitation, Purchaser's rights, title, interests, remedies, powers and/or duties hereunder or thereunder. In connection with any Transfer, the Company agrees to cooperate fully with Purchaser and any potential Transferee. Such cooperation shall include, but is not limited to, cooperating with any audits or other due diligence investigation undertaken by any potential Transferee. Notwithstanding the foregoing, the Purchaser agrees that (a) it will not Transfer this Agreement or the Other Agreements to an entity whose primary business directly competes with the Company's business as set forth in Section 7.7, and (b) Purchaser will give written notice to the Company of its intent to make a Transfer thirty (30) days prior to such Transfer and during the thirty (30) day period the Company shall have the right to prepay the Senior Subordinated Obligations in full without Prepayment Fee. 12.6 Successors and Assigns. This Agreement will inure to the benefit of and be binding upon the parties hereto and their respective successors and permitted assigns. 12.7 Headings. The headings of the sections and subsections of this Agreement are inserted for convenience only and do not constitute a part of this Agreement. 51 12.8 Counterparts. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, and it shall not be necessary in making proof of this Agreement to produce or account for more than one such counterpart or reproduction thereof permitted by Section 12.4. 12.9 Reliance on and Survival Provisions. All covenants, representations and warranties made by the Company herein and in any certificates delivered pursuant hereto, whether or not in connection with the closing, (a) shall be deemed to be material and to have been relied upon by Purchaser, notwithstanding any investigation heretofore or hereafter made by Purchaser or on Purchaser's behalf, and (b) shall survive the delivery of this Agreement and the Senior Subordinated Note until all obligations of the Company under this Agreement shall have been satisfied. 12.10 Integration and Severability. This Agreement and the Other Agreements embody the entire agreement and understanding among Purchaser, the Company and its Subsidiaries, and supersedes all prior agreements and understandings relating to the subject matter hereof. In case any one or more of the provisions contained in this Agreement or in any Senior Subordinated Note or Deferral Note, or any application thereof, shall be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein and therein, and any other application thereof, shall not in any way be affected or impaired thereby. 12.11 LAW GOVERNING. THIS AGREEMENT HAS BEEN SUBSTANTIALLY NEGOTIATED AND IS BEING EXECUTED, DELIVERED, AND ACCEPTED, AND IS INTENDED TO BE PERFORMED, IN THE STATE OF MICHIGAN. ALL OBLIGATIONS, RIGHTS AND REMEDIES HEREUNDER, SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF MICHIGAN WITHOUT REFERENCE TO THE CHOICE OF LAW PRINCIPLES OF SUCH STATE. THE SENIOR SUBORDINATED NOTE SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF MICHIGAN. PURCHASER RETAINS ALL RIGHTS UNDER THE LAWS OF THE UNITED STATES OF AMERICA, INCLUDING THOSE RELATING TO THE CHARGING OF INTEREST. THE COMPANY FURTHER AGREES THAT ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT, THE NOTE OR ANY OTHER AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY MAY BE BROUGHT IN ANY COURT OF THE STATE OF MICHIGAN, OR IN ANY COURT OF THE UNITED STATES OF AMERICA SITTING IN MICHIGAN, AND THE COMPANY HEREBY SUBMITS TO AND ACCEPTS GENERALLY AND UNCONDITIONALLY THE JURISDICTION OF THOSE COURTS WITH RESPECT TO ITS PERSON AND PROPERTY, AND IRREVOCABLY 52 CONSENTS TO THE SERVICE OF PROCESS IN CONNECTION WITH ANY SUCH ACTION OR PROCEEDING BY PERSONAL DELIVERY TO SUCH AGENT OR TO THE COMPANY OR BY THE MAILING THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID TO THE COMPANY AT ITS ADDRESS SET FORTH IN SECTION 12.3, SUCH SERVICE TO BE EFFECTIVE AS THE EQUIVALENT OF PERSONAL DELIVERY UPON THE DATE OF MAILING AND SUCH SERVICE WILL CONSTITUTE PERSONAL SERVICE. NOTHING IN THIS SECTION 12.11 SHALL AFFECT THE RIGHT OF PURCHASER TO BRING ANY SUCH ACTION OR PROCEEDING AGAINST THE COMPANY OR PROPERTY IN THE COURTS OF ANY OTHER JURISDICTION. THE COMPANY HEREBY IRREVOCABLY WAIVES ANY OBJECTION TO THE LAYING OF VENUE OF ANY SUCH SUIT OR PROCEEDING IN THE ABOVE DESCRIBED COURTS. 12.12 WAIVERS; MODIFICATION. NO PROVISION OF THIS AGREEMENT MAY BE WAIVED, CHANGED OR MODIFIED, OR THE DISCHARGE THEREOF ACKNOWLEDGED, ORALLY, BUT ONLY BY AN AGREEMENT IN WRITING SIGNED BY THE PARTY AGAINST WHOM THE ENFORCEMENT OF ANY WAIVER, CHANGE, MODIFICATION OR DISCHARGE IS SOUGHT. 12.13 CONFIDENTIALITY. PURCHASER AGREES TO KEEP ANY NON-PUBLIC INFORMATION DELIVERED OR MADE AVAILABLE TO IT BY THE COMPANY CONFIDENTIAL AND TO USE SUCH INFORMATION ONLY FOR THE PURPOSE OF EVALUATING, APPROVING, STRUCTURING AND ADMINISTERING THIS AGREEMENT AND THE TRANSACTIONS CONTEMPLATED HEREBY (COLLECTIVELY, THE "TRANSACTIONS"); PROVIDED THAT NOTHING HEREIN SHALL PREVENT PURCHASER FROM DISCLOSING SUCH INFORMATION (I) TO PERSONS EMPLOYED OR RETAINED BY PURCHASER WHO ARE ENGAGED OR EXPECTED TO BE ENGAGED IN EVALUATING, APPROVING, STRUCTURING OR ADMINISTERING THE TRANSACTIONS, (II) TO ANY OTHER PERSON IF REASONABLY INCIDENTAL TO THE ADMINISTRATION OF THE TRANSACTIONS, (III) TO ANY OTHER PURCHASER OR HOLDER, (IV) PURSUANT TO ANY SUBPOENA OR EXPRESS DIRECTION OF ANY COURT OR OTHER AUTHORIZED GOVERNMENTAL AGENCY OR AS OTHERWISE REQUIRED BY LAW, (V) UPON THE REQUEST OR DEMAND OF ANY REGULATORY AGENCY, EXAMINER OR COMPARABLE AUTHORITY, (VI) WHICH HAS THERETOFORE BEEN PUBLICLY DISCLOSED OR IS OTHERWISE AVAILABLE TO PURCHASER ON A NON-CONFIDENTIAL BASIS FROM A SOURCE THAT IS NOT, TO ITS KNOWLEDGE, SUBJECT TO A CONFIDENTIALITY AGREEMENT WITH THE COMPANY, (VII) IN CONNECTION WITH ANY LITIGATION TO WHICH ANY PURCHASER OR ANY OF ITS AFFILIATES MAY BE A PARTY, (VIII) TO THE EXTENT NECESSARY IN CONNECTION WITH THE EXERCISE OF ANY REMEDY HEREUNDER, (IX) TO PURCHASER'S AFFILIATES (INCLUDING ITS GENERAL AND LIMITED PARTNERS AND INVESTMENT COMMITTEE), LEGAL COUNSEL AND INDEPENDENT AUDITORS (X) IN CONNECTION WITH ANY GENERAL ADVERTISING OR OTHER 53 GENERAL WRITTEN DESCRIPTION BY PURCHASER OF THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT (DISCLOSING ONLY THE NAME OF THE COMPANY AND ITS SUBSIDIARIES, THEIR LOGO AND THE AMOUNT AND/OR GENERAL NATURE OF THE INVESTMENT BY PURCHASER), AND (XI) SUBJECT TO PROVISIONS SUBSTANTIALLY SIMILAR TO THOSE CONTAINED IN THIS SECTION 12.13, TO ANY ACTUAL OR PROPOSED TRANSFEREE OR ASSIGNEE. A PURCHASER THAT DISCLOSES CONFIDENTIAL INFORMATION TO OTHER PERSONS AS CONTEMPLATED BY CLAUSE (I), (II) OR (XI) OF THE FOREGOING PROVISO SHALL INFORM SUCH OTHER PERSONS OF THE CONFIDENTIAL NATURE OF SUCH INFORMATION AND SHALL INSTRUCT THEM TO KEEP SUCH INFORMATION CONFIDENTIAL (EXCEPT FOR DISCLOSURES PERMITTED BY THE FOREGOING PROVISO). BEFORE ANY PURCHASER DISCLOSES CONFIDENTIAL INFORMATION PURSUANT TO CLAUSE (IV) AND (VII) OF THE FOREGOING PROVISO, SUCH PURCHASER SHALL, TO THE EXTENT PERMITTED BY LAW, ADVISE THE COMPANY OF SUCH PROPOSED DISCLOSURE SO THAT THE COMPANY MAY, IN ITS DISCRETION, SEEK AN APPROPRIATE PROTECTIVE ORDER. 12.14 WAIVER OF JURY TRIAL. TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, THE COMPANY AND PURCHASER HEREBY IRREVOCABLY AND EXPRESSLY WAIVE ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED UPON CONTRACT, TORT, OR OTHERWISE) ARISING OUT OF OR RELATING TO THIS AGREEMENT, THE SENIOR SUBORDINATED NOTE OR ANY OF THE OTHER AGREEMENTS OR OTHER DOCUMENTS ENTERED INTO IN CONNECTION THEREWITH OR THE TRANSACTIONS CONTEMPLATED THEREBY OR THE ACTIONS OF PURCHASER IN THE NEGOTIATION, ADMINISTRATION, OR ENFORCEMENT THEREOF. [The remainder of this page is left blank intentionally.] 54 IN WITNESS WHEREOF, the Company and Purchaser have caused this Agreement to be executed and delivered by their respective officers thereunto duly authorized. COMPANY: DECKERS OUTDOOR CORPORATION By: /s/ Scott Ash ------------------------------------- Its: CFO ------------------------------ Company's Address for Notices: 495-A South Fairview Avenue Goleta, CA 93117 Attn: Chairman Facsimile: 805-967-7862 with a copy to: PURCHASER: THE PENINSULA FUND III LIMITED PARTNERSHIP By: Peninsula Capital Partners L.L.C. Its: General Partner By: /s/ Scott A. Reilly ---------------------------------- Scott A. Reilly, President and Chief Investment Officer 55 EX-10.24 8 v88494exv10w24.txt EXHIBIT 10.24 EXHIBIT 10.24 EXECUTION COPY ================================================================================ AMENDED AND RESTATED CREDIT AGREEMENT dated as of November 25, 2002 among DECKERS OUTDOOR CORPORATION and UGG HOLDINGS, INC., as Borrowers, and COMERICA BANK -- CALIFORNIA, as Bank $27,000,000 ================================================================================ TABLE OF CONTENTS

i "Currency Obligation".......................................................................... 8 "Current Liabilities".......................................................................... 9 "Debt" ........................................................................................ 9 "Dilution"..................................................................................... 9 "Distributions"................................................................................ 9 "Dollars" or "$"............................................................................... 9 "Eligible Accounts"............................................................................ 10 "Eligible Assignee"............................................................................ 12 "Eligible Inventory"........................................................................... 12 "ERISA" ....................................................................................... 12 "ERISA Event".................................................................................. 13 "ERISA Group".................................................................................. 13 "Event of Default"............................................................................. 13 "Excluded Subsidiaries"........................................................................ 13 "Expenses"..................................................................................... 13 "Fees" ........................................................................................ 14 "Financial Statement(s)"....................................................................... 14 "Foreign Exchange Agreement"................................................................... 14 "Foreign Exchange Reserve"..................................................................... 14 "Foreign Exchange Sublimit".................................................................... 14 "GAAP" ........................................................................................ 14 "Governing Documents".......................................................................... 15 "Governmental Authority"....................................................................... 15 "Guaranties" and "Guaranty".................................................................... 15 "Guarantor(s)"................................................................................. 15 "Hazardous Materials".......................................................................... 15 "Holbrook"..................................................................................... 15 "Indemnified Person(s)"........................................................................ 16 "Insolvency Proceeding"........................................................................ 16 "Intangible Assets"............................................................................ 16 "Interest Payment Date"........................................................................ 16 "Interest Period".............................................................................. 16 "Internal Revenue Code"........................................................................ 17 "Inventory".................................................................................... 17 "Inventory Sublimit"........................................................................... 17 "Inventory Sublimit Increase Period"........................................................... 17 "ISP" ......................................................................................... 17 "Knowledge".................................................................................... 17 "Late Payment Fee"............................................................................. 17 "Lending Office"............................................................................... 17 "Letter(s) of Credit".......................................................................... 17 "Letter of Credit Application"................................................................. 18 "Letter of Credit Fee"......................................................................... 18 "Letter of Credit Sublimit".................................................................... 18

ii "Letter of Credit Usage"....................................................................... 18 "LIBOR" ....................................................................................... 18 "LIBOR Business Day"........................................................................... 18 "LIBOR Lending Rate"........................................................................... 18 "LIBOR Lending Rate Portion"................................................................... 18 "LIBOR Reserve Percentage"..................................................................... 19 "Lien" ........................................................................................ 19 "Loan Document(s)"............................................................................. 19 "Loans" ....................................................................................... 20 "Material Adverse Effect"...................................................................... 20 "Multiemployer Plan"........................................................................... 20 "Net Cash Proceeds"............................................................................ 20 "Note Purchase Agreement"...................................................................... 20 "Notes" ....................................................................................... 21 "Notice of Borrowing".......................................................................... 21 "Notice of Conversion or Continuation"......................................................... 21 "Obligations".................................................................................. 21 "Overadvance".................................................................................. 21 "Overadvance Limit"............................................................................ 21 "Overadvance Period"........................................................................... 21 "Participant".................................................................................. 21 "Patent and Trademark Security Agreements"..................................................... 22 "PBGC" ........................................................................................ 22 "Peninsula".................................................................................... 22 "Permitted Debt"............................................................................... 22 "Permitted Investments"........................................................................ 22 "Permitted Liens".............................................................................. 23 "Person" ...................................................................................... 23 "Plan" ........................................................................................ 23 "Prior Agreement".............................................................................. 23 "Purchase Agreement"........................................................................... 23 "Purchase Documents"........................................................................... 24 "Purchase Money Lien".......................................................................... 24 "Quick Ratio".................................................................................. 24 "Regulation D"................................................................................. 24 "Reimbursement Obligations".................................................................... 24 "Reportable Event"............................................................................. 24 "Responsible Officer".......................................................................... 24 "Restricted Payment"........................................................................... 24 "Retiree Health Plan".......................................................................... 25 "Revolving Credit Commitment".................................................................. 25 "Revolving Loans".............................................................................. 25 "Revolving Loans Maturity Date"................................................................ 25 "Revolving Loans Note"......................................................................... 25

iii "SEC" ......................................................................................... 25 "Security Agreement (Borrowers)"............................................................... 25 "Security Agreement (Subsidiary)".............................................................. 25 "Sellers"...................................................................................... 25 "Senior Debt to Consolidated EBITDA Ratio"..................................................... 25 "Shareholder".................................................................................. 26 "Solvent"...................................................................................... 26 "Stock Pledge Agreements"...................................................................... 26 "Subordinate Debt"............................................................................. 26 "Subordination Agreement (Peninsula)".......................................................... 26 "Subordination Agreement (Seller)"............................................................. 26 "Subordination Agreements"..................................................................... 27 "Subsidiary"................................................................................... 27 "Swaps" ....................................................................................... 27 "Taxes" ....................................................................................... 27 "Term Loan".................................................................................... 27 "Term Loan Maturity Date"...................................................................... 27 "Term Loan Note"............................................................................... 27 "Teva License Agreement"....................................................................... 28 "Thatcher"..................................................................................... 28 "UCC" ......................................................................................... 28 "Uniform Customs".............................................................................. 28 "Unmatured Event of Default"................................................................... 28 "Yeti Action".................................................................................. 28 "Yeti Claim"................................................................................... 28 1.2 Accounting Terms and Determinations............................................................ 28 1.3 Computation of Time Periods.................................................................... 28 1.4 Construction................................................................................... 29 1.5 Exhibits and Schedules......................................................................... 29 1.6 No Presumption Against Any Party............................................................... 29 1.7 Independence of Provisions..................................................................... 29 ARTICLE II TERMS OF THE CREDIT................................................................................... 30 2.1 Revolving Loans................................................................................ 30 2.2 Foreign Exchange Forward Contracts............................................................. 30 2.3 Term Loan...................................................................................... 31 2.4 Interest Rates; Payments of Interest........................................................... 32 2.5 Notice of Borrowing Requirements............................................................... 33 2.6 Conversion or Continuation Requirements........................................................ 34 2.7 Additional Costs............................................................................... 35 2.8 Illegality; Impossibility...................................................................... 36 2.9 Disaster....................................................................................... 36 2.10 Increased Risk-Based Capital Cost.............................................................. 36 2.11 Notes; Statements of Obligations............................................................... 37

iv 2.12 Holidays....................................................................................... 37 2.13 Time and Place of Payments..................................................................... 38 2.14 Mandatory Principal Reductions................................................................. 38 2.15 Fees........................................................................................... 38 ARTICLE III LETTERS OF CREDIT.................................................................................... 39 3.1 Letters of Credit.............................................................................. 39 3.2 Procedure for Issuance of Letters of Credit.................................................... 40 3.3 Fees, Commissions and Other Charges............................................................ 40 3.4 Reimbursement Obligations...................................................................... 40 3.5 Obligations Absolute........................................................................... 41 3.6 Letter of Credit Payments...................................................................... 41 3.7 Outstanding Letters of Credit Following Event of Default....................................... 42 3.8 Letter of Credit Applications.................................................................. 42 ARTICLE IV CONDITIONS PRECEDENT.................................................................................. 42 4.1 Conditions to Initial Loans or Letter(s) of Credit............................................. 42 4.2 Conditions to all Loans and Letters of Credit.................................................. 45 ARTICLE V REPRESENTATIONS AND WARRANTIES......................................................................... 45 5.1 Legal Status................................................................................... 45 5.2 No Violation; Compliance....................................................................... 46 5.3 Authorization; Enforceability.................................................................. 46 5.4 Approvals; Consents............................................................................ 47 5.5 Liens.......................................................................................... 47 5.6 Debt........................................................................................... 47 5.7 Litigation..................................................................................... 47 5.8 No Default..................................................................................... 47 5.9 Subsidiaries................................................................................... 47 5.10 Taxes.......................................................................................... 48 5.11 Correctness of Financial Statements............................................................ 48 5.12 ERISA.......................................................................................... 48 5.13 Other Obligations.............................................................................. 48 5.14 Public Utility Holding Company Act............................................................. 49 5.15 Investment Company Act......................................................................... 49 5.16 Patents, Trademarks, Copyrights, and Intellectual Property, etc................................ 49 5.17 Environmental Condition........................................................................ 49 5.18 Solvency....................................................................................... 50 5.19 Eligible Accounts.............................................................................. 50 5.20 Eligible Inventory............................................................................. 51 5.21 Acquisition.................................................................................... 51 ARTICLE VI AFFIRMATIVE COVENANTS................................................................................. 51 6.1 Punctual Payments.............................................................................. 51 6.2 Books and Records; Collateral Audits........................................................... 51

v 6.3 Collateral Reporting and Financial Statements.................................................. 52 6.4 Existence; Preservation of Licenses; Compliance with Law....................................... 53 6.5 Insurance...................................................................................... 53 6.6 Assets......................................................................................... 54 6.7 Taxes and Other Liabilities.................................................................... 54 6.8 Notice to Bank................................................................................. 55 6.9 Employee Benefits.............................................................................. 55 6.10 Further Assurances............................................................................. 56 6.11 Bank Accounts.................................................................................. 56 6.12 Environment.................................................................................... 56 6.13 Additional Collateral.......................................................................... 57 6.14 Guarantors..................................................................................... 57 6.15 Returns........................................................................................ 58 ARTICLE VII NEGATIVE COVENANTS................................................................................... 58 7.1 Use of Funds; Margin Regulation................................................................ 58 7.2 Debt........................................................................................... 58 7.3 Liens.......................................................................................... 58 7.4 Merger, Consolidation, Transfer of Assets...................................................... 59 7.5 Leases......................................................................................... 59 7.6 Sales and Leasebacks........................................................................... 59 7.7 Asset Sales.................................................................................... 59 7.8 Investments.................................................................................... 60 7.9 Character of Business.......................................................................... 60 7.10 Distributions.................................................................................. 61 7.11 Guaranty....................................................................................... 61 7.12 Capital Expenditures........................................................................... 61 7.13 Transactions with Affiliates................................................................... 61 7.14 Stock Issuance................................................................................. 62 7.15 Financial Condition............................................................................ 62 7.16 Transactions Under ERISA....................................................................... 63 ARTICLE VIII EVENTS OF DEFAULT AND REMEDIES...................................................................... 64 8.1 Events of Default.............................................................................. 64 8.2 Remedies....................................................................................... 67 8.3 Setoff......................................................................................... 67 8.4 Appointment of Receiver or Trustee............................................................. 67 8.5 Remedies Cumulative............................................................................ 67 ARTICLE IX TAXES ................................................................................................ 68 9.1 Taxes on Payments.............................................................................. 68 9.2 Indemnification For Taxes...................................................................... 68 9.3 Evidence of Payment............................................................................ 68

vi ARTICLE X MISCELLANEOUS.......................................................................................... 69 10.1 Notices........................................................................................ 69 10.2 No Waivers..................................................................................... 69 10.3 Expenses; Documentary Taxes; Indemnification................................................... 69 10.4 Amendments and Waivers......................................................................... 70 10.5 Successors and Assigns; Participations; Disclosure............................................. 71 10.6 Confidentiality................................................................................ 72 10.7 Counterparts; Effectiveness; Integration....................................................... 72 10.8 Severability................................................................................... 72 10.9 Knowledge...................................................................................... 72 10.10 Additional Waivers............................................................................. 73 10.11 Destruction Of Borrowers' Documents............................................................ 73 10.12 CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER..................................................... 73 10.13 Amended and Restated Agreement................................................................. 74 ARTICLE XI JOINT AND SEVERAL LIABILITY; SINGLE LOAN ACCOUNT...................................................... 74 11.1 Joint and Several Liability.................................................................... 74 11.2 Primary Obligation; Waiver of Marshalling...................................................... 75 11.3 Financial Condition of Borrowers............................................................... 75 11.4 Continuing Liability........................................................................... 75 11.5 Additional Waivers............................................................................. 75 11.6 Settlement or Releases......................................................................... 78 11.7 No Election.................................................................................... 78 11.8 Indefeasible Payment........................................................................... 79 11.9 Single Loan Account............................................................................ 79 11.10 Apportionment of Proceeds of Loans............................................................. 79 11.11 Bank Held Harmless............................................................................. 79 11.12 Borrowers' Integrated Operations............................................................... 80

vii EXHIBITS AND SCHEDULES Exhibit 1.1B - Form of Borrowing Base Certificate Exhibit 1.1L-1 - Form of Commercial Letter of Credit Application and Agreement Exhibit 1.1L-2 - Form of Standby Letter of Credit Application and Agreement Exhibit 2.5(b) - Form of Notice of Borrowing Exhibit 2.6(b) - Form of Notice of Conversion or Continuation Exhibit 4.1(b) - Form of Opinions of Borrowers' Counsel Exhibit 6.3(d) - Form of Compliance Certificate Schedule 1.1E - Locations of Eligible Inventory Schedule 5.6 - Permitted Debt Schedule 5.7 - Litigation Schedule 5.9 - Subsidiaries Schedule 5.12 - Employee Benefit Plans Schedule 7.5 - Leases vii AMENDED AND RESTATED CREDIT AGREEMENT This AMENDED AND RESTATED CREDIT AGREEMENT, dated as of November 25, 2002, is entered into among Deckers Outdoor Corporation, a Delaware corporation ("Parent"), and UGG HOLDINGS, INC., California corporation ("UGG") (collectively sometimes referred to herein as "Borrowers" and individually as a "Borrower"), on the one hand, and Comerica Bank -- California, a California banking corporation ("Bank"), on the other hand. The parties hereto previously entered into that certain Revolving Credit Agreement, dated as of February 21, 2002 (the "Prior Agreement"). The parties hereto desire to amend and restate the Prior Agreement in its entirety in accordance with the terms and conditions of this Agreement. NOW THEREFORE, the parties hereto hereby agree as follows: ARTICLE I DEFINITIONS AND INTERPRETATIONS 1.1 Definitions. The following terms, as used herein, shall have the following meanings: "Account" and "Account Debtor" have the meanings given to such terms in the Security Agreement. "Acquisition" means the purchase and sale transactions contemplated by the Purchase Agreement respecting the assets relating to or used in commerce in connection with the Teva(R) brand. "Affiliate" means any Person (i) that, directly or indirectly, controls, is controlled by or is under common control with any Borrower or any Subsidiary; (ii) which to the Knowledge of Parent, directly or indirectly beneficially owns or controls ten percent (10%) or more of any class of voting stock of any Borrower or any Subsidiary; or (iii) ten percent (10%) or more of the voting stock of which is directly or indirectly beneficially owned or held by any Borrower or any Subsidiary. For purposes of the foregoing, control (including controlled by and under common control with) shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. "Agreement" 1 means this Amended and Restated Credit Agreement, as amended or restated from time to time in accordance with its terms. "Annual Fee" has the meaning given to such term in Section 2.15(b). "Applicable A/R Advance Rate" means the percentage set forth in the table below opposite the applicable Dilution:
Dilution Applicable A/R Advance Rate - -------- --------------------------- Equal to or less than 5% 80% Greater than 5% but less than or equal to 10% 75% Greater than 10% but less than or equal to 15% 70% Greater than 15% but less than or equal to 20%(1) 65%(2)
"Applicable Base 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, 2002, the margin will be as set forth opposite Pricing Level V: - ---------- (1) For every 5% increase in Dilution over 20%, the Applicable A/R Advance Rate shall decrease by an additional 5%. (2) For every 5% increase in Dilution over 20%, the Applicable A/R Advance Rate shall decrease by an additional 5%. 2
Consolidated Total Applicable Base Liabilities to Lending Rate Applicable Base Pricing Consolidated Margin For All Lending Rate Margin Level EBITDA Ratio Revolving Loans For the Term Loan --------- ----------------------- ------------------ ------------------- I Less than 1.00:1.0 0 basis points 250 basis points II Greater than 1.00:1.0 0 basis points 250 basis points but less than 1.50:1.0 III Greater than or equal 0 basis point 250 basis points to 1.50:1.0 but less than 2.00:1.0 IV Greater than or equal 0 basis points 250 basis points to 2.00:1.0 but less than 2.50:1.0 V Greater than or equal 0 basis points 250 basis points to 2.50:1.0
"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, 2002, the margin will be as set forth opposite Pricing Level V:
Consolidated Total Applicable LIBOR Liabilities to Lending Rate Applicable LIBOR Pricing Consolidated Margin For All Lending Rate Margin Level EBITDA Ratio Revolving Loans For the Term Loan -------- ------------------------ -------------------- ------------------- I Less than 1.00:1.0 100 basis points 400 basis points II Greater than 1.00:1.0 125 basis points 400 basis points but less than 1.50:1.0 III Greater than or equal 150 basis points 400 basis points to 1.50:1.0 but less than 2.00:1.0 IV Greater than or equal 200 basis points 400 basis points to 2.00:1.0 but less than 2.50:1.0
3 ~~V Greater than or equal 250 basis points 400 basis points to 2.50:1.0~~

"Applicable Percentage" means the percentage 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, 2002, the margin will be as set forth opposite Pricing Level V:
Consolidated Total Liabilities to Pricing Consolidated Applicable Level EBITDA Ratio Percentage -------- ------------------------ ------------ I Less than 1.00:1.0 1.00% II Greater than 1.00:1.0 1.25% but less than 1.50:1.0 III Greater than or equal to 1.50% 1.50:1.0 but less than 2.00:1.0 IV Greater than or equal to 1.75% 2.00:1.0 but less than 2.50:1.0 V Greater than or equal to 1.75% 2.50:1.0
"Asset" means any interest of a Person in any kind of property or asset, whether real, personal, or mixed real and personal, and whether tangible or intangible. "Asset Sale" means any sale, transfer or other disposition of any Borrower's or any Subsidiary's (other than an Excluded Subsidiary) businesses or Asset(s) now owned or hereafter acquired, including shares of stock and indebtedness of any Subsidiary (other than an Excluded Subsidiary), receivables and leasehold interests. "Audit Fee" 4 has the meaning given to such term in Section 6.2. "Bankruptcy Code" means The Bankruptcy Reform Act of 1978 (Pub. L. No. 95-598; 11 U.S.C.), as amended or supplemented from time to time, or any successor statute, and any and all rules and regulations issued or promulgated in connection therewith. "Base Lending Rate" means the variable per annum rate equal to the Base Rate plus the Applicable Base Lending Rate Margin. "Base Lending Rate Portion" means any portion of any Loan designated by a Borrower as bearing interest at the Base Lending Rate pursuant to Section 2.5 or 2.6. "Base LIBOR" applicable to any Interest Period for a LIBOR Lending Rate Portion means the offered rate per annum (rounded upward to the nearest one-hundredth of one percent (.01%)), if any, to first-class banks in the LIBOR market quoted by Bank at 11:00 a.m. Pacific time, two (2) LIBOR Business Days prior to the first day of such Interest Period for Dollar deposits of an amount comparable to the principal amount of the LIBOR Lending Rate Portion for which the LIBOR Lending Portion is being determined with maturities comparable to the Interest Period for which such LIBOR Lending Rate will apply. "Base Rate" means the variable rate of interest announced by Bank at its corporate headquarters as its base rate and which serves as the basis upon which effective rates of interest are calculated for those loans making reference thereto. The Base Rate is determined by Bank from time to time as a means of pricing credit extensions to some customers and is neither directly tied to some external rate of interest or index nor necessarily the lowest rate of interest charged by Bank at any given time for any particular class of customers or credit extensions. "Borrowing" means a borrowing of Revolving Loans from Bank pursuant to the terms and conditions hereof. "Borrowing Base" means, as of the date of determination, the lesser of (a) the Revolving Credit Commitment or (b) (i) the Eligible Accounts times the Applicable A/R Advance Rate, plus (ii) the lesser of (x) 50% of the Eligible Inventory, (y) the Inventory Sublimit, or (z) the aggregate Dollar amount of outstanding 5 Borrowings against Eligible Accounts (provided, that this clause (z) shall not apply during any Inventory Sublimit Increase Period); 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. "Borrowing Base Certificate" means a certificate from a Responsible Officer of Parent certifying the Borrowing Base, in the form of Exhibit 1.1B. "Business Day" means any day other than a Saturday, a Sunday, or a day on which commercial banks in the City of Los Angeles, California are authorized or required by law or executive order or decree to close. "Capital Expenditures" means expenditures made in cash, or financed with long term debt, by any Person for the acquisition of any fixed Assets or improvements, replacements, substitutions, or additions thereto that have a useful life of more than one (1) year, including the direct or indirect acquisition of such Assets by way of increased product or service charges, offset items, or otherwise, and the principal portion of payments with respect to Capital Lease Obligations, calculated in accordance with GAAP. "Capital Lease" means any lease of an Asset by a Person as lessee which would, in conformity with GAAP, be required to be accounted for as an Asset and corresponding liability on the balance sheet of that Person. "Capital Lease Obligations" of a Person means the amount of the obligations of such Person under all Capital Leases which would be shown as a liability on a balance sheet of such Person prepared in accordance with GAAP. "Capital Stock" means any and all shares, interests, participations or other equivalents (however designated) of capital stock of a corporation, any and all equivalent ownership interests in a Person (other than a corporation) and any and all warrants or options to purchase any of the foregoing. "Cash Flow Coverage Ratio" means, for the rolling four (4) fiscal quarter period of Parent ending on the date of determination, the ratio of: (i) the sum of (1) Consolidated Net Profit for such period, plus (2) depreciation and 6 amortization expense for such period, minus (3) any Restricted Payments made during such period, subject to Section 7.10, plus (or minus) (4) the increase (or decrease) in the deferred tax liability for such period, (5) minus (plus) the increase (decrease) in deferred tax assets for such period, minus (6) any unfinanced Capital Expenditures made during such period, plus (7) litigation expenses recorded during such period related to the Yeti Action, plus (8) royalty expense recorded pursuant to the TEVA License Agreement and paid during such period, plus (9) the non-cash Consolidated Interest Expense recorded during such period, plus (10) transaction fees and expenses paid during such period related to the Acquisition, this Agreement and the financing agreements with Peninsula, to (ii) the current portion of Borrowers' consolidated long term Debt plus the current portion of Borrowers' consolidated Capital Lease Obligations, in each case as of the date of determination. "Change of Control" means the time at which Douglas B. Otto fails to be the beneficial owner (as defined in Rule 13d-3 under the Securities Exchange Act of 1934) of a percentage (based on voting power, in the event different classes of stock shall have different voting powers) of the voting stock of Parent equal to at least twenty-five percent (25%). "Closing Date" means the date when all of the conditions set forth in Section 4.1 have been fulfilled to the reasonable satisfaction of Bank and its counsel. "Closing Fee" has the meaning given to such term in Section 2.15(a). "Collateral Access Agreement" has the meaning given to such term in the Security Agreement. "Collateral Assignment of Purchase Documents" means that certain Collateral Assignment of Purchase Documents, dated as of even date herewith, between Parent and Bank. "Compliance Certificate" means a certificate of compliance to be delivered quarterly in accordance with Section 6.3(c), substantially in the form of Exhibit 6.3(c). "Consolidated EBITDA" means, with respect to any period, the sum of (without duplication) (i) Consolidated Net Profit for such period (excluding extraordinary gains and losses); (ii) Consolidated Interest Expense during such period; (iii) consolidated federal and state income tax expense; and (iv) Borrowers' and the 7 Subsidiaries' consolidated depreciation and amortization during such period; in each case calculated in accordance with GAAP. "Consolidated Effective Tangible Net Worth" means, as of any date of determination, the result of (a) Borrowers' and Subsidiaries consolidated total stockholder's equity, minus (b) the sum of (i) all Intangible Assets of Borrowers and Subsidiaries, and (ii) all amounts due to Borrowers from Affiliates (other than Subsidiaries). "Consolidated Interest Expense" means, with respect to any period, the interest expense for such period calculated in accordance with GAAP on the aggregate amount of Borrowers' and the Subsidiaries' consolidated Debt, including the interest portion of Borrowers' and the Subsidiaries' consolidated Capital Lease Obligations. "Consolidated Net Profit" and "Consolidated Net Loss" mean, respectively, with respect to any period, the consolidated net profit, or loss, as applicable, of Borrowers and the Subsidiaries after all federal, state and local income taxes reflected on Borrowers' Financial Statement for such period, calculated in accordance with GAAP, plus any write-off of goodwill pursuant to FASB 142. "Consolidated Pretax Profit" means the consolidated annual profit of Borrowers and the Subsidiaries before all federal, state and local income taxes reflected on Borrowers' Financial Statement for such period, calculated in accordance with GAAP, plus any write-off of goodwill pursuant to FASB 142. "Consolidated Total Liabilities to Consolidated EBITDA Ratio" means the ratio of (i) Borrowers' and Subsidiaries consolidated total liabilities as of the date of determination, calculated in accordance with GAAP; to (ii) Consolidated EBITDA for the rolling four fiscal quarter period ending on the date of determination; provided, however, solely for purposes of this definition, Consolidated EBITDA shall exclude litigation expenses related to the Yeti Action, royalty payments recorded pursuant to the TEVA License Agreement and recorded during the fiscal year ending December 31, 2002, and any write-off of goodwill pursuant to FASB 142 during the fiscal year ending December 31, 2002. "Copyright Security Agreements" means, collectively, (i) that certain Copyright Security Agreement, dated as of even date herewith, between Borrowers and Bank, and (ii) any Copyright Security Agreement or like agreement hereafter entered into by any Borrower or any Subsidiary, on the one hand, and Bank, on the other hand, pursuant to Section 6.13(a). "Currency Obligation" 8 has the meaning given to such term in the Foreign Exchange Agreement. "Current Liabilities" means, as of the date of determination, Borrowers' and Subsidiaries consolidated liabilities coming due within one year (including all amounts due to any Borrower's or Subsidiary's shareholders, officers and Affiliates), calculated in accordance with GAAP. "Debt" means, as of the date of determination, the sum, but without duplication, of any and all of a Person's: (i) indebtedness heretofore or hereafter created, issued, incurred or assumed by such Person (directly or indirectly) for or in respect of money borrowed; (ii) Capital Lease Obligations; (iii) obligations evidenced by bonds, debentures, notes, or other similar instruments; (iv) obligations for the deferred purchase price of property or services (including trade obligations except accounts payable to trade creditors for goods or services which are not aged more than 90 days from the billing date and current operating liabilities (other than for borrowed money) which are not more than 90 days past due, in each case incurred in the ordinary course of business, as presently conducted, and paid within the specified time, unless contested in good faith in appropriate proceedings (if applicable)); (v) current liabilities in respect of unfunded vested benefits under any Plan; (vi) obligations under letters of credit; (vii) obligations under acceptance facilities; (viii) obligations under all guaranties, endorsements (other than for collection or deposit in the ordinary course of business), and other voluntary contingent obligations to purchase, to provide funds for payment, or supply funds to invest in any other Person, or otherwise to assure a creditor against loss; (ix) obligations secured by any Lien on any Asset of such Person, whether or not such obligations have been assumed; and (x) Swaps. "Dilution" means, as of any date of determination, a percentage, based upon the experience of the immediately prior 365 days, as determined by Bank based upon Bank's most recent audit of the Accounts, that is the result of dividing the Dollar amount of (a) bad debt write-downs, discounts, advertising allowances, credits, or other dilutive items with respect to the Accounts during such period, by (b) Borrower's collections with respect to the Accounts during such period (excluding extraordinary items) plus the Dollar amount of clause (a). On the Closing date, Dilution is in excess of 5% but less than 10%. "Distributions" means dividends or distributions of earnings made by a Person to its shareholders, partners or members, as the case may be. "Dollars" or "$" means lawful currency of the United States of America. 9 "Eligible Accounts" means those Accounts created by any Borrower in the ordinary course of business, that arise out of such Borrower's sale of goods or rendition of services, that strictly comply with each and all of the representations and warranties respecting Accounts made by Borrowers to Bank in this Agreement and the Loan Documents, and that are and at all times continue to be acceptable to Bank in all respects; provided, however, that standards of eligibility may be fixed and revised from time to time by Bank in Bank's reasonable credit judgment. In determining the amount to be included, Eligible Accounts shall be calculated net of customer deposits and unapplied cash remitted to any Borrower. Eligible Accounts shall not include the following: (i) Accounts that the Account Debtor has failed to pay within 90 days of invoice date; provided that (x) Accounts for Teva(R) with selling terms up to 120 days from invoice date shall not be deemed ineligible under this clause (i) if the invoice is created from November 1 through January 31 of each year, provided, that any such Accounts shall no longer be eligible if they are past due one day; and (y) Accounts pre-approved in writing by Bank, in its sole discretion, in the aggregate amount not exceeding $5,000,000 owing to UGG with selling terms up to 120 days from invoice date shall not be deemed ineligible under this clause (i) if the invoice is paid within 150 days from invoice date; (ii) Accounts owed by an Account Debtor or its Affiliates where 25% or more of all Accounts owed by that Account Debtor (or its Affiliates) are deemed ineligible under clause (i) above; (iii) Accounts with respect to which the Account Debtor is an officer, director, shareholder, employee, Affiliate, or agent of any Borrower; (iv) 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; (v) 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; (vi) 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 USC Section 3727), or (ii) any state of the 10 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), (vii) 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; (viii) 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; (ix) 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; (x) Accounts the collection of which Bank, in its reasonable credit judgment, believes to be doubtful by reason of the Account Debtor's financial condition; (xi) Accounts which are in default or collection; (xii) Accounts on C.O.D. terms; (xiii) 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; (xiv) Accounts that are not subject to a valid and perfected first priority Lien in favor of Bank; (xv) 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 appropriate, for the then-current year, or is exempt from such filing requirement; and (xvi) 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. 11 "Eligible Assignee" means (a) a commercial bank, commercial finance company or other asset based lender, having total assets in excess of $1,000,000,000; (b) any Affiliate of Bank, and (c) if an Event of Default exists, any Person reasonably acceptable to Bank. "Eligible Inventory" means 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), that complies with each of the representations and warranties respecting Eligible Inventory made by Borrower in the Loan Documents, and that is not excluded as ineligible by virtue of the one or more of the criteria set forth below; provided, however, that such criteria may be fixed and revised from time to time by Bank in Bank's reasonable credit judgment to address the results of any audit or appraisal performed by Bank from time to time after the Closing Date. In determining the amount to be so included, Inventory shall be valued at the lower of cost or market on a basis consistent with Borrowers' historical accounting practices. An item of Inventory shall not be included in Eligible Inventory if: (i) a Borrower does not have good, valid, and marketable title thereto, (ii) it is not located at one of the locations in the United States set forth on Schedule 1.1E or in transit from one such location to another such location, (iii) it is 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, (iv) it is not subject to a valid and perfected first priority Lien in favor of Bank, (v) it consists of goods returned or rejected by the applicable Borrower's customers, or (vi) it consists of 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. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, or any successor statute, and any and all regulations thereunder. 12 "ERISA Event" means (a) a Reportable Event with respect to a Plan or Multiemployer Plan, (b) the withdrawal of a member of the ERISA Group from a Plan during a plan year in which it was a substantial employer (as defined in Section 4001(a)(2) of ERISA), (c) the providing of notice of intent to terminate a Plan in a distress termination (as described in Section 4041(c) of ERISA), (d) the institution by the PBGC of proceedings to terminate a Plan or Multiemployer Plan, (e) any event or condition (i) that provides a basis under Section 4042(a)(1), (2), or (3) of ERISA for the termination of or the appointment of a trustee to administer, any Plan or Multiemployer Plan, of (ii) that may result in termination of a Multiemployer Plan pursuant to Section 4041A of ERISA, (f) the partial or complete withdrawal within the meaning of Sections 4203 and 4205 of ERISA of a member of the ERISA Group from a Multiemployer Plan, or (g) providing any security to any Plan under Section 401(a)(29) of the Internal Revenue Code by a member of the ERISA Group. "ERISA Group" means Borrowers and all members of a controlled group of corporations and all trades or business (whether or not incorporated) under common control which, together with Borrowers are treated as a single employer under Section 414 of the Internal Revenue Code. "Event of Default" has the meaning set forth in Section 8.1. "Excluded Subsidiaries" means all Subsidiaries of Borrowers that: (i) are not organized under the laws of any state or any territory of the United States of America, or (ii) are not wholly owned by any Borrower or any Subsidiary. "Expenses" means (i) all out-of-pocket expenses of Bank paid or incurred in connection with their due diligence and investigation of Borrower, including appraisal, filing, recording, documentation, publication and search fees and other such expenses, and all attorneys' fees and expenses (including attorneys' fees incurred pursuant to proceedings arising under the Bankruptcy Code) incurred in connection with the structuring, negotiation, drafting, preparation, execution and delivery of this Agreement, the Loan Documents, and any and all other documents, instruments and agreements entered into in connection herewith; (ii) all out-of-pocket expenses of Bank, including attorneys' fees and expenses (including attorneys' fees incurred pursuant to proceedings arising under the Bankruptcy Code) paid or incurred in connection with the negotiation, preparation, execution and delivery of any waiver, forbearance, consent, amendment or addition to this Agreement or any Loan Document, or the termination hereof and thereof; (iii) all costs or expenses paid or advanced by Bank which are required to be paid by Borrowers under this Agreement or the Loan Documents, including taxes and insurance premiums of every nature and kind of Bank; and (iv) if an Event of Default occurs, all expenses paid or incurred by Bank, including attorneys' fees and expenses (including attorneys' fees incurred pursuant to 13 to proceedings arising under the Bankruptcy Code), costs of collection, suit, arbitration, judicial reference and other enforcement proceedings, and any other out-of-pocket expenses incurred in connection therewith or resulting therefrom, whether or not suit is brought, or in connection with any refinancing or restructuring of the Obligations and the liabilities of Borrowers under this Agreement, any of the Loan Documents, or any other document, instrument or agreement entered into in connection herewith in the nature of a workout. "Fees" means the Annual Fee, the Closing Fee, the Late Payment Fee, the Letter of Credit Fees and the Audit Fees. "Financial Statement(s)" means, with respect to any accounting period of any Person, statements of income and statements of cash flows of such Person for such period, and balance sheets of such Person as of the end of such period, setting forth in each case in comparative form figures for the corresponding period in the preceding fiscal year or, if such period is a full fiscal year, corresponding figures from the preceding annual audit, all prepared in reasonable detail and in accordance with GAAP, subject to year-end adjustments in the case of monthly Financial Statements. Financial Statement(s) shall include the schedules thereto and annual Financial Statements shall also include the footnotes thereto. "Foreign Exchange Agreement" means that certain Foreign Currency Exchange Master Agreement, dated as of January 11, 2002, between Parent and Bank, together with all other Bank's standard agreements, instruments and documents executed by a Borrower in connection therewith. "Foreign Exchange Reserve" means an amount equal to ten percent (10%) of the Dollar equivalent of all of Borrower's outstanding Currency Obligations. "Foreign Exchange Sublimit" means Ten Million Dollars ($10,000,000). "GAAP" means generally accepted accounting principles in the United States of America, consistently applied, which are in effect as of the date of this Agreement. If any changes in accounting principles from those in effect on the date hereof are hereafter occasioned by promulgation of rules, regulations, pronouncements or opinions by or are otherwise required by the Financial Accounting Standards Board or the American Institute of Certified Public Accountants (or successors thereto or agencies with similar functions), and any of such changes results in a change in the method of calculation of, or affects the results of such calculation of, any of the financial covenants, standards or terms found 14 herein, then the parties hereto agree to enter into and diligently pursue negotiations in order to amend such financial covenants, standards or terms so as to equitably reflect such changes, with the desired result that the criteria for evaluating financial condition and results of operations of Borrower and the Subsidiaries shall be the same after such changes as if such changes had not been made. "Governing Documents" means the certificate or articles or certificate of incorporation, by-laws, articles or certificate of organization, operating agreement, or other organizational or governing documents of any Person. "Governmental Authority" means any federal, state, local or other governmental department, commission, board, bureau, agency, central bank, court, tribunal or other instrumentality or authority or subdivision thereof, domestic or foreign, exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Guaranties" and "Guaranty" means, individually or collectively as the context requires, each certain Continuing Guaranty executed by a Guarantor in favor of Bank. "Guarantor(s)" means, individually or collectively as the context requires, all Subsidiaries (other than Excluded Subsidiaries), and every other Person who hereafter executes a Guaranty in favor of Bank with respect to the Obligations. On the Closing Date there are no Guarantors. "Hazardous Materials" means all or any of the following: (a) substances that are defined or listed in, or otherwise classified pursuant to, any applicable laws or regulations as hazardous substances, hazardous materials, hazardous wastes, toxic substances, or any other formulation intended to define, list, or classify substances by reason of deleterious properties such as ignitability, corrosivity, reactivity, carcinogenicity, reproductive toxicity, or EP toxicity or are otherwise regulated for the protection of persons, property or the environment; (b) oil, petroleum, or petroleum derived substances, natural gas, natural gas liquids, synthetic gas, drilling fluids, produced waters, and other wastes associated with the exploration, development, or production of crude oil, natural gas, or geothermal resources; (c) any flammable substances or explosives or any radioactive materials; and (d) asbestos in any form or electrical equipment which contains any oil or dielectric fluid containing levels of polychlorinated biphenyls in excess of fifty (50) parts per million. "Holbrook" means Holbrook LTD, a Honk Kong corporation and a wholly-owned subsidiary of Parent. 15 "Indemnified Person(s)" has the meaning given to such term in Section 10.3(c). "Insolvency Proceeding" means any proceeding commenced by or against any Person, under any provision of the Bankruptcy Code, or under any other bankruptcy or insolvency law, including, but not limited to, assignments for the benefit of creditors, formal or informal moratoriums, compositions, or extensions with some or all creditors. "Intangible Assets" means, with respect to any Person, that portion of the book value of all of such Person's assets that would be treated as intangibles under GAAP. "Interest Payment Date" means: (i) with respect to each Base Lending Rate Portion, the last day of each and every month commencing the first such day after the making of such Loan, and the Revolving Loans Maturity Date; and (ii) with respect to each LIBOR Lending Rate Portion, the earlier of: (1) the last day of the Interest Period with respect thereto, or (2) if the Interest Period has a duration of more than one month, every LIBOR Business Day that occurs during such Interest Period every one month from the first day of such Interest Period. "Interest Period" means, with respect to each LIBOR Lending Rate Portion, the period commencing on the date of such LIBOR Lending Rate Portion and ending on the numerically corresponding day one (1), two (2), three (3) or six (6) months thereafter as Parent may elect pursuant to the applicable Notice of Borrowing or Notice of Conversion or Continuation; provided, however, that: (i) any Interest Period which would otherwise end on a day which is not a LIBOR Business Day shall be extended to the next succeeding LIBOR Business Day unless such LIBOR Business Day falls in another calendar month in which case such Interest Period shall end on the immediately preceding LIBOR Business Day; (ii) any Interest Period which begins on the last LIBOR Business Day of the calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last LIBOR Business Day of the calendar month in which it would have ended if there were a numerically corresponding day in such calendar month; and 16 (iii) no Interest Period respecting a Revolving Loan may extend beyond the Revolving Loans Maturity Date, and no Interest Period respecting the Term Loan may extend beyond the Term Loan Maturity Date. "Internal Revenue Code" means the Internal Revenue Code of 1986, as amended from time to time, or any successor statute, and any and all regulations thereunder. "Inventory" has the meaning given to such term in the Security Agreement. "Inventory Sublimit" means (i) during any Inventory Sublimit Increase Period, Ten Million Seven Hundred Fifty Thousand Dollars ($10,750,000), (ii) from November 1, 2002 through December 31, 2002, Nine Million Dollars ($9,000,000), and (iii) at all other times, Seven Million Five Hundred Thousand Dollars ($7,500,000). "Inventory Sublimit Increase Period" means a 90 day period commencing upon written notice from Parent to Bank of Parent's request therefor. An Inventory Sublimit Increase Period may only commence once per year during the first fiscal quarter of Parent. "ISP" means the International Standby Practices (1998 version), and any subsequent versions or revisions approved by a Congress of the International Chamber of Commerce Publication 590 and adhered to by Bank. "Knowledge" has the meaning given to such term in Section 10.9. "Late Payment Fee" has the meaning given to such term in Section 2.15(c). "Lending Office" means Bank's office located at its address set forth on the signature pages hereof, or such other office of Bank as it may hereafter designate as its Lending Office by notice to Parent. "Letter(s) of Credit" 17 has the meaning given to such term in Section 3.1(a). "Letter of Credit Application" means a Commercial Letter of Credit Application and Agreement or a Standby Letter of Credit Application and Agreement, as applicable, substantially in the forms of Exhibits 1.1L-1 and 1.1L-2, respectively. "Letter of Credit Fee" has the meaning given to such term in Section 3.3(a). "Letter of Credit Sublimit" means Ten Million Dollars ($10,000,000). "Letter of Credit Usage" means, on any date of determination, the aggregate maximum amounts available to be drawn under all outstanding Letters of Credit, without regard to whether any conditions to drawing could then be met. "LIBOR" means London interbank offered rate. "LIBOR Business Day" means any Business Day on which major commercial banks are open for international business (including dealings in Dollar deposits) in Los Angeles, California and London, England. "LIBOR Lending Rate" means, with respect to a LIBOR Lending Rate Portion, the rate per annum (rounded upwards if necessary to the nearest whole one-hundredth of one percent (.01%)), determined as the sum of: (a) the quotient of: (i) Base LIBOR for the relevant Interest Period of such LIBOR Lending Rate Portion; divided by (ii) the number equal to one hundred percent (100%) minus the LIBOR Reserve Percentage with respect to such Interest Period; plus (b) the Applicable LIBOR Lending Rate Margin. The LIBOR Lending Rate shall be adjusted automatically on the effective date of any change in the LIBOR Reserve Percentage, such adjustment to affect any LIBOR Lending Rate Portion outstanding on such effective date to the extent such change is applied retroactively to eurocurrency funding of a member bank in the Federal Reserve System. Each determination of a LIBOR Lending Rate by Bank, including, but not limited to, any determination as to the applicability or allocability of reserves to eurocurrency liabilities or as to the amount of such reserves, shall be conclusive and final in the absence of manifest error. "LIBOR Lending Rate Portion" 18 means any portion of any Loan designated by a Borrower as bearing interest at the LIBOR Lending Rate pursuant to Section 2.5 or 2.6. "LIBOR Reserve Percentage" means, for any Interest Period of any LIBOR Lending Rate Portion, the daily average of the stated maximum rate (rounded upward to the nearest one-hundredth of one percent (.01%)), as determined by Bank in accordance with its usual procedures (which determination shall be conclusive in the absence of manifest error), at which reserves are required to be maintained during such Interest Period by Bank (including supplemental, marginal, and emergency reserves) under Regulation D by Bank against Eurocurrency liabilities (as such term is defined in Regulation D), but without benefit or credit of proration, exemptions, or offsets that might otherwise be available to Bank from time to time under Regulation D. Without limiting the generality of the foregoing, LIBOR Reserve Percentage shall include any other reserves required to be maintained by Bank against (i) any category of liabilities that includes deposits by reference to which the LIBOR Lending Rate for a LIBOR Lending Rate Portion is being determined and (ii) any category of extension of credit or other assets that includes LIBOR Lending Rate Portion. "Lien" means any mortgage, deed of trust, pledge, security interest, hypothecation, assignment, deposit arrangement or other preferential arrangement, charge or encumbrance (including, any conditional sale or other title retention agreement, or finance lease) of any kind. "Loan Document(s)" means each of the following documents, instruments, and agreements individually or collectively, as the context requires: (i) the Notes; (ii) the Security Agreement (Borrowers); (iii) the Letter of Credit Applications; (iv) the Guaranties; (v) the Security Agreements (Subsidiary); (vi) the Stock Pledge Agreements; (vii) the Patent and Trademark Security Agreements; (viii) the Copyright Security Agreements; (ix) the Foreign Exchange Agreement; 19 (x) the Subordination Agreements; (xi) the Collateral Assignment of Purchase Documents; and (xii) such other documents, instruments, and agreements (including intellectual property security agreements, control agreements, financing statements and fixture filings) as Bank may reasonably request in connection with the transactions contemplated hereunder or to perfect or protect the liens and security interests granted to Bank in connection herewith. "Loans" means the Revolving Loans and the Term Loan (each, a "Loan"). "Material Adverse Effect" means a material adverse effect on (i) the business, Assets, condition (financial or otherwise), or results of operations of the Borrower and the Subsidiaries taken as a whole; (ii) the ability of any Borrower to perform its obligations under this Agreement and the Loan Documents to which it is a party (including, without limitation, repayment of the Obligations as they come due), or the ability of any Guarantor to perform its obligations under the Loan Documents to which it is a party, (iii) the validity or enforceability of this Agreement, the Loan Documents, or the rights or remedies of Bank hereunder and thereunder, (iv) the value of the Assets (taken as a whole) assigned or pledged to Bank as collateral, or (v) the priority of Bank's Liens with respect to the Assets assigned or pledged thereto as collateral. Bank acknowledges and agrees that for purposes of this Agreement, any liability arising from any Yeti Claim shall not be deemed to constitute a Material Adverse Effect. "Multiemployer Plan" means a multiemployer plan as defined in Section 4001(a)(3) of ERISA or Section 3(37) of ERISA to which any member of the ERISA Group has contributed, or was obligated to contribute, within the preceding six plan years (while a member of such ERISA Group) including for these purposes any Person which ceased to be a member of the ERISA Group during such six year period. "Net Cash Proceeds" means in connection with any Asset Sale, the cash proceeds (including any cash payments received by way of deferred payment whether pursuant to a note, installment receivable or otherwise, but only as and when actually received) from such Asset Sale, less any proceeds used to replace the Asset which is the subject of the Asset Sale and net of (i) attorneys' fees, accountants' fees, investment banking fees, brokerage commissions and amounts required to be applied to the repayment of any portion of the Debt secured by a Lien not prohibited hereunder on any Asset which is the subject of such sale, (ii) other customary fees, expenses and commissions incurred in connection with the Asset Sale, and (iii) taxes paid or reasonably estimated to be payable as a result of such Asset Sale. "Note Purchase Agreement" 20 means that certain Note Purchase Agreement, dated as of November 25, 2002, between Parent and Peninsula. "Notes" means, collectively, the Revolving Loans Note and the Term Loan Note (each, a "Note"). "Notice of Borrowing" means an irrevocable notice from a Borrower to Bank of such Borrower's request for a Borrowing pursuant to the terms of Section 2.5, substantially in the form of Exhibit 2.5(b). "Notice of Conversion or Continuation" means a written notice given pursuant to the terms of Section 2.6(b), substantially in the form of Exhibit 2.6(b). "Obligations" means any and all indebtedness, liabilities, and obligations of Borrower owing to Bank and to its successors and assigns, previously, now, or hereafter incurred, and howsoever evidenced, whether direct or indirect, absolute or contingent, joint or several, liquidated or unliquidated, voluntary or involuntary, due or not due, legal or equitable, whether incurred before, during, or after any Insolvency Proceeding and whether recovery thereof is or becomes barred by a statute of limitations or is or becomes otherwise unenforceable or unallowable as claims in any Insolvency Proceeding, together with all interest thereupon (including interest under Section 2.4(b) and including any interest that, but for the provisions of the Bankruptcy Code, would have accrued during the pendency of an Insolvency Proceeding. The Obligations shall include, without limiting the generality of the foregoing, all principal and interest owing under the Loans, all Reimbursement Obligations, all Expenses, the Fees, any other fees and expenses due hereunder and under the Loan Documents (including any fees or expenses that, but for the provisions of the Bankruptcy Code, would have accrued during the pendency of an Insolvency Proceeding), and all other indebtedness evidenced by this Agreement and/or the Loan Documents. "Overadvance" has the meaning set forth in Section 2.1(c). "Overadvance Limit" means Two Million Dollars ($2,000,000). "Overadvance Period" means November 1, 2002 through April 30, 2003 and December 1, 2003 through April 30, 2004. "Participant" 21 has the meaning set forth in Section 10.5(d). "Patent and Trademark Security Agreements" means, collectively, (i) that certain Patent and Trademark Security Agreement, dated as of February 21, 2002, between Parent and Bank, (ii) that certain Patent and Trademark Security Agreement, dated as of even date herewith, between Parent and Bank, and (iii) any Patent and Trademark Security Agreement or like agreement hereafter entered into by any Borrower or any Subsidiary, on the one hand, and Bank, on the other hand, pursuant to Section 6.13(a). "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "Peninsula" means The Peninsula Fund III Limited Partnership, a Delaware limited partnership. "Permitted Debt" means (i) Debt owing to Bank in accordance with the terms of this Agreement and the Loan Documents, (ii) Debt listed on Schedule 5.6, but no renewals, extensions or refinancings thereof, (iii) Debt up to a maximum aggregate amount of Five Hundred Thousand Dollars ($500,000) outstanding at any one time incurred in the ordinary course of business, (iv) trade obligations and normal accruals in the ordinary course of its business not yet due and payable, or with respect to which such Borrower is contesting in good faith the amount of validity thereof by appropriate proceedings diligently pursued and available to such Borrower, (v) Debt in the form of guaranties permitted under Section 7.11, (vi) obligations or indebtedness owing to another Borrower or Subsidiary to the extent permitted by Section 7.8, and (vii) Subordinate Debt. "Permitted Investments" means any of the following investments denominated and payable in Dollars, maturing within one year from the date of acquisition, selected by a Borrower: (i) marketable direct obligations issued or unconditionally guaranteed by the United States government or issued by any agency thereof and backed by the full faith and credit of the United States; (ii) marketable direct obligations issued by any state of the United States or any political subdivision of any such state or any public instrumentality thereof and, at the time of acquisition, having a credit rating obtainable from Standard & Poor's Corporation ("S&P") of not less than A-1 or not less than P-1 from Moody's Investors Service, Inc. ("Moody's"); (iii) commercial paper or corporate promissory notes bearing at the time of acquisition a credit rating of S&P of not less than A-1 or not less than P-1 from Moody's issued by United States, Canadian, European or Japanese bank holding companies or industrial or financial companies, with maturities of 180 days or less; (iv) certificates of deposit issued by and bankers acceptances of and interest bearing deposits with Bank; and (v) money market funds 22 organized under the laws of the United States or any state thereof that invest predominantly in any of the foregoing investments permitted under clauses (i), (ii), (iii) and (iv). "Permitted Liens" means (i) Liens for current taxes, assessments or other governmental charges which are not delinquent or remain payable without any penalty, or are being contested in good faith by appropriate proceedings, provided that, if delinquent, adequate reserves have been set aside with respect thereto as required by GAAP and, by reason of nonpayment, no property is subject to a material risk of loss or forfeiture; (ii) Liens in favor of Bank, in accordance with the Loan Documents, (iii) statutory Liens, such as inchoate mechanics', inchoate materialmen's, landlord's, warehousemen's, and carriers' liens, and other similar liens, other than those described in clause (i) above, arising in the ordinary course of business with respect to obligations which are not delinquent or are being contested in good faith by appropriate proceedings, provided that, if delinquent, adequate reserves have been set aside with respect thereto as required by GAAP and, by reason of nonpayment, no property is subject to a material risk of loss or forfeiture; (iv) Liens relating to Capital Lease Obligations permitted hereunder and Liens securing any leases permitted in Section 7.5, (v) judgment Liens that do not constitute an Event of Default under Section 8.1(i), and (vi) Liens, if they constitute such, of any true lease and consignment UCC filings permitted hereunder, (vii) Purchase Money Liens securing Debt described in clauses (ii) and (iii) of the definition of "Permitted Debt" hereinabove, and (viii) Liens in favor of Peninsula and its successors and assigns granted pursuant to the Note Purchase Agreement. "Person" means and includes natural persons, corporations, limited partnerships, general partnerships, limited liability companies, limited liability partnerships, joint stock companies, joint ventures, associations, companies, trusts, banks, trust companies, land trusts, business trusts, or other organizations, irrespective of whether they are legal entities, and governments and agencies and political subdivisions thereof. "Plan" means an employee benefit plan as defined in Section 3(3) of ERISA in which any personnel of any member of the ERISA Group participate or from which any such personnel may derive a benefit or with respect to which any member of the ERISA Group may incur liability, excluding any Multiemployer Plan, but including any plan either established or maintained by any member of the ERISA Group or to which such Person contributes under the laws of any foreign country. "Prior Agreement" has the meaning given to such term in the Recitals hereof. "Purchase Agreement" 23 means that certain Asset Purchase Agreement, dated as of October 9, 2002, among Sellers and Parent, respecting the Acquisition. "Purchase Documents" means the Purchase Agreement, together with any and all bills of sale, assignment agreements and other agreements, instruments and documents evidencing (i) the transfer of the Assets of Sellers as set forth in the Purchase Agreement, and (ii) any Subordinate Debt or other obligations owing by Parent to Sellers (or either of them). "Purchase Money Lien" means a Lien on any item of equipment of a Borrower; provided that (i) such Lien attaches only to that Asset and (ii) the purchase-money obligation secured by such item of equipment does not exceed one hundred percent (100%) of the purchase price of such item of equipment. "Quick Ratio" means, as of the date of determination, the ratio of (i) Borrowers' consolidated accounts receivable plus Borrowers' consolidated cash on hand and marketable securities, to (ii) Current Liabilities plus outstanding Revolving Loans and Letter of Credit Usage. "Regulation D" means Regulation D of the Board of Governors of the Federal Reserve System, as such regulation may be amended or supplemented from time to time. "Reimbursement Obligations" means the obligations of Borrowers to reimburse Bank pursuant to Section 3.4 amounts drawn under Letters of Credit. "Reportable Event" means any of the events described in Section 4043(c) of ERISA other than a Reportable Event as to which the provision of 30 days notice to the PBGC is waived under applicable regulations. "Responsible Officer" means either the Chief Executive Officer, Chief Financial Officer or Controller of a Person, or such other officer, employee, or Bank of such Person designated by a Responsible Officer in a writing delivered to Bank. "Restricted Payment" means (i) any Distribution; (ii) any payment made to purchase, redeem, retire, or otherwise acquire for value any Capital Stock now or hereafter outstanding; (iii) any distribution by a Person of Assets 24 to its shareholders, whether in cash, Assets, or in obligations of such Person; (iv) any action by a Person to allocate or otherwise set apart any sum for the payment of any Distribution on, or for the purchase, redemption or retirement of, any of its Capital Stock; or (v) any other distribution of a Person by reduction of capital or otherwise in respect of any of its Capital Stock. "Retiree Health Plan" means an employee welfare benefit plan within the meaning of Section 3(1) of ERISA that provides benefits to individuals after termination of their employment, other than as required by Section 601 of ERISA. "Revolving Credit Commitment" means Eighteen Million Dollars ($18,000,000). "Revolving Loans" has the meaning given to such term in Section 2.1. "Revolving Loans Maturity Date" means June 1, 2004. "Revolving Loans Note" means that certain Amended and Restated Secured Promissory Note (Revolving Loans), dated as of even date herewith, in the amount of Twenty Million Dollars ($20,000,000), made by Borrowers to the order of Bank. "SEC" means United States Securities and Exchange Commission. "Security Agreement (Borrowers)" means that certain Security Agreement, dated as of February 21, 2002, among Borrowers and Bank. "Security Agreement (Subsidiary)" means any Security Agreement now or hereafter entered into by a Subsidiary and Bank in accordance with Section 6.14. "Sellers" means Thatcher and Teva Sport Sandals, Inc., an Arizona corporation. "Senior Debt to Consolidated EBITDA Ratio" 25 means the ratio of (i) the amount of the outstanding Obligations as of the date of determination; to (ii) Consolidated EBITDA for the rolling four fiscal quarter period ending on the date of determination; provided, however, solely for purposes of this definition, Consolidated EBITDA shall exclude litigation expenses related to the Yeti Action recorded during the relevant period, royalty payments recorded pursuant to the TEVA License Agreement during the fiscal year ending December 31, 2002, and any write-off of goodwill pursuant to FASB 142 during the fiscal year ending December 31, 2002. "Shareholder" means a shareholder of any Borrower. "Solvent" means, with respect to any Person on the date any determination thereof is to be made, that on such date: (a) the present fair valuation of the Assets of such Person is greater than such Person's probable liability in respect of existing debts; (b) such Person does not intend to, and does not believe that it will, incur debts beyond such Person's ability to pay as such debts mature; and (c) such Person is not engaged in business or a transaction, and is not about to engage in business or a transaction, which would leave such Person with Assets remaining which would constitute unreasonably small capital after giving effect to the nature of the particular business or transaction. For purposes of this definition (i) the fair valuation of any property or assets means the amount realizable within a reasonable time, either through collection or sale of such Assets at their regular market value, which is the amount obtainable by a capable and diligent Person from an interested buyer willing to purchase such property or assets within a reasonable time under ordinary circumstances; and (ii) the term debts includes any payment obligation, whether or not reduced to judgment, equitable or legal, matured or unmatured, liquidated or unliquidated, disputed or undisputed, secured or unsecured, absolute, fixed or contingent. "Stock Pledge Agreements" means, collectively, (i) that certain Security Agreement-Stock Pledge, dated as of February 21, 2002, between Parent and Bank, (ii) that certain Security Agreement-Stock Pledge, dated as of even date herewith, between Parent and Bank, and (iii) any other Security Agreement-Stock Pledge or like agreement hereafter entered into between any Borrower and Bank pursuant to Section 6.13(b). "Subordinate Debt" has the meaning given to such term in either Subordination Agreement. "Subordination Agreement (Peninsula)" means that certain Subordination Agreement, dated as of even date herewith, among Peninsula, Bank and Parent. "Subordination Agreement (Seller)" 26 means that certain Subordination Agreement, dated as of even date herewith, among Thatcher, Bank and Parent. "Subordination Agreements" means, collectively, the Subordination Agreement (Peninsula) and the Subordination Agreement (Seller). "Subsidiary" means any corporation, limited liability company, partnership, trust or other entity (whether now existing or hereafter organized or acquired) of which any Borrower or one or more Subsidiaries of any Borrower at the time owns or controls directly or indirectly more than 50% of the shares of stock or partnership or other ownership interest having general voting power under ordinary circumstances to elect a majority of the board of directors, managers or trustees or otherwise exercising control of such corporation, limited liability company, partnership, trust or other entity (irrespective of whether at the time stock or any other form of ownership of any other class or classes shall have or might have voting power by reason of the happening of any contingency). "Swaps" means payment obligations with respect to interest rate swaps, currency swaps and similar obligations obligating a Person to make payments, whether periodically or upon the happening of a contingency. For the purposes of this Agreement, the amount of the obligation under any Swap shall be the amount determined, in respect thereof as of the end of the then most recently ended fiscal quarter of Borrowers, based on the assumption that such Swap had terminated at the end of such fiscal quarter, and in making such determination, if any agreement relating to such Swap provides for the netting of amounts payable by and to each party thereto or if any such agreement provides for the simultaneous payment of amounts by and to each party, then in each such case, the amount of such obligation shall be the net amount so determined. "Taxes" has the meaning set forth in Section 9.1. "Term Loan" has the meaning given to such term in Section 2.3(a). "Term Loan Maturity Date" means November 25, 2004. "Term Loan Note" 27 means that certain Secured Promissory Note (Term Loan), dated as of even date herewith, in the original principal amount of Seven Million Dollars ($7,000,000), made by Borrowers to the order of Bank. "Teva License Agreement" means that certain Teva License Agreement, dated June 7, 1999, between Thatcher, as licensor, and Parent, as licensee, wherein Parent licensed the right to manufacture, distribute, sell and advertise the Licensed Products (as defined therein) under the Teva(R) brand name. "Thatcher" means Mark Thatcher, an individual domiciled in the State of Arizona. "UCC" means the California Uniform Commercial Code, as amended or supplemented from time to time. "Uniform Customs" means the Uniform Customs and Practice for Documentary Credits (1993 Revision), International Chamber of Commerce Publication No. 500, as the same may be amended from time to time. "Unmatured Event of Default" means any condition or event which with the giving of notice or lapse of time or both would, unless cured or waived, become an Event of Default. "Yeti Action" means any action arising from any Yeti Claim, including, without limitation, that certain action, styled Yeti By Molly Ltd. v. Deckers Outdoor Corp., pending in the United States District Court for the District of Montana, Case No. CV 95-27-M-CCL. "Yeti Claim" means any claim that has been brought or that may be brought by Yeti By Molly, Ltd. or Molly Strongbutts, or any Affiliate, related person, successor or assignee of either. 1.2 Accounting Terms and Determinations. Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder shall be made, and all financial statements required to be delivered hereunder shall be prepared in accordance with GAAP. 1.3 Computation of Time Periods. 28 In this Agreement, with respect to the computation of periods of time from a specified date to a later specified date, the word from means from and including and the words to and until each mean to but excluding. Periods of days referred to in this Agreement shall be counted in calendar days unless otherwise stated. 1.4 Construction. Unless the context of this Agreement clearly requires otherwise, references to the plural include the singular and to the singular include the plural, references to any gender include any other gender, the part includes the whole, the term including is not limiting, and the term or has, except where otherwise indicated, the inclusive meaning represented by the phrase and/or. References in this Agreement to determination by Bank include good faith estimates by Bank (in the case of quantitative determinations), and good faith beliefs by Bank (in the case of qualitative determinations). The words hereof, herein, hereby, hereunder, and similar terms in this Agreement refer to this Agreement as a whole and not to any particular provision of this Agreement. Article, section, subsection, clause, exhibit and schedule references are to this Agreement, unless otherwise specified. Any reference in this Agreement or any of the Loan Documents to this Agreement or any of the Loan Documents includes any and all permitted alterations, amendments, changes, extensions, modifications, renewals, or supplements thereto or thereof, as applicable. 1.5 Exhibits and Schedules. All of the exhibits and schedules attached hereto shall be deemed incorporated herein by reference. 1.6 No Presumption Against Any Party. Neither this Agreement, any of the Loan Documents, any other document, agreement, or instrument entered into in connection herewith, nor any uncertainty or ambiguity herein or therein shall be construed or resolved using any presumption against any party hereto, whether under any rule of construction or otherwise. On the contrary, this Agreement, the Loan Documents, and the other documents, instruments, and agreements entered into in connection herewith have been reviewed by each of the parties and their counsel and shall be construed and interpreted according to the ordinary meanings of the words used so as to accomplish fairly the purposes and intentions of all parties hereto. 1.7 Independence of Provisions. All agreements and covenants hereunder, under the Loan Documents, and the other documents, instruments, and agreements entered into in connection herewith shall be given independent effect such that if a particular action or condition is prohibited by the terms of any such agreement or covenant, the fact that such action or condition would be permitted within the limitations of another agreement or covenant shall not be construed as allowing such action to be taken or condition to exist. 29 ARTICLE II TERMS OF THE CREDIT 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) At all times during any Overadvance Period, the outstanding Obligations (other than Obligations in respect of the Term Loan) after giving effect to any proposed Borrowing shall not exceed the sum of the Borrowing Base plus the Overadvance Limit, and at all other times 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 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; and (d) Notwithstanding the terms of clause (c) of this Section 2.1, solely during any Overadvance Period, (i) Overadvances do not need to be repaid to Bank provided that such Overadvances do not exceed, in the aggregate amount outstanding, the Overadvance Limit, and (ii) if, at any time or for any reason, the amount of the outstanding Overadvances exceeds, in the aggregate, the Overadvance Limit, Borrowers shall immediately pay to Bank, upon Bank's election and demand, in cash, the amount of such excess 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. 30 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) At all times during any Overadvance Period, the outstanding Obligations after giving effect to any proposed incurrence of a Currency Obligation by Parent shall not exceed the sum of the Borrowing Base plus the Overadvance Limit, and at all other times, 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. 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 Closing Date, in an amount equal to Seven Million Dollars ($7,000,000), the proceeds of which shall only be used for the purposes allowed in Section 7.1(b). Bank shall make the proceeds of the Term Loan available to Borrowers on the Closing Date by transferring same day funds pursuant to written disbursement instructions provided to Bank by Borrowers on the Closing Date. (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:
Payment Due Date Monthly Principal Reduction Payments - ---------------- ------------------------------------ ~~Closing Date -- 4/30/03 $ 0 5/31/03 $1,750,000.00~~
31 ~~6/30/03 and the last day of each month thereafter $ 291,666.67~~

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. 2.4 Interest Rates; Payments of Interest. (a) Interest Rate Options. (i) Loans. Subject to the terms and conditions hereof, all Loans, or portions thereof, may be outstanding as either Base Lending Rate Portions or LIBOR Lending Rate Portions, by designating, in accordance with Sections 2.5(b) and 2.6(b), either the Base Lending Rate or the LIBOR Lending Rate to apply to all or any portion of the unpaid principal balance of the Loans. (ii) Limitations on LIBOR Lending Rate Portions. There shall be no more than three (3) LIBOR Lending Rate Portions outstanding at any time. Revolving Loan LIBOR Lending Rate Portions shall be in minimum aggregate amounts each of One Hundred Thousand Dollars ($100,000). Term Loan LIBOR Lending Rate Portions shall be in minimum aggregate amounts each of Two Hundred Fifty Thousand Dollars ($250,000). (b) Default Rate. Upon the occurrence and during the continuance of an Event of Default, in addition to and not in substitution of any of Bank's other rights and remedies with respect to such Event of Default, the entire unpaid principal balance of the Loans 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. (c) Computation of Interest. All computations of interest shall be calculated on the basis of a year of three hundred sixty (360) days for the actual days elapsed. In the event that the Base Rate announced is, from time to time, changed, adjustment in the rate of interest payable hereunder on all Base Lending Rate Portions shall be made as of 12:01 a.m. (Pacific time) on the effective date of the change in the Base Rate. Interest shall accrue from the Closing Date to the date of repayment of the Loans in accordance with the provisions of this Agreement; provided, however, if a Loan is repaid on the same day on which it is made, then one (1) day's interest shall be paid on that Loan. Any and all interest not paid when due shall thereafter be deemed to be a 32 Revolving Loan as a Base Lending Rate Portion made under Section 2.1 and shall bear interest thereafter as provided for in Section 2.4(b). (d) Change in Applicable Base Lending Rate Margin and Applicable LIBOR Lending Rate Margin. Changes in the Applicable Base Lending Rate Margin and Applicable LIBOR Lending Rate Margin resulting from a change in the Consolidated Total Liabilities to Consolidated EBITDA Ratio, shall become effective on the first day of the calendar month following Bank's receipt of the latest Compliance Certificate, and shall be based on the Consolidated Total Liabilities to Consolidated EBITDA Ratio disclosed in such Compliance Certificate; provided, however, for purposes of determining the aforementioned margins, if Parent fails to deliver to Bank an accurately completed Compliance Certificate when due hereunder, the Consolidated Total Liabilities to Consolidated EBITDA Ratio shall be conclusively presumed to be greater than 2.50:1.0 until the applicable Compliance Certificate has been so completed and delivered to Bank. No reduction in the Applicable Base Lending Rate Margin or Applicable LIBOR Lending Rate Margin shall be granted if an Event of Default has occurred and is continuing. (e) Maximum Interest Rate. 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 Bank 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 Obligations, other than interest, in the inverse order of maturity, and the provisions hereof shall be deemed amended to provide for the highest permissible rate. If there are no Obligations outstanding, Bank shall refund to Borrowers such excess. (f) Payments of Interest. All accrued but unpaid interest on the Loans, calculated in accordance with this Section 2.4, shall be due and payable, in arrears, on each and every Interest Payment Date. 2.5 Notice of Borrowing Requirements. (a) Each Borrowing of a Base Lending Rate Portion shall be made on a Business Day and each Borrowing of a LIBOR Lending Rate Portion shall be made on a LIBOR Business Day. (b) Each Borrowing shall be made upon telephonic notice given by a Responsible Officer of a Borrower, followed by a Notice of Borrowing, given by facsimile or personal service, delivered to Bank at the address set forth in the Notice of Borrowing. If for a Base Lending Rate Portion, Bank shall be given such notice no later than 11:00 a.m., Pacific time, one (1) Business Day prior to the day on which such Borrowing is to be made, and, if for a LIBOR Lending Rate Portion, Bank shall be given notice no later than 9:00 a.m., Pacific time, three (3) LIBOR Business Days prior to the day on which such Borrowing is to be made, and such notice shall state the amount and purpose thereof (subject to the provisions of Section 2.1). 33 (c) Bank shall not incur any liability to Borrowers in acting upon any telephonic notice which Bank believes in good faith to have been given by a Responsible Officer of any Borrower, or for otherwise acting in good faith under this Section 2.5, and in making any Loans pursuant to telephonic notice. (d) So long as all of the conditions for a Borrowing of a Loan set forth herein have been satisfied, Bank shall credit the proceeds of such Loan on the applicable Borrowing date into Borrowers' general deposit account number 1891922658 maintained with Bank. 2.6 Conversion or Continuation Requirements. (a) Parent shall have the option to: (i) convert, at any time, all or any portion of any of the outstanding Loans, subject to the limitations and requirements of Section 2.4(a), from a portion bearing interest at one of the interest rate options available pursuant to Section 2.4(a) to another; or (ii) upon the expiration of any Interest Period applicable to a LIBOR Lending Rate Portion, to continue all or any portion of such LIBOR Lending Rate Portion as a LIBOR Lending Rate Portion with the succeeding Interest Period(s) of such continued LIBOR Lending Rate Portion commencing on the expiration date of the Interest Period previously applicable thereto, subject in the following limitations: (i) a LIBOR Lending Rate Portion may only be converted to a Base Lending Rate Portion or continued as a LIBOR Lending Rate Portion on the expiration date of the Interest Period applicable thereto; (ii) no outstanding Loan, or portion thereof, may be continued as, or be converted into, a LIBOR Lending Rate Portion in the event that, on the earlier of the date of the delivery of the Notice of Conversion or Continuation or the telephonic notice in respect thereof, any Event of Default or Unmatured Event of Default has occurred and is continuing; (iii) if Parent fails to deliver the appropriate Notice of Conversion or Continuation or the telephonic notice in respect thereof pursuant to the required notice period before the expiration of the Interest Period of a LIBOR Lending Rate Portion, such LIBOR Lending Rate Portion shall automatically be converted to a Base Lending Rate Portion; and (iv) no outstanding Loan may be continued as, or be converted into, a LIBOR Lending Rate Portion in the event that, after giving effect to any such conversion or continuation, there would be more than three (3) LIBOR Lending Rate Portions outstanding. (b) Parent shall give telephonic notice of any proposed continuation or conversion pursuant to this Section 2.6 followed by a Notice of Conversion or Continuation, given by facsimile or personal service, delivered to Bank at the address set forth in the Notice of Conversion or Continuation, no later than 11:00 a.m., Pacific time, on the Business Day which is the proposed conversion date (in the case of a conversion to a Base Lending Rate Portion) and no later than 9:00 a.m., Pacific time, three (3) LIBOR Business Days in advance of the proposed conversion or continuation date (in the case of a conversion to, or a continuation of, a LIBOR Lending Rate 34 Portion). If such Notice of Conversion or Continuation is received by Bank not later than 11:00 a.m., Pacific time, on a LIBOR Business Day, such day shall be treated as the first LIBOR Business Day of the required notice period. In any other event, such notice will be treated as having been received at the opening of business of the next LIBOR Business Day. A Notice of Conversion or Continuation shall specify: (1) the proposed conversion or continuation date (which shall be a Business Day or a LIBOR Business Day, as applicable); (2) the amount of the Revolving Loan to be converted or continued; (3) the nature of the proposed conversion or continuation; and (4) in the case of a conversion to or continuation of a LIBOR Lending Rate Portion, the requested Interest Period. (c) Bank shall not incur any liability to Borrowers in acting upon any telephonic notice referred to above which Bank believes in good faith to have been given by a Responsible Officer of Parent or for otherwise acting in good faith under this Section 2.6. Any Notice of Conversion or Continuation (or telephonic notice in respect thereof) shall be irrevocable and Borrowers shall be bound to convert or continue in accordance therewith. 2.7 Additional Costs. (a) Borrowers shall reimburse Bank for any increase in Bank's costs (which shall include, but not be limited to, taxes, other than taxes imposed on the overall net income of Bank, fees or charges), or any loss or expense (including, without limitation, any loss or expense incurred by reason of the liquidation or re-employment of deposits or other funds acquired by Bank to fund or maintain outstanding the principal amount of the Loans) incurred by it directly or indirectly resulting from the making of any LIBOR Lending Rate Portion due to: (i) the modification, adoption, or enactment of any law, rule, regulation or treaty or the interpretation thereof by any governmental or other authority (whether or not having the force of law) which becomes effective after the date hereof; (ii) the modification or new application of any law, regulation or treaty or the interpretation thereof by any governmental or other authority (whether or not having the force of law) which becomes effective after the date hereof; (iii) compliance by Bank with any request or directive (whether or not having the force of law) of any monetary or fiscal agency or authority which becomes effective after the date hereof; (iv) violations by Borrowers of the terms of this Agreement; or (v) any prepayment of a LIBOR Lending Rate Portion at any time prior to the end of the applicable Interest Period, including pursuant to Section 8.2. (b) The amount of such costs, losses, or expenses shall be determined solely by Bank based upon the assumption that Bank funded one hundred percent (100%) of each LIBOR Lending Rate Portion in the LIBOR market. In attributing Bank's general costs relating to its eurocurrency operations to any transaction under this Agreement or averaging any costs over a period of time, Bank may use any reasonable attribution or averaging methods which it deems appropriate and practical. Bank shall notify Borrowers of the amount due Bank pursuant to this Section 2.7 and Borrowers shall pay to Bank the amount due within fifteen (15) days of its receipt of such notice. A certificate as to the amounts payable pursuant to the foregoing sentence together with whatever detail is reasonably available to Bank shall be submitted by such Bank to Borrowers. Such determination shall, if not objected to within ten (10) days, be conclusive and binding upon Borrowers in the absence of manifest error. If Bank claims increased costs, loss, or expenses pursuant to this Section 2.7, then Bank, if requested by Borrower, shall use reasonable efforts to take such steps that 35 Borrowers reasonably requests, including designating different Lending Offices, as would eliminate or reduce the amount of such increased costs, losses, or expenses, so long as taking such steps would not, in the reasonable judgment of Bank, otherwise be disadvantageous to Bank. Any recovery by Bank or its Lending Office of amounts previously borne by Borrowers pursuant to this Section 2.7 shall be promptly remitted, without interest (unless Bank received interest on such recovered amounts), to Borrowers by such Bank. 2.8 Illegality; Impossibility. Notwithstanding anything herein to the contrary, if Bank determines (which determination shall be conclusive absent manifest error) that any law, rule, regulation, treaty or directive, or any change therein, or any change in the interpretation or administration thereof by any Governmental Authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by Bank (or its Lending Office) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency shall make it unlawful or impossible for Bank (or its Lending Office) to fund or maintain a LIBOR Lending Rate Portion in the LIBOR market or to continue such funding or maintaining, then Bank shall give notice of such circumstances to Borrowers and (i) in the case of each and every LIBOR Lending Rate Portion which is outstanding, Borrowers shall, if requested by Bank, prepay such LIBOR Lending Rate Portion(s) on or before the date specified in such request, together with interest accrued thereon, and the date so specified shall be deemed to be the last day of the Interest Period of that LIBOR Lending Rate Portion, and concurrent with any such prepayment, Bank shall make a Base Lending Rate Portion to Borrowers in the principal amount equal to the principal amount of the LIBOR Lending Rate Portions so prepaid, and (ii) Bank shall not be obligated to make any further LIBOR Lending Rate Portions until Bank determines that it would no longer be unlawful or impossible to do so. 2.9 Disaster. Notwithstanding anything herein to the contrary, if Bank determines (which determination shall be conclusive absent manifest error) that (i) Bank is unable to determine the LIBOR Lending Rate with respect to any Notice of Borrowing or Notice of Conversion or Continuation selecting the LIBOR Lending Rate because quotations of interest rates for the relevant deposits are not being provided in the relevant amounts or for the relative maturities or (ii) the LIBOR Lending Rate will not adequately reflect the cost to Bank of making or funding LIBOR Lending Rate Portions, then (x) the right of Borrowers to select the LIBOR Lending Rate shall be suspended until Bank notifies Borrowers that the circumstances causing such suspension no longer exist, and (y) Borrowers shall repay in full the then outstanding principal balance of all LIBOR Lending Rate Portions, together with interest accrued thereon, on the last day of the Interest Period applicable to each such LIBOR Lending Rate Portion, and concurrent with any such prepayment, Bank shall make a Base Lending Rate Portion to Borrowers in the principal amount equal to the principal amount of the LIBOR Lending Rate Portions so repaid. 2.10 Increased Risk-Based Capital Cost. 36 If the amount of capital required or expected to be maintained by Bank or any Person directly or indirectly owning or controlling Bank (each a "Control Person"), shall be affected by: (a) the introduction or phasing in of any law, rule or regulation after the date hereof; (b) any change after the date hereof in the interpretation of any existing law, rule or regulation by any central bank or United States or foreign governmental authority charged with the administration thereof; or (c) compliance by Bank or such Control Person with any directive, guideline or request from any central bank or United States or foreign governmental authority (whether or not having the force of law) promulgated or made after the date hereof, and Bank shall have reasonably determined that such introduction, phasing in, change or compliance shall have had or will thereafter have the effect of reducing (x) the rate of return on Bank's or such Control Person's capital, or (y) the asset value to Bank or such Control Person of the Loans made or maintained by Bank, in either case to a level below that which Bank or such Control Person could have achieved or would thereafter be able to achieve but for such introduction, phasing in, change or compliance (after taking into account Bank's or such Control Person's policies regarding capital), in either case by an amount which Bank in its reasonable judgment deems material, then, on demand by Bank, Borrowers shall pay to Bank or such Control Person such additional amount or amounts as shall be sufficient to compensate Bank or such Control Person, as the case may be, for such reduction. 2.11 Notes; Statements of Obligations. The Revolving Loans and Borrowers' obligation to repay the same shall be evidenced by the Revolving Loans Note, this Agreement and the books and records of Bank. The Term Loan and Borrowers' obligation to repay the same shall be evidenced by the Term Loan Note, this Agreement and the books and records of Bank. Bank shall render monthly statements of the Loans to Borrowers, including statements of all principal and interest owing on the Loans, and all Fees and Expenses owing, and such statements (absent manifest error) shall be presumed to be correct and accurate and constitute an account stated between Borrower and Bank's unless, within thirty (30) days after receipt thereof by Parent, Parent delivers to Bank, at the address specified in Section 10.1, written objection thereof specifying the error or errors, if any, contained in any such statement. 2.12 Holidays. Any principal or interest in respect of the Loans (other than in respect of a LIBOR Lending Rate Portion) which would otherwise become due on a day other than a Business Day, shall instead become due on the next succeeding Business Day and such adjustment shall be reflected in the computation of interest; provided, however, that in the event that such due date shall, subsequent to the specification thereof by Bank, for any reason no longer constitute a Business Day, Bank may change such specified due date in accordance with this Section 2.12. 37 2.13 Time and Place of Payments. (a) All payments due hereunder shall be made available to Bank in immediately available Dollars, not later than 12:00 p.m., Pacific time, on the day of payment, to the following address or such other address as Bank may from time to time specify by notice to Parent: Comerica Bank -- California 15303 Ventura Boulevard Sherman Oaks, California 91403 Attention: Jason D. Brown (b) Borrowers hereby authorizes Bank to charge Borrowers' general demand deposit account number 1891922658 with Bank, or any other demand deposit account maintained by any Borrower with Bank, for the amount of any payment due or past due hereunder or under any Loan Document, for the full amount thereof. Should there be insufficient funds in any such demand deposit account to pay all such sums when due, the full amount of such deficiency shall be immediately due and payable in cash by Borrowers. (c) In addition, Borrowers hereby authorizes Bank at its option, without prior notice to Borrowers, to advance a Revolving Loan as a Base Lending Rate Portion for any payment due or past due hereunder, including principal and interest owing on the Loans, the Fees and all Expenses, and to pay the proceeds of such Revolving Loan to Bank for application toward such due or past due payment. 2.14 Mandatory Principal Reductions. Each Borrower shall pay to Bank, on the first Business Day following such Borrower's receipt thereof, one hundred percent (100%) of the Net Cash Proceeds derived from each and all of its Asset Sales (except to the extent such Net Cash Proceeds exceed the amount of all outstanding Revolving Loans on such date), other than Asset Sales permitted by Section 7.7; provided, however, in accordance with Section 7.7, Borrowers shall not conduct or consummate any Asset Sales unless and until the prior written consent of Bank has been obtained, or unless such Asset Sale is otherwise permitted by Section 7.7. 2.15 Fees. (a) On the Closing Date, Borrowers shall pay to Bank a closing fee (the "Closing Fee") in the amount of Two Hundred Thirty Thousand Dollars ($230,000). (b) On each anniversary of the Closing Date (except for the Term Loan Maturity Date, Borrowers shall pay to Bank an annual fee (the "Annual Fee"), each in the amount of One Hundred Thousand Dollars ($100,000). (c) 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 Bank's other rights and remedies with respect to such 38 nonpayment, Borrowers shall pay to Bank a late payment fee (the "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. ARTICLE III LETTERS OF CREDIT 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 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) At all times during any Overadvance Period, the face amount of the Letter of Credit requested, if and when issued, must not cause the Obligations to exceed the sum of the Borrowing Base plus the Overadvance Limit, and at all other times, 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 39 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. 3.2 Procedure for Issuance of Letters of Credit. Any Borrower may request that the Bank issue a Letter of Credit at any time prior to the date which is thirty (30) days prior to the Revolving Loans Maturity Date by delivering to the Bank a Letter of Credit Application at its address for notices specified herein a Letter of Credit Application therefor, completed to the reasonable satisfaction of the Bank, together with such other certificates, documents and other papers and information as the Bank may reasonably request. Upon receipt of any Letter of Credit Application, the Bank will process such Letter of Credit Application and the certificates, documents and other papers and information delivered to it in connection therewith in accordance with its customary procedures and shall promptly issue the Letter of Credit requested thereby (but in no event shall the Bank be required to issue any Letter of Credit earlier than three (3) Business Days after its receipt of the Letter of Credit Application therefor and all such other certificates, documents and other papers and information relating thereto) by issuing the original of such Letter of Credit to the beneficiary thereof or as otherwise may be agreed by the Bank and such Borrower. The Bank shall furnish a copy of such Letter of Credit to such Borrower promptly following the issuance thereof. 3.3 Fees, Commissions and Other Charges. (a) Borrowers shall pay to Bank a fee in an amount equal to the face amount of each and every Letter of Credit times the Applicable Percentage (the "Letter of Credit Fee"). The Letter of Credit Fee shall be due and payable upon issuance of the applicable Letter of Credit. (b) In addition to the foregoing, Borrowers shall pay or reimburse the Bank for such normal and customary costs and expenses as are reasonably incurred or charged by the Bank in issuing, effecting payment under, amending or otherwise administering any Letter of Credit. 3.4 Reimbursement Obligations. (a) Borrowers agree to reimburse the Bank on the same Business Day on which a draft is presented under any Letter of Credit and paid by the Bank, provided that the Bank provides notice to Parent prior to 11:00 a.m., Pacific time, on such Business Day and otherwise Borrowers will reimburse the Bank on the next succeeding Business Day; provided, further, that the failure to provide such notice shall not affect Borrowers' absolute and unconditional obligation to reimburse the Bank when required hereunder for any draft paid under any Letter of Credit. The Bank shall provide notice to Borrower on such Business Day as a draft is presented and paid by the Bank indicating the amount of (i) such draft so paid and (ii) any taxes, fees, charges or other costs or expenses incurred by the Bank in connection with such payment. Each such payment shall be made to the Bank at its address specified on the signature pages hereof in lawful money of the United States of America and in immediately available funds. 40 (b) Interest shall be payable on any and all amounts remaining unpaid by Borrowers under this Section from the date such amounts become payable (whether at stated maturity, by acceleration or otherwise) until payment in full at the rate which would be payable on any outstanding Revolving Loans that are (i) in the case of the first day on which such amounts become payable (except where such amounts become payable by reason of the acceleration thereof), Base Lending Rate Portions which were not then overdue and (ii) in all cases to which clause (i) is not applicable, Base Lending Rate Portions which were then overdue. (c) Each drawing under any Letter of Credit shall constitute a request by Borrowers to Bank for a Borrowing of a Revolving Loan as a Base Lending Rate Portion. The date of such drawing shall be deemed the date on which such Borrowing is made. 3.5 Obligations Absolute. (a) Borrowers' obligations under this Article III shall be absolute and unconditional under any and all circumstances and irrespective of any set-off, counterclaim or defense to payment which any Borrower may have or have had against the Bank or any beneficiary of a Letter of Credit. (b) Borrowers also agree with the Bank that Borrowers' Reimbursement Obligations under Section 3.4 shall not be affected by, among other things, (i) the validity or genuineness of documents or of any endorsements thereon, even though such documents shall in fact prove to be invalid, fraudulent or forged, or (ii) any dispute between or among any Borrower and any beneficiary of any Letter of Credit or any other party to which such Letter of Credit may be transferred or (iii) any claims whatsoever of any Borrower against the beneficiary of such Letter of Credit or any such transferee. (c) Bank shall not be liable for any error, omission, interruption or delay in transmission, dispatch or delivery of any message or advice, however transmitted, in connection with any Letter of Credit, except for errors or omissions caused by the Bank's gross negligence or willful misconduct. (d) Borrowers agree that any action taken or omitted by the Bank under or in connection with any Letter of Credit or the related drafts or documents, if done in the absence of gross negligence or willful misconduct and in accordance with the standards of care specified in the UCC, shall be binding on Borrowers and shall not result in any liability of the Bank to Borrowers. 3.6 Letter of Credit Payments. If any draft shall be presented for payment under any Letter of Credit, the responsibility of the Bank to Borrowers in connection with such draft shall, in addition to any payment obligation expressly provided for in such Letter of Credit, be limited to determining that the documents (including each draft) delivered under such Letter of Credit in connection with such presentment are in conformity with such Letter of Credit. In determining whether to pay under any Letter of Credit, only the Bank shall be responsible for determining that the documents and certificates required to be 41 delivered under the Letter of Credit have been delivered and that they comply on their face with the requirements of such Letter of Credit. 3.7 Outstanding Letters of Credit Following Event of Default. With respect to all Letters of Credit outstanding upon the occurrence of an Event of Default, Borrowers shall either replace such Letters of Credit, whereupon such Letters of Credit shall be canceled, with letters of credit issued by another issuer acceptable to the beneficiary of such Letter of Credit, or provide the Bank, as security for such Letters of Credit, with a cash collateral deposit in an amount equal to one hundred and five percent (105%) of the Letter of Credit Usage for so long as such Letters of Credit remain outstanding during the continuance of such Event of Default. Borrowers hereby grant to Bank a security interest in such cash collateral to secure all Obligations of Borrowers under this Agreement and the other Loan Documents. Amounts held in such cash collateral account shall be applied by Bank to the payment of drafts drawn under such Letters of Credit and the payment of customary costs and expenses charged or incurred by the Bank in connection therewith, and the unused portion thereof after all such Letters of Credit shall have expired or been fully drawn upon, if any, shall be applied to repay other Obligations. After all such Letters of Credit shall have expired or been fully drawn upon, all Reimbursement Obligations shall have been satisfied and all other Obligations shall have been paid in full in cash, and the obligations of Bank hereunder have terminated the balance, if any, in such cash collateral account shall be returned to Borrowers. Borrowers shall execute and deliver to Bank such further documents and instruments as Bank may request to evidence the creation and perfection of the within security interest in such cash collateral account. 3.8 Letter of Credit Applications. In the event of any conflict between the terms of this Article III and the terms of any Letter of Credit Application, the terms of such Letter of Credit Application shall govern and control any such conflict. ARTICLE IV CONDITIONS PRECEDENT 4.1 Conditions to Initial Loans or Letter(s) of Credit. Bank's obligation to make the initial Loans and/or to issue the initial Letter(s) of Credit is subject to and contingent upon the fulfillment of each of the following conditions to the satisfaction of Bank and its counsel: (a) receipt by Bank of this Agreement and each of the Loan Documents, all duly executed by Borrowers and/or the other Persons party thereto, acknowledged where required, and in form and substance satisfactory to Bank; 42 (b) receipt by Bank, of a duly executed opinion of Borrowers' counsel, dated as of the Closing Date, covering the matters set forth in Exhibit 4.1(b) and otherwise in form and substance satisfactory to Bank; (c) with respect to each Borrower, receipt by Bank of a Certificate of the Secretary of such Borrower, dated as of the Closing Date, certifying (i) the incumbency and signatures of the Responsible Officers of such Borrower who are executing this Agreement and the Loan Documents on behalf of such Borrower; (ii) the By-Laws of such Borrower and all amendments thereto as being true and correct and in full force and effect; and (iii) the resolutions of the Board of Directors of such Borrower as being true and correct and in full force and effect, authorizing the execution and delivery of this Agreement and the Loan Documents, and authorizing the transactions contemplated hereunder and thereunder, and authorizing the Responsible Officers of such Borrower to execute the same on behalf of such Borrower; (d) receipt by Bank of a certificate signed by the Chief Executive Officer and Chief Financial Officer of each Borrower, dated as of the Closing Date, certifying that (i) both immediately before and immediately after giving effect to the transactions contemplated by this Agreement and the Loan Documents, such Borrower is and will be Solvent; (ii) to the best of their knowledge after due and diligent inquiry, the representations and warranties of such Borrower contained in this Agreement and the Loan Documents are true and correct, and (iii) to the best of their knowledge after due and diligent inquiry, both immediately before and immediately after giving effect to the transactions contemplated by this Agreement and the Loan Documents, no Event of Default or Unmatured Event of Default is continuing or shall occur; (e) receipt by Bank of the original certificates evidencing one hundred percent (100%) of the issued and outstanding Capital Stock of each Subsidiary (other than the Excluded Subsidiaries), together with undated stock powers with respect thereto, duly executed in blank, and in form and substance reasonably satisfactory to Bank; (f) receipt by Bank of the original certificates evidencing sixty-five percent (65%) of the issued and outstanding Capital Stock of each Excluded Subsidiary (except for all Excluded Subsidiaries that are treated as disregarded entities under the I.R.C., the original certificates evidencing one hundred percent (100%) of the issued and outstanding Capital Stock of each such Excluded Subsidiary), together with undated stock powers with respect thereto, duly executed in blank, and in form and substance reasonably satisfactory to Bank; (g) receipt by Bank of duly executed copies of the Note Purchase Agreement and all other agreements, instruments and documents evidencing the Subordinate Debt owing by Parent to Peninsula, and all security therefor, and Parent shall have received not less than $14,000,000 in proceeds of such Subordinate Debt, and such Subordinate Debt shall have a maturity of not less than six years following the Closing Date, bear current interest at not greater than 12% per annum and accrued interest at not greater than 4.75% per annum, and shall otherwise be on terms and conditions acceptable to Bank; 43 (h) receipt by Bank of duly executed copies of the Purchase Documents, certified by the Secretary of Parent, together with such other evidence that Bank shall reasonably require that on the Closing Date and funding of the Term Loan, the Acquisition shall be consummated and Bank shall have a first priority security interest in and upon all of Parent's right title and interest in and to the Assets acquired pursuant to the Acquisition; (i) receipt by Bank of a duly executed copy of the subordinate Note payable to Thatcher in the amount of $13,000,000 and such note shall have a maturity of not less than six years following the Closing Date, bear current interest at not greater than 7% per annum and accrued interest at not more than 2% per annum, and shall otherwise be on terms and conditions acceptable to Bank; (j) Parent shall have issued not less than $5,500,000 in preferred stock to Thatcher as part of the consideration for the Acquisition, and Bank shall have received copies of the stock certificates and any agreements, instruments and/or documents setting forth shareholder rights, certified by the Secretary of Parent, and such preferred stock shall have no Distributions or interest payments and shall otherwise be on terms and conditions acceptable to Bank; (k) receipt by Bank of a pro forma balance sheet and Compliance Certificate, each giving effect to the Acquisition and in form and content satisfactory to Bank; (l) receipt by Bank of an audit of the Accounts and the Inventory, acceptable to Bank; (m) after giving effect to all Borrowings on the Closing Date, Borrowers shall have not less than $4,000,000 in excess availability under Section 2.1; (n) receipt by Bank of historical Financial Statements for Thatcher's catalog business, reasonably acceptable to Bank; (o) receipt by Bank of such Uniform Commercial Code and other public record searches with respect to Borrowers and Sellers, in each case satisfactory to Bank; (p) receipt by Bank of such Lien releases as Bank shall require with respect to all Assets included in the Acquisition, in form for filing and otherwise reasonably satisfactory to Bank; (q) receipt by Bank of (i) the Closing Fee, and (ii) all Expenses owing on the Closing Date; (r) no Material Adverse Effect shall have occurred since the close of Parent's most recent fiscal year, as determined by Bank in its reasonable discretion; (s) receipt by Bank of copies of insurance binders or insurance certificates evidencing Borrowers' having caused to be obtained insurance in accordance with Section 6.5, including the Bank's loss payee endorsements required by such Section; 44 (t) receipt by Bank of such other documents, instruments and agreements as Bank may reasonably request in connection with the transactions contemplated hereunder or to perfect or protect the liens and security interests granted to Bank for the ratable benefit of Bank's in connection herewith; and (u) the Closing Date shall have occurred on or before November 30, 2002. 4.2 Conditions to all Loans and Letters of Credit. Bank's obligation hereunder to make any Loans to Borrowers (including the initial Loans), and/or to issue any Letters of Credit (including the initial Letter(s) of Credit), is further subject to and contingent upon the fulfillment of each of the following conditions to the satisfaction of Bank: (a) (i) in the case of a Borrowing, receipt by Bank of a Notice of Borrowing as required by Section 2.5(b) and written disbursement instructions to Bank consistent with Section 7.1, and (ii) in the case of a Letter of Credit, receipt by Bank of a Letter of Credit Application and the other papers and information required under Section 3.2; (b) the fact that, immediately before and after such Borrowing or issuance of Letter of Credit, as the case may be, no Event of Default or Unmatured Event of Default shall have occurred or be continuing; and (c) the fact that the representations and warranties of Borrowers contained in this Agreement shall be true on and as of the date of such Borrowing, or issuance of Letter of Credit, as the case may be (except for any representations and warranties made as of a specific earlier date, which shall remain true as of such date). ARTICLE V REPRESENTATIONS AND WARRANTIES In order to induce Bank to enter into this Agreement and to make Loans and/or issue any Letters of Credit, each Borrower represents and warrants to Bank that on the Closing Date and on the date of each Borrowing or issuance of a Letter of Credit: 5.1 Legal Status. Each Borrower is a corporation duly organized and existing under the laws of the state of its organization. Each Borrower and each Subsidiary has the power and authority to own its own Assets and to transact the business in which it is engaged, and is properly licensed, qualified to do business and in good standing in every jurisdiction in which it is doing business where failure to so qualify could have a Material Adverse Effect. 45 5.2 No Violation; Compliance. (a) The execution, delivery and performance of this Agreement, the Loan Documents and the Purchase Documents to which each Borrower is a party are within such Borrower's powers, are not in conflict with the terms of the Governing Documents of such Borrower, and do not result in a breach of or constitute a default under any contract, obligation, indenture or other instrument to which such Borrower is a party or by which such Borrower is bound or affected, which breach or default could reasonably be expected to have a Material Adverse Effect. To the best Knowledge of Borrowers, there is no law, rule or regulation (including Regulations T, U and X of the Federal Reserve Board), nor is there any judgment, decree or order of any court or Governmental Authority binding on any Borrower which would be contravened by the execution, delivery, performance or enforcement of this Agreement, the Loan Documents and the Purchase Documents to which any Borrower is a party. (b) The execution, delivery and performance of the Loan Documents to which each Guarantor is a party are within such Guarantor's powers, are not in conflict with the terms of the Governing Documents of such Guarantor, and do not result in a breach of or constitute a default under any contract, obligation, indenture or other instrument to which such Guarantor is a party or by which such Guarantor is bound or affected, which breach or default could reasonably be expected to have a Material Adverse Effect. To the best Knowledge of Borrowers, there is no law, rule or regulation (including Regulations T, U and X of the Federal Reserve Board), nor is there any judgment, decree or order of any court or Governmental Authority binding on any Guarantor which would be contravened by the execution, delivery, performance or enforcement of the Loan Documents to which such Guarantor is a party. 5.3 Authorization; Enforceability. (a) Each Borrower has taken all corporate action necessary to authorize the execution and delivery of this Agreement, the Loan Documents and the Purchase Documents to which such Borrower is a party, and the consummation of the transactions contemplated hereby and thereby. Upon their execution and delivery in accordance with the terms hereof, this Agreement, the Loan Documents and the Purchase Documents to which each Borrower is a party will constitute legal, valid and binding agreements and obligations of such Borrower enforceable against such Borrower in accordance with their respective terms, except as enforceability may be limited by bankruptcy, insolvency, and similar laws and equitable principles affecting the enforcement of creditors' rights generally. (b) Each Guarantor has taken all corporate, partnership or limited liability company action, as applicable, necessary to authorize the execution and delivery of the Loan Documents to which such Guarantor is a party, and the consummation of the transactions contemplated thereby. Upon their execution and delivery in accordance with the terms hereof, the Loan Documents to which each Guarantor is a party will constitute legal, valid and binding agreements and obligations of such Guarantor enforceable against such Guarantor in accordance with their respective terms, except as enforceability may be limited by bankruptcy, insolvency, fraudulent 46 conveyance, and similar laws and equitable principles affecting the enforcement of creditors' rights generally. 5.4 Approvals; Consents. No approval, consent, exemption or other action by, or notice to or filing with, any Governmental Authority is necessary in connection with the execution, delivery, performance or enforcement of this Agreement, the Loan Documents or the Purchase Documents. All requisite Governmental Authorities and third parties have approved or consented to the transactions contemplated by this Agreement, the Loan Documents and the Purchase Documents, and all applicable waiting periods have expired and there is no governmental or judicial action, actual or threatened, that has or could have a reasonable likelihood of restraining, preventing or imposing burdensome conditions on the transactions contemplated by this Agreement, the Loan Documents and the Purchase Documents. 5.5 Liens. Each Borrower and each of the Subsidiaries (other than the Excluded Subsidiaries) has good and marketable title to, or valid leasehold interests in, all of its Assets, free and clear of all Liens or rights of others, except for Permitted Liens. 5.6 Debt. Each Borrower and each of the Subsidiaries (other than the Excluded Subsidiaries) has no Debt other than Permitted Debt. 5.7 Litigation. Except as set forth in Schedule 5.7, there are no suits, proceedings, claims or disputes pending or, to the Knowledge of Borrowers, threatened, against or affecting any Borrower or any of Borrower's Assets, or any Subsidiary (other than the Excluded Subsidiaries) or any of such Subsidiary's (other than the Excluded Subsidiaries) Assets, which are not fully covered by applicable insurance and as to which no reservation of rights has been taken by the insurer thereunder. 5.8 No Default. No Event of Default or Unmatured Event of Default has occurred and is continuing or would result from the incurring of obligations by any Borrower or any Subsidiary (other than the Excluded Subsidiaries) under this Agreement or the Loan Documents. 5.9 Subsidiaries. Set forth in Schedule 5.9 is a complete and accurate list of the Subsidiaries, showing the jurisdiction of incorporation of each and showing the percentage of each Borrower's ownership of the Capital Stock of each Subsidiary. All of the outstanding Capital Stock of each Subsidiary has been validly issued, is fully paid and nonassessable, and is owned by Borrower free and clear of all Liens except Permitted Liens. 47 5.10 Taxes. All tax returns required to be filed by each Borrower and each of the Subsidiaries (other than the Excluded Subsidiaries) in any jurisdiction have in fact been filed, and all taxes, assessments, fees and other governmental charges upon each Borrower and each of the Subsidiaries (other than the Excluded Subsidiaries) or upon any of their Assets, income or franchises, which are due and payable have been paid. The provisions for taxes on the books of each Borrower and each of the Subsidiaries (other than the Excluded Subsidiaries) are adequate for all open years, and for each Borrower's and each of the Subsidiaries (other than the Excluded Subsidiaries) current fiscal period. The foregoing representations and warranties are qualified by reference to the fact that Parent is being audited by the Internal Revenue Service and its Netherlands Subsidiary is being audited by The Inland Revenue. 5.11 Correctness of Financial Statements. Borrowers' audited, consolidated Financial Statement as of its fiscal year ended December 31, 2001, and all other information and data furnished by Borrowers to Bank in connection therewith, are complete and correct in all material respects and accurately and fairly present in all material respects the financial condition and results of operations of Borrowers and the Subsidiaries as of their respective dates. Any forecasts of future financial performance delivered by Borrowers to Bank have been made in good faith and are based on reasonable assumptions and investigations by Borrowers. Said audited Financial Statement have been prepared in accordance with GAAP. Since the date of such audited Financial Statement, there has been no change in any Borrower's financial condition or results of operations sufficient to have a Material Adverse Effect. Borrowers and the Subsidiaries (other than the Excluded Subsidiaries) have no contingent obligations, liabilities for taxes or other outstanding financial obligations which are material in the aggregate, except as disclosed in such statements, information and data. 5.12 ERISA. Neither any Borrower nor any member of the ERISA Group maintains or contributes to any Plan or Multiemployer Plan, other than those listed on Schedule 5.12. Except as set forth on Schedule 5.12, each Borrower and each member of the ERISA Group have satisfied the minimum funding standards of ERISA and the Internal Revenue Code with respect to each Plan and Multiemployer Plan to which it is obligated to contribute. Except as set forth in Schedule 5.12, no ERISA Event has occurred nor has any other event occurred that may result in an ERISA Event that reasonably could be expected to result in a Material Adverse Effect. None of Borrowers, any member of the ERISA Group, or any fiduciary of any Plan is subject to any direct or indirect liability with respect to any Plan that could reasonably be expected to result in a Material Adverse Effect (other than to make regularly scheduled required contributions and to pay Plan benefits in the normal course) under any applicable law, treaty, rule, regulation, or agreement. Neither Borrowers nor any member of the ERISA Group is required to provide security to any Plan under Section 401(a)(29) of the Internal Revenue Code. Each Plan will be able to fulfill its benefit obligations as they come due in accordance with the Plan documents and under GAAP. 5.13 Other Obligations. 48 Neither any Borrower nor any Subsidiary (other than the Excluded Subsidiaries) is in default on any (i) Debt in the aggregate principal amount among all Borrowers in excess of $500,000 or (ii) any other lease, commitment, contract, instrument or obligation which is material to the operation of its business. 5.14 Public Utility Holding Company Act. No Borrower is a holding company, or an affiliate of a holding company or a subsidiary company of a holding company, within the meaning of the Public Utility Holding Company Act of 1935, as amended. 5.15 Investment Company Act. No Borrower is an investment company, or a company controlled by an investment company, within the meaning of the Investment Company Act of 1940, as amended. 5.16 Patents, Trademarks, Copyrights, and Intellectual Property, etc. Each Borrower and each Subsidiary (other than the Excluded Subsidiaries) has all necessary, patents, patent rights, licenses, trademarks, trademark rights, trade names, trade name rights, copyrights, permits, and franchises in order for it to conduct its business and to operate its Assets, without known conflict with the rights of third Persons. The consummation of the transactions contemplated by this Agreement will not alter or impair any of such rights of any Borrower or any Subsidiary (other than the Excluded Subsidiaries). No adverse judgments or pending material claims have been made with respect to each Borrower's and each Subsidiary's (other than Excluded Subsidiaries) title to or the validity of any unexpired trademark, trademark registration, trade name, patent, copyright, copyright registration, except as may be as set forth on Schedule C to the Patent and Trademark Security Agreement. The representations and warranties set forth in this Section 5.16 are qualified by reference to the matters disclosed in a letter, dated November 25, 2002, from Sheppard, Mullin, Richter & Hampton, counsel to Borrowers, addressed to Bank. 5.17 Environmental Condition. (i) None of any Borrower's or any Subsidiary's (other than the Excluded Subsidiaries) Assets has ever been used by any Borrower or such Subsidiary (other than the Excluded Subsidiaries) or by previous owners or operators in the disposal of, or to produce, store, handle, treat, release, or transport, any Hazardous Materials; (ii) none of any Borrower's or any Subsidiary's (other than the Excluded Subsidiaries) Assets has ever been designated or identified in any manner pursuant to any environmental protection statute as a Hazardous Materials disposal site, or a candidate for closure pursuant to any environmental protection statute; (iii) no Lien arising under any environmental protection statute has attached to any revenues or to any real or personal property owned or operated by any Borrower or any Subsidiary; (other than the Excluded Subsidiaries) and (iv) neither Borrower nor any Subsidiary has received a summons, citation, notice, or directive from the Environmental Protection Agency or any other federal or state governmental agency concerning any action or 49 omission by any Borrower or any Subsidiary (other than the Excluded Subsidiaries) resulting in the releasing or disposing of Hazardous Materials into the environment. 5.18 Solvency. Both before and after giving effect to this Agreement, the Loan Documents and the Purchase Documents, and the transactions contemplated hereby and thereby, each Borrower and each Subsidiary (other than the Excluded Subsidiaries) is Solvent. No transfer of property is being made by any Borrower or any Subsidiary and no obligation is being incurred by any Borrower or any Subsidiary in connection with the transactions contemplated by this Agreement, the Loan Documents or the Purchase Documents with the intent to hinder, delay, or defraud either present or future creditors of any Borrower any Subsidiary. 5.19 Eligible Accounts. The Eligible Accounts are bona fide existing payment obligations of Account Debtors created by the sale and delivery of Inventory or the rendition of services to such Account Debtors in the ordinary course of a Borrower's business, and, to the Knowledge of Borrowers, are owed to such Borrower without defenses, disputes, offsets, counterclaims, or rights of return or cancellation. As to each Eligible Account, such Account is not, (a) owed by an employee, Affiliate, or agent of any Borrower, (b) on account of a transaction wherein goods were placed on consignment or were sold pursuant to a guaranteed sale, a sale or return, a sale on approval, a bill and hold, or on any other terms by reason of which the payment by the Account Debtor may be conditional, (c) payable in a currency other than Dollars, (d) owed by an Account Debtor that has or has asserted a right of setoff, has disputed its liability, or has made any claim with respect to its obligation to pay the Account, (e) to the Knowledge of Borrowers, owed by an Account Debtor that is subject to any Insolvency Proceeding or is not Solvent 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, (f) on account of a transaction as to which the goods giving rise to such Account have not been shipped and billed to the Account Debtor or the services giving rise to such Account have not been performed and accepted by the Account Debtor, (g) a right to receive 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, and (h) an Account that has not been billed to the customer. 50 5.20 Eligible Inventory. All Eligible Inventory consists of shoes, footwear and apparel of good and merchantable quality, free from defects. As to each item of Eligible Inventory, such Inventory is (i) owned by the applicable Borrower free and clear of all Liens other than Permitted Liens; (ii) either located at one of the locations set forth on Schedule 1.1E or in transit from one such location to another such location; (iii) not located on real property leased by a Borrower or in a contract warehouse, in each case, unless subject to a Collateral Access Agreement executed by the lessor, the warehouseman, or other third party, as the case may be, and unless segregated or otherwise separately identifiable from goods of others, if any, stored on the premises; (iv) not goods that have been returned or rejected by the applicable Borrower's customers, and (v) not goods that are obsolete or slow moving, restrictive or custom items, raw materials work-in-process, or 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. 5.21 Acquisition. The Acquisition has been duly consummated in accordance with the terms of the Purchase Agreement and all applicable laws, rules and regulations, and legal title to the Assets covered thereby has been duly transferred, assigned and conveyed to Parent, and Parent and/or Holbrook is the legal owner and title holder of all such Assets, free and clear of all Liens and claims of third Persons, other than Permitted Liens. Without limiting the generality of the foregoing, (i) Parent and Sellers have complied with all applicable laws relating to the Acquisition, including the Hart-Scott Rodino Act and bulk sales laws, and (ii) title to all intellectual property Assets purchased by Parent pursuant to the Acquisition has been duly transferred to Parent on the records of the applicable federal filing offices (to the extent such transfer is required to vest Parent with title to such Assets). ARTICLE VI AFFIRMATIVE COVENANTS Each Borrower covenants and agrees that from the Closing Date and thereafter until the indefeasible payment, performance and satisfaction in full of the Obligations, all of Bank's obligations hereunder have been terminated and no Letters of Credit are outstanding, such Borrower shall: 6.1 Punctual Payments. Punctually pay the interest and principal on the Loans, the Fees and all Expenses and any other fees and liabilities due under this Agreement and the Loan Documents at the times and place and in the manner specified in this Agreement or the Loan Documents. 6.2 Books and Records; Collateral Audits. 51 Maintain, and cause each of the Subsidiaries (other than the Excluded Subsidiaries) to maintain, adequate books and records in accordance with GAAP, and permit any officer, employee or agent of Bank, at any time (upon one (1) Business Day's notice unless an Event of Default has occurred and is continuing, in which event no notice shall be required) and from time to time (but not more than twice per year unless an Event of Default has occurred and is continuing), (a) to inspect, audit and examine such books and records, and to make copies of the same, and/or (b) to audit the Accounts and the Inventory in order to verify such Borrower's financial condition or the amount, quality, value, condition of, or any other matter relating to, the Accounts and/or the Inventory. In connection therewith, Borrowers shall pay to Bank Bank's standard audit fee ("Audit Fee") for each audit plus all Expenses in connection therewith, payable upon demand. The Audit Fee shall in no event exceed $1,500 per auditor per day. 6.3 Collateral Reporting and Financial Statements. Deliver to Bank the following, all in form and detail reasonably satisfactory to Bank and in such number of copies as Bank may reasonably request: (a) (x) as soon as available but not later than twenty (20) days after the end of each month, (i) a detailed aging, by total, of the Accounts, and upon Bank's request, a reconciliation to the detailed calculation of the Borrowing Base previously provided to Bank, (ii) a summary aging, by vendor, of Borrowers' accounts payable and any book overdraft, (iii) back log reports, approved purchase order reports, pre-sold Inventory reports, and Inventory reports, (iv) a Borrowing Base Certificate, (v) an accrued vendor invoice report (or similar accounts payable and accrual report), and (vi) an accrued Inventory recap report (or similar accounts payable and accrual report); and (y) a backlog report on a quarterly basis; (b) as soon as available but not later than thirty (30) days after the end of each month, a consolidated internally prepared Financial Statement for Borrowers and the Subsidiaries which shall include Borrowers' and the Subsidiaries' consolidated balance sheet as of the close of such period, and Borrowers' and the Subsidiaries' consolidated statement of income and retained earnings and consolidated statement of cash flow for such period and year to date, certified by the Chief Financial Officer of Borrowers, to the best of his or her knowledge after due and diligent inquiry, as being complete and correct and fairly presenting in all material respects Borrowers' and its Subsidiaries' financial condition and results of operations for such period; (c) as soon as available but not later than forty-five (45) days after the end of each quarterly accounting period, a Compliance Certificate from the Chief Financial Officer of Borrowers, stating, among other things, that he or she has reviewed the provisions of this Agreement and the Loan Documents and that, to the best of his or her knowledge after due and diligent inquiry there exists no Event of Default or Unmatured Event of Default, and containing the calculations and other details necessary to demonstrate compliance with Sections 7.12 and 7.15; (d) as soon as available but not later than sixty (60) days after the end of each fiscal year, an annual operating budget for the following fiscal year; 52 (e) as soon as available but not later than one hundred twenty (120) days after the end of each fiscal year, a complete copy of Borrowers' and the Subsidiaries' consolidated audited Financial Statement, which shall include at least Borrowers' and the Subsidiaries' balance sheet as of the close of such fiscal year, and Borrowers' and the Subsidiaries' statement of income and retained earnings and statement of cash flow for such fiscal year, certified by KPMG LLP or another certified public accountant selected by Borrower and reasonably satisfactory to Bank, which certificate shall not be qualified in any manner whatsoever; (f) as soon as available but not later than fifteen (15) days after filing thereof with the SEC, (i) copies of each annual or quarterly report, proxy or Financial Statement or other report or communications sent to the Shareholders of Parent, and (ii) copies of all annual, regular, periodic and special reports and registration statements which Parent may file or be required to file with the SEC; (g) promptly upon receipt by any Borrower, copies of any and all reports and management letters submitted to a Borrower or any Subsidiary by any certified public accountant in connection with any examination of any Borrower's or any Subsidiary's financial records made by such accountant; and (h) from time to time, operating statistics, operating plans and any other information as Bank may reasonably request, promptly upon such request. 6.4 Existence; Preservation of Licenses; Compliance with Law. Preserve and maintain, and cause each Subsidiary (other than the Excluded Subsidiaries) to preserve and maintain, its corporate existence and good standing in the state of its organization, qualify and remain qualified, and cause each Subsidiary (other than the Excluded Subsidiaries) to qualify and remain qualified, as a foreign corporation in every jurisdiction where the failure to be so qualified could have a Material Adverse Effect; and preserve, and cause each of the Subsidiaries (other than the Excluded Subsidiaries) to preserve, all of its licenses, permits, governmental approvals, rights, privileges and franchises required for its operations; and comply, and cause each of the Subsidiaries (other than the Excluded Subsidiaries) to comply, with the provisions of its Governing Documents; and comply, and cause each of the Subsidiaries (other than the Excluded Subsidiaries) to comply, with the requirements of all applicable laws, rules, regulations, orders of any Governmental Authority having authority or jurisdiction over it, except for such laws, rules and regulations where the failure to so comply could not have a Material Adverse Effect, and comply, and cause each of the Subsidiaries (other than the Excluded Subsidiaries) to comply, with all requirements for the maintenance of its business, insurance, licenses, permits, governmental approvals, rights, privileges and franchises. 6.5 Insurance. (a) Maintain, at Borrowers' expense, insurance respecting its Assets wherever located, covering loss or damage by fire, theft, explosion, and all other hazards and risks as ordinarily are insured against by other Persons engaged in the same or similar businesses. Borrowers 53 also shall maintain business interruption, public liability, and product liability insurance, as well as insurance against larceny, embezzlement, and criminal misappropriation. All such policies of insurance shall be in such amounts and with such insurance companies as are reasonably satisfactory to Bank. Borrowers shall deliver copies of all such policies to Bank with a satisfactory lender's loss payable endorsement naming Bank as sole loss payee or, in the case of equipment or real estate which is subject to a Purchase Money Lien, an additional insured, and shall contain a waiver of warranties; provided, however, that Bank shall be listed as an additional insured with respect to losses of any equipment that are subject to a Purchase Money Lien or otherwise financed by a lender other than under this Agreement. Every policy of insurance or endorsement shall contain a clause requiring the insurer to give not less than 30 days' prior written notice to Bank in the event of cancellation of the policy for any reason whatsoever, and the insurer's agreement that any loss payable thereunder shall be payable notwithstanding any act or negligence of any Borrower or Bank which might, absent such agreement, result in a forfeiture of all or a part of such insurance payment. (b) Original policies or certificates thereof satisfactory to Bank evidencing such insurance shall be delivered to Bank as soon as available but in no event less than one (1) day prior to the expiration of the existing or preceding policies. Parent shall give Bank prompt notice of any loss covered by such insurance in excess of $500,000. Upon the occurrence and during the continuance of an Event of Default, Bank shall have the exclusive right to adjust any losses payable under any such insurance policies, without any liability to Borrower whatsoever in respect of such adjustments. Any monies received as payment for any loss under any insurance policy mentioned above or as payment of any award or compensation for condemnation or taking by eminent domain, shall be paid over to Bank to be applied at the option of either to the prepayment of the Obligations without premium or shall be disbursed to Parent under staged payment terms reasonably satisfactory to Bank for application to the cost of repairs, replacements, or restorations. Any such repairs, replacements, or restorations shall be effected with reasonable promptness and shall be of a value at least equal to the value of the items or property destroyed prior to such damage or destruction. In the event of any prepayment of the Obligations pursuant to the foregoing prior to the Revolving Loans Maturity Date, the Revolving Credit Commitment shall be permanently reduced pro rata by the amount of such prepayment. Upon the occurrence of an Event of Default, Bank shall have the right to apply all prepaid premiums to the payment of the Obligations in such order or form as Bank shall determine. Borrowers shall, concurrently with the annual Financial Statements required to be delivered by Borrowers pursuant to Section 6.3(e), deliver to Bank, as Bank may request, copies of certificates describing all insurance of Borrowers and the Subsidiaries then in effect. 6.6 Assets. Maintain, keep and preserve, and cause each Subsidiary (other than the Excluded Subsidiaries) to maintain, keep and preserve, all of its Assets (tangible or intangible) which are necessary to its business in good repair and condition, and from time to time make necessary repairs, renewals and replacements thereto so that such Assets shall be fully and efficiently preserved and maintained. 6.7 Taxes and Other Liabilities. 54 Pay and discharge when due, and cause each Subsidiary (other than the Excluded Subsidiaries) to pay and discharge when due, any and all assessments and taxes, both real or personal and including federal and state income taxes, and any and all other Permitted Debt. 6.8 Notice to Bank. Promptly, upon any Borrower acquiring Knowledge thereof, give written notice to Bank of: (a) all litigation affecting any Borrower or any Subsidiary (other than the Excluded Subsidiaries) where the amount in controversy is in excess of Five Hundred Thousand Dollars ($500,000); (b) any material dispute which may exist between any Borrower or any Subsidiary (other than the Excluded Subsidiaries), on the one hand, and any Governmental Authority, on the other; (c) any labor controversy resulting in or threatening to result in a strike against any Borrower or any Subsidiary (other than the Excluded Subsidiaries); (d) any proposal by any Governmental Authority to acquire the Assets or business, valued in the aggregate in excess of $500,000, of any Borrower or any Subsidiary (other than the Excluded Subsidiaries), or to compete with any Borrower or any Subsidiary (other than the Excluded Subsidiaries); (e) any reportable event under Section 4043(c)(5), (6) or (13) of ERISA with respect to any Plan, any decision to terminate or withdraw from a Plan, any finding made with respect to a Plan under Section 4041(c) or (e) of ERISA, the commencement of any proceeding with respect to a Plan under Section 4042 of ERISA, or any material increase in the actuarial present value of unfunded vested benefits under all Plans over the preceding year; (f) any Event of Default or Unmatured Event of Default; and (g) any other matter which has resulted or reasonably could be expected to have a Material Adverse Effect. 6.9 Employee Benefits. (a) (i) Promptly, and in any event within ten (10) Business Days after any Borrower obtains Knowledge that an ERISA Event has occurred that reasonably could be expected to result in a Material Adverse Effect, deliver or cause to be delivered a written statement of the Chief Financial Officer of Parent describing such ERISA Event and any action that is being taken with respect thereto by Borrowers or member of the ERISA Group, and any action taken or threatened by the Internal Revenue Service, Department of Labor, or PBGC. Each Borrower shall (i) be deemed to know all facts known by the administrator of any Plan of which it is the plan sponsor; (ii) promptly and in any event within three (3) Business Days after the filing thereof with the Internal Revenue Service, deliver or cause to be delivered a copy of each funding waiver request filed with respect to 55 any Plan and all communications received by any Borrower or, to the knowledge of any Borrower, any member of the ERISA Group with respect to such request; and (iii) promptly and in any event within three (3) Business Days after receipt by Borrowers or, to the Knowledge of Borrowers, any member of the ERISA Group, of the PBGC's intention to terminate a Plan or to have a trustee appointed to administer a Plan, copies of each such notice. (b) Cause to be delivered to Bank, upon Bank's request, each of the following: (i) a copy of each Plan (or, where any such plan is not in writing, complete description thereof) (and if applicable, related trust agreements of other funding instruments) and all amendments thereto, all written interpretations thereof and written descriptions thereof that have been distributed to employees or former employees of any Borrower or its Subsidiaries; (ii) the most recent determination letter issued by the IRS with respect to each Plan; (iii) for the three (3) most recent Plan years, annual reports on Form 5500 Series required to be filed with any governmental agency for each Plan; (iv) all actuarial reports prepared for the last three (3) Plan years for each Plan; (v) a listing of all Multiemployer Plans, with the aggregate amount of the most recent annual contributions required to be made by any Borrower or any member of the ERISA Group to each such plan and copies of the collective bargaining agreements requiring such contributions; (vi) any information that has been provided to any Borrower or any member of the ERISA Group regarding withdrawal liability under any Multiemployer Plan; and (vii) the aggregate amount of the most recent annual payments made to former employees of Borrowers under any Retiree Health Plan. 6.10 Further Assurances. Execute and deliver, or cause to be executed and delivered, upon the request of Bank and at Borrowers' expense, such additional documents, instruments and agreements as Bank may reasonably determine to be necessary or advisable to carry out the provisions of this Agreement and the Loan Documents, and the transactions and actions contemplated hereunder and thereunder. 6.11 Bank Accounts. Maintain, and cause each Subsidiary (other than the Excluded Subsidiaries) to maintain, its cash on hand and cash equivalent investments in deposit accounts at Bank or any of its Subsidiaries. Notwithstanding the foregoing, Borrowers and the Subsidiaries shall be permitted to maintain cash in deposit accounts other than at Bank, provided that (i) such deposit accounts are listed on Schedule 1 to the Security Agreement (Borrowers), (ii) the cash on deposit in all of such deposit accounts does not exceed $250,000, in the aggregate, at any time, and (iii) upon Bank's request, Borrowers shall promptly deliver to Bank such control agreements and/or other agreements, instruments and documents, fully and duly executed, as Bank shall reasonably require to perfect and maintain perfected Bank's security interest in such deposit accounts, all in form and substance reasonably satisfactory to Bank. 6.12 Environment. Be and remain, and cause each Subsidiary (other than the Excluded Subsidiaries) and each operator of any of any Borrower's or any Subsidiary's (other than the Excluded Subsidiaries) Assets to be and 56 remain, in compliance with the provisions of all federal, state and local environmental, health and safety laws, codes and ordinances, and all rules and regulations issued thereunder; notify Bank immediately of any notice of a hazardous discharge or environmental complaint received from any Governmental Authority or any other Person; notify Bank immediately of any hazardous discharge from or affecting its premises; immediately contain and remove the same, in compliance with all applicable laws; promptly pay any fine or penalty assessed in connection therewith; permit Bank to inspect the premises, to conduct tests thereon, and to inspect all books, correspondence, and records pertaining thereto; and at Bank's request, and at Borrowers' expense, provide a report of a qualified environmental engineer, satisfactory in scope, form and content to Bank, and such other and further assurances reasonably satisfactory to Bank that the condition has been corrected. 6.13 Additional Collateral. (a) With respect to any Assets (or any interest therein) acquired after the Closing Date by any Borrower or any Subsidiary (other than the Excluded Subsidiaries) that are of a type covered by the Lien created by any of the Loan Documents but which are not so subject, promptly (and in any event within thirty (30) days after the acquisition thereof): (i) execute and deliver, or cause such Subsidiary (other than the Excluded Subsidiaries) to execute and deliver, to Bank such amendments to the relevant Loan Documents or such other documents as Bank shall deem necessary or advisable to grant to Bank a Lien on such Assets (or such interest therein), (ii) take all actions, or cause such Subsidiary (other than the Excluded Subsidiaries) to take all actions, necessary or advisable to cause such Lien to be duly perfected in accordance with all applicable law, including, without limitation, the filing of financing statements in such jurisdictions as may be requested by Bank, (iii) if requested by Bank, deliver to Bank legal opinions relating to the matters described in the immediately preceding clauses (i) and (ii), which opinions shall be in form and substance, and from counsel, reasonably satisfactory to Bank, and (iv) if requested by Bank, deliver to Bank evidence of insurance as required by Section 6.5. (b) Without limiting the generality of Section 6.13(a), except as otherwise provided in Section 6.13(c), each Borrower shall pledge to Bank all of its right, title and interest in and to the Capital Stock of each presently existing and hereafter acquired or formed Subsidiaries pursuant to a Stock Pledge Agreement, and such Borrower shall take such actions as Bank shall reasonably require to perfect its security interest in all such Capital Stock; provided that Borrowers shall not acquire or form any new Subsidiaries except as otherwise permitted under Section 7.8(b). (c) Notwithstanding Section 6.13(b), Borrowers shall only be required to pledge sixty-five percent (65%) of the Capital Stock of the Excluded Subsidiaries (except with respect to any Excluded Subsidiary that is treated as a disregarded entity under the I.R.C., Borrowers shall comply with Section 6.13(b) and this Section 6.13(c) shall not be applicable). 6.14 Guarantors. Cause each and every now existing and hereafter acquired or formed Subsidiary (other than any Borrower and the Excluded Subsidiaries) to execute and deliver to Bank a Guaranty and Security Agreement (Subsidiary), in form and substance satisfactory to Bank. 57 6.15 Returns. Cause returns and allowances, as between any Borrower and its Account Debtors, to be on the same basis and in accordance with the usual customary practices of such Borrower, as they exist at the time of the execution and delivery of this Agreement. If, at a time when no Event of Default has occurred and is continuing, any Account Debtor returns any Inventory to any Borrower, such Borrower promptly shall determine the reason for such return and, if Borrower accepts such return, issue a credit memorandum (with a copy to be sent to Bank upon its request) in the appropriate amount to such Account Debtor. If, at a time when an Event of Default has occurred and is continuing, any Account Debtor returns any Inventory to any Borrower, such Borrower promptly shall determine the reason for such return and, if Bank consents (which consent shall not be unreasonably withheld), issue a credit memorandum (with a copy to be sent to Bank upon its request) in the appropriate amount to such Account Debtor. ARTICLE VII NEGATIVE COVENANTS Each Borrower further covenants and agrees that from the Closing Date and thereafter until the indefeasible payment, performance and satisfaction in full of the Obligations, all of Bank's, obligations hereunder have been terminated and no Letters of Credit are outstanding, such Borrower shall not: 7.1 Use of Funds; Margin Regulation. (a) Use any proceeds of the Revolving Loans for any purpose other than (i) for working capital, (ii) for general corporate purposes, (iii) to refinance the Obligations outstanding under the Prior Agreement, and/or (iv) for payment to Sellers of amounts owing to them on the Closing Date pursuant to the Purchase Agreement; (b) Use any proceeds of the Term Loan for any purpose other than for payment to Sellers of amounts owing to them on the Closing Date pursuant to the Purchase Agreement; or (c) Use any portion of the proceeds of the Loans in any manner which might cause the Loans, the application of the proceeds thereof, or the transactions contemplated by this Agreement to violate Regulation T, U, or X of the Board of Governors of the Federal Reserve System, or any other regulation of such board, or to violate the Securities and Exchange Act of 1934, as amended or supplemented. 7.2 Debt. Create, incur, assume or suffer to exist, or permit any Subsidiary (other than the Excluded Subsidiaries) to create, incur, assume or suffer to exist, any Debt except Permitted Debt. 7.3 Liens. 58 Create, incur, assume or suffer to exist, or permit any Subsidiary (other than the Excluded Subsidiaries) to create, incur, assume or suffer to exist, any Lien (including the lien of an attachment, judgment or execution) on any of its Assets, whether now owned or hereafter acquired, except Permitted Liens; or sign or file, or permit any Subsidiary (other than the Excluded Subsidiaries) to sign or file, under the UCC as adopted in any jurisdiction, a financing statement which names any Borrower or any Subsidiary (other than the Excluded Subsidiaries) as a debtor, except with respect to Permitted Liens, or sign, or permit any Subsidiary (other than the Excluded Subsidiaries) to sign, any security agreement authorizing any secured party thereunder to file such a financing statement, except with respect to Permitted Liens. 7.4 Merger, Consolidation, Transfer of Assets. Wind up, liquidate or dissolve, reorganize, reincorporate, merge or consolidate with or into any other Person, or acquire all or substantially all of the Assets or the business of any other Person, or permit any Subsidiary to do so; provided, however, upon prior written notice to Bank, any Subsidiary may merge into or consolidate with or transfer Assets to any Borrower or any other Subsidiary. 7.5 Leases. Create, incur, assume or suffer to exist, or permit any Subsidiary (other than the Excluded Subsidiaries) to create, incur, assume or suffer to exist, any obligation as a lessee for the rental or hire of any real or personal property, other than (i) leases that have been or should be capitalized in accordance with GAAP, (ii) leases (other than Capital Leases) that do not in the aggregate require payments (including taxes, insurance, maintenance, and similar expenses which any Borrower or any Subsidiary (other than the Excluded Subsidiaries) is required to pay under the terms of any lease) in excess of Five Hundred Thousand Dollars ($500,000) on a consolidated basis for Borrowers and the Subsidiaries (other than the Excluded Subsidiaries) in any fiscal year of Borrowers (or (x) One Million Dollars ($1,000,000) on a consolidated basis for Borrowers and the Subsidiaries (other than the Excluded Subsidiaries) in any fiscal year of Borrowers in the event that Parent shall, subject to the terms of the Security Agreement, relocate its chief executive office from the location listed on the signature page hereof, and/or (y) One Million Dollars ($1,000,000) on a consolidated basis for Borrowers and the Subsidiaries (other than the Excluded Subsidiaries) in any fiscal year of Borrowers in the event that Parent shall, subject to the terms of the Security Agreement, relocate its distribution center), and (iii) the leases identified on Schedule 7.5. 7.6 Sales and Leasebacks. Sell, transfer, or otherwise dispose of, or permit any Subsidiary (other than the Excluded Subsidiaries) to sell, transfer, or otherwise dispose of, any real or personal property to any Person, and thereafter directly or indirectly leaseback the same or similar property. 7.7 Asset Sales. Conduct any Asset Sale, or permit any Subsidiary (other than the Excluded Subsidiaries) to do so, other than (i) sales of Inventory in the ordinary course of business, (ii) dispositions of obsolete, worn 59 or nonfunctional equipment, (iii) sales of Assets generating aggregate Net Cash Proceeds of no more than $500,000 in any fiscal year, (iv) sales of marketable securities, (v) licensing of intellectual property in the ordinary course of business, and (vi) other Asset Sales approved in writing by Bank (which approval shall not be unreasonably withheld or delayed). 7.8 Investments. (a) Except as otherwise permitted by clauses (b), (c) and (d) of this Section 7.8, make any loans or advances to, or any investment in, any Person (other than Permitted Investments); or acquire, or permit any Subsidiary to acquire, any Capital Stock, (other than pursuant to Parent's stock buyback program), Assets, obligations, or other securities of, make any contribution to, or otherwise acquire any interest in, any Person; or acquire or form or permit any Subsidiary (other than the Excluded Subsidiaries) to acquire or form, any new Subsidiary (other than the Excluded Subsidiaries); or participate, or permit any Subsidiary to participate, as a partner or joint venturer with any other Person. (b) Notwithstanding the terms of Section 7.8(a), any Borrower may acquire or form, and permit any Subsidiary to acquire or form, any new Subsidiary or the Assets of another Person; provided that (i) the acquisition costs for all such acquisitions (including the total consideration paid to the seller(s), taxes, fees and other transaction costs), does not exceed, in the aggregate, Ten Million Dollars ($10,000,000), (ii) such acquisition is of a business engaged in the manufacture, design, marketing, distribution and/or sale (wholesale or retail) of apparel, shoes, footwear and/or outdoor sporting goods, (iii) Borrowers shall have complied with Sections 6.13 and 6.14, (iv) the acquisition shall not be hostile, and (v) prior to the consummation of the acquisition, Borrowers shall have demonstrated to the reasonable satisfaction of Bank that both before and, on a pro forma basis after giving effect to such acquisition, no Event of Default shall be continuing or will result therefrom. (c) Notwithstanding the terms of Section 7.8(a), Parent shall be permitted to consummate the Acquisition in accordance with the terms and conditions of the Purchase Agreement. (d) Notwithstanding the terms of Section 7.8(a), Borrowers shall be permitted to make loans and advances (i) to their employees, provided that such loans and advances do not exceed Two Hundred Thousand Dollars ($200,000) in the aggregate outstanding at any time, (ii) to any Subsidiary and (iii) to any Excluded Subsidiary, provided that such net loans and advances to Excluded Subsidiaries do not exceed Five Hundred Thousand Dollars ($500,000) in the aggregate per calendar year. 7.9 Character of Business. Engage in any business activities or operations substantially different from or unrelated to its present business activities and operations, or permit any Subsidiary (other than the Excluded Subsidiaries) to do so (it being specifically acknowledged by Bank that Borrowers may directly or 60 indirectly engage in the retail sale of apparel, footwear and shoes and in the licensing of intellectual property to be used in connection with the sale of consumer goods). 7.10 Distributions. (a) Except as otherwise permitted by Section 7.10(b), make any Restricted Payments, or permit any Subsidiary to do so (other than an Excluded Subsidiary). (b) Notwithstanding the terms of Section 7.10(a), (i) any Borrower (other than Parent) and any Subsidiary may declare and pay Distributions to its parent, (ii) Parent may make Restricted Payments pursuant to its stock buyback program provided that the proceeds of the Loans may not be used for such purpose, and (iii) Parent shall be permitted to redeem for cash shares of preferred stock issued to Thatcher so long as such redemption is permitted under the terms of the Note Purchase Agreement. 7.11 Guaranty. Assume, guaranty (other than any guaranty of the Debt owing by Douglas B. Otto to Bank and other than any guaranty issued on behalf of an Australian supplier in an aggregate amount not to exceed $500,000 from time to time), endorse (other than checks and drafts received by a Borrower in the ordinary course of business so long as an Event of Default has not occurred), or otherwise be or become directly or contingently responsible or liable, or permit any Subsidiary (other than the Excluded Subsidiaries) to assume, guaranty, endorse, or otherwise be or become directly or contingently responsible or liable (including, any agreement to purchase any obligation, stock, Assets, goods, or services or to supply or advance any funds, Assets, goods, or services, or any agreement to maintain or cause such Person to maintain, a minimum working capital or net worth, or otherwise to assure the creditors of any Person against loss) for the obligations of any other Person (other than a Borrower); or pledge or hypothecate, or permit any Subsidiary (other than the Excluded Subsidiaries) to pledge or hypothecate, any of its Assets as security for any liabilities or obligations of any other Person (other than a Borrower). 7.12 Capital Expenditures. Make, or permit any Subsidiary (other than the Excluded Subsidiaries) to make, any Capital Expenditures, or any commitments therefor, in excess of Two Million Dollars ($2,000,000) in the aggregate, on a consolidated basis, in any fiscal year. 7.13 Transactions with Affiliates. Enter into any transaction, including borrowing or lending and the purchase, sale, or exchange of property or the rendering of any service (including management services), with any Affiliate (other than with Parent or with a Subsidiary that is not an Excluded Subsidiary), or permit any Subsidiary (other than the Excluded Subsidiaries) to enter into any transaction, including borrowing or lending and the purchase, sale, or exchange of property or the rendering of any service (including management services), with any Affiliate (other than with Parent or with a Subsidiary that is not an Excluded Subsidiary), other than in the ordinary course of and pursuant to the reasonable 61 requirements of such Borrower's or such Subsidiary's business and upon fair and reasonable terms no less favorable to such Borrower or such Subsidiary than would obtain in a comparable arm's length transaction with a Person not an Affiliate. Notwithstanding the foregoing, (a) Parent shall be permitted to sell to Holbrook the foreign intellectual property assets acquired in the Acquisition, and Holbrook shall be entitled to repay the purchase price thereof, all in accordance with terms agreed to between Holbrook and Parent, and (b) Parent may provide management services to Holbrook in consideration of a management fee payable by Holbrook to Parent. 7.14 Stock Issuance. Permit any Subsidiary to issue any additional Capital Stock. 7.15 Financial Condition. Permit or suffer: (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 period:
TEST DATE / PERIOD: MINIMUM QUICK RATIO: ------------------- -------------------- ~~12/31/02 0.65:1.0 01/01/03 -- 12/31/003 0.70:1.0 01/01/04 and thereafter 0.85:1.0~~
(b) Consolidated Net Profit, or Consolidated Net Loss, for any fiscal quarter of Parent, to be less, or greater, as applicable, than the amount set forth in the table below opposite the applicable fiscal quarter:
FISCAL MINIMUM QUARTERLY CONSOLIDATED QUARTER NET PROFIT (OR MAXIMUM ENDING: QUARTERLY CONSOLIDATED NET LOSS): --------- --------------------------------- 12/31/02 $ 300,000 03/31/03 $2,000,000 06/30/03 $ 700,000 09/30/03 $ (500,000)
62 12/31/03 $ 500,000 03/31/04 $2,000,000 06/30/04 $ 700,000 09/30/03 $ (500,000) 12/31/04 $ 500,000

(c) Consolidated Pretax Profit to be less than $500,000 for the fiscal year of Parent ending December 31, 2002, or the Consolidated Net Profit to be less than $4,000,000 for any fiscal year of Parent, commencing with the fiscal year ending December 31, 2003. (d) The Senior Debt to Consolidated EBITDA Ratio, measured as of the end of each fiscal quarter of Parent, at any time to be greater than the ratio set forth in the table below opposite the applicable fiscal quarter:
MAXIMUM FISCAL SENIOR DEBT TO QUARTER ENDING: CONSOLIDATED EBITDA RATIO: --------------- -------------------------- 12/31/02 2.25:1.0 3/31/03 2.25:1.0 06/30/03 and each fiscal quarter 1.50:1.0 thereafter
(e) The Cash Flow Coverage Ratio, measured as of the end of each fiscal quarter of Parent, commencing with the fiscal quarter ending December 31, 2002, at any time to be less than 1.50:1.0. (f) Consolidated Effective Tangible Net Worth, measured as of the end of each fiscal quarter of Parent, commencing with the fiscal quarter ending December 31, 2002, at any time to be less than the sum of (i) $18,500,000 plus, (ii) on a cumulative basis, 75% of the Consolidated Net Profit (but in no event less than zero) for each fiscal year, commencing with the fiscal year ending December 31, 2003, and minus (iii) on a cumulative basis, any payments made to Peninsula that are permitted to be made pursuant to the terms of the Subordination Agreement (Peninsula). 7.16 Transactions Under ERISA. Directly or indirectly: 63 (a) engage, or permit any member of the ERISA Group to engage, in any prohibited transaction which is reasonably likely to result in a civil penalty or excise tax described in Sections 406 of ERISA or 4975 of the Internal Revenue Code for which a statutory or class exemption is not available or a private exemption has not been previously obtained from the Department of Labor; (b) permit to exist with respect to any Plan any accumulated funding deficiency (as defined in Sections 302 of ERISA and 412 of the Internal Revenue Code), whether or not waived; (c) fail, or permit any member of the ERISA Group to fail, to pay timely required contributions or installments due with respect to any waived funding deficiency to any Plan; (d) terminate, or permit any member of the ERISA Group to terminate, any Plan where such event would result in any liability of any Borrower or any member of ERISA Group under Title IV of ERISA; (e) fail, or permit any member of the ERISA Group to fail, to make any required contribution or payment to any Multiemployer Plan; (f) fail, or permit any member of the ERISA Group to fail, to pay to a Plan or Multiemployer Plan any required installment or any other payment required under Section 412 of the Internal Revenue Code on or before the due date for such installment or other payment; (g) amend, or permit any member of the ERISA Group to amend, a Plan resulting in an increase in current liability for the plan year such that either of any Borrower or any member of the ERISA Group is required to provide security to such Plan under Section 401(a)(29) of the Internal Revenue Code; or (h) withdraw, or permit any member of the ERISA Group to withdraw, from any Multiemployer Plan where such withdrawal is reasonably likely to result in any liability of any such entity under Title IV of ERISA; which, individually or in the aggregate, results in or reasonably would be expected to result in a claim against or liability of any Borrower, any of the Subsidiaries or any member of the ERISA Group in excess of Five Hundred Thousand Dollars ($500,000). ARTICLE VIII EVENTS OF DEFAULT AND REMEDIES 8.1 Events of Default. The occurrence of any one or more of the following events, acts or occurrences shall constitute an event of default (an "Event of Default") hereunder: 64 (a) Borrowers fail to pay when due any payment of principal due on the Loans, or fail to pay within three (3) days of the due date thereof any interest due on the Loans, the Fees, any Expenses, or any other amount payable hereunder or under any Loan Document; (b) Borrowers fail to observe or perform any of the covenants and agreements set forth in Article VII; (c) Borrowers or any Guarantor fail to observe or perform any covenant or agreement set forth in this Agreement or the Loan Documents (other than those covenants and agreements described in Sections 8.1(a) and 8.1(b)), and such failure continues for fifteen (15) days after the earlier to occur of (i) Borrowers obtaining Knowledge of such failure or (ii) Bank's dispatch of notice to Borrowers of such failure; (d) Any representation, warranty or certification made by any Borrower or any Guarantor or any officer or employee of any Borrower or any Guarantor in this Agreement or any Loan Document, in any certificate, financial statement or other document delivered pursuant to this Agreement or any Loan Document proves to have been misleading or untrue in any material respect when made or if any such representation, warranty or certification is withdrawn; (e) Any Borrower or any Guarantor fails to pay when due any payment in respect of its Debt (including any Subordinate Debt) in the aggregate principal amount in excess of $500,000 (other than under this Agreement) in the aggregate principal amount in excess of $500,000; (f) Any event or condition occurs that: (i) results in the acceleration of the maturity of any of any Borrower's or any Guarantor's Debt (including any Subordinate Debt) in the aggregate principal amount in excess of $500,000; or (ii) permits (or, with the giving of notice or lapse of time or both, would permit) the holder or holders of such Debt or any Person acting on behalf of such holder or holders to accelerate the maturity thereof; (g) Any Borrower or any Guarantor commences a voluntary Insolvency Proceeding seeking liquidation, reorganization or other relief with respect to itself or its Debt or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official over it or any substantial part of its property, or consents to any such relief or to the appointment of or taking possession by any such official in an involuntary Insolvency Proceeding or fails generally to pay its Debt as it becomes due, or takes any action to authorize any of the foregoing; (h) An involuntary Insolvency Proceeding is commenced against any Borrower or any Guarantor seeking liquidation, reorganization or other relief with respect to it or its Debt or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property and any of the following events occur: (i) the petition commencing the Insolvency Proceeding is not timely controverted; (ii) the petition commencing the Insolvency Proceeding is not dismissed within forty-five (45) calendar days of the date of the filing thereof; (iii) an interim trustee is appointed to take possession of all or a substantial portion of the Assets of, or to operate all or any substantial portion of the business of, Borrower or such Guarantor; or (iv) an order for relief shall have been issued or entered therein; 65 (i) Any Borrower or any Guarantor suffers (i) one or more money judgments in excess of $500,000 in the aggregate over applicable insurance coverage or (ii) one or more writs, warrants of attachment, or similar process involving Assets valued in the aggregate in excess of $500,000, and any of the foregoing shall continue in effect for a period of thirty (30) days without being vacated, discharged, satisfied, stayed or bonded pending appeal; (j) A judgment creditor obtains possession of any of the Assets valued in the aggregate in excess of $500,000 of any Borrower or any Guarantor by any means, including levy, distraint, replevin, or self-help, (k) Any order, judgment or decree is entered decreeing the dissolution of any Borrower or any Guarantor, or any Guarantor dies; (l) Any Borrower or any Guarantor is enjoined, restrained or in any way prevented by court order from continuing to conduct all or any material part of its business affairs; (m) A notice of lien, levy or assessment is filed of record with respect to any or all of any Borrower's or any Guarantor's Assets valued in the aggregate in excess of $500,000 by any Governmental Authority, or any taxes or debts owing at any time hereafter to any Governmental Authority becomes a Lien, whether inchoate or otherwise, upon any or all of any Borrower's or any Guarantor's Assets valued in the aggregate in excess of $500,000 and the same is not paid on the payment date thereof; (n) If any Borrower's or any Guarantor's records are prepared and kept by an outside computer service bureau on the Closing Date or during the term of this Agreement such an agreement with an outside service bureau is entered into, and at any time thereafter, without first obtaining the written consent of Bank, such Borrower or Guarantor terminates, modifies, amends or changes its contractual relationship with said computer service bureau or said computer service bureau fails to provide Bank with any requested information or financial data pertaining to Bank's Collateral, such Borrower's or Guarantor's financial condition or the results of such Borrower's or Guarantor's operations; (o) Any reportable event, which Bank determines constitutes grounds for the termination of any Plan by the PBGC or for the appointment by the appropriate United States District Court of a trustee to administer any such Plan, shall have occurred and be continuing thirty (30) days after written notice of such determination shall have been given to Parent by Bank, or any such Plan shall be terminated within the meaning of Title IV of ERISA, or a trustee shall be appointed by the appropriate United States District Court to administer any such Plan, or the PBGC shall institute proceedings to terminate any Plan and in case of any event described in this Section 8.1(p), the aggregate amount of Borrowers' liability to the PBGC under Sections 4062, 4063 or 4064 of ERISA shall exceed five percent (5%) of the Consolidated Effective Tangible Effective Net Worth; (p) Any Change of Control occurs; 66 (q) Any of the Loan Documents fails to be in full force and effect for any reason, or Bank fails to have a perfected, first priority Lien in and upon all of the collateral assigned or pledged to Bank thereunder, or a breach, default or an event of default occurs under any Loan Document; or (r) Any other Material Adverse Effect occurs. 8.2 Remedies. Upon the occurrence of any Event of Default described in Section 8.1(g) or 8.1(h), Bank's obligation hereunder to make Loans to Borrowers and/or Bank's to issue Letters of Credit shall immediately terminate and the Obligations shall become immediately due and payable without any election or action on the part of Bank, without presentment, demand, protest or notice of any kind, all of which each Borrower hereby expressly waives. Upon the occurrence and continuance of any other Event of Default, either or both of the following actions may be taken: (i) Bank may without notice of its election and without demand, immediately terminate the Revolving Credit Commitment, whereupon Bank's obligation to make Loans to Borrowers and/or to issue Letters of Credit shall immediately cease; and (ii) Bank may, without notice of its election and without demand, declare the Obligations to be due and payable, whereupon the Obligations shall become immediately due and payable, without presentment, demand, protest or notice of any kind, all of which each Borrower hereby expressly waives. 8.3 Setoff. During the continuance of an Event of Default, Bank is hereby authorized at any time and from time to time, without notice to Borrowers (any such notice being expressly waived by each Borrower), to set off and apply any and all deposits (general or special, time or demand, provisional or final), at any time held and other indebtedness at any time owing by Bank to or for the credit or the account of Borrowers, against any and all of the Obligations owing to Bank, irrespective of whether Bank shall have made any demand under this Agreement or the Loan Documents, and although the Obligations may be unmatured. Bank agrees promptly to notify Borrowers after any such setoff and application, provided that the failure to give such notice shall not affect the validity of such setoff and application. 8.4 Appointment of Receiver or Trustee. Borrowers hereby irrevocably agree that Bank, has the right under this Agreement, upon the occurrence of an Event of Default, to seek the appointment of a receiver, trustee or similar official over Borrowers to effect the transactions contemplated by this Agreement, and that Bank is entitled to seek such relief. Borrowers hereby irrevocably agree not to object to such appointment on any grounds. 8.5 Remedies Cumulative. 67 The rights and remedies of Bank herein and in the Loan Documents are cumulative, and are not exclusive of any other rights, powers, privileges, or remedies, now or hereafter existing, at law, in equity or otherwise. ARTICLE IX TAXES 9.1 Taxes on Payments. All payments in respect of the Obligations shall be made free and clear of and without any deduction or withholding for or on account of any present and future taxes, levies, imposts, deductions, charges, withholdings, assessments or governmental charges, and all liabilities with respect thereto, imposed by the United States of America, any foreign government, or any political subdivision or taxing authority thereof or therein, excluding any taxes imposed on Bank under the Internal Revenue Code or similar state and local laws and determined by such Bank's net income, and any franchise taxes imposed on Bank by any state (or any political subdivision thereof) (all such non-excluded taxes, levies, imposts, deductions, charges, withholdings, assessments, charges and liabilities being hereinafter referred to as "Taxes"). If any Taxes are imposed and required by law to be deducted or withheld from any amount payable to Bank, then Borrowers shall (i) increase the amount of such payment so that Bank will receive a net amount (after deduction of all Taxes) equal to the amount due hereunder, and (ii) pay such Taxes to the appropriate taxing authority for the account of Bank prior to the date on which penalties attach thereto or interest accrues thereon; provided, however, if any such penalties or interest shall become due, Borrowers shall make prompt payment thereof to the appropriate taxing authority. 9.2 Indemnification For Taxes. Borrowers shall indemnify Bank for the full amount of Taxes (including penalties, interest, expenses and Taxes arising from or with respect to any indemnification payment) arising therefrom or with respect thereto, whether or not the Taxes were correctly or legally asserted. This indemnification shall be made on demand. If Borrowers make a payment under Section 9.1 or this Section 9.2 for account of Bank and Bank reasonably determines that it has received or been granted a credit against or relief or remission for, or repayment of, any Tax paid or payable by it in respect of or calculated with reference to the deduction or withholding giving rise to such payment, Bank shall, to the extent that it can do so without prejudice to the retention of the amount of such credit, relief, remission or repayment, pay to Borrower such amount as Bank shall have reasonably determined to be attributable to such deduction or withholding. The amount paid by Bank to Borrowers pursuant to the immediately preceding sentence shall not exceed: (x) in the case of a refund of cash, the amount of cash refunded to Bank with respect to such Tax; or (y) in the case of a refund taking the form of a credit against Tax, the economic benefit to Bank with respect to the amount received as credit with respect to such Tax. Borrowers further agree promptly to return to Bank the amount of any credit or refund actually paid to Borrowers by Bank if Bank is required to repay it. 9.3 Evidence of Payment. 68 Within thirty (30) days after the date of payment of any Taxes, Borrower shall furnish to Bank the original or a certified copy of a receipt evidencing payment thereof. If no Taxes are payable in respect of any payment due hereunder or under the Notes, Borrowers shall furnish to Bank a certificate from each appropriate taxing authority, or an opinion of counsel acceptable to Bank, in either case stating that such payment is exempt from or not subject to Taxes. ARTICLE X MISCELLANEOUS 10.1 Notices. All notices, requests and other communications to any party hereunder shall be in writing (including facsimile transmission or similar writing) and shall be given to such party at its address or facsimile number set forth on the signature pages hereof or such other address or facsimile number as such party may hereafter specify by notice to the other party in accordance with this Section 10.1. Each such notice, request or other communication shall be deemed given on the second (2nd) business day after mailing; provided that actual notice, however and from whomever given or received, shall always be effective on receipt; provided further that notices to Bank pursuant to Article II and Article III shall not be effective until received by a Responsible Officer of Bank; provided further that notices sent by Bank in connection with Bank's exercise of its enforcement rights against any of its collateral shall be deemed given when deposited in the mail or personally delivered, or, where permitted by law, transmitted by facsimile. 10.2 No Waivers. No failure or delay by Bank in exercising any right, power or privilege hereunder or under any Loan Document shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. 10.3 Expenses; Documentary Taxes; Indemnification. (a) Borrowers shall pay all Expenses on demand. (b) Borrowers shall pay all and indemnify Bank against any and all transfer taxes, documentary taxes, assessments, or charges made by any Governmental Authority and imposed by reason of the execution and delivery of this Agreement, any of the Loan Documents, or any other document, instrument or agreement entered into in connection herewith. (c) Each Borrower shall and hereby agrees to indemnify, protect, defend and hold harmless Bank and their respective directors, officers, Banks, employees and attorneys (collectively, the "Indemnified Persons" and individually, an "Indemnified Person") from and against (i) any and all losses, claims, damages, liabilities, deficiencies, judgments, costs and expenses (including attorneys' fees and attorneys' fees incurred pursuant to proceedings arising under the Bankruptcy Code) incurred by any Indemnified Person (except to the extent that it is finally 69 judicially determined to have resulted from the gross negligence or willful misconduct of any Indemnified Person) arising out of or by reason of any litigations, investigations, claims or proceedings (whether administrative, judicial or otherwise), including discovery, whether or not Bank is designated a party thereto, which arise out of or are in any way related to (1) this Agreement, the Loan Documents or the transactions contemplated hereby or thereby, (2) any actual or proposed use by Borrowers of the proceeds of the Loans, (3) Bank's entering into this Agreement, the Loan Documents or any other agreements and documents relating hereto, or (4) the Acquisition; (ii) any such losses, claims, damages, liabilities, deficiencies, judgments, costs and expenses arising out of or by reason of the use, generation, manufacture, production, storage, release, threatened release, discharge, disposal or presence on, under or about any Borrower's operations or property or property leased by any Borrower of any material, substance or waste which is or becomes designated as Hazardous Materials; and (iii) any such losses, claims, damages, liabilities, deficiencies, judgments, costs and expenses incurred in connection with any remedial or other action taken by any Borrower or Bank in connection with compliance by any Borrower with any federal, state or local environmental laws, acts, rules, regulations, orders, directions, ordinances, criteria or guidelines (except to the extent that it is finally judicially determined to have resulted from the gross negligence or willful misconduct of any Indemnified Person). If and to the extent that the obligations of Borrowers hereunder are unenforceable for any reason, Borrowers hereby agree to make the maximum contribution to the payment and satisfaction of such obligations to Bank which is permissible under applicable law. (d) Borrowers' obligations under this Section 10.3 and under Section 9.2 shall survive any termination of this Agreement and the Loan Documents and the payment in full of the Obligations, and are in addition to, and not in substitution of, any other of its obligations set forth in this Agreement. 10.4 Amendments and Waivers. Neither this Agreement nor any Loan Document, nor any terms hereof or thereof may be amended, supplemented or modified except in accordance with the provisions of this Section 10.4. Bank may from time to time, (a) enter into with Borrowers or any other Person written amendments, supplements or modifications hereto and to the Loan Documents or (b) waive, on such terms and conditions as Bank may specify in such instrument, any of the requirements of this Agreement or the Loan Documents or any Event Default or Unmatured Event of Default and its consequences, if, but only if, such amendment, supplement, modification or waiver is in writing and is signed by the party asserted to be bound thereby, and then such amendment, supplement, modification or waiver shall be effective only in the specific instance and specific purpose for which given. Any such waiver and any such amendment, supplement or modification shall be binding upon Borrower, Bank and all future holders of the Loans. In the case of any waiver, Borrower and Bank shall be restored to their former positions and rights hereunder and under the Loan Documents, and any Event of Default or Unmatured Event of Default waived shall be deemed to be cured and not continuing; no such waiver shall extend to any subsequent or other Event of Default or Unmatured Event of Default or impair any right consequent thereon. 70 Borrowers may, from time to time, prospectively amend any Schedule hereto or to any Loan Document. No such amendment shall be evidence, in and of itself, that the representations and warranties in the corresponding section of the applicable agreement previously made are no longer true and correct in all material respects, nor shall any such amendment cure any Event of Default caused by a misrepresentation previously made. 10.5 Successors and Assigns; Participations; Disclosure. (a) This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that Borrowers may not assign or transfer any of its rights or obligations under this Agreement without the prior written consent of all Bank's and any such prohibited assignment or transfer by Borrowers shall be void. (b) Bank may make, carry or transfer the Loans at, to or for the account of, any of its branch offices or the office of an Affiliate of Bank or to any Federal Reserve Bank, all without Borrowers' consent. (c) Bank may, at its own expense, assign to one or more banks or other Eligible Assignees all or a portion of its rights (including voting rights) and obligations under this Agreement and the Loan Documents. In the event of any such assignment by Bank pursuant to this Section 10.5(c), Bank's obligations under this Agreement arising after the effective date of such assignment shall be released and concurrently therewith, transferred to and assumed by Bank's assignee to the extent provided for in the document evidencing such assignment, and Bank shall give prompt notice of such assignment to Borrowers. The provisions of this Section 10.5 relate only to absolute assignments (whether or not arising as the result of foreclosure of a security interest) and that such provisions do not prohibit assignments creating security interests, including, without limitation, any pledge or assignment by Bank of any Loan or the Note to any Federal Reserve Bank in accordance with applicable law. (d) Bank may at any time sell to one or more banks or other financial institutions (each a "Participant") participating interests in the Loans, the Letters of Credit and in any other interest of Bank hereunder. In the event of any such sale by Bank of a participating interest to a Participant, Bank's obligations under this Agreement shall remain unchanged, Bank shall remain solely responsible for the performance thereof, and Borrowers shall continue to deal solely and directly with Bank in connection with Bank's rights and obligations under this Agreement. Each Borrower agrees that each Participant shall, to the extent provided in its participation agreement, be entitled to the benefits of Article IX with respect to its participating interest. (e) Each Borrower authorizes Bank to disclose to any assignee under Section 10.5(c) or any Participant (either, a "Transferee") and any prospective Transferee any and all financial information in Bank's possession concerning Borrowers which has been delivered to Bank by Borrowers pursuant to this Agreement or which has been delivered to Bank by Borrowers in connection with Bank's credit evaluation prior to entering into this Agreement; provided that such Transferee or prospective Transferee has first agreed to be bound by the provisions of Section 11.6. 71 (f) Each Borrower agrees that Bank may use Borrower's and the Subsidiaries' name(s) in advertising and promotional materials, and in conjunction therewith, Bank may disclose the amount of the Loans and the purpose thereof. 10.6 Confidentiality. Bank agrees to keep confidential any information relating to Borrower and the Subsidiaries previously delivered or delivered from time to time by Borrower hereunder; provided that nothing herein shall prevent Bank from disclosing such information: (a) to any Affiliate of Bank or any actual or potential Transferee that agrees to be bound by this Section 10.6, (b) upon order, subpoena, or other process of any court or administrative agency, (c) upon the request or demand of any regulatory agency or authority having jurisdiction over Bank, (d) which has been publicly disclosed (other than by Bank or any Transferee unless such disclosure was otherwise permitted hereunder), (e) which has been obtained from any Person that is not a party hereto or an Affiliate of any such party, (f) in connection with the exercise of any remedy, or the resolution of any dispute, hereunder or under any Loan Document, (g) to the legal counsel or certified public accountants for Bank or (h) as otherwise permitted by Borrower or as expressly contemplated by this Agreement. 10.7 Counterparts; Effectiveness; Integration. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement shall be effective when executed by each of the parties hereto. This Agreement constitutes the entire agreement and understanding among the parties hereto and supersedes any and all prior agreements and understandings, oral or written, relating to the subject matter hereof. 10.8 Severability. The provisions of this Agreement are severable. The invalidity, in whole or in part, of any provision of this Agreement shall not affect the validity or enforceability of any other of its provisions. If one or more provisions hereof shall be declared invalid or unenforceable, the remaining provisions shall remain in full force and effect and shall be construed in the broadest possible manner to effectuate the purposes hereof. 10.9 Knowledge. For purposes of this Agreement, an individual will be deemed to have knowledge of a particular fact or other matter if: (a) such individual is actually aware of such fact or other matter; or (b) a prudent individual could be expected to discover or otherwise become aware of such fact or other matter in the course of conducting a reasonably comprehensive investigation concerning the existence of such fact or other matter. Each Borrower will be deemed to have knowledge of a particular fact or other matter if the chief executive officer, chief operating officer, chief financial officer, controller, treasurer, president, senior vice president or other such executive officer of such Borrower has, or at any time had, knowledge of such fact or other matter. Parent will be deemed to 72 have knowledge of a partial fact or other matter if any other Borrower has knowledge of such fact or other matter. 10.10 Additional Waivers. (a) Each Borrower agrees that checks and other instruments received by Bank in payment or on account of the Obligations constitute only conditional payment until such items are actually paid to Bank and each Borrower waives the right to direct the application of any and all payments at any time or times hereafter received by Bank on account of the Obligations, and each Borrower agrees that Bank shall have the continuing exclusive right to apply and reapply such payments in any manner as Bank may deem advisable, notwithstanding any entry by Bank upon its books. (b) Each Borrower waives demand, protest, notice of protest, notice of default or dishonor, notice of payment and nonpayment, notice of any default, nonpayment at maturity, release, compromise, settlement, extension or renewal of any or all commercial paper, accounts, documents, instruments, chattel paper, and guarantees at any time held by Bank on which such Borrower may in any way be liable. (c) Bank shall not in any way or manner be liable or responsible for (a) the safekeeping of the Inventory or Equipment; (b) any loss or damage thereto occurring or arising in any manner or fashion from any cause; (c) any diminution in the value thereof; or (d) any act or default of any carrier, warehouseman, bailee, forwarding agency or other person whomsoever. All risk of loss, damage or destruction of Inventory shall be borne by Borrowers. (d) Each Borrower waives the right and the right to assert a confidential relationship, if any, it may have with any accountant, accounting firm and/or service bureau or consultant in connection with any information requested by Bank pursuant to or in accordance with this Agreement, and agrees that Bank may contact directly any such accountants, accounting firm and/or service bureau or consultant in order to obtain such information. 10.11 Destruction Of Borrowers' Documents. Any documents, schedules, invoices or other papers delivered to Bank may be destroyed or otherwise disposed of by Bank six (6) months after they are delivered to or received by Bank, unless Parent requests, in writing, the return of the said documents, schedules, invoices or other papers and makes arrangements, at Borrowers' expense, for their return. 10.12 CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER. (a) THE VALIDITY OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS (UNLESS EXPRESSLY PROVIDED TO THE CONTRARY IN ANOTHER LOAN DOCUMENT IN RESPECT OF SUCH OTHER LOAN DOCUMENT), THE CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT HEREOF AND THEREOF, AND THE RIGHTS OF THE PARTIES HERETO AND THERETO WITH RESPECT TO ALL MATTERS ARISING HEREUNDER OR THEREUNDER OR 73 RELATED HERETO OR THERETO 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 AGREEMENT AND THE OTHER LOAN DOCUMENTS 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 BANK'S OPTION, IN THE COURTS OF ANY JURISDICTION WHERE BANK ELECTS TO BRING SUCH ACTION OR WHERE SUCH COLLATERAL OR OTHER PROPERTY MAY BE FOUND. BORROWERS AND BANK WAIVE, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, ANY RIGHT EACH MAY HAVE TO ASSERT THE DOCTRINE OF FORUM NON CONVENIENS OR TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION 10.12. (c) THE BORROWERS AND BANK HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREIN OR THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. THE BORROWERS AND BANK 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. 10.13 Amended and Restated Agreement. This Agreement amends and restates in its entirety, and continues the Obligations incurred under, the Prior Agreement. ARTICLE XI JOINT AND SEVERAL LIABILITY; SINGLE LOAN ACCOUNT 11.1 Joint and Several Liability. Each Borrower agrees that it is jointly and severally, directly and primarily liable to Bank for payment, performance and satisfaction in full of the Obligations and that such liability is independent of the duties, obligations, and liabilities of the other Borrower. Bank may bring a separate action or 74 actions on each, any, or all of the Obligations against any Borrower, whether action is brought against the other Borrowers or whether the other Borrowers are joined in such action. In the event that any Borrower fails to make any payment of any obligation on or before the due date thereof, the other Borrowers immediately shall cause such payment to be made or each of such obligations to be made or each of such Obligations to be performed, kept, observed, or fulfilled. 11.2 Primary Obligation; Waiver of Marshalling. This Agreement and the Loan Documents to which Borrowers are a party are a primary and original obligation of each Borrower, are not the creation of a surety relationship, and are an absolute, unconditional, and continuing promise of payment and performance which shall remain in full force and effect without respect to future changes in conditions, including any change of law or any invalidity or irregularity with respect to this Agreement or the Loan Documents to which Borrowers are a party. Each Borrower agrees that its liability under this Agreement and the Loan Documents which Borrowers are a party shall be immediate and shall not be contingent upon the exercise or enforcement by Bank of whatever remedies they may have against the other Borrowers, or the enforcement of any lien or realization upon any security Bank may at any time possess. Each Borrower consents and agrees that Bank shall be under no obligation to marshal any assets of any Borrower against or in payment of any or all of the Obligations. 11.3 Financial Condition of Borrowers. Each Borrower acknowledges that it is presently informed as to the financial condition of the other Borrowers and of all other circumstances which a diligent inquiry would reveal and which bear upon the risk of nonpayment of the Obligations. Each Borrower hereby covenants that it will continue to keep informed as to the financial condition of the other Borrowers, the status of the other Borrowers and of all circumstances which bear upon the risk of nonpayment. Absent a written request from any Borrower to Bank for information, each Borrower hereby waives any and all rights it may have to require Bank to disclose to such Borrower any information which Bank may now or hereafter acquire concerning the condition or circumstances of the other Borrowers. 11.4 Continuing Liability. The liability of each Borrower under this Agreement and the Loan Documents to which Borrowers are a party includes Obligations arising under successive transactions continuing, compromising, extending, increasing, modifying, releasing, or renewing the Obligations, changing the interest rate, payment terms, or other terms and conditions thereof, or creating new or additional Obligations after prior Obligations have been satisfied in whole or in part. To the maximum extent permitted by law, each Borrower hereby waives any right to revoke its liability under this Agreement and Loan Documents as to future indebtedness, and in connection therewith, each Borrower hereby waives any rights it may have under Section 2815 of the California Civil Code. 11.5 Additional Waivers. Each Borrower absolutely, unconditionally, knowingly, and expressly waives: 75 (a) (1) notice of acceptance hereof; (2) notice of any Loans or other financial accommodations made or extended under this Agreement and the Loan Documents to which Borrowers are a party or the creation or existence of any Obligations; (3) notice of the amount of the Obligations, subject, however, to each Borrower's right to make inquiry of Bank to ascertain the amount of the Obligations at any reasonable time; (4) notice of any adverse change in the financial condition of the other Borrowers or of any other fact that might increase such Borrower's risk hereunder; (5) notice of presentment for payment, demand, protest, and notice thereof as to any instruments among the Loan Documents to which Borrowers are a party; (6) notice of any Unmatured Event of Default or Event of Default; and (7) all other notices (except if such notice is specifically required to be given to Borrowers hereunder or under the Loan Documents to which Borrowers are a party) and demands to which such Borrower might otherwise be entitled. (b) its right, under Sections 2845 or 2850 of the California Civil Code, or otherwise, to require Bank to institute suit against, or to exhaust any rights and remedies which Bank has or may have against, the other Borrowers or any third party, or against any collateral for the Obligations provided by the other Borrowers, or any third party. Each Borrower further waives any defense arising by reason of any disability or other defense (other than the defense that the Obligations shall have been fully and finally performed and indefeasibly paid) of the other Borrowers or by reason of the cessation from any cause whatsoever of the liability of the other Borrowers in respect thereof. (c) (1) any rights to assert against Bank any defense (legal and equitable), set-off, counterclaim, or claim which such Borrower may now or at any time hereafter have against the other Borrowers or any other party liable to Bank; (2) any defense, set-off, counterclaim, or claim, of any kind or nature, arising directly or indirectly from the present or future lack of perfection, sufficiency, validity, or enforceability of the Obligations or any security therefor; (3) any defense such Borrower has to performance hereunder, and any right such Borrower has to be exonerate, provided by Sections 2819, 2822, or 2825 of the California Civil Code, or otherwise, arising by reason of: the impairment or suspension of Bank's rights or remedies against the other Borrowers; the alteration by Bank of the Obligations; any discharge of the other Borrowers' obligations to Bank by operation of law as a result of Bank's intervention or omission; or the acceptance by Bank of anything in partial satisfaction of the Obligations; and (4) the benefit of any statute of limitations affecting such Borrower's liability hereunder or the enforcement thereof, and any act which shall defer or delay the operation of any statute of limitations applicable to the Obligations shall similarly operate to defer or delay the operation of such statute of limitations applicable to such Borrower's liability hereunder. (d) Each Borrower absolutely, unconditionally, knowingly, and expressly waives any defense arising by reason of or deriving from (i) any claim or defense based upon an election of remedies by Bank including any defense based upon an election of remedies by Bank under the provisions of Sections 580a, 580b, 580d, and 726 of the California Code of Civil Procedure or any similar law of California or any other jurisdiction; or (ii) any election by Bank under Section 1111(b) of the Bankruptcy Code to limit the amount of, or any collateral securing, its claim against the Borrowers. Pursuant to California Civil Code Section 2856(b): 76 (i) Each Borrower waives all rights and defenses arising out of an election of remedies by the creditor, even though that election of remedies, such as a nonjudicial foreclosure with respect to security for a guaranteed obligation, has destroyed such Borrower's rights of subrogation and reimbursement against the other Borrowers by the operation of Section 580(d) of the California Code of Civil Procedure or otherwise. (ii) Each Borrower waives all rights and defenses that such Borrower may have because the Obligations are secured by real property. This means, among other things: (1) Bank may collect from such Borrower without first foreclosing on any real or personal property collateral pledged by the other Borrowers; and (2) if Bank forecloses on any real property collateral pledged by the other Borrowers: (A) the amount of the Obligations may be reduced only by the price for which that collateral is sold at the foreclosure sale, even if the collateral is worth more than the sale price; and (B) Bank may collect from such Borrower even if Bank, by foreclosing on the real property collateral, has destroyed any right such Borrower may have to collect from the other Borrowers. This is an unconditional and irrevocable waiver of any rights and defenses each Borrower may have because the Obligations are secured by real property. These rights and defenses include, but are not limited to, any rights or defenses based upon Section 580a, 580b, 580d, or 726 of the California Code of Civil Procedure. (e) If any of the Obligations at any time are secured by a mortgage or deed of trust upon real property, Bank may elect, in its sole discretion, upon a default with respect to the Obligations, to foreclose such mortgage or deed of trust judicially or nonjudicially in any manner permitted by law, before or after enforcing this Agreement and the Loan Documents, without diminishing or affecting the liability of any Borrower hereunder except to the extent the Obligations are repaid with the proceeds of such foreclosure. Each Borrower understands that (a) by virtue of the operation of California's antideficiency law applicable to nonjudicial foreclosures, an election by Bank nonjudicially to foreclose such a mortgage or deed of trust probably would have the effect of impairing or destroying rights of subrogation, reimbursement, contribution, or indemnity of such Borrower against the other Borrowers or other guarantors or sureties, and (b) absent the waiver given by such Borrower, such an election would prevent Bank from enforcing this Agreement and the Loan Documents to which Borrowers are a party against such Borrower. Understanding the foregoing, and understanding that such Borrower is hereby relinquishing a defense to the enforceability of this Agreement and the Loan Documents to which Borrowers are a party, such Borrower hereby waives any right to assert against Bank any defense to the enforcement of this Agreement and the Loan Documents to which Borrowers are a party, whether denominated "estoppel" or otherwise, based on or arising from an election by Bank nonjudicially to foreclose any such mortgage or deed of trust. Each Borrower understands that the effect of the foregoing waiver may be that each Borrower may have liability hereunder for amounts with respect to which such Borrower may be left without rights of subrogation, reimbursement, contribution, or indemnity against the other Borrower or other guarantors or sureties. Each Borrower also agrees that the "fair market value" provisions of Section 580a of the California Code of Civil Procedure shall have no applicability with respect to the determination of such Borrower's liability under this Agreement and the Loan Documents to which Borrowers are a party. 77 (f) Each Borrower hereby absolutely, unconditionally, knowingly, and expressly waives: (i) any right of subrogation such Borrower has or may have as against the other Borrowers with respect to the Obligations; (ii) any right to proceed against the other Borrowers or any other Person, now or hereafter, for contribution, indemnity, reimbursement, or any other suretyship rights and claims, whether direct or indirect, liquidated or contingent, whether arising under express or implied contract or by operation of law, which such Borrower may now have or hereafter have as against the other Borrowers with respect to the Obligations; and (iii) any right to proceed or seek recourse against or with respect to any property or asset of the other Borrowers. (g) WITHOUT LIMITING THE GENERALITY OF ANY OTHER WAIVER OR OTHER PROVISION SET FORTH IN THIS AGREEMENT, EACH BORROWER HEREBY ABSOLUTELY, KNOWINGLY, UNCONDITIONALLY, AND EXPRESSLY WAIVES AND AGREES NOT TO ASSERT ANY AND ALL BENEFITS OR DEFENSES ARISING DIRECTLY OR INDIRECTLY UNDER ANY ONE OR MORE OF CALIFORNIA CIVIL CODE SECTIONS 2799, 2808, 2809, 2810, 2815, 2819, 2820, 2821, 2822, 2825, 2839, 2845, 2848, 2849, AND 2850, CALIFORNIA CODE OF CIVIL PROCEDURE SECTIONS 580a, 580b, 580c, 580d, AND 726, CALIFORNIA UNIFORM COMMERCIAL CODE SECTIONS 3116, 3118, 3119, 3419, AND 3605, AND CHAPTER 2 OF TITLE 14 OF PART 4 OF DIVISION 3 OF THE CALIFORNIA CIVIL CODE. 11.6 Settlement or Releases. Each Borrower consents and agrees that without notice to or by such Borrower, and without affecting or impairing the liability of such Borrower hereunder, Bank may, by action or inaction: (a) compromise, settle, extend the duration or the time for the payment of, or discharge the performance of, or may refuse to or otherwise not enforce this Agreement and the Loan Documents, or any part thereof, with respect to the other Borrowers or any Guarantor; (b) release the other Borrowers or any Guarantor or grant other indulgences to the other Borrowers or any Guarantor in respect thereof; or (c) release or substitute any Guarantor, if any, of the Obligations, or enforce, exchange, release, or waive any security for the Obligations or any other guaranty of the Obligations, or any portion thereof. 11.7 No Election. Bank shall have the right to seek recourse against each Borrower to the fullest extent provided for herein, and no election by Bank to proceed in one form of action or proceeding, or against any party, or on any obligation, shall constitute a waiver of Bank's right to proceed in any other form of action or proceeding or against other parties unless Bank has expressly waived such right in writing. Specifically, but without limiting the generality of the foregoing, no action or proceeding by Bank under this Agreement and the Loan Documents shall serve to diminish the liability of any Borrower under this Agreement and the Loan Documents to which Borrowers are a party except to the extent 78 that Bank finally and unconditionally shall have realized indefeasible payment by such action or proceeding. 11.8 Indefeasible Payment. The Obligations shall not be considered indefeasibly paid unless and until all payments to Bank are no longer subject to any right on the part of any Person, including any Borrower, any Borrower as a debtor in possession, or any trustee (whether appointed pursuant to the Bankruptcy Code, or otherwise) of any Borrower's Assets to invalidate or set aside such payments or to seek to recoup the amount of such payments or any portion thereof, or to declare same to be fraudulent or preferential. Upon such full and final performance and indefeasible payment of the Obligations, Bank shall have no obligation whatsoever to transfer or assign its interest in this Agreement and the Loan Documents to any Borrower. In the event that, for any reason, any portion of such payments to Bank is set aside or restored, whether voluntarily or involuntarily, after the making thereof, then the obligation intended to be satisfied thereby shall be revived and continued in full force and effect as if said payment or payments had not been made, and any Borrower shall be liable for the full amount Bank is required to repay plus any and all costs and expenses (including attorneys' fees and attorneys' fees incurred in proceedings brought under the Bankruptcy Code) paid by Bank in connection therewith. 11.9 Single Loan Account. At the request of Borrowers to facilitate and expedite the administration and accounting processes and procedures of the Loans and Borrowings, Bank have agreed, in lieu of maintaining separate loan accounts on Bank's books in the name of each of the Borrowers, that Bank may maintain a single loan account under the name of all of both Borrowers (the "Loan Account"). All Loans shall be made jointly and severally to Borrowers and shall be charged to the Loan Account, together with all interest and other charges as permitted under and pursuant to this Agreement. The Loan Account shall be credited with all repayments of Obligations received by Bank, on behalf of Borrowers, from either Borrower pursuant to the terms of this Agreement. 11.10 Apportionment of Proceeds of Loans. Each Borrower expressly agrees and acknowledges that Bank shall have no responsibility to inquire into the correctness of the apportionment or allocation of or any disposition by any of Borrowers of (a) the Loans or any Borrowings, or (b) any of the expenses and other items charged to the Loan Account pursuant to this Agreement. The Loans and all such Borrowings and such expenses and other item shall be made for the collective, joint, and several account of Borrowers and shall be charged to the Loan Account. 11.11 Bank Held Harmless. Each Borrower agrees and acknowledges that the administration of this Agreement on a combined basis, as set forth herein, is being done as an accommodation to Borrowers and at their request, and that Bank shall incur no liability to Borrowers as a result thereof. To induce Bank to do so, and in consideration thereof, each Borrower hereby agrees to indemnify and hold Bank harmless from and 79 against any and all liability, expense, loss, damage, claim of damage, or injury, made against Bank by Borrowers or by any other person or entity, arising from or incurred by reason of such administration of the Agreement. 11.12 Borrowers' Integrated Operations. Each Borrower represents and warrants to Bank that the collective administration of the Loans is being undertaken by Bank pursuant to this Agreement because Borrowers are integrated in their operation and administration and require financing on a basis permitting the availability of credit from time to time to Borrowers. Each Borrower will derive benefit, directly and indirectly, from such collective administration and credit availability because the successful operation of each Borrower is enhanced by the continued successful performance of the integrated group. * * * [remainder of this page intentionally left blank] * * * 80 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. DECKERS OUTDOOR CORPORATION By /s/ Scott Ash ---------------------------------------- M. Scott Ash, Chief Financial Officer Address for notices: Deckers Outdoor Corporation 495-A South Fairview Avenue Goleta, California 93117 Attn: Chief Financial Officer Telephone: (805) 967-7611, Ext. 185 Facsimile: (805) 967-7862 UGG HOLDINGS, INC. By /s/ Scott Ash ---------------------------------------- M. Scott Ash, Chief Financial Officer Address for notices: UGG HOLDINGS, INC. 495-A South Fairview Avenue Goleta, California 93117 Attn: Chief Financial Officer Telephone: (805) 967-7611, Ext. 185 Facsimile: (805) 967-7862 81 COMERICA BANK -- CALIFORNIA By /s/ Jason Brown ---------------------------------------- Jason D. Brown, Vice President Address for notices and Lending Office: Comerica Bank -- California 15303 Ventura Boulevard Sherman Oaks, California 91403 Attn: Jason D. Brown Telephone: (818) 379-2926 Facsimile: (818) 379-2902 82 EX-21.1 9 v88494exv21w1.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 10 v88494exv23w1.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 17, 2003, with respect to the consolidated balance sheets of Deckers Outdoor Corporation and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of operations, stockholders' equity and other comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2002, and the related financial statement schedule, which report appears in the December 31, 2002 annual report on Form 10-K of Deckers Outdoor Corporation. Our report refers to the implementation of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, on January 1, 2002. /s/ KPMG LLP - ------------ Los Angeles, California March 27, 2003 EX-99.1 11 v88494exv99w1.txt EXHIBIT 99.1 EXHIBIT 99.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, DOUGLAS B. OTTO, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report of DECKERS OUTDOOR CORPORATION on Form 10-K for the annual period ended December 31, 2002 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such report fairly presents in all material respects the financial condition and results of operations of DECKERS OUTDOOR CORPORATION as of, and for, the periods presented in such report. Date: March 31, 2003 /s/ DOUGLAS B. OTTO ------------------------------------ DOUGLAS B. OTTO, Chief Executive Officer of Deckers Outdoor Corporation A signed original of this written statement required by Section 906 has been provided to Deckers Outdoor Corporation and will be retained by Deckers Outdoor Corporation and furnished to the Securities and Exchange Commission or its staff upon request. EX-99.2 12 v88494exv99w2.txt EXHIBIT 99.2 EXHIBIT 99.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, M. SCOTT ASH, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report of DECKERS OUTDOOR CORPORATION on Form 10-K for the annual period ended December 31, 2002 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such report fairly presents in all material respects the financial condition and results of operations of DECKERS OUTDOOR CORPORATION as of and for, the periods presented in such report. Date: March 31, 2003 /s/ M. SCOTT ASH ------------------------------------ M. SCOTT ASH, Chief Financial Officer of Deckers Outdoor Corporation A signed original of this written statement required by Section 906 has been provided to Deckers Outdoor Corporation and will be retained by Deckers Outdoor Corporation 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


PART I
	Item 2.Properties
	Item 3.Legal Proceedings
	Item 4.Submission of Matters to a Vote of Security Holders
PART II
	Item 5.Market for Registrant’s Common Equity and Related Stockholder Matters
	Item 6.Selected Financial Data
	Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations
	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
		CONSOLIDATED BALANCE SHEETS
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.Controls and Procedures
	Item 15.Exhibits, Financial Statement Schedules and Reports on Form 8-K
SIGNATURES
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
Exhibit 10.17
Exhibit 10.20
Exhibit 10.21
Exhibit 10.22
Exhibit 10.23
Exhibit 10.24
Exhibit 21.1
Exhibit 23.1
Exhibit 99.1
Exhibit 99.2



	2002				2001

	High		Low		High		Low

First Quarter	$	6.30	$	3.99	$	5.13	$	3.38
Second Quarter		5.79		4.25		4.80		3.41
Third Quarter		5.25		3.56		4.90		3.23
Fourth Quarter		4.53		2.56		4.75		3.41



		Years ended December 31

		2002			2001			2000		1999		1998


		(In thousands, except per share data)
Income Statement Data
Net sales		$	99,107			91,461			113,738		111,099		103,534
Cost of sales			57,577			52,903			63,540		66,051		67,268

	Gross profit		41,530			38,558			50,198		45,048		36,266
Selling, general and administrative expenses			34,954			34,040			37,568		38,298		39,064
Litigation Charges			3,228			2,180			—		—		—

	Income (loss) from operations		3,348			2,338			12,630		6,750		(2,798	)
Other expense (income)			504			(473	)		295		1,508		1,320

	Income (loss) before income taxes (benefit) and cumulative effect of accounting change		2,844			2,811			12,335		5,242		(4,118	)
Income taxes (benefit)			1,224			1,185			5,320		2,358		(1,211	)

	Income (loss) before cumulative effect of accounting change		1,620			1,626			7,015		2,884		(2,907	)
Cumulative effect of accounting change, net of $843,000 income tax benefit			(8,973	)		—			—		—		—

	Net income (loss)	$	(7,353	)		1,626			7,015		2,884		(2,907	)

Basic income (loss) per common share before cumulative effect of accounting change		$	0.17			0.18			0.77		0.33		(0.34	)
Cumulative effect of accounting change			(0.96	)		—			—		—		—

Basic net income (loss) per common share		$	(0.79	)		0.18			0.77		0.33		(0.34	)

Average basic common shares			9,328			9,247			9,093		8,834		8,632

Diluted income (loss) per common share before cumulative effect of accounting change		$	0.17			0.17			0.74		0.32		(0.34	)
Cumulative effect of accounting change			(0.92	)		—			—		—		—

Diluted net income (loss) per common share		$	(0.75	)		0.17			0.74		0.32		(0.34	)

Average diluted common shares			9,806			9,661			9,476		8,981		8,632


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


		Page

PART I
Item 1.	Business		3
Item 2.	Properties		18
Item 3.	Legal Proceedings		18
Item 4.	Submission of Matters to a Vote of Security Holders		19
PART II
Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters		20
Item 6.	Selected Financial Data		21
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		22
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk		33
Item 8.	Financial Statements and Supplementary Data		33
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		33
PART III
Item 10.	Directors and Executive Officers of the Registrant		62
Item 11.	Executive Compensation		62
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		62
Item 13.	Certain Relationships and Related Transactions		62
Item 14.	Controls and Procedures		62
Item 15.	Exhibits, Financial Statement Schedules and Reports on Form 8-K		62
Signatures			65
Certifications			66



		At December 31

		2002		2001		2000		1999		1998


		(In thousands)
Balance Sheet Data
Current assets		$	44,561		60,580		53,650		49,044		59,309
Current liabilities			22,108		19,193		13,168		10,386		17,174
	Total assets		122,412		85,884		77,712		73,482		84,373
Long-term debt, less current installments			35,077		159		449		6,276		15,199
	Total stockholders’ equity		65,227		66,532		64,095		56,820		52,000


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


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



		Payments due by period

				Less than						More than
Contractual Obligations		Total		1 year		1-3 years		3-5 years		5 years

Long-Term Debt Obligations		$	39,028,000		3,951,000		7,983,000		1,500,000		25,594,000
Operating Lease Obligations			2,981,000		972,000		1,379,000		630,000		—

	Total	$	42,009,000		4,923,000		9,362,000		2,130,000		25,594,000


	Page

Independent Auditors’ Report		35
Consolidated Balance Sheets as of December 31, 2002 and 2001		36
Consolidated Statements of Operations for each of the years in the three-year period ended December 31, 2002		37
Consolidated Statements of Stockholders’ Equity and Other Comprehensive Income (Loss) for each of the years in the three-year period ended December 31, 2002		38
Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2002		39
Notes to Consolidated Financial Statements		40
Consolidated Financial Statement Schedule
Valuation and Qualifying Accounts		61


			2002			2001

ASSETS (NOTE 4)
Current assets:
	Cash and cash equivalents		$	3,941,000			16,689,000
	Trade accounts receivable, less allowance for doubtful accounts and sales discounts of $2,635,000 and $2,820,000 as of December 31, 2002 and 2001, respectively			20,851,000			20,395,000
	Inventories			17,067,000			18,425,000
	Prepaid expenses and other current assets			783,000			1,694,000
	Refundable income taxes (note 5)			—			995,000
	Deferred tax assets (note 5)			1,919,000			2,382,000

		Total current assets		44,561,000			60,580,000
Property and equipment, at cost, net (note 3)				3,864,000			3,857,000
Trademarks, net (notes 12 and 13)				51,152,000			—
Goodwill, net (notes 12 and 13)				17,955,000			16,597,000
Intangible assets (notes 12 and 13)				1,666,000			3,344,000
Deferred tax assets (note 5)				1,428,000			778,000
Other assets, net				1,786,000			728,000

			$	122,412,000			85,884,000

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Notes payable and current installments of long-term debt (note 4)		$	3,951,000			290,000
	Trade accounts payable			12,916,000			13,915,000
	Reserve for returns			1,255,000			1,235,000
	Accrued sales commissions			434,000			1,215,000
	Accrued payroll			1,908,000			982,000
	Other accrued expenses			912,000			1,556,000
	Income tax payable			732,000			—

		Total current liabilities		22,108,000			19,193,000

Long-term debt, less current installments (note 4)				35,077,000			159,000
Commitments and contingencies (note 8)
Stockholders’ equity (note 6):
	Series A preferred stock at liquidation preference, $0.01 par value. Preferred stock, 5,000,000 shares (1,375,000 Series A); issued and outstanding 1,375,000 shares at December 31, 2002			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 10,297,309 shares and outstanding 9,324,357 shares at December 31, 2001			95,000			93,000
	Additional paid-in capital			26,210,000			25,689,000
	Retained earnings			33,898,000			41,251,000
	Accumulated other comprehensive income (loss) (note 9)			(476,000	)		123,000

				65,227,000			67,156,000
	Less note receivable from stockholder/former officer			—			624,000

		Total stockholders’ equity		65,227,000			66,532,000

			$	122,412,000			85,884,000


																		Accumulated			Note receivable
		Preferred stock				Common stock						Additional						other			from			Total
												paid-in			Retained			comprehensive			stockholder/			stockholders’			Comprehensive
		Shares		Amount		Shares			Amount			capital			earnings			income			former officer			equity			income (loss)

Balance at December 31, 1999			—	$	—		9,065,005		$	91,000			24,743,000			32,610,000			—			(624,000	)		56,820,000			—
Fair value of options issued under Teva license agreement (note 7)			—		—		—			—			78,000			—			—			—			78,000			—
Common stock issued under stock incentive plan			—		—		40,671			—			118,000			—			—			—			118,000			—
Common stock issued under the employee stock purchase plan			—		—		30,301			—			64,000			—			—			—			64,000			—
Net earnings			—		—		—			—			—			7,015,000			—			—			7,015,000			7,015,000

	Total comprehensive income																										$	7,015,000

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


		2002		2001

Machinery and equipment		$	7,609,000		9,913,000
Furniture and fixtures			1,031,000		981,000
Leasehold improvements			1,087,000		561,000

			9,727,000		11,455,000
Less accumulated depreciation and amortization			5,863,000		7,598,000

	Net property and equipment	$	3,864,000		3,857,000


		Federal			State			Total

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

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

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

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

2000:
	Current	$	5,492,000			1,419,000			6,911,000
	Deferred		(1,286,000	)		(305,000	)		(1,591,000	)

		$	4,206,000			1,114,000			5,320,000


				Weighted
				average
	Shares			exercise price

Outstanding at December 31, 1999		1,141,600		$	3.68
Granted		215,500			3.28
Exercised		(21,800	)		2.23
Canceled		(56,400	)		3.37

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


		2002			2001			2000

Net sales to external customers:
	Teva wholesale	$	64,849,000			61,221,000			79,732,000
	Simple wholesale		10,159,000			10,853,000			16,328,000
	Ugg wholesale		23,491,000			19,185,000			15,310,000
	Catalog/internet		608,000			—			—
	Other		—			202,000			2,368,000

		$	99,107,000			91,461,000			113,738,000

Income from operations:
	Teva wholesale	$	12,622,000			12,407,000			19,953,000
	Simple wholesale		285,000			241,000			2,501,000
	Ugg wholesale		6,589,000			3,674,000			2,863,000
	Catalog/internet		194,000			—			—
	Other (primarily unallocated overhead)		(16,342,000	)		(13,984,000	)		(12,687,000	)

		$	3,348,000			2,338,000			12,630,000


	2002		2001

Revolving line of credit with Comerica Bank, weighted average interest rate of 3.75% at December 31, 2002 (described below)	$	4,775,000		—
Term loan with Comerica Bank, secured by all assets of the Company, interest (5.42% at December 31, 2002) at Bank’s base rate or LIBOR plus a margin, as defined, principal payment of $1,750,000 due on May 31, 2003 with equal monthly payments of $292,000 beginning June 30, 2003, with final payment due on November 25, 2004		7,000,000		—
Unsecured subordinated note, payable in quarterly principal installments of $1,500,000 beginning November 2007, interest at a rate of 16.75%, of which 12% is payable monthly and 4.75% is payable at maturity, compounded monthly, due November 2008. A prepayment penalty ranging from 4% to 5% is incurred for any portion repaid prior to November 2004		14,068,000		—
Unsecured junior subordinated 9% note payable to the seller of Teva, interest payable in annual installments at a rate of 7% through November 2008. Principal and additional interest of 2% are due in November 2008, compounded annually		13,026,000		—
Note payable for purchase of computer equipment, secured by underlying equipment, payable in quarterly installments of $74,200, including interest at a rate of 9.51% through May 2002		—		143,000
Unsecured note payable in quarterly installments of $49,200, including interest at a rate of 7.93%, due December 2003		159,000		306,000

		39,028,000		449,000
Less current installments		3,951,000		290,000

	$	35,077,000		159,000


2003		$	3,951,000
2004			7,983,000
2005			—
2006			—
2007			1,500,000
Thereafter			25,594,000

	Total	$	39,028,000


			2002		2001

Deferred tax assets:
	Uniform capitalization adjustment to inventory		$	448,000		789,000
	Bad debt and other reserves			1,580,000		1,685,000
	Amortization of intangible assets			956,000		580,000
	Depreciation of property and equipment			472,000		198,000
	Other			62,000		—

		Total gross deferred tax assets		3,518,000		3,252,000

Deferred tax liabilities:
	State taxes			171,000		84,000
	Other			—		8,000

		Total deferred tax liabilities		171,000		92,000

		Net deferred tax assets	$	3,347,000		3,160,000


Year ending December 31:

2003	$	972,000
2004		694,000
2005		685,000
2006		630,000

	$	2,981,000


		2002		2001

Total assets for reportable segments		$	110,956,000		59,428,000
Elimination of intersegment payables			29,000		10,000
Unallocated refundable income taxes and deferred tax assets			3,100,000		3,946,000
Other unallocated corporate assets			8,327,000		22,500,000

	Consolidated total assets	$	122,412,000		85,884,000



	2002

	March 31			June 30		September 30			December 31

Net sales	$	33,259,000			22,369,000		17,727,000			25,752,000
Gross profit		15,114,000			10,071,000		6,698,000			9,647,000
Income (loss) before cumulative effect of a change in accounting principle		2,162,000			642,000		(2,547,000	)		1,363,000
Cumulative effect of a change in accounting principle, net of income tax benefit		(8,973,000	)		—		—			—
Net income (loss)		(6,811,000	)		642,000		(2,547,000	)		1,363,000
Basic income (loss) per common share before cumulative effect of accounting change	$	0.23			0.07		(0.27	)		0.15
Cumulative effect of accounting change		(0.96	)		—		—			—

Basic net income (loss) per common share	$	(0.73	)		0.07		(0.27	)		0.15


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

	Net assets acquired	$	64,199,000


			2002			2001

Pro forma net sales			$	101,267,000			93,559,000
Pro forma net income before cumulative effect of a change in accounting principle				1,341,000			1,374,000
Cumulative effect of a change in accounting principle, net of tax benefit				(8,973,000	)		—

		Pro forma net income (loss)	$	(7,632,000	)		1,374,000

Basic income (loss) per share:
	Pro forma net income (loss) before cumulative effect of a change in accounting principle		$	0.14			0.15
	Cumulative effect of a change in accounting principle			(0.95	)		—

		Pro forma net income (loss)	$	(0.81	)		0.15

Diluted income (loss) per share:
	Pro forma net income before cumulative effect of a change in accounting principle		$	0.14			0.12
	Cumulative effect of a change in accounting principle			(0.91	)		—

		Pro forma net income (loss)	$	(0.77	)		0.12


	Teva		Simple			Ugg			Total

Balance as of January 1, 2002	$	680,000		2,007,000			13,910,000			16,597,000
Goodwill acquired during year		11,174,000		—			—			11,174,000
Impairment losses		—		(2,007,000	)		(7,809,000	)		(9,816,000	)

Balance as of December 31, 2002	$	11,854,000		—			6,101,000			17,955,000


		Balance at
		beginning of						Balance at
Description		year		Additions		Deductions		end of year

Year ended December 31, 2000:
	Allowance for doubtful accounts	$	1,813,000		1,994,000		1,663,000		2,144,000
	Reserve for sales discounts		290,000		1,007,000		589,000		708,000
Year ended December 31, 2001:
	Allowance for doubtful accounts		2,144,000		1,658,000		1,788,000		2,014,000
	Reserve for sales discounts		708,000		946,000		848,000		806,000
Year ended December 31, 2002:
	Allowance for doubtful accounts		2,014,000		1,785,000		1,846,000		1,953,000
	Reserve for sales discounts		806,000		713,000		837,000		682,000


Item 12.	*Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters*


Exhibit

	2.1	Certificate of Ownership and Merger Merging Deckers Corporation into Deckers Outdoor Corporation. (Exhibit 2.1 to the Registrant’s Registration Statement on Form S-1, File No. 33-67248 and incorporated by reference herein)
	3.1	Amended and Restated Certificate of Incorporation of Deckers Outdoor Corporation. (Exhibit 3.1 to the Registrant’s Registration Statement on Form S-1, File No. 33-67248 and incorporated by reference herein)
	3.2	Restated Bylaws of Deckers Outdoor Corporation. (Exhibit 3.2 to the Registrant’s Registration Statement on Form S-1, File No. 33-67248 and incorporated by reference herein)
	10.1	1993 Employee Stock Incentive Plan. (Exhibit 99 to the Registrant’s Registration Statement on Form S-8, File No. 33-47097 and incorporated by reference herein)
	10.2	Form of Incentive Stock Option Agreement under 1993 Employee Stock Incentive Plan. (Exhibit 10.9 to the Registrant’s Registration Statement on Form S-1, File No. 33-67248 and incorporated by reference herein)
	10.3	Form of Non-Qualified Stock Option Agreement under 1993 Employee Stock Incentive Plan. (Exhibit 10.10 to the Registrant’s Registration Statement on Form S-1, File No. 33-67248 and incorporated by reference herein)
	10.4	Form of Restricted Stock Agreement. (Exhibit 10.11 to the Registrant’s Registration Statement on Form S-1, File No. 33-67248 and incorporated by reference herein)
	10.5	Employment Agreement with Douglas B. Otto. (Exhibit 10.13 to the Registrant’s Registration Statement on Form S-1, File No. 33-67248 and incorporated by reference herein)
	10.6	First Amendment to Employment Agreement with Douglas B. Otto. (Exhibit 10.14 to the Registrant’s Registration Statement on Form S-1, File No. 33-67248 and incorporated by reference herein)
	10.7	Second Amendment to Employment Agreement with Douglas B. Otto. (Exhibit 10.15 to the Registrant’s Registration Statement on Form S-1, File No. 33-67248 and incorporated by reference herein)
	10.8	Third Amendment to Employment Agreement with Douglas B. Otto. (Exhibit 10.30 to the Registrant’s Registration Statement on Form S-1, File No. 33-67248 and incorporated by reference herein)


Exhibit

	10.9	Agreement for Sales of Assets, dated January 26, 1995, between Ken and Nancy Young and Deckers Acquisition Corporation. (Exhibit 10.36 to the Registrant’s Form 10-K for the period ended December 31, 1994 and incorporated by reference herein)
	10.10	Deckers Outdoor Corporation 1995 Employee Stock Purchase Plan. (Exhibit 4.4 to the Registrant’s Registration Statement on Form S-8, File No. 33-96850 and incorporated by reference herein)
	10.11	Amended Compensation Plan for Outside Members of the Board of Directors. (Exhibit 10.42 to the Registrant’s Form 10-Q for the period ended September 30, 1996 and incorporated by reference herein)
	10.12	Extension Agreement to Employment Agreement with Douglas B. Otto. (Exhibit 10.36 to the Registrant’s Form 10-K for the period ended December 31, 1996 and incorporated by reference herein)
	10.13	Shareholder Rights Agreement, dated as of November 12, 1998. (Exhibit 10.39 to the Registrant’s Form 10-Q for the period ended September 30, 1998 and incorporated by reference herein)
	10.14	Employment Agreement dated February 27, 2001 between Deckers Outdoor Corporation and Peter Benjamin. (Exhibit 10.20 to the Registrant’s Form 10-Q for the period ended June 30, 2001 and incorporated by reference herein)
	10.15	Revolving Credit Agreement dated as of February 21, 2002 among Deckers Outdoor Corporation, UGG Holdings, Inc. and Comerica Bank — California. (Exhibit 10.21 to the Registrant’s Form 10-K for the year ended December 31, 2001 and incorporated by reference herein.)
	10.16	Employment Agreement dated March 29, 2002 between Douglas B. Otto and Deckers Outdoor Corporation. (Exhibit 10.22 to the Registrant’s Form 10-Q for the period ended March 31, 2002 and incorporated by reference herein.)
	10.17	*Employment Agreement dated August 20, 2002 between Peter C. Benjamin and Deckers Outdoor Corporation.
	10.18	Asset Purchase Agreement dated as of October 9, 2002 by and Among Mark Thatcher, Teva Sport Sandals, Inc. and Deckers Outdoor Corporation. (Exhibit 2.1 to the Registrant’s Form 8-K/A filed February 7, 2003 and incorporated herein by reference.)
	10.19	Disclosure letter associated with the Asset Purchase Agreement. (Exhibit 2.2 to the Registrant’s Form 8-K/A filed February 7, 2003 and incorporated herein by reference.)+
	10.20	*Employment Agreement dated November 25, 2002 between John A. Kalinich and Deckers Outdoor Corporation.
	10.21	*Employment Agreement dated November 25, 2002 between Mark Thatcher and Deckers Outdoor Corporation.
	10.22	*Unsecured Subordinated Promissory Note dated November 25, 2002 between Mark Thatcher and Deckers Outdoor Corporation.
	10.23	*Note Purchase Agreement dated as of November 25, 2002 by and among Deckers Outdoor Corporation and The Peninsula Fund III Limited Partnership.
	10.24	*Amended and Restated Credit Agreement, dated as of November 25, 2002, by and among Deckers Outdoor Corporation, UGG Holdings Inc., and Comerica Bank-California.
	21.1	*Subsidiaries of Registrant.
	23.1	*Independent Auditors’ Consent.
	99.1	*Certification of the Chief Executive Officer.
	99.2	*Certification of the Chief Financial Officer.



Signature	Title	Date


/s/ DOUGLAS B. OTTO Douglas B. Otto	Chairman of the Board, President and Chief Executive Officer

/s/ M. SCOTT ASH M. Scott Ash	Chief Financial Officer (Principal Financial and Accounting Officer)

/s/ GENE E. BURLESON Gene E. Burleson	Director

/s/ JOHN M. GIBBONS John M. Gibbons	Director

/s/ REX A. LICKLIDER Rex A. Licklider	Director

/s/ DANIEL L. TERHEGGEN Daniel L. Terheggen	Director

/s/ JOHN A. KALINICH John A. Kalinich	Director