UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
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 OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 318-3100
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of each exchange on
Title of each class 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 [ ]
THE NUMBER OF SHARES OF CLASS A COMMON STOCK OUTSTANDING AS OF NOVEMBER 10,
2000: 10,302,826
THE NUMBER OF SHARES OF CLASS B COMMON STOCK OUTSTANDING AS OF NOVEMBER 10,
2000: 25,117,445
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Page 1
SKECHERS U.S.A., INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
PAGE
----
PART I FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Balance Sheets
September 30, 2000 and December 31, 1999.......................................... 3
Condensed Consolidated Statements of Earnings
Three-month periods ended September 30, 2000 and 1999.............................. 4
Condensed Consolidated Statements of Earnings
Nine-month periods ended September 30, 2000 and 1999................................ 5
Condensed Consolidated Statements of Cash Flows
Nine-month periods ended September 30, 2000 and 1999................................ 6
Notes to Condensed Consolidated Financial Statements.......................... ..... 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS....................................................................... 10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.......................... 19
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS................................................................... 19
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS........................................... 19
ITEM 3. DEFAULTS UPON SENIOR SECURITIES..................................................... 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................. 19
ITEM 5. OTHER INFORMATION................................................................... 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................................................... 19
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SKECHERS U.S.A., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
ASSETS
September 30, December, 31
2000 1999
------------ -----------
Current Assets:
Cash $ 7,801 $ 10,836
Trade accounts receivable, less allowance for bad debts and returns
of $6,491 in 2000 and $3,237 in 1999 103,889 63,052
Due from officers and employees 210 851
Other receivables 820 2,771
Inventories 94,946 68,959
Prepaid expenses and other current assets 7,852 5,130
Deferred tax assets 2,810 2,810
-------- --------
Total current assets 218,328 154,409
-------- --------
Property and equipment, at cost, less accumulated depreciation and amortization 39,190 21,387
Intangible assets, at cost, less applicable amortization 585 663
Other assets, at cost 1,185 1,455
-------- --------
$259,288 $177,914
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term borrowings $ 55,870 $ 30,382
Current installments of long-term borrowings 2,466 1,060
Accounts payable 55,917 47,696
Accrued expenses 12,798 10,268
-------- --------
Total current liabilities 127,051 89,406
-------- --------
Long-term borrowings, excluding current installments 10,554 2,508
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $.001 par value; 10,000 authorized; none issued -- --
and outstanding
Class A Common Stock, $.001 par value; 100,000 shares authorized; 10,090 and
7,091 shares issued and outstanding at September 30, 2000 and
December 31, 1999, respectively 10 7
Class B Common Stock, $.001 par value; 60,000 shares authorized; 25,323 and
27,814 shares issued and outstanding at September 30, 2000 and
December 31, 1999, respectively 25 28
Additional paid-in capital 71,600 69,948
Retained earnings 50,048 16,017
-------- --------
Total stockholders' equity 121,683 86,000
-------- --------
$259,288 $177,914
======== ========
See accompanying notes to unaudited condensed consolidated financial statements.
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SKECHERS U.S.A., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(In thousands, except per share data)
Three-Months Ended September 30,
---------------------------------
2000 1999
--------- ---------
Net sales $ 205,749 $ 124,177
Cost of sales 118,838 71,340
--------- ---------
Gross profit 86,911 52,837
Royalty income, net 6 --
--------- ---------
86,917 52,837
--------- ---------
Operating expenses:
Selling 25,177 15,814
General and administrative 33,865 21,534
--------- ---------
59,042 37,348
--------- ---------
Earnings from operations 27,875 15,489
--------- ---------
Other income (expense):
Interest, net (2,674) (1,465)
Other, net (59) 219
--------- ---------
(2,733) (1,246)
--------- ---------
Earnings before income taxes 25,142 14,243
Income taxes 9,855 5,698
--------- ---------
Net earnings $ 15,286 $ 8,545
========= =========
Net earnings per share:
Basic $ 0.43 $ 0.25
========= =========
Diluted $ 0.40 $ 0.24
========= =========
Weighted average shares:
Basic 35,837 34,814
========= =========
Diluted 37,915 35,594
========= =========
See accompanying notes to unaudited condensed consolidated financial statements.
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SKECHERS U.S.A., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(In thousands, except per share data)
Nine-Months Ended September 30,
---------------------------------
2000 1999
--------- ---------
Net sales $ 502,992 $ 324,495
Cost of sales 293,310 192,228
--------- ---------
Gross profit 209,682 132,267
Royalty income, net 115 207
--------- ---------
209,797 132,474
--------- ---------
Operating expenses:
Selling 56,289 42,972
General and administrative 91,088 56,726
--------- ---------
147,377 99,698
--------- ---------
Earnings from operations 62,420 32,776
--------- ---------
Other income (expense):
Interest, net (6,666) (5,334)
Other, net 218 722
--------- ---------
(6,448) (4,612)
--------- ---------
Earnings before income taxes 55,972 28,164
Income taxes 21,941 6,897
--------- ---------
Net earnings $ 34,031 $ 21,267
========= =========
Pro forma operations data:
Earnings before income taxes $ 55,972 $ 28,164
Income taxes 21,941 11,266
--------- ---------
Net earnings $ 34,031 $ 16,898
========= =========
Net earnings per share:
Basic $ 0.97 $ 0.55
========= =========
Diluted $ 0.93 $ 0.52
========= =========
Weighted average shares:
Basic 35,229 30,737
========= =========
Diluted 36,512 32,430
========= =========
See accompanying notes to unaudited condensed consolidated financial statements.
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SKECHERS U.S.A., INC. AND SUBSIDIARIES
STATEMENTS OF CONDENSED CONSOLIDATED CASH FLOWS
(Unaudited)
(In thousands)
Nine-Months Ended September 30,
-------------------------------
2000 1999
--------- ----------
Cash flows from operating activities:
Net earnings $ 34,031 $ 21,267
Adjustments to reconcile net earnings to net cash used in operating
activities:
Depreciation and amortization of property and
equipment 4,021 3,032
Amortization of intangible assets 78 55
Provision (recovery) for bad debts and returns 3,254 (494)
Loss on disposal of equipment -- 400
Gain on distribution of intangibles -- (118)
(Increase) decrease in assets:
Receivables (41,499) (24,081)
Inventories (25,987) 9,216
Deferred tax assets -- (2,195)
Prepaid expenses and other current assets (2,722) 733
Other assets 270 (1,743)
Increase (decrease) in liabilities:
Accounts payable 8,221 (3,069)
Accrued expenses 2,530 (2,048)
-------- --------
Net cash provided by (used in) operating activities (17,803) 955
-------- --------
Cash flows used in investing activities-capital expenditures (21,824) (6,599)
-------- --------
Cash flows from financing activities:
Net proceeds from initial public offering of common stock -- 69,720
Net proceeds from issuance of common stock 1,652 --
Net proceeds (payments) related to short-term borrowings 25,488 (22,320)
Proceeds from long-term borrowings 10,197 --
Payments on long-term borrowings (745) (562)
Payments on notes payable to stockholder -- (12,244)
Distributions paid to stockholders -- (35,364)
-------- --------
Net cash provided by (used in) financing activities 36,592 (770)
-------- --------
Net decrease in cash (3,035) (6,414)
Cash at beginning of period 10,836 10,942
-------- --------
Cash at end of period $ 7,801 $ 4,528
======== ========
Supplemental disclosures of cash flow information: Cash paid during the period
for:
Interest $ 4,065 $ 5,500
Income taxes 17,906 7,343
======== =======
The Company had a non-cash distribution of intangibles aggregating $350 during
the nine months ended September 30, 1999.
See accompanying notes to unaudited condensed consolidated financial statements.
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SKECHERS U.S.A., INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) GENERAL
The unaudited condensed consolidated financial statements have been prepared on
the same basis as the audited consolidated financial statements and, in the
opinion of management, reflect all adjustments (consisting of normal recurring
adjustments) necessary for a fair presentation for each of the periods
presented. The results of operations for interim periods are not necessarily
indicative of results to be achieved for full fiscal years.
As contemplated by the Securities and Exchange Commission (SEC) under Rule 10-01
of Regulation S-X, the accompanying condensed consolidated financial statements
and related footnotes have been condensed and do not contain certain information
that will be included in the Company's annual consolidated financial statements
and footnotes thereto. For further information, refer to the consolidated
financial statements and related footnotes for the year ended December 31, 1999
included in the Company's Annual Report on Form 10-K.
(2) 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 for nine-month period ended September 30, 1999 gives
effect to the sale by the Company of those shares of common stock necessary to
fund the payment of the excess of (i) the sum of 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 June
7, 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):
Three-Months Ended Nine-Months Ended
September 30, September 30,
-------------------- ------------------
2000 1999 2000 1999
------ ------ ------ ------
Weighted average shares used in basic
Computation 35,837 34,814 35,229 30,737
Shares to fund stockholders'
distributions described above -- -- -- 713
Dilutive effect of stock options 2,078 780 1,283 980
------ ------ ------ ------
Weighted average shares used in
diluted computation 37,915 35,594 36,512 32,430
====== ====== ====== ======
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SKECHERS U.S.A., INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
(3) INCOME TAXES
Income taxes for the interim periods were computed using the effective tax rate
estimated to be applicable for the full fiscal year, which is subject to ongoing
review and evaluation by management.
The pro forma income tax adjustment for the nine months ended September 30, 1999
represents taxes that would have been reported had the Company been subject to
Federal and state income taxes as a C Corporation, assuming an effective rate of
40.0%.
(4) SHORT-TERM BORROWINGS
The Company has available a secured line of credit permitting borrowings of up
to $120.0 million based upon eligible accounts receivable and inventories. The
agreement expires on December 31, 2002. As amended on June 1, 2000, borrowings
bear interest at the prime rate (9.5% at September 30, 2000) minus 0.50%. The
agreement provides for the issuance of letters of credit up to a maximum of
$36.0 million of which 50% decreases the amount available for borrowings under
the agreement. Outstanding letters of credit at September 30, 2000 were $4.6
million. Available borrowings under the line of credit at September 30, 2000
were $70.9 million. 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 September 30, 2000.
(5) LEASE OBLIGATIONS
The Company has entered into three capital lease agreements since December 31,
1999. The first is with Banc of America Leasing & Capital, LLC and provides up
to approximately $11.3 million for the purchase of material/inventory handling,
sortation and delivery equipment.
The Company will pay 60 monthly payments, each equal to 1.6% of original cost
plus a 35.0% (of original cost) balloon payment at the end of the lease. The
interest rate per annum is equal to 2.25% plus the U.S. Treasury obligation
bond-equivalent yield per annum corresponding to the average life of the lease
term. In addition, the Company will pay the same interest rate on advances from
the date of the advance until the lease commencement date. During the nine
months ended September 30, 2000, the Company submitted and received advances for
$8.5 million at an interest rate of 8.5%. The Company is required to maintain
financial covenants including specified minimum tangible net worth, and leverage
ratios. The Company was in compliance with these covenants at September 30,
2000.
The second, dated February 4, 2000, provided $933,000 for the acquisition of
warehouse equipment. The term of the lease is for five years at an interest rate
of 8.8% per annum.
The third, dated May 15, 2000, provided $850,000 for the acquisition of
warehouse equipment. The term of the lease is for 5 years at an interest rate of
9.4% per annum.
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SKECHERS U.S.A., INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
(6) LITIGATION
In January 2000 and December 1999, 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.
These suits have now been consolidated into one matter. As this matter is in the
early stages of pleading and 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.
(7) STOCKHOLDERS' EQUITY
During the nine-months ended September 30, 2000, certain Class B stockholders
converted 1,990,710 shares of Class B common stock to Class A common stock.
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
Condensed Consolidated Financial Statements and Notes thereto appearing
elsewhere in this document.
This Form 10-Q contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, including statements with
regards to the Company's revenues, earnings, spending, margins, cash flow,
orders, inventory, products, actions, plans, strategies and objectives.
Forward-looking statements include, without limitation, any statement that may
predict, forecast, indicate or simply state future results, performance or
achievements, and may contain the words "believe," "anticipate," "expect,"
"estimate," "intend," "plan," "project," "will be," "will continue," "will
result," "could," "may," "might," or any variations of such words with similar
meanings. Any such statements are subject to risks and uncertainties that could
cause the Company's actual results to differ materially from those which are
management's current expectations or forecasts. Such information is subject to
the risk that such expectations or forecasts, or the assumptions underlying such
exceptions or forecasts, become inaccurate.
Risks and uncertainties that could affect the Company's actual results and could
cause such results to differ materially from those contained forward-looking
statements made
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Page 9
by or on behalf of the Company are included under the "Risk Factors" on pages 14
through 22 in the Company's Form 10-K.
OVERVIEW
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 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, Dillards, Robinsons-May, 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 as well
as through its' European subsidiaries, and directly to consumers through Company
owned stores, via mail order and e-commerce.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated, selected information
from the Company's results of operations as a percentage of net sales. Pro forma
reflects adjustments for Federal and state income taxes for the nine months
ended September 30, 1999 as if the Company had been taxed as a C Corporation at
an assumed effective rate of 40.0% rather than as an S Corporation.
Three-Months Ended
September 30,
---------------------------------------------------
2000 1999
---------------------- ------------------------
Net sales $ 205,749 100.0% $ 124,177 100.0%
Cost of sales 118,838 57.8 71,340 57.5
--------- ----- --------- -----
Gross profit 86,911 42.2 52,837 42.5
Royalty income, net 6 -- -- 0.0
--------- ----- --------- -----
86,917 42.2 52,837 42.5
--------- ----- --------- -----
Operating expenses:
Selling 25,177 12.2 15,814 12.7
General and administrative 33,865 16.5 21,534 17.3
--------- ----- --------- -----
59,042 28.7 37,348 30.0
--------- ----- --------- -----
Earnings from operations 27,875 13.5 15,489 12.5
Interest expense, net (2,674) (1.3) (1,465) (1.2)
Other, net (59) -- 219 0.2
--------- ----- --------- -----
Earning before income taxes 25,142 12.2 14,243 11.5
Income taxes 9,855 4.8 5,698 4.6
--------- ----- --------- -----
Net earnings $ 15,286 7.4% $ 8,545 6.9%
========= ===== ========= =====
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Page 10
Nine-Months Ended
September 30,
---------------------------------------------------
2000 1999
---------------------- ----------------------
Net sales $ 502,992 100.0% $ 324,495 100.0%
Cost of sales 293,310 58.3 192,228 59.2
--------- ----- --------- -----
Gross profit 209,682 41.7 132,267 40.8
Royalty income, net 115 -- 207 0.0
--------- ----- --------- -----
209,797 41.7 132,474 40.8
--------- ----- --------- -----
Operating expenses:
Selling 56,289 11.2 42,972 13.2
General and administrative 91,088 18.1 56,726 17.5
--------- ----- --------- -----
147,377 29.3 99,698 30.7
--------- ----- --------- -----
Earnings from operations 62,420 12.4 32,776 10.1
Interest expense, net (6,666) (1.3) (5,334) (1.6)
Other income, net 218 -- 772 0.2
--------- ----- --------- -----
Earnings before pro forma
income taxes 55,972 11.1 28,164 8.7
Pro forma income taxes 21,941 4.4 11,266 3.5
--------- ----- --------- -----
Pro forma net earnings $ 34,031 6.8% $ 16,898 5.2%
========= ===== ========= =====
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
Net Sales
Net sales for three-months ended September 30, 2000 were $205.7 million or 65.7%
higher than $124.2 million in the comparable period of 1999. The increase in net
sales is a result of strong market acceptance and continued brand imaging of the
Skechers name and styles. The Company continues to focus primarily on its
wholesale business, which experienced tremendous growth during the three-months
ended September 30, 2000 compared to the same period in 1999. Retail sales grew
during the three-months ended September 30, 2000 compared to the same period in
1999 due to nine additional Company retail store locations opened during the
year. Mail order sales increased during the three-months ended September 30,
2000 compared to 1999 due to the increased focus on catalog development and
expansion of circulation. International sales experienced an increase in sales
during the three-months ended September 30, 2000 compared to the same period in
1999 due to expansion into Germany and increased brand awareness achieved
through advertising and marketing campaigns abroad.
Gross Profit
The Company's gross profit as a percentage of net sales remained strong at 42.2%
for the three-months ended September 30, 2000 compared to 42.5% for the
comparable period in 1999. The slight decrease in overall profit margin is the
result of slightly higher international sales at lower gross margins over retail
in the three-months ended September 30, 2000.
Selling Expenses
Selling expense (which includes sales salaries, commissions and incentives,
advertising, promotions, trade shows and catalog printing costs) increased $9.4
million to $25.2 million or 12.2% of net sales for the three-months ended
September 30, 2000 from $15.8 million or 12.7% of net sales for the three-months
ended September 30, 1999. As a percentage of net sales, sales salaries,
commission and incentives expenses increased to 2.4% of net sales in the
three-months ended September 30, 2000 from 1.8% for the comparable period in
1999. This increase is
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Page 11
attributable to the hiring of additional sales personnel and additional
incentives based on volume to enable continued growth.
Management is committed to the overall marketing strategy that is largely
responsible for the increase in the market presence, product visibility and
product demand over the past three years. The Company has increased its
advertising budget consistent with projected sales, which has included such
avenues as magazines, television, trade shows, billboards, and buses. The
Company endeavors to spend approximately 8% to 10% of annual net sales in the
marketing of Skechers footwear through advertising, promotions, public
relations, trade shows and other marketing efforts. Marketing expense as a
percentage of net sales may vary from quarter to quarter. In the three-months
ended September 30, 2000, total advertising expenses increased to $15.6 million
or 7.6% of net sales from $10.3 million or 8.3% of net sales for the same period
in 1999.
General and Administrative Expenses
General and administrative expenses increased 57.3% to $33.9 million or 16.5% of
net sales for the three-months ended September 30, 2000 from $21.5 million or
17.3% of net sales for the three-months ended September 30, 1999. During
three-months ended September 30, 2000, salaries, wages and temporary help costs
accounted for the majority of the increase. These costs increased to $17.8
million or 8.7% of net sales from $10.5 million or 8.5% of net sales for the
comparable period in 1999. Such increase can be attributed in part to normal
payroll costs associated with additional staffing needs to meet the growth of
the Company and the addition of new retail locations. In addition, the Company
utilized overtime and temporary help for the warehousing and shipping department
to meet the demand of the increasing sales volume.
Interest Expense, Net
Interest expense, net, increased 82.5% or $1.2 million to $2.7 million for the
three-months ended September 30, 2000 from $1.5 million for the three-month
ended September 30, 1999. The increase is primarily a result of increased
financing costs associated with capital additions made during the year,
increased purchases of inventory and build up of accounts receivable
commensurate with growth.
Other, Net
During the three-months ended September 30, 2000 the Company incurred other
expenses, net of $59,000. During the three-months ended September 30, 1999 the
Company realized other income, net of $219,000, including a legal settlement of
$674,000.
Income Taxes
Income taxes for the interim period were computed using the effective tax rate
estimated to be applicable for the full fiscal year, which is subject to ongoing
review and evaluation by management.
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NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
Net Sales
Net sales for nine-months ended September 30, 2000 were $503.0 million or 55.0%
higher than $324.5 million in the comparable period of 1999. The Company
continues to focus primarily on its wholesale business, which experienced a
53.8% increase during the nine-months ended September 30, 2000 versus the
nine-months ended September 30, 1999. The increase in sales is a result of
continued brand awareness and imaging achieved through the significant expansion
of the Company's dedicated nationwide sales force and marketing campaigns.
Additionally, the Company continues to experience growth through product
diversification and increased style offerings. The Company has expanded its
product categories to offer additional styles of women's, men's and children's
athletic shoes and a line of men's quality dress shoes. Retail sales grew during
the nine-months ended September 30, 2000 compared the same period in 1999. The
increase is primarily due to 9 more locations being added nationwide during the
year. Mail order sales increased during the nine-months ended September 30, 2000
compared to 1999 due to the focus on catalog development and expansion of
circulation. International sales experienced an increase during the nine-months
ended September 30, 2000 compared to 1999 due to increase brand awareness and
advertising campaigns abroad.
Gross Profit
The Company's gross profit as a percentage of net sales increased to 41.7% for
the nine-months ended September 30, 2000 from 40.8% for the comparable period in
1999. The increase is due in part to increased sales in the higher margin
product categories within the domestic wholesale business. Domestic wholesale
profit margin increased 2.1% during the nine-months ended September 30, 2000
from the comparable period in 1999. Additionally, sales returns and allowances
as a percentage of gross sales decreased 0.4% during the nine-months ended
September 30, 2000 compared to the same period in 1999.
Selling Expenses
Selling expenses increased $13.3 million to $56.3 million or 11.2% of net sales
for the nine-months ended September 30, 2000 from $43.0 million or 13.2% of net
sales for the comparable period in 1999. The increase in total expenses is
primarily due to the increase in advertising and promotional costs attributable
to the Company's ongoing marketing efforts. The decrease as a percentage of net
sales is attributable to the sales growth realized from the strength in the
brand image and product awareness.
Advertising, trade show and catalog expenses increased $9.1 million to $44.8
million or 8.9% of net sales for the nine-months ended September 30, 2000 from
$35.7 million or 11.0% of net sales for the comparable period in 1999. The
increase is a result of advertising and catalog costs. The decrease as a
percentage of net sales is primarily a result of sales growth.
As a percentage of net sales, sales salaries, commission and incentives expenses
remained consistent at 2.2% of net sales in the nine-months ended September 30,
2000 compared to the same period in 1999.
General and Administrative Expenses
General and administrative expenses increased 60.6% to $91.1 million or 18.1% of
net sales for the nine-months ended September 30, 2000 from $56.7 million or
17.5% of net sales for the comparable period in 1999. This 0.6% increase as a
percentage of net sales is partly attributable to the Company's mail order
business, which
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inherently has a higher percentage of expenses per dollar sales. Additionally,
the Company incurred increased distribution and warehousing costs to meet demand
until its new distribution center is operational, which is expected in the
fourth quarter of 2000, and expansion into six new retail locations has caused
expenses to increase.
During nine-months ended September 30, 2000, salaries, wages and temporary help
costs increased to $41.2 million or 8.2% of net sales from $23.6 million or 7.3%
of net sales for the comparable period in 1999. Such increase can be attributed
in part to normal payroll costs associated with additional staffing needs to
meet the growth of the Company. In addition, the Company utilized overtime and
temporary help for the warehousing and shipping department to meet the demand of
the increasing sales volume.
Interest Expense, Net
Interest expense, net, increased 25.0% or $1.3 million to $6.7 million for the
nine-months ended September 30, 2000 from $5.3 million for the nine-month ended
September 30, 1999. The increase is primarily a result of financing costs
associated with increased capital additions and short-term borrowings made
during the year.
Other Income, Net
Other income, net for the nine-months ended September 30, 1999 includes a gain
of $674,000 related to commercial lawsuits filed by the Company.
Income Taxes
Income taxes for the interim period were computed using the effective tax rate
estimated to be applicable for the full fiscal year, which is subject to ongoing
review and evaluation by management.
The pro forma income tax adjustment for the interim period ended September 30,
1999 represents taxes that would have been reported had the Company been subject
to Federal and state income taxes as a C Corporation, assuming an effective rate
of 40.0%.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's need for funds arises primarily from its working capital
requirements, including the need to finance its receivables and inventory. The
Company's working capital was $91.3 million at September 30, 2000 and $65.0
million at December 31, 1999. The 40.4% increase in working capital at September
30, 2000 was principally due to the increase in trade accounts receivable and
inventories net of an increase in related short-term borrowings and accounts
payable since December 31, 1999.
The Company is currently negotiating with a lender to provide approximately $7.9
million for the acquisition of the Company's Ontario, California, distribution
facilities and related improvements. It is anticipated that the financing will
be amortized over 30 years, with a final balloon payment due after 10 years, and
will be at current market rates for similar financing. Additionally, the Company
has currently signed a purchase agreement for the acquisition of an additional
corporate facility located in Manhattan Beach, California. The Company is in the
process of completing due diligence review and is negotiating with a lender to
provide approximately $10.4 million of the $14.5 million purchase price. There
is no assurance the Company will obtain the financing.
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 0.08%
of net sales for the nine-month period ended September 30, 2000. 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 used in operating activities totaled $17.8 million for the nine-months
ended September 30, 2000 compared to cash provided by operating activities of
$955,000 for the comparable period in 1999. The decrease in cash provided by
operating activities was the net result of a substantial increase in trade
accounts receivable(net of a $6.5 million provision for bad debts and returns)
and inventories offset by an increase in related accounts payable and accrued
expenses. These increases are due to the Company's growth during the nine-months
ended September 30, 2000.
Net cash used in investing activities, consisting of capital expenditures,
totaled $21.8 million and $6.6 million for the nine-months ended September 30,
2000 and 1999, respectively. Capital expenditures during the nine-months ended
September 30, 2000 were comprised primarily of equipment for the new
material/inventory handling, sortation and delivery system and the construction
of 9 additional retail stores. Investing activities for the same period in 1999
were primarily due to capital expenditures in connection with the establishment
of the Company's existing distribution facilities in Ontario, California, the
construction of additional Company retail stores, and additional hardware and
software for the Company's computer needs.
Net cash provided by financing activities totaled $36.6 million during the
nine-months ended September 30, 2000, compared to cash used in financing
activities of $770,000 for the comparable period in 1999. During the nine-months
ended September 30, 2000, cash was provided by proceeds from borrowings on the
Company's credit facilities as well as capital lease financing during the
period. This compares to cash used in financing activities during the
nine-months ended September 30, 1999, principally to repay short-term
borrowings, as well as payments to stockholders, which were partially financed
by the initial public offering.
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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 $70.9 million of availability as of September 30, 2000) with The
CIT Group, as agent for the lenders. The Company negotiated more favorable
interest terms on June 1, 2000. As amended, the revolving line of credit bears
interest at the prime rate (9.5% at September 30, 2000) minus 0.50%. Interest on
the revolving line of credit is payable monthly. The revolving line of credit
expires on December 31, 2002. The revolving line of credit provides a sub-limit
for letters of credit of up to $36.0 million to finance the Company's foreign
purchases of merchandise inventory. As of September 30, 2000, the Company had
approximately $4.6 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 $2.3 million as of September 30, 2000, bears interest
at the prime rate plus 1% and is due in monthly installments with a final
balloon payment December 2002. The proceeds from this note were used to purchase
equipment for one of 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, working capital 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 September 30,
2000.
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 2001. 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.
QUARTERLY RESULTS AND SEASONALITY
While sales of footwear products have historically been somewhat seasonal in
nature with the strongest sales generally occurring in the third and fourth
quarters, the Company believes that changes in its product offerings have
somewhat mitigated the effect of this seasonality and, consequently, the
Company's sales are not necessarily as subjected to seasonal trends as that of
its' past or its' competitors in the footwear industry.
The Company has experienced, and expects to continue to experience, variability
in its net sales and operating results 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 (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
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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 operating
results for any particular quarter are not necessarily indicative of the results
for the full year.
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 net 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 net 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 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 2000 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. The Company's short-term
borrowings are sensitive to changes in short-term interest rates and an increase
in rates may decrease the Company's earnings.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 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, SFAS No. 133 should not impact the
Company's financial position or results of operations.
On March 31, 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, Accounting for Certain Transactions involving Stock
Compensation - an interpretation of APB Opinion No. 25 (FIN 44). This
interpretation provides guidance for issues that have arisen in applying APB
Opinion No. 25 Accounting for Stock Issued to Employees. FIN 44 applies
prospectively to new awards, exchanges of awards in business combinations,
modification of outstanding awards, and changes in grantee status that occur on
or after July 1, 2000, except for the provisions related to
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repricings and the definition of an employee which apply to awards issued after
December 15, 1998. The provisions related to modifications to fixed stock option
awards to add a reload feature are for awards modified after January 12, 2000.
The new interpretation is not expected to have a material impact upon the
Company's financial statements.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK -- Not
Applicable
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS -- Not Applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS -- Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES -- Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS -- Not Applicable
ITEM 5. OTHER INFORMATION -
On September 5, 2000, the Board of Directors of the Company appointed Robert
Siegel and Jeffrey Greenberg as members of the Board of Directors. Robert Siegel
is a Class 2 director serving until the annual meeting of stockholders in 2001.
Jeffrey Greenberg is a Class 1 director serving until the annual meeting of
stockholders in 2003.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K --
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the
quarterly period ended September 30, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SKECHERS U.S.A, INC.
Dated: November 14, 2000 /s/ David Weinberg
---------------------------------
David Weinberg
Executive Vice President and
Chief Financial Officer
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