SKECHERS USA INC - Annual Report: 2005 (Form 10-K)
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2005
OR
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND 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 Incorporation or Organization) | (I.R.S. Employer Identification No.) |
| 228 Manhattan Beach Blvd., Manhattan Beach, California | 90266 | |
| (Address of Principal Executive Offices) | (Zip Code) |
Registrant’s telephone number, including area code: (310) 318-3100
Securities registered pursuant to Section 12(b) of the Act:
| Name of Each Exchange on | ||
| Title of Each Class | Which Registered | |
| Class A Common Stock, $0.001 par value | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes o Noþ
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yeso
Noþ
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. Yesþ Noo
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.o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in
Rule 12b-2 of the Exchange Act.
(Check one): Large accelerated filero Accelerated filerþ Non-accelerated filero
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yeso Noþ
As of June 30, 2005, the aggregate market value of the voting and non-voting Class A and Class B
Common Stock held by non-affiliates of the Registrant was approximately $324 million based upon the
closing price of $14.26 of the Class A Common Stock on the New York Stock Exchange on such date.
The number
of shares of Class A Common Stock outstanding as of March 1, 2006: 23,879,447.
The number of shares of Class B Common Stock outstanding as of March 1, 2006: 16,445,889.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s Definitive Proxy Statement issued in connection with the 2006 Annual
Meeting of the Stockholders of the Registrant are incorporated by reference into Part III.
SKECHERS U.S.A., INC.
TABLE OF CONTENTS TO ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2005
TABLE OF CONTENTS TO ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2005
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| EXHIBIT 3.2(A) | ||||||||
| Exhibit 10.6 | ||||||||
| Exhibit 10.6(a) | ||||||||
| EXHIBIT 10.11 | ||||||||
| EXHIBIT 21.1 | ||||||||
| EXHIBIT 23.1 | ||||||||
| EXHIBIT 31.1 | ||||||||
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| EXHIBIT 32.1 | ||||||||
Table of Contents
SPECIAL NOTE ON FORWARD LOOKING STATEMENTS
This annual report on Form 10-K contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, including statements with regards to future
revenue, projected 2006 results, earnings, spending, margins, cash flow, orders, expected timing of
shipment of products, inventory levels, future growth or success in specific countries, categories
or market sectors, continued or expected distribution to specific retailers, liquidity, capital
resources and market risk, 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 “likely,” “believe,” “anticipate,” “expect,”
“estimate,” “intend,” “plan,” “project,” “will be,” “will continue,” “will result,” “could,” “may,”
“might,” or any variations of such words with similar meanings. Any such statements are subject to
risks and uncertainties that could cause our company’s actual results to differ materially from
those which are management’s current expectations or forecasts. Such information is subject to the
risk that such expectations or forecasts, or the assumptions underlying such expectations or
forecasts, become inaccurate.
Risk factors include but are not limited to the following: international, national and local
general economic, political and market conditions; intense competition among sellers of footwear
for consumers; changes in fashion trends and consumer demands; popularity of particular designs and
categories of products; the level of sales during the spring, back-to-school and holiday selling
seasons; the ability to anticipate, identify, interpret or forecast changes in fashion trends,
consumer demand for our products and the various market factors described above; the ability of our
company to maintain its brand image; the ability to sustain, manage and forecast our company’s
growth and inventories; the ability to secure and protect trademarks, patents and other
intellectual property; the loss of any significant customers, decreased demand by industry
retailers and cancellation of order commitments; potential disruptions in manufacturing related to
overseas sourcing and concentration of production in China, including, without limitation,
difficulties associated with political instability in China, the occurrence of a natural disaster
or outbreak of a pandemic disease in China, or electrical shortages, labor shortages or work
stoppages that may lead to production delays; increased costs of freight and transportation to meet
delivery deadlines; violation of labor or other laws by our independent contract manufacturers,
suppliers or licensees; potential imposition of additional duties, tariffs or other trade
restrictions; business disruptions due to energy shortages or natural disasters such as an
earthquake due to the location of our domestic warehouse, headquarters and a substantial number of
our retail stores in California; changes in business strategy or development plans; the ability to
obtain additional capital to fund operations, finance growth and service debt obligations; the
ability to attract and retain qualified personnel; compliance with the financial covenants in our
long-term debt agreements and $150 million line of credit facility; compliance with recent
corporate governance legislation including the Sarbanes-Oxley Act of 2002; the disruption, expense
and potential liability associated with existing or unanticipated future litigation; and other
factors referenced or incorporated by reference in this report and other reports filed with the
United States Securities and Exchange Commission (the “SEC”).
The risks included here are not exhaustive. Other sections of this annual report may include
additional factors that 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.
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PART I
ITEM 1. BUSINESS
We were incorporated in California in 1992 and reincorporated in Delaware in 1999. Throughout
this annual report, we refer to Skechers U.S.A., Inc., a Delaware corporation, and its consolidated
subsidiaries as “we,” “us,” “our,” “our company” and “Skechers” unless otherwise indicated. Our
Internet website address is www.skechers.com. Our annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, Form 3’s, 4’s and 5’s filed on behalf of directors,
officers and 10% stockholders, and any amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge on our
website as soon as reasonably practicable after we electronically file such material with, or
furnish it to, the SEC. You can learn more about us by reviewing such filings on our website or at
the SEC’s website at www.sec.gov.
GENERAL
We design and market Skechers-branded contemporary footwear for men, women and children under
seven individual brand names. Our footwear reflects a combination of style, quality and value that
appeals to a broad range of consumers. In addition to Skechers-branded lines, we also offer seven
uniquely branded designer, fashion and street-focused footwear lines for men, women and children.
These lines are branded and marketed separately from Skechers and appeal to specific audiences. Our
brands are sold through department stores, specialty stores, athletic retailers, and boutiques as
well as our e-commerce website and our own retail stores. We operate 34 concept stores, 56 factory
outlet stores and 32 warehouse outlet stores in the United States, and 10 concept stores and two
warehouse outlets internationally. Our objective is to profitably grow our operations worldwide
while leveraging our recognizable Skechers brand through our strong product lines, innovative
advertising and diversified distribution channels.
We seek to offer consumers a vast array of fashionable footwear that satisfies their active,
casual, dress casual and dress footwear needs. Our core consumers are style-conscious 12- to
24-year-old men and women attracted to our youthful brand image and fashion forward designs. Many
of our best-selling and core styles are also developed for children with colors and materials that
reflect a playful image appropriate for this demographic.
We believe that brand recognition is an important element for success in the footwear
business. We have aggressively promoted our brands through comprehensive marketing campaigns for
men, women and children. For Skechers in 2005, we capitalized on the popularity of American Idol
winner and rising star Carrie Underwood in our domestic and international print advertising, and
launched television sponsor spots for many of our Skechers branded lines as well as some of our
uniquely branded lines. For Mark Nason, Michelle K and 310 Motoring, we also developed print ads,
including ads featuring multi-platinum hip hop recording artist The Game for his signature 310
footwear line. Our Marc Ecko Footwear is supported through print ads developed by Marc Ecko for the
apparel lines Ecko Unltd. and Ecko Red. Our strategy continues to focus on print advertisements in
targeted publications such as GQ, Lucky, Details, Seventeen, Maxim, People, Teen People, Teen
Vogue, Slam, In Style, and many others.
Since we introduced our first line, Skechers USA Sport Utility Footwear, in December 1992, we
have expanded our product offering and grown our net sales while substantially increasing the
breadth and penetration of our account base. Each of our seven Skechers-branded product lines
benefits from the Skechers reputation for contemporary and progressive styling, quality, comfort
and affordability. We have seven product lines currently in the marketplace that are not branded
with the Skechers name that benefit from our marketing support, quality management and expertise.
To promote innovation and brand relevance, we manage our product lines separately by utilizing
dedicated sales and design 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 BRANDS
Skechers USA. Our Skechers USA category for men and women includes five types of footwear: (i)
Casuals, (ii) Dress Casuals, (iii) Comfort (for men only), (iv) Outdoor (for men only) and (v)
Sport Fusion. This category is generally sold through mid-tier retailers, department stores and
some footwear specialty shops.
| • | For men, the Casuals category includes “black and brown” boots and shoes that generally have a rugged urban design — some with industrial-inspired fashion features. This category is defined by the heavy-lugged outsole and value-oriented materials employed in the uppers as well as leather uppers. For women, the Casuals category includes basic “black and brown” oxfords |
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| and slip-ons, lug outsole boots, and casual sandals. The women’s line also uses value-oriented materials, but a growing number of styles may also be designed in leather. We design and price both the men’s and women’s categories to appeal primarily to young persons with broad acceptance across age groups. |
| • | For men, the Dress Casuals category is comprised of basic “black and brown” men’s shoes that feature shiny leathers and dress details, but still utilize the heavy-lugged outsole and value-oriented materials. This category is designed and priced for young men seeking their first work or evening shoe. For women, the Dress Casual line is comprised of more stylized boots and shoes, which may include leather uppers, shearling or faux fur lining or trim, or which in general may be more trend-influenced. | ||
| • | Skechers Comfort is a line of trend-right casuals for men who want all-day comfort without compromising style. Characteristics of the line include comfortable outsoles, cushioned insoles and quality leather uppers. A category with unique features, we market and package the Skechers Comfort styles in a shoe box that is distinct from that of other categories in the Skechers USA line of footwear. | ||
| • | Our Outdoor styles for men primarily consist of hiker-influenced constructions including boots and shoes. While this category includes many technical performance features, we market this category of footwear primarily on the basis of style and comfort. Outsoles generally consist of molded and contoured hardened rubber. Many designs 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 more durable hardware such as metal D-rings instead of eyelets. Uppers are generally constructed of heavily oiled nubuck and full-grain leathers. We market and package the Outdoor styles in a shoe box that is distinct from that of other categories in the Skechers USA line of footwear. | ||
| • | Our Sport Fusion line is comprised of low-profile, sport-influenced Euro casuals targeted at trend-conscious young men and women. With many outsoles adopted from our men’s Sport and women’s Active lines, this line primarily features leather or nubuck uppers, but may also include mesh. |
Skechers Sport. Our Skechers Sport footwear for men and women includes: (i) Joggers, Trail
runners, Sport hikers, Terrainers, (ii) Performance (for men only), (iii) Street Casuals and (iv)
Sport Sandals. Our Skechers Sport category is distinguished by its technical performance-inspired
looks; however, we generally do not promote the technical performance features of these shoes.
Skechers Sport is typically sold through specialty shoe stores, department stores and athletic
footwear retailers.
| • | Our Jogger, Trail Runner, Sport Hiker and cross trainer-inspired Terrainer designs are lightweight constructions that include cushioned heels, polyurethane midsoles, phylon and other synthetic outsoles, as well as 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 contrasting pop colors such as lime green, orange and red in addition to traditional athletic white. | ||
| • | The Performance category is comprised of multi-purpose running shoes that are marketed as men’s lifestyle athletic footwear. Some styles include 3M reflective accents, breathable upper construction, quality leathers, abrasion-resistant toe and heel cap, removable moisture wicking molded EVA sock liner, outsole forefoot flex grooves for improved flexibility, non-marking rubber lugs with impact dispersment technology (IDT), aggressive all terrain traction lugs, external torsion stabilizer and tuned dual-density molded ethyl vinyl acetate (EVA) midsole with pronation control. | ||
| • | Street Casual incorporates lower profiles, classic details and skate, street and fusion influences in a collection of essential, basic casual sneakers. The uppers are designed in leather, suede, nubuck, canvas and/or mesh. Street Casual is targeted to young consumers, but also appeals to a broader demographic. | ||
| • | Our Sport Sandals are primarily designed from existing Skechers Sport outsoles and may include many of the same sport features as our sneakers with the addition of new technologies geared toward making a comfortable sport sandal. Sport sandals are designed as seasonal footwear for the consumer who already wears our Skechers Sport sneakers. |
Skechers Active. A natural companion to Skechers Sport, Skechers Active has grown from a
casual everyday line into a complete line of fusion and sport fusion sneakers for females of all
ages. Marked by low-profile outsoles, the Active line is available in a multitude of colors as well
as solid white or black, in fabrics, leathers and meshes, and with various closures – traditional
laces, zig-zag straps and cross straps, among others. The line also now includes Mary Jane, sandal
and open back styles. Active sneakers are typically retailed through specialty casual shoe stores
and department stores.
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Somethin’ Else from Skechers. Targeting 12- to 25-year-old trend-savvy females, the Somethin’
Else from Skechers line is focused on current fashions through an array of stylish shoes, boots,
heels and sandals. With a growing offering that includes flats, heeled boots, clogs and
sport-influenced looks, the line is designed to meet junior consumers’ needs – from school to work
to weekends – and is a complementary line for women who already wear Skechers USA, Skechers Active
and Skechers Sport. Many styles are made from more affordable materials such as man-made leather,
offering more young consumers the opportunity to buy trend-right shoes at a reasonable price. This
line is typically sold through department and specialty stores.
Collection by Skechers. The Collection by Skechers line is comprised of stylish dress shoes,
dress casual shoes and sandals for the young fashion-forward male consumer. The looks include
classic tailored and fashion-forward square, round 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 may be either leather or man-made. The uppers are quality leathers
including glossy, box, distressed and aniline. Collection by Skechers is sold through specialty
casual shoe stores and department stores.
Skechers Work. Expanding on our heritage of cutting-edge utility footwear, Skechers Work
offers a complete line of men’s and women’s sport oxfords, field boots, trail hikers and athletic
shoes. The Skechers Work line includes the (i) Lightweight Aluminum Series (“LAS”), (ii) Steel Toe,
(iii) Occupational and (iv) Slip-Resistant categories, which may feature electrical hazard,
electrostatic-dissipative and slip-resistant technologies, as well as breathable, seam-sealed
HydroguardTM waterproof membranes. Our LAS, Steel Toe and Occupational products have
been independently tested and certified to meet ASTM F 2412/2413-05; CSA Z195-02 or SATRA PM 77
standards, and our slip-resistant soles have been tested pursuant to the James testing method for
slip resistance. The uppers are in high-quality leather, nubuck, truebuck and durabuck. Constructed
on high-abrasion, long wearing soles, the line is designed for men and women with jobs that require
certain safety requirements. Skechers Work is primarily marketed through business-to-business
channels, but is also available direct-to-consumers and through select department and specialty
stores.
| • | Our LAS trail hikers and sport oxfords are exclusively designed for industry professionals who need lightweight, all-day footwear protection. Their innovative design includes a durable, ultra-lightweight safety toe, torque flex construction and high-grade materials for superior strength and comfort. | ||
| • | Our Steel Toe athletic sneakers, boots, hikers, oxfords and sport oxfords, which are ideal for environments requiring safety footwear. These durable styles feature breathable lining, oil and abrasion resistant outsoles and steel toe design for optimal protection, all-day comfort and prolonged durability. | ||
| • | Our Occupational boots, oxfords and hikers offer versatile features for those requiring utility, safety and comfort features, but who also want style. Designed with an array of textured uppers and colorways, the footwear capitalizes on function and comfort – from breathable lining to contoured insoles and abrasion-resistant outsoles for prolonged wear. | ||
| • | Our Slip-Resistant boots, athletics, sport and slip-on oxfords, and clogs are ideal for the service industry. These shoes offer comfort and safety in dry or wet conditions by utilizing breathable lining and James-tested slip, oil and abrasion resistant outsoles for optimal safety and reliability. |
Skechers Kids. The Skechers Kids line includes: (i) Skechers Kids, which is a range of
infants, toddlers, boys and girls boots, shoes and sneakers; (ii) S-Lights, which is lighted
footwear for toddlers, boys and girls and (iii) Somethin’ Else from Skechers for Girls, which is
trend-inspired boots, shoes, sandals and dress sneakers. Skechers Kids and Somethin’ Else from
Skechers for Girls are comprised primarily of shoes that are designed as “takedowns” of their adult
counterparts, allowing the younger set the opportunity to wear the same popular styles as their
older siblings and schoolmates. This “takedown” strategy maintains the product’s integrity by
offering premium leathers, hardware and outsoles without the attendant costs involved in designing
and developing new products. In addition, we adapt current fashions from our men’s and women’s
lines by modifying designs and choosing colors and materials that are more suitable for the playful
image that we have established in the children’s footwear market. Skechers Kids shoes are
available at department stores and specialty and athletic retailers.
| • | The Skechers Kids line includes embellishments or adornments such as fresh colors and fabrics from our Skechers adult shoes. Some of these styles are also adapted for toddlers with softer, more pliable outsoles, and for infants with soft, leather-sole crib shoes. | ||
| • | S-Lights is a line of sneakers and sandals with a combined pattern of lights on the outsole and other areas of the shoes. |
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| • | Somethin’ Else from Skechers for Girls is a line of trend-right sandals, shoes, boots, street sneakers and dress casuals for young girls. For this line, we have taken many of our successful junior bottoms and tailored them to a younger demographic, lowering platforms and wedges as needed and creating all new upper treatments and colors on select styles. Many styles are made from more affordable materials such as man-made leather, offering young consumers the opportunity to buy stylish shoes at affordable prices. |
FASHION AND STREET BRANDS
The Fashion and Street Division and its brands are marketed separately from SKECHERS.
Rhino Red and Unltd. by Marc Ecko. Rhino Red is a line of women’s classic and fashion-forward
fusion sneakers and casual and dress causal heels and boots. Unltd. by Marc Ecko is a line of men’s
street-inspired traditional sneakers, fusion sneakers and urban-focused casuals. Targeted to the
street-savvy 18- to 34-year-old consumer, the footwear reflects Ecko Unltd.’s men’s apparel and the
Ecko Red women’s apparel, and effectively utilizes the globally recognized Rhino logo on the
majority of sneakers and casuals. Unltd. by Marc Ecko for boys and Rhino Red for girls sneaker
lines primarily consist of takedowns from the adult Marc Ecko footwear lines with additional or
different colorways geared toward children and that reflect the boys’ and girls’ Ecko Unltd. and
Ecko Red clothing. The licensed brands are sold through select department stores and specialty
retailers.
310 Motoring. The 310 Motoring footwear collection utilizes top-quality leathers, a
fashion-forward approach to design and comfort, and materials that are derived from 310 Motoring’s
customized cars, including wood burl and carbon fiber. A multi-tiered approach, the line consists
of high-end, cutting-edge athletics, heritage to high-design boots and shoes, and sophisticated
driving-inspired shoes and boots for men and boys. 310 Motoring footwear is available in select
department stores, specialty retailers and urban independents.
In the last week of 2005, we launched multi-platinum hip hop recording artist The Game’s
signature 310 sneaker, known as Hurricane by 310, in select specialty athletic stores. The initial
Hurricane street athletic sneaker consists of one color and one style. Additional colors are
planned to launch in the first quarter of 2006.
Michelle K. Targeted toward stylish 18- to 34-year-old women, Michelle K is a signature
designer line of fashion forward fusion sneakers, sporty boots and sandals. The Michelle K line is
marked by a unique combination of materials, textures and colors. The line is available in select
upscale department stores and better boutiques. It is sold internationally under the name Skechers
by designer Michelle K. This brand also includes Michelle K Girl, a fashion-forward line,
primarily comprised of fusion casual sneakers as well as boots and sandals marked by a unique
combination of colors, materials, textures and embellishments.
Mark Nason and Siren by Mark Nason. Mark Nason is a sophisticated and fashion forward footwear
collection, marketed to style-conscious men, designed to complement designer denim and dress casual
wear. Primarily crafted and constructed in Italy, the Mark Nason collection is comprised of classic
and modern boots, shoes and sandals with distinctive profiles and luxurious hand-distressed
leathers. The Mark Nason line distinguishes itself with high quality individual styling and may
utilize unique materials such as premium leathers, etched and tattooed leathers, hand-treated,
hand-scraped and hand-cut leathers, hand-treated leather uppers and soles, snakeskin and eel skin.
Siren by Mark Nason, an uninhibited designer boot line for discerning women, was launched in the
fourth quarter of 2005 as a response to the reaction of women to the men’s Mark Nason collection.
The ultimate accompaniment to designer denim and casual couture, the line’s boots are fueled with
bold profiles, alluring details and distinct textures. Handcrafted in Italy, the boots utilize
premium leathers, hand-treated details, leather outsoles, and some may include snakeskin and other
exotic materials. Mark Nason and Siren by Mark Nason are available in upscale department stores
and better boutiques.
Kitson. Launched in the fourth quarter of 2005, Kitson footwear is a line of fashion sneakers
and sandals targeted to hip and trend-savvy women and girls. A licensed brand, Kitson is an
ultra-hip Los Angeles boutique known for sparking the hottest and newest trends, and where young
Hollywood celebrities come to shop. Kitson goods are must-have merchandise, featured in leading
style and lifestyle magazines. Kitson footwear is available at the Kitson retail boutique, upscale
department stores and other boutiques.
PRODUCT DESIGN AND DEVELOPMENT
Our principal goal in product design is to generate new and exciting footwear in all of our
product lines with contemporary and progressive styles and comfort-enhancing performance features.
Targeted to the active, youthful and style-savvy, we design most new styles to be fashionable and
marketable to the 12- to 24-year old consumer, while substantially all of our lines appeal to the
broader
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range of 5- to 40-year-old consumers, with an exclusive selection for infants and toddlers.
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 products’ success is related to our ability to recognize trends in the
footwear markets and to design products that anticipate and accommodate consumers’ ever-evolving
preferences. We are able to quickly translate the latest footwear trends into stylish, quality
footwear at a reasonable price by analyzing and interpreting current and emerging lifestyle trends.
Lifestyle trend information is compiled and analyzed by our designers from various sources,
including the review and analysis of modern music, television, cinema, clothing, alternative sports
and other trend-setting media; traveling to domestic and international fashion markets to identify
and confirm current trends; consulting with our retail customers for information on current retail
selling trends; participating in major footwear trade shows to stay abreast of popular brands,
fashions and styles; and subscribing to various fashion and color information services. In
addition, a key component of our design philosophy is to continually reinterpret and develop our
successful styles in our brand’s image.
The footwear design process typically begins about nine months before the start of a season.
Our products are designed and developed primarily by our in-house design staff. To promote
innovation and brand relevance, we utilize dedicated design teams, who report to our senior design
executives, and focus on each of the men’s, women’s and children’s categories. In addition, we
utilize outside design firms on an item-specific basis to supplement our internal design efforts.
The design process is extremely collaborative, as members of the design staff frequently meet with
the heads of retail, merchandising, sales, production and sourcing to further refine our products
to meet the particular needs of the target market.
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 embellishments, which are arrived at after
close consultation with our production department. Prototype blueprints and specifications are
created and forwarded to our manufacturers for a design prototype. The design prototypes are then
sent back to our design teams. Our major retail customers may also review these new design
concepts. 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. We also occasionally order limited production runs that 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. Our design teams can easily and quickly modify and
refine a design based on customer input. Generally, the production process can take six months to
nine months from design concept to commercialization.
SOURCING
Factories. Our products are produced by independent contract manufacturers located primarily
in China and, to a lesser extent, in Italy, Vietnam, Brazil and various other countries. We do not
own or operate any manufacturing facilities as we believe that the use of independent manufacturers
substantially increases our production flexibility and capacity while reducing capital expenditures
and avoiding the costs of managing a large production work force.
When possible, we seek to use 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 2005, we
had four manufacturers that accounted for approximately 59.7% of total purchases. One manufacturer
accounted for 32.4%, and one other accounted for 11.2% of our total purchases during the year ended
December 31, 2005. To date, we have not experienced difficulty in obtaining manufacturing services.
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% 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. We do not have any
long-term contracts with any of our manufacturers; however, we have long-standing relationships
with many of our manufacturers and believe our relationships to be good.
We closely monitor sales activity after initial introduction of a product in our concept
stores to determine whether there is substantial demand for a 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, while less popular styles can be
discontinued after only a limited production run. We believe that sales in our concept stores can
also help forecast sales in national retail stores, and
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we share this sales information with our wholesale accounts. Sales, merchandising, production
and allocations management analyze historical and current sales and market data from our wholesale
account base and our own retail stores to develop an internal product quantity forecast that allows
us to better manage our future production and inventory levels. For those styles with high
sell-through percentages, we maintain an in-stock position to minimize the time necessary to fill
customer orders by placing orders with our manufacturers prior to the time we receive customers’
orders for such footwear.
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 of all production is performed in the United States by our in-house
production department and in Asia through an approximately 165-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
convicted, forced or indentured labor (as defined under U.S. law) nor child labor (as defined by
the manufacturer’s country) is used in the production process, and 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 not only finished goods meet our established design specifications, but also that all
goods bearing our trademarks meet our standards for quality. Our quality control personnel located
in China and Taiwan 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 production. For some of our
lower volume manufacturers, our staff is on-site during significant production runs or we will
perform unannounced visits to their manufacturing sites to further monitor compliance with our
manufacturing specifications.
ADVERTISING AND MARKETING
With a marketing philosophy of “Unseen, Untold, Unsold,” we take a targeted approach to
marketing to drive traffic, build brand recognition and properly position our diverse lines within
the marketplace. Senior management is directly involved in shaping our image and the conception,
development and implementation of our advertising and marketing activities. The focus of our
marketing plan is print and television advertising, which is supported by outdoor, trend-influenced
marketing, public relations promotions and in-store support. In addition, we utilize celebrity
endorsees in our advertisements. We also believe our Internet websites and trade shows are
effective marketing tools to both consumers and corporate accounts. We have historically budgeted
advertising as a percentage projected net sales. In 2005, we advertised in a more efficient manner
while net sales increased, which resulted in advertising and marketing expenditures equaling 5.8%
of our annual net sales, which was below our historical range of 8% to 10% of annual net sales.
Advertising. The majority of our advertising is conceptualized by our in-house design team.
In 2005, we utilized the creative services of an outside photographer to also design several key
ads, from which our design team was able to create additional advertisements and marketing
materials. This allowed us to take a new approach to our advertising while also maintaining control
and integrity of the Skechers brand by building a relationship with one outside creative source yet
still crafting ads in-house.
We believe that our advertising strategies, methods and creative campaigns are directly
related to our success. Through our lifestyle and image-driven advertising, we generally seek to
build and increase brand awareness by linking the Skechers brand and our other brands to youthful,
contemporary lifestyles and attitudes rather than to market a particular footwear product. In
addition to our compelling Skechers lifestyle ads, we have also created product specific ads for
our men’s lines to appeal to both men and women who purchase footwear for men. Our ads are designed
with a broad approach to eliminate single categorization and to provide merchandise flexibility and
to facilitate the “brands and product designs” direction of evolving footwear fashions and consumer
preferences.
To further build brand awareness and influence consumer spending, we have selectively signed
endorsement agreements with celebrities whom we believed would reach new markets. Through the first
half of 2005, we continued our international endorsement agreement with global superstar Christina
Aguilera for our women’s lines. When the agreement expired at the end of June 2005, we signed 2005
American Idol winner and rising star Carrie Underwood to appear in Skechers advertisements in
support of our women’s lines. In recent years, we had similar endorsement agreements for Skechers
with singer and actress Britney Spears, professional basketball player and actor Rick Fox, and
actors Robert Downey, Jr., Matt Dillon and Rob Lowe. We also signed multi-platinum hip hop
superstar The Game as well as the Oscar-nominated actor Terrence Howard to support our 310 Motoring
brand. From time to
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time, we may sign other celebrities to endorse our brand name and image in order to
strategically market our products among specific consumer groups in the future.
In addition to advertising our Skechers branded lines through men’s, women’s and children’s
ads, we also support our Michelle K, Mark Nason and 310 Motoring lines through individual unique
print advertisements. For Michelle K and Mark Nason, we have focused on key-selling styles in
product-driven ads that captured the brands’ essence. For 310 Motoring, we have created several
lifestyle ads that reflected the high-end roots of this automotive inspired line, including ads
featuring multi-platinum hip hop recording artist The Game for his signature 310 footwear line.
Unltd. by Marc Ecko and Rhino Red advertisements are created and implemented by Ecko.Complex, LLC
dba Ecko Unltd., the parent company of Ecko Unltd. and Ecko Red, which allows for exposure of our
Mark Ecko footwear brands without us having to incur significant advertising costs.
With a targeted approach, our print ads appear regularly in popular fashion and lifestyle
consumer publications, such as GQ, Cosmopolitan, Elle, Lucky, Seventeen, Teen People, Maxim, Slam,
Rolling Stone, and Complex, as well as in weekly publications such as People, Us Weekly, Star, and
TV Guide, among others. Our television commercials are primarily produced in-house and air during
key selling seasons. In 2005, we created product-driven sponsor spots for Skechers Sport Fusion
for men and women, Skechers Sport for men, Skechers Work, and Skechers for boys and girls, as well
as for Michelle K Girl and 310 Motoring. We have found these to be a cost-effective way to
advertise during key national and cable programming. Our in-house media buyer strategically
selects the ideal programs and geographic areas for our commercials for maximum consumer impact.
Outdoor. In an effort to reach consumers where they shop and in high traffic areas as they
travel to and from work or while running errands, we launched a multi-level outdoor campaign that
included 800-plus mall kiosks, billboards, transportation systems and telephone kiosks. We believe
these are effective and efficient ways to reach a broad range of consumers and leave a lasting
impression of our Skechers branded lines.
Trend-Influenced Marketing/Public Relations. Our public relations team’s objectives are to
secure product placement in key fashion magazines, place our footwear on the feet of trend-setting
celebrities, and garner positive and accurate press on our company. Through our commitment to
aggressively promote our upcoming styles, our products are often featured in leading fashion and
pop culture magazines, as well as in select films and popular television shows. Our footwear has
been prominently displayed and referenced on news and magazine shows including The Today Show, Good
Day L.A., Country Music Television, and E! Style; and on entertainment shows, including Law &
Order, Fear Factor, and The Dr. Phil Show, among others. We have also amassed an array of prominent
product placements in magazines including Lucky, Seventeen, Teen People, Teen Vogue, CosmoGirl,
InStyle, Stuff, Maxim, Slam, Cargo, Dime and Footwear News. In addition, our brands have been
associated with cutting edge events and select celebrities, and our product has been seen worn by
trend-setters like Denis Leary, Eva Longoria, Black Eyed Peas, Big & Rich, Sugarland, Drew
Barrymore, John Corbett, Halle Berry, Ice-T, Paris Hilton and Jamie Foxx, among others.
Promotions. By applying creative sales techniques via a broad spectrum of mediums, our
marketing team seeks to build brand recognition and drive traffic to Skechers’ retail stores and
our retail partners’ locations. Skechers’ promotional strategies have encompassed in-store
specials, concert promotions, charity events, product tie-ins and giveaways, and collaborations
with national retailers and radio stations. Our imaginative promotions are consistent with
Skechers’ imaging and lifestyle.
Visual Merchandising. Our in-house visual merchandising team supports wholesale accounts,
distributors and our retail stores by developing displays that effectively leverage our products at
the point of purchase. Our point-of-purchase display items include signage, graphics, displays,
counter cards, banners and other merchandising items. These materials mirror the look and feel of
our national print advertising in order to reinforce brand image at the point-of-purchase.
Our visual merchandising coordinators (“VMC’s”) work with our sales force and directly with
our customers to ensure better sell-through at the retail level by generating greater consumer
awareness through Skechers brand displays. Our VMC’s communicate with and visit our wholesale
customers on a regular basis to aid in proper display of our merchandise. They also run in-store
promotions to enhance the sale of Skechers footwear and create excitement surrounding the Skechers
brand. We believe that these efforts help stimulate impulse sales and repeat purchases.
Trade Shows. To better showcase our diverse products to footwear buyers in the United States
and Europe, and to distributors around the world, we regularly exhibit at the leading trade shows.
Along with specialty trade shows, we exhibit at WSA’s The Shoe Show, FFANY and MAGIC in the United
States, and GDS, MICAM, Bread & Butter, and Who’s Next in Europe. Our dynamic, state-of-the-art
trade show exhibits are developed by our in-house architect to showcase our latest product
offerings in a lifestyle setting reflective of each of our brands. By investing in innovative
displays and individual rooms showcasing each line, our sales force can
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present a sales plan for each line and buyers are able to truly understand the breadth and
depth of our offerings, thereby optimizing commitments and sales at the retail level. For select
non-Skechers branded lines such as Michelle K, 310 Motoring and our Marc Ecko footwear lines, we
have created individual exhibits to ensure the brand integrity. Our innovative exhibits have won
numerous awards over the years, including Best Booth Design at the WSA Shoe Show, February 2001 and
February 2003, and for our Unltd. by Marc Ecko and Rhino Red booth in August 2004 and February
2005. For FFANY, we show in our own New York showroom as is common during this show.
Internet.
We also promote our brand image through our e-commerce
website, www.skechers.com, to
consumers who access the Internet. This website currently enables us to present information on our
products and store locations to consumers. Our website is interactive, affording consumers the
ability to directly order products on the Internet, and it provides us a mechanism for customer
feedback as well as allowing us to receive and respond directly to consumer feedback. Our website
is intended to enhance the Skechers brand without the associated costs of advertising.
Along with www.skechers.com, we have also established unique Internet websites for Michelle K
(www.michellek.com), Mark Nason (www.marknason.com) and 310 Motoring (www.310motoring.com). These
websites are designed to serve as marketing tools, properly imaging these brands while also
informing customers about the respective product lines.
PRODUCT DISTRIBUTION CHANNELS
We have three reportable segments – domestic wholesale sales, international wholesale sales
and retail sales. In addition, we report an “All other” segment, which includes our e-commerce
sales and other miscellaneous sales. In the United States, our products are available through a
network of wholesale accounts comprised of department, athletic and specialty stores.
Internationally, our products are available through wholesale accounts in more than 100 countries
and territories through our global network of distributors and our Canadian and European
subsidiaries. Additionally, 12 distributors opened 38 distributor-owned Skechers retail stores in
16 countries as of December 31, 2005. Skechers owns and operates retail stores both domestically
and internationally through three integrated retail formats—concept, factory outlet and warehouse
outlet stores. Each of these channels serves an integral function in the global distribution of our
products.
Domestic Wholesale. We distribute our footwear through the following domestic wholesale
distribution channels: department stores, specialty stores, athletic shoe stores and independent
retailers. Department stores and specialty retailers are the largest distribution channels, but we
believe that we appeal to a variety of wholesale accounts, many of whom may operate stores within
the same retail location due to our distinct product lines and variety of styles, from which
retailers can select those lines and styles that best satisfy the fashion, function and price
criteria of their customers. Management has a clearly defined growth strategy for each of our
channels of distribution. An integral component of our strategy is to offer our accounts the
highest level of customer service so that our products will be fully represented in existing retail
locations and new locations within each account.
In an effort to provide knowledgeable and personalized service to our wholesale accounts, the
sales force is segregated by product line, each of which is headed by a vice president or national
sales manager. Reporting to each sales manager are knowledgeable account executives and territory
managers. Our vice president and national sales managers report to our senior vice president of
sales. All of our vice president and national sales managers are compensated on a salary basis,
while our account executives and territory managers are compensated on a commission basis. None of
our domestic sales personnel sell competing products.
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-throughs. Our visual merchandise coordinators 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
that appropriate styles are purchased for specific accounts and for specific stores within those
accounts as well as to 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
our 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.
International Wholesale. Our products are sold in more than 100 countries and territories
throughout the world. We generate revenues from outside the United States from three principal
sources: (i) direct sales to department stores and specialty retail stores through our subsidiaries
in Canada, France, Germany, Spain, Italy, Portugal, Switzerland, Austria, the Benelux Region and
the United Kingdom, (ii) sales of our footwear to more than 30 foreign distributors who distribute
such footwear to department stores and specialty retail stores in countries and territories across
Eastern Europe, Asia, Latin America, South America, Africa, the Middle East
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and Australia, among other regions and (iii) to a lesser extent, royalties from licensees who
manufacture and distribute our non-footwear products outside the United States.
We believe that international distribution of our products represents a significant
opportunity to increase sales and profits. We intend to further increase our share of the
international footwear market by heightening our marketing presence in those countries in which we
currently have a presence through our international advertising campaigns, which are designed to
establish Skechers as a global brand synonymous with trend-right casual shoes.
| • | International Subsidiaries |
Europe
We currently distribute product in most of Western Europe through the following
subsidiaries: Skechers USA Ltd., with its offices and showrooms in London, England;
Skechers S.a.r.l., with its offices and showrooms in Lausanne, Switzerland; Skechers USA
France S.A.S., with its offices and showrooms in Paris, France; Skechers USA Deutschland
GmbH, with its offices and showrooms in Dietzenbach, Germany; Skechers USA Iberia, S.L.,
with its offices and showrooms in Madrid, Spain; Skechers USA Benelux B.V., with its
offices and showrooms in Waalwijk, the Netherlands; and Skechers USA Italia S.r.l., with
its offices and showroom in Verona, Italy.
In regards to our Skechers-owned retail stores in Europe, we have nine concept
stores and one factory outlet store located in five countries, including the key
locations of Oxford Street in London, Alstadt District in Düsseldorf and Kalverstraat
Street in Amsterdam.
To accommodate our European subsidiaries’ operations, we operate an approximately
240,000 square foot distribution center in Liege, Belgium. This distribution center is
currently used to store and deliver product to our subsidiaries and retail stores
throughout Europe.
Canada
Merchandising and marketing of our product in Canada is managed by our wholly-owned
subsidiary, Skechers USA Canada, Inc. with its offices and showrooms outside Toronto in
Mississauga, Ontario. Product sold in Canada is primarily sourced from our U.S.
distribution center in Ontario, California. We have one concept store located in
Toronto’s Eaton Centre and one factory outlet store located in Toronto.
| • | Distributors |
Outside of Western Europe and Canada, our footwear is distributed through an extensive
network of more than 30 distributors, who sell our products to department, athletic and
specialty stores in more than 100 countries around the world. Through agreements with 12 of
these distributors, 38 distributor-owned Skechers retail stores are open in 17 countries,
including nine stores that were opened in 2005. One distributor-owned store was closed in
2005.
| STORE | NUMBER OF | |||||||
| REGION | FORMAT | STORES | LOCATION(1) | |||||
Asia
|
Concept Warehouse |
3 4 |
Osaka, Japan; Tokyo, Japan; South Korea Osaka, Japan (2); Shizuoka, Japan; Tochigi-ken, Japan |
|||||
Australia
|
Concept | 1 | Sydney, Australia | |||||
Central America/ South America |
Concept | 22 | Chile (4); Columbia (5); Ecuador; El Salvador; Guatemala (2); Panama (2); Peru; Venezuela (6) | |||||
Eastern Europe
|
Concept | 4 | Moscow, Russia (3); Kiev, Ukraine | |||||
Middle East
|
Concept | 3 | Tel Aviv, Israel; Riyadh, Saudi Arabia; Dubai, UAE | |||||
South Africa
|
Concept | 1 | Sandton, South Africa | |||||
| (1) | One store per location except as otherwise noted. |
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The distributors are responsible for their respective store’s operations, have ownership
of their respective store’s assets and select the broad collection of our products to sell to
consumers in their regions. In order to maintain a globally consistent image, we provide
architectural, graphic and visual guidance and materials for the design of the stores, and we
train the local staff on our products and corporate culture. We intend to expand our
international presence and global recognition of the Skechers brand name by continuing to
sell our footwear to foreign distributors and by opening flagship retail stores with
distributors that have local market expertise.
Retail Stores. We pursue our retail store strategy through our three integrated retail
formats: the concept store, the factory outlet store and the warehouse outlet store. Our
three-store format enables us to promote the full Skechers product offering in an attractive
environment that appeals to a broad group of consumers. This format also allows us to manage our
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 February 28, 2006, we
operated 34 concept stores, 56 factory outlet stores and 32 warehouse outlet stores in the United
States, and ten concept stores and two warehouse outlet stores internationally. We closed three
stores and opened 11 new stores in 2005. We opened one new store in the first two months of 2006,
with an additional 15 to 20 stores planned to open by the end of 2006.
| • | Concept Stores. |
Our concept stores are located at either marquee street locations or in major shopping
malls in large metropolitan cities. Our concept stores have a threefold purpose in our
operating strategy. First, concept stores serve as a showcase for a wide range of our product
offering for the current season as we estimate that our average wholesale customer carries no
more than 5% of the complete Skechers line in any one location. Our concept stores showcase
our products in a cutting-edge, open-floor setting, providing the customer with the complete
Skechers story. Second, retail locations are generally chosen to generate maximum marketing
value for the Skechers brand name through signage, store front presentation and interior
design. Domestic locations include concept stores at Times Square and 34th Street in New
York, Santa Monica’s Third Street Promenade, Dallas’ Northpark Center, Las Vegas’ Fashion
Show Mall, Seattle’s Bellevue Square Mall, Woodfield Mall outside Chicago and international
locations include Oxford Street in London, Alstadt District in Dusseldorf and Kalverstraat
Street in Amsterdam. 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. We believe that product sell-through information and rapid customer feedback derived
from our concept stores enables our design, 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 opened one concept store and closed three
others in 2005.
The typical Skechers concept store is approximately 2,500 square feet, although in
certain markets we have opened concept stores as large as 6,400 square feet or as small as
1,200 square feet. When deciding where to open concept stores, we identify top geographic
markets in the larger metropolitan cities in the United States, Europe and Canada. When
selecting a specific site, we evaluate the proposed sites’ traffic pattern, co-tenancies,
sales volume of 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 their venues.
In an effort to market and test our non-Skechers brands, we opened a new format of
concept store, SoHo Lab. In 2004, we converted an existing Skechers concept store in New
York’s SoHo District to the new format, removing all Skechers signage and graphics, replacing
them with graphics from our fashion and street lines: Michelle K, Mark Nason, 310 Motoring,
Unltd. by Marc Ecko and Rhino Red. In 2005, we converted two additional Skechers concept
stores in urban and/or fashion locations to SoHo Lab stores, and in 2006, we plan to open
four more SoHo Lab locations built from the ground up. The stores may also include more
fashion forward Skechers styles.
| • | Factory Outlet Stores. |
Our factory outlet stores are generally located in manufacturers’ direct outlet centers
throughout the United States. In addition, we have two international outlet stores – one in
Canada that opened in 2005 and one in England. 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 9,000 square feet. Inventory in these stores is
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supplemented by
certain first-line styles sold at full retail price points. We opened nine domestic factory
outlet stores in 2005, and one more in the first two months of 2006.
| • | 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 5,200 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, which could otherwise compromise the Skechers brand image. We seek to
open our warehouse outlet stores in areas that are in close proximity to our concept stores
in order to facilitate the timely transfer of inventory that we want to liquidate as soon as
practicable. We did not open any new warehouse outlet stores in 2005.
Electronic Commerce. Our e-commerce sales represented less than 1.0% of total net sales in
2005, 2004 and 2003. Our website, www.skechers.com, is a virtual storefront that promotes the
Skechers brand name. Designed to provide a positive shopping experience, the website showcases our
products in an easy-to-navigate format, allowing consumers to browse our selections and purchase
our footwear. This virtual store has provided a convenient alternative-shopping environment, become
an efficient and effective additional retail distribution channel, and has improved our customer
service.
LICENSING
We believe that selective licensing of the Skechers brand name and our product line names to
manufacturers may broaden and enhance the individual brands without requiring significant capital
investments or additional incremental operating expenses. Our multiple product lines plus
additional subcategories present many potential licensing opportunities on terms with licensees
that we believe will provide more effective manufacturing, distribution or marketing of
non-footwear products. We also believe that the reputation of Skechers and its history in launching
brands has also enabled us to partner with reputable non-footwear brands in order to design and
market their footwear.
The first launch of Skechers licensed product was Skechers Kids apparel for boys and girls
from the licensee, Kids Headquarters, in the United States for the 2003 back-to-school selling
season. Due to the successful in-store launch of Skechers Kids, we
expanded our licensing agreement with Kids Headquarters to include infant and toddler apparel, boys’
and girls’ daywear and sleepwear, and swimwear for boys and girls. We also extended our territory
for licensed apparel for infants, toddlers and children by signing a licensing agreement with
MultiGroup Inc. for design and distribution of Skechers Kids in Canada.
As of February 28, 2006, we had 14 active domestic and international licensing agreements. In
addition to our licensing agreement with MultiGroup, we have international licensing agreements
with other licensees for the design and distribution of men’s and women’s active apparel in Israel;
for adult and children’s active apparel, swimwear, hosiery and accessories in Japan; and new in
2005, bags in select Central and South American countries and watches in the Philippines. We have
also signed an agreement for Skechers bags in China, which are expected to begin shipping in 2006.
We have signed agreements to design, develop and market footwear for the street lifestyle
apparel brands, Ecko Unltd., Ecko Red and Zoo York under the Marc Ecko Enterprises umbrella and for
Kitson, the ultra-hip Hollywood boutique.
DISTRIBUTION FACILITIES AND OPERATIONS
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 (i)
to our approximately 1.4 million square-foot internally managed distribution center located in
Ontario, California, (ii) to our approximately 240,000 square-foot distribution center located in
Liege, Belgium or (iii) directly from third-party manufacturers to our other international
customers. Upon receipt at either of the distribution centers, merchandise is inspected and
recorded in our management information system and packaged according to customers’ orders for
delivery. Merchandise is shipped to customers by whatever means each customer requests, which is
usually by common carrier. The 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 it includes
direct billing and shipping information.
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The following table sets forth a summary of our distribution facilities:
| ADDRESS | STATUS | SQUARE FOOTAGE | |||||
Avenue du parc Industriel, Liege, Belgium |
Leased since July 2002 | 241,700 | |||||
4100 East Mission Blvd., Ontario, CA |
Leased since June 2001 | 763,300 | |||||
1670 Champagne Avenue, Ontario, CA |
Owned since October 2000 | 263,700 | |||||
1661 South Vintage, Avenue, Ontario, CA |
Leased since November 1997 | 127,800 | |||||
1777 South Vintage, Avenue, Ontario, CA |
Leased since November 1997 | 284,600 | |||||
| 1,681,100 | |||||||
We believe that we have the capacity at our Ontario distribution center to increase our
current operations to meet any future growth, 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.
Our lease agreement for our Liege, Belgium distribution center provides for first right of
refusal on three remaining facilities planned for development, allowing for expansion of up to
approximately 735,000 square feet. We believe that the capacity available to us within this lease
agreement will allow for further growth of our international operations.
BACKLOG
As of December 31, 2005, our backlog was $250.5 million, compared to $220.5 million as of
December 31, 2004. 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 2006. However, for a variety of reasons, including customer demand
for our products, the timing of shipments, product mix of customer orders, the amount of in-season
orders and a shift towards tighter lead times within backlog levels, backlog may not be a reliable
measure of future sales for any succeeding period. In addition, cancellation rates that we have
realized in the past may not be indicative of cancellation rates to be expected in the future.
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 80
foreign countries. We also have design patents and pending design and utility patent applications
in both the United States and approximately 25 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 and 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 be certain that
we will be successful in this regard. Furthermore, we cannot be certain 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 has 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
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prohibitive. From time to time we discover products in the marketplace that are counterfeit
reproductions of our products or that otherwise infringe upon intellectual property rights held by
us. 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
our products 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 Inc., 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, Puma AG and New Balance Athletic Shoe, Inc. Our children’s shoes compete
with brands of children’s footwear such as those 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 been in existence for a longer period of time, 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 we do. We cannot
be certain that we will be able to compete successfully against present or future competitors, or
that competitive pressures will not have a material adverse effect on our business, financial
condition and results of operations.
EMPLOYEES
As of February 28, 2006, we employed 2,997 persons, 1,680 of whom were employed on a full-time
basis and 1,317 of whom 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.
ITEM 1A. RISK FACTORS
In addition to the other information in this annual report, 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 others in
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 material adverse effect on our results of operations or financial condition.
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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 the Skechers 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 consumer preferences,
consumers may consider our brand image to be outdated or associate our brand with styles of
footwear that are no longer popular. In the past, several footwear companies including ours 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 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 an
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 Stock.
We Depend Upon A Relatively Small Group Of Customers For A Large Portion Of Our Sales.
During 2005, 2004 and 2003, our net sales to our five largest customers accounted for
approximately 25.4%, 26.8% and 27.7% of total net sales, respectively. No customer accounted for
more than 10% of our net sales during 2005, 2004 and 2003. One customer accounted for 10.3% and
10.9% of net trade receivables at December 31, 2005 and December 31, 2004, respectively. 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 which may result in our loss of customers or our inability to collect
accounts receivable 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 International Sales And Manufacturing Operations Are Subject To The Risks Of Doing Business
Abroad, Particularly In China, 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 the year ended December 31, 2005 were derived from
sales of footwear manufactured in foreign countries, with most manufactured in China and, to a
lesser extent, in Italy, Vietnam 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 the following risks: political
and social unrest, including the military presence in Iraq;
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changing economic conditions; currency
exchange rate fluctuations; international political tension and terrorism; labor shortages and work
stoppages; electrical shortages, transportation delays; loss or damage to products in transit;
expropriation; nationalization; the imposition of domestic and international tariffs and trade
duties, import and export controls and other non-tariff barriers, exposure to different legal
standards (particularly with respect to intellectual property), compliance with foreign laws, and
changes in domestic and foreign governmental policies. We have not, to date, been materially
affected by any such risks, but we cannot predict the likelihood of such developments occurring or
the resulting long-term adverse impact on our business, results of operations or financial
condition.
In particular, because most of our products are manufactured in China, adverse changes in
trade or political relations with China, political instability in China, the occurrence of a
natural disaster such as an earthquake or hurricane in China or the outbreak of a pandemic disease
such as Severe Acute Respiratory Syndrome (SARS) or the Avian Flu in China would severely interfere
with the manufacture of our products and would have a material adverse effect on our operations. In
addition, electrical shortages, labor shortages or work stoppages may extend the production time
necessary to produce our orders, and there may be circumstances in the future where we may have to
incur premium freight charges to expedite the delivery of product to our customers. If we incur a
significant amount of premium charges to airfreight product for our customers, our gross profit
will be negatively affected if we are unable to collect those charges.
Also, our manufacturers located in China may be subject to the effects of exchange rate
fluctuations should the Chinese currency not remain stable with the U.S. dollar. The value of the
Chinese currency depends to a large extent on the Chinese government’s policies and China’s
domestic and international economic and political developments. Since 1994, the official exchange
rate for the conversion of the Chinese currency was pegged to the U.S. dollar at a virtually fixed
rate of approximately 8.28 Yuan per U.S. dollar. However, on July 21, 2005, the Chinese government
revalued the Yuan by 2.1%, setting the exchange rate at 8.11 Yuan per U.S. dollar, and adopted a
more flexible system based on a trade-weighted basket of foreign currencies of China’s main trading
partners. Under the new “managed float” policy, the exchange rate of the Yuan may shift each day up
to 0.3% in either direction from the previous day’s close, and as a result, the valuation of the
Yuan may increase incrementally over time should the China central bank allow it to do so, which
could significantly increase labor and other costs incurred in the production of our footwear in
China.
The Potential Imposition Of Additional Duties, Tariffs And Other Trade Restrictions, Including The
European Union’s Anticipated Anti-Dumping Duties On Leather Footwear Made In China And Vietnam,
Could Have An Adverse Impact On Our Sales And Profitability.
All of our products manufactured overseas and imported into the United States, the European
Union (“EU”) and other countries are subject to customs duties collected by customs authorities.
Customs information submitted by us is routinely subject to review by
customs authorities. We are unable to predict whether additional customs duties, anti-dumping
duties, quotas, safeguard measures or other trade restrictions may be imposed on the importation of
our products in the future. Such actions could result in increases in the cost of our products
generally and might adversely affect the sales and profitability of Skechers and the imported
footwear industry as a whole.
Following the phase-out at the beginning of 2005 of quotas that had been imposed by the EU
since 1994 on the import of certain types of footwear manufactured in China, and the expiration of
a separate EU anti-dumping case in 2003 against footwear made in China, Indonesia and Thailand,
there has been renewed pressure from the EU footwear manufacturing industry to re-impose some level
of trade protection on imported footwear from China, India, Vietnam and other exporting countries.
In mid-2005, the EU Trade Commission initiated an anti-dumping investigation into leather footwear
imported from China and Vietnam. Along with other major footwear manufacturers, we have been
actively participating as respondents in this investigation and are taking the position that
certain categories of footwear should not be within the product scope of this investigation and do
not meet the legal requirements of injury and price in an anti-dumping investigation, as part of
our efforts to minimize any adverse financial impact on our results of operations in 2006 and
beyond. We believe that our major competitors stand in much the same position of risk regarding
these potential trade measures.
We May Be Unable To Successfully Execute Our Growth Strategy Or Maintain Our Growth.
Although our company has generally exhibited steady growth since we started our business, we
had a decrease in size in the past and our rate of growth has declined at times as well, and we may
experience similar decreases in size or declines in rate of growth again in the future. Our ability
to grow in the future depends upon, among other things, the continued success of our efforts to
maintain our brand image and expand our footwear offerings and distribution channels. Furthermore,
as our business becomes larger, we may not be able to effectively manage our growth. We anticipate
that as our business continues to grow, we will have to improve
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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 impact our business, results of operations and financial condition.
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 2003 were lower
than anticipated. This lower level of sales adversely affected our operating results for 2003 and
could do so again in 2006 and beyond.
Economic, Political, Military Or Other Events In The United States Or 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
terrorist 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, or possible
military action, taken by the United States and other nations, in Iraq or other countries 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.
Our Quarterly Revenues And Operating Results Fluctuate As A Result Of A Variety Of Factors,
Including Seasonal Fluctuations In Demand For Footwear, Delivery Date Delays And Potential
Fluctuations In Our Annualized Tax Rate, 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. Our major customers generally have no obligation to purchase forecasted amounts and may
cancel orders, change delivery schedules or change the mix of products ordered with minimal notice
and without penalty. As a result, we may not be able to accurately predict our quarterly sales. In
addition, sales of footwear products have historically been somewhat seasonal in nature with the
strongest sales generally occurring in our second and third quarters for the back-to-school selling
season. Back-to-school sales typically ship in June, July and August, and delays in the timing,
cancellation, or rescheduling of these customer orders and shipments by our wholesale customers
could negatively impact our net sales and results of operations for our second and third quarters.
More specifically, the timing of when products are shipped is determined by the delivery schedules
set by our wholesale customers, which could cause sales to shift between our second and third
quarters. Because our expense levels are partially based on our expectations of future net sales,
our expenses may be disproportionately large relative to our revenues, and we may be unable to
adjust spending in a timely manner to compensate for any unexpected revenue shifts, which could
have a material adverse effect on our operating results. Also, our annualized tax rate is based on
projections of our domestic and international operating results for the year, which we review and
revise as necessary at the end of each quarter, and it is highly sensitive to fluctuations in
projected international earnings. Any quarterly fluctuations in our annualized tax rate that may
occur could have a material impact on our quarterly operating results. 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 Stock.
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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 2005
and 2004, the top four manufacturers of our products produced approximately 59.7% and 56.1% of our
total purchases, respectively. One manufacturer accounted for 32.4% and 28.2% of total purchases
during 2005 and 2004, respectively. A second manufacturer accounted for 11.2% and 11.0% of our
total purchases during 2005 and 2004, respectively. We do not have long-term contracts with our
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. In particular, manufacturers in China are facing a
labor shortage as migrant workers seek better wages and working conditions in farming and other
vocations, and if this trend continues, our current manufacturers’ operations could be adversely
affected.
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, this could result in our
customers canceling orders, refusing to accept deliveries or demanding reductions in purchase
prices, any of which could have a material adverse effect on our business and results of
operations.
Our Business Could Be Harmed If Our Contract Manufacturers, Suppliers Or Licensees Violate Labor,
Trade 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.
In addition, if we, or our foreign manufacturers, violate United States or foreign trade laws
or regulations, we may be subject 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 products, 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 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% of our gross wholesale sales during 2005 or 2004.
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.
Our Strategies Involve A Number Of Risks That Could Prevent Or Delay Any 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.
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In addition, some or a substantial number of new stores could be opened in regions of the
United States in which we currently have few or no stores. Any 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 that any new store openings are in
existing markets, we may experience reduced net sales volumes in existing stores in those markets.
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 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 that are heavily
dependent on customer traffic generated by tourism. Any substantial decrease in tourism resulting
from political, social or military events, 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.
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 Operating 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.
The Disruption, Expense And Potential Liability Associated With Existing And Unanticipated Future
Litigation Against Us Could Have A Material Adverse Effect On Our Business, Results Of Operations
And Financial Condition.
We are subject to various legal proceedings and threatened legal proceedings from time to time
as part of our business. We are not currently a party to any legal proceedings or aware of any
threatened legal proceedings, the adverse outcome of which, individually or
in the aggregate, we believe would have a material adverse effect on our business, results of
operations or financial condition. However, any unanticipated litigation in the future, regardless
of its merits, could significantly divert management’s attention from our operations and result in
substantial legal fees to us. Further, there can be no assurance that any actions that have been or
will be brought against us will be resolved in our favor or, if significant monetary judgments are
rendered against us, that we will have the ability to pay such judgments. Such disruptions, legal
fees and any losses resulting from these claims could have a material adverse effect on our
business, results of operations and financial condition.
Our Trademarks, Design Patents And Other Intellectual Property Rights May Not Be Adequately
Protected Outside The United States.
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
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outside the United States 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
United States. We may face significant expenses and liability in connection with the protection of
our intellectual property rights outside the United States, 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®, S in Shield
Design® and Performance-S Shifted Design® 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 and a limited number of utility
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 and technologies 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 and necessary management attention
to such matters, which could negatively impact our business or financial condition.
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
Stock.
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 38 of our retail
stores, our headquarters in Manhattan Beach and our domestic distribution center in Ontario.
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 or wild fires affecting California, could significantly disrupt our
business including the operation of our only domestic distribution center. We may be more
susceptible to these issues than our competitors whose operations are not as concentrated in
California.
Failure By Us To Comply With Any Of The Financial Covenants In Our Long-Term Debt Agreements And
$150 Million Line Of Credit Facility Could Have A Material Adverse Impact On Our Business.
A significant decrease in our operating results could adversely effect our ability to maintain
required financial covenants under our various long-term debt agreements and our $150 million
credit facility. If these financial covenants are not maintained, the creditors will have the
option to require immediate repayment of all outstanding long-term debt and any amounts outstanding
under the credit facility, if any, and some of these agreements also contain cross-default
provisions. The most likely result would require us to renegotiate certain terms of these
agreements, obtain waivers from the creditors or obtain new debt agreements with other creditors,
which may contain less favorable terms. If we are unable to renegotiate acceptable terms, obtain
necessary waivers or obtain new debt agreements, this could have a material adverse effect on our
business, results of operations and financial condition.
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Recognizing Compensation Expense Related To Stock Options Under FASB Statement 123(R) Will Reduce
Our Future Reported Earnings.
The Financial Accounting Standards Board (FASB) has issued a new accounting standard
(Statement 123(R)) requiring companies to begin recognizing compensation expense related to all
unvested and newly granted stock options. We included such expenses on a pro forma basis in the
notes to our quarterly and annual financial statements through December 31, 2005 in accordance with
U.S. GAAP and did not include compensation expense related to stock options in reported earnings.
We adopted Statement 123(R) on January 1, 2006 as required. Thus, our reported earnings will be
lower in 2006 and thereafter than they would otherwise be under the previous accounting treatment
for stock options, and as a result, the trading price of our Class A Common Stock could decline.
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, 2005, Robert Greenberg, Chairman of the Board and Chief Executive Officer,
beneficially owned 73.5% of our outstanding Class B Common Stock and members of Mr. Greenberg’s
immediate family beneficially owned the remainder of our outstanding Class B Common Stock. The
holders of Class A Common Stock and Class B Common Stock have identical rights except that holders
of Class A Common Stock are entitled to one vote per share while holders of Class B Common Stock
are entitled to ten votes per share on all matters submitted to a vote of our stockholders. As a
result, as of December 31, 2005, Mr. Greenberg beneficially owned approximately 64.5% of the
aggregate number of votes eligible to be cast by our stockholders, and together with shares
beneficially owned by other members of his immediate family, he beneficially owned approximately
87.5% 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 Stock. The
differential in the voting rights may adversely affect the value of our Class A Common Stock to the
extent that investors or any potential future purchaser view the superior voting rights of our
Class B Common Stock to have value.
Our Charter Documents And Delaware Law May Inhibit A Takeover, Which May Cause A Decline In The
Value Of Our Stock.
Provisions of Delaware law, our certificate of incorporation or our bylaws could make it more
difficult for a third party to acquire us, even if closing such a transaction would be beneficial
to our stockholders. Mr. Greenberg’s substantial beneficial ownership
position, together with the authorization of Preferred Stock, the disparate voting rights
between our Class A Common Stock and Class B Common Stock, the classification of our Board of
Directors and the lack of cumulative voting in our certificate of incorporation and bylaws, may
have the effect of delaying, deferring or preventing a change in control, may discourage bids for
our Class A Common Stock at a premium over the market price of the Class A Common Stock and may
adversely affect the market price of our Class A Common Stock.
We Are Still Exposed To Potential Risks From Recent Legislation Requiring Public Companies To
Evaluate Controls Under Section 404 Of The Sarbanes-Oxley Act Of 2002.
We are subject to various regulatory requirements, including the Sarbanes-Oxley Act of 2002.
We, like all other public companies, are incurring expenses and, to a lesser extent, diverting
management’s time in an effort to comply with Section 404 of the Sarbanes-Oxley Act of 2002. We
have implemented processes documenting and evaluating our system of internal controls. If, in the
future, management identifies one or more material weaknesses, or our external auditors are unable
to attest that our management’s report is fairly stated or to express an opinion on the
effectiveness of our internal controls, this could result in a loss of investor confidence in our
financial reports, have an adverse effect on our stock price and/or subject us to sanctions or
investigation by regulatory authorities.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
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ITEM 2. PROPERTIES
Our corporate headquarters and additional administrative offices are located at four premises
in Manhattan Beach, California, which consist of an aggregate of approximately 100,000 square feet.
We own and lease portions of our corporate headquarters and administrative offices. The leased
property expires between February 2007 and October 2010, with options to extend these leases in
some cases, and the current aggregate annual rent for the leased property is approximately $0.4
million. Also, construction commenced in 2005 on another corporate facility in Manhattan Beach,
California that is expected to be approximately 55,000 square feet. This facility is scheduled to
be completed by the end of 2007.
Our U.S. 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 rent of
approximately $4.2 million. The leased property expires between November 2007 and May 2011, and
these leases contain rent escalation provisions. The owned distribution facility is approximately
264,000 square feet.
Our European distribution center consists of a 240,000 square-foot facility in Liege, Belgium
under a 25-year operating lease with base rent of approximately $1.1 million per year. The lease
provides for first right of refusal on three facilities planned for development, allowing for
expansion up to a total of approximately 735,000 square feet. We believe that the capacity
available to us within our lease agreement should allow for further growth of our international
operations. The lease agreement also provides for early termination at five-year intervals
beginning in February 2007, pending notification as prescribed in the lease.
All of our domestic retail stores and showrooms are leased with terms expiring between
February 2006 and September 2018. The leases provide for rent escalations tied to either increases
in the lessor’s operating expenses, fluctuations in the consumer price index in the relevant
geographical area or a percentage of the store’s gross sales in excess of the base annual rent.
Total base rent expense related to our domestic retail stores and showrooms was $17.8 million for
the year ended December 31, 2005.
We also lease all of our international administrative offices, retail stores and showrooms
located in Canada, France, Germany, Switzerland, Italy, Spain, the Netherlands and the United
Kingdom. The leased properties expire at various dates between July 2006 and September 2018. Total
rent for the leased properties aggregated approximately $6.0 million for 2005.
ITEM 3. LEGAL PROCEEDINGS
On December 2, 2002, a class action complaint entitled OMAR QUINONES v. SKECHERS USA, INC. et
al. was filed in the Superior Court for the State of California for the County of Orange (Case No.
02CC00353). The complaint, as amended, alleges overtime and related violations of the California
Labor Code on behalf of managers of Skechers’ retail stores and seeks, inter alia,
damages and restitution, as well as injunctive and declaratory relief. On February 25, 2003,
another related class action complaint entitled MYRNA CORTEZ v. SKECHERS USA, INC. et al. was filed
in the Superior Court for the State of California for the County of Los Angeles (Case No.
BC290932), asserting similar claims and seeking similar relief on behalf of assistant managers. On
July 7, 2004, a third class action complaint entitled MYRNA CORTEZ et al. v. SKECHERS USA, INC. et
al. was filed in the Superior Court for the State of California for the County of Los Angeles (Case
No. BC318101). The complaint alleges wage violations of the California Labor Code and unfair
business practices relating to deductions for uniforms on behalf of employees of Skechers’ retail
stores and seeks, inter alia, damages and civil penalties, as well as injunctive relief. On
December 20, 2004, the parties agreed to a preliminary settlement that fully resolved all claims
brought by the plaintiffs in each of the three lawsuits. Under the terms of the preliminary
settlement, Skechers was to pay a potential maximum settlement amount of approximately $1.8
million, which was recorded to other expense in the consolidated statement of earnings during the
fourth quarter of 2004, to cover claims made by eligible class members, plaintiff attorneys’ fees
and costs, and costs of a third-party administrator. On July 18, 2005, the court approved the
preliminary settlement, and all claims from eligible class members have been received. The final
settlement payout, which was within the $1.8 million amount that was accrued and reserved, was $1.6
million.
On March 25, 2003, a shareholder securities class action complaint captioned HARVEY SOLOMON v.
SKECHERS USA, INC. et al. was filed against Skechers and certain of its officers and directors in
the United States District Court for the Central District of California (Case No. 03-2094 DDP). On
April 2, 2003, a shareholder securities class action complaint captioned CHARLES ZIMMER v. SKECHERS
USA, INC. et al. was filed against Skechers and certain of its officers and directors in the United
States District Court for the Central District of California (Case No. 03-2296 PA). On April 15,
2003, a shareholder securities class action complaint captioned MARTIN H. SIEGEL v. SKECHERS USA,
INC. et al. was filed against Skechers and certain of its officers and directors in the United
States District Court for the Central District of California (Case No 03-2645 RMT). On May 6, 2003,
a shareholder securities class action complaint captioned ADAM D. SAPHIER v. SKECHERS USA, INC. et
al. was served on Skechers
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and certain of its officers and directors in the United States District
Court for the Central District of California (Case No. 03-3011 FMC). On May 9, 2003, a shareholders
securities class action complaint captioned LARRY L. ERICKSON v. SKECHERS USA, INC. et al. was
served on Skechers and certain of its officers and directors in the United States District Court
for the Central District of California (Case No. 03-3101 SJO). Each of these class action
complaints alleged violations of the federal securities laws on behalf of persons who purchased
publicly traded securities of Skechers between April 3, 2002 and December 9, 2002. In July 2003,
the court in these federal securities class actions, all pending in the United States District
Court for the Central District of California, ordered the cases consolidated and a consolidated
complaint to be filed and served. On September 25, 2003, the plaintiffs filed a consolidated
complaint entitled In re SKECHERS USA, Inc. Securities Litigation, Case No. CV-03-2094-PA in the
United States District Court for the Central District of California, consolidating all of the
federal securities actions above. The complaint names as defendants Skechers and certain officers
and directors and alleges violations of the federal securities laws and breach of fiduciary duty on
behalf of persons who purchased publicly traded securities of Skechers between April 3, 2002 and
December 9, 2002. The complaint seeks compensatory damages, interest, attorneys’ fees and
injunctive and equitable relief. Skechers moved to dismiss the consolidated complaint in its
entirety. On May 10, 2004, the court granted Skechers’ motion to dismiss with leave for plaintiffs
to amend the complaint. On August 9, 2004, plaintiffs filed a first amended consolidated complaint
for violations of the federal securities laws. The allegations and relief sought were virtually
identical to the original consolidated complaint. Skechers has moved to dismiss the first amended
consolidated complaint and the motion was set for hearing on December 6, 2004. On March 21, 2005,
the court granted the motion to dismiss the first amended consolidated complaint with leave for
plaintiffs to amend one final time. On April 7, 2005, plaintiffs elected to stand on the first
amended consolidated complaint and requested entry of judgment so that an appeal from the court’s
ruling could be taken. On April 26, 2005, the court entered judgment in favor of Skechers and the
individual defendants, and on May 3, 2005, plaintiffs filed an appeal with the United States Court
of Appeals for the Ninth Circuit. As of the date of filing this annual report, all briefing by the
parties has been completed and the parties are waiting on a hearing date. Discovery has not
commenced in the underlying action. While it is too early to predict the outcome of the appeal and
any subsequent litigation, Skechers believes the suit is without merit and intends to vigorously
defend against the claims.
On April 3, 2003, a shareholder derivative complaint captioned BRADFORD MITCHELL v. JEFFREY
GREENBERG et al. was filed against Skechers and certain of its officers in the Superior Court of
the State of California, Los Angeles County (Case No. BC 293317). On April 3, 2003, a shareholder
derivative complaint captioned GEORGIA MANOLAS v. JEFFREY GREENBERG et al. was filed against
Skechers and certain of its officers in the Superior Court of the State of California, Los Angeles
County (Case No. BC293388). On April 8, 2003, a shareholder derivative complaint captioned JEFF
GRAVITTER v. ROBERT Y. GREENBERG was filed against Skechers and certain of its officers in the
Superior Court of the State of California, Los Angeles County (Case No. BC293561). Each of these
class action complaints included allegations of violations of California Corporation Code § 25402
and breach of fiduciary duty. On August 29, 2003, the plaintiffs in these state derivative actions
filed a consolidated complaint entitled In re SKECHERS USA, Inc. Derivative Litigation, Case No.
BC-293317, in the Superior Court of the State of California, Los Angeles County, consolidating all
of the state derivative actions above. The complaint alleges violations of California Corporation
Code §25402, breaches of fiduciary duty, waste of corporate assets and unjust enrichment. The
complaint sought compensatory damages, treble damages, disgorgement of profits, imposition of a
constructive trust, equitable and injunctive relief, and costs. The matter had been settled in
principle and a settlement stipulation between the parties had been signed, although the settlement
was subject to court approval. On June 3, 2005, the court declined to approve the proposed
settlement, although the court stated that the parties are free to settle the case between each
other without formal court approval and indeed are encouraged to do so. In response, the parties
revised the stipulation of settlement and opted to give the shareholders notice of settlement. The
parties sought court approval of the revised settlement, and the court approved such settlement on
December 19, 2005. The settlement was funded entirely by Skechers’ insurance carrier.
On May 19, 2005, Rosemary Almanza filed a lawsuit against Skechers in the Superior Court of
the State of California, County of San Bernadino, ROSEMARY ALMANZA v. SKECHERS U.S.A., INC. (Case
No. RCV 087714). The complaint alleges wrongful termination under the California Fair Employment
and Housing Act, California Government Code §12900, et seq., as a result of harassment,
discrimination and retaliation against Ms. Almanza. The complaint seeks compensatory damages,
punitive and exemplary damages, interest and attorneys’ fees. Skechers plans on defending the
allegations vigorously and believes the claims are without merit. On February 20, 2006, the
parties settled the suit, and the settlement did not have a material adverse effect on our
company’s financial condition or results of operations.
On September 23, 2005, Gary Palmer filed a lawsuit in United States District Court, Eastern
District of California against Chelsea Financing Partnership, L.P., which is the owner of an outlet
mall in Folsom, California, and 71 retailers including Skechers located in the outlet mall (Case
No. 2:05-cv-01935-MCE-GGH). The complaint alleges that Chelsea Financing Partnership, L.P. and the
retailers have violated the Americans with Disabilities Act of 1990, the Disabled Persons Act and
the Unruh Civil Rights Act by failing to make the facilities fully and equally accessible to
handicapped individuals, and that such violations discriminate against
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plaintiff. The complaint
seeks injunctive and preventive relief, declaratory relief, actual and statutory damages, exemplary
damages and attorneys’ fees from the defendants. On December 14, 2005, the parties settled the
suit, and the settlement did not have a material adverse effect on our company’s financial
condition or results of operations.
On December 21, 2005, Twelve Ten Studios, Inc. filed a lawsuit against Skechers in United
States District Court, Central District of California, TWELVE TEN STUDIOS, INC. v. SKECHERS U.S.A.,
INC. (Case No. CV 05008863). The complaint alleges copyright infringement for use of an embroidered
fabric design authored by plaintiff for use on women’s footwear in 2003. The complaint seeks
injunctive relief, compensatory damages, punitive and exemplary damages, interest, and attorneys’
fees and costs. Although Skechers believed the case was without merit, the style at issue was
insignificant and the matter was settled on a confidential basis to avoid costly and protracted
litigation. Skechers does not believe the settlement will have a material adverse effect on our
company’s financial condition or results of operations.
Skechers occasionally becomes involved in litigation arising from the normal course of
business and we are unable to determine the extent of any liability that may arise. Other than the
foregoing, we have no reason to believe that any liability with respect to pending legal actions,
individually or in the aggregate, will have a material adverse effect on our company’s consolidated
financial statements or 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
2005.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Our Class A Common Stock trades on the New York Stock Exchange 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, 2005 |
||||||||
First Quarter |
$ | 16.90 | $ | 12.80 | ||||
Second Quarter |
15.62 | 11.18 | ||||||
Third Quarter |
18.19 | 13.94 | ||||||
Fourth Quarter |
16.50 | 12.00 | ||||||
YEAR ENDED DECEMBER 31, 2004 |
||||||||
First Quarter |
$ | 13.31 | $ | 7.51 | ||||
Second Quarter |
14.55 | 10.17 | ||||||
Third Quarter |
15.25 | 11.56 | ||||||
Fourth Quarter |
15.25 | 10.60 | ||||||
As of March 1, 2006, there were 110 holders of record of our Class A Common Stock (including
holders who are nominees for an undetermined number of beneficial owners) and 23 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.
Since our conversion from an S Corporation to a C Corporation prior to the initial public
offering of our Class A Common Stock in 1999, 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 Stock 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.
Our equity compensation plan information is provided as set forth in Part III, Item 12 of this
annual report.
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ITEM 6. SELECTED FINANCIAL DATA
The following tables set
forth our company’s selected
consolidated financial data as of and for each of the years in the five-year period ended December 31, 2005.
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
| YEARS ENDED DECEMBER 31, | ||||||||||||||||||||
| 2005 | 2004 | 2003 | 2002 | 2001 | ||||||||||||||||
STATEMENT OF EARNINGS DATA: |
||||||||||||||||||||
Net sales |
$ | 1,006,477 | $ | 920,322 | $ | 834,976 | $ | 943,582 | $ | 960,385 | ||||||||||
Gross profit |
420,482 | 370,857 | 317,686 | 386,673 | 406,180 | |||||||||||||||
Royalty income, net |
6,628 | 7,060 | 4,170 | 1,145 | (303 | ) | ||||||||||||||
Operating expenses: |
||||||||||||||||||||
Selling |
81,378 | 79,673 | 84,653 | 94,274 | 111,401 | |||||||||||||||
General and administrative |
269,436 | 248,999 | 238,550 | 210,889 | 205,989 | |||||||||||||||
Earnings (loss) from operations |
76,296 | 49,245 | (1,347 | ) | 82,655 | 88,487 | ||||||||||||||
Interest expense, net |
4,786 | 7,973 | 8,839 | 8,927 | 13,852 | |||||||||||||||
Earnings (loss) before income taxes |
72,797 | 38,720 | (10,373 | ) | 75,341 | 75,955 | ||||||||||||||
Net earnings (loss) |
44,717 | 23,553 | (11,867 | ) | 47,036 | 47,270 | ||||||||||||||
Net earnings (loss) per share:(1) |
||||||||||||||||||||
Basic |
$ | 1.13 | $ | 0.61 | $ | (0.31 | ) | $ | 1.26 | $ | 1.30 | |||||||||
Diluted |
$ | 1.06 | $ | 0.59 | $ | (0.31 | ) | $ | 1.20 | $ | 1.24 | |||||||||
Weighted average shares:(1) |
||||||||||||||||||||
Basic |
39,686 | 38,638 | 37,840 | 37,275 | 36,409 | |||||||||||||||
Diluted |
44,518 | 39,800 | 37,840 | 40,854 | 38,059 | |||||||||||||||
| AS OF DECEMBER 31, | ||||||||||||||||||||
| BALANCE SHEET DATA: | 2005 | 2004 | 2003 | 2002 | 2001 | |||||||||||||||
Working capital |
$ | 361,210 | $ | 313,883 | $ | 275,124 | $ | 286,760 | $ | 139,972 | ||||||||||
Total assets |
581,957 | 518,653 | 466,533 | 483,156 | 407,486 | |||||||||||||||
Long-term debt, excluding current portion |
107,288 | 113,038 | 116,047 | 117,204 | 29,616 | |||||||||||||||
Stockholders’ equity |
343,830 | 294,895 | 255,654 | 259,236 | 199,016 | |||||||||||||||
| (1) | Basic earnings (loss) per share represents net earnings (loss) divided by the weighted-average number of common shares outstanding for the period. Diluted earnings (loss) per share, in addition to the weighted average determined for basic earnings per share, reflects the potential dilution that could occur if options to issue common stock were exercised or converted into common stock and assumes the conversion of our 4.50% Convertible Subordinated Notes for the period outstanding since their issuance in April 2002, unless their inclusion would be anti-dilutive. |
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
GENERAL
We design, market and sell contemporary footwear for men, women and children under the
Skechers brand as well as seven other unique brand names. Our footwear is sold through a wide range
of department stores and leading specialty retail stores, mid-tier retailers, boutiques, our own
retail stores, distributor-owned international 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.
Our operations are organized along our distribution channels and have the following three
reportable sales segments – domestic wholesale sales, international wholesale sales and retail
sales. In addition, we report an “All other” segment, which includes our e-commerce sales and
other miscellaneous sales. We evaluate segment performance based primarily on net sales and gross
margins. See detailed segment information in footnote 12 to our consolidated financial statements
included under Part II, Item 8 of this annual report.
FINANCIAL OVERVIEW
Our net sales for 2005 increased $86.2 million, or 9.4% percent, to $1.006 billion from $920.3
million in 2004. Our strong performance in 2005 was the result of our dedicated efforts to
consistently deliver trend-right styles, which has led to an increased demand for our in-season
product and continued growth in our fashion and street lines. Our domestic wholesale segment is
our largest distribution channel comprising 63.0%, 63.3%, and 67.4% of our consolidated net sales
for the years ended December 31, 2005, 2004 and 2003, respectively. Our international wholesale
sales comprised 16.3%, 17.0%, and 14.6% of our consolidated net sales for the years ended December
31, 2005, 2004 and 2003, respectively. Retail sales comprised 20.0%, 19.2%, and 17.3% of our
consolidated net sales for the years ended December 31, 2005, 2004 and 2003, respectively, of which
our domestic retail sales comprised 18.4%, 17.6%, and 16.0% of our consolidated net sales for the
years ended December 31, 2005, 2004 and 2003, respectively. Our international retail sales did not
comprise more than 10% of our consolidated net sales in 2005, 2004 or 2003.
Domestic wholesale unit sales volume increased 8.1% to 34.4 million pairs in 2005 from 31.8
million pairs in 2004, and our average selling price per pair increased 0.8% to $18.45 in 2005 from
$18.31 in 2004. These increases in average selling price per pair and increase in unit sales volume
were due to the continued improvement and favorable response to our in-season product in 2005.
We achieved diluted earnings per share of $1.06 on net sales of $1.006 billion in 2005.
Our higher net sales and profitability for 2005 as compared to 2004 are primarily attributable
to stronger than anticipated sales of in-line product, increased margins due to a shift in sales to
our higher margin business units, increased international wholesale and retail sales, and a
reduction in selling expenses as a percentage of net sales. We had working capital of $361.2
million at December 31, 2005, an increase of $47.3 million from working capital of $313.9 million
at December 31, 2004. We generated an increase of $59.3 million in cash during 2005 bringing our
cash balance to $197.0 million at year end compared to $137.7 million at December 31, 2004.
These positive results are being driven by focusing on our core strengths and 2005 initiatives
which included:
New product design and delivery. Our success depends on our ability to frequently introduce
new styles and product lines as well as design products in anticipation of consumers’ ever-evolving
preferences. This includes building our existing product lines with updates to proven sellers as
well as creating new styles that we believe will become core to the line in upcoming seasons. Our
focus in 2005 was primarily on updating many key sellers in our current lines and growing our
product offering for our recently launched fashion and street lines: 310 Motoring, Unltd. by Marc
Ecko and Rhino Red. In addition, we also introduced two new product lines: Kitson for women and
girls, and Siren by Mark Nason for women.
We will continue to broaden our product offering with new lines that do not directly compete
with our existing brands and allow us the opportunity to broaden the targeted demographic profile
of our consumer base, increase our shelf space and enter into new doors without detracting from
existing business. Recently, we announced a licensed line of footwear for Zoo York, which is one
of the leading action sport apparel brands, that we expect to introduce for the 2006 back-to-school
selling season.
Building our brands. As a marketing-driven company, we consistently focus on advertising the
Skechers brands in targeted publications, on key television programming and in high traffic areas
and key malls. During 2005, we capitalized on our presence with
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celebrity endorsee driven ads — first with the worldwide Christina Aguilera campaign that
concluded in June, and then with the launch of our new Skechers celebrity endorsee, rising star and
American Idol winner Carrie Underwood. We believe Ms. Underwood’s appeal and popularity will have
a positive impact on our brand and create further demand for our product as her debut album remains
one of the top albums in the United States. In addition, the launch of television sponsorship
campaigns for our Skechers men’s, women’s and children’s lines will further grow our brand with our
diverse consumer base.
Our goal with our fashion and street lines is to increase brand recognition through the
continued presence of print and television advertising in targeted markets. Depending on need, each
brand has its own print campaign and some may have additional forms of marketing, such as
television. Of the seven brands that comprise this division, Unltd. by Marc Ecko and Rhino Red are
globally recognized brands, Michelle K and Mark Nason are becoming more established through several
years of marketing efforts, and 310 Motoring and Kitson are brands with rapidly growing
recognition. With the appeal and uniqueness of the 310 Motoring brand, we were able to develop a
signature line of sneakers with multi-platinum hip hop recording artist The Game, which has
resulted in a complete marketing program featuring him. In addition, we signed an endorsement deal
with Oscar-nominated actor Terrence Howard to support our 310 Motoring brand. We believe that
these campaigns, including the 310/Game campaign, should generate additional demand for our fashion
and street products in 2006.
Targeted approach to licensing. We have signed select licensing deals in the United States
and abroad to further grow and enhance the image of the Skechers brand. Our most significant
domestic license to date is with Kids Headquarters for Skechers Kids apparel, daywear and
sleepwear, which launched for the back-to-school selling season in 2003. We have also signed
licensing agreements for apparel and/or accessories in Japan, Israel, China, Philippines, and
Central and South America. We believe these licenses will have a positive impact on our brand in
these international markets.
Further develop international businesses. In 2005, we continued to focus on improving our
international operations by (i) increasing our customer base within our subsidiary business, (ii)
increasing the product count within each account, (iii) delivering the right product into the right
markets, specifically with our distributor business and (iv) tailoring our product offerings
currently available to our international customers to increase demand for our product. Our
international business is supported by eight subsidiaries that sell direct to wholesale accounts in
11 countries in Europe and in Canada. We believe the continued strength of our international
business is a direct result of a broader acceptance of our trend-right product and increases in
style counts. We believe most of our distributors have implemented appropriate product and
marketing efforts, which positions them to improve their businesses in 2006. We expect countries
where distributors have opened Skechers retail stores to benefit the most from these efforts.
Further grow our company-owned retail business. With a focus on profitably growing our retail
business, in 2005 we increased our store count by eight stores, and we opened one additional store
in Utah in the first two months of 2006, bringing our domestic and international store count to
134. We have seen double digit comparable store sales growth in our domestic retail business during
2005 and believe that it will continue to grow as we expand into new domestic markets. We plan to
open another 15 to 20 stores in 2006.
Continued management of expenses. We continue to focus on cost management and are dedicated
to growing profitably. In 2005, our selling and general and administrative expenses declined
slightly as a percentage of net sales. In addition, we saw improved gross margins as a result of
improved management of our inventory levels as well as a shift in sales to our higher margin
business units.
YEAR ENDED DECEMBER 31, 2005 COMPARED TO THE YEAR ENDED DECEMBER 31, 2004
Net sales
Net sales for 2005 were $1.006 billion, an increase of $86.2 million, or 9.4%, over net sales
of $920.3 million in 2004. The increase in net sales was due to increased domestic wholesale sales,
retail sales and increased direct international sales in Germany, Spain, Benelux, Italy and Canada,
offset by decreased sales in the United Kingdom and France. Our domestic wholesale segment
increased 8.9%, or $52.1 million, to $634.3 million compared to $582.2 million in 2004. The
increase in domestic wholesale segment net sales came on a 8.1% unit sales volume increase to 34.4
million pairs from 31.8 million pairs in 2004. Our average selling price per pair increased 0.7% to
$18.45 from $18.31 in 2004. The increase in sales was a result of increased demand for our
in-season products and broader acceptance of our new lines, including sport fusion and casual
fusion footwear. The strongest increases came in our Women’s Active, Mark Ecko, and Men’s USA
lines.
Our retail segment sales increased $24.8 million to $201.6 million in 2005, a 14.0% increase
over sales of $176.8 million in 2004. The increase in retail sales was due to a net increase of
eight stores, increased sales across all three store formats and positive
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comparable store sales. During 2005, we opened ten new domestic stores, one international
store and closed three other domestic stores. These new stores contributed $4.6 million in net
sales during 2005. Of our new store additions, ten were outlet stores and one was a concept store.
In addition, during 2005, we realized positive comparable store sales increases in our domestic
and international retail stores of 16.9% in our concept stores comparable sales and 3.7% in our
international store comparable sales. Our domestic retail sales increased 14.7% due to positive
comparable sales and having four retail stores that were opened in 2004 being open the entire year
in 2005. Our international retail sales increased 6.7% in 2005 compared to 2004, due to increased
comparable sales, the opening of one additional store, as well as favorable currency translation
adjustments. We currently anticipate opening one international retail store in 2006.
We currently have 122 domestic retail stores, and we believe that we have a presence in most
major markets. We currently plan to open between approximately 15 to 20 domestic retail stores in
2006. During 2005 we closed three under-performing retail stores as compared to closing four
retail stores in 2004. We periodically review all of our stores for impairment. During 2005, we
recorded an impairment charge of $0.9 million related to leasehold improvements for two of our
stores. Further, we carefully review our under-performing stores and may consider the non-renewal
of leases upon completion of the current term of the applicable lease.
Our international wholesale segment sales increased $7.0 million to $163.5 million in 2005, a
4.5% increase over sales of $156.5 million in 2004. Our international wholesale sales consist of
direct subsidiary sales – those we make to department stores and specialty retailers — and sales to
our distributors who in turn sell to department stores and specialty retailers in various
international regions where we do not sell direct. The increase in international wholesale sales
was primarily due to increased direct subsidiary sales, which were partially offset by reduced
distributor sales. Direct subsidiary sales increased $11.1 million, or 15.4%, to $83.4 million
compared to net sales of $72.3 million in 2004. The increase in direct subsidiary sales was
primarily due to increased sales into Germany, Canada, Spain and Italy. Our distributor sales
decreased $4.1 million to $80.1 million in 2005, a 4.9% decrease over sales of $84.2 million in
2004. This was primarily due to decreased sales into Japan.
Our e-commerce sales, included in our “All other” segment, increased $2.2 million to $7.0
million in 2005, a 46.0% increase over sales of $4.8 million in 2004. Our e-commerce sales made up
less than 1% of our consolidated net sales in both 2005 and 2004.
Gross profit
Gross profit for 2005 increased $49.6 million to $420.5 million as compared to $370.9 million
in 2004. Our domestic wholesale segment increased $18.0 million, or 8.4%, to $232.4 million in
2005 compared to $214.4 million in 2004. Gross profit as a percentage of net sales, or gross
margin, increased to 41.8% in 2005 from 40.3% in 2004. This gross margin increase was the result of
the increase in international wholesale margins, which increased to 37.2% in 2005 from 34.6% for
2004, and as a result of retail sales becoming a larger portion of consolidated net sales, which
achieve higher gross margins than our wholesale sales. Increased margins was also a result of
increased demand for our in-season products and broader acceptance of our new lines, including
sport fusion and casual fusion footwear.
Gross profit for our retail segment increased $22.5 million, or 22.2%, to $123.9 million in
2005 as compared to $101.4 million in 2004. This increase in gross profit was due to four stores
that were opened in 2004 being open the entire year in 2005 and positive comparable store sales
increases of 3.7% and 16.9% in our international and domestic stores, respectively. During 2005,
we opened ten new domestic stores, one international store and closed three other domestic stores.
Gross margins increased to 61.5% in 2005 as compared to 57.4% in 2004. The increase in margin was
primarily due to a larger portion of our retail sales coming from our higher margin concept stores
and positive comparable store sales increases.
Gross profit for our international wholesale segment increased $6.7 million, or 12.4%, to
$60.8 million for 2005 compared to $54.1 million in 2004. Gross margins were 37.2% for 2005
compared to 34.6% in 2004. The increase in gross margins was primarily due to increased margins in
our distributor business. The increase in distributor gross margins was primarily due to stronger
sales of in-line merchandise and better product sell-throughs. International wholesale sales
through our foreign subsidiaries achieve higher gross margins than our international wholesale
sales through our foreign distributors. Gross margins for our direct subsidiary sales were 42.4%
for both 2005 and 2004.
Our cost of sales includes the cost of footwear purchased from our manufacturers, royalties,
duties, quota costs, inbound freight (including ocean, air and freight from the dock to our
distribution centers), broker fees and storage costs. Because we include expenses related to our
distribution network in general and administrative expenses while some of our competitors may
include expenses of this type in cost of sales, our gross margins may not be comparable, and we may
report higher gross margins than some of our competitors in part for this reason.
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Licensing
Net licensing royalties decreased $0.5 million, or 7.0%, to $6.6 million for 2005 compared to
$7.1 million in 2004. The decrease in net licensing royalties is primarily the result of decreased
royalty revenue associated with our various licensing agreements.
Selling expenses
Selling expenses increased by $1.7 million, or 2.1%, to $81.4 million for 2005 from $79.7
million in 2004. As a percentage of net sales, selling expenses were 8.1% and 8.7% in 2005 and
2004, respectively. Selling expenses consist primarily of the following accounts: sales
representative sample costs, sales commissions, trade shows, advertising and promotional costs,
which may include television and ad production costs, and expenses associated with marketing
materials.
The increase in selling expenses was primarily due to increased media advertising expenses of
$3.2 million and increased sales commissions of $1.0 million, partially offset by lower sales
representative samples of $1.6 million and trade show and catalog expenses of $0.9 million.
General and administrative expenses
General and administrative expenses increased by $20.4 million, or 8.2%, to $269.4 million for
2005 from $249.0 million in 2004. As a percentage of sales, general and administrative expenses
were 26.8% and 27.1% in 2005 and 2004, respectively. General and administrative expenses consist
primarily of the following: salaries, wages and related taxes, various overhead costs associated
with our corporate staff, domestic and international retail operations, non-selling related costs
of our international operations, costs associated with our domestic and European distribution
centers, professional fees related to both legal and accounting, insurance, and depreciation and
amortization, amongst other expenses. Our distribution network related costs are included in
general and administrative expenses and are not allocated to segments.
The increase in general and administrative expenses was primarily due to increased salaries
and wages and related payroll costs of $11.2 million, increased depreciation and repairs and
maintenance for our stores of $2.5 million, and increased warehouse and distribution costs of $1.7
million. In addition, expenses related to our distribution network, including the functions of
purchasing, receiving, inspecting, allocating, warehousing and packaging our products totaled $70.5
million and $71.3 million for 2005 and 2004, respectively. Impairment charges related to the
write-off of leasehold improvements at one of our domestic and one international retail stores was
$0.9 million in 2005 as compared to $40,000 for the same period last year.
We believe that we have established our presence in most major domestic and international
retail markets. We opened ten domestic and one international retail stores in 2005 while closing
three other stores. We currently plan to open between 15 to 20 domestic stores in 2006. In
addition, we currently believe that we have sufficiently developed our international direct selling
efforts; therefore, we currently do not anticipate entering any new international markets in 2006.
Instead, we will focus on (i) enhancing the efficiency of our international operations, (ii)
increasing our customer base, (iii) increasing the product count within each customer and (iv)
tailoring our product offerings currently available to our international customers to increase
demand for our product.
We continue to review our cost structure to develop efficiencies within our operations;
however, we believe that our current cost structure is consistent with our anticipated sales levels
in 2006.
Interest income (expense)
Net interest expense for 2005 decreased $3.2 million to $4.8 million for 2005 compared to net
interest expense of $8.0 million in 2004. Interest expense is derived from our convertible notes,
mortgages on our distribution center, our corporate office located in Manhattan Beach, California,
our capital lease obligations and interest on amounts owed to our foreign manufacturers. The
reduction in net interest expense is due to the amortized reduction of our long-term debt and
capital leases as well as increased interest income due to increased short-term interest rates and
increased cash balances during 2005.
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Other income (expense)
Other income, net increased $3.9 million to $1.3 million for 2005, compared to $2.6 million
expense in year 2004. The increase in other income was due to recoveries related to the settlement
of various lawsuits for $1.6 million during 2005 as compared to settlement payments of $2.3 million
in 2004.
Income taxes
The effective tax rate for 2005 was 38.6% as compared to 39.2% in 2004. Income tax expense
for 2005 was $28.1 million compared to $15.2 million for 2004. The tax provision was computed
using the effective tax rates applicable to each of our domestic and international taxable
jurisdictions. The 2005 rate is slightly lower than the expected domestic rate of approximately
40%, due to our non-U.S. subsidiary earnings in lower tax rate jurisdictions and our reinvestment
of undistributed earnings from our non-U.S. subsidiaries, thereby indefinitely postponing their
remittance to the United States Internal Revenue Service. As such, we did not provide for deferred
income taxes on accumulated undistributed earnings of our non-U.S. subsidiaries.
YEAR ENDED DECEMBER 31, 2004 COMPARED TO THE YEAR ENDED DECEMBER 31, 2003
Net sales
Net sales for 2004 were $920.3 million, an increase of $85.3 million, or 10.2%, over net sales
of $835.0 million in 2003. The increase in net sales was due to increased wholesale sales, retail
sales and increased direct international sales in the United Kingdom, Germany, Spain, Benelux,
Italy and Canada, offset by decreased sales in France. Our domestic wholesale segment increased
3.3%, or $19.3 million, to $582.2 million compared to $562.9 million in 2003. The increase in
domestic wholesale segment net sales came on a 4.8% unit sales volume decrease to 31.8 million
pairs from 33.4 million pairs in 2003 offset by an increase in our average selling price per pair
of 8.6% to $18.31 from $16.86 in 2003. The increase in average selling price per pair and the
decrease in unit sales volume were due to the reduced level of markdown and closeout merchandise in
2004, when compared to 2003, when we were focused on reducing our inventory levels.
Our retail segment sales increased $32.2 million to $176.8 million in 2004, a 22.3% increase
over sales of $144.6 million in 2003. The increase in retail sales was due to the increase in
warehouse and factory outlet stores and positive comparable store sales ranging from 2.5% to 16.9%.
During 2004, we opened four new domestic stores and closed four other domestic stores. These new
stores contributed $2.5 million in net sales during 2004. Of our new store additions, three were
outlet stores and one was a warehouse store, which tend to have higher average sales per store than
our concept stores. In addition, during 2004, we realized positive comparable store sales increases
in many of our domestic and international retail stores ranging from an increase of 2.5% in our
warehouse stores comparable sales to an increase of 16.9% in our international store comparable
sales. Our domestic retail sales increased 20.5% due to positive comparable store sales and having
an additional twenty-three retail stores that were opened in 2003 being open the entire year in
2004. Our international retail sales increased 44.6% in 2004 compared to 2003, due to increased
comparable sales, six stores opened in 2003 being open the entire year of 2004, as well as
favorable currency translation adjustments.
Our international wholesale segment sales increased $34.9 million to $156.5 million in 2004, a
28.7% increase over sales of $121.6 million in 2003. The increase in international wholesale sales
was due to increased distributor and direct subsidiary sales. Our distributor sales increased $16.1
million to $84.2 million in 2004, a 23.6% increase over sales of $68.1 million in 2003. This was
primarily due to increased sales into Japan, Panama, Chile, the Philippines and Australia. Our
international direct sales increased $18.8 million to $72.3 million in 2004, a 35.1% increase over
sales of $53.5 million in 2003. The increase in direct sales was primarily due to increased sales
into the United Kingdom, Germany, Canada, Italy and Spain, offset by decreased sales into France.
Our e-commerce sales decreased $1.0 million to $4.8 million in 2004, a 17.2% decrease over
sales of $5.8 million in 2003. Our e-commerce sales made up less than 1% of our consolidated net
sales in both 2004 and 2003.
Gross profit
Gross profit for 2004 increased $53.2 million to $370.9 million as compared to $317.7 million
in 2003. Our domestic wholesale segment increased $28.6 million, or 15.3%, to $214.4 million in
2004 compared to $185.8 million in 2003. Gross profit as a percentage of net sales, or gross
margin, increased to 40.3% in 2004 from 38.0% in 2003. This gross margin increase was the result of
the increase in domestic wholesale margins, which increased to 36.9% in 2004 from 33.0% for 2003,
and as a result of retail sales becoming a larger portion of consolidated net sales, which achieve higher gross margins than
our wholesale sales. The domestic wholesale
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margin increase was primarily due to the significantly
lower volume of markdown merchandise, lower sales allowances and a lower volume of close-out
product to discounters, all of which previously resulted from our significantly higher levels of
inventory in 2003. In addition, we realized higher margins within our Men’s and Women’s Sport lines
and Women’s Active lines in 2004 compared to 2003.
Gross profit for our retail segment increased $15.1 million, or 17.5%, to $101.4 million in
2004 as compared to $86.3 million in 2003. This increase in gross profit was due to 29 stores that
were opened in 2003 being open the entire year in 2004 and positive comparable store sales. Gross
margins decreased to 57.4% in 2004 as compared to 59.7% in 2003. The decrease in margin was
primarily due to a larger portion of our retail sales coming from our lower margin outlet and
warehouse stores, despite both positive comparable store sales increases and new store openings in
these formats. In addition, we increased our promotional price activity within those store formats
in 2004 when compared to 2003 which drove down our margins.
Gross profit for our international wholesale segment increased $11.7 million, or 27.6%, to
$54.1 million for 2004 compared to $42.4 million in 2003. Gross margins were 34.6% for 2004
compared to 34.9% in 2003. International wholesale sales through our foreign subsidiaries achieve
higher gross margins than our international wholesale sales through our foreign distributors. Gross
margins for our international subsidiary sales increased to 42.4% for 2004 compared to 41.6% in
2003. The increase in gross margins for our international subsidiary sales was due to a broader
acceptance of our new styles as well as a lower volume of close-out product to discounters.
During the second half of 2004, our third-party manufacturers located in China notified us of
electrical shortages which caused them, in some cases, to shut down production at least one day a
week. For production orders that were outstanding with firm delivery dates and that did not ship in
time to meet our delivery requirements, the manufacturer paid the costs to overnight product to our
distribution centers. Future electrical shortages may extend the time necessary to produce our
orders, and there may be circumstances where we may have to incur premium freight charges to
expedite product to our customers. If we incur a significant amount of premium charges to
airfreight product for our customers, our gross profit will be negatively affected if we are unable
to collect those charges. We are currently unable to determine the extent, if any, of any adverse
margin impact we may realize as a result of air freighting product to customers. Premium freight
charges incurred during 2004 were not significant.
Licensing
Net licensing royalties increased $2.9 million, or 69.0%, to $7.1 million for 2004 compared to
$4.2 million in 2003. The increase in licensing royalties is primarily the result of an additional
$2.5 million in royalties associated with our licensing agreement for Skechers Kids apparel with
Kids Headquarters, which launched during the back-to-school selling season in 2003. During 2003, we
entered into various domestic and international licensing agreements. These new licensing
arrangements have been in the development stage, and many of these licensed products became
available at retail during 2004.
Selling expenses
Selling expenses decreased by $5.0 million, or 5.9%, to $79.7 million for 2004 from $84.7
million in 2003. As a percentage of net sales, selling expenses were 8.7% and 10.1% in 2004 and
2003, respectively. The decrease in selling expenses was primarily due to reduced media
advertising expenses of $8.6 million, offset by increased trade show and catalog expenses of $1.6
million and increased sales commissions and sales representative samples of $2.0 million. Media
advertising decreased due to a reduction in international advertising and promotional costs of
approximately $3.0 million despite commencing a major international print campaign in 2004
featuring international pop star Christina Aguilera, a reduction in television advertising of $3.7
million and reduced promotional spending of $1.9 million.
General and administrative expenses
General and administrative expenses increased by $10.4 million, or 4.4%, to $249.0 million for
2004 from $238.6 million in 2003. As a percentage of sales, general and administrative expenses
were 27.1% and 28.6% in 2004 and 2003, respectively. The increase in expenses was primarily the
result of increased revenues in 2004. The increase in general and administrative expenses was
primarily due to increased salaries and wages and related payroll costs of $7.3 million, increased
warehouse and distribution costs of $2.6 million, increased rent of $2.0 million and increased bad
debt expense of $2.1 million, which were partially offset by lower professional fees of $3.9
million and travel expenses of $2.0 million. In addition, expenses related to our distribution
network, including the functions of purchasing, receiving, inspecting, allocating, warehousing and
packaging our products totaled $71.3 million
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and $62.4 million for 2004 and 2003, respectively. Impairment charges related to the
write-off of fixed assets at one of our domestic retail stores was $40,000 in 2004 as compared to
$0.6 million for the same period last year.
Interest income (expense)
Net interest expense for 2004 decreased $0.8 million to $8.0 million for 2004 compared to net
interest expense of $8.8 million in 2003. Interest expense is derived from our convertible notes,
mortgages on our distribution center, our corporate office located in Manhattan Beach, California,
our capital lease obligations and interest on amounts owed to our foreign manufacturers. The
reduction in interest expense is due to the amortized reduction of our long-term debt and capital
leases.
Other income (expense)
Other expense, net increased $2.4 million to $2.6 million for 2004, compared to $0.2 million
in year 2003. The increase in other expense was due the settlement of various lawsuits for $2.3
million in 2004.
Income taxes
The effective tax rate for 2004 was 39.2%. Income tax expense for 2004 was $15.2 million
compared to $1.5 million for 2003. The tax provision was computed using the effective tax rates
applicable to each of our domestic and international taxable jurisdictions. The 2004 rate is lower
than the expected domestic rate of approximately 40%, due to our non-U.S. subsidiary earnings in
lower tax rate jurisdictions and our reinvestment of undistributed earnings from our non-U.S.
subsidiaries, thereby indefinitely postponing their remittance to the United States Internal
Revenue Service. We have not provided for withholding and U.S. federal income taxes for our foreign
undistributed earnings.
LIQUIDITY AND CAPITAL RESOURCES
Our working capital at December 31, 2005 was $361.2 million, an increase of $47.3 million from
working capital of $313.9 million at December 31, 2004. Our cash and cash equivalents at December
31, 2005 were $197.0 million compared to $137.7 million at December 31, 2004. The increase in cash
and cash equivalents of $61.1 million was the result of increased operating cash flows due to our
net earnings of $44.7 million in 2005, which included non-cash depreciation and amortization of
$23.4 million, as well as stock issuances of $7.7 million, partially offset by capital spending of
$14.0 million and debt repayments of $7.7 million.
During 2005, our operating activities generated $75.9 million in net cash compared to cash
provided by operating activities of $33.0 million for 2004. The significant improvement in our
operating cash flows for 2005, when compared to 2004, was the result of increased earnings and
reduced inventory balances partially offset by increased accounts receivable balances. During the
year, we successfully converted our Ontario distribution center into a foreign trade zone, which
allows us to only pay import duties when goods are shipped. This has resulted in a reduction in our
investment in inventory of approximately $6.6 million as compared to December 31, 2004.
Net cash used in investing activities was $14.0 million for 2005 as compared to $16.0 million
in 2004. The reduction in capital expenditures in 2005 was primarily due to the purchase of our
corporate headquarters for $11.0 million in the third quarter of 2004, offset by increased capital
expenditures of $7.0 million related to our opening of eleven retail stores and construction of a
new corporate facility in 2005. During 2005, we entered into a construction agreement with Morley
Construction Company for the construction of our third corporate facility in Manhattan Beach,
California. The agreement has a maximum payment clause in which Morley agrees that the construction
cost of the facility will not exceed $18.1 million. We expect the building to be completed by the
end of 2007. Excluding the construction of our corporate headquarters we expect our on going
capital expenditures for 2006 to be approximately $12.0 million, which includes opening between 15
to 20 domestic retail stores and one international retail store, minor capital improvements at our
distribution centers and investments in information technology. We do not anticipate entering any
new international markets in 2006. We currently anticipate that our capital expenditure
requirements will be funded through our operating cash flows or current cash on hand, or available
lines of credit.
Net cash used by financing activities was $0.7 million during 2005 compared to net cash
provided by financing activities of $5.9 million during 2004. The decrease in cash provided by
financing activities was due to a balloon repayment of our long-term debt of $4.6 million, and
decreased cash provided from the issuance of stock, when compared to 2004.
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In April 2002, we issued $90.0 million aggregate principal amount of 4.50% Convertible
Subordinated Notes due April 15, 2007. Interest on the notes is paid semi-annually in April and
October of each year. Discount and issuance costs of approximately $3.4 million are being
amortized to interest expense over the term of the debentures. The notes are convertible at the
option of the holder into shares of Class A Common Stock at a conversion rate of 38.5089 shares of
Class A Common Stock per $1,000 principal amount of notes, which is equivalent to a conversion
price of approximately $25.968 per share. The conversion rate is subject to adjustment. The notes
are subject to optional redemption at the option of our company, in whole or in part, at the
following redemption prices: 101.80% of the principal amount for the twelve-month period beginning
April 15, 2005, 100.90% of the principal amount for the twelve-month period beginning April 15,
2006 and 100% of the principal amount thereafter. The notes are unsecured and subordinated to our
present and future senior debt as well as indebtedness and other liabilities of our subsidiaries.
The indenture does not restrict our incurrence of indebtedness, including senior debt, or our
subsidiaries’ incurrence of indebtedness.
We have available a secured line of credit, amended as of June 25, 2004, permitting borrowings
up to $150.0 million based upon eligible accounts receivable and inventories. Borrowings bear
interest at the prime rate (7.25% at December 31, 2005) minus 0.50%, and the agreement renews
automatically from year to year unless terminated by either party upon written notice 60 days prior
to year-end. The agreement provides for the issuance of letters of credit up to a maximum of $30.0
million. Under the agreement, available borrowings are reduced by 50% of the first $1 million of
outstanding guarantees and 75% of outstanding guarantees that exceed $1 million. Outstanding
letters of credit at December 31, 2005 were $3.9 million. Available borrowings under the line of
credit at December 31, 2005 were $147.4 million, and no amounts were outstanding at December 31,
2005. We pay an unused line of credit fee of 0.25% annually. The agreement provides the following
financial covenants should the loan balance exceed 60% of all eligible accounts, as defined:
stockholders’ equity shall not decrease by more than 20% in any given calendar quarter; a tangible
net worth be maintained as defined in the agreement; and limits to the payment of dividends if in
default of any provision of the agreement. We were in compliance with these covenants at December
31, 2005.
We believe that anticipated cash flows from operations, available borrowings under our
revolving line of credit, cash on hand, proceeds from the issuance of the notes and our financing
arrangements will be sufficient to provide us with the liquidity necessary to fund our anticipated
working capital and capital requirements through 2006. However, in connection with our current
strategies, 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 success of our
international operations, 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, acquisition of other brands or companies, and the number and timing of new store openings.
To the extent that available funds are insufficient to fund our future activities, we may need to
raise additional funds through public or private financing. We cannot be assured 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.
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DISCLOSURE ABOUT CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following table aggregates all material contractual obligations and commercial commitments as
of December 31, 2005:
| Payments Due by Period (In Thousands) | ||||||||||||||||||||
| Less than | One to | Three to | More Than | |||||||||||||||||
| One | Three | Five | Five | |||||||||||||||||
| Total | Year | Years | Years | Years | ||||||||||||||||
Long-Term Obligations (1). |
$ | 96,075 | $ | 4,050 | $ | 92,025 | — | — | ||||||||||||
Other Long-Term Debt |
24,648 | 1,783 | 3,566 | $ | 3,567 | $ | 15,732 | |||||||||||||
Capital Lease Obligations |
1,056 | 841 | 215 | — | — | |||||||||||||||
Operating Lease Obligations (2) |
210,818 | 32,959 | 60,119 | 50,359 | 67,381 | |||||||||||||||
Purchase Obligations (3) |
149,554 | 149,554 | — | — | — | |||||||||||||||
Construction Contract (4) |
16,601 | 8,300 | 8,301 | — | — | |||||||||||||||
Minimum payments related to our
licensing arrangements |
9,070 | 2,450 | 3,420 | 3,200 | — | |||||||||||||||
Financed insurance premiums |
1,335 | 1,335 | — | — | — | |||||||||||||||
| $ | 509,157 | $ | 201,272 | $ | 167,646 | $ | 57,126 | $ | 83,113 | |||||||||||
| (1) | The long-term debt consists of our 4.50% convertible notes receivable due April 15, 2007 and related interest payments due in April and October of each year unless converted into our Class A Common Stock as provided for in the indenture agreement. | |
| (2) | Operating lease commitments consists primarily of real property leases for our retail stores, corporate offices and distribution centers. These leases frequently include options that permit us to extend beyond the terms of the initial fixed term. Payments for these lease terms are provided for by cash flows generated from operations or, if needed, by our $150.0 million secured line of credit, for which no amounts were outstanding at December 31, 2005. | |
| (3) | Purchase obligations includes the following: (i) accounts payable balances for the purchase footwear of $57.8 million, (ii) outstanding letters credit of $3.9 million and (iii) open purchase commitments with our foreign manufacturers for $87.9 million. We currently expect to fund these commitments with cash flows from operations and/or cash on hand. | |
| (4) | During 2005, we entered into a construction agreement with Morley Construction Company for the construction of our third corporate facility in Manhattan Beach, California. The agreement has a maximum payment clause in which Morley agrees that the construction cost of the facility will not exceed $18.1 million. We expect the building to be completed by the end of 2007. |
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any relationships with unconsolidated entities or financial partnerships such
as entities often referred to as structured finance or special purpose entities that would have
been established for the purpose of facilitating off-balance-sheet arrangements or for other
contractually narrow or limited purposes. As such, we are not exposed to any financing, liquidity,
market or credit risk that could arise if we had engaged in such relationships.
CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
Management’s Discussion and Analysis of Financial Condition and Results of Operations is based
upon our consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported amounts of assets,
liabilities, sales and expenses, and related disclosure of contingent assets and liabilities. We
base our estimates on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different assumptions or conditions.
We believe the following critical accounting estimates are affected by more significant
judgments used in the preparation of our consolidated financial statements: revenue recognition,
promotional items, valuation allowances, inventory reserves, valuation of
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intangible and long-lived assets, litigation reserves, valuations of deferred income taxes,
cooperative arrangements and foreign currency translation.
Revenue Recognition. We derive income from the sale of footwear and royalties earned from
licensing the Skechers brand. The significant portion of our revenue is recognized upon shipment of
footwear. Domestically, goods are shipped directly from our domestic distribution center in
Ontario, California, and revenue is recognized upon shipment from the distribution center (FOB
shipping point). For our international wholesale accounts, product is shipped direct from our
distribution center in Liege, Belgium, and revenue is recognized upon shipment from the
distribution center. For our distributor sales, the goods are delivered directly from the
independent factories to our distributors’ freight forwarders on a Free Named Carrier (FCA) basis,
and revenue is recognized upon receipt of a freight cargo receipt.
Our company recognizes revenue from retail sales at the point of sale.
Royalty income is earned from our licensing arrangements. Upon signing a new licensing
agreement, we receive up-front fees, which are generally characterized as prepaid royalties. These
fees are initially deferred and recognized as revenue as earned (i.e., as licensed sales are
reported to the company or on a straight line basis over the term of the agreement). The first
calculated royalty payment is based on actual sales of the licensed product. Typically, at each
quarter end we receive correspondence from our licensees indicating what the actual sales for the
period were. This information is used to calculate and accrue the related royalties currently
receivable based on the terms of the agreement.
Allowance for bad debts, returns and customer chargebacks. We provide a reserve against our
receivables for estimated losses that may result from our customers’ inability to pay. 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 it is 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. 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.
We also reserve for potential disputed amounts or chargebacks with our customers. Our
chargeback reserve is based on a collectibility percentage based on factors such as: historical
trend, current economic conditions, and nature of the chargeback receivables. We also reserve for
potential sales returns and allowances based on historical trends.
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. For receivables that are not
specifically identified as high risk, we provide a reserve based upon a percent of sales for the
last two months. This percentage is based on our historical loss rate. Gross trade accounts
receivable balance was $141.8 million and the allowance for bad debts, returns and customer
chargebacks was $7.2 million at December 31, 2005.
Inventory write-downs. Inventories are stated at the lower of cost or market. We review our
inventory on a regular basis for excess and slow moving inventory. Our review is based on inventory
on hand, prior sales and our expected net realizable value. Our analysis includes a review of
inventory quantities on hand at period end in relation to year-to-date sales and projections for
sales in the near future. The net realizable value, or market value, is determined based on our
estimate of sales prices of such inventory through off-price or discount store channels. A
write-down of inventory is considered permanent and creates a new cost basis for those units. The
likelihood of any material inventory write-down is dependent primarily on our expectation of future
consumer demand for our product. A misinterpretation or misunderstanding of future consumer demand
for our product or of the economy, or other failure to estimate correctly, could result in
inventory valuation changes, either favorably or unfavorably, compared to the requirement
determined to be appropriate as of the balance sheet date. At December 31, 2005, our gross
inventory value was $136.7 million and our inventory reserve was $0.5 million.
Valuation of long-lived assets. When circumstances warrant, we assess the impairment of
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; |
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| • | any loss of legal ownership or title to the asset(s); | ||
| • | any 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. In addition, we prepare a summary of store contribution from our domestic
retail stores to assess potential impairment of the fixed assets and leasehold improvements. Stores
with negative contribution opened in excess of twenty-four months are then reviewed in detail to
determine if impairment exists. At December 31, 2005 we recorded an impairment charge in general
and administrative expenses for leasehold improvements and furniture and fixtures of $0.9 million.
Litigation reserves. Estimated amounts for claims that are probable and can be reasonably
estimated are recorded as liabilities in our consolidated balance sheets. The likelihood of a
material change in these estimated reserves would depend 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
a large portion of the 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 operations and financial position.
Valuation of deferred income taxes. We record a valuation allowance when necessary to reduce
our deferred tax assets to the amount that is more likely than not to be realized. The likelihood
of a material change in our expected realization of our deferred tax assets depends on future
taxable income and the effectiveness of our tax planning strategies amongst the various domestic
and international tax jurisdictions in which we operate. We evaluate our projections of taxable
income to determine the recoverability of our deferred tax assets and the need for a valuation
allowance. As of December 31, 2005, we had net deferred tax assets of $15.1 million and a
valuation allowance of $1.5 million against losses not expected to be utilized by certain foreign
subsidiaries.
Cooperative arrangements. We do not have a formal cooperative advertising program and any
related activity is usually small. Any payments made or credits provided to our resellers are
either charged against net sales, if the criteria of Emerging Issues Task Force Issue No. 01-9 has
not been met, or charged to the line item caption selling expense when certain criteria have been
met. Amounts that are charged as an expense in the line item caption selling expense are typically
supported by an invoice or other supporting documentation from our customers that provide
verifiable support of their expenditures, which may include third-party invoices for
advertising-related costs, i.e. photo and catalog costs.
Foreign currency translation. Our international operations generally use their respective
local currencies as their functional currency. In accordance with Statement of Financial Accounting
Standards No. 52, “Foreign Currency Translation” (“SFAS 52”), revenues and expenses from our
international subsidiaries are translated using the monthly average exchange rates in effect for
the period in which such revenues and expenses occur. International subsidiaries that use their
local currency as their functional currency translate their assets and liabilities using current
rates of exchange at the balance sheet date. The resulting translation gains and losses for such
subsidiaries are included within accumulated other comprehensive income (loss) as a separate
component of stockholders’ equity. One international subsidiary has a functional currency of the
U.S. dollar. Resulting remeasurement gains and losses from this subsidiary are included in the
determination of net earnings. A substantial portion of our intercompany loans are considered
long-term investments and the gains or losses from currency fluctuations are included as a
component of translation adjustment in other comprehensive income.
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.
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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 2005 and 2004, 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.
FUTURE ACCOUNTING CHANGES
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement
No. 123(R) (revised 2004), “Share-Based Payment,” which is a revision of FASB Statement No. 123,
“Accounting for Stock-Based Compensation.” Statement 123(R) supersedes APB Opinion No. 25,
“Accounting for Stock Issued to Employees,” and amends FASB Statement No. 95, “Statement of Cash
Flows.” Generally, the approach in Statement 123(R) is similar to the approach described in
Statement 123. However, Statement 123(R) requires all share-based payments to employees, including
grants of employee stock options, to be recognized in the income statement based on their fair
values. Pro forma disclosure is no longer an alternative.
On April 14, 2005, the SEC announced a deferral of the effective date of Statement 123(R) for
calendar year companies until the beginning of 2006. Early adoption will be permitted in periods in
which financial statements have not yet been issued. We have adopted Statement 123(R) effective
January 1, 2006.
We adopted Statement 123(R) using the modified-prospective method in which compensation cost
is recognized beginning with the effective date (a) based on the requirements of Statement 123(R)
for all share-based payments granted and modified after the effective date and (b) based on the
requirements of Statement 123 for all awards granted to employees prior to the effective date of
Statement 123(R) that remain unvested on the effective date. We currently account for share-based
payments to employees using Opinion 25’s intrinsic value method and, as such, generally recognize
no compensation cost for employee stock options. Accordingly, the adoption of Statement 123(R)’s
fair value method will have a significant impact on our results of operations, although it will
have no impact on our overall financial position. The Company estimates that the adoption of
Statement 123(R) will result in the recognition of compensation costs
of approximately $1.7 million
in 2006, excluding the cost associated with additional share-based
awards granted in 2006, if any. Statement 123(R) also requires excess tax benefits as defined to be reported as a
financing cash flow rather than as an operating cash flow as required under current literature.
This requirement will reduce net operating cash flows and increase net financing cash flows in
periods after adoption. While we cannot estimate what those amounts will be in the future (because
they depend on, among other things, when employees exercise stock options), the amounts of
operating cash flows recognized in prior periods for such excess tax deductions were $1.5 million,
$2.0 million and $0.8 million for the years ended December 31 2005, 2004 and 2003, respectively.
In November 2004, the FASB issued SFAS No. 151, “Inventory Costs” (“SFAS 151”), an amendment
of ARB No. 43, Chapter 4. SFAS 151 clarifies the accounting for abnormal amounts of idle facility
expense, freight, handling costs and wasted material. SFAS 151 is effective for inventory costs
incurred during fiscal years beginning after June 15, 2005. We adopted the provisions of SFAS 151
on January 1, 2006 and such adoption will not have a material impact on our consolidated financial
statements.
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections, a
replacement of Accounting Principles Board Opinion (APB) No. 20, Accounting Changes, and FASB
Statement No. 3, Reporting Accounting Changes in Interim Financial Statements”(“SFAS 154”). This
Statement requires retrospective application to prior periods’ financial statements of a change in
accounting principle. It applies both to voluntary changes and to changes required by an accounting
pronouncement if the pronouncement does not include specific transition provisions. APB 20
previously required that most voluntary changes in accounting principles be recognized by recording
the cumulative effect of a change in accounting principle. SFAS 154 is effective for fiscal years
beginning after December 15, 2005. We adopted the provisions of SFAS 154 on January 1, 2006 and
such adoption will not have a material impact on our consolidated financial statements.
In June 2005, the EITF reached a consensus on Issue No. 05-06, “Determining the Amortization
Period for Leasehold Improvements” (“EITF 05-06”). EITF 05-06 provides guidance for determining the
amortization period used for leasehold improvements acquired in a business combination or purchased
after the inception of a lease, collectively referred to as subsequently acquired leasehold
improvements. EITF 05-06 provides that the amortization period used for the subsequently acquired
leasehold improvements to be the lesser of (a) the subsequently acquired leasehold improvements’
useful lives, or (b) a period that reflects renewals that are reasonably assured upon the
acquisition or the purchase. EITF 05-06 is effective on a prospective basis for
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subsequently acquired leasehold improvements purchased or acquired in periods beginning after
June 29, 2005. We do not expect the adoption of EITF 05-06 to have a material impact on our
results of operations or financial condition.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
We do not hold any derivative securities that require fair value presentation per FASB
Statement No. 133.
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 changes
in foreign currency exchange rates have and will have an impact on our results of operations.
Interest rate fluctuations. At December 31, 2005, no amounts were outstanding that were
subject to changes in interest rates; however, the interest rate charged on our line of credit
facility is based on the prime rate of interest, and changes in the prime rate of interest will
have an effect on the interest charged on outstanding balances. No amounts are currently
outstanding.
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
revenues, expenses, 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 the 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.
39
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| Page | ||||
| 41 | ||||
| 43 | ||||
| 44 | ||||
| 45 | ||||
| 46 | ||||
| 47 | ||||
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Skechers U.S.A., Inc.:
Skechers U.S.A., Inc.:
We have audited the accompanying consolidated balance sheets of Skechers U.S.A., Inc. and
subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of
operations, stockholders’ equity and comprehensive income (loss), and cash flows for each of the
years in the three year period ended December 31, 2005. In connection with our audits of the
consolidated financial statements, we also have audited the related financial statement schedule.
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 the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Skechers U.S.A., Inc. and subsidiaries as of December
31, 2005 and 2004, and the results of their operations and their cash flows for each of the years
in the three year period ended December 31, 2005, in conformity with U.S. generally accepted
accounting principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of Skechers U.S.A. Inc’s., internal control over
financial reporting as of December 31, 2005, based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and our report dated March 14, 2006 expressed an unqualified opinion on
management’s assessment of, and the effective operation of, internal control over financial
reporting.
/s/ KPMG LLP
Los Angeles, California
March 14, 2006
March 14, 2006
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Skechers U.S.A., Inc.:
Skechers U.S.A., Inc.:
We have audited management’s assessment, included in the accompanying Management’s Report on
Internal Control Over Financial Reporting appearing under Item 9A, that Skechers U.S.A., Inc.
maintained effective internal control over financial reporting as of December 31, 2005, based on
criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Skechers U.S.A., Inc’s. management is responsible
for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility is to express an
opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management’s assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion.
A company’s internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that Skechers U.S.A., Inc. maintained effective
internal control over financial reporting as of December 31, 2005, is fairly stated, in all
material respects, based on criteria established in Internal Control—Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion,
Skechers U.S.A., Inc. maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2005, based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Skechers U.S.A., Inc. and
subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of
operations, stockholders’ equity and comprehensive income (loss), and cash flows for each of the
years in the three year period ended December 31, 2005, and the related financial statement
schedule, and our report dated March 14, 2006 expressed an unqualified opinion on those
consolidated financial statements and financial statement schedule.
/s/ KPMG LLP
Los Angeles, California
March 14, 2006
March 14, 2006
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SKECHERS U.S.A., INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
| December, 31 | December, 31 | |||||||
| 2005 | 2004 | |||||||
ASSETS |
||||||||
Current Assets: |
||||||||
Cash and cash equivalents |
$ | 197,007 | $ | 137,653 | ||||
Trade accounts receivable, less allowances of $7,196 in 2005 and $6,043 in 2004 |
134,600 | 120,463 | ||||||
Other receivables |
6,888 | 2,726 | ||||||
Total receivables |
141,488 | 123,189 | ||||||
Inventories |
136,171 | 149,757 | ||||||
Prepaid expenses and other current assets |
11,628 | 10,139 | ||||||
Deferred tax assets |
5,755 | 3,865 | ||||||
Total current assets |
492,049 | 424,603 | ||||||
Property and equipment, at cost, less accumulated depreciation and amortization |
72,945 | 82,564 | ||||||
Intangible assets, at cost, less accumulated amortization |
1,131 | 1,641 | ||||||
Deferred tax assets |
9,337 | 4,906 | ||||||
Other assets, at cost |
6,495 | 4,939 | ||||||
TOTAL ASSETS |
$ | 581,957 | $ | 518,653 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||
Current Liabilities: |
||||||||
Current installments of long-term borrowings |
$ | 1,040 | $ | 3,123 | ||||
Accounts payable |
108,395 | 93,694 | ||||||
Accrued expenses |
21,404 | 13,903 | ||||||
Total current liabilities |
130,839 | 110,720 | ||||||
4.50% convertible subordinated notes |
90,000 | 90,000 | ||||||
Long-term borrowings, excluding current installments |
17,288 | 23,038 | ||||||
Total liabilities |
238,127 | 223,758 | ||||||
Commitments and contingencies |
||||||||
Stockholders’ equity: |
||||||||
Preferred Stock, $.001 par value; 10,000 authorized; none issued
and outstanding |
— | — | ||||||
Class A Common Stock, $.001 par value; 100,000 shares authorized; 23,382 and |
||||||||
22,234 shares issued and outstanding at December 31, 2005 and
December 31, 2004, respectively |
23 | 22 | ||||||
Class B Common Stock, $.001 par value; 60,000 shares authorized; 16,651 and
17, 011 shares issued and outstanding at December 31, 2005 and
December 31, 2004, respectively |
17 | 17 | ||||||
Additional paid-in capital |
126,274 | 117,091 | ||||||
Accumulated other comprehensive income |
7,039 | 12,005 | ||||||
Retained earnings |
210,477 | 165,760 | ||||||
Total stockholders’ equity |
343,830 | 294,895 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
$ | 581,957 | $ | 518,653 | ||||
See accompanying notes to consolidated financial statements.
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SKECHERS U.S.A., INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
| 2005 | 2004 | 2003 | ||||||||||
Net sales |
$ | 1,006,477 | $ | 920,322 | $ | 834,976 | ||||||
Cost of sales |
585,995 | 549,465 | 517,290 | |||||||||
Gross profit |
420,482 | 370,857 | 317,686 | |||||||||
Royalty income, net |
6,628 | 7,060 | 4,170 | |||||||||
| 427,110 | 377,917 | 321,856 | ||||||||||
Operating expenses: |
||||||||||||
Selling |
81,378 | 79,673 | 84,653 | |||||||||
General and administrative |
269,436 | 248,999 | 238,550 | |||||||||
| 350,814 | 328,672 | 323,203 | ||||||||||
Earnings (loss) from operations |
76,296 | 49,245 | (1,347 | ) | ||||||||
Other income (expense): |
||||||||||||
Interest income |
2,151 | 243 | 670 | |||||||||
Interest expense |
(6,937 | ) | (8,216 | ) | (9,509 | ) | ||||||
Other, net |
1,287 | (2,552 | ) | (187 | ) | |||||||
| (3,499 | ) | (10,525 | ) | (9,026 | ) | |||||||
Earnings (loss) before income taxes |
72,797 | 38,720 | (10,373 | ) | ||||||||
Income tax expense |
28,080 | 15,167 | 1,494 | |||||||||
Net earnings (loss) |
$ | 44,717 | $ | 23,553 | $ | (11,867 | ) | |||||
Net earnings (loss) per share: |
||||||||||||
Basic |
$ | 1.13 | $ | 0.61 | $ | (0.31 | ) | |||||
Diluted |
$ | 1.06 | $ | 0.59 | $ | (0.31 | ) | |||||
Weighted average shares: |
||||||||||||
Basic |
39,686 | 38,638 | 37,840 | |||||||||
Diluted |
44,518 | 39,800 | 37,840 | |||||||||
See accompanying notes to consolidated financial statements.
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SKECHERS U.S.A., INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)
(In thousands)
| COMMON STOCK | ||||||||||||||||||||||||||||||||
| SHARES | AMOUNT | |||||||||||||||||||||||||||||||
| ACCUMULATED | ||||||||||||||||||||||||||||||||
| ADDITIONAL | OTHER | TOTAL | ||||||||||||||||||||||||||||||
| PAID-IN | COMPREHENSIVE | RETAINED | STOCKHOLDERS’ | |||||||||||||||||||||||||||||
| CLASS A | CLASS B | CLASS A | CLASS B | CAPITAL | INCOME (LOSS) | EARNINGS | EQUITY | |||||||||||||||||||||||||
Balance at December 31, 2002 |
18,369 | 19,317 | 18 | 19 | 102,109 | 3,016 | 154,074 | 259,236 | ||||||||||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||||||
Net earnings (loss) |
— | — | — | — | — | — | (11,867 | ) | (11,867 | ) | ||||||||||||||||||||||
Foreign currency translation adjustment |
— | — | — | — | — | 5,121 | — | 5,121 | ||||||||||||||||||||||||
Total comprehensive (loss) |
(6,746 | ) | ||||||||||||||||||||||||||||||
Deferred compensation |
— | — | — | — | 123 | — | — | 123 | ||||||||||||||||||||||||
Contribution of common stock to the 401(k)
Plan |
83 | — | — | — | 707 | — | — | 707 | ||||||||||||||||||||||||
Proceeds from issuance of common stock
under the employee stock purchase plan |
196 | — | — | — | 1,319 | — | — | 1,319 | ||||||||||||||||||||||||
Proceeds from issuance of common stock
under the employee stock option plan |
37 | — | — | — | 190 | — | — | 190 | ||||||||||||||||||||||||
Tax benefit of non-qualified stock options |
— | — | — | — | 824 | — | — | 824 | ||||||||||||||||||||||||
Conversion of Class B Common Stock into
Class A Common Stock |
431 | (431 | ) | 1 | — | — | — | — | 1 | |||||||||||||||||||||||
Balance at December 31, 2003 |
19,116 | 18,886 | 19 | 19 | 105,272 | 8,137 | 142,207 | 255,654 | ||||||||||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||||||
Net earnings |
— | — | — | — | — | — | 23,553 | 23,553 | ||||||||||||||||||||||||
Foreign currency translation adjustment |
— | — | — | — | — | 3,868 | — | 3,868 | ||||||||||||||||||||||||
Total comprehensive income |
27,421 | |||||||||||||||||||||||||||||||
Deferred compensation |
— | — | — | — | 129 | — | — | 129 | ||||||||||||||||||||||||
Contribution of common stock to the 401(k)
Plan |
94 | — | — | — | 763 | — | — | 763 | ||||||||||||||||||||||||
Proceeds from issuance of common stock
under the employee stock purchase plan |
165 | — | — | — | 1,384 | — | — | 1,384 | ||||||||||||||||||||||||
Proceeds from issuance of common stock
under the employee stock option plan |
984 | — | 1 | — | 7,521 | — | — | 7,522 | ||||||||||||||||||||||||
Tax benefit of non-qualified stock options |
— | — | — | — | 2,022 | — | — | 2,022 | ||||||||||||||||||||||||
Conversion of Class B Common Stock into
Class A Common Stock |
1,875 | (1,875 | ) | 2 | (2 | ) | — | — | — | — | ||||||||||||||||||||||
Balance at December 31, 2004 |
22,234 | 17,011 | $ | 22 | $ | 17 | $ | 117,091 | $ | 12,005 | $ | 165,760 | $ | 294,895 | ||||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||||||
Net earnings |
— | — | — | — | — | — | 44,717 | 44,717 | ||||||||||||||||||||||||
Foreign currency translation
adjustment |
— | — | — | — | — | (4,966 | ) | — | (4,966 | ) | ||||||||||||||||||||||
Total comprehensive income |
39,751 | |||||||||||||||||||||||||||||||
Contribution of common stock to the 401(k)
Plan |
59 | — | — | — | 767 | — | — | 767 | ||||||||||||||||||||||||
Proceeds from issuance of common stock
under the employee stock purchase plan |
135 | — | — | — | 1,550 | — | — | 1,550 | ||||||||||||||||||||||||
Proceeds from issuance of common stock
under the employee stock option plan |
594 | — | 1 | — | 5,365 | — | — | 5,366 | ||||||||||||||||||||||||
Tax benefit of non-qualified stock options |
— | — | — | — | 1,501 | — | — | 1,501 | ||||||||||||||||||||||||
Conversion of Class B Common Stock into
Class A Common Stock |
360 | (360 | ) | — | — | — | — | — | — | |||||||||||||||||||||||
Balance at December 31, 2005 |
23,382 | 16,651 | $ | 23 | $ | 17 | $ | 126,274 | $ | 7,039 | $ | 210,477 | $ | 343,830 | ||||||||||||||||||
See
accompanying notes to consolidated financial statements.
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SKECHERS U.S.A., INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| 2005 | 2004 | 2003 | ||||||||||
Cash flows from operating activities: |
||||||||||||
Net earnings (loss) |
$ | 44,717 | $ | 23,553 | $ | (11,867 | ) | |||||
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities: |
||||||||||||
Depreciation and amortization of property and equipment |
22,070 | 20,523 | 21,123 | |||||||||
Amortization of deferred financing costs |
765 | 765 | 765 | |||||||||
Amortization of intangible assets |
523 | 490 | 475 | |||||||||
Provision for bad debts and returns |
2,882 | 4,871 | 7,317 | |||||||||
Tax benefit of non-qualified stock options |
1,501 | 2,022 | 824 | |||||||||
Non cash stock compensation |
— | 129 | 123 | |||||||||
Deferred taxes |
(6,322 | ) | (3,150 | ) | (4,918 | ) | ||||||
Loss on disposal of equipment |
170 | 163 | 730 | |||||||||
(Increase) decrease in assets: |
||||||||||||
Receivables |
(22,106 | ) | (24,150 | ) | (4,570 | ) | ||||||
Inventories |
13,202 | (11,560 | ) | 11,852 | ||||||||
Prepaid expenses and other current assets |
(871 | ) | 216 | 2,593 | ||||||||
Other assets |
(2,476 | ) | 93 | (396 | ) | |||||||
Increase (decrease) in liabilities: |
||||||||||||
Accounts payable |
14,179 | 16,387 | (8,890 | ) | ||||||||
Accrued expenses |
7,664 | 2,694 | (2,842 | ) | ||||||||
Net cash provided by operating activities |
75,898 | 33,046 | 12,319 | |||||||||
Cash flows used in investing activities: |
||||||||||||
Capital expenditures |
(14,029 | ) | (15,875 | ) | (20,664 | ) | ||||||
Acquisition of Canadian distributor |
— | — | (2,344 | ) | ||||||||
Purchase of intellectual property |
— | (125 | ) | (1,125 | ) | |||||||
Proceeds from the sales of property and equipment |
— | 35 | 16 | |||||||||
Net cash used in investing activities |
(14,029 | ) | (15,965 | ) | (24,117 | ) | ||||||
Cash flows from financing activities: |
||||||||||||
Net proceeds from the issuances of stock through employee
stock purchase plan and the exercise of stock options |
6,916 | 8,906 | 1,509 | |||||||||
Payments on long-term debt |
(7,660 | ) | (3,043 | ) | (2,420 | ) | ||||||
Net cash provided by (used in) financing activities |
(744 | ) | 5,863 | (911 | ) | |||||||
Net increase (decrease) in cash and cash equivalents |
61,125 | 22,944 | (12,709 | ) | ||||||||
Effect of exchange rates on cash and cash equivalents |
(1,771 | ) | 1,230 | 1,358 | ||||||||
Cash and cash equivalents at beginning of year |
137,653 | 113,479 | 124,830 | |||||||||
Cash and cash equivalents at end of year |
$ | 197,007 | $ | 137,653 | $ | 113,479 | ||||||
Supplemental disclosures of cash flow information: |
||||||||||||
Cash paid during the year for: |
||||||||||||
Interest |
$ | 6,938 | $ | 8,190 | $ | 8,451 | ||||||
Income taxes |
27,914 | 15,761 | 4,267 | |||||||||
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
The Company issued 59,203, 93,692, and 83,351 shares of Class A Common Stock to the Company’s
401(k) plan, with a value of $767,000, $763,000, and $707,000 for the years ended December 31,
2005, 2004 and 2003, respectively.
In addition, we acquired equipment aggregating $2.3 million under capital lease obligations
for the year ended December 31, 2003.
See accompanying notes to consolidated financial statements.
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SKECHERS U.S.A., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 an e-commerce businesses.
The consolidated financial statements have been prepared in accordance with accounting
principles generally accepted in the United States and include the accounts of the Company and its
wholly owned subsidiaries. All significant intercompany balances and transactions have been
eliminated in consolidation. Certain reclassifications have been made to prior year amounts to
conform to current year presentation.
(b) Business Segment Information
Skechers operations are organized along its distribution channels and consists of the following
operating segments:
Domestic Wholesale – The sale of footwear directly to department stores, specialty and independent
retailers throughout the United States.
International Wholesale – The sale of footwear directly to department stores, specialty and
independent retailers in Switzerland, the United Kingdom, Germany, France, Spain, Italy, Austria,
Ireland, Canada and the Benelux Region, and through distributors who sell our footwear to
department stores and specialty retail stores across Eastern Europe, Asia, South America, Africa,
the Middle East and Australia.
Retail – We own and operate retail stores both domestically and, on a smaller scale,
internationally through three integrated retail formats. Our three distinct retail formats are as
follows:
| • | Concept Stores. Located in marquee street locations and high performing regional malls, concept stores promote awareness of the Skechers brand and showcase a broad assortment of in-season footwear styles. The products offered in our concept stores are full price, in season and typically attract fashion conscious consumers. |
| • | Factory Outlet Stores. 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. Freestanding warehouse outlet stores appeal to our most value conscious consumers and enable us to liquidate excess merchandise, discontinued lines and odd-size inventory in a cost-efficient manner. |
Detail segment information is provided in note 12.
(c) Revenue Recognition
The Company recognizes revenue on wholesale sales when products are shipped and the customer
takes ownership and assumes risk of loss, collection of relevant receivable is probable, persuasive
evidence of an arrangement exists and the sales price is fixed or determinable. This generally
occurs at the time of shipment. Allowances for estimated returns, discounts, doubtful accounts and
chargebacks are provided for when related revenue is recorded. Related costs paid to third-party
shipping companies are recorded as a cost of sales.
The Company recognizes revenue from retail sales at the point of sale.
Net royalty income is earned from our licensing arrangements. Upon signing a new licensing
agreement, we receive up-front fees, which are generally characterized as prepaid royalties. These
fees are initially deferred and recognized as revenue as earned based on the terms of the contract
(i.e., as licensed sales are reported to the company or on a straight line basis over the term of
the agreement). The first calculated royalty payment is based on actual sales of the licensed
product. Typically, at each quarter end we receive
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correspondence from our licensees indicating what the actual sales for the period were. This
information is used to calculate and accrue the related royalties based on the terms of the
agreement.
(d) Cash and Cash Equivalents
Cash and cash equivalents consist primarily of certificates of deposit with an initial term of
less than three months. For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid debt instruments with original maturities of three months or less to be
cash equivalents.
(e) Foreign Currency Translation
In accordance with Statement of Financial Accounting Standards No. 52, Foreign Currency
Translation (“SFAS 52”), certain international operations use the respective local currencies as
their functional currency, while other international operations use the U.S. Dollar as their
functional currency. The Company considers the U.S. dollar as its functional currency. The
Company operates internationally through the following foreign subsidiaries: Skechers USA Ltd.,
located in the United Kingdom, with a functional currency of the British Pound; Skechers USA
Canada, Inc., located in Canada, with a functional currency of the Canadian dollar; Skechers USA
Iberia, SL located in Spain, Skechers USA Deutschland GmbH located in Germany, Skechers USA France
S.A.S. located in France, Skechers EDC SPRL located in Belgium, Skechers USA Benelux B.V. located
in the Netherlands, Skechers USA Italia S.r.l., located in Italy, all with a functional currency of
the Euro. Translation adjustments for these subsidiaries are included in other comprehensive
income (loss). Additionally, one international subsidiary, Skechers S.a.r.l. located in
Switzerland, operates with a functional currency of the U.S. dollar. Resulting remeasurement gains
and losses from this subsidiary are included in the determination of net earnings (loss). Assets
and liabilities of the foreign operations denominated in local currencies are translated at the
rate of exchange at the balance sheet date. Revenues and expenses are translated at the weighted
average rate of exchange during the period. Translation of intercompany loans of a long-term
investment nature are included as a component of translation adjustment in other comprehensive
income (loss). Total comprehensive income (loss) for the three years ended December 31, 2005
consists of the following (in thousands):
| 2005 | 2004 | 2003 | ||||||||||
Net earnings (loss) |
$ | 44,717 | $ | 23,553 | $ | (11,867 | ) | |||||
Accumulated other comprehensive income: |
||||||||||||
Foreign currency translation adjustments |
(4,966 | ) | 3,868 | 5,121 | ||||||||
Total comprehensive income (loss) |
$ | 39,751 | $ | 27,421 | $ | (6,746 | ) | |||||
(f) 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. Reserves are estimated based upon inventory on hand, historical sales activity, and the
expected net realizable value. The net realizable value is determined based upon estimated sales
prices of such inventory through off-price or discount store channels.
(g) Income Taxes
The Company accounts for income taxes in accordance with Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes (“SFAS 109”), which requires that the Company
recognize deferred tax liabilities and assets based on the differences between the financial
statement carrying amounts and the tax bases of assets and liabilities, using enacted tax rates in
effect in the years the differences are expected to reverse. Deferred income tax benefit (expense)
results from the change in net deferred tax assets or deferred tax liabilities. A valuation
allowance is recorded when it is more likely than not that some or all or any deferred tax assets
will not be realized.
We record liabilities for probable income tax assessments based on our estimate of potential
tax related exposures. Recording of these assessments requires significant judgment as
uncertainties often exist in respect to new laws, new interpretations of existing laws and rulings
by taxing authorities. Differences between actual results and our assumptions, or changes in our
assumptions in future periods, are recorded in the period they become known.
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(h) 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
|
10 years | |
Furniture, fixtures and equipment
|
5 years | |
Leasehold improvements
|
Useful life or remaining lease term, which ever is shorter |
(i) Intangible Assets
SFAS No. 142, “Goodwill and Other Intangible Assets,” eliminates the requirement to amortize
goodwill and indefinite-lived intangible assets, requiring instead that those assets be measured
for impairment at least annually, and more often when events indicate that impairment exists.
Intangible assets with finite lives will continue to be amortized over their useful lives ranging
from 5–10 years, generally on a straight-line basis. Intangible assets, all subject to
amortization, as of December 31, 2005 and 2004 are as follows (in thousands):
| 2005 | 2004 | |||||||
Intellectual property |
$ | 1,250 | $ | 1,250 | ||||
Other intangibles |
1,000 | 1,000 | ||||||
Trademarks |
1,050 | 1,050 | ||||||
Less accumulated amortization |
(2,169 | ) | (1,659 | ) | ||||
Total Intangible Assets |
$ | 1,131 | $ | 1,641 | ||||
(j) Long-Lived Assets
In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived
Assets”, long-lived assets, such as property, plant, and equipment, and purchased intangibles
subject to amortization, are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset to the estimated
undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an
asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by
which the carrying amount of the asset exceeds the fair value of the asset. The Company recognized
impairment charges of approximately $0.9 million, $40,000 and $0.6 million for the years ended
December 31, 2005, 2004 and 2003, respectively. The impairment charges in 2005, 2004 and 2003
related to the write down of leasehold improvements at six under-performing company owned retail
stores. Fair value was based on estimated discounted future cash flows.
(k) 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, 2005,
2004 and 2003 was approximately $58.2 million, $56.0 million, and $62.9 million, respectively.
Prepaid advertising costs at December 31, 2005 and 2004 were $2.4 million and $1.2 million,
respectively. Prepaid amounts outstanding at December 31, 2005 and 2004 represent the unamortized
portion of endorsement contracts and advertising in trade publications which had not run as of
December 31, 2005 and 2004, respectively.
(l) Earnings Per Share
Basic earnings per share represents net earnings (loss) divided by the weighted average number
of common shares outstanding for the period. Diluted earnings (loss) per share, in addition to the
weighted average determined for basic earnings (loss) per share, includes potential common shares
which would arise from the exercise of stock options using the treasury stock method, and the
conversion of the Company’s 4.50% Convertible Subordinated Notes for the period outstanding since
their issuance in April 2002, if their effects are dilutive.
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The following is a reconciliation of net earnings (loss) and weighted average common shares
outstanding for purposes of calculating earnings per share (in thousands):
| Year Ended December 31, | ||||||||||||
| Basic earnings per share | 2005 | 2004 | 2003 | |||||||||
Net earnings (loss) |
$ | 44,717 | $ | 23,553 | $ | (11,867 | ) | |||||
Weighted average common shares outstanding |
39,686 | 38,638 | 37,840 | |||||||||
Basic earnings (loss) per share |
$ | 1.13 | $ | 0.61 | $ | (0.31 | ) | |||||
| Year Ended December 31, | ||||||||||||
| Diluted earnings per share | 2005 | 2004 | 2003 | |||||||||
Net earnings (loss) |
$ | 44,717 | $ | 23,553 | $ | (11,867 | ) | |||||
After tax effect of interest expense on 4.50%
convertible subordinated notes |
2,487 | — | — | |||||||||
Earnings (loss) for purposes of
computing diluted earnings per share |
$ | 47,204 | $ | 23,553 | $ | (11,867 | ) | |||||
Weighted average common shares outstanding |
39,686 | 38,638 | 37,840 | |||||||||
Dilutive stock options |
1,366 | 1,162 | — | |||||||||
Weighted average assumed conversion of
4.50% convertible subordinated notes |
3,466 | — | — | |||||||||
Weighted average common shares outstanding |
44,518 | 39,800 | 37,840 | |||||||||
Diluted earnings (loss) per share |
$ | 1.06 | $ | 0.59 | $ | (0.31 | ) | |||||
Options to purchase 764,500, 1,689,717, and 5,232,487 shares of common stock at prices ranging
from $2.78 to $24.00 were outstanding at December 31, 2005, 2004 and 2003, respectively 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. The impact from the assumed conversion of the 4.50% convertible subordinated notes
in 2004 and 2003 was anti-dilutive and, was therefore excluded from those calculations.
(m) Stock Compensation
The Company accounts for stock-based compensation under the provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123), as
amended. Under the provisions of SFAS 123, the Company has elected to continue to measure
compensation cost for employees and nonemployee directors of the Company under the intrinsic value
method of APB No. 25 and to comply with the pro forma disclosure requirements under SFAS 123. The
Company applies the fair value techniques of SFAS 123 to measure compensation cost for
options/warrants granted to nonemployees.
Option valuation methods require the input of highly subjective assumptions including the
expected stock price volatility, expected term and forfeiture rate. Using the Black-Scholes option
valuation model, the estimated weighted average fair value of options granted during 2005, 2004 and
2003 were $8.28, $5.39 and $4.95 per share, respectively. See note 6 (d) regarding assumptions
used in the Black-Scholes option valuation model.
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The following table illustrates the effects on net earnings (loss) had compensation cost for
the Company’s stock option plans and its stock purchase plans been determined based on the
estimated fair value at the grant dates for awards under those plans consistent with the fair value
method of SFAS 123 utilizing the Black- Scholes option-pricing model in each period (in thousands):
| 2005 | 2004 | 2003 | ||||||||||
Net earnings (loss), as reported |
$ | 44,717 | $ | 23,553 | $ | (11,867 | ) | |||||
Deduct total stock-based employee compensation
expense under fair value-based method for all
awards, net of related tax effects |
(1,853 | ) | (4,012 | ) | (6,231 | ) | ||||||
Pro forma net earnings (loss) for basic pro
forma earnings per share |
42,864 | 19,541 | (18,098 | ) | ||||||||
Add back interest on 4.50% debentures, net of tax |
2,487 | — | — | |||||||||
Pro forma net earnings (loss) for diluted pro
forma earnings per share |
$ | 45,351 | $ | 19,541 | $ | (18,098 | ) | |||||
Pro forma net earnings (loss) per share: |
||||||||||||
Basic |
$ | 1.08 | $ | 0.51 | $ | (0.48 | ) | |||||
Diluted |
1.02 | 0.49 | (0.48 | ) | ||||||||
Pro forma basic net earnings (loss) per share represents net pro forma earnings (loss) divided
by the weighted average number of common shares outstanding for the period. Pro forma diluted
earnings (loss) per share, in addition to the weighted average determined for pro forma basic
earnings (loss) per share, includes the dilutive effect of common stock equivalents which would
arise from the exercise of stock options using the treasury stock method, and assumes the
conversion of the Company’s 4.50% Convertible Subordinated Notes for the period outstanding since
their issuance in April 2002, if their effects are dilutive.
(n) 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. 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.
(o) 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 $6.0 million, $5.7 million, and $6.1 million
during the years ended December 31, 2005, 2004 and 2003, respectively.
(p) Fair Value of Financial Instruments
The carrying amount of the Company’s financial instruments, which principally include cash,
accounts receivable, accounts payable and accrued expenses, approximates fair value due to the
relatively short maturity of such instruments.
The fair value of the Company’s short-term borrowings reflects the fair value based upon
current rates available to the Company for similar debt. The fair value of the Company’s 4.50%
Convertible Subordinated Notes at December 31, 2005 was $90.0 million, based on the price of the
debt in the public market, which was the same as the carrying value of $90.0 million.
(q) New Accounting Standards
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement
No. 123(R) (revised 2004), “Share-Based Payment,” which is a revision of FASB Statement No. 123,
“Accounting for Stock-Based Compensation.” Statement 123(R) supersedes APB Opinion No. 25,
“Accounting for Stock Issued to Employees,” and amends FASB Statement No. 95, “Statement of Cash
Flows.” Generally, the approach in Statement 123(R) is similar to the approach described in
Statement 123. However, Statement 123(R) requires all share-based payments to employees, including
grants of employee stock options, to be recognized in the income statement based on their fair
values. Pro forma disclosure is no longer an alternative.
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We adopted Statement 123(R) effective January 1, 2006 using the modified-prospective method in
which compensation cost is recognized beginning with the effective date (a) based on the
requirements of Statement 123(R) for all share-based payments granted and modified after the
effective date and (b) based on the requirements of Statement 123 for all awards granted to
employees prior to the effective date of Statement 123(R) that remain unvested on the effective
date. We currently account for share-based payments to employees using Opinion 25’s intrinsic
value method and, as such, generally recognize no compensation cost for employee stock options.
Accordingly, the adoption of Statement 123(R)’s fair value method will have a significant impact on
our results of operations, although it will have no impact on our overall financial position. Statement 123(R) also requires excess tax
benefits as defined to be reported as a financing cash flow rather than as an operating cash flow
as required under current literature. This requirement will reduce net operating cash flows and
increase net financing cash flows in periods after adoption. While we cannot estimate what those
amounts will be in the future (because they depend on, among other things, when employees exercise
stock options), the amounts of operating cash flows recognized in prior periods for such excess tax
deductions were $1.5 million, $2.0 million and $0.8 million for the years ended December 31 2005,
2004 and 2003, respectively.
In November 2004, the FASB issued SFAS No. 151, “Inventory Costs” (“SFAS 151”), an amendment
of ARB No. 43, Chapter 4. SFAS 151 clarifies the accounting for abnormal amounts of idle facility
expense, freight, handling costs and wasted material. SFAS 151 is effective for inventory costs
incurred during fiscal years beginning after June 15, 2005. We adopted the provisions of SFAS 151
on January 1, 2006 and such adoption will not have a material impact on our consolidated financial
statements.
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections, a
replacement of Accounting Principles Board Opinion (APB) No. 20, Accounting Changes, and FASB
Statement No. 3, Reporting Accounting Changes in Interim Financial Statements”(“SFAS 154”). This
Statement requires retrospective application to prior periods’ financial statements of a change in
accounting principle. It applies both to voluntary changes and to changes required by an accounting
pronouncement if the pronouncement does not include specific transition provisions. APB 20
previously required that most voluntary changes in accounting principles be recognized by recording
the cumulative effect of a change in accounting principle. SFAS 154 is effective for fiscal years
beginning after December 15, 2005. We adopted the provisions of SFAS 154 on January 1, 2006 and
such adoption will not have a material impact on our consolidated financial statements.
In June 2005, the EITF reached a consensus on Issue No. 05-06, “Determining the Amortization
Period for Leasehold Improvements” (“EITF 05-06”). EITF 05-06 provides guidance for determining the
amortization period used for leasehold improvements acquired in a business combination or purchased
after the inception of a lease, collectively referred to as subsequently acquired leasehold
improvements. EITF 05-06 provides that the amortization period used for the subsequently acquired
leasehold improvements to be the lesser of (a) the subsequently acquired leasehold improvements’
useful lives, or (b) a period that reflects renewals that are reasonably assured upon the
acquisition or the purchase. EITF 05-06 is effective on a prospective basis for subsequently
acquired leasehold improvements purchased or acquired in periods beginning after June 29, 2005. We
do not expect the adoption of EITF 05-06 to have a material impact on our results of operations or
financial condition.
(2) PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2005 and 2004 is summarized as follows (in thousands):
| 2005 | 2004 | |||||||
Land |
$ | 14,358 | $ | 16,158 | ||||
Buildings and improvements |
33,536 | 28,881 | ||||||
Furniture, fixtures and equipment |
74,034 | 71,540 | ||||||
Leasehold improvements |
56,177 | 51,324 | ||||||
Total property and equipment |
178,105 | 167,903 | ||||||
Less accumulated depreciation and amortization |
105,160 | 85,339 | ||||||
Property and equipment, net |
$ | 72,945 | $ | 82,564 | ||||
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(3) ACCRUED EXPENSES
Accrued expenses at December 31, 2005 and 2004 is summarized as follows (in thousands):
| 2005 | 2004 | |||||||
Accrued inventory purchases |
$ | 4,535 | $ | 4,537 | ||||
Accrued payroll and related taxes |
10,140 | 8,522 | ||||||
Income taxes payable |
5,885 | — | ||||||
Accrued interest |
844 | 844 | ||||||
Accrued expenses |
$ | 21,404 | $ | 13,903 | ||||
(4) SHORT-TERM BORROWINGS
The Company has available a secured line of credit, amended as of June 25, 2004, permitting
borrowings up to $150.0 million based upon eligible accounts receivable and inventories. Borrowings
bear interest at the prime rate (7.25% at December 31, 2005) minus 0.50%, and the agreement renews
automatically from year to year unless terminated by either party upon written notice 60 days prior
to year-end. The agreement provides for the issuance of letters of credit up to a maximum of $30.0
million. Under the agreement, available borrowings are reduced by 50% of the first $1 million of
outstanding guarantees and 75% of outstanding guarantees that exceed $1 million. Outstanding
letters of credit at December 31, 2005 were $3.9 million. Available borrowings under the line of
credit at December 31, 2005 were $147.4 million, and no amounts were outstanding at December 31,
2005 and 2004. The Company pays an unused line of credit fee of .25% annually. The agreement
provides the following financial covenants should the loan balance exceed 60% of all eligible
accounts, as defined: stockholders’ equity shall not decrease by more than 20% in any given
calendar quarter; a tangible net worth requirement as defined in the agreement; and limits to the
payment of dividends if in default of any provision of the agreement. The Company was in compliance
with these covenants at December 31, 2005.
(5) LONG-TERM BORROWINGS
Long-term debt at December 31, 2005 and 2004 is as follows (in thousands):
| 2005 | 2004 | |||||||
4.50% Convertible Subordinated Notes due April 15,
2007 (see below) |
$ | 90,000 | $ | 90,000 | ||||
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 |
10,004 | 10,204 | ||||||
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 |
7,420 | 7,522 | ||||||
Capital lease obligation, due in aggregate monthly
installments of $195 (includes principal and
interest), interest rate of 7.66%, secured by
equipment, repaid in December 2005 (see note 11) |
— | 6,438 | ||||||
Capital lease obligation, due in quarterly
installments of $171.6 (includes principal and
interest), fixed rate of interest at 7.0%, secured by
property, through July 2007 (see note 11) |
805 | 1,588 | ||||||
Capital lease obligations, interest rates from
7.12%-7.9%, secured by equipment, maturing in various
installments through January 2007 (see note 11) |
99 | 409 | ||||||
Subtotal |
108,328 | 116,161 | ||||||
Less current installments |
1,040 | 3,123 | ||||||
Total long-term debt |
$ | 107,288 | $ | 113,038 | ||||
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The aggregate maturities of long-term borrowings at December 31, 2005 are as follows:
2006 |
$ | 1,040 | ||
2007 |
90,539 | |||
2008 |
379 | |||
2009 |
410 | |||
2010 |
444 | |||
Thereafter |
15,516 | |||
| $ | 108,328 | |||
In April 2002, we issued $90.0 million aggregate principal amount of 4.50% Convertible
Subordinated Notes due April 15, 2007. Interest on the notes is paid semi-annually in April and
October of each year. Discount and issuance costs of approximately $3.4 million are being
amortized to interest expense over the term of the debentures. The notes are convertible at the
option of the holder into shares of Class A Common Stock at a conversion rate of 38.5089 shares of
Class A Common Stock per $1,000 principal amount of notes, which is equivalent to a conversion
price of approximately $25.968 per share. The conversion rate is subject to adjustment. The notes
are subject to optional redemption at the option of our company, in whole or in part, at the
following redemption prices: 101.80% of the principal amount for the twelve-month period beginning
April 15, 2005, 100.90% of the principal amount for the twelve-month period beginning April 15,
2006 and 100% of the principal amount thereafter. The notes are unsecured and subordinated to our
present and future senior debt as well as indebtedness and other liabilities of our subsidiaries.
The indenture does not restrict our incurrence of indebtedness, including senior debt, or our
subsidiaries’ incurrence of indebtedness.
The Company’s long-term debt obligations contain both financial and non-financial covenants,
including cross default provisions. The Company is in compliance with all its material
non-financial covenants, including any cross default provisions, and financial covenants of our
long-term debt as of December 31, 2005.
(6) STOCKHOLDERS’ EQUITY
(a) Stock Issuances
The authorized capital stock of the Company consists of 100,000,000 shares of Class A Common
Stock, par value $.001 per share, and 60,000,000 shares of Class B Common Stock, par value $.001
per share. The Company has also authorized 10,000,000 shares of preferred stock, $.001 par value
per share.
The Class A Common Stock and Class B Common Stock have identical rights other than with
respect to voting, conversion and transfer. The Class A Common Stock is entitled to one vote per
share, while the Class B Common Stock is entitled to ten votes per share on all matters submitted
to a vote of stockholders. The shares of Class B Common Stock are convertible at any time at the
option of the holder into shares of Class A Common Stock on a share-for-share basis. In addition,
shares of Class B Common Stock will be automatically converted into a like number of shares of
Class A Common Stock upon any transfer to any person or entity which is not a permitted transferee.
During 2005, 2004 and 2003 certain Class B stockholders converted 360,000, 1,875,372 and
431,056 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.
In May 2003, stockholders approved an amendment to the plan to increases the number of Class A
Common Stock authorized for issuance under the plan to 11,215,154. Option awards are generally
granted with an exercise price equal to the market price of the Company’s stock at the date of
grant. Stock option awards generally become exercisable over a four-year graded vesting period and
expire ten years from the date of grant.
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Shares subject to option under the Stock Option Plan were as follows:
| WEIGHTED | ||||||||||
| SHARES | OPTION EXERCISE PRICE | |||||||||
Outstanding at December 31, 2002 |
5,429,383 | $ | 10.89 | |||||||
Granted |
267,500 | 7.99 | ||||||||
Exercised |
(36,491 | ) | 5.21 | |||||||
Canceled |
(427,905 | ) | 11.27 | |||||||
Outstanding at December 31, 2003 |
5,232,487 | 10.75 | ||||||||
Granted |
905,000 | 8.47 | ||||||||
Exercised |
(983,947 | ) | 7.75 | |||||||
Canceled |
(178,199 | ) | 11.40 | |||||||
Outstanding at December 31, 2004 |
4,975,341 | 10.90 | ||||||||
Granted |
35,000 | 13.52 | ||||||||
Exercised |
(593,671 | ) | 9.04 | |||||||
Canceled |
(207,233 | ) | 14.89 | |||||||
Outstanding at December 31, 2005 |
4,209,437 | $ | 10.98 | |||||||
Options available for grant at December 31, 2005 |
3,248,847 | |||||||||
The following table summarizes information about stock options outstanding and exercisable at
December 31, 2005:
| OPTIONS OUTSTANDING | OPTIONS EXERCISABLE | |||||||||||||||||||
| WEIGHTED | ||||||||||||||||||||
| NUMBER | WEIGHTED | WEIGHTED | NUMBER | AVERAGE | ||||||||||||||||
| RANGE OF | OUTSTANDING | AVERAGE REMAINING | AVERAGE | EXERCISABLE AT | EXERCISE | |||||||||||||||
| EXERCISE PRICE | DECEMBER 31, 2005 | CONTRACTUAL LIFE | EXERCISE PRICE | DECEMBER 31, 2005 | PRICE | |||||||||||||||
$2.78 to $8.83 |
1,609,918 | 6.9 years | $ | 6.95 | 1,208,043 | $ | 6.66 | |||||||||||||
$8.84 to $11.78 |
1,073,280 | 5.0 years | 10.70 | 1,055,030 | 10.71 | |||||||||||||||
$11.79 to $20.62 |
1,296,739 | 5.0 years | 14.00 | 1,226,239 | 14.01 | |||||||||||||||
$20.63 to $29.45 |
229,500 | 5.4 years | 23.48 | 229,500 | 23.48 | |||||||||||||||
| 4,209,437 | 5.7 years | $ | 10.98 | 3,718,812 | $ | 11.27 | ||||||||||||||
At December 31, 2005, 2004 and 2003, the number of options exercisable for each year was
3,718,812, 3,889,109, and 3,711,340, respectively. The weighted-average exercise price of those
options was $11.27, $11.00 and $11.63, respectively.
(c) Stock Purchase Plan
Effective July 1, 1998, the Company adopted the 1998 Employee Stock Purchase Plan (1998 Stock
Purchase Plan). The Company’s Employee Stock Purchase Plan (the “ESPP”) provides that a total of
2,781,415, shares of Class A Common Stock are reserved for issuance under the plan. The ESPP,
which is intended to qualify as an “employee stock purchase plan” under Section 423 of the Code, is
implemented utilizing six-month offerings with purchases occurring at six-month intervals. The
ESPP administration is overseen by the Board of Directors. Employees are eligible to participate
if they are employed by the Company for at least 20 hours per week and more than five months in any
calendar year. The ESPP permits eligible employees to purchase Common Stock through payroll
deductions, which may not exceed 15% of an employee’s compensation. The price of Common Stock
purchased under the ESPP is 85% of the lower of the fair market value of the Common Stock at the
beginning of each six-month offering period or on the applicable purchase date. Employees may end
their participation in an offering at any time during the offering period. The Board may at any
time amend or terminate the ESPP, except that no such amendment or termination may adversely affect
shares previously granted under the ESPP. During 2005, 2004 and 2003, 135,387, 164,502, and
195,893 shares were issued, respectively, under the 1998 Stock Purchase Plan for which the Company
received approximately $1.6 million, $1.4 million, and $1.3 million, respectively.
(d) Stock Compensation
For pro forma net income purposes, the fair value of each option is estimated on the date of
grant using the Black-Scholes option pricing model that uses the assumptions noted in the following
table. Expected volatility is based on historical share price data. The
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Company uses historical employee exercise and cancellation data to estimate expected term and
forfeiture rates. The risk-free rate is based on U.S. Treasury yields in effect at the time of
grant. Employees that have similar historical exercise behavior are considered separately for
valuation purposes. Because the Black-Scholes based option valuation models incorporate ranges of
assumptions for inputs, those inputs are disclosed in the table as follows:
| 2005 | 2004 | 2003 | ||||||||||
Dividend yield |
— | — | — | |||||||||
Expected volatility |
71 | % | 73 | % | 77 | % | ||||||
Risk-free interest rate |
3.88 | % | 3.23 | % | 2.5 | % | ||||||
Expected life of option |
5 | 5 | 5 | |||||||||
The weighted-average fair value per share of options granted during 2005, 2004 and 2003 were
$8.28, $5.39 and $4.95, respectively. The total intrinsic value of options exercised during 2005,
2004 and 2003 were $4.0 million, $5.2 million and $0.1 million, respectively.
(7) OTHER INCOME (EXPENSE), NET
Other income (expense), net at December 31, 2005, 2004 and 2003 is summarized as follows (in
thousands):
| 2005 | 2004 | 2003 | ||||||||||
Gain (loss) on foreign currency transactions |
$ | (351 | ) | $ | (258 | ) | $ | 80 | ||||
Legal settlements |
1,638 | (2,294 | ) | (394 | ) | |||||||
Other revenue |
— | — | 127 | |||||||||
Total other income, net |
$ | 1,287 | $ | (2,552 | ) | $ | (187 | ) | ||||
(8) INCOME TAXES
The provisions for income tax expense were as follows (in thousands):
| 2005 | 2004 | 2003 | ||||||||||
Actual income taxes: |
||||||||||||
Federal: |
||||||||||||
Current |
$ | 27,562 | $ | 15,060 | $ | 4,956 | ||||||
Deferred |
(4,157 | ) | (2,328 | ) | (3,223 | ) | ||||||
Total federal |
23,405 | 12,732 | 1,733 | |||||||||
State: |
||||||||||||
Current |
5,417 | 3,087 | 1,139 | |||||||||
Deferred |
(588 | ) | (1,415 | ) | (570 | ) | ||||||
Total state |
4,829 | 1,672 | 569 | |||||||||
Foreign : |
||||||||||||
Current |
1,423 | 170 | 317 | |||||||||
Deferred |
(1,577 | ) | 593 | (1,125 | ) | |||||||
Total foreign |
(154 | ) | 763 | (808 | ) | |||||||
Total income taxes |
$ | 28,080 | $ | 15,167 | $ | 1,494 | ||||||
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Income taxes differ from the statutory tax rates as applied to earnings (loss) before income
taxes as follows (in thousands):
| 2005 | 2004 | 2003 | ||||||||||
Expected income tax expense |
$ | 25,479 | $ | 13,552 | $ | (3,594 | ) | |||||
State income tax, net of federal benefit |
3,585 | 1,296 | 240 | |||||||||
Rate differential on foreign income |
(1,694 | ) | 433 | 4,358 | ||||||||
Non-deductible expenses |
321 | 301 | 342 | |||||||||
Other |
389 | (415 | ) | 148 | ||||||||
Total provision for income taxes |
$ | 28,080 | $ | 15,167 | $ | 1,494 | ||||||
The tax effects of temporary differences that give rise to significant portions of deferred
tax assets and deferred tax liabilities at December 31, 2005 and 2004 are presented below (in
thousands):
| DEFERRED TAX ASSETS: | 2005 | 2004 | ||||||
Deferred tax assets — current: |
||||||||
Inventory adjustments |
$ | 2,037 | $ | 2,677 | ||||
Accrued expenses |
4,160 | 2,168 | ||||||
Allowances for receivables |
2,293 | 1,445 | ||||||
Total current assets |
8,490 | 6,290 | ||||||
Deferred tax assets — long term: |
||||||||
Depreciation on property and equipment |
8,351 | 4,373 | ||||||
Loss carryforward |
2,441 | 2,983 | ||||||
Valuation allowance |
(1,455 | ) | (2,450 | ) | ||||
Total long term assets |
9,337 | 4,906 | ||||||
Total deferred tax assets |
17,827 | 11,196 | ||||||
Deferred tax liabilities — current: |
||||||||
Prepaid expenses |
2,551 | 2,241 | ||||||
Other |
184 | 184 | ||||||
Total deferred tax liabilities |
2,735 | 2,425 | ||||||
Net deferred tax assets |
$ | 15,092 | $ | 8,771 | ||||
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.
Consolidated U.S. income (loss) before income taxes was $66.0 million, $35.0 million, and $2.0
million for the years ended December 31, 2005, 2004 and 2003, respectively. The corresponding
income (loss) before income taxes for non-U.S. based operations was $6.8 million, $3.7 million, and
($12.4) million for the years ended December 31, 2005, 2004 and 2003, respectively.
As of December 31, 2005 and December 31, 2004, Skechers had combined foreign operating loss
carry-forwards to reduce future taxable income of approximately $6.7 million and $8.3 million,
respectively. Some of these net operating losses expire beginning in 2008 and several can be
carried forward indefinitely. As of December 31, 2005 and 2004, a valuation allowance of $1.5
million and $2.5 million, respectively, had been set up for those carryforwards not expected to be
utilized before their expiration date.
The Company had negative accumulated earnings from its foreign subsidiaries of $0.9 million,
and therefore has not provided for withholding and U.S. federal income taxes for undistributed
earnings.
(9) BUSINESS AND CREDIT CONCENTRATIONS
The Company operates in the footwear industry and generates most of its sales in the United
States, although its 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 its customers to satisfy their obligations and provides for estimated doubtful accounts.
Domestic accounts receivable, which generally do not require collateral from customers, amounted to
$103.9 million and $88.2 million before allowances for bad debts and sales returns, and chargebacks
at December 31, 2005 and 2004, respectively. Foreign accounts receivable, which generally are
collateralized by letters of credit, amounted to $37.9 million and $38.3 million before allowance
for bad debts, sales returns, and
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chargebacks at December 31, 2005 and 2004, respectively. International net sales amounted to
$179.6 million, $171.5 million, and $132.0 million for the years ended December 31, 2005, 2004 and
2003, respectively. The Company’s credit losses due to write-off’s for the years ended December 31,
2005, 2004 and 2003 were $2.9 million, $4.9 million, and $7.3 million respectively, and did not
significantly differ from management’s expectations.
Net sales to customers in North America exceeded 80% of total net sales for each of the years
in the three-year period ended December 31, 2005. Assets located outside the United States consist
primarily of cash, accounts receivable, inventory, property and equipment, and other assets. Net
assets held outside the United States were $106.1 million and $110.3 million at December 31, 2005
and 2004, respectively.
During
2005, 2004, and 2003, no customer accounted for 10% or more of net sales. One customer
accounted for 10.3% and 10.9% of net trade receivables at December 31, 2005 and 2004, respectively.
During 2005, 2004 and 2003, our net sales to our five largest customers accounted for
approximately 25.4%, 26.8% and 27.7%, respectively.
During 2005, the Company had four manufacturers, each of which accounted for between 7.9% and
32.4% of total purchases. During 2004, the Company had four manufacturers, each of which accounted
for between 7.9% and 28.2% of total purchases. During 2003, the Company had four manufacturers,
each of which accounted for between 7.4% and 24.6% of total purchases.
Most 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.
(10) BENEFIT PLAN
The Company has adopted a profit sharing plan covering all employees who are 21 years of age
and have completed 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 six year period.
The Company’s contributions to the plan amounted to $0.8 million, $0.8 million, and $0.7
million for the years ended December 31, 2005, 2004 and 2003, respectively. As its contribution to
the plan for 2005, 2004 and 2003, the Company issued 59,203, 93,692, and 83,351 shares of its Class
A Common Stock, respectively. The shares contributed to the plan contain certain restrictions
regarding the subsequent sales of those shares.
(11) COMMITMENTS AND CONTINGENCIES
(a) Construction
During 2005, we entered into a construction agreement with Morley Construction Company for the
construction of our third corporate facility in Manhattan Beach, California. The agreement has a
maximum payment clause in which Morley agrees that the construction cost of the facility will not
exceed $18.1 million, of which $1.5 million was incurred as of December 31, 2005. We expect the
building to be completed by the end of 2007.
(b) Leases
The Company leases facilities under operating lease agreements expiring through July 2027. The
Company pays taxes, maintenance and insurance in addition to the lease obligation. The Company also
leases certain equipment and automobiles under operating lease agreements expiring at various dates
through April 2006. Rent expense for the years ended December 31, 2005, 2004 and 2003 approximated
$37.2 million, $31.4 million, and $29.0 million, respectively.
The Company also leases certain property and equipment under capital lease agreements
requiring monthly installment payments through July 2007. The cost of this property and equipment
was $2.8 million with a net book value of $1.1 million at December 31, 2005. The cost of this
property and equipment was $17.4 million with a net book value of $4.4 million at December 31,
2004. Amortization of these assets is included in depreciation expense in the accompanying
consolidated statements of cash flows.
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Minimum lease payments, which takes into account escalation clauses, are recognized on a
straight-line basis over the minimum lease term. Subsequent adjustments to our lease payments due
to changes in an existing index, usually the consumer price index, are typically included in our
calculation of the minimum lease payments when the adjustment is known. Reimbursements for
leasehold improvements are recorded as liabilities and are amortized over the lease term. Lease
concessions, in our case is usually a free rent period, is considered in the calculation of our
minimum lease payments for the minimum lease term.
Future minimum lease payments under noncancellable leases at December 31, 2005 are as follows (in
thousands):
| CAPITAL | OPERATING | |||||||
| LEASES | LEASES | |||||||
Year ending December 31: |
||||||||
2006 |
$ | 841 | $ | 32,959 | ||||
2007 |
215 | 32,054 | ||||||
2008 |
— | 28,065 | ||||||
2009 |
— | 25,860 | ||||||
2010 |
— | 24,499 | ||||||
Thereafter |
— | 67,381 | ||||||
| 1,056 | $ | 210,818 | ||||||
Less imputed interest |
152 | |||||||
Present value of net minimum lease payments |
$ | 904 | ||||||
(c) Litigation
The Company recognizes legal expense in connection with loss contingencies as incurred.
On December 2, 2002, a class action complaint entitled OMAR QUINONES v. SKECHERS USA, INC. et
al. was filed in the Superior Court for the State of California for the County of Orange (Case No.
02CC00353). The complaint, as amended, alleges overtime and related violations of the California
Labor Code on behalf of managers of Skechers’ retail stores and seeks, inter alia, damages and
restitution, as well as injunctive and declaratory relief. On February 25, 2003, another related
class action complaint entitled MYRNA CORTEZ v. SKECHERS USA, INC. et al. was filed in the Superior
Court for the State of California for the County of Los Angeles (Case No. BC290932), asserting
similar claims and seeking similar relief on behalf of assistant managers. On July 7, 2004, a third
class action complaint entitled MYRNA CORTEZ et al. v. SKECHERS USA, INC. et al. was filed in the
Superior Court for the State of California for the County of Los Angeles (Case No. BC318101). The
complaint alleges wage violations of the California Labor Code and unfair business practices
relating to deductions for uniforms on behalf of employees of Skechers’ retail stores and seeks,
inter alia, damages and civil penalties, as well as injunctive relief. On December 20, 2004, the
parties agreed to a preliminary settlement that fully resolved all claims brought by the plaintiffs
in each of the three lawsuits. Under the terms of the preliminary settlement, Skechers was to pay a
potential maximum settlement amount of approximately $1.8 million, which was recorded to other
expense in the consolidated statement of earnings during the fourth quarter of 2004, to cover
claims made by eligible class members, plaintiff attorneys’ fees and costs, and costs of a
third-party administrator. On July 18, 2005, the court approved the preliminary settlement, and all
claims from eligible class members have been received. The final settlement payout, which was
within the $1.8 million amount that was accrued and reserved, was $1.6 million.
On March 25, 2003, a shareholder securities class action complaint captioned HARVEY SOLOMON v.
SKECHERS USA, INC. et al. was filed against Skechers and certain of its officers and directors in
the United States District Court for the Central District of California (Case No. 03-2094 DDP). On
April 2, 2003, a shareholder securities class action complaint captioned CHARLES ZIMMER v. SKECHERS
USA, INC. et al. was filed against Skechers and certain of its officers and directors in the United
States District Court for the Central District of California (Case No. 03-2296 PA). On April 15,
2003, a shareholder securities class action complaint captioned MARTIN H. SIEGEL v. SKECHERS USA,
INC. et al. was filed against Skechers and certain of its officers and directors in the United
States District Court for the Central District of California (Case No 03-2645 RMT). On May 6, 2003,
a shareholder securities class action complaint captioned ADAM D. SAPHIER v. SKECHERS USA, INC. et
al. was served on Skechers and certain of its officers and directors in the United States District
Court for the Central District of California (Case No. 03-3011 FMC). On May 9, 2003, a shareholders
securities class action complaint captioned LARRY L. ERICKSON v. SKECHERS USA, INC. et al. was
served on Skechers and certain of its officers and directors in the United States District Court
for the Central District of California (Case No. 03-3101 SJO). Each of these class action
complaints alleged violations of the federal securities laws on behalf of persons who purchased
publicly traded securities of Skechers between April 3, 2002 and December 9, 2002. In July 2003,
the court in these federal securities class actions, all pending in the United States District
Court for the Central District of California, ordered the
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cases consolidated and a consolidated complaint to be filed and served. On September 25, 2003,
the plaintiffs filed a consolidated complaint entitled In re SKECHERS USA, Inc. Securities
Litigation, Case No. CV-03-2094-PA in the United States District Court for the Central District of
California, consolidating all of the federal securities actions above. The complaint names as
defendants Skechers and certain officers and directors and alleges violations of the federal
securities laws and breach of fiduciary duty on behalf of persons who purchased publicly traded
securities of Skechers between April 3, 2002 and December 9, 2002. The complaint seeks compensatory
damages, interest, attorneys’ fees and injunctive and equitable relief. Skechers moved to dismiss
the consolidated complaint in its entirety. On May 10, 2004, the court granted Skechers’ motion to
dismiss with leave for plaintiffs to amend the complaint. On August 9, 2004, plaintiffs filed a
first amended consolidated complaint for violations of the federal securities laws. The allegations
and relief sought were virtually identical to the original consolidated complaint. Skechers has
moved to dismiss the first amended consolidated complaint and the motion was set for hearing on
December 6, 2004. On March 21, 2005, the court granted the motion to dismiss the first amended
consolidated complaint with leave for plaintiffs to amend one final time. On April 7, 2005,
plaintiffs elected to stand on the first amended consolidated complaint and requested entry of
judgment so that an appeal from the court’s ruling could be taken. On April 26, 2005, the court
entered judgment in favor of Skechers and the individual defendants, and on May 3, 2005, plaintiffs
filed an appeal with the United States Court of Appeals for the Ninth Circuit. As of the date of
filing this annual report, all briefing by the parties has been completed and the parties are
waiting on a hearing date. Discovery has not commenced in the underlying action. While it is too
early to predict the outcome of the appeal and any subsequent litigation, Skechers believes the
suit is without merit and intends to vigorously defend against the claims.
On April 3, 2003, a shareholder derivative complaint captioned BRADFORD MITCHELL v. JEFFREY
GREENBERG et al. was filed against Skechers and certain of its officers in the Superior Court of
the State of California, Los Angeles County (Case No. BC 293317). On April 3, 2003, a shareholder
derivative complaint captioned GEORGIA MANOLAS v. JEFFREY GREENBERG et al. was filed against
Skechers and certain of its officers in the Superior Court of the State of California, Los Angeles
County (Case No. BC293388). On April 8, 2003, a shareholder derivative complaint captioned JEFF
GRAVITTER v. ROBERT Y. GREENBERG was filed against Skechers and certain of its officers in the
Superior Court of the State of California, Los Angeles County (Case No. BC293561). Each of these
class action complaints included allegations of violations of California Corporation Code § 25402
and breach of fiduciary duty. On August 29, 2003, the plaintiffs in these state derivative actions
filed a consolidated complaint entitled In re SKECHERS USA, Inc. Derivative Litigation, Case No.
BC-293317, in the Superior Court of the State of California, Los Angeles County, consolidating all
of the state derivative actions above. The complaint alleges violations of California Corporation
Code §25402, breaches of fiduciary duty, waste of corporate assets and unjust enrichment. The
complaint sought compensatory damages, treble damages, disgorgement of profits, imposition of a
constructive trust, equitable and injunctive relief, and costs. The matter had been settled in
principle and a settlement stipulation between the parties had been signed, although the settlement
was subject to court approval. On June 3, 2005, the court declined to approve the proposed
settlement, although the court stated that the parties are free to settle the case between each
other without formal court approval and indeed are encouraged to do so. In response, the parties
revised the stipulation of settlement and opted to give the shareholders notice of settlement. The
parties sought court approval of the revised settlement, and the court approved such settlement on
December 19, 2005. The settlement was funded entirely by Skechers’ insurance carrier.
On May 19, 2005, Rosemary Almanza filed a lawsuit against Skechers in the Superior Court of
the State of California, County of San Bernadino, ROSEMARY ALMANZA v. SKECHERS U.S.A., INC. (Case
No. RCV 087714). The complaint alleges wrongful termination under the California Fair Employment
and Housing Act, California Government Code §12900, et seq., as a result of harassment,
discrimination and retaliation against Ms. Almanza. The complaint seeks compensatory damages,
punitive and exemplary damages, interest and attorneys’ fees. Skechers plans on defending the
allegations vigorously and believes the claims are without merit. Nonetheless, it is too early to
predict the outcome and whether the outcome will have a material adverse effect on Skechers’
financial condition or results of operations. On February 20, 2006, the parties settled the suit,
and the settlement did not have a material adverse effect on our company’s financial condition or
results of operations.
On September 23, 2005, Gary Palmer filed a lawsuit in United States District Court, Eastern
District of California against Chelsea Financing Partnership, L.P., which is the owner of an outlet
mall in Folsom, California, and 71 retailers including Skechers located in the outlet mall (Case
No. 2:05-cv-01935-MCE-GGH). The complaint alleges that Chelsea Financing Partnership, L.P. and the
retailers have violated the Americans with Disabilities Act of 1990, the Disabled Persons Act and
the Unruh Civil Rights Act by failing to make the facilities fully and equally accessible to
handicapped individuals, and that such violations discriminate against plaintiff. The complaint
seeks injunctive and preventive relief, declaratory relief, actual and statutory damages, exemplary
damages and attorneys’ fees from the defendants. On December 14, 2005, the parties settled the
suit, and the settlement did not have a material adverse effect on our company’s financial
condition or results of operations.
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On December 21, 2005, Twelve Ten Studios, Inc. filed a lawsuit against Skechers in United
States District Court, Central District of California, TWELVE TEN STUDIOS, INC. v. SKECHERS U.S.A.,
INC. (Case No. CV 05008863). The complaint alleges copyright infringement for use of an embroidered
fabric design authored by plaintiff for use on women’s footwear in 2003. The complaint seeks
injunctive relief, compensatory damages, punitive and exemplary damages, interest, and attorneys’
fees and costs. Although Skechers believed the case was without merit, the style at issue was
insignificant and the matter was settled on a confidential basis to avoid costly and protracted
litigation. Skechers does not believe the settlement will have a material adverse effect on the
Company’s financial condition or results of operations.
Skechers occasionally becomes involved in litigation arising from the normal course of
business and we are unable to determine the extent of any liability that may arise. Other than the
foregoing, we have no reason to believe that any liability with respect to pending legal actions,
individually or in the aggregate, will have a material adverse effect on the Company’s consolidated
financial statements or results of operations.
(d) Product
Financing
The Company finances production activities in part through the use of interest-bearing open
purchase arrangements with certain of its international manufacturers. These arrangements currently
bear interest at rates between 0% and 1.5% per 30 to 60 day term. The amounts outstanding under
these arrangements at December 31, 2005 and 2004 were $57.8 million and $45.0 million,
respectively, which are included in accounts payable in the accompanying consolidated balance
sheets. Interest expense incurred by the Company under these arrangements amounted to $2.8 million
in 2005, $3.1 million in 2004, and $1.9 million in 2003.
(12) SEGMENT INFORMATION
In accordance with the requirement of SFAS 131, “Disclosures about Segments of an Enterprise
and Related Information,” the Company’s reportable business segments and respective accounting
policies of the segments are the same as described in note 1. We have three reportable segments –
domestic wholesale sales, international wholesale sales and retail sales. In addition, we report
an “All other” segment, which includes our e-commerce sales and other miscellaneous sales.
Management evaluates segment performance based primarily on net sales and gross margins.
All costs and expenses of the Company are analyzed on an aggregate basis, and these costs are
not allocated to the Company’s segments. Net sales, gross margins and identifiable assets for the
domestic wholesale segment, international wholesale, retail, and the “All other” segment on a
combined basis were as follows (in thousands):
| 2005 | 2004 | 2003 | ||||||||||
Net sales |
||||||||||||
Domestic wholesale |
$ | 634,294 | $ | 582,240 | $ | 562,924 | ||||||
International wholesale |
163,523 | 156,470 | 121,637 | |||||||||
Retail |
201,610 | 176,783 | 144,582 | |||||||||
All other |
7,050 | 4,829 | 5,833 | |||||||||
Total |
$ | 1,006,477 | $ | 920,322 | $ | 834,976 | ||||||
| 2005 | 2004 | 2003 | ||||||||||
Gross Profit |
||||||||||||
Domestic wholesale |
$ | 232,401 | $ | 214,356 | $ | 185,849 | ||||||
International wholesale |
60,758 | 54,128 | 42,422 | |||||||||
Retail |
123,928 | 101,402 | 86,284 | |||||||||
All other |
3,395 | 971 | 3,131 | |||||||||
Total |
$ | 420,482 | $ | 370,857 | $ | 317,686 | ||||||
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| 2005 | 2004 | |||||||
Identifiable Assets |
||||||||
Domestic wholesale |
$ | 417,859 | $ | 356,977 | ||||
International wholesale |
95,285 | 95,389 | ||||||
Retail |
68,649 | 66,084 | ||||||
All other |
164 | 203 | ||||||
Total |
$ | 581,957 | $ | 518,653 | ||||
Geographic Information
The following summarizes our operations in different geographic areas for the period indicated:
| 2005 | 2004 | 2003 | ||||||||||
Net Sales (1) |
||||||||||||
United States |
$ | 826,920 | $ | 748,818 | $ | 702,944 | ||||||
Canada |
18,350 | 14,406 | 7,308 | |||||||||
Europe (2) |
161,207 | 157,098 | 124,724 | |||||||||
Total |
$ | 1,006,477 | $ | 920,322 | $ | 834,976 | ||||||
| 2005 | 2004 | |||||||
Long-lived Assets |
||||||||
United States |
$ | 63,840 | $ | 68,079 | ||||
Canada |
717 | 715 | ||||||
Europe (2) |
8,388 | 13,770 | ||||||
Total |
$ | 72,945 | $ | 82,564 | ||||
| (1) | The Company has subsidiaries in Canada, United Kingdom, Germany, France, Spain, Italy, and the Netherlands that generate net sales within those respective countries and in some cases the neighboring regions. The Company also has a subsidiary in Switzerland that generates net sales to that region in addition to net sales to our distributors located in numerous non-European countries. Net sales are attributable to geographic regions based on the location of the Company subsidiary. | |
| (2) | Europe consists of Switzerland, United Kingdom, Germany, France, Spain, Italy, and the Netherlands. |
(13) RELATED PARTY TRANSACTIONS
The Company had net sales to R. Siskind & Company in the amount of $0.9 million for the year
ended December 31, 2004. The Company had no outstanding accounts receivable from R. Siskind &
Company at December 31, 2005 and December 31, 2004, respectively. Mr. Siskind, who is a director
of the Company, founded R. Siskind & Company, which is a business that purchases brand name men’s
and women’s apparel and accessories and redistributes those items to off-price retailers, and he is
its sole shareholder, Chief Executive Officer, President and sole member of its Board of Directors.
During 2005, the Company paid approximately $47,000 to the Manhattan Inn Operating Company,
LLC (“MIOC”) for having its annual holiday party at the Shade Hotel, which is a hotel owned and
operated by MIOC. Michael Greenberg, President and a director of the Company, owns a 12.5%
beneficial ownership interest in MIOC, and four other officers, directors and vice presidents of
the Company own in aggregate an additional 5% beneficial ownership in MIOC. The Company had no
outstanding accounts receivable from MIOC or the Shade Hotel at December 31, 2005.
The Company has receivables from officers and employees of $0.5 million and $0.3 million at
December 31, 2005 and 2004, respectively. These amounts primarily relate to travel advances and
incidental personal purchases on Company-issued credit cards that are not business-related
expenses. These receivables are short-term and are expected to be repaid within a reasonable
period of time.
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We had no other significant transactions with or payables to officers, directors or
significant shareholders of the Company.
(14) SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized unaudited financial data are as follows (in thousands):
| 2005 | MARCH 31 | JUNE 30 | SEPTEMBER 30 | DECEMBER 31 | ||||||||||||
Net sales |
$ | 246,219 | $ | 263,928 | $ | 272,836 | $ | 223,494 | ||||||||
Gross profit |
100,436 | 111,536 | 115,473 | 93,037 | ||||||||||||
Net earnings |
10,267 | 15,917 | 12,632 | 5,901 | ||||||||||||
Net earnings per share: |
||||||||||||||||
Basic |
$ | 0.26 | $ | 0.40 | $ | 0.32 | $ | 0.15 | ||||||||
Diluted |
0.25 | 0.38 | 0.30 | 0.14 | ||||||||||||
| 2004 | MARCH 31 | JUNE 30 | SEPTEMBER 30 | DECEMBER 31 | ||||||||||||
Net sales |
$ | 221,488 | $ | 234,704 | $ | 257,658 | $ | 206,472 | ||||||||
Gross profit |
89,707 | 95,237 | 103,938 | 81,975 | ||||||||||||
Net earnings |
7,046 | 8,342 | 6,037 | 2,128 | ||||||||||||
Net earnings per share: |
||||||||||||||||
Basic |
$ | 0.18 | $ | 0.22 | $ | 0.16 | $ | 0.05 | ||||||||
Diluted |
0.18 | 0.21 | 0.15 | 0.05 | ||||||||||||
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Attached as exhibits to this annual report on Form 10-K are certifications of our Chief
Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), which are required in accordance
with Rule 13a-14 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). This
“Controls and Procedures” section includes information concerning the controls and controls
evaluation referred to in the certifications.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The term “disclosure controls and procedures” refers to the controls and other procedures of a
company that are designed to ensure that information required to be disclosed by a company in the
reports that it files or submits under the Exchange Act, is recorded, processed, summarized and
reported within required time periods. We have established disclosure controls and procedures to
ensure that material information relating to Skechers and its consolidated subsidiaries is made
known to the officers who certify our financial reports, as well as other members of senior
management and the Board of Directors, to allow timely decisions regarding required disclosures. As
of the end of the period covered by this annual report on Form 10-K, we carried out an evaluation
under the supervision and with the participation of our management, including our CEO and CFO, of
the effectiveness of the design and operation of our disclosure controls and procedures pursuant to
Rule 13a-15 of the Exchange Act. Based upon that evaluation, our CEO and CFO concluded that our
disclosure controls and procedures are effective.
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MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act. Internal
control over financial reporting includes those policies and procedures that (i) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions
and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the Company; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the company’s assets that could have a material effect on the
financial statements.
We conducted an evaluation of the effectiveness of our internal control over financial
reporting based on the framework in Internal Control – Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). Based on our evaluation under the
framework in Internal Control- Integrated Framework, our management has concluded that as of
December 31, 2005, our internal control over financial reporting is effective.
Our independent registered public accountants, KPMG LLP, audited the financial statements
included in this annual report on Form 10-K and have issued an attestation report on management’s
assessment of, and the effectiveness of our internal control over financial reporting as of
December 31, 2005, which is included in Part II, Item 8 of this annual report on Form 10-K.
INHERENT LIMITATIONS ON EFFECTIVENESS OF CONTROLS
Our management, including our Chief Executive Officer and Chief Financial Officer, does
not expect that our disclosure controls and procedures or our internal control over financial
reporting will prevent or detect all error and all fraud. A control system, no matter how well
designed and operated, can provide only reasonable, not absolute, assurance that the control
system’s objectives will be met. The design of a control system must reflect the fact that there
are resource constraints, and the benefits of controls must be considered relative to their costs.
Further, because of the inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that misstatements due to error or fraud will not occur or that all
control issues and instances of fraud, if any, within the company have been detected. These
inherent limitations include the realities that judgments in decision-making can be faulty and that
breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the
individual acts of some persons, by collusion of two or more people, or by management override of
the controls. The design of any system of controls is based in part on certain assumptions about
the likelihood of future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions. Projections of any evaluation of
controls effectiveness to future periods are subject to risks. Over time, controls may become
inadequate because of changes in conditions or deterioration in the degree of compliance with
policies or procedures.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
Although there were no significant changes to our internal controls over financial reporting
that have materially affected, or are reasonably likely to materially affect, our internal controls
over financial reporting during the fourth quarter of 2005, we have completed our efforts regarding
compliance with Section 404 of the Sarbanes-Oxley Act of 2002 for year ended December 31, 2005.
The results of our evaluation are discussed above in Management’s Report on Internal Control Over
Financial Reporting.
ITEM 9B. OTHER INFORMATION
None.
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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 2005 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 2005 fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
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 2005 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 2005 fiscal year.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item 14 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 2005 fiscal year.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
| 1. | Financial Statements: See “Index to Consolidated Financial Statements” in Part II, Item 8 on page 40 of this annual report on Form 10-K. |
| 2. | Financial Statement Schedule: See “Schedule II—Valuation and Qualifying Accounts” on page 66 of this annual report on Form 10-K. |
| 3. | Exhibits: The exhibits listed in the accompanying “Index to Exhibits” are filed or incorporated by reference as part of this Form 10-K. |
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SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
(in thousands)
Years Ended December 31, 2005, 2004 and 2003
| BALANCE AT | CHARGED TO | DEDUCTIONS | BALANCE | |||||||||||||
| BEGINNING OF | COSTS AND | AND | AT END | |||||||||||||
| DESCRIPTION | PERIOD | EXPENSES | WRITE-OFFS | OF PERIOD | ||||||||||||
Year-ended December 31, 2003: |
||||||||||||||||
Allowance for chargebacks |
$ | 3,831 | $ | 1,276 | $ | (4,087 | ) | $ | 1,020 | |||||||
Allowance for
doubtful accounts |
1,627 | 306 | (734 | ) | 1,199 | |||||||||||
Reserve for sales returns and
Allowances |
3,040 | 5,736 | (3,134 | ) | 5,642 | |||||||||||
Year-ended December 31, 2004: |
||||||||||||||||
Allowance for chargebacks |
$ | 1,020 | $ | 1,858 | $ | (2,300 | ) | $ | 578 | |||||||
Allowance for doubtful accounts |
1,199 | 1,814 | (1,126 | ) | 1,887 | |||||||||||
Reserve for sales returns and
Allowances |
5,642 | 1,199 | (3,263 | ) | 3,578 | |||||||||||
Year-ended December 31, 2005: |
||||||||||||||||
Allowance for chargebacks |
$ | 578 | $ | 368 | $ | (323 | ) | $ | 623 | |||||||
Allowance for doubtful accounts |
1,887 | 870 | (792 | ) | 1,965 | |||||||||||
Reserve for sales returns and
Allowances |
3,578 | 1,644 | (614 | ) | 4,608 | |||||||||||
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INDEX TO EXHIBITS
| EXHIBIT | ||||
| NUMBER | DESCRIPTION OF EXHIBIT | |||
| 2.1 | Agreement of Reorganization and Plan of Merger dated May 7, 1999 (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 | Amended and Restated Certificate of Incorporation dated April 29, 1999 (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 May 12,
1999). |
|||
| 3.2 | Bylaws dated May 28, 1998 (incorporated by reference to exhibit number 3.2 of the
Registrant’s Registration Statement on Form S-1 (File No. 333-60065) filed with the
Securities and Exchange Commission on July 29, 1998). |
|||
| 3.2 | (a) | Amendment to Bylaws dated as of April 8, 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). |
|||
| 4.2 | Purchase Agreement, dated April 14, 2002, between the Registrant and CIBC World Markets
Corp., relating to the 4.5% Convertible Subordinated Notes (incorporated by reference to
exhibit number 4.1 of the Registrant’s Form 10-Q for the quarter ended June 30, 2002). |
|||
| 4.3 | Indenture, dated April 9, 2002, between the Registrant and Wells Fargo Bank, National
Association, as Trustee, relating to the 4.5% Convertible Subordinated Notes (incorporated
by reference to exhibit number 4.2 of the Registrant’s Form 10-Q for the quarter ended June
30, 2002). |
|||
| 4.4 | Form of Specimen Restricted Global Security (incorporated by reference to exhibit number 4.3
of the Registrant’s Form 10-Q for the quarter ended June 30, 2002). |
|||
| 4.5 | Registration Rights Agreement, dated April 9, 2002, between the Registrant and CIBC World
Markets Corp., relating to the 4.5% Convertible Subordinated Notes (incorporated by
reference to exhibit number 4.4 of the Registrant’s Form 10-Q for the quarter ended June 30,
2002). |
|||
| 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 (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 quarter ended June 30, 2000). |
||
| 10.3- | 10.5 | [Reserved]. |
||
| 10.6 | ** | Indemnification
Agreement entered into between the Registrant and each of its directors and
executive officers. |
||
| 10.6 | (a)** | List of Registrant’s directors and executive officers who entered into Indemnification
Agreement referenced in Exhibit 10.6 with the Registrant. |
||
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Table of Contents
| EXHIBIT | ||||
| NUMBER | DESCRIPTION OF EXHIBIT | |||
| 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 quarter ended 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 quarter ended June 30, 1999). |
|||
| 10.9 | [Reserved]. |
|||
| 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 ended 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 ended 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
quarter ended September 30, 2001). |
||
| 10.10 | (h) | Sixth Amendment to Amended and Restated Loan and Security Agreement dated June 12, 2002
(incorporated by reference to exhibit number 10.10(h) of the Registrant’s Form 10-K for the
year ended December 31, 2003). |
||
| 10.10 | (i) | Seventh Amendment to Amended and Restated Loan and Security Agreement dated April 18, 2002
(incorporated by reference to exhibit number 10.10(i) of the Registrant’s Form 10-K for the
year ended December 31, 2003). |
||
| 10.10 | (j) | Eighth Amendment to Amended and Restated Loan and Security Agreement dated September 30,
2002 (incorporated by reference to exhibit number 10.10(j) of the Registrant’s Form 10-K for
the year ended December 31, 2003). |
||
| 10.10 | (k) | Ninth Amendment to Amended and Restated Loan and Security Agreement dated August 18, 2003
|
||
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Table of Contents
| EXHIBIT | ||||
| NUMBER | DESCRIPTION OF EXHIBIT | |||
(incorporated by reference to exhibit number 10.10(k) of the Registrant’s Form 10-K for the
year ended December 31, 2003).
|
||||
| 10.10 | (l) | Tenth Amendment to Amended and Restated Loan and Security Agreement dated December 31, 2003
(incorporated by reference to exhibit number 10.10(l) of the Registrant’s Form 10-K for the
year ended December 31, 2003). |
||
| 10.10 | (m) | Eleventh Amendment to Amended and Restated Loan and Security Agreement dated June 25, 2004
(incorporated by reference to exhibit number 10.10(m) of the Registrant’s Form 10-K for the
year ended December 31, 2004). |
||
| 10.11 | Standard Offer, Agreement and Escrow Instructions, and Addendum, dated July 27, 2004,
between the Registrant and Holt/Hawthorn and Victory Partners, for the purchase of property
located at 228 Manhattan Beach Boulevard, Manhattan Beach, California. |
|||
| 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
(File No. 333-60065) filed with the Securities and Exchange Commission on July 29, 1998). |
|||
| 10.13 | Lease Agreement and Addendum, 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
(File No. 333-60065) filed with the Securities and Exchange Commission on July 29, 1998). |
|||
| 10.13 | (a) | Addendum No. 2, 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(a) of the Registrant’s Form 10-K for the year ended December 31, 2003). |
||
| 10.14 | Lease Agreement, dated November 21, 1997, between the Registrant and The Prudential
Insurance Company of America, regarding 1661 South Vintage Avenue, Ontario, California
(incorporated by reference to exhibit number 10.14 of the Registrant’s Registration
Statement on Form S-1 (File No. 333-60065) filed with the Securities and Exchange Commission
on July 29, 1998). |
|||
| 10.14 | (a) | First Amendment to Lease Agreement, dated April 26, 2002, between the Registrant and
ProLogis California I LLC, regarding 1661 South Vintage Avenue, Ontario, California
(incorporated by reference to exhibit number 10.14(a) of the Registrant’s Form 10-K for the
year ended December 21, 2002). |
||
| 10.15 | Lease Agreements, dated November 21, 1997, between the Registrant and The Prudential
Insurance Company of America, regarding 1777 South Vintage Avenue, Ontario, California
(incorporated by reference to exhibit number 10.15 of the Registrant’s Registration
Statement on Form S-1 (File No. 333-60065) filed with the Securities and Exchange Commission
on July 29, 1998). |
|||
| 10.15 | (a) | First Amendment to Lease Agreement, dated April 26, 2002, between the Registrant and Cabot
Industrial Properties, L.P., regarding 1777 South Vintage Avenue, Ontario, California
(incorporated by reference to exhibit number 10.15(a) of the Registrant’s Form 10-K for the
year ended December 21, 2002). |
||
| 10.16 | Lease Agreement and Addendum, 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 ended
December 31, 1999). |
|||
| 10.16 | (a) | Addendum No. 2, 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 10.9(a) of the Registrant’s Form 10-K for the year ended December 31, 2003). |
||
| 10.17 | Agreement dated August 25, 2005 between Duncan Investments, LLC, a wholly owned subsidiary
of the Registrant, and Morley Construction Company regarding 330 South Sepulveda Boulevard,
| |||
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| EXHIBIT | ||||
| NUMBER | DESCRIPTION OF EXHIBIT | |||
Manhattan Beach, California (incorporated by reference to exhibit number 10.1 of the
Registrant’s Form 8-K filed with the Securities and Exchange Commission on August 29, 2005). |
||||
| 10.18 | General Conditions of the Contract for Construction regarding 330 South Sepulveda Boulevard,
Manhattan Beach, California (incorporated by reference to exhibit number 10.2 of the
Registrant’s Form 8-K filed with the Securities and Exchange Commission on August 29, 2005). |
|||
| 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 ended 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 ended 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 ended 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 ended 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 ended 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 ended 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 ended December 31, 2000). |
|||
| 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 ended 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 ended 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 (incorporated by reference to
exhibit number 10.27 of the Registrant’s Form 10-K for the year ended December 31, 2001). |
|||
| 10.27 | (a) | First Amendment to Lease Agreement, dated October 26, 2000, between the Registrant and
Manhattan Corners, LLC, regarding 1100 Highland Avenue, Manhattan Beach, California
(incorporated by reference to exhibit number 10.27(a) of the Registrant’s Form 10-K for the
year ended December 31, 2003). |
||
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| EXHIBIT | ||||
| NUMBER | DESCRIPTION OF EXHIBIT | |||
| 10.28 | Lease Agreement, dated April 10, 2001, between the Registrant and ProLogis California I LLC,
regarding 4100 East Mission Boulevard, Ontario, California (incorporated by reference to
exhibit number 10.28 of the Registrant’s Form 10-K for the year ended December 31, 2001). |
|||
| 10.28 | (a) | First Amendment to Lease Agreement, dated October 22, 2003, between the Registrant and
ProLogis California I LLC, regarding 4100 East Mission Boulevard, Ontario, California
(incorporated by reference to exhibit number 10.28(a) of the Registrant’s Form 10-K for the
year ended December 31, 2003). |
||
| 10.29 | Lease Agreement, dated February 8, 2002, between Skechers International, a subsidiary of the
Registrant, and ProLogis Belgium II SPRL, regarding ProLogis Park Liege Distribution Center
I in Liege, Belgium (incorporated by reference to exhibit number 10.29 of the Registrant’s
Form 10-K for the year ended December 31, 2002). |
|||
| 21.1 | Subsidiaries of the Registrant. |
|||
| 23.1 | Consent of Independent Registered Public Accounting Firm. |
|||
| 31.1 | Certification of the Chief Executive Officer pursuant Securities Exchange Act Rule 13a-14(a). |
|||
| 31.2 | Certification of the Chief Financial Officer pursuant Securities Exchange Act Rule 13a-14(a). |
|||
| 32.1 | Certification pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|||
| ** | Management contract or compensatory plan or arrangement required to be filed as an exhibit. |
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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 16th day of March
2006.
| SKECHERS U.S.A., INC. |
||||
| By: | /S/ ROBERT GREENBERG | |||
| Robert Greenberg | ||||
| Chairman of the Board and Chief Executive Officer |
||||
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
|
Chief Executive Officer | March 16, 2006 | ||
Robert Greenberg |
(Principal Executive Officer) | |||
/S/ MICHAEL GREENBERG
|
President and Director | March 16, 2006 | ||
Michael Greenberg |
||||
/S/ DAVID WEINBERG
|
Executive Vice President, Chief Operating Officer | March 16, 2006 | ||
David Weinberg
|
and Director | |||
/S/ FREDERICK H. SCHNEIDER
|
Chief Financial Officer (Principal Financial and Accounting Officer) |
March 16, 2006 | ||
Frederick H. Schneider |
||||
/S/ JEFFREY GREENBERG
|
Director | March 16, 2006 | ||
Jeffrey Greenberg |
||||
/S/ J. GEYER KOSINSKI
|
Director | March 16, 2006 | ||
J. Geyer Kosinski |
||||
/S/ MORTON D. ERLICH
|
Director | March 16, 2006 | ||
Morton D. Erlich |
||||
/S/ RICHARD SISKIND
|
Director | March 16, 2006 | ||
Richard Siskind |
72