UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER: 001-14429
SKECHERS U.S.A., INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-4376145
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
228 MANHATTAN BEACH BLVD.
MANHATTAN BEACH, CALIFORNIA 90266
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 318-3100
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
Class A Common Stock $0.001 par value New York Stock Exchange
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K 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 the Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant based upon the closing sales price of its Class A Common Stock on
March 28, 2000 on the New York Stock Exchange was approximately $100.1 million.
The number of shares of Class A Common Stock outstanding as of March 28, 2000
was 8,481,623.
The number of shares of Class B Common Stock outstanding as of March 28, 2000
was 26,423,445.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Definitive Proxy Statement issued in connection
with the 2000 Annual Meeting of the Stockholders of the Registrant are
incorporated by reference into Part III.
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SKECHERS U.S.A., INC.
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
INDEX TO ANNUAL REPORT ON FORM 10-K
PART I PAGE
Item 1. Business 4
Item 2. Properties 22
Item 3. Legal Proceedings 23
Item 4. Submission of Matters to a Vote of Security Holders 24
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 25
Item 6. Selected Financial Data 26
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations 26
Item 8. Financial Statements and Supplementary Data 32
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure 32
PART III
Item 10. Directors and Executive Officers of the Registrant 32
Item 11. Executive Compensation 32
Item 12. Security Ownership of Certain Beneficial Owners and Management 33
Item 13. Security Relationships and Related Transactions 33
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 33
Signatures
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PART I
ITEM 1. BUSINESS
Certain information contained in this report constitutes forward-looking
statements which involve risks and uncertainties including, but not limited to,
information with regard to the Company's plans to increase the number of retail
locations, and styles of footwear, the maintenance of customer accounts and
expansion of business with such accounts, the successful implementation of the
Company's strategies, future growth and growth rates and future increases in net
sales, expenses, capital expenditures and net earnings. The words "believes,"
"anticipates," "plans," "expects," "may," "will," "intends," "estimates," and
similar expressions are intended to identify forward-looking statements. These
forward-looking statements involve risks and uncertainties, and the Company's
actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including, but not
limited to, those set forth under "Risk Factors" and elsewhere in this Report.
GENERAL
Skechers U.S.A., Inc. (the "Company" or "Skechers") designs and markets branded
contemporary casual, active, rugged and lifestyle footwear for men, women and
children. The Company's objective is to become a leading source of contemporary
casual and active footwear while ensuring the longevity of both the Company and
the Skechers brand name through controlled, well managed growth. The Company
strives to achieve this objective by developing and offering a balanced
assortment of basic and fashionable merchandise across a wide spectrum of
product categories and styles, while maintaining a diversified, low-cost
sourcing base and controlling the growth of its distribution channels. The
Company sells its products to department stores such as Nordstrom, Macy's,
Dillards, Robinsons-May, and JC Penney and specialty retailers such as
Footlocker, Famous Footwear, Genesco's Journeys and Jarman chains, and
Footaction U.S.A. The Company also sells its products internationally in over
100 countries and territories through major international distributors.
The Company's product offerings of men's, women's and children's footwear appeal
to a broad customer base between the ages of 5 and 40 years. The Company's
strategy of providing a growing and balanced assortment of quality basic
footwear and seasonal and fashion footwear with progressive styling at
competitive prices gives Skechers this broader based customer appeal. Skechers
men's and women's footwear are primarily designed with the active, youthful
lifestyle of the 12 to 25 year old age group in mind. The Company's product
offerings include casual and utility oxfords, loggers, boots and demi-boots;
skate, street and fashion sneakers; hikers, trail runners and joggers; sandals,
slides and other open-toe footwear; and dress casual shoes. The Company
continually seeks to increase the number of styles offered and the breadth of
categories with which the Skechers brand name is identified.
The Company's management and design team collectively possess extensive
experience in the footwear industry. Robert Greenberg and Michael Greenberg, the
Chairman of the Board and President, respectively, founded the Company in 1992.
Prior to that time, Robert Greenberg had co-founded L.A. Gear, Inc. ("L.A.
Gear")
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and, together with a management team which included Michael Greenberg, was
instrumental in L.A. Gear's growth until his resignation in early 1992. The
Greenbergs are joined on the management team by several design, merchandise,
production, and marketing executives with experience in a broad range of
industries. Management believes this core group comprises an effective and
efficient management and design team with the experience to recognize and
respond to emerging consumer trends and demands.
FOOTWEAR
Skechers offers men's, women's and children's footwear in a broad range of
styles, fabrics and colors. The Company offers a broad selection of merchandise
in an effort to maximize its ability to respond to changing fashion trends and
consumer preferences as well as to limit its exposure to any specific style. The
Company believes that its products and brand offer a broad appeal to men, women
and children.
The Company introduced its first footwear line with the Skechers brand name in
December 1992. Since that time, the Company has expanded its product offerings
and grown its net sales while substantially increasing the breadth and
penetration of its account base. The Company currently categorizes its footwear
in three major product lines: (i) USA (men's and women's), (ii) Sport, and (iii)
Skechers Collection. These general product lines are offered in varying styles
for men, women and children (except for Skechers Collection which is currently
offered in men's styles only).
Skechers USA. The Company's Skechers USA category (also referred to as the
"Lifestyle" products) includes four types of footwear: (i) Sport Utility, (ii)
Utility, (iii) Classics, and (iv) Hikers. The Sport Utility category includes
generally "Black & Brown" boots and shoes that have a rugged, less refined
design with industrial-inspired fashion features. This category is defined by
the heavy-lugged outsole and value-oriented materials employed in the uppers.
Uppers are typically constructed of oiled suede and "Crazy Horse" or distressed
leathers which enhance the rugged appearance of the boots and oxfords of this
category. The Company designs and prices this category to appeal primarily to
young men with broad acceptance across age groups. Suggested retail price points
range from $45.00 to $65.00 for this category. The Company's Utility styles
consist of a single category of boots that are designed to meet the functional
demands of a work boot but are marketed as casual footwear. The outsoles of this
category are designed to be durable and wearable with Goodyear welted, hardened
rubber outsoles. Uppers are constructed of thicker, better grades of heavily
oiled leathers. Utility boots may include steel toes, water-resistant or
water-proof construction and/or materials, padded collars and Thermolite
insulation. Styles include logger boots and demi-boots, engineer boots,
motorcycle boots and six-and eight-eyelet work boots. Suggested retail price
points range from $80.00 to $100.00 for this category. The Classics styles
include comfort oriented design and performance features. Boots and shoes in
this category employ softer outsoles which are often constructed of polyvinyl
carbon ("PVC"). The more refined design of this footwear employs better grades
of leather and linings than those used in the Company's Sport Utility boots and
shoes. Uppers are generally constructed of grizzly leather or highly-finished
leather that produces a waxy shine. Designs are sportier than the Sport Utility
category and feature oxfords, wingtips, monkstraps, demi-boots and boots.
Suggested retail price points range from $70.00 to $85.00 for this category. The
Company's Hiker styles consist of a single category of boots and demi-boots that
include many comfort and technical performance features that distinguish this
footwear as Hikers. The Company markets this footwear primarily on the basis of
style and comfort rather than on technical performance. However, many of the
technical performance features in the Hikers contribute to the level of comfort
this footwear provides. Outsoles generally consist of molded and contoured
hardened rubber. Many designs may include gussetted tongues to prevent
penetration of water and debris, cushioned mid-soles, motion control devices
such as heel cups, water-resistant or water-proof construction and materials and
heavier, more durable hardware such as metal D-rings instead of eyelets. Uppers
are generally constructed of heavily oiled nubuck and full-grain leathers.
Suggested retail price points range from $55.00 to $100.00 for this category.
Skechers Sport. Skechers Sport or "Active Street" footwear include skate
sneakers, joggers, trail runners, sport hikers and multi-functional shoes
inspired by cross-trainers. The Company distinguishes its Skechers Sport
category by its technical performance inspired looks; however, generally the
Company does not
5
promote the technical performance features of these shoes. Certain of the
Company's skate sneakers are designed with the technical performance features
necessary for competitive level skateboarding. The skate sneaker styles ("Street
Sneaker") are designed to appeal to the teenager whose casual shoe of choice is
a skate or street sneaker and is intended to be retailed through specialty
casual shoe stores and department stores. The other Skechers Sport footwear
styles include comfort performance not available in the Street Sneaker styles.
The Skechers Sport designs are light-weight constructions that include cushioned
heels, polyurethane mid-soles, phylon and other synthetic outsoles and white
leather or synthetic uppers such as durabuck and cordura and ballistic nylon
mesh. The Skechers Sport features electric and technically inspired hues in
addition to the traditional athletic white. Skechers Sport is marketed through
traditional athletic footwear specialty retailers as well as basic existing
accounts. Suggested retail price points range from $40.00 to $70.00 for this
category.
Skechers Collection. The Skechers Collection, introduced in 1998, features dress
casual shoes designed to complement a young man's semi-formal attire. This
category features more sophisticated designs influenced, in part, by prevailing
trends in Italy and other European countries. As such, this footwear is more
likely than other categories to be sourced from Italy and Portugal. Outsoles
project a sleeker profile, while uppers are constructed of glossy, "box" leather
and aniline, resulting in a highly polished appearance. Designs include
monkstraps, wingtips, oxfords, cap toes and demi-boots and often feature
blind-eyelets to enhance the sophisticated nature of the styling. Suggested
retail price points range from $85.00 to $130.00 for this category.
The Company offers sandalized footwear which features open-toe and open-side
constructions consistent with the Company's offering in the Skechers USA,
Skechers Sport and Skechers Collection categories of footwear. Such footwear
includes fisherman's sandals, shower sandals, beach sandals, slides,
comfort-oriented land sandals and technically-inspired water sport sandals.
Sandalized footwear includes both leather and synthetic constructions and may
feature suede footbeds with form-fitting mid-soles. The Company typically
delivers its sandalized footwear to retailers from February to August. Suggested
retail price points range from $20.00 to $60.00 for this category.
In early 1996, the Company substantially increased its product offerings and
marketing focus on its children's footwear line. The children's line features a
range of products including boots, shoes and sneakers. The Skechers children's
line is comprised primarily of shoes that are designed like their adult
counterparts but in "takedown" versions, so that the younger set can wear the
same popular styles as their older siblings and schoolmates. This "takedown"
strategy maintains the integrity of the product in the premium leathers,
hardware and outsoles without the attendant costs involved in designing and
developing new products. In addition, the Company also adapts current fashion
from the Company's men's and women's lines by modifying designs and choosing
colors and materials that are more suitable to the playful image Skechers has
established in the children's footwear market. In 1999, the Company launched its
Skechers Lights category, which is a line of lighted footwear combining
sequencing patterns and lights in the outsole and other areas of the shoes.
Skechers' children's footwear is currently offered at domestic retail prices
ranging from $20.00 to $50.00.
PRODUCT DESIGN AND DEVELOPMENT
Management believes that its product success is related in large part to its
ability to recognize trends in the footwear markets and to design products which
anticipate and accommodate consumers' ever-evolving preferences. The Company
strives to analyze, interpret and translate current and emerging lifestyle
trends. Lifestyle trend information is compiled by Skechers' designers through
various methods designed to monitor changes in culture and society, including
(i) review and analysis of modern music, television, cinema, clothing,
alternative sports and other trend-setting media, (ii) travel to domestic and
international fashion markets to identify and confirm current trends, (iii)
consultation with the Company's retail customers for information on current
retail selling trends, (iv) participation in major footwear trade shows to stay
abreast of popular brands, fashions and styles and (v) subscription to various
fashion and color
6
information services. In addition, a key component of Skechers' design
philosophy is to continually reinterpret both its basic and current successful
styles in the Skechers image.
The Company intends to continue to leverage its reputation for quality products
and its relationships with retailers through, among other things, the
introduction of new styles in its existing and also new categories of footwear.
Also, the Company believes it enhances its position with retailers through its
in-stock inventory program. This program increases the availability of Skechers'
best-selling products, which management believes has contributed to more
consistent product flow to its retail customers and an increased ability to
respond to reorder demand.
Offer a Breadth of Innovative Products. The Company has continued to broaden its
product line in an effort to reach a larger consumer base. In addition, offering
broader products allows the Company to increase sales to its current customer
and consumer base. The Company offers a wide variety of different styles of
footwear generally in three to four different colors and material variations
typically in 10 to 12 different sizes. These styles span a broad spectrum of
product categories ranging from skate and street sneakers to fashion sneakers,
from steel toe boots with heavy-lugged soles to casual dress shoes for men. The
Company has developed this breadth of merchandise offerings in an effort to
improve its ability to respond to changing fashion trends and customer
preferences, as well as to limit its exposure to any single industry
participant. Management does not believe that any single industry participant
competes directly with the Company across its entire product offering. Although
major new product introductions take place in advance of both the spring and the
fall selling seasons, the Company typically introduces new designs in its
existing lines every 30 to 60 days to keep current with emerging trends.
Design Team. All of the Company's footwear is designed with an active, youthful
lifestyle in mind. The design team's primary mandate is to design shoes
marketable to the 12 to 25 year old consumer. While these designs are
contemporary in styling, management believes that substantially all of the line
appeals to the broader 5 to 40 year old consumer. Although many of the Company's
shoes have performance features, such as hikers, trail runners, skate sneakers
and joggers, the Company generally does not position its shoes in the
marketplace as technical performance shoes. The Company's principal goal in
product design is to generate new and exciting footwear with contemporary and
progressive style features and comfort enhancing performance features.
Management does not believe that technology is a differentiating factor in
marketing footwear in the casual shoe industry.
The footwear design process typically begins about nine months before the start
of a season. Skechers' products are designed and developed by the Company's
in-house staff. The Company also utilizes outside design firms on an
item-specific basis to supplement its design efforts. Separate design teams
focus on each of the men's, women's and children's categories, reporting to the
Company's Vice President of Design, who has over nine years of experience in
footwear design. The design process is extremely collaborative; members of the
design staff meet weekly with the heads of retail and merchandising, sales,
production and sourcing to further refine the Company's products in order to
meet the particular needs of the Company's markets.
After the design team arrives at a consensus regarding the fashion themes for
the coming season, the group then translates these themes into Skechers
products. These interpretations include variations in product color, material
structure and decoration, which are arrived at after close consultation with the
Company's production department. Prototype blueprints and specifications are
created and forwarded to the Company's prototype manufacturers located in
Taiwan, which then forward design prototypes back to the Company's domestic
design team. New design concepts are often also reviewed by the Company's major
retail customers. This customer input not only allows the Company to measure
consumer reaction to the latest designs, but also affords the Company
an opportunity to foster deeper and more collaborative relationships with its
customers. The Company's design team can easily and quickly modify and refine a
design based on this development input.
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SOURCING
Substantially all of the Company's products are produced in China. The Company
does not own or operate any manufacturing facilities. Management believes the
use of independent manufacturers increases its production flexibility and
capacity while at the same time substantially reducing capital expenditures and
avoiding the cost of managing a large production work force. While the Company
has long standing relationships with many of its manufacturers and believes its
relationships to be good, there are no long-term contracts between the Company
and any of its manufacturers.
The Company maintains an in-stock position for selected styles of footwear in
order to minimize the time necessary to fill customer orders. In order to
maintain an in-stock position, the Company places orders for selected footwear
with its manufacturers prior to the time the Company receives customers' orders
for such footwear. In order to reduce the risk of overstocking, the Company
seeks to assess demand for its products by soliciting input from its customers
and monitoring retail sell-through. In addition, the Company analyzes historical
and current sales and market data to develop internal product quantity forecasts
which helps reduce inventory risks.
Asian Office. To safeguard product quality and consistency, the Company oversees
the key aspects of the production process from prototyping through production to
finished product. Monitoring is performed by the Company's in-house production
department and out of the Company's office in Taiwan. Management believes the
Company's Asian presence allows Skechers to negotiate supplier and manufacturer
arrangements more effectively and ensure timely delivery of finished footwear.
In addition, the Company requires its manufacturers to certify that neither
convict, forced, indentured labor (as defined under U.S. law) nor child labor
(as defined by the manufacturer's country) was used in the production process,
that compensation will be paid according to local law and that the factory is in
compliance with local safety regulations.
Factories. Manufacturers are selected in large part on the basis of the
Company's prior experience with the manufacturer and the amount of available
production capacity. The Company attempts to monitor its selection of
independent factories to ensure that no one manufacturer is responsible for a
disproportionate amount of the Company's merchandise. In addition, the Company
seeks to use, whenever possible, manufacturers that have previously produced the
Company's footwear, which the Company believes enhances continuity and quality
while controlling production costs. The Company generally limits product orders
to 30.0% or less of that manufacturer's total production at any one period of
time. In addition, the Company sources product for styles that account for a
significant percentage of the Company's net sales from at least three different
manufacturers. For the year ended December 31, 1999, the Company had four
manufacturers which accounted for 15.5%, 13.4%, 13.3% and 12.3% of total
purchases, respectively.
Quality Control. Management believes that quality control is an important
and effective means of maintaining the quality and reputation of its products.
The Company's quality control program is designed to ensure that finished goods
not only meet with Company established design specifications, but also that all
goods bearing its trademarks meet the Company's standards for quality. Quality
control personnel perform an array of inspection procedures at various stages of
the production process, including examination and testing of (i) prototypes of
key products prior to manufacture, (ii) samples and materials prior to
production and (iii) final products prior to shipment. The Company employees are
on-site at each of Skechers' major manufacturers to oversee in person key phases
of production. In addition, unannounced visits to the manufacturing sites to
further monitor compliance with Skechers' manufacturing specifications are made
by the Company employees and agents.
MARKETING AND PROMOTION
The Company's marketing focus is to maintain and enhance recognition of the
Skechers brand name as a casual, active youthful brand that stands for quality,
comfort and design innovation. Senior management is directly involved in shaping
the Company's image and its advertising and promotional activities. Towards this
end, the Company endeavors to spend between 8.0% and 10% of annual net sales in
the marketing of Skechers footwear through an integrated effort of advertising,
promotions, public relations, trade shows and other marketing efforts, which the
Company believes substantially heightens brand awareness.
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Advertising. Management believes that the Company's success to date is due in
large part to its advertising strategies and methods. The Company's in-house
marketing and advertising team has developed a comprehensive program to promote
the Skechers brand name through lifestyle and image advertising. The Company has
made a conscious effort to avoid the association of the Skechers name with any
single category of shoe to provide merchandise flexibility and to aid the
ability to take the brand and product design in the direction of evolving
footwear fashions and consumer preferences. The Company uses a variety of media
for its national advertising. Print efforts are represented by one or two page
collage features in popular fashion and lifestyle consumer publications that
appeal to the Company's target customer group. Skechers' progressive television
advertisements are primarily created in-house and air frequently on top
television shows. Different advertisements are created for each of the 5 to 9,
10 to 24 and 25 to 35 year old consumer groups.
Certain of the Company's retail accounts feature "in-store shop" formats in
which the Company provides fixtures, signage and visual merchandise assistance
in a dedicated floor space within the store. The design of the shops utilizes
the distinctive Skechers advertising strategies to promote brand recognition and
differentiate Skechers' presence in the store from that of its competition. The
installation of these "in-store shops" enables the Company to establish premium
locations within the retailers and management believes it aids in increased
sell-through and higher maintained margins for the Company's customers. The
Company's in-house display merchandising department supports retailers and
distributors by developing point-of-purchase advertising to further promote its
products in stores and to leverage the brand recognition at the retail level.
Promotions. Skechers' in-house promotions department is responsible for building
national brand name recognition. Teaming up with national retailers and radio
stations, the promotions department is responsible for cross promotions, which
help draw customers to retail store locations.
Public Relations. The Company's in-house public relations department is
responsible for increasing Skechers' media exposure. The department communicates
the Skechers image to the public and news media through the active solicitation
of fashion editorial space, arranging interviews with key Company personnel and
coordinating local publicity and special events programs for the Company,
including celebrity appearances and fashion shows. With its strategy tied to
promoting the newest styles produced by the product development team, Skechers'
products are often featured in fashion and pop culture magazines and on a select
group of films and popular television shows. For example, Skechers shoes have
been prominently displayed on the television series Dharma & Greg and referenced
in the film 10 Things I Hate About You.
Trade Shows. To showcase the Skechers product to footwear buyers, in 1999, the
Company exhibited at 13 trade shows. The Company prides itself on having
innovative and dynamic exhibits on the show floor. Designed in-house, the
Company's state-of-the-art trade show exhibits feature the latest products and
provide a stage for Skechers' internally developed music-video-style dance and
stage shows featuring progressive music and nightclub lighting.
Electronic Commerce and Mail-Order Catalog. In 1998, the Company launched its
initial product mail order catalog. Concurrently, Skechers went live with its
interactive website (www.skechers.com). It features the Company's current
mail-order catalog for on-line shopping. It also features photos, interviews and
information on Company-sponsored events. The Company's website and mail-order
catalog are intended to further enhance the Skechers brand image.
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DISTRIBUTION CHANNELS
Skechers has implemented a strategy of controlling the growth of the
distribution channels through which the Company's products are sold in order to
protect the Skechers brand name, properly service customer accounts and better
manage the growth of the business. The Company has limited distribution of its
product to those retailers which management believes can best support the
Skechers brand name in the market. By focusing on the Company's existing
accounts, the Company can deepen its relationships with its existing customers
by providing a heightened level of customer service. Management believes close
relationships with its customers help the Company to maximize their customers'
(i) retail sell-through, (ii) maintained margins and (iii) inventory turns.
Limiting product distribution to the appropriate accounts and closely working
with those accounts also helps the Company to reduce its own inventory markdowns
and customer returns and allowances while maintaining the proper showcase for
the Skechers brand name and product.
Sales and Field Service Representatives. As of February 29, 2000, the Company
has 86 and 8 sales and field service representatives, respectively. Each of the
sales representatives is compensated on a salary plus commission basis; the
representatives sell Skechers products exclusively. Senior management,
specifically Michael Greenberg, is actively involved in selling to and
maintaining relationships with Skechers' major retail accounts. For the year
ended December 31, 1999 the top five sales persons accounted for 43.7% of the
Company's net domestic sales. One of these salespersons generated 14.5% of the
Company's net domestic sales for the year ended December 31, 1999.
The field service representatives ensure proper presentation of Skechers'
merchandise and point-of-purchase marketing materials. The Company's sales and
field service personnel work closely with the accounts to coordinate the
appropriate inventory level and product mix that should be carried in each store
in an effort to help retail sell-through and enhance the customer's product
margin. Such information is then used as a basis for developing sales
projections and product needs for such customers. This information in turn
assists the Company with scheduling production. Along with a staff of in-house
customer service employees, the Company is committed to achieving customer
satisfaction and to building a loyal customer base by providing a high level of
knowledgeable, attentive and personalized customer service.
Concept Stores. As of December 31, 1999, the Company operated 23 concept stores
at marquee locations in major metropolitan cities. The stores are typically
designed to create a distinctive Skechers look and feel and enhance customer
association of the Skechers brand with current youthful lifestyle trends and
styles. The concept stores feature modern music and lighting and present an open
floor design to allow customers to readily view the merchandise on display.
These concept stores serve a threefold purpose in the Company's operating
strategy. First, concept stores serve as a showcase for the full range of the
Company's product offerings for the current season, providing the customer with
the entire product story. In contrast, management estimates that its average
retail customer carries no more than 5.0% of the complete Skechers line. Second,
retail locations are generally chosen to generate maximum marketing value for
the Skechers brand name through signage and store front presentation. Third, the
Company's concept stores also serve as marketing and product testing venues by
providing rapid product feedback. Management believes that product sell-through
information derived from the Company's concept stores enables the Company's
sales, merchandising and production staff to respond quickly to market changes
and new product introductions. The Company occasionally orders limited
production runs which may initially be tested in Skechers' concept stores. By
working closely with store personnel, the Company obtains customer feedback that
often influences product design and development. Management believes that sales
in Skechers' retail stores can help forecast sales in national retail stores.
Such responses serve to augment sales and limit the Company's inventory
markdowns and customer returns and allowances. Management adjusts its product
and sales strategy based upon seven to 14 days of retail sales information.
10
The Company seeks to instill enthusiasm and dedication in its concept store
management personnel and sales associates through incentive programs and regular
communication with store personnel. Sales associates receive commissions on
sales with a guaranteed minimum compensation. Concept store managers receive
base compensation plus incentive compensation based on sales. The Company has
well-established concept store operating policies and procedures and utilizes an
in-store training regimen for all new store employees. Merchandise presentation
instructions and detailed product descriptions also are provided to sales
associates to enable them to gain familiarity with Skechers product offerings.
Factory and Warehouse Outlet Stores. As of December 31, 1999, the Company
also operated 19 factory and warehouse outlet stores that enable the Company to
liquidate excess, discontinued and odd-size inventory in a cost-efficient
manner. Inventory in these stores is supplemented by certain first-line styles
sold at full retail price points. The factory outlet stores are generally
located in manufacturers' outlet centers throughout the country. The Company's
factory outlet stores have enabled it to increase sales in certain geographic
markets where Skechers' products were not previously available and to consumers
who favor value-oriented retailers. The outlets provide opportunities for the
Company to sell discontinued and excess merchandise, thereby reducing the need
to sell such merchandise to discounters at excessively low prices. The Company's
free-standing warehouse outlet stores enable it to liquidate other excess
merchandise, discontinued lines and odd sizes. The Company strives to
geographically position its factory and warehouse outlet stores to minimize
potential conflicts with the Company's retail customers.
Other Direct Distribution Outlets. The Company's mail-order catalog and website
act as sales vehicles. Management believes that these distribution channels will
not generate material growth for the Company in the near term; however,
management believes that they may present attractive long-term opportunities
with minimal near-term costs.
INTERNATIONAL OPERATIONS
Although the Company's primary focus is on the domestic market, the Company
presently markets its product in countries and territories in Europe, Asia and
selected other foreign regions. Skechers derives revenues and earnings from
outside the United States from two principal sources: (i) sales of Skechers
footwear directly to foreign distributors who distribute such footwear to
department stores and specialty retail stores and (ii) to a lesser extent,
royalties from licensees who manufacture and distribute Skechers products
outside the United States.
Management believes that international distribution of Skechers products may
represent a significant opportunity to increase revenue and profits. Although
the Company is in the early stages of its international expansion, Skechers
products are currently sold in more than 100 countries and territories. The
Company's goal is to increase international sales through foreign distributors
by heightening the Company's international marketing presence in those
countries. In 1998, the Company launched its first major international
advertising campaign, which was designed to establish Skechers as a global brand
synonymous with casual shoes. This advertising campaign continued during 1999.
The Company is exploring selling directly to retailers in certain European
countries in the near future. In addition, the Company is exploring selectively
opening flagship retail stores internationally on its own or through joint
ventures.
DISTRIBUTION FACILITY
The Company believes that strong distribution support is a critical factor in
the Company's operations. Following the manufacturing, the Company's products
are packaged in shoe boxes bearing bar codes and generally either shipped to the
Company's approximately 700,000 square feet of leased distribution centers
located in Ontario, California, or shipped directly from the manufacturer to
Skechers' international customers. Upon receipt at the central distribution
centers, merchandise is inspected and recorded in the
11
Company's management information system and packaged according to customers'
orders for delivery. Merchandise is shipped to the customer by whatever means
the customer requests, which is usually by common carrier. The central
distribution centers have multi-access docks, enabling the Company to receive
and ship simultaneously and to pack separate trailers for shipments to different
customers at the same time. The Company has an electronic data interchange
system to which some of the Company's larger customers are linked. This system
allows these customers to automatically place orders with the Company, thereby
eliminating the time involved in transmitting and inputting orders, and includes
direct billing and shipping information.
POTENTIAL LICENSING ARRANGEMENTS
Management believes that selective licensing of the Skechers brand name to
non-footwear-related manufacturers may broaden and enhance the Skechers image
without requiring significant capital investments or additional incremental
operating expenses by the Company. From time to time, the Company has
experimented with certain manufacturers on a very limited basis to study the
potential impact of licensing the brand. The Company currently has licensing
agreements internationally for apparel with Life Gear Corporation in Japan and
for footwear with Pentland Group PLC in the United Kingdom. Management believes
that revenues from licensing agreements will not be a material source of growth
for the Company in the near term; however, management believes that licensing
arrangements may present attractive long-term opportunities with minimal
near-term costs.
12
BACKLOG
The Company generally receives the bulk of the orders for each of the spring and
fall seasons a minimum of three months prior to the date the products are
shipped to customers. At December 31, 1999, the Company's backlog was $121.7
million, compared to $74.9 million at December 31, 1998. To manage inventory
risk, the Company estimates its production requirements and engages in certain
other inventory management techniques. For a variety of reasons, including the
timing of shipments, product mix of customer orders and the amount of in-season
orders, backlog may not be a reliable measure of future sales for any succeeding
period.
INTELLECTUAL PROPERTY RIGHTS
The Company owns and utilizes a variety of trademarks, including the Skechers
trademark. As of December 31, 1999, the Company had approximately 30
registrations and approximately 60 pending applications for its trademarks in
the United States. In addition, as of December 31, 1999, the Company had
approximately 431 trademark registrations and applications in approximately 80
foreign countries. The Company also had 45 design patents issued and
approximately 26 design patent applications pending in the United States. The
Company regards its trademarks and other intellectual property as valuable
assets and believes that they have significant value in the marketing of its
products. The Company vigorously protects its trademarks against infringement,
including through the use of cease and desist letters, administrative
proceedings and lawsuits.
The Company relies on trademark, patent, copyright and trade secret protection,
and, non-disclosure agreements and licensing arrangements to establish, protect
and enforce intellectual property rights in the design of its products. In
particular, the Company believes that its future success will depend in
significant part on the Company's ability to maintain and protect the Skechers
trademark. Despite the Company's efforts to safeguard and maintain its
intellectual property rights, there can be no assurance that the Company will be
successful in this regard. There can be no assurance that third parties will not
assert intellectual property claims against the Company in the future.
Furthermore, there can be no assurance that the Company's trademarks, products
and promotional materials or other intellectual property rights do not or will
not violate the intellectual property rights of others, that its intellectual
property would be upheld if challenged, or that the Company would, in such an
event, not be prevented from using its trademarks or other intellectual property
rights. Such claims, if proved, could materially and adversely affect the
Company's business, financial condition and results of operations. In addition,
although any such claims may ultimately prove to be without merit, the necessary
management attention to and legal costs associated with litigation or other
resolution of future claims concerning trademarks and other intellectual
property rights could materially and adversely affect the Company's business,
financial condition and results of operations. The Company has sued and has been
sued by third parties for infringement of intellectual property. It is the
opinion of management that none of these claims have materially impaired the
Company's ability to utilize its trademarks.
The laws of certain foreign countries do not protect intellectual property
rights to the same extent or in the same manner as do the laws of the United
States. Although the Company continues to implement protective measures and
intends to defend its intellectual property rights vigorously, there can be no
assurance that these efforts will be successful or that the costs associated
with protecting its rights in certain jurisdictions will not be prohibitive.
13
From time to time, the Company discovers products in the marketplace that are
counterfeit reproductions of the Company's products or that otherwise infringe
upon intellectual property rights held by the Company. There can be no assurance
that actions taken by the Company to establish and protect its trademarks and
other intellectual property rights will be adequate to prevent imitation of its
products by others or to prevent others from seeking to block sales of the
Company's products as violating trademarks and intellectual property rights. If
the Company is unsuccessful in challenging a third party's products on the basis
of infringement of its intellectual property rights, continued sales of such
product by that or any other third party could adversely impact the Skechers
brand, result in the shift of consumer preferences away from the Company and
generally have a material adverse effect on the Company's business, financial
condition and results of operations.
COMPETITION
Competition in the footwear industry is intense. Although the Company believes
that it does not compete directly with any single company with respect to its
entire range of products, the Company's products compete with other branded
products within their product category as well as with private label products
sold by retailers, including some of the Company's customers. The Company's
utility footwear and casual shoes compete with footwear offered by companies
such as The Timberland Company, Dr. Martens, Kenneth Cole Productions, Steven
Madden, Ltd. and Wolverine World Wide, Inc. The Company's athletic shoes compete
with brands of athletic footwear offered by companies such as Nike, Inc., Reebok
International Ltd., Adidas-Salomon AG and New Balance. The Company's children's
shoes compete with brands of children's footwear offered by companies such as
The Stride Rite Corporation. In varying degrees, depending on the product
category involved, the Company competes on the basis of style, price, quality,
comfort and brand name prestige and recognition, among other considerations.
These and other competitors pose challenges to the Company's market share in its
major domestic markets and may make it more difficult to establish the Company
in Europe, Asia and other international regions. The Company also competes with
numerous manufacturers, importers and distributors of footwear for the limited
shelf space available for the display of such products to the consumer.
Moreover, the general availability of contract manufacturing capacity allows
ease of access by new market entrants. Many of the Company's competitors are
larger, have achieved greater recognition for their brand names, have captured
greater market share and/or have substantially greater financial, distribution,
marketing and other resources than the Company. There can be no assurance that
the Company will be able to compete successfully against present or future
competitors or that competitive pressures faced by the Company will not have a
material adverse effect on the Company's business, financial condition and
results of operations.
EMPLOYEES
As of February 29, 2000, the Company employed 888 persons, 549 of which were
employed on a full-time basis and 339 of which were employed on a part-time
basis. None of the Company's employees are subject to a collective bargaining
agreement. The Company believes that its relations with its employees are
satisfactory. The Company offers its employees a discount on Skechers
merchandise to encourage enthusiasm for the product and Company loyalty.
RISK FACTORS
In addition to the other information in this Form 10-K, the following factors
should be considered in evaluating the Company and it's business.
CHANGING CONSUMER DEMANDS AND FASHION TRENDS
The footwear industry is subject to rapidly changing consumer demands and
fashion trends. The Company believes that its success depends in large part upon
its ability to identify and interpret fashion trends and to anticipate and
respond to such trends in a timely manner. There can be no assurance that the
Company will be able to continue to meet changing consumer demands or to develop
successful styles in the future. Decisions with respect to product designs often
need to be made several 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, lower sales, excess inventories, higher inventory markdowns, impairment
of the Company's brand image and lower gross margins as a percentage of net
sales ("Gross Margins") as a result of allowances and discounts provided to
retailers. Conversely, the failure by the Company to anticipate consumer demand
could result in inventory shortages, which in turn could adversely affect the
timing of shipments to customers, negatively impacting retailer and distributor
relationships, and diminish brand loyalty. In addition, even if the Company
reacts appropriately to changes in consumer preferences, consumers may identify
the Company's brand image with an outmoded fashion or the association of the
brand may be limited to styles or categories of footwear no longer in demand.
There can
14
be no assurance that the Company will successfully adapt to changing consumer
demands and fashion trends, and any such failure to adapt could have a material
adverse effect on the Company's business, financial condition and results of
operations. Because of these risks, a number of companies in the footwear
industry, and in the fashion and apparel industry, have experienced periods,
which can be over several years, of rapid growth in revenues and earnings and
thereafter periods of declining sales and losses which in some cases have
resulted in the companies ceasing to do business. Until January 1992, several of
the Company's executive officers and key employees were employed by L.A. Gear,
Inc., an athletic and casual footwear and apparel company, which experienced
similar fluctuations.
The Company intends to market additional lines of footwear in the future and, as
is typical with new products, demand and market acceptance will be subject to
uncertainty. Failure to regularly develop and introduce new products
successfully could materially and adversely impact the Company's future growth
and profitability. Achieving market acceptance for new products may require
substantial marketing efforts. There can be no assurance that the Company's
marketing efforts will be successful or that the Company will have the funds
necessary to undertake sufficient efforts.
RISKS RELATING TO STYLE CONCENTRATION
If any one style or group of similar styles of the Company's footwear were to
represent a substantial portion of the Company's net sales, the Company could be
exposed to risk should consumer demand for such style or group of styles
decrease in subsequent periods. In the past, gross sales were adversely affected
by decreased consumer demand for a style of footwear that previously represented
a significant portion of the Company's sales. This style no longer represents a
significant portion of the Company's sales. The Company attempts to hedge this
risk by offering a broad range of products, and no style comprised over 5.0%
of the Company's gross wholesale sales, net of discounts, for the year ended
December 31, 1999. There can be no assurance that fluctuations in sales of any
given style that represents a significant portion of the Company's net sales
will not recur in the future and have a material adverse effect on the Company's
business, financial condition and results of operations.
ABILITY TO MANAGE GROWTH
The Company has experienced rapid growth over the past three years and
remains vulnerable to a variety of business risks generally associated with
rapidly growing companies. The Company intends to continue to pursue an
aggressive growth strategy through expanded marketing and promotion efforts,
frequent introductions of products, broader lines of casual and performance
footwear, expansion of retail stores and increased international market
penetration, all of which may place a significant strain on the Company's
financial, management and other resources. The Company's future performance will
depend in part on its ability to manage change in both its domestic and
international operations and will require the Company to attract, train, manage
and retain management, sales, marketing and other key personnel. The Company's
ability to manage its growth effectively will require it to continue to improve
its operational and financial control systems, infrastructure and management
information systems. For example, in early 1998, the Company moved its
distribution center to a larger facility and currently intends to install a new
material handling system at its second distribution facility in latter part of
2000 at a total cost of approximately $12.0 million. There can be no assurance
that these expansion efforts will be successfully completed or that they will
not interfere with existing operations. The inability of the Company's
management to manage growth effectively could have a material adverse effect on
the Company's business, financial condition and results of operations.
ABILITY TO SUSTAIN PRIOR RATE OF GROWTH OR INCREASE NET SALES OR EARNINGS
The Company has realized rapid growth since inception, increasing net sales at a
compound annual growth rate of 36.2% from $90.8 million in 1994 to $424.6
million in 1999. From 1998 to 1999, the Company experienced a 13.9% and 14.2%
increase in net sales and earnings from operations, respectively. In the future,
the Company's rate of growth will be dependent upon, among other things, the
continued success of
15
its efforts to expand its footwear offerings and distribution channels. The
Company's profitability in any calendar quarter of any fiscal year depends upon,
among other things, the timing and level of advertising and trade show
expenditures and the timing and level of shipments of seasonal merchandise.
There can be no assurance that the Company's rate of growth will not decline or
that it will be profitable in any quarter of any succeeding fiscal year. In
addition, the Company may have more difficulty maintaining its prior rate of
growth to the extent it becomes larger.
As part of its growth strategy, the Company seeks to further penetrate
existing retail accounts, open its own retail stores in selected locations and
increase its international operations, including distributing in countries and
territories where the Company has little distribution experience and where the
Company's brand name is not yet well known. There can be no assurance that these
and the Company's other growth strategies will be successful. Success will
depend on various factors, including the strength of the Company's brand name,
market success of current and new products, competitive conditions, the ability
of the Company to manage increased net sales and stores and the availability of
desirable locations. The Company's business also depends on general economic
conditions and levels of consumer spending, which are currently high, and a
decline in the economy or a recession could adversely impact the Company's
business, financial condition and operating results since consumers often reduce
spending on footwear and apparel in such times. There can be no assurance that
the Company will be able to increase its sales to existing customers, open and
operate new retail stores or increase its international operations on a
profitable basis or that the Company's earnings from operations as a percentage
of net sales ("Operating Margins") will improve, and there can be no assurance
that the Company's growth strategies will be successful or that the Company's
net sales or net earnings will increase as a result of the implementation of
such strategies. In addition, the Company has significantly expanded its
infrastructure and personnel to achieve economies of scale in anticipation of
continued increases in net sales. Because these expenses are fixed, at least in
the short term, operating results and margins would be adversely impacted if the
Company does not achieve anticipated continued growth.
RISKS ASSOCIATED WITH FOREIGN OPERATIONS
Substantially all of the Company's net sales for the year ended December
31, 1999 were derived from sales of footwear manufactured for the Company
outside of the United States. During such period, substantially all of such
manufactured products were produced in China. Additionally, the Company intends
to increase its international sales efforts. Foreign manufacturing and sales are
subject to a number of risks, including work stoppages, transportation delays,
changing economic conditions, expropriation, international political tension,
political and social unrest, nationalization, the imposition of tariffs, import
and export controls and other nontariff barriers, exposure to different legal
standards (particularly with respect to intellectual property), burdens with
complying with a variety of foreign laws and changes in domestic and foreign
governmental policies, any of which could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
has not experienced material losses as a result of fluctuation in the value of
foreign currencies. The Company's net sales and cost of goods sold are
denominated in U.S. Dollars; consequently, the Company does not engage in
currency hedging. Nevertheless, currency fluctuations could adversely affect the
Company in the future. Also, the Company may be subjected to additional duties,
significant monetary penalties, the seizure and the forfeiture of the products
the Company is attempting to import or the loss of its import privileges if the
Company or its suppliers are found to be in violation of U.S. laws and
regulations applicable to the importation of the Company's products. Such
violations may include (i) inadequate record keeping of its imported products,
(ii) misstatements or errors as to the origin, quota category, classification,
marketing or valuation of its imported products, (iii) fraudulent visas or (iv)
labor violations under U.S. or foreign laws. There can be no assurance that the
Company will not incur significant penalties (monetary or otherwise) if the
United States Customs Service determines that these laws or regulations have
been violated or that the Company failed to exercise reasonable care in its
obligations to comply with these laws or regulations on an informed basis. Such
factors could render the conduct of business in a particular country undesirable
or impractical, which could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company continues
to monitor the political and economic stability of the Asian countries with
which it conducts business. A substantial portion of the Company's footwear is
manufactured in China. China has been granted "normal trade relations" status
under United States tariff laws through early July 2000, which provides a
favorable
16
category of United States import duties. As a result of continuing concerns in
the United States Congress regarding China's human rights policies, disputes
regarding Chinese trade policies, including the country's inadequate protection
of United States intellectual property rights, and current relations with China
regarding weapons information, there has been, and may be in the future,
opposition to the extension of "normal trade relations" status for China. In
2000, however, there will be for the first time, a major effort by the U.S.
Congress to pass legislation that would make permanent China's "natural trade
relations" status in return for the country's expected accession to the World
Trade Organization. The proposal is controversial, and there can be no assurance
that it will be passed. Moreover, there can be no assurance that China will
continue to enjoy "natural trade relations" status in the future. The loss of
"normal trade relations" status for China would result in a substantial increase
in the import duty of goods manufactured in China and imported into the United
States and would result in increased costs for the Company. Such increases in
import duties and costs could have a material adverse effect on the Company's
business, financial condition and results of operations.
Although the footwear sold by the Company is not currently subject to quotas in
the United States, certain countries in which the Company's products are sold
are subject to certain quotas and restrictions on foreign products which to date
have not had a material adverse effect on the Company's business, financial
condition and results of operations. However, such countries may alter or modify
such quotas or restrictions. Countries in which the Company's products are
manufactured may, from time to time, impose new or adjust quotas or other
restrictions on exported products, and the United States may impose new duties,
tariffs and other restrictions on imported products, any of which could have a
material adverse effect on the Company's business, financial condition and
results of operations and its ability to import products at the Company's
current or increased quantity levels. Other restrictions on the importation of
the Company's products are periodically considered by the U.S. Congress, and
there can be no assurance that tariffs or duties on the Company's products may
not be raised, resulting in higher costs to the Company, or that import quotas
with respect to such products may not be imposed or made more restrictive.
DEPENDENCE ON CONTRACT MANUFACTURERS
The Company's footwear products are currently manufactured by independent
contract manufacturers. For the year ended December 31, 1999, the top four
manufacturers of the Company's manufactured products accounted for 15.5%, 13.4%,
13.3% and 12.3% of total purchases, respectively. The Company has no long-term
contracts with its manufacturers and competes with other footwear companies for
production facilities. Although the Company has established close working
relationships with its principal manufacturers, the Company's future success
will depend, in large part, on maintaining such relationships and developing new
relationships. There can be no assurance that the Company will not experience
difficulties with such manufacturers, including reduction in the availability of
production capacity, failure to meet the Company's quality control standards,
failure to meet production deadlines or increase in manufacturing costs. This
could result in cancellation of orders, refusal to accept deliveries or a
reduction in purchase prices, any of which could have a material adverse effect
on the Company's business, financial condition and results of operations. In the
event that the Company's current manufacturers were for any reason to cease
doing business with the Company, the Company could experience an interruption in
the manufacture of its products, which could have a material adverse effect on
the Company's business, financial condition and results of operations. Although
the Company believes that it could find alternative sources to manufacture its
products within 90 to 120 days after the date of disruption, establishment of
new manufacturing relationships involves various uncertainties, including
payment terms, costs of manufacturing, adequacy of manufacturing capacity,
quality control and timeliness of delivery. The Company cannot predict whether
it will be able to establish new manufacturing relationships, either in the
countries in which it currently does business or in other countries in which it
does not currently do business, that will be as favorable as those that now
exist. Any significant delay in manufacture of the Company's footwear products
or the inability to provide products consistent with the Company's standards,
would have a material adverse effect on the Company's business, financial
condition and results of operations.
17
The Company requires its independent contract manufacturers to operate in
compliance with applicable laws and regulations. The Company requires its
manufacturers to certify that neither convict, forced, indentured labor (as
defined under U.S. law) nor child labor (as defined by the manufacturer's
country) was used in the production process, that compensation will be paid in
accordance with local law and that the factory is in compliance with local
safety regulations. Although the Company's operating guidelines promote ethical
business practices and the Company's sourcing personnel periodically visit and
monitor the operations of its independent contract manufacturers, the Company
does not control these vendors or their labor practices. The violation of labor
or other laws by an independent contract manufacturer of the Company, or the
divergence of an independent contract manufacturer's labor practices from those
generally accepted as ethical in the United States, could result in adverse
publicity for the Company and could have a material adverse effect on the
Company's business, financial condition and results of operations.
DEPENDENCE ON KEY CUSTOMERS AND SALES REPRESENTATIVES
During the year ended December 31, 1999, the Company's net sales to its five
largest customers accounted for approximately 30.8% of total net sales. For the
year ended December 31, 1999, no one customer accounted for 10.0% or more of net
sales. Although the Company has long-term relationships with many of its
customers, none of its customers has any contractual obligations to purchase the
Company's products. There can be no assurance that the Company will be able to
retain its existing major customers. In addition, the retail industry has
periodically experienced consolidation, contractions and closings and any future
consolidation, contractions or closings may result in loss of customers or
uncollectability of accounts receivables of any major customer in excess of
amounts insured by the Company. For example, in late 1998, The Venator Group
announced the closure of its Kinney and Footquarters shoe stores and, in early
1999, Edison Brothers closed its Wild Pair shoe stores.
As of December 31, 1999, the Company had one customer which accounted for 10.1%
of trade accounts receivable. The loss of or significant decrease in sales to
any one of the Company's major customers or uncollectability of any accounts
receivable of any major customer in excess of amounts insured could have a
material adverse effect on its business, financial condition and results of
operations.
The Company has entered into employment agreements with each of its
salespersons. Although each salesperson has agreed under these agreements to
keep certain information of the Company confidential, these salespersons are not
subject to non-competition agreements with the Company. The loss of any of such
salespersons may result in the disruption of service to such customers serviced
by such salespersons, which could have a material adverse effect on the
Company's business, financial condition and results of operations.
SEASONALITY; QUARTERLY FLUCTUATIONS
Sales of footwear products have historically been somewhat seasonal in nature
with the strongest sales generally occurring in the third and fourth quarters.
During 1999, the Company aggressively addressed this seasonal fluctuations by
introducing new styles that addressed the seasonal demands. As a result, the
Company's third and fourth quarter represented 29.2% and 23.6% of net sales in
1999, respectively, compared to 38.4% and 22.0% of net sales in 1998,
respectively. The Company's net sales in the fourth quarter of 1998 were also
adversely affected by the overall weakness in the retail footwear market. In the
third and fourth quarters of 1999, income from operations represented 39.9% and
15.6% of earnings from operations for the year, as compared to income from
operations during the third quarter of 72.0% and a loss from operations was
generated in the fourth quarter of 1998. Operating expenses for the fourth
quarter of 1998 were impacted by certain discretionary expenses of approximately
$3.2 million and by significantly higher marketing expenses as a percentage of
net sales than the Company typically incurs. The Company has experienced and
expects to continue to experience some variability in its net sales, operating
results and net earnings on a quarterly basis. The Company's domestic customers
generally assume responsibility for scheduling pickup and delivery of purchased
products. Any delay in scheduling or pickup which is beyond the Company's
control, could materially negatively impact the Company's net sales and results
of operations for any given quarter. The Company believes the factors which
influence this variability include
18
(i) the timing of the Company's introduction of new footwear products, (ii) the
level of consumer acceptance of new and existing products, (iii) general
economic and industry conditions that affect consumer spending and retail
purchasing, (iv) the timing of the placement, cancellation or pickup of customer
orders, (v) increases in the number of employees and overhead to support growth,
(vi) the timing of expenditures in anticipation of increased sales and customer
delivery requirements, (vii) the number and timing of new Company retail store
openings and (viii) actions by competitors. Due to these and other factors, the
results for any particular quarter are not necessarily indicative of results for
the full year. This cyclically and any related fluctuation in consumer demand
could have a material adverse effect on the Company's business, financial
condition and results of operations.
EXPOSURE TO FLUCTUATIONS IN ECONOMIC CONDITIONS
The footwear industry in general is dependent on the economic environment and
levels of consumer spending which affect not only the ultimate consumer, but
also retailers, the Company's primary direct customers. Purchases of footwear
tend to decline in periods of recession or uncertainty regarding future economic
prospects, when consumer spending, particularly on discretionary items,
declines. As a result, the Company's operating results may be adversely affected
by downward trends in the economy or the occurrence of events that adversely
affect the economy in general.
RISKS RELATING TO ADVANCE PURCHASES OF PRODUCTS
To minimize purchasing costs, the time necessary to fill customer orders and the
risk of non-delivery, the Company places orders for certain of its products with
its manufacturers prior to the time the Company has received all of its
customers' orders and maintains an inventory of certain products that it
anticipates will be in greater demand. There can be no assurance, however, that
the Company will be able to sell the products it has ordered from manufacturers
or that it has in its inventory. Inventory levels in excess of customer demand
may result in inventory write-downs and the sale of excess inventory at
discounted prices could significantly impair the Company's brand image and could
have a material adverse effect on the Company's business, financial condition
and results of operations. As of December 31, 1999, the Company had
19
approximately $98.0 million of open purchase orders with its manufacturers and
$69.0 million of inventory relating to order backlog of $121.7 million.
ADDITIONAL CAPITAL REQUIREMENTS
The Company expects that anticipated cash flow from operations, available
borrowings under the Company's revolving line of credit, cash on hand and its
financing arrangements will be sufficient to provide the Company with the
liquidity necessary to fund its anticipated working capital and capital
requirements through 2000. However, in connection with its growth
strategy, the Company will incur significant working capital requirements and
capital expenditures. The Company's future capital requirements will depend on
many factors, including, but not limited to, the levels at which the Company
maintains inventory, the market acceptance of the Company's footwear, the levels
of promotion and advertising required to promote its footwear, the extent to
which the Company invests in new product design and improvements to its existing
product design and the number and timing of new store openings. To the extent
that available funds are insufficient to fund the Company's future activities,
the Company may need to raise additional funds through public or private
financing. No assurance can be given that additional financing will be available
or that, if available, it can be obtained on terms favorable to the Company.
Failure to obtain such financing could delay or prevent the Company's planned
expansion, which could adversely affect the Company's business, financial
condition and results of operations. In addition, if additional capital is
raised through the sale of additional equity or convertible securities, dilution
to the Company's stockholders could occur.
20
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a large extent upon the expertise and
continuing contributions of Robert Greenberg, Chairman of the Board and Chief
Executive Officer, Michael Greenberg, President, and David Weinberg, Executive
Vice President and Chief Financial Officer. Each of these officers currently has
a three-year employment contract with the Company. These agreements do not
have non-competition provisions upon termination of employment. The loss of the
services of any of these individuals or any other key employee could have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company's future success also depends on its ability
to identify, attract and retain additional qualified personnel. The competition
for such employees is intense, and there can be no assurance that the Company
will be successful in identifying, attracting and retaining such personnel. The
Company maintains $5.0 million of "key man" life insurance on the life of Robert
Greenberg. The loss of key employees or the inability to hire or retain
qualified personnel in the future could have a material adverse effect on the
Company's business, financial condition and results of operations.
CONTROL OF THE COMPANY BY PRINCIPAL STOCKHOLDER; DISPARATE VOTING RIGHTS
Robert Greenberg, Chairman of the Board and Chief Executive Officer, owns 65.0%
of the outstanding Class B Common Stock of the Company. The holders of Class A
Common Stock and Class B Common Stock have identical rights except that holders
of Class A Common Stock are entitled to one vote per share while holders of
Class B Common Stock are entitled to ten votes per share on all matters
submitted to a vote of the stockholders. As a result, Mr. Greenberg holds
approximately 63.4% of the aggregate number of votes eligible to be cast by the
Company's stockholders. Therefore, Mr. Greenberg is able to control
substantially all matters requiring approval by the stockholders of the Company,
including the election of directors and the approval of mergers or other
business combination transactions, and also has control over the management and
affairs of the Company. As a result of such control, certain transactions are
not possible without the approval of Mr. Greenberg, including proxy contests,
tender offers, open market purchase programs or other transactions that can give
stockholders of the Company the opportunity to realize a premium over the
then-prevailing market prices for their shares of Class A Common Stock. The
differential in the voting rights may adversely affect the value of the Class A
Common Stock to the extent that investors or any potential future purchaser of
the Company view the superior voting rights of the Class B Common Stock to have
value.
ANTI-TAKEOVER PROVISIONS
The Company is subject to the anti-takeover provisions of Section 203 of the
Delaware General Corporation Law. In general, Section 203 prevents an
"interested stockholder" (defined generally as a person owning more than 15.0%
or more of the Company's outstanding voting stock) from engaging in a "business
combination" with the Company for three years following the date that person
became an interested stockholder unless the business combination is approved in
a prescribed manner. This statute could make it more difficult for a third party
to acquire control of the Company.
The Board of Directors has the authority to issue up to 10,000,000 shares of
Preferred Stock and to determine the rights, preferences, privileges and
restrictions of such shares without any further vote or action by the
stockholders. Although at present the Company has no plans to issue any shares
of Preferred Stock, Preferred Stock could be issued with voting, liquidation,
dividend and other rights superior to the rights of the Common Stock. The
issuance of Preferred Stock under certain circumstances could have the effect of
delaying or preventing a change in control of the Company.
21
Mr. Greenberg's substantial beneficial ownership position, together with the
authorization of Preferred Stock, the disparate voting rights between the Class
A and Class B Common Stock, the classification of the Board of Directors and the
lack of cumulative voting in the Company's Certificate of Incorporation and
Bylaws, may have the effect of delaying, deferring or preventing a change in
control of the Company, may discourage bids for the Company's Class A Common
Stock at a premium over the market price of the Class A Common Stock and may
adversely affect the market price of the Class A Common Stock.
NO ASSURANCE OF ACTIVE TRADING MARKET FOR CLASS A COMMON STOCK AND POSSIBLE
VOLATILITY OF STOCK PRICE
The market price of our Class A Common Stock has been extremely volatile. During
1999, the Company's Common Stock reached a high of $11.81 per share and a low of
$3.44. On December 31, 1999, the closing market price was $3.81 per share. The
market price for shares of the Class A Common Stock may continue to fluctuate
based upon a number of factors, including, without limitation, business
performance, news announcements, quarterly fluctuations in the Company's
financial results, changes in earnings estimates or recommendations by analysts
or changes in general economic and market conditions.
If the Company's results of operations fail to meet the expectations of
securities analysts or investors in a future quarter, the market price of our
Class A Common Stock could also be materially adversely affected.
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
The sales of substantial amounts of the Company's Class A Common Stock in the
public market or the prospect of such sales could materially and adversely
affect the market price of the Class A Common Stock. The Company has outstanding
8,481,623 shares of Class A Common Stock. In addition, the Company has
outstanding 26,423,445 shares of Class B Common Stock, all of which are
convertible into Class A Common Stock on a share-for-share basis at the election
of the holder or upon transfer or disposition to persons who are not Permitted
Transferees (as defined in the Company's Certificate of Incorporation). The
8,481,623 shares of Class A Common Stock are eligible for sale in the public
market without restriction. The 26,423,445 shares of Class B Common Stock are
restricted in nature and are saleable pursuant to Rule 144 under the Securities
Act of 1933, as amended (the "Securities Act"). Robert Greenberg, Chairman of
the Board and Chief Executive Officer, and Michael Greenberg, President,
beneficially own an aggregate of 20,860,613 shares of Class B Common Stock for
which they have received certain registration rights to sell such shares of
Class A Common Stock issuable upon conversion of their shares of Class B Common
Stock in the public market. The Company also registered under the Securities Act
shares of Class A Common Stock reserved for issuance pursuant to the Stock
Option Plan and the 1998 Employee Stock Purchase Plan.
YEAR 2000 COMPLIANCE
The Company instituted a program to determine the internal readiness of its
computer systems for handling the year 2000 ("Y2K") issue. Although management
believes the Company adequately addressed Y2K compliance issues, and to date,
there have not been any problems with the Company's computer systems and
non-informational technology systems relating to Y2K compliance, there can be no
assurance that such problems will not be identified in the future. However, the
Company believes that it has sufficient resources and that any such problems
subsequently identified will not be material to the Company's financial position
or results of operations.
ITEM 2. PROPERTIES
The Company's corporate headquarters and additional administrative offices are
located at three premises in Manhattan Beach, California, and consist of an
aggregate of approximately 35,000 square feet. The leases on the premises expire
between February 2002 and February 2008, with options to extend in some cases,
and the current aggregate annual rent is approximately $1.1 million.
22
The Company also leases space for its distribution centers and its retail
stores. These facilities aggregate approximately 1.1 million square feet, with
an annual aggregate base rental of approximately $8.0 million, plus, in some
cases, a percentage of the store's gross sales in excess of the base annual
rent. The terms of these leases vary as to duration and rent escalation
provisions. The Company has also signed leases for retail stores expected to be
opened in 2000. In general, the leases expire between August 2000 and November
2010 and provide for rent escalations tied to either increases in the lessor's
operating expenses or fluctuations in the consumer price index in the relevant
geographical area.
ITEM 3. LEGAL PROCEEDINGS
On April 16, 1999, a complaint captioned Swanier v. Skechers was filed against
the Company and an employee of the Company in the Superior Court, County of Los
Angeles, Southwest District, Torrance, Case No. YC034808. The complaint alleged
various causes of action in connection with plaintiff's employment by the
Company. The Complaint has since been settled, and the terms of the settlement
did not have a material impact on the Company's financial position or results of
its operations.
On June 14, 1999, a complaint captioned R. Griggs Group Limited v. Skechers
U.S.A., Inc. was filed against the Company in the United States District Court,
Northern District of California (San Francisco Division), Case No. 99-2862. R.
Griggs Group Limited manufactures and markets footwear including Dr. Martens.
The complaint alleged various causes of action, including Federal, state and
common law unfair competition and Federal and state dilution, with respect to
certain trade dress marks of certain styles of footwear, and fraud and deceit
regarding the plaintiff's alleged postponement of the filing of the action. On
June 15, 1999, the Company filed a complaint captioned Skechers U.S.A., Inc. v.
R. Griggs Group Limited in the United States District Court, Central District of
California (Los Angeles Division), Case No. 99-06115. The complaint sought a
declaratory judgment of non-infringement, invalidity and unenforceability of
defendant's trade dress rights and further declatory judgment that the Company
did not breach a trade dress settlement agreement previously entered into by and
between the parties. The two complaints were resolved in February 2000. The
parties have signed a letter of intent embodying the material terms of the
settlement and are currently working on the final written agreement. The terms
are confidential but the Company can disclose that the settlement will not
require payment of any money by the Company. The non-monetary terms will not
have a material impact on the Company's financial position or results of
operations.
On December 29, 1999, a complaint captioned Shapiro, et al., v. Skechers U.S.A.,
Inc., et al. was filed against the Company and two of its officers and directors
in the United States District Court, Central District of California, Case No.
99-13559. The complaint is a purported class action claiming damages for alleged
violations of the Securities Act and the Securities Exchange Act of 1934, as
amended (the "Securities Exchange Act"). The Shapiro complaint also names the
underwriters for the Company's Initial Public Offering of its Class A Common
Stock on June 9, 1999 (the "Offering") as defendants in the case. On January 12,
2000, a compliant captioned Abraham, et al., v. Skechers U.S.A., Inc., et al.
was filed against the Company and two of its officers and directors in the
United States District Court, Central District of California, Case No. 00-00471.
The complaint is a purported class action claiming damages for alleged
violations of the Securities Act and Securities Exchange Act. On January 24,
2000, a complaint captioned Astrolio, et al., v. Skechers U.S.A., Inc., et al.
was filed against the Company and two of its officers and directors in the
United States District Court, Central District of California, Case No. 00-00772.
The complaint is a purported class action claiming damages changes for alleged
violations of the Securities Act and Securities Exchange Act. The Astrolio
complaint also names the underwriters for the Offering as defendants in the
case. On January 19, 2000, a complaint captioned Pugliesi, et al., v. Skechers
U.S.A., Inc., et al. was filed against the Company and two of its officers and
directors in the United States District Court, Central District of California,
Case No. 00-00631. The complaint is a purported class action claiming damages
for alleged violations of the Securities Act and the Securities Exchange Act.
Shapiro, Abraham, Astrolio, and Pugliesi (collectively, the "Skechers Securities
Litigation") were each filed within the last three months, and no defendant as
yet has filed a formal response. All of the complaints in the Skechers
Securities Litigation seek both damages and recission on behalf of a class of
23
persons who purchased securities in, or traceable to, the Offering and / or
thereafter on the open market prior to July 6, 1999. The four cases are expected
to be consolidated. As these matters are in the early stages of discovery,
neither the Company nor its counsel are able to conclude as to the potential
likelihood of an unfavorable outcome. The Company is vigorously defending these
complaints and believes their defenses to be meritorious. Accordingly, the
Company has not provided for any potential losses associated with these
lawsuits.
The Company occasionally becomes involved in litigation arising from the normal
course of business. Other than the foregoing, management believes that any
liability with respect to pending legal actions, individually or in the
aggregate, will not have a material adverse effect on the Company's business,
financial condition and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the security holders to be voted on during the
fourth quarter of 1999.
24
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Class A Common Stock began trading on the New York Stock Exchange
on June 9, 1999 after the Company completed an initial public offering of
7,000,000 shares of Class A Common Stock at $11.00 per share. The Company's
Class A Common Stock trades under the symbol "SKX". The following table sets
forth, for the periods indicated, the high and low sales prices of the Class A
Common Stock.
Year Ended December 31, 1999: High Low
------ ------
Second Quarter (1) $11.81 $ 9.75
Third Quarter
10.25 4.75
Fourth Quarter
5.19 3.44
(1) For the period from June 9, 1999 to June 30, 1999.
As of March 28, 2000, there were 63 holders of record of Class A Common Stock
(including holders who are nominees for an undetermined number of beneficial
owners) and 6 holders of record of the Company's Class B Common Stock. These
figures do not include beneficial owners who hold shares in nominee name. The
Class B Common Stock is not publicly traded but each share is convertible upon
request of the holder into one share of Class A Common Stock.
In May 1992, the Company elected to be treated for Federal and state income tax
purposes as an S Corporation under Subchapter S of the Internal Revenue Code of
1986, as amended (the "Code"), and comparable state laws. As a result, earnings
of the Company, since such initial election, were included in the taxable income
of the Company's stockholders for Federal and state income tax purposes, and the
Company was not subject to income tax on such earnings, other than franchise and
net worth taxes. Prior to the closing of the Offering, the Company terminated
its S Corporation status, and since then the Company has been treated for
Federal and state income tax purposes as a corporation under Subchapter C of the
Code and, as a result, had become subject to state and Federal income taxes. By
reason of the Company's treatment as an S Corporation for Federal and state
income tax purposes, the Company, since inception, had provided to its
stockholders funds for the payment of income taxes on the earnings of the
Company. The Company declared distributions relating to its S Corporation status
of $7.9 million in 1998 and $35.4 million in 1999 ("S Corporation
Distributions"), $21.0 million of which was paid from a portion of the net
proceeds of the Offering.
In connection with the Offering and the termination of the Company's S
Corporation tax status, the Company entered into a tax indemnification agreement
with each of its stockholders. The agreement provides that the Company will
indemnify and hold harmless each of the stockholders for Federal, state, local
or foreign income tax liabilities, and costs relating thereto, resulting from
any adjustment to the Company's taxable income that is the result of an increase
in or change in character of, the Company's income during the period it was
treated as an S Corporation up to the Company's tax savings in connection with
such adjustments. The agreement also provides that if there is a determination
that the Company was not an S Corporation prior to the Offering, stockholders
will indemnify the Company for the additional tax liability arising as a result
of such determination. The stockholders will also indemnify the Company for any
increase in the Company's tax liability to the extent such increase results in a
related decrease in the stockholders' tax liability.
Purchasers of shares of Class A Common Stock in the Offering did not receive any
portion of the S Corporation Distributions. The Company has
25
never declared or paid dividends on its Class A Common Stock. The Company
currently intends to retain any earnings for use in its business and does not
anticipate paying any cash dividends in the foreseeable future.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
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, 1999.
SUMMARY FINANCIAL DATA
(In thousands, except earnings per share)
Years ended December 31,
-------------------------------------------------------------------------
1995 1996 1997 1998 1999
--------- --------- --------- --------- ---------
STATEMENT OF OPERATION DATA:
Net sales $ 110,649 $ 115,410 $ 183,827 $ 372,680 $ 424,601
Gross profit 31,957 34,211 68,723 154,580 174,608
Operating expenses:
Selling 12,150 11,739 21,584 49,983 57,332
General and administrative 19,850 18,939 32,397 71,461 79,114
Earnings from operations 1,800 5,125 15,636 33,991 38,830
Interest expense 3,676 3,231 4,186 8,631 6,554
Earnings (loss) before income taxes and
extraordinary credit (1,662) 1,955 11,413 25,121 32,691
Net earnings (loss) (1,222)(1) 1,910 11,023 24,471 24,056
PRO FORMA OPERATIONS DATA: (2)
Earnings (loss) before income taxes and
extraordinary credit $ (1,662) $ 1,955 $ 11,413 $ 25,121 $ 32,691
Income taxes (benefit) (665) 782 4,565 10,048 12,880
Net earnings (loss) (727)(1) 1,173 6,848 15,073 19,811
Net earnings (loss) per share: (3)
Basic $ (0.03) $ 0.04 $ 0.25 $ 0.54 $ 0.62
Diluted $ (0.02) $ 0.04 $ 0.23 $ 0.49 $ 0.60
Weighted average shares: (3)
Basic 27,814 27,814 27,814 27,814 31,765
Diluted 29,614 29,614 29,614 30,610 33,018
As of December 31,
----------------------------------------------------------------
BALANCE SHEET DATA: 1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
Working capital $ 8,155 $ 11,987 $ 17,081 $ 23,106 $ 65,003
Total assets 47,701 42,151 90,881 146,284 177,914
Total debt 31,748 25,661 39,062 70,933 33,950
Stockholders' equity 938 3,336 11,125 27,676 86,000
(1) Includes an extraordinary gain of $443,000 net of state income taxes of
$7,000 ($270,000 on a pro forma basis, net of $180,000) resulting from the
acceleration of the repayment of a note.
(2) Reflects adjustments for Federal and state income taxes assuming the
Company had been taxed as a C Corporation rather than as an S Corporation.
(3) Basic earnings per share represents net earnings divided by the
weighted-average number of common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution that could occur
if options to issue common stock were exercised or converted into common
stock. The weighted average diluted shares outstanding gives effect to the
sale by the Company of those shares of common stock necessary to fund the
payment of (i) stockholder distributions paid or declared from January 1,
1998 to June 7, 1999, the S Corporation termination date, in excess of (ii)
the S Corporation earnings from January 1, 1998 to December 31, 1998 for
both 1997 and 1998, and January 1, 1999 to June 7, 1999 for 1999, based on
an initial public offering price of $11 per share, net of underwriting
discounts.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain information contained in the following Management's Discussion and
Analysis of Financial Condition and Results of Operations constitute
forward-looking statements within the meaning of the Securities Act and the
Securities Exchange Act, which can be identified by the use of forward-looking
terminology such as "believes," "anticipates," "plans," "expects," "may,"
"will," "intends," "estimates" and similar expressions that are intended to
identify forward-looking statements. These forward-looking statements involve
risks and uncertainties, and the Company's actual results may differ materially
from the results discussed in the forward-looking statements as a result of
certain factors set forth in "Risk Factors" and elsewhere in this Report.
OVERVIEW
The Company has realized rapid growth since inception, increasing net sales at a
compound annual growth rate of 36.2% from $90.8 million in 1994 to $424.6
million in 1999. Significant growth was experienced in 1998, when the Company
experienced a 102.7% and 117.4% increase in sales and earnings from operations,
respectively. This momentum continued into 1999 with a 13.9% increase in sales
and a 14.2% increase in earnings from operations. From 1997 to 1998, the Company
also experienced an improvement in Gross Margin from 37.4% to 41.5% and was able
to maintain these margins at a comparable level in 1999 of 41.1%. Operating
Margin also increased from 8.5% in 1997 to 9.1% in 1998 and 9.1% in 1999. These
improvements resulted in part from the shift to offering Skechers product
exclusively (away from the "Cross Colours", "Karl Kani" and "So...LA" brands)
and in part from economies of scale. In the future, the Company's rate of growth
will be dependent upon, among other things, the continued success of its efforts
to expand its footwear offerings within the Skechers brand or developing
alternative, successful brands. There can be no assurance that the rate of
growth will not decline in future periods or that the Company will improve or
maintain Operating Margins.
As the Company's sales growth has accelerated, management has focused on
investing in infrastructure to support continued expansion in a disciplined
manner. Major areas of investment have included expanding the Company's
distribution facilities, hiring additional personnel, developing product
sourcing and quality control offices in Taiwan, upgrading the Company's
management information systems, developing and expanding the Company's retail
stores and launching its direct mail business in August 1998 through its web
site and catalog. The Company has established this infrastructure to achieve
further economies of scale in anticipation of continued increases in sales.
Because expenses relating to this infrastructure are fixed, at least in the
short-term, operating results and margins would be adversely affected if the
Company does not achieve anticipated continued growth.
26
Management has implemented a strategy of controlling the growth of the
distribution channels through which the Company's products are sold in order to
protect the Skechers brand name, properly service customer accounts and better
manage the growth of the business. Increasing sales depend on various factors,
including strength of the Company's brand name, competitive conditions, the
ability of the Company to manage the increased sales and stores. There can be no
assurance that the Company's growth strategy will be successful or that the
Company's sales or earnings will increase as a result of the implementation of
such efforts.
As of February 29, 2000 the Company operated 23 concept stores at marquee
locations in major metropolitan cities. Each concept store serves not only as a
showcase for the Company's full product offering for the current season but also
as a rapid product feedback mechanism. Product sell-through information derived
from the Company's concept stores enables the Company's sales, merchandising and
production staff to respond to market changes and new product introductions.
Such responses serve to augment sales and limit inventory markdowns and customer
returns and allowances. As of February 29, 2000, the Company also operated 19
factory and warehouse outlet stores that enable the Company to liquidate excess,
discontinued and odd-size inventory in a cost efficient manner. The Company
plans to increase the number of retail locations in the future to further its
strategic goals as well as in an effort to increase sales and earnings. The
Company plans to open at least three new concept stores and six new outlet
stores in the remainder of 2000.
Although the Company's primary focus is on the domestic market, the Company
presently markets its product in countries in Europe, Asia and selected other
foreign regions through distributorship agreements. To date, international sales
have been made in U.S. Dollars, although there can be no assurance that this
will continue to be the case. The Company's goal is to increase sales through
distributors by heightening the Company's marketing support in these countries.
Sales through foreign distributors have resulted in lower gross margins to the
Company than domestic sales. To the extent that the Company expands its
international operations through distribution arrangements, its overall gross
margins may be adversely affected. In 1998, the Company launched its first major
international advertising campaign in Europe and Asia. In an effort to increase
profit margins on products sold internationally and more effectively promote the
Skechers brand name, the Company is exploring selling directly to retailers in
certain European countries in the future. In addition, the Company is exploring
selectively opening flagship retail stores internationally on its own or through
joint ventures. There can be no assurance that such expansion plans will be
successful.
Management believes that selective licensing of the Skechers brand name to
non-footwear-related manufacturers may broaden and enhance the Skechers image
without requiring significant capital investments or the incurrence of
significant incremental operating expenses by the Company. The Company is
experimenting with certain manufacturers on very limited basis to study the
potential impact of licensing its brand name. To date, there has not been any
significant royalty income from such licensing agreements.
The Company contracts with third parties for the manufacture of all of its
products. The top four manufacturers of the Company's products in 1999 accounted
for 15.5%, 13.4%, 13.3% and 12.3% of total purchases, respectively. During 1998,
the Company had four manufacturers which accounted for 15.4%, 14.2%, 12.1%, and
10.4% of total purchases, respectively, and in 1997, the Company had two
manufacturers which accounted for 21.7% and 15.0% of total purchases,
respectively. To date, products have been purchased in U.S. Dollars, although
there can be no assurance that this will continue to be the case. The Company
believes the use of independent manufacturers increases its production
flexibility and capacity while at the same time allowing the Company to
substantially reduce capital expenditures and avoid the costs of managing a
large production work force. Substantially all of the
27
Company's products are produced in China. The Company finances its production
activities in part through the use of interest-bearing open purchase
arrangements with certain of its Asian manufacturers. These facilities currently
bear interest at a rate between 1.5% for 30 day financing and 2.0% for 45 to 60
day financing (depending on the factory). Management believes that the use of
these arrangements affords the Company additional liquidity and flexibility.
Finished goods are received, inspected and shipped to domestic accounts
primarily from the Company's distribution centers located in Ontario,
California. Substantially all of the international orders are shipped directly
from the manufacturer to Skechers' international distributors.
In May 1992, the Company elected to be treated for Federal and state income tax
purposes as an S Corporation under Subchapter S of the Code and comparable state
laws. As a result, earnings of the Company, since such initial election, were
included in the taxable income of the Company's stockholders for Federal and
state income tax purposes, and the Company was not subject to income tax on such
earnings, other than franchise and net worth taxes. Since the termination of the
Company's S Corporation status on June 7, 1999, the Company has been treated for
Federal and state income tax purposes as a corporation under Subchapter C of the
Code and, as a result, became subject to state and Federal income taxes. By
reason of the Company's treatment as an S Corporation for Federal and state
income tax purposes, the Company, since inception, has made distributions to its
stockholders to include the payment of income taxes on the earnings of the
Company as well as the taxes payable when the Company's converted to a C
Corporation. The Company declared S Corporation Distributions of $7.9 million
in 1998 and $35.4 million in 1999, $21.0 million of which was paid from a
portion of the net proceeds of the Offering.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEARS ENDED DECEMBER 31, 1998 AND
1997
Net Sales
Net sales increased by $51.9 million to $424.6 million, an increase of 14.0%.
This compares to an increase of $188.9 million, or 102.7%, to $372.7 million for
the 1998 as compared to $183.8 million for 1997. Continued growth in sales of
branded footwear is primarily as a result of (i) greater brand awareness driven
in part by a continued expansion of the Company's national marketing efforts,
(ii) a broader breadth of men's, women's and children's product offerings, (iii)
the development of the Company's domestic and international sales forces and
(iv) the transition of the Company's account base in the direction of larger
accounts with multiple stores and increased sales to such accounts, resulting in
higher sales per account.
During 1999, the Company was able to successfully target additional styles and
categories in the moderately-priced footwear market. Wholesale units sold
increased 20.5% from 16.1 million units in 1998 to 19.4 million units in 1999.
The Company was able to accomplish this and still maintain its gross margin at a
level comparable to that achieved in 1998 by carefully targeting production and
inventory levels with the level of orders from customers. In addition, it was
able to better match styles with seasonal trends during 1999. During 1998, the
increase in unit sales was 106.4%, from 7.8 million units in 1997 to 16.1
million units in 1998, compared to a sales increase of 102.7%.
28
Gross Profit
The Company's gross profit increased $20.0 million, or 13.0%, to $174.6 million
in 1999 compared to $154.6 million in 1998. In 1998, gross profit increased
$85.9 million, or 124.9%, to $154.6 million compared to $68.7 million in 1997.
Gross margin increased from 37.4% in 1997 to 41.5% in 1998, but remained
relatively constant at 41.1% in 1999. The increase in the gross margin in 1998
was primarily due to (i) an increase in the proportions of total sales derived
from the women's and children's footwear line, which had a higher gross margin
than the men's footwear line, (ii) better retail sell-through at the Company's
retail customer accounts, which typically results in fewer markdowns and (iii)
an increase in the Company's retail store sales, since such retail gross margins
are higher than wholesale gross margins and
Selling Expenses
Selling expenses increased $7.3 million, or 14.7%, to $57.3 million in 1999
compared to $50.0 million in 1998. As a percentage of net sales, selling
expenses remained relatively constant in 1999 at 13.5% compared to 13.4% in
1998. Selling expenses increased $28.4 million, or 131.6%, to $50.0 million for
1998 from $21.6 million (11.7% of net sales) for 1997. The increase during 1998
was primarily due to increased advertising expenditures and sales compensation
due to the increase in footwear sales, the implementation of a new sales
compensation package and the hiring of additional sales personnel. Advertising
expenses as a percentage of sales for 1999, 1998 and 1997 was 11.2%, 11.3% and
8.6%, respectively.
General and Administrative Expenses
General and administrative expenses increased $7.7 million to $79.1 million in
1999, compared to $71.5 million in 1998. As a percentage of sales, general and
administrative expenses decreased to 18.6% from 19.2%. In 1998, general and
administrative expenses increased $39.1 million, or 120.6%, to $71.5 million for
1998 from $32.4 million (17.6% of net sales) for 1997. The increase in total
dollars and as a percentage of sales in 1998 is primarily due to (i) the hiring
of additional personnel, (ii) an increase in costs associated with the Company's
distribution facilities to support the Company's growth, (iii) increased product
design and development costs, (iv) the addition of 23 retail stores which were
not open in 1997, and (v) increased discretionary expenses consisting of bonuses
paid to an executive officer and certain employees. Also included in general and
administrative expenses in 1998 and 1997 are $7.0 million and $2.7 million,
respectively, of bonus compensation expense related to the Company's 1996
Incentive Compensation Plan. In 1999, $1.2 million in bonuses were paid on
discretionary basis by the board.
Interest Expense
Interest expense decreased to $6.6 million in 1999 from $8.6 million in 1998 as
a result of a reduction in borrowings under the Company's revolving line of
credit and the repayment of the $10.0 million note payable to a stockholder.
From 1997 to 1998, interest expense increased $4.4 million, or 106.2%, to $8.6
million for 1998 as compared to $4.2 million for 1997 as a result of increased
borrowings to fund the Company's expanded operations and interest expense
associated with open purchase arrangements with certain of the Company's Asian
manufacturers, which in part finance the Company's manufacturing activities.
29
Pro Forma Income Taxes
Pro forma income taxes represent taxes, which would have been reported assuming
the Company been subject to federal and state taxes as a C Corporation.
LIQUIDITY AND CAPITAL RESOURCES
Up until the completion of the Offering in June, 1999, the Company relied upon
internally generated funds, trade credit, borrowings under credit facilities and
loans from a stockholder to finance its operations and expansion. The Company's
need for funds arises primarily from its working capital requirements, including
the need to finance its inventory and receivables. The Company's working capital
was $65.0 million at December 31, 1999 as compared to $23.1 million at December
31, 1998. This increase in working capital was primarily due to the proceeds,
after distribution to stockholders, of the proceeds from the Offering in June
1999, offset in part by the requirements to continue to fund the Company's
growth and expansion in 1999.
As part of the Company's working capital management, the Company performs
substantially all customer credit functions internally, including extension of
credit and collections. The Company's bad debt write-offs were less than 1.0% of
net sales for 1999 and 1998. The Company carries bad debt insurance to cover
approximately the first 90.0% of bad debts on substantially all of the Company's
major retail accounts.
Net cash provided by operating activities totaled $13.1 million during 1999,
compared to net cash used in operating activities of $4.3 million for 1998. The
increase in cash provided by operating activities was due to a reduction in the
buildup of inventory levels (a decrease in inventory balances as a percentage of
sales).
Net cash used in investing activities totaled $10.8 million and $9.4 million for
1999 and 1998, respectively, and related to capital expenditures. Capital
expenditures were principally expended in connection with the establishment of
the Company's distribution center in Ontario, California, additional hardware
and software for the Company's computer needs as well as the addition of retail
stores. Capital expenditures for 1999 included approximately $5.5 million used
for the installation of a new material handling system, expected to be completed
in 2000, for the Company's most recently opened distribution facility, the total
of which is expected to be approximately $12.0 million.
Net cash used in financing activities totaled $2.4 million in 1999, compared to
cash flow provided by financing activities of $23.2 million in 1998. The
decrease in cash from financing activities was primarily due to reduced
financing needs to fund growth (a corresponding increase in cash flow from
operations and funds available from initial public offering of $69.7 million).
The Company's credit facility provides for borrowings under a revolving line of
credit of up to $120.0 million and a term loan, with actual borrowings limited
to available collateral and certain limitations on total indebtedness
(approximately $39.5 million of availability as of December 31, 1999) with
The CIT Group, as agent for the lenders. As of December 31, 1999, there
was approximately $30.4 million outstanding under the revolving line of credit.
The revolving line of credit bears interest at the Company's option at either
the prime rate (8.5% at December 31, 1999) plus 25 basis points or at Libor
(6.0% at December 31, 1999) plus 2.75%. The revolving line of credit expires on
December 31, 2002. Interest on the revolving line of credit is payable monthly
in arrears. The revolving line of credit provides a sub-limit for letters of
credit of up to $18.0 million to finance the Company's foreign purchases of
merchandise inventory. As of December 31, 1999, the Company had approximately
$4.4 million of letters of credit under the revolving line of credit. The term
loan component of the credit facility, which has a principal balance of
approximately $2.4 million as of December 31, 1999, bears interest at the prime
rate plus 100
30
basis points and is due in monthly installments of $25,000 with a final balloon
payment December 2002. The proceeds from this note were used to purchase
equipment for the Company's distribution centers in Ontario, California and the
note is secured by such equipment. The credit facility contains certain
financial covenants that require the Company to maintain minimum tangible net
worth of at least $20.0 million, working capital of at least $14.0 million and
specified leverage ratios and limit the ability of the Company to pay dividends
if it is in default of any provisions of the credit facility. The Company was in
compliance with these covenants as of December 31, 1999. The credit facility is
collateralized by the Company's real and personal property, including, among
other things, accounts receivable, inventory, general intangibles and equipment
and is guaranteed by the Company's wholly-owned subsidiaries.
As of December 31, 1998, the Company had an unsubordinated note payable to the
Greenberg Family Trust in the amount of $10.0 million. The Company recorded
interest expense of approximately $433,000, $540,000 and $1.1 million related to
notes payable to the Greenberg Family Trust during the years ended December 31,
1999, 1998 and 1997, respectively. This note was repaid during 1999, with the
proceeds, in part, from the Offering.
By reason of the Company's treatment as an S Corporation for Federal and state
income tax purposes, the Company since inception provided to its stockholders
funds for the payment of income taxes on the earnings of the Company as well as
the conversion from an S Corporation to a C Corporation during 1999. The Company
declared S Corporation Distributions of $35.4 million, $7.9 million and $3.2
million in 1999, 1998 and 1997, respectively. Since the termination of the
Company's S Corporation status, earnings have been and will be retained for the
foreseeable future in the operations of the business.
The Company believes that anticipated cash flows from operations, available
borrowings under the Company's revolving line of credit, cash on hand and its
financing arrangements will be sufficient to provide the Company with the
liquidity necessary to fund its anticipated working capital and capital
requirements through fiscal 2000. However, in connection with its growth
strategy, the Company will incur significant working capital requirements and
capital expenditures. The Company's future capital requirements will depend on
many factors, including, but not limited to, the levels at which the Company
maintains inventory, the market acceptance of the Company's footwear, the levels
of promotion and advertising required to promote its footwear, the extent to
which the Company invests in new product design and improvements to its existing
product design and the number and timing of new store openings. To the extent
that available funds are insufficient to fund the Company's future activities,
the Company may need to raise additional funds through public or private
financing. No assurance can be given that additional financing will be available
or that, if available, it can be obtained on terms favorable to the Company and
its stockholders. Failure to obtain such financing could delay or prevent the
Company's planned expansion, which could adversely affect the Company's
business, financial condition and results of operations. In addition, if
additional capital is raised through the sale of additional equity or
convertible securities, dilution to the Company's stockholders could occur.
INFLATION
The Company does not believe that the relatively moderate rates of inflation
experienced in the United States over the last three years have had a
significant effect on its sales or profitability. However, the Company cannot
accurately predict the effect of inflation on future operating results. Although
higher rates of inflation have been experienced in a number of foreign countries
in which the Company's products are manufactured, the Company does not believe
that inflation has had a material effect on the Company's sales or
profitability. In the past, the Company has been able to offset its foreign
product cost increases by increasing prices or changing suppliers, although no
assurance can be given that the Company will be able to continue to make such
increases or changes in the future.
EXCHANGE RATES
The Company receives U.S. Dollars for substantially all of its product sales and
its royalty income. Inventory purchases from offshore contract manufacturers are
primarily denominated in U.S. Dollars; however, purchase prices for the
Company's products may be impacted by fluctuations in the exchange rate
31
between the U.S. Dollar and the local currencies of the contract manufacturers,
which may have the effect of increasing the Company's cost of goods in the
future. During 1998 and 1999, exchange rate fluctuations did not have a material
impact on the Company's inventory costs. The Company does not engage in hedging
activities with respect to such exchange rate risk.
MARKET RISK
The Company does not hold any derivative securities or other market rate
sensitive instruments.
YEAR 2000 COMPLIANCE
In prior years, the Company discussed the nature and progress of its plans to
become Year 2000 ("Y2K") compliant. As a result of those planning and
implementation efforts, the Company experienced no significant disruptions in
mission critical information technology and non-information technology systems
and believes those systems have successfully responded to the Y2K date change.
The Company's costs associated with becoming Y2K compliant were less than
$100,000 exclusive of system upgrades incurred in the normal course of business.
The Company is not aware of any material problems resulting from Y2K issues,
either with its products, its internal systems or the products and services of
third parties. The potential inability of third parties to address their own Y2K
issues remains a risk which is difficult to assess. The Company will continue to
monitor its mission critical computer applications and those of its suppliers
and vendors throughout the Y2K to ensure that any latent Y2K matters that may
arise are addressed promptly.
FUTURE ACCOUNTING CHANGES
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS No. 133"). SFAS No. 133 modifies the
accounting for derivative and hedging activities and is effective for fiscal
years beginning after June 15, 2000. Since the Company does not presently hold
any derivatives or engage in hedging activities, accordingly SFAS No. 133 should
not impact the Company's financial position or results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item 8 is incorporated by reference to Skechers
U.S.A., Inc.'s Consolidated Financial Statements and Independent Auditors'
Report beginning at page F-1 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 is hereby incorporated by reference
from Skechers U.S.A., Inc.'s definitive proxy statement, to be filed pursuant to
Regulation 14A within 120 days after the end of Skechers U.S.A., Inc.'s 1999
fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is hereby incorporated by reference
from Skechers U.S.A., Inc.'s definitive proxy statement, to be filed pursuant to
Regulation 14A within 120 days after the end of Skechers U.S.A., Inc.'s 1999
fiscal year.
32
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 11 is hereby incorporated by reference
from Skechers U.S.A., Inc.'s definitive proxy statement, to be filed pursuant to
Regulation 14A within 120 days after the end of Skechers U.S.A., Inc.'s 1999
fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 11 is hereby incorporated by reference
from Skechers U.S.A., Inc.'s definitive proxy statement, to be filed pursuant to
Regulation 14A within 120 days after the end of Skechers U.S.A., Inc.'s 1999
fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Consolidated financial statements and schedules required to be filed
hereunder are indexed on Page F-1 hereof.
(b) Reports on Form 8K ---There were no reports on Form 8-K filed during the
last quarter of the fiscal year ended December 31, 1999.
(c) Exhibits
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- -------- -----------------------------------------------------------------
2.1 Agreement of Reorganization and Plan of Merger (incorporated by
reference to exhibit number 3.2(a) of the Registrant's
Registration Statement on Form S-1, as amended (File No.
333-60065), filed with the Securities and Exchange Commission on
May 12, 1999).
3.1 Certificate of Incorporation (incorporated by reference to
exhibit number 3.1 of the Registrant's Registration Statement on
Form S-1, as amended (File No. 333-60065), filed with the
Securities and Exchange Commission on July 29, 1998).
3.2 Bylaws (incorporated by reference to exhibit number 3.2 of the
Registrant's Registration Statement on Form S-1, as amended (File
No. 333-60065), filed with the Securities and Exchange Commission
on July 29, 1998).
3.2(a) Amendment to Bylaws (incorporated by reference to exhibit number
3.2(a) of the Registrant's Registration Statement on Form S-1, as
amended (File No. 333-60065), filed with the Securities and
Exchange Commission on May 12, 1999).
4.1 Form of Specimen Class A Common Stock Certificate (incorporated
by reference to exhibit number 4.1 of the Registrant's
Registration Statement on Form S-1, as amended (File No.
333-60065), filed with the Securities and Exchange Commission on
May 12, 1999).
10.1 Amended and Restated 1998 Stock Option, Deferred Stock and
Restricted Stock Plan (incorporated by reference to exhibit
number 10.1 of the Registrant's Registration Statement on Form
S-1, as amended (File No. 333-60065), filed with the Securities
and Exchange Commission on July 29, 1998).
10.2 1998 Employee Stock Purchase Plan (incorporated by reference to
exhibit number 10.2 of the Registrant's Registration Statement on
Form S-1, as amended (File No. 333-60065), filed with the
Securities and Exchange Commission on May 12, 1999).
10.2(a) Amendment to 1998 Employee Stock Purchase Plan (incorporated by
reference to exhibit number 10.2(a) of the Registrant's
Registration Statement on Form S-1, as amended (File No.
333-60065), filed with the Securities and Exchange Commission on
June 7, 1999).
33
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- -------- -----------------------------------------------------------------
10.3 Employment Agreement dated June 14, 1999, between the Registrant
and Robert Greenberg (incorporated by reference to exhibit number
10.3 of the Registrant's Registration Statement on Form 10-Q, for
the period ending June 30, 1999).
10.3(a) Amendment No. 1 to Employment Agreement between the Registrant
and Robert Greenberg dated December 31, 1999.
10.4 Employment Agreement dated June 14, 1999, between the Registrant
and Michael Greenberg (incorporated by reference to exhibit
number 10.4 of the Registrant's Registration Statement on Form
10-Q, for the period ending June 30, 1999).
10.4(a) Amendment to Employment Agreement between the Registrant and
Michael Greenberg dated December 31, 2000.
10.5 Employment Agreement dated June 14, 1999, between the Registrant
and David Weinberg (incorporated by reference to exhibit number
10.5 of the Registrant's Registration Statement on Form 10-Q, for
the period ending June 30, 1999).
10.5(a) Amendment No. 1 to Employment Agreement between the Registrant
and David Weinberg dated December 31, 2000.
10.6 Indemnification Agreement dated June 7, 1999 between the
Registrant and its directors and executive officers.
10.6(a) List of Registrant's directors and executive officers who entered
into Indemnification Agreement referenced in Exhibit 10.6 with
the Registrant.
10.7 Registration Rights Agreement dated June 9, 1999, between the
Registrant, the Greenberg Family Trust, and Michael Greenberg
(incorporated by reference to exhibit number 10.7 of the
Registrant's Registration Statement on Form 10-Q, for the period
ending June 30, 1999).
10.8 Tax Indemnification Agreement dated June 8, 1999, between the
Registrant and certain shareholders (incorporated by reference to
exhibit number 10.8 of the Registrant's Registration Statement on
Form 10-Q, for the period ending June 30, 1999).
10.9 Subordinated Promissory Note between the Registrant and the
Greenberg Family Trust, dated December 22, 1998 (incorporated by
reference to exhibit number 10.9 of the Registrant's Registration
Statement on Form S-1, as amended (File No. 333-60065), filed
with the Securities and Exchange Commission on April 9, 1999).
10.10 Amended and Restated Loan and Security Agreement between the
Registrant and Heller Financial, Inc., dated September 4, 1998
(incorporated by reference to exhibit number 10.10 of the
Registrant's Registration Statement on Form S-1, as amended (File
No. 333-60065), filed with the Securities and Exchange Commission
on April 9, 1999).
10.10(a) Term Loan A Note, dated September 4, 1998, between the Registrant
and Heller Financial, Inc. (incorporated by reference to exhibit
number 10.10(a) of the Registrant's Registration Statement on
Form S-1, as amended (File No. 333-60065), filed with the
Securities and Exchange Commission on April 9, 1999).
10.10(b) Revolving Note dated September 4, 1998, between the Registrant
and Heller Financial, Inc. (incorporated by reference to exhibit
number 10.10(b) of the Registrant's Registration Statement on
Form S-1, as amended (File No. 333-60065), filed with the
Securities and Exchange Commission on April 9, 1999).
10.10(c) First Amendment to Amended and Restated Loan and Security
Agreement, dated September 11, 1998 (incorporated by reference to
exhibit number 10.10(c) of the Registrant's Registration
Statement on Form S-1, as amended (File No. 333-60065), filed
with the Securities and Exchange Commission on April 9, 1999).
34
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- -------- -----------------------------------------------------------------
10.10(d) Second Amendment to Amended and Restated Loan and Security
Agreement, dated December 23, 1998 (incorporated by reference to
exhibit number 10.10(d) of the Registrant's Registration
Statement on Form S-1, as amended (File No. 333-60065), filed
with the Securities and Exchange Commission on April 9, 1999).
10.11 Lease, dated April 15, 1998, between the Registrant and
Holt/Hawthorn and Victory Partners, regarding 228 Manhattan Beach
Boulevard, Manhattan Beach, California (incorporated by reference
to exhibit number 10.11 of the Registrant's Registration
Statement on Form S-1, as amended (File No. 333-60065), filed
with the Securities and Exchange Commission on April 9, 1999).
10.12 Commercial Lease Agreement, dated February 19, 1997, between the
Registrant and Richard and Donna Piazza, regarding 1110 Manhattan
Avenue, Manhattan Beach, California (incorporated by reference to
exhibit number 10.12 of the Registrant's Registration Statement
on Form S-1, as amended (File No. 333-60065), filed with the
Securities and Exchange Commission on July 29, 1998).
10.13 Lease, dated June 12, 1998, between the Registrant and Richard
and Donna Piazza, regarding 1112 Manhattan Avenue, Manhattan
Beach, California (incorporated by reference to exhibit number
10.13 of the Registrant's Registration Statement on Form S-1, as
amended (File No. 333-60065), filed with the Securities and
Exchange Commission on July 29, 1998).
10.14 Lease, dated November 21, 1997, between the Registrant and The
Prudential Insurance Company of America, regarding 1661 So.
Vintage Avenue, Ontario, California (incorporated by reference to
exhibit number 10.14 of the Registrant's Registration Statement
on Form S-1, as amended (File No. 333-60065), filed with the
Securities and Exchange Commission on July 29, 1998).
10.15 Lease, dated November 21, 1997, between the Registrant and The
Prudential Insurance Company of America, regarding 1777 So.
Vintage Avenue, Ontario, California (incorporated by reference to
exhibit number 10.15 of the Registrant's Registration Statement
on Form S-1, as amended (File No. 333-60065), filed with the
Securities and Exchange Commission on July 29, 1998).
10.16 Commercial Lease, dated April 10, 1998, between the Registrant
and Proficiency Ontario Partnership, regarding 5725 East Jurupa
Street (incorporated by reference to exhibit number 10.16 of the
Registrant's Registration Statement on Form S-1, as amended (File
No. 333-60065), filed with the Securities and Exchange Commission
on July 29, 1998).
10.17 Lease and Addendum, dated June 11, 1998, between the Registrant
and Delores McNabb, regarding Suite 3 on the first floor of the
north building, Suite 9 on the first floor of the south building
at 904 Manhattan Avenue, Manhattan Beach, California
(incorporated by reference to exhibit number 10.17 of the
Registrant's Registration Statement on Form S-1, as amended (File
No. 333-60065), filed with the Securities and Exchange Commission
on April 9, 1999).
10.18 Addendum to Lease, dated September 14, 1998, between the
Registrant and Delores McNabb, regarding Suites 3, 4 and 5 on the
second floor of the north building at 904 Manhattan Avenue,
Manhattan Beach California (incorporated by reference to exhibit
number 10.18 of the Registrant's Registration Statement on Form
S-1, as amended (File No. 333-60065), filed with the Securities
and Exchange Commission on April 9, 1999).
10.19 Promissory Note between the Registrant and the Greenberg Family
Trust, dated December 22, 1998 (incorporated by reference to
exhibit number 10.19 of the Registrant's Registration Statement
on Form S-1, as amended (File No. 333-60065), filed with the
Securities and Exchange Commission on April 9, 1999).
10.20 Lease, dated October 15, 1999, between the Registrant and
Champagne Building Group LP, regarding 1670 South Champagne
Avenue, Ontario, California.
10.21 Lease, dated November 18, 1999, between the Registrant and
Pacifica California/Apollo, LLC, regarding Suites 125, 300, and
330 at 225 South Sepulveda Boulevard, Manhattan Beach,
California.
10.22 Lease, dated July 1, 1999, between the Registrant and Richard and
Donna Piazza, regarding 1108-B Manhattan Avenue, Manhattan Beach,
California.
21.1 Subsidiaries of the Registrant
35
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- -------- -----------------------------------------------------------------
23.1 Consent of KPMG LLP
24.1 Power of Attorney (included on signature page)
27 Financial Data Schedule
SIGNATURES
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, in the City of Manhattan
Beach, State of California on the 30th day of March, 2000.
SKECHERS U.S.A, INC.
By: /s/ Robert Greenberg
------------------------------------
Robert Greenberg
Chairman of the Board
and Chief Executive Officer
POWER OF ATTORNEY
We, the undersigned officers and directors of Skechers U.S.A., Inc., do
hereby constitute and appoint Robert Greenberg, Michael Greenberg and David
Weinberg, or either of them, our true and lawful attorneys and agents, to do
any and all acts and things in our names in the capacities indicated below,
which said attorneys and agents, or either of them, may deem necessary or
advisable to enable said corporation to comply with the Securities Exchange
Act of 1934, as amended, and any rules, regulations, and requirements of the
Securities and Exchange Commission, in connection with this report,
including specifically, but without limitation, power and authority to sign
for us or any of us in our names and in the capacities indicated below, any
and all amendments to this report, and we do hereby ratify and confirm all
that the said attorneys and agents, or either of them, shall do or cause to
be done by virtue hereof.
36
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ROBERT GREENBERG Chairman of the Board and Chief Executive March 30, 2000
------------------------------------ Officer (Principal Executive Officer)
Robert Greenberg
/s/ MICHAEL GREENBERG President and Director March 30, 2000
------------------------------------
Michael Greenberg
/s/ DAVID WEINBERG Executive Vice President, Chief Financial March 30, 2000
------------------------------------ Officer and Director (Principal Financial and
David Weinberg Accounting Officer)
Director March , 2000
------------------------------------
John Quinn
Director March , 2000
------------------------------------
Richard Siskind
37
SKECHERS U.S.A., INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Independent Auditors' Report F-2
Consolidated Balance Sheets - December 31, 1998 and 1999 F-3
Consolidated Statements of Earnings - Each of the years in the three-year period
ended December 31, 1999 F-4
Consolidated Statements of Stockholders' Equity - Each of the years in the three-year
period ended December 31, 1999 F-5
Consolidated Statements of Cash Flows - Each of the years in the three-year period
ended December 31, 1999 F-6
Notes to Consolidated Financial Statements F-7
Schedule II - Valuation and Qualifying Accounts F-18
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Skechers U.S.A., Inc.:
We have audited the accompanying consolidated financial statements of Skechers
U.S.A., Inc. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 Skechers U.S.A.,
Inc. and subsidiaries as of December 31, 1998 and 1999 and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999 in conformity with generally accepted accounting
principles. Also, in our opinion, the related 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.
KPMG LLP
Los Angeles, California
February 29, 2000
F-2
SKECHERS U.S.A., INC.
Consolidated Balance Sheets
December 31, 1998 and 1999
(In thousands, except per share data)
ASSETS 1998 1999
-------- --------
Current assets:
Cash $ 10,942 10,836
Trade accounts receivable, less allowances for bad debts and
returns of $3,413 in 1998 and $3,237 in 1999 46,771 63,052
Due from officers and employees 116 851
Other receivables 2,329 2,771
-------- --------
Total receivables 49,216 66,674
-------- --------
Inventories 65,390 68,959
Prepaid expenses and other current assets 2,616 5,130
Deferred tax assets -- 2,810
-------- --------
Total current assets 128,164 154,409
Property and equipment, at cost, less accumulated depreciation
and amortization 15,196 21,387
Intangible assets, at cost, less applicable amortization 1,003 663
Other assets, at cost 1,921 1,455
-------- --------
$146,284 177,914
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 54,323 30,382
Current installments of long-term borrowings 816 1,060
Current installments of notes payable to stockholder 2,244 --
Accounts payable 38,145 47,696
Accrued expenses 9,530 10,268
-------- --------
Total current liabilities 105,058 89,406
-------- --------
Long-term borrowings, excluding current installments 3,550 2,508
Notes payable to stockholder, excluding current installments 10,000 --
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value. Authorized 10,000 shares;
none issued and outstanding -- --
Class A Common stock, $.001 par value. Authorized 100,000
shares; issued and outstanding 7,091 shares at December 31,
1999 -- 7
Class B Common stock, $.001 par value. Authorized 60,000
shares; issued and outstanding 27,814 shares 2 28
Additional paid-in capital -- 69,948
Retained earnings 27,674 16,017
-------- --------
Total stockholders' equity 27,676 86,000
-------- --------
$146,284 177,914
======== ========
See accompanying notes to consolidated financial statements.
F-3
SKECHERS U.S.A., INC.
Consolidated Statements of Earnings
Three-year period ended December 31, 1999
(In thousands, except per share data)
1997 1998 1999
--------- --------- ---------
Net sales $ 183,827 372,680 424,601
Cost of sales 115,104 218,100 249,993
--------- --------- ---------
Gross profit 68,723 154,580 174,608
Royalty income, net 894 855 668
--------- --------- ---------
69,617 155,435 175,276
--------- --------- ---------
Operating expenses:
Selling 21,584 49,983 57,332
General and administrative 32,397 71,461 79,114
--------- --------- ---------
53,981 121,444 136,446
--------- --------- ---------
Earnings from operations 15,636 33,991 38,830
--------- --------- ---------
Other income (expense):
Interest (4,186) (8,631) (6,554)
Other, net (37) (239) 415
--------- --------- ---------
(4,223) (8,870) (6,139)
--------- --------- ---------
Earnings before income taxes 11,413 25,121 32,691
Income taxes 390 650 8,635
--------- --------- ---------
Net earnings $ 11,023 24,471 24,056
========= ========= =========
Pro forma operations data:
Earnings before income taxes $ 11,413 25,121 32,691
Income taxes 4,565 10,048 12,880
--------- --------- ---------
Net earnings $ 6,848 15,073 19,811
========= ========= =========
Net earnings per share:
Basic $ 0.25 0.54 0.62
Diluted 0.23 0.49 0.60
========= ========= =========
Weighted-average shares:
Basic 27,814 27,814 31,765
Diluted 29,614 30,610 33,018
========= ========= =========
See accompanying notes to consolidated financial statements.
F-4
SKECHERS U.S.A., INC.
Consolidated Statement of Stockholders' Equity
Three-year period ended December 31, 1999
(In thousands)
COMMON STOCK
----------------------------------------
SHARES AMOUNT ADDITIONAL TOTAL
------------------ ------------------ PAID-IN RETAINED STOCKHOLDERS'
CLASS A CLASS B CLASS A CLASS B CAPITAL EARNINGS EQUITY
------- ------- ------- ------- ---------- ------- -------------
Balance at December 31, 1996 -- 27,814 $ -- 2 -- 3,334 3,336
Net earnings -- -- -- -- -- 11,023 11,023
S Corporation distribution -- -- -- -- -- (3,234) (3,234)
------- ------- ------- ------- ------- ------- -------
Balance at December 31, 1997 -- 27,814 -- 2 -- 11,123 11,125
Net earnings -- -- -- -- -- 24,471 24,471
S Corporation distribution -- -- -- -- -- (7,920) (7,920)
------- ------- ------- ------- ------- ------- -------
Balance at December 31, 1998 -- 27,814 -- 2 -- 27,674 27,676
Net earnings -- -- -- -- -- 24,056 24,056
Proceeds from issuance of common stock in
connection with initial public offering 7,000 -- 7 26 69,687 -- 69,720
Proceeds from issuance of common stock under
the employee stock purchase plan 91 -- -- -- 261 -- 261
S Corporation distribution:
Cash -- -- -- -- -- (35,363) (35,363)
Cross Colours trademark -- -- -- -- -- (350) (350)
------- ------- ------- ------- ------- ------- -------
Balance at December 31, 1999 7,091 27,814 $ 7 28 69,948 16,017 86,000
======= ======= ======= ======= ======= ======= =======
See accompanying notes to consolidated financial statements.
F-5
SKECHERS U.S.A., INC.
Consolidated Statements of Cash Flows
Three-year period ended December 31, 1999
(In thousands)
1997 1998 1999
-------- -------- --------
Cash flows from operating activities:
Net earnings $ 11,023 24,471 24,056
Adjustments to reconcile net earnings to net cash provided by
(used in) operating activities:
Depreciation and amortization of property and equipment 1,137 2,843 3,752
Amortization of intangible assets 1,456 148 108
Provision for bad debts and returns 870 1,423 (176)
Loss on disposal of equipment -- -- 903
Gain (loss) on distribution of intangibles -- 190 (118)
Increase in assets:
Receivables (12,635) (17,760) (17,282)
Inventories (30,021) (19,558) (3,569)
Prepaid expenses and other current assets (290) (1,877) (2,514)
Deferred tax assets -- -- (2,810)
Other assets (1,212) (512) 466
Increase (decrease) in liabilities:
Accounts payable 27,623 2,132 9,551
Accrued expenses (83) 4,249 738
-------- -------- --------
Net cash provided by (used in) operating activities (2,132) (4,251) 13,105
-------- -------- --------
Cash flows used in investing activities:
Capital expenditures (6,239) (9,434) (10,846)
Intangible assets (512) (14) --
-------- -------- --------
Net cash used in investing activities (6,751) (9,448) (10,846)
-------- -------- --------
Cash flows from financing activities:
Net proceeds from initial public offering of common stock -- -- 69,720
Net proceeds from issuance of common stock -- -- 261
Net proceeds (payments) related to short-term borrowings 10,426 31,486 (23,697)
Proceeds from long-term debt 3,000 581 --
Payments on long-term debt (25) (562) (1,042)
Payments on notes payable to stockholder -- (1,006) (12,244)
Distributions paid to stockholders (3,234) (7,320) (35,363)
-------- -------- --------
Net cash provided by (used in) financing activities 10,167 23,179 (2,365)
-------- -------- --------
Net increase (decrease) in cash 1,284 9,480 (106)
Cash at beginning of year 178 1,462 10,942
-------- -------- --------
Cash at end of year $ 1,462 10,942 10,836
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 4,186 8,067 6,782
Income taxes 226 1,416 10,619
======== ======== ========
Supplemental disclosures of noncash investing and financing activities:
During 1999, the Company declared a noncash distribution of intangibles of
$350.
During 1998, the Company acquired $1,372 of property and equipment under
capital lease arrangements. In connection with one of these arrangements,
the Company received $581 in cash through a sale leaseback transaction.
See accompanying notes to consolidated financial statements.
F-6
SKECHERS U.S.A., INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) THE COMPANY
Skechers U.S.A., Inc. (the Company) designs, develops, markets
and distributes footwear. The Company also operates retail
stores, direct mail and e commerce businesses.
The accompanying consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All
significant intercompany balances and transactions have been
eliminated in consolidation.
(b) REVENUE RECOGNITION
Revenue is recognized upon shipment of product or at point of
sale for retail operations. Allowances for estimated returns and
discounts are provided when the related revenue is recorded.
Revenues from royalty agreements are recognized as earned.
(c) INVENTORIES
Inventories, principally finished goods, are stated at the lower
of cost (based on the first-in, first-out method) or market. The
Company provides for estimated losses from obsolete or
slow-moving inventories.
(d) INCOME TAXES
The Company accounts for income taxes under the asset and
liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to the
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes
the enactment date.
(e) DEPRECIATION AND AMORTIZATION
Depreciation and amortization of property and equipment is
computed using the straight-line method based on the following
estimated useful lives:
Furniture, fixtures and equipment 5 years
Leasehold improvements Useful life or remaining
lease term, whichever is shorter
Intangible assets consist of trademarks and are amortized on a
straight-line basis over ten years. The accumulated amortization
as of December 31, 1998 and 1999 is $1,088,000 and $1,196,000,
respectively.
F-7
SKECHERS U.S.A., INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(f) LONG-LIVED ASSETS
The Company reports long-lived assets, including intangibles, at
amortized cost. As part of an ongoing review of the valuation
and amortization of long-lived assets, management assesses the
carrying value of assets if facts and circumstances suggest that
such assets may be impaired. If this review indicates that the
assets will not be recoverable, as determined by a nondiscounted
cash flow projections over the remaining amortization period,
their carrying value is reduced to estimated fair market value,
based on discounted cash flows.
(g) ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising expense
for the years ended December 31, 1997, 1998 and 1999
approximated $15,800,000, $42,200,000 and $47,400,000,
respectively. Prepaid advertising costs at December 31, 1998 and
1999 were $0 and $1,800,000, respectively. Prepaid amounts
outstanding at December 31, 1999 represent advertising in trade
publications which had not run as of December 31, 1999.
(h) START-UP COSTS
Start-up costs are charged to operations as incurred.
(i) EARNINGS PER SHARE
Basic earnings per share represents net earnings divided by the
weighted-average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential
dilution that could occur if options to issue common stock were
exercised or converted into common stock. The weighted average
diluted shares outstanding gives effect to the sale by the
Company of those shares of common stock necessary to fund the
payment of (i) stockholder distributions paid or declared from
January 1, 1998 to June 7, 1999, the S Corporation termination
date, in excess of (ii) the S Corporation earnings from January
1, 1998 to December 31, 1998 for both 1997 and 1998, and January
1, 1998 to June 7, 1999 for 1999, based on an initial public
offering price of $11 per share, net of underwriting discounts.
The reconciliation of basic to diluted weighted-average shares
is as follows (in thousands):
1997 1998 1999
------ ------ ------
Weighted-average shares used in
basic computation 27,814 27,814 31,765
Shares to fund stockholder
distributions 1,800 1,800 533
Dilutive effect of stock options -- 996 720
------ ------ ------
Weighted-average shares used in
diluted computation 29,614 30,610 33,018
====== ====== ======
Options to purchase 1,391,000 and 1,411,000 shares of common
stock at prices ranging from $2.78 to $6.13 were outstanding at
December 31, 1998 and 1999, 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.
F-8
SKECHERS U.S.A., INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(j) USE OF ESTIMATES
Management 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 generally accepted accounting principles. Actual results
could differ from those estimates.
(k) PRODUCT DESIGN AND DEVELOPMENT COSTS
The Company charges all product design and development costs to
expense when incurred. Product design and development costs
aggregated approximately $1,800,000, $2,400,000 and $2,600,000
during the years ended December 31, 1997, 1998 and 1999,
respectively.
(l) COMPREHENSIVE INCOME
The Company reports comprehensive income under Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive
Income. Except for net earnings, the Company does not have any
transactions and other economic events that qualify as
comprehensive income as defined under SFAS No. 130. Accordingly,
the adoption of SFAS No. 130 did not affect the Company's
financial reporting.
(m) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of the Company's financial instruments,
which principally include cash, accounts receivable, accounts
payable and accrued expenses, approximates fair value due to the
relatively short maturity of such instruments.
The fair value of the Company's short-term instruments reflects
the fair value based upon current rates available to the Company
for similar debt. The fair value of the Company's long-term debt
instruments is based on quoted market prices.
(2) PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows (in thousands):
1998 1999
------- -------
Furniture, fixtures and equipment $11,849 17,863
Leasehold improvements 8,738 12,392
------- -------
Total property and equipment 20,587 30,255
Less accumulated depreciation and amortization 5,391 8,868
------- -------
Property and equipment, net $15,196 21,387
======= =======
F-9
SKECHERS U.S.A., INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(3) SHORT-TERM BORROWINGS
The Company has available a secured line of credit, as amended in
December 1998, permitting borrowings up to $120,000,000 based upon
eligible accounts receivable and inventories. The agreement expires on
December 31, 2002. Borrowings bear interest at the rate of prime (8.5%
at December 31, 1999) plus .25% or at LIBOR (6.0% at December 31, 1999)
plus 2.75%, as elected by the Company. The agreement provides for the
issuance of letters of credit up to a maximum of $18,000,000, which
decreases the amount available for borrowings under the agreement.
Outstanding letters of credit at December 31, 1999 were $4,400,000.
Available borrowings under the line of credit at December 31, 1999 was
approximately $39,500,000. The Company pays an unused line of credit fee
of .25% annually. The Company is required to maintain certain financial
covenants including specified minimum tangible net worth, working
capital and leverage ratios as well as limit the payment of dividends if
it is in default of any provision of the agreement. The Company was in
compliance with these covenants at December 31, 1999.
(4) NOTES PAYABLE TO STOCKHOLDER
Stockholder loans were repaid during 1999. The Company recorded interest
expense of approximately $1,060,000, $540,000 and $433,000 related to
the stockholder notes during the years ended December 31, 1997, 1998 and
1999, respectively.
(5) LONG-TERM BORROWINGS
Long-term debt at December 31, 1998 and 1999 is as follows (in
thousands):
1998 1999
------ ------
Note payable to bank, due in monthly installments of
$25,000 plus interest at prime (8.5% at December 31,
1999) plus 1%, secured by equipment, due December 2002 $2,700 2,400
Capital leases, due in aggregate monthly installments of
$64,000, average interest rate of 16.3%, secured by
equipment, due through August 2002 1,666 1,168
------ ------
4,366 3,568
Less current installments 816 1,060
------ ------
$3,550 2,508
====== ======
The aggregate maturities of long-term borrowings at December 31, 1999
are as follows:
2000 $1,060
2001 664
2002 1,844
------
$3,568
======
F-10
SKECHERS U.S.A., INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(6) STOCKHOLDERS' EQUITY
(a) STOCK ISSUANCES
Effective as of May 28, 1999, the Company was reincorporated in
Delaware. The existing California corporation was merged into a
newly formed Delaware corporation and each outstanding share of
common stock of the existing California corporation was
exchanged, for a share of $.001 par value Class B common stock
of the new Delaware corporation. In addition, pursuant to the
reincorporation merger, an approximate 13,907-for-1 common stock
split was authorized. The amendment and stock split has been
reflected retroactively in the accompanying consolidated
financial statements.
The authorized capital stock of the Delaware corporation
consists of 100,000,000 shares of Class A common stock, par
value $.001 per share, and 60,000,000 shares of Class B common
stock, par value $.001 per share. The Company has also
authorized 10,000,000 shares of preferred stock, $.001 par value
per share.
The Class A common stock and Class B common stock have identical
rights other than with respect to voting, conversion and
transfer. The Class A common stock is entitled to one vote per
share, while the Class B common stock is entitled to ten votes
per share on all matters submitted to a vote of stockholders.
The shares of Class B common stock are convertible at any time
at the option of the holder into shares of Class A common stock
on a share-for-share basis. In addition, shares of Class B
common stock will be automatically converted into a like number
of shares of Class A common stock upon any transfer to any
person or entity which is not a permitted transferee.
On June 9, 1999, the Company issued 7,000,000 shares of Class A
common stock in an initial public offering and received net
proceeds of $69,720,000.
On February 28, 2000, certain Class B stockholders converted
1,390,710 shares of Class B common stock to Class A common
stock.
(b) STOCK OPTION PLAN
In January 1998, the Board of Directors of the Company adopted
the 1998 Stock Option, Deferred Stock and Restricted Stock Plan
(Stock Option Plan) for the grant of qualified incentive stock
options (ISO), stock options not qualified and deferred stock
and restricted stock. The exercise price for any option granted
may not be less than fair value (110% of fair value for ISOs
granted to certain employees). Under the Stock Option Plan,
5,215,154 shares are reserved for issuance. In January 1998,
1,390,715 options to acquire Class A common stock were granted
at an exercise price of $2.78 per share, which was equal to the
fair market value. The options vest 25% on June 9, 1999 and 25%
each anniversary thereafter over the next three years. In
connection with the Company's initial public offering on June 9,
1999, the Company granted 1,209,636 options to acquire Class A
common stock at an exercise price of $11 per share which vest
ratably in 20% increments commencing one year from the grant
date. During 1999, 84,777 of the $11 per share options were
canceled. The options expire ten years from the date of grant.
F-11
SKECHERS U.S.A., INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
Shares subject to option under the Stock Option Plan at December
31, 1999 were as follows:
SHARES OPTION PRICE
---------- ----------------
Outstanding at December 31, 1997 -- $ --
Granted 1,390,715 2.78
----------
Outstanding at December 31, 1998 1,390,715 2.78
Granted 1,209,636 11.00
Canceled (84,777) 11.00
----------
Outstanding at December 31, 1999 2,515,574 2.78 - 11.00
==========
Exercisable at December 31, 1999 347,678 2.78
========== ============
Options available for grant at December 31, 1999 2,614,803
==========
(c) STOCK PURCHASE PLAN
Effective July 1, 1998, the Company adopted the 1998 Employee
Stock Purchase Plan (1998 Stock Purchase Plan). Under terms of
the 1998 Stock Purchase Plan, 2,781,415 shares of common stock
are reserved for sale to employees at a price no less that 85%
of the lower of the fair market value of the Class A common
stock at the beginning of the one-year offering period or the
end of each of the six-month purchase periods. During 1999,
90,913 shares were issued under the 1998 Stock Purchase Plan for
which the Company received $261,000.
(d) STOCK COMPENSATION
The Company accounts for stock compensation under SFAS No. 123,
Accounting for Stock-Based Compensation, and has elected to
measure compensation cost under Accounting Principles Board
Opinion No. 25 and comply with the pro forma disclosure
requirements. Had compensation cost been determined using the
fair value at the grant date for awards during 1998 and 1999,
consistent with the provisions of SFAS No. 123, the Company's
pro forma net earnings (in thousands) and earnings per share
would have been reduced to the amounts as indicated below. No
stock awards were granted in 1997.
1998 1999
---------- ----------
Pro forma net earnings $ 14,875 19,077
========== ==========
Pro forma net earnings per share:
Basic $ .53 .60
Diluted .49 .58
========== ==========
F-12
SKECHERS U.S.A., INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
The fair value of each option is estimated on the date of grant.
The Company used the minimum value method for stock awards prior
to its initial public offering and the Black-Scholes option
pricing models for stock awards afterwards. The following
weighted-average assumptions used for grants were as follows:
1998 1999
---- ----
Dividend yield -- --
Expected volatility -- 55%
Risk-free interest rate 5.7% 6.2%
Expected life of option 8 5
==== ====
The weighted-average fair value of options granted during 1998
and 1999 were $2.78 and $6.93, respectively.
(7) INCOME TAXES
The pro forma unaudited income tax adjustments represent taxes which
would have been reported assuming the Company been subject to federal
and state income taxes as a C Corporation. The historical and pro forma
provisions for income tax expense were as follows (in thousands):
1997 1998 1999
------- ------- -------
Actual income taxes:
Federal:
Current $ -- -- 8,012
Deferred -- -- (792)
------- ------- -------
Total federal -- -- 7,220
------- ------- -------
State:
Current 390 650 1,480
Deferred -- -- (65)
------- ------- -------
Total state 390 650 1,415
------- ------- -------
Total actual income taxes 390 650 8,635
------- ------- -------
Pro forma adjustments:
Federal 3,573 7,864 3,533
State 602 1,534 712
------- ------- -------
Total pro forma adjustments 4,175 9,398 4,245
------- ------- -------
Total pro forma income taxes $ 4,565 10,048 12,880
======= ======= =======
F-13
SKECHERS U.S.A., INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
Pro forma income taxes differs from the statutory tax rate as applied to
earnings before income taxes as follows:
1997 1998 1999
------ ------ ------
Expected income tax expense $3,880 8,541 11,569
State income tax, net of federal benefit 685 1,507 1,311
------ ------ ------
Total provision for pro forma
income taxes $4,565 10,048 12,880
====== ====== ======
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities at December
31, 1999 is presented below:
Deferred tax assets:
Inventory adjustments $ 615,000
State taxes 520,000
Allowances for receivables 1,275,000
Other 808,000
----------
Total deferred tax assets 3,218,000
----------
Deferred tax liabilities:
Depreciation of property and equipment 279,000
Other 129,000
----------
Total deferred tax liabilities 408,000
----------
Net deferred tax assets $2,810,000
==========
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.
Through June 7, 1999, the Company was treated for federal and state
income tax purposes as an S Corporation under Subchapter S of the
Internal Revenue Code and comparable state laws. As a result, the
earnings of the Company through June 7, 1999 were included in the
taxable income of the Company's stockholders for federal and state
income tax purposes, and the Company was generally not subject to income
tax on such earnings, other than California and other state franchise
taxes.
In connection with the Company's initial public offering of its Class A
common stock in June 1999, the Company terminated its S Corporation
status and became a C Corporation subject to federal and state income
taxes. The Company's change of status to a C Corporation resulted in the
recording of deferred tax assets amounting to $1,800,000. This amount is
reflected as a reduction of actual income tax expense in the
accompanying 1999 consolidated statement of earnings.
F-14
SKECHERS U.S.A., INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(8) BUSINESS AND CREDIT CONCENTRATIONS
The Company sells footwear products principally throughout the United
States and foreign countries. The footwear industry is impacted by the
general economy. Changes in the marketplace may significantly affect
management's estimates and the Company's performance. Management
performs regular evaluations concerning the ability of customers to
satisfy their obligations and provides for estimated doubtful accounts.
Domestic accounts receivable amounted to $45,500,000 and $57,500,000
before allowance for bad debts and returns at December 31, 1998 and
1999, respectively, which generally do not require collateral from
customers. Foreign accounts receivable amounted to $4,600,000 and
$9,100,000 before allowance for bad debts and returns at December 31,
1998 and 1999, respectively, which generally are collateralized by
letters of credit. International net sales amounted to $27,700,000,
$34,700,000 and $43,900,000 for the years ended December 31, 1997, 1998
and 1999, respectively. The Company's credit losses for the years ended
December 31, 1997, 1998 and 1999 were $908,000, $102,000 and $1,699,000,
respectively, and did not significantly differ from management's
expectations.
Net sales to customers in the United States exceeded 90% of total net
sales for each of the years in the three year period ended December 31,
1999. All long-lived assets of the Company are located in the United
States. The Company has no significant assets outside the United States.
During 1997 and 1999, no customer accounted for 10% or more of net
sales. During 1998, the Company had one significant customer which
accounted for 11.8% of net sales. The Company had one customer which
accounted for 12.6% and 10.1% of trade accounts receivable at December
31, 1998 and 1999, respectively.
During 1997, the Company had two manufacturers which accounted for 21.7%
and 15.0% of total purchases, respectively. During 1998, the Company had
four manufacturers which accounted 15.4%, 14.2%, 12.1% and 10.4% of
total purchases, respectively. During 1999, the Company had four
manufacturers which accounted 15.5%, 13.4%, 13.3% and 12.3% of total
purchases, respectively.
Substantially all of the Company's products are produced in China. The
Company's operations are subject to the customary risks of doing
business abroad, including, but not limited to, currency fluctuations,
custom duties and related fees, various import controls and other
monetary barriers, restrictions on the transfer of funds, labor unrest
and strikes and, in certain parts of the world, political instability.
The Company believes it has acted to reduce these risks by diversifying
manufacturing among various factories. To date, these risk factors have
not had a material adverse impact on the Company's operations.
(9) BENEFIT PLAN
The Company has adopted a profit sharing plan covering all employees who
are 21 years of age and have completed one year of service. Employees
may contribute up to 15.0% of annual compensation. Company contributions
to the plan are discretionary and vest over a five-year period. The
Company's contributions to the plan amounted to $93,000, $242,000 and
$259,000 for the years ended December 31, 1997, 1998 and 1999,
respectively.
F-15
SKECHERS U.S.A., INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(10) COMMITMENTS AND CONTINGENCIES
(a) LEASES
The Company leases facilities under operating lease agreements
expiring through November 2010. The leases are on an all-net
basis, whereby the Company pays taxes, maintenance and
insurance. The Company also leases certain equipment and
automobiles under operating lease agreements expiring at various
dates through August 2002. Rent expense for the years ended
December 31, 1997, 1998 and 1999 approximated $3,000,000,
$7,900,000 and $9,800,000, respectively.
The Company also leases certain property and equipment under
capital lease agreements requiring monthly installment payments
through August 2002.
Future minimum lease payments under noncancellable leases at
December 31, 1999 are as follows (in thousands):
CAPITAL OPERATING
LEASES LEASES
-------- ---------
Year ending December 31:
2000 $ 760 9,954
2001 364 10,125
2002 44 9,837
2003 -- 7,728
2004 -- 7,035
Thereafter -- 15,186
------- -------
$ 1,168 59,865
======= =======
(b) LITIGATION
In December 1999 and January 2000, the Company and two
officers/directors were named as defendants in four purported
class-action lawsuits. Two of the lawsuits also named the
underwriters of the Company's initial public offering as
defendants. All of the complaints seek damages and rescission on
behalf of a class of persons who purchased securities in, or
traceable to, the Company's initial public offering or
thereafter on the open market prior to July 6, 1999. As these
matters are in the early stages of discovery, neither the
Company nor its counsel are able to conclude as to the potential
likelihood of an unfavorable outcome. The Company is vigorously
defending these complaints and believe their defenses to be
meritorious. Accordingly, the Company has not provided for any
potential losses associated with these lawsuits.
The Company is involved in other litigation 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.
F-16
SKECHERS U.S.A., INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(c) PURCHASE COMMITMENTS
At December 31, 1999, the Company had purchase commitments of
approximately $104,463,000.
The Company finances production activities in part through the
use of interest-bearing open purchase arrangements with certain
of its Asian manufacturers. These arrangements currently bear
interest at a rate between 1.5% and 2.0% per 30 to 60 day term.
The amounts outstanding under these arrangements at December 31,
1998 and 1999 were $23,500,000 and $34,900,000, respectively,
which are included in accounts payable in the accompanying
consolidated financial statements. Interest expense incurred by
the Company under these arrangements amounted to $1,400,000 in
1997, $2,900,000 in 1998 and $3,000,000 in 1999.
(11) QUARTERLY SUMMARY OF INFORMATION (UNAUDITED)
Summarized unaudited financial data are as follows (in thousands):
1999 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------ ------------ ------------ ------------
Net sales $ 95,736 104,582 124,177 100,106
Gross profit 36,698 42,732 52,837 42,341
Pro forma net earnings 2,104 6,248 8,545 2,914
============ ============ ============ ============
Pro forma net earnings per share:
Basic $ .08 .21 .25 .08
Diluted .07 .20 .24 .08
============ ============ ============ ============
1998 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------ ------------ ------------ ------------
Net sales $ 59,873 87,684 143,045 82,078
Gross profit 22,483 35,997 62,176 33,924
Pro forma net earnings (loss) 651 4,759 13,553 (3,890)
============ ============ ============ ============
Pro forma net earnings (loss) per share:
Basic $ .02 .17 .49 (.14)
Diluted .02 .16 .44 (.13)
============ ============ ============ ============
F-17
SCHEDULE II
SKECHERS U.S.A., INC.
Valuation and Qualifying Accounts
Years ended December 31, 1997, 1998 and 1999
BALANCE AT CHARGED TO DEDUCTIONS BALANCE
BEGINNING OF COSTS AND AND AT END
DESCRIPTION PERIOD EXPENSES WRITE-OFFS OF PERIOD
----------- ----------- ----------- ----------- -----------
As of December 31, 1997:
Allowance for obsolescence $ 908,000 554,000 (554,000) 908,000
Allowance for doubtful accounts 295,000 1,878,000 (908,000) 1,265,000
Reserve for sales returns and allowances 825,000 5,463,000 (5,563,000) 725,000
As of December 31, 1998:
Allowance for obsolescence 908,000 64,000 (465,000) 507,000
Allowance for doubtful accounts 1,265,000 702,000 (501,000) 1,466,000
Reserve for sales returns and allowances 725,000 10,840,000 (9,618,000) 1,947,000
As of December 31, 1999:
Allowance for obsolescence 507,000 134,000 -- 641,000
Allowance for doubtful accounts 1,466,000 740,000 (1,699,000) 507,000
Reserve for sales returns and allowances 1,947,000 13,600,000 (12,817,000) 2,730,000
=========== =========== =========== ===========
F-18