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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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
TITLE OF EACH CLASS ON WHICH REGISTERED
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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. [X]
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 26, 2001 on the New York Stock Exchange was approximately $419 million.
The number of shares of Class A Common Stock outstanding as of March 26, 2001
was 12,546,972.
The number of shares of Class B Common Stock outstanding as of March 26, 2001
was 23,505,451.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Definitive Proxy Statement issued in connection
with the 2001 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, 2000
INDEX TO ANNUAL REPORT ON FORM 10-K
PAGE
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PART I
Item 1. Business............................................................... 3
Item 2. Properties............................................................. 15
Item 3. Legal Proceedings...................................................... 16
Item 4. Submission of Matters to a Vote of Security Holders.................... 17
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.. 18
Item 6. Selected Financial Data................................................ 19
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................. 19
Item 7a. Quantitative and Qualitative Disclosures About Market Risk............ 23
Item 8. Financial Statements and Supplementary Data............................ 24
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure................................................... 24
PART III
Item 10. Directors and Executive Officers of the Registrant..................... 25
Item 11. Executive Compensation................................................. 25
Item 12. Security Ownership of Certain Beneficial Owners and Management......... 25
Item 13. Security Relationships and Related Transactions........................ 25
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........ 26
Signatures........................................................................ 29
Consolidated Financial Statements................................................. F-1
2
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 our 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 our strategies,
future growth and growth rates and future increases in net sales, expenses,
capital expenditures and net earnings. The words "believes," "anticipates,"
"plans," "expects," "endeavors," "may," "will," "intends," "estimates," and
similar expressions are intended to identify forward-looking statements. These
forward-looking statements involve risks and uncertainties, and our 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. ("Skechers") designs and markets branded contemporary
casual, active, rugged and lifestyle footwear for men, women and children. Our
objective is to become a leading source of contemporary casual and active
footwear while ensuring the longevity of both Skechers and the Skechers brand
name through controlled, well managed growth. We strive 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 our distribution channels. We sell our products to department stores
such as Nordstrom, Macy's, Dillards, Robinsons-May, and JC Penney and specialty
retailers such as Footlocker, Lady Footlocker, Kid's Footlocker, Famous
Footwear, Genesco's Journeys and Jarman chains, and Footaction U.S.A. We also
own and operate Skechers' retail stores and sell product directly to consumers
through mail order and web site distribution. We, through major international
distributors, sell our products in over 100 countries and territories, with the
exception of France and Germany where we sell directly to department stores and
specialty retailers.
Our 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. Our 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. Our 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. Our 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.
Our 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 Skechers in 1992. Prior to that
time, Robert Greenberg co-founded L.A. Gear, Inc. ("L.A. Gear") 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. We believe
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. We offer a broad selection of categories in an
effort to maximize our ability to respond to changing fashion trends and
consumer preferences as well as to limit our exposure to any specific style. We
believe that our products and brand offer a broad appeal to men, women and
children.
We introduced our first footwear line with the Skechers brand name in
December 1992. Since that time, we have expanded our product offerings and grown
our net sales while substantially increasing the breadth and penetration of our
account base. We currently categorize our footwear into six product lines: (i)
Skechers USA, (ii) Skechers Sport, (iii) Skechers Collection, (iv) Skechers
Kids, (v) Somethin' Else from Skechers, and (vi) Skechers by Michelle K. 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
and Somethin' Else from Skechers and Skechers by Michelle K which are offered in
women's styles only).
Skechers USA. Our Skechers USA category 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. We design and price this category to appeal primarily to young
men with broad acceptance
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across age groups. Suggested retail price points range from $45.00 to $70.00 for
this category. Our 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 our 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 $55.00 to $75.00 for this category. Our 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. We market 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 includes skate
sneakers, joggers, trail runners, sport hikers and multi-functional shoes
inspired by cross-trainers. We distinguish our Skechers Sport category by its
technical performance inspired looks; however, generally we do not promote the
technical performance features of these shoes. Certain of our 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 $65.00 for this category.
Skechers Collection. The Skechers Collection 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.
Skechers Kid's. The Skechers Kid's line features a range of products
including boots, shoes and sneakers and 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, we also adapt current
fashion from our men's and women's lines by modifying designs and choosing
colors and materials that are more suitable to the playful image we have
established in the children's footwear market. We also have a Skechers Lights
category, which is a line of lighted footwear combining sequencing patterns and
lights in the outsole and other areas of the shoes. Our children's footwear is
offered at retail prices ranging from $20.00 to $50.00.
Somethin' Else from Skechers. The Somethin' Else from Skechers line,
introduced in February 2001, is a young women's line that features an array of
stylish shoes, boots and sandals for females between the ages of 12 and 24. This
new line is expected to be available to consumers beginning Fall 2001. We
designed the line to be a complementary line for the junior customer who already
wears Skechers USA and Skechers Sport styles.
Skechers by Michelle K. The Skechers by Michelle K line, also introduced in
February 2001, is a new dress casual junior line for trend-savvy young women
between the ages of 18 and 34. This new line is expected to be available in Fall
2001.
We offer sandalized footwear which features open-toe and open-side
constructions consistent with our offerings 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
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leather and synthetic constructions and may feature suede footbeds with
form-fitting mid-soles. We typically deliver our sandalized footwear to
retailers from February to August. Suggested retail price points range from
$20.00 to $60.00 for this category.
PRODUCT DESIGN AND DEVELOPMENT
We believe that our product success is related in a large part to our ability
to recognize trends in the footwear markets and to design products which
anticipate and accommodate consumers' ever-evolving preferences. We strive to
analyze, interpret and translate current and emerging lifestyle trends.
Lifestyle trend information is compiled by our 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 our
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
information services. In addition, a key component of our design philosophy is
to continually reinterpret both our basic and current successful styles in the
Skechers image.
We intend to continue to leverage our reputation for quality products and our
relationships with retailers through, among other things, the introduction of
new styles in our existing and new categories of footwear. Also, we believe our
in stock inventory program enhances our position with retailers. This program
increases the availability of our best-selling products, which we believe has
contributed to more consistent product flow to our retail customers and an
increased ability to respond to reorder demand.
Offer a Breadth of Innovative Products. We have continued to broaden our
product line in an effort to reach a larger consumer base. In addition,
offering a broader range of products allows us to increase sales to our current
customer and consumer base. We offer a wide variety of different styles of
footwear generally in three to four different colors and material variations and
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. We
have developed this breadth of merchandise offerings in an effort to improve our
ability to respond to changing fashion trends and customer preferences, as well
as to limit our exposure to any single industry participant. We do not believe
that any single industry participant competes directly with us across our entire
product offering. Although major new product introductions take place in advance
of both the spring and the fall selling seasons, we typically introduce new
designs in to our existing lines every 30 to 60 days to keep current with
emerging trends.
Design Team. All of our 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, we believe that substantially all of the line appeals
to the broader 5 to 40 year old consumer. Although many of our shoes have
performance features, such as hikers, trail runners, skate sneakers and joggers,
we generally do not position our shoes in the marketplace as technical
performance shoes. Our principal goal in product design is to generate new and
exciting footwear with contemporary and progressive style features and comfort
enhancing performance features. We do 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 our in-house
staff. We also utilize outside design firms on an item-specific basis to
supplement our design efforts. Separate design teams focus on each of the men's,
women's and children's categories, and report to our senior design executives.
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 Skechers' products to meet the particular needs of
our 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 our
production department. Prototype blueprints and specifications are created and
forwarded to our prototype manufacturers located in Taiwan, which then forward
design prototypes back to our domestic design team. New design concepts are
often also reviewed by our major retail customers. Customer input not only
allows us to measure consumer reaction to the latest designs, but also affords
us an opportunity to foster deeper and more collaborative relationships with our
customers. Our design team can easily and quickly modify and refine a design
based on customer input.
SOURCING
A substantial portion of our products are produced in China. To date,
products have been purchased in U.S. Dollars, although we cannot assure you that
this will continue to be the case. We do not own or operate any manufacturing
facilities. We believe the use of independent manufacturers increases our
production flexibility and capacity while at the same time substantially
reducing capital expenditures and avoiding the cost of managing a large
production work force. We finance our production activities in part through the
use of interest-bearing open purchase arrangements with certain of our Asian
manufacturers. These facilities currently bear interest
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at a rate between 1.0% and 2.0% for 30 to 60 days financing, depending on the
factory. We believe that the use of these arrangements affords us additional
liquidity and flexibility. While we have long-standing relationships with many
of our manufacturers and believe our relationships to be good, there are no
long-term contracts between us and any of our manufacturers.
We maintain 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, we place orders for selected footwear with our manufacturers
prior to the time we receive customers' orders for such footwear. In order to
reduce the risk of overstocking, we seek to assess demand for our products by
soliciting input from our customers and monitoring retail sell-through. In
addition, we analyze 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, we oversee the
key aspects of the production process from prototyping through production to
finished product. Monitoring is performed by our domestic production department
and from our offices in China and Taiwan. We believe that our Asian presence
allows us to negotiate supplier and manufacturer arrangements more effectively,
decrease product turnaround time, and ensure timely delivery of finished
footwear. In addition, we require our 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) is 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 our prior
experience with the manufacturer and the amount of available production
capacity. We attempt to monitor our selection of independent factories to ensure
that no one manufacturer is responsible for a disproportionate amount of our
merchandise. We also seek to use, whenever possible, manufacturers that have
previously produced our footwear, which we believe enhances continuity and
quality while controlling production costs. In addition, we source product for
styles that account for a significant percentage of our net sales from at least
four different manufacturers. For the year ended December 31, 2000, we had four
manufacturers which accounted for between 9% and 20%, each, of total purchases.
Quality Control. We believe that quality control is an important and
effective means of maintaining the quality and reputation of our products. Our
quality control program is designed to ensure that finished goods not only meet
our established design specifications, but also that all goods bearing our
trademarks meet our 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 raw materials prior
to manufacture, (ii) samples and materials at various stages of production and
(iii) final products prior to shipment. Our employees are on-site at each
of our major manufacturers to oversee key phases of production. In
addition, unannounced visits to the manufacturing sites, to further monitor
compliance with our manufacturing specifications, are made by our employees
and agents.
MARKETING AND PROMOTION
Our 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 our
image and our advertising and promotional activities. Towards this end, we
endeavor to spend between 8% and 10% of annual net sales in the marketing of
our footwear through an integrated effort of advertising, promotions,
public relations, trade shows and other marketing efforts, which we believe
substantially heightens brand awareness.
Advertising. We believe that our success to date is due in large part to our
advertising strategies and methods. Our in-house marketing and advertising team
has developed a comprehensive program to promote the Skechers brand name through
lifestyle and image advertising. We have 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.
We use a variety of media for our national advertising. Print efforts are
represented by one and two page ads displayed in popular fashion and lifestyle
consumer publications that appeal to our target customer group. Our progressive
television advertisements are primarily produced 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 our retail accounts feature "in-store shop" formats in which we
provide fixtures, signage and visual merchandise assistance in a dedicated floor
space within the store. The design of our "in store shop" utilizes our distinct
advertising strategies to promote brand recognition and differentiate our
presence in the store from that of our competition. The installation
of these "in-store shops" enables us to establish premium locations within the
retailers and we believe it aids in increased sell-through and higher maintained
margins for our customers. Our in-house display merchandising department
supports retailers and distributors by developing point-of-purchase advertising
to further promote our products in stores and to leverage the brand recognition
at the retail level.
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Promotions. Our in-house promotions department is also 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. Our in-house public relations department is also
responsible for increasing our media exposure. Our objective is to communicate
the Skechers image to the public and news media through the active solicitation
of fashion editorial placements, arranging interviews for our key personnel and
coordinating local publicity and special event programs for us. During 2000, we
received notable press coverage in print publications including the New York
Times, the Los Angeles Times, Investors Business Daily and BusinessWeek.
Skechers was noted in the press in BusinessWeek's top 100 hot growth companies
and ranked in the number five position; for receiving Footwear Plus' Young
Women's Excellence in Design award; and, in DNR, as a top footwear brand for the
Generation Y male. With our strategy tied to promoting the newest styles
produced by the product development team, our products are often featured in
fashion and pop culture magazines and in a select group of films and popular
television shows.
Endorsements. In 2000, we signed our first celebrity endorsement agreements
in an effort to strategically leverage and market the Skechers brand to specific
consumer groups. We signed singer Britney Spears for an international (worldwide
excluding the United States) print media campaign through June 2002. We signed
actor Matt Dillon for a Skechers Collection print media campaign, which will
appear in magazines through January 2002. We also signed actor Rob Lowe for a
limited term print media campaign. From time to time, we may sign other
celebrities to endorse the brand and to strategically focus marketing, but there
are currently no other endorsements planned.
Trade Shows. To showcase the Skechers product to footwear buyers, we
exhibited at 21 trade shows during 2000. We pride ourselves on having innovative
and dynamic exhibits on the show floor. Designed in-house, our state-of-the-art
trade show exhibits feature the latest products and provide a stage show
featuring progressive music and nightclub lighting.
Electronic Commerce and Mail-Order Catalog. During 2000, we continued the
production and distribution of our mail order catalog. The mail order catalog
offers a selection of the most popular products sold at retail. Concurrent with
the distribution of each catalog, our interactive website (www.skechers.com) is
expanded to include the offerings of the current catalog. Our website also
features photos, interviews and information on Skechers-sponsored events. Our
website and mail-order catalog are intended to further enhance the Skechers
brand image.
DISTRIBUTION CHANNELS
We have implemented a strategy of controlling the growth of the distribution
channels through which our products are sold in order to protect the Skechers
brand name, properly service customer accounts and better manage the growth of
the business. We have limited distribution of our product to those retailers
that we believe can best support the Skechers brand name in the market. By
focusing on our existing accounts, we can deepen our relationships with our
existing customers by providing a heightened level of customer service. We
believe close relationships with our customers help us to maximize our (i)
retail sell-through, (ii) maintained margins, (iii) inventory turns, (iv) and
reduce our inventory markdowns and customer returns and allowances.
Sales and Field Service Representatives. As of February 28, 2001, we had 102
and 15 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 is
actively involved in selling to and maintaining relationships with our major
retail accounts. For the year ended December 31, 2000, the top five sales
persons accounted for 36.1% of our net domestic wholesale sales. One of these
salespersons generated 14.0% of our net domestic wholesale sales for the year
ended December 31, 2000.
The field service representatives ensure proper presentation of our
merchandise and point-of-purchase marketing materials. Our 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 us with
scheduling production. Along with a staff of in-house customer service
employees, we are 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, 2000, we operated 24 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 our operating strategy. First,
concept stores showcase a wide range of our product offerings for the current
season, providing the customer with the entire product story. In contrast, we
estimate that our average retail customer carries no more than 5.0% of the
complete Skechers line.
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Second, retail locations are generally chosen to generate maximum marketing
value for the Skechers brand name through signage and store front presentation.
Third, our concept stores also serve as marketing and product testing venues by
providing rapid product feedback. We believe that product sell-through
information derived from our concept stores enables our sales, merchandising and
production staff to respond quickly to market changes and new product
introductions. We occasionally order limited production runs which may initially
be tested in Skechers' concept stores. By working closely with store personnel,
we obtain customer feedback that often influences product design and
development. We believe that sales in our retail stores can help forecast sales
in national retail stores. Such responses serve to augment sales and limit our
inventory markdowns and customer returns and allowances. We adjust our product
and sales strategy based upon seven to 14 days of retail sales information.
We seek to instill enthusiasm and dedication in our 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. We have
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, 2000, we also
operated 28 factory and warehouse outlet stores that enable us 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. Our factory outlet stores
have enabled us to increase sales in certain geographic markets where our
products were not previously available and to consumers who favor value-oriented
retailers. The outlets provide opportunities for us to sell discontinued and
excess merchandise, thereby reducing the need to sell such merchandise to
discounters at excessively low prices. Our free-standing warehouse outlet stores
enable us to liquidate other excess merchandise, discontinued lines and odd
sizes. We strive to geographically position our factory and warehouse outlet
stores to areas not supported by traditional footwear retailers that would carry
our brand.
Other Direct Distribution Outlets. Our mail-order catalog and website act as
sales vehicles. We believe that these distribution channels will not become a
significant portion of total revenues for us in the near term; however, we
believe that they may present attractive long-term opportunities with minimal
near-term costs.
INTERNATIONAL OPERATIONS
Although our primary focus is on the domestic market, we presently market our
products in countries and territories in Europe, Asia and selected other foreign
regions. We derive revenues and earnings from outside the United States from
three principal sources: (i) sales of our footwear directly to foreign
distributors who distribute such footwear to department stores and specialty
retail stores, (ii) in France and Germany, we sell footwear directly to
department stores and specialty retail stores and (iii) to a lesser extent,
royalties from licensees who manufacture and distribute our products outside the
United States.
We believe that international distribution of our products may represent a
significant opportunity to increase revenues and profits. Although we are in the
early stages of our international expansion, our products are currently sold in
more than 100 countries and territories. Our goal is to increase international
sales, through both foreign distributors and directly, by heightening our
international marketing presence in those countries. During 2000, we continued
our international advertising campaigns, which are designed to establish
Skechers as a global brand synonymous with casual shoes. We are also exploring
further direct sales to retailers in certain European countries. In February
2001, we announced the creation of Skechers USA Ltd., a subsidiary with its
headquarters in London, England. Skechers USA Ltd. will organize its operations
in the United Kingdom and Ireland and establish direct control over wholesale
distribution, merchandising, and marketing in that region. In addition, we are
selectively opening flagship retail stores internationally on our own or through
joint ventures. In February and March 2001, we opened our first flagship retail
stores on Oxford Street in London and in the prestigious Centro Mall in
Oberhausen, Germany, respectively. We also plan to open a flagship store at the
Forum Les Halles in Paris by the end of Spring 2001.
DISTRIBUTION FACILITY
We believe that strong distribution support is a critical factor in our
operations. Once manufactured, our products are packaged in shoe boxes bearing
bar codes and either shipped to our approximately 962,000 square feet of
Skechers managed distribution centers located in Ontario, California, or shipped
directly from the manufacturer to our international customers. During 2000, we
increased our distribution capacity with the purchase of an approximately
264,000 square foot distribution center located in Ontario, California. We lease
the remaining distribution space of approximately 698,000 square feet.
8
POTENTIAL LICENSING ARRANGEMENTS
We believe 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 us. From time to time, we have experimented with certain
manufacturers on a very limited basis to study the potential impact of licensing
the brand. We periodically review potential internationally licensing
arrangements for footwear in various geographical regions that present favorable
business opportunities. We believe that revenues from licensing agreements will
not provide a significant portion of our net revenues in the near term; however,
we believe that licensing arrangements may present attractive long-term
opportunities with minimal near-term costs.
BACKLOG
We generally receive the bulk of our 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, 2000, our backlog was $221.6 million, compared to
$121.7 million at December 31, 1999. While backlog orders are subject to
cancellation by customers, we have not experienced significant cancellation of
orders in the past and we expect that substantially all the orders will be
shipped in fiscal 2001. However, 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
We own and utilize a variety of trademarks, including the Skechers trademark.
We have a significant number of both registrations and pending applications for
our trademarks in the United States. In addition, we have trademark
registrations and trademark applications in approximately 81 foreign countries.
We also have design patents, and pending design and utility patent applications,
in both the United States and various foreign countries. We continuously look to
increase the number of our patents and trademarks, both domestically and
internationally, where necessary to protect valuable intellectual property. We
regard our trademarks and other intellectual property as valuable assets and
believe that they have significant value in the marketing of our products. We
vigorously protect our trademarks against infringement, including through the
use of cease and desist letters, administrative proceedings and lawsuits.
We rely on trademark, patent, copyright, trade secret protection,
non-disclosure agreements and licensing arrangements to establish, protect and
enforce intellectual property rights in our logos, tradenames and in the
design of our products. In particular, we believe that our future success will
largely depend on our ability to maintain and protect the Skechers trademark.
Despite our efforts to safeguard and maintain our intellectual property rights,
we cannot assure you that we will be successful in this regard. We cannot assure
you that third parties will not assert intellectual property claims against us
in the future. Furthermore, we cannot assure you that our trademarks, products
and promotional materials or other intellectual property rights do not or will
not violate the intellectual property rights of others, that our intellectual
property would be upheld if challenged, or that we would, in such an event, not
be prevented from using our trademarks or other intellectual property rights.
Such claims, if proven, could materially and adversely affect our 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 our business, financial condition and results of
operations. We have sued and have been sued by third parties for infringement of
intellectual property. It is our opinion that none of these claims have
materially impaired our ability to utilize our 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 we continue to implement protective measures and intend to
defend our intellectual property rights vigorously, we cannot assure you that
these efforts will be successful or that the costs associated with protecting
our rights in certain jurisdictions will not be prohibitive. From time to time,
we discover products in the marketplace that are counterfeit reproductions of
our products or that otherwise infringe upon intellectual property rights held
by us. We cannot assure you that actions taken by us to establish and protect
our trademarks and other intellectual property rights will be adequate to
prevent imitation of our products by others or to prevent others from seeking to
block sales of our products as violating trademarks and intellectual property
rights. If we are unsuccessful in challenging a third party's products on the
basis of infringement of our intellectual property rights, continued sales of
such products by that or any other third party could adversely impact the
Skechers brand, result in the shift of consumer preferences away from us and
generally have a material adverse effect on our business, financial condition
and results of operations.
9
COMPETITION
Competition in the footwear industry is intense. Although we believe that we
do not compete directly with any single company with respect to its entire range
of products, our products compete with other branded products within their
product category as well as with private label products sold by retailers,
including some of our customers. Our 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. Our
athletic shoes compete with brands of athletic footwear offered by companies
such as Nike, Inc., Reebok International Ltd., Adidas-Salomon AG and New
Balance. Our children's shoes compete with brands of children's footwear offered
by The Stride Rite Corporation. In varying degrees, depending on the product
category involved, we compete on the basis of style, price, quality, comfort and
brand name prestige and recognition, among other considerations. These and other
competitors pose challenges to our market share in our major domestic markets
and may make it more difficult to establish Skechers in Europe, Asia and other
international regions. We also compete 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 our 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 us. We
cannot assure you that we will be able to compete successfully against present
or future competitors or that competitive pressures faced by us will not have a
material adverse effect on our business, financial condition and results of
operations.
EMPLOYEES
As of February 28, 2001, we employed 1,666 persons, 917 of which were
employed on a full-time basis and 749 of which were employed on a part-time
basis. None of our employees are subject to a collective bargaining agreement.
We believe that our relations with our employees are satisfactory. We offer our
employees a discount on Skechers merchandise to encourage enthusiasm for the
product and Skechers loyalty.
RISK FACTORS
In addition to the other information in this Form 10-K, the following
factors should be considered in evaluating us and our business.
OUR FUTURE SUCCESS DEPENDS ON OUR ABILITY TO RESPOND TO CHANGING CONSUMER
DEMANDS AND TO IDENTIFY AND INTERPRET FASHION TRENDS.
The footwear industry is subject to rapidly changing consumer demands and
fashion trends. Accordingly, we must identify and interpret fashion trends and
respond in a timely manner. If we do not continue to meet changing consumer
demands or develop successful styles in the future, then we may not be
successful. Sometimes, we must make decisions about product designs several
months in advance. If we fail to anticipate, identify or react appropriately to
changes in styles and trends our failure may result in lower sales, excess
inventories, higher inventory markdowns, and impaired brand image.
A failure to anticipate trends may also lead to lower gross margins as a
percentage of net sales since we may have to provide allowances and discounts to
retailers. Conversely, if we fail to anticipate consumer demand for our
products, we may experience inventory shortages. Inventory shortages might delay
shipments to customers, negatively impact retailer and distributor
relationships, and diminish brand loyalty.
CONSUMERS MAY CONSIDER OUR BRAND OUTMODED.
Even if we react appropriately to changes in consumer preferences, there is
always a risk that consumers may consider our brand image to be outmoded or
associate the brand with styles of footwear that are no longer popular. As a
result of these risks, several footwear companies have experienced periods of
rapid growth in revenues and earnings followed by periods of declining sales and
losses which, in some cases, have resulted in a decision to cease doing
business.
OUR NEW STYLES OF FOOTWEAR MAY NOT BE POPULAR.
We intend to market new lines of footwear in the future. Demand for and
market acceptance of these new products are uncertain. In addition, achieving
market acceptance for new products may require substantial marketing efforts. We
cannot be sure that our marketing efforts will be successful or that we will
have the funds necessary to sufficiently market the new products. Our growth and
profitability could be materially and adversely impacted if our marketing
efforts and new products are not successful.
10
OUR BUSINESS MAY BE ADVERSELY AFFECTED IF ANY STYLE OF FOOTWEAR REPRESENTS A
SUBSTANTIAL PORTION OF OUR NET SALES.
If consumer demand for a style or group of styles that represents a
substantial portion of our net sales decreases then our business may be
adversely affected. In the past, we have experienced decreased consumer demand
for a style of footwear that represented a significant portion of our sales and
our gross sales were adversely affected as a result. This style no longer
represents a significant portion of our sales. We now offer a broad range of
products and no style comprised over 10% of our gross wholesale sales, net of
discounts, for the year ended December 31, 2000. Nonetheless, it is always
possible that fluctuations in sales of styles that represent a significant
portion of our net sales will occur in the future. Such fluctuations could have
harm our business.
IF WE FAIL TO MANAGE OUR GROWTH EFFECTIVELY, IT COULD HAVE AN ADVERSE EFFECT ON
OUR BUSINESS.
In the past, we have experienced rapid growth and we intend to continue to
pursue an aggressive growth strategy by expanding our marketing and promotion
efforts, frequently introducing new products, broadening our lines of casual and
performance footwear, and increasing our international market. Our growth
strategy may place a significant strain on our finances, management and other
resources. Our future performance will depend on various factors, including our
ability to manage increased sales and additional retail stores, manage change in
our domestic and international operations, attract, train, manage and retain
management, sales, marketing and other key personnel, and continue to improve
our operational and financial control systems, infrastructure and management
information systems. We cannot be sure that these expansion efforts will be
successfully completed or that they will not interfere with existing operations.
If our management cannot manage growth effectively it could harm our business.
WE MAY BE UNABLE TO SUSTAIN OUR PRIOR RATE OF GROWTH.
We have grown quickly since we started our business. Our net sales
increased at a compound annual growth rate of 39.7% from $90.8 million in 1994
to $675.0 million in 2000. From 1999 to 2000, we experienced a 59% increase in
net sales and 109% increase in earnings from operations. Our future rate of
growth will depend upon, among other things, the continued success of our
efforts to expand our footwear offerings and distribution channels. Our
profitability in any calendar quarter depends, in part, upon the timing and
level of advertising and trade show expenditures, and shipments of seasonal
merchandise. Our rate of growth may decline or we may not be profitable in any
quarter of any succeeding fiscal year. Furthermore, as our business becomes
larger, we may not be able to maintain our prior growth rate. Our current growth
strategy includes further penetration of existing retail accounts, opening
retail stores in selected locations, increasing our international operations,
and distributing in countries where we have little distribution experience or
where our brand name is not well known. Our future success depends on various
factors, including (i) the strength of our brand name, (ii) market success of
current and new products, (iii) competitive conditions and our ability to manage
increased sales and additional retail stores, (iv) the availability of desirable
locations, and (v) increasing sales to existing customers. We cannot assure you
that our current growth strategy or other growth strategies will be successful
or that our sales or earnings will increase as a result of the implementation of
such efforts.
OUR BUSINESS MAY BE NEGATIVELY IMPACTED AS A RESULT OF CHANGES IN THE ECONOMY.
Our industry is dependent on the general economic environment and levels of
consumer spending which affect not only the ultimate consumer, but also
retailers, our 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. We may not be
able to increase our sales to existing customers, open and operate new retail
stores or increase our international operations on a profitable basis or improve
our earnings from operations as a percentage of net sales. As a result, our
operating results may be adversely affected by downward trends in the economy or
the occurrence of events that adversely affect the economy in general.
Furthermore, in anticipation of continued increases in net sales, we have
significantly expanded our infrastructure and workforce to achieve economies of
scale. Because these expenses are fixed in the short term, operating results and
margins could be adversely impacted if we do not continue to grow as
anticipated.
OUR INTERNATIONAL SALES AND OPERATIONS COULD ADVERSELY EFFECT OUR BUSINESS.
Substantially all of our net sales for the year ended December 31, 2000
were derived from sales of footwear manufactured in other foreign countries,
with most manufactured in China. We also sell our footwear in several foreign
countries and plan to increase our international sales efforts as part of our
growth strategy. Foreign manufacturing and sales are subject to a number of
risks, including (i) work stoppages, (ii) transportation delays, (iii) changing
economic conditions, (iv) expropriation, (v) international political tension,
(vi) political and social unrest, (vii) nationalization, (viii) the imposition
of tariffs, (ix) import and export controls and other nontariff barriers, (x)
exposure to different legal standards (particularly with respect to intellectual
property), (xi) compliance with foreign laws, and (xii) changes in domestic and
foreign governmental policies. Each of these risks could harm our business.
11
In addition, if we, or our suppliers, violate U.S. laws or regulations we
may be subjected to extra duties, significant monetary penalties, the seizure
and the forfeiture of the products we are attempting to import or the loss of
our import privileges. Possible violations of U.S. laws or regulations could
include inadequate record keeping of our imported products, misstatements or
errors as to the origin, quota category, classification, marketing or valuation
of our imported products, fraudulent visas, or labor violations under U.S. or
foreign laws. These risks could render our conduct of business in a particular
country undesirable or impractical and have a negative impact on our business,
financial condition and results of operations. We continue to monitor the
political and economic stability of the Asian countries with which we conduct
business.
WE COULD BE ADVERSELY AFFECTED IF THE CHINESE GOVERNMENT CHANGES ITS POLICIES
TOWARDS THE UNITED STATES OR NATIONALIZES PRIVATE ENTERPRISE.
Over the past several years, the Chinese government has pursued economic
reform policies and has encouraged greater private economic activity and
economic decentralization. The Chinese government may not continue to pursue
these policies or may significantly alter them to our detriment from time to
time without notice. Manufacturers with whom we work could be affected by
changes in policies by the Chinese government resulting in changes in laws,
regulations, or their interpretation, the imposition of confiscatory taxation,
restrictions on currency conversion or imports, and changes in the sources of
supply. These risks could harm our business.
WE COULD SUFFER LOSSES FROM CORRUPT OR FRAUDULENT BUSINESS PRACTICES.
Conducting business in China is inherently risky. Corruption, extortion,
bribery, pay-offs, theft and other fraudulent practices are common in China. We
could suffer losses from these practices if we do not implement successful
preventative measures.
WE COULD BE ADVERSELY BE AFFECTED BY CURRENCY FLUCTUATIONS.
Even though we have not experienced material losses as a result of
fluctuations in the value of foreign currencies, our net sales and cost of goods
sold are denominated in U.S. Dollars and we do not engage in currency hedging,
therefore we could be adversely affected by currency fluctuations in the future.
TRADE RESTRICTIONS COULD HARM OUR BUSINESS.
Our products are subject to certain quotas and restrictions on foreign
products in some of the foreign countries where our footwear is sold. To date,
these quotas have not had a material adverse effect on our business, financial
condition or results of operations. However, the quotas or restrictions may be
modified or altered at any time. In addition, countries where our products are
manufactured may impose new quotas or adjust existing quotas or other
restrictions on exported products. The United States might also impose new
duties, tariffs and other restrictions on imported products, any of which could
have a material adverse effect on our business, financial condition and results
of operations. New duties, tariffs or other restrictions could also affect our
ability to import products at our current levels or at increased levels and,
consequently, harm our business. If tariffs or duties on our products are raised
or made more restrictive, it may result in higher costs and could negatively
impact our business.
WE DEPEND ON CONTRACT MANUFACTURERS.
Our footwear products are currently manufactured by independent contract
manufacturers. For the year ended December 31, 2000, the top four manufacturers
of our manufactured products produced approximately 9%-20% each of total
purchases. We do not have long-term contracts with manufacturers and we compete
with other footwear companies for production facilities. Although we have
established close working relationships with our principal manufacturers, we
must maintain those relationships and develop new relationships with additional
manufacturers. It is possible that we may experience difficulties with these
manufacturers, including reductions in the availability of production capacity,
failure to meet our quality control standards, failure to meet production
deadlines or increased manufacturing costs. This could result in cancellation of
orders, refusal to accept deliveries or a reduction in purchase prices, any of
which could harm our business.
If our current manufacturers cease doing business with us, we could
experience an interruption in the manufacture of our products, which could have
a material adverse effect on our business, financial condition and results of
operations. Although we believe that we could find alternative manufacturers
within 90 to 120 days, new manufacturing relationships involve various
uncertainties, including payment terms, costs of manufacturing, adequacy of
manufacturing capacity, quality control, and timeliness of delivery. We may be
unable to establish new manufacturing relationships that will be as favorable as
the relationships we have now. If we are unable to provide products consistent
with our standards or the manufacture of our footwear is delayed, our business
could be harmed.
12
OUR BUSINESS COULD BE NEGATIVELY IMPACTED IF OUR CONTRACT MANUFACTURERS VIOLATE
THE LAW.
We require our independent contract manufacturers to operate in compliance
with applicable laws and regulations. We also require our 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) is 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 we
promote ethical business practices and our sourcing personnel periodically visit
and monitor the operations of our independent contract manufacturers, we do not
control these vendors or their labor practices. If one of our independent
contract manufacturers violates the labor or other laws, it could result in
adverse publicity for us and harm our business. In addition, if the United
States Customs Service determines that laws or regulations have been violated or
that we failed to exercise reasonable care in our obligations to comply with
these laws or regulations we may incur significant penalties that maybe monetary
or otherwise.
WE ARE DEPENDENT ON KEY CUSTOMERS.
During the year ended December 31, 2000, our net sales to our five largest
customers accounted for approximately 26.5% of total net sales. No one customer
accounted for 10.0% or more of net sales during the year ended December 31,
2000. Although we have long-term relationships with many of our customers, our
customers do not have a contractual obligation to purchase our products and we
cannot be certain that we will be able to retain our existing major customers.
Furthermore, the retail industry has experienced consolidation, contractions and
closings. If there are further consolidations, contractions or closings in the
future, we may lose customers or be unable to collect accounts receivables of
major customers in excess of amounts that we have insured. As of December 31,
2000, we had one customer that accounted for 15.3% of trade accounts receivable.
If we lose a major customer, experience a significant decrease in sales to a
major customer, or are unable to collect the accounts receivable of a major
customer in excess of amounts insured, our business could be harmed.
WE DO NOT HAVE NON-COMPETITION AGREEMENTS WITH OUR SALESPERSONS.
We have entered into employment agreements with each of our salespersons.
Although these employment agreements require our salespersons to keep certain
information confidential, we have not entered into separate non-competition
agreements with them. In addition, if a salesperson leaves or is terminated,
service may be disrupted to the customers who were serviced by this salesperson.
These factors could harm our business.
SEASONAL FLUCTUATIONS IN DEMAND FOR FOOTWEAR AND DELIVERY DELAYS MAY AFFECT OUR
QUARTERLY NET SALES.
Sales of footwear products have historically been somewhat seasonal in
nature with the strongest sales generally occurring in the third and fourth
quarters. During 2000, we continued to address seasonal fluctuations by
introducing new styles that addressed seasonal demands. We have experienced and
expect to continue to experience some variability in our net sales, operating
results and net earnings on a quarterly basis.
Our domestic customers generally assume responsibility for scheduling
pickup and delivery of purchased products. Delays in scheduling or pickup which
are beyond our control could materially negatively impact our net sales and
results of operations for any given quarter. We believe the factors which
influence this variability include (i) the timing of our 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 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 cycle and any related fluctuations
in consumer demand could have a material adverse effect on our business,
financial condition and results of operations.
IF WE FAIL TO MAINTAIN APPROPRIATE LEVELS OF INVENTORY, OUR BUSINESS COULD BE
HARMED.
We place orders with our manufacturers for some of our products prior to
the time we receive all of our customers' orders. We do this to minimize
purchasing costs, the time necessary to fill customer orders, and the risk of
non-delivery. We also maintain an inventory of certain products that we
anticipate will be in greater demand. However, we cannot assure you that we will
be able to sell the products we have ordered in advance from manufacturers or
that we have in our 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 our brand image and could have a material
adverse effect on our business, financial condition and results of operations.
13
WE MAY HAVE SIGNIFICANT CAPITAL REQUIREMENTS AND EXPENDITURES AS A RESULT OF OUR
AGGRESSIVE GROWTH STRATEGY.
We expect that cash flow from operations, available borrowings under our
revolving line of credit, cash on hand and our financing arrangements will be
sufficient to provide us with the liquidity to fund our anticipated working
capital and capital requirements through 2001. We will, however, have
significant working capital requirements and capital expenditures as a result of
our aggressive growth strategy. Our future capital requirements will depend on
factors such as (i) the levels at which we maintain inventory, (ii) the market
acceptance of our footwear, (iii) the levels of promotion and advertising
required to promote our footwear, (iv) the extent to which we invest in new
product design, (v) improvements to our existing product design, and (vi) the
number and timing of new store openings.
If available funds are insufficient to fund our future activities, we may
need to raise additional funds through public or private financing. We cannot be
sure that additional financing will be available or that, if available, it can
be obtained on terms that will be favorable to us. If we fail to obtain such
financing, we may not be able to complete our planned expansion and our business
could be harmed. In addition, if we raise additional capital through the sale of
additional equity or convertible securities, our stockholders' ownership may be
diluted.
WE DEPEND ON KEY PERSONNEL TO MANAGE OUR BUSINESS EFFECTIVELY IN A RAPIDLY
CHANGING MARKET, AND IF WE ARE UNABLE TO RETAIN EXISTING PERSONNEL, OUR BUSINESS
COULD BE HARMED.
Our future success depends upon the continued services 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 us, each
agreement was entered into on June 14, 1999. 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 our business, financial condition and results of
operations. We maintain $5.0 million of "key man" life insurance on the life of
Robert Greenberg. Our future success also depends on our ability to identify,
attract and retain additional qualified personnel. Competition for employees in
our industry is intense. Furthermore, we may not be successful in identifying,
attracting and retaining qualified employees in the future. The loss of key
employees or the inability to hire or retain qualified employees in the future
could harm our business.
ONE PRINCIPAL STOCKHOLDER IS ABLE TO CONTROL SUBSTANTIALLY ALL MATTERS REQUIRING
A VOTE OF OUR STOCKHOLDERS.
Robert Greenberg, Chairman of the Board and Chief Executive Officer,
beneficially owns 72.7% of our outstanding Class B Common Stock. 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 69.0% of the aggregate number of votes eligible to be cast by our
stockholders. Therefore, Mr. Greenberg is able to control substantially all
matters requiring approval by our stockholders. Matters that require the
approval of our stockholders include the election of directors and the approval
of mergers or other business combination transactions. Mr. Greenberg also has
control over our management and affairs. 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 our stockholders 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 view the superior voting rights of the Class B Common Stock to have
value.
OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY INHIBIT A TAKEOVER, WHICH MAY CAUSE A
DECLINE IN THE VALUE OF OUR STOCK.
Provisions of Delaware law, our certificate of incorporation, or our bylaws
could make it more difficult for a third party to acquire us, even if closing
such a transaction would be beneficial to our stockholders. 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 our certificate of incorporation and bylaws, may have the
effect of delaying, deferring or preventing a change in control, may discourage
bids for our 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.
WE CANNOT ASSURE YOU THAT THE TRADING MARKET FOR OUR CLASS A COMMON STOCK WILL
REMAIN ACTIVE, AND THE PRICE OF OUR STOCK MAY BE VOLATILE.
The market price of our Class A Common Stock has been extremely volatile.
During 2000, our Class A Common Stock reached a high of $19.94 per share and a
low of $3.25. On December 31, 2000, the closing market price was $15.50 per
share. The market
14
price for shares of our Class A Common Stock may continue to fluctuate based
upon a number of factors, including, without limitation (i) business
performance, (ii) news announcements, (iii) quarterly fluctuations in our
financial results, (iv) changes in earnings estimates, (v) recommendations by
analysts, (vi) changes in general economic and market conditions, or (vii) a
failure to meet the expectations of securities analysts or investors in a future
quarter. These same factors could have a material adverse effect on the market
price of our Class A Common Stock.
THE SALES OF SUBSTANTIAL AMOUNTS OF OUR 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.
As of March 26, 2001, we had outstanding 12,546,972 shares of Class A
Common Stock. In addition, we had outstanding 23,505,451 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 certain persons. The 12,546,972 shares of Class A Common Stock
are eligible for sale in the public market without restriction. The 23,505,451
shares of Class B Common Stock are restricted in nature and are saleable
pursuant to Rule 144 under the Securities Act of 1933.
As of March 26, 2001, Robert Greenberg, Chairman of the Board and Chief
Executive Officer, and Michael Greenberg, President, beneficially own an
aggregate of 18,948,619 shares of Class B Common Stock. Robert and Michael
Greenberg have also received certain registration rights to sell shares of Class
A Common Stock which will be issuable upon conversion of their shares of Class B
Common Stock in the public market. Shares of Class A Common Stock reserved for
issuance pursuant to our Stock Option Plan and the 1998 Employee Stock Purchase
Plan have also been registered under the Securities Act of 1933.
SPECIAL NOTE ON FORWARD LOOKING STATEMENTS AND REPORTS PREPARED BY ANALYSTS.
The Form 10-K contains or incorporates forward-looking statements. You can
identify these forward-looking statements by our use of the words "believes,"
"anticipates," "plans," "expects," "endeavors," "may," "will," "intends,"
"estimates" and similar expressions, whether in the negative or affirmative.
Although we believe that these forward-looking statements reflect our plans,
intentions and expectations reasonably, we may not actually achieve these plans,
intentions or expectations. In addition, the risks included here are not
exhaustive. Other sections of this report may include additional factors which
could adversely impact our business and financial performance. Moreover, we
operate in a very competitive and rapidly changing environment. New risk factors
emerge from time to time and we cannot predict all such risk factors, nor can we
assess the impact of all such risk factors on our business or the extent to
which any factor, or combination of factors, may cause actual results to differ
materially from those contained in any forward looking statements. Given these
risks and uncertainties, investors should not place undue reliance on
forward-looking statements as a prediction of actual results. Investors should
also be aware that while we do, from time to time, communicate with securities
analysts, we do not disclose any material non-public information or other
confidential commercial information to them. Accordingly, individuals should not
assume that we agree with any statement or report issued by any analyst,
regardless of the content of the report. Thus, to the extent that reports issued
by securities analysts contain any projections, forecasts or opinions, such
reports are not our responsibility.
ITEM 2. PROPERTIES
Our corporate headquarters and additional administrative offices are located
at four premises in Manhattan Beach, California, and consist of an aggregate of
approximately 100,000 square feet. We own and lease portions of our corporate
headquarters and administrative offices. The leased property expires between
February 2002 and February 2008, with options to extend in some cases, and the
current aggregate annual rent is approximately $1.1 million.
We also lease space for our distribution centers and our retail stores. These
leased facilities aggregate approximately 1.0 million square feet, with an
annual aggregate base rental of approximately $10.7 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. We have also signed leases for retail stores expected to be opened
in 2001. In general, the leases expire between January 2002 and August 2011 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.
During 2000, we purchased an administrative office building in Manhattan
Beach, California with approximately 63,000 square feet of office space. The
purchase price was $14.5 million and the acquisition was financed, in part, with
a bank loan of $10,850,000. We also purchased an approximately 264,000 square
foot distribution facility located in Ontario, California. The purchase price
was $11,450,000, and the acquisition was financed, in part, with a bank loan of
$7,850,000.
15
In February 2001, we completed the purchase of three adjacent
properties located in Manhattan Beach, California for a total of $4,500,000. We
financed the purchase of the properties through internally generated funds and
currently available short-term borrowings. We intend to build additional
administrative offices on these properties.
ITEM 3. LEGAL PROCEEDINGS
On June 14, 1999, a complaint captioned R. GRIGGS GROUP LIMITED V. SKECHERS
U.S.A., INC. was filed against Skechers 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 of certain styles of footwear, and fraud and deceit
regarding the plaintiff's alleged postponement of the filing of the action. The
complaint was resolved in February 2000. The parties have settled the matter and
a final settlement agreement has been signed. The terms are confidential but
Skechers can disclose that the settlement did not require payment of any money
by Skechers. The non-monetary terms will not have a material impact on the
Skechers' 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 Skechers 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 of 1933 and the Securities Exchange
Act of 1934. The complaint also names as defendants the underwriters for
Skechers' June 9, 1999 initial public offering of its Class A Common Stock. On
January 12, 2000, a complaint captioned Abraham, et al., v. Skechers U.S.A.,
Inc., et al. was filed against Skechers and two of its officers and directors in
the United States District Court, Central District of California, Court Case No.
00-00471. The complaint is a purported class action claiming damages for alleged
violations of the Securities Act of 1933 and the Securities Exchange Act of
1934. On January 24, 2000, a complaint captioned Astrolio, et al., v. Skechers
U.S.A., Inc., et al. was filed against Skechers 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
for alleged violations of the Securities Act of 1933 and the Securities Exchange
Act of 1934. The complaint also names the underwriters for Skechers' initial
public offering of its Class A Common Stock 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 Skechers 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 of 1933 and the Securities Exchange Act of
1934.
All four securities actions were subsequently consolidated into one matter
and a consolidated complaint was filed on June 1, 2000. The consolidated
complaint named as defendants Skechers, two officers of Skechers, and the
underwriters of Skechers' initial public offering of its Class A Common Stock on
June 9, 1999. The class alleged in the consolidated complaint, consists of all
persons who purchased securities in, or traceable to, Skechers' initial public
offering of its Class A Common Stock on June 9, 1999 or thereafter on the open
market prior to June 15, 1999.
In response to the consolidated complaint, Skechers filed a motion to dismiss
the entire case. On September 25, 2000, a tentative order was issued to dismiss
the consolidated complaint in its entirety, with leave to amend. As of December
31, 2000, a final order has not issued. Thus, as these matters are still in the
pleading stage and no discovery has been conducted, neither Skechers nor
Skechers' counsel are able to conclude as to the potential likelihood of an
unfavorable outcome. In any event, Skechers is vigorously defending the claims
and believes that our defenses are meritorious. Skechers also maintains
insurance that we believe covers all the matters alleged in the consolidated
complaint as currently pled. Accordingly, Skechers has not provided for any
potential losses associated with these lawsuits.
On September 29, 2000, a complaint captioned MADISON TRADING LIMITED
CORPORATION AND MERCURY INTERNATIONAL TRADING CORPORATION V. SKECHERS USA, INC.,
LOVITT FILMS, INC. AND BERT LOVITT was filed against Skechers in the United
States District Court in Massachusetts, Civil Case No. CV-12016JLT. The lawsuit
alleges quantum meruit, intentional interference with contract, intentional
interference with advantageous relationship, unfair practices and declaratory
relief arising out of a business arrangement between Skechers and inventor Bert
Lovitt. The complaint seeks an injunction preventing Skechers from using certain
technology, compensatory damages, exemplary damages and treble damages. The
court denied the plaintiffs' motion for a preliminary injunction. While it is
too early to predict what the outcome of such suit will be, Skechers denies
liability and will defend itself vigorously. Nonetheless, there is no basis to
believe that an adverse result would have a material impact on operations or
financial results. Accordingly, Skechers has not provided for any potential
losses associated with this lawsuit.
We occasionally become involved in litigation arising from the normal course
of business. Other than the foregoing, we believe that any liability with
respect to pending legal actions, individually or in the aggregate, will not
have a material adverse effect on our business, financial condition and results
of operations.
16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to our security holders to be voted on during the
fourth quarter of 2000.
17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Skechers' Class A Common Stock began trading on the New York Stock Exchange
on June 9, 1999 after Skechers completed an initial public offering of 7,000,000
shares of Class A Common Stock at $11.00 per share. Skechers' 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.
HIGH LOW
------ -----
YEAR ENDED DECEMBER 31, 2000
First Quarter.................................. $ 7.69 $3.25
Second Quarter................................. 16.31 7.50
Third Quarter.................................. 19.94 12.50
Fourth Quarter................................. 16.75 11.44
YEAR ENDED DECEMBER 31, 1999
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 26, 2001, there were 63 holders of record of Class A Common Stock
(including holders who are nominees for an undetermined number of beneficial
owners) and 9 holders of record of Skechers' 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, Skechers 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 Skechers, since such initial election, were included in the taxable income of
Skechers' stockholders for Federal and state income tax purposes, and Skechers
was not subject to income tax on such earnings, other than franchise and net
worth taxes. Prior to the closing of Skechers' initial public offering of its
Class A Common Stock on June 9, 1999, Skechers terminated its S Corporation
status, and since then Skechers 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 Skechers'
treatment as an S Corporation for Federal and state income tax purposes,
Skechers, since inception, had provided to its stockholders funds for the
payment of income taxes on the earnings of Skechers. Skechers 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 Skechers' initial public offering
of its Class A Common Stock.
In connection with Skechers' initial public offering of its Class A Common
Stock and the termination of Skechers' S Corporation tax status, Skechers
entered into a tax indemnification agreement with each of its stockholders. The
agreement provides that Skechers 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 Skechers' taxable
income that is the result of an increase in or change in character of, Skechers'
income during the period it was treated as an S Corporation up to Skechers' tax
savings in connection with such adjustments. The agreement also provides that if
there is a determination that Skechers was not an S Corporation prior to the
initial public offering of its Class A Common Stock on June 9, 1999,
stockholders will indemnify Skechers for the additional tax liability arising as
a result of such determination. The stockholders will also indemnify Skechers
for any increase in Skechers' tax liability to the extent such increase results
in a related decrease in the stockholders' tax liability.
Purchasers of shares in the initial public offering of its Class A Common
Stock on June 9, 1999 did not receive any portion of the S Corporation
Distributions. Skechers has never declared or paid dividends on its Class A
Common Stock. Skechers currently intends to retain any earnings for use in its
business and does not anticipate paying any cash dividends in the foreseeable
future.
18
ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth selected consolidated financial data of
Skechers as of and for each of the years in the five-year period ended December
31, 2000.
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
STATEMENT OF OPERATION DATA:
Net sales ......................... $115,410 $183,827 $372,680 $424,601 $675,036
Gross profit ...................... 34,211 68,723 154,580 174,608 284,225
Operating expenses:
Selling ........................ 11,739 21,584 49,983 57,332 77,451
General and administrative ..... 18,939 32,397 71,461 79,114 125,827
Earnings from operations .......... 5,125 15,636 33,991 38,830 81,263
Interest expense .................. 3,231 4,186 8,631 6,554 9,230
Earnings before income taxes ...... 1,955 11,413 25,121 32,691 72,351
Net earnings ...................... 1,910 11,023 24,471 24,056 43,751
PRO FORMA OPERATIONS DATA:(1)
Earnings before income taxes ...... $ 1,955 $ 11,413 $ 25,121 $ 32,691 $ 72,351
Income taxes ...................... 782 4,565 10,048 12,880 28,600
Net earnings ...................... 1,173 6,848 15,073 19,811 43,751
Net earnings per share:(2)
Basic .......................... $ 0.04 $ 0.25 $ 0.54 $ 0.62 $ 1.24
Diluted ........................ $ 0.04 $ 0.23 $ 0.49 $ 0.60 $ 1.20
Weighted average shares:(2)
Basic .......................... 27,814 27,814 27,814 31,765 35,142
Diluted ........................ 29,614 29,614 30,610 33,018 36,563
AS OF DECEMBER 31,
------------------------------------------------------------
BALANCE SHEET DATA: 1996 1997 1998 1999 2000
- ------------------- -------- -------- -------- -------- --------
Working capital ..................... $ 11,987 $ 17,081 $ 23,106 $ 65,003 $ 93,305
Total assets ........................ 42,151 90,881 146,284 177,914 303,400
Total debt .......................... 25,661 39,062 70,933 33,950 85,321
Stockholders' equity ................ 3,336 11,125 27,676 86,000 134,046
- ----------
(1) Reflects adjustments for Federal and state income taxes for 1996 through
1999 assuming Skechers had been taxed as a C Corporation rather than as an S
Corporation for the full year.
(2) 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
Skechers 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," "endeavors,"
"may," "will," "intends," "estimates" and similar expressions that are intended
to identify forward-looking statements. These forward-looking statements involve
risks and uncertainties, and our 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
Skechers has realized rapid growth since inception, increasing net sales at a
compound annual growth rate of 39.7% from $90.8 million in 1994 to $675.0
million in 2000. This momentum continued into 2000 with a 59.0% increase in
sales and a 109.3% increase in earnings from operations, as compared to 1999.
During 1998 and 1999, our gross margins as a percentage of net sales remained
relatively constant at 41.5% and 41.1%, respectively, and during 2000, gross
margins improved to 42.1% of net sales. Operating
19
margin as a percentage of net sales also increased from 9.1% in each of 1998 and
1999 to 12.0% in 2000. In the future, our rate of growth will be dependent upon,
among other things, the continued success of our efforts to expand our footwear
offerings within the Skechers brand or developing alternative, successful
brands. We cannot assure you that the rate of growth will not decline in future
periods or that we will improve or maintain operating margins.
As our sales growth has accelerated, we have focused on investing in our
infrastructure to support continued expansion in a disciplined manner. Major
areas of investment have included expanding our distribution and administrative
facilities, hiring additional personnel, developing product sourcing and quality
control offices in China and Taiwan, upgrading our management information
systems, developing and expanding our retail stores and expanding the offerings
available through our web site and direct mail catalog. We have 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 we do not achieve anticipated continued growth.
We have implemented a strategy of controlling the growth of the distribution
channels through which our 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
our brand name, competitive conditions, and our ability to manage the increased
sales and stores. We cannot assure you that our growth strategy will be
successful or that our sales or earnings will increase as a result of the
implementation of such efforts.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE YEAR ENDED DECEMBER 31, 1999
Net Sales
Net sales for 2000 were $675.0 million, an increase of $250.4 million or
59.0% over 1999 net sales of $424.6 million. The substantial increase in net
sales continues to be driven by increases in our wholesale revenues, which
increased 59.0% over last year. In addition, we realized a 51.5% increase in
wholesale units sold, to 29.4 million units in 2000 from 19.4 million units in
1999. The increase in the wholesale business is primarily due to expansion of
the domestic sales force, continued consumer acceptance of the company's product
offerings, and increased marketing campaigns. During 2000, we continued to
introduce, and generate sales from, new product categories in the women's,
men's, children's athletic shoes, and our men's quality dress line. Retail sales
for 2000 also increased over 1999 due to increased sales at those stores opened
at least one year and from the addition of 10 new locations added during 2000.
Mail order sales in 2000 also increased over 1999 due to an increase in the
number of mailings and an increase in the circulation of the mailings. Fiscal
year 2000 international sales increased over last year primarily due to
increased brand acceptance and increased advertising campaigns.
During 2000, we continued to increase our focus on international sales,
through such measures as the establishment of an international infrastructure,
creation of an international subsidiary (Skechers USA, Ltd.), selling direct to
department stores and specialty retailers, the opening of concept stores in
London and Germany, and the signing of a lease for a concept store in France,
scheduled to open during May 2001. In addition, we have signed celebrity
endorsements that will be used in various international marketing campaigns
through the middle of 2002.
Gross Profit
In 2000, gross profit increased to $284.2 million, a 62.8% increase over
gross profit of $174.6 million in 1999. Gross profit as a percentage of net
sales was 42.1% in 2000, in comparison to 41.1% in 1999. The increase in gross
profit as a percentage of net sales is due to (i) an increase in the proportion
of sales derived from the women's footwear line, which have a higher gross
margin as a percentage of net sales than the men's footwear line (ii) fewer
markdowns as a percentage of sales and (iii) increased sales at retail which
provide a higher gross margin as a percentage of net sales than wholesale gross
margins.
Selling Expenses
Selling expenses were $77.5 million in 2000, an increase of 35.1% over
selling expenses of $57.3 million in 1999. However, selling expense as a
percentage of net sales decreased to 11.5% in 2000 from 13.5% in 1999. The
increase in absolute dollars was primarily due to increased print advertising,
both internationally and domestically, increased promotional expenses, and
additional sales commissions due to increased sales volume.
We are 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. We have increased our advertising
budget consistent with projected sales, which has included such avenues as
magazines, television, trade shows, billboards, and buses. We endeavor to spend
approximately
20
8% to 10% of annual net sales in the marketing of Skechers footwear through
advertising, promotions, public relations, trade shows and other marketing
efforts.
General and Administrative Expenses
General and administrative expenses in 2000 were $125.8 million compared to
$79.1 million in 1999. As a percent of sales, general and administrative
expenses remained the same at 18.6% in both 2000 and 1999. The increase in
general and administrative expenses are primarily due to additional salary,
wages, temporary help costs, and warehousing and distribution costs associated
with increased sales volume. In addition, we realized increased operating costs
from the ten new retail facilities added during 2000, and, although to a lesser
extent, we incurred additional general and administrative expenses related to
infrastructure additions to support our international operations.
We expect general and administrative expenses to increase in absolute
dollars, however, to remain the same or decrease as a percent of net sales. The
increase in expenditures will be the result of our continued efforts to increase
our market share, through the opening of additional retail stores, both
domestically and internationally, expanding our direct selling efforts
internationally, and creating the necessary infrastructure to support the
ongoing operations.
Interest Expense
Interest expense increased to $9.2 million in 2000 from $6.6 million in
1999. The increase was due to increased financing costs associated with
additional borrowings to support our working capital requirements, capital
additions made during the year, increased purchases of inventory and the build
up of accounts receivable commensurate with our growth.
Other, Net
Other, net consists primarily of a gain from the settlement of commercial
lawsuits and net gain from foreign exchange rate fluctuations.
Income Taxes
The 2000 effective tax rate was 39.5%, which is comparable to the pro forma
effective rate of 39.4% in 1999. The prior years pro forma taxes represent those
taxes that would have been reported had we been subject to federal and state
income taxes as a C corporation for the full year. We continually review and
evaluate various tax strategies to minimize our tax liability.
We are expanding our international operations and plan to reinvest any
undistributed earnings from our non-U.S. subsidiaries, thereby indefinitely
postponing their remittance. As a result, we do not plan to provide for deferred
income taxes on any accumulated undistributed earnings that our non-U.S.
subsidiaries earn in the future. Assuming that our international operations are
successful, our effective tax rates should decrease accordingly.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31, 1998
Net Sales
Net sales increased by $51.9 million to $424.6 million, an increase of 13.9%
over 1998 sales of $372.7 million. Continued growth in the sales of branded
footwear is primarily the result of (i) greater brand awareness driven in part
by a continued expansion of our national marketing efforts, (ii) a broader
breadth of men's, women's and children's product offerings, (iii) the
development of our domestic and international sales forces and (iv) the
transition of our 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, we were 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.
We were able to accomplish this and still maintain our gross margin, as a
percentage of net sales, 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, we were able to better match styles with seasonal
trends during 1999.
21
Gross Profit
Our gross profit increased $20.0 million, or 13.0%, to $174.6 million in 1999
compared to $154.6 million in 1998. Gross margins as a percentage of net sales
decreased slightly in 1999 to 41.1% compared to 41.5% in 1998. The slight
decrease in gross margin, as a percentage of net sales, in 1999 compared to
1998, was due to slightly higher ocean freight costs by third party shipping
companies on imported products.
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. The increase in selling expenses was primarily due to increased
advertising expenses and additional compensation resulting from increased sales
volume. Advertising expenses as a percentage of sales for 1999 and 1998 was
11.2% and 11.3%, 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% in 1999 from 19.2% in 1998. The
increase in general and administrative expenses was due to (i) the hiring of
additional personnel, (ii) increased distribution related costs to support the
increase in sales volume, (iii) and additional rent and other operating expenses
related to the addition of 10 new stores added in 1999.
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.
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
Our capital needs are derived primarily from working capital requirements and
the continued growth of the business. Our working capital at December 31, 2000
was $93.3 million, an increase of $28.3 million over working capital of $65.0
million at December 31, 1999. The increase in working capital was primarily due
to the increase in accounts receivable and inventories, partially offset by
increases in short term borrowings and accounts payable.
Net cash used in operating activities for the current year was $1.0 million
compared to cash provided by operating activities of $13.1 million last year.
The decrease in cash provided by operating activities was due to the significant
increases in receivables and inventories, offset by increases in accounts
payable and increased depreciation, to support the increase in sales volume.
Net cash used in investing activities was $21.8 million, an increase of $11.0
million over last year. The increase in investing activities reflects the
non-financed portion of capital expenditures related to the material handling
and sortation equipment for our distribution facility, and the acquisition of an
administrative building and distribution facility. Current year capital
expenditures also includes the construction and investment in 10 new retail
facilities opened during 2000.
During 2000, we financed a significant portion of our acquisition of a
distribution facility located in Ontario, California and the acquisition of an
administrative office building in Manhattan Beach, California. The financing
provides for monthly payments of principal and interest and a balloon payment
due in 10 years.
Net cash provided by financing activities totaled $20.8 million in 2000
compared to cash used in financing activities of $2.4 million in 1999. The cash
provided by financing activities was derived primarily from our short-term
credit facilities, and, to a lesser extent, proceeds from the exercise of stock
options.
Our credit facility provides for borrowing 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 $62.1 million of availability as of December 31, 2000) with the
CIT Group, as agents for the lenders. At December 31, 2000, there was
approximately $49.8 million outstanding under the revolving line of credit. The
revolving line of credit bears interest at prime rate (9.5% at December 31,
2000)
22
minus .5%. Interest on the line of credit is payable monthly in arrears. 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 our foreign purchases of merchandise inventory. As of December 31, 2000,
we had approximately $8.6 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 $2.1 million as of December 31, 2000, bears interest at the prime
rate plus 1.0% 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 our distribution centers in Ontario, California and the note is secured
by such equipment. The credit facility contains certain financial covenants that
require us to maintain minimum tangible net worth, working capital, and
specified leverage ratios and limits our ability to pay dividends if we are in
default of any provisions of the credit facility. We were in compliance with
these covenants as of December 31, 2000.
At December 31, 1998, we had an unsubordinated note payable to the Greenberg
Family Trust in the amount of $10.0 million. We recorded interest expense of
approximately $433,000 and $540,000 related to notes payable to the Greenberg
Family Trust during the years ended December 31, 1999 and 1998, respectively.
This note was repaid during 1999, with the proceeds, in part, from Skechers'
initial public offering of its Class A Common Stock.
By reason of our treatment as an S Corporation for Federal and state income
tax purposes, we have since inception provided to our stockholders funds for the
payment of income taxes on our earnings as well as the conversion from an S
Corporation to a C Corporation during 1999. We declared S Corporation
Distributions of $35.4 million ($21.0 million of which was paid from a portion
of the net proceeds of Skechers' initial public offering of its Class A Common
Stock) and $7.9 million in 1999 and 1998, respectively. Since the termination of
our S Corporation status, earnings have been and will be retained for the
foreseeable future in the operations of the business.
We believe that anticipated cash flows from operations, available borrowings
under our revolving line of credit, cash on hand and its financing arrangements
will be sufficient to provide us with the liquidity necessary to fund our
anticipated working capital and capital requirements through fiscal 2001.
However, in connection with our growth strategy, we will incur significant
working capital requirements and capital expenditures. Our future capital
requirements will depend on many factors, including, but not limited to, the
levels at which we maintain inventory, the market acceptance of our footwear,
the levels of promotion and advertising required to promote our footwear, the
extent to which we invest in new product design and improvements to our existing
product design and the number and timing of new store openings. To the extent
that available funds are insufficient to fund our future activities, we may need
to raise additional funds through public or private financing. We cannot assure
you that additional financing will be available or that, if available, it can be
obtained on terms favorable to us and our stockholders. Failure to obtain such
financing could delay or prevent our planned expansion, which could adversely
affect our 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 our stockholders could occur.
INFLATION
Skechers 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, Skechers 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 Skechers' products are manufactured, Skechers does not believe that
inflation has had a material effect on Skechers' sales or profitability. In the
past, Skechers has been able to offset its foreign product cost increases by
increasing prices or changing suppliers, we cannot assure you that Skechers will
be able to continue to make such increases or changes in the future.
EXCHANGE RATES
Skechers 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 Skechers'
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 Skechers' cost of goods in the future. During 1999 and
2000, exchange rate fluctuations did not have a material impact on Skechers'
inventory costs. Skechers does not engage in hedging activities with respect to
such exchange rate risk.
ITEM 7(a) QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Skechers does not hold any derivative securities.
At December 31, 2000, 37% of the Company's total indebtedness contained fixed
rates of interest ranging from 7.66% to 7.89%. Substantially all of the
Company's remaining indebtedness is at variable rates of interest and,
accordingly, while changes in interest rates would not impact the fair value of
these financial instruments, such changes would impact net earnings in future
periods.
23
FUTURE ACCOUNTING CHANGES
In March 2000, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 44 ("Interpretation 44"), Accounting for Certain Transactions
Involving Stock Compensation. Interpretation 44 provides criteria for the
recognition of compensation expense in certain stock-based compensation
arrangements that are accounted for under Accounting Principles Board Opinion
No. 25, Accounting for Stock-Based Compensation. Interpretation 44 is effective
July 1, 2000, with certain provisions that are effective retroactively to
December 15, 1998 and January 12, 2000. Interpretation 44 did not have a
material impact on our financial statements
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"), as amended by SFAS No. 137.
SFAS No. 133 modifies the accounting for derivative and hedging activities and
is effective for fiscal years beginning after June 15, 2000. Since Skechers does
not presently hold any derivatives or engage in hedging activities, accordingly
SFAS No. 133 should not impact Skechers' 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 our
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.
24
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 is hereby incorporated by
reference from our definitive proxy statement, to be filed pursuant to
Regulation 14A within 120 days after the end of our 2000 fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is hereby incorporated by
reference from our definitive proxy statement, to be filed pursuant to
Regulation 14A within 120 days after the end of our 2000 fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is hereby incorporated by
reference from our definitive proxy statement, to be filed pursuant to
Regulation 14A within 120 days after the end of our 2000 fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is hereby incorporated by
reference from our definitive proxy statement, to be filed pursuant to
Regulation 14A within 120 days after the end of our 2000 fiscal year.
25
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 8-K -- There were no reports on Form 8-K filed during
the last quarter of the fiscal year ended December 31, 2000.
(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 Amended and restated 1998 Employee Stock Purchase Plan
(incorporated by reference to exhibit number 10.1 of the
Registrant's Form 10-Q, for the period ending June 30, 2000)
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 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 (incorporated by
reference to exhibit number 10.3(a) of the Registrant's Form
10-K for the year ending 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 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 (incorporated by
reference to exhibit number 10.4(a) of the Registrant's Form
10-K for the year ending December 31, 1999).
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 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 (incorporated by
reference to exhibit number 10.5(a) of the Registrant's Form
10-K for the year ending December 31, 1999).
10.6 Indemnification Agreement dated June 7, 1999 between the
Registrant and its directors and executive officers
(incorporated by reference to exhibit number 10.6 of the
Registrant's Form 10-K for the year ending December 31, 1999).
10.6(a) List of Registrant's directors and executive officers who
entered into Indemnification Agreement referenced in Exhibit
10.6 with the Registrant (incorporated by reference to exhibit
number 10.6(a) of the Registrant's Form 10-K for the year
ending December 31, 1999).
10.7 Registration Rights Agreement dated June 9, 1999, between the
Registrant, the Greenberg Family Trust, and
26
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
Michael Greenberg (incorporated by reference to exhibit number
10.7 of the Registrant's 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 Form 10-Q for the
period ending June 30, 1999).
10.9 Lease Agreement, dated July 1, 1999, between the Registrant
and Richard and Donna Piazza, regarding 1108-B Manhattan
Avenue, Manhattan Beach, California (incorporated by reference
to exhibit number 10.22 of the registrant's Form 10-K for the
year ending December 31, 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).
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).
10.10(e) Third Amendment to Amended and Restated Loan and Security
Agreement dated February 1, 2000.
10.10(f) Fourth Amendment to Amended and Restated Loan and Security
Agreement dated June 1, 2000.
10.11 Lease Agreement, 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 Agreement, 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 Agreement, 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 Agreements, 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 Agreement, 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 Agreement 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
27
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
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 Agreement, 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 Standard Offer, Agreement and Escrow Instructions, Addendum
and Additional Provisions, dated October 12, 2000, between the
Registrant and/or its assignees and Champagne Building Group
L.P., for the purchase of property located at 1670 South
Champagne Avenue, Ontario, California.
10.20 Lease Agreement, dated November 15, 1999, between the
Registrant and Champagne Building Group L.P., regarding 1670
South Champagne Avenue, Ontario, California (incorporated by
reference to exhibit 10.20 of the Registrant's Form 10-K for
the year ending December 31, 1999).
10.21 Amendment of Lease Agreement dated December 20, 2000, between
the Registrant and Yale Investments, LLC (a wholly owned
subsidiary of the Registrant), regarding 1670 South Champagne
Avenue, Ontario, California.
10.22 Purchase and Sale Agreement with Escrow Instructions, dated
November 13, 2000, between the Registrant and Pacifica
California/Apollo, LLC, for the purchase of property located
at 225 South Sepulveda Boulevard, Manhattan Beach, California.
10.22(a) First Amendment to Purchase and Sale Agreement, dated November
29, 2000, between the Registrant and Pacifica
California/Apollo, LLC, for the purchase of property located
at 225 South Sepulveda Boulevard, Manhattan Beach, California.
10.23 Promissory Note, dated December 27, 2000, between the
Registrant and Washington Mutual Bank, FA, for the purchase of
property located at 225 South Sepulveda Boulevard, Manhattan
Beach, California.
10.24 Assignment and Assumption Agreement, dated December 27, 2000,
between the Registrant and Pacifica California/Apollo, LLC,
regarding 225 South Sepulveda Boulevard, Manhattan Beach,
California.
10.25 Loan Agreement, dated December 21, 2000, between Yale
Investments, LLC, and MONY Life Insurance Company, for the
purchase of property located at 1670 South Champagne Avenue,
Ontario, California.
10.26 Promissory Note, dated December 21, 2000, between Yale
Investments, LLC, and MONY Life Insurance Company, for the
purchase of property located at 1670 Champagne Avenue,
Ontario, California.
21.1 Subsidiaries of the Registrant
23.1 Consent of KPMG LLP
24.1 Power of Attorney (included on signature page)
28
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 29th day of March, 2001.
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.
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 March 29, 2001
- -------------------------------------------- Executive Officer (Principal
Robert Greenberg Executive Officer)
/S/ MICHAEL GREENBERG President and Director March 29, 2001
- --------------------------------------------
Michael Greenberg
/S/ DAVID WEINBERG Executive Vice President, Chief March 29, 2001
- -------------------------------------------- Financial Officer and Director
David Weinberg (Principal Financial and
Accounting Officer)
/S/ JEFFREY GREENBERG Director March 29, 2001
- --------------------------------------------
Jeffrey Greenberg
/S/ JOHN QUINN Director March 29, 2001
- --------------------------------------------
John Quinn
/S/ ROBERT SIEGEL Director March 29, 2001
- --------------------------------------------
Robert Siegel
/S/ RICHARD SISKIND Director March 29, 2001
- --------------------------------------------
Richard Siskind
29
SKECHERS U.S.A., INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report......................................................... F-2
Consolidated Balance Sheets -- December 31, 1999 and 2000............................ F-3
Consolidated Statements of Earnings -- Each of the years in the three-year
period ended December 31, 2000..................................................... F-4
Consolidated Statements of Stockholders' Equity -- Each of the years in the
three-year period ended December 31, 2000.......................................... F-5
Consolidated Statements of Cash Flows -- Each of the years in the three-year
period ended December 31, 2000..................................................... F-6
Notes to Consolidated Financial Statements........................................... F-7
Schedule II -- Valuation and Qualifying Accounts..................................... S-1
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 auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
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, 1999 and 2000 and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2000 in conformity with accounting principles
generally accepted in the United States of America. 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 23, 2001
F-2
SKECHERS U.S.A., INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 2000
(IN THOUSANDS)
ASSETS
1999 2000
-------- --------
Current assets:
Cash .......................................................................... $ 10,836 $ 8,781
Trade accounts receivable, less allowances for bad debts and
returns of $3,237 in 1999 and $5,152 in 2000 ............................... 63,052 96,628
Due from officers and employees ............................................... 851 540
Other receivables ............................................................. 2,771 1,016
-------- --------
Total receivables ..................................................... 66,674 98,184
-------- --------
Inventories ................................................................... 68,959 111,708
Prepaid expenses and other current assets ..................................... 5,130 6,457
Deferred tax assets ........................................................... 2,810 4,414
-------- --------
Total current assets .................................................. 154,409 229,544
Property and equipment, at cost, less accumulated depreciation
and amortization ............................................................. 21,387 70,405
Intangible assets, at cost, less applicable amortization ........................ 663 559
Other assets, at cost ........................................................... 1,455 2,892
-------- --------
$177,914 $303,400
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings ......................................................... $ 30,382 $ 49,754
Current installments of long-term borrowings .................................. 1,060 2,452
Accounts payable .............................................................. 47,696 72,865
Accrued expenses .............................................................. 10,268 11,168
-------- --------
Total current liabilities ............................................. 89,406 136,239
-------- --------
Long-term borrowings, excluding current installments ............................ 2,508 33,115
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 and 10,789 shares at December 31, 1999 and 2000,
respectively ............................................................... 7 10
Class B Common stock, $.001 par value. Authorized 60,000 shares; issued
and outstanding 27,814 and 24,805 shares at December 31, 1999 and 2000,
respectively ............................................................... 28 25
Additional paid-in capital .................................................... 69,948 74,243
Retained earnings ............................................................. 16,017 59,768
-------- --------
Total stockholders' equity ............................................ 86,000 134,046
-------- --------
$177,914 $303,400
======== ========
See accompanying notes to consolidated financial statements.
F-3
SKECHERS U.S.A., INC.
CONSOLIDATED STATEMENTS OF EARNINGS
THREE-YEAR PERIOD ENDED DECEMBER 31, 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1998 1999 2000
--------- --------- ---------
Net sales .................................. $ 372,680 $ 424,601 $ 675,036
Cost of sales .............................. 218,100 249,993 390,811
--------- --------- ---------
Gross profit ..................... 154,580 174,608 284,225
Royalty income, net ........................ 855 668 316
--------- --------- ---------
155,435 175,276 284,541
--------- --------- ---------
Operating expenses:
Selling .................................. 49,983 57,332 77,451
General and administrative ............... 71,461 79,114 125,827
--------- --------- ---------
121,444 136,446 203,278
--------- --------- ---------
Earnings from operations ......... 33,991 38,830 81,263
--------- --------- ---------
Other income (expense):
Interest ................................. (8,631) (6,554) (9,230)
Other, net ............................... (239) 415 318
--------- --------- ---------
(8,870) (6,139) (8,912)
--------- --------- ---------
Earnings before income taxes ..... 25,121 32,691 72,351
Income taxes ............................... 650 8,635 28,600
--------- --------- ---------
Net earnings ..................... $ 24,471 $ 24,056 $ 43,751
========= ========= =========
Net earnings per share:
Basic .................................... $ 1.24
Diluted .................................. $ 1.20
=========
Weighted-average shares:
Basic .................................... 35,142
Diluted .................................. 36,563
=========
Pro forma operations data:
Earnings before income taxes ............. $ 25,121 $ 32,691
Income taxes ............................. 10,048 12,880
--------- ---------
Net earnings ..................... $ 15,073 $ 19,811
========= =========
Net earnings per share:
Basic .................................... $ 0.54 $ 0.62
Diluted .................................. $ 0.49 $ 0.60
========= =========
Weighted-average shares:
Basic .................................... 27,814 31,765
Diluted .................................. 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, 2000
(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, 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
Net earnings ............................. -- -- -- -- -- 43,751 43,751
Proceeds from issuance of common stock
under the employee stock purchase plan. 267 -- -- -- 1,073 -- 1,073
Proceeds from issuance of common stock
under the employee stock option plan .. 422 -- -- -- 1,499 -- 1,499
Tax effect of non-qualified stock
options ............................... -- -- -- -- 1,636 -- 1,636
Deferred compensation .................... -- -- -- -- 87 -- 87
Conversion of Class B common stock into
Class A common stock .................... 3,009 (3,009) 3 (3) -- -- --
--------- --------- --------- --------- --------- --------- ---------
Balance at December 31, 2000 ............... 10,789 24,805 $ 10 $ 25 $ 74,243 $ 59,768 $ 134,046
========= ========= ========= ========= ========= ========= =========
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, 2000
(IN THOUSANDS)
1998 1999 2000
-------- -------- --------
Cash flows from operating activities:
Net earnings ................................................................ $ 24,471 $ 24,056 $ 43,751
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization of property and equipment .................. 2,843 3,752 5,894
Amortization of intangible assets ........................................ 148 108 104
Provision (recovery) for bad debts and returns ........................... 1,423 (176) 1,915
Tax effect of non-qualified stock options ................................ -- -- 1,636
Deferred compensation .................................................... -- -- 87
Loss on disposal of equipment ............................................ -- 903 78
Gain (loss) on distribution of intangibles ............................... 190 (118) --
Increase in assets:
Receivables ............................................................ (17,760) (17,282) (33,426)
Inventories ............................................................ (19,558) (3,569) (42,749)
Prepaid expenses and other current assets .............................. (1,877) (2,514) (1,327)
Deferred tax assets .................................................... -- (2,810) (1,604)
Other assets ........................................................... (512) 466 (1,437)
Increase (decrease) in liabilities:
Accounts payable ....................................................... 2,132 9,551 25,169
Accrued expenses ....................................................... 4,249 738 900
-------- -------- --------
Net cash provided by (used in) operating activities ................. (4,251) 13,105 (1,009)
-------- -------- --------
Cash flows used in investing activities:
Capital expenditures ........................................................ (9,434) (10,846) (21,897)
Proceeds from the sales of fixed assets ..................................... -- -- 51
Intangible assets ........................................................... (14) -- --
-------- -------- --------
Net cash used in investing activities ............................... (9,448) (10,846) (21,846)
-------- -------- --------
Cash flows from financing activities:
Net proceeds from initial public offering of common stock ................... -- 69,720 --
Net proceeds from issuance of common stock .................................. -- 261 2,572
Net proceeds (payments) related to short-term borrowings .................... 31,486 (23,697) 19,372
Proceeds from long-term debt ................................................ 581 -- --
Payments on long-term debt .................................................. (562) (1,042) (1,144)
Payments on notes payable to stockholder .................................... (1,006) (12,244) --
Distributions paid to stockholders .......................................... (7,320) (35,363) --
-------- -------- --------
Net cash provided by (used in) financing activities ................. 23,179 (2,365) 20,800
-------- -------- --------
Net increase (decrease) in cash ..................................... 9,480 (106) (2,055)
Cash at beginning of year ..................................................... 1,462 10,942 10,836
-------- -------- --------
Cash at end of year ........................................................... $ 10,942 $ 10,836 $ 8,781
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest ................................................................. $ 8,067 $ 6,782 $ 8,386
Income taxes ............................................................. 1,416 10,619 27,712
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During 2000, the Company acquired $14,444 of property and equipment under
capital lease arrangements. In addition, the Company acquired an office building
and distribution facility and issued two notes for $10,850 and $ 7,850,
respectively.
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, 1999 AND 2000
(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:
Buildings 20 years
Building improvements 20 years or useful life, whichever
is shorter
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, 1999 and
2000 is $1,196,000 and $492,000, respectively.
(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 projection over the remaining amortization period, their carrying value is
reduced to estimated fair value, based on discounted cash flows.
F-7
(g) Advertising Costs
Advertising costs are expensed in the period in which the advertisements are
run. Advertising expense for the years ended December 31, 1998, 1999 and 2000
were approximately $42,200,000, $47,400,000 and $59,122,000, respectively.
Prepaid advertising costs at December 31, 1999 and 2000 were $1,800,000 and
$2,605,000, respectively. Prepaid amounts outstanding at December 31, 1999 and
2000 represent advertising in trade publications, which had not run as of
December 31, 1999 and 2000, respectively.
(h) 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 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):
1998 1999 2000
------ ------ ------
Weighted-average shares used in basic computation ...... 27,814 31,765 35,142
Shares to fund stockholder distributions ............... 1,800 533 --
Dilutive effect of stock options ....................... 996 720 1,421
------ ------ ------
Weighted-average shares used in diluted computation .... 30,610 33,018 36,563
====== ====== ======
Options to purchase 1,391,000, 1,411,000 and 1,117,920 shares of common stock
at prices ranging from $2.78 to $19.19 were outstanding at December 31, 1998,
1999 and 2000, respectively, but were not included in the computation of diluted
earnings per share because the options' exercise price was greater than the
average market price of the common shares.
(i) 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 accounting principles generally accepted in the
United States of America. Actual results could differ from those estimates.
(j) 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
$2,400,000, $2,600,000 and $3,700,000 during the years ended December 31, 1998,
1999 and 2000, respectively.
(k) Comprehensive Income
Except for net earnings, the Company does not have any transactions and other
economic events that qualify as comprehensive income.
(l) 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.
F-8
2) PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows (in thousands):
1999 2000
------- -------
Land ............................................. $ -- $ 7,858
Buildings and improvements ....................... -- 18,639
Furniture, fixtures and equipment ................ 17,863 37,529
Leasehold improvements ........................... 12,392 21,029
------- -------
Total property and equipment ........... 30,255 85,055
Less accumulated depreciation and amortization ... 8,868 14,650
------- -------
Property and equipment, net ............ $21,387 $70,405
======= =======
(3) SHORT-TERM BORROWINGS
The Company has available a secured line of credit, as amended in June 2000,
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 (9.5% at December 31, 2000) minus .50%. The
agreement provides for the issuance of letters of credit up to a maximum of
$36,000,000, which decreases the amount available for borrowings under the
agreement. Outstanding letters of credit at December 31, 2000 were $8,586,000.
Available borrowings under the line of credit at December 31, 2000 were
approximately $62,054,000. 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, 2000.
(4) NOTES PAYABLE TO STOCKHOLDER
Stockholder loans were repaid during 1999. The Company recorded interest
expense of approximately $540,000 and $433,000 related to the stockholder notes
during the years ended December 31, 1998 and 1999, respectively.
(5) LONG-TERM BORROWINGS
Long-term debt at December 31, 1999 and 2000 is as follows (in thousands):
1999 2000
------- -------
Capital lease, due in aggregate monthly installments of $195, interest rate of 7.66%,
secured by equipment, balloon payment of $4,431 due February 2006 ............................ $ -- $12,661
Note payable to bank, due in monthly installments of $82.2 (includes principal and
interest), fixed rate interest at 7.79%, secured by property, payment of $8,716
due January 2011 .............................................................................. -- 10,850
Note payable to bank, due in monthly installments of $57.6 (includes principal and
interest), fixed rate interest at 7.89%, secured by property, balloon payment of
$6,776 due February 2011 ...................................................................... -- 7,850
Note payable to bank, due in monthly installments of $25 plus interest at prime
(9.5% at December 31, 2000) plus 1%, secured by equipment, due December 2002 .................. 2,400 2,100
Capital leases, due in aggregate monthly installments of $101, interest rates from 8.75%-18.28%,
secured by equipment, maturing in various installments through February 2005 ................. 1,168 2,106
------- -------
3,568 35,567
Less current installments ...................................................................... 1,060 2,452
------- -------
$ 2,508 $33,115
======= =======
The aggregate maturities of long-term borrowings at December 31, 2000 are as
follows:
2001............................................. $ 2,452
2002............................................. 4,100
2003............................................. 2,274
2004............................................. 2,461
2005............................................. 2,244
Thereafter....................................... 22,036
-------
$35,567
=======
F-9
(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.
During 2000, certain Class B stockholders converted 3,008,704 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 value. The options vested 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 2000,
118,999 of the $11 per share options were canceled. The options expire ten years
from the date of grant.
Shares subject to option under the Stock Option Plan were as follows:
SHARES OPTION PRICE
---------- -------------
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
----------
Granted ............................................ 1,532,695 3.94 -- 19.19
Exercised .......................................... (422,370) 2.78 -- 13.00
Canceled ........................................... (136,998) 3.94 -- 13.00
----------
Outstanding at December 31, 2000 ..................... 3,488,901 2.78 -- 19.19
==========
Exercisable at December 31, 2000 ..................... 862,111 2.78 -- 18.44
========== ==== =====
Options available for grant at December 31, 2000 ..... 1,303,883
==========
(c) Stock Purchase Plan
Effective July 1, 1998, the Company adopted the 1998 Employee Stock Purchase
Plan (1998 Stock Purchase Plan). Under the 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 2000, 266,865 shares (90,913 shares in
1999) were issued under the 1998 Stock Purchase Plan for which the Company
received $1,073,000 ($261,000 in 1999).
F-10
(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 of SFAS 123. Had compensation cost been determined using
the fair value at the grant date for awards during 1998, 1999, and 2000
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.
1998 1999 2000
-------- -------- --------
Pro forma net earnings ................ $ 14,875 $ 19,077 $ 41,458
======== ======== ========
Pro forma net earnings per share:
Basic ............................... $ .53 $ .60 $ 1.18
Diluted ............................. .49 .58 1.13
======== ======== ========
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 2000
---- ---- ----
Dividend yield .............. -- -- --
Expected volatility ......... -- 55% 70%
Risk-free interest rate ..... 5.7% 6.2% 6.3%
Expected life of option ..... 8 5 5
==== ==== ====
The weighted-average fair value of options granted during 1998, 1999, and
2000 were $2.78, $6.93, and $10.69, respectively.
(7) INCOME TAXES
The pro forma unaudited income tax adjustments for 1998 and 1999 represent
taxes, which would have been reported assuming the Company had been subject to
federal and state income taxes as a C Corporation the entire year. The actual
and pro forma provisions for income tax expense were as follows (in thousands):
1998 1999 2000
-------- -------- --------
Actual income taxes:
Federal:
Current .............................. $ -- $ 8,012 $ 25,420
Deferred ............................. -- (792) (1,360)
-------- -------- --------
Total federal ................... -- 7,220 24,060
-------- -------- --------
State:
Current .............................. 650 1,480 4,784
Deferred ............................. -- (65) (244)
-------- -------- --------
Total state ..................... 650 1,415 4,540
-------- -------- --------
Total actual income taxes ....... 650 8,635 28,600
-------- -------- --------
Pro forma adjustments:
Federal ................................. 7,864 3,533
State ................................... 1,534 712
-------- --------
Total pro forma adjustments ..... 9,398 4,245
-------- --------
Total pro forma income taxes .... $ 10,048 $ 12,880
======== ========
Income taxes (proforma for 1998 and 1999) differs from the statutory tax rate
as applied to earnings before income taxes as follows:
1998 1999 2000
------- ------- -------
Expected income tax expense .............................. $ 8,541 $11,569 $25,323
State income tax, net of federal benefit ................. 1,507 1,311 2,951
Other .................................................... -- -- 326
------- ------- -------
Total provision for pro forma income taxes ..... $10,048 $12,880 $28,600
======= ======= =======
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities at December 31,
1999 and 2000 are presented below:
F-11
Deferred tax assets: 1999 2000
------ ------
Inventory adjustments ...................... $ 615 $1,176
State taxes ................................ 520 1,490
Allowances for receivables ................. 1,275 2,100
Other ...................................... 808 1,060
------ ------
Total deferred tax assets .......... 3,218 5,826
------ ------
Deferred tax liabilities:
Depreciation of property and equipment ..... 279 1,386
Other ...................................... 129 26
------ ------
Total deferred tax liabilities ..... 408 1,412
------ ------
Net deferred tax assets ................. $2,810 $4,414
====== ======
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.
(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 $57,189,000 and
$87,825,000 before allowances for bad debts and returns at December 31, 1999 and
2000, respectively, which generally do not require collateral from customers.
Foreign accounts receivable amounted to $9,100,000 and $13,955,000 before
allowance for bad debts and returns at December 31, 1999 and 2000, respectively,
which generally are collateralized by letters of credit. International net sales
amounted to $34,700,000, $43,900,000 and $65,159,000 for the years ended
December 31, 1998, 1999 and 2000, respectively. The Company's credit losses for
the years ended December 31, 1998, 1999 and 2000 were $102,000, $1,699,000 and
$537,000, respectively, and did not significantly differ from management's
expectations.
Net sales to customers in the United States of America exceeded 90% of total
net sales for each of the years in the three-year period ended December 31,
2000. All long-lived assets of the Company are located in the United States. The
Company has no significant assets outside the United States of America.
During 1999 and 2000, 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 10.1% and 15.3%
of trade accounts receivable at December 31, 1999 and 2000, respectively.
During 1998, the Company had four manufacturers that accounted for between
10.4% and 15.4% each of total purchases. During 1999, the Company had four
manufacturers that accounted between 12.3% and 15.5% each of total purchases.
During 2000, the company had four manufacturers that accounted for 9.2% and
20.2% each of total purchases.
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.
F-12
(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 $242,000, $259,000 and $500,000 for the years ended
December 31, 1998, 1999 and 2000, respectively.
(10) COMMITMENTS AND CONTINGENCIES
(a) Leases
The Company leases facilities under operating lease agreements expiring
through August 2011. 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 July 2005. Rent expense for the years ended December 31, 1998, 1999 and
2000 approximated $7,900,000, $9,800,000 and $13,200,000, respectively.
The Company also leases certain property and equipment under capital lease
agreements requiring monthly installment payments through February 2006.
Future minimum lease payments under noncancellable leases at December 31,
2000 are as follows (in thousands):
CAPITAL OPERATING
LEASES LEASES
------- ---------
Year ending December 31:
2001............................................. $ 3,191 $14,168
2002............................................. 3,013 14,210
2003............................................. 2,798 12,199
2004............................................. 2,798 11,477
2005............................................. 2,394 10,724
Thereafter....................................... 4,626 18,909
------- -------
$18,820 $81,687
Less imputed interest............................ 4,053 =======
-------
Present value of net minimum lease payments...... $14,767
=======
(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.
All four actions were subsequently consolidated into one matter and a
consolidated complaint was filed on June 1, 2000. The consolidated complaint
named as defendants the Company, two officers of the Company, and the
underwriters of the Company's Offering. The class, as currently alleged in the
consolidated complaint now on file, consists of all persons who purchased
securities in, or traceable to, the Company's June 9, 1999 Offering or
thereafter on the open market prior to June 15, 1999.
In response to the consolidated complaint, the Company filed a motion to
dismiss the entire case. On September 25, 2000, the Court issued a tentative
order to dismiss the consolidated complaint in its entirety, with leave to
amend. As of December 31, 2000, the Court has not issued a final order. Thus, as
these matters are in still in the pleading stage and no discovery has been
conducted, neither the Company nor Company counsel are able to conclude as to
the potential likelihood of an unfavorable outcome. In any event, the Company is
vigorously defending the claims and believes that its defenses are meritorious.
The Company also maintains insurance that it believes covers all the matters
alleged in the consolidated complaint as currently pled. 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-13
(c) Purchase Commitments
At December 31, 2000, the Company had purchase commitments of approximately
$107,000,000.
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%
and 2% per 30 to 60 day term. The amounts outstanding under these arrangements
at December 31, 1999 and 2000 were $34,900,000 and $48,484,000, respectively,
which are included in accounts payable in the accompanying consolidated
financial statements. Interest expense incurred by the Company under these
arrangements amounted to $2,900,000 in 1998, $3,000,000 in 1999 and $6,400,000
in 2000.
(d) Compensation
Certain officers and key employees of the company are entitled to incentive
bonuses under employment contracts. The bonuses are based on company performance
(11) SUBSEQUENT EVENT
In February 2001, the Company completed the purchase of three separate real
properties, located in Manhattan Beach, California, for a total of $4,500,000.
(12) SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized unaudited financial data are as follows (in thousands):
2000 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- ---- -------- ------- ------------ -----------
Net sales ...................... $133,344 $163,899 $205,749 $172,044
Gross profit ................... 53,634 69,137 86,911 74,543
Net earnings ................... 6,734 12,010 15,286 9,721
======== ======== ======== ========
Net earnings per share:
Basic ........................ $ .19 $ .34 $ .43 $ .27
Diluted ...................... .19 .33 .40 .26
======== ======== ======== ========
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
======== ======== ======== ========
F-14
SKECHERS U.S.A., INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1998, 1999, AND 2000
BALANCE AT CHARGED TO DEDUCTIONS BALANCE
BEGINNING OF COSTS AND AND AT END
DESCRIPTION PERIOD EXPENSES WRITE-OFFS OF PERIOD
- ----------- ------------ ------------ ------------ ------------
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
As of December 31, 2000:
Allowance for obsolescence .................... $ 641,000 $ 177,000 $ -- $ 818,000
Allowance for doubtful accounts ............... 507,000 1,326,000 (537,000) 1,296,000
Reserve for sales returns and allowances ...... $ 2,730,000 $ 15,651,000 $(14,525,000) $ 3,856,000
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S-1