Skechers U.S.A. Annual Report 2002

Plain-text annual report

Table of ContentsUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .COMMISSION FILE NUMBER: 001-14429SKECHERS U.S.A., INC.(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE(STATE OR OTHER JURISDICTION OFINCORPORATION OR ORGANIZATION) 228 MANHATTAN BEACH BLVD.MANHATTAN BEACH, CALIFORNIA(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) 95-4376145(I.R.S. EMPLOYERIDENTIFICATION NO.) 90266(ZIP CODE)REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 318-3100SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: TITLE OF EACH CLASSClass A Common Stock, $0.001 par value NAME OF EACH EXCHANGEON WHICH REGISTEREDNew York Stock Exchange Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities ExchangeAct of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not becontained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of theForm 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [X] No [ ] As of March 28, 2003, the aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately$123 million based upon the closing price of $6.64 of the Class A Common Stock on the New York Stock Exchange on such date. The number of shares of Class A Common Stock outstanding as of March 28, 2003 was 18,570,018. TABLE OF CONTENTSPART IITEM 1. BUSINESSITEM 2. PROPERTIESITEM 3. LEGAL PROCEEDINGSITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSPART IIITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDERMATTERSITEM 6. SELECTED FINANCIAL DATAITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONSITEM 7(a) QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING ANDFINANCIAL DISCLOSUREPART IIIITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTITEM 11. EXECUTIVE COMPENSATIONITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ANDRELATED STOCKHOLDER MATTERSITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSITEM 14. CONTROLS AND PROCEDURESITEM 15. PRINCIPAL ACCOUNTANT FEES AND SERVICESPART IVITEM 16. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-KSIGNATURESEXHIBIT 10.14(a)EXHIBIT 10.15(a)EXHIBIT 10.28EXHIBIT 21.1EXHIBIT 23.1EXHIBIT 99.1Table of Contents The number of shares of Class B Common Stock outstanding as of March 28, 2003 was 19,206,561.DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant’s Definitive Proxy Statement issued in connection with the 2003 Annual Meeting of the Stockholders of theRegistrant are incorporated by reference into Part III.2Table of ContentsSKECHERS U.S.A., INC.FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002INDEX TO ANNUAL REPORT ON FORM 10-K PAGE PART IItem 1. Business 4 Item 2. Properties 22 Item 3. Legal Proceedings 22 Item 4. Submission of Matters to a Vote of Security Holders 23 PART IIItem 5. Market for Registrant’s Common Equity and Related Stockholder Matters 24 Item 6. Selected Financial Data 24 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 25 Item 7a. Quantitative and Qualitative Disclosures About Market Risk 33 Item 8. Financial Statements and Supplementary Data 34 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 34 PART IIIItem 10. Directors and Executive Officers of the Registrant 34 Item 11. Executive Compensation 34 Item 12. Security Ownership of Certain Beneficial Owners and Management 34 Item 13. Security Relationships and Related Transactions 35 Item 14. Controls and Procedures 35 Item 15. Principal Accountant Fees and Services 35 PART IVItem 16. Exhibits, Financial Statement Schedules and Reports on Form 8-K 35 Signatures 41 Consolidated Financial Statements F-1 3Table of ContentsPART IITEM 1. BUSINESS Certain information contained in this report constitutes forward-looking statements which involve risks and uncertainties including, butnot limited to, information with regard to our plans to increase the number of retail locations and styles of footwear, the maintenance ofcustomer accounts and expansion of business with such accounts, the successful implementation of our strategies, future growth andgrowth rates and future increases in net sales, expenses, capital expenditures and net earnings. The words “believes,” “anticipates,” “plans,”“expects,” “endeavors,” “may,” “will,” “intends,” “estimates,” and similar expressions are intended to identify forward-looking statements.These forward-looking statements involve risks and uncertainties, and our actual results could differ materially from those anticipated inthese forward-looking statements as a result of certain factors, including, but not limited to, those set forth under “Risk Factors” andelsewhere in this Report. We were incorporated in California in 1992 and reincorporated in Delaware in 1999. Our Internet website address is www.skechers.com.We make our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to thosereports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, available free of charge on our website assoon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (the“SEC”). You can learn more about us by reviewing such filings on our website or at the SEC’s website at www.sec.gov.GENERAL We design and market a collection of Skechers-branded contemporary footwear for men, women and children as well as a designer linefor women branded separately to appeal to a unique audience. Our footwear reflects a combination of style, quality and value that appeals to abroad range of customers. Our shoes are sold through a wide range of department stores and leading specialty stores, a growing network ofour own retail stores, and our e-commerce Web site. Our objective is to profitably grow our operations worldwide while leveraging our brand,one of the most recognized names in the footwear industry, through its strong product lines, innovative advertising and diversifieddistribution channels. We seek to offer consumers a vast array of fashionable footwear that satisfies their active, casual, dress casual and dress footwear needs.Our product line currently consists of over 1,500 current styles that are organized in 11 distinct collections. Our core consumers are style-conscious 12- to 24-year-old men and women attracted to our youthful brand image and fashion forward designs. Over the last several years,we have introduced and expanded several footwear lines that have broadened our customer base, including Somethin’ Else from Skechersfor juniors, the designer line Michelle K for style-savvy women, and the category Skechers Comfort for men. Many of our best-selling andcore styles are developed specifically for children with colors and materials that reflect a playful image appropriate for this demographic. We believe that brand recognition is an important element for success in the footwear business. We have aggressively promoted theSkechers brand through a comprehensive marketing campaign. In 2002, we developed image-oriented lifestyle ads for print and televisionthat we believe resulted in a higher level of recognition of the Skechers brand across a variety of footwear categories. As part of this strategy,we incorporated celebrity endorsees Britney Spears, Rick Fox, and Robert Downey Jr. into our print and marketing campaigns. The strategyfocuses on print advertisements in targeted publications such as GQ, Details, Vogue, Elle, Elle Girl and Seventeen, and is supported bytelevision commercials for adults and children aired on major networks and leading cable channels such as MTV, ESPN and Nickelodeon.Product Lines In December 1992, we introduced our first Skechers-branded line called Skechers USA Sport Utility Footwear. Since that time, we haveexpanded our product offering and grown our net sales while substantially increasing the breadth and penetration of our account base. Eachof our Skechers-branded product lines benefits from the Skechers reputation for contemporary and progressive styling, quality, comfort, andaffordability. To promote innovation and brand relevance, we manage our product lines separately by utilizing dedicated design and marketingteams. Our product lines share back office services in order to limit our operating expenses and fully utilize our management’s vastexperience in the footwear industry. Skechers USA. Our Skechers USA category for men and women includes four types of footwear: (i) Casuals, (ii) Classics, (iii) Outdoor(for men only), and (iv) Comfort (for men only).4Table of Contents • The Casuals category includes “black and brown” boots and shoes that generally have a rugged urban design – some with industrial-inspired fashion features. This category is defined by the heavy-lugged outsole and value-oriented materials employed in the uppers.We design and price this category to appeal primarily to young persons with broad acceptance across age groups. Suggested retail pricepoints range from $45.00 to $70.00 for this category. • The Classics category of boots and shoes employ softer outsoles, which are often constructed of polyvinyl carbon (“PVC”). The morerefined design of this footwear utilizes better grades of leather and linings. Designs are sportier than the Casuals category and featureoxfords, wingtips, monk straps, demi-boots and boots. Suggested retail price points range from $50.00 to $75.00 for this category. • Our Outdoor styles for men primarily consist of hiker-influenced constructions that include boots and shoes. While this categoryincludes many technical performance features, we market it primarily on the basis of style and comfort. However, many of thetechnical performance features in the Outdoor category contribute to the level of comfort this footwear provides. Outsoles generallyconsist of molded and contoured hardened rubber. Many designs include gussetted tongues to prevent penetration of water and debris,as well as cushioned mid-soles, motion control devices such as heel cups, water-resistant or water-proof construction and materials,and more durable hardware such as metal D-rings instead of eyelets. Uppers are generally constructed of heavily oiled nubuck and full-grain leathers. Suggested retail price points range from $45.00 to $75.00 for this category. • Skechers Comfort is a line of trend-right casuals for men who want all-day comfort without compromising style. Characteristics of theline include comfortable outsoles, cushioned insoles and quality leather uppers. Skechers Comfort is intended to be available in manyof the same stores that carry Skechers USA as well as additional mid-tier and better department stores. Suggested retail price pointsrange from $50.00 to $75.00 for this category. Skechers Sport. Our Skechers Sport footwear for men and women includes (i) Joggers, Trail runners, Sport hikers, Terrainers, (ii) Court,and (iii) Silver Series sneakers (for men only). Our Skechers Sport category is distinguished by its technical performance-inspired looks;generally, however, we do not promote the technical performance features of these shoes. • Our Jogger, Trail runner, Sport hiker and cross trainer-inspired Terrainer designs are lightweight constructions that include cushionedheels, polyurethane midsoles, and phylon and other synthetic outsoles, as well as leather or synthetic uppers such as durabuck,cordura and nylon mesh. Careful attention is devoted to the design, pattern and construction of the outsoles, which vary greatlydepending on the intended use. This category features earth tones and athletic-inspired hues with pop colors in addition to thetraditional athletic white. The Jogger, Trail runner, Sport hiker and Terrainer styles are marketed through athletic footwear specialtyretailers as well as basic existing accounts. Suggested retail price points range from $40.00 to $70.00 for this category. • The Court category is inspired from classic court shoes and includes technical features, but is not meant to be a performance shoe line.The court shoes feature lightweight constructions that include polyurethane and phylon midsoles, rubber low-profile outsoles, and heelairbag inserts for additional comfort and performance. The uppers are mostly mid-cut with some low tops, and constructed with betterquality smooth, full-grain and tumbled leathers, typically in white. The court styles are marketed through athletic footwear specialtyretailers as well as basic existing accounts. Suggested retail price points range from $40.00 to $70.00 for this category. • The Skechers Sport Silver Series incorporates retro influences, lower profiles, simple styling, and classic details in a collection ofsneakers. With groupings that are designed for everyday casual and casual work or school attire, the sneakers come in a variety ofbright colors as well as basics. The uppers are designed in leather, suede and/or mesh. The Silver Series is marketed throughdepartment stores, and specialty and athletic retailers. Suggested retail price points range from $40.00 to $60.00 for this category. Skechers Collection. The Skechers Collection line features stylish (i) dress casual and dress and (ii) EuroSport shoes for the youngfashion-forward male consumer. In addition to basic “essential” styles, this category is comprised of more sophisticated designs influenced,in part, by prevailing trends in Italy and other European countries. Given the look, style and quality, this footwear is primarily sourced fromItaly. We promoted Skechers Collection with advertising campaigns featuring Rick Fox and Robert Downey, Jr. in 2002, and Matt Dillon andRob Lowe in 2001.5Table of Contents • Our dress and dress casuals include classic tailored and fashion-forward square, round and pointed lasts in a variety of styles, such asbicycle toes, monk straps, wingtips, oxfords, cap toes, demi-boots and boots. The outsoles project a sleeker profile and can be eitherleather or man-made. The uppers are high-quality leathers including glossy, “box,” and aniline. Suggested retail price points rangefrom $70.00 to $155.00 for this category. • Inspired by the latest in European fashion, EuroSport blends classic dress casual styling with European sport fashions to create aversatile and comfortable casual shoe. Marked by details and unique styling, the EuroSport collection features high-quality leathers andsuede in multiple colorations, and sport-inspired rubber outsoles. Suggested retail price points range from $65.00 to $100.00 for thiscategory. Skechers Kids. The Skechers Kids line features a range of products including boots, shoes and sneakers. Comprised primarily of shoesthat are designed as “takedowns” of their adult counterparts, the line offers the younger set the same popular styles as their older siblings andschoolmates. This “takedown” strategy maintains the product’s integrity by offering premium leathers, hardware and outsoles without theattendant costs involved in designing and developing new products. In addition, we adapt current fashions from our men’s and women’slines by modifying designs and choosing colors and materials that are more suitable for the playful image we have established in thechildren’s footwear market. Skechers Kids includes variations on Skechers Sport, Skechers USA, Skechers Collection, Skechers Retros,Skechers Active and Somethin’ Else from Skechers adult shoes. Unique to Skechers Kids, S-Lights is a line of lighted footwear, whichcombine a sequence of patterns and lights on the outsole and other areas of the shoes. Skechers Kids is available in department stores,specialty and athletic stores. Our children’s footwear is offered at retail prices ranging from $20.00 to $50.00. Somethin’ Else from Skechers. Targeted toward 12- to 25-year-old trend-savvy females, Somethin’ Else from Skechers focuses on currentfashions with an array of stylish shoes, boots and sandals. With a growing offering of styles that includes flats, heeled boots, clogs and sport-influenced looks, the line is designed to meet junior consumers’ needs – from school to work to weekends to the prom – and is acomplementary line for juniors who already wear Skechers USA and Skechers Sport. Many styles are made from more affordable materialssuch as man-made leather, offering more young consumers the opportunity to buy trend-right shoes at affordable prices. This line is typicallyretailed through department and specialty stores. Suggested retail price points range from $20.00 to $70.00 for this category. Michelle K. Targeted toward stylish 18- to 34-year-old women, Michelle K is a signature designer line comprised of high-fashion boots,pumps and flats, as well as an expanded division of sport shoes. Head designer and visionary Michelle Kelchak derives her inspiration fromher extensive travels, which is evident in her collections reflective of the latest European, Asian and American trends and fashions. Madewith the finest European materials and craftsmanship, Michelle K is marked by high-grade leathers, fine detailing and design and flatteringsilhouettes, including sculpted heels and lower kitten heels. Most styles are crafted in Italy, Portugal and Spain, with others made in Brazil.The line is available in better department stores and boutiques. Suggested retail price points range from $75.00 to $300.00 for this category. 4 Wheelers by Skechers. Designed for the men, women and children, 4 Wheelers by Skechers is a line of technical fashion roller skatesthat incorporates our most popular sneaker uppers, including the Energy and Energy II, on quality aluminum and nylon chassis andpolyurethane wheels. Technical features include: full precision ABEC-1, 3 and 5 bearings, unique heel brakes for easy control, durablechassis, controllable steering, and reinforced upper. In 2002, we launched Britney 4 Wheelers, a signature Britney Spears roller skate linewith an advertising campaign featuring the celebrated star. Suggested retail price points for adults range from $80.00 to $100.00, and forchildren from $60.00 to $75.00. Skechers Active. Launched in 2002, Skechers Active is a line of everyday, everywhere casual sneakers for females of all ages.Predominately a white-leather based line with bright and pastel pop colors, the line has grown to include select solid color styles and uniquefabric treatments such as chrome and perforated metallic. Active sneakers are typically retailed through specialty casual shoe stores anddepartment stores. Suggested retail price points range from $30.00 to $55.00 for this category. Skechers Retros. Launched in 2002, Skechers Retros are primarily high-contrast colored sneakers in leather or suede with low-profileoutsoles. Retros sneakers are typically retailed through specialty casual shoe stores and department stores. Suggested retail price pointsrange from $40.00 to $55.00 for this category. Skechers Work. Expanding on our heritage of cutting-edge utility footwear, Skechers Work offers a complete line of men’s and women’soxfords, boots, trail hikers and sport athletics. Launched in 2002, the Skechers Work line includes (i) Steel Toe, (ii) Work and (iii) Slip-Resistant. Our steel toe, electrostatic-dissipative, and electrical hazard technologies respectively meet and exceed the6Table of Contentsindustry’s Mark II and ANSI standards, and our slip-resistant soles meet Mark II standards. The uppers are in high-quality leather, nubuckand durabuck. Constructed on high-abrasion, long wearing soles, the line is designed for men and women with jobs that require certainsafety requirements. Skechers Work is primarily marketed through business-to-business channels, but is also available direct-to-consumersand through select department and specialty stores. • The Skechers steel toe category of sneakers, hikers, oxfords and boots are ideal for environments requiring safety footwear or toughterrain. These durable styles feature breathable lining, oil- and abrasion-resistant outsoles and steel toe design for optimal protection,all-day comfort and prolonged durability. Some styles also offer electrical hazard, electrostatic-dissipative and water-resistant features.Suggested retail price points range from $45.00 to $110.00 for this category. • The Skechers Work line of boots, oxfords and hikers offer versatile features for utility-driven men without sacrificing style. Designedwith an array of textured uppers and colorways, the footwear capitalizes on function and comfort – from breathable lining to contouredinsoles and abrasion-resistant outsoles for prolonged wear. Suggested retail price points range from $60.00 to $100.00 for this category. • Ideal for the service industry, the Skechers Slip-Resistant line of boots, oxfords and sneakers offer comfort and safety in dry or wetconditions – from breathable lining to Mark II-tested slip-, oil- and abrasion-resistant outsoles for optimal safety and reliability.Electrostatic-dissipative features are also available on select styles. Suggested retail price points range from $50.00 to $75.00 for thiscategory.PRODUCT DESIGN AND DEVELOPMENT Our principal goal in product design is to generate new and exciting footwear with contemporary and progressive styles and comfort-enhancing performance features. Targeted to the active, youthful and style-savvy, we design most new styles to be fashionable andmarketable to the 12- to 25-year old consumer, while substantially all of our lines appeal to the broader range of 5- to 40-year old consumers,with an exclusive selection to infants and toddlers. While many of our shoes have performance features, we generally do not position ourshoes in the marketplace as technical performance shoes. We believe that our products’ success is related to our ability to recognize trends in the footwear markets and to design products thatanticipate and accommodate consumers’ ever-evolving preferences. We are able to quickly translate the latest trends in to stylish, qualityfootwear at a reasonable price. We strive to analyze, interpret and translate current and emerging lifestyle trends. Lifestyle trend informationis compiled by our designers through various methods that monitor changes in culture and society, including the review and analysis ofmodern music, television, cinema, clothing, alternative sports and other trend-setting media; travel to domestic and international fashionmarkets to identify and confirm current trends; consultation with our retail customers for information on current retail selling trends;participation in major footwear trade shows to stay abreast of popular brands, fashions and styles; and subscription to various fashion andcolor information services. In addition, a key component of our design philosophy is to continually reinterpret our successful styles in theSkechers image. The footwear design process typically begins about nine months before the start of a season. Our products are designed and developed byour in-house staff. To promote innovation and brand relevance, we utilize dedicated design teams that focus on each of the men’s, women’sand children’s categories, and report to our senior design executives. In addition, we utilize outside design firms on an item-specific basis tosupplement our design efforts. The design process is extremely collaborative; members of the design staff meet weekly with the heads ofretail and merchandising, sales, production and sourcing to further refine our products to meet the particular needs of our markets. After a design team arrives at a consensus regarding the fashion themes for the coming season, the designers then translate thesethemes into our products. These interpretations include variations in product color, material structure and decoration, which are arrived atafter close consultation with our production department. Prototype blueprints and specifications are created and forwarded to our prototypemanufacturers located in Taiwan, which then forward design prototypes back to our domestic design team. Our major retail customers oftenalso review these new design concepts. Customer input not only allows us to measure consumer reaction to the latest designs, but alsoaffords us an opportunity to foster deeper and more collaborative relationships with our customers. Our design teams can easily and quicklymodify and refine a design based on customer input. We occasionally order limited production runs which may initially be tested in our concept stores. By working closely with store7Table of Contentspersonnel, we obtain customer feedback that often influences product design and development. We believe that sales in our concept storescan help forecast sales in national retail stores. We strive to determine within seven to 14 days after initial introduction of a product whetherthere is substantial demand for the style, thereby aiding us in our sourcing decisions. Styles that have substantial consumer appeal arehighlighted in upcoming collections or offered as part of our periodic style offerings. The ability to initially test our products allows us todiscontinue less popular styles after only a limited production run which affords us an indicator of future production and a hedge to fashionrisks. Also, we strive to monitor five- and 10-week trailing trends of orders of our retail account base in order to manage future production ofstyles that are increasing or decreasing in popularity. Generally, the production process takes approximately six months from design conceptto commercialization.SOURCING Factories. Our products are produced by independent contract manufacturers primarily located in China and, to a lesser extent, in Italy, thePhilippines, Brazil and various other countries. Substantially all of our products are manufactured in China. We do not own or operate anymanufacturing facilities. We believe the use of independent manufacturers increases our production flexibility and capacity while at the sametime substantially reduces capital expenditures and avoids the costs of managing a large production work force. We seek to use, whenever possible, manufacturers that have previously produced our footwear, which we believe enhances continuityand quality while controlling production costs. We attempt to monitor our selection of independent factories to ensure that no onemanufacturer is responsible for a disproportionate amount of our merchandise. We source product for styles that account for a significantpercentage of our net sales from at least four different manufacturers. During 2002, we had four manufacturers that accounted forapproximately 53.8% of total purchases. One manufacturer accounted for 22.7% of our total purchases during the year ended December 31,2002. To date, we have not experienced difficulty in obtaining manufacturing services. We maintain an in-stock position for selected styles of footwear in order to minimize the time necessary to fill customer orders. In order tomaintain an in-stock position, we place orders for selected footwear with our manufacturers prior to the time we receive customers’ orders forsuch footwear. In order to reduce the risk of overstocking, we seek to assess demand for our products by soliciting input from our customersand monitoring retail sell-through. In addition, we analyze historical and current sales and market data to develop internal product quantityforecasts which helps reduce inventory risks. We finance our production activities in part through the use of interest-bearing open purchase arrangements with certain of our Asianmanufacturers. These facilities currently bear interest at a rate between 0.5% and 1.5% for 30 to 60 days financing, depending on the factory.We believe that the use of these arrangements affords us additional liquidity and flexibility. While we have long-standing relationships withmany of our manufacturers and believe our relationships to be good, there are no long-term contracts between us and any of ourmanufacturers. Production Oversight. To safeguard product quality and consistency, we oversee the key aspects of production from initial prototypemanufacture through initial production runs to final manufacture. Monitoring is performed domestically by our in-house productiondepartment and in Asia through an approximately 179-person staff working from our offices in China and Taiwan. We believe that our Asianpresence allows us to negotiate supplier and manufacturer arrangements more effectively, decrease product turnaround time, and ensuretimely delivery of finished footwear. In addition, we require our manufacturers to certify that neither convict, forced, indentured labor (asdefined under U.S. law) nor child labor (as defined by the manufacturer’s country) is used in the production process, that compensation willbe paid according to local law and that the factory is in compliance with local safety regulations. Quality Control. We believe that quality control is an important and effective means of maintaining the quality and reputation of ourproducts. Our quality control program is designed to ensure that finished goods not only meet our established design specifications, but alsothat all goods bearing our trademarks meet our standards for quality. Quality control personnel perform an array of inspection procedures atvarious stages of the production process, including examination and testing of prototypes of key raw materials prior to manufacture, samplesand materials at various stages of production and final products prior to shipment. Our employees are on-site at each of our majormanufacturers to oversee key phases of production. In addition, unannounced visits to the manufacturing sites, to further monitorcompliance with our manufacturing specifications, are made by our employees and agents.ADVERTISING AND MARKETING Our advertising and marketing goal is to maintain and enhance recognition of the Skechers brand name as a casual, active youthful8Table of Contentsbrand that stands for quality, comfort and design innovation. Senior management is directly involved in shaping our image and theconception, development and implementation of our advertising and marketing activities. We have and continue to adjust our advertisingbudget consistent with projected sales, which has included such avenues as magazines, television, trade shows, billboards, mall kiosks,radio spots and buses. Approximately 8% to 10% of annual net sales is dedicated to marketing Skechers footwear through advertising,promotions, public relations, trade shows and other efforts.Advertising The majority of Skechers advertising is conceived and designed by our in-house team. By retaining our advertising functions in-house, webelieve that we are able to maintain a greater degree of control over both the creative process and the integrity of the Skechers image, whilerealizing substantial savings compared to using outside agencies. We believe that our advertising strategies, methods and creative campaigns are directly related to our success as our advertisementspromote Skechers product in edgy lifestyle settings. Our in-house advertising team has developed a comprehensive program to promote theSkechers brand through lifestyle- and image-driven advertising. While all of our advertisements feature our footwear, they generally seek tobuild and increase brand awareness by linking Skechers to youthful, contemporary lifestyles and attitudes rather than to market a particularfootwear product. Our ads are designed with a broad approach to eliminate single categorization and to provide merchandise flexibility andfacilitate the brand’s and product design’s direction of evolving footwear fashions and consumer preferences. To further establish Skechers as a household name, we signed endorsement agreements with celebrities we felt would reach newmarkets. In 2002, we signed professional basketball player and actor Rick Fox and actor Robert Downey, Jr. to contracts for separate limitedterm worldwide print media campaigns. We previously had similar relationships with actors Matt Dillon and Rob Lowe. From time to time,we may sign other celebrities to endorse our brand name and image in order to strategically market our products among specific consumergroups in the future. We use a variety of media for our national advertising. Print efforts are represented by one- and two- page ads displayed in popular fashionand lifestyle consumer publications that appeal to our target customer group, such as Elle, Details, Seventeen, GQ, People, Teen People,Rolling Stone, Vogue, and many others. Our progressive television advertisements are primarily produced in-house and air frequently ontop television shows on major networks and cable channels. Different advertisements are created for each of the 5- to 11-, 12- to 24-, and 25-to 35-year-old male and female consumer groups. Our in-house media buyer strategically selects the ideal programs and geographic areasfor our commercials for maximum consumer impact.Marketing and Promotions By applying creative sales techniques via a broad spectrum of mediums, the marketing and promotions team seeks to build brandrecognition and drive traffic to Skechers retail stores and our retail partners’ locations, serving as a catalyst for increased product sales.Skechers’ promotional strategies have encompassed in-store specials, concert promotions, charity events, product tie-ins and giveaways,and collaborations with national retailers and radio stations. Our imaginative promotions are consistent with Skechers’ imaging and lifestyle.Public Relations Our public relations team’s objective is to garner positive and accurate press on our company, and to secure product placement in keyfashion magazines and place Skechers footwear on the feet of trend-setting celebrities. During 2002, we received notable press coverage in numerous print publications, including a Top 10 ranking in BusinessWeek’s Top 100Growth Companies, and Top 5 status in Footwear News’ list of 10 Most Profitable Footwear Vendors and Best-Selling Footwear Brands. Wehave also been featured in Investor’s Business Daily, Los Angeles Times, Wall Street Journal and Footwear News. We have consistently received recognition in the footwear industry for our exciting and innovative products, marketing efforts and service.In 2002, Skechers was awarded the 2001 Corporate Vendor of the Year and Children’s Vendor of the Year awards from Shoe Carnival, whichapplauded the Company’s 112 percent increase in sales and 105 percent increase in gross profit at the shoe chain’s stores in 2001 comparedto 2000. Skechers also received the 2002 Supplier of the Year award in the footwear category from Sporting Goods Business at their annualTrendsetter Awards. The accolades are a testament to the breadth of Skechers’ impact.9Table of Contents Through our commitment to aggressively promoting our design and development teams’ upcoming styles, our products are often featuredin leading fashion and pop culture magazines, as well as in select films and popular television shows. In addition to a high-profile scene at aSkechers retail store in the hit movie About A Boy, our footwear has been prominently displayed and referenced on The Today Show,Oprah, Good Morning America, E! Style, Six Feet Under and Fastlane, among others, and has amassed an array of prominent productplacements in magazines including Lucky, GQ, YM, Seventeen, Elle, InStyle and Footwear News. In addition, the Skechers brand hasbeen associated with cutting edge events and select celebrities, and our product has been seen worn by trend-setters like Vin Diesel, Usher,Christina Ricci, Ali Landry, Daryl Hannah, and Gwen Stefani, among others.Trade Shows To best showcase our diverse products to footwear buyers across the nation, we exhibited at 27 trade shows during 2002. Our dynamic,state-of-the-art trade show exhibits, which are designed by our in-house architect and feature our latest product offerings, are speciallyplanned and built to accommodate each trade show and are enhanced with lifestyle images reflective of our brand. By investing in innovativedisplays and individual rooms showcasing each line, our sales force can present a sales plan for each line and buyers are able to trulyunderstand the breadth and depth of our offerings, optimizing commitments and sales at the retail level. Our innovative exhibits have wonnumerous awards, including Best Booth Design at the World Shoe Association, February 2001 and February 2003.Internet We also promote our brand image through our website at www.skechers.com to customers who directly access the Internet. This websitecurrently enables us to present information on our products and store locations to consumers. The website is interactive, affording customersthe ability to directly order products on the Internet and to allow us to receive and respond directly to customer feedback. Our website isintended to enhance the Skechers brand without the associated costs of advertising. Our website provides fashion information, provides amechanism for customer feedback, promotes customer loyalty and further enhances the Skechers brand image through interactive content,photos, interviews and information on Skechers-sponsored events.Visual Merchandising Our in-house display-merchandising department supports retailers and distributors by developing point-of-purchase advertising to furtherpromote our products in our wholesale customers’ stores and to leverage recognition of the Skechers brand name at the retail level. Ourvisual merchandising coordinators work with our sales department to ensure better sell-through at the retail level. Our coordinatorscommunicate with and visit our wholesale customers on a regular basis to aid in the proper visual display of our merchandise and todistribute and display such point-of-purchase items as signage, packaging, displays, counter cards, banners, and other merchandising items.These materials mirror the look and feel of our national print advertising in order to reinforce brand image at the point-of-purchase. We believethese efforts help stimulate impulse sales and repeat purchases. Our merchandise personnel also work closely with our wholesale customers to ensure the optimal exposure of our products. We haveconcept shops in approximately 100 major accounts, which are exclusive selling areas within stores that offer our products and incorporateSkechers signage and customized fixture designs, and we have a visual presence in our major accounts, we are able to enhance brandrecognition and ensure the consistent presentation of our products in our wholesale customers’ stores.DOMESTIC SALES AND DISTRIBUTION Our products are sold in the United States through three primary distribution channels: to a network of wholesale accounts, in our ownretail stores and, to a lesser extent, through electronic commerce on our interactive Web site. Each of these channels and the three distinctformats of our retail stores — concept stores, factory outlet stores and warehouse outlet stores — serve an integral function in the domesticdistribution of our products.Wholesale Distribution During fiscal 2002, we distributed our footwear to approximately 3,000 wholesale accounts in the United States. We believe that our broadproduct line enables us to appeal to a variety of wholesale accounts, many of whom may operate stores within the same mall or other retaillocations, because retailers can select those styles of ours that best satisfy the fashion, function and price criteria of their clients. Managementhas a clearly defined growth strategy for each of our channels of distribution. An integral component of our strategy is to offer our accounts thehighest level of customer service so that our products will be more fully represented in existing retail locations and new locations within eachaccount. We have approximately 101 sales and 13 visual merchandise coordinators to service our wholesale accounts. In an effort to provideknowledgeable and personalized service to our wholesale accounts, the sales force is segregated into geographical regions each headed by aregional sales manager. Reporting to each regional sales manager are knowledgeable sales representatives for each of our product lines.Each of these regional sales managers and the Vice President of Sales-Children’s Division reports to our Executive Vice President,Domestic U.S. Sales, who has over 20 years of experience in the branded consumer products industry. Each of the sales staff iscompensated on a salary plus commission basis with none of the representatives selling competitive products. Senior management isactively involved in selling to and maintaining relationships with our major retail accounts.10Table of Contents We believe that we have developed a loyal customer base of wholesale accounts through a heightened level of customer service. Webelieve that our close relationships with these accounts help us to maximize their retail sell-through, maintained margins and inventoryturns which in turn minimizes our inventory markdowns, customer returns, allowances and chargebacks. Our visual merchandisecoordinators work with our wholesale accounts to ensure that our merchandise and point-of-purchase marketing materials are properlypresented. Sales executives and merchandise personnel work closely with accounts to ensure the appropriate styles are purchased forspecific accounts and for specific stores within those accounts as well as ensure that appropriate inventory levels are carried at each store.Such information is then utilized to help develop sales projections and determine the product needs of wholesale accounts. The value addedservices we provide our wholesale customers help us maintain strong relationships with our existing wholesale customers and attractpotential new wholesale customers.Retail Stores We pursue our retail store strategy through our three integrated retail formats: the concept store, the factory outlet store and the warehouseoutlet store. Our three-store format enables us to promote the full Skechers line in an attractive environment, appeal to a broad group ofcustomers that are segmented by price points and manage inventory in an efficient and brand sensitive manner. In addition, most of ourretail stores are profitable and have a positive effect on our operating results. As of December 31, 2002, we operated 34 concept stores, 34factory outlet stores and 23 warehouse outlet stores in the United States. We plan to open between 20 to 25 retail stores during 2003. • Concept Stores. Our concept stores are located at either marquee street locations or in major shopping malls in large metropolitancities. Our concept stores serve a threefold purpose in our operating strategy. First, concept stores serve as a showcase for a wide rangeof our product offerings for the current season, providing the customer with the entire product story. The concept stores feature a cuttingedge design, modern music and lighting and present an open floor design to allow customers to readily view the merchandise ondisplay. In contrast, we estimate that our average wholesale customer carries no more than 5% of the complete Skechers line. Second,retail locations are generally chosen to generate maximum marketing value for the Skechers brand name through signage, store frontpresentation and interior design. These locations include concept stores on Times Square and 34th Street in New York City, NewburyStreet in Boston and in Santa Monica’s Third Street Promenade. The stores are typically designed to create a distinctive Skechers lookand feel and enhance customer association of the Skechers brand name with current youthful lifestyle trends and styles. Third, theconcept stores serve as marketing and product testing venues that provide rapid product feedback from customers. We believe thatproduct sell-through information derived from our concept stores enables our sales, merchandising and production staff to respond tomarket changes and new product introductions. Such responses serve to augment sales and limit our inventory markdowns andcustomer returns and allowances. We strive to adjust our product and sales strategy based upon seven to 14 days of retail salesinformation. The prototypical Skechers concept store is approximately 2,750 square feet although in certain selected markets we have openedconcept stores as large as 7,000 square feet or as small as 1,200 square feet. When deciding where to open concept stores, we identifytop geographic markets in the larger metropolitan cities in the United States. When selecting a specific site, we evaluate the proposedsites’ traffic pattern, co-tenancies, sales volume by neighboring concept stores, lease economics and other factors considered importantwithin the specific location. If we are considering opening a concept store in a shopping mall, our strategy is to obtain space as centrallylocated as possible in the mall where we expect foot traffic to be most concentrated. We believe that the strength of the Skechers brandname has enabled us to negotiate more favorable terms with shopping malls that want us to open up concept stores to attract customertraffic to these malls. We opened five new domestic concept stores in each of 2001 and 2002. • Factory Outlet Stores. Our factory outlet stores are generally located in manufacturers’ direct outlet centers throughout the UnitedStates. Our factory outlet stores provide opportunities for us to sell discontinued and excess merchandise, thereby reducing the need tosell such merchandise to discounters at excessively low prices, which could otherwise compromise the Skechers brand image.Skechers factory outlet stores range in size from approximately 1,900 to 6,000 square feet. Inventory in these stores is supplementedby certain first-line styles sold at full retail price points generally of $60.00 or lower. We opened 11 new factory outlet stores during 2001and five new factory outlet stores during 2002. • Warehouse Outlet Stores. Our free-standing warehouse outlet stores, which are located throughout the United States, enable us toliquidate excess merchandise, discontinued lines and odd-size inventory in a cost-efficient manner. Skechers warehouse outlet storesrange in size from approximately 5,600 to 14,800 square feet. Our warehouse outlet stores enable us to sell11Table of Contents discontinued and excess merchandise that would otherwise typically be sold to discounters at excessively low prices, thuscompromising the Skechers brand image. We seek to open our warehouse outlet stores in areas that are in close proximity to our otherretail stores in order to facilitate the timely transfer of inventory that we want to liquidate as soon as practicable. We opened 10 newwarehouse outlet stores during 2001 and three new warehouse outlet stores during 2002. Electronic Commerce. Our electronic commerce sales represented less than 1.0% of total net sales for each of 2001 and 2002. Ourwebsite, www.skechers.com, is a virtual storefront that promotes the Skechers brand name. Designed as a customer center, our websiteshowcases our products in an easy-to-navigate format, allowing customers to see and purchase our footwear. This virtual store has become asuccessful additional retail distribution channel, has improved customer service and is a fun and entertaining alternative-shoppingenvironment.INTERNATIONAL OPERATIONS We market our products in countries and territories throughout the world. We generate revenues from outside the United States from fourprincipal sources: (1) sales of our footwear to foreign distributors who distribute such footwear to department stores and specialty retail storesin Europe, Asia, Latin America, South America and numerous other countries and territories, (2) in France, Germany, Spain, Italy, Portugal,Austria, the Benelux Region and the United Kingdom, we sell footwear directly to department stores and specialty retail stores and (3) inFrance, Germany, the United Kingdom, and Canada through retail stores that we own and operate and (4) to a lesser extent, royalties fromlicensees who manufacture and distribute our products outside the United States. We believe that international distribution of our products represents a significant opportunity to increase revenues and profits. Weestablished subsidiaries in Spain, Belgium and Canada during 2002, and our products are sold in more than 100 countries and territoriesaround the world. We intend to further increase our share of the international footwear market by heightening our marketing presence inthose countries through our international advertising campaigns, which are designed to establish Skechers as a global brand synonymouswith casual shoes.Europe We have historically sold our footwear to selected wholesale customers in Europe through our foreign distributors. In 2001, we beganexpanding our European operations to directly sell our footwear to certain wholesale accounts and retail stores in Europe in an effort toincrease profit margins and more effectively market and promote the Skechers brand name. By the end of 2002, we had organized SkechersU.S.A. Ltd., with its offices in London, England, Skechers S.a.r.l., with its offices in Lausanne, Switzerland, Skechers U.S.A. France SASwith its offices in Paris, France, Skechers U.S.A. Deutschland GmbH with its offices in Dietzenbach, Germany, Skechers USA Iberia, withits offices in Madrid, Spain, and Skechers USA Benelux B.V. with its offices in Waalwijk, the Netherlands. Each of these subsidiaries wasformed to establish direct control over wholesale distribution, merchandising, and marketing of our products in their respective countries oforganization, as well as certain surrounding countries. In February 2003, we established Skechers USA Italia S.r.l. and in March we leased an administrative office in Verona to support ourdirect selling efforts in that region. In 2001, we utilized a third party contract warehouse located in Belgium to distribute our footwear to our customers and retail stores inFrance, Germany and the United Kingdom. During 2002, we established Skechers EDC SPRL, and in August 2002, we entered into alease agreement for an approximately 240,000 square foot distribution center in Liege, Belgium. The distribution center will provide productto our subsidiaries and retail stores throughout Europe. We began shipping product out of the Liege, Belgium distribution center in December2002.Canada In November 2002, we established our subsidiary Skechers USA Canada and opened our first Canadian flagship store in Toronto’s EatonCentre. In January 2003, Skechers USA Canada assumed, from our Canadian distributor, distribution, merchandising, and marketing ofour product in Canada. Product sold in Canada is primarily sourced from our distribution center in Ontario, California, USA. We anticipateopening an administrative office and showroom in the Toronto region to support our direct selling efforts during the first quarter endingMarch 31, 2003.12Table of ContentsAsia In Japan, through an agreement with our Japanese distributor Achilles Corporation, we have opened two flagship retail stores, one inKichijuoji opened in December 2001 and one in Osaka opened in March 2002. Achilles Corporation is responsible for the store’s operationsand selecting a broad collection of our products to sell to Japanese consumers. In order to maintain a globally consistent image, we providedarchitectural, graphic and visual guidance and materials for the design of the store, and we trained the local staff on our products andcorporate culture. We intend to expand our international presence and global recognition of the Skechers brand name in Asia by continuing tosell our footwear to foreign distributors and opening flagship retail stores with distributors that have local market expertise.LICENSING We believe that selective licensing of the Skechers brand name to non-footwear-related manufacturers may broaden and enhance theSkechers brand image without requiring significant capital investments or additional incremental operating expenses by us. Our diversegroup of products presents many potential licensing opportunities on terms with licensees that we believe will provide more effectivemanufacturing, distribution or marketing of products such as accessories, backpacks and children’s clothing than could be achieved in-house;however, we intend to be selective in granting any use of the Skechers brand name for such licensed products. We believe that the strengthof the Skechers brand name and the size of our business will enable us to attract premier licensing partners with a proven track record ofbrand sensitivity. During 2002, we entered into the following three primary licensing arrangements within the apparel and accessories sectors: 1. Socks and hosiery sector. In June 2002, we entered into an agreement with Renfro Corporation to be our licensee for hosiery in theUnited States. Under this arrangement, Renfro Corporation will create quality and stylish men and women’s sport, casual andfashion hosiery. Product is expected to be available in department stores and specialty retailers in late Spring 2003. 2. Watch sector. In October 2002, we entered into an agreement with Advance Group Inc. to be our licensee for a Skechers Sport line ofsport-related men and women’s watches in the United States and Canada. The watches are expected to be available in leadingdepartment stores, specialty stores and catalogs during the second quarter ending June 30, 2003. 3. Children’s apparel sector. In December 2002, we entered into an agreement with Kids’ Headquarters to design and distributechildren’s tops and bottoms in denim, woven and knit materials, as well as coordinating outerwear and headwear using selectSkechers logo’s in the United States. The apparel is expected to be available through department stores and specialty stores in time forthe 2003 Back-to-School selling season. In March 2003, we signed a license agreement with Garson International for Skechers Collection-branded outerwear, including men’sjackets and coats in leather, suede, and cloth materials. The product is expected to be available in major department stores and specialtystores in late 2003. We continue to review potential domestic licensing arrangements and hope to announce additional agreements during2003. In addition, we periodically review potential international licensing arrangements for footwear in various geographical regions that presentfavorable business opportunities. We intend to maintain substantial control over the design, manufacturing specifications, advertising anddistribution of any licensed products and to maintain a policy of evaluating any future licensing arrangements to ensure consistentrepresentation of the Skechers image.DISTRIBUTION We believe that strong distribution support is a critical factor in our operations. Once manufactured, our products are packaged in shoeboxes bearing bar codes and are shipped either to (1) our approximately 1.4 million square feet of internally managed distribution centerlocated in Ontario, California, (2) to our approximately 240,000 square foot distribution center located in Liege, Belgium, which beganshipping in December 2002 to our European customers and retail stores, or (3) directly from third party manufacturers to our otherinternational customers. Upon receipt at the central distribution centers, merchandise is inspected and recorded in our managementinformation system and packaged according to customers’ orders for delivery. Merchandise is shipped to the customer by whatever meansthe customer requests, which is usually by common carrier. The central distribution centers have multi-access docks,13Table of Contentsenabling us to receive and ship simultaneously and to pack separate trailers for shipments to different customers at the same time. We havean electronic data interchange system, or EDI system, to which some of our larger customers are linked. This system allows thesecustomers to automatically place orders with us, thereby eliminating the time involved in transmitting and inputting orders, and includesdirect billing and shipping information. The following table sets forth a summary of our distribution facilities: ADDRESS STATUS SQUARE FOOTAGE Avenue du parc Industriel, Liege, Belgium Leased since July 2002 241,700 4100 East Mission Blvd., Ontario, CA Leased since June 2001 763,300 1670 Champagne Avenue, Ontario, CA Owned since October 2000 263,700 1661 South Vintage Avenue, Ontario, CA Leased since November 1997 127,800 1777 South Vintage Avenue, Ontario, CA Leased since November 1997 284,600 1,681,100(1) (1) Excludes 285,600 square feet located at 5725 East Jurupa Street that we leased in April 1998 and occupied until we subleased thefacility in June 2001. We believe that we have the capacity at our Ontario distribution center to increase our current operations to meet any future growth, and ifwe should ever need to expand our distribution facilities to allow for further growth, we believe there is presently enough space available inclose proximity that leads us to believe leasing or purchasing additional property will not be a problem in the foreseeable future. Our lease agreement for our Liege, Belgium distribution center provides for first right of refusal on three remaining facilities planned fordevelopment, allowing for expansion of up to approximately 967,000 square feet. We believe that the capacity available to us within our leaseagreement will allow for further grow of our international operations.BACKLOG As of December 31, 2002, our backlog was $205.0 million, compared to $222.2 million as of December 31, 2001. While backlog ordersare subject to cancellation by customers, we have not experienced significant cancellation of orders in the past and we expect thatsubstantially all the orders will be shipped in 2002. However, for a variety of reasons, including the timing of shipments, product mix ofcustomer orders, the amount of in-season orders, a shift towards tighter lead times within backlog levels, backlog may not be a reliablemeasure of future sales for any succeeding period.INTELLECTUAL PROPERTY RIGHTS We own and utilize a variety of trademarks, including the Skechers trademark. We have a significant number of both registrations andpending applications for our trademarks in the United States. In addition, we have trademark registrations and trademark applications inapproximately 85 foreign countries. We also have design patents, and pending design and utility patent applications, in both the UnitedStates and various foreign countries. We continuously look to increase the number of our patents and trademarks, both domestically andinternationally, where necessary to protect valuable intellectual property. We regard our trademarks and other intellectual property as valuableassets and believe that they have significant value in the marketing of our products. We vigorously protect our trademarks againstinfringement, including through the use of cease and desist letters, administrative proceedings and lawsuits. We rely on trademark, patent, copyright, trade secret protection, non-disclosure agreements and licensing arrangements to establish,protect and enforce intellectual property rights in our logos, tradenames and in the design of our products. In particular, we believe that ourfuture success will largely depend on our ability to maintain and protect the Skechers trademark. Despite our efforts to safeguard andmaintain our intellectual property rights, we cannot assure you that we will be successful in this regard. Furthermore, we cannot assure youthat our trademarks, products and promotional materials or other intellectual property rights do not or will not violate the intellectual propertyrights of others, that our intellectual property would be upheld if challenged, or that we would, in such an event, not be prevented from usingour trademarks or other intellectual property rights. Such claims, if proven, could materially and adversely affect our business, financialcondition and results of operations. In addition, although any such claims may ultimately prove14Table of Contentsto be without merit, the necessary management attention to and legal costs associated with litigation or other resolution of future claimsconcerning trademarks and other intellectual property rights could materially and adversely affect our business, financial condition andresults of operations. We have sued and have been sued by third parties for infringement of intellectual property. It is our opinion that none ofthese claims have materially impaired our ability to utilize our intellectual property rights. The laws of certain foreign countries do not protect intellectual property rights to the same extent or in the same manner as do the laws ofthe United States of America. Although we continue to implement protective measures and intend to defend our intellectual property rightsvigorously, these efforts may not be successful or the costs associated with protecting our rights in certain jurisdictions may be prohibitive.From time to time, we discover products in the marketplace that are counterfeit reproductions of our products or that otherwise infringe uponintellectual property rights held by us. Actions taken by us to establish and protect our trademarks and other intellectual property rights maynot be adequate to prevent imitation of our products by others or to prevent others from seeking to block sales of our products as violatingtrademarks and intellectual property rights. If we are unsuccessful in challenging a third party’s products on the basis of infringement of ourintellectual property rights, continued sales of such products by that or any other third party could adversely impact the Skechers brand, resultin the shift of consumer preferences away from us and generally have a material adverse effect on our business, financial condition andresults of operations.COMPETITION Competition in the footwear industry is intense. Although we believe that we do not compete directly with any single company with respectto its entire range of products, our products compete with other branded products within their product category as well as with private labelproducts sold by retailers, including some of our customers. Our utility footwear and casual shoes compete with footwear offered bycompanies such as The Timberland Company, Dr. Martens, Kenneth Cole Productions, Steven Madden, Ltd. and Wolverine World Wide,Inc. Our athletic shoes compete with brands of athletic footwear offered by companies such as Nike, Inc., Reebok International Ltd., Adidas-Salomon AG and New Balance. Our children’s shoes compete with brands of children’s footwear offered by The Stride Rite Corporation. Invarying degrees, depending on the product category involved, we compete on the basis of style, price, quality, comfort and brand nameprestige and recognition, among other considerations. These and other competitors pose challenges to our market share in our majordomestic markets and may make it more difficult to establish our products in Europe, Asia and other international regions. We also competewith numerous manufacturers, importers and distributors of footwear for the limited shelf space available for the display of such products tothe consumer. Moreover, the general availability of contract manufacturing capacity allows ease of access by new market entrants. Many ofour competitors are larger, have achieved greater recognition for their brand names, have captured greater market share and/or havesubstantially greater financial, distribution, marketing and other resources than us. We cannot assure you that we will be able to competesuccessfully against present or future competitors or that competitive pressures faced by us will not have a material adverse effect on ourbusiness, financial condition and results of operations.EMPLOYEES As of February 28, 2003, we employed 2,521 persons, 1,385 of which were employed on a full-time basis and 1,136 of which wereemployed on a part-time basis. None of our employees are subject to a collective bargaining agreement. We believe that our relations with ouremployees are satisfactory. We offer our employees a discount on Skechers merchandise to encourage enthusiasm for our products andloyalty to Skechers.RISK FACTORS In addition to the other information in this Form 10-K, the following factors should be considered in evaluating us and our business. OUR FUTURE SUCCESS DEPENDS ON OUR ABILITY TO RESPOND TO CHANGING CONSUMER DEMANDS, IDENTIFYAND 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 interpretfashion trends and respond in a timely manner. Demand for and market acceptance of new products are uncertain and achieving marketacceptance for new products generally requires substantial product development and marketing efforts and expenditures. If we do notcontinue to meet changing consumer demands and develop successful styles in the future, our growth and profitability will be negativelyimpacted. We frequently make decisions about product designs and marketing expenditures several months in advance of the time whenconsumer acceptance can be determined. If we fail to anticipate, identify or react appropriately to changes in styles and trends or are notsuccessful in marketing new products, we could experience excess inventories, higher than15Table of Contentsnormal markdowns or an inability to profitably sell our products. Because of these risks, a number of companies in the footwear industryspecifically, and the fashion and apparel industry in general, have experienced periods of rapid growth in revenues and earnings andthereafter 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 OURBRAND 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 tochanging consumer demand, our brand name and brand image may be impaired. Even if we react appropriately to changes in consumerpreferences, consumers may consider our brand image to be outmoded or associate our brand with styles of footwear that are no longerpopular. In the past, several footwear companies have experienced periods of rapid growth in revenues and earnings followed by periods ofdeclining 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 tominimize purchasing costs, the time necessary to fill customer orders and the risk of non-delivery. We also maintain an inventory of certainproducts that we anticipate will be in greater demand. However, we may be unable to sell the products we have ordered in advance frommanufacturers or that we have in our inventory. Inventory levels in excess of customer demand may result in inventory write-downs, and thesale of excess inventory at discounted prices could significantly impair our brand image and have a material adverse effect on our operatingresults and financial condition. Conversely, if we underestimate consumer demand for our products or if our manufacturers fail to supply thequality products that we require at the time we need them, we may experience inventory shortages. Inventory shortages might delayshipments 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 continuedsuccess of our efforts to expand our footwear offerings and distribution channels. However, our rate of growth may decline or we may not beprofitable in future quarters or fiscal years. Furthermore, as our business becomes larger, we may not be able to maintain our historicalgrowth rate or effectively manage our growth. We anticipate that as our business grows, we will have to improve and enhance our overallfinancial and managerial controls, reporting systems and procedures. We may be unable to successfully implement our current growthstrategy 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 ultimateconsumer, but also retailers, our primary direct customers. Purchases of footwear tend to decline in periods of recession or uncertaintyregarding future economic prospects, when consumer spending, particularly on discretionary items, declines. During periods of recession oreconomic uncertainty, we may not be able to maintain or increase our sales to existing customers, make sales to new customers, open andoperate 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 andmaterially affected by downward trends in the economy or the occurrence of events that adversely affect the economy in general.Furthermore, in anticipation of continued increases in net sales, we have significantly expanded our infrastructure and workforce to achieveeconomies of scale. Because these expenses are fixed in the short term, our operating results and margins will be adversely impacted if wedo not continue to grow as anticipated. For example, due in large part to the slowdown in the global economy, our net sales for 2002 werelower than anticipated. This lower level of sales adversely affected our operating results for 2002 and could continue to do so in 2003 andbeyond.ECONOMIC, POLITICAL, MILITARY OR OTHER EVENTS IN THE UNITED STATES OR IN A COUNTRY WHERE WE MAKESIGNIFICANT SALES OR HAVE SIGNIFICANT OPERATIONS COULD INTERFERE WITH OUR SUCCESS OR OPERATIONSTHERE AND HARM OUR BUSINESS.16Table of Contents We market and sell our products and services throughout the world. The September 11, 2001 terrorist attacks disrupted commercethroughout 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 tocommerce throughout the world. To the extent that such disruptions further slow the global economy or, more particularly, result in delays orcancellations of purchase orders for our products, our business and results of operations could be materially adversely affected. We areunable to predict whether the threat of new attacks or the responses thereto will result in any long-term commercial disruptions or if suchactivities 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 accountedfor 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 tradeaccounts receivable. Although we have long-term relationships with many of our customers, our customers do not have a contractualobligation to purchase our products and we cannot be certain that we will be able to retain our existing major customers. Furthermore, theretail industry regularly experiences consolidation, contractions and closings. If there are further consolidations, contractions or closings inthe future, we may lose customers or be unable to collect accounts receivables of major customers in excess of amounts that we haveinsured. If we lose a major customer, experience a significant decrease in sales to a major customer, or are unable to collect the accountsreceivable 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 ORGROUP 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 torisk should consumer demand for such style or group of styles decrease in subsequent periods. We attempt to hedge this risk by offering abroad 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 salescould have a negative impact on our operating results.WE RELY ON INDEPENDENT CONTRACT MANUFACTURERS AND, AS A RESULT, ARE EXPOSED TO POTENTIALDISRUPTIONS IN PRODUCT SUPPLY. Our footwear products are currently manufactured by independent contract manufacturers. During 2002, the top four manufacturers of ourmanufactured products produced approximately 53.8% of our total purchases. One manufacturer accounted for 22.7% of total purchases forthe year ended December 31, 2002 and no one manufacturer accounted for more than 20% of total purchases for the year endedDecember 31, 2001. We do not have long-term contracts with manufacturers and we compete with other footwear companies for productionfacilities. We could experience difficulties with these manufacturers, including reductions in the availability of production capacity, failure tomeet our quality control standards, failure to meet production deadlines or increased manufacturing costs. This could result in our customerscanceling orders, refusing to accept deliveries or demanding reductions in purchase prices, any of which could have a negative impact on ourcash 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 alternativemanufacturers that will be as favorable as the relationships we have now. For example, new manufacturers may have higher prices, lessfavorable payment terms, lower manufacturing capacity, lower quality standards or higher lead times for delivery. If we are unable to provideproducts consistent with our standards or the manufacture of our footwear is delayed or becomes more expensive, our business would beharmed.OUR INTERNATIONAL SALES AND MANUFACTURING OPERATIONS ARE SUBJECT TO THE RISKS OF DOING BUSINESSABROAD, WHICH COULD AFFECT OUR ABILITY TO SELL OR MANUFACTURE OUR PRODUCTS IN INTERNATIONALMARKETS, 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 mostmanufactured in China and, to a lesser extent, in Italy, the Philippines and Brazil. We also sell our footwear in several foreign17Table of Contentscountries and plan to increase our international sales efforts as part of our growth strategy. Foreign manufacturing and sales are subject to anumber of risks, including: • political and social unrest, including the anticipated war with Iraq; • 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 Chinaor political instability in China would severely interfere with the manufacture of our products and would materially adversely affect ouroperations. 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, orlabor violations. The effects of these factors could render our conduct of business in a particular country undesirable or impractical and have anegative impact on our operating results.OUR BUSINESS COULD BE HARMED IF OUR CONTRACT MANUFACTURERS, SUPPLIERS OR LICENSEES VIOLATE LABOROR OTHER LAWS. We require our independent contract manufacturers, suppliers and licensees to operate in compliance with applicable United States andforeign laws and regulations. Manufacturers are required to certify that neither convicted, forced or indentured labor (as defined under UnitedStates law) nor child labor (as defined by the manufacturer’s country) is used in the production process, that compensation is paid inaccordance with local law and that their factories are in compliance with local safety regulations. Although we promote ethical businesspractices and our sourcing personnel periodically visit and monitor the operations of our independent contract manufacturers, suppliers andlicensees, we do not control them or their labor practices. If one of our independent contract manufacturers, suppliers or licensees violateslabor or other laws or diverges from those labor practices generally accepted as ethical in the United States, it could result in adverse publicityfor us, damage our reputation in the United States, or render our conduct of business in a particular foreign country undesirable orimpractical, any of which could harm our business.OUR PLANNED EXPANSION INVOLVES A NUMBER OF RISKS THAT COULD PREVENT OR DELAY ANY SUCCESSFULOPENING OF NEW STORES AS WELL AS IMPACT THE PERFORMANCE OF OUR EXISTING STORES.18Table of Contents 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 orno stores. Any expansion into new markets may present competitive, merchandising and distribution challenges that are different from thosecurrently encountered in our existing markets. Any of these challenges could adversely affect our business and results of operations. Inaddition, to the extent that any new store openings are in existing markets, we may experience reduced net sales volumes in existing storesin those markets.MANY OF OUR RETAIL STORES DEPEND HEAVILY ON THE CUSTOMER TRAFFIC GENERATED BY SHOPPING AND FACTORYOUTLET 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 mallswhere we depend on obtaining prominent locations in the malls and the overall success of the malls to generate customer traffic. We cannotcontrol the development of new malls, the availability or cost of appropriate locations within existing or new malls or the success of individualmalls. Some of our concept stores occupy street locations which are heavily dependent on customer traffic generated by tourism. Anysubstantial decrease in tourism resulting from the September 11, 2001 terrorist attacks, the anticipated war with Iraq,a downturn in theeconomy or otherwise, is likely to adversely affect sales in our existing stores, particularly those with street locations. The effects of thesefactors could hinder our ability to open retail stores in new markets or reduce sales of particular existing stores, which could negatively affectour 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 RESULTIN 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 anumber of factors, many of which are beyond our control. For example, sales of footwear products have historically been somewhat seasonalin nature with the strongest sales generally occurring in the third and fourth quarters. Also, delays in scheduling or pickup of purchasedproducts by our domestic customers could negatively impact our net sales and results of operations for any given quarter. As a result of thesespecific and other general factors, our operating results will likely vary from quarter to quarter and the results for any particular quarter maynot be necessarily indicative of results for the full year. Any shortfall in revenues or net income from levels expected by securities analystsand 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 GREATERRESOURCES THAN OURS, AND IF WE ARE UNABLE TO COMPETE EFFECTIVELY WITH THESE COMPANIES, OUR MARKETSHARE 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 significantlygreater financial, technological, engineering, manufacturing, marketing and distribution resources than we do. Their greater capabilities inthese areas may enable them to better withstand periodic downturns in the footwear industry, compete more effectively on the basis of priceand production and more quickly develop new products. In addition, new companies may enter the markets in which we compete, furtherincreasing 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 thestrength of our brand name, as well as many factors beyond our control. We may not be able to compete successfully in the19Table of Contentsfuture, and increased competition may result in price reductions, reduced profit margins, loss of market share, and inability to generate cashflows that are sufficient to maintain or expand our development and marketing of new products, which would adversely impact the tradingprice of our Class A common shares.OBTAINING ADDITIONAL CAPITAL TO FUND OUR OPERATIONS AND FINANCE OUR GROWTH COULD MAKE IT DIFFICULTFOR 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 equityofferings or debt financings. If we cannot raise needed funds on acceptable terms, we may not be able to successfully execute our growthstrategy, take advantage of future opportunities or respond to competitive pressures or unanticipated requirements. To the extent we raiseadditional capital by issuing debt, it may become difficult for us to meet debt service obligations. To the extent we raise additional capital byissuing 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 IFWE 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 ofthese individuals or any other key employee could harm us. Our future success also depends on our ability to identify, attract and retainadditional qualified personnel. Competition for employees in our industry is intense and we may not be successful in attracting and retainingsuch personnel.OUR TRADEMARKS, DESIGN PATENTS AND OTHER INTELLECTUAL PROPERTY RIGHTS MAY NOT BE ADEQUATELYPROTECTED OUTSIDE THE U.S. We believe that our trademarks, design patents and other proprietary rights are important to our success and our competitive position. Wedevote substantial resources to the establishment and protection of our trademarks and design patents on a worldwide basis. In the course ofour international expansion, we have, however, experienced conflicts with various third parties that have acquired or claimed ownershiprights in certain trademarks similar to ours or have otherwise contested our rights to our trademarks. We have in the past successfullyresolved these conflicts through both legal action and negotiated settlements, none of which we believe has had a material impact on ourfinancial condition and results of operations. Nevertheless, we cannot assure you that the actions we have taken to establish and protect ourtrademarks and other proprietary rights outside the U.S. will be adequate to prevent imitation of our products by others or to prevent othersfrom seeking to block sales of our products as a violation of the trademarks and proprietary rights of others. Also, we cannot assure you thatothers will not assert rights in, or ownership of, trademarks, designs and other proprietary rights of ours or that we will be able tosuccessfully resolve these types of conflicts to our satisfaction. In addition, the laws of certain foreign countries may not protect proprietaryrights 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 ourintellectual property rights outside the U.S. and if we are unable to successfully protect our rights or resolve intellectual property conflicts withothers, our business or financial condition may be adversely affected.OUR ABILITY TO COMPETE COULD BE JEOPARDIZED IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTYRIGHTS 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 factorin 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 againstinfringement. We also have a number of design patents and a limited number of utility patents covering components and features used invarious shoes. We believe that our success depends primarily upon skills in design, research and development, production and marketingrather than upon our patent position. However, we have followed a policy of filing applications for United States and foreign patents ondesigns 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. Wecannot, however, know whether we will be able to secure patents or trademark protection for our intellectual property in the future or thatprotection will be adequate for future products. Further, we face the risk of ineffective protection of intellectual property rights20Table of Contentsin the countries where we source and distribute our products. We have been sued for patent and trademark infringement and cannot be surethat our activities do not and will not infringe on the proprietary rights of others. If we are compelled to prosecute infringing parties, defend ourintellectual property, or defend ourselves from intellectual property claims made by others, we may face significant expenses and liabilitywhich could negatively impact our business or financial condition.ENERGY SHORTAGES, NATURAL DISASTERS OR A DECLINE IN ECONOMIC CONDITIONS IN CALIFORNIA COULDINCREASE 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 andour domestic distribution center in Ontario. Because California has and may in the future experience energy and electricity shortages, wemay be subject to increased operating costs as a result of higher electricity and energy rates and may be subject to rolling blackouts whichcould interrupt our business. Any such impact could be material and adversely affect our profitability. In addition, because a significant portionof our net sales is derived from sales in California, a decline in the economic conditions in California, whether or not such decline spreadsbeyond California, could materially adversely affect our business. Furthermore, a natural disaster or other catastrophic event, such as anearthquake affecting California, could significantly disrupt our business. We may be more susceptible to these issues than our competitorswhose operations are not as concentrated in California.ONE PRINCIPAL STOCKHOLDER IS ABLE TO CONTROL SUBSTANTIALLY ALL MATTERS REQUIRING A VOTE OF OURSTOCKHOLDERS AND HIS INTERESTS MAY DIFFER FROM THE INTERESTS OF OUR OTHER STOCKHOLDERS. As of December 31, 2002, Robert Greenberg, Chairman of the Board and Chief Executive Officer, beneficially owned 77.1% of ouroutstanding Class B common shares and members of Mr. Greenberg’s immediate family beneficially owned the remainder of ouroutstanding Class B common shares. The holders of Class A common shares and Class B common shares have identical rights except thatholders of Class A common shares are entitled to one vote per share while holders of Class B common shares are entitled to ten votes pershare on all matters submitted to a vote of our stockholders. As a result, as of December 31, 2002, 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 immediatefamily held approximately 91.3% of the aggregate number of votes eligible to be cast by our stockholders. Therefore, Mr. Greenberg is able tocontrol substantially all matters requiring approval by our stockholders. Matters that require the approval of our stockholders include theelection of directors and the approval of mergers or other business combination transactions. Mr. Greenberg also has control over ourmanagement 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 apremium over the then-prevailing market prices for their shares of our Class A common shares. The differential in the voting rights mayadversely affect the value of our Class A common shares to the extent that investors or any potential future purchaser view the superiorvoting 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 THEVALUE OF OUR STOCK. Provisions of Delaware law, our certificate of incorporation, or our bylaws could make it more difficult for a third party to acquire us, even ifclosing such a transaction would be beneficial to our stockholders. Mr. Greenberg’s substantial beneficial ownership position, together withthe authorization of Preferred Stock, the disparate voting rights between the Class A common shares and Class B common shares, theclassification of the Board of Directors and the lack of cumulative voting in our certificate of incorporation and bylaws, may have the effect ofdelaying, deferring or preventing a change in control, may discourage bids for our Class A common shares at a premium over the marketprice 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, includingstatements with regards to our revenues, earnings, spending, margins, cash flow, orders, inventory, products, actions, plans, strategies andobjectives. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or simply state futureresults, performance or achievements, and may contain the words “believe,” “anticipate,” “expect,” “estimate,” “intend,” “plan,” “project,” “willbe,” “will continue,” “will,” “result,” “could,” “may,” “might,” or any variations of such words with similar meanings. Any such statements aresubject to risks and uncertainties that would cause our actual results to differ materially from those which are management’s currentexpectations or forecasts. Such information is subject to the risk that such expectations or forecasts, or the assumptions underlying suchexceptions or forecasts, become inaccurate. In addition, the risks included here are not21Table of Contentsexhaustive. Other sections of this report may include additional factors which could adversely impact our business and financialperformance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time andwe 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 theserisks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. Investorsshould also be aware that while we do, from time to time, communicate with securities analysts, we do not disclose any material non-publicinformation or other confidential commercial information to them. Accordingly, individuals should not assume that we agree with anystatement or report issued by any analyst, regardless of the content of the report. Thus, to the extent that reports issued by securities analystscontain any projections, forecasts or opinions, such reports are not our responsibility.ITEM 2. PROPERTIES Our corporate headquarters and additional administrative offices are located at five premises in Manhattan Beach, California, and consistof an aggregate of approximately 110,000 square feet. We own and lease portions of our corporate headquarters and administrative offices.The leased property expires between June 2003 and February 2008, with options to extend in some cases, the current aggregate annual rentfor the leased property is approximately $1.2 million. Our U.S. distribution center consists of four facilities located in Ontario, California. The three leased facilities aggregate approximately1,176,000 square feet, with an annual base rental of approximately $4.0 million. The leased property expires between July 2005 and May2011, and contains rent escalation provisions. The owned distribution facility is approximately 264,000 square feet. In December 2002, we began to ship product from our internally managed approximately 240,000 square foot distribution center in Liege,Belgium. The facility is leased under a 25-year operating lease for approximately $950,000 base rent per year. The lease agreement providesfor first right of refusal on three facilities planned for development, allowing for expansion of up to approximately 967,000 square feet. Webelieve that the capacity available to us within our lease agreement should allow for further growth of our international operations. The leaseagreement also provides for early termination at five year intervals beginning in year five, pending notification as prescribed in the lease. All of our retail stores and showrooms are leased with terms expiring between June 2003 and January 2013. The leases provide for rentescalations tied to either increases in the lessor’s operating expenses or fluctuations in the consumer price index in the relevant geographicalarea, and in some cases a percentage of the store’s gross sales in excess of the base annual rent. Total rent expenses related to our retailstores and showrooms was $13.1 million for the year ended December 31, 2002. We also lease all of our international administrative offices, retail stores and showrooms located in Canada, France, Germany,Switzerland, Spain, the Netherlands, and the United Kingdom. The leased properties expire at various dates between July 2003 andNovember 2017. Total rent for the leased properties aggregated approximately $2.1 million during 2002.ITEM 3. LEGAL PROCEEDINGS On October 28, 2002, Skechers settled the lawsuit captioned RAYMOND MEIER v. SKECHERS USA, INC. that had been filed in theUnited States District Court for the Southern District of New York (Case No. 02 CV 4139). The settlement is final and the terms areconfidential. The obligations assumed will not have a material effect on Skechers’ financial position or results of operations. On December 13, 2002, Skechers finalized the settlement of various lawsuits pending between Skechers and Heeling Sports Limitedand Heeling Management Corporation in the United States District Court for the Central District of California (Case No. 02-1906NM) and theUnited States District Court for the Eastern District of Texas (Civil Action Nos. 4:02cv101; 4:02cv169). The settlement is final and the termsare confidential. The obligations assumed will not have a material effect on Skechers’ financial position or results of operations. 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 StatesDistrict Court for the Central District of California (Case No. 02-07766 PA) asserting claims for, inter alia, patent infringement, dilution andunfair competition. Fortune Dynamics’ counterclaims allege violations of the federal antitrust laws, breach of contract, interference witheconomic relations and unfair competition. The counterclaims seek, inter alia, compensatory, treble and punitive22Table of Contentsdamages, as well as injunctive relief. While it is too early in the litigation to predict the outcome of the claims against Skechers, Skechersbelieves that it has meritorious defenses to the claims asserted by Fortune Dynamic 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 2, 2002, a class action complaint entitled OMAR QUINONES v. SKECHERS USA, INC. et al. was filed in the SuperiorCourt for the State of California for the County of Orange (Case No. 02CC00353). The complaint, as amended, alleges overtime and relatedviolations of the California Labor Code on behalf of managers of Skechers’ retail stores and seeks, inter alia, damages and restitution, aswell 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 outcomeof the claims against Skechers, Skechers believes that it has meritorious defenses to the claims asserted in both class actions and intends todefend 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 theUnited States District Court for the Central District of California (Case No. 02-9774 AHM). The complaint, as amended, alleges breach ofcontract, fraud, trademark infringement, false impression of association, trademark dilution, unfair competition and related claims againstSkechers in connection with a merchandising license agreement entered into between the parties relating to Skechers’ line of Britney 4Wheelers skates. The lawsuit seeks, inter alia, compensatory and punitive damages, imposition of a constructive trust, an accounting anddeclaratory relief. While it is too early in the litigation to predict the outcome of the claims against Skechers, Skechers believes that it hasmeritorious defenses to the claims asserted by Britney Brands and intends to defend against those claims vigorously. Skechers has alsoasserted counterclaims against Britney Brands. Further, Skechers does not believe that an adverse result would have a material effect onSkechers’ 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 allegesclaims for trademark infringement, trademark dilution, unfair competition and deceptive trade practices arising out of Skechers’ alleged use ofmarks confusingly similar to Adidas’ three stripe mark. The lawsuit seeks, inter alia, compensatory, treble and punitive damages, as well asinjunctive relief. While it is too early in the litigation to predict the outcome of the claims against Skechers, Skechers believes that it hasmeritorious defenses to the claims asserted by Adidas and intends to defend against those claims vigorously. Skechers also intends to assertcounterclaims against Adidas. Further, Skechers does not believe that an adverse result would have a material effect on Skechers’ financialposition or results of operations. On March 25, 2003, a class action complaint captioned HARVEY SOLOMON v. SKECHERS USA, INC. et al. was filed againstSkechers and certain of its officers and directors in the United States District Court for the Central District of California (Case No. 03-2094DDP). The complaint alleges violations of the federal securities laws and breach of fiduciary duty on behalf of persons who purchased publiclytraded 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 iswithout 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 anyliability with respect to pending legal actions, individually or in the aggregate, will not have a material adverse effect on our business, finalcondition or results of operation.ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Skechers held its annual meeting of stockholders on May 31, 2002. Of 228,184,775 votes eligible to be cast, 227,917,504 votes werereturned, or 99.9%, formulating a quorum, and at the stockholders’ meeting, the following proposals were adopted by the margins indicated. Proposal No. 1 – To elect two members to the Board of Directors to serve for a three-year term as Class III Directors. Number of Votes Director For Against Richard Siskind 227,782,846 135,258 Geyer Kosinski 227,782,846 135,258 23Table of ContentsProposal No. 2 – To ratify the appointment of independent accountants for the year ending December 31, 2002.Proposal No. 2 was approved with 227,577,407 votes for, 331,656 votes against and 8,441 abstaining, thereby approving the ratification ofappointment of KPMG LLP as independent accountants to provide audit services to Skechers for the fiscal year ending December 31, 2002.PART IIITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our Class A Common Stock began trading on the New York Stock Exchange on June 9, 1999 after we completed the initial publicoffering of 7,000,000 shares of our Class A Common Stock at $11.00 per share. Our Class A Common Stock trades under the symbol“SKX”. The following table sets forth, for the periods indicated, the high and low sales prices of our Class A Common Stock. We have notdeclared or paid any cash dividends on our Class A Common Stock and do not anticipate paying any cash dividends in the foreseeable future.Our current policy is to retain all of our earnings to finance the growth and development of our business. HIGH LOW YEAR ENDED DECEMBER 31, 2002 First Quarter $19.60 $12.80 Second Quarter 24.40 18.00 Third Quarter 21.60 8.75 Fourth Quarter 12.90 6.52 YEAR ENDED DECEMBER 31, 2001 First Quarter $32.20 $14.50 Second Quarter 40.30 22.80 Third Quarter 29.40 11.33 Fourth Quarter 15.05 10.00 As of March 28, 2003, there were 113 holders of record of our Class A Common Stock (including holders who are nominees for anundetermined number of beneficial owners) and 8 holders of record of our Class B Common Stock. These figures do not include beneficialowners who hold shares in nominee name. The Class B Common Stock is not publicly traded but each share is convertible upon request ofthe holder into one share of Class A Common Stock. Our equity compensation plan information is provided as set forth in Part III, Item 12 herein.ITEM 6. SELECTED FINANCIAL DATA In May 1992, we elected to be treated for federal and state income tax purposes as an S Corporation under Subchapter S of the InternalRevenue Code of 1986, as amended (the “Code”), and comparable state laws. As a result, our earnings, since such initial election, wereincluded in the taxable income of our stockholders for federal and state income tax purposes, and we were not subject to income tax on suchearnings, other than franchise and net worth taxes. Prior to the closing of the initial public offering of our Class A common shares on June 9,1999, we terminated our S Corporation status, and since then we have been treated for federal and state income tax purposes as acorporation under Subchapter C of the Code and, as a result, are subject to state and federal income taxes. By reason of our treatment as anS Corporation for federal and state income tax purposes, we, since inception, have provided to our stockholders funds for the payment ofincome taxes on our earnings as well as our conversion from an S Corporation to a C Corporation during 1999. We declared distributionsrelating to our S Corporation status of $35.4 million and $7.9 million in 1999 and 1998, respectively. Purchasers of shares in the initialpublic offering of our Class A common shares on June 9, 1999 did not receive any portion of these S Corporation distributions. Since thetermination of our S Corporation status earnings have been and will be retained for the foreseeable future in the operations of our business.We have not declared or paid any cash dividends on our Class A common shares and do not anticipate paying any cash dividends in theforeseeable future. Our current policy is to retain all of our earnings to finance the growth and development of our business. The following tables set forth selected consolidated financial data of Skechers as of and for each of the years in the five-year period endedDecember 31, 2002.24Table of ContentsSUMMARY FINANCIAL DATA(IN THOUSANDS, EXCEPT EARNINGS PER SHARE) YEARS ENDED DECEMBER 31, 1998 1999 2000 2001 2002 STATEMENT OF EARNINGS DATA: Net sales $372,680 $424,601 $675,036 $960,385 $943,582 Gross profit 154,580 174,608 284,225 406,180 386,673 Operating expenses: Selling 49,983 57,332 77,451 111,401 94,274 General and administrative 71,461 79,114 125,827 205,989 210,752 Earnings from operations 33,991 38,830 81,263 88,487 82,792 Interest expense 8,631 6,554 9,230 13,852 8,927 Earnings before income taxes 25,121 32,691 72,351 75,955 75,341 Net earnings 24,471 24,056 43,751 47,270 47,036 PRO FORMA OPERATIONSDATA:(1) Earnings before income taxes $25,121 $32,691 $72,351 $75,955 $75,341 Income taxes 10,048 12,880 28,600 28,685 28,305 Net earnings 15,073 19,811 43,751 47,270 47,036 Net earnings per share:(2) Basic $0.54 $0.62 $1.24 $1.30 $1.26 Diluted $0.49 $0.60 $1.20 $1.24 $1.20 Weighted average shares:(2) Basic 27,814 31,765 35,142 36,409 37,275 Diluted 30,610 33,018 36,563 38,059 40,854 AS OF DECEMBER 31, BALANCE SHEET DATA: 1998 1999 2000 2001 2002 Working capital $23,106 $65,003 $93,305 $139,972 $286,760 Total assets 146,284 177,914 303,400 407,486 483,156 Total debt 70,933 33,950 85,321 115,931 119,646 Stockholders’ equity 27,676 86,000 134,046 199,016 259,236 (1) Reflects adjustments for federal and state income taxes as if Skechers had been taxed as a C Corporation rather than as an SCorporation for periods prior to its initial public offering on June 9, 1999.(2) Basic earnings per share represents net earnings divided by the weighted-average number of common shares outstanding for theperiod. Diluted earnings per share, in addition to the weighted average determined for basic earnings per share, reflects the potentialdilution that could occur if options to issue common stock were exercised or converted into common stock and assumes theconversion of our 4.50% Convertible Subordinated Notes for the period outstanding since their issuance in April 2002. The weightedaverage diluted shares outstanding gives effect to the sale by Skechers of those shares of common stock necessary to fund thepayment of (i) stockholder distributions paid or declared from January 1, 1998 to June 7, 1999, the S Corporation termination date, inexcess of (ii) the S Corporation earnings from January 1, 1998 to December 31, 1998 for 1996 through 1998, and January 1, 1999 toJune 7, 1999 for 1999, based on an initial public offering price of $11 per share, net of underwriting discounts.ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain information contained in the following Management’s Discussion and Analysis of Financial Condition and Results of Operationsconstitute forward-looking statements within the meaning of the Securities Act and the Securities Exchange Act, which can be identified bythe use of forward-looking terminology such as “believes,” “anticipates,” “plans,” “expects,” “endeavors,” “may,” “will,” “intends,” “estimates”and similar expressions that are intended to identify forward-looking statements. These forward-looking statements involve risks anduncertainties, and our actual results may differ materially from the results discussed in the forward-looking statements as a result of certainfactors set forth in Item 1 of this report under “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 througha 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.25Table of Contents We generate revenues from three principal sources and have the following reportable 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 integratedretail 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 awarenessof the Skechers brand and showcase a broad assortment of our in-season footwear styles. The products offered in our concept storesare full price in-season products and typically attract fashion conscious customers. Our proto-typical concept store is approximately2,750 square feet and generates gross margins that are the highest of our three retail formats. Factory Outlet Stores. Our factory outlet stores are generally located in manufacturers’ outlet centers and provide opportunities to sellan assortment of in-season, discontinued and excess merchandise at lower price points. Our factory outlet stores range in size from1,900 square feet to 6,000 square feet and generally have price points less of $60.00 or lower. Gross margins generated from ourfactory outlet stores are less than those in our concept stores. Warehouse Outlet Stores. Our freestanding warehouse outlet stores appeal to our most value conscious customers and enable us toliquidate excess merchandise, discontinued lines and odd-size inventory in a cost-efficient manner. Our warehouse outlet stores aretypically located in manufacturers’ direct outlet centers throughout the U.S. These stores allows us to sell discontinued and excessmerchandise, thereby reducing the need to sell merchandise to discounters at excessively low prices, which could compromise theSkechers brand.• DISTRIBUTORS. Internationally, we sell our footwear to our foreign distributors who distribute such footwear to department stores andspecialty retail stores in Europe, Asia, Latin America, South America and numerous other countries and territories. Approximately 78.9%, 76.0% and 72.3% of our net sales were derived from our domestic wholesale segment for the years endedDecember 31, 2000, 2001, and 2002, respectively. Typically, our retail sales achieve higher gross margins as a percentage of net sales thandomestic wholesale sales. Sales through foreign distributors result in lower gross margins as a percentage of net sales than retail orwholesale sales. None of our domestic retail sales formats, international wholesale sales, international retail sales, or internationaldistributor sales comprised more than 10% of our consolidated net sales for either fiscal 2000, 2001 or 2002. We have implemented a strategy of controlling the growth of the distribution channels through which our products are sold in order toprotect the Skechers brand name, properly secure customer accounts and better manage the growth of the business. We seek wholesaleaccounts that we believe can best support the Skechers brand name in the market as part of our efforts to expand our wholesale distribution.We seek to selectively open retail stores in high profile, high traffic locations in major metropolitan areas both domestically andinternationally. Domestically, we are currently planning to open approximately 20 to 25 retail stores during fiscal 2003 as compared to 13 infiscal 2002. We seek to increase the number of international wholesale accounts that we sell directly to, thereby reducing our reliance onforeign distributors and we anticipate opening two to four international retail stores in 2003, one of which was opened in Manchester,England in February 2003. We have realized rapid growth since inception, increasing net sales from $90.8 million in 1994 to $943.6 million in 2002. However,during 2002 our revenues declined 1.7% when compared to 2001, due to the economic slowdown in both the U.S. and in some internationalcountries where our product is distributed and from the elimination of our mail order sales. Also, based on our current estimates, wecurrently anticipate sales levels during the first quarter of 2003 to be 15 to 20% lower than sales during the first quarter of 2002. We currentlyexpect sales for the first six months of 2003 to be lower than sales in the comparable period in 2002. We currently anticipate sales for thesecond half of 2003 to be higher than the second half of 2002. These estimates may be affected by a number of factors within and out of ourcontrol, including but limited to, the continued threat of terrorist attacks throughout the world, the war with Iraq, and any additional militaryaction taken, or contemplated, by the United States and other nations that could cause additional significant disruption to commercethroughout the world. As our sales growth accelerated, we focused on investing in our infrastructure to support continued expansion in a disciplined manner.The infrastructure additions are included in both selling and general and administrative type expenses. During 2001 and 2002, we expandedour administrative facilities, hired additional personnel, developed product sourcing and quality control offices in China and Taiwan, upgradedour management information systems, opened additional retail stores, established an internally managed distribution center in Belgium,expanded our international direct selling efforts by establishing subsidiaries in the United Kingdom,26Table of ContentsFrance, Germany, Spain, Switzerland, Canada, the Netherlands, and in March 2003 in Italy. Not all of the fixed costs incurred during thisexpansion period have been leveraged over a full year’s sales. We established this infrastructure to achieve economies of scale in anticipationof continued increases in sales. Because expenses relating to this infrastructure are fixed, at least in the short-term, operating results andmargins would be adversely affected if we do not achieve our anticipated sales growth. For example, during the fourth quarter of 2002, wesaw a de-leveraging of our expenses as sales declined 15.5% when compared to the fourth quarter of 2001. We anticipate additional de-leveraging of our costs as we currently expect first quarter 2003 sales to be 15% to 20% lower than sales in the first quarter of 2002. Our gross margins during fiscal 2002 decreased to 41.0% compared to 42.3% in 2001. During the fourth quarter ended December 31,2002, our gross margins were 38.5% compared to 39.7% in the fourth quarter ended December 31, 2001. Given the continuing weak retailenvironment, we currently anticipate that margins during the first half of fiscal 2003 will be lower than those in the first half of 2002.Operating margin as a percentage of net sales decreased from 12.0% in 2000, to 9.2% in 2001, and to 8.8% in 2002. In addition, during thefourth quarter of fiscal 2002, we realized our first quarterly loss, since becoming a public company in June 1999, of $8.6 million compared tonet income of $2.0 million in the fourth quarter of 2001. Increasing sales and maintaining or improving gross margins and operating marginsdepends on various factors, including, strength of our brand name, competitive conditions and our ability to efficiently manage sales throughall distribution channels. In the future, sales and earnings growth will be dependent upon, among other things, the continued success of ourefforts to expand our footwear offerings within the Skechers brand or developing alternative, successful brands. We can not assure you thatthe rate of growth will not continue to decline in future periods or that we will improve or maintain gross margins or operating margins. Notwithstanding our net loss during the fourth quarter 2002, and the anticipated results for the first quarter of 2003, we remain committedto the overall marketing strategy that has been largely responsible for the increase in the development of the Skechers brand of products. Wehave and continue to adjust our advertising budget based on projected sales, which has included such avenues as magazines, television,trade shows, radio spots, billboards, and buses. We endeavor to spend approximately 8% to 10% of annual net sales in the marketing ofSkechers footwear through advertising, promotions, public relations, trade shows and other marketing efforts. We believe that selective licensing of the Skechers brand name to non-footwear related manufacturers may broaden and enhance theSkechers image without requiring us to expend significant capital investments or incur significant incremental operating expenses. Althoughwe have licensed certain manufacturers to produce and market certain Skechers products on a limited basis, to date we have not derived anysignificant royalty income from these licensing arrangements. Royalty income is recognized as revenue when earned and is offset by relatedexpenses. During 2002, we entered into three licensing arrangements, within the apparel and accessories market, for socks and hosieryitems, watches, and children’s apparel, and in March 2003, we signed an additional licensing agreement, to compliment our SkechersCollection product line, for outwear. Although licensing royalties may increase in dollar value on a go forward basis, we do not anticipate thatthey will become a significant portion of our consolidated net sales. We contract with third parties for the manufacture of all our products. We do not own or operate any manufacturing facilities. In 2002, thetop four suppliers of our products accounted for 53.8% of our total purchases, and one vendor accounted for over 20% of our purchases. Todate, substantially all products are purchased in U.S. dollars, but this may not continue to be the case. We believe the use of independentmanufacturers increases our production flexibility and capacity yet at the same time allows us to substantially reduce capital expendituresand avoid the costs of managing a large production work force. Substantially all of our products are produced in China. We finance ourproduction activities in part through the use of interest-bearing open purchase arrangements with certain of our Asian suppliers. Thesefacilities currently bear interest at a rate between 0.5% and 1.5% with financing for 30 to 60 days. We believe that the use of thesearrangements affords us additional liquidity and flexibility.YEAR ENDED DECEMBER 31, 2002 COMPARED TO THE YEAR ENDED DECEMBER 31, 2001Net sales Net sales for 2002 decreased 1.7% to $943.6 million compared to $960.4 million in 2001. The decrease in net sales was primarily due toreduced domestic wholesale segment sales which were $682.6 million for 2002, compared to $729.9 million in 2001. The decrease in thedomestic wholesale segment sales during 2002 was primarily due to decreases in both the men’s and women’s lines, partially offset byincreases in our kids lines, and sales from the Skechers Work line launched in 2002, and to a lesser extent, the 4-Wheelers line started inthe third quarter of 2001. Domestic wholesale segment volume decreased to 35.2 million pairs in 2002 from 36.3 million pairs in 2001.Distributor net sales decreased 13.4% primarily due to decreased sales into the South American market place. International wholesale netsales increased 119.1% in 2002 compared to 2001. The increase was primarily due to our direct27Table of Contentssales efforts in place for the full year in 2002 compared to approximately nine months in 2001. Domestic retail sales increased 24.8% in2002 over 2001, due to the addition of 13 retail stores added during 2002. International retail sales increased 30.2% due to most stores beingopened the entire 12 months period in 2002, compared to only a portion in 2001, and to a lesser extent, new flagship stores opened inFrankfurt, Germany and Toronto, Canada during the fourth quarter of 2002. Our direct mail sales decreased over 50%, in 2002 compared to2001 due to the elimination of our mail order and catalog operations in October 2001. During 2002, we continued to expand internationally by establishing subsidiaries in Canada, Spain, the Benelux region, and in the firstquarter of 2003, in Italy. Our international subsidiary’s infrastructure typically includes a sales and support staff and showroom to present thefull range of our product offerings to prospective accounts. We continuously evaluate international regions where we can profitably transitionour business model. We also anticipate opening two to four international retail stores in 2003, one of which was opened in Manchester,England in February 2003. During the year ended December 31, 2002, we opened 13 domestic retails stores: five concept stores, fivewarehouse outlet stores, and three factory outlet stores. We anticipate opening approximately 20 to 25 domestic retail stores during 2003, fiveof which have already been opened to date.Gross profit Gross profit for 2002 was $386.7 compared to gross profit of $406.2 million in 2001. Gross margin was 41.0% for 2002 compared to42.3% for 2001. Gross margin for the domestic wholesale segment was 38.4% in 2002 compared to 40.9% in 2001. The decrease in grossmargin in the domestic wholesale segment was due primarily to concessions given to our wholesale accounts to stimulate sales at retailduring this sluggish retail environment, additional costs related to the domestic west coast port strike which lead to additional airfreight costsfrom our international manufacturers, rerouting of freight to east coast and Canadian ports, and the subsequent trucking costs from thoseports to our distribution center in Ontario, California. In addition we realized lower margins from our company owned retail stores due toadditional sales promotions during 2002 compared to 2001.Selling expenses Selling expenses for the 2002 were $94.3 million compared to $111.4 million in 2001, a decrease of $17.1 million or 15.4%. Sellingexpense as a percentage of net sales decreased to 10% compared to 11.6% in 2001. The decrease in selling expense was primarily due todecreased advertising, which was 8.1% of sales in 2002 compared to 9.0% in 2001. Advertising reductions were realized from fewerdomestic print ads, and cable TV ads, other selling expense reductions were derived from reduced commissions, samples, and reductions ingeneral and point of purchase promotional items.General and administrative expenses General and administrative expenses for 2002 were $210.8 million compared to $206.0 million for 2001. As a percentage of net salesgeneral and administrative expenses were 22.3% in 2002, compared to 21.4% in 2001. The increase in general and administrativeexpenses during 2002 compared to 2001 was due to increased rent (approximately $5.0 million) and depreciation charges (approximately$2.3 million) related to the addition of 13 retail stores and the full year’s effect of the 26 stores added in 2001, infrastructure additions tosupport our direct selling efforts in the United Kingdom, Germany, France, and new subsidiaries added in 2002, including Spain, Canada,and the Netherlands and, to a lesser extent, legal reserves and the move into our internally managed distribution center in Liege, Belgium inthe fourth quarter of 2002. However, the expense increases noted were partially offset by reduced temporary help costs (approximately$9.0 million) at our distribution facility in Ontario, California. The costs added during this expansion period have not been leveraged over a full year’s sales. We established this infrastructure toachieve economies of scale in anticipation of continued increases in sales. Because expenses relating to this infrastructure are fixed, at leastin the short-term, operating results and margins would be adversely affected if we do not achieve our anticipated sales growth.Interest expense Interest expense decreased to $8.9 million in 2002 compared to $13.9 million in 2001. The decrease is due to the elimination of our short-term borrowings whose interest rate was tied to the prime rate of interest, which has decreased over the last two years and reduced interestrates charged on amounts outstanding with our foreign manufacturers.28Table of ContentsOther income Other income for 2002 was $1.5 million compared to $1.3 million in 2001. The slight increase in other income was due to foreignexchange gains, offset by decreased rent revenue from the leasing of office space at one of our administrative facilities.Income taxes The effective tax rate in 2002 was 37.6% compared to 37.8% in 2001. The decrease in the effective tax rate is due to changes in income indiffering tax jurisdictions as a result of our international expansion. We are expanding our international operations and plan to reinvest anyundistributed earnings from our non-U.S. subsidiaries, thereby indefinitely postponing their remittance. As a result, we do not plan to providefor deferred income taxes on any accumulated undistributed earnings that our non-U.S. subsidiaries earn in the future.YEAR ENDED DECEMBER 31, 2001 COMPARED TO THE YEAR ENDED DECEMBER 31, 2000Net sales Net sales for 2001 increased 42.3% to $960.4 million compared to $675.0 million in 2000. The increase in net sales was due to anincrease in domestic wholesale segment sales of $197.3 million in 2001 to $729.9 million, compared to $532.6 million in 2000. Theincrease was due to increased sales in all product lines, primarily Women’s Sport and Kids lines, the introduction of three new product linesduring 2001, and additional styles added within each product line. Domestic wholesale volume increased to 36.3 million pairs in 2001 from25.8 million pairs in 2000. Domestic retail sales increased 50% over 2000 levels largely due to the addition of 26 retail stores during 2001.Net sales from our direct mail and web based distribution channels remained consistent in 2001 as compared to 2000. However, in October2001, we elected to discontinue our mail order and catalog operations, which represented less 1% of net sales in 2001, although we continueto offer a selected assortment of merchandise through our interactive website. During 2001, total international sales increased 85.7% over 2000 levels. International sales consist of distributor sales, which increased47.4% due to continued acceptance of our product offerings in the international marketplace. International wholesale revenues increasedsubstantially from nominal levels in 2000 due to marketing and advertising campaigns in support of the establishment of our threeinternational subsidiaries located in the United Kingdom, France and Germany, where we began to sell direct to department stores andspecialty retailers in 2001. During 2001, we generated our first international retail sales as we opened our first three international flagshipretail stores located in the United Kingdom, France and Germany.Gross profit Gross profit for 2001 was $406.2 million, an increase of 42.9% over $284.2 million in 2000. Gross margin was 42.3% for 2001compared to 42.1% for 2000. Gross margins for the domestic wholesale segment was 40.9% in 2001 compared to 40.3% in 2000. The slightmargin increase in the domestic wholesale segment was the result of reduced cargo costs partly offset by reduced margins during the threemonths ended December 31, 2001 for price concessions given to our wholesale customers. Also, offsetting the slight increase to grossmargins were price reductions at our factory outlet and warehouse outlet stores to help stimulate inventory sell through at the retail level.Selling expenses Selling expenses for 2001 were $111.4 million, an increase of 43.8% over last year’s $77.5 million. Selling expenses as a percent of netsales increased slightly to 11.6% from 11.5% in 2000. The increase in the level of spending was primarily due to increased advertising in bothprint and television media and additional advertising to support the increase in sales activities in the United Kingdom, Germany and Francewhere we commenced selling direct to department stores and specialty retailers. During 2001 advertising expenses were $86.6 million, or9.0% of net sales, compared to $59.1 million, or 8.8% of net sales in 2000.General and administrative expenses General and administrative expenses for 2001 were $206.0 million compared to $125.8 million in 2000. General and administrativeexpenses as a percentage of net sales was 21.4% in 2001 compared to 18.6% in 2000. The increase in general and administrative expensesin absolute dollars and as a percentage of net sales was due to planned infrastructure additions to support the 26 domestic retail stores addedduring 2001 and to establish operating entities, and flagship retail stores, in the United Kingdom,29Table of ContentsFrance and Germany to support our direct selling efforts in those countries. In addition, we increased our distribution capacity with facility andcapital asset additions and enhanced our information systems to support the increase in sales volume.Interest expense Interest expense increased to $13.9 million in 2001 from $9.2 million in 2000. The increase was due to increased short-term borrowingsto support our working capital requirements and retail store additions and increased capital asset financing to support the increase in salesvolume and capacity expansion.Other income Other income increased to $1.3 million in 2001 compared to $318,000 in 2000. The increase in other income is due to rental incomerelated to the leasing of offices at our administrative office building and legal settlements, partially offset by the disposal of fixed assets. Weexpect rental income to decrease during 2002 as tenant leases expire.Income taxes The effective tax rate in 2001 was 37.8% compared to 39.5% in 2000. The decrease in the effective tax rate is due to changes in income indiffering tax jurisdictions as a result of our international expansion. We are expanding our international operations and plan to reinvest anyundistributed earnings from our non-U.S. subsidiaries, thereby indefinitely postponing their remittance. As a result, we do not plan to providefor deferred income taxes on any accumulated undistributed earnings that our non-U.S. subsidiaries earn in the future.LIQUIDITY AND CAPITAL RESOURCESOur working capital at December 31, 2002 was $286.8 million, an increase of $146.8 million from $140.0 million at December 31, 2001.The increase in working capital was primarily due to the elimination of our short-term borrowings of approximately $84.2 million with aportion of the proceeds from the issuance of $90 million of long-term convertible subordinated notes in April 2002. In addition to refinancingour short-term borrowings, we increased our cash balances by $109.3 million in 2002. Our working capital increase was offset by an$13.7 million decrease in receivables primarily attributed to reduced wholesale sales of approximately $37.6 million during the fourth quarterended December 31, 2002 and a $12.8 million increase in accounts payable and accrued expenses.Net cash provided by operating activities for the year ended December 31, 2002 was approximately $116.8 million, compared to cash used inoperating activities of $1.7 million for the year ended December 31, 2001. The decrease in sales in 2002 over 2001 and especially the fourthquarter of 2002 as compared to the fourth quarter of 2001, resulted in a decrease of $23.5 million in our investment in accounts receivableand inventories compared to a corresponding build-up of $76.4 million of these accounts in the prior year. We experienced an increase in netsales of $285.3 million in 2001 over 2000, which drove the increase in accounts receivable and inventories in 2001. As a consequence ofthese trends, we were able to generate $116.8 million in operating cash flow. As a result of our improved operating cash flow and $17 millionin reduced capital expenditures, we were able to refinance all of our short-term borrowings of $84 million with the issuance of $90 million ofconvertible subordinated notes due in April 2007, and generate available borrowings under our line of credit of $100 million at December 31,2002.Net cash used in investing activities was $14.5 million for the year ended December 31, 2002, compared to $31.5 million for the year endedDecember 31, 2001. The decrease was due to reduced capital expenditures requirements resulting from fewer retail store openings in 2002than in 2001, 26 in 2001 compared to 13 in 2002, and prior year investing activities including the acquisition of real properties in ManhattanBeach, California. We anticipate an increase cash used in investing activities during 2003, compared to 2002, due to our current forecast of20 to 25 domestic retail store additions and two to four international retail store additions in 2003. In 2003, we have already opened oneinternational retail store and four domestic retail stores.Net cash provided by financing activities for the year ended December 31, 2002 was $6.0 million, compared to $40.0 million for the yearended December 31, 2001. The decrease in cash provided by financing activities was due to the reduction of net financing derived from ourshort-term borrowings, which was repaid with a portion of the proceeds from the issuance of our convertible subordinated notes issued inApril 2002, and reduced use of the line of credit facility due to increased cash flows provided by operating activities of $116.8 million and tolesser extent, the reduction in capital expenditures from a decrease in store openings.30Table of ContentsIn April 2002, we issued $90.0 million aggregate principal amount of 4.50% Convertible Subordinated Notes due April 15, 2007. The notesare convertible into shares of our Class A Common Stock. Interest on the notes is paid semi-annually on April 15 and October 15 of eachyear, which commenced October 15, 2002. The notes are convertible at the option of the holder into shares of Class A Common Stock at aconversion rate of 38.5089 shares of Class A Common Stock per $1,000 principal amount of notes, which is equivalent to a conversion priceof approximately $25.968 per share. The conversion rate is subject to adjustment. The notes may be converted at any time on or before theclose of business on the maturity date, unless the notes have been previously redeemed or repurchased; provided, however, that if a note iscalled for redemption or repurchase, the holder will be entitled to convert the notes at any time before the close of business on the dateimmediately preceding the date fixed for redemption or repurchase, as the case may be. The notes are unsecured and subordinated to ourpresent and future senior debt. The notes are also structurally subordinated in right of payment to all indebtedness and other liabilities of oursubsidiaries. The indenture does not restrict our incurrence of indebtedness, including senior debt, or our subsidiaries’ incurrence ofindebtedness. Net proceeds from the sale of the notes were $86.2 million. The refinancing of our short term borrowings with long termcapital was done to provide us with long-term capital to provide for the future growth of the business.In July 2002, we renegotiated our line of credit facility, which now provides for borrowings of up to $200.0 million, with actual borrowingslimited to available collateral and certain limitations on total indebtedness (approximately $100.9 million of availability as of December 31,2002) with the CIT Group, as agents for the lenders. At December 31, 2003, no amounts were outstanding under the revolving line of credit.The revolving line of credit bears interest at prime rate (4.25% at December 31, 2002) minus .5%. Interest on the line of credit is payablemonthly in arrears. The revolving line of credit expires on December 31, 2003. The revolving line of credit provides a sub-limit for letters ofcredit of up to $30.0 million to finance our foreign purchases of merchandise inventory. As of December 31, 2002, we had approximately$5.0 million of letters of credit under the revolving line of credit. The credit facility provides that stockholders’ equity shall not decrease bymore than 20% in any calendar quarter, contains a tangible net worth requirement, as defined in the agreement, and limits the payment ofdividends if we are in default of any provision of the agreement. We were in compliance with these covenants as of December 31, 2002.We believe that anticipated cash flows from operations, available borrowings under our revolving line of credit, cash on hand, proceeds fromthe issuance of the notes and our financing arrangements will be sufficient to provide us with the liquidity necessary to fund our anticipatedworking capital and capital requirements through fiscal 2003. However, in connection with our growth strategy, we will incur significantworking capital requirements and capital expenditures. Our future capital requirements will depend on many factors, including, but notlimited to, the levels at which we maintain inventory, the market acceptance of our footwear, the success of our international expansion, thelevels of promotion and advertising required to promote our footwear, the extent to which we invest in new product design and improvementsto our existing product design and the number and timing of new store openings. To the extent that available funds are insufficient to fund ourfuture activities, we may need to raise additional funds through public or private financing. We cannot assure you that additional financingwill be available or that, if available, it can be obtained on terms favorable to our stockholders and us. Failure to obtain such financing coulddelay 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.CRITICAL ACCOUNTING POLICIESRevenue Recognition. The company derives its revenue from the sale of footwear. In general, revenue is recognized upon shipment of themerchandise. Domestically, goods are shipped directly from our domestic distribution center in Ontario, California, and revenue isrecognized upon shipment from the distribution center (FOB shipping point). For our international wholesale accounts, product is shippeddirect from our distribution center in Liege, Belgium, and revenue is recognized upon shipment from the distribution center. For ourdistributor sales, the goods are delivered directly from the independent factories to the distributors on an FOB shipping point basis andrevenue is recognized upon shipment from the factory. In all of the above cases, each of the following have been met prior to revenuerecognition: persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed and determinable and collectibility isreasonably assured.Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United Statesrequires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures ofcontingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during thereporting period. Specifically, management must make estimates in the following areas:Allowance for bad debts, returns, and customer chargebacks. We insure selected customer account balances both greater than $200,000 andaccepted by the insurance company should our customer not pay. We also provide a reserve against our receivables for31Table of Contentsestimated losses that may result from our customers’ inability to pay, and disputed and returned items. We determine the amount of thereserve by analyzing known uncollectible accounts, aged receivables, economic conditions in the customers’ country or industry, historicallosses and our customers’ credit-worthiness. Amounts later determined and specifically identified to be uncollectible are charged or written offagainst this reserve. To minimize the likelihood of uncollectibility, customers’ credit-worthiness is reviewed periodically based on externalcredit reporting services and our experience with the account and adjusted accordingly. Should a customer’s account become past due, wegenerally place a hold on the account and discontinue further shipments to that customer, minimizing further risk of loss. The likelihood of amaterial loss on an uncollectible account would be mainly dependent on deterioration in the overall economic conditions in a particularcountry or environment. Reserves are fully provided for all probable losses of this nature. Gross trade accounts receivable balance was$105.9 million and the allowance for bad debts, returns, and customer chargebacks was $8.5 million at December 31, 2002.Inventory adjustments. Inventories are stated at lower of cost or market. We review our inventory on a regular basis for excess and slowmoving inventory based on prior sales and net realizable value. A write down of inventory is considered permanent and creates a new costbasis for those units. The likelihood of any material inventory write-down is dependent primarily on consumer demand and competitorproduct offerings. Inventories were stated at $148.0 million at December 31, 2002.Valuation of intangible and other long-lived assets. When circumstances warrant, we assess the impairment of intangible and other long-lived assets that require us to make assumptions and judgments regarding the carrying value of these assets. The assets are considered tobe impaired if we determine that the carrying value may not be recoverable based upon our assessment of the following events or changes incircumstances: • the asset’s ability to continue to generate income; • loss of legal ownership or title to the asset; • significant changes in our strategic business objectives and utilization of the asset(s); or • the impact of significant negative industry or economic trendsIf the assets are considered to be impaired, the impairment we recognize is the amount by which the carrying value of the assets exceeds thefair value of the assets. In addition, we base the useful lives and related amortization or depreciation expense on our estimate of the periodthat the assets will generate revenues or otherwise be used by us. If a change were to occur in any of the above-mentioned factors orestimates, the likelihood of a material change in our reported results would increase.Litigation reserves. Estimated amounts for claims that are probable and can be reasonably estimated are recorded as liabilities in theconsolidated balance sheets. The likelihood of a material change in these estimated reserves would be dependent on new claims as theymay arise and the favorable or unfavorable outcome of the particular litigation. Both the amount and range of loss on the remaining pendinglitigation is uncertain. As such, we are unable to make a reasonable estimate of the liability that could result from unfavorable outcomes inlitigation. As additional information becomes available, we will assess the potential liability related to our pending litigation and revise ourestimates. Such revisions in our estimates of the potential liability could materially impact our results of operation and financial position.Valuation of deferred income taxes. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amountexpected to be realized. The likelihood of a material change in our expected realization of these assets depends on future taxable income, andthe effectiveness of our tax planning and strategies among the various tax jurisdictions in which we operate.INFLATION We do not believe that the relatively moderate rates of inflation experienced in the United States over the last three years have had asignificant effect on our sales or profitability. However, we cannot accurately predict the effect of inflation on future operating results. Althoughhigher rates of inflation have been experienced in a number of foreign countries in which our products are manufactured, we do not believethat inflation has had a material effect on our sales or profitability. While we have been able to offset our foreign product cost increases byincreasing prices or changing suppliers in the past, we cannot assure you that we will be able to continue to make such increases or changesin the future.EXCHANGE RATES32Table of Contents We receive U.S. dollars for substantially all of our product sales and our royalty income. Inventory purchases from offshore contractmanufacturers are primarily denominated in U.S. dollars; however, purchase prices for our products may be impacted by fluctuations in theexchange rate between the U.S. dollar and the local currencies of the contract manufacturers, which may have the effect of increasing ourcost of goods in the future. During 2002 and 2001, exchange rate fluctuations did not have a material impact on our inventory costs. We donot engage in hedging activities with respect to such exchange rate risk.ITEM 7(a) QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKMARKET RISK We do not hold any derivative securities. Market risk is the potential loss arising from the adverse changes in market rates and prices, such as interest rates and foreign currencyexchange rates. Changes in interest rates and, in the future, changes in foreign currency exchange rates have and will have an impact onour results of operations. Interest rate fluctuations. At December 31, 2002, 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 havean 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 ourinventory 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. Wemanage these risks by primarily denominating these purchases and commitments in U.S. dollars. We do not engage in hedging activitieswith respect to such exchange rate risks.FUTURE ACCOUNTING CHANGES In June 2001, FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 requires the Company to recordthe fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement oftangible long-lived assets that result from the acquisition, construction, development, and/or normal use of the assets. The Company alsorecords a corresponding asset that is depreciated over the life of the asset. Subsequent to the initial measurement of the asset retirementobligation, the obligation will be adjusted at the end of each period to reflect the passage of time and changes in the estimated future cashflows underlying the obligation. The Company adopted SFAS No. 143 on January 1, 2003. The adoption of SFAS No. 143 did not have amaterial effect on the Company’s financial statements. In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB StatementNo. 13, and Technical Corrections. SFAS No. 145 amends existing guidance on reporting gains and losses on the extinguishment of debt toprohibit the classification of the gain or loss as extraordinary, as the use of such extinguishments have become part of the risk managementstrategy of many companies. SFAS No. 145 also amends SFAS No. 13 to require sale-leaseback accounting for certain lease modificationsthat have economic effects similar to sale-leaseback transactions. The provisions of the Statement related to the rescission of StatementNo. 4 is applied in fiscal years beginning after May 15, 2002. Earlier application of these provisions is encouraged. The provisions of theStatement related to Statement No. 13 were effective for transactions occurring after May 15, 2002, with early application encouraged. Theadoption of SFAS No. 145 is not expected to have a material effect on the Company’s financial statements. In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 addressesfinancial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity. The provisions of this Statementare effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The adoption of SFASNo. 146 is not expected to have a material effect on the Company’s financial statements. In September 2002, the FASB Emerging Issues Task Force issued EITF No. 02-16, Accounting by a Reseller for Cash ConsiderationReceived from a Vendor. EITF No. 02-16 addresses how a reseller of a vendor’s products should account for cash33Table of Contentsconsideration (as that term is defined in EITF No. 01-9) received from a vendor. EITF 02-16 is not expected to have a material effect on theCompany’s financial statements. In November 2002, the FASB issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees,Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASBInterpretation No. 34. This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financialstatements about its obligations under guarantees issued. The Interpretation also clarifies that a guarantor is required to recognize, atinception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions of theInterpretation are applicable to guarantees issued or modified after December 31, 2002 and are not expected to have a material effect on theCompany’s financial statements. The disclosure requirements are effective for financial statements of interim and annual periods endingafter December 31, 2002. In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure, anamendment of FASB Statement No. 123. This Statement amends FASB Statement No. 123, Accounting for Stock-Based Compensation, toprovide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employeecompensation. In addition, this Statement amends the disclosure requirements of Statement No. 123 to require prominent disclosures inboth annual and interim financial statements. Certain of the disclosure modifications are required for fiscal years ending after December 15,2002 and are included in the notes to these consolidated financial statements. In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of ARB No. 51. ThisInterpretation addresses the consolidation by business enterprises of variable interest entities as defined in the Interpretation. TheInterpretation applies immediately to variable interests in variable interest entities created after January 31, 2003, and to variable interests invariable interest entities obtained after January 31, 2003. The application of this Interpretation is not expected to have a material effect on theCompany’s financial statements.ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this Item 8 is incorporated by reference to our Consolidated Financial Statements and Independent Auditors’Report beginning at page F-1 of this Form 10-K.ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.PART IIIITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item 10 is hereby incorporated by reference from our definitive proxy statement, to be filed pursuant toRegulation 14A within 120 days after the end of our 2002 fiscal year.ITEM 11. EXECUTIVE COMPENSATION The information required by this Item 11 is hereby incorporated by reference from our definitive proxy statement, to be filed pursuant toRegulation 14A within 120 days after the end of our 2002 fiscal year.ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS The information required by this Item 12 is hereby incorporated by reference from our definitive proxy statement, to be filed pursuant toRegulation 14A within 120 days after the end of our 2002 fiscal year.34Table of ContentsITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item 13 is hereby incorporated by reference from our definitive proxy statement, to be filed pursuant toRegulation 14A within 120 days after the end of our 2002 fiscal year.ITEM 14. CONTROLS AND PROCEDURES (a) Evaluation of disclosure controls and procedures The term “disclosures controls and procedures” refers to the controls and procedures of a company that are designed to ensure thatinformation required to be disclosed by a company in the reports that it files under Rules 13a – 14 of the Securities and Exchange Actof 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the required time periods. Within 90 days priorto the date of filing this report (the “Evaluation Date”), we carried out an evaluation under the supervision and with participation of ourChief Executive Officer and Chief Financial Officer of the effectiveness of our disclosure controls and procedures. Based on thatevaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, such controls andprocedures were effective in ensuring that required information will be disclosed on a timely basis in our periodic reports filed underthe Exchange Act. (b) Changes in internal control There were no significant changes to our internal controls subsequent to the Evaluation Date.ITEM 15. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required by this Item 15 is hereby incorporated by reference from our definitive proxy statement, to be filed pursuant toRegulation 14A within 120 days after the end of our 2002 fiscal year.PART IVITEM 16. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Consolidated financial statements and schedules required to be filed hereunder are indexed on Page F-1 hereof. (b) Reports on Form 8-K — There were no reports on Form 8-K filed during the last quarter of the fiscal year ended December 31, 2002. (c) Exhibits EXHIBIT NUMBER DESCRIPTION OF EXHIBIT 2.1 Agreement of Reorganization and Plan of Merger (incorporated by reference to exhibit number 3.2(a) of theRegistrant’s Registration Statement on Form S-1, as amended (File No. 333-60065), filed with the Securities andExchange Commission on May 12, 1999). 3.1 Certificate of Incorporation (incorporated by reference to exhibit number 3.1 of the Registrant’s Registration Statementon Form S-1, as amended (File No. 333-60065), filed with the Securities and Exchange Commission on July 29,1998). 3.2 Bylaws (incorporated by reference to exhibit number 3.2 of the Registrant’s Registration Statement on Form S-1, asamended (File No. 333-60065), filed with the Securities and Exchange Commission on July 29, 1998). 3.2(a) Amendment to Bylaws (incorporated by reference to exhibit number 3.2(a) of the Registrant’s Registration Statementon Form S-1, as amended (File No. 333-60065), filed with the Securities and Exchange Commission on May 12,1999).35Table of Contents EXHIBIT NUMBER DESCRIPTION OF EXHIBIT 4.1 Form of Specimen Class A Common Stock Certificate (incorporated by reference to exhibit number 4.1 of theRegistrant’s Registration Statement on Form S-1, as amended (File No. 333-60065), filed with the Securities andExchange Commission on May 12, 1999). 10.1 Amended and Restated 1998 Stock Option, Deferred Stock and Restricted Stock Plan (incorporated by reference toexhibit number 10.1 of the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-60065), filedwith the Securities and Exchange Commission on July 29, 1998). 10.1(a) Amendment No. 1 to Amended and Restated 1998 Stock Option, Deferred Stock and Restricted Stock Plan(incorporated by reference to exhibit number 4.4 of the Registrant’s Registration Statement on Form S-8 (FileNo. 333-71114), filed with the Securities and Exchange Commission on October 5, 2001). 10.2 Amended and restated 1998 Employee Stock Purchase Plan (incorporated by reference to exhibit number 10.1 of theRegistrant’s Form 10-Q, for the period ending June 30, 2000) 10.3 Employment Agreement dated June 14, 1999, between the Registrant and Robert Greenberg (incorporated byreference to exhibit number 10.3 of the Registrant’s Form 10-Q for the period ending June 30, 1999). 10.3(a) Amendment No. 1 to Employment Agreement between the Registrant and Robert Greenberg dated December 31,1999 (incorporated by reference to exhibit number 10.3(a) of the Registrant’s Form 10-K for the year endingDecember 31, 1999). 10.4 Employment Agreement dated June 14, 1999, between the Registrant and Michael Greenberg (incorporated byreference to exhibit number 10.4 of the Registrant’s Form 10-Q for the period ending June 30, 1999). 10.4(a) Amendment to Employment Agreement between the Registrant and Michael Greenberg dated December 31, 2000(incorporated by reference to exhibit number 10.4(a) of the Registrant’s Form 10-K for the year ending December 31,1999). 10.5 Employment Agreement dated June 14, 1999, between the Registrant and David Weinberg (incorporated byreference to exhibit number 10.5 of the Registrant’s Form 10-Q for the period ending June 30, 1999). 10.5(a) Amendment No. 1 to Employment Agreement between the Registrant and David Weinberg dated December 31,2000 (incorporated by reference to exhibit number 10.5(a) of the Registrant’s Form 10-K for the year endingDecember 31, 1999). 10.6 Indemnification Agreement dated June 7, 1999 between the Registrant and its directors and executive officers(incorporated by reference to exhibit number 10.6 of the Registrant’s Form 10-K for the year ending December 31,1999). 10.6(a) List of Registrant’s directors and executive officers who entered into Indemnification Agreement referenced inExhibit 10.6 with the Registrant (incorporated by reference to exhibit number 10.6(a) of the Registrant’s36Table of Contents EXHIBIT NUMBER DESCRIPTION OF EXHIBIT Form 10-K for the year ending December 31, 1999). 10.7 Registration Rights Agreement dated June 9, 1999, between the Registrant, the Greenberg Family Trust, andMichael Greenberg (incorporated by reference to exhibit number 10.7 of the Registrant’s Form 10-Q for the periodending June 30, 1999). 10.8 Tax Indemnification Agreement dated June 8, 1999, between the Registrant and certain shareholders (incorporatedby reference to exhibit number 10.8 of the Registrant’s Form 10-Q for the period ending June 30, 1999). 10.9 Lease Agreement, dated July 1, 1999, between the Registrant and Richard and Donna Piazza, regarding 1108-BManhattan Avenue, Manhattan Beach, California (incorporated by reference to exhibit number 10.22 of theregistrant’s Form 10-K for the year ending December 31, 1999). 10.10 Amended and Restated Loan and Security Agreement between the Registrant and Heller Financial, Inc., datedSeptember 4, 1998 (incorporated by reference to exhibit number 10.10 of the Registrant’s Registration Statement onForm S-1, as amended (File No. 333-60065), filed with the Securities and Exchange Commission on April 9, 1999). 10.10(a) Term Loan A Note, dated September 4, 1998, between the Registrant and Heller Financial, Inc. (incorporated byreference to exhibit number 10.10(a) of the Registrant’s Registration Statement on Form S-1, as amended (FileNo. 333-60065), filed with the Securities and Exchange Commission on April 9, 1999). 10.10(b) Revolving Note dated September 4, 1998, between the Registrant and Heller Financial, Inc. (incorporated byreference to exhibit number 10.10(b) of the Registrant’s Registration Statement on Form S-1, as amended (FileNo. 333-60065), filed with the Securities and Exchange Commission on April 9, 1999). 10.10(c) First Amendment to Amended and Restated Loan and Security Agreement, dated September 11, 1998 (incorporatedby reference to exhibit number 10.10(c) of the Registrant’s Registration Statement on Form S-1, as amended (FileNo. 333-60065), filed with the Securities and Exchange Commission on April 9, 1999). 10.10(d) Second Amendment to Amended and Restated Loan and Security Agreement, dated December 23, 1998(incorporated by reference to exhibit number 10.10(d) of the Registrant’s Registration Statement on Form S-1, asamended (File No. 333-60065), filed with the Securities and Exchange Commission on April 9, 1999). 10.10(e) Third Amendment to Amended and Restated Loan and Security Agreement dated February 1, 2000 (incorporated byreference to exhibit number 10.10(e) of the Registrant’s Form 10-K for the year ending December 31, 2000). 10.10(f) Fourth Amendment to Amended and Restated Loan and Security Agreement dated June 1, 2000 (incorporated byreference to exhibit number 10.10(f) of the Registrant’s Form 10-K for the year ending December 31, 2000). 10.10(g) Fifth Amendment to Amended and Restated Loan and Security Agreement dated July 11, 2001 (incorporated byreference to exhibit number 10.10(g) of the Registrant’s Form 10-Q for the period ending September 30, 2001). 10.11 Lease Agreement, dated April 15, 1998, between the Registrant and Holt/Hawthorn and Victory Partners, regarding228 Manhattan Beach Boulevard, Manhattan Beach, California (incorporated by reference to exhibit number 10.11 ofthe Registrant’s Registration Statement on Form S-1, as amended (File No. 333-60065), filed with the Securitiesand Exchange Commission on April 9, 1999).37Table of Contents EXHIBIT NUMBER DESCRIPTION OF EXHIBIT 10.12 Commercial Lease Agreement, dated February 19, 1997, between the Registrant and Richard and Donna Piazza,regarding 1110 Manhattan Avenue, Manhattan Beach, California (incorporated by reference to exhibit number 10.12of the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-60065), filed with the Securitiesand Exchange Commission on July 29, 1998). 10.13 Lease Agreement, dated June 12, 1998, between the Registrant and Richard and Donna Piazza, regarding 1112Manhattan Avenue, Manhattan Beach, California (incorporated by reference to exhibit number 10.13 of theRegistrant’s Registration Statement on Form S-1, as amended (File No. 333-60065), filed with the Securities andExchange Commission on July 29, 1998). 10.14 Lease Agreement, dated November 21, 1997, between the Registrant and The Prudential Insurance Company ofAmerica, regarding 1661 South Vintage Avenue, Ontario, California (incorporated by reference to exhibit number10.14 of the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-60065), filed with theSecurities and Exchange Commission on July 29, 1998). 10.14(a) First Amendment to Lease Agreement, dated April 26, 2002, between the Registrant and ProLogis California I LLC,regarding 1661 South Vintage Avenue, Ontario, California. 10.15 Lease Agreements, dated November 21, 1997, between the Registrant and The Prudential Insurance Company ofAmerica, regarding 1777 South Vintage Avenue, Ontario, California (incorporated by reference to exhibit number10.15 of the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-60065), filed with theSecurities and Exchange Commission on July 29, 1998). 10.15(a) First Amendment to Lease Agreement, dated April 26, 2002, between the Registrant and Cabot Industrial Properties,L.P. , regarding 1777 South Vintage Avenue, Ontario, California. 10.16 Commercial Lease Agreement, dated April 10, 1998, between the Registrant and Proficiency Ontario Partnership,regarding 5725 East Jurupa Street (incorporated by reference to exhibit number 10.16 of the Registrant’s RegistrationStatement on Form S-1, as amended (File No. 333-60065), filed with the Securities and Exchange Commission onJuly 29, 1998). 10.17 Lease Agreement and Addendum, dated June 11, 1998, between the Registrant and Delores McNabb, regardingSuite 3 on the first floor of the north building, Suite 9 on the first floor of the south building at 904 ManhattanAvenue, Manhattan Beach, California (incorporated by reference to exhibit number 10.17 of the Registrant’sRegistration Statement on Form S-1, as amended (File No. 333-60065), filed with the Securities and ExchangeCommission on April 9, 1999). 10.18 Addendum to Lease Agreement, dated September 14, 1998, between the Registrant and Delores McNabb, regardingSuites 3, 4 and 5 on the second floor of the north building at 904 Manhattan Avenue, Manhattan Beach, California(incorporated by reference to exhibit number 10.18 of the Registrant’s Registration Statement on Form S-1, asamended (File No. 333-60065), filed with the Securities and Exchange Commission on April 9, 1999). 38Table of Contents EXHIBIT NUMBER DESCRIPTION OF EXHIBIT 10.18(a) Addendum to Lease Agreement, dated April 15, 2000, between the Registrant and Delores McNabb, regarding Suites7, 8 and 9 on the second floor of the south building at 904 Manhattan Avenue, Manhattan Beach, California(incorporated by reference to exhibit number 10.18(a) of the Registrant’s Form 10-K for the year ending December 31,2001). 10.19 Standard Offer, Agreement and Escrow Instructions, Addendum and Additional Provisions, dated October 12, 2000,between the Registrant and/or its assignees and Champagne Building Group L.P., for the purchase of propertylocated at 1670 South Champagne Avenue, Ontario, California (incorporated by reference to exhibit number 10.19 ofthe Registrant’s Form 10-K for the year ending December 31, 2000). 10.20 Lease Agreement, dated November 15, 1999, between the Registrant and Champagne Building Group L.P.,regarding 1670 South Champagne Avenue, Ontario, California (incorporated by reference to exhibit number 10.20 ofthe Registrant’s Form 10-K for the year ending December 31, 1999). 10.21 Amendment of Lease Agreement dated December 20, 2000, between the Registrant and Yale Investments, LLC (awholly owned subsidiary of the Registrant), regarding 1670 South Champagne Avenue, Ontario, California(incorporated by reference to exhibit number 10.21 of the Registrant’s Form 10-K for the year ending December 31,2000). 10.22 Purchase and Sale Agreement with Escrow Instructions, dated November 13, 2000, between the Registrant andPacifica California/Apollo, LLC, for the purchase of property located at 225 South Sepulveda Boulevard, ManhattanBeach, California (incorporated by reference to exhibit number 10.22 of the Registrant’s Form 10-K for the yearending December 31, 2000). 10.22(a) First Amendment to Purchase and Sale Agreement, dated November 29, 2000, between the Registrant and PacificaCalifornia/Apollo, LLC, for the purchase of property located at 225 South Sepulveda Boulevard, Manhattan Beach,California (incorporated by reference to exhibit number 10.22(a) of the Registrant’s Form 10-K for the year endingDecember 31, 2000). 10.23 Promissory Note, dated December 27, 2000, between the Registrant and Washington Mutual Bank, FA, for thepurchase of property located at 225 South Sepulveda Boulevard, Manhattan Beach, California (incorporated byreference to exhibit number 10.23 of the Registrant’s Form 10-K for the year ending December 31, 2000). 10.24 Assignment and Assumption Agreement, dated December 27, 2000, between the Registrant and PacificaCalifornia/Apollo, LLC, regarding 225 South Sepulveda Boulevard, Manhattan Beach, California (incorporated byreference to exhibit number 10.24 of the Registrant’s Form 10-K for the year ending December 31, 2000). 10.25 Loan Agreement, dated December 21, 2000, between Yale Investments, LLC, and MONY Life Insurance Company,for the purchase of property located at 1670 South Champagne Avenue, Ontario, California (incorporated byreference to exhibit number 10.25 of the Registrant’s Form 10-K for the year ending December 31, 2000).39Table of Contents EXHIBIT NUMBER DESCRIPTION OF EXHIBIT 10.26 Promissory Note, dated December 21, 2000, between Yale Investments, LLC, and MONY Life Insurance Company,for the purchase of property located at 1670 Champagne Avenue, Ontario, California (incorporated by reference toexhibit number 10.26 of the Registrant’s Form 10-K for the year ending December 31, 2000). 10.27 Lease Agreement, dated April 28, 2000, between the Registrant and Manhattan Corners, LLC, regarding 1100Highland Avenue, Manhattan Beach, California (incorporated by reference to exhibit number 10.27 of theRegistrant’s Form 10-K for the year ending December 31, 2001). 10.28 Lease Agreement, dated April 10, 2001, between the Registrant and ProLogis California I LLC, regarding 4100 EastMission Boulevard, Ontario, California (incorporated by reference to exhibit number 10.28 of the Registrant’sForm 10-K for the year ending December 31, 2001). 10.29 Lease Agreement, dated February 8, 2002, between Skechers International, a subsidiary of the Registrant, andProLogis Belgium II SPRL, regarding ProLogis Park Liege Distribution Center I in Liege, Belgium. 21.1 Subsidiaries of the Registrant 23.1 Consent of KPMG LLP 24.1 Power of Attorney (included on signature page) 99.1 Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C Section 1350, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002.40Table of ContentsSIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized, in the City of Manhattan Beach, State of California on the 28th day ofMarch, 2003. SKECHERS U.S.A, INC. By: /S/ ROBERT GREENBERG Robert GreenbergChairman of the Board and Chief Executive OfficerPOWER OF ATTORNEY We, the undersigned officers and directors of Skechers U.S.A., Inc., do hereby constitute and appoint Robert Greenberg, MichaelGreenberg and David Weinberg, or either of them, our true and lawful attorneys and agents, to do any and all acts and things in our namesin the capacities indicated below, which said attorneys and agents, or either of them, may deem necessary or advisable to enable saidcorporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, and requirements of the Securitiesand Exchange Commission, in connection with this report, including specifically, but without limitation, power and authority to sign for us orany of us in our names and in the capacities indicated below, any and all amendments to this report, and we do hereby ratify and confirm allthat the said attorneys and agents, or either of them, shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf ofthe Registrant and in the capacities and on the dates indicated. SIGNATURE TITLE DATE /S/ ROBERT GREENBERGRobert Greenberg Chairman of the Board and Chief Executive Officer (PrincipalExecutive Officer) March 28, 2003 /S/ MICHAEL GREENBERGMichael Greenberg President and Director March 28, 2003 /S/ DAVID WEINBERGDavid Weinberg Executive Vice President, Chief Financial Officer and Director(Principal Financial and Accounting Officer) March 28, 2003 Jeffrey Greenberg Director J. Geyer Kosinski Director /S/ THOMAS J. POLETTIThomas J. Poletti Director March 28, 2003 Richard Siskind Director 41Table of ContentsCERTIFICATIONSI, Robert Greenberg, certify that:1. I have reviewed this annual report on Form 10-K for the year ended December 31, 2002 of Skechers U.S.A., Inc.2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material factnecessary to make the statements made, in light of the circumstances under which such statements were made, not misleading withrespect to the period covered by this annual report;3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in allmaterial respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in thisannual report.4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (asdefined 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 itsconsolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annualreport 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 ofthis annual report (the “Evaluation Date”); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on ourevaluation 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 auditcommittee 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 internalcontrols; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’sinternal controls; and6. The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internalcontrols or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including anycorrective actions with regard to significant deficiencies and material weaknesses.Date: March 28, 2003 /S/ ROBERT GREENBERG Robert Greenberg,Chief Executive Officer42Table of ContentsCERTIFICATIONSI, David Weinberg, certify that:1. I have reviewed this annual report on Form 10-K for the year ended December 31, 2002 of Skechers U.S.A., Inc.2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material factnecessary to make the statements made, in light of the circumstances under which such statements were made, not misleading withrespect to the period covered by this annual report;3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in allmaterial respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in thisannual report.4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (asdefined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: d) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annualreport is being prepared; e) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date ofthis annual report (the “Evaluation Date”); and f) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on ourevaluation 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 auditcommittee of registrant’s board of directors (or persons performing the equivalent function): c) 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 internalcontrols; and d) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’sinternal controls; and6. The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internalcontrols or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including anycorrective actions with regard to significant deficiencies and material weaknesses.Date: March 28, 2003 /S/ DAVID WEINBERG David Weinberg,Executive Vice Presidentand Chief Financial Officer43Table of ContentsSKECHERS U.S.A., INC.INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE Independent Auditors’ Report F-2 Consolidated Balance Sheets — December 31, 2001 and 2002 F-3 Consolidated Statements of Earnings — Each of the years in the three-year period ended December 31, 2002 F-4 Consolidated Statements of Stockholders’ Equity and Comprehensive Income — Each of the years in the three-year period endedDecember 31, 2002 F-5 Consolidated Statements of Cash Flows — Each of the years in the three-year period ended December 31, 2002 F-6 Notes to Consolidated Financial Statements F-7 Schedule II — Valuation and Qualifying Accounts S-1 F-1Table of ContentsINDEPENDENT AUDITORS’ REPORTThe Board of Directors and StockholdersSkechers U.S.A., Inc.: We have audited the accompanying consolidated financial statements of Skechers U.S.A., Inc. and subsidiaries as listed in theaccompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statementschedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements andfinancial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standardsrequire that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidatedfinancial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position ofSkechers U.S.A., Inc. and subsidiaries as of December 31, 2001 and 2002 and the results of their operations and their cash flows for each ofthe years in the three-year period ended December 31, 2002 in conformity with accounting principles generally accepted in the United Statesof America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financialstatements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG LLP Los Angeles, California February 17, 2003F-2Table of ContentsSKECHERS U.S.A., INC.CONSOLIDATED BALANCE SHEETSDECEMBER 31, 2001 AND 2002(IN THOUSANDS)ASSETS 2001 2002 Current assets: Cash and cash equivalents $15,554 $124,830 Trade accounts receivable, less allowances of $7,113 in 2001 and $8,498 in 2002 120,285 97,419 Due from officers and employees 1,013 617 Other receivables 1,816 7,144 Total receivables 123,114 105,180 Inventories 157,659 147,984 Prepaid expenses and other current assets 17,695 14,779 Deferred tax assets 4,804 703 Total current assets 318,826 393,476 Property and equipment, at cost, less accumulated depreciation and amortization 85,739 83,666 Intangible assets, at cost, less applicable amortization 458 927 Other assets, at cost 2,463 5,087 $407,486 $483,156 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Short-term borrowings $84,175 $— Current installments of long-term borrowings 2,140 2,442 Accounts payable 77,498 88,578 Accrued expenses 15,041 15,696 Total current liabilities 178,854 106,716 4.50% convertible subordinated notes — 90,000 Long-term borrowings, excluding current installments 29,616 27,204 Total liabilities 208,470 223,920 Commitments and contingencies Stockholders’ equity: Preferred stock, $.001 par value. Authorized 10,000 shares; none issued and outstanding — — Class A Common stock, $.001 par value. Authorized 100,000 shares; issued and outstanding15,329 and 18,369 shares at December 31, 2001 and 2002, respectively 15 18 Class B Common stock, $.001 par value. Authorized 60,000 shares; issued and outstanding21,482 and 19,317 shares at December 31, 2001 and 2002, respectively 21 19 Additional paid-in capital 91,909 102,109 Accumulated other comprehensive income 33 3,016 Retained earnings 107,038 154,074 Total stockholders’ equity 199,016 259,236 $407,486 $483,156 See accompanying notes to consolidated financial statements.F-3Table of ContentsSKECHERS U.S.A., INC.CONSOLIDATED STATEMENTS OF EARNINGSYEARS ENDED DECEMBER 31, 2000, 2001, and 2002(IN THOUSANDS, EXCEPT PER SHARE DATA) 2000 2001 2002 Net sales $675,036 $960,385 $943,582 Cost of sales 390,811 554,205 556,909 Gross profit 284,225 406,180 386,673 Royalty income, net 316 (303) 1,145 284,541 405,877 387,818 Operating expenses: Selling 77,451 111,401 94,274 General and administrative 125,827 205,989 210,752 203,278 317,390 305,026 Earnings from operations 81,263 88,487 82,792 Other income (expense): Interest, net (9,230) (13,852) (8,927) Other, net 318 1,320 1,476 (8,912) (12,532) (7,451) Earnings before income taxes 72,351 75,955 75,341 Income taxes 28,600 28,685 28,305 Net earnings $43,751 $47,270 $47,036 Net earnings per share: Basic $1.24 $1.30 $1.26 Diluted $1.20 $1.24 $1.20 Weighted-average shares: Basic 35,142 36,409 37,275 Diluted 36,563 38,059 40,854 See accompanying notes to consolidated financial statements.F-4Table of ContentsSKECHERS U.S.A., INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOMEYEARS’ ENDED DECEMBER 31, 2000, 2001, and 2002(IN THOUSANDS)See accompanying notes to consolidated financial statements. COMMON STOCK SHARES AMOUNT CLASS A CLASS B CLASS A CLASS B Balance at December 31, 1999 7,091 27,814 $7 $28 Net earnings — — — — Proceeds from issuance of common stock under the employee stockpurchase plan 267 — — — Proceeds from issuance of common stock under the employee stockoption plan 422 — — — Tax effect of non-qualified stock options — — — — Deferred compensation — — — — Conversion of Class B common stock into Class A common stock 3,009 (3,009) 3 (3) Balance at December 31, 2000 10,789 24,805 10 25 Comprehensive income: Net earnings — — — — Foreign currency translation adjustment — — — — Proceeds from issuance of common stock under the employee stockpurchase plan 136 — — — Proceeds from issuance of common stock under the employee stockoption plan 1,081 — 1 — Tax effect of non-qualified stock options — — — — Conversion of Class B common stock into Class A common stock 3,323 (3,323) 4 (4) Balance at December 31, 2001 15,329 21,482 15 21 Comprehensive income: Net earnings — — — — Foreign currency translation adjustment — — — — Contribution of common stock to the 401(k) Plan 48 — — — Proceeds from issuance of common stock under the employee stockpurchase plan 175 — — — Proceeds from issuance of common stock under the employee stockoption plan 652 — 1 — Tax effect of non-qualified stock options — — — — Conversion of Class B common stock into Class A common stock 2,165 (2,165) 2 (2) Balance at December 31, 2002 18,369 19,317 $18 $19 [Additional columns below][Continued from above table, first column(s) repeated] ACCUMULATED ADDITIONAL OTHER TOTAL PAID-IN COMPREHENSIVE RETAINED STOCKHOLDERS' CAPITAL INCOME EARNINGS EQUITY Balance at December 31, 1999 $69,948 — $16,017 $86,000 Net earnings — — 43,751 43,751 Proceeds from issuance of common stock under theemployee stock purchase plan 1,073 — — 1,073 Proceeds from issuance of common stock under theemployee stock option plan 1,499 — — 1,499 Tax effect of non-qualified stock options 1,636 — — 1,636 Deferred compensation 87 — — 87 Deferred compensation 87 — — 87 Conversion of Class B common stock into Class Acommon stock — — — — Balance at December 31, 2000 74,243 — 59,768 134,046 Comprehensive income: Net earnings — — 47,270 47,270 Foreign currency translation adjustment — $33 — 33 Proceeds from issuance of common stock under theemployee stock purchase plan 1,689 — — 1,689 Proceeds from issuance of common stock under theemployee stock option plan 7,679 — — 7,680 Tax effect of non-qualified stock options 8,298 — — 8,298 Conversion of Class B common stock into Class Acommon stock — — — — Balance at December 31, 2001 91,909 33 107,038 199,016 Comprehensive income: Net earnings — — 47,036 47,036 Foreign currency translation adjustment — 2,983 — 2,983 Contribution of common stock to the 401(k) Plan 702 — — 702 Proceeds from issuance of common stock under theemployee stock purchase plan 1,777 — — 1,777 Proceeds from issuance of common stock under theemployee stock option plan 4,674 — — 4,675 Tax effect of non-qualified stock options 3,047 — — 3,047 Conversion of Class B common stock into Class Acommon stock — — — — Balance at December 31, 2002 $102,109 $3,016 $154,074 $259,236 F-5Table of ContentsSKECHERS U.S.A., INC.CONSOLIDATED STATEMENTS OF CASH FLOWSYEARS ENDED DECEMBER 31, 2000, 2001, and 2002(IN THOUSANDS) 2000 2001 2002 Cash flows from operating activities: Net earnings $43,751 $47,270 $47,036 Adjustments to reconcile net earnings to net cash provided by (used in)operating activities: Depreciation and amortization of property and equipment 5,894 15,202 17,428 Amortization of debt offering costs — — 541 Amortization of intangible assets 104 101 101 Provision for bad debts and returns 4,626 5,507 4,963 Tax effect of non-qualified stock options 1,636 8,298 3,047 Deferred taxes (1,604) (390) 4,101 Deferred compensation 87 — — Loss on disposal of equipment 78 983 137 (Increase) decrease in assets: Receivables (36,137) (30,437) 13,660 Inventories (42,749) (45,951) 9,825 Prepaid expenses and other current assets (1,327) (11,238) 2,973 Other assets (1,437) 429 197 Increase in liabilities: Accounts payable 25,169 4,633 11,372 Accrued expenses 900 3,873 1,433 Net cash provided by (used in) operating activities (1,009) (1,720) 116,814 Cash flows used in investing activities: Capital expenditures (21,897) (31,519) (14,520) Proceeds from the sales of property and equipment 51 — — Net cash used in investing activities (21,846) (31,519) (14,520) Cash flows from financing activities: Net proceeds from issuance of common stock 2,572 9,369 6,452 Net proceeds (payments) related to short-term borrowings 19,372 34,421 (84,175) Payments on long-term debt (1,144) (3,811) (2,453) Proceeds from the issuance of convertible subordinated Notes, net ofoffering costs — — 86,175 Net cash provided by financing activities 20,800 39,979 5,999 Net increase (decrease) in cash (2,055) 6,740 108,293 Effect of exchange rates on cash — 33 983 Cash and cash equivalents at beginning of year 10,836 8,781 15,554 Cash and cash equivalents at end of year $8,781 $15,554 $124,830 Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $8,386 $13,613 $8,283 Income taxes 27,712 27,220 19,192 SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES: During 2000, the Company acquired $14,444 of property and equipment under capital lease arrangements. In addition, the Companyacquired an office building and distribution facility and issued two notes for $10,850 and $ 7,850, respectively. During, 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 $ 344,000 under capital lease obligations.See accompanying notes to consolidated financial statements.F-6Table of ContentsSKECHERS U.S.A., INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2001 AND 2002(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) The Company Skechers U.S.A., Inc. (the Company) designs, develops, markets and distributes footwear. The Company also operates retail stores ande-commerce businesses. The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Allsignificant intercompany balances and transactions have been eliminated in consolidation. (b) 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 integratedretail 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 awarenessof the Skechers brand and showcase a broad assortment of our in-season footwear styles. The products offered in our concept storesare 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 sellan 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 toliquidate excess merchandise, discontinued lines and odd-size inventory in a cost-efficient manner. Our factory outlet stores aretypically 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 andspecialty retail stores in Europe, Asia, Latin America, South America and numerous other countries and territories.Detail segment information is provided in note 11. (c) Revenue Recognition The Company recognizes revenue when products are shipped and the customer takes title and assumes risk of loss, collection of relevantreceivable is probable, persuasive evidence of an arrangement exists and the sales price is fixed or determinable. Allowances for estimatedreturns, discounts, bad debts and chargebacks are provided for when related revenue is recorded. Amounts billed for shipping and handlingcosts are recorded as a component of net sales. Related costs paid to third-party shipping companies are recorded as a cost of sales. Revenues from royalty agreements are recognized as earned. (d) Cash Equivalents Cash equivalents consist primarily of certificates of deposit with an initial term of less than three months. For purposes of the consolidatedstatements of cash flows, the Company considers all highly liquid debt instruments with original maturities of three months or less to becash equivalents.F-7Table of Contents(e) Foreign Currency Translation The Company considers the U.S. dollar as the functional currency. Assets and liabilities of the foreign operations denominated in localcurrencies are translated at the rate of exchange at the balance sheet date. Revenues and expenses are translated at the weighted averagerate of exchange during the period. Translation of intercompany loans of a long-term investment nature are included as a component oftranslation adjustment in other comprehensive income. Total comprehensive income at December 31, consists of the following: 2000 2001 2002 Net earnings $43,751 $47,270 $47,036 Accumulated other comprehensive income: Foreign currency translation adjustments — 33 2,983 Total comprehensive income $43,751 $47,303 $50,019 Accumulated other comprehensive income $— $33 $3,016 (f) Inventories Inventories, principally finished goods, are stated at the lower of cost (based on the first-in, first-out method) or market. The Companyprovides for estimated losses from obsolete or slow-moving inventories and writes down the cost of inventory at the time suchdeterminations are made. (g) Income Taxes The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for thefuture tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities andtheir respective tax basis. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period thatincludes the enactment date. (h) Depreciation and Amortization Depreciation and amortization of property and equipment is computed using the straight-line method based on the following estimateduseful lives: Buildings 20 yearsBuilding improvements 20 years or useful life, whichever is shorterFurniture, fixtures and equipment 5 yearsLeasehold improvements Useful life or remaining lease term, whichever is shorter Intangible assets consist of trademarks and are amortized on a straight-line basis over ten years. The accumulated amortization as ofDecember 31, 2001 and 2002 is $593,000 and $694,000, respectively. (i) Long-Lived Assets SFAS No. 144 provides a single accounting model for long-lived assets to be disposed of. SFAS No. 144 also changes the criteria forclassifying an asset as held for sale; and broadens the scope of businesses to be disposed of that qualify for reporting as discontinuedoperations and changes the timing of recognizing losses on such operations. The Company adopted SFAS No. 144 on January 1, 2002. Theadoption of SFAS No. 144 did not affect the Company’s financial statements.F-8Table of Contents In accordance with SFAS No. 144, long-lived assets, such as property, plant, and equipment, and purchased intangibles subject toamortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset maynot be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimatedundiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cashflows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Prior to the adoption of SFAS No. 144, the Company accounted for long-lived assets in accordance with SFAS No. 121, Accounting forImpairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. (j) Advertising Costs Advertising costs are expensed in the period in which the advertisements are first run or over the life of the endorsement contract.Advertising expense for the years ended December 31, 2000, 2001 and 2002 was approximately $59,122,000, $86,625,000 and$76,824,000, respectively. Prepaid advertising costs at December 31, 2001 and 2002 were $1,440,000 and $1,114,000, respectively. Prepaidamounts outstanding at December 31, 2001 and 2002 represents the unamortized portion of endorsement contracts and advertising in tradepublications which had not run as of December 31, 2001 and 2002, respectively. (k) Earnings Per ShareBasic 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 equivalentswhich 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 earningsper share (in thousands): Fiscal Year Ended December 31, Basic earnings per share 2000 2001 2002 Net earnings $43,751 $47,270 $47,036 Weighted average common shares outstanding 35,142 36,409 37,275 Basic earnings per share $1.24 $1.30 $1.26 The following is a reconciliation of net earnings and weighted average common shares outstanding for purposes of calculating dilutedearnings per share (in thousands): Fiscal Year Ended December 31, Diluted earnings per share 2000 2001 2002 Net earnings $43,751 $47,270 $47,036 After tax effect equivalent of interest expense on 4.50% convertiblesubordinated notes — — 1,832 Earnings for purposes of computing diluted earnings per share $— $— $48,868 Weighted average common shares outstanding 35,142 36,409 37,275 Dilutive stock options 1,421 1,650 1,063 Weighted average assumed conversion of 4.50% convertiblesubordinated notes — — 2,516 Weighted average common shares outstanding 36,563 38,059 40,854 Diluted earnings per share $1.20 $1.24 $1.20 F-9Table of Contents Options to purchase 1,117,920, 279,500 and 931,922 shares of common stock at prices ranging from $12.38 to $29.45 wereoutstanding at December 31, 2000, 2001 and 2002, respectively, but were not included in the computation of diluted earnings per sharebecause the options’ exercise price was greater than the average market price of the common shares and therefore their inclusion would beanti-dilutive. (l) Stock Compensation The Company accounts for stock-based compensation under the provisions of Statement of Financial Accounting Standards No. 123,Accounting for Stock-Based Compensation (SFAS 123). Under the provisions of SFAS 123, the Company has elected to continue tomeasure compensation cost for employees and nonemployee directors of the Company under the intrinsic value method of APB No. 25 andcomply with the pro forma disclosure requirements under SFAS 123. The Company applies the fair value techniques of SFAS 123 tomeasure compensation cost for options/warrants granted to nonemployees.The following table illustrates the effects on net earnings the fair value-based method had been applied to all outstanding and unvestedawards in each period (in thousands). 2000 2001 2002 Net earnings, as reported $43,751 $47,270 $47,036 Add stock-based employee compensation expense included inreported net income, net of tax 52 — — Deduct total stock-based employee compensation expense underfair value- based method for all awards, net of tax (3,432) (7,936) (7,378) Pro forma net earnings for basic pro forma earnings per share $40,371 $39,334 $39,658 Add back interest on 4.50% debentures, net of tax — — 1,832 Pro forma net earnings for diluted pro forma earnings per share $40,371 $39,334 $41,490 Pro forma net earnings per share: Basic $1.15 $1.08 $1.06 Diluted 1.10 1.03 1.02 Pro forma basic net earnings per share represents net pro forma earnings divided by the weighted average number of common sharesoutstanding for the period. Pro forma diluted earnings per share, in addition to the weighted average determined for pro forma basic earningsper share, includes common stock equivalents which would arise from the exercise of stock options using the treasury stock method, andassumes the conversion of the Company’s 4.50% Convertible Subordinated Notes for the period outstanding since their issuance in April2002. (m) Use of Estimates Management has made a number of estimates and assumptions relating to the reporting of assets, liabilities, revenues and expensesand the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with accountingprinciples generally accepted in the United States of America. Significant areas requiring the use of management estimates relate primarily tothe valuation of inventories, accounts receivable allowances, the useful lives of assets for depreciation, evaluation of impairment,recoverability of deferred taxes and litigation reserves. Actual results could differ from those estimates.F-10Table of Contents (n) Product Design and Development Costs The Company charges all product design and development costs to expense when incurred. Product design and development costsaggregated approximately $3,700,000, $5,493,000 and $5,984,000 during the years ended December 31, 2000, 2001 and 2002,respectively. (o) Fair Value of Financial Instruments The carrying amount of the Company’s financial instruments, which principally include cash, accounts receivable, accounts payable andaccrued expenses, approximates fair value due to the relatively short maturity of such instruments. The fair value of the Company’s short-term borrowings reflects the fair value based upon current rates available to the Company forsimilar debt. The fair value of the Company’s 4.50% Convertible Subordinated Notes at December 31, 2002 was $71.4 million, based on theprice of the debt in the public market. (p) New Accounting Standards In June 2001, FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 requires the Company to recordthe fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement oftangible long-lived assets that result from the acquisition, construction, development, and/or normal use of the assets. The Company alsorecords a corresponding asset that is depreciated over the life of the asset. Subsequent to the initial measurement of the asset retirementobligation, the obligation will be adjusted at the end of each period to reflect the passage of time and changes in the estimated future cashflows underlying the obligation. The Company will adopt SFAS No. 143 on January 1, 2003. The adoption of SFAS No. 143 is not expectedto have a material effect on the Company’s financial statements. In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB StatementNo. 13, and Technical Corrections. SFAS No. 145 amends existing guidance on reporting gains and losses on the extinguishment of debt toprohibit the classification of the gain or loss as extraordinary, as the use of such extinguishments have become part of the risk managementstrategy of many companies. SFAS No. 145 also amends SFAS No. 13 to require sale-leaseback accounting for certain lease modificationsthat have economic effects similar to sale-leaseback transactions. The provisions of the Statement related to the rescission of StatementNo. 4 is applied in fiscal years beginning after May 15, 2002. Earlier application of these provisions is encouraged. The provisions of theStatement related to Statement No. 13 were effective for transactions occurring after May 15, 2002, with early application encouraged. Theadoption of SFAS No. 145 is not expected to have a material effect on the Company’s financial statements. In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 addressesfinancial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity. The provisions of this Statementare effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The adoption of SFASNo. 146 is not expected to have a material effect on the Company’s financial statements. In September 2002, the FASB Emerging Issues Task Force issued EITF No. 02-16, Accounting by a Reseller for Cash ConsiderationReceived from a Vendor. EITF No. 02-16 addresses how a reseller of a vendor’s products should account for cash consideration (as that termis defined in EITF No. 01-9) received from a vendor. EITF 02-16 is not expected to have a material effect on the Company’s financialstatements. In November 2002, the FASB issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees,Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASBInterpretation No. 34. This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financialstatements about its obligations under guarantees issued. The Interpretation also clarifies that a guarantor is required to recognize, atinception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions of theInterpretation are applicable to guarantees issued or modified after December 31, 2002 and are not expected to have a material effect on theCompany’s financial statements. The disclosure requirements are effective for financial statements of interim and annual periods endingafter December 31, 2002.F-11Table of Contents In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure, anamendment of FASB Statement No. 123. This Statement amends FASB Statement No. 123, Accounting for Stock-Based Compensation, toprovide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employeecompensation. In addition, this Statement amends the disclosure requirements of Statement No. 123 to require prominent disclosures inboth annual and interim financial statements. Certain of the disclosure modifications are required for fiscal years ending after December 15,2002 and are included in the notes to these consolidated financial statements. In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of ARB No. 51. ThisInterpretation addresses the consolidation by business enterprises of variable interest entities as defined in the Interpretation. TheInterpretation applies immediately to variable interests in variable interest entities created after January 31, 2003, and to variable interests invariable interest entities obtained after January 31, 2003. The application of this Interpretation is not expected to have a material effect on theCompany’s financial statements.(2) PROPERTY AND EQUIPMENT Property and equipment is summarized as follows (in thousands): 2001 2002 Land $12,358 $12,358 Buildings and improvements 20,527 21,144 Furniture, fixtures and equipment 46,468 55,431 Leasehold improvements 35,765 41,149 Total property and equipment 115,118 130,082 Less accumulated depreciation and amortization 29,379 46,416 Property and equipment, net $85,739 $83,666 (3) ACCRUED EXPENSES Accrued expenses is summarized as follows (in thousands): 2001 2002 Accrued inventory purchases $8,208 $6,814 Accrued payroll and related taxed 5,751 6,327 Taxes payable 773 1,397 Accrued interest — 839 Other accrued liabilities 309 319 Accrued expenses $15,041 $15,696 (4) SHORT-TERM BORROWINGSThe Company has available a secured line of credit, as amended on July 12, 2002, permitting borrowings up to $200.0 million based uponeligible accounts receivable and inventories. Borrowings bear interest at the prime rate (4.25% at December 31, 2002) minus 0.50%, and theagreement expires on December 31, 2003. The agreement provides for the issuance of letters of credit up to a maximum of $30.0 million ofwhich 50% decreases the amount available for borrowings under the agreement. Outstanding letters of credit at December 31, 2002 were$5.0 million. Available borrowings under the line of credit at December 31, 2002 were $100.9 million and no amounts were outstanding atDecember 31, 2002 and $84.2 million was outstanding at December 31, 2001. The Company pays an unused line of credit fee of .25%annually. The agreement provides that stockholders’ equity shall not decrease by more than 20% in any given calendar quarter, contains atangible net worth requirement, as defined in the agreement, and limits the payment of dividends if in default of any provision of theagreement. The Company was in compliance with these covenants at December 31, 2002.(5) LONG-TERM BORROWINGS Long-term debt at December 31, 2001 and 2002 is as follows (in thousands):F-12Table of Contents 2001 2002 4.50% Convertible Subordinated Notes due April 15, 2007 (see below) $— $90,000 Note payable to bank, due in monthly installments of $82.2 (includes principal and interest),fixed rate interest at 7.79%, secured by property, balloon payment of $8,716 due January2011 10,716 10,558 Note payable to bank, due in monthly installments of $57.6 (includes principal and interest),fixed rate interest at 7.89%, secured by property, balloon payment of $6,776 due February2011 7,782 7,702 Capital lease obligation, due in aggregate monthly installments of $195, interest rate of 7.66%,secured by equipment, balloon payment of $4,431 due February 2006 (see note 10) 11,367 9,847 Capital lease obligations, due in aggregate monthly installments of $60, interest rates from7.25%-9.59%, secured by equipment, maturing in various installments through January2007 (see note 10) 1,891 1,539 31,756 119,646 Less current installments 2,140 2,442 $29,616 $117,204 The aggregate maturities of long-term borrowings at December 31, 2001 are as follows: 2003 $2,442 2004 2,644 2005 2,435 2006 5,005 2007 90,349 Thereafter 16,771 $119,646 In April 2002, the Company issued $90.0 million aggregate principal amount of 4.50% Convertible Subordinated Notes (the “Notes”) dueApril 15, 2007. The Notes are convertible into shares of Class A common stock. Interest on the Notes is paid semi-annually on April 15 andOctober 15 of each year, commencing October 15, 2002. The Notes are convertible at the option of the holder into shares of Class A commonstock at a conversion rate of 38.5089 shares of Class A common stock per $1,000 principal amount of Notes, which is equivalent to aconversion price of approximately $25.968 per share. The conversion rate is subject to adjustment. The Notes may be converted at any timeon 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 onthe date immediately preceding the date fixed for redemption or repurchase, as the case may be. The Notes are unsecured and subordinatedto our present and future Senior Debt, as defined in the indenture. The Notes are also structurally subordinated in right of payment to allindebtedness and other liabilities of the Company’s subsidiaries. The indenture under which the Notes were issued does not restrict theincurrence of indebtedness, including Senior Debt, or the subsidiaries’ incurrence of indebtedness. Net proceeds from the issuance of theNotes were $86.2 million, of which $65.0 million was used to repay amounts owing under the Company’s line of credit and the remainingproceeds will be used for working capital. The costs associated with the issuance of the Notes, approximately $3.8 million, will be amortizedusing the effective interest method over the life of the Notes and are included in interest expense as amortized.(6) STOCKHOLDERS’ EQUITY (a) Stock Issuances The authorized capital stock of the Company consists of 100,000,000 shares of Class A common stock, par value $.001 per share, and60,000,000 shares of Class B common stock, par value $.001 per share. The Company has also authorized 10,000,000 shares of preferredstock, $.001 par value per share. The Class A common stock and Class B common stock have identical rights other than with respect to voting, conversion and transfer.The Class A common stock is entitled to one vote per share, while the Class B common stock is entitled to ten votes per share on all matterssubmitted to a vote of stockholders. The shares of Class B common stock are convertible at any time at the option of the holder into shares ofClass A common stock on a share-for-share basis. In addition, shares of Class B common stock will be automatically converted into a likenumber of shares of Class A common stock upon any transfer to any person or entity which is not aF-13Table of Contentspermitted transferee. During 2001 and 2002 certain Class B stockholders converted 3,323,300 and 2,164,554 shares of Class B common stock to Class Acommon stock, respectively. (b) Stock Option Plan In January 1998, the Board of Directors of the Company adopted the 1998 Stock Option, Deferred Stock and Restricted Stock Plan (StockOption Plan) for the grant of qualified incentive stock options (ISO), stock options not qualified and deferred stock and restricted stock. Theexercise price for any option granted may not be less than fair value (110% of fair value for ISOs granted to certain employees). In June 2001,the stockholders approved an amendment to the plan to increase the number of shares of Class A common stock authorized for issuanceunder the plan to 8,215,154. The options expire ten years from the date of grant. Shares subject to option under the Stock Option Plan were as follows: WEIGHTED SHARES OPTION PRICE Outstanding at December 31, 1999 2,515,574 $6.41 Granted 1,532,695 10.79 Exercised (422,370) 3.55 Canceled (136,998) 10.23 Outstanding at December 31, 2000 3,488,901 8.51 Granted 2,177,880 14.31 Exercised (1,080,995) 7.10 Canceled (87,628) 15.08 Outstanding at December 31, 2001 4,498,158 11.53 Granted 1,689,595 7.77 Exercised (652,396) 7.17 Canceled (105,974) 11.22 Outstanding at December 31, 2002 5,429,383 10.89 Options available for grant at December 31, 2002 630,011 The following table summarizes information about stock options outstanding and exercisable at December 31, 2002. OPTIONS OUTSTANDING OPTIONS EXERCISABLE WEIGHTED NUMBER WEIGHTED WEIGHTED NUMBER AVERAGERANGE OF OUTSTANDING AVERAGE REMAINING AVERAGE EXERCISABLE AT EXERCISEEXERCISE PRICE DECEMBER 31, 2002 CONTRACTUAL LIFE EXERCISE PRICE DECEMBER 31, 2002 PRICE $2.78 to $9.28 1,852,078 8.9 years $6.17 668,121 $5.14 $9.29 to $12.38 1,721,155 7.8 years 10.75 806,198 10.76 $12.39 to $15.75 1,519,150 7.7 years 14.07 811,280 13.70 $15.76 to $29.45 337,000 8.2 years 23.23 150,850 23.35 5,429,383 8.2 years $10.89 2,436,449 $10.98 At December 31, 2000, 2001 and 2002, the number of options exercisable for each year was 862,111, 1,249,681, and 2,436,449respectively. The weighted-average exercise price of those options was $7.87, $11.06 and $10.98 respectively. (c) Stock Purchase Plan Effective July 1, 1998, the Company adopted the 1998 Employee Stock Purchase Plan (1998 Stock Purchase Plan). Under the terms ofthe 1998 Stock Purchase Plan, 2,781,415 shares of common stock are reserved for sale to employees at a price no less than 85% of thelower of the fair market value of the Class A common stock at the beginning of the one-year offering period or the end of each of the six-monthpurchase periods. During 2000, 2001 and 2002, 266,865 and 135,600 and 175,098 shares were issued under the 1998 Stock PurchasePlan for which the Company received $1,073,000, $1,689,000, and $1,777,000, respectively. (d) Stock Compensation For pro forma net income purposes, the fair value of each option is estimated on the date of grant using the Black-Scholes optionF-14Table of Contentspricing model. The weighted-average assumptions used for grants were as follows: 2000 2001 2002 Dividend yield — — — Expected volatility 70% 80% 82%Risk-free interest rate 6.3% 4.2% 2.7%Expected life of option 5 5 5 The weighted-average fair value of options granted during 2000, 2001, and 2002 were $6.83, $9.55, and $5.02, respectively.(7) INCOME TAXES The provisions for income tax expense were as follows (in thousands): 2000 2001 2002 Actual income taxes: Federal: Current $25,420 $24,134 $20,031 Deferred (1,360) 16 3,398 Total federal 24,060 24,150 23,429 State: Current 4,784 4,627 3,592 Deferred (244) (406) 703 Total state 4,540 4,221 4,295 Foreign — current — 314 581 Total actual income taxes $28,600 $28,685 $28,305 Income taxes differs from the statutory tax rate as applied to earnings before income taxes as follows (in thousands): 2000 2001 2002 Expected income tax expense $25,323 $26,584 $26,364 State income tax, net of federal benefit 2,951 2,744 2,767 Rate differential on foreign income — (822) (1,003)Other 326 179 177 Total provision for income taxes $28,600 $28,685 $28,305 The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities atDecember 31, 2001 and 2002 are presented below (in thousands): DEFERRED TAX ASSETS: 2001 2002 Inventory adjustments $1,749 $2,221 Accrued expenses 1,379 1,354 Allowances for receivables 2,898 1,491 Other — 163 Total deferred tax assets 6,026 5,229 Deferred tax liabilities: Prepaid expenses — 2,401 Deferred revenue — 1,092 Depreciation of property and equipment 1,222 843 Other — 190 Total deferred tax liabilities 1,222 4,526 Net deferred tax assets $4,804 $703 Management believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize the netdeferred tax assets. Consolidated U.S. income before taxes was $72.4 million, $69.7 million, and $72.2 million for the years ended December 31,F-15Table of Contents2000, 2001, and 2002, respectively. The corresponding income (loss) before taxes for non-U.S. based operations was ($0.1), $6.3, and$3.1 million for the years ended December 31, 2000, 2001, and 2002, respectively. The Company has not provided withholding and U.S. federal income taxes on approximately $9.3 million of undistributed earnings of itsforeign subsidiaries because such earnings are or will be invested indefinitely in such subsidiaries or will be offset by approximate credits forforeign taxes paid. It is not practicable to determine the U.S. federal income tax liability, if any, which would be payable if such earnings werenot reinvested indefinitely.(8) BUSINESS AND CREDIT CONCENTRATIONS The Company operates in the footwear industry and generates most of its sales in the United States, although it’s products are sold intovarious foreign countries. The footwear industry is impacted by the general economy. Changes in the marketplace may significantly affectmanagement’s estimates and the Company’s performance. Management performs regular evaluations concerning the ability of customersto satisfy their obligations and provides for estimated doubtful accounts. Domestic accounts receivable amounted to $102,543,000 and$86,801,000 before allowances for bad debts and sales returns, and chargebacks at December 31, 2001 and 2002, respectively, whichgenerally do not require collateral from customers. Foreign accounts receivable amounted to $24,855,000 and $19,116,000 before allowancefor bad debts, sales returns, and chargebacks at December 31, 2001 and 2002, respectively, which generally are collateralized by letters ofcredit. International net sales amounted to $65,159,000, $121,001,000 and $134,955,000 for the years ended December 31, 2000, 2001 and2002, respectively. The Company’s credit losses for the years ended December 31, 2000, 2001 and 2002 were $2,511,000, $3,546,000 and$2,654,000, respectively, and did not significantly differ from management’s expectations. Net sales to customers in the United States of America exceeded 85% of total net sales for each of the years in the three-year period endedDecember 31, 2002. Assets located outside of the United States of America consists primarily of cash, accounts receivable, inventory,property and equipment, and other assets and totaled $59,795,000 and $66,850,000, at December 31, 2001 and 2002, respectively. During 2000, 2001 and 2002, no customer accounted for 10% or more of net sales. The Company had one customer which accounted for10.2% of trade accounts receivable at December 31, 2001. No one customer accounted for greater than 10% of trade accounts receivable atDecember 31, 2002. During 2000, the Company had four manufacturers that accounted for between 9.2% and 20.2% each of total purchases. During 2001,the company had four manufacturers that accounted for between 7.9% and 19.9%, each, of total purchases. During 2002, the company hadfour manufacturers that accounted for between 9.3% and 22.7%, each, of total purchases. Substantially all of the Company’s products are produced in China. The Company’s operations are subject to the customary risks of doingbusiness abroad, including, but not limited to, currency fluctuations, custom duties and related fees, various import controls and othermonetary barriers, restrictions on the transfer of funds, labor unrest and strikes and, in certain parts of the world, political instability. TheCompany believes it has acted to reduce these risks by diversifying manufacturing among various factories. To date, these risk factors havenot had a material adverse impact on the Company’s operations.(9) BENEFIT PLAN The Company has adopted a profit sharing plan covering all employees who are 21 years of age and have completed one year of service.The plan was amended in April 2001 to allow employees to enter into the plan after six months of service. Employees may contribute up to15.0% of annual compensation. Company contributions to the plan are discretionary and vest over a five-year period. The Company’s contributions to the plan amounted to $500,000, $702,000 and $788,000 for the years ended December 31, 2000, 2001and 2002, respectively. As its contribution to the plan in 2002, the Company has committed to issue 83,351 shares of its Class A commonstock, the shares will be issued in March 2003. The company’s contribution to the plan for 2001 was 48,072 shares which were issued in2002. The shares contributed to the plan contain certain restrictions regarding the subsequent sales of those shares.F-16Table of Contents(10) COMMITMENTS AND CONTINGENCIES (a) Leases The Company leases facilities under operating lease agreements expiring through July 2027. The leases are on an all-net basis, wherebythe Company pays taxes, maintenance and insurance. The Company also leases certain equipment and automobiles under operating leaseagreements expiring at various dates through April 2006. Rent expense for the years ended December 31, 2000, 2001 and 2002approximated $13,200,000, $18,014,000 and $22,167,000, respectively. The Company also leases certain property and equipment under capital lease agreements requiring monthly installment paymentsthrough January 2007. The cost of this property and equipment was $15,456,000 with a net book value of $9,315,000 at December 31,2002. Future minimum lease payments under noncancellable leases at December 31, 2002 are as follows (in thousands): CAPITAL OPERATING LEASES LEASES Year ending December 31: 2003 $3,065 $23,634 2004 3,065 23,461 2005 2,714 22,237 2006 4,721 20,630 2007 1 18,692 Thereafter — 78,666 $13,566 $187,320 Less imputed interest 2,180 Present value of net minimum lease payments $11,386 The Company leases office space to unrelated third parties under noncancellable operating leases expiring through November 2004,annual rentals are approximately $96,000 and $49,000 for the years ended December 31, 2003 and 2004, respectively. (c) Litigation On October 28, 2002, Skechers settled the lawsuit captioned RAYMOND MEIER v. SKECHERS USA, INC. that had been filed in theUnited States District Court for the Southern District of New York (Case No. 02 CV 4139). The settlement is final and the terms areconfidential. The obligations assumed will not have a material effect on Skechers’ financial position or results of operations.On December 13, 2002, Skechers finalized the settlement of various lawsuits pending between Skechers and Heeling Sports Limited andHeeling Management Corporation in the United States District Court for the Central District of California (Case No. 02-1906NM) and theUnited States District Court for the Eastern District of Texas (Civil Action Nos. 4:02cv101; 4:02cv169). The settlement is final and the termsare confidential. The obligations assumed will not have a material effect on Skechers’ financial position or results of operations.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 DistrictCourt for the Central District of California (Case No. 02-07766 PA) asserting claims for, inter alia, patent infringement, dilution and unfaircompetition. Fortune Dynamics’ counterclaims allege violations of the federal antitrust laws, breach of contract, interference with economicrelations and unfair competition. The counterclaims seek, 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 defensesto the claims asserted by Fortune Dynamic and intends to defend against those claims vigorously. Further, Skechers does not believe that anadverse result would 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 SuperiorCourt for the State of California for the County of Orange (Case No. 02CC00353). The complaint, as amended, alleges overtime and relatedviolations of the California Labor Code on behalf of managers of Skechers’ retail stores and seeks, inter alia, damages and restitution, aswell 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 outcomeof the claims against Skechers, Skechers believes that it has meritorious defenses toF-17Table of Contentsthe claims asserted in both class actions and intends to defend against those claims vigorously. Further, Skechers does not believe that anadverse 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 theUnited States District Court for the Central District of California (Case No. 02-9774 AHM). The complaint, as amended, alleges breach ofcontract, fraud, trademark infringement, false impression of association, trademark dilution, unfair competition and related claims againstSkechers in connection with a merchandising license agreement entered into between the parties relating to Skechers’ line of Britney 4Wheelers skates. The lawsuit seeks, inter alia, compensatory and punitive damages, imposition of a constructive trust, an accounting anddeclaratory relief. While it is too early in the litigation to predict the outcome of the claims against Skechers, Skechers believes that it hasmeritorious defenses to the claims asserted by Britney Brands and intends to defend against those claims vigorously. Skechers has alsoasserted counterclaims against Britney Brands. Further, Skechers does not believe that an adverse result would have a material effect onSkechers’ 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. wasfiled against Skechers in the United States District Court for the District of Oregon (Case No. CV 03-170 KI). The complaint alleges claims fortrademark infringement, trademark dilution, unfair competition and deceptive trade practices arising out of Skechers’ alleged use of marksconfusingly similar to Adidas’ three stripe mark. The lawsuit seeks, inter alia, compensatory, treble and punitive damages, as well asinjunctive relief. While it is too early in the litigation to predict the outcome of the claims against Skechers, Skechers believes that it hasmeritorious defenses to the claims asserted by Adidas and intends to defend against those claims vigorously. Skechers also intends to assertcounterclaims against Adidas. Further, Skechers does not believe that an adverse result would have a material effect on Skechers’ financialposition or results of operations.On March 25, 2003, a class action complaint captioned HARVEY SOLOMON v. SKECHERS USA, INC. et al. was filed against Skechersand certain of its officers and directors in the United States District Court for the Central District of California (Case No. 03-2094 DDP). Thecomplaint alleges violations of the federal securities laws and breach of fiduciary duty on behalf of persons who purchased publicly tradedsecurities 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 withoutmerit 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 anyliability with respect to pending legal actions, individually or in the aggregate, will not have a material adverse effect on our business, finalcondition or results of operation. (c) Purchase Commitments At December 31, 2002, the Company had purchase commitments of approximately $201,287,000. The Company finances production activities in part through the use of interest-bearing open purchase arrangements with certain of itsinternational manufacturers. These arrangements currently bear interest at rates between 0.5% and 1.5% per 30 to 60 day term. Theamounts outstanding under these arrangements at December 31, 2001 and 2002 were $49,255,000 and $51,411,000, respectively, whichare included in accounts payable in the accompanying consolidated balance sheets. Interest expense incurred by the Company under thesearrangements amounted to $6,400,000 in 2000, $5,900,000 in 2001, and $2,278,000 in 2002. (d) Compensation Certain officers and key employees of the company are entitled to incentive bonuses under employment contracts. The bonuses are basedon Company performance.(11) SEGMENT INFORMATIONIn accordance with the requirement of SFAS 131, “Disclosures about Segments of an Enterprise and Related Information,” the Company’sreportable business segments and respective accounting policies of the segments are the same as described in Note 1. The only reportablesegment in which the total assets or total net sales exceeds the quantitative thresholds established by SFAS No. 131 is the domesticwholesale segment. Accordingly, all other segments have been combined for this presentation. Management evaluates segmentperformance 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 andgross margins for the domestic wholesale segment and the other segments on a combined basis were as follows (in thousands).F-18Table of Contents 2000 2001 2002 Net sales Domestic wholesale $532,600 $729,900 $682,600 All other 142,436 230,485 260,982 $675,036 $960,385 $943,582 Gross profit Domestic wholesale $214,637 $298,529 $262,118 All other 69,588 107,651 124,555 $284,225 $406,180 $386,673 Assets Domestic wholesale $234,624 $291,704 $352,205 All other 68,776 115,782 130,951 $303,400 $407,486 $483,156 (12) SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Summarized unaudited financial data are as follows (in thousands): 2001 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 Net sales $227,494 $230,899 $287,900 $214,092 Gross profit 99,314 99,175 122,595 85,096 Net earnings 17,100 16,822 11,378 1,970 Net earnings per share: Basic $.48 $.46 $.31 $.05 Diluted .45 .44 .30 .05 2002 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 Net sales $244,949 $256,652 $261,147 $180,834 Gross profit 102,524 105,786 108,800 69,563 Net earnings (loss) 20,278 21,258 14,107 (8,607) Net earnings (loss) per share: Basic $.55 $.57 $.38 $(.23) Diluted .53 .52 .35 (.23) F-19Table of ContentsSKECHERS U.S.A., INC.SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTSYEARS ENDED DECEMBER 31, 2000, 2001, AND 2002 BALANCE AT CHARGED TO DEDUCTIONS BALANCE BEGINNING OF COSTS AND AND AT ENDDESCRIPTION PERIOD EXPENSES WRITE-OFFS OF PERIOD As of December 31, 2000: Allowance for doubtful accounts $507,000 $1,526,000 $(737,000) $1,296,000 Reserve for sales returns and allowances 2,730,000 3,100,000 (1,974,000) 3,856,000 As of December 31, 2001: Allowance for chargebacks $— $3,618,000 $— $3,618,000 Allowance for doubtful accounts 1,296,000 1,499,000 (1,723,000) 1,072,000 Reserve for sales returns and allowances 3,856,000 390,000 (1,823,000) 2,423,000 As of December 31, 2002: Allowance for chargebacks $3,618,000 $1,138,000 $(925,000) $3,831,000 Allowance for doubtful accounts 1,072,000 1,409,000 (854,000) 1,627.000 Reserve for sales returns and allowances 2,423,000 2,416,000 (1,799,000) 3,040,000 S-1 EXHIBIT 10.14(a) FIRST AMENDMENT TO LEASE THIS FIRST AMENDMENT to Lease ("Amendment") is dated for reference purposes April 26, 2002 and is entered into by and between PROLOGIS CALIFORNIA I LLC ("Lessor"), and SKECHERS USA, INC. ("Lessee"). RECITALS WHEREAS Lessor and Lessee executed that certain lease (the "Lease") dated December 1, 1997 whereby Lessor leased to Lessee those certain Premises comprised of approximately 127,799 square feet commonly known as Ontario Distribution Center #4, 1661 S. Vintage Avenue, Ontario CA 91761 (the "Premises"), and capitalized terms used and not otherwise defined herein shall have the meanings given those terms in the Original Lease. WHEREAS Lessee and Lessor desire to amend the Lease pursuant to this First Amendment to Lease. NOW, THEREFORE, for valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties agree to amend the Lease as follows: 1. Term: Pursuant to Section 3 of the Original Lease, the Term shall be extended for five (5) years commencing on December 1, 2002 and ending on November 30, 2007. 2. Base Rent: Pursuant to Section 4 of the Original Lease, the new Base Rent shall be in accordance with the following schedule: Period Monthly Base Rent Months 1 - 60 $37,701 3. Option to Extend: Lessee shall have one (1) five (5) year Option to Extend the Lease pursuant to the same terms and conditions as the Second Option outlined in Paragraph 39.4 of the Original Lease. 4. Tenant Improvements: Lessor, at Lessor's sole cost and expense, shall perform the following improvements which shall commence at execution of the First Amendment to Lease: a) replace carpet in the north office pod with comparable carpet to the south office pod; b) seal coat the parking lot; c) re-stripe the parking lot and truck court; d) service the windows and repair any leaks; and e) HVAC units are currently in good condition, however, should any of the units need to be replaced during the Term, Lessor shall amortize the cost over the useful life and Lessee shall pay the prorated amount for as long as they occupy the building. 5. Other Terms & Conditions: Except as expressly amended by this First Amendment to Lease, all other terms and conditions of the Lease shall remain in full force and effect. IN WITNESS WHEREOF, the parties hereto have signed this FIRST Amendment to Lease as of the day and year first above written. LESSOR LESSEE PROLOGIS CALIFORNIA I LLC SKECHERS USA, INC. BY PROLOGIS TRUST, ITS MANAGING MEMBER By /S/ Ned K. Anderson By D. Weinberg -------------------------- -------------------- Name: Ned K. Anderson Name: /s/ D. Weinberg ----------------- Title: Managing Director Title: CFO --------------- Date: 4/25/02 Date: 4-18-02 ------------------------ ----------------- EXHIBIT 10.15(a) FIRST AMENDMENT TO LEASE THIS FIRST AMENDMENT TO LEASE, dated this 26th day of April, 2002 (the "Amendment"), is entered into by and between CABOT INDUSTRIAL PROPERTIES, L.P., a Delaware limited partnership ("Landlord") and SKECHERS USA, INC., a Delaware corporation ("Tenant"). WITNESSETH: WHEREAS, Landlord's predecessor and Tenant entered into that certain Lease dated November 21, 1997 (the "Lease") for those certain premises commonly referred to as 1777 Vintage Ave., Ontario, California (the "Premises"); and WHEREAS, Landlord and Tenant desire to extend the term of the Lease and to amend certain other provisions of the Lease as more fully set forth below. NOW, THEREFORE, in consideration of the mutual covenants and conditions contained herein and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: 1. Definitions. Unless otherwise specifically set forth herein, all capitalized terms herein shall have the same meaning as set forth in the Lease. 2. Term. The term of the Lease shall be extended until and shall terminate on, November 30, 2007, which date shall be deemed to be the Expiration Date for all purposes under the Lease. 3. Tenant Improvements. Landlord shall, at Landlord's sole cost and expense, complete the following work in the Premises: (i) replace the carpet in all offices on the north and south side of the building with carpet of equal grade as that currently in place; (ii) repair all dock seals; (iii) re-stripe parking lot in the shipping yard; (iv) remove trees which are causing damage to the parking lot and repair such damage; (v) replace two five-ton HVAC units and service all other units; (vi) repair warehouse floor; and (vii) reseal windows. Other than the foregoing, Tenant agrees that Landlord shall have no obligation to make any improvements, repairs, or alterations to the Premises whatsoever. 4. Tenant Allowance. Other than the Landlord's work set forth in Paragraph 3 above, Tenant shall be responsible, at Tenant's sole cost and expense, for the construction of any improvements in the Premises which it desires. Provided the Lease is in full force and effect and Tenant is not in default thereunder, Landlord hereby agrees to pay to Tenant toward the cost of laying ceramic tile in the Premises (the "Work") an amount equal to the lesser of: (i) the actual cost of the Work; or (ii) Eight Thousand Seven Hundred Fifty Dollars ($8,750.00) (the "Allowance"). Landlord shall pay Tenant the Allowance or any portion thereof requested by Tenant within thirty (30) days of the delivery to Landlord, of: (i) evidence of completion of the Work; (ii) copies of all invoices relating to the Work; and, (iii) final lien waivers from all contractors, subcontractors and materialmen. Tenant shall complete the Work on or beforeJanuary 1, 2003 and Tenant shall make any request for disbursements of the Allowance on or before thirty (30) days after such date. 5. Base Rental. From and after December 1, 2002, the Base Rent payable monthly under the Lease shall be Eighty-Three Thousand Nine Hundred Forty-Four and 91/100 Dollars ($83,944.91) 6. Renewal Options. All Options set forth in Paragraph 39 of the Lease are hereby deleted and terminated and Tenant shall have no rights to exercise any Option set forth therein. Tenant shall, provided the Lease is in full force and effect and Tenant is not in default under any of the other terms and conditions of the Lease at the time of notification or commencement, have the option to renew the Lease for a term of five (5) years, for the portion of the Premises being leased by Tenant as of the date the renewal term is to commence, on the same terms and conditions set forth in the Lease, except as modified by the terms, covenants and conditions as set forth below: a. If Tenant elects to exercise said option, then Tenant shall provide Landlord with written notice no earlier that the date which is twelve (12) months prior to the expiration of the then current term of the Lease but no later than the date which is nine (9) months prior to the expiration of the then current term of this Lease. If Tenant fails to provide such notice, Tenant shall have no further or additional right to extend or renew the term of the Lease. b. The Base Rent in effect at the expiration of the then current term of the Lease shall be adjusted to reflect the Fair Market Rent, as defined in Paragraph 39.5 of the Lease. c. This option is not transferable; the parties hereto acknowledge and agree that they intend that the aforesaid option to renew this Lease shall be "personal" to Tenant as set forth above and that in no event will any assignee or sublessee have any rights to exercise the aforesaid option to renew. 7. Broker Indemnification. Tenant represents and warrants to Landlord that no real estate broker, agent, commissioned salesperson or other person has represented or dealt with the Tenant in the negotiations of this Amendment, other than CB Richard Ellis and RREEF Management Company. Landlord agrees to pay all commissions due the foregoing broker. Tenant agrees to indemnify and hold Landlord harmless from and against any claim for any such commissions, fees or other form of compensation by and such third party claiming through the Tenant, including, without limitation, any and all claims, causes of action, damages, costs and expenses, including attorney's fees associated therewith. 8. Incorporation. Except as modified herein, all other terms and conditions of the Lease shall continue in full force and effect. 9. Limitation of Landlord's Liability. It is expressly understood and agreed that none of Landlord's covenants, undertakings or agreements made in this Amendment or the Lease are made or intended as personal covenants, undertakings or agreements by Landlord, and any liability of Landlord for damages for breach or nonperformance by Landlord orotherwise arising under or in connection with this Amendment or the Lease or therelationship of Landlord and Tenant hereunder, shall be collectible only out ofLandlord's interest in the Land and the Building, in each case as the same maythen be encumbered, and no personal liability is assumed by, nor at any time maybe asserted against, Landlord, or its shareholders, officers, directors,employees, agents, legal representatives, successors or assigns, all suchliability, if any, being expressly waived and released by Tenant. IN WITNESS WHEREOF, Landlord and Tenant have executed the Amendment as of the day and year first written above.LANDLORD: TENANT:CABOT INDUSTRIAL PROPERTIES SKECHERS USA INC., a DelawareL.P., a Delaware limited partnership corporationBy: Cabot Industrial Trust, A Maryland real estate investment trust, its General Partner RREEF America L.L.C., By: A Delaware Limited Liability By: /s/ DAVID WEINBERG Company, its authorized agent ------------------------- /s/ DANIEL J. SCHMIDT ------------------------------- Daniel J. SchmidtTitle: VP Title: CFO ------------------------------- ----------------------- Date: 4/26/02 Date: 4-18-02 ------------------------------- ----------------------- Exhibit 10.28 AGREEMENT FOR THE AVAILABILITY OF SPACE FOR THE STORAGE OF GOODS AND OFFICES FOR THE MANAGEMENT OF THISTHE UNDERSIGNED:ProLogis Belgium II SPRL, with its registered office in Regus Pegasus Park, Pegasuslaan 5, B-1831 Diegem, registered with the register of Commerce of Brussels under number 642.799 and with VAT registration number BE 472435431, hereby represented by Mr. Jacobus C.J. Nuijten, Director, hereinafter referred to as 'PROLOGIS',ANDSkechers International, an ordinary partnership under the laws of Switzerland, with its registered office at P.O. Box 415, Templar House, Don Road, St. Helier, Jersey JE4 8WH, Channel Islands and with US tax identification number 98 - 0357124, hereby represented by Mr. David Weinberg, Director, hereinafter referred to as 'SKECHERS',HAVE AGREED THE FOLLOWING:ARTICLE 1: SUBJECT OF THE AGREEMENTProLogis makes space available to Skechers, which accepts, for the storage of goods and offices for the management thereof, the following real estate: ProLogis Park Liege Distribution Center I, as referred to in Article 2 as the Premises, which is built on the parcel of industrial land located in the Industrial Park Hauts-Sarts, Milmort, Liege, Avenue du Parc Industriel, recorded in the land register as Herstal, 6th department, section A, part of no. 621/b, Herstal 7th department, section A, part of no. 450/t and part of no. 450/y and Herstal 8th department, section A, part of no. 288/d in size according to the "as built plans" by AID NV - W. Albregts, Andrelaan 8, 2960 Brecht (ref : "dossier 5801") and referred to as 'Hall 1' in the aforementioned plans (hereinafter the 'Site'). The as built plans will be attached to the deed as Appendix 1 and will be registered simultaneously.ProLogis has built a building on the Site with a total surface area of approximately 22,458 m(2) (hereinafter the 'Premises') for which ProLogis obtained the necessary permits, subdivided as follows: - 19,860 m(2) warehouse space (hereinafter the 'Warehouse'); - 1,634 m(2) mezzanine space (hereinafter the 'Mezzanine'); - 964 m(2) office space (hereinafter the 'Office Space'), divided over two floors.In addition, ProLogis developed approximately 100 car parking places on the Premises. The parking spaces are primarily at the side of the building towards the sprinkler tank. Upon consultation with ProLogis, Skechers can change or expand the parking places, subject to not jeopardising the traffic flow on the Site. In case of multi-tenancy on the Site, a division by ration of the parking places will take place. However, the Premises will keep at least approximately 100 parking places.Parties waive all their rights in case of difference between the actual total measure(s) of the made available space and the above mentioned measure(s). 1ARTICLE 2: THE INTENDED USE OF THE PREMISESThe Premises are built by ProLogis with a view to the industrial purposes ofSkechers, i.e. a distribution and added value logistics center and anysupporting or related activities. The Warehouse may be used solely andexclusively as a space for the storage, transshipment, reparation,transportation, handling and distribution of goods. If an operating orenvironmental permit or notification is required for the activities of Skechers,Skechers shall be responsible, at its sole risk and expense, for the request andobtainment thereof, as well as for any renewal or extension during the term ofthis Agreement. Skechers shall bear all costs relating thereto and shallstrictly adhere to all conditions imposed by such permit or notification. Inaddition, Skechers shall fully comply with the conditions set forth in theletter of July 1, 2002, from SPI+ concerning the economic activities, attachedhereto as Appendix 2, and in the conduct of its activities, Skechers shall atall times comply with all applicable legislation and regulations. Skechers shallfully indemnify and hold harmless ProLogis for any losses and damages sufferedby ProLogis as a result of a breach by Skechers of any law, regulation or permitcondition.The Office Space may be used solely and exclusively for administrative and/orshowroom activities, with the exception of any activity as a result of which theAgreement would fall within the scope of the Law of April 30, 1951. The parkingspaces may be used solely and exclusively for the parking of the cars ofSkechers and its contacts.All other activities and/or adjustments in the Premises may only take placesubject to prior written permission by ProLogis, which will not withhold itspermission without any justified reasons.ProLogis undertakes to furnish the Premises in such a manner and Skechersundertakes to use the Premises in such a manner that each payment under thecurrent Agreement will at any time be subject to VAT (Belgian VAT) within themeaning of Article 44, Section 3 2(o)(a), second point, of the VAT Code.In the event that, due to a use of the Premises during the term of thisAgreement which is not in conformity with the terms of this Agreement, thepayments under the current Agreement are no longer subject to VAT, either inpart or in their entirety, Skechers will compensate ProLogis for any losssuffered by the latter as a result, including the loss which ProLogis may sufferby being unable to recoup the VAT already paid by it.Skechers is not authorized to alter this use without prior written permission byProLogis, which will not withhold its permission without any justified reasons.It is explicitly agreed that any use of the Premises or the Site for any work oractivity covered by the legislation regarding commercial leases (The Law datedApril 30, 1951 as amended) is strictly prohibited.Skechers may not use the Premises as residential accommodation nor may it keepany living animals there.Skechers may not carry out any activities in the Premises, nor install anyobjects or equipment which would subject the floor to excessive loads or exertan extreme pressure on the structure of the Premises.Within this context, it must be stated that the maximum floor load permitted inthe Warehouse is 5,000 kg per m(squared) of the floor area, on the Mezzaninefloor in the Warehouse 400 kg per m(squared) of the floor area and in the OfficeSpace 400 kg per m(squared) of the floor area.Skechers is not entitled, for whatever reason, to conduct public sales in thePremises. 2Skechers is obliged to obtain all required permits from the competentauthorities at its own cost and risk enabling a proper operation in thePremises.ARTICLE 3: PRICE AND DEPOSITThe Agreement for the availability of the Premises is entered into on the basisof an annual price (price level July 1, 2002) of nine hundred and thirteenthousand nine hundred and twenty-two Euro zero Eurocent, i.e. (euro) 913.922,00,(+VAT: one hundred and ninety-one thousand nine hundred and twenty-three Euroand sixty-two Eurocent, i.e. (euro) 191.923,62), hereinafter referred to as the`Price', payable per quarter and in advance in four (4) equal parts of twohundred and twenty-eight thousand four hundred and eighty Euro fifty Eurocent,i.e. (euro) 228.480,50, (+VAT: forty-seven thousand nine hundred and eightyEuro ninety-one Eurocent, i.e. (euro) 47.980,91), to be made by direct banktransfer to the bank account of ProLogis.The annual price excluding VAT is broken down into:Warehouse: forty Euro zero Eurocent, i.e. (euro) 40,00, (+VAT) per square meter per annum price level July 1, 2002: seven hundred and ninety-four thousand four hundred Euro zero Eurocent, i.e. (euro) 794.400,00;Office: eighty-five Euro zero Eurocent, i.e. (euro) 85,00, (+VAT) per square meter per annum price level July 1, 2002: eighty-one thousand nine hundred and forty Euro zero Eurocent, i.e. (euro) 81.940,00;Mezzanine storage: twenty-three Euro zero Eurocent, i.e. (euro) 23,00, (+VAT) per square meter per annum price level July 1, 2002: thirty-seven thousand five hundred and eighty-two Euro zero Eurocent, i.e. (euro) 37.582,00;As stipulated in Article 5, this Agreement is to take effect on July 17, 2002.Skechers is given a rent-free period from July 17, 2002 up to and includingDecember 31, 2002. The first period over which payment is due will therefore bethe period from January 1, 2003 up to and including March 31, 2003, which is dueas from January 1, 2003. Skechers will, however, as at August 31, 2002 pay thePrice for one month of use of the Premises, equal to an amount of seventy-sixthousand one hundred and sixty Euro zero Eurocent, i.e. (euro) 76.160,00,(+VAT: fifteen thousand nine hundred and ninety-three Euro and sixty Eurocent,i.e. (euro) 15.993,60), which will be credited to the Price due for the firstquarter of 2003.The Price must be paid in Euro and is payable to ProLogis Belgium II SPRL,account number: 720-5406468-88 (ABN Amro Bank in Brussels).If Skechers, either in part or in its entirety, is in default with the paymentof the above-mentioned quarterly payments of the Price on the aforementioneddates when the payments are due, Skechers must pay ProLogis, by operation of law("ipso iure") and without notice of default, the interest due over that sumamounting to twelve percent (12%) per annum, whereby any month that hascommenced must be regarded as completed.If it is established during the term of the Agreement that Skechers is no longera 100% subsidiary (directly or indirectly) of Skechers USA Inc. Skechers will,at the first request by ProLogis, provide ProLogis with a deposit equivalent tothree (3) months' rent, including VAT, i.e. a total amount of two hundredseventy-six thousand four hundred and sixty-one Euro forty-one Eurocent, i.e.(euro) 276.461,41. 3When the Price in accordance with Article 4 is modified, the amount of thedeposit will have to be adjusted in line with the annual adjustment of the Pricepayments every year. This deposit may only be released six (6) months after thetermination of the Agreement, provided that Skechers have been released properlyof the obligations resulting from this Agreement. Under no circumstance, shallthe deposit paid be used by Skechers to pay the Price. However, in the event ofbreach of Agreement on the part of Skechers, ProLogis may use the aforementioneddeposit to compensate for Skechers' overdue payments and any other omissions inthe performance of its obligations by Skechers.ARTICLE 4: AGREEMENT MODIFICATIONSUnless otherwise provided by law, it is determined that the Price, as stipulatedin Article 3, will be linked to the consumer price index ("health index)" aspublished each month in the Belgian State Gazette.The basic index is that of the month prior to the signature of thisAgreement, i.e. the month July 2002.The Price will be reviewed annually on the date of the entry into force of thisAgreement, automatically and by operation of law, in accordance with theincrease of the aforementioned index according to the formula as defined below,whereby the month used for the new index will be the month prior to the relevantanniversary of the date of the entry into force: new Price = Price x new index ----------------- basic indexHowever, the new Price will at no time be lower than the Price as stipulatedabove.Skechers will implement the modifications to the Price subject to a one-monthnotification to that effect by ProLogis.In the event that the publication of the `consumer price index' (health index)should be discontinued, the parties will agree to replace this by the new indexpublished by the Belgian government.In the event that no new official index is published, the parties, if they failto come to an agreement, will submit the problem to a tribunal of threearbitrators. Each party will appoint its own arbitrator within one month ofbeing requested to do so by the other party and the two arbitrators will jointlyappoint a third arbitrator.If one of the parties fails to duly appoint its arbitrator or if the twoarbitrators fail to appoint a third arbitrator, the missing arbitrator will beappointed, at the request of either party, by the Justice of the Peace in whosejurisdiction the Premises are located.It is explicitly agreed that ProLogis shall only waiver the right to increasethe Price arising from this article by a written confirmation, signed byProLogis.ARTICLE 5: COMMENCEMENT AND DURATION OF THE AGREEMENTSubject to the provisions in Article 14 and the provisions below and allobligations resulting therefrom, the availability of the Premises commences onJuly 17, 2002 hereinafter referred to as the `Date of Commencement', for aduration of twenty-five (25) consecutive years and ends by operation of law onJuly 16, 2027.Skechers is only entitled to terminate the Agreement after five (5), ten (10),fifteen (15) and twenty (20) years after the Date of Commencement, being July17, 2002, subject to a notice period of twelve (12) months, without prejudice toArticle 20 and without any 4compensation nor VAT adjustment to be paid, except as set forth in article 2,6th Section, of this Agreement, to ProLogis.This Agreement will then end by operation of law on July 16,2027.This Agreement cannot be tacitly renewed.ARTICLE 6: MARKET REVIEW OF PRICEEither party has the right to demand the Price to be adjusted to the marketprices for such properties at that location. Such adjustment may occur for thefirst time with effect from July 1, 2012 and for the second time with effectfrom July 1,2022.The newly to be determined Price shall never be lower than 90% of the last paidPrice in June 2012 and June 2022, respectively and never be higher than 110% ofthe last paid Price in June 2012 and June 2022 respectively. Six (6) monthsprior to each date that the market price adjustment will become effective asaforementioned, ProLogis shall notify Skechers of its suggested adjusted Price.If parties have not reached any agreement on the Price adjustment to the marketprice within two (2) months of receipt of the notice as aforementioned, thatPrice adjustment will be fixed by three property experts. The experts must beinstructed to take into account when fixing the Price everything that has beenagreed by the parties with respect to the Premises. Either party shall appointone expert within fourteen (14) days after a party has received the request tothat effect from the other party. An expert will have to announce within eight(8) days of the date of the instruction whether he will accept it. The thirdexpert will be appointed by these two experts within eight (8) days after theiracceptance of their appointment. The third expert's judgment shall be decisivein the absence of agreement between the experts on the Price adjustment to befixed. If any of the parties fails to appoint an expert or if the two appointedexperts cannot agree on the appointment of a third expert, the most diligentparty may request the President of the Chamber of Commerce and Industries ofLiege to appoint the expert(s). Each party shall pay the expenses of the expertappointed by or for him. The expenses of the third expert will be born equallyby ProLogis and Skechers. The experts will be instructed to issue their reportwithin six weeks after the appointment has been determined.This Market Review is applicable for the Premises and any of the distributioncenters used by Skechers upon exercising its options and rights pursuant toArticle 20.ARTICLE 7: TRANSFER OF THE AVAILABILITY AND LEASINGSkechers may lease the Premises (wholly or partially) and/or transfer its rights(wholly or partially) subject to prior written permission by ProLogis. Such apermission shall not unreasonably be withheld by ProLogis to Skechers' requestfor permission to sublease all or part of the Premises insofar the articles ofthis Agreement are complied with. It shall be reasonable for ProLogis to withhold its consent for a transfer inany of the following instances: (i) the identity or business reputation of the candidate will, in the good faith judgment of ProLogis, tend to damage the goodwill or reputation of the Premises; (ii) the creditworthiness of the candidate is unsatisfactory to the fair judgment of ProLogis; (iii) the transfer to another customer of ProLogis on the Site is at a rate, which is below the rate charged by ProLogis for comparable space on the site. 5 (iv) the terms and conditions of the transfer agreement are not the same as the terms and conditions of this Agreement. (v) the term of the transfer agreement will exceed the remaining term of this Agreement. The transfer is not subjected to VAT during its' entire course.Even if transfer is permitted through the above or by way of consent ofProLogis, Skechers is not allowed to market the Premises for a price lower thanthe Price under this agreement.Any approved transfer shall be expressly subject to the terms and conditions ofthis Agreement.Skechers shall provide to ProLogis all information concerning the candidate asProLogis may request.Notwithstanding the above, ProLogis grants Skechers the right to transfer and/orassign the Premises as a whole or parts to a Skechers entity, which is at leasta 51% (directly or indirectly) owned subsidiary of Skechers USA Inc. under thecondition that: (i) the terms and conditions of the transfer agreement will be the same as and in accordance with the terms and conditions of this Agreement; (ii) the term of the transfer agreement will never exceed the remaining term of the Agreement; and (iii) the transfer agreement is during its entire course subjected to VAT.The prior consent by ProLogis is not required for occupation and operating fromthe Premises or part of it in case another third party logistic operator isoccupying and operating the Leased Premises or part of it on behalf of Skechersor other customers of the third party operator. However, the transfer to thethird party logistic is under the condition that: (i) the terms and conditions of the transfer agreement will be the same as and in accordance with the terms and conditions as this Agreement; (ii) the term of the transfer agreement will never exceed the remaining term of the Agreement; and (iii) the transfer agreement is during its entire course subjected to VAT.In the event of (sub-)lease, Skechers will at any rate continue to be jointlyand severally responsible and liable toward ProLogis, together with the lessee,for all obligations resulting from this Agreement, and in particular for anyadditional costs which would result from such letting.In the event that Skechers transfers its rights as referred to in this Agreementand before the deposit provided by Skechers may be released, the assignee must,in turn, provide ProLogis with a bank guarantee equivalent to a rent period ofsix (6) months based on the Price (including VAT), applicable at that time,increased, in applicable, with an advance of the service charges of six months,(including VAT).If ProLogis is of the opinion that the assignee or lessee provides insufficientfinancial guarantees, ProLogis may make its consent to the transfer of therights or to the letting by Skechers dependent on the integral maintenance ofthe bank guarantee provided or to be provided by Skechers together with the bankguarantee of the assignee or lessee equal to six months' Price at that time(including VAT, increased with an advance of the Service Charges of six months(including VAT). 6ARTICLE 8: CHARGES, TAXES AND COMPENSATIONAll relevant charges or taxes relating to the Premises, including the advancelevy in respect of real estate tax, VAT, the occupation or the activity carriedout by Skechers in them, whether they are imposed by the State, the Province,the Municipality, the Federation of Municipalities, the Urban Area or any otherauthority will solely and exclusively be for the account of Skechers.Skechers will compensate ProLogis for any loss which ProLogis may suffer as aresult of any overdue payments of the aforementioned taxes and compensation.Skechers will bear all costs relating to the use of water, gas, electricity,telephone, telex, etc. or relating to any other services and utilities of thePremises.It will also pay any charges by the utility companies for measurementappliances, systems, wiring, pipes, mains, etc.Skechers may not claim any compensation from ProLogis in case of adiscontinuance or interruption, irrespective of the duration of such adiscontinuance or interruption of the water supply, gas and electricity,telephone, telex, etc., or of any other services and provisions such as heating,airing, etc. related to the Premises, whatever the reason, unless such adiscontinuance or interruption may be ascribed to failure on the part ofProLogis to take all reasonable measures to ensure the continuation of suchprovisions and services.ARTICLE 9: SERVICESSkechers will take care of all the services, supplies and site maintenance ofthe Premises according the specifications provided by ProLogis at Skechers' owncosts, attached to this Agreement as Appendix 3.Skechers undertakes for the full term of this Agreement, as a bonus paterfamilias and in accordance with the requirements of good management, to concludeall agreements which, in Skechers' opinion are required, for the services.Skechers shall inform ProLogis of the conclusion of these agreements. Skechersshall, with the exclusion of ProLogis, be responsible for the due execution ofsuch agreements. Skechers shall fully indemnify and hold harmless ProLogis forall damages or claims which could result from agreements for services concludedby Skechers.ProLogis has the right to inspect and review the Premises. If Skechers does notperform the services properly, ProLogis will notify Skechers in writing tocomply within thirty (30) calendar days. If Skechers fails to comply therewith,Prologis is entitled to take over all supply, services and maintenance of thePremises. Skechers will be invoiced accordingly.ARTICLE 10: INSURANCEProLogis undertakes to take out an insurance for the Premises (covering fire andwater damage, civil liability as well as all windows in the premises); as of thenotification by Skechers to ProLogis that Skechers has made the requiredagreements for the services pursuant to Article 9, this insurance shall be takenout by ProLogis but the insurance premiums in relation thereto shall be chargedto Skechers.Skechers undertakes to insure its personal assets and company equipment whichare in the Premises against fire hazards and related risks, loss due toelectrical faults, storm damage, water damage and Civil Liability, and to takeout any other insurance required on account of the Skechers activities. 7At the first request of ProLogis, Skechers will allow inspection of thepolicies.The insurance taken by Skechers shall include a clause in which the insurersundertake to notify ProLogis at least fifteen (15) days beforehand by registeredmail of any cancellation or termination of the insurance policy.ProLogis and Skechers, as well as their insurers, mutually waive any right ofrecourse they might have on the basis of the respective policies taken outtoward one another, toward any sublessees and toward any person admitted to thePremises.Skechers also waives any recourse which it might be entitled to exercisepursuant to Articles 1721 and 1386 of the Belgian Civil Code. Skechersundertakes to impose these obligations to any lessees and/or occupants.If Skechers increases the risk in such a way that this will lead to an increaseof the insurance premium, it alone shall pay the increased premium arising fromit in relation to the insurance of the Premises.ARTICLE 11: ADVERTISING SIGNSSubject to the obtainment of all necessary permissions and permits by and atcost of ProLogis, ProLogis shall erect an illuminated sign (1200 mm x 370 mm) infront of the Premises to display the name of Skechers as well as of ProLogis andthe address. This sign will be designed in close cooperation with Skechers. Themaintenance and proper functioning of the signage is part of the services of thePremises, pursuant to Article 9, and it is Skechers' responsibility.If Skechers wishes to fix another advertising sign, it shall only do so at theplaces assigned for that purpose by ProLogis on and around the Premises and itmust submit a design of this to ProLogis and have its written permission,whereby the permission by ProLogis does not affect the obligation on the part ofSkechers to acquire the necessary permissions and permits for the proposedadvertising signs from the competent authorities.Drilling in face brick and blue limestone is strictly prohibited.ARTICLE 12: THE STATE OF THE PREMISES AT THE COMMENCEMENT OF THE AGREEMENTBefore Skechers commences its occupation of the Premises as stipulated inArticle 5, a "State-of-Delivery" report will be agreed upon by the partiesdescribing the current status of the Premises as well as the way the Premisesshould be delivered at the end of the Agreement period or any other agreedtermination date of the Agreement, including a list of improvements that do anddo not need to be reinstated by Skechers, subject to the provisions in Article14. Any improvements by Skechers are to be maintained by Skechers and are not anintegral part of the Premises. This "State-of-Delivery" report will be signed bySkechers and ProLogis on the official delivery date of the Premises, tentativelyscheduled on September 16, 2002, and will be attached to this Agreement asAppendix 4.ARTICLE 13: MAINTENANCE OF THE PREMISESA. During the entire duration of the Agreement, Skechers will have to maintainthe Premises well and it will carry out any necessary repairs and work for itsown account, as set forth in Appendix 3.It will use and maintain the Premises with due care. 8It will, inter alia, take care of all the maintenance work and repairs mentionedin articles 1754 a.f. of the Belgian Civil Code, with the exception of the workreferred to in Article 14.Apart from the obligations on the part of Skechers arising from the generalregulations of the Belgian Civil Code, Skechers will, inter alia, be responsiblefor the following (without prejudice to the non-restrictive nature of thisenumeration):- to maintain, repair and renew the interior paintwork and the interior decoration of the Premises.- to maintain, repair and, if necessary, to replace the sanitary fittings, the water faucets and any equivalent appliances and fittings.- to properly maintain the water pipes, the water outlets and sewer pipes, emptying grease traps and protect them against frost and, if necessary, to unblock them.- to repair any damage which is not directly the result of age or a defective condition and, if necessary, to replace them.- to repair and, if necessary, to replace the wall paneling, floors, all locks and electrical equipment.- to replace any broken windows, whatever the reason thereof (the costs hereof shall, however, be covered by the insurance referred to in the first paragraph of Article 10).- to maintain the heating and ventilation system and to repair any damage which is not directly the result of age or a defective condition.- to clean the ventilation ducts and to have the chimneys swept.- to be responsible for maintaining the paving of the grounds forming part of the Premises and keeping it at its original level.- To insure and properly maintain the roof of the Premises.Skechers undertakes to submit to ProLogis the annual statement regarding themaintenance of the heating and the ESFR Sprinkler system, as well as the annualstatement of the sweeping of the chimneys by an approved chimney sweeper.To keep the certificate of the sprinkler system valid, Skechers shall at leastevery two weeks start up the engine of the sprinkler pumps. The results of thistest must be added to the logbook belonging to the sprinkler system.If Skechers fails to comply with the obligations which it must fulfill pursuantto the Civil Code in general or pursuant to this article in particular and if itdoes not remedy this failure within two (2) weeks of the written notice ofdefault by ProLogis, ProLogis, provided it has sent a letter to Skecherscontaining a plan of the works ("bestek") will be entitled to have the necessaryworks carried out for the account of Skechers and to claim the repayment of allcosts incurred as a result of this. This does not affect any other right andrecourse of ProLogis toward Skechers under this Agreement or by law.B. During the entire duration of the Agreement, Skechers will have to complywith any statutory, administrative or any other applicable regulations. Skecherswill be responsible for any consequences arising from failure to comply withthese regulations.C. Skechers will be liable for any loss due to an act or omission ofSkechers or due to any act or omission of any its representatives,employees and any persons in general for which Skechers is liable by law.D. On the date of commencement of this Agreement, the level of the land ofthe Premises, including the front area pertaining to the Premises is atthe original level. 9The maintenance of the aforementioned lands, the replacement of any damagedparts of these lands and the maintenance of these lands at the original levelwill be carried out for the account of Skechers.ARTICLE 14: FURNISHING AND ALTERATION WORKSkechers is entitled to fix partitions and lighting systems in the Premises andto carry out small works and improvements necessary for or useful to itsactivities.Upon the termination of this Agreement, ProLogis may, at its own choice, keepthe partitions, lighting system, small works and improvements itself without anycompensation or payment to Skechers, or obligate Skechers to remove thepartitions, lighting system, small works and improvements and to return thePremises to their original state, at the costs of Skechers.Significant alterations or work, in particular where they affect the structureof the Premises, are not permitted, unless prior written permission has beengiven by ProLogis. ProLogis will have to give the reasons for withholding itspermission. If ProLogis gives such permission, it will also immediately informSkechers, whether or not, upon termination of the Agreement, it will keep thesignificant alterations or work subject to the permission. In the absence ofsuch decision by ProLogis, the significant alterations or work need to beremoved.ProLogis grants the right to Skechers to install the following improvements in,at or around the Premises: - raising heaters in the warehouse in accordance with the racking layout to be provided by Skechers; - carpeting in the office area; - a separated drivers area of 25m(2) in the warehouse at the entrance door at the warehouse directly right at the street side of the office pod, as indicated on the plan attached as Appendix 5; - adjusting the first fire exit door in the warehouse wall at the side of the parking into an employee entrance as well as a fire exit door, as indicated on the plan attached as Appendix 5; - from the corner at the end of the building along the truck court towards the sprinkler tank, the fence will be re-placed with a reinforced galvanized fence for security reasons, as indicated on the plan attached as Appendix 5; - the number of car parking places will be extended to approximately 100 places, primarily on the side of the building towards the sprinkler tank, as indicated on the plan attached as Appendix 5.Skechers is not obliged to reinstate these improvements. In addition, theparties agree that the aforementioned works have no impact on the Date ofCommencement or the payments of Price under the Agreement as agreed in Article 3and Article 5 respectively.ARTICLE 15: DEFECTS AND REPAIRSProLogis is, for its own account, only responsible for the repair of anystructural defects of the Premises as meant in article 606 of the Civil code.However, if it appears that any such defects are the result of a failure bySkechers to perform its maintenance obligation or of any injudicious orinadmissible use by Skechers or of any other reason which may be ascribed toSkechers, Skechers will be responsible for the repairs. 10If Skechers identifies a defect or any damage for which ProLogis is normallyresponsible, even if it is caused by a third party, it must notify ProLogis inwriting of this situation promptly and not later than ten (10) days followingthe discovery of the defect and/or damage.If Skechers fails to notify ProLogis, it will be personally responsible for anydamage or loss resulting from this failure of notification.Skechers will have to allow the performance of any maintenance and repair work,considered necessary by ProLogis. It will not be entitled to any compensation,such as a reduction of the Price or any other type of compensation, relating toor resulting from such work, irrespective of the duration, even where it wouldexceed 40 days.All the costs arising from the alterations or adjustments of the Premisesordered by a competent authority on account of a fact, an act or omission on thepart of Skechers will be borne solely and exclusively by Skechers.ARTICLE 16: THE STATE OF THE PREMISES UPON TERMINATION OF THE AGREEMENTProLogis and Skechers agree that, if and for whatever reason, this Agreementterminates or ends, the "State of Delivery" report, as referred to in Article12, shall be leading and shall be the basis for a new inspection report of thePremises. ProLogis will in the presence of Skechers draw up a new inspectionreport of the Premises upon the release of them by Skechers, in order todetermine whether Skechers is responsible for any damages.ProLogis will have this inspection report drawn up promptly after thetermination of the current Agreement. Such report shall indicate the damages inthe Premises for which Skechers is responsible and liable, as well as theduration on non-availability of the Premises due to the required repair works.In the event of disagreement on the contents of such inspection report, thismatter shall be submitted as soon as possible to an independent expertspecialized in real estate. This expert shall be appointed by the parties or,failing agreement, at the request of either party by the President of theChamber of Commerce and Industries of Liege. The decision of the expert shall bebinding for both parties. The costs of the expert shall be equally borne by bothparties.The transfer of the keys, in whatever form, upon or after the departure bySkechers shall not at any time release or discharge Skechers of its obligations,either in part or in their entirety in relation with the obligations of Skechersunder this Agreement, and in particular with respect to possible repair works orthe non-availability of the Premises.Upon its departure, Skechers shall pay any outstanding service charges, pursuantto Article 9.Skechers shall have to leave the Premises well-maintained and clean at the endor termination of this Agreement.Skechers shall be liable for any damages to the Premises, due to an act oromission on its part or due to any act or omission on the part of itsrepresentatives, employees and of any persons in general for which Skechers isliable by law or in accordance with this Agreement.Next to the repair costs, Skechers will have to pay ProLogis any compensationresulting from the unavailability of the Premises due to an act or omission forwhich Skechers is liable pursuant to the preceding paragraph or because Skechershas not vacated the Premises in due time. This compensation will be theequivalent of the then valid Price 11due by Skechers for the period of unavailability of the Premises, asdetermined between parties or by the expert.ARTICLE 17: EXPROPRIATIONIn the event that the Premises, either in part or in their entirety, areexpropriated, Skechers will have no right of recourse against ProLogis. Therights which Skechers asserts against the expropriating authority shall at nottime affect the rights which ProLogis shall have against the expropriatingauthority.ARTICLE 18: VISITS TO THE PREMISES/ FOR RENT OR FOR SALE ProLogis and its agent and representatives are authorized to visit the Premiseswith a person appointed by Skechers, whenever necessary, subject to priornotification (at least eight working days) to Skechers.During the six (6) months before the termination of the Agreement or in theevent of any sale of the Premises, ProLogis is entitled to fix the necessaryadvertising signs and announcements without excessively hindering the activitiesof Skechers.ARTICLE 19: TERMS OF THE CONTRACT OF SALESkechers explicitly states to be informed and that it is aware of and complieswith the terms of the Contract of sale dated June 6, 2001 between ProLogis andServices Promotion Initiatives en Provence de Liege (SPI+) SCRL, and Skechersundertakes, for itself, any of its entitled parties and any of its successorsand assigns, to comply conscientiously with the provisions of this Contract ofsale, if applicable, articles two (2), three (3), four (4), five (5), six (6),seven (7) and eight (8) of this Contract of sale, in so far as these are or canbe applicable to Skechers, and to ensure that these stipulations are alsocomplied with conscientiously by any third parties which may acquire a right oflease, use or any other right to the Premises or the site.Skechers shall indemnify and hold fully harmless ProLogis for any damage and/orcosts which may arise from a failure to comply with the aforementioned terms ofthe Contract of sale. ProLogis declares that the Agreement is in compliance witharticles 2 up to 8 of the Contract of Sale, insofar as applicable.The articles 2 up to 8 of the above Contract of Sale set forth the following: L'affectation economique grevant le bien vendu Article deux.- Le bien faisant l'objet de la presente vente est greve d'une affectation economique, celle-ci devant etre consideree comme une condition essentielle de la cession consentie par la societe (( Services Promotion Initiatives en Province de Liege )). La notion d'affectation economique a ete precisee dans le preambule. L'interdiction de donner partiellement ou en totalite au bien, une autre affectation, est absolue sauf ce qui est precise ci-apres. L'obligation de construire sur le bien des batiments dans un delai determine. Article trois.- L'acquereur s'engage a edifier sur le bien faisant l'objet de la presente convention dans un delai de deux ans un ensemble de batiments conformes au plan d'implantation du dix-huit janvier deux mille un et approuve par la S.P.I. Cet engagement constitue une condition essentielle du present acte de vente. Sans prejudice au droit pour la 12 S.P.I. d'exercer la faculte de rachat visee a l'article 6, la S.P.I. pourra, en cas d'inexecution de cette obligation, considerer la vente comme resolue de plein droit, et sans mise en demeure prealable. En cas de resolution de la vente, la S.P.I. n'est tenue qu'au remboursement du prix tel que stipule a l'article 1, sans aucune majoration, indemnite quelconque ni interet. L'acquereur sera tenu de remettre le bien dans l'etat ou il l'a recu. La S.P.I. ne devra aucune indemnite pour des ameliorations ou plus-values apportees au bien par l'acquereur et sera libre de conserver le cas echeant, ces ameliorations. L'obligation d'exercer une activite economique determinee Article quatre.- L'acquereur s'engage a exploiter dans l'immeuble a eriger sur le terrain vendu, l'activite definie par les parties, de la maniere suivante: construction de halls, pour mise a disposition, par location ou vente, a des entreprises. Elle devra etre conforme a la description plus detaillee qui en a ete donnee par l'acquereur dans sa lettre du dix-huit fevrier deux mille dans la mesure ou les termes de cette lettre ont ete expressement acceptes par le Bureau Executif de la S.P.I. en sa seance du dix mars deux mille. Cette activite devra etre pleinement exercee dans le meme delai de deux ans stipule a l'article 3. L'acquereur ou tout autre utilisateur du bien lui succedant est tenu de demander l'autorisation prealable a la S.P.I. pour tout changement significatif de l'activite exercee sur le bien vendu ou en cas de cessation totale ou partielle de cette activite. Cet engagement constitue une obligation essentielle du contrat. La S.P.I. peut, le cas echeant, autoriser l'exercice d'une activite nouvelle et/ou renoncer a la sanction prevue par le contrat. Cette autorisation exceptionnelle et cette renonciation ne se presument pas et doivent faire l'objet d'une decision expresse de la S.P.I. Cession de la propriete ou de la jouissance du bien a un tiers Article cinq.- L'acquereur pourra ceder tout ou partie de bien vendu, en faire apport, le donner en location ou en transferer de toute autre maniere la propriete, l'usage ou la jouissance, avec l'accord prealable et ecrit de la societe << Services Promotion Initiatives en Province de Liege >> et sous la condition d'imposer au nouvel utilisateur du bien, le respect integral de la presente convention. Cet accord devra etre donne dans un delai de 15 jours ouvrables a dater de la demande faite par l'acquereur. A defaut, la S.P.I.+ sera sensee avoir donne son accord sur la demande. La S.P.I. refusera ou acceptera la cession de la propriete ou de la jouissance en fonction des objectifs definis au preambule de la presente convention et des objectifs generaux poursuivis par elle. La S.P.I. se reserve notamment le droit de controler si l'activite prevue par le cessionnaire ou le locataire ou tout autre utilisateur nouveau, ne risque pas de porter atteinte a la salubrite du parc industriel au sein duquel est integre le bien vendu et si cette activite s'integre le cas echeant, dans le programme d'implantation poursuivi sur ce site. Le contrat passe entre l'acquereur et le nouvel utilisateur du bien doit obligatoirement stipuler l'engagement du nouvel utilisateur au benefice de la S.P.I. de respecter toutes les clauses de la presente convention, relatives a l'affectation economique grevant le bien vendu (article 2), a l'obligation de construire les batiments dans un delai determine (article 3), a l'obligation d'exercer l'activite economique determinee par la convention (article 4), a la cession de la propriete et de la jouissance (article 5) et a la faculte de rachat (article 6). Ces clauses devront etre integralement reproduites dans la convention. Une copie de celle-ci doit etre soumise a la S.P.I. sans delai, des le jour de la signature. En cas de violation du present article, l'acquereur initial 13 reste solidairement tenu de toutes les obligations du contrat en cas de manquement par le cessionnaire a ces obligations. Faculte de rachat Article six.- La societe "Services Promotion Initiatives en Province de Liege" ou la Region pourra, sur le pied de l'article 32 paragraphe 1 de la loi du 30 decembre 1970 sur l'expansion economique, modifie en ce qui concerne la Region Wallonne par le decret du 15 mars 1990 publie au Moniteur Belge du 7 juin 1990, racheter le terrain et/ou le batiment au cas ou il ne respecte pas les autres conditions d'utilisation. Le rachat s'operera au prix du marche de l'immobilier. En aucun cas, ce prix ne peut depasser celui qui est fixe par les Comites d'Acquisition d'Immeubles. Toutefois, moyennant l'accord, de la S.P.I., l'acquereur pourra revendre le bien, et dans ce cas, l'acte de revente devra reproduire les clauses visees aux articles 2, 3, 4, 5 et 6. La venderesse considerera comme executee l'activite economique telle que precisee a l'article 4 des presente, par la mise en oeuvre de tous les moyens normaux et necessaires ainsi que les efforts de promotion auxquels s'engage de bonne foi l'acquereur pour que la vente ou la location, le leasing et la mise a disposition de l'immeuble decrit a l'article 3 intervienne dans les meilleurs delais. CONDITIONS Particulieres Articles sept.- Tout travail de nature a modifier le niveau du terrain faisant l'objet de la presente vente ne pourra etre effectue par l'acquereur sans l'autorisation prealable de la venderesse. Article huit.- L'acquereur s'engage a n'installer ou a ne laisser installer sur le bien vendu que des enseignes ou panneaux publicitaires destines a renseigner sa raison sociale, son nom ou les produits fabriques ou vendus par lui. L'installation de cette publicite sera soumise a l'accord prealable de la venderesse. L'acquereur s'engage a maintenir en etat de parfaite proprete les parties non baties de la parcelle.ARTICLE 20: OPTION RIGHTS, RIGHTS OF FIRST REFUSAL AND DEVELOPMENT CONDITIONS20.1 OPTION RIGHT ON DISTRIBUTION CENTER IIProLogis grants Skechers an option right free of charge until January 1, 2004 onthe use of Distribution Center II (hereinafter "DC II") (hereinafter the"Option"). Skechers will have to notify via registered letter to ProLogis itsintention to use DC II prior to that date, in the absence whereof ProLogis shallbe free in this respect, except as set forth in Article 20.2. DC II is moreclosely described in Appendix 6.In case Skechers wants to use DC II, this will be on similar price levels as thePremises (price level July 1, 2002), as adjusted in accordance with Article 4.On the commencement date for DC II, this Agreement will be synchronized with theagreement for DC II via an addendum to this Agreement. The initial term will befive (5) years during which Skechers can not terminate for both the Premises andDC II, as of the date of commencement for DC II. This Option is subject to thewritten approval of the local authorities for the extension of the validityperiod of the building permit for DC II with twelve (12) months until March 1,2004.In addition to the above, ProLogis grants an extension to the Option untilOctober 1, 2004 subject to the following conditions. The extension of the Optionis subject to the written approval of the local authorities for the extension ofthe validity period of the building 14permit for DC II with another nine (9) months until December 1, 2004. In caseSkechers exercises the Option after January 1, 2004 and consequently the date ofcommencement of the construction for DC II shall not be met, Skechers shall payto ProLogis the land carry costs for the period as of March 1, 2004 up toDecember 1, 2004, being twenty-four thousand seven hundred and fifty Euro(i.e., (euro) 24.750,OO) (+ VAT, if applicable). If the date of commencement ofthe construction for DC II is prior to the end of this nine (9) month period,i.e., prior to December 1, 2004, the land carry costs shall be reduced pro ratatemporis.In case the construction cost index exceeds the consumer price index(hereinafter "CPI"), the price for DC II will be adjusted and consequentlyincreased with the difference between the CPI and the construction cost index.The Price will be the basis price for DC II (price level July 1, 2002) increasedby the annual indexation.In the event Skechers will execute its Option, to use DC II, Skechers will begiven a "Use free"-period for DC II of four (4) months for which no payments aredue, except applicable service charges and VAT.20.2 RIGHT OF FIRST REFUSAL DC IIAs of October 1, 2004 Skechers has the right of first refusal during ten (10)working days as of the issue of the first proposal thereto by ProLogis to usethe entire DC II. In case Skechers will execute its right of first refusal inorder to use DC II, it must inform ProLogis within ten (10) working days afterthe date of issue of a proposal by ProLogis by registered letter, in the absencewhereof ProLogis shall be free in this respect. Skechers will only have thisright of first refusal once.If Skechers exercises its right of first refusal on DC II within ten (10)working days prior to the agreed completion date with the contractor for DC II,Skechers will be given a four (4) months "Use free"-period for which no paymentsare due, except applicable service charges and VAT.In case Skechers executes its right of first refusal and accepts the proposal touse DC II, this will be on similar adjusted Price levels as the Premises (pricelevel July 1, 2002). On the commencement date for DC II, the Agreement will besynchronized with the agreement for DC II via an addendum to this Agreement. Theinitial term will be five (5) years during which Skechers can not terminate forboth the Premises and DC II, as of the date of commencement for DC II. Thisright of first refusal is subject to the written approval of the localauthorities for the extension of the validity period of the building permit forDC II with twelve (12) months until March 1, 2004, and, if applicable, withanother nine (9) months until December 1, 2004 in case of article 20.1 3rdparagraph.In case the construction cost index exceeds the CPI, the Price will be adjustedand consequently increased with the difference between the CPI and theconstruction cost index. The price of the Premises will be the basis price forDC II (price level July 1, 2002), increased by the annual indexation.However, should ProLogis come to terms to let DC II to another customer at orafter the completion date of DC II, it agrees to give Skechers a right of firstrefusal for a period of ten (10) working days to use the facility on exactly thesame terms and conditions as those for the proposed agreement with the othercustomer. If Skechers does not accept within the ten-day period, it looses itsright of first refusal.20.3 LAND RESERVATION FOR DC III AND DC IVProLogis has foreseen the development of two other distribution centers, DC IIIand DC IV, of similar sizes and building specifications as the Premises and DCII, located parallel to the Premises and DC II on the Site, as displayed on theattached Site plan in Appendix 7. Under the existing agreement between SPI+ andProLogis, ProLogis is obliged to buy 15the land ultimately on July 1, 2004. However, the actual transfer of the landand the belonging payment can be postponed until January 1, 2005. Thisreservation is subject to the written approval of SPI+, The letter of SPI+confirming the reservation on the land by ProLogis, will be attached to theAgreement as Appendix 8.If ProLogis exercises its right to purchase the land for DC III and IV afterSkechers has not used or failed to use its Option for DC II, pursuant to Article20.1, ProLogis agrees, subject to any rights granted to any customer in DC II,to offer DC III to Skechers for use prior to offering it on the market, for aperiod of twenty (20) working days as of the written proposal issued thereto byProLogis. If Skechers declines to use DC III and ProLogis would agree to anagreement with another customer at a price more than 10% less than offered toSkechers, Skechers will be given ten (10) working days to accept DC III onexactly the same terms and conditions. In this case, Skechers will receive asigned copy of the binding proposal to the other customer. If Skechers does notexercise this option within ten-day period, it loses the option and ProLogisshall be free in this respect.In order to retain an option on DC IV, Skechers will have to take DC III for usewhen offered by ProLogis.ProLogis has been granted the right to purchase the land for DC III and DC IV bythe owner SPI+ until January 2005. In the event that ProLogis can not or willnot execute this right to purchase, ProLogis agrees that this right can be givento Skechers. However, as only the owner of this land SPI+ can grant the right toSkechers, ProLogis will ask SPI+ to notify in writing to Skechers that in caseProLogis declines the reservation rights, those rights will be granted by SPI+to Skechers. ProLogis shall not be held responsible for the transferral of theserights to Skechers by SPI+. This transfer right is subject to the writtenapproval of SPI+, which letter will be attached to the Agreement as Appendix 9.20.4 RIGHTS ON DC III AND DC IVIn the event that Skechers executes the Option or its right of first refusalpursuant to Article 20.1 and Article 20.2 respectively, on DC II, ProLogis willreserve the land exclusively for Skechers for a period of two (2) years timefrom the date of purchase free of charge, ultimately until January 1, 2007.Skechers will have an option to use DC III and DC IV respectively, until themoment ProLogis is obliged to start the construction of DC III and DC IVrespectively, according to the conditions of the building permit, but in anyevent not later than January 1, 2007. ProLogis will inform Skechers in writingof the ultimate date for the start of construction of DC III and DC IV. Skecherswill have to notify via registered letter to ProLogis its intention to use DCIII and DC IV within 20 working days of ProLogis' letter, in the absence whereofProLogis shall be free in this respect.In case the construction cost index exceeds the CPI, the price for using DC IIIand DC IV will be adjusted and consequently increased with the differencebetween the CPI and the construction cost index. The Price of the Premises willbe the basis price for DC III and DC IV respectively (price level July 1, 2002),increased by the annual indexation.In case the difference between purchase price of the land on which the Premisesand DC II are located and the purchase price for the land on which DC III and DCIV are to built exceeds the CPI, the price for using DC III and DC IV will beadjusted and consequently increased with the difference between the land pricepaid for the Premises and DC II increased by the CPI and the actual purchaseprice of the land for DC III and DC IV. The Price of the Premises will be thebasis price for DC III and DC IV respectively (price level July 1, 2002),increased by the annual indexation.20.5 TERM PREMISES, DC II AND DC IIIIn case Skechers opted to use DC III pursuant to Article 20.4, this will be onsimilar adjusted Price levels as the Premises and DC II. On the commencementdate for DC III, the Agreement for the Premises and DC II will have to besynchronized with the 16agreement for DC III via an addendum to the respective agreements. The initialterm, during which Skechers can not terminate any of the agreements for thePremises, DC II and DC III, will be seven (7) years, as of the date ofcommencement for DC III.20.6 TERM PREMISES, DC II, DC III AND DC IVIn case Skechers opted to use DC IV pursuant to Article 20.4, this will be onsimilar adjusted Price levels as the Premises, DC II and DC III. On thecommencement date for DC IV, the agreements for the Premises, DC II and DC IIIwill be synchronized with the agreement for DC IV via an addendum to therespective agreements. The initial term, during which Skechers can not terminateany of the agreements for the Premises, DC II, DC III and DC IV, will be ten(10) years for the Premises, DC II, DC III and DC IV.20.7 DEVELOPMENT CONDITIONS DC III AND DC IVThe new development of DC III and/or DC IV, and accordingly the rights andoptions related thereto as granted to Skechers pursuant to this Article 20, willbe: - subject to approval of ProLogis Board of Trustees; and - subject to satisfactory credit review of Skechers (no less than current approved financials without any expected significant adverse change).The new development of DC III and/or DC IV will initially be based on the designfor the Premises and DC II, but can be adjusted in close cooperation withSkechers.In the event the Skechers declines its option or rights for DC III pursuant tothis Article 20, it also looses its option and any other rights whatsoeverpursuant to this Article 20 for DC IV.In the event that ProLogis does not develop DC III and DC IV Skechers has theright to purchase the land for DC III and DC IV at ProLogis' total acquisitionscosts related to such land, at the same terms and conditions, subject to theterms and conditions of the contract of sale for the land on which DC III and DCIV were planned to be built. ProLogis shall notify to Skechers via registeredletter its intention not to develop DC and DC IV. Within twenty (20) workingdays of issue of ProLogis' letter, Skechers shall have to notify via registeredletter its decision to buy the land on which DC III and DC IV were planned to bebuilt, in the absence whereof ProLogis shall be free in this respect.20.8 EXERCISE OF RIGHTS AND OPTIONSSkechers must exercise its options and rights of first refusal pursuant to thisArticle 20 in a timely fashion to enable it to use future phases of thedevelopment on the Site. Specifically, if Skechers does not exercise its rightor Option with respect to DC II, it looses all of its possible rights to DC II,III and IV. In such a case, ProLogis has no further obligations to Skechers tobuild for or to make further phases available on the Site to Skechers, except incase of Article 20.3, paragraph 2.20.9 USE OF DC II, DC III AND DC IVIn the event Skechers will execute its rights pursuant to this Article 20, touse DC III and/or DC IV, Skechers will be given a "Use free"-period for thatparticular distribution center of four (4) months for which no payments are due,except applicable service charges and VAT only, once at the commencement date ofthe respective Distribution center. Said "Use free"-period will apply only tothe new distribution center to be occupied.20.10 NOTICE PERIODFor the Premises and DC II the notice period is twelve (12) months pursuant toArticle 5. If Skechers starts using DC III the notice periods for alldistribution centers (i.e. Premises, DC II and DC III) increases to eighteen(18) months. 17If Skechers starts using DC IV the notice periods for all distribution centers(i.e. Premises, DC II, DC III and DC IV) increases to twenty-four (24) months.ARTICLE 21: ENVIRONMENT AND HEALTHSkechers shall at all times use its best efforts to minimize the impact of itsactivities on the environment and human health.Skechers shall, both during the Agreement and afterwards, fully indemnifyProLogis and hold ProLogis harmless for all damages and costs resulting from therelease by Skechers of harmful substances into the air, the water, the soil andthe groundwater, or from any activity which is harmful for the environment orhuman health, including but not limited to (i) the fees and expenses for surveysor other studies, preventive or remedying measures and for monitoring programs,(ii) the decrease of the value of the Site, (iii) the loss of benefit of theexploitation of the Site, (iv) liabilities towards third parties and/or publicauthorities, (v) all penalties, interests, proceedings and fees of technical,legal and financial experts.Prior to the commencement of this Agreement, ProLogis has conducted a Phase IEnvironmental Site Assessment, Industrial Park Hauts-Sarts-Milmort, ProLogisBelgium II Sprl ProLogis Belgium III, V, VI Sprl, Avenue du Parc Industriel,4041 Herstal-Milmort (Liege), Belgium (GEDAS, January 18, 2001, project number:1l/15/1844) and the Geotechnical Site Investigation (GEDAS, March 7, 2001,project number: 1l/15/1844 - revision B) on the Site, for its own account. TheAssessment and the Geotechnical site Investigation (together `the GEDAS report')have been appended to this Agreement as Appendix 10. ProLogis shall haveestablished an update of the GEDAS report (of both the Assessment and theGeotechnical site investigation) by GEDAS which will be communicated toSkechers prior to the official delivery date of the Premises, as referred to inArticle 16, which will include drills on the Site and an examination of samplesof the soil and ground water of the Site evaluated on the basis of the Walloonstandards for the parameters for which such standards currently exist and on thebasis of the Flemish standards for the other parameters (the "Update report").This Update report will be attached to this Agreement as Appendix 10bis. TheGEDAS report and the Update report represent a legally appropriate survey and isregarded a sufficient basis to describe the status of the soil and ground waterof the Site, agreed by ProLogis and Skechers.Prior to the termination of the Agreement, Skechers will, at its sole expense,order an accredited expert to carry out an exploratory soil survey on the Site.If the Agreement is extended by virtue of Article 20, Skechers is only obligatedto have this exploratory soil survey carried out prior to the termination of theextended Agreement.If the results of this exploratory soil survey indicate that there areconcentrations of substances in the soil and/or the groundwater of the Siteexceeding the standards which apply on such date and/or which give cause tofurther survey measures and/or soil decontamination, Skechers will have thesefurther surveys and soil decontamination carried out, for its own account.However, ProLogis will carry the cost of further survey measures and/or soilremediation for the contamination ascertained in the GEDAS report and the UpdateReport.Skechers will also compensate ProLogis for any damage which the latter maysuffer as a result of any soil and/or groundwater contamination exceeding thecontamination ascertained in `the GEDAS report' and the Update report or as aresult of the survey and remediation measures carried out by Skechers for suchcontamination. 18Skechers will make a reasonable effort to ensure that the survey and remediationmeasures are carried out prior to the termination of the Agreement and interfereas little as possible with the use of the Site.ARTICLE 22 - RIGHT TO PURCHASEAs at July 16, 2027 (the "Final Termination of the Agreement") and insofarSkechers has exercised all of its rights and options pursuant to Article 20 andhas used all of the Premises, DC II, DC III and DC IV, Skechers has the right topurchase the shares of the entities that own the distribution centers or thedirect real estate, as offered in the sole discretion of ProLogis, that are inuse by Skechers under this Agreement as at the Final Termination of theAgreement. It being understood that all costs, rights and taxes, of whatevernature, related to the purchase are borne exclusively by Skechers. Skechersshall hold ProLogis harmless in this respect.This right of purchase is only valid if the Skechers has fulfilled all of itsobligations of the agreement(s) related to the use of the four distributioncenters and other obligations related to the agreement(s).If Skechers wants to exercise this right, Skechers will notify ProLogis six (6)months prior to the Final Termination of the Agreement and initiate the pricedetermination procedure as set hereafter.The purchase price will be the fair open market value based on a ten (10) yearagreement for use of the distribution centers at market rent and will bedetermined by three property experts. Either party shall appoint one expertwithin fourteen (14) days after a party has received the request to that effectfrom the other party. An expert will have to announce within eight (8) days ofthe date of the instruction whether he will accept it. The third expert will beappointed by these two experts within eight (8) days after their acceptance oftheir appointment. The third expert's judgment shall be decisive in the absenceof agreement between the experts on the purchase price to be fixed. If any ofthe parties fails to appoint an expert or if the two appointed experts cannotagree on the appointment of a third expert, the party who takes action first mayrequest the President of the Chamber of Commerce and Industries of Liege toappoint the expert(s). Each party shall pay the expenses of the expert appointedby or for him. The expenses of the third expert will be born equally by Skechersand ProLogis. The experts will be instructed to issue their report within six(6) weeks after the appointment has been determined. Investments made bySkechers will not be taken into account. The closing of the purchase has tooccur no later than ten (10) days after the Final Termination of the Agreement.In the event that ProLogis proposes to transfer the shares of theentity/entities or the real estate as aforementioned, other than to an entitycontrolled by ProLogis European Properties Fund, before July 16, 2027, ProLogisagrees to give Skechers a First Right of Offer on the shares or the real estatedirectly. This right is valid until ten (10) working days after ProLogis hasinformed Skechers of such intended transfer.ARTICLE 23. VARIOUS CLAUSES23.1. This Agreement contains the entire agreement of the parties hereto with regard to the object to which it refers and contains everything the parties have negotiated and agreed upon within the framework of this Agreement. No amendment or modification of this Agreement shall take effect unless it is in writing and is executed by duly authorized representatives of the parties. 19 The Appendices to this Agreement form an integral part thereof and any reference to this Agreement shall include a reference to the Appendices and vice versa. It replaces and annuls any agreement, communication, offer, proposal, or correspondence, oral or written, previously exchanged or concluded between the parties and referring to the same object.23.2 Notwithstanding any provision contrary to the present Agreement, neither party shall be liable for a delay or failure to fulfill its obligations under this Agreement arising from any cause beyond its reasonable control or arising from strikes, lockouts, work stoppages or other collective labor disputes, insofar that the party invoking the force majeure informs the other party as soon as reasonable possible of the occurrence and the estimated duration and the termination thereof, as well as an accurate description of the causes thereof. In case the situation of force majeure has a duration of more than two (2) months, the other party is entitled to terminate this Agreement in accordance with the terms of this Agreement.23.3. The parties acknowledge that they have required all notices and legal proceedings provided for under the present Agreement, or related hereto, to be drawn up in the English language, to the extent permitted by rules of public policy relating directly or indirectly to these proceedings.23.4. If one or more of the provisions of this Agreement is declared to be invalid, illegal or unenforceable in any respect under the applicable law, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected. In the case whereby such invalid, illegal or unenforceable clause affects the entire nature of this Agreement, each of the parties shall use its best efforts to immediately and in good faith negotiate a legally valid replacement provision.23.5. No failure or delay of a party to exercise any right or remedy under this Agreement shall be considered a final waiver thereof, nor shall any single or partial exercise of any right or remedy preclude any other or further exercise thereof. The rights and remedies provided in this Agreement are cumulative and not exclusive of any rights or remedies provided by law.23.6. If this Agreement is to be registered, Skechers shall do so as soon as reasonably possible. A proof of registration is to be submitted to ProLogis. The costs and possible penalties resulting thereof are to be borne solely by Skechers.23.7. The parties acknowledge that they have required the present Agreement to be drawn up in the French and the English language, both with equal value. The French version will be used for registration purposes. The English version will be attached to the French version as Appendix 11.23.8. The Price for the Mezzanine floor in the Premises, price level July 1, 2002, is based on the fitting out as office directly adjacent to the office pod divided equally over the Mezzanine floor and in all cases less than 10% of the total Warehouse space in the Premises, with a minimum of 500 m(squared). The Price for the Mezzanine in July 1, 2002, amounts to twenty-three Euro ((euro) 23,00) per square meter (m(squared)) per annum and reflects a reduction in the Price for Skechers as long as the Mezzanine floor is used for storage. If Skechers desires to use the Mezzanine floor for office activities, ProLogis will fit-out the Mezzanine floor as office of an equal quality as the office pods. In this case the Price will be adjusted to the actual Prices for offices in the Premises based on the initial Price of eighty-five Euro ((euro) 85,00) per square meter (m(squared)) per annum, price level July 1, 2002. It is 20 prohibited that Skechers will refurbish the Mezzanine floor into offices. However, if Skechers performs such works, ProLogis reserves the right to charge the office Price as if ProLogis has executed such work.23.9 In addition to the fit-out as described in Article 23.8, and Appendix 4, ProLogis will fit-out the Office Space with carpet and interior windows blinds only once at the beginning of the Agreement. These improvements will be owned and maintained by Skechers and are not an integral part of the Premises.23.10. Skechers is entitled to select its own advisors and associated sub-contractors for any additional work in the Premises. Prior to any executing of structural work in the Premises the written approval of ProLogis is required, which shall not unreasonable be withheld.23.11. Subject to the limitations set forth in the necessary authorisations and permits, the Premises are 24 hours and 7 days a week available for Skechers, but ProLogis cannot be held liable for Force Majeure.ARTICLE 24: CHOICE OF DOMICILEProLogis accounting correspondence address is ProLogis Belgium II SPRL,Boulevard Royal 25B, L-2449 Luxembourg, Luxembourg.Without prejudice to Article 3 of this Agreement, any notifications andcorrespondence which must be addressed to the other party, may be served in alegally valid manner at the following addresses: for ProLogis: ProLogis Belgium II SPRL, Regus Pegasus Park, Pegasuslaan 5, B-l/831 Diegem; for Skechers: Skechers International, Part Industriel Hauts-Sarts, Zone 3, Avenue du Part Industriel, 4041 Herstal.Except if agreed otherwise, any change of address can only take place withinBelgium. Any change of address must be notified by registered letter to theother party, the new address being considered the official address for purposesof this Agreement from the first business day following the sending of suchnotice letter.Notwithstanding the preceding, all notifications between Skechers andProLogis directly related to the Agreement shall be in the form ofregistered letters.ARTICLE 25: COMPETENT COURTSIn the event of any dispute relating to the conclusion, validity, theimplementation or the interpretation of this Agreement, the courts of Liege willhave sole and exclusive jurisdiction.ARTICLE 26: APPLICABLE LAWThis Agreement shall be governed by and construed in accordance with Belgianlaw.ARTICLE 27: BANK GUARANTEEBy way of security for the due performance by Skechers of its obligations underthis Agreement, Skechers shall at the time of signing of this Agreement and notlater than the date of entry into force of this Agreement as set forth inArticle 5 of the Agreement, which 21in any event can not be later than August 13, 2002, give to ProLogis a bankguarantee at first demand issued by any first class European bank having abranch office in Belgium and doing business in Belgium for an amount equal tonine hundred and thirteen thousand nine hundred and twenty-two Euro, i.e. (euro)913.922,00, plus VAT of one hundred and ninety-one thousand nine hundred andtwenty-three Euro and sixty-two Eurocent, i.e. (euro) 191.923,62 amounting to atotal of Euro 1.105.845,60 (in words: one million one hundred five thousandeight hundred forty five Euro and sixty euro cent), being the Price of one (1)year use under the terms of the Agreement, to be adjusted in accordance with theterms and conditions of this Agreement.Upon the written confirmation of the approval by ProLogis of the financial dataof Skechers for 2002 and 2003, as approved by Skechers' auditors and signed byits CFO for approval, the amount as set forth in the preceding paragraph, shallbe reduced to an amount equal to the Price, as determined and adjusted inaccordance with the terms and conditions of this Agreement, for a period ofthree (3) months plus VAT, so that it should always equals three (3) monthsPrice plus VAT. It being understood that the financial data of Skechers for 2002and 2003 have to be at least as good as those shown in the provided balancesheet and income statement of Skechers per June 30, 2002 and without anysignificant adverse change having taken place within Skechers. In the absencewhereof, the initial amount equal to the Price of one (1) year use under theterms of the Agreement shall remain applicable.This bank guarantee shall only be released six (6) months after the expiry ortermination of the Agreement, including its extensions, insofar Skechers willhave been fully released of its obligations under this Agreement.The bank guarantee shall be part of this Agreement and shall be attached to itas Appendix 12.In the absence of the bank guarantee as at August 13, 2002 at the latest, thisAgreement will be null and void ipso iure without any further notice beingrequired or any legal proceedings to be started. If ProLogis should decide torefer to the lack of the bank guarantee and thereby invokes the nullity of theAgreement, all Price payments, charges and any other payments due to ProLogisunder this Agreement will nevertheless remain in force as a compensation due tothe unavailability of the Premises, without prejudice to any other compensationProLogis may claim.Next to the bank guarantee, ProLogis obtained from Skechers USA Inc., a companyunder the laws of the State of Delaware having its principal place of businessat 228 Manhattan Beach Blvd, Manhattan Beach, CA 90266, USA, a letter, attachedhereto as Appendix 13, pursuant to which the latter declares in favor ofProLogis, including the successors in title of ProLogis, the financial soundnessand the complete observance by Skechers of its obligations under thisAgreement. This letter is essential for ProLogis for entering into thisAgreement. 22This Agreement was made out in quadruplicate in Brussel 2/08/2002. Each party acknowledges to have received its original copy./s/ Mr. Jacobus C.J. Nuijten /s/ Mr. David Weinberg ------------------------------ --------------------------For ProLogis Belgium II SPRL, For Skechers International,Mr. Jacobus C.J. Nuijten Mr. David WeinbergTHE FOLLOWING APPENDICES ARE PART OF THIS AGREEMENT:APPENDICES: 1. As built plans by AID NV, W. Albregts, Andrelaan 8, 2960 Brecht (ref: "dossier 8501"); 2. Letter SPI + of July 1, 2002; 3. List of services, supplies and site maintenance; 4. State of Delivery; 5. Plan alteration work (feuille 02/12 - dossier 5801); 6. Description DC II; 7. Site plan DC III and DC IV; 8. Letter SPI + of June 21, 2002; 9. Approval of SPI + of July 4, 2002; 10. Gedas report; 10bis. Update report; 11. English version of the Agreement; 12. Bank Guarantee; 13. Letter of Skechers USA Inc. of August 5, 2002. 23 . . . Exhibit 21.1 Subsidiaries of the RegistrantName of Subsidiary State/Country of Incorporation/Organization Skechers By Mail, Inc. DelawareSkechers U.S.A., Inc. II DelawareSkechers U.S.A. Ltd. EnglandSkechers U.S.A. France SAS FranceSkechers U.S.A. Deutschland GmbH GermanySkechers S.a.r.l. SwitzerlandSkechers Collection LLC CaliforniaSkechers Sport LLC CaliforniaDuncan Investments, LLC CaliforniaYale Investments, LLC DelawareSkechers International SwitzerlandSkechers International II SwitzerlandSkechers USA Iberia, S.L. SpainSkechers EDC SPRL BelgiumSkechers USA Benelux, B.V. NetherlandsSkechers USA Canada, Inc. CanadaSkechers USA Italia S.r.l Italy Exhibit 23.1 Independent Accountants' ConsentWe consent to incorporation by reference in the registration statement (No.333-71114) on Form S-8 of Skechers U.S.A., Inc. of our report dated February 17,2003, relating to the consolidated balance sheets of Skechers U.S.A., Inc. andsubsidiaries as of December 31, 2002 and 2001 and the related consolidatedstatements of earnings, stockholders' equity and comprehensive income, and cashflows for each of the years in the three-year period ended December 31, 2002,and the related financial statement schedule, which report appears in theDecember 31, 2002, annual report on Form 10-K of Skechers U.S.A., Inc. KPMG LLPLos Angeles, CaliforniaMarch 28, 2003 EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report of Skechers U.S.A., Inc. (the "Company") onForm 10-K for the year ending December 31, 2002 as filed with the Securities andExchange Commission on the date hereof (the "Report"), each of the undersigned,in the capacities and on the date indicated below, hereby certifies, pursuant to18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-OxleyAct of 2002, that to his knowledge:(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company./S/ ROBERT GREENBERG-------------------------------Robert GreenbergChief Executive Officer(Principal Executive Officer)March 28, 2003/S/ DAVID WEINBERG-------------------------------David WeinbergChief Financial Officer(Principal Financial and Accounting Officer)March 28, 2003A SIGNED ORIGINAL OF THIS WRITTEN STATEMENT REQUIRED BY THE SECTION 906 HAS BEEN PROVIDED TO THE COMPANY AND WILL BE RETAINED BY THE COMPANY AND FURNISHED TO THE SECURITIES AND EXCHANGE COMMISSION OR ITS STAFF UPON REQUEST.

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