<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 MARCH 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO _______________ .
COMMISSION FILE NUMBER: 001-14429
SKECHERS U.S.A., INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-4376145
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
228 MANHATTAN BEACH BLVD.
MANHATTAN BEACH, CALIFORNIA 90266
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 318-3100
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of each exchange on
Title of each class Which registered
Class A Common Stock $0.001 par value New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
THE NUMBER OF SHARES OF CLASS A COMMON STOCK OUTSTANDING AS OF MAY 9, 2000:
8,484,537
THE NUMBER OF SHARES OF CLASS B COMMON STOCK OUTSTANDING AS OF MAY 9, 2000:
26,423,445
<PAGE> 2
SKECHERS U.S.A., INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2000
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) PAGE
----
<S> <C> <C>
Condensed Consolidated Balance Sheets
March 31, 2000 and December 31, 1999.......................................... 3
Condensed Consolidated Statements of Earnings
Three-month periods ended March 31, 2000 and 1999............................. 4
Condensed Consolidated Statements of Cash Flows
Three-months periods ended March 31, 2000 and 1999............................ 5
Notes to Condensed Consolidated Financial Statements.......................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS................................................................. 9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.................... 15
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 15
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 15
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16
ITEM 5. OTHER INFORMATION 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16
</TABLE>
2
<PAGE> 3
SKECHERS U.S.A., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
ASSETS
March 31, December 31,
2000 1999
-------- ------------
<S> <C> <C>
Current Assets:
Cash $ 1,722 $ 10,836
Trade accounts receivable, less allowance for bad debts and returns
of $4,063 in 2000 and $3,237 in 1999 84,994 63,052
Due from officers and employees 206 851
Other receivables 800 2,771
Inventories 63,482 68,959
Prepaid expenses and other current assets 6,745 5,130
Deferred tax assets 2,810 2,810
-------- --------
Total current assets 160,759 154,409
-------- --------
Property and equipment, at cost, less accumulated depreciation and amortization 23,317 21,387
Intangible assets, at cost, less applicable amortization 637 663
Other assets, at cost 1,396 1,455
-------- --------
$186,109 $177,914
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term borrowings $ 41,678 $ 30,382
Current installments of long-term borrowings 1,038 1,060
Accounts payable 36,989 47,696
Accrued expenses 8,785 10,268
-------- --------
Total current liabilities 88,490 89,406
-------- --------
Long-term borrowings, excluding current installments 4,885 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 7
8,482 shares and 7,091 issued and outstanding at March 31, 2000 and
December 31, 1999, respectively
Class B Common Stock, $.001 par value; 60,000 shares authorized; 26 28
26,423 and 27,814 shares issued and outstanding at March 31, 2000 and
December 31, 1999, respectively
Additional paid-in capital 69,948 69,948
Retained earnings 22,751 16,017
-------- --------
Total stockholders' equity 92,734 86,000
-------- --------
$186,109 $177,914
======== ========
See accompanying notes to unaudited condensed consolidated financial statements.
</TABLE>
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 March 31,
----------------------------
2000 1999
--------- --------
<S> <C> <C>
Net sales $ 133,344 $ 95,736
Cost of sales 79,709 59,038
--------- --------
Gross profit 53,635 36,698
Royalty income, net 5 49
--------- --------
53,640 36,747
--------- --------
Operating expenses:
Selling expenses 14,671 15,571
General and administrative expenses 26,094 16,397
--------- --------
40,765 31,968
--------- --------
Earnings from operations 12,875 4,779
--------- --------
Other income (expense):
Interest, net (1,799) (1,754)
Other, net -- 482
--------- --------
(1,799) (1,272)
--------- --------
Earnings before income taxes 11,076 3,507
Income taxes 4,342 78
--------- --------
Net earnings $ 6,734 $ 3,429
========= ========
Pro forma operations data:
Earnings before income taxes $ 11,076 $ 3,507
Income taxes 4,342 1,403
--------- --------
Net earnings $ 6,734 $ 2,104
========= ========
Net earnings per share:
Basic $ 0.19 $ 0.08
========= ========
Diluted $ 0.19 $ 0.07
========= ========
Weighted average shares:
Basic 34,905 27,814
========= ========
Diluted 35,658 30,084
========= ========
See accompanying notes to unaudited condensed consolidated financial statements.
</TABLE>
4
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SKECHERS U.S.A., INC. AND SUBSIDIARIES
STATEMENTS OF CONDENSED CONSOLIDATED CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three-Months Ended March 31,
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 6,734 $ 3,429
Adjustments to reconcile net earnings to net cash
used in operating activities:
Depreciation and amortization of property and
equipment 1,166 856
Amortization of intangible assets 26 32
Provision (recovery) for bad debts and returns 825 (659)
Loss on disposal of equipment 29 --
Gain on distribution of intangibles -- (118)
(Increase) decrease in assets:
Receivables (20,151) (5,625)
Inventories 5,477 21,061
Prepaid expenses and other current assets (1,615) 932
Other assets 59 67
Decrease in liabilities:
Accounts payable (10,707) (17,866)
Accrued expenses (1,483) (2,980)
-------- -------
Net cash used in operating activities (19,640) (871)
-------- -------
Cash flows used in investing activities-capital expenditures (3,125) (946)
-------- -------
Cash flows from financing activities:
Net proceeds (payments) related to short-term borrowings 11,296 (7,538)
Proceeds from long-term borrowings 2,605 --
Payments on long-term borrowings (250) (129)
Payments on notes payable to stockholder -- (449)
Distributions paid to stockholders -- (20)
-------- -------
Net cash provided by (used in) financing activities 13,651 (8,136)
-------- -------
Net decrease in cash (9,114) (9,953)
Cash at beginning of period 10,836 10,942
-------- -------
Cash at end of period $ 1,722 $ 989
======== =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 1,756 $ 1,801
Income taxes 945 --
======== =======
During the three-months period ended March 31, 1999, the Company had non-cash
distributions of intangibles of $350.
See accompanying notes to unaudited condensed consolidated financial statements.
</TABLE>
5
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SKECHERS U.S.A., INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) GENERAL
The accompanying condensed consolidated balance sheet at December 31, 1999 has
been derived from the audited financial statements at that date but does not
include all of the information and footnotes required by generally accepted
accounting principles ("GAAP") for complete financial statements.
The accompanying unaudited condensed consolidated financial statements have been
prepared on the same basis as the audited consolidated financial statements and
reflect all adjustments (consisting of normal recurring accruals) which are, in
the opinion of management, necessary for a fair presentation of the results of
operations for the interim periods. The interim financial information and notes
thereto should be read in conjunction with the Skechers U.S.A., Inc. (the
"Company" or "Skechers") annual report to stockholders on Form 10-K. The results
of operations for the three-months ended March 31, 2000 are not necessarily
indicative of results to be expected for the full year.
Certain amounts in the prior year financial statements have been reclassified to
conform to the current year presentation.
(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 the three-months ended March 31, 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
December 31, 1998 for 1998 and January 1, 1999 to June 7, 1999 for 1999 based on
an initial public offering price of $11 per share, net of underwriting
discounts.
The reconciliation of basic to diluted weighted average shares is as follows (in
thousands):
<TABLE>
<CAPTION>
Three-Months Ended
March 31,
------------------
2000 1999
------ ------
<S> <C> <C>
Weighted average shares used in basic
computation 34,905 27,814
Shares to fund stockholders'
distributions described above -- 1,231
Dilutive effect of stock options 753 1,039
------ ------
Weighted average shares used in
diluted computation 35,658 30,084
====== ======
</TABLE>
Options to purchase 1,217,136 shares of common stock at prices ranging from
$7.06 to $11.00 were outstanding at March 31, 2000, but not included in the
computation of diluted earnings per share because the options' exercise price
was greater than the average market price of the common shares.
6
<PAGE> 7
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 three-months ended March 31, 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, as amended in December 1998,
permitting borrowings up to $120,000,000 based upon eligible accounts receivable
and inventories. The agreement expires on December 31, 2002. Borrowings bear
interest at the rate of prime (9.0% at March 31, 2000) plus .25% or at LIBOR
6.1% at March 31, 2000) plus 2.75%, as elected by the Company. The agreement
provides for the issuance of letters of credit up to a maximum of $36,000,000
of which 50% decreases the amount available for borrowings under the agreement.
Outstanding letters of credit at March 31, 2000 were $2,958,000. Available
borrowings under the line of credit at March 31, 2000 was $50,631,000. The
Company pays an unused line of credit fee of .25% annually. The Company is
required to maintain certain financial covenants including specified minimum
tangible net worth, working capital and leverage ratios as well as limit the
payment of dividends if it is in default of any provision of the agreement. The
Company was in compliance with these covenants at March 31, 2000.
(5) LEASE OBLIGATIONS
The Company has entered into two finance lease agreements. The first one is with
Banc of America Leasing & Capital, LLC for up to $11,250,000 of the purchase
price of a new material/inventory handling, sortation and delivery system. 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 first
three months of 2000, the Company submitted and received advances for
$1,672,000 at an interest rate of 8.8%.
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 the agreement.
The Company was in compliance with these covenants at March 31, 2000.
The second finance agreement for the lease of $933,000 of warehouse equipment
commenced on February 4, 2000. The term of the lease is for five years at an
interest rate of 8.7% per annum.
7
<PAGE> 8
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.
As these matters are 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
On February 28, 2000, certain Class B stockholders converted 1,390,710 shares of
Class B common stock to Class A common stock.
8
<PAGE> 9
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 discussed in
management's then 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 by or on behalf of the Company are included under the "Risk
Factors" on pages 12 through 19 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.
9
<PAGE> 10
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 three-months
ended March 31, 1999 as if the Company had been taxed as a C Corporation at an
assumed effective rate of 40.0% rather than as a S Corporation.
<TABLE>
<CAPTION>
Three-Months Ended
March 31,
-------------------------------------------------
2000 1999
---------------------- ----------------------
<S> <C> <C> <C> <C>
Net sales $ 133,344 100.0% $ 95,736 100.0%
Cost of sales 79,709 59.8% 59,038 61.7%
--------- ----- -------- -----
Gross profit 53,635 40.2% 36,698 38.3%
Royalty income, net 5 0.0% 49 0.1%
--------- ----- -------- -----
53,640 40.2% 36,747 38.4%
--------- ----- -------- -----
Operating expenses:
Selling 14,671 11.0% 15,571 16.3%
General and administrative 26,094 19.6% 16,397 17.1%
--------- ----- -------- -----
40,765 30.6% 31,968 33.4%
--------- ----- -------- -----
Earnings from operations 12,875 9.6% 4,779 5.0%
Interest expense, net (1,799) (1.3%) (1,754) (1.8%)
Other, net -- 0.0% 482 0.5%
--------- ----- -------- -----
Earnings before pro forma
income taxes 11,076 8.3% 3,507 3.7%
Pro forma income taxes 4,342 3.2% 1,403 1.5%
--------- --- -------- ---
Pro forma net earnings $ 6,734 5.1% $ 2,104 2.2%
========= === ======== ===
</TABLE>
10
<PAGE> 11
Net Sales
Net sales for three-months ended March 31, 2000 were $133.3 million or 39.3%
higher than the $95.7 million recorded in the comparable period of 1999. The
Company continued to focus primarily on its wholesale business, which
experienced a 40.0% increase primarily as a result of greater brand awareness
driven by a national marketing campaign and broader breadth of product
offerings. Retail sales grew as eight more locations were added nationwide
throughout the year. E-commerce sales more than doubled as shoe purchases over
the Company's interactive website increased.
Gross Profit
The Company's gross profit remained strong and consistent with the same period
in 1999. The majority of the 1.9% increase in gross profit margin was
attributable to the domestic wholesale business, which improved 5.4% during the
first three months period in 2000. Management attributes the continued strength
in profit margins to the brand equity developed in the past three years
supported by a highly aggressive and comprehensive advertising campaign.
Continued product demands translate into reduced closeout sales, less need for
discounts and markdowns, reduced returns and allowances and higher percentage of
collectable accounts; all of which contributed to the stronger gross profit
margin. As a percentage of gross sales, sales returns and allowances fell by
0.6% to 3.4% in first three months of 2000 compared to 3.9% in first three
months of 1999. In addition, the Company has been able to take advantage of the
growing product demand by increasing order quantities and reducing costs for the
purchase of merchandise and related services, whenever possible.
Selling Expenses
Selling expenses include sales salaries, commissions and incentives,
advertising, promotions and trade shows. Sales salaries, commission and
incentives expenses dropped to 2.1% of net sales in the first three months of
the year from 2.7% for the comparable period in 1999. This decrease is
attributable to an efficient commission and salary structure that rewards the
efforts of the hard working sales representatives but at the same time 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 8.0% 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 sales may vary from quarter to quarter. In the first three months
of the current year, total advertising expenses decreased to $11.8 million or
8.9% of sales from $12.7 million or 13.2% of sales for the same period in 1999.
General and Administrative Expenses
General and administrative expenses as a percentage of net sales increased
approximately 2.5% from the prior year. Salaries, wages and temporary help
increased 71.0% during the first quarter from prior year to a combined quarterly
total of $11.0 million. 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
11
<PAGE> 12
help for the warehousing and shipping department to meet the demand of the
increasing sales volume until the new fully automated material-handling
warehouse is fully implemented.
Interest Expense
Interest expense for the periods ending March 31, 2000 and 1999 were comparable.
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 three-months ended March 31, 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%.
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 receivables and inventory. The Company's working capital was $72.3 million
at March 31, 2000 and $65.0 million at December 31, 1999, respectively. The
11.2% increase in working capital at March 31, 2000 was principally due to the
increase in trade accounts receivable resulting from the 39.3% increase in sales
during the quarter.
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 three-months ended March 31, 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 $19.6 million and $871,000 for the
three-months ended March 31, 2000 and 1999, respectively. The increase in cash
used in operating activities was due primarily to a substantial increase in
accounts receivable resulting from the Company's growth during the first quarter
of 2000 as well as a reduction in accounts payable during the quarter.
Net cash used in investing activities totaled $3.1 million and $946,000 for the
three-months ended March 31, 2000 and 1999, respectively, and related to capital
expenditures. Capital expenditures during the quarter ended March 31, 2000 were
comprised primarily of equipment for the new material/inventory handling,
sortation and delivery system. 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 $13.7 million during the
three-months ended March 31, 2000, compared to cash used in financing activities
of $8.1 million for the three-months ended March 31, 1999. During the
three-months ended March 31, 2000, cash was provided by proceeds from borrowings
on the Company's credit facilities as well as capital lease financings during
the quarter. This compares to cash used in operating activities principally to
repay short-term borrowings during the quarter ended March 31, 1999, as well as
payments to stockholders.
12
<PAGE> 13
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 $50.6 million of availability as of March 31, 2000) with The CIT
Group, as agent for the lenders. The revolving line of credit bears interest at
the Company's option at either the prime rate (9.0% at March 31, 2000) plus 25%
basis points or at Libor (6.1% at March 31, 2000) 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 March 31, 2000, the Company had
approximately $3.0 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 March 31, 2000, 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 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 March 31, 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.
13
<PAGE> 14
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.
14
<PAGE> 15
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 or other market rate
sensitive instruments.
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 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In January 2000 and December 2000, the Company and two officers/directors were
named as defendants in four purported class-action lawsuits. Two of the lawsuits
also named the underwriters of the Company's initial public offering as
defendants. All of the complaints seek damages and rescission on behalf of a
class of persons who purchased securities in, or traceable to, the Company's
initial public offering or thereafter on the open market prior to July 6, 1999.
As these matters are 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, 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.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS -- Not Applicable
15
<PAGE> 16
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.
16
<PAGE> 17
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: May 15, 2000 /s/ David Weinberg
------------------------------------
David Weinberg
Executive Vice President and
Chief Financial Officer
17
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