<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO _______.
COMMISSION FILE NUMBER: 001-14429
SKECHERS U.S.A., INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-4376145
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
228 MANHATTAN BEACH BLVD.
MANHATTAN BEACH, CALIFORNIA 90266
(Address of Principal Executive (Zip Code)
Offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 318-3100
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<TABLE>
<CAPTION>
Name of each exchange on
Title of each class which registered
<S> <C>
Class A Common Stock $0.001 par value New York Stock Exchange
</TABLE>
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
THE NUMBER OF SHARES OF CLASS A COMMON STOCK OUTSTANDING AS OF NOVEMBER 10,
1999: 7,000,000
THE NUMBER OF SHARES OF CLASS B COMMON STOCK OUTSTANDING AS OF NOVEMBER 10,
1999: 27,814,155
<PAGE> 2
SKECHERS U.S.A., INC.
1999 FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE #
------
<S> <C>
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - SKECHERS U.S.A., INC.
Condensed Consolidated Balance Sheets -- December 31, 1998 and
September 30, 1999 1
Condensed Consolidated Statements of Earnings -- Three-month periods ended
September 30, 1998 and 1999 2
Condensed Consolidated Statements of Earnings -- Nine-months periods ended
September 30, 1998 and 1999 3
Condensed Consolidated Statement of Stockholders' Equity -- Nine-month
period ended September 30, 1999 4
Condensed Consolidated Statement of Cash Flows -- Nine-months periods ended
September 30, 1998 and 1999 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 19
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 19
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 19
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 19
ITEM 5. OTHER INFORMATION 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 19
SIGNATURES 19
</TABLE>
<PAGE> 3
SKECHERS U.S.A., INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
ASSETS
<TABLE>
<CAPTION>
September 30
December 31 1999
1998 (Unaudited)
----------- ------------
<S> <C> <C>
Current assets:
Cash $ 10,942 4,528
Trade accounts receivable, less allowances for bad debts
and returns of $3,413 in 1998 and $2,919 in 1999 46,771 71,731
Due from officers and employees 116 25
Other receivables 2,329 2,035
----------- -----------
Total receivables 49,216 73,791
----------- -----------
Inventories 65,390 56,174
Deferred tax assets -- 2,195
Prepaid expenses and other current assets 2,616 1,883
----------- -----------
Total current assets 128,164 138,571
Property and equipment, at cost, less accumulated
depreciation and amortization 15,196 18,363
Intangible assets, at cost, less applicable amortization 1,003 716
Other assets, at cost 1,921 3,664
----------- -----------
$146,284 161,314
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 54,323 31,939
Current installments of long-term borrowings 816 880
Current installments of notes payable to stockholder 2,244 --
Accounts payable 38,145 35,076
Accrued expenses 8,897 7,482
Distributions payable 633 --
----------- -----------
Total current liabilities 105,058 75,377
----------- -----------
Long-term borrowings, excluding current installments 3,550 2,988
Notes payable to stockholder, excluding current installments 10,000 --
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $.001 par value; 10,000 shares authorized;
none issued and outstanding -- --
Class A Common Stock, $.001 par value; 100,000 shares
authorized; 7,000 issued and outstanding at September 30, 1999 -- 28
Class B Common Stock, $.001 par value; 60,000 shares
authorized; 27,814 issued and outstanding 2 7
Additional paid-in capital -- 69,687
Retained earnings 27,674 13,227
----------- -----------
Total stockholders' equity 27,676 82,949
----------- -----------
$146,284 $161,314
=========== ===========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
1
<PAGE> 4
SKECHERS U.S.A., INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
Three-month periods ended September 30, 1998 and 1999
(unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Net sales $143,045 124,177
Cost of sales 80,869 71,340
----------- -----------
Gross profit 62,176 52,837
Royalty income, net 106 --
----------- -----------
62,282 52,837
----------- -----------
Operating expenses:
Selling 16,443 15,814
General and administrative 21,379 21,534
----------- -----------
37,822 37,348
----------- -----------
Earnings from operations 24,460 15,489
----------- -----------
Other income (expense):
Interest (1,883) (1,465)
Other, net 11 219
----------- -----------
(1,872) (1,246)
----------- -----------
Earnings before income taxes 22,588 14,243
Income taxes 704 5,698
----------- -----------
Net earnings $ 21,884 8,545
=========== ===========
Pro forma operations data:
Earnings before income taxes $ 22,588 14,243
Income taxes 9,035 5,698
----------- -----------
Net earnings $ 13,553 8,545
=========== ===========
Net earnings per share:
Basic $ 0.49 0.25
=========== ===========
Diluted $ 0.44 0.24
=========== ===========
Weighted average shares:
Basic 27,814 34,814
=========== ===========
Diluted 30,692 35,594
=========== ===========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
2
<PAGE> 5
SKECHERS U.S.A., INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
Nine-month periods ended September 30, 1998 and 1999
(unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
1998 1999
--------- ---------
<S> <C> <C>
Net sales $290,602 324,495
Cost of sales 169,946 192,228
--------- ---------
Gross profit 120,656 132,267
Royalty income, net 325 207
--------- ---------
120,981 132,474
--------- ---------
Operating expenses:
Selling 32,767 42,972
General and administrative 50,415 56,726
--------- ---------
83,182 99,698
--------- ---------
Earnings from operations 37,799 32,776
--------- ---------
Other income (expense):
Interest (6,223) (5,334)
Other, net 29 722
--------- ---------
(6,194) (4,612)
--------- ---------
Earnings before income taxes 31,605 28,164
Income taxes 888 6,897
--------- ---------
Net earnings $ 30,717 21,267
========= =========
Pro forma operations data:
Earnings before income taxes $ 31,605 28,164
Income taxes 12,642 11,266
--------- ---------
Net earnings $ 18,963 16,898
========= =========
Net earnings per share:
Basic $ 0.68 0.55
========= =========
Diluted $ 0.62 0.52
========= =========
Weighted average shares:
Basic 27,814 30,737
========= =========
Diluted 30,634 32,430
========= =========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
3
<PAGE> 6
SKECHERS U.S.A., INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Nine-month period ended September 30, 1999
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Common Stock Additional Total
------------------------ Paid in Retained Stockholders'
Shares Amount Capital Earnings Equity
-------- -------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1998 27,814 $ 2 $ -- $ 27,674 $ 27,676
Net earnings -- -- -- 21,267 21,267
Proceeds from initial public offering 7,000 33 69,687 -- 69,720
Distributions:
Cash -- -- -- (35,364) (35,364)
Cross Colours trademark -- -- -- (350) (350)
-------- -------- -------- -------- --------
Balance at September 30, 1999 34,814 $35 $69,687 $ 13,227 $ 82,949
======== ======== ======== ======== ========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
4
<PAGE> 7
SKECHERS U.S.A., INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine-month periods ended September 30, 1998 and 1999
(unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 30,717 21,267
Adjustments to reconcile net earnings to net cash
used in operating activities:
Depreciation and amortization of property and
equipment 1,932 3,032
Amortization of intangible assets 98 55
Provision for bad debts and returns 654 (494)
Gain on distribution of intangibles -- (118)
Loss on disposal of equipment 190 400
Increase in assets:
Receivables (36,438) (24,081)
Inventories (11,210) 9,216
Deferred tax assets -- (2,195)
Prepaid expenses and other current assets (1,217) 733
Other assets 209 (1,743)
Increase (decrease) in liabilities:
Accounts payable 11,752 (3,069)
Accrued expenses (2,087) (2,048)
-------- --------
Net cash provided by (used in) operating activities (5,400) 955
-------- --------
Cash flows used in investing activities - capital expenditures (7,491) (6,599)
-------- --------
Cash flows from financing activities:
Net proceeds from initial public offering of common stock -- 69,720
Net proceeds (payments) related to short-term borrowings 15,373 (22,320)
Payments related to long-term debt (200) (562)
Payments on notes payable to stockholder -- (12,244)
Distributions paid to stockholders (2,157) (35,364)
-------- --------
Net cash provided by (used in) financing activities 13,016 (770)
-------- --------
Net decrease in cash 125 (6,414)
Cash at beginning of period 1,462 10,942
-------- --------
Cash at end of period $ 1,587 4,528
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 6,208 5,500
Income taxes 888 7,343
======== ========
</TABLE>
During the nine-month period ended September 30, 1999, the Company declared a
non-cash distribution of intangibles of $350.
See accompanying notes to unaudited condensed consolidated financial statements.
5
<PAGE> 8
SKECHERS U.S.A., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
(1) GENERAL
The unaudited operating results have been prepared on the same basis as the
audited consolidated financial statements and, in the opinion of management,
include all adjustments (consisting only of normal recurring accruals) necessary
for a fair presentation for the periods. The accompanying interim condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto, together with management's
discussion and analysis of financial condition and results of operations,
contained in the Company's Registration Statement on Form S-1 (File No.
333-60065). The results of operations for interim periods are not necessarily
indicative of results to be achieved for full fiscal years.
(2) PRO FORMA INFORMATION
Income Taxes
Effective June 7, 1999, the Company terminated its S Corporation election,
becoming a C Corporation subject to Federal and state income taxes. The tax
provisions include historical income taxes and pro forma income tax adjustments
which represent taxes which would have been reported had the Company been
subject to Federal and state income taxes as a C Corporation. The Company's
conversion to a C Corporation on June 7, 1999 resulted in a one-time noncash
credit to earnings for establishing the deferred tax asset on June 7, 1999 of
$1.8 million. This amount is reflected as deferred taxes and reduces the
provision for historical income taxes in the accompanying condensed consolidated
statement of earnings.
The pro forma unaudited income tax adjustments presented represent taxes which
would have been reported had the Company been subject to Federal and state
income taxes as a C Corporation, assuming a 40.0% rate. The historical and pro
forma provisions for income tax expense were as follows (in thousands):
<TABLE>
<CAPTION>
Three-Months Ended Nine-months Ended
September 30 September 30
---------------------- ----------------------
1998 1999 1998 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Historical income taxes $ 704 5,698 888 6,897
-------- -------- -------- --------
Pro forma adjustments:
Federal 6,665 -- 9,403 3,495
State 1,666 -- 2,351 874
-------- -------- -------- --------
Total pro forma adjustments 8,331 -- 11,754 4,369
-------- -------- -------- --------
Total pro forma income taxes $9,035 5,698 12,642 11,266
======== ======== ======== ========
</TABLE>
6
<PAGE> 9
SKECHERS U.S.A., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
Pro forma income taxes differs from the statutory tax rate as applied to
earnings before income taxes as follows:
<TABLE>
<CAPTION>
Three-Months Nine-months
Ended September 30 Ended September 30
-------------------- --------------------
1998 1999 1998 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Expected income tax expense $7,906 4,985 11,062 9,857
State income tax, net of Federal benefit 1,129 713 1,580 1,409
------ ------ ------ ------
Total provision for pro forma
income taxes $9,035 5,698 12,642 11,266
====== ====== ====== ======
</TABLE>
Earnings Per Share
The Company reports pro-forma earnings per share under Statement of Financial
Accounting Standards No. 128 ("SFAS No. 128"), "Earnings Per Share". Under SFAS
No. 128, basic earnings per share excludes any dilutive effects of options,
warrants and convertible securities. Diluted earnings per share reflects the
potential dilution that could occur if securities to issue common stock were
exercised or converted into common stock. The weighted average diluted shares
outstanding gives effect to the sale by the Company of those shares of common
stock necessary to fund the payment of the excess of (i) the sum of stockholder
distributions paid or declared from January 1, 1998 to June 7, 1999, the S
Corporation termination date, in excess of (ii) the S Corporation earnings from
January 1, 1998 to December 31, 1998 for 1998 and January 1, 1998 to June 7,
1999 for 1999 based on an initial public offering price of $11 per share, net of
underwriting discounts.
The reconciliation of basic to diluted weighted average shares is as follows (in
thousands):
<TABLE>
<CAPTION>
Three-Months Ended Nine-months Ended
September 30 September 30
---------------------- ----------------------
1998 1999 1998 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Weighted average shares used in
basic computation 27,814 34,814 27,814 30,737
Shares to fund stockholders
distributions described above 1,839 -- 1,839 713
Dilutive stock options 1,039 780 981 980
-------- -------- -------- --------
Weighted average shares used in
diluted computation 30,692 35,594 30,634 32,430
======== ======== ======== ========
</TABLE>
The Company granted options to purchase 1,209,636 shares of Class A common stock
on June 9, 1999 at $11 per share. These options were excluded from the
computation of diluted weighted average shares as they were anti-dilutive.
7
<PAGE> 10
SKECHERS U.S.A., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
(3) COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No.
130 establishes standards to measure all changes in equity that result from
transactions and other economic events other than transactions with owners.
Comprehensive income is the total of net earnings and all other nonowner changes
in equity. Except for net earnings, the Company does not have any transactions
and other economic events that qualify as comprehensive income as defined under
SFAS No. 130. Accordingly, the adoption of SFAS No. 130 did not affect the
Company's financial reporting.
(4) COMPUTER SOFTWARE COSTS
The Company adopted Statement of Position 98-1 ("SOP 98-1"), "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use" effective
January 1, 1999. The adoption of SOP 98-1 did not have a significant impact on
the Company's financial position or results of operations.
(5) START-UP COSTS
The Company adopted SOP 98-5, "Reporting on the Costs of Start-up Activities"
effective January 1, 1999. The adoption of SOP 98-5 did not have a significant
impact on the Company's financial position or results of operations.
(6) BANK BORROWINGS
The Company has available a secured line of credit, as amended in December 1998,
permitting borrowings up to $120.0 million based upon eligible accounts
receivable and inventories. The borrowings bear interest at the rate of prime
(8.25% at September 30, 1999) plus 0.25% or at LIBOR (6.08% at September 30,
1999) plus 2.75% and the line of credit expires on December 31, 2002. The
agreement provides for the issuance of letters of credit up to a maximum of
$18.0 million, which decreases the amount available for borrowings under the
agreement. The outstanding letters of credit at September 30, 1999 are $3.2
million. The Company paid a 1.0% per annum fee on the maximum letter of credit
amount plus 0.50% of the difference between the revolving loan commitment less
the maximum letter of credit amount. At September 30, 1999, the Company had
available credit aggregating approximately $47.7 million. The agreement contains
certain restrictive covenants, including tangible net worth and net working
capital, as defined, with which the Company was in compliance at September 30,
1999.
At September 30, 1999, the Company had $2.5 million outstanding under a secured
note payable with a financial institution, bearing interest at the rate of prime
plus 1.0%, payable in monthly installments of $25,000 and due November 30, 2002.
(7) NOTES PAYABLE TO STOCKHOLDER
Stockholder loans aggregating $11.8 million were repaid with proceeds from the
Company's initial public offering during June 1999. The Company recorded
interest expense of approximately $474,000 and $433,000 related to these notes
during the nine-month periods ended September 30, 1998 and 1999, respectively.
8
<PAGE> 11
SKECHERS U.S.A., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
(8) STOCKHOLDERS' EQUITY
Effective as of May 28, 1999, the Company was reincorporated in Delaware,
whereby the existing California corporation was merged into a newly formed
Delaware corporation and pursuant to which each outstanding share of common
stock of the existing California corporation was exchanged for a share of $.001
par value Class B common stock of the new Delaware corporation. In addition,
pursuant to the reincorporation merger, an approximate 13,907 for 1 common stock
split was authorized. The amendment and stock split has been reflected
retroactively in the accompanying condensed consolidated financial statements.
The authorized capital stock of the Delaware corporation consists of 100,000,000
shares of Class A common stock, par value $.001 per share, and 60,000,000 shares
of Class B common stock, par value $.001 per share. The Company has also
authorized 10,000,000 shares of preferred stock, $.001 par value per share.
The Class A common stock and Class B common stock have identical rights other
than with respect to voting, conversion and transfer. The Class A common stock
is entitled to one vote per share, while the Class B common stock is entitled to
ten votes per share on all matters submitted to a vote of stockholders. The
shares of Class B common stock are convertible at any time at the option of the
holder into shares of Class A common stock on a share-for-share basis. In
addition, shares of Class B common stock will be automatically converted into a
like number of shares of Class A common stock upon any transfer to any person or
entity which is not a permitted transferee.
On June 9, 1999, the Company issued 7.0 million shares of Class A common stock
in an initial public offering and received net proceeds of $69.7 million. The
application of net proceeds were applied to (i) repayment of stockholder loans
of $11.8 million, (ii) dividend distributions of $31.8 million, and (iii)
partial repayment of the Company's revolving line of credit of $26.1 million. On
June 9, 1999, the Company also granted 1,209,636 options to acquire Class A
common stock at an exercise price of $11 per share which vest ratably in 20%
increments commencing one year from the grant date.
(9) LITIGATION
The Company is involved in litigation arising from the ordinary course of
business. Management does not believe that the disposition of these matters will
have a material adverse effect on the Company's financial position or results of
operations.
9
<PAGE> 12
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
Condensed Consolidated Financial Statements and Notes thereto appearing
elsewhere herein. This section contains certain forward-looking statements that
involve risks and uncertainties including, but not limited to, information with
regard to anticipated marketing expenditures, the successful implementation of
the Company's strategies, future growth and growth rates, and future increases
in net sales, expenses, capital expenditures and net earnings. Without limiting
the foregoing, the words "endeavors," "believes," "anticipates," "plans,"
"expects," "may," "could," "will," "intends," "estimates" and similar
expressions are intended to identify forward-looking statements. These
forward-looking statements involve risks and uncertainties, and the Company's
actual results may differ materially from the results discussed in the
forward-looking statements as a result of certain factors including, among
others, changing consumer demand and fashion trends, popularity of particular
styles and demand for such, the ability of management to manage the Company's
growth and sustain its rate of growth, the loss of significant manufacturers or
customers, the size and timing of purchases, seasonal and quarterly fluctuations
in earnings, the ability to protect intellectual property rights, increased
costs of freight and transportation, ability to retain qualified personnel,
increase in marketing expenditures, changes to estimates of capital expenditures
or additional capital requirements, increased costs or disruptions due to year
2000 issues, and general risks associated with doing business outside the United
States, such as import duties, tariffs and political and economic instability.
Other sections of this report may include additional factors which could
adversely impact the Company's business and financial condition.
OVERVIEW
The Company designs and markets branded contemporary casual, active, rugged and
lifestyle footwear for men, women and children. The Company sells its products
to department stores such as Nordstrom, Macy's, Dillards, Robinson's-May and JC
Penney, and specialty retailers such as Famous Footwear, Genesco's Journeys and
Jarman chains, The Venator Group's Foot Locker and Lady Foot Locker chains, and
Footaction U.S.A. The Company's marketing focus is to maintain and enhance
recognition of the Skechers brand name as a casual, active, youthful, lifestyle
brand that stands for quality, comfort and design innovation. The Company
endeavors to spend between 8.0% and 10.0% of annual net sales in the marketing
of Skechers footwear through an integrated effort of advertising, promotions,
public relations, trade shows and other marketing efforts.
On June 9, 1999, the Company issued 7.0 million shares of Class A common stock
in an initial public offering (the "Offering") and received net proceeds of
approximately $69.7 million (after deducting underwriting discounts and
commissions and Offering expenses). The application of net proceeds were applied
to (i) repayment of a $10 million subordinated note and a $1.8 million
unsubordinated note, each to the Greenberg Family Trust, (ii) dividend
distributions of $31.8 million, and (iii) partial repayment of the Company's
revolving line of credit of $26.1 million.
In May 1992, the Company elected to be treated for Federal and state income tax
purposes as an S Corporation under Subchapter S of the Internal Revenue Code of
1986, as amended, and comparable state laws. As a result, for the period from
inception through June 7, 1999, earnings of the Company were included in the
taxable income of the Company's stockholders for Federal and state income tax
purposes, and the Company was not subject to income tax on such earnings, other
than franchise and net worth taxes. The Company terminated its S Corporation
status on June 7, 1999 in connection with the Offering. Accordingly, the Company
is treated for Federal and state income tax purposes as a corporation under
Subchapter C of the Code and, as a result, is subject to state and Federal
income taxes. By reason of the Company's treatment as an S Corporation for
Federal and state income tax purposes, the Company, for the period from
inception through June 7, 1999 provided to its stockholders funds for the
payment of income taxes on the earnings of the Company. In April 1999, the
Company declared and paid a distribution consisting of the first installment of
Federal income taxes payable on S Corporation earnings for 1998 in the amount of
$3.5 million. Also, the Company used a portion of its proceeds of the Offering
to make a
10
<PAGE> 13
distribution consisting of the final installment of Federal income taxes payable
on S Corporation earnings for 1998 (the "Final 1998 Distribution"). The amount
of the Final 1998 Distribution was $7.6 million. Upon the termination of the
Company's S Corporation status, the Company declared (i) a distribution
consisting of income taxes payable on S Corporation earnings from January 1,
1999 through June 7, 1999 (the "Final Tax Distribution"), and (ii) a
distribution in an amount designed to constitute the Company's remaining and
undistributed accumulated S Corporation earnings through June 7, 1999 (the
"Final S Corporation Distribution"). The amount of the Final Tax Distribution
was $2.8 million and the amount of the Final S Corporation Distribution was
$21.4 million and such amounts were funded with a portion of the net proceeds of
the Offering. Purchasers of shares of Class A Common Stock in the Offering did
not receive any portion of the Final 1998 Distribution, the Final Tax
Distribution or the Final S Corporation Distribution. After the date of such
termination, the Company was no longer treated as an S Corporation and,
accordingly, it became subject to Federal and state income taxes. All pro forma
income taxes reflect adjustments for Federal and state income taxes as if the
Company had been taxed as a C Corporation rather than an S Corporation.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated, selected information
from the Company's results of operations as a percentage of net sales. Pro forma
reflects adjustments for Federal and state income taxes as if the Company had
been taxed as a C Corporation at an assumed 40% rate rather than an S
Corporation.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1998 1999 1998 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 56.5 57.5 58.5 59.2
-------- -------- -------- --------
Gross profit 43.5 42.5 41.5 40.8
Royalty income, net 0.0 0.0 0.1 0.0
-------- -------- -------- --------
43.5 42.5 41.6 40.8
-------- -------- -------- --------
Operating expenses:
Selling 11.5 12.7 11.3 13.2
General and administrative 14.9 17.3 17.3 17.5
-------- -------- -------- --------
26.4 30.0 28.6 30.7
-------- -------- -------- --------
Earnings from operations 17.1 12.5 13.0 10.1
Interest expense, net (1.3) (1.2) (2.1) (1.6)
Other, net 0.0 0.2 0.0 0.2
-------- -------- -------- --------
Earnings before pro forma
Income taxes 15.8 11.5 10.9 8.7
Pro forma income taxes 6.3 4.6 4.4 3.5
======== ======== ======== ========
Pro forma net earnings 9.5% 6.9% 6.5% 5.2%
======== ======== ======== ========
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998
Net Sales
Net sales decreased $18.8 million, or 13.2%, to $124.2 million for the three
months ended September 30, 1999 as compared to $143.0 million for the three
months ended September 30, 1998. This decrease was due to a shift in retail
buying patterns relative to the prior year from the third quarter into the
fourth quarter of
11
<PAGE> 14
1999 and lower at once orders resulting partially from a slowdown in overall
back-to-school sales at certain of the Company's major retail customers.
Provisions for returns and allowances were $4.5 million for the three months
ended September 30, 1999 as compared to $3.8 million for the three months ended
September 30, 1998. Net sales through the Company's retail stores increased $3.1
million, or 35.7%, to $12.0 million for the three months ended September 30,
1999 as compared to $8.9 million for the three months ended September 30, 1998.
This increase is primarily due to new store openings. The Company operated 39
retail stores during the third quarter of 1999 versus 30 retail stores during
the third quarter of 1998. The Company closed its Times Square store in October
1999 due to redevelopment of the Times Square area. Net sales generated from
international operations decreased $298,000, or 2.6%, to $11.0 million for the
three months ended September 30, 1999, as compared to $11.3 million for the
three months ended September 30, 1998.
Gross Profit
The Company's gross profit decreased $9.4 million, or 15.0%, to $52.8 million
for the three months ended September 30, 1999, compared to $62.2 million for the
three months ended September 30, 1998. The decrease was attributable to lower
sales. Gross profit as a percentage of net sales ("Gross Margin") decreased to
42.5% for the three months ended September 30, 1999 from 43.5% for the same
period in 1998. The decrease in Gross Margin was primarily due to higher ocean
freight costs resulting from rate increases by third party shipping companies on
imported products beginning in the second quarter of 1999. The effect of the
rate increases were partially offset by the increase in the Company's retail
sales, including direct mail, since such retail Gross Margins are higher than
wholesale Gross Margins.
Selling Expenses
Selling expenses include sales salaries, commissions and incentives,
advertising, promotions and trade shows. Selling expenses decreased $629,000, or
3.8%, to $15.8 million (12.7% of net sales) for the three months ended September
30, 1999 from $16.4 million (11.5% of net sales) for the three months ended
September 30, 1998. The decrease in total dollars was primarily due to decreased
marketing (advertising and tradeshow) expenditures, and sales compensation due
to the decrease in sales. Advertising expenses as a percentage of net sales for
the three months ended September 30, 1999 and 1998 was 10.9% and 9.9%,
respectively. The Company endeavors to spend approximately 8.0% to 10.0% of
annual net sales in the marketing of Skechers footwear through advertising,
promotions, public relations, trade shows and other marketing efforts. Marketing
expense as a percentage of net sales may vary from quarter to quarter. The
increase as a percentage of sales was due primarily to lower sales.
General and Administrative Expenses
General and administrative expenses increased $155,000, or 0.7%, to $21.5
million (17.3% of net sales) for the three months ended September 30, 1999 from
$21.4 million (14.9% of net sales) for the three months ended September 30,
1998. The increase in total dollars is primarily due to (i) the hiring of
additional personnel, (ii) increased product design and development costs and
(iii) the net addition of nine retail stores which were not open in the third
quarter of 1998. The increase was partially offset by lower incentive
compensation. During the three months ended September 30, 1999, the Company
recognized $550,000 of officer incentive compensation pursuant to employment
agreements. During the three months ended September 30, 1998, the Company
recognized $1.6 million of incentive compensation relating to the Company's 1996
Incentive Compensation Plan (the "1996 Incentive Compensation Plan") which
expired December 31, 1998. The Company has not introduced a non-officer
incentive compensation plan for 1999.
12
<PAGE> 15
The increase in general and administrative expense as a percentage of net sales
was primarily due to lower sales.
Interest Expense
Interest expense decreased $418,000, or 22.2%, to $1.5 million for the three
months ended September 30, 1999 as compared to $1.9 million for the three months
ended September 30, 1998 as a result of the application of net proceeds from the
Offering which were partially used to reduce debt.
Other Income, Net
Other income, net during the three month periods ended September 30, 1999 and
1998 related to miscellaneous income of $219,000 and $11,000, respectively.
Pro Forma Income Taxes
Pro forma income taxes have been provided at the assumed rate of 40.0% for
Federal and state purposes.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
Net Sales
Net sales increased $33.9 million, or 11.7%, to $324.5 million for the nine
months ended September 30, 1999 as compared to $290.6 million for the nine
months ended September 30, 1998. This increase was due to increased sales of
branded footwear primarily as a result of (i) greater brand awareness driven in
part by a significant expansion of the Company's national marketing efforts,
(ii) a broader breadth of men's, women's and children's product offerings, (iii)
the development of the Company's domestic sales force and international
distributor network, (iv) the increased volume of the Company's existing account
base with multiple stores and increased sales to such accounts, resulting in
higher sales per account, (v) the operation of 40 Company stores (which includes
one store that closed in January 1999) during the nine months ended September
30, 1999 versus the operation of 30 Company stores during the nine months ended
September 30, 1998, and (vi) the launch of the Company's direct mail business in
August 1998. The increase was partially offset by lower third quarter 1999 sales
as previously mentioned. Provisions for returns and allowances were $11.4
million for the nine months ended September 30, 1999 as compared to $9.4 million
for the nine months ended September 30, 1998. Net sales through the Company's
retail stores increased $11.8 million, or 65.1%, to $30.0 million for the nine
months ended September 30, 1999 as compared to $18.2 million for the nine months
ended September 30, 1998. This increase is primarily due to new store openings.
Net sales generated from international operations increased $5.1 million, or
19.9%, to $30.9 million for the nine months ended September 30, 1999, as
compared to $25.8 million for the nine months ended September 30, 1998.
Gross Profit
The Company's gross profit increased $11.6 million, or 9.6%, to $132.3 million
for the nine months ended September 30, 1999, compared to $120.7 million for the
nine months ended September 30, 1998. The increase was attributable to higher
sales. Gross Margin decreased to 40.8% for the nine months ended September 30,
1999 from 41.5% for the same period in 1998. The decrease in Gross Margin was
primarily due to higher ocean freight costs resulting from rate increases by
third party shipping companies on imported product beginning in the second
quarter of 1999. The effect of the rate increases were partially
13
<PAGE> 16
offset by the increase in the Company's retail sales, including direct mail,
since such retail Gross Margins are higher than wholesale Gross Margins.
Selling Expenses
Selling expenses increased $10.2 million, or 31.1%, to $43.0 million (13.2% of
net sales) for the nine months ended September 30, 1999 from $32.8 million
(11.3% of net sales) for the nine months ended September 30, 1998. The increase
in total dollars was primarily due to increased marketing (advertising and
tradeshow) expenditures, sales compensation due to the increase in sales, and
the hiring of additional sales personnel. Marketing expenses as a percentage of
net sales for the nine months ended September 30, 1999 and 1998 was 11.0% and
9.3%, respectively.
General and Administrative Expenses
General and administrative expenses increased $6.3 million, or 12.5%, to $56.7
million (17.5% of net sales) for the nine months ended September 30, 1999 from
$50.4 million (17.3% of net sales) for the nine months ended September 30, 1998.
The increase in total dollars is primarily due to (i) the hiring of additional
personnel, (ii) an increase in costs associated with the Company's distribution
facilities to support the Company's growth, (iii) increased product design and
development costs and (iv) the addition of 9 retail stores, net which were not
open in the nine months ended September 30, 1998. The increase was partially
offset by lower incentive compensation. During the nine months ended September
30, 1999, the Company recognized $550,000 of officer incentive compensation
pursuant to employment agreements. During the nine months ended September 30,
1998, the Company recognized $3.2 million of incentive compensation relating to
the Company's 1996 Incentive Compensation Plan which expired December 31, 1998.
The Company has not introduced a non-officer incentive compensation plan for
1999. The increase in general and administrative expense as a percentage of net
sales was primarily due to lower sales.
Interest Expense
Interest expense decreased $889,000, or 14.3%, to $5.3 million for the nine
months ended September 30, 1999 as compared to $6.2 million for the nine months
ended September 30, 1998 as a result of the application of net proceeds from the
Offering which were partially used to reduce debt.
Other Income, Net
Other income, net during the nine month periods ended September 30, 1999 and
1998 related to miscellaneous income of $722,000 and $29,000, respectively.
Pro Forma Income Taxes
Pro forma income taxes have been provided at the assumed rate of 40.0% for
Federal and state purposes.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically relied upon internally generated funds, trade
credit, borrowings under credit facilities and loans from stockholders to
finance its operations and expansion. The Company's need for funds arises
primarily from its working capital requirements, including the need to finance
its inventory and receivables. The Company's working capital was $63.2 million
at September 30, 1999 and $23.1 million at December 31, 1998, respectively. The
increase in working capital at September 30, 1999 as compared to December 31,
1998 was primarily due to the Offering and application of net proceeds therefrom
as well as net earnings during the nine months ended September 30, 1999.
As part of the Company's working capital management, the Company performs
substantially all customer credit functions internally, including extension of
credit and collections. The Company's bad debt write-offs were less than 1.0% of
net sales for nine months ended September 30, 1998 and 1999. The Company
14
<PAGE> 17
carries bad debt insurance to cover approximately the first 90.0% of bad debts
on substantially all of the Company's major retail accounts.
Net cash provided by (used in) operating activities totaled $955,000 and $(5.4)
million for the nine months ended September 30, 1999 and 1998, respectively. The
increase in cash provided by operating activities was due primarily to a
decrease in inventory balances. The decrease in inventory from December 31, 1998
to September 30, 1999 of $9.2 million was primarily due to maintaining strict
inventory controls during the nine month period ending September 30, 1999.
Net cash used in investing activities totaled $6.6 million and $7.5 million for
the nine months ended September 30, 1999 and 1998, respectively, and related to
capital expenditures. Capital expenditures in 1999 primarily included the
construction of additional Company retail stores and trade show booths, as well
as additional hardware and software for the Company's computer needs. Investing
activities in 1998 was primarily due to increased capital expenditures in
connection with the establishment of the Company's distribution facilities in
Ontario, California, the construction of additional Company retail stores, and
additional hardware and software for the Company's computer needs.
The Company estimates that its capital expenditures for the year ending December
31, 1999 will be approximately $10.0 million, of which approximately $5.5
million will be used for the installation of a new material handling system for
the Company's most recently opened distribution facility. Total expenditures for
the new material handling system are expected to be approximately $10.0 million,
the balance of which will be spent in 2000. The Company also anticipates
spending $400,000 for expenditures on equipment for the Company's distribution
facilities, and $4.1 million capital expenditures related to general corporate
purposes in 1999, including leasehold improvements and purchases of furniture
and equipment in connection with the opening of additional retail stores,
additions and advancements to the Company's management information systems,
costs associated with trade show booths and leasehold improvements to the
Company's facilities.
Net cash provided by (used in) financing activities totaled $(770,000) and $13.0
million for the nine months ended September 30, 1999 and 1998, respectively. The
increase in cash used in financing activities was primarily due to payments on
debt and dividend distributions which were partially financed by the Offering.
The Company's credit facility provides for borrowings under a revolving line of
credit of up to $120.0 million and a term loan, with actual borrowings limited
to available collateral and certain limitations on total indebtedness
(approximately $47.7 million of availability as of September 30, 1999) with
Heller Financial, Inc., as agent for the lenders. As of September 30, 1999,
there was approximately $31.9 million outstanding under the revolving line of
credit. The revolving line of credit bears interest at the Company's option at
either the prime rate (8.25% at September 30, 1999) plus 25 basis points or at
Libor (6.08% at September 30, 1999) plus 2.75%. The revolving line of credit
expires on December 31, 2002. Interest on the revolving line of credit is
payable monthly. The revolving line of credit provides a sub-limit for letters
of credit of up to $18.0 million to finance the Company's foreign purchases of
merchandise inventory. As of September 30, 1999, the Company had approximately
$3.2 million of letters of credit under the revolving line of credit. The term
loan component of the credit facility, which has a principal balance of
approximately $2.5 million as of September 30, 1999, bears interest at the prime
rate plus 100 basis points and is due in monthly installments with a final
balloon payment December 2002. The proceeds from this note were used to purchase
equipment for the Company's distribution centers in Ontario, California and the
note is secured by such equipment. The credit facility contains certain
financial covenants that require the Company to maintain minimum tangible net
worth of at least $20.0 million, working capital of at least $14.0 million and
specified leverage ratios and limit the ability of the Company to pay dividends
if it is in default of any provisions of the credit facility. The Company was in
compliance with these covenants as of September 30, 1999. The credit facility is
collateralized by the Company's real and personal property, including, among
other things, accounts receivable, inventory, general intangibles and equipment
and is guaranteed by the Company's wholly-owned subsidiaries.
15
<PAGE> 18
By reason of the Company's treatment as an S Corporation for Federal and state
income tax purposes, the Company from inception to June 7, 1999, the S
Corporation termination date, provided to its stockholders funds for the payment
of income taxes on the earnings of the Company. In April 1999, the Company
declared the April Tax Distribution of $3.5 million, and connection with the
Offering declared the Final 1998 Distribution, of $7.6 million, the Final Tax
Distribution, of $2.8 million, and the Final S Corporation Distribution, of
$21.4 million. The Company's C Corporation earnings will be retained for the
foreseeable future in the operations of the business.
The Company believes that anticipated cash flows from operations, available
borrowings under the Company's revolving line of credit, cash on hand and its
financing arrangements will be sufficient to provide the Company with the
liquidity necessary to fund its anticipated working capital and capital
requirements through fiscal 2000. However, in connection with its growth
strategy, the Company will incur significant working capital requirements and
capital expenditures. The Company's future capital requirements will depend on
many factors, including, but not limited to, the levels at which the Company
maintains inventory, the market acceptance of the Company's footwear, the levels
of promotion and advertising required to promote its footwear, the extent to
which the Company invests in new product design and improvements to its existing
product design and the number and timing of new store openings. To the extent
that available funds are insufficient to fund the Company's future activities,
the Company may need to raise additional funds through public or private
financing. No assurance can be given that additional financing will be available
or that, if available, it can be obtained on terms favorable to the Company and
its stockholders. Failure to obtain such financing could delay or prevent the
Company's planned expansion, which could adversely affect the Company's
business, financial condition and results of operations. In addition, if
additional capital is raised through the sale of additional equity or
convertible securities, dilution to the Company's stockholders could occur.
QUARTERLY RESULTS AND SEASONALITY
Sales of footwear products are somewhat seasonal in nature with the strongest
sales generally occurring in the third and fourth quarters
The Company has experienced, and expects to continue to experience, variability
in its net sales and operating results on a quarterly basis. The Company's
domestic customers generally assume responsibility for scheduling pickup and
delivery of purchased products. Any delay in scheduling or pickup which is
beyond the Company's control could materially negatively impact the Company's
net sales and results of operations for any given quarter. The Company believes
the factors which influence this variability include (i) the timing of the
Company's introduction of new footwear products, (ii) the level of consumer
acceptance of new and existing products, (iii) general economic and industry
conditions that affect consumer spending and retail purchasing, (iv) the timing
of the placement, cancellation or pickup of customer orders, (v) increases in
the number of employees and overhead to support growth, (vi) the timing of
expenditures in anticipation of increased sales and customer delivery
requirements, (vii) the number and timing of new Company retail store openings
and (viii) actions by competitors. Due to these and other factors, the operating
results for any particular quarter are not necessarily indicative of the results
for the full year.
INFLATION
The Company does not believe that the relatively moderate rates of inflation
experienced in the United States over the last three years have had a
significant effect on its net sales or profitability. However, the Company
cannot accurately predict the effect of inflation on future operating results.
Although higher rates of inflation have been experienced in a number of foreign
countries in which the Company's products are manufactured, the Company does not
believe that inflation has had a material effect on the Company's net sales or
profitability. In the past, the Company has been able to offset its foreign
product cost increases by increasing prices or changing suppliers, although no
assurance can be given that the Company will be able to continue to make such
increases or changes in the future.
EXCHANGE RATES
16
<PAGE> 19
The Company receives U.S. Dollars for substantially all of its product sales and
its royalty income. Inventory purchases from offshore contract manufacturers are
primarily denominated in U.S. Dollars; however, purchase prices for the
Company's products may be impacted by fluctuations in the exchange rate between
the U.S. Dollar and the local currencies of the contract manufacturers, which
may have the effect of increasing the Company's cost of goods in the future.
During 1998 and 1999, exchange rate fluctuations did not have a material impact
on the Company's inventory costs. The Company does not engage in hedging
activities with respect to such exchange rate risk.
MARKET RISK
The Company does not hold any derivative securities or other market rate
sensitive instruments.
YEAR 2000 COMPLIANCE
The Company relies on its internal computer systems to manage and conduct its
business. The Company also relies, directly and indirectly, on external systems
of business enterprises such as third party manufacturers and suppliers,
customers, creditors and financial organizations, and of governmental entities,
both domestic and internationally, for accurate exchange of data.
Many existing computer programs were designed and developed without regard for
the Year 2000 ("Y2K") and beyond. If the Company or its significant third party
business partners and intermediaries fail to make necessary modifications,
conversions, and contingency plans on a timely basis, the Y2K issue could have a
material adverse effect on the Company's business and financial condition.
Management believes that its competitors face a similar risk. In recognition of
this risk, the Company has established a project team to assess, remediate, test
and develop contingency plans.
State of Readiness
The Company has developed a Y2K plan with the objective of having all of its
information technology ("IT") systems compliant in a timely manner. Currently
all significant IT systems are compliant except minor modifications which will
be completed in November 1999. The Company's significant IT systems include its
order management and inventory system, electronic data interchange ("EDI")
system, distribution center processing system, retail merchandise and point of
sale system, financial applications system, local area network and personal
computers. The Company tested and completed Y2K changes to its order management
and inventory system in July 1999. The Company tested and completed Y2K changes
to its EDI system related to inbound transactions from customers in July 1999.
The Company began contacting its EDI trading customers and discuss their Y2K
readiness to receive the Company's outbound transactions in August 1999. The
Company has completed substantially all Y2K changes to its distribution center
processing system except for upgrading the operating system to the Y2K version.
Upgrade to the Y2K version is part of the Company's on-going maintenance
contract with its vendor. The Company is upgrading the operating system with
implementation targeted for November 1999. The Company has completed
substantially all Y2K changes to its retail merchandise and point of sale
system. The Company's financial applications system was upgraded with testing
and implementation completed in May 1999. The system upgrades for the Company's
financial application systems began in 1998 for the purpose of enhancing system
functionality to accommodate the Company's expanding business and related
information needs. The Company's local area network hardware and software
providers have advised the Company that such systems are Y2K compliant. The
Company has completed Y2K changes to its personal computers .
The Company's non-IT systems include security, fire prevention, environmental
control equipment and phone systems. Many of these systems are currently Y2K
compliant. Modification to the remaining systems are expected by November 1999.
The Company's Y2K project team is continuing to conduct formal communications
with its significant business partners to determine the extent to which the
Company is vulnerable to those third parties' failure to remediate their own Y2K
issues. This process is expected to continue throughout 1999.
17
<PAGE> 20
Risks and Contingency Plans
The Company is not aware of any material operational issues associated with
preparing its internal systems for the Y2K, however, there is no assurance that
there will not be a delay in the implementation. The Company's inability to
implement such systems and changes in a timely manner could have a material
adverse effect on future results of operations, financial condition and cash
flows.
The potential inability of the Company's significant business partners and
intermediaries to address their own Y2K issues remains a risk which is difficult
to assess. The Company is dependent on four key manufacturers located in China
for the production of its footwear. The failure of one or more of these
manufacturers to adequately address their own Y2K issues could interrupt the
Company's supply chain. The inability of port authorities or shipping lines to
address their own Y2K issues could also interrupt the Company's supply chain.
Additionally, the inability of one or more of the Company's significant
customers to become Y2K compliant could adversely impact the Company's sales to
those customers.
The Company is developing contingency plans which may include finding
alternative suppliers, manual interventions and adding increased staffing. There
is no assurance that the Company will correctly anticipate the level, impact or
duration of noncompliance by its significant business partners that provide
inadequate information.
As the Company has not completed evaluations of its significant business
partners' Y2K readiness, the Company is currently unable to determine the most
reasonable likely worst case scenario. The Company will continue its efforts
towards contingency planning throughout 1999.
Costs
The Company estimates its costs associated with becoming Y2K compliant will be
less than $100,000, exclusive of system upgrades incurred in the normal course
of business. Efforts to modify the Company's IT systems have substantially been
performed internally, however, the Company does not separately track such costs.
These costs primarily relate to salaries and wages which are expensed as
incurred.
FUTURE ACCOUNTING CHANGES
In September 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS No. 133"). SFAS No. 133 modifies the
accounting for derivative and hedging activities and is effective for fiscal
years beginning after September 15, 2000. Since the Company does not presently
hold any derivatives or engage in hedging activities, accordingly SFAS No. 133
should not impact the Company's financial position or results of operations.
18
<PAGE> 21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK -- Not
Applicable
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company filed a complaint captioned Skechers U.S.A., Inc. v.
Wolverine World Wide, Inc., et al, on October 13, 1998 in the United States
District Court for the Central District of California, Los Angeles, Case No.
98-8335 DT alleging various causes of action relating to trade dress
infringement. On December 10, 1998, certain of the defendants counter claimed
against the Company for claims relating to design patent and trade dress
infringement. The complaint and counter claim were resolved in September 1999.
The terms of the resolution are confidential, however, such resolution did not
have a material impact on the Company's financial position or results of
operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS -- Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES -- Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS -- Not Applicable
ITEM 5. OTHER INFORMATION-- Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K --
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SKECHERS U.S.A, INC.
Dated: November 10, 1999 /s/ David Weinberg
-------------------------------
David Weinberg
Executive Vice President and Chief
Financial Officer
19
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