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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, 2001
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
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 25, 2002 on the New York Stock Exchange was approximately $341 million.
The number of shares of Class A Common Stock outstanding as of March 25,
2002 was 15,667,855.
The number of shares of Class B Common Stock outstanding as of March 25,
2002 was 21,246,777.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Definitive Proxy Statement issued in connection
with the 2002 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, 2001
INDEX TO ANNUAL REPORT ON FORM 10-K
PAGE
PART I
Item 1. Business........................................................... 3
Item 2. Properties.........................................................19
Item 3. Legal Proceedings..................................................20
Item 4. Submission of Matters to a Vote of Security Holders................21
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters................................................22
Item 6. Selected Financial Data............................................23
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................23
Item 7a. Quantitative and Qualitative Disclosures About Market Risk.........30
Item 8. Financial Statements and Supplementary Data........................31
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure...........................................31
PART III
Item 10. Directors and Executive Officers of the Registrant.................32
Item 11. Executive Compensation.............................................32
Item 12. Security Ownership of Certain Beneficial Owners and Management.....32
Item 13. Security Relationships and Related Transactions....................32
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....33
Signatures...................................................................37
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
We design and market a collection of contemporary footwear for men, women
and children under the Skechers brand, one of the most recognized names in the
footwear industry. Our footwear reflects a combination of style, quality and
value that appeals to a broad range of customers. Our shoes are sold through a
wide range of department stores and leading specialty stores, a growing network
of our own retail stores and our e-commerce website. Our objective is to
continue to profitably grow our domestic operations, while leveraging our brand
name to expand internationally.
We seek to offer consumers a collection of fashionable footwear that
satisfies their casual, active and dress footwear needs. Our product line
currently consists of over 1,500 active styles that are organized in seven
distinct collections. Our core customer is a style-conscious consumer between
the ages of 12 and 25 who is attracted to our youthful brand image and fashion
forward designs. Over the last several years, we have introduced and expanded
several footwear lines that have broadened our customer base. These shoes
combine styling themes found elsewhere in our product line with colors and
materials that reflect a playful image appropriate for children. We have also
recently introduced or expanded several other lines such as Skechers Collection
and Skechers by Michelle K that appeal to young adults interested in
sophisticated fashions for the workplace and social occasions.
We believe that a well-recognized brand is an important element for success
in the footwear business. We have aggressively promoted the Skechers brand
through a comprehensive marketing campaign. This ongoing program has included
endorsements from celebrities such as Britney Spears, Rick Fox, Robert Downey,
Jr., Matt Dillon and Rob Lowe, print advertisements in publications such as GQ,
Vogue and Seventeen and commercials aired on major networks and leading cable
channels such as MTV, ESPN and Nickelodeon. We believe that this campaign, which
is image oriented rather than product specific, has resulted in a high level of
recognition of the Skechers brand across a variety of footwear categories.
Product Lines
In December 1992, we introduced our first Skechers-branded line called
Skechers Sport Utility Footwear. 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. Each of our product lines benefits from the
umbrella of the Skechers brand, which is recognized for contemporary and
progressive styling, quality, comfort, and affordability. To promote innovation
and brand relevance, we manage our product lines separately by utilizing
dedicated design and marketing teams. Our product lines share back office
services in order to limit our operating expenses and fully utilize our
management's vast experience in the footwear industry.
Skechers USA. Our Skechers USA category for men and women includes six types
of footwear: (i) Casuals, (ii) Utility, (iii) Steel Toe, (iv) Classics, (v)
Outdoor, and (vi) Comfort (for men only).
- The Casuals category includes "Black & Brown" boots and shoes that
generally have a rugged, less refined design - some with
industrial-inspired fashion features. This category is defined by the
heavy-lugged outsole and value-oriented materials employed in the
uppers. We design and price this category to appeal primarily to young
persons with broad acceptance across age groups. Suggested retail price
points range from $45.00 to $70.00 for this category.
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- 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 Utility outsoles are designed to be durable and
wearable with Goodyear welted and hardened rubber outsoles. Uppers are
constructed of thicker, better grades of heavily oiled leathers, and may
include water-resistant or waterproof 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.
- Steel Toe, an expanded category within Skechers USA, includes boots,
shoes and athletic sneakers with steel toe construction. This category
is designed for men and women whose jobs have certain safety
requirements. Suggested retail price points range from $45.00 to $100.00
for this category.
- The Classics category of boots and shoes employ softer outsoles, which
are often constructed of polyvinyl carbon ("PVC"). The more refined
design of this footwear utilizes better grades of leather and linings.
Designs are sportier than the Casuals category and feature oxfords,
wingtips, monk straps, demi-boots and boots. Suggested retail price
points range from $55.00 to $75.00 for this category.
- Our Outdoor styles primarily consist of hiker-influenced constructions
that include boots and shoes. While this category includes many comfort
and technical performance features, we market it primarily on the basis
of style and comfort rather than on performance. However, many of the
technical performance features in the Outdoor category 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.
- Launched in stores in Fall 2001, Skechers Comfort is the latest category
of Skechers USA. With comfortable outsoles, more cushioned insoles and
leather uppers, the line of stylish casuals is for trend-savvy men of
all ages who want more edge in their black and brown footwear. Skechers
Comfort is intended to be available in many of the same stores that
carry Skechers USA as well as additional mid-tier and better department
stores. Suggested retail price points range from $55.00 to $75.00 for
this category.
Skechers Sport. Our Skechers Sport footwear for men and women includes (i)
Joggers, Trail runners, Sport hikers, "Terrainers" (multi-functional shoes
inspired by cross-trainers), (ii) Court, and (iii) "Street" active sneakers. 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.
- Our Jogger, Trail runner, Sport hiker and Terrainer designs are
lightweight constructions that include cushioned heels, polyurethane
midsoles, phylon and other synthetic outsoles, and white leather or
synthetic uppers such as durabuck, cordura and nylon mesh. Careful
attention is devoted to the design, pattern and construction of the
outsoles, which vary greatly depending on the intended use. This
category features earth tones and athletic-inspired hues with popular
colors in addition to the traditional athletic white. The Jogger, Trail
runner, Sport hiker and Terrainer styles are marketed through athletic
footwear specialty retailers as well as basic existing accounts.
Suggested retail price points range from $40 to $80 for this
category.
- The Court category is inspired from classic court shoes and includes
technical features, but is not meant to be a performance shoe. The court
shoes feature lightweight constructions that include polyurethane and
phylon midsoles, rubber low-profile outsoles, and some with heel airbag
inserts for additional comfort and performance. The uppers are mostly
mid-cut with some low tops, and constructed with better quality smooth,
full-grain and tumbled leathers, typically in white. The court styles
are marketed through athletic footwear specialty retailers as well as
basic existing accounts. Suggested retail price points range from $40.00
to $70.00 for this category.
- Street active sneakers are everyday, everywhere casual shoes for females
of all ages. Active sneakers are intended to be retailed through
specialty casual shoe stores and department stores. Suggested retail
price points range from $40.00 to $65.00 for this category.
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Skechers Collection. The Skechers Collection line features stylish dress
casual, dress and EuroSport shoes for the fashion-forward young male consumer.
With some basic "essential" styles, this category is primarily comprised of 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. The dress and dress casuals
include classic tailored and fashion-forward square, rounder and pointed lasts
in a variety of styles, such as bicycle toes, monk straps, wingtips, oxfords,
cap toes, demi-boots and boots. The outsoles project a sleeker profile and can
be either man-made or leather. The uppers are in high-quality leathers including
glossy, "box," and aniline. Inspired by the latest in European fashion,
EuroSport blends classic dress casual styling with sport to create a versatile
and comfortable casual shoe. First delivered in 2001, EuroSport is marked by
details, high-quality leathers and suede in multiple colorations, and
sport-inspired rubber outsoles. We have promoted Skechers Collection with
advertising campaigns featuring Rick Fox, Robert Downey, Jr., Matt Dillon and
Robe Lowe. Suggested retail price points range from $65.00 to $155.00 for this
category.
Skechers Kids. The Skechers Kids line features a range of products including
boots, shoes and sneakers. Comprised primarily of shoes that are designed like
their adult counterparts but in "takedown" versions, the line offers the younger
set the same popular styles as their older siblings and schoolmates. This
"takedown" strategy maintains the product integrity with premium leathers,
hardware and outsoles without the attendant costs involved in designing and
developing new products. In addition, we 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. Skechers Kids includes variations on Skechers Sport, Skechers
USA and Skechers Collection adult shoes. Unique to Skechers Kids is S-Lights, 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. Launched in stores in Fall 2001, Somethin'
Else from Skechers is a junior line that features an array of stylish shoes,
boots and sandals. We target to 12- to 25-year old style conscious females, and
Somethin' Else from Skechers is focused on current styling with numerous details
and various silhouettes - including wedges and sculpted wedges. Many of the
boots and shoes are made from more affordable materials such as man-made
leather. Somethin' Else from Skechers is designed to be a complementary line for
juniors who already wear Skechers USA and Skechers Sport styles. Suggested
retail price points range from $20.00 to $70.00 for this category.
Skechers by Michelle K. The Skechers by Michelle K line, also launched in
stores in Fall 2001, is a designer line for trend-savvy young women between the
ages of 18 and 34. A signature line from our head designer, Michelle Kelchak,
the category is comprised of high fashion boots, shoes and sandals. Noticing a
hole in the market for affordable high-fashion footwear, Michelle and her team
of designers have created a line reflective of the latest European, Asian and
American trends at a reasonable price and of the highest quality. Most styles
are crafted in Italy, Portugal and Spain, with others made in Brazil. Skechers
by Michelle K is marked by high-grade leathers, fine detailing and design and
flattering silhouettes, including sculpted heels and lower kitten heels.
Suggested retail price points range from $60.00 to $250.00 for this category.
4 Wheelers by Skechers. Launched in stores in Fall 2001, 4 Wheelers by
Skechers is a line of technical fashion roller skates for men, women and
children. The skates incorporate our most popular sneaker uppers, including the
Energy and Energy II, on quality aluminum and nylon chassis and polyurethane
wheels. The uppers are in cool color combinations and feature fashion details
such as glimmer trim for some women and girls' styles. Technical features
include: full precision ABEC-1, 3 and 5 bearings, unique heel brake for easy
control, durable chassis, controllable steering, and reinforced upper. Designed
for the entire family, 4 Wheelers by Skechers are street skates that can be worn
indoors, and are ideal for fun and fitness. We have promoted 4 Wheelers by
Skechers with an advertising campaign featuring Britney Spears. Suggested retail
price points for adults range from $80.00 to $100.00, and for children from
$60.00 to $75.00.
In addition to the previously mentioned lines, we offer seasonal 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 leather and
synthetic constructions and may feature suede footbeds with form-fitting
midsoles. 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
Our principal goal in product design is to generate new and exciting
footwear with contemporary and progressive styles and comfort enhancing
performance features. All of our footwear is designed with an active, youthful
lifestyle in mind. We design most
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new styles to be fashionable and marketable to the 12 to 25 year old consumer,
while substantially all of our lines appeal to the broader range of 5 to 40 year
old consumers. While many of our shoes have performance features, we generally
do not position our shoes in the marketplace as technical performance shoes.
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 that
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 (1) review and
analysis of modern music, television, cinema, clothing, alternative sports and
other trend-setting media, (2) travel to domestic and international fashion
markets to identify and confirm current trends, (3) consultation with our retail
customers for information on current retail selling trends, (4) participation in
major footwear trade shows to stay abreast of popular brands, fashions and
styles and (5) subscription to various fashion and color information services.
In addition, a key component of our design philosophy is to continually
reinterpret our successful styles in the Skechers image.
The footwear design process typically begins about nine months before the
start of a season. Our products are designed and developed by our in-house
staff. To promote innovation and brand relevance, we utilize dedicated design
teams that focus on each of the men's, women's and children's categories, and
report to our senior design executives. In addition, we utilize outside design
firms on an item-specific basis to supplement our design efforts. 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 our products to meet the particular needs of our markets.
After a design team arrives at a consensus regarding the fashion themes for
the coming season, the designers then translate these themes into our 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 teams can easily and quickly modify and refine a design
based on customer input.
We occasionally order limited production runs which may initially be tested
in our 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 concept stores can help forecast sales in national
retail stores. We strive to determine within seven to 14 days after initial
introduction of a product whether there is substantial demand for the style,
thereby aiding us in our sourcing decisions. Styles that have substantial
consumer appeal are highlighted in upcoming collections or offered as part of
our periodic style offerings. The ability to initially test our products allows
us to discontinue less popular styles after only a limited production run which
affords us an indicator of future production and a hedge to fashion risks. Also,
we strive to monitor five- and 10-week trailing trends of orders of our retail
account base in order to manage future production of styles that are increasing
or decreasing in popularity. Generally, the production process takes
approximately six months from design concept to commercialization.
SOURCING
Factories. Our products are produced by independent contract manufacturers
primarily located in China and, to a lesser extent, in Italy, the Philippines,
Brazil and various other countries. Substantially all of our products are
manufactured in China. 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 reduces capital
expenditures and avoids the costs of managing a large production work force.
We seek to use, whenever possible, manufacturers that have previously
produced our footwear, which we believe enhances continuity and quality while
controlling production costs. 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 source product for styles that
account for a significant percentage of our net sales from at least four
different manufacturers. During 2001, we had four manufacturers that accounted
for approximately 51.9% of total purchases. No one manufacturer accounted for
20.0% or more of our total purchases for this period. To date, we have not
experienced difficulty in obtaining manufacturing services.
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
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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.
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 at a rate between 0.5%
and 1.5% 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.
Production Oversight. To safeguard product quality and consistency, we
oversee the key aspects of production from initial prototype manufacture through
initial production runs to final manufacture. Monitoring is performed
domestically by our in-house production department and in Asia through an
approximately 130-person staff working 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.
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 prototypes of key raw materials prior to
manufacture, samples and materials at various stages of production and 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.
ADVERTISING AND MARKETING
Our advertising and 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 the conception, development and implementation of our
advertising and marketing activities. We have and continue to increase 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 8% to 10% of annual net sales in the marketing
of Skechers footwear through advertising, promotions, public relations, trade
shows and other marketing efforts.
Advertising
Substantially all of our advertising is conceived and designed by our
in-house staff. By retaining our advertising functions in-house, we believe that
we are able to maintain a greater degree of control over both the creative
process and the integrity of the Skechers brand image, while realizing
substantial cost savings compared to using outside agencies.
We believe that our success to date is due in large part to our advertising
strategies and methods. Our in-house advertising team has developed a
comprehensive program to promote the Skechers brand name through lifestyle and
image advertising. While all advertisements feature our footwear, our
advertisements generally seek to build and increase brand awareness by linking
the Skechers brand to youthful, contemporary lifestyles and attitudes rather
than to market a particular footwear product. 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, such as Spin,
Details, Seventeen, GQ, Vibe, Rolling Stone, Vogue and many others. Our
progressive television advertisements are primarily produced in-house and air
frequently on top television shows on major networks and the cable channels.
Different advertisements are created for each of the 5 to 11, 12 to 24 and 25 to
35 year old male and female consumer groups. Our in-house media buyer
strategically selects during which program and in which geographic area certain
of our commercials will air in order to reach the appropriate target audience.
Endorsements. We believe that the high profile image and diverse appeal of
each of our celebrity endorsements will help the Skechers brand reach new
markets. In 2000, we signed our first celebrity endorsement agreements,
including signing singer Britney Spears for an international (worldwide
excluding the United States) print media campaign through June 2002. We expanded
upon our
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successful relationship with Britney Spears in 2002 by signing a three-year
worldwide licensing agreement for her to promote our collection of Britney
Spears 4 Wheelers, which is fashioned after our 4 Wheelers by Skechers line of
technical fashion roller skates. We also recently signed professional basketball
player and actor Rick Fox and actor Robert Downey, Jr. to separate limited term
worldwide print media campaigns. We previously had similar relationships with
actors Matt Dillon and Rob Lowe. From time to time, we may sign other
celebrities to endorse our brand name and image and to strategically focus
marketing of our products among specific consumer groups.
Marketing and Promotions. By applying creative sales techniques to a broad
spectrum of mediums, the marketing and promotions team develops Skechers brand
name recognition, serving as a catalyst for increased product sales. Skechers
promotional strategies have encompassed in-store specials, concert promotions,
product tie-ins and giveaways, and collaborations with national retailers and
radio stations. Our imaginative promotions draw customers to Skechers retail
stores and to our retail partners' locations, which results in an expanded
customer base and strong product sell-throughs.
Public Relations. During 2001, we received notable press coverage in print
publications, including a Forbes cover story and being ranked ninth in
BusinessWeek's Top 100 Growth Companies. In addition, we were noted in Money,
Vogue, Movieline, Entertainment Weekly, Elle and Sportswear International, among
others. We have repeatedly received recognition in the footwear industry for our
exciting and innovative products, including Excellence in Children's Design
Award by Footwear Plus magazine. Skechers was awarded the 2001 "Corporate Vendor
of the Year" and "Children's Vendor of the Year" awards from Shoe Carnival. The
Shoe Carnival awards recognize brands that have the largest sales increases and
profit margin in the shoe chains stores throughout the retail fiscal year. With
our strategy tied to promoting the newest styles produced by our design and
development teams, our products are often featured in fashion and pop culture
magazines, and in a select group of films and popular television shows. For
example, our shoes have been prominently displayed and referenced on The Today
Show, Oprah, Good Morning America, Dharma & Greg and Malcolm in the Middle.
Merchandising
Our in-house display merchandising department supports retailers and
distributors by developing point-of-purchase advertising to further promote our
products in our wholesale customers' stores and to leverage recognition of the
Skechers brand name at the retail level. Our field service representatives
coordinate with our sales department to ensure better sell-through at the retail
level. Our representatives communicate with and visit our wholesale customers on
a regular basis to aid in the proper visual display of our merchandise and to
distribute and display such point-of-purchase items as signage, packaging,
displays, counter cards, banners and other visual merchandising displays. These
materials mirror the look and feel of our national print advertising in order to
reinforce brand image at the point-of-purchase. We believe these efforts help
stimulate impulse sales and repeat purchases.
Our merchandise personnel also work closely with our wholesale customers to
ensure the optimal exposure of our products through our shop-in-shops, which are
exclusive selling areas within stores that offer our products and incorporate
Skechers signage and customized fixture designs. The shop-in-shop concept
enhances brand recognition and ensures the consistent presentation of our
products in our wholesale customers' stores. As of December 31, 2001, our
wholesale customers' stores included more than 300 shop-in-shops. We plan to add
additional shop-in-shops during 2002.
Trade Shows. To best showcase our diverse products to footwear buyers across
the nation, we exhibited at 23 trade shows during 2001. Our dynamic,
state-of-the-art trade show exhibits, which are designed by our in-house
architect and feature our latest product offerings, are specially planned and
built to accommodate each trade show and are enhanced with lifestyle images that
capture the image of our brand. By investing in innovative displays and
individual rooms showcasing each line, our sales force can present a sales plan
for each line and buyers are able to truly understand the breadth and depth of
our offerings, optimizing commitments and sales at the retail level. Our
innovative exhibits continually win awards, including Best Booth Design at the
World Shoe Association, February 2001.
Internet. We also promote our brand image through our website at
www.skechers.com to customers who directly access the Internet. This website
currently enables us to present information on our products and store locations
to consumers. The website is interactive, affording customers the ability to
directly order products on the Internet and to allow us to receive and respond
directly to customer feedback. Our website is intended to enhance the Skechers
brand without the associated costs of advertising. Our website provides fashion
information, provides a mechanism for customer feedback, promotes customer
loyalty and further enhances the Skechers brand image through interactive
content, photos, interviews and information on Skechers-sponsored events.
8
DOMESTIC SALES AND DISTRIBUTION CHANNELS
Our products are sold in the United States through three primary
distribution channels: to a network of wholesale accounts, in our own retail
stores and, to a lesser extent, through electronic commerce on our interactive
website. Each of these channels and the three distinct categories of our retail
stores - concept stores, factory outlet stores and warehouse outlet stores -
serves an integral function in the domestic distribution of our products.
Wholesale Distribution
As of December 31, 2001, we distributed our footwear to over 3,500
wholesale accounts in the United States. We believe that our broad product line
enables us to appeal to a variety of wholesale accounts, many of whom may
operate stores within the same mall or other retail locations, because retailers
can select those styles of ours that best satisfy the fashion, function and
price criteria of their clients. Management has implemented a strategy of
controlling the growth of our wholesale distribution channels. Our strategy is
to continue offering our accounts the highest level of customer service so that
our products will be more fully represented in existing retail locations and new
locations within each account.
We have approximately 100 sales and 15 field service representatives to
service our wholesale accounts. In an effort to provide knowledgeable and
personalized service to our wholesale accounts, the sales force is segregated
into men's, women's and children's divisions. The men's and women's divisions
have a combined six regional sales managers and the children's division has
three dedicated regional sales managers. Additionally, Skechers by Michelle K,
Skechers Collections, and 4 Wheelers by Skechers are each headed by its own
national sales manager. Each of these sales managers reports to our Executive
Vice President, Domestic U.S. Sales, who has over 20 years of experience in the
branded consumer products industry. Each of the sales staff is compensated on a
salary plus commission basis with none of the representatives selling
competitive products. Senior management is actively involved in selling to and
maintaining relationships with Skechers' major retail accounts.
We believe that we have developed a loyal customer base of wholesale
accounts through a heightened level of customer service. We believe that our
close relationships with these accounts help us to maximize their retail
sell-through, maintained margins and inventory turns which in turn minimizes our
inventory markdowns and customer returns and allowances. Our field service
representatives work with our wholesale accounts to ensure that our merchandise
and point-of-purchase marketing materials are properly presented. Sales
executives and merchandise personnel work closely with accounts to ensure the
appropriate styles are purchased for specific accounts and for specific stores
within those accounts as well as ensure that appropriate inventory levels are
carried at each store. Such information is then utilized to help develop sales
projections and determine the product needs of wholesale accounts. The value
added services we provide our wholesale customers help us maintain strong
relationships with our existing wholesale customers and attract potential new
wholesale customers.
Retail Stores
We pursue our retail store strategy through our three integrated retail
formats: the concept store, the factory outlet and the warehouse outlet store.
Our three store format enables us to promote the full Skechers line in an
attractive environment, appeal to a broad group of customers that are segmented
by price points and manage inventory in an efficient and brand sensitive manner.
In addition, most of our retail stores are profitable and have a positive effect
on our operating results. As of December 31, 2001, we operated 29 concept
stores, 29 factory outlet stores and 20 warehouse outlet stores in the United
States. We plan to open between 10 to 15 retail stores during 2002.
- Concept Stores. Our concept stores are located at either marquee
street locations or in major shopping malls in large metropolitan
cities. Our concept stores serve a threefold purpose in our
operating strategy. First, concept stores serve as a showcase for a
wide range of our product offerings for the current season,
providing the customer with the entire product story. The concept
stores feature modern music and lighting and present an open floor
design to allow customers to readily view the merchandise on
display. In contrast, we estimate that our average retail customer
carries no more than 5.0% of the complete Skechers line. Second,
retail locations are generally chosen to generate maximum marketing
value for the Skechers brand name through signage, store front
presentation and interior design. These locations include concept
stores on 34th Street in New York City and in Santa Monica's Third
Street Promenade. The stores are typically designed to create a
distinctive Skechers look and feel and enhance customer association
of the Skechers brand name with current youthful lifestyle trends
and styles. Third, the concept stores serve as marketing and product
testing venues that provide rapid product feedback from customers.
We believe that product sell-through information
9
derived from our concept stores enables our sales, merchandising and
production staff to respond to market changes and new product
introductions. Such responses serve to augment sales and limit our
inventory markdowns and customer returns and allowances. We strive
to adjust our product and sales strategy based upon seven to 14 days
of retail sales information.
The prototypical Skechers concept store is approximately 2,500
square feet although in certain selected markets we have opened
concept stores as large as 7,000 square feet or as small as 1,100
square feet. When deciding where to open concept stores, we identify
top geographic markets in the larger metropolitan cities in the
United States. When selecting a specific site, we evaluate the
proposed sites' traffic pattern, co-tenancies, average sales per
square foot achieved by neighboring concept stores, lease economics
and other factors considered important within the specific location.
If we are considering opening a concept store in a shopping mall,
our strategy is to obtain space as centrally located as possible in
the mall where we expect foot traffic to be most concentrated. We
believe that the strength of the Skechers brand name has enabled us
to negotiate more favorable terms with shopping malls that want us
to open up concept stores to attract customer traffic to these
malls. We opened two new concept stores during 2000 and five new
concept stores during 2001.
- Factory Outlet Stores. Our factory outlet stores are generally
located in manufacturers' outlet centers throughout the United
States. Our factory outlet stores provide opportunities for us to
sell discontinued and excess merchandise, thereby reducing the need
to sell such merchandise to discounters at excessively low prices,
which could otherwise compromise the Skechers brand image. Skechers
factory outlet stores range in size from approximately 1,900 to
6,000 square feet. Inventory in these stores is supplemented by
certain first-line styles sold at full retail price points generally
of $60.00 or lower. We opened five new factory outlet stores during
2000 and 11 new factory outlet stores during 2001.
- Warehouse Outlet Stores. Our free-standing warehouse outlet stores,
which are located throughout the United States, enable us to
liquidate excess merchandise, discontinued lines and odd-size
inventory in a cost-efficient manner. Skechers warehouse outlet
stores range in size from approximately 5,600 to 14,800 square feet.
Our warehouse outlet stores enable us to sell discontinued and
excess merchandise that would otherwise typically be sold to
discounters at excessively low prices, thus compromising the
Skechers brand image. We seek to open our warehouse outlet stores in
areas that are in close proximity to our other retail stores in
order to facilitate the timely transfer of inventory that we want to
liquidate as soon as practicable. We opened three new warehouse
outlet stores during 2000 and 10 new warehouse outlet stores during
2001.
Electronic Commerce. Our electronic commerce sales represented less than
1.0% of total net sales for each of 2000 and 2001. Our website,
www.skechers.com, is a virtual storefront that promotes the Skechers brand name.
Designed as a customer center, our website showcases our products in an
easy-to-navigate format, allowing customers to see and purchase our footwear.
This virtual store has become a successful additional retail distribution
channel, has improved customer service and is a fun and entertaining
alternative-shopping environment.
INTERNATIONAL OPERATIONS
We market our products in countries and territories throughout the world. We
generate revenues from outside the United States from three principal sources:
(1) sales of our footwear directly to foreign distributors who distribute such
footwear to department stores and specialty retail stores in Europe, Asia, Latin
America, South America and numerous other countries and territories, (2) in
France, Germany and the United Kingdom, we sell footwear directly to department
stores and specialty retail stores and through retail stores that we own and
operate and (3) 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 represents 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 around the world. We intend to further
increase our share of the international footwear market by heightening our
marketing presence in those countries through our international advertising
campaigns, which are designed to establish Skechers as a global brand synonymous
with casual shoes.
10
Europe
We have historically sold our footwear to selected wholesale customers in
Europe through our foreign distributors. In 2001, we expanded our European
operations and began to directly sell our footwear to certain wholesale accounts
and retail stores in Europe in an effort to increase profit margins and more
effectively market and promote the Skechers brand name. We organized Skechers
U.S.A. Ltd. in the United Kingdom and Ireland and opened the subsidiary's
headquarters in London to establish direct control over wholesale distribution,
merchandising, and marketing of our products in these countries. We also
organized Skechers U.S.A. SAS with its office in Paris, France and Skechers
U.S.A. Deutschland GmbH with its office in Dietzenbach, Germany, with each of
these subsidiaries formed to establish direct control over our products in their
respective countries of organization. In 2001, we began to utilize a contract
warehouse located in Belgium to distribute our footwear to our customers and
retail stores in France, Germany and the United Kingdom.
Additionally, we are beginning to selectively open flagship retail stores
internationally on our own or through joint ventures with local distributors. In
the first three months of 2001, we opened our first European flagship retail
stores on Oxford Street in London, at the Forum Les Halles in Paris and in the
prestigious Centro Mall in Oberhausen, Germany. We intend to open additional
wholly-owned flagship retail stores in the European Union (EU) countries and
enter into agreements with distributors to operate flagship retail stores in
non-EU countries.
Asia
In December 2001, we opened our first Asian flagship retail store in
Kichijuoji, Japan by agreement with Japanese distributor Achilles Corporation.
Achilles Corporation is responsible for the store's operations and selecting a
broad collection of our products to sell to Japanese consumers. In order to
maintain a globally consistent image, we provided architectural, graphic and
visual guidance and materials for the design of the store, and we trained the
local staff on our products and corporate culture. We intend to expand our
international presence and global recognition of the Skechers brand name in Asia
by continuing to sell our footwear to foreign distributors and opening flagship
retail stores with distributors that have local market expertise.
LICENSING
We believe that selective licensing of the Skechers brand name to
non-footwear-related manufacturers may broaden and enhance the Skechers brand
image without requiring significant capital investments or additional
incremental operating expenses by us. Our diverse group of products presents
many potential licensing opportunities on terms with licensees that we believe
will provide more effective manufacturing, distribution or marketing of products
such as accessories, backpacks and children's clothing than could be achieved
in-house; however, we intend to be selective in granting any use of the Skechers
brand name for such licensed products. We believe that the strength of the
Skechers brand name and the size of our business will enable us to attract
premier licensing partners with a proven track record of brand sensitivity. We
are also interested in exploring the possibility of licensing our other
trademarks and trade names for use with non-footwear products that could enable
us to successfully enter and compete in non-footwear markets that we would not
be likely to succeed in using the Skechers brand name and without having to
compromise the Skechers brand image. In addition, we periodically review
potential international licensing arrangements for footwear in various
geographical regions that present favorable business opportunities. We intend to
maintain substantial control over the design, manufacturing specifications,
advertising and distribution of any licensed products and to maintain a policy
of evaluating any future licensing arrangements to ensure consistent
representation of the Skechers image.
DISTRIBUTION
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 are shipped either (1) to our approximately 1.4 million square
feet of internally managed distribution center located in Ontario, California,
(2) to an approximately 130,000 square foot contract warehouse located in Gent,
Belgium for distribution to our European customers and retail stores or (3)
directly from the manufacturer to our other international customers. Upon
receipt at the central distribution centers, merchandise is inspected and
recorded in our management information system and packaged according to
customers' orders for delivery. Merchandise is shipped to the customer by
whatever means the customer requests, which is usually by common carrier. The
central distribution centers have multi-access docks, enabling us to receive and
ship simultaneously and to pack separate trailers for shipments to different
customers at the same time. We have an electronic data interchange system, or
EDI system, to which some of our larger customers are linked. This system allows
these customers to automatically place orders with us, thereby eliminating the
time involved in transmitting and inputting orders, and includes direct billing
and shipping information.
11
The following table sets forth a summary of the facilities that comprise our
Ontario distribution center:
ADDRESS STATUS SQUARE FOOTAGE
------- ------ --------------
1661 South Vintage Avenue Leased since November 1997 127,800
1777 South Vintage Avenue Leased since November 1997 284,600
1670 Champagne Avenue Owned since October 2000 263,700
4100 East Mission Blvd. Leased since June 2001 763,300
---------
1,439,400(1)
=========
- ----------------
(1) Excludes 285,600 square feet located at 5725 East Jurupa Street that we
leased in April 1998 and occupied until we subleased the facility in June
2001.
We believe that we have the capacity at our Ontario distribution center to
increase our current operations to meet projected demand, and if we should ever
need to expand our distribution facilities to allow for further growth, we
believe there is presently enough space available in close proximity that leads
us to believe leasing or purchasing additional property will not be a problem in
the foreseeable future.
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. As of December 31, 2001, our backlog was $222.2 million, compared to
$221.6 million as of December 31, 2000. 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 2002. 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 85 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. 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 intellectual property rights.
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, these efforts may not be
successful or the costs associated with protecting our rights in certain
jurisdictions may be prohibitive. From time to time, we discover products in the
marketplace that are counterfeit reproductions of our products or that
12
otherwise infringe upon intellectual property rights held by us. Actions taken
by us to establish and protect our trademarks and other intellectual property
rights may not 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.
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 our products 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, 2002, we employed 1,964 persons, 1,111 of which were
employed on a full-time basis and 853 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, IDENTIFY AND INTERPRET FASHION TRENDS AND SUCCESSFULLY MARKET NEW
PRODUCTS.
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. Demand for and market acceptance of new products are
uncertain and achieving market acceptance for new products generally requires
substantial product development and marketing efforts and expenditures. If we do
not continue to meet changing consumer demands and develop successful styles in
the future, our growth and profitability will be negatively impacted. We
frequently make decisions about product designs and marketing expenditures
several months in advance of the time when consumer acceptance can be
determined. If we fail to anticipate, identify or react appropriately to changes
in styles and trends or are not successful in marketing new products, we could
experience excess inventories, higher than normal markdowns or an inability to
profitably sell our products. Because of these risks, a number of companies in
the footwear industry specifically, and the fashion and apparel industry in
general, have experienced periods of rapid growth in revenues and earnings and
thereafter periods of declining sales and losses, which in some cases have
resulted in companies in these industries ceasing to do business. Similarly,
these risks could have a severe negative effect on our results of operations or
financial condition.
OUR BUSINESS AND THE SUCCESS OF OUR PRODUCTS COULD BE HARMED IF WE ARE UNABLE TO
MAINTAIN OUR BRAND IMAGE.
Our success to date has been due in large part to the strength of our brand.
If we are unable to timely and appropriately respond to changing consumer
demand, our brand name and brand image may be impaired. Even if we react
appropriately to changes in
13
consumer preferences, consumers may consider our brand image to be outmoded or
associate our brand with styles of footwear that are no longer popular. In the
past, several footwear companies have experienced periods of rapid growth in
revenues and earnings followed by periods of declining sales and losses. Our
business may be similarly affected in the future.
OUR BUSINESS COULD BE HARMED IF WE FAIL TO MAINTAIN PROPER INVENTORY LEVELS.
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 may be unable 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 have a material adverse effect on our operating results and financial
condition. Conversely, if we underestimate consumer demand for our products or
if our manufacturers fail to supply the quality products that we require at the
time we need them, we may experience inventory shortages. Inventory shortages
might delay shipments to customers, negatively impact retailer and distributor
relationships, and diminish brand loyalty.
WE MAY BE UNABLE TO SUCCESSFULLY EXECUTE OUR GROWTH STRATEGY OR MANAGE OR
SUSTAIN OUR GROWTH.
We have grown quickly since we started our business. Our ability to grow in
the future depends upon, among other things, the continued success of our
efforts to expand our footwear offerings and distribution channels. However, our
rate of growth may decline or we may not be profitable in future quarters or
fiscal years. Furthermore, as our business becomes larger, we may not be able to
maintain our historical growth rate or effectively manage our growth. We
anticipate that as our business grows, we will have to improve and enhance our
overall financial and managerial controls, reporting systems and procedures. We
may be unable to successfully implement our current growth strategy or other
growth strategies or effectively manage our growth, any of which would
negatively impair our net sales and earnings.
OUR BUSINESS MAY BE NEGATIVELY IMPACTED AS A RESULT OF CHANGES IN THE ECONOMY.
Our business depends on the general economic environment and levels of
consumer spending that 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. During periods
of recession or economic uncertainty, we may not be able to maintain or increase
our sales to existing customers, make sales to new customers, open and operate
new retail stores, maintain sales levels at our existing stores, maintain or
increase our international operations on a profitable basis, or maintain or
improve our earnings from operations as a percentage of net sales. As a result,
our operating results may be adversely and materially 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,
our operating results and margins will be adversely impacted if we do not
continue to grow as anticipated. For example, due in large part to the slowdown
in the global economy, our net sales for 2001 were lower than anticipated. This
lower level of sales adversely affected our operating results for 2001 and could
continue to do so in 2002 and beyond.
ECONOMIC, POLITICAL, MILITARY OR OTHER EVENTS IN A COUNTRY WHERE WE MAKE
SIGNIFICANT SALES OR HAVE SIGNIFICANT OPERATIONS COULD INTERFERE WITH OUR
SUCCESS OR OPERATIONS THERE AND HARM OUR BUSINESS.
We market and sell our products and services throughout the world. The
September 11, 2001 attacks disrupted commerce throughout the United States and
other parts of the world. The continued threat of similar attacks throughout the
world and the military action taken by the United States and other nations may
cause significant disruption to commerce throughout the world. To the extent
that such disruptions further slow the global economy or, more particularly,
result in delays or cancellations of purchase orders for our products, our
business and results of operations could be materially adversely affected. We
are unable to predict whether the threat of new attacks or the responses thereto
will result in any long-term commercial disruptions or if such activities or
responses will have a long-term material adverse effect on our business, results
of operations or financial condition.
14
WE DEPEND UPON A RELATIVELY SMALL GROUP OF CUSTOMERS FOR A LARGE PORTION OF OUR
SALES.
During 2001, our net sales to our five largest customers accounted for
approximately 25.7% of total net sales. No one customer accounted for 10.0% or
more of our net sales during 2001. As of December 31, 2001, one customer
accounted for 10.2% of our net trade accounts receivable. 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 regularly experiences 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. 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.
OUR OPERATING RESULTS COULD BE NEGATIVELY IMPACTED IF OUR SALES ARE CONCENTRATED
IN ANY ONE STYLE OR GROUP OF STYLES.
If any one style or group of similar styles of our footwear were to
represent a substantial portion of our net sales, we could be exposed to risk
should consumer demand for such style or group of styles decrease in subsequent
periods. We attempt to hedge this risk by offering a broad range of products,
and no style comprised over 5.0% of our gross wholesale sales for the years
ended either December 31, 2000 or 2001. However, this may change in the future
and fluctuations in sales of any given style that represents a significant
portion of our future net sales could have a negative impact on our operating
results.
WE RELY ON INDEPENDENT CONTRACT MANUFACTURERS AND, AS A RESULT, ARE EXPOSED TO
POTENTIAL DISRUPTIONS IN PRODUCT SUPPLY.
Our footwear products are currently manufactured by independent contract
manufacturers. During 2001, the top four manufacturers of our manufactured
products produced approximately 51.9% of our total purchases, but none
individually accounted for more than 20.0%. We do not have long-term contracts
with manufacturers and we compete with other footwear companies for production
facilities. We could 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 our customers canceling orders,
refusing to accept deliveries or demanding reductions in purchase prices, any of
which could have a negative impact on our cash flow and harm our business.
If our current manufacturers cease doing business with us, we could
experience an interruption in the manufacture of our products. Although we
believe that we could find alternative manufacturers, we may be unable to
establish relationships with alternative manufacturers that will be as favorable
as the relationships we have now. For example, new manufacturers may have higher
prices, less favorable payment terms, lower manufacturing capacity, lower
quality standards or higher lead times for delivery. If we are unable to provide
products consistent with our standards or the manufacture of our footwear is
delayed or becomes more expensive, our business would be harmed.
OUR INTERNATIONAL SALES AND MANUFACTURING OPERATIONS ARE SUBJECT TO THE RISKS OF
DOING BUSINESS ABROAD, WHICH COULD AFFECT OUR ABILITY TO SELL OR MANUFACTURE OUR
PRODUCTS IN INTERNATIONAL MARKETS, OBTAIN PRODUCTS FROM FOREIGN SUPPLIERS OR
CONTROL THE COSTS OF OUR PRODUCTS.
Substantially all of our net sales during 2001 were derived from sales of
footwear manufactured in foreign countries, with most manufactured in China and,
to a lesser extent, in Italy, the Philippines and Brazil. 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:
- political and social unrest;
- changing economic conditions;
- international political tension and terrorism;
- work stoppages;
- transportation delays;
- loss or damage to products in transit;
- expropriation;
15
- nationalization;
- the imposition of tariffs and trade duties both international
and domestically;
- import and export controls and other nontariff barriers;
- exposure to different legal standards (particularly with
respect to intellectual property);
- compliance with foreign laws; and
- changes in domestic and foreign governmental policies.
In particular, because substantially all of our products are manufactured in
China, adverse change in trade or political relations with China or political
instability in China would severely interfere with the manufacture of our
products and would materially adversely affect our operations.
In addition, if we, or our foreign manufacturers, violate United States or
foreign 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 United States or foreign laws or regulations could include inadequate record
keeping of our imported product, misstatements or errors as to the origin, quota
category, classification, marketing or valuation of our imported products,
fraudulent visas, or labor violations. The effects of these factors could render
our conduct of business in a particular country undesirable or impractical and
have a negative impact on our operating results.
OUR BUSINESS COULD BE HARMED IF OUR CONTRACT MANUFACTURERS, SUPPLIERS OR
LICENSEES VIOLATE LABOR OR OTHER LAWS.
We require our independent contract manufacturers, suppliers and licensees
to operate in compliance with applicable United States and foreign laws and
regulations. Manufacturers are required to certify that neither convicted,
forced or indentured labor (as defined under United States law) nor child labor
(as defined by the manufacturer's country) is used in the production process,
that compensation is paid in accordance with local law and that their factories
are 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, suppliers and licensees,
we do not control them or their labor practices. If one of our independent
contract manufacturers, suppliers or licensees violates labor or other laws or
diverges from those labor practices generally accepted as ethical in the United
States, it could result in adverse publicity for us, damage our reputation in
the United States, or render our conduct of business in a particular foreign
country undesirable or impractical, any of which could harm our business.
OUR PLANNED EXPANSION INVOLVES A NUMBER OF RISKS THAT COULD PREVENT OR DELAY THE
SUCCESSFUL OPENING OF NEW STORES AS WELL AS IMPACT THE PERFORMANCE OF OUR
EXISTING STORES.
Our ability to open and operate new stores successfully depends on many
factors, including, among others, our ability to:
- identify suitable store locations, the availability of which
is outside of our control;
- negotiate acceptable lease terms, including desired tenant
improvement allowances;
- source sufficient levels of inventory to meet the needs of new
stores;
- hire, train and retain store personnel;
- successfully integrate new stores into our existing
operations; and
- satisfy the fashion preferences in new geographic areas.
In addition, many of our new stores will be opened in regions of the United
States in which we currently have few or no stores. The expansion into new
markets may present competitive, merchandising and distribution challenges that
are different from those currently encountered in our existing markets. Any of
these challenges could adversely affect our business and results of operations.
In addition, to the extent our new store openings are in existing markets, we
may experience reduced net sales volumes in existing stores in those markets.
16
MANY OF OUR RETAIL STORES DEPEND HEAVILY ON THE CUSTOMER TRAFFIC GENERATED BY
SHOPPING AND FACTORY OUTLET MALLS OR BY TOURISM.
Many of our concept stores are located in shopping malls and some of our
factory outlet stores are located in manufacturers' outlet malls where we depend
on obtaining prominent locations in the malls and the overall success of the
malls to generate customer traffic. We cannot control the development of new
malls, the availability or cost of appropriate locations within existing or new
malls or the success of individual malls. Some of our concept stores occupy
street locations which are heavily dependent on customer traffic generated by
tourism. Any substantial decrease in tourism resulting from the September 11,
2001 attacks, a downturn in the economy or otherwise, is likely to adversely
affect sales in our existing stores, particularly those with street locations.
The effects of these factors could hinder our ability to open retail stores in
new markets or reduce sales of particular existing stores, which could
negatively affect our operating results.
OUR QUARTERLY REVENUES AND OPERATING RESULTS FLUCTUATE AS A RESULT OF A VARIETY
OF FACTORS, INCLUDING SEASONAL FLUCTUATIONS IN DEMAND FOR FOOTWEAR AND DELIVERY
DATE DELAYS, WHICH MAY RESULT IN VOLATILITY OF OUR STOCK PRICE.
Our quarterly revenues and operating results have varied significantly in
the past and can be expected to fluctuate in the future due to a number of
factors, many of which are beyond our control. For example, sales of footwear
products have historically been somewhat seasonal in nature with the strongest
sales generally occurring in the third and fourth quarters. Also, delays in
scheduling or pickup of purchased products by our domestic customers could
negatively impact our net sales and results of operations for any given quarter.
As a result of these specific and other general factors, our operating results
will likely vary from quarter to quarter and the results for any particular
quarter may not be necessarily indicative of results for the full year. Any
shortfall in revenues or net income from levels expected by securities analysts
and investors could cause a decrease in the trading price of our Class A common
shares.
WE FACE INTENSE COMPETITION, INCLUDING COMPETITION FROM COMPANIES WITH
SIGNIFICANTLY GREATER RESOURCES THAN OURS, AND IF WE ARE UNABLE TO COMPETE
EFFECTIVELY WITH THESE COMPANIES, OUR MARKET SHARE MAY DECLINE AND OUR BUSINESS
COULD BE HARMED.
We face intense competition in the footwear industry from other established
companies. A number of our competitors have significantly greater financial,
technological, engineering, manufacturing, marketing and distribution resources
than we do. Their greater capabilities in these areas may enable them to better
withstand periodic downturns in the footwear industry, compete more effectively
on the basis of price and production and more quickly develop new products. In
addition, new companies may enter the markets in which we compete, further
increasing competition in the footwear industry.
We believe that our ability to compete successfully depends on a number of
factors, including the style and quality of our products and the strength of our
brand name, as well as many factors beyond our control. We may not be able to
compete successfully in the future, and increased competition may result in
price reductions, reduced profit margins, loss of market share, and inability to
generate cash flows that are sufficient to maintain or expand our development
and marketing of new products, which would adversely impact the trading price of
our Class A common shares.
OBTAINING ADDITIONAL CAPITAL TO FUND OUR OPERATIONS AND FINANCE OUR GROWTH COULD
MAKE IT DIFFICULT FOR US TO SERVICE OUR DEBT OBLIGATIONS.
If our working capital needs exceed our current expectations, we may need to
raise additional capital through public or private equity offerings or debt
financings. If we cannot raise needed funds on acceptable terms, we may not be
able to successfully execute our growth strategy, take advantage of future
opportunities or respond to competitive pressures or unanticipated requirements.
To the extent we raise additional capital by issuing debt, it may become
difficult for us to meet debt service obligations. To the extent we raise
additional capital by issuing equity securities, our stockholders may experience
substantial dilution. Also, any new equity securities may have greater rights,
preferences or privileges than our existing Class A common shares.
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. The
loss of the services of any of these individuals or any other key employee could
harm us. Our future success also depends on our ability to identify, attract and
retain additional qualified personnel. Competition for employees in our industry
is intense and we may not be successful in attracting and retaining such
personnel.
17
OUR TRADEMARKS, DESIGN PATENTS AND OTHER INTELLECTUAL PROPERTY RIGHTS MAY NOT BE
ADEQUATELY PROTECTED OUTSIDE THE U.S.
We believe that our trademarks, design patents and other proprietary rights
are important to our success and our competitive position. We devote substantial
resources to the establishment and protection of our trademarks and design
patents on a worldwide basis. In the course of our international expansion, we
have, however, experienced conflicts with various third parties that have
acquired or claimed ownership rights in certain trademarks similar to ours or
have otherwise contested our rights to our trademarks. We have in the past
successfully resolved these conflicts through both legal action and negotiated
settlements, none of which we believe has had a material impact on our financial
condition and results of operations. Nevertheless, we cannot assure you that the
actions we have taken to establish and protect our trademarks and other
proprietary rights outside the U.S. will be adequate to prevent imitation of our
products by others or to prevent others from seeking to block sales of our
products as a violation of the trademarks and proprietary rights of others.
Also, we cannot assure you that others will not assert rights in, or ownership
of, trademarks, designs and other proprietary rights of ours or that we will be
able to successfully resolve these types of conflicts to our satisfaction. In
addition, the laws of certain foreign countries may not protect proprietary
rights to the same extent as do the laws of the U.S. We may face significant
expenses and liability in connection with the protection of our intellectual
property rights outside the U.S. and if we are unable to successfully protect
our rights or resolve intellectual property conflicts with others, our business
or financial condition may be adversely affected.
OUR ABILITY TO COMPETE COULD BE JEOPARDIZED IF WE ARE UNABLE TO PROTECT OUR
INTELLECTUAL PROPERTY RIGHTS OR IF WE ARE SUED FOR INTELLECTUAL PROPERTY
INFRINGEMENT.
We use trademarks on nearly all of our products and believe that having
distinctive marks that are readily identifiable is an important factor in
creating a market for our goods, in identifying us, and in distinguishing our
goods from the goods of others. We consider our Skechers(R) and S Design(R)
trademarks to be among our most valuable assets and we have registered these
trademarks in many countries. In addition, we own many other trademarks, which
we utilize in marketing our products. We continue to vigorously protect our
trademarks against infringement. We also have a number of design patents
covering components and features used in various shoes. We believe that our
success depends primarily upon skills in design, research and development,
production and marketing rather than upon our patent position. However, we have
followed a policy of filing applications for United States and foreign patents
on designs that we deem valuable.
We believe that our patents and trademarks are generally sufficient to
permit us to carry on our business as presently conducted. We cannot, however,
know whether we will be able to secure patents or trademark protection for our
intellectual property in the future or that protection will be adequate for
future products. Further, we face the risk of ineffective protection of
intellectual property rights in the countries where we source and distribute our
products. We have been sued for patent and trademark infringement and cannot be
sure that our activities do not and will not infringe on the proprietary rights
of others. If we are compelled to prosecute infringing parties, defend our
intellectual property, or defend ourselves from intellectual property claims
made by others, we may face significant expenses and liability which could
negatively impact our business or financial condition.
ENERGY SHORTAGES, NATURAL DISASTERS OR A DECLINE IN ECONOMIC CONDITIONS IN
CALIFORNIA COULD INCREASE OUR OPERATING EXPENSES OR ADVERSELY AFFECT OUR SALES
REVENUE.
A substantial portion of our operations are located in California, including
37 of our retail stores, our headquarters in Manhattan Beach and our domestic
distribution center in Ontario. Because California has and may in the future
experience energy and electricity shortages, we may be subject to increased
operating costs as a result of higher electricity and energy rates and may be
subject to rolling blackouts which could interrupt our business. Any such impact
could be material and adversely affect our profitability. In addition, because a
significant portion of our net sales is derived from sales in California, a
decline in the economic conditions in California, whether or not such decline
spreads beyond California, could materially adversely affect our business.
Furthermore, a natural disaster or other catastrophic event, such as an
earthquake affecting California, could significantly disrupt our business. We
may be more susceptible to these issues than our competitors whose operations
are not as concentrated in California.
ONE PRINCIPAL STOCKHOLDER IS ABLE TO CONTROL SUBSTANTIALLY ALL MATTERS REQUIRING
A VOTE OF OUR STOCKHOLDERS AND HIS INTERESTS MAY DIFFER FROM THE INTERESTS OF
OUR OTHER STOCKHOLDERS.
As of December 31, 2001, Robert Greenberg, Chairman of the Board and Chief
Executive Officer, beneficially owned 74.4% of our outstanding Class B common
shares and members of Mr. Greenberg's immediate family beneficially owned the
remainder of our outstanding Class B common shares. The holders of Class A
common shares and Class B common shares have identical rights except
18
that holders of Class A common shares are entitled to one vote per share while
holders of Class B common shares are entitled to ten votes per share on all
matters submitted to a vote of our stockholders. As a result, as of December 31,
2001, Mr. Greenberg held approximately 69.5% of the aggregate number of votes
eligible to be cast by our stockholders and together with shares held by other
members of his immediate family held approximately 93.4% 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 our Class A common shares. The differential in the voting rights
may adversely affect the value of our Class A common shares to the extent that
investors or any potential future purchaser view the superior voting rights of
our Class B common shares 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 common shares
and Class B common shares, 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 shares at a premium over the market price
of the Class A common shares and may adversely affect the market price of the
Class A common shares.
SPECIAL NOTE ON FORWARD LOOKING STATEMENTS AND REPORTS PREPARED BY ANALYSTS.
This Form 10-K contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, including statements with
regards to our revenues, earnings, spending, margins, cash flow, orders,
inventory, products, actions, plans, strategies and objectives. Forward-looking
statements include, without limitation, any statement that may predict,
forecast, indicate or simply state future results, performance or achievements,
and may contain the words "believe," "anticipate," "expect," "estimate,"
"intend," "plan," "project," "will be," "will continue," "will," "result,"
"could," "may," "might," or any variations of such words with similar meanings.
Any such statements are subject to risks and uncertainties that would cause our
actual results to differ materially from those which are management's current
expectations or forecasts. Such information is subject to the risk that such
expectations or forecasts, or the assumptions underlying such exceptions or
forecasts, become inaccurate. 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 five premises in Manhattan Beach, California, and consist of an aggregate of
approximately 110,000 square feet. We own and lease portions of our corporate
headquarters and administrative offices. The leased property expires between
August 2002 and February 2008, with options to extend in some cases,
the current aggregate annual rent for the leased property is approximately $1.2
million.
Our distribution center consists of four facilities located in Ontario,
California. The three leased facilities aggregate approximately 1,176,000 square
feet, with an annual base rental of approximately $5.2 million. The leased
property expires between August 2002 and May 2011, and contains rent escalation
provisions. The owned distribution facility is approximately 264,000 square
feet.
All of our retail stores and showrooms are leased with terms expiring
between January 2003 and August 2012. The leases provide for rent escalations
tied to either increases in the lessor's operating expenses or fluctuations in
the consumer price index in the relevant
19
geographical area, and in some cases a percentage of the store's gross sales in
excess of the base annual rent. Total rent expenses related to our retail stores
and showrooms was $9.3 million for the year ended December 31, 2001.
In February 2001, we completed the purchase of three adjacent properties
located in Manhattan Beach, California for a total of $4.5 million. 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.
We also lease all of our administrative offices, retail stores and showrooms
located in France, Germany, Switzerland, and the United Kingdom. The leased
property expires at various dates between July 2002 and March 2016. Total rent
for this leased property aggregated approximately $1.4 million during 2001.
ITEM 3. LEGAL PROCEEDINGS
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, and on June 20,
2001, an order was issued dismissing the case in its entirety with leave to
amend. The class filed an amended complaint on or about August 3, 2001, and on
September 26, 2001, Skechers filed a motion to dismiss the amended complaint in
its entirety. In response to the motion, and after discussions between class
counsel and counsel for defendants, the class agreed to dismiss with prejudice
the entire consolidated class action as to Skechers, its two named officers and
defendants and the underwriters. The class agreed to dismiss with prejudice
without any settlement from defendants. Thus, the stipulation had no material
impact on operations or financial results. A stipulation of dismissal with
prejudice was executed by the parties in late December 2001. The court signed
the stipulation without modification and entered the order of dismissal on
January 30, 2002.
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. In February 2002, all parties
agreed to settlement in principle and as of this filing are reducing the
settlement agreement to writing. The terms of the settlement are confidential.
Notwithstanding, the terms will not have a material impact on the financial
position or results of operations of Skechers.
20
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.
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 2001.
21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Class A Common Stock began trading on the New York Stock Exchange on
June 9, 1999 after we completed the initial public offering of 7,000,000 shares
of our Class A Common Stock at $11.00 per share. Our 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 our Class A Common Stock.
HIGH LOW
YEAR ENDED DECEMBER 31, 2001
First Quarter............................. $32.20 $14.50
Second Quarter............................ 40.30 22.80
Third Quarter............................. 29.40 11.33
Fourth Quarter............................ 15.05 10.00
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 25, 2002, there were 104 holders of record of our Class A
Common Stock (including holders who are nominees for an undetermined number of
beneficial owners) and 9 holders of record of our 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, we 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, our
earnings, since such initial election, were included in the taxable income of
our stockholders for federal and state income tax purposes, and we were not
subject to income tax on such earnings, other than franchise and net worth
taxes. Prior to the closing of the initial public offering of our Class A common
shares on June 9, 1999, we terminated our S Corporation status, and since then
we have been treated for federal and state income tax purposes as a corporation
under Subchapter C of the Code and, as a result, are subject to state and
federal income taxes. By reason of our treatment as an S Corporation for federal
and state income tax purposes, we, since inception, have provided to our
stockholders funds for the payment of income taxes on our earnings as well as
our conversion from an S Corporation to a C Corporation during 1999. We declared
distributions relating to our S Corporation status of $35.4 million and $7.9
million in 1999 and 1998, respectively. Purchasers of shares in the initial
public offering of our Class A common shares on June 9, 1999 did not receive any
portion of these S Corporation distributions. Since the termination of our S
Corporation status earnings have been and will be retained for the foreseeable
future in the operations of our business. We have not declared or paid any cash
dividends on our Class A common shares and do not anticipate paying any cash
dividends in the foreseeable future. Our current policy is to retain all of our
earnings to finance the growth and development of our business.
22
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, 2001.
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
YEARS ENDED DECEMBER 31,
------------------------
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
STATEMENT OF EARNINGS DATA:
Net sales................................. $183,827 $372,680 $424,601 $675,036 $960,385
Gross profit.............................. 68,723 154,580 174,608 284,225 554,205
Operating expenses:
Selling................................ 21,584 49,983 57,332 77,451 111,401
General and administrative............. 32,397 71,461 79,114 125,827 205,989
Earnings from operations.................. 15,636 33,991 38,830 81,263 88,487
Interest expense.......................... 4,186 8,631 6,554 9,230 13,852
Earnings before income taxes.............. 11,413 25,121 32,691 72,351 75,955
Net earnings.............................. 11,023 24,471 24,056 43,751 47,270
PRO FORMA OPERATIONS DATA:(1)
Earnings before income taxes.............. $ 11,413 $ 25,121 $ 32,691 $ 72,351 $ 75,955
Income taxes.............................. 4,565 10,048 12,880 28,600 28,685
Net earnings.............................. 6,848 15,073 19,811 43,751 47,270
Net earnings per share:(2)
Basic.................................. $ 0.25 $ 0.54 $ 0.62 $ 1.24 $ 1.30
Diluted................................ $ 0.23 $ 0.49 $ 0.60 $ 1.20 $ 1.24
Weighted average shares:(2)
Basic.................................. 27,814 27,814 31,765 35,142 36,409
Diluted................................ 29,614 30,610 33,018 36,563 38,059
AS OF DECEMBER 31,
------------------
BALANCE SHEET DATA: 1997 1998 1999 2000 2001
------------------- ---- ---- ---- ---- ----
Working capital................ $17,081 $ 23,106 $ 65,003 $ 93,305 $139,972
Total assets................... 90,881 146,284 177,914 303,400 407,486
Total debt..................... 39,062 70,933 33,950 85,321 115,931
Stockholders' equity........... 11,125 27,676 86,000 134,046 199,016
- ----------
(1) Reflects adjustments for federal and state income taxes as if Skechers had
been taxed as a C Corporation rather than as an S Corporation for periods
prior to its initial public offering on June 9, 1999.
(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 1996
through 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.
23
OVERVIEW
We design, market and sell contemporary footwear for men, women and children
under the Skechers brand. Our footwear is sold through a wide range of
department stores and leading specialty retail stores, a growing network of our
own retail stores and our e-commerce website. Our objective is to continue to
profitably grow our domestic operations, while leveraging our brand name to
expand internationally.
We generate revenues from three principal sources:
- WHOLESALE. We sell footwear directly to department stores and specialty
retail stores both domestically and internationally.
- RETAIL. We own and operate our own retail stores both domestically and,
on a smaller scale, internationally through three integrated retail
formats. Our retail formats are as follows:
Concept Stores. Our concept stores are located in marquee street
locations and high performing regional malls, promote awareness of
the Skechers brand and showcase a broad assortment of our in-season
footwear styles.
Factory Outlet Stores. Our factory outlet stores are generally
located in manufacturers' outlet centers and provide opportunities
to sell an assortment of in-season, discontinued and excess
merchandise at lower price points.
Warehouse Outlet Stores. Our freestanding warehouse outlet stores
appeal to our most value conscious customers and enable us to
liquidate excess merchandise, discontinued lines and odd-size
inventory in a cost-efficient manner.
- DISTRIBUTORS. Internationally, we sell our footwear to our foreign
distributors who distribute such footwear to department stores and
specialty retail stores in Europe, Asia, Latin America, South America
and numerous other countries and territories.
The substantial portion of our revenues are derived from domestic wholesale
sales. Typically, retail sales achieve higher gross margins as a percentage of
net sales than wholesale sales. Sales through foreign distributors result in
lower gross margins as a percentage of net sales than retail or wholesale sales.
None of our domestic retail sales, international wholesale sales, international
retail sales, or international distributor sales comprised more than 10% of our
consolidated net sales for either fiscal 1999, 2000 or 2001.
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 secure customer accounts and better manage the growth of
the business. We seek wholesale accounts that we believe can best support the
Skechers brand name in the market as part of our efforts to expand our wholesale
distribution. We seek to selectively open retail stores in high profile, high
traffic locations in major metropolitan areas both domestically and
internationally. Domestically, we are currently planning to open approximately
10 to 15 retail stores during fiscal 2002 as compared to 26 in fiscal 2001. We
seek to increase the number of international wholesale accounts which we sell
directly to, thereby reducing our reliance on foreign distributors and may seek
to open additional international retail stores on a selected basis.
We have realized rapid growth since inception, increasing net sales at a
compound annual growth rate of 40.1% from $90.8 million in 1994 to $960.4
million in 2001. This momentum continued into 2001 with a 42.3% increase in
sales and an 8.0% increase in net earnings compared to 2000. However, given the
current global economic environment and the world events triggered on September
11, 2001, we currently do not anticipate achieving similar sales growth during
the year ending December 31, 2002. Based on our current estimates, we anticipate
sales levels during the first six months of fiscal 2002 to be consistent with
the first six months of fiscal 2001, and any sales growth to be realized during
the second half of 2002. These estimates may be affected by the continued threat
of terrorist attacks throughout the world and any military action taken by the
United States and other nations that could cause additional significant
disruption to commerce throughout the world.
As our sales growth accelerated, we focused on investing in our
infrastructure to support continued expansion in a disciplined manner. During
2000, we expanded our distribution and administrative facilities, hired
additional personnel, developed product sourcing and quality control offices in
China and Taiwan, upgraded our management information systems, opened additional
retail stores and expanded the offerings available through our web site. During
2001, we made planned infrastructure additions to support the addition of 26 new
domestic retail stores, commenced our international expansion with the
establishment of international subsidiaries in the United Kingdom, France and
Germany to manage our direct selling efforts in those areas, opened our first
three
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international flagship retail stores and increased the number of product lines
to expand the breadth of our product offerings. The fixed costs incurred during
this expansion period have not yet been leveraged over a full year's sales. We
established this infrastructure to achieve 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 our anticipated sales growth. For
example, due in large part to the slowdown in the global economy, our net sales
in 2001 were lower than anticipated. This lower level of sales adversely
affected our operating results for 2001 and could continue to do so in 2002 and
beyond.
Our gross margins have improved annually from 41.1% in 1999 to 42.1% in 2000
to 42.3% in 2001. During the fourth quarter ended December 31, 2001, our gross
margin was 39.7% compared to 43.3% in the same period during 2000. Given the
continuing weak retail environment, we currently anticipate that margins during
the first half of fiscal 2002 will be consistent with gross margins during the
fourth quarter of fiscal 2001 and, if any, improvement to take place during the
second half of fiscal 2002. Operating margin as a percentage of net sales
increased from 9.1% in 1999 to 12.0% in 2000 but decreased to 9.2% during 2001.
Increasing sales and maintaining or improving gross margins and operating
margins depends on various factors, including, strength of our brand name,
competitive conditions and our ability to efficiently manage sales through all
distribution channels. 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 can not assure you that the rate of growth will not decline in future
periods or that we will improve or maintain gross margins or operating margins.
Given the increase in 2001 of selling and general and administrative
expenses on both an absolute dollar basis and as a percentage of net sales, and
given the state of the global economy following the events of September 11,
2001, we initiated various cost cutting measures in the fourth quarter of 2001
to better leverage our cost infrastructure over our newly expanded operations.
From a selling expense standpoint, we reorganized our sales force by
consolidating some regions, which resulted in staff reductions. We also
eliminated our mail order operations and related selling expenses associated
with the mail order catalog, and we estimate the annual savings from these
actions will be approximately $6.0 million in 2002. From the general and
administrative expense standpoint, we eliminated some administrative positions
and reduced temporary staff at our distribution center without reducing our
order fulfillment rate.
Notwithstanding our cost cutting measures, we remain committed to the
overall marketing strategy that has been largely responsible for the increase in
the market presence, product visibility and product demand over the past three
years. We have and continue to increase 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 8% to 10% of
annual net sales in the marketing of Skechers footwear through advertising,
promotions, public relations, trade shows and other marketing efforts.
We believe that selective licensing of the Skechers brand name to
non-footwear-related manufacturers may broaden and enhance the Skechers image
without requiring us to expend significant capital investments or incur
significant incremental operating expenses. Although we have licensed certain
manufacturers to produce and market certain Skechers products on a limited
basis, to date we have not derived any significant royalty income from these
licensing arrangements. Royalty income is recognized as revenue when earned. We
believe that revenues from licensing agreements will not be a material source of
growth for us in the near term; however, we believe that licensing arrangements
may present attractive long-term opportunities with minimal near-term costs.
We contract with third parties for the manufacture of all our products. We
do not own or operate any manufacturing facilities. In 2001, the top four
suppliers of our products accounted for 51.9% of our total purchases, but no one
manufacturer accounted for more than 20.0%. To date, substantially all products
are purchased in U.S. dollars, but this may not continue to be the case. We
believe the use of independent manufacturers increases our production
flexibility and capacity yet at the same time allows us to substantially reduce
capital expenditures and avoid the costs of managing a large production work
force. Substantially all of our products are produced in China. We finance our
production activities in part through the use of interest-bearing open purchase
arrangements with certain of our Asian suppliers. These facilities currently
bear interest at a rate between 0.5% and 1.5% with financing for 30 to 60 days.
We believe that the use of these arrangements affords us additional liquidity
and flexibility.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO THE YEAR ENDED DECEMBER 31, 2000
Net Sales
Net sales for 2001 increased 42.3% to $960.4 million compared to $675.0
million in 2000. The increase in net sales was due in part to a 37.0% increase
in domestic wholesale revenues over 2000 levels as a result of increased sales
in all product lines, primarily Women's Sport and Kids lines, the introduction
of three new product lines during 2001, and additional styles added within each
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product line. Domestic wholesale volume increased to 42.1 million pairs in 2001
from 29.4 million pairs in 2000. Domestic retail sales increased 50% over 2000
levels largely due to the addition of 26 retail stores during 2001. Net sales
from our direct mail and web based distribution channels remained consistent in
2001 as compared to 2000. However, in October 2001, we elected to discontinue
our mail order and catalog operations, which represented less 1% of net sales in
2001, although we continue to offer a selected assortment of merchandise through
our interactive website.
During 2001, total international sales increased 85.7% over 2000 levels.
International sales consist of distributor sales, which increased 47.4% due to
continued acceptance of our product offerings in the international marketplace.
International wholesale revenues increased substantially from nominal levels in
2000 due to marketing and advertising campaigns in support of the establishment
of our three international subsidiaries located in the United Kingdom, France
and Germany, where we began to sell direct to department stores and specialty
retailers in 2001. During 2001, we generated our first international retail
sales as we opened our first three international flagship retail stores located
in the United Kingdom, France and Germany.
Gross Profit
Gross profit for 2001 was $406.2 million, an increase of 42.9% over $284.2
million in 2000. Gross margin was 42.3% for 2001 compared to 42.1% for 2000. The
slight margin increase was the result of reduced cargo costs partly offset by
reduced margins during the three months ended December 31, 2001 for price
concessions given to our wholesale customers and price reductions at our factory
outlet and warehouse outlet stores to help stimulate inventory sell through at
the retail level.
Selling expenses
Selling expenses for 2001 were $111.4 million, an increase of 43.8% over
last year's $77.5 million. Selling expenses as a percent of net sales increased
slightly to 11.6% from 11.5% in 2000. The increase in the level of spending was
primarily due to increased advertising in both print and television media and
additional advertising to support the increase in sales activities in the United
Kingdom, Germany and France where we commenced selling direct to department
stores and specialty retailers. During 2001 advertising expenses were $86.6
million, or 9.0% of net sales, compared to $59.1 million, or 8.8% of net sales
in 2000.
General and administrative expenses
General and administrative expenses for 2001 were $206.0 million compared to
$125.8 million in 2000. General and administrative expenses as a percentage of
net sales was 21.4% in 2001 compared to 18.6% in 2000. The increase in general
and administrative expenses in absolute dollars and as a percentage of net sales
was due to planned infrastructure additions to support the 26 domestic retail
stores added during 2001 and to establish operating entities, and flagship
retail stores, in the United Kingdom, France and Germany to support our direct
selling efforts in those countries. In addition, we increased our distribution
capacity with facility and capital asset additions and enhanced our information
systems to support the increase in sales volume.
Interest expense
Interest expense increased to $13.9 million in 2001 from $9.2 million in
2000. The increase was due to increased short-term borrowings to support our
working capital requirements and retail store additions and increased capital
asset financing to support the increase in sales volume and capacity expansion.
Other income
Other income increased to $1.3 million in 2001 compared to $318,000 in 2000.
The increase in other income is due to rental income related to the leasing of
offices at our administrative office building and legal settlements, partially
offset by the disposal of fixed assets. We expect rental income to decrease
during 2002 as tenant leases expire.
Income taxes
The effective tax rate in 2001 was 37.8% compared to 39.5% in 2000. The
decrease in the effective tax rate is due to changes in income in differing tax
jurisdictions as a result of our international expansion. 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.
26
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% from $424.6 million in 1999. The increase was due in large part to a 59%
increase in our domestic wholesale revenues over 1999 levels. In addition, we
realized a 51.5% increase in domestic wholesale units sold to 29.4 million units
in 2000 from 19.4 million units in 1999. The increase in the domestic wholesale
business is primarily due to expansion of the domestic sales force, continued
consumer acceptance of our 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. Domestic retail sales for 2000 increased 50% from 1999
levels due to increased sales at stores open for at least one year and
from the addition of 10 new locations added during 2000. Net sales from our
direct mail and web based distribution channels increased substantially in 2000
largely due to an increase in the number of direct mailings and an increase in
the circulation of the mailings.
Fiscal 2000 international sales consisted almost entirely of sales through
distributors and increased 48.4% over 1999 levels primarily due to increased
brand acceptance and increased advertising campaigns. During 2000, we began our
international direct selling efforts, through which we sold direct to department
stores and specialty retainers and therefore generated nominal sales in 2000.
Gross profit
In 2000, gross profit increased to $284.2 million, a 62.8% increase from
$174.6 million in 1999. Gross margin was 42.1% in 2000 compared to 41.1% in
1999. The increase in gross margin was due to (i) an increase in the proportion
of sales derived from our women's footwear line, which have a higher gross
margin than the men's footwear line, (ii) fewer markdowns as a percentage of
sales and (iii) increased sales at retail.
Selling expenses
Selling expenses were $77.5 million in 2000, an increase of 35.1% over $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. During 2000, advertising expenses were $59.1
million, or 8.8% of net sales, compared to $47.4 million, or 11.2% of net sales
in 1999.
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 at 18.6% for both 2000 and 1999. The increase in absolute
dollars was primarily due to additional personnel costs reflected in the form of
additional salary, wages and temporary help costs to support the higher level of
sales, and increased warehousing and distribution costs associated with
increased sales volume. In addition, we realized increased operating costs from
the 10 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.
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 gains from foreign exchange rate fluctuations.
27
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.
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,
2001 was $140.0 million, an increase of $46.7 million over working capital of
$93.3 million at December 31, 2000. The increase in working capital was
primarily due to the increase in accounts receivable, inventory, and prepaid and
other current assets consisting primarily of prepaid income taxes offset by
increased short-term borrowings and to a lesser extent accounts payable and
accrued expenses.
Inventories increased $46.0 million or 41.1% to $157.7 million at December
31, 2001, from $111.7 million at December 31, 2000. Our sales backlog of $222.2
million at December 31, 2001 is consistent with the level at December 31, 2000.
Our commitment to inventory at December 31, 2001, which includes inventory on
hand, inventory in transit (for which we have title), and merchandise in
process, for which we do not have title, increased slightly over our commitment
to inventory at December 31, 2000. Also, the increase in our inventories
reflects a greater breadth of products and support for the expansion of our
international operations. At December 31, 2001, we had purchase commitments of
approximately $89.4 million.
Net cash used in operating activities for the year ended December 31, 2001
was $1.7 million, compared to cash used in operating activities of $1.0 million
for the same period last year. The increase in cash used in operating activities
was primarily due to increases in receivables, inventories, and prepaid taxes.
Net cash used in investing activities was $31.5 million for the year ended
December 31, 2001, an increase of $9.7 million over the $21.8 million for the
year ended December 31, 2000. The increase in cash used in investing activities
was due to increased capital expenditures related to the addition of 26 domestic
retail stores, the addition of three international stores, capital expenditures
related to establishing our international operating units, and the acquisition
of real properties in Manhattan Beach, California that is expected to be
converted into an administrative office facility.
Net cash provided by financing activities for the year ended December 31,
2001 was $40.0 million, compared to $20.8 million for the year ended December
31, 2000. The net 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 and our employee stock purchase plan, partially
offset by reductions in long-term debt.
In July 2001, we renegotiated our line of credit facility which now provides
for borrowings of up to $150.0 million, with actual borrowings limited to
available collateral and certain limitations on total indebtedness
(approximately $54.2 million of availability as of December 31, 2001) with CIT
Group, a subsidiary of TYCO, as agents for the lenders. At December 31, 2001,
there was approximately $84.2 million outstanding under the revolving line of
credit. The revolving line of credit bears interest at prime rate (4.75% at
December 31, 2001) minus .5%. Interest on the line of credit is payable monthly
in arrears. The revolving line of credit expires on December 31, 2003. The
revolving line of credit provides a sub-limit for letters of credit of up to
$30.0 million to finance our foreign purchases of merchandise inventory. As of
December 31, 2001, we had approximately $5.4 million of letters of credit under
the revolving line of credit. In February 2002, we borrowed an additional $ 43.0
million under the line of credit. The credit facility contains covenants
indicating that stockholders' equity shall not decrease by more than 20% in any
calendar quarter, and limits the payment of dividends if we are in default of
any provision of the agreement. We were in compliance with these covenants as of
December 31, 2001.
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 at a rate between 0.5%
and 1.5% for 30 to 60 days financing, depending on the factory.
We believe that anticipated cash flows 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 necessary to fund our
anticipated working capital and
28
capital requirements through fiscal 2002. 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 financings. We cannot assure you that additional financing will be
available or that, if available, it can be obtained on terms favorable to our
stockholders and us. 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.
CRITICAL ACCOUNTING POLICIES
Use of Estimates. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Specifically, management must make
estimates in the following areas:
Allowance for bad debts, returns, and customer chargebacks. We insure selected
customer account balances both greater than $200,000 and accepted by the
insurance company should our customer not pay. We also provide a reserve against
our receivables for estimated losses that may result from our customers'
inability to pay, and disputed and returned items. We determine the amount of
the reserve by analyzing known uncollectible accounts, aged receivables,
economic conditions in the customers' country or industry, historical losses and
our customers' credit-worthiness. Amounts later determined and specifically
identified to be uncollectible are charged or written off against this reserve.
To minimize the likelihood of uncollectibility, customers' credit-worthiness is
reviewed periodically based on external credit reporting services and our
experience with the account and adjusted accordingly. Should a customer's
account become past due, we generally place a hold on the account and
discontinue further shipments to that customer, minimizing further risk of loss.
The likelihood of a material loss on an uncollectible account would be mainly
dependent on deterioration in the overall economic conditions in a particular
country or environment. Reserves are fully provided for all probable losses of
this nature. Gross trade accounts receivable balance was $127.4 million and the
allowance for doubtful accounts was $7.1 million at December 31, 2001.
Inventory adjustments. Inventories are stated at lower of cost or market. We
review our inventory on a regular basis for excess and slow moving inventory
based on prior sales and net realizable value. The likelihood of any material
inventory write-down is dependent primarily on consumer demand and competitor
product offerings. Inventories were stated at $157.7 million at December 31,
2001.
Valuation of intangible and other long-lived assets. When circumstances warrant,
we assess the impairment of intangible and other long-lived assets that require
us to make assumptions and judgments regarding the carrying value of these
assets. The assets are considered to be impaired if we determine that the
carrying value may not be recoverable based upon our assessment of the following
events or changes in circumstances:
- the asset's ability to continue to generate income;
- loss of legal ownership or title to the asset;
- significant changes in our strategic business objectives and
utilization of the asset(s); or
- the impact of significant negative industry or economic trends
If the assets are considered to be impaired, the impairment we recognize is the
amount by which the carrying value of the assets exceeds the fair value of the
assets. In addition, we base the useful lives and related amortization or
depreciation expense on our estimate of the period that the assets will generate
revenues or otherwise be used by us. If a change were to occur in any of the
above-mentioned factors or estimates, the likelihood of a material change in our
reported results would increase.
Litigation reserves. Estimated amounts for claims that are probable and can be
reasonably estimated are recorded as liabilities in the consolidated balance
sheets. The likelihood of a material change in these estimated reserves would be
dependent on new claims as they may arise and the favorable or unfavorable
outcome of the particular litigation. Both the amount and range of loss on the
29
remaining pending litigation is uncertain. As such, we are unable to make a
reasonable estimate of the liability that could result from unfavorable outcomes
in litigation. As additional information becomes available, we will assess the
potential liability related to our pending litigation and revise our estimates.
Such revisions in our estimates of the potential liability could materially
impact our results of operation and financial position.
Valuation of deferred income taxes. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to be realized.
The likelihood of a material change in our expected realization of these assets
depends on future taxable income, and the effectiveness of our tax planning and
strategies among the various tax jurisdictions in which we operate.
INFLATION
We do 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 our sales or profitability. However, we 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 our products are manufactured, we do not believe that inflation has had a
material effect on our sales or profitability. While we have been able to offset
our foreign product cost increases by increasing prices or changing suppliers in
the past, we cannot assure you that we will be able to continue to make such
increases or changes in the future.
EXCHANGE RATES
We receive U.S. dollars for substantially all of our product sales and our
royalty income. Inventory purchases from offshore contract manufacturers are
primarily denominated in U.S. dollars; however, purchase prices for our 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 our cost of goods in the future. During 2001 and 2000, exchange rate
fluctuations did not have a material impact on our inventory costs. We do
not engage in hedging activities with respect to such exchange rate risk.
ITEM 7(a) QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
We do not hold any derivative securities.
Market risk is the potential loss arising from the adverse changes in market
rates and prices, such as interest rates and foreign currency exchange rates.
Changes in interest rates and, in the future, changes in foreign currency
exchange rates have and will have an impact on our results of operations.
Interest rate fluctuations. At December 31, 2001, approximately $84.2 million of
our outstanding borrowings are subject to changes in interest rates; however, we
do not use derivatives to manage this risk. This exposure is linked to the prime
rate of interest. We believe that moderate changes in the prime rate will not
materially affect our operating results or financial condition. For example, a
1% change in interest rates would result in approximately $842,000 annual impact
on pretax income (loss) based upon those outstanding borrowing at December 31,
2001.
Foreign exchange rate fluctuations. We face market risk to the extent that
changes in foreign currency exchange rates affect our non-U.S. dollar functional
currency foreign subsidiary's assets and liabilities. In addition, changes in
foreign exchange rates may affect the value of our inventory commitments. Also,
inventory purchases of our products may be impacted by fluctuations in the
exchange rates between the U.S. dollar and the local currencies of the contract
manufacturers, which could have the effect of increasing cost of goods sold in
the future. We manage these risks by primarily denominating these purchases and
commitments in U.S. dollars. We do not engage in hedging activities with respect
to such exchange rate risks.
FUTURE ACCOUNTING CHANGES
Effective January 1, 2001, we adopted Statement of Financial Accounting
Standards No. 133 ("SFAS 133"), Accounting for Derivative Instruments and
Hedging Activities. As a result, we recognize financial instruments, such as
foreign currency forward contracts, at fair value regardless of the purpose or
intent for holding the instrument. Changes in the fair value of derivative
financial instruments are either recognized periodically through the statement
of earnings or through stockholders' equity as a component of accumulated other
comprehensive income or loss. The classification depends on whether the
derivative financial instrument qualifies
30
for hedge accounting, and if so, whether it qualifies as a fair value hedge or
cash flow hedge. Generally, changes in fair values of derivatives designated as
fair value hedges are matched in the statement of earnings against the
respective gain or loss relating to the hedged items. Changes in fair values of
derivatives accounted for as cash flow hedges, to the extent they are effective
as hedges, are recorded in accumulated other comprehensive income net of
deferred taxes. Changes in fair values of derivatives not qualifying as hedges
are currently reported in earnings. The implementation of this standard did not
have a significant impact on our financial statements.
During April 2001, the Emerging Issues Task Force ("EITF") issued EITF No.
00-14, Accounting for Certain Sales Incentives, and EITF No. 01-9, Accounting
for Consideration Given by a Vendor to a Customer (including A Reseller of the
Vendor's Products), which are effective for the first quarter beginning after
December 15, 2001. These EITF's prescribe guidance regarding the timing of
recognition and income statement classification of costs incurred for certain
sales incentive programs to retailers and end consumers. We expect that the
adoption of EITF No. 00-14 and EITF No. 01-9 will not have a material impact on
our financial position or results of operations.
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 141 ("SFAS 141"), Business Combinations, and Statement of Financial
Accounting Standards No. 142 ("SFAS 142"), Goodwill and Other Intangible Assets.
SFAS 141 requires that the purchase method be used for all business combinations
initiated after June 30, 2001. SFAS 142 requires that goodwill and intangible
assets with indefinite useful lives no longer be amortized to earnings, but
instead be reviewed for impairment in accordance with the provisions of SFAS
142. The amortization of goodwill and intangible assets with indefinite useful
lives ceases upon adoption of SFAS 142 which is effective for fiscal years
starting after December 15, 2001. We are in the process of quantifying the
anticipated impact of adopting the provisions of SFAS 142, which is not expected
to be material.
In October 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 144 ("SFAS 144"), Accounting for
the Impairment or Disposal of Long-Lived Assets, which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
While SFAS 144 supersedes Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of, it retains many of the fundamental provisions of that statement.
The standard is effective for fiscal years beginning after December 15, 2001. We
expect that the adoption of SFAS 144 will not have a material impact on our
financial position or results from 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.
31
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 2001 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 2001 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 2001 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 2001 fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Consolidated financial statements and schedules required to be filed
hereunder are indexed on Page F-1 hereof.
(b) Reports on Form 8-K -- There were no reports on Form 8-K filed during
the last quarter of the fiscal year ended December 31, 2001.
(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).
10.1(a) Amendment No. 1 to Amended and Restated 1998 Stock Option,
Deferred Stock and Restricted Stock Plan (incorporated by
reference to exhibit number 4.4 of the Registrant's
Registration Statement on Form S-8 (File No. 333-71114),
filed with the Securities and Exchange Commission on
October 5, 2001).
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).
33
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
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 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 (incorporated by
reference to exhibit number 10.10(e) of the Registrant's
Form 10-K for the year ending December 31, 2000).
10.10(f) Fourth Amendment to Amended and Restated Loan and Security
Agreement dated June 1, 2000 (incorporated by reference to
exhibit number 10.10(f) of the Registrant's Form 10-K for
the year ending December 31, 2000).
10.10(g) Fifth Amendment to Amended and Restated Loan and Security
Agreement dated July 11, 2001 (incorporated by reference
to exhibit number 10.10(g) of the Registrant's Form 10-Q
for the period ending September 30, 2001).
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).
34
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
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 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).
10.18(a) Addendum to Lease Agreement, dated April 15, 2000, between
the Registrant and Delores McNabb, regarding Suites 7, 8
and 9 on the second floor of the south building at 904
Manhattan Avenue, Manhattan Beach, California.
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 (incorporated by reference to exhibit number
10.19 of the Registrant's Form 10-K for the year ending
December 31, 2000).
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 number 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 (incorporated by
reference to exhibit number 10.21 of the Registrant's Form
10-K for the year ending December 31, 2000).
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 (incorporated by reference to
exhibit number 10.22 of the Registrant's Form 10-K for the
year ending December 31, 2000).
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 (incorporated by reference to exhibit number
10.22(a) of the Registrant's Form 10-K for the year ending
December 31, 2000).
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 (incorporated by
reference to exhibit number 10.23 of the Registrant's Form
10-K for the year ending December 31, 2000).
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 (incorporated by
reference to exhibit number 10.24 of the Registrant's Form
10-K for the year ending December 31, 2000).
35
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
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 (incorporated by reference to
exhibit number 10.25 of the Registrant's Form 10-K for the
year ending December 31, 2000).
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 (incorporated by reference to exhibit
number 10.26 of the Registrant's Form 10-K for the year
ending December 31, 2000).
10.27 Lease Agreement, dated April 28, 2000, between the
Registrant and Manhattan Corners, LLC, regarding 1100
Highland Avenue, Manhattan Beach, California.
10.28 Lease Agreement, dated April 10, 2001, between the
Registrant and ProLogis California I LLC, regarding 4100
East Mission Boulevard, Ontario, California.
21.1 Subsidiaries of the Registrant
23.1 Consent of KPMG LLP
24.1 Power of Attorney (included on signature page)
36
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 27th day of March, 2002.
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 27, 2002
- ----------------------------------------------------- Executive Officer (Principal
Robert Greenberg Executive Officer)
/S/ MICHAEL GREENBERG President and Director March 27, 2002
- -----------------------------------------------------
Michael Greenberg
/S/ DAVID WEINBERG Executive Vice President, Chief March 27, 2002
- ----------------------------------------------------- Financial Officer and Director
David Weinberg (Principal Financial and
Accounting Officer)
Director
- -----------------------------------------------------
Jeffrey Greenberg
Director
- -----------------------------------------------------
J. Geyer Kosinski
/S/ THOMAS J. POLETTI Director March 27, 2002
- -----------------------------------------------------
Thomas J. Poletti
Director
- -----------------------------------------------------
Richard Siskind
37
SKECHERS U.S.A., INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report............................................................................................. F-2
Consolidated Balance Sheets -- December 31, 2000 and 2001................................................................ F-3
Consolidated Statements of Earnings -- Each of the years in the three-year period ended December 31, 2001................ F-4
Consolidated Statements of Stockholders' Equity and Comprehensive Income -- Each of the years in the three-year period
ended December 31, 2001.................................................................................................. F-5
Consolidated Statements of Cash Flows -- Each of the years in the three-year period ended December 31, 2001.............. 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, 2000 and 2001 and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2001 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 13, 2002
F-2
SKECHERS U.S.A., INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 2001
(IN THOUSANDS)
ASSETS
2000 2001
---- ----
Current assets:
Cash ..................................................................... $ 8,781 $ 15,554
Trade accounts receivable, less allowances
of $5,152 in 2000 and $7,113 in 2001 .................................. 96,628 120,285
Due from officers and employees .......................................... 540 1,013
Other receivables ........................................................ 1,016 1,816
-------- --------
Total receivables ................................................ 98,184 123,114
-------- --------
Inventories .............................................................. 111,708 157,659
Prepaid expenses and other current assets ................................ 6,457 17,695
Deferred tax assets ...................................................... 4,414 4,804
-------- --------
Total current assets ............................................. 229,544 318,826
Property and equipment, at cost, less accumulated depreciation
and amortization ........................................................ 70,405 85,739
Intangible assets, at cost, less applicable amortization ................... 559 458
Other assets, at cost ...................................................... 2,892 2,463
-------- --------
$303,400 $407,486
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings .................................................... $ 49,754 $ 84,175
Current installments of long-term borrowings ............................. 2,452 2,140
Accounts payable ......................................................... 72,865 77,498
Accrued expenses ......................................................... 11,168 15,041
-------- --------
Total current liabilities ........................................ 136,239 178,854
-------- --------
Long-term borrowings, excluding current installments ....................... 33,115 29,616
Commitments and contingencies (footnote 9)
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 10,789 and 15,329 shares at December 31, 2000 and 2001,
respectively .......................................................... 10 15
Class B Common stock, $.001 par value. Authorized 60,000 shares; issued
and outstanding 24,805 and 21,482 shares at December 31, 2000 and 2001,
respectively .......................................................... 25 21
Additional paid-in capital ............................................... 74,243 91,909
Accumulated other comprehensive income ................................... -- 33
Retained earnings ........................................................ 59,768 107,038
-------- --------
Total stockholders' equity ....................................... 134,046 199,016
-------- --------
$303,400 $407,486
======== ========
See accompanying notes to consolidated financial statements.
F-3
SKECHERS U.S.A., INC.
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1999, 2000, and 2001
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1999 2000 2001
--------- --------- ---------
Net sales ............................ $ 424,601 $ 675,036 $ 960,385
Cost of sales ........................ 249,993 390,811 554,205
--------- --------- ---------
Gross profit ............... 174,608 284,225 406,180
Royalty income, net .................. 668 316 (303)
--------- --------- ---------
175,276 284,541 405,877
--------- --------- ---------
Operating expenses:
Selling ............................ 57,332 77,451 111,401
General and administrative ......... 79,114 125,827 205,989
--------- --------- ---------
136,446 203,278 317,390
--------- --------- ---------
Earnings from operations ... 38,830 81,263 88,487
--------- --------- ---------
Other income (expense):
Interest, net ...................... (6,554) (9,230) (13,852)
Other, net ......................... 415 318 1,320
--------- --------- ---------
(6,139) (8,912) (12,532)
--------- --------- ---------
Earnings before income taxes 32,691 72,351 75,955
Income taxes ......................... 8,635 28,600 28,685
--------- --------- ---------
Net earnings ............... $ 24,056 $ 43,751 $ 47,270
========= ========= =========
Net earnings per share:
Basic .............................. $ 1.24 $ 1.30
Diluted ............................ $ 1.20 $ 1.24
========= =========
Weighted-average shares:
Basic .............................. 35,142 36,409
Diluted ............................ 36,563 38,059
========= =========
Pro forma operations data (unaudited):
Earnings before income taxes ....... $ 32,691
Income taxes ....................... 12,880
---------
Net earnings ............... $ 19,811
=========
Net earnings per share:
Basic .............................. $ 0.62
Diluted ............................ $ 0.60
=========
Weighted-average shares:
Basic .............................. 31,765
Diluted ............................ 33,018
=========
See accompanying notes to consolidated financial statements.
F-4
SKECHERS U.S.A., INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1999, 2000, and 2001
(IN THOUSANDS)
COMMON STOCK
-------------------------------------------
SHARES AMOUNT ADDITIONAL
--------------------- --------------------- PAID-IN
CLASS A CLASS B CLASS A CLASS B CAPITAL
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1998 ........................ -- 27,814 -- $ 2 --
Net earnings ....................................... -- -- -- -- --
Proceeds from issuance of common stock in
connection with initial public offering .......... 7,000 -- $ 7 26 $ 69,687
Proceeds from issuance of common stock
under the employee stock purchase plan ........... 91 -- -- -- 261
S Corporation distribution:
Cash ............................................. -- -- -- -- --
Cross Colours trademark .......................... -- -- -- -- --
--------- --------- --------- --------- ---------
Balance at December 31, 1999 ........................ 7,091 27,814 7 28 69,948
Net earnings ....................................... -- -- -- -- --
Proceeds from issuance of common stock
under the employee stock purchase plan ........... 267 -- -- -- 1,073
Proceeds from issuance of common stock
under the employee stock option plan ............. 422 -- -- -- 1,499
Tax effect of non-qualified stock options .......... -- -- -- -- 1,636
Deferred compensation .............................. -- -- -- -- 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
Comprehensive income:
Net earnings ........................................ -- -- -- -- --
Foreign currency translation adjustment ........... -- -- -- -- --
Proceeds from issuance of common stock
under the employee stock purchase plan ............. 1,081 -- 1 -- 7,679
Proceeds from issuance of common stock
under the employee stock option plan ............. 136 -- -- -- 1,689
Tax effect of non-qualified stock options .......... -- -- -- -- 8,298
Conversion of Class B common stock into
Class A common stock ............................. 3,323 (3,323) 4 (4) --
--------- --------- --------- --------- ---------
Balance at December 31, 2001 ........................ 15,329 21,482 $ 15 $ 21 $ 91,909
========= ========= ========= ========= =========
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE RETAINED STOCKHOLDERS'
INCOME EARNINGS EQUITY
------ -------- --------
Balance at December 31, 1998 ........................ -- $ 27,674 $ 27,676
Net earnings ....................................... -- 24,056 24,056
Proceeds from issuance of common stock in
connection with initial public offering .......... -- -- 69,720
Proceeds from issuance of common stock
under the employee stock purchase plan ........... -- -- 261
S Corporation distribution:
Cash ............................................. -- (35,363) (35,363)
Cross Colours trademark .......................... -- (350) (350)
--------- --------- ---------
Balance at December 31, 1999 ........................ -- 16,017 86,000
Net earnings ....................................... -- 43,751 43,751
Proceeds from issuance of common stock ............
under the employee stock purchase plan ........... -- -- 1,073
Proceeds from issuance of common stock ............
under the employee stock option plan ............. -- 1,499
Tax effect of non-qualified stock options .......... -- -- 1,636
Deferred compensation .............................. -- -- 87
Conversion of Class B common stock into
Class A common stock ............................. -- -- --
--------- --------- ---------
Balance at December 31, 2000 ........................ -- 59,768 134,046
Comprehensive income:
Net earnings ....................................... -- 47,270 47,270
Foreign currency translation adjustment ........... 33 -- 33
Proceeds from issuance of common stock
under the employee stock purchase plan ........... -- -- 1,689
Proceeds from issuance of common stock
under the employee stock option plan ............. -- -- 7,680
Tax effect of non-qualified stock options .......... -- -- 8,298
Conversion of Class B common stock into
Class A common stock ............................. -- -- --
--------- --------- ---------
Balance at December 31, 2001 ........................ $ 33 $ 107,038 $ 199,016
========= ========= =========
See accompanying notes to consolidated financial statements.
F-5
SKECHERS U.S.A., INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 2000, and 2001
(IN THOUSANDS)
1999 2000 2001
-------- -------- --------
Cash flows from operating activities:
Net earnings .............................................. $ 24,056 $ 43,751 $ 47,270
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization of property and equipment 3,752 5,894 15,202
Amortization of intangible assets ...................... 108 104 101
Provision (recovery) for bad debts and returns ......... (176) 1,915 1,961
Tax effect of non-qualified stock options .............. -- 1,636 8,298
Deferred taxes ......................................... (2,810) (1,604) (390)
Deferred compensation .................................. -- 87 --
Loss on disposal of equipment .......................... 903 78 983
Gain (loss) on distribution of intangibles ............. (118) -- --
Increase (decrease) in assets:
Receivables .......................................... (17,282) (33,426) (26,891)
Inventories .......................................... (3,569) (42,749) (45,951)
Prepaid expenses and other current assets ............ (2,514) (1,327) (11,238)
Other assets ......................................... 466 (1,437) 429
Increase in liabilities:
Accounts payable ..................................... 9,551 25,169 4,633
Accrued expenses ..................................... 738 900 3,873
-------- -------- --------
Net cash provided by (used in) operating activities 13,105 (1,009) (1,720)
-------- -------- --------
Cash flows used in investing activities:
Capital expenditures ...................................... (10,846) (21,897) (31,519)
Proceeds from the sales of property and equipment ......... -- 51 --
-------- -------- --------
Net cash used in investing activities ............. (10,846) (21,846) (31,519)
-------- -------- --------
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 9,369
Net proceeds (payments) related to short-term borrowings .. (23,697) 19,372 34,421
Payments on long-term debt ................................ (1,042) (1,144) (3,811)
Payments on notes payable to stockholder .................. (12,244) -- --
Distributions paid to stockholders ........................ (35,363) -- --
-------- -------- --------
Net cash provided by (used in) financing activities
(2,365) 20,800 39,979
-------- -------- --------
Net increase (decrease) in cash ........................... (106) (2,055) 6,740
Effect of exchange rates on cash .......................... -- -- 33
Cash at beginning of year ................................... 10,942 10,836 8,781
-------- -------- --------
Cash at end of year ......................................... $ 10,836 $ 8,781 $ 15,554
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest ............................................... $ 6,782 $ 8,386 $ 13,613
Income taxes ........................................... 10,619 27,712 27,220
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During 1999, the Company declared a noncash distribution of intangibles of
$350.
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.
See accompanying notes to consolidated financial statements.
F-6
SKECHERS U.S.A., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 2001
(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 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, discounts, bad debts, and
chargebacks 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 and writes down the
cost of inventory at the time such determinations are made.
(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
basis. 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, 2000 and
2001 is $492,000 and $593,000, respectively.
(f)Long-Lived Assets
The Company reports long-lived assets, including intangibles, at amortized
cost. 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
F-7
estimated fair value, based on discounted cash flows. The Company will implement
SFAS No. 142, Goodwill and Other Intangible Assets, on January 1, 2002 and SFAS
No. 144, Accounting for the Impairment or Disposal of Long Lived Assets. See
note (1)(m).
(g) Advertising Costs
Advertising costs are expensed in the period in which the advertisements are
first run or over the life of the endorsement contract. Advertising expense for
the years ended December 31, 1999, 2000 and 2001 were approximately $47,400,000,
$59,122,000 and $86,625,000, respectively. Prepaid advertising costs at December
31, 2000 and 2001 were $2,605,000 and $1,440,000, respectively. Prepaid amounts
outstanding at December 31, 2000 and 2001 represents the unamortized portion of
endorsement contracts and advertising in trade publications which had not run as
of December 31, 2000 and 2001, 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 for 1999 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 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):
1999 2000 2001
------- ------- ------
Weighted-average shares used in basic computation................. 31,765 35,142 36,409
Shares to fund stockholder distributions.......................... 533 -- --
Dilutive effect of stock options.................................. 720 1,421 1,650
------- ------- -------
Weighted-average shares used in diluted computation............... 33,018 36,563 38,059
======= ======= =======
Options to purchase 1,411,000, 1,117,920 and 279,500 shares of common stock
at prices ranging from $6.13 to $24.00 were outstanding at December 31, 1999,
2000 and 2001, 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 and therefore their inclusion would be
anti-dilutive.
(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. Significant areas requiring the use of management
estimates relate primarily to the valuation of inventories, accounts receivable
allowances, the useful lives of assets for depreciation, evaluation of
impairment, recoverability of deferred taxes and litigation reserves. 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
$2,600,000, $3,700,000 and $5,493,000 during the years ended December 31, 1999,
2000 and 2001, respectively.
(k) Comprehensive Income
Other comprehensive income at December 31, 2000 and 2001, consists of net
earnings and foreign currency translation gains of $0 and $33,000 respectively.
(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.
F-8
The fair value of the Company's short-term and long-term borrowings reflects
the fair value based upon current rates available to the Company for similar
debt.
(m) New Accounting Standards
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 133 ("SFAS 133"), Accounting for Derivative Instruments
and Hedging Activities. As a result, the Company recognizes financial
instruments, such as foreign currency forward contracts, at fair value
regardless of the purpose or intent for holding the instrument. Changes in the
fair value of derivative financial instruments are either recognized
periodically through the statement of earnings or through stockholders' equity
as a component of accumulated other comprehensive income or loss. The
classification depends on whether the derivative financial instrument qualifies
for hedge accounting, and if so, whether it qualifies as a fair value hedge or
cash flow hedge. Generally, changes in fair values of derivatives designated as
fair value hedges are matched in the statement of earnings against the
respective gain or loss relating to the hedged items. Changes in fair values of
derivatives accounted for as cash flow hedges, to the extent they are effective
as hedges, are recorded in accumulated other comprehensive income net of
deferred taxes. Changes in fair values of derivatives not qualifying as hedges
are currently reported in earnings. The implementation of this standard did not
have any impact on the company's financial statements.
During April 2001, the Emerging Issues Task Force ("EITF") issued EITF No.
00-14, Accounting for Certain Sales Incentives, and EITF No. 01-9, Accounting
for Consideration Given by a Vendor to a Customer (Including A Reseller of the
Vendor's Products), which are effective for the first quarter beginning after
December 15, 2001. These EITF's prescribe guidance regarding the timing of
recognition and income statement classification of costs incurred for certain
sales incentive programs to retailers and end consumers. The Company expects
that the adoption of EITF No. 00-14 and EITF No. 01-9 will not have a material
impact on its financial position or results of operations.
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 141 ("SFAS 141"), Business Combinations, and Statement of Financial
Accounting Standards No. 142 ("SFAS 142"), Goodwill and Other Intangible Assets.
SFAS 141 requires that the purchase method be used for all business combinations
initiated after June 30, 2001. SFAS 142 requires that goodwill and intangible
assets with indefinite useful lives no longer be amortized to earnings, but
instead be reviewed for impairment in accordance with the provisions of SFAS
142. The amortization of goodwill and intangible assets with indefinite useful
lives ceases upon adoption of SFAS 142 which is effective for fiscal years
starting after December 15, 2001. The Company is in the process of quantifying
the anticipated impact of adopting the provisions of SFAS 142, which is not
expected to be material.
In October 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 144 ("SFAS 144"), Accounting for
the Impairment or Disposal of Long-Lived Assets, which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
While SFAS 144 supersedes Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of, it retains many of the fundamental provisions of that statement.
The standard is effective for fiscal years beginning after December 15, 2001.
The Company expects that the adoption of SFAS 144 will not have a material
impact on its financial position or results of operations.
(2) PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows (in thousands):
2000 2001
---- ----
Land........................................................ $ 7,858 $ 12,358
Buildings and improvements.................................. 18,639 20,527
Furniture, fixtures and equipment........................... 37,529 46,468
Leasehold improvements...................................... 21,029 35,765
--------- ---------
Total property and equipment...................... 85,055 115,118
Less accumulated depreciation and amortization.............. 14,650 29,379
--------- ---------
Property and equipment, net....................... $ 70,405 $ 85,739
========= =========
F-9
(3) SHORT-TERM BORROWINGS
The Company has available a secured line of credit, as amended on July 11,
2001, permitting borrowings up to $150.0 million based upon eligible accounts
receivable and inventories. Borrowings bear interest at the prime rate (4.75% at
December 31, 2001) minus 0.50%, and the agreement expires on December 31, 2003.
The agreement provides for the issuance of letters of credit up to a maximum of
$30.0 million of which 50% decreases the amount available for borrowings under
the agreement. Outstanding letters of credit at December 31, 2001 were $5.4
million. Available borrowings under the line of credit at December 31, 2001 were
$54.2 million. The Company pays an unused line of credit fee of .25% annually.
The agreement provides that stockholders' equity shall not decrease by more than
20% in any given calendar quarter, and limits 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, 2001. In February 2002, the Company borrowed an
additional $ 43.0 million under the line of credit.
(4) LONG-TERM BORROWINGS
Long-term debt at December 31, 2000 and 2001 is as follows (in thousands):
2000 2001
------- -------
Note payable to bank, due in monthly installments of $82.2 (includes principal
and interest), fixed rate interest at 7.79%, secured by property, balloon
payment of $8,716 due January 2011 ........................................................... $10,850 $10,716
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 7,782
Note payable to bank, due in monthly installments of $25 plus interest at prime
(4.75% at December 31, 2001) plus 1%, secured by equipment, repaid during 2001 ................ 2,100 --
Capital lease obligation, 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 11,367
Capital lease obligations, due in aggregate monthly installments of $74, interest rates from
7.25%-18.28%, secured by equipment, maturing in various installments through February 2006 .... 2,106 1,891
------- -------
35,567 31,756
Less current installments ...................................................................... 2,452 2,140
------- -------
$33,115 $29,616
======= =======
The aggregate maturities of long-term borrowings at December 31, 2001 are as
follows:
2002........ $ 2,140
2003........ 2,596
2004........ 2,552
2005........ 2,342
2006........ 5,005
Thereafter.. 17,121
-------
$31,756
=======
(5) 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 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.
F-10
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 and 2001 certain Class B stockholders converted 3,008,704 and
3,323,300 shares of Class B common stock to Class A common stock, respectively.
(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). In June 2001, the stockholders approved an
amendment to the plan to increase the number of shares of Class A common stock
authorized for issuance under the plan to 8,215,154. The options expire ten
years from the date of grant.
Shares subject to option under the Stock Option Plan were as follows:
WEIGHTED
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 6.41
Granted............................................. 1,532,695 10.79
Exercised........................................... (422,370) 3.55
Canceled............................................ (136,998) 10.23
----------- -----
Outstanding at December 31, 2000...................... 3,488,901 8.51
Granted............................................. 2,177,880 14.31
Exercised........................................... (1,080,995) 7.10
Canceled............................................ (87,628) 15.08
-----------
Outstanding at December 31, 2001...................... 4,498,158 11.53
===========
Options available for grant at December 31, 2001...... 2,215,631
===========
The following table summarizes information about stock options outstanding and
exercisable at December 31, 2001.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
WEIGHTED
NUMBER WEIGHTED WEIGHTED NUMBER AVERAGE
RANGE OF OUTSTANDING AVERAGE REMAINING AVERAGE EXERCISABLE AT EXERCISE
EXERCISE PRICE DECEMBER 31, 2001 CONTRACTUAL LIFE EXERCISE PRICE DECEMBER 31, 2001 PRICE
-------------- ----------------- ---------------- -------------- ----------------- -----
$ 2.78 to $ 6.13 742,556 6.7 years $ 3.19 218,616 $ 3.08
$10.48 to $12.38 1,896,290 8.7 years 10.76 518,182 10.78
$13.00 to $15.75 1,541,312 8.7 years 14.05 446,208 13.41
$18.00 to $29.45 318,000 9.3 years 23.36 66,675 23.60
--------- ---------
4,498,158 8.4 years $11.53 1,249,681 $ 11.06
--------- ---------
F-11
At December 31, 1999, 2000 and 2001, the number of options exercisable
for each year was 347,678, 862,111, and 1,249,681 respectively. The
weighted-average exercise price of those options was $2.78, $7.87 and $11.06
respectively.
(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 than 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 and 2001, 266,865 and 135,600
shares were issued under the 1998 Stock Purchase Plan for which the Company
received $1,073,000 and $1,689,000, respectively.
(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 1999, 2000, and 2001
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.
1999 2000 2001
--------- --------- ---------
Pro forma net earnings............... $ 19,077 $ 41,458 $ 42,281
========= ========= =========
Pro forma net earnings per share:
Basic.............................. $ .60 $ 1.18 $ 1.16
Diluted............................ .58 1.13 1.11
========= ========= =========
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:
1999 2000 2001
------ ------ -----
Dividend yield..................... -- -- --
Expected volatility................ 55% 70% 80%
Risk-free interest rate............ 6.2% 6.3% 4.2%
Expected life of option............ 5 5 5
==== ==== ====
The weighted-average fair value of options granted during 1999, 2000, and
2001 were $6.93, $6.83, and $9.55, respectively.
(6) INCOME TAXES
The pro forma unaudited income tax adjustments for 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):
1999 2000 2001
--------- ---------- -------
Actual income taxes:
Federal:
Current.............................. $ 8,012 $ 25,420 $ 24,134
Deferred............................. (792) (1,360) 16
--------- --------- ---------
Total federal................... 7,220 24,060 24,150
--------- --------- ---------
State:
Current.............................. 1,480 4,784 4,627
Deferred............................. (65) (244) (406)
--------- --------- ---------
Total state..................... 1,415 4,540 4,221
--------- --------- ---------
Foreign:
Current.............................. -- -- 314
Deferred............................. -- -- --
--------- --------- ---------
Total foreign................... -- -- 314
--------- --------- ---------
F-12
Total actual income taxes....... 8,635 28,600 28,685
--------- --------- ---------
Pro forma adjustments:
Federal................................. 3,533
State................................... 712
---------
Total pro forma adjustments..... 4,245
---------
Total pro forma income taxes.... $ 12,880
=========
Income taxes (pro forma for 1999) differs from the statutory tax rate as
applied to earnings before income taxes as follows:
1999 2000 2001
--------- --------- ---------
Expected income tax expense............................. $ 11,569 $ 25,323 $ 26,584
State income tax, net of federal benefit................ 1,311 2,951 2,744
Rate differential on foreign income.......................... -- -- (822)
Other................................................... -- 326 179
--------- --------- ---------
Total provision for income taxes.............. $ 12,880 $ 28,600 $ 28,685
========= ========= =========
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities at December 31,
2000 and 2001 are presented below:
DEFERRED TAX ASSETS: 2000 2001
-------------------- -------- --------
Inventory adjustments...................... $ 1,176 $ 1,749
State taxes................................ 1,490 --
Allowances for receivables................. 2,100 2,898
Other...................................... 1,060 1,379
-------- --------
Total deferred tax assets.......... 5,826 6,026
-------- --------
Deferred tax liabilities:
Depreciation of property and equipment..... 1,386 1,222
Other...................................... 26 --
-------- --------
Total deferred tax liabilities..... 1,412 1,222
-------- --------
Net deferred tax assets................. $ 4,414 $ 4,804
======== ========
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.
Prior to 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.
Consolidated U.S. income before taxes was $32.7 million, $72.4 million, and
$69.7 million for the years ended December 31, 1999, 2000, and 2001,
respectively. The corresponding income (loss) before taxes for non U.S. based
operations was $0, ($.1), and $6.3 million for the years ended December 31,
1999, 2000, and 2001, respectively.
The Company has not provided withholding and U.S. federal income taxes on
approximately $6.2 million of undistributed earnings of its foreign subsidiaries
because such earnings are or will be invested indefinitely in such subsidiaries
or will be offset by approximate credits for foreign taxes paid. It is not
practicable to determine the U.S. federal income tax liability, if any, that
would be payable if such earnings were not reinvested indefinitely.
F-13
(7) BUSINESS AND CREDIT CONCENTRATIONS
The Company operates in the footwear industry and generates most of its
sales in the United States, although it's products are sold into various 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 $87,825,000 and
$102,543,000 before allowances for bad debts and returns at December 31, 2000
and 2001, respectively, which generally do not require collateral from
customers. Foreign accounts receivable amounted to $13,955,000 and $24,855,000
before allowance for bad debts and returns at December 31, 2000 and 2001,
respectively, which generally are collateralized by letters of credit.
International net sales amounted to $43,900,000, $65,159,000 and $121,001,000
for the years ended December 31, 1999, 2000 and 2001, respectively. The
Company's credit losses for the years ended December 31, 1999, 2000 and 2001
were $1,699,000, $537,000 and $1,459,000, respectively, and did not
significantly differ from management's expectations.
Net sales to customers in the United States of America exceeded 87% of total
net sales for each of the years in the three-year period ended December 31,
2001. Assets located outside of the United States of America consists primarily
of cash, accounts receivable, inventory, property and equipment, and other
assets and totaled $22,959,000 and $59,795,000, at December 31, 2000 and 2001,
respectively.
During 1999, 2000 and 2001, no customer accounted for 10% or more of net
sales. The Company had one customer which accounted for 15.3% of trade accounts
receivable at December 31, 2000. At December 31, 2001, one customer accounted
for 10.2% of trade accounts receivable.
During 1999, the Company had four manufacturers that accounted for between
12.3% and 15.5% each of total purchases. During 2000, the Company had four
manufacturers that accounted for between 9.2% and 20.2% each of total purchases.
During 2001, the company had four manufacturers that accounted for between 7.9%
and 19.9%, 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.
(8) 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. The plan was amended in
April 2001 to allow employees to enter into the plan after six months 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 $259,000, $500,000, and
$703,000 for the years ended December 31, 1999, 2000 and 2001, respectively. As
its contribution to the plan in 2001, the Company issued 48,072 shares of its
Class A common stock. The shares contributed to the plan contain certain
restrictions regarding the subsequent sales of those shares.
(9) COMMITMENTS AND CONTINGENCIES
(a) Leases
The Company leases facilities under operating lease agreements expiring
through August 2012. 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, 1999, 2000 and
2001 approximated $9,800,000, $13,200,000 and $18,014,000, respectively.
The Company also leases certain property and equipment under capital lease
agreements requiring monthly installment payments through February 2006. The
cost of this property and equipment was $16,154,000 with a net book value of $
12,501,000 at December 31, 2001.
Future minimum lease payments under noncancellable leases at December 31,
2001 are as follows (in thousands):
F-14
CAPITAL OPERATING
LEASES LEASES
------ ------
Year ending December 31:
2002............................................. $ 3,118 $ 21,416
2003............................................. 2,909 20,818
2004............................................. 2,909 19,970
2005............................................. 2,571 19,976
2006............................................. 4,721 16,342
Thereafter....................................... 1 52,293
--------- ---------
$ 16,229 $150,815
========
Less imputed interest............................ 2,971
---------
Present value of net minimum lease payments...... $ 13,258
=========
The Company leases office space to unrelated third parties under
noncancellable operating leases expiring through November 2004, annual rentals
are approximately $311,000, $119,000 and $106,000 for the years ended December
31, 2002, 2003, and 2004, respectively.
(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.
The court issued an order on June 20, 2001 dismissing the consolidated
complaint in its entirety with leave to plaintiffs to amend. The class filed an
amended complaint on August 3, 2001 and the Company filed a motion to dismiss
the amended complaint. In response to the motion, and after discussions between
class counsel and counsel for defendants, the class agreed to dismiss with
prejudice the entire consolidated class action as to the Company, its two named
officers and defendants and the underwriters. The class agreed to dismiss with
prejudice without any settlement from defendants. Thus, the stipulation had no
material impact on operations or financial results. A stipulation of dismissal
with prejudice was executed by the parties in late December 2001. The court
signed the stipulation without modification and entered the order of dismissal
on January 30, 2002.
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.
(c) Purchase Commitments
At December 31, 2001, the Company had purchase commitments of approximately
$89,353,000.
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 rates between 0.5%
and 1.5% per 30 to 60 day term. The amounts outstanding under these arrangements
at December 31, 2000 and 2001 were $48,484,000 and $49,255,000, respectively,
which are included in accounts payable in the accompanying consolidated balance
sheets. Interest expense incurred by the Company under these arrangements
amounted to $3,000,000 in 1999, $6,400,000 in 2000 and $5,900,000 in 2001.
(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.
(10) SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
F-15
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
========== =========== ========== ==========
2001 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- ---- ----------- ----------- ---------------- --------------
Net sales................................ $ 227,494 $ 230,899 $ 287,900 $ 214,092
Gross profit............................. 99,314 99,175 122,595 85,096
Net earnings............................. 17,100 16,822 11,378 1,970
========== =========== ========== ==========
Net earnings per share:
Basic.................................. $ .48 $ .46 $ .31 $ .05
Diluted................................ .45 .44 .30 .05
========== =========== ========== ==========
F-16
SKECHERS U.S.A., INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1999, 2000, AND 2001
BALANCE AT CHARGED TO DEDUCTIONS BALANCE
BEGINNING OF COSTS AND AND AT END
DESCRIPTION PERIOD EXPENSES WRITE-OFFS OF PERIOD
----------- ---------------- --------------- ---------------- ------------
As of December 31, 1999:
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 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
As of December 31, 2001
Allowance for chargebacks................................ -- 3,618,000 -- 3,618,000
Allowance for doubtful accounts...................... 1,296,000 1,235,000 (1,459,000) 1,072,000
Reserve for sales returns and allowances............. $ 3,856,000 $ 29,615,000 $ (31,048,000) $ 2,423,000
============ ============= =============== =============
S-1