Back to GetFilings.com



Table of Contents

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, 2003

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
incorporation or organization)
  (I.R.S. Employer
Identification No.)
 
228 MANHATTAN BEACH BLVD.
MANHATTAN BEACH, CALIFORNIA
  90266
(Address of Principal Executive Offices)   (Zip Code)

REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 318-3100

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [   ]

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [X] No [   ]

     THE NUMBER OF SHARES OF CLASS A COMMON STOCK OUTSTANDING AS OF MAY 12, 2003: 18,573,536

     THE NUMBER OF SHARES OF CLASS B COMMON STOCK OUTSTANDING AS OF MAY 12, 2003: 19,206,561

 


TABLE OF CONTENTS

CONDENSED CONSOLIDATED BALANCE SHEETS
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
STATEMENTS OF CONDENSED CONSOLIDATED CASH FLOWS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 4. CONTROLS AND PROCEDURES
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
ITEM 3. DEFAULT UPON SENIOR SECURITIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
EXHIBIT 99.1


Table of Contents

SKECHERS U.S.A., INC. AND SUBSIDIARIES

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2003

INDEX

         
        PAGE
       
PART I   FINANCIAL INFORMATION    
ITEM 1.   CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)    
    Condensed Consolidated Balance Sheets — March 31, 2003 and December 31, 2002   3
    Condensed Consolidated Statements of Earnings — Three-months periods ended March 31, 2003 and 2002   4
    Condensed Consolidated Statements of Cash Flows — Three-months periods ended March 31, 2003 and 2002   5
    Notes to Condensed Consolidated Financial Statements   6
ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS   13
ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK   24
ITEM 4.   CONTROLS AND PROCEDURES   25
PART II   OTHER INFORMATION    
ITEM 1.   LEGAL PROCEEDINGS   26
ITEM 2.   CHANGE IN SECURITIES AND USE OF PROCEEDS   27
ITEM 3.   DEFAULT UPON SENIOR SECURITIES   27
ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS   27
ITEM 5.   OTHER INFORMATION   27
ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K   27

2


Table of Contents

SKECHERS U.S.A., INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)
(In thousands)

ASSETS

                       
          MARCH 31,   DECEMBER 31,
          2003   2002
         
 
Current Assets:
               
 
Cash and cash equivalents
  $ 80,578     $ 124,830  
 
Trade accounts receivable, less allowances of $8,451 in 2003 and $8,498 in 2002
    121,158       97,419  
 
Due from officers and employees
    796       617  
 
Other receivables
    5,637       7,144  
 
   
     
 
     
Total receivables
    127,591       105,180  
 
   
     
 
 
Inventories
    173,973       147,984  
 
Prepaid expenses and other current assets
    12,302       14,779  
 
Deferred tax assets
    703       703  
 
   
     
 
   
Total current assets
    395,147       393,476  
Property and equipment, at cost, less accumulated depreciation and amortization
    86,614       83,666  
Intangible assets, at cost, less applicable amortization
    1,347       356  
Other assets, at cost
    5,588       5,658  
 
   
     
 
 
  $ 488,696     $ 483,156  
 
   
     
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
               
 
Current installments of long-term borrowings
  $ 2,495     $ 2,442  
 
Accounts payable
    89,488       88,578  
 
Accrued expenses
    11,395       15,696  
 
   
     
 
   
Total current liabilities
    103,378       106,716  
 
   
     
 
4.50% Convertible subordinated notes
    90,000       90,000  
Long-term borrowings, excluding current installments
    26,579       27,204  
 
   
     
 
   
Total liabilities
    219,957       223,920  
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; 18,570 shares and 18,369 issued and outstanding at March 31, 2003 and December 31, 2002, respectively
    19       18  
 
Class B Common Stock, $.001 par value; 60,000 shares authorized; 19,207 and 19,317 shares issued and outstanding at March 31, 2003 and December 31, 2002, respectively
    19       19  
 
Additional paid-in capital
    102,862       102,109  
 
Accumulated other comprehensive income
    3,304       3,016  
 
Retained earnings
    162,535       154,074  
 
   
     
 
   
Total stockholders’ equity
    268,739       259,236  
 
   
     
 
 
  $ 488,696     $ 483,156  
 
   
     
 

See accompanying notes to unaudited condensed
consolidated financial statements.

3


Table of Contents

SKECHERS U.S.A., INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)
(In thousands, except per share data)

                     
        THREE MONTHS ENDED MARCH 31,
       
        2003   2002
       
 
Net sales
  $ 208,593     $ 244,949  
Cost of sales
    118,275       142,425  
 
   
     
 
   
Gross profit
    90,318       102,524  
Royalty income, net
    271       108  
 
   
     
 
 
    90,589       102,632  
 
   
     
 
Operating expenses:
               
 
Selling expenses
    17,620       18,691  
 
General and administrative expenses
    57,086       49,632  
 
   
     
 
 
    74,706       68,323  
 
   
     
 
   
Earnings from operations
    15,883       34,309  
 
   
     
 
Other income (expense):
               
 
Interest, net
    (2,097 )     (2,063 )
 
Other, net
    (314 )     43  
 
   
     
 
 
    (2,411 )     (2,020 )
 
   
     
 
   
Earnings before income taxes
    13,472       32,289  
Income taxes
    5,011       12,011  
 
   
     
 
   
Net earnings
  $ 8,461     $ 20,278  
 
   
     
 
Net earnings per share:
               
 
Basic
  $ 0.22     $ 0.55  
 
   
     
 
 
Diluted
  $ 0.22     $ 0.53  
 
   
     
 
Weighted average shares:
               
 
Basic
    37,708       36,849  
 
   
     
 
 
Diluted
    41,480       38,172  
 
   
     
 

See accompanying notes to unaudited condensed
consolidated financial statements.

4


Table of Contents

SKECHERS U.S.A., INC. AND SUBSIDIARIES

STATEMENTS OF CONDENSED CONSOLIDATED CASH FLOWS

(Unaudited)
(In thousands)

                           
            THREE MONTHS ENDED MARCH 31,
           
            2003   2002
           
 
Cash flows from operating activities:
               
 
Net earnings
  $ 8,461     $ 20,278  
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
               
   
Depreciation and amortization of property and equipment
    4,874       4,272  
   
Amortization of intangible assets
    79       25  
   
Amortization of note offering costs
    191        
   
Provision for receivables allowances
    2,377       894  
   
Loss on disposal of equipment
          6  
   
Tax effect of non-qualified stock options
    8       195  
   
(Increase) decrease in assets:
               
       
Receivables
    (24,693 )     (25,966 )
       
Inventories
    (24,543 )     46,541  
       
Prepaid expenses and other current assets
    2,484       8,002  
       
Other assets
    (114 )     271  
   
Increase (decrease) in liabilities:
               
       
Accounts payable
    1,652       (19,113 )
       
Accrued expenses
    (4,455 )     1,629  
 
   
     
 
       
Net cash provided by (used in) operating activities     (33,679 )     37,034  
 
   
     
 
Cash flows used in investing activities:
               
     
Acquisition of Canadian distributor
    (2,344 )      
     
Capital expenditures
    (7,726 )     (1,798 )
 
   
     
 
       
Net cash used in investing activities     (10,070 )     (1,798 )
 
   
     
 
Cash flows from financing activities:
               
 
Net proceeds from short-term borrowings
          12,472  
 
Proceeds from the exercise of stock options
    37       722  
 
Payments on long-term borrowings
    (595 )     (673 )
 
   
     
 
       
Net cash provided by (used in) financing activities     (558 )     12,521  
 
   
     
 
Net increase (decrease) in cash
    (44,307 )     47,757  
Effect of exchange rates on cash
    55       (435 )
Cash at beginning of period
    124,830       15,554  
 
   
     
 
Cash at end of period
  $ 80,578     $ 62,876  
 
   
     
 
Supplemental disclosures of cash flow information:
               
Cash paid during the period for:
               
     
Interest
  $ 1,075     $ 2,195  
     
Income taxes
    286       8  
 
   
     
 

     During the three months ended March 31, 2003, the Company issued 83,351 shares of Class A common stock to the Company’s 401k plan with a value of approximately $709,000. In addition, the Company acquired equipment aggregating $23,000 under capital lease obligations.

     During the three months ended March 31, 2002, the Company issued 48,072 shares of Class A common stock to the Company’s 401k plan with a value of approximately $702,000. In addition, the Company acquired equipment aggregating $70,000 under capital lease obligations.

See accompanying notes to unaudited condensed
consolidated financial statements.

5


Table of Contents

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 is 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, 2002 included in the Company’s Annual Report on Form 10-K.

(2)  BUSINESS SEGMENT INFORMATION

Business Segment Information

Skechers operations are organized along its distribution channels and consists of the following operating segments:

WHOLESALE. We sell footwear directly to department stores and specialty retail stores both domestically and internationally.

RETAIL. We own and operate our own retail stores both domestically and, on a smaller scale, internationally through three integrated retail formats. Our three distinct retail formats are as follows:

     Concept Stores. Our concept stores are located in marquee street locations and high performing regional malls, promote awareness of the Skechers brand and showcase a broad assortment of our in-season footwear styles. The products offered in our concept stores are full price in season product and typically attract fashion conscious customers.
 
     Factory Outlet Stores. Our factory outlet stores are generally located in manufacturers’ outlet centers and provide opportunities to sell an assortment of in-season, discontinued and excess merchandise at lower price points.
 
     Warehouse Outlet Stores. Our freestanding warehouse outlet stores appeal to our most value conscious customers and enable us to liquidate excess merchandise, discontinued lines and odd-size inventory in a cost-efficient manner. Our factory outlet stores are typically located in manufacturers direct outlet centers throughout the U.S.

DISTRIBUTORS. Internationally, we sell our footwear to our foreign distributors who distribute such footwear to department stores and specialty retail stores in Europe, Asia, Latin America, South America and numerous other countries and territories.

Detail segment information is provided in note 11.

Certain reclassifications have been made to prior year amounts to be consistent with the current year presentation.

6


Table of Contents

(3)  OTHER COMPREHENSIVE INCOME

     The Company operates internationally through the following foreign subsidiaries: Skechers S.a.r.l located in Switzerland, with a functional currency of the U.S. dollar; Skechers USA Ltd., located in the United Kingdom, with a functional currency of the British Pound; Skechers USA Canada located in Canada, with a functional currency of the Canadian dollar: Skechers USA Iberia, SL located in Spain, Skechers USA Deutschland, GmbH located in Germany, Skechers USA France SAS located in France, Skechers EDC SPRL located in Belgium, Skechers USA Benelux BV located in the Netherlands, Skechers USA Italia srl, located in Italy, all with a functional currency of the Euro.

                   
      Three-Months Ended
      March 31,
     
      2003   2002
     
 
Net earnings
  $ 8,461     $ 20,278  
Accumulated other comprehensive income:
               
 
Foreign currency translation adjustments
    288       (435 )
 
   
     
 
Total comprehensive income
  $ 8,749     $ 19,843  
 
   
     
 

(4)  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, in addition to the weighted average determined for basic earnings per share, includes common stock equivalents which would arise from the exercise of stock options using the treasury stock method, and assumes the conversion of the Company’s 4.50% Convertible Subordinated Notes for the period outstanding since their issuance in April 2002.

The following is a reconciliation of net earnings and weighted average common shares outstanding for purposes of calculating basic earnings per share (in thousands):

                 
    Three-Months Ended March 31,
   
    2003   2002
   
 
Net earnings
  $ 8,461     $ 20,278  
Weighted average common shares outstanding
    37,708       36,849  
Basic earnings per share
  $ 0.22     $ 0.55  
 
   
     
 

7


Table of Contents

The following is a reconciliation of net earnings and weighted average common shares outstanding for purposes of calculating diluted earnings per share (in thousands):

                 
    Three-Months Ended March 31,
   
    2003   2002
   
 
Net earnings
  $ 8,461     $ 20,278  
After-tax equivalent of interest expense on 4.50% convertible subordinated debt
    636        
 
   
     
 
Earnings for purposes of computing diluted earnings per share
  $ 9,097     $ 20,278  
 
   
     
 
Weighted average common shares outstanding
    37,708       36,849  
Dilutive stock options
    306       1,323  
Weighted average assumed conversion of 4.50% convertible subordinated notes
    3,466        
 
   
     
 
Weighted average common shares outstanding
    41,480       38,172  
 
   
     
 
Diluted earnings per share
  $ 0.22     $ 0.53  
 
   
     
 

     Options to purchase 318,000 and 3,697,305 shares of common stock at prices ranging from $18.00 to $29.45 and $7.96 to $29.45 were outstanding at March 31, 2002 and 2003, respectively, but were not included in the computation of diluted earnings per share because the options’ exercise price was greater than the average market price of the common shares and therefore their inclusion would be anti-dilutive.

(5)  STOCK COMPENSATION

Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” encourages, but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company’s stock at the date of grant over the amount an employee must pay to acquire the stock.

In connection with the exercise of options, the Company realized income tax benefits of $8,000 and $ 195,000 in the quarters ended March 31, 2003 and 2002, respectively, that have been credited to additional paid-in capital.

8


Table of Contents

Had compensation cost for the plan been determined based on the fair value of the options at the grant dates consistent with the method of SFAS No. 123, the Company’s net earnings and earnings per share would have been (all amounts in thousands, except per share data):

                     
        Three Months Ended March 31,
       
        2003   2002
       
 
Net earnings, as reported
  $ 8,461     $ 20,278  
Deduct total stock-based employee compensation expense under fair value-based method for all awards, net of tax
    (1,095 )     (1,468 )
 
   
     
 
Pro forma net earnings for basic pro forma earnings per share
  $ 7,366     $ 18,810  
Add back interest on 4.50% debentures, net of tax
    636        
 
   
     
 
Pro forma net earnings for diluted pro forma earnings per share
  $ 8,002     $ 18,810  
 
   
     
 
Pro forma net earnings per share:
               
 
Basic
  $ 0.20     $ 0.51  
 
Diluted
    0.19       0.49  
Weighted shares
               
   
Weighted average
    37,708       36,849  
   
Diluted
    41,480       38,172  

(6)  INTANGIBLE ASSETS

     SFAS No. 142, “Goodwill and Other Intangible Assets,” eliminates the requirement to amortize goodwill and indefinite-lived intangible assets, requiring instead that those assets be measured for impairment at least annually, and more often when events indicate that impairment exists. Intangible assets with finite lives will continue to be amortized over their useful lives. Intangible assets as of March 31, 2003 and December 31, 2002 are as follows (in thousands):

                 
    March 31, 2003   December 31, 2002
   
 
Other intangibles
  $ 1,070     $  
Trademarks
    451       451  
Less accumulated amortization
    (174 )     (95 )
 
   
     
 
 
  $ 1,347     $ 356  
 
   
     
 

(7)  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.

9


Table of Contents

(8)  SHORT-TERM BORROWINGS

The Company has available a secured line of credit, as amended on July 12, 2002, permitting borrowings up to $200.0 million based upon eligible accounts receivable and inventories. Borrowings bear interest at the prime rate (4.25% at March 31, 2003) minus 0.50%, and the agreement expires on December 31, 2003. The agreement provides for the issuance of letters of credit up to a maximum of $30.0 million of which 50% decreases the amount available for borrowings under the agreement. Outstanding letters of credit at March 31, 2003 were $7.3 million. Available borrowings under the line of credit at March 31, 2003 were $152.4 million and no amounts were outstanding at March 31, 2003. The Company pays an unused line of credit fee of 0.25% annually. The agreement provides that stockholders’ equity shall not decrease by more than 20% in any given calendar quarter, contains a tangible net worth requirement, as defined in the agreement, and limits the payment of dividends if in default of any provision of the agreement. The Company was in compliance with these covenants at March 31, 2003.

(9)  LITIGATION

On November 7, 2002, Fortune Dynamic asserted counterclaims against Skechers in an action captioned SKECHERS USA, INC. et al. v. STEVEN MADDEN LTD., RSV SPORT INC. and FORTUNE DYNAMIC, INC. that Skechers had commenced in the United States District Court for the Central District of California (Case No. 02-07766 PA) asserting claims for, inter alia, patent infringement, dilution and unfair competition. Fortune Dynamics’ counterclaims allege violations of the federal antitrust laws, breach of contract, interference with economic relations and unfair competition. The parties have settled all claims and counterclaims in principle and are currently documenting the agreement. The terms of the settlements are confidential. The terms will not have a material effect on Skechers’ financial position or results of operations.

On December 2, 2002, a class action complaint entitled OMAR QUINONES v. SKECHERS USA, INC. et al. was filed in the Superior Court for the State of California for the County of Orange (Case No. 02CC00353). The complaint, as amended, alleges overtime and related violations of the California Labor Code on behalf of managers of Skechers’ retail stores and seeks, inter alia, damages and restitution, as well as injunctive and declaratory relief. On February 25, 2003, another related class action complaint entitled MYRNA CORTEZ v. SKECHERS USA, INC. et al. was filed in the Superior Court for the State of California for the County of Los Angeles (Case No. BC290932) asserting similar claims and seeking similar relief on behalf of assistant managers. While it is too early in the litigation to predict the outcome of the claims against Skechers, Skechers believes that it has meritorious defenses to the claims asserted in both class actions and intends to defend against those claims vigorously. Further, Skechers does not believe that an adverse result would have a material effect on Skechers’ financial position or results of operations.

On December 23, 2002, a complaint captioned BRITNEY BRANDS, INC. v. SKECHERS USA, INC. was filed against Skechers in the United States District Court for the Central District of California (Case No. 02-9774 AHM). The claims and counterclaims have been settled in principle and the parties are in the process of documenting the settlement. The terms are confidential and will not have a material effect on Skechers’ financial position or results of operations.

On February 6, 2003, a complaint captioned ADIDAS AMERICA, INC. and ADIDAS-SALOMON AG v. SKECHERS USA, INC. et al. was filed against Skechers in the United States District Court for the District of Oregon (Case No. CV 03-170 KI). The complaint alleges claims for trademark infringement, trademark dilution, unfair competition and deceptive trade practices arising out of Skechers’ alleged use of marks confusingly similar to Adidas’ three stripe mark. The lawsuit seeks, inter alia, compensatory, treble and punitive damages, as well as injunctive relief. While it is too early in the litigation to predict the outcome of the claims against Skechers, Skechers believes that it has meritorious defenses to the claims asserted by Adidas and intends to defend against those claims vigorously. Skechers also intends to assert counterclaims against Adidas. Further, Skechers does not believe that an adverse result would have a material effect on Skechers’ financial position or results of operations.

On March 25, 2003, a class action complaint captioned HARVEY SOLOMON v. SKECHERS USA, INC. et al. was filed against Skechers and certain of its officers and directors in the United States District Court for the Central District of California (Case No. 03-2094 DDP). The complaint alleges violations of the federal securities laws and breach of fiduciary duty on behalf of persons who purchased publicly traded securities of Skechers between April 3, 2002 and December 9, 2002. The complaint seeks compensatory damages, interest, attorneys’ fees, and injunctive and equitable relief. While it is too early to predict the outcome of the litigation, the Company believes the suit is without merit and intends to vigorously defend against the claims.

On April 2, 2003, a class action complaint captioned CHARLES ZIMMER v. SKECHERS USA, INC. et al. was filed against Skechers and certain of its officers and directors in the United States District Court for the Central District of California (Case No. 03-2296 PA). The complaint alleges violations of the federal securities laws on behalf of persons who purchased publicly traded securities of Skechers between April 3, 2002 and December 9, 2002. The complaint seeks compensatory damages, interest, costs, and

10


Table of Contents

injunctive and equitable relief. While it is too early to predict the outcome of the litigation, the Company believes the suit is without merit and intends to vigorously defend against the claims.

On April 3, 2003, a shareholder derivative complaint captioned BRADFORD MITCHELL v. JEFFREY GREENBERG et al. was filed against Skechers and certain of its officers in the Superior Court of the State of California, Los Angeles County (Case No. BC 293317). The complaint alleges violations of California Corporation Code § 25402 and breach of fiduciary duty. The complaint seeks treble damages, imposition of a constructive trust, and costs. While it is too early to predict the outcome of the litigation, the Company believes the suit is without merit and intends to vigorously defend against the claims.

On April 3, 2003, a shareholder derivative complaint captioned GEORGIA MANOLAS v. JEFFREY GREENBERG et al. was filed against Skechers and certain of its officers in the Superior Court of the State of California, Los Angeles County (Case No. BC293388). The complaint alleges violations of California Corporation Code § 25402 and breach of fiduciary duty. The complaint seeks treble damages, imposition of a constructive trust, and costs. While it is too early to predict the outcome of the litigation, the Company believes the suit is without merit and intends to vigorously defend against the claims.

On April 8, 2003, a shareholder derivative complaint captioned JEFF GRAVITTER v. ROBERT Y. GREENBERG was filed against Skechers and certain of its officers in the Superior Court of the State of California, Los Angeles County (Case No. BC293561). The complaint alleges violations of California Corporation Code § 25402, breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets and unjust enrichment. The complaint seeks compensatory damages, treble damages, disgorgement of profits, imposition of a constructive trust, equitable and injunctive relief, and costs. While it is too early to predict the outcome of the litigation, the Company believes the suit is without merit and intends to vigorously defend against the claims.

On April 15, 2003, a class action complaint captioned MARTIN H. SIEGEL v. SKECHERS USA, INC. et al. was filed against Skechers and certain of its officers and directors in the United States District Court for the Central District of California (Case No 03-2645 RMT). The complaint alleges violations of the federal securities laws and breach of fiduciary duty on behalf of persons who purchased publicly traded securities of Skechers between April 3, 2002 and December 9, 2002. The complaint seeks compensatory damages, interest, attorneys’ fees, and injunctive and equitable relief. While it is too early to predict the outcome of the litigation, the Company believes the suit is without merit and intends to vigorously defend against the claims.

On May 6, 2003, a class action complaint captioned ADAM D. SAPHIER v. SKECHERS USA, INC. et al. was served on Skechers and certain of its officers and directors in the United States District Court for the Central District of California (Case No. 03-3011 FMC). The complaint alleges violations of the federal securities laws on behalf of persons who purchased publicly traded securities of Skechers between April 3, 2002 and December 9, 2002. The complaint seeks compensatory damages, interest, attorneys’ fees and injunctive and equitable relief. While it is too early to predict the outcome of the litigation, the Company believes the suit is without merit and intends to vigorously defend the suit.

On May 9, 2003, a class action complaint captioned LARRY L. ERICKSON v. SKECHERS USA, INC. et al. was served on Skechers and certain of its officers and directors in the United States District Court for the Central District of California (Case No. 03-3101 SJO). The complaint alleges violations of the federal securities laws and breach of fiduciary duty on behalf of persons who purchased publicly traded securities of Skechers between April 3, 2002 and December 9, 2002. The complaint seeks compensatory damages, interest, attorneys’ fees and injunctive and equitable relief. While it is too early to predict the outcome of the litigation, the Company believes the suit is without merit and intends to vigorously defend the suit.

We occasionally become involved in litigation arising from the normal course of business. Other than the foregoing, we believe that any liability with respect to pending legal actions, individually or in the aggregate, will not have a material adverse effect on our business, financial condition or results of operation.

(10)  STOCKHOLDERS’ EQUITY

During the three-months ended March 31, 2003, certain Class B stockholders converted 111,056 shares of Class B common stock into an equivalent number of Class A common stock.

(11)  SEGMENT INFORMATION

In accordance with the requirement of SFAS 131, “Disclosures about Segments of an Enterprise and Related Information,” the Company’s reportable business segments and respective accounting policies of the segments are the same as described in Note 1. The only reportable segment in which the total assets or total net sales exceeds the quantitative thresholds established by SFAS No. 131 is

11


Table of Contents

the domestic wholesale segment. Accordingly, all other segments have been combined for this presentation. Management evaluates segment performance based primarily on revenue and gross margins.

All costs and expenses of the Company are analyzed on an aggregate basis and these costs are not allocated to the Company’s segments. The vast majority of the Company’s capital expenditures related to the retail operations both domestically and internationally. Net sales and gross margins for the domestic wholesale segment and the other segments on a combined basis were as follows (in thousands).

                   
      Three Months Ended March 31,
     
      2003   2002
     
 
Net sales
               
 
Domestic wholesale
  $ 147,297     $ 184,849  
 
All other
    61,296       60,100  
 
   
     
 
 
  $ 208,593     $ 244,949  
 
   
     
 
Gross profit
               
 
Domestic wholesale
  $ 58,441     $ 73,088  
 
All other
    31,877       29,436  
 
   
     
 
 
  $ 90,318     $ 102,524  
 
   
     
 
                         
            March 31, 2003   December 31, 2002
           
 
Assets
                   
 
  Domestic wholesale   $ 365,411     $ 328,080  
 
  All other     123,285       155,076  
 
           
     
 
 
          $ 488,696     $ 483,156  
 
           
     
 

12


Table of Contents

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 forward-looking statements made by or on behalf of the Company are set forth in “Risk Factors” and elsewhere in this report.

OVERVIEW

We design, market and sell contemporary footwear for men, women and children under the Skechers brand. Our footwear is sold through a wide range of department stores and leading specialty retail stores, a growing network of our own retail stores and our e-commerce website. Our objective is to continue to profitably grow our domestic operations, while leveraging our brand name to expand internationally.

We generate revenues from three principal sources:

WHOLESALE. We sell footwear directly to department stores and specialty retail stores both domestically and internationally.

RETAIL. We own and operate our own retail stores both domestically and, on a smaller scale, internationally through three retail formats. Our retail formats are as follows:

          Concept Stores. Our concept stores are located in marquee street locations and high performing regional malls, promote awareness of the Skechers brand and showcase a broad assortment of our in-season footwear styles.
 
          Factory Outlet Stores. Our factory outlet stores are generally located in manufacturers’ outlet centers and provide opportunities to sell an assortment of in-season, discontinued and excess merchandise at lower price points.
 
          Warehouse Outlet Stores. Our freestanding warehouse outlet stores appeal to our most value conscious customers and enable us to liquidate excess merchandise, discontinued lines and odd-size inventory in a cost-efficient manner.

DISTRIBUTORS. Internationally, we sell our footwear to our foreign distributors who distribute such footwear to department stores and specialty retail stores in Europe, Asia, Latin America, South America and numerous other countries and territories.

The only reportable segment in which the total assets or total net sales exceeds the quantitative thresholds established by SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” is the domestic wholesale segment. Accordingly, all other segments are combined. Management evaluates segment performance based primarily on revenue and gross margins.

The substantial portion of our revenues are derived from the domestic wholesale segment. Domestic wholesale segment sales were 70.6% and 75.5% of total sales for the three months ended March 31, 2003 and 2002, respectively. Typically, retail sales achieve higher gross margins as a percentage of net sales than wholesale sales. Sales through foreign distributors result in lower gross margins as a percentage of net sales than retail or wholesale sales. None of our domestic retail sales formats, international wholesale sales,

13


Table of Contents

international retail sales, or international distributor sales individually comprised more than 10% of our consolidated net sales for the three months ended March 31, 2003 and 2002.

RESULTS OF OPERATIONS

The following table sets forth for the periods indicated, selected information from the Company’s results of operations in aggregate dollar amounts and as a percentage of net sales:

                                   
      THREE-MONTHS ENDED
      MARCH 31,
     
      2003   2002
     
 
Net sales
  $ 208,593       100.0 %   $ 244,949       100.0 %
Cost of sales
    118,275       56.7 %     142,425       58.1 %
 
   
     
     
     
 
 
Gross profit
    90,318       43.3 %     102,524       41.9 %
Royalty income, net
    271       0.1 %     108       0.0 %
 
   
     
     
     
 
 
    90,589       43.4 %     102,632       41.9 %
 
   
     
     
     
 
Operating expenses:
                               
 
Selling
    17,620       8.4 %     18,691       7.6 %
 
General and administrative
    57,086       27.4 %     49,632       20.3 %
 
   
     
     
     
 
 
    74,706       35.8 %     68,323       27.9 %
 
   
     
     
     
 
Earnings from operations
    15,883       7.6 %     34,309       14.0 %
 
Interest, net
    (2,097 )     (1.0 %)     (2,063 )     (0.8 %)
 
Other, net
    (314 )     (0.2 %)     43       0.0 %
 
   
     
     
     
 
Earnings before income taxes
    13,472       6.5 %     32,289       13.2 %
Income taxes
    5,011       2.4 %     12,011       4.9 %
 
   
     
     
     
 
Net earnings
  $ 8,461       4.1 %   $ 20,278       8.3 %
 
   
     
     
     
 

Net Sales

Net sales for the three-months ended March 31, 2003 were $208.6 million, compared to $244.9 million for the three months ended March 31, 2002. The decrease in net sales was due to the reduction in domestic wholesale segment sales. Domestic wholesale segment sales were $147.3 million for the three months ended March 31, 2003, compared to $184.8 million for the three months ended March 31, 2002. Domestic wholesale segment volume decreased to 8.6 million pairs for the three months ended March 31, 2003, compared to 10.2 million pairs during the same period in 2002. The decrease in domestic wholesale segment sales was due to reduced sales in most of the men’s, women’s and kids’ lines, offset by increased sales in the Somethin’ Else From Skechers junior women’s line and the Skechers Work line launched in the third quarter of 2002.

Our distributor sales decreased 15.5% during the three months ended March 31, 2003, compared to the three months ended March 31, 2002. The decrease was primarily due to reduced sales into South America, and, to a lesser extent, the Asia and the Pacific Rim regions. International wholesale sales increased 11.8% during the three months ended March 31, 2003, compared to the same period in 2002. The increase was due to our international expansion, in which we added Spain, the Netherlands, and Canada subsequent to March 31, 2002. Our international retail sales increased 46.2% during the three months ended March 31, 2003, compared to the same period in 2002, due primarily to the increase in the number of international retail stores.

During 2002, we continued our international expansion as we established subsidiaries in Canada, Spain, and the Netherlands. In addition, during the first quarter of 2003 we established a subsidiary in Italy and will begin selling direct to wholesalers during the second quarter ended June 30, 2003. We continually evaluate international regions where we can transition our business model and any additional expansion is based on the results of those evaluations.

Our domestic retail store sales increased 6.7% during the three months ended March 31, 2003, compared to the same period in 2002. The increase was due to the addition of 18 stores subsequent to March 31, 2002, eight of which were concept and five each of factory outlet and warehouse outlet stores. We currently estimate that we will open 25-30 new domestic retail stores during fiscal 2003, compared to 13 in 2002, six of which have been opened to date.

14


Table of Contents

Our sales for the three months ended March 31, 2003 were adversely affected by the overall political and economic environment, apprehensive consumer spending and reduced retail activity. As a result of continuing challenging conditions, we currently anticipate that sales for the second quarter ended June 30, 2003, will be approximately $200 to $210 million, compared to $256.7 million during the three months ended June 30, 2002.

Gross profit

Gross profit for the three months ended March 31, 2003 was $90.3 million, compared to $102.5 million during the three months ended March 31, 2002. Gross margin was 43.3% for the three months ended March 31, 2003 compared to 41.9% during the same period of 2002. Gross margin for the domestic wholesale segment for the three months ended March 31, 2003 was 39.7% slightly above the gross margin for the three months ended March 31, 2002 of 39.5%. The increase in overall gross margin during the three months ended March 31, 2003 compared to the same three months in 2002 was due to higher margins from our international wholesale channel, a result of our direct selling efforts, and domestic retail sales becoming a higher percentage of total net sales.

We currently anticipate margin reductions during the remainder of 2003, as we believe that freight costs will increase during the remainder of the calendar 2003.

Selling expenses

Selling expenses, which consists primarily of advertising and production costs, tradeshows and commissions, for the three months ended March 31, 2003 were $17.6 million compared to $18.7 million for the three months ended March 31, 2002. Selling expenses as a percent of net sales were 8.4% for the three months ended March 31, 2003, compared to 7.6% for the three months ended March 31, 2002. The decrease in absolute dollars was due to reduced advertising and promotional costs and sales commissions partially offset by higher trade show costs. We currently anticipate an increase in selling expenses during the second quarter ended June 30, 2003, compared to the quarter ended March 31, 2003, as we launch an aggressive advertising campaign through a combination of print, radio, and television ads.

Advertising expense as a percent of net sales was 6.2% for the three months ended March 31, 2003 compared to 5.6% for the three months ended March 31, 2002. Advertising expense of 6.2% of net sales is lower than our usual spend of approximately 8%-10% of net sales, as such, we currently anticipate increasing our advertising expenditures during the second quarter ending June 30, 2003 to be approximately 10% of net sales. The actual advertising percent of net sales may differ if our currently anticipated sales levels are not achieved.

General and administrative expenses

General and administrative expenses for the three months ended March 31, 2003 were $57.1 million compared to $49.6 million during the three months ended March 31, 2002. As a percent of sales general and administrative expenses were 27.4% for the three months ended March 31, 2003 compared to 20.3% for the three months ended March 31, 2002. The increase in general and administrative expenses was primarily due to increased rent of approximately $1.8 million, additional depreciation of $650,000, and personnel service costs and related taxes of $3.0 million. The increase in general and administrative expenses were due to the addition of 18 domestic and three international retail stores, and establishing international subsidiaries in Spain, Canada, and the Netherlands, including our distribution center in Liege, Belgium which began shipping in December 2002.

As our sales growth accelerated through 2001 and the first half of 2002, we focused on investing in our infrastructure to support our expected increase in sales. We invested in our international expansion with the establishment of international subsidiaries and showrooms to present our products to prospective accounts, sales and administrative staff to support our international sales, and more recently with the establishment of our distribution center in Belgium, to distribute product to our international customers and our retail stores. Given the level of investment in our infrastructure, many of our costs are fixed in the short term, hence when sales decline we realize a deleveraging of our expenses. We realized a deleveraging of our cost structure during the three months ended March 31, 2003, and based on current estimates, we expect a certain level of deleveraging during the second quarter ended June 30, 2003, as we currently expect sales to be $200 to $210 million compared to $256.7 million in the three months ended June 30, 2002.

15


Table of Contents

Interest

Interest expense for the three months ended March 31, 2003 was $2.1 million consistent with the interest for the three months ended March 31, 2002.

Other, net

Other net was an expense of $314,000 for the three months ended March 31, 2003, compared to income of $43,000 for the three months ended March 31, 2002. The change in other net was primarily due to reduced rent revenue from the leasing of office space at one of our corporate facilities and reduced legal settlements received.

Income taxes

Income taxes were computed using the effective tax rate estimated to be applicable for the full fiscal year. The effective tax rate for the three months ended March 31, 2003 was consistent with the rate for the three months ended March 31, 2002 of 37.2%

LIQUIDITY AND CAPITAL RESOURCES

Our working capital at March 31, 2003 was $291.8 million, an increase of $5.0 million from working capital of $286.8 million at December 31, 2002. Our cash and cash equivalents at March 31, 2003 were $80.6 million compared to $124.8 million at December 31, 2002. During the three months ended March 31, 2003, we used $33.7 million in cash for our operating activities compared to cash provided by operating activities of $37.0 million for the three months ended March 31, 2002. The net use of cash during the three months ended March 31, 2003, compared to the same period in 2002, from operating activities was due to our increased investment in inventory of $24.5 million, resulting from our aggressive inventory position to fill a higher level of at once orders that did not achieve our anticipated levels during the first quarter ended March 31, 2003, and increased receivables of $24.7 million reflecting the normal seasonality of our business. The other factors impacting operating cash flows were reduced earnings of $11.8 million over the prior year and increased float of accounts payable.

Net cash used in investing activities was $10.1 million for the three months ended March 31, 2003, compared to $1.8 million during the three months ended March 31, 2002. Capital expenditures incurred to date consist primarily of domestic retail store additions of $4.2 million, and equipment and leasehold improvements at our international retail stores and Belgium distribution center of $2.8 million. To date, we have opened six domestic and one international retail stores, and currently anticipate opening 30-35 stores in total during fiscal 2003. We currently expect our total company capital expenditures for the year ending December 31, 2003 to be approximately $25-$30 million. In addition, we spent $2.3 million related to the acquisition of our Canadian distributor, of which $1.3 million related to the repurchase of inventory. We initiated our direct selling efforts in Canada during the three months ended March 31, 2003.

Net cash used in financing activities was $558,000 during the three months ended March 31, 2003, compared to net cash provided by investing activities of $12.5 million during the three months ended March 31, 2002. The decrease in net cash provided by financing activities was due to reduced short-term borrowings, which were repaid in April 2002 with a portion of the proceeds from the issuance of our convertible notes, and, to lesser extent, reduced cash provided from the exercise of stock options.

In April 2002, we issued $90.0 million aggregate principal amount of 4.50% Convertible Subordinated Notes due April 15, 2007. The notes are convertible in shares of our Class A common stock. Interest on the notes is paid semi-annually on April 15 and October 15 of each year, and commenced on October 15, 2002. The notes are convertible at the option of the holder into shares of Class A common stock at a conversion rate of 38.5089 shares of Class A common stock per $1,000 principal amount of notes, which is equivalent to a conversion price of approximately $25.968 per share. The conversion rate is subject to adjustment. The notes may be converted at any time on or before the close of business on the maturity date, unless the notes have been previously redeemed or repurchased; provided, however, that if a note is called for redemption or repurchase, the holder will be entitled to convert the notes at any time before the close of business on the date immediately preceding the date fixed for redemption or repurchase, as the case may be. The notes are unsecured and subordinated to our present and future Senior Debt, as defined in the indenture. The notes are also structurally subordinated in right of payment to all indebtedness and other liabilities of our subsidiaries. The indenture does not restrict our incurrence of indebtedness, including Senior Debt, or our subsidiaries’ incurrence of indebtedness. Net proceeds from the sale of the notes were $86.2 million.

Our line of credit facility, as amended on July 12, 2002, provides for borrowings of up to $200.0 million based upon eligible accounts receivable and inventories. Borrowings bear interest at the prime rate (4.25% at March 31, 2003) minus 0.50%, and the agreement expires on December 31, 2003. The agreement provides for the issuance of letters of credit up to a maximum of $30.0 million of which 50% decreases the amount available for borrowings under the agreement. Outstanding letters of credit at March 31, 2003 were $7.3 million. Available borrowings under the line of credit at March 31, 2003 were $152.4 million and no amounts were outstanding at March 31, 2003. We pay an unused line of credit fee of 0.25% annually. The agreement provides that stockholders’ equity shall not

16


Table of Contents

decrease by more than 20% in any given calendar quarter, contains a tangible net worth requirement, as defined in the agreement, and limits the payment of dividends if in default of any provision of the agreement. The Company was in compliance with these covenants at March 31, 2003.

We believe that anticipated cash flows from operations, available borrowings under our revolving line of credit, cash on hand, proceeds from the issuance of the notes and our financing arrangements will be sufficient to provide us with the liquidity necessary to fund our anticipated working capital and capital requirements through fiscal 2003. To the extent that available funds are insufficient to fund our future activities, we may need to raise additional funds through public or private financing. We cannot assure you that additional financing will be available or that, if available, it can be obtained on terms favorable to us and our stockholders. Failure to obtain such financing could delay or prevent our planned expansion, which could adversely affect our business, financial condition and results of operations. In addition, if additional capital is raised through the sale of additional equity or convertible securities, dilution to our stockholders could occur.

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, we believe that changes in our product offerings have somewhat mitigated the effect of this seasonality and, consequently, our sales are not necessarily as subjected to seasonal trends as that of our past or our competitors in the footwear industry.

We have experienced, and expect to continue to experience, variability in our net sales and operating results on a quarterly basis. Our domestic customers generally assume responsibility for scheduling pickup and delivery of purchased products. Any delay in scheduling or pickup which is beyond our control could materially negatively impact our net sales and results of operations for any given quarter. We believe the factors which influence this variability include (i) the timing of our 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 our new 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

We do not believe that the relatively moderate rates of inflation experienced in the United States of America over the last three years has had a significant effect on our net sales or profitability. However, we cannot accurately predict the effect of inflation on future operating results. Although higher rates of inflation have been experienced in a number of foreign countries in which our products are manufactured, we do not believe that inflation has had a material effect on our net sales or profitability. In the past, we have been able to offset our foreign product cost increases by increasing prices or changing suppliers, although no assurance can be given that we will be able to continue to make such increases or changes in the future.

EXCHANGE RATES

We receive U.S. dollars for substantially all of our product sales and our royalty income. Inventory purchases from offshore contract manufacturers are primarily denominated in U.S. dollars; however, purchase prices for our products may be impacted by fluctuations in the exchange rate between the U.S. dollar and the local currencies of the contract manufacturers, which may have the effect of increasing our cost of goods in the future. During the three months ending March 31, 2003, exchange rate fluctuations did not have a material impact on our inventory costs. We do not engage in hedging activities with respect to such exchange rate risk.

RISK FACTORS

     In addition to the other information in this Form 10-Q, the following factors should be considered in evaluating us and our business.

17


Table of Contents

OUR FUTURE SUCCESS DEPENDS ON OUR ABILITY TO RESPOND TO CHANGING CONSUMER DEMANDS, IDENTIFY AND INTERPRET FASHION TRENDS AND SUCCESSFULLY MARKET NEW PRODUCTS.

     The footwear industry is subject to rapidly changing consumer demands and fashion trends. Accordingly, we must identify and interpret fashion trends and respond in a timely manner. Demand for and market acceptance of new products are uncertain and achieving market acceptance for new products generally requires substantial product development and marketing efforts and expenditures. If we do not continue to meet changing consumer demands and develop successful styles in the future, our growth and profitability will be negatively impacted. We frequently make decisions about product designs and marketing expenditures several months in advance of the time when consumer acceptance can be determined. If we fail to anticipate, identify or react appropriately to changes in styles and trends or are not successful in marketing new products, we could experience excess inventories, higher than normal markdowns or an inability to profitably sell our products. Because of these risks, a number of companies in the footwear industry specifically, and the fashion and apparel industry in general, have experienced periods of rapid growth in revenues and earnings and thereafter periods of declining sales and losses, which in some cases have resulted in companies in these industries ceasing to do business. Similarly, these risks could have a severe negative effect on our results of operations or financial condition.

OUR BUSINESS AND THE SUCCESS OF OUR PRODUCTS COULD BE HARMED IF WE ARE UNABLE TO MAINTAIN OUR BRAND IMAGE.

     Our success to date has been due in large part to the strength of our brand. If we are unable to timely and appropriately respond to changing consumer demand, our brand name and brand image may be impaired. Even if we react appropriately to changes in consumer preferences, consumers may consider our brand image to be outmoded or associate our brand with styles of footwear that are no longer popular. In the past, several footwear companies have experienced periods of rapid growth in revenues and earnings followed by periods of declining sales and losses. Our business may be similarly affected in the future.

OUR BUSINESS COULD BE HARMED IF WE FAIL TO MAINTAIN PROPER INVENTORY LEVELS.

     We place orders with our manufacturers for some of our products prior to the time we receive all of our customers’ orders. We do this to minimize purchasing costs, the time necessary to fill customer orders and the risk of non-delivery. We also maintain an inventory of certain products that we anticipate will be in greater demand. However, we may be unable to sell the products we have ordered in advance from manufacturers or that we have in our inventory. Inventory levels in excess of customer demand may result in inventory write-downs, and the sale of excess inventory at discounted prices could significantly impair our brand image and have a material adverse effect on our operating results and financial condition. Conversely, if we underestimate consumer demand for our products or if our manufacturers fail to supply the quality products that we require at the time we need them, we may experience inventory shortages. Inventory shortages might delay shipments to customers, negatively impact retailer and distributor relationships, and diminish brand loyalty.

WE MAY BE UNABLE TO SUCCESSFULLY EXECUTE OUR GROWTH STRATEGY OR MANAGE OR SUSTAIN OUR GROWTH.

     We have grown quickly since we started our business. Our ability to grow in the future depends upon, among other things, the continued success of our efforts to expand our footwear offerings and distribution channels. However, our rate of growth may decline or we may not be profitable in future quarters or fiscal years. Furthermore, as our business becomes larger, we may not be able to maintain our historical growth rate or effectively manage our growth. We anticipate that as our business grows, we will have to improve and enhance our overall financial and managerial controls, reporting systems and procedures. We may be unable to successfully implement our current growth strategy or other growth strategies or effectively manage our growth, any of which would negatively impair our net sales and earnings.

OUR BUSINESS MAY BE NEGATIVELY IMPACTED AS A RESULT OF CHANGES IN THE ECONOMY.

     Our business depends on the general economic environment and levels of consumer spending that affect not only the ultimate consumer, but also retailers, our primary direct customers. Purchases of footwear tend to decline in periods of recession or uncertainty regarding future economic prospects, when consumer spending, particularly on discretionary items, declines. During periods of recession or economic uncertainty, we may not be able to maintain or increase our sales to existing customers, make sales to new customers, open and operate new retail stores, maintain sales levels at our existing stores, maintain or increase our international operations on a profitable basis, or maintain or improve our earnings from operations as a percentage of net sales. As a result, our operating results may be adversely and materially affected by downward trends in the economy or the occurrence of events that

18


Table of Contents

adversely affect the economy in general. Furthermore, in anticipation of continued increases in net sales, we have significantly expanded our infrastructure and workforce to achieve economies of scale. Because these expenses are fixed in the short term, our operating results and margins will be adversely impacted if we do not continue to grow as anticipated. For example, due in large part to the slowdown in the global economy, our net sales for 2002 and the first quarter of 2003 were lower than anticipated. This lower level of sales adversely affected our operating results for 2002 and first quarter 2003 and could continue to do so for the remainder of 2003 and beyond.

ECONOMIC, POLITICAL, MILITARY OR OTHER EVENTS IN THE UNITED STATES OR IN A COUNTRY WHERE WE MAKE SIGNIFICANT SALES OR HAVE SIGNIFICANT OPERATIONS COULD INTERFERE WITH OUR SUCCESS OR OPERATIONS THERE AND HARM OUR BUSINESS.

     We market and sell our products and services throughout the world. The September 11, 2001 terrorist attacks disrupted commerce throughout the United States and other parts of the world. The continued threat of similar attacks throughout the world and the military action, or possible military action, taken by the United States and other nations, in Iraq or other countries may cause significant disruption to commerce throughout the world. To the extent that such disruptions further slow the global economy or, more particularly, result in delays or cancellations of purchase orders for our products, our business and results of operations could be materially adversely affected. We are unable to predict whether the threat of new attacks or the responses thereto will result in any long-term commercial disruptions or if such activities or responses will have a long-term material adverse effect on our business, results of operations or financial condition.

WE DEPEND UPON A RELATIVELY SMALL GROUP OF CUSTOMERS FOR A LARGE PORTION OF OUR SALES.

     During 2002, our net sales to our five largest customers accounted for approximately 25.4% of total net sales. No one customer accounted for 10.0% or more of our net sales during 2002. As of December 31, 2002, no one customer accounted for more than 10% of our net trade accounts receivable. Although we have long-term relationships with many of our customers, our customers do not have a contractual obligation to purchase our products and we cannot be certain that we will be able to retain our existing major customers. Furthermore, the retail industry regularly experiences consolidation, contractions and closings. If there are further consolidations, contractions or closings in the future, we may lose customers or be unable to collect accounts receivables of major customers in excess of amounts that we have insured. If we lose a major customer, experience a significant decrease in sales to a major customer, or are unable to collect the accounts receivable of a major customer in excess of amounts insured, our business could be harmed.

OUR OPERATING RESULTS COULD BE NEGATIVELY IMPACTED IF OUR SALES ARE CONCENTRATED IN ANY ONE STYLE OR GROUP OF STYLES.

     If any one style or group of similar styles of our footwear were to represent a substantial portion of our net sales, we could be exposed to risk should consumer demand for such style or group of styles decrease in subsequent periods. We attempt to hedge this risk by offering a broad range of products, and no style comprised over 5.0% of our gross wholesale sales for the years ended December 31, 2001 or 2002. However, this may change in the future and fluctuations in sales of any given style that represents a significant portion of our future net sales could have a negative impact on our operating results.

WE RELY ON INDEPENDENT CONTRACT MANUFACTURERS AND, AS A RESULT, ARE EXPOSED TO POTENTIAL DISRUPTIONS IN PRODUCT SUPPLY.

     Our footwear products are currently manufactured by independent contract manufacturers. During 2002, the top four manufacturers of our manufactured products produced approximately 53.8% of our total purchases. One manufacturer accounted for 22.7% of total purchases for the year ended December 31, 2002 and no one manufacturer accounted for more than 20% of total purchases for the year ended December 31, 2001. We do not have long-term contracts with manufacturers and we compete with other footwear companies for production facilities. We could experience difficulties with these manufacturers, including reductions in the availability of production capacity, failure to meet our quality control standards, failure to meet production deadlines or increased manufacturing costs. This could result in our customers canceling orders, refusing to accept deliveries or demanding reductions in purchase prices, any of which could have a negative impact on our cash flow and harm our business.

     If our current manufacturers cease doing business with us, we could experience an interruption in the manufacture of our products. Although we believe that we could find alternative manufacturers, we may be unable to establish relationships with alternative manufacturers that will be as favorable as the relationships we have now. For example, new manufacturers may have higher prices,

19


Table of Contents

less favorable payment terms, lower manufacturing capacity, lower quality standards or higher lead times for delivery. If we are unable to provide products consistent with our standards or the manufacture of our footwear is delayed or becomes more expensive, our business would be harmed.

OUR INTERNATIONAL SALES AND MANUFACTURING OPERATIONS ARE SUBJECT TO THE RISKS OF DOING BUSINESS ABROAD, WHICH COULD AFFECT OUR ABILITY TO SELL OR MANUFACTURE OUR PRODUCTS IN INTERNATIONAL MARKETS, OBTAIN PRODUCTS FROM FOREIGN SUPPLIERS OR CONTROL THE COSTS OF OUR PRODUCTS.

     Substantially all of our net sales during 2002 were derived from sales of footwear manufactured in foreign countries, with most manufactured in China and, to a lesser extent, in Italy, the Philippines and Brazil. We also sell our footwear in several foreign countries and plan to increase our international sales efforts as part of our growth strategy. Foreign manufacturing and sales are subject to a number of risks, including:

          political and social unrest;
 
          changing economic conditions;
 
          international political tension and terrorism;
 
          work stoppages;
 
          transportation delays;
 
          loss or damage to products in transit;
 
          expropriation;
 
          nationalization;
 
          the imposition of tariffs and trade duties both international and domestically;
 
          import and export controls and other nontariff barriers;
 
          exposure to different legal standards (particularly with respect to intellectual property);
 
          compliance with foreign laws; and
 
          changes in domestic and foreign governmental policies.

     In particular, because substantially all of our products are manufactured in China, adverse change in trade or political relations with China or political instability in China would severely interfere with the manufacture of our products and would materially adversely affect our operations. Uncertainty regarding the short-term and long-term effects of the severe acute respiratory syndrome (“SARS”) crisis, specifically in China, and throughout the Far East, could severely interfere with the manufacture of our products, which would materially adversely affect our operations.

     In addition, if we, or our foreign manufacturers, violate United States or foreign laws or regulations, we may be subjected to extra duties, significant monetary penalties, the seizure and the forfeiture of the products we are attempting to import or the loss of our import privileges. Possible violations of United States or foreign laws or regulations could include inadequate record keeping of our imported product, misstatements or errors as to the origin, quota category, classification, marketing or valuation of our imported products, fraudulent visas, or labor violations. The effects of these factors could render our conduct of business in a particular country undesirable or impractical and have a negative impact on our operating results.

20


Table of Contents

OUR BUSINESS COULD BE HARMED IF OUR CONTRACT MANUFACTURERS, SUPPLIERS OR LICENSEES VIOLATE LABOR OR OTHER LAWS.

     We require our independent contract manufacturers, suppliers and licensees to operate in compliance with applicable United States and foreign laws and regulations. Manufacturers are required to certify that neither convicted, forced or indentured labor (as defined under United States law) nor child labor (as defined by the manufacturer’s country) is used in the production process, that compensation is paid in accordance with local law and that their factories are in compliance with local safety regulations. Although we promote ethical business practices and our sourcing personnel periodically visit and monitor the operations of our independent contract manufacturers, suppliers and licensees, we do not control them or their labor practices. If one of our independent contract manufacturers, suppliers or licensees violates labor or other laws or diverges from those labor practices generally accepted as ethical in the United States, it could result in adverse publicity for us, damage our reputation in the United States, or render our conduct of business in a particular foreign country undesirable or impractical, any of which could harm our business.

OUR PLANNED EXPANSION INVOLVES A NUMBER OF RISKS THAT COULD PREVENT OR DELAY ANY SUCCESSFUL OPENING OF NEW STORES AS WELL AS IMPACT THE PERFORMANCE OF OUR EXISTING STORES.

     Our ability to open and operate new stores successfully depends on many factors, including, among others, our ability to:

          identify suitable store locations, the availability of which is outside of our control;
 
          negotiate acceptable lease terms, including desired tenant improvement allowances;
 
          source sufficient levels of inventory to meet the needs of new stores;
 
          hire, train and retain store personnel;
 
          successfully integrate new stores into our existing operations; and
 
          satisfy the fashion preferences in new geographic areas.

     In addition, some or a substantial number of new stores could be opened in regions of the United States in which we currently have few or no stores. Any expansion into new markets may present competitive, merchandising and distribution challenges that are different from those currently encountered in our existing markets. Any of these challenges could adversely affect our business and results of operations. In addition, to the extent that any new store openings are in existing markets, we may experience reduced net sales volumes in existing stores in those markets.

MANY OF OUR RETAIL STORES DEPEND HEAVILY ON THE CUSTOMER TRAFFIC GENERATED BY SHOPPING AND FACTORY OUTLET MALLS OR BY TOURISM.

     Many of our concept stores are located in shopping malls and some of our factory outlet stores are located in manufacturers’ outlet malls where we depend on obtaining prominent locations in the malls and the overall success of the malls to generate customer traffic. We cannot control the development of new malls, the availability or cost of appropriate locations within existing or new malls or the success of individual malls. Some of our concept stores occupy street locations which are heavily dependent on customer traffic generated by tourism. Any substantial decrease in tourism resulting from the September 11, 2001 terrorist attacks, the anticipated war with Iraq,a downturn in the economy or otherwise, is likely to adversely affect sales in our existing stores, particularly those with street locations. The effects of these factors could hinder our ability to open retail stores in new markets or reduce sales of particular existing stores, which could negatively affect our operating results.

OUR QUARTERLY REVENUES AND OPERATING RESULTS FLUCTUATE AS A RESULT OF A VARIETY OF FACTORS, INCLUDING SEASONAL FLUCTUATIONS IN DEMAND FOR FOOTWEAR AND DELIVERY DATE DELAYS, WHICH MAY RESULT IN VOLATILITY OF OUR STOCK PRICE.

     Our quarterly revenues and operating results have varied significantly in the past and can be expected to fluctuate in the future due to a number of factors, many of which are beyond our control. For example, sales of footwear products have historically been somewhat seasonal in nature with the strongest sales generally occurring in the third and fourth quarters. Also, delays in scheduling or

21


Table of Contents

pickup of purchased products by our domestic customers could negatively impact our net sales and results of operations for any given quarter. As a result of these specific and other general factors, our operating results will likely vary from quarter to quarter and the results for any particular quarter may not be necessarily indicative of results for the full year. Any shortfall in revenues or net income from levels expected by securities analysts and investors could cause a decrease in the trading price of our Class A common shares.

WE FACE INTENSE COMPETITION, INCLUDING COMPETITION FROM COMPANIES WITH SIGNIFICANTLY GREATER RESOURCES THAN OURS, AND IF WE ARE UNABLE TO COMPETE EFFECTIVELY WITH THESE COMPANIES, OUR MARKET SHARE MAY DECLINE AND OUR BUSINESS COULD BE HARMED.

     We face intense competition in the footwear industry from other established companies. A number of our competitors have significantly greater financial, technological, engineering, manufacturing, marketing and distribution resources than we do. Their greater capabilities in these areas may enable them to better withstand periodic downturns in the footwear industry, compete more effectively on the basis of price and production and more quickly develop new products. In addition, new companies may enter the markets in which we compete, further increasing competition in the footwear industry.

     We believe that our ability to compete successfully depends on a number of factors, including the style and quality of our products and the strength of our brand name, as well as many factors beyond our control. We may not be able to compete successfully in the future, and increased competition may result in price reductions, reduced profit margins, loss of market share, and inability to generate cash flows that are sufficient to maintain or expand our development and marketing of new products, which would adversely impact the trading price of our Class A common shares.

OBTAINING ADDITIONAL CAPITAL TO FUND OUR OPERATIONS AND FINANCE OUR GROWTH COULD MAKE IT DIFFICULT FOR US TO SERVICE OUR DEBT OBLIGATIONS.

     If our working capital needs exceed our current expectations, we may need to raise additional capital through public or private equity offerings or debt financings. If we cannot raise needed funds on acceptable terms, we may not be able to successfully execute our growth strategy, take advantage of future opportunities or respond to competitive pressures or unanticipated requirements. To the extent we raise additional capital by issuing debt, it may become difficult for us to meet debt service obligations. To the extent we raise additional capital by issuing equity securities, our stockholders may experience substantial dilution. Also, any new equity securities may have greater rights, preferences or privileges than our existing Class A common shares.

WE DEPEND ON KEY PERSONNEL TO MANAGE OUR BUSINESS EFFECTIVELY IN A RAPIDLY CHANGING MARKET, AND IF WE ARE UNABLE TO RETAIN EXISTING PERSONNEL, OUR BUSINESS COULD BE HARMED.

     Our future success depends upon the continued services of Robert Greenberg, Chairman of the Board and Chief Executive Officer, Michael Greenberg, President, and David Weinberg, Executive Vice President and Chief Financial Officer. The loss of the services of any of these individuals or any other key employee could harm us. Our future success also depends on our ability to identify, attract and retain additional qualified personnel. Competition for employees in our industry is intense and we may not be successful in attracting and retaining such personnel.

OUR TRADEMARKS, DESIGN PATENTS AND OTHER INTELLECTUAL PROPERTY RIGHTS MAY NOT BE ADEQUATELY PROTECTED OUTSIDE THE U.S.

     We believe that our trademarks, design patents and other proprietary rights are important to our success and our competitive position. We devote substantial resources to the establishment and protection of our trademarks and design patents on a worldwide basis. In the course of our international expansion, we have, however, experienced conflicts with various third parties that have acquired or claimed ownership rights in certain trademarks similar to ours or have otherwise contested our rights to our trademarks. We have in the past successfully resolved these conflicts through both legal action and negotiated settlements, none of which we believe has had a material impact on our financial condition and results of operations. Nevertheless, we cannot assure you that the actions we have taken to establish and protect our trademarks and other proprietary rights outside the U.S. will be adequate to prevent imitation of our products by others or to prevent others from seeking to block sales of our products as a violation of the trademarks and proprietary rights of others. Also, we cannot assure you that others will not assert rights in, or ownership of, trademarks, designs and other proprietary rights of ours or that we will be able to successfully resolve these types of conflicts to our satisfaction. In addition, the laws of certain foreign countries may not protect proprietary rights to the same extent as do the laws of the U.S. We may face significant expenses and liability in connection with the protection of our intellectual property rights outside the U.S. and if we are unable to successfully protect our rights or resolve intellectual property conflicts with others, our business or financial condition

22


Table of Contents

may be adversely affected.

OUR ABILITY TO COMPETE COULD BE JEOPARDIZED IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS OR IF WE ARE SUED FOR INTELLECTUAL PROPERTY INFRINGEMENT.

     We use trademarks on nearly all of our products and believe that having distinctive marks that are readily identifiable is an important factor in creating a market for our goods, in identifying us, and in distinguishing our goods from the goods of others. We consider our Skechers® and S Design® trademarks to be among our most valuable assets and we have registered these trademarks in many countries. In addition, we own many other trademarks, which we utilize in marketing our products. We continue to vigorously protect our trademarks against infringement. We also have a number of design patents and a limited number of utility patents covering components and features used in various shoes. We believe that our success depends primarily upon skills in design, research and development, production and marketing rather than upon our patent position. However, we have followed a policy of filing applications for United States and foreign patents on designs and technologies that we deem valuable.

     We believe that our patents and trademarks are generally sufficient to permit us to carry on our business as presently conducted. We cannot, however, know whether we will be able to secure patents or trademark protection for our intellectual property in the future or that protection will be adequate for future products. Further, we face the risk of ineffective protection of intellectual property rights in the countries where we source and distribute our products. We have been sued for patent and trademark infringement and cannot be sure that our activities do not and will not infringe on the proprietary rights of others. If we are compelled to prosecute infringing parties, defend our intellectual property, or defend ourselves from intellectual property claims made by others, we may face significant expenses and liability which could negatively impact our business or financial condition.

ENERGY SHORTAGES, NATURAL DISASTERS OR A DECLINE IN ECONOMIC CONDITIONS IN CALIFORNIA COULD INCREASE OUR OPERATING EXPENSES OR ADVERSELY AFFECT OUR SALES REVENUE.

     A substantial portion of our operations are located in California, including 39 of our retail stores, our headquarters in Manhattan Beach and our domestic distribution center in Ontario. Because California has and may in the future experience energy and electricity shortages, we may be subject to increased operating costs as a result of higher electricity and energy rates and may be subject to rolling blackouts which could interrupt our business. Any such impact could be material and adversely affect our profitability. In addition, because a significant portion of our net sales is derived from sales in California, a decline in the economic conditions in California, whether or not such decline spreads beyond California, could materially adversely affect our business. Furthermore, a natural disaster or other catastrophic event, such as an earthquake affecting California, could significantly disrupt our business. We may be more susceptible to these issues than our competitors whose operations are not as concentrated in California.

ONE PRINCIPAL STOCKHOLDER IS ABLE TO CONTROL SUBSTANTIALLY ALL MATTERS REQUIRING A VOTE OF OUR STOCKHOLDERS AND HIS INTERESTS MAY DIFFER FROM THE INTERESTS OF OUR OTHER STOCKHOLDERS.

     As of May 7, 2003, Robert Greenberg, Chairman of the Board and Chief Executive Officer, beneficially owned 77.2% of our outstanding Class B common shares and members of Mr. Greenberg’s immediate family beneficially owned the remainder of our outstanding Class B common shares. The holders of Class A common shares and Class B common shares have identical rights except that holders of Class A common shares are entitled to one vote per share while holders of Class B common shares are entitled to ten votes per share on all matters submitted to a vote of our stockholders. As a result, as of May 7, 2003, Mr. Greenberg held approximately 70.4% of the aggregate number of votes eligible to be cast by our stockholders and together with shares held by other members of his immediate family held approximately 91.2% of the aggregate number of votes eligible to be cast by our stockholders. Therefore, Mr. Greenberg is able to control substantially all matters requiring approval by our stockholders. Matters that require the approval of our stockholders include the election of directors and the approval of mergers or other business combination transactions. Mr. Greenberg also has control over our management and affairs. As a result of such control, certain transactions are not possible without the approval of Mr. Greenberg, including, proxy contests, tender offers, open market purchase programs, or other transactions that can give our stockholders the opportunity to realize a premium over the then-prevailing market prices for their shares of our Class A common shares. The differential in the voting rights may adversely affect the value of our Class A common shares to the extent that investors or any potential future purchaser view the superior voting rights of our Class B common shares to have value.

OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY INHIBIT A TAKEOVER, WHICH MAY CAUSE A DECLINE IN THE VALUE OF OUR STOCK.

23


Table of Contents

     Provisions of Delaware law, our certificate of incorporation, or our bylaws could make it more difficult for a third party to acquire us, even if closing such a transaction would be beneficial to our stockholders. Mr. Greenberg’s substantial beneficial ownership position, together with the authorization of Preferred Stock, the disparate voting rights between the Class A common shares and Class B common shares, the classification of the Board of Directors and the lack of cumulative voting in our certificate of incorporation and bylaws, may have the effect of delaying, deferring or preventing a change in control, may discourage bids for our Class A common shares at a premium over the market price of the Class A common shares and may adversely affect the market price of the Class A common shares.

SPECIAL NOTE ON FORWARD LOOKING STATEMENTS AND REPORTS PREPARED BY ANALYSTS.

     This Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements with regards to our revenues, earnings, spending, margins, cash flow, orders, inventory, products, actions, plans, strategies and objectives. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or simply state future results, performance or achievements, and may contain the words “believe,” “anticipate,” “expect,” “estimate,” “intend,” “plan,” “project,” “will be,” “will continue,” “will,” “result,” “could,” “may,” “might,” or any variations of such words with similar meanings. Any such statements are subject to risks and uncertainties that would cause our actual results to differ materially from those which are management’s current expectations or forecasts. Such information is subject to the risk that such expectations or forecasts, or the assumptions underlying such exceptions or forecasts, become inaccurate. In addition, the risks included here are not exhaustive. Other sections of this report may include additional factors which could adversely impact our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and we cannot predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. Investors should also be aware that while we do, from time to time, communicate with securities analysts, we do not disclose any material non-public information or other confidential commercial information to them. Accordingly, individuals should not assume that we agree with any statement or report issued by any analyst, regardless of the content of the report. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not our responsibility.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the potential loss arising from the adverse changes in market rates and prices, such as interest rates and foreign currency exchange rates. Changes in interest rates and, in the future, changes in foreign currency exchange rates have and will have an impact on our results of operations.

Interest rate fluctuations. At March 31, 2003, no amounts were outstanding that were subject to changes in interest rates; however, the interest rate charged on our line of credit facility is based on the prime rate of interest and changes in the prime rate of interest will have an effect on the interest charged on outstanding balances. No amounts are currently outstanding.

Foreign exchange rate fluctuations. We face market risk to the extent that changes in foreign currency exchange rates affect our non-U.S. dollar functional currency foreign subsidiary’s assets and liabilities. In addition, changes in foreign exchange rates may affect the value of our inventory commitments. Also, inventory purchases of our products may be impacted by fluctuations in the exchange rates between the U.S. dollar and the local currencies of the contract manufacturers, which could have the effect of increasing cost of goods sold in the future. The company manages these risks by primarily denominating these purchases and commitments in U.S. dollars. The company does not engage in hedging activities with respect to such exchange rate risks.

New Accounting Pronouncements

In June 2001, the FASB issued Statement of Financial Accounting Standards No. 143, (“SFAS 143”), “Accounting for Asset Retirement Obligations". SFAS No. 143 requires the Company to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or the normal operation of a long-lived asset, except for certain obligations of leases. The adoption of SFAS 143 did not have a material impact on the Company’s financial statements.

In July 2002, the FASB issued Statement of Financial Accounting Standards No. 146, (“SFAS 146”), “Accounting for Costs Associated with Exit or Disposal Activities". SFAS No. 146 addresses the accounting and reporting for costs associated with exit or

24


Table of Contents

disposal activities and nullifies Emerging Issues Task Force (EITF) Issue 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity". It also substantially nullifies EITF Issue No. 88-10, “Costs Associated with Lease Modification or Termination.” The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The adoption of SFAS 146 did not have a material impact on the Company’s financial statements.

In November 2002, the FASB issued FASB Interpretation No. 45 (“FIN”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Other”. This interpretation clarifies the requirements of a guarantor in accounting for and disclosing certain guarantees issued and outstanding. This interpretation is effective for fiscal years ending after December 15, 2002. The adoption of FIN 45 did not have a material impact on the Company’s financial statements.

In December 2002, the FASB issued Statement of Financial Accounting Standards No.148 (“SFAS 148”), “Accounting for Stock-Based Compensation — Transition and Disclosure, an amendment of FASB Statement No. 123". This Statement amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement No. 123 to require prominent disclosures in both annual and interim financial statements. The disclosure requirements apply to all companies for fiscal years ending after December 15, 2002 and for interim periods beginning after December 15, 2002. The Company has adopted the disclosure provisions of SFAS No. 148. (See Note 5 “Stock Compensation”).

In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.” FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. The adoption of FIN 46 is not expected to have a material impact on the Company’s financial statements.

In November 2002, the EITF published Issue No. 02-16, “Accounting by a Customer (including a Reseller) for Certain Consideration Received from a Vendor”. EITF No. 02-16 addresses how a reseller of a vendor’s products should account for cash consideration received from a vendor. Rebates, reimbursements, incentives or the like received from suppliers should be accounted for under EITF 02-16. Rebates or refunds of a specified amount of cash consideration that is exchanged pursuant to a binding arrangement, only if the reseller completes a specified cumulative level of purchases or remains a reseller of the vendor’s products for a specified time period, should be recognized as a reduction of the cost of sales. Recognition should be based on a systematic and rational allocation of the cash consideration offered to each of the underlying transactions that results in progress by the reseller toward earning the rebate or refund provided the amounts are probable and reasonably estimate. The guidance in this Issue is effective for incentives entered into after December 31, 2002. The adoption of EITF 02-16 did not have a material impact on the Company’s financial statements.

ITEM 4. CONTROLS AND PROCEDURES

(a)  Evaluation of disclosure controls and procedures

The term “disclosure controls and procedures” refers to the controls and procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within required time periods. Within 90 days prior to the date of filing of this report (the “Evaluation Date”), we carried out an evaluation under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer of the effectiveness of our disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, such controls and procedures were effective in ensuring that required information will be disclosed on a timely basis in our periodic reports filed under the Exchange Act.

(b)  Changes in internal controls

There were no significant changes to our internal controls or in other factors that could significantly affect our internal controls subsequent to the Evaluation Date.

25


Table of Contents

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On April 2, 2003, a class action complaint captioned CHARLES ZIMMER v. SKECHERS USA, INC. et al. was filed against Skechers and certain of its officers and directors in the United States District Court for the Central District of California (Case No. 03-2296 PA). The complaint alleges violations of the federal securities laws on behalf of persons who purchased publicly traded securities of Skechers between April 3, 2002 and December 9, 2002. The complaint seeks compensatory damages, interest, costs, and injunctive and equitable relief. While it is too early to predict the outcome of the litigation, the Company believes the suit is without merit and intends to vigorously defend against the claims.

On April 3, 2003, a shareholder derivative complaint captioned BRADFORD MITCHELL v. JEFFREY GREENBERG et al. was filed against Skechers and certain of its officers in the Superior Court of the State of California, Los Angeles County (Case No. BC 293317). The complaint alleges violations of California Corporation Code § 25402 and breach of fiduciary duty. The complaint seeks treble damages, imposition of a constructive trust, and costs. While it is too early to predict the outcome of the litigation, the Company believes the suit is without merit and intends to vigorously defend against the claims.

On April 3, 2003, a shareholder derivative complaint captioned GEORGIA MANOLAS v. JEFFREY GREENBERG et al. was filed against Skechers and certain of its officers in the Superior Court of the State of California, Los Angeles County (Case No. BC293388). The complaint alleges violations of California Corporation Code § 25402 and breach of fiduciary duty. The complaint seeks treble damages, imposition of a constructive trust, and costs. While it is too early to predict the outcome of the litigation, the Company believes the suit is without merit and intends to vigorously defend against the claims.

On April 8, 2003, a shareholder derivative complaint captioned JEFF GRAVITTER v. ROBERT Y. GREENBERG was filed against Skechers and certain of its officers in the Superior Court of the State of California, Los Angeles County (Case No. BC293561). The complaint alleges violations of California Corporation Code § 25402, breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets and unjust enrichment. The complaint seeks compensatory damages, treble damages, disgorgement of profits, imposition of a constructive trust, equitable and injunctive relief, and costs. While it is too early to predict the outcome of the litigation, the Company believes the suit is without merit and intends to vigorously defend against the claims.

On April 15, 2003, a class action complaint captioned MARTIN H. SIEGEL v. SKECHERS USA, INC. et al. was filed against Skechers and certain of its officers and directors in the United States District Court for the Central District of California (Case No 03-2645 RMT). The complaint alleges violations of the federal securities laws and breach of fiduciary duty on behalf of persons who purchased publicly traded securities of Skechers between April 3, 2002 and December 9, 2002. The complaint seeks compensatory damages, interest, attorneys’ fees, and injunctive and equitable relief. While it is too early to predict the outcome of the litigation, the Company believes the suit is without merit and intends to vigorously defend against the claims.

On May 6, 2003, a class action complaint captioned ADAM D. SAPHIER v. SKECHERS USA, INC. et al. was served on Skechers and certain of its officers and directors in the United States District Court for the Central District of California (Case No. 03-3011 FMC). The complaint alleges violations of the federal securities laws on behalf of persons who purchased publicly traded securities of Skechers between April 3, 2002 and December 9, 2002. The complaint seeks compensatory damages, interest, attorneys’ fees and injunctive and equitable relief. While it is too early to predict the outcome of the litigation, the Company believes the suit is without merit and intends to vigorously defend the suit.

On May 9, 2003, a class action complaint captioned LARRY L. ERICKSON v. SKECHERS USA, INC. et al. was served on Skechers and certain of its officers and directors in the United States District Court for the Central District of California (Case No. 03-3101 SJO). The complaint alleges violations of the federal securities laws and breach of fiduciary duty on behalf of persons who purchased publicly traded securities of Skechers between April 3, 2002 and December 9, 2002. The complaint seeks compensatory damages, interest, attorneys’ fees and injunctive and equitable relief. While it is too early to predict the outcome of the litigation, the Company believes the suit is without merit and intends to vigorously defend the suit.

On December 23, 2002, a complaint captioned BRITNEY BRANDS, INC. v. SKECHERS USA, INC. was filed against Skechers in the United States District Court for the Central District of California (Case No. 02-9774 AHM). The claims and counterclaims have been settled in principle and the parties are in the process of documenting the settlement. The terms are confidential and will not have a material effect on the Company’s financial position or results of operations.

26


Table of Contents

We occasionally become involved in litigation arising from the normal course of business. Other than the foregoing, we believe that any liability with respect to pending legal actions, individually or in the aggregate, will not have a material adverse effect on our business, financial condition or results of operation.

ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS — Not applicable

ITEM 3. DEFAULT UPON SENIOR SECURITIES — Not applicable

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS — None

ITEM 5. OTHER INFORMATION — Not applicable

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K —

     (a)  Exhibits

99.1 Certification pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002

     (b)  Reports on Form 8-K

The Registrant did not file any current reports on Form 8-K during the three months ended March 31, 2003, although subsequent to March 31, 2003, the Registrant filed one current report on Form 8-K.

On April 24, 2003, pursuant to Item 12, “Results of Operations and Financial Condition,” in accordance with interim guidance promulgated by the Securities and Exchange Commission in Release No. 34-47583 that was issued on March 27, 2003.

On April 25, 2003, under Item 12 — Results of Operation and Financial Condition. Regarding the Registrant’s announcement on April 24, 2003 of its financial results for the first quarter ended March 31, 2003. A copy of the press release was furnished as Exhibit 99.1 to the Form 8-K. Further, on April 24, 2003, the Registrant held a conference call and audio web cast regarding its financial results for the first quarter ended March 31, 2003. A transcript of the call and audio web cast was furnished as Exhibit 99.2 to the Form 8-K.

27


Table of Contents

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 14, 2003 /S/ David Weinberg

David Weinberg
Executive Vice President and
Chief Financial Officer

28


Table of Contents

CERTIFICATIONS

I, Robert Greenberg, certify that:

1. I have reviewed this quarterly report on Form 10-Q for the three months ended March 31, 2003 of Skechers U.S.A., Inc.

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report.

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

        a)    designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
 
        b)    evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
 
        c)    presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

        a)    all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
 
        b)    any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: May 14, 2003  

  /S/ Robert Greenberg

Robert Greenberg,
Chief Executive Officer

29


Table of Contents

CERTIFICATIONS

I, David Weinberg, certify that:

1. I have reviewed this quarterly report on Form 10-Q for the three months ended March 31, 2003 of Skechers U.S.A., Inc.

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report.

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

        a)    designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
 
        b)    evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
 
        c)    presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

        a)    all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
 
        b)    any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: May 14, 2003  

  /S/ David Weinberg

David Weinberg,
Chief Financial Officer

30