<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO _______________ .
COMMISSION FILE NUMBER: 001-14429
SKECHERS U.S.A., INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 95-4376145
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
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:
<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 AUGUST
10, 2000: 9,325,796
THE NUMBER OF SHARES OF CLASS B COMMON STOCK OUTSTANDING AS OF AUGUST
10, 2000: 25,823,445
PAGE 1
<PAGE> 2
SKECHERS U.S.A., INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Balance Sheets
June 30, 2000 and December 31, 1999.......................................... 3
Condensed Consolidated Statements of Earnings
Three-month periods ended June 30, 2000 and 1999.............................. 4
Condensed Consolidated Statements of Earnings
Six-month periods ended June 30, 2000 and 1999................................ 5
Condensed Consolidated Statements of Cash Flows
Six-month periods ended June 30, 2000 and 1999................................ 6
Notes to Condensed Consolidated Financial Statements.......................... 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS................................................................. 10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.................... 19
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 19
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 19
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 19
ITEM 5. OTHER INFORMATION 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 19
</TABLE>
PAGE 2
<PAGE> 3
SKECHERS U.S.A., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
ASSETS
<TABLE>
<CAPTION>
June 30, December, 31
2000 1999
-------- --------
<S> <C> <C>
Current Assets:
Cash $ 7,062 $ 10,836
Trade accounts receivable, less allowance for bad debts and returns
of $6,248 in 2000 and $3,237 in 1999 112,132 63,052
Due from officers and employees 160 851
Other receivables 1,067 2,771
Inventories 91,309 68,959
Prepaid expenses and other current assets 5,303 5,130
Deferred tax assets 2,810 2,810
-------- --------
Total current assets 219,843 154,409
-------- --------
Property and equipment, at cost, less accumulated depreciation and amortization 31,874 21,387
Intangible assets, at cost, less applicable amortization 611 663
Other assets, at cost 1,402 1,455
-------- --------
$253,730 $177,914
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term borrowings $ 46,099 $ 30,382
Current installments of long-term borrowings 1,800 1,060
Accounts payable 79,620 47,696
Accrued expenses 13,623 10,268
-------- --------
Total current liabilities 141,142 89,406
-------- --------
Long-term borrowings, excluding current installments 7,215 2,508
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $.001 par value; 10,000 authorized; none issued -- --
and outstanding
Class A Common Stock, $.001 par value; 100,000 shares authorized; 9,285 and
7,091 shares issued and outstanding at June 30, 2000 and
December 31, 1999, respectively 9 7
Class B Common Stock, $.001 par value; 60,000 shares authorized;
25,823 and 27,814 shares issued and outstanding at June 30, 2000 and
December 31, 1999, respectively 26 28
Additional paid-in capital 70,575 69,948
Retained earnings 34,763 16,017
-------- --------
Total stockholders' equity 105,373 86,000
-------- --------
$253,730 $177,914
======== ========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
PAGE 3
<PAGE> 4
SKECHERS U.S.A., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three-Months Ended June 30,
---------------------------------
2000 1999
--------- ---------
<S> <C> <C>
Net sales $ 163,899 $ 104,582
Cost of sales 94,763 61,850
--------- ---------
Gross profit 69,137 42,732
Royalty income, net 104 158
--------- ---------
69,240 42,890
--------- ---------
Operating expenses:
Selling 16,441 11,587
General and administrative 31,130 18,795
--------- ---------
47,571 30,382
--------- ---------
Earnings from operations 21,669 12,508
--------- ---------
Other income (expense):
Interest, net (2,192) (2,115)
Other, net 277 21
--------- ---------
(1,915) (2,094)
--------- ---------
Earnings before income taxes 19,754 10,414
Income taxes 7,744 1,121
--------- ---------
Net earnings $ 12,010 $ 9,293
========= =========
Pro forma operations data:
Earnings before income taxes $ 19,754 $ 10,414
Income taxes 7,744 4,166
--------- ---------
Net earnings $ 12,010 $ 6,248
========= =========
Net earnings per share:
Basic $ 0.34 $ 0.21
========= =========
Diluted $ 0.33 $ 0.20
========= =========
Weighted average shares:
Basic 34,940 29,506
========= =========
Diluted 36,307 31,462
========= =========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
PAGE 4
<PAGE> 5
SKECHERS U.S.A., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Six-Months Ended June 30,
---------------------------------
2000 1999
--------- ---------
<S> <C> <C>
Net sales $ 297,243 $ 200,318
Cost of sales 174,472 120,888
--------- ---------
Gross profit 122,771 79,430
Royalty income, net 109 207
--------- ---------
122,880 79,637
--------- ---------
Operating expenses:
Selling 31,112 27,158
General and administrative 57,224 35,192
--------- ---------
88,335 62,350
--------- ---------
Earnings from operations 34,545 17,287
--------- ---------
Other income (expense):
Interest, net (3,991) (3,869)
Other, net 277 504
--------- ---------
(3,714) (3,365)
--------- ---------
Earnings before income taxes 30,830 13,922
Income taxes 12,086 1,200
--------- ---------
Net earnings $ 18,745 $ 12,722
========= =========
Pro forma operations data:
Earnings before income taxes $ 30,830 $ 13,922
Income taxes 12,086 5,569
--------- ---------
Net earnings $ 18,745 $ 8,353
========= =========
Net earnings per share:
Basic $ 0.54 $ 0.29
========= =========
Diluted $ 0.52 $ 0.27
========= =========
Weighted average shares:
Basic 34,923 28,665
========= =========
Diluted 36,040 30,777
========= =========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
PAGE 5
<PAGE> 6
SKECHERS U.S.A., INC. AND SUBSIDIARIES
STATEMENTS OF CONDENSED CONSOLIDATED CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Six-Months Ended June 30,
-------------------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 18,745 $ 12,722
Adjustments to reconcile net earnings to net cash
used in operating activities:
Depreciation and amortization of property and
equipment 2,478 2,031
Amortization of intangible assets 52 55
Provision (recovery) for bad debts and returns 3,011 (570)
Loss on disposal of equipment 72 --
Gain on distribution of intangibles (118)
(Increase) decrease in assets:
Receivables (49,696) (27,418)
Inventories (22,350) 6,657
Deferred tax assets -- (2,195)
Prepaid expenses and other current assets (173) 224
Other assets 53 32
Increase (decrease) in liabilities:
Accounts payable 31,924 17,865
Accrued expenses 3,355 (591)
-------- --------
Net cash provided by (used in) operating activities (12,529) 8,694
-------- --------
Cash flows used in investing activities-capital expenditures (13,037) (3,730)
-------- --------
Cash flows from financing activities:
Net proceeds from initial public offering of common stock -- 69,720
Net proceeds from issuance of common stock 628 --
Net proceeds (payments) related to short-term borrowings 15,717 (39,717)
Proceeds from long-term borrowings 5,822 --
Payments on long-term borrowings (375) (132)
Payments on notes payable to stockholder -- (12,244)
Distributions paid to stockholders -- (33,312)
-------- --------
Net cash provided by (used in) financing activities 21,792 (15,685)
-------- --------
Net decrease in cash (3,774) (10,721)
Cash at beginning of period 10,836 10,942
-------- --------
Cash at end of period $ 7,062 $ 221
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 3,172 $ 3,951
Income taxes 5,283 79
======== ========
</TABLE>
During the six-month period ended June 30, 2000, the Company acquired property
and equipment aggregating $6,020 under capital lease obligations.
During the six-month period ended June 30, 1999, the Company declared cash
dividends of $35,364 of which $33,312 were paid during the six months ended June
30, 1999. The Company also distributed intangibles aggregating of $350 during
the six months ended June 30, 1999.
See accompanying notes to unaudited condensed consolidated financial statements.
PAGE 6
<PAGE> 7
SKECHERS U.S.A., INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) GENERAL
The unaudited condensed consolidated financial statements have been prepared on
the same basis as the audited consolidated financial statements and, in the
opinion of management, reflect all adjustments (consisting of normal recurring
adjustments) necessary for a fair presentation for each of the periods
presented. The results of operations for interim periods are not necessarily
indicative of results to be achieved for full fiscal years.
As contemplated by the Securities and Exchange Commission (SEC) under Rule 10-01
of Regulation S-X, the accompanying condensed consolidated financial statements
and related footnotes have been condensed and do not contain certain information
that will be included in the Company's annual consolidated financial statements
and footnotes thereto. For further information, refer to the consolidated
financial statements and related footnotes for the year ended December 31, 1999
included in the Company's Annual Report on Form 10-K.
(2) EARNINGS PER SHARE
Basic earnings per share represents net earnings divided by the weighted average
number of common shares outstanding for the period. Diluted earnings per share
reflects the potential dilution that could occur if options to issue common
stock were exercised or converted into common stock. The weighted average
diluted shares outstanding for three-month and six-month periods ended June 30,
1999 gives effect to the sale by the Company of those shares of common stock
necessary to fund the payment of the excess of (i) the sum of stockholder
distributions paid or declared from January 1, 1998 to June 7, 1999, the S
Corporation termination date, in excess of (ii) the S Corporation earnings from
January 1, 1998 to June 7, 1999 based on an initial public offering price of $11
per share, net of underwriting discounts.
The reconciliation of basic to diluted weighted average shares is as follows (in
thousands):
<TABLE>
<CAPTION>
Three-Months Ended Six-Months Ended
June 30, June 30,
-------------------------- --------------------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Weighted average shares used in basic
Computation 34,940 29,506 34,923 28,665
Shares to fund stockholders'
distributions described above -- 920 -- 1,074
Dilutive effect of stock options 1,367 1,036 1,117 1,038
------ ------ ------ ------
Weighted average shares used in
diluted computation 36,307 31,462 36,040 30,777
====== ====== ====== ======
</TABLE>
PAGE 7
<PAGE> 8
SKECHERS U.S.A., INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
(3) INCOME TAXES
Income taxes for the interim periods were computed using the effective tax rate
estimated to be applicable for the full fiscal year, which is subject to ongoing
review and evaluation by management.
The pro forma income tax adjustment for the interim periods ended June 30, 1999
represents taxes that would have been reported had the Company been subject to
Federal and state income taxes as a C Corporation, assuming an effective rate of
40.0%.
(4) SHORT-TERM BORROWINGS
The Company has available a secured line of credit permitting borrowings up to
$120.0 million based upon eligible accounts receivable and inventories. The
agreement expires on December 31, 2002. As amended on June 1, 2000, borrowings
bear interest at the prime rate (9.5% at June 30, 2000) minus 0.50%. The
agreement provides for the issuance of letters of credit up to a maximum of
$36.0 million of which 50% decreases the amount available for borrowings under
the agreement. Outstanding letters of credit at June 30, 2000 were $2.2 million.
Available borrowings under the line of credit at June 30, 2000 were $78.7
million. The Company pays an unused line of credit fee of .25% annually. The
Company is required to maintain certain financial covenants including specified
minimum tangible net worth, working capital and leverage ratios as well as limit
the payment of dividends if it is in default of any provision of the agreement.
The Company was in compliance with these covenants at June 30, 2000.
(5) LEASE OBLIGATIONS
The Company has entered into three capital lease agreements since December 31,
1999. The first is with Banc of America Leasing & Capital, LLC and provides up
to $11,250,000 for the purchase of material/inventory handling, sortation and
delivery equipment. The Company will pay 60 monthly payments, each equal to 1.6%
of original cost plus a 35.0% (of original cost) balloon payment at the end of
the lease. The interest rate per annum is equal to 2.25% plus the U.S. Treasury
obligation bond-equivalent yield per annum corresponding to the average life of
the lease term. In addition, the Company will pay the same interest rate on
advances from the date of the advance until the lease commencement date. During
the six months ended June 30, 2000, the Company submitted and received advances
for $4,237,000 at an interest rate of 8.5%.
The Company is required to maintain financial covenants including specified
minimum tangible net worth, working capital and leverage ratios as well as limit
the payment of dividends if it is in default of the agreement. The Company was
in compliance with these covenants at June 30, 2000.
The second, dated February 4, 2000, provided $933,000 for the acquisition of
warehouse equipment. The term of the lease is for five years at an interest rate
of 8.8% per annum.
The third, dated May 15, 2000, provides $850,000 for the acquisition of
warehouse equipment. The term of the lease is for 5 years at an interest rate of
9.4% per annum.
PAGE 8
<PAGE> 9
SKECHERS U.S.A., INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
(6) LITIGATION
In January 2000 and December 1999, the Company and two officers/directors were
named as defendants in four purported class-action lawsuits. Two of the lawsuits
also named the underwriters of the Company's initial public offering as
defendants. All of the complaints seek damages and rescission on behalf of a
class of persons who purchased securities in, or traceable to, the Company's
initial public offering or thereafter on the open market prior to July 6, 1999.
These suits have now been consolidated into one matter. As this matter is in the
early stages of discovery, neither the Company nor its counsel are able to
conclude as to the potential likelihood of an unfavorable outcome. The Company
is vigorously defending these complaints and believe their defenses to be
meritorious. Accordingly, the Company has not provided for any potential losses
associated with these lawsuits.
The Company is involved in other litigation arising from the ordinary course of
business. Management does not believe that the disposition of these matters will
have a material effect on the Company's financial position or results of
operations.
(7) STOCKHOLDERS' EQUITY
During the three-months ended June 30, 2000, certain Class B stockholders
converted 600,000 shares of Class B common stock to Class A common stock. On
February 28, 2000, certain Class B stockholders converted 1,390,710 shares of
Class B common stock to Class A common stock.
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
Condensed Consolidated Financial Statements and Notes thereto appearing
elsewhere in this document.
This Form 10-Q contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, including statements with
regards to the Company's revenues, earnings, spending, margins, cash flow,
orders, inventory, products, actions, plans, strategies and objectives.
Forward-looking statements include, without limitation, any statement that may
predict, forecast, indicate or simply state future results, performance or
achievements, and may contain the words "believe," "anticipate," "expect,"
"estimate," "intend," "plan," "project," "will be," "will continue," "will
result," "could," "may," "might," or any variations of such words with similar
meanings. Any such statements are subject to risks and uncertainties that could
cause the Company's actual results to differ materially from those which are
management's current expectations or forecasts. Such information is subject to
the risk that such expectations or forecasts, or the assumptions underlying such
exceptions or forecasts, become inaccurate.
Risks and uncertainties that could affect the Company's actual results and could
cause such results to differ materially from those contained forward-looking
statements made
PAGE 9
<PAGE> 10
by or on behalf of the Company are included under the "Risk Factors" on pages 14
through 22 in the Company's Form 10-K.
OVERVIEW
Skechers designs and markets branded contemporary casual, active rugged and
lifestyle footwear for men, women and children. The Company's objective is to
become a leading source of contemporary casual and active footwear while
ensuring the longevity of both the Company and Skechers brand name through
controlled, well managed growth. The Company strives to achieve this objective
by developing and offering a balanced assortment of basic and fashionable
merchandise across a wide spectrum of product categories and styles, while
maintaining a diversified, low-cost sourcing base and controlling the growth of
its distribution channels. The Company sells its products to department stores
such as Nordstrom, Dillards, Robinsons-May, JC Penney and specialty retailers
such as Footlocker, Famous Footwear, Genesco's Journeys and Jarman chains, and
Footaction U.S.A. The Company also sells its products internationally in over
100 countries and territories through major international distributors and
directly to consumers through Company owned stores and via mail order and
e-commerce.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated, selected information
from the Company's results of operations as a percentage of net sales. Pro forma
reflects adjustments for Federal and state income taxes for the interim periods
ended June 30, 1999 as if the Company had been taxed as a C Corporation at an
assumed effective rate of 40.0% rather than as an S Corporation.
<TABLE>
<CAPTION>
Three-Months Ended
June 30,
--------------------------------------------------------------------------
2000 1999
----------------------------- -----------------------------
<S> <C> <C> <C> <C>
Net sales $ 163,899 100.0% $ 104,582 100.0%
Cost of sales 94,763 57.8 61,850 59.1
--------- ----- --------- -----
Gross profit 69,137 42.2 42,732 40.9
Royalty income, net 104 0.0 158 0.1
--------- ----- --------- -----
69,240 42.2 42,890 41.0
--------- ----- --------- -----
Operating expenses:
Selling 16,441 10.0 11,587 11.1
General and administrative 31,130 19.0 18,795 18.0
--------- ----- --------- -----
47,571 29.0 30,382 29.1
--------- ----- --------- -----
Earnings from operations 21,669 13.2 12,508 12.0
Interest expense, net (2,192) (1.3) (2,115) (2.0)
Other, net 277 0.2 21 0.0
--------- ----- --------- -----
Earnings before pro forma
income taxes 19,754 12.1 10,414 10.0
Pro forma income taxes 7,744 4.8 4,166 4.0
--------- ----- --------- -----
Pro forma net earnings $ 12,010 7.3 % $ 6,248 6.0%
========= ===== ========= =====
</TABLE>
PAGE 10
<PAGE> 11
<TABLE>
<CAPTION>
Six-Months Ended
June 30,
--------------------------------------------------------------------------
2000 1999
----------------------------- -----------------------------
<S> <C> <C> <C> <C>
Net sales $ 297,243 100.0% $ 200,318 100.0%
Cost of sales 174,472 58.7 120,888 60.3
--------- ----- --------- -----
Gross profit 122,771 41.3 79,430 39.7
Royalty income, net 109 0.1 207 0.1
--------- ----- --------- -----
122,880 41.4 79,637 39.8
--------- ----- --------- -----
Operating expenses:
Selling 31,112 10.5 27,158 13.6
General and administrative 57,224 19.3 35,192 17.6
--------- ----- --------- -----
88,335 29.8 62,350 31.2
--------- ----- --------- -----
Earnings from operations 34,545 11.6 17,287 8.6
Interest expense, net (3,991) (1.3) (3,869) (1.9)
Other income, net 277 0.1 504 0.2
--------- ----- --------- -----
Earnings before pro forma
income taxes 30,830 10.4 13,922 6.9
Pro forma income taxes 12,086 4.1 5,569 2.8
--------- ----- --------- -----
Pro forma net earnings $ 18,745 6.3% $ 8,353 4.2%
========= ===== ========= =====
</TABLE>
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
Net Sales
Net sales for three-months ended June 30, 2000 were $163.9 million or 56.7%
higher than $104.6 million in the comparable period of 1999. The increase in net
sales is a result of continued brand imaging and awareness achieved through the
support of a dedicated nationwide sales force and enhanced marketing efforts.
Additionally, the Company has experienced sales growth due to the expansion of
product categories and number of styles offered. The Company continues to focus
primarily on its wholesale business, which experienced a 54% increase in sales
during the three-months ended June 30, 2000 compared to the same period in 1999.
Retail sales grew as 10 additional Company retail locations opened during the
year, 5 of which opened since January 1, 2000. Mail order sales increased during
the three-months ended June 30, 2000 compared to 1999 due to the increased focus
on catalog development and expansion of circulation. International sales
experienced an increase in sales during the three-months ended June 30, 2000
compared to the same period in 1999 due to increased brand awareness achieved
through advertising and marketing campaigns abroad.
Gross Profit
The Company's gross profit as a percentage of net sales increased to 42.2% for
the three-months ended June 30, 2000 from 40.9% for the comparable period in
1999. The increase is due in part to increased sales in the Company's Retail and
Mail Order business and sales in higher margin product categories recently
introduced by the Company. Domestic wholesale profit margin increased by 3.7%
during the three-months ended June 30, 2000 from the comparable period in 1999.
The increase in overall profit margin was offset slightly by an increase in a
provision for estimated sales returns
PAGE 11
<PAGE> 12
and allowances as a percentage of gross sales which increased by 0.5% to 3.3% in
three-months ended June 30, 2000 compared to 2.8% in the comparable period in
1999.
Selling Expenses
Selling expense (which includes sales salaries, commissions and incentives,
advertising, promotions, trade shows and catalog printing costs) increased $4.9
million to $16.4 million or 10.0% of net sales for the three months ended June
30, 2000 from $11.6 million or 11.1% of net sales for the three months ended
June 30, 1999. As a percentage of net sales, sales salaries, commission and
incentives expenses decreased to 1.9% of net sales in the three-months ended
June 30, 2000 from 2.0% for the comparable period in 1999. This decrease is
attributable to a sliding scale commission structure that declines as a
percentage of net sales.
Management is committed to the overall marketing strategy that is largely
responsible for the increase in the market presence, product visibility and
product demand over the past three years. The Company has increased its
advertising budget consistent with projected sales, which has included such
avenues as magazine, television, trade show, billboards, and buses. The Company
endeavors to spend approximately 8% to 10% of annual net sales in the marketing
of Skechers footwear through advertising, promotions, public relations, trade
shows and other marketing efforts. Marketing expense as a percentage of net
sales may vary from quarter to quarter. In the three-months ended June 30, 2000,
total advertising expenses increased to $11.9 million or 7.0% of net sales from
$8.9 million or 8.5% of net sales for the same period in 1999.
General and Administrative Expenses
General and administrative expenses increased 65.6% to $31.1 million or 19.0% of
net sales for the three-months ended June 30, 2000 from $18.8 million or 18.0%
of net sales for the three-months ended June 30, 1999. The increase as a
percentage of net sales is partially attributable to increased volume in the
Company's Mail Order Business, which inherently has a higher percentage of
expenses per dollar sales than the Company's other business units. Additionally,
the Company incurred increased distribution and warehousing costs to meet demand
until its new distribution center is operational, which is expected in the
fourth quarter of 2000, and expansion into new retail locations has caused
expenses to increase.
During three-months ended June 30, 2000, salaries, wages and temporary help
costs increased to $14.4 million or 8.5% of net sales from $7.8 million or 7.5%
of net sales for the comparable period in 1999. Such increase can be attributed
in part to normal payroll costs associated with additional staffing needs to
meet the growth of the Company. In addition, the Company utilized overtime and
temporary help for the warehousing and shipping department to meet the demand of
the increasing sales volume.
Interest Expense
Interest expense for the three-months ended June 30, 2000 and 1999 was
comparable.
PAGE 12
<PAGE> 13
Income Taxes
Income taxes for the interim period were computed using the effective tax rate
estimated to be applicable for the full fiscal year, which is subject to ongoing
review and evaluation by management.
The pro forma income tax adjustment for the interim period ended June 30, 1999
represents taxes that would have been reported had the Company been subject to
Federal and state income taxes as a C Corporation, assuming an effective rate of
40.0%.
Other Income, Net
Other income, net for the three-months ended June 30, 2000 includes a gain of
$312,000 related to commercial lawsuits filed by the Company and settled on
favorable terms.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
Net Sales
Net sales for six-months ended June 30, 2000 were $297.2 million or 48.4% higher
than $200.3 million in the comparable period of 1999. The Company continues to
focus primarily on its wholesale business, which experienced a 47% increase
during the six-months ended June 30, 2000 versus the six-months ended June 30,
1999. The increase in sales is a result of continued brand awareness and imaging
achieved through the significant expansion of the Company's dedicated nationwide
sales force and marketing campaigns. Additionally, the Company continues to
experience growth through product diversification and increased style offerings.
The Company has expanded its product categories to offer additional styles of
women's, men's and children's athletic shoes and a line of men's quality dress
shoes. Retail sales grew during the six-months ended June 30, 2000 compared the
same period in 1999. The increase is primarily due to 10 more locations being
added nationwide during the year. Mail order sales increased during the
six-months ended June 30, 2000 compared to 1999 due to the focus on catalog
development and expansion of circulation. International sales experienced an
increase during the six-months ended June 30, 2000 compared to 1999 due to
increase brand awareness and advertising campaigns abroad.
Gross Profit
The Company's gross profit as a percentage of net sales increased to 41.3% for
the six-months ended June 30, 2000 from 39.7% for the comparable period in 1999.
The increase is due in part to increased sales in the Company's Mail Order and
Retail business and higher margin product categories within the domestic
wholesale business. Domestic wholesale profit margin increased 3.5% during the
six-months ended June 30, 2000 from the comparable period in 1999. Sales returns
and allowances as a percentage of gross sales remained consistent at 3.3% during
the six-months ended June 30, 2000 compared to the same period in 1999.
PAGE 13
<PAGE> 14
Selling Expenses
Selling expenses increased $4.0 million to $31.1 million or 10.5% of net sales
for the six-months ended June 30, 2000 from $27.2 million or 13.6% of net sales
for the comparable period in 1999. The increase in total dollars is primarily
due to the increase in advertising and promotional costs attributable to the
Company's ongoing marketing efforts. The decrease as a percentage of net sales
is attributable to the sales growth realized from the strength in the brand
image and product awareness.
As a percentage of net sales, sales salaries, commission and incentives expenses
dropped to 2.0% of net sales in the six-months ended June 30, 2000 from 2.3% for
the comparable period in 1999. This decrease is attributable to a sliding scale
commission structure that declines as a percentage of net sales.
General and Administrative Expenses
General and administrative expenses increased 62.6% to $57.2 million or 19.3% of
net sales for the six-months ended June 30, 2000 from $35.2 million or 17.6% of
net sales for the comparable period in 1999. This 1.7% increase as a percentage
of net sales is partly attributable to the Company's Mail Order business which
inherently has a higher percentage of expenses per dollar sales. Additionally,
the Company incurred increased distribution and warehousing costs to meet demand
until its new distribution center is operational, which is expected in the
fourth quarter of 2000, and expansion into new retail locations has caused
expenses to increase.
During six-months ended June 30, 2000, salaries, wages and temporary help costs
increased to $25.9 million or 8.4% of net sales from $14.3 million or 6.9% of
net sales for the comparable period in 1999. Such increase can be attributed in
part to normal payroll costs associated with additional staffing needs to meet
the growth of the Company. In addition, the Company utilized overtime and
temporary help for the warehousing and shipping department to meet the demand of
the increasing sales volume.
Interest Expense
Interest expense for the six-months ended June 30, 2000 and 1999 was comparable.
Income Taxes
Income taxes for the interim period were computed using the effective tax rate
estimated to be applicable for the full fiscal year, which is subject to ongoing
review and evaluation by management.
The pro forma income tax adjustment for the interim period ended June 30, 1999
represents taxes that would have been reported had the Company been subject to
Federal and state income taxes as a C Corporation, assuming an effective rate of
40.0%.
Other Income, Net
Other income, net for the six-months ended June 30, 2000 includes a gain of
$312,000 related to commercial lawsuits filed by the Company and settled on
favorable terms.
PAGE 14
<PAGE> 15
LIQUIDITY AND CAPITAL RESOURCES
The Company's need for funds arises primarily from its working capital
requirements, including the need to finance its receivables and inventory. The
Company's working capital was $78.7 million at June 30, 2000 and $65.0 million
at December 31, 1999. The 21.1% increase in working capital at June 30, 2000 was
principally due to the increase in trade accounts receivable and inventories net
of an increase in related short-term borrowings and accounts payable since
December 31, 2000.
The Company is currently negotiating with a lender to provide approximately $8.4
million for the acquisition of the Company's Ontario, California, distribution
facilities and related improvements. It is anticipated that the financing will
be amortized over 20 years, with a final balloon payment due after 10 years, and
will be at current market rates for similar financing.
As part of the Company's working capital management, the Company performs
substantially all customer credit functions internally, including extension of
credit and collections. The Company's bad debt write-offs were less than 0.06%
of net sales for the six-month period ended June 30, 2000. The Company carries
bad debt insurance to cover approximately the first 90.0% of bad debts on
substantially all of the Company's major retail accounts.
Net cash used in operating activities totaled $12.5 million for the six-months
ended June 30, 2000 compared to cash provided by operating activities of $8.7
million for the comparable period in 1999. The decrease in cash provided by
operating activities was the net result of a substantial increase in trade
accounts receivable(net of a $3.0 million provision for bad debts and returns)
and inventories offset by a substantial increase in related accounts payable and
accrued expenses. These increases are due to the Company's growth during the
six-months ended June 30, 2000.
Net cash used in investing activities, consisting of capital expenditures,
totaled $13.0 million and $3.7 million for the six-months ended June 30, 2000
and 1999, respectively. Capital expenditures during the six-months ended June
30, 2000 were comprised primarily of equipment for the new material/inventory
handling, sortation and delivery system and the construction of 5 additional
retail stores. Investing activities for the same period in 1999 was primarily
due to capital expenditures in connection with the establishment of the
Company's existing distribution facilities in Ontario, California, the
construction of additional Company retail stores, and additional hardware and
software for the Company's computer needs.
Net cash provided by financing activities totaled $21.7 million during the
six-months ended June 30, 2000, compared to cash used in financing activities of
$15.7 million for the comparable period in 1999. During the six-month ended June
30, 2000, cash was provided by proceeds from borrowings on the Company's credit
facilities as well as capital lease financing during the period. This compares
to cash used in financing activities during the six-months ended June 30, 1999,
principally to repay short-term borrowings, as well as payments to stockholders,
which were partially financed by the initial public offering.
PAGE 15
<PAGE> 16
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 $78.7 million of availability as of June 30, 2000) with The CIT
Group, as agent for the lenders. The Company negotiated more favorable interest
terms on June 1, 2000. As amended, the revolving line of credit bears interest
at the prime rate (9.5% at June 30, 2000) minus 0.50%. Interest on the revolving
line of credit is payable monthly. The revolving line of credit expires on
December 31, 2002. The revolving line of credit provides a sub-limit for letters
of credit of up to $36.0 million to finance the Company's foreign purchases of
merchandise inventory. As of June 30, 2000, the Company had approximately $2.2
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
$2.3 million as of June 30, 2000, bears interest at the prime rate plus 1% and
is due in monthly installments with a final balloon payment December 2002. The
proceeds from this note were used to purchase equipment for one of the Company's
distribution centers in Ontario, California and the note is secured by such
equipment. The credit facility contains certain financial covenants that require
the Company to maintain minimum tangible net worth working capital and specified
leverage ratios and limit the ability of the Company to pay dividends if it is
in default of any provisions of the credit facility. The Company was in
compliance with these covenants as of June 30, 2000.
The Company believes that anticipated cash flows from operations, available
borrowings under the Company's revolving line of credit, cash on hand and its
financing arrangements will be sufficient to provide the Company with the
liquidity necessary to fund its anticipated working capital and capital
requirements through fiscal 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
While sales of footwear products have historically been somewhat seasonal in
nature with the strongest sales generally occurring in the third and fourth
quarters, the Company believes that changes in its product offerings have
somewhat mitigated the effect of this seasonality and, consequently, the
Company's sales are not necessarily as subjected to seasonal trends as that of
its' past or its' competitors in the footwear industry.
The Company has experienced, and expects to continue to experience, variability
in its net sales and operating results on a quarterly basis. The Company's
domestic customers generally assume responsibility for scheduling pickup and
delivery of purchased products. Any delay in scheduling or pickup which is
beyond the Company's control could materially negatively impact the Company's
net sales and results of operations for any given quarter. The Company believes
the factors which influence this variability include (i) the timing of the
Company's introduction of new footwear products, (ii) the level of consumer
acceptance of new and existing products, (iii) general economic and
PAGE 16
<PAGE> 17
industry conditions that affect consumer spending and retail purchasing, (iv)
the timing of the placement, cancellation or pickup of customer orders, (v)
increases in the number of employees and overhead to support growth, (vi) the
timing of expenditures in anticipation of increased sales and customer delivery
requirements, (vii) the number and timing of new Company retail store openings
and (viii) actions by competitors. Due to these and other factors, the operating
results for any particular quarter are not necessarily indicative of the results
for the full year.
INFLATION
The Company does not believe that the relatively moderate rates of inflation
experienced in the United States over the last three years have had a
significant effect on its net sales or profitability. However, the Company
cannot accurately predict the effect of inflation on future operating results.
Although higher rates of inflation have been experienced in a number of foreign
countries in which the Company's products are manufactured, the Company does not
believe that inflation has had a material effect on the Company's net sales or
profitability. In the past, the Company has been able to offset its foreign
product cost increases by increasing prices or changing suppliers, although no
assurance can be given that the Company will be able to continue to make such
increases or changes in the future.
EXCHANGE RATES
The Company receives U.S. Dollars for substantially all of its product sales and
its royalty income. Inventory purchases from offshore contract manufacturers are
primarily denominated in U.S. Dollars; however, purchase prices for the
Company's products may be impacted by fluctuations in the exchange rate between
the U.S. Dollar and the local currencies of the contract manufacturers, which
may have the effect of increasing the Company's cost of goods in the future.
During 2000 and 1999, exchange rate fluctuations did not have a material impact
on the Company's inventory costs. The Company does not engage in hedging
activities with respect to such exchange rate risk.
MARKET RISK
The Company does not hold any derivative securities. The Company's short-term
borrowings are sensitive to changes in short-term interest rates and an increase
in rates may decrease the Company's earnings.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("SFAS No. 133"). SFAS No. 133 modifies the accounting
for derivative and hedging activities and is effective for fiscal years
beginning after June 15, 2000. Since the Company does not presently hold any
derivatives or engage in hedging activities, SFAS No. 133 should not impact the
Company's financial position or results of operations.
On March 31, 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, Accounting for Certain Transactions involving Stock
Compensation - an interpretation of APB Opinion No. 25 (FIN 44). This
interpretation provides guidance for issues that have arisen in applying APB
Opinion No. 25 Accounting for Stock Issued to Employees. FIN 44 applies
prospectively to new awards, exchanges of awards in business combinations,
modification of outstanding awards, and changes in grantee status that occur on
or after July 1, 2000, except for the provisions related to
PAGE 17
<PAGE> 18
repricings and the definition of an employee which apply to awards issued after
December 15, 1998. The provisions related to modifications to fixed stock option
awards to add a reload feature are for awards modified after January 12, 2000.
The new interpretation is not expected to have a material impact upon the
Company's financial statements.
PAGE 18
<PAGE> 19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS - Not Applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS -- Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES -- Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 14, 2000, the Company held its Annual Meeting of Stockholders. The
following matters were voted on at the meeting: (1) the election of a member to
the Board of Directors; (2) the ratification and approval of KPMG LLP as the
Company's independent auditors for fiscal 2000; (3) and the transaction of other
business which came to the attention of the stockholders during the meeting.
The results of the voting on these matters are set forth below:
<TABLE>
<CAPTION>
VOTES
PROPOSAL VOTES FOR AGAINST/WITHHELD ABSTENTIONS BROKER NON-VOTES
-------- --------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C>
Proposal No. 1 --
Election of Director
Nominee
Robert Greenberg 258,552,595 50,343 0 0
Proposal No. 2 --
Ratification of KPMG LLP
as Independent Auditors
for Fiscal 2000 258,590,027 7,411 5,500 0
</TABLE>
The following Directors were not standing for election and are continuing as
Directors of the Company: Michael Greenberg, David Weinberg, John Quinn, and
Richard Siskind.
ITEM 5. OTHER INFORMATION -- Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K --
(a) Exhibits
10.1 Amendment to 1998 Employee Stock Purchase Plan
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the
quarterly period ended June 30, 2000.
PAGE 19
<PAGE> 20
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: August 14, 2000 /s/ David Weinberg
---------------------------------
David Weinberg
Executive Vice President and
Chief Financial Officer
PAGE 20
