Skechers U.S.A.
Annual Report 2003

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 ACTOF 1934FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934FOR 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) 95-4376145(I.R.S. EMPLOYERIDENTIFICATION NO.) 228 MANHATTAN BEACH BLVD.MANHATTAN BEACH, CALIFORNIA(ADDRESS OF PRINCIPAL EXECUTIVEOFFICES) 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. [X] Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [X] No [ ] As of June 30, 2003, the aggregate market value of the Class A and Class B Common Stock held by non-affiliates of the Registrant wasapproximately $155 million based upon the closing price of $7.40 of the Class A Common Stock on the New York Stock Exchange on suchdate. The number of shares of Class A Common Stock outstanding as of March 9, 2004 was 20,422,423. The number of shares of Class B Common Stock outstanding as of March 9, 2004 was 17,786,561.1Table of ContentsDOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant’s Definitive Proxy Statement issued in connection with the 2004 Annual Meeting of the Stockholders of theRegistrant are incorporated by reference into Part III.2SKECHERS U.S.A., INC.FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003INDEX TO ANNUAL REPORT ON FORM 10-K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 DISCLOSUREITEM 9A. CONTROLS AND PROCEDURESPART 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. PRINCIPAL ACCOUNTANT FEES AND SERVICESPART IVITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-KSIGNATURESINDEX TO CONSOLIDATED FINANCIAL STATEMENTSEXHIB 10.9(a)EXHIBIT 10.10(h)EXHIBIT 10.10(i)EXHIBIT 10.10(j)EXHIBIT 10.10(k)EXHIBIT 10.10(l)EXHIBIT 10.13(a)EXHIBIT 10.18EXHIBIT 10.18(A)EXHIBIT 10.27(a)EXHIBIT 10.28(a)EXHIBIT 21.1EXHIBIT 23.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32Table of Contents PAGE PART I Item 1. Business 4Item 2. Properties 23Item 3. Legal Proceedings 24Item 4. Submission of Matters to a Vote of Security Holders 25PART II Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters 25Item 6. Selected Financial Data 26Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 27Item 7a. Quantitative and Qualitative Disclosures About Market Risk 37Item 8. Financial Statements and Supplementary Data 38Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 38Item 9a. Controls and Procedures 38PART III Item 10. Directors and Executive Officers of the Registrant 38Item 11. Executive Compensation 38Item 12. Security Ownership of Certain Beneficial Owners and Management 38Item 13. Certain Relationships and Related Transactions 38Item 14. Principal Accountant Fees and Services 39PART IV Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 39Signatures 43Consolidated Financial Statements F-13Table 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, Forms 3, 4, and 5 filed on behalf ofdirectors and executive officers, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the SecuritiesExchange Act of 1934, available free of charge on our website as soon 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 websiteor at the SEC’s website at www.sec.gov.GENERAL We design and market Skechers-branded contemporary footwear for men, women and children under seven individual brand names. Wealso offer a designer line for women, a high-end men’s line, a men’s urban-focused specialty line, and a licensed urban-targeted men’s,women’s and children’s line — all branded and marketed separately to appeal to a unique audience. Our footwear reflects a combination ofstyle, quality and value that appeals to a broad range of customers. Our shoes are sold through department stores, specialty stores, athleticretailers and independents as well as our own retail stores, and our e-commerce website. Our objective is to profitably grow our operationsworldwide while leveraging our recognizable brand through our strong product lines, licensed apparel and accessories, innovative advertisingand diversified distribution 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 offerings are organized within 15 distinct collections. Our core consumers are style-conscious 12- to 24-year-old men andwomen attracted to our youthful brand image and fashion forward designs. Over the last several years, we have broadened our customerbase by expanding several footwear lines, including Michelle K and Somethin’ Else from Skechers, and introducing new lines, such as thehigh-end men’s line Mark Nason, Somethin’ Else from Skechers for Girls, the urban-based 310 Motoring Footwear, and Marc Ecko/RhinoRed footwear for men, women and children. Many of our best-selling and core styles are also developed for children with colors and materialsthat 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 2003, we developed product-focused lifestyle domestic and internationalprint ads for men and women that incorporated several of our lines, including Skechers Sport, Skechers Collection and Somethin’ Else fromSkechers. Many of these same styles were also seen in our Skechers adult television campaign. For children, we updated our animatedtelevision spot to effectively reach kids with fresh product. As part of our international strategy, we launched ads incorporating celebrityChristina Aquilera. In addition, we developed product ads for the launch of Mark Nason and ads featuring designer Michelle K for her line.Our strategy continues to focus on print advertisements in targeted publications such as GQ, Maxim, Vogue, Elle, Teen People andSeventeen, and is supported by television commercials for adults and children aired on major networks and leading cable channels such asMTV, ESPN and Nickelodeon.Product Lines Since we introduced our first Skechers-branded line, Skechers USA Sport Utility Footwear, in December 1992, we have expanded ourproduct offering and grown our net sales while substantially increasing the breadth and penetration of our account base. Each of ourSkechers-branded product lines benefits from the Skechers reputation for contemporary and progressive styling, quality, comfort, andaffordability. Our product lines that are not branded with the Skechers name benefit from our marketing support, quality management andexpertise. To promote innovation and brand relevance, we manage our product lines separately by utilizing dedicated4Table of Contentssales and design teams. Our product lines share back office services in order to limit our operating expenses and fully utilize ourmanagement’s vast experience in the footwear industry. Skechers USA. Our Skechers USA category for men and women includes four types of footwear: (i) Casuals and Classics, (ii) DressCasuals (for men only), (iii) Comfort (for men only), and (iv) Outdoor (for men only). • The Casuals category includes “black and brown” boots and shoes that generally have a rugged urban design — some withindustrial-inspired fashion features and some women’s styles with comfort-inspired designs. This category is defined by the heavy-lugged outsole and value-oriented materials employed in the uppers. Also in this grouping is the Classics category of boots andshoes, which are marked by softer outsoles constructed of polyvinyl carbon (PVC). We design and price these categories to appealprimarily to young persons with broad acceptance across age groups. Suggested retail price points range from $45.00 to $100.00 forthis category. • The Dress Casuals category is comprised of basic “black and brown” men’s shoes that feature shiny leathers and dress details, butstill utilize the heavy-lugged outsole and value-oriented materials. This category is designed and priced for young men seeking theirfirst work or evening shoe. Suggested retail price points range from $50.00 to $65.00 for this category. • Skechers Comfort is a line of trend-right casuals for men who want all-day comfort without compromising style. Characteristics ofthe line include comfortable outsoles, cushioned insoles and quality leather uppers. Marketed in its own box, Skechers Comfort isintended to be available in many of the same stores that carry Skechers USA as well as additional mid-tier and better departmentstores. 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 anddebris; 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 andfull-grain leathers. Marketed in its own box, Outdoor is intended to be available in mid-tier and better department stores as well asspecialty shops. Suggested retail price points range from $45.00 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) Performance, and (iii) Street Casuals. 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 includecushioned heels, polyurethane midsoles, and phylon and other synthetic outsoles, as well as leather or synthetic uppers such asdurabuck, cordura and nylon mesh. Careful attention is devoted to the design, pattern and construction of the outsoles, which varygreatly depending on the intended use. This category features earth tones and athletic-inspired hues with pop colors in addition tothe traditional athletic white. The Jogger, Trail runner, Sport hiker and Terrainer styles are marketed through athletic footwearspecialty retailers as well as basic existing accounts. Suggested retail price points range from $40.00 to $70.00 for this category. • The Performance category is comprised of multi-purpose running shoes that are marketed as lifestyle athletic footwear that can beused as a multi-purpose performance shoe. Some styles include: 3M reflective accents, breathable upper construction, qualityleathers, abrasion-resistant toe and heel cap, removable moisture wicking molded EVA sockliner, outsole forefoot flex grooves forimproved flexibility, non-marking rubber lugs with IDT (Impact Dispersment Technology), aggressive all terrain traction lugs,external torsion stabilizer, and tuned dual-density molded Ethyl Vinyl Acetate (EVA) midsole with pronation control. Theperformance styles are marketed through athletic footwear specialty retailers as well as basic existing accounts. Suggested retailprice points range from $50.00 to $60.00 for this category. • Street Casual incorporates lower profiles, classic details and skate and street influences in a collection of essential, basic casualsneakers. The uppers are designed in leather, suede, nubuck and/or mesh. Street Casual is targeted to young consumers, but alsoappeals to a broader demographic. The line is marketed through department and specialty stores. Suggested retail price pointsrange from $45.00 to $55.00 for this category.5Table of Contents Skechers Collection. The Skechers Collection line includes (i) stylish dress and dress casual, and (ii) EuroCasual 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. • Our dress and dress casuals include classic tailored and fashion-forward square, round and pointed lasts in a variety of styles,such as bicycle toes, monk straps, wingtips, oxfords, cap toes, demi-boots and boots. The outsoles project a sleeker profile and canbe either leather or man-made. The uppers are high-quality leathers including glossy, “box,” distressed, and aniline. Suggestedretail price points range from $60.00 to $155.00 for this category. • EuroCasual blends dress styling with European influences to create a versatile and comfortable casual shoe. Marked by leatherand stitch details and unique styling, the EuroCasual collection of sneakers, oxfords and slip-ons features high-quality leather andsuede materials in multiple colorations, and sport-inspired rubber outsoles. Suggested retail price points range from $65.00 to$100.00 for this category. Somethin’ Else from Skechers. Targeting 12- to 25-year-old trend-savvy females, Somethin’ Else from Skechers focuses on currentfashions with an array of stylish shoes, boots, heels and sandals. With a growing offering 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. Skechers Active. Skechers Active is a line of everyday casual sneakers for females of all ages. Predominately a white-leather based linewith bright and pastel pop colors, the line has grown to include select solid color styles and unique fabric treatments such as chrome andperforated metallic. Active sneakers are typically retailed through specialty casual shoe stores and department stores. Suggested retail pricepoints range from $30.00 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. The Skechers Work line includes (i) Steel Toe, (ii) Work and (iii) Slip-Resistant categories. Oursteel toe, electrostatic-dissipative, and electrical hazard technologies have been independently tested and certified to meet ANSI standards,and our slip-resistant soles have been tested pursuant to the Slip Resistance ASTM F 1677-96 (Mark II Machine). The uppers are in high-quality leather, nubuck and durabuck. Constructed on high-abrasion, long wearing soles, the line is designed for men and women with jobsthat require certain safety requirements. Skechers Work is primarily marketed through business-to-business channels, but is also availabledirect-to-consumers and through select department and specialty stores. • The Skechers steel toe category of sneakers, hikers, oxfords and boots is ideal for environments requiring safety footwear or toughterrain. These durable styles feature breathable lining, oil- and abrasion-resistant outsoles and steel toe design for optimalprotection, all-day comfort and prolonged durability. Some styles also offer electrical hazard, electrostatic-dissipative and water-resistant features. Suggested retail price points range from $50.00 to $100.00 for this category. • The Skechers Work line of boots, oxfords and hikers offers versatile features for those requiring utility, safety and comfort features,but who also want style. Designed with an array of textured uppers and colorways, the footwear capitalizes on function and comfort– from breathable lining to contoured insoles and abrasion-resistant outsoles for prolonged wear. Suggested retail price points rangefrom $47.00 to $100.00 for this category. • Ideal for the service industry, the Skechers Slip-Resistant line of boots, oxfords and sneakers offers 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 $65.00 forthis category. Michelle K. Targeted toward stylish 18- to 34-year-old women, Michelle K is a signature designer line comprised of (i) high-fashion boots,pumps and flats, and (ii) Michelle K Sport, an expanded division of sport shoes. Head designer and visionary Michelle Kelchak derives herinspiration from her extensive travels, which is evident in her collections that reflect the latest European, Asian and American trends andfashions. Michelle K and Michelle K Sport are marketed to consumers separate from Skechers in the United States.6Table of Contents • Made predominately with fine European materials and craftsmanship, Michelle K is marked by high-grade leathers, fine detailing anddesign, and flattering silhouettes, including sculpted and lower kitten heels. Most styles are crafted in Italy, Portugal and Spain, with othersmade in Brazil. The line is available in better department stores and boutiques. Suggested retail price points range from $120.00 to $300.00for this category. • Michelle K Sport is a growing line of fashion-inspired designer EuroSport casuals marked by a unique combination of materials,textures and colors. The low-profile looks are designed as a complementary casual line for women who already wear Michelle K fashion anddress footwear, and are marketed to the same better department stores and boutiques as well as select department stores and specialtyretailers. Suggested retail price points range from $70.00 to $90.00 for this category. Mark Nason. Launched in 2003, Mark Nason is a sophisticated and forward footwear collection targeting men with discerning style. Theline is comprised predominately of stylish dress casual and dress oxfords, slip-ons and boots, but also includes a unique grouping of sandalsand fashion sneakers. Signature to the Mark Nason line is the premium leathers, the high quality and style. In this collection, look forunusual hand-treated leather uppers and soles, fine leathers, distinctive shapes, unique closures, and a variety of colorations. Suchcharacteristics have included, and may include in the future genuine python or eel boots, hand-treated, hand-scraped and hand-cut leathers,and jute and rubber compounds. The majority of the Mark Nason shoes are constructed in Italy. The Mark Nason line is marketed toconsumers separate from Skechers. It is available in better department stores and boutiques. Suggested retail price points for this line rangefrom $100.00 to $600.00. Skechers Kids. The Skechers Kids line includes: (i) a range of infants/toddlers, boys and girls boots, shoes and sneakers; (ii) S-Lights,lighted footwear for toddlers, boys and girls; and (iii) Somethin’ Else from Skechers for Girls, trend-inspired boots, shoes, sandals and dresssneakers. Skechers Kids and Somethin’ Else from Skechers for Girls are comprised primarily of shoes that are designed as “takedowns” oftheir adult counterparts, allowing the younger set the same popular styles as their older siblings and schoolmates. This “takedown” strategymaintains the product’s integrity by offering premium leathers, hardware and outsoles without the attendant costs involved in designing anddeveloping new products. In addition, we adapt current fashions from our men’s and women’s lines by modifying designs and choosingcolors and materials that are more suitable for the playful image we have established in the children’s footwear market. • Utilizing our takedown strategy, the Skechers Kids line includes variations on Skechers Sport, Skechers USA, Skechers Collection,and Skechers Active adult shoes. Skechers Kids styles are also adapted for toddlers with softer, more pliable outsoles, and for infants withsoft, leather sole crib shoes. Skechers Kids shoes are available at department stores and specialty and athletic retailers. Our children’sfootwear is offered at retail prices ranging from $18.00 to $50.00. • S-Lights is a line of lighted sneakers, which combines a sequence of patterns and lights on the outsole and other areas of the shoes.S-Lights are intended to be marketed in the same retail stores as Skechers Kids. Our lighted footwear is offered at retail prices ranging from$30.00 to $45.00.• Somethin’ Else from Skechers for Girls is a line of trend-right sandals, shoes, boots, street sneakers and dress casuals for younggirls. For this line, we have taken many of our successful junior bottoms, tailoring them to the demographic with lower platforms andwedges as needed, and largely giving the shoes all new upper treatments and colors designed to appeal to girls. Many styles are made frommore affordable materials such as man-made leather, offering more young consumers the opportunity to buy stylish shoes. Acomplementary line for girls who already wear Skechers Kids, Somethin’ Else from Skechers for Girls is available in department andspecialty stores, and retails at prices ranging from $20.00 to $45.00.LICENSED BRANDS 310 Motoring. Brought to market in 2003 with an expected delivery of before back-to-school 2004, the 310 Motoring footwear collectionutilizes top-quality leathers, a fashion-forward approach to design and comfort, and materials that are derived from 310 Motoring’s customizedcars, including wood burl and carbon fiber. A multi-tiered approach, the line consists of three categories: “Bel Cavallo,” high-end, cutting-edgeathletics; “Motoring,” heritage to high-tech stylish boots and shoes; and “Racing,” sophisticated driving-inspired shoes and boots. 310Motoring footwear will be marketed to consumers separate from Skechers and will be made available in select department stores, specialtyretailers and urban independents. Suggested retail price points range from $80.00 to $150.00 for this category.7Table of ContentsMarc Ecko and Rhino Red Footwear. Brought to market in late 2003 with a product delivery date of Spring 2004, Marc Ecko Footwear for menand Rhino Red for women is a line of urban- and street-inspired sneakers, joggers and shoes, with an assortment of fashion sandals, heelsand boots for women. Targeted to the street-savvy 18- to 34-year-old consumer, the footwear reflects Ecko Unlimited’s men’s apparel and theEcko Red women’s apparel, and effectively utilizes the globally recognized Rhino logo on the majority of sneakers and casuals. The line willbe marketed to consumers separate from Skechers and will be made available in select department stores, specialty retailers and urbanindependents. Suggested retail price points for Marc Ecko Footwear for men is $70.00 to $100.00. Suggested retail price points for the RhinoRed line for women is $45.00 to $130.00.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 24-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 for 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 into stylish, qualityfootwear at a reasonable price. We strive to analyze, interpret and translate current and emerging lifestyle trends. Lifestyle trend informationis compiled and analyzed by our designers from various sources that monitor trends in culture and society, including the review and analysisof modern 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 and develop our successfulstyles in the Skechers image. The footwear design process typically begins about nine months before the start of a season. Our products are designed and developedprimarily by our in-house design staff. To promote innovation and brand relevance, we utilize dedicated design teams that focus on each ofthe men’s, women’s and children’s categories, and report to our senior design executives. In addition, we utilize outside design firms on anitem-specific basis to supplement our internal design efforts. The design process is extremely collaborative; members of the design stafffrequently meet with the heads of retail, merchandising, sales, production and sourcing to further refine our products to meet the particularneeds of our the target market. 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 ourmanufacturers for a design prototype. The design prototypes are then sent back to our design teams. Our major retail customers may alsoreview these new design concepts. Customer input not only allows us to measure consumer reaction to the latest designs, but also affordsus an opportunity to foster deeper and more collaborative relationships with our customers. Our design teams can easily and quickly modifyand 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 store personnel,we obtain customer feedback that often influences product design and development. We believe that sales in our concept stores can helpforecast sales in national retail stores and we share this sales information with our wholesale accounts. We closely monitor sales activityafter initial introduction of a product to determine whether there is substantial demand for the style, thereby aiding us in our sourcingdecisions. Styles that have substantial consumer appeal are highlighted in upcoming collections or offered as part of our periodic styleofferings. The ability to initially test our products allows us to discontinue less popular styles after only a limited production run which affordsus an indicator of future production and a hedge to fashion risks. Also, sales, merchandising, production and allocations managementmonitor weekly sales trends of orders of our retail account base in order to manage future production of styles that are increasing ordecreasing in popularity. Generally, the production process can take from six months to nine months from design concept tocommercialization.SOURCING8Table of Contents Factories. Our products are produced by independent contract manufacturers primarily located in China and, to a lesser extent, in Italy,Vietnam, Brazil and various other countries. We do not own or operate any manufacturing facilities with the belief that the use of independentmanufacturers increases our production flexibility and capacity while at the same time substantially reducing capital expenditures andavoiding 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 2003, we had four manufacturers that accounted forapproximately 49.9% of total purchases. One manufacturer accounted for 24.6% of our total purchases during the year ended December 31,2003. To date, we have not experienced difficulty in obtaining manufacturing services. We maintain an in-stock position for various styles of footwear in order to minimize the time necessary to fill customer orders. For styleswith high sell through percentages we will maintain an in-stock position, placing orders for selected footwear with our manufacturers prior tothe time we receive customers’ orders for such footwear. In order to reduce the risk of overstocking, we assess demand for our products bysoliciting input from our customers, including their retail sell through rates, and monitor retail sell-through at our own retail stores. Throughthe analysis of historical and current sales and market data we develop an internal product quantity forecast which helps us manage ourinventory levels. 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% 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 170-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. Our quality control personnel located in China perform an array ofinspection procedures at various stages of the production process, including examination and testing of prototypes of key raw materials priorto manufacture, samples and materials at various stages of production and final products prior to shipment. Our employees are on-site ateach of our major manufacturers to oversee production. For some of our lower volume manufactures, our staff is on-site during significantproduction runs or we will perform unannounced visits to their manufacturing sites to further monitor compliance with our manufacturingspecifications.ADVERTISING AND MARKETING With a marketing philosophy of “Unseen, Untold, Unsold,” we take a targeted approach designed to drive traffic, build brand recognitionand properly position our diverse lines within the marketplace by highlighting key styles in lifestyle settings. Senior management is directlyinvolved in shaping our image and the conception, development and implementation of our advertising and marketing activities. The focus ofour marketing plan is print and television advertising, with support from radio, billboard, mall kiosk, public relations and product placement.We continue to adjust our advertising budget to be consistent with projected sales, targeting approximately 8% to 10% of annual net sales forour marketing, advertising and trade show efforts. 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.9Table of Contents We believe that our advertising strategies, methods and creative campaigns are directly related to our success. Our in-house advertisingteam has developed a comprehensive program to promote the Skechers brand through edgy lifestyle- and image-driven advertising. While allof our advertisements feature our footwear, they generally seek to build and increase brand awareness by linking Skechers to youthful,contemporary lifestyles and attitudes rather than to market a particular footwear product. Our ads are designed with a broad approach toeliminate single categorization and to provide merchandise flexibility and facilitate the brand’s and product design’s direction of evolvingfootwear fashions and consumer preferences. Our print efforts are represented by one- and two-page ads displayed in popular fashion andlifestyle consumer publications that appeal to our target customer group, such as Elle, Details, Seventeen, Maxim, People, Teen People,Rolling Stone, YM, and many others. To further build brand awareness and influence consumer spending, we have selectively signed endorsement agreements with celebritieswe felt would reach new markets. In 2003, we signed an international endorsement agreement with global superstar Christina Aguilera forour women’s lines. In recent years we had similar endorsement agreements with singer and actress Britney Spears, professional basketballplayer and actor Rick Fox, and actors Robert Downey, Jr., Matt Dillon and Rob Lowe. From time to time, we may sign other celebrities toendorse our brand name and image in order to strategically market our products among specific consumer groups in the future. In addition to advertising our Skechers branded lines through men’s, women’s and children’s ads, we also support our Michelle K, MarkNason, and now 310 and Marc Ecko/Rhino Red lines through individual unique print advertisements in targeted books such as Vogue,Maxim and XXL. Designer Michelle K appears in the advertisements for her line, which we believe is creating a more personable andrelatable brand to consumers while establishing her as a celebrity designer. Our progressive television advertisements are primarily produced in-house and air during key selling seasons on top television shows onmajor networks and cable channels. We create different campaigns targeted to our 5- to 11 and 12- to 24-year-old consumer groups. Our in-house media buyer strategically selects the ideal programs and geographic areas for our commercials for maximum consumer impact.Promotions By applying creative sales techniques via a broad spectrum of mediums, the promotions team seeks to build brand recognition and drivetraffic to Skechers retail stores and our retail partners’ locations, serving as a catalyst for increased product sales. Skechers’ promotionalstrategies have encompassed in-store specials, concert promotions, charity events, product tie-ins and giveaways, and collaborations withnational retailers and radio stations. Our imaginative promotions are consistent with Skechers’ imaging and lifestyle.Public Relations Our public relations team’s objectives are to garner positive and accurate press on our company, to secure product placement in keyfashion magazines, and place our footwear on the feet of trend-setting celebrities. Domestic and international fashion and footwear trade publications, business magazines, and television news shows consistently reporton Skechers events and news items. Such stories include Skechers on Fortune’100 Fastest Growing Companies list and Robert Greenbergand Michael Greenberg on Footwear News’ The Power 50. Through our commitment to aggressively promote our upcoming styles, our products are often featured in leading fashion and pop culturemagazines, as well as in select films and popular television shows. In addition to a high-profile scene at a Skechers retail store in the award-winning movie Thirteen, our footwear has been prominently displayed and referenced on The Today Show, Good Morning America,Good Day Live, E! Style, VH1, MTV and Extreme Dating, among others, and has amassed an array of prominent product placements inmagazines including Rolling Stone, Lucky, GQ, YM, Seventeen, Teen People, Teen Vogue, Maxim, InStyle and Footwear News. Inaddition, the Skechers brand has been associated with cutting edge events and select celebrities, and our product has been seen worn bytrend-setters like Vin Diesel, Britney Spears, Paris Hilton, Jeff Goldblum, Melissa Joan Hart, Farrah Fawcett, Elijah Wood, among others.Trade Shows To better showcase our diverse products to footwear buyers in the United States, Europe and distributors around the world, we exhibited atthe leading trade shows during 2003. This growing list includes WSA’s The Shoe Show, FFANY and MAGIC in the10Table of ContentsUnited States, and GDS, MICAM and Who’s Next in Europe. Our dynamic, state-of-the-art trade show exhibits, which are developed by ourin-house architect and feature our latest product offerings, are specially designed and built to accommodate each trade show and areenhanced with lifestyle images reflective of our brand. By investing in innovative displays and individual rooms showcasing each line, oursales force can present a sales plan for each line and buyers are able to truly understand the breadth and depth of our offerings, optimizingcommitments and sales at the retail level. For select non-Skechers branded lines such as Michelle K, we have created individual exhibits toensure the brand integrity. Our innovative exhibits have won numerous awards, including Best Booth Design at the WSA Shoe Show,February 2001 and February 2003. For FFANY, we show in our own New York showroom as is common during this show.Internet We also promote our brand image through our e-commerce website at www.skechers.com to customers who access the Internet. Thiswebsite currently enables us to present information on our products and store locations to consumers. The website is interactive, affordingcustomers the ability to directly order products on the Internet and to allow us to receive and respond directly to customer feedback. Ourwebsite is intended to enhance the Skechers brand without the associated costs of advertising. Our website provides fashion information,provides a mechanism for customer feedback, promotes customer loyalty and further enhances the Skechers brand image throughinteractive content, photos, interviews and information on Skechers-sponsored events. In addition, in 2003 we launched unique websites for Michelle K and Mark Nason. Both sites are designed to serve as marketing tools,properly imaging the brand while also informing customers.Visual Merchandising Our in-house visual 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 (VMC’s) work with our sales force and directly with our customers to ensure better sell-through at theretail level by generating greater consumer awareness by providing Skechers brand displays. Our coordinators communicate with and visit our wholesale customers on a regular basis to aid in proper visual display of ourmerchandise. They distribute point-of-purchase items such as signage, graphics, displays, counter cards, banners, and other merchandisingitems. These materials mirror the look and feel of our national print advertising in order to reinforce brand image at the point-of-purchase. TheVMC’s also run in-store promotions to enhance the sale of Skechers footwear and create excitement surrounding the Skechers brand. Webelieve that these 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 over 60 major accounts, which are exclusive selling areas within stores that offer our products and incorporate Skecherssignage and customized fixture designs. Through our visual merchandising efforts we are able to enhance brand recognition and ensure theconsistent presentation of our products in our wholesale customers’ stores by providing high end custom displays.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 website. 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 We distribute our footwear through the following wholesale distribution channels; department stores, specialty stores, athletic shoe storesand independent retailers. Although the departments stores and specialty retailers are the largest distribution channels, we believe that ourdistinct product lines enables us to appeal to a variety of wholesale accounts, many of whom may operate stores within the same mall orother retail locations, because retailers can select those styles of ours that best satisfy the fashion, function and price criteria of theircustomers. Management has a clearly defined growth strategy for each of our channels of distribution. An integral component of our strategyis to offer our accounts the highest level of customer service so that our products will be fully represented in existing retail locations and newlocations within each account.11Table of Contents In an effort to provide knowledgeable and personalized service to our wholesale accounts, the sales force is segregated by product line,each headed by a national or regional sales manager. Reporting to each sales manager are knowledgeable account executives and territorymanagers. Our national and regional sales managers report to our vice president of sales. All of our national and regional sales managersare compensated on a salary basis, while our account executives and territory managers are compensated on a commission basis. None ofour domestic sales personnel sell competing products. 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-throughs. Our visual merchandise coordinatorswork with our wholesale accounts to ensure that our merchandise and point-of-purchase marketing materials are properly presented. Salesexecutives and merchandise personnel work closely with accounts to ensure the appropriate styles are purchased for specific accounts andfor specific stores within those accounts as well as ensure that appropriate inventory levels are carried at each store. Such information is thenutilized to help develop sales projections and determine the product needs of our wholesale accounts. The value added services we provideour wholesale customers help us maintain strong relationships with our existing wholesale customers and attract potential new wholesalecustomers.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, 2003, we operated 40 concept stores, 42factory outlet stores and 32 warehouse outlet stores in the United States. We currently have plans to open four domestic retail stores in 2004. • Concept Stores. Our concept stores are located at either marquee street locations or in major shopping malls in large metropolitancities. Our concept stores have a threefold purpose in our operating strategy. First, concept stores serve as a showcase for a widerange of our product offerings for the current season in a cutting-edge, open-floor setting, providing the customer with the completeSkechers story. In contrast, we estimate that our average wholesale customer carries no more than 5% of the complete Skechersline in any one location. Second, retail locations are generally chosen to generate maximum marketing value for the Skechersbrand name through signage, store front presentation and interior design. These locations include concept stores at Times Squareand 34th Street in New York, Santa Monica’s Third Street Promenade, Universal CityWalk, Las Vegas’ Fashion Show Mall, andWoodfield Mall outside Chicago. The stores are typically designed to create a distinctive Skechers look and feel and enhancecustomer association of the Skechers brand name with current youthful lifestyle trends and styles. Third, the concept stores serveas marketing and product testing venues. We believe that product sell-through information and rapid customer feedback derivedfrom our concept stores enables our design, sales, merchandising and production staff to respond to market changes and newproduct introductions. Such responses serve to augment sales and limit our inventory markdowns and customer returns andallowances. The prototypical Skechers concept store is approximately 2,500 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, weidentify top geographic markets in the larger metropolitan cities in the United States. When selecting a specific site, we evaluate theproposed sites’ traffic pattern, co-tenancies, sales volume by neighboring concept stores, lease economics and other factorsconsidered important within the specific location. If we are considering opening a concept store in a shopping mall, our strategy is toobtain space as centrally located as possible in the mall where we expect foot traffic to be most concentrated. We believe that thestrength of the Skechers brand name has enabled us to negotiate more favorable terms with shopping malls that want us to openup concept stores to attract customer traffic to these malls. We opened five new concept stores in 2002 and eight in 2003, includingthe first Michelle K store on fashionable Robertson Boulevard in Los Angeles. • 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 theneed to sell such merchandise to discounters at excessively low prices, which could otherwise compromise the Skechers brandimage. Skechers factory outlet stores range in size from approximately 1,900 to 9,000 square feet. Inventory in these stores issupplemented by certain first-line styles sold at full retail price points, generally $60.00 or lower. We opened five new factory outletstores during 2002 and eight new factory outlet stores during 2003.12Table of Contents • 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 outletstores range in size from approximately 5,200 to 14,800 square feet. Our warehouse outlet stores enable us to sell discontinuedand excess merchandise that would otherwise typically be sold to discounters at excessively low prices, thus compromising theSkechers brand image. We seek to open our warehouse outlet stores in areas that are in close proximity to our other retail stores inorder to facilitate the timely transfer of inventory that we want to liquidate as soon as practicable. We opened three new warehouseoutlet stores during 2002 and nine new warehouse outlet stores during 2003. Electronic Commerce. Our electronic commerce sales represented less than 1.0% of total net sales for each of 2002 and 2003. 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 Our products are sold in more than 100 countries and territories throughout the world. We generate revenues from outside the UnitedStates from four principal sources: (1) sales of our footwear to 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; (2) in Canada, France,Germany, Spain, Italy, Portugal, Switzerland, Austria, the Benelux Region and the United Kingdom, we sell footwear directly to departmentstores and specialty retail stores; (3) in France, Germany, the United Kingdom, the Netherlands, Spain and Canada through retail stores thatwe own and operate; and (4) to a lesser extent, royalties from licensees who manufacture and distribute our products outside the UnitedStates. We believe that international distribution of our products represents a significant opportunity to increase sales and profits. We intend tofurther increase our share of the international footwear market by heightening our marketing presence in those countries, in which wecurrently have a presence, through our international advertising campaigns, which are designed to establish Skechers as a global brandsynonymous with trend-right 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 and showrooms in London, England; Skechers S.a.r.l., with its offices and showrooms in Lausanne,Switzerland; Skechers U.S.A. France SAS with its offices and showrooms in Paris, France; Skechers U.S.A. Deutschland GmbH with itsoffices and showrooms in Dietzenbach, Germany; Skechers USA Iberia, with its offices and showrooms in Madrid, Spain; and SkechersUSA Benelux B.V. with its offices and showrooms in Waalwijk, the Netherlands. Each of these subsidiaries was formed to establish directcontrol over wholesale distribution, merchandising, and marketing of our products in their respective countries of organization, as well ascertain 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 regards to international retail stores, during 2003, in four European countries we opened six stores, five of which were concept storesand one factory outlet, bringing our total Skechers owned and operated European stores to ten. 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 provides product toour subsidiaries and retail stores throughout Europe. We began shipping product out of the Liege, Belgium distribution center in December2002.Canada13Table of Contents 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 the distribution, merchandising, and marketing of our product in Canada fromour Canadian distributor. Product sold in Canada is primarily sourced from our U.S. distribution center in Ontario, California. In October2003, SKECHERS USA Canada opened an administrative office and showroom outside Toronto in Mississauga, Ontario, to support ourdirect selling efforts.Asia Through an agreement with our Japanese distributor Achilles Corporation, Achilles opened two flagship retail stores and three outletstores in Japan, including the 2003 openings of a flagship store in Osaka and outlet stores in Tochigi-ken and Shizuoka. Achilles Corporationis responsible for the store’s operations, has ownership of the stores assets and selects the broad collection of our products to sell toJapanese consumers. In order to maintain a globally consistent image, we provide architectural, graphic and visual guidance and materialsfor the design of the store, and we trained the local staff on our products and corporate culture. We intend to expand our international presenceand global recognition of the Skechers brand name in Asia by continuing to sell our footwear to foreign distributors and opening flagship retailstores with distributors that have local market expertise.Central America/South America Through agreements with two distributors in Central and South America, we have opened 12 concept stores in eight countries in theregion where Skechers product is also available through wholesale accounts. Dabsan International in Panama is responsible for theoperations and product selection for Skechers stores in Columbia, Costa Rica, Ecuador, Guatemala, Panama, Peru and Venezuela. Ourdistributor Catecu S.A. in Chile is responsible for the operations and product selection for the Skechers store in Santiago, Chile. As withJapan, our international team works closely with the distributors to ensure the architectural, graphic and visual images are consistent withSkechers corporate strategies.Australia In 2003, our distributor in Australia, Accent Group LTD, opened its first Skechers flagship store in Sydney through a retail licensingagreement with Skechers. The Accent Group owns and operates the store, and we provide guidance on product selection, as well as ensurethat the image and attitude of the store is reflective of our company owned stores.Russia Ilion, one of our Russian distributors, opened its first Skechers flagship store in Moscow in 2003, and handles the merchandising andoperations, while we assist in the graphic and visual elements to keep a consistent brand identity.South Africa Our South African distributor Footwear Trading Co., opened their first Skechers flagship store in Sandton in September 2003, andhandles the merchandising and operations, while we assist in the graphic and visual elements to keep a consistent brand identity.LICENSING We believe that selective licensing of the Skechers brand name and our line names to manufacturers may broaden and enhance theindividual brands without requiring significant capital investments or additional incremental operating expenses. Our multiple product linesplus additional subcategories presents many potential licensing opportunities on terms with licensees that we believe will provide moreeffective manufacturing, distribution or marketing of products such as accessories, underwear/loungewear and apparel than could beachieved in-house. We believe that the strength of the Skechers brand name and the size of our business will enable us to attract premierlicensing partners with a proven track record of brand sensitivity.We signed our first licensing deal in May 2002 for men’s and women’s sport, casual and fashion hosiery/socks, and have since signedseveral apparel, accessories and underwear/sleepwear licensing agreements for men, women and children in the United States and in selectoverseas markets for our various lines. The first launch of licensed product was Skechers Kids apparel for boys and girls from KidsHeadquarters in July 2003 for the Back-to-School selling season.Due to the successful in-store launch of Skechers Kids, in 2003 we expanded our licensing agreement with Kids Headquarters to includeinfant and toddler apparel and boy’s and girl’s daywear and sleepwear. We also extended our reach with infant, toddler and children’s apparelby signing a licensing agreement with MultiGroup Inc. for design and distribution in Canada.Among the licensing agreements signed during 2003, we entered into three primary apparel licensing arrangements:14Table of Contents1. Somethin’ Else from SKECHERS. In October 2003, we entered into an agreement with Federal Jeans, Inc. to be our licensee forSomethin’ Else from SKECHERS-branded junior sportswear apparel in the United States and Canada. Under this agreement, FederalJeans will design, distribute and market coordinated tops and bottoms in denim, knit and woven materials. Product is expected to beavailable at department stores for the 2004 back-to-school selling season.2. Michelle K. In August 2003, we entered into an agreement with Koral Industries to be our licensee for Michelle K contemporarywomen’s apparel in the United States. Under the agreement, Koral Industries will design, distribute and market trend-right denim, knit andwoven tops, bottoms, dresses, and jackets. The wearable trend basics are expected to be available in better department stores and boutiquesin Fall 2004.3. Skechers USA. In October 2003, we entered into an agreement with Paul Davril, Inc. (PDI) to be our licensee for Skechers USA men’sand women’s casual sportswear. Under the agreement, PDI will design, distribute and market Skechers-branded men’s and women’s topsand bottoms in woven, denim and leather materials, including pants, T-shirts, sweaters, shorts and outwear as part of a sportswearcollection. The line is expected to launch in department and specialty stores in Spring 2005.Also of note, in 2003 we entered into our first international licensing agreement with Mitsui & Co., Inc. to be our licensee for Skechers-branded men’s, women’s and children’s apparel and accessories in Japan. Under the agreement, Mitsui will manufacture and distributeSkechers Sport, Skechers USA and Skechers Kids apparel, hosiery, headwear, watches and eyewear; product began shipping to Japanesedepartment and specialty stores in Spring 2004.With our existing licensing agreements and as we continue to sign new agreements, we intend to maintain substantial control over thedesign, manufacturing specifications, advertising and distribution of any licensed products and to maintain a policy of evaluating any futurelicensing arrangements to ensure consistent representation 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, or (3) directly fromthird party manufacturers to our other international customers. Upon receipt at the central distribution centers, merchandise is inspected andrecorded in our management information system and packaged according to customers’ orders for delivery. Merchandise is shipped to thecustomer by whatever means the customer requests, which is usually by common carrier. The central distribution centers have multi-accessdocks, enabling us to receive and ship simultaneously and to pack separate trailers for shipments to different customers at the same time.We have an 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.15Table of Contents 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 growth of our international operations.BACKLOGAs of December 31, 2003, our backlog was $195.5 million, compared to $205.0 million as of December 31, 2002. While backlog orders aresubject to cancellation by customers, we have not experienced significant cancellation of orders in the past and we expect that substantially allthe orders will be shipped in 2004. However, for a variety of reasons, including the customer demand for our products, the timing ofshipments, product mix of customer orders, the amount of in-season orders, a shift towards tighter lead times within backlog levels, backlogmay not be a reliable measure of future sales for any succeeding period. In addition, cancellation rates that we have realized in the past arenot indicative of cancellation rates to be expected in the future.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 90 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 prove to be without merit, the necessarymanagement attention to and legal costs associated with litigation or other resolution of future claims concerning trademarks and otherintellectual property rights could materially and adversely affect our business, financial condition and results of operations. We have sued andhave been sued by third parties for infringement of intellectual property. It is our opinion that none of these claims have materially impairedour 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 footwear16Table of Contentssuch as those offered by The Stride Rite Corporation. In varying degrees, depending on the product category involved, we compete on thebasis of style, price, quality, comfort and brand name prestige and recognition, among other considerations. These and other competitorspose challenges to our market share in our major domestic markets and may make it more difficult to establish our products in Europe, Asiaand other international regions. We also compete with numerous manufacturers, importers and distributors of footwear for the limited shelfspace available for the display of such products to the consumer. Moreover, the general availability of contract manufacturing capacity allowsease of access by new market entrants. Many of our competitors are larger, have been in existence for a longer period of time, have achievedgreater recognition for their brand names, have captured greater market share and/or have substantially greater financial, distribution,marketing and other resources than us. We cannot assure you that we will be able to compete successfully against present or futurecompetitors or that competitive pressures faced by us will not have a material adverse effect on our business, financial condition and resultsof operations.EMPLOYEES As of February 29, 2004, we employed 2,618 persons, 1,413 of which were employed on a full-time basis and 1,205 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.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, IDENTIFY ANDINTERPRET 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 than normal markdowns or an inability to profitablysell our products. Because of these risks, a number of companies in the footwear industry specifically, and the fashion and apparel industryin general, have experienced periods of rapid growth in revenues and earnings and thereafter periods of declining sales and losses, which insome cases have resulted in companies in these industries ceasing to do business. Similarly, these risks could have a severe negative effecton 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 experience17Table of Contentsinventory shortages. Inventory shortages might delay shipments to customers, negatively impact retailer and distributor relationships, anddiminish 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. Our rate of growth has declined in recent periods and maycontinue to decline or we may not be profitable in future quarters or fiscal years. Furthermore, as our business becomes larger, we may notbe able to maintain our historical growth rate or effectively manage our growth. We anticipate that as our business grows, we will have toimprove and enhance our overall financial and managerial controls, reporting systems and procedures. We may be unable to successfullyimplement our current growth strategy or other growth strategies or effectively manage our growth, any of which would negatively impair ournet 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 2003 werelower than anticipated. This lower level of sales adversely affected our operating results for 2003 and could continue to do so in 2004 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. 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 2003, our net sales to our five largest customers accounted for approximately 25.1% of total net sales. No one customer accountedfor 10.0% or more of our net sales during 2003. As of December 31, 2003, 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.18Table of Contents 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% of our gross wholesale sales for the years ended December 31, 2002 or 2003.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 2003, the top four manufacturers of ourmanufactured products produced approximately 49.9% of our total purchases. One manufacturer accounted for 24.6% of total purchases forthe year ended December 31, 2003 and the same manufacturer accounted for 22.7% of total purchases for the year ended December 31,2002. We do not have long-term contracts with manufacturers and we compete with other footwear companies for production facilities. Wecould experience difficulties with these manufacturers, including reductions in the availability of production capacity, failure to meet ourquality control standards, failure to meet production deadlines or increased manufacturing costs. This could result in our customers cancelingorders, refusing to accept deliveries or demanding reductions in purchase prices, any of which could have a negative impact on our cash flowand 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 2003 were derived from sales of footwear manufactured in foreign countries, with mostmanufactured in China and, to a lesser extent, in Italy, VietNam and Brazil. We also sell our footwear in several foreign countries and plan toincrease our international sales efforts as part of our growth strategy. Foreign manufacturing and sales are subject to a number of risks,including: • political and social unrest, including our military presence in 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);19Table of Contents • 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 STRATGIES INVOLVE A NUMBER OF RISKS THAT COULD PREVENT OR DELAY ANY SUCCESSFUL OPENING OF NEWSTORES AS WELL AS IMPACT THE PERFORMANCE OF OUR EXISTING STORES. Our ability to open and operate new stores successfully depends on many factors, including, among others, our ability to: • identify suitable store locations, the availability of which is outside of our control; • negotiate acceptable lease terms, including desired tenant improvement allowances; • source sufficient levels of inventory to meet the needs of new stores; • hire, train and retain store personnel; • successfully integrate new stores into our existing operations; and • satisfy the fashion preferences in new geographic areas. In addition, some or a substantial number of new stores could be opened in regions of the United States in which we currently have few 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.20Table of Contents 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, our military presence in 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 the future, andincreased competition may result in price reductions, reduced profit margins, loss of market share, and inability to generate cash flows thatare sufficient to maintain or expand our development and marketing of new products, which would adversely impact the trading price of ourClass 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.21Table of ContentsOUR 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 in Shield Design® trademarks to be among our most valuable assets and we have registered these trademarks in many countries. Inaddition, we own many other trademarks, which we utilize in marketing our products. We continue to vigorously protect our trademarksagainst infringement. We also have a number of design patents and a limited number of utility patents covering components and featuresused in various shoes. We believe that our success depends primarily upon skills in design, research and development, production andmarketing rather than upon our patent position. However, we have followed a policy of filing applications for United States and foreign patentson designs and technologies that we deem valuable. We believe that our patents and trademarks are generally sufficient to permit us to carry on our business as presently conducted. 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 rights in the countrieswhere we source and distribute our products. We have been sued for patent and trademark infringement and cannot be sure that our activitiesdo not and will not infringe on the proprietary rights of others. If we are compelled to prosecute infringing parties, defend our intellectualproperty, or defend ourselves from intellectual property claims made by others, we may face significant expenses and liability and necessarymanagement attention to such matters, which 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 41 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, 2003, Robert Greenberg, Chairman of the Board and Chief Executive Officer, beneficially owned 68.3% of ouroutstanding Class B common shares and members of Mr. Greenberg’s immediate family beneficially owned the remainder of our22Table of Contentsoutstanding 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, 2003, Mr. Greenberg held approximately 62.1%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 90.8% 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 not exhaustive. Other sections of this report may includeadditional factors which could adversely impact our business and financial performance. Moreover, we operate in a very competitive andrapidly changing environment. New risk factors emerge from time to time and we cannot predict all such risk factors, nor can we assess theimpact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differmaterially from those contained in any forward looking statements. Given these risks and uncertainties, investors should not place unduereliance on forward-looking statements as a prediction of actual results. Investors should also be aware that while we do, from time to time,communicate with securities analysts, we do not disclose any material non-public information or other confidential commercial informationto them. Accordingly, individuals should not assume that we agree with any statement or report issued by any analyst, regardless of thecontent of the report. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reportsare 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 2004 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 $4.1 million. The leased property expires between November 2007 andMay 2011, and contains rent escalation provisions. The owned distribution facility is approximately 264,000 square feet.23Table of Contents 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 March 2004 and August 2014. The leases provide for rentescalations tied to either increases in the lessor’s operating expenses, 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 $16.9 million for the year ended December 31, 2003. We also lease all of our international administrative offices, retail stores and showrooms located in Canada, France, Germany,Switzerland, Italy, Spain, the Netherlands, and the United Kingdom. The leased properties expire at various dates between June 2004 andNovember 2017. Total rent for the leased properties aggregated approximately $4.9 million during 2003.ITEM 3. LEGAL PROCEEDINGS 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 is unable to determine the extent, if any, of any liability however, and does notbelieve that an adverse result would have a material effect on Skechers’ consolidated 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. On October 15, 2003, the parties settled the suit and all written documentation has been executed. The terms of thesettlement are confidential and did not have a material effect on Skechers’ consolidated financial position or results of operations. On March 25, 2003, a shareholder securities class action complaint captioned HARVEY SOLOMON v. SKECHERS USA, INC. et al.was filed against Skechers and certain of its officers and directors in the United States District Court for the Central District of California(Case No. 03-2094 DDP). On April 2, 2003, a shareholder securities class action complaint captioned CHARLES ZIMMER v. SKECHERSUSA, INC. et al. was filed against Skechers and certain of its officers and directors in the United States District Court for the Central District ofCalifornia (Case No. 03-2296 PA). On April 15, 2003, a shareholder securities class action complaint captioned MARTIN H. SIEGEL v.SKECHERS USA, INC. et al. was filed against Skechers and certain of its officers and directors in the United States District Court for theCentral District of California (Case No 03-2645 RMT). On May 6, 2003, a shareholder securities class action complaint captioned ADAM D.SAPHIER v. SKECHERS USA, INC. et al. was served on Skechers and certain of its officers and directors in the United States District Courtfor the Central District of California (Case No. 03-3011 FMC). On May 9, 2003, a shareholders securities class action complaint captionedLARRY L. ERICKSON v. SKECHERS USA, INC. et al. was served on Skechers and certain of its officers and directors in the United StatesDistrict Court for the Central District of California (Case No. 03-3101 SJO). Each of these class action complaints alleged violations of thefederal securities laws on behalf of persons who purchased publicly traded securities of SKECHERS between April 3, 2002 and December 9,2002. In July 2003, the court in these federal securities class actions, all pending in the United States District Court for the Central District ofCalifornia, ordered the cases consolidated and a consolidated complaint to be filed and served. On September 25, 2003, the plaintiffs filed aconsolidated complaint entitled In re SKECHERS USA, Inc. Securities Litigation, Case No. CV-03-2094-PA in the United States DistrictCourt for the Central District of California, consolidating all of the federal securities actions above. The complaint names as defendantsSkechers and certain officers and directors and alleges violations of the federal securities laws and breach of fiduciary duty24Table of Contentson behalf of persons who purchased publicly traded securities of SKECHERS between April 3, 2002 and December 9, 2002. The complaintseeks compensatory damages, interest, attorneys’ fees and injunctive and equitable relief. While it is too early to predict the outcome of thelitigation, Skechers believes the suit is without merit and intends to vigorously defend the suit. On April 3, 2003, a shareholder derivative complaint captioned BRADFORD MITCHELL v. JEFFREY GREENBERG et al. was filedagainst Skechers and certain of its officers in the Superior Court of the State of California, Los Angeles County (Case No. BC 293317). OnApril 3, 2003, a shareholder derivative complaint captioned GEORGIA MANOLAS v. JEFFREY GREENBERG et al. was filed againstSkechers and certain of its officers in the Superior Court of the State of California, Los Angeles County (Case No. BC293388). On April 8,2003, a shareholder derivative complaint captioned JEFF GRAVITTER v. ROBERT Y. GREENBERG was filed against Skechers and certainof its officers in the Superior Court of the State of California, Los Angeles County (Case No. BC293561). Each of these class actioncomplaints included allegations of violations of California Corporation Code § 25402 and breach of fiduciary duty. On August 29, 2003, theplaintiffs in these state derivative actions filed a consolidated complaint entitled In re SKECHERS USA, Inc. Derivative Litigation, CaseNo. BC-293317, in the Superior Court of the State of California, Los Angeles County, consolidating all of the state derivative actions above.The complaint alleges violations of California Corporation Code § 25402, breaches of fiduciary duty, waste of corporate assets and unjustenrichment. The complaint seeks compensatory damages, treble damages, disgorgement of profits, imposition of a constructive trust,equitable and injunctive relief, and costs. While it is too early to predict the outcome of the litigation, the Company believes the suit is withoutmerit and intends to vigorously defend against the claims. On July 11, 2003 MG Footwear Inc., commenced a lawsuit against Skechers in the United States District Court for the District of NewJersey, MG FOOTWEAR, LLC v. SKECHERS USA, INC., Case No. 03-3252 (DMC), alleging inducement of breach of contract andinterference with contractual relations between MG Footwear and Yakira, LLC. The suit seeks $50 million dollars in punitive damages. Thematter stayed pending the outcome of a related arbitration between MG Footwear and Yakira, LLC. Skechers plans on defending theallegations vigorously and believes the claims are without merit. Nonetheless, it is too early to predict the outcome and predict whether theoutcome will have an adverse impact on the results Skechers operations or financial results. We occasionally become involved in litigation arising from the normal course of business, with respect to the above cases, we are unableto determine the extent of any liability that may arise. Other than the foregoing, we have no reason to believe that any liability with respect topending legal actions, individually or in the aggregate, will have a material adverse effect on our business, financial condition or results ofoperation.ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to our security holders to be voted on during the fourth quarter of 2003.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, 2003 First Quarter $10.24 $5.16 Second Quarter 8.39 6.38 Third Quarter 9.26 6.10 Fourth Quarter 8.28 6.40 YEAR ENDED DECEMBER 31, 2002 First Quarter $19.60 $12.80 25Table of Contents HIGH LOW Second Quarter 24.40 18.00 Third Quarter 21.60 8.75 Fourth Quarter 12.90 6.52 As of March 3, 2004, there were 118 holders of record of our Class A Common Stock (including holders who are nominees for anundetermined number of beneficial owners) and 15 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 in 1999. Purchasers of shares in the initial public offering of our Class A commonshares on June 9, 1999 did not receive any portion of these S Corporation distributions. Since the termination of our S Corporation statusearnings have been and will be retained for the foreseeable future in the operations of our business. We have not declared or paid any cashdividends on our Class A common shares and do not anticipate paying any cash dividends in the foreseeable future. Our current policy is toretain 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, 2003.SUMMARY FINANCIAL DATA(IN THOUSANDS, EXCEPT EARNINGS PER SHARE) YEARS ENDED DECEMBER 31, 1999 2000 2001 2002 2003 STATEMENT OF EARNINGS DATA: Net sales $424,601 $675,036 $960,385 $943,582 $834,976 Gross profit 174,608 284,225 406,180 386,673 317,686 Operating expenses: Selling 57,332 77,451 111,401 94,274 84,653 General and administrative 79,114 125,827 205,989 210,889 238,550 Earnings (loss) from operations 38,830 81,263 88,487 82,655 (1,347) Interest expense 6,554 9,230 13,852 8,927 8,839 Earnings (loss) before income taxes 32,691 72,351 75,955 75,341 (10,373) Net earnings (loss) 24,056 43,751 47,270 47,036 (11,867)PRO FORMA OPERATIONS DATA:(1) Earnings (loss) before income taxes $32,691 $72,351 $75,955 $75,341 $(10,373) Income taxes 12,880 28,600 28,685 28,305 1,494 Net earnings (loss) 19,811 43,751 47,270 47,036 (11,867) Net earnings (loss) per share:(2) Basic $0.62 $1.24 $1.30 $1.26 $(0.31) Diluted $0.60 $1.20 $1.24 $1.20 $(0.31) Weighted average shares:(2) Basic 31,765 35,142 36,409 37,275 37,840 Diluted 33,018 36,563 38,059 40,854 37,840 26Table of Contents AS OF DECEMBER 31, BALANCE SHEET DATA: 1999 2000 2001 2002 2003 Working capital $65,003 $93,305 $139,972 $286,760 $277,835 Total assets 177,914 303,400 407,486 483,156 466,533 Total debt 33,950 85,321 115,931 119,646 119,273 Stockholders’ equity 86,000 134,046 199,016 259,236 255,654 (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, unless theirinclusion would be anti-dilutive. The weighted average diluted shares outstanding for 1999 gives effect to the sale by Skechers of thoseshares of common stock necessary to fund the payment of (i) stockholder distributions paid or declared from January 1, 1998 toJune 7, 1999, the S Corporation termination date, in excess of (ii) the S Corporation earnings from January 1, 1998 to December 31,1998 for 1996 through 1998, and January 1, 1999 to June 7, 1999 for 1999, based on an initial public offering price of $11 per share,net of underwriting discounts.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.GENERAL 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. We generate revenues from the following three principal sources:• WHOLESALE. We sell footwear directly to department stores and specialty retail stores both domestically and internationally. • RETAIL. We own and operate our own retail stores both domestically and internationally through three integrated retail formats. Theutilization of three distinct retail formats is to appeal to a broad range of customers that are segmented by price points and allows us tomanage inventory in an efficient and brand sensitive manner. Our three retail formats are as follows: 1. Concept Stores. Our concept stores are located in marquee street locations and high performing regional malls, promoteawareness of the Skechers brand and showcase a broad assortment of our in-season footwear styles. The products offered in ourconcept stores are full price in-season products and typically attract fashion conscious customers. Our proto-typical concept store isapproximately 2,500 square feet and generates gross margins that are the highest of our three retail formats. 2. Factory Outlet Stores. Our factory outlet stores are generally located in manufacturers’ outlet centers and provide opportunities tosell an assortment of in-season, discontinued and excess merchandise at lower price points. Our factory outlet stores range in sizefrom 1,900 square feet to 9,000 square feet and generally have price points less of $60.00 or lower. Gross margins generated fromour factory outlet stores are less than those in our concept stores.27Table of Contents 3. Warehouse Outlet Stores. Our freestanding warehouse outlet stores appeal to our most value conscious customers and enableus to liquidate excess merchandise, discontinued lines and odd-size inventory in a cost-efficient manner. These stores allow us tosell discontinued and excess merchandise, thereby reducing the need to sell merchandise to discounters at excessively low prices,which could compromise the Skechers 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.FINANCIAL OVERVIEW We have two reportable business segments, domestic wholesale and distributor sales. Our domestic wholesale segment is our largestdistribution channel comprising 76.0%, 72.3% and 67.4% of our net sales for the years ended December 31, 2001, 2002, and 2003,respectively. Our distributor sales comprised 10.4%, 8.7%, and 8.4% of our consolidated net sales for the years ended December 31, 2001,2002, and 2003, respectively. Gross margins provided by our distribution channels are such that, our retail sales achieve higher grossmargins as a percentage of net sales than domestic wholesale sales. Sales through foreign distributors result in lower gross margins as apercentage of net sales than retail or wholesale sales. None of our domestic retail sales formats, international wholesale sales, orinternational retail sales comprised more than 10% of our consolidated net sales for either fiscal 2001, 2002 or 2003. We had realized rapid growth since inception, increasing net sales from $90.8 million in 1994 to $960.4 million in 2001. However during2002 and 2003, we saw our net sales decline, by 1.7% and 11.5%, for the years ended December 31, 2002 and 2003, respectively, whencompared to the prior year. The decline in net sales during 2003 from 2002 was primarily due to reduced domestic wholesale sales and,although to a lesser extent, reduced sales to our international distributors. Our distributor sales have decreased in part due to the expansionof our international direct selling efforts, which sales are classified as international wholesale, as compared to distributor sales in prior years.During 2003, our domestic wholesale sales declined 17.5% on a 5.2% decline in unit sales volume, and in a 13.1% decrease in the averageprice per pair sold. As a result, we realized a decrease in margins, which declined to 38.0% in 2003 compared to 41.0% in 2002. Thedecrease in average price per pair sold, and the negative impact on margins in 2003 was due to various factors. First, was the build up ofcommitted inventory (which includes inventory on hand and in-transit from the factory which is on our books and inventory in process at thefactory which is not in our books) from our third party manufacturers at December 31, 2002. The increase in committed inventory was to takeadvantage of at once orders during the first half of 2003, which did not materialize to the levels we had anticipated. Second, as a result of ourat once orders not achieving the levels expected, we ended up with higher than anticipated inventory levels, which reached a high of $217.1million at June 30, 2003. As a result, we undertook an aggressive sales strategy to significantly reduce our inventory levels in an alreadydifficult retail environment, one where consumers were seeking product markdowns at the retail level. This sales strategy was initiated intoboth of our domestic and international wholesale distribution channels. Third, we saw a decrease in demand for some of our product linesthat had traditionally made up a larger portion of our domestic wholesale sales. We continually update, modify and expand our productofferings based on current and expected trends, which may include the addition of new styles within existing product lines, such as withinour Skechers Work and Skechers Sport lines, and in some cases the addition of new product lines such as our Michelle K sport line and ourhigh end men’s line Mark Nason. Offsetting the decline in our domestic wholesale sales was a 15.4% increase in our retail sales. The increase was due to the net increaseof 29 retail stores during 2003, and the incremental effect of having the 15 retail stores we opened in 2002 open for all of 2003. AtDecember 31, 2003, we had 125 retail stores opened worldwide and we currently believe that we have established our presence in mostmajor markets. As such, we currently feel that we are now able to curtail our retail expansion, and therefore, we currently have plans to openfour domestic, and no international, retail stores in 2004. During 2003, we recorded an impairment charge of $619,000 to write off the fixedassets at three of our domestic retail stores. Further, we are carefully reviewing our under performing stores and may consider the non-renewal of leases at lease renewal. During 2003, we continued our international expansion with the establishment of international subsidiaries in Canada, the Netherlands,and Italy. These subsidiaries support our direct selling efforts in those countries and are in addition to our subsidiaries established in theUnited Kingdom, Germany, France and Spain. We currently believe that we have developed our international direct selling efforts, therefore,we currently do not anticipate entering any new international markets in 2004. Instead, we will focus on (i) enhancing the efficiency of ourinternational operations, (ii) increasing our customer base, (iii) increasing the product count within each customer, and (iv) tailoring ourproduct offerings currently available to our international customers to increase demand for our product. 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.28Table of ContentsDuring 2003, we continued to increase our licensing opportunities and have now signed 12 domestic and three international licensingagreements in the last two years. Our licensing agreements, which now consist of apparel, accessories, loungewear, and swimwear, covermost of our brand names available for licensing. Our most significant license to date is with Kids Headquarters for Skechers kids apparel,which launched for back to school in 2003. Due to the successful launch of the kid’s apparel line, we have expanded the agreement toinclude infant and toddler apparel and boys’ and girls’ daywear and sleepwear. As many of our licensing arrangements were signed in 2003,we currently believe that most product offerings will be available in stores by fall 2004.YEAR ENDED DECEMBER 31, 2002 COMPARED TO THE YEAR ENDED DECEMBER 31, 2003Net sales Net sales for 2003 were $835.0 million an 11.5% decrease from net sales of $943.6 million in 2002. The decrease in net sales was due toreduced domestic wholesale sales, partially offset by increases in international wholesale and retail sales. Domestic wholesale net salesdecreased 17.5% to $562.9 million in 2003 compared to $682.6 million in 2002. The decrease in domestic wholesale net sales was theresult of a 5.2% decrease in unit sales volume, to 33.4 million pairs in 2003 from 35.2 pairs million in 2002, and a 13.1% decrease in theaverage selling price pair to $16.86 in 2003 from $19.39 in 2002. The anticipated decrease in the average selling price per pair was due toour aggressive selling efforts to relieve our inventory levels that were built up from our inventory commitments at December 31, 2002. Wehad anticipated that our inventory commitments would be utilized by at once orders in the first half of 2003, however, the level of at onceorders during this period were lower than anticipated. The lower level of at once orders during the first half of 2003 allowed our inventorylevels to reach a high of $217.1 million at June 30, 2003. As such we continued our aggressive sales campaign through the end of 2003,which negatively impacted our average selling price per pair.Our distributor net sales decreased 14.7%, to $70.4 million in 2003 from $82.5 million in 2002, due to reduced sales into the SouthAmerican, Asian, and Mexican markets, as well as the reclassification previously described.Our other segment net sales consist of international wholesale, international and domestic retail sales and e-commerce sales. Ourinternational wholesale sales increased 9.7%, due to expansion of our direct selling efforts into the Benelux region, Canada, and Italy, whichwere previously classified as distributor sales, offset by reduced sales into the United Kingdom and France.Our domestic retail sales increased 12.2% due to the net addition of 23 domestic retail stores and having the 13 retail stores opened in 2002open the entire year of 2003. We currently have 114 domestic retail stores, and currently plan to open four domestic retail store stores in2004. During 2003 we closed two retail stores. We periodically review all of our stores for impairment and/or, in the case of under performingstores, store closure. Our international retail sales increased 81.6% in 2003 compared to 2002, due to the addition of six stores and the twostores opened in 2002 being open the entire year of 2003. We currently do not anticipate opening any international retail stores in 2004. Oure-commerce sales decreased 9.8% in 2003 when compared to 2002. Our e-commerce sales made up less than 1% of our consolidated netsales in both fiscal 2002 and 2003.During 2003, we began to generate licensing revenues from licensing our brand name and our branded lines to non-footwear manufacturers.Our licensing revenues in 2003 were derived primarily from our kids apparel licensing agreement with Kid’s Headquarter. In total, wegenerated licensing revenues of approximately $2.9 in fiscal 2003. We currently anticipate that licensing fees will increase in fiscal 2004, asadditional licensing products become available to consumers.Gross profitGross profit for fiscal 2003 was $317.7 million compared to $386.7 million in 2002. Gross profit as a percent of net sales was 38.0%compared to 41.0% in 2002. The decrease in margin was due to the decrease in domestic wholesale margins, which were 33.0% in 2003compared to 38.4% in 2002. The decrease in domestic wholesale margins was due to our aggressive sales strategy, primarily in the secondhalf of 2003, that we employed in order to reduce our inventory levels. The effect of this sales strategy was a 13.1% decrease in the averageselling price per pair for the year and a domestic wholesale margin of 27.1% during the fourth quarter of 2003, compared to 33.8% in thefourth quarter of 2002. Offsetting the domestic wholesale margin decrease in fiscal 2003 was the increase in our domestic retail sales, whichhave a higher gross margin than domestic wholesale sales, as they have become a higher percentage of our consolidated net sales. Duringthe second half of 2003, we moved a significant amount of excess and clearance priced inventory. However, we have recently begun to shiphigher margin products, as such, we currently anticipate that margins during the first quarter of 2004 will be approximately 40%.Selling expenses29Table of Contents Selling expenses for 2003 were $84.7 million, a decrease of $9.6 million from selling expenses of $94.3 million in 2002. Sellingexpenses as percentage of sales were 10.1% in 2003 compared to 10.0% in 2002. The decrease in selling expenses was primarily due toreduced advertising expenses, which decreased to $71.7 million in 2003 from $75.1 million in 2002, although because of the reduction innet sales, advertising expense increased as a percentage of net sales to 8.6% in 2003 from 8.0% in 2002. The decrease in advertising wasdue to reduced domestic media ads of approximately $8.5 million, primarily television and trade print, offset by increased internationaladvertising and promotional costs of approximately $2.2 million, including a major print campaign featuring international pop star ChristinaAguilera for our women’s sport line, as well as increased sample costs of approximately $2.1 million associated with developing styles fornew and existing product lines.General and administrative expenses General and administrative costs for 2003 were $238.6 million, an increase of 13.1% over general and administrative expenses of$210.9 million in 2002. General and administrative expenses as a percent of sales were 28.6% in 2003 compared to 22.3% in 2002. Theincrease in general and administrative expenses was due to increased salaries, wages, taxes and related benefits of $13.0 million, increasedrent of $8.5 million, increased depreciation $3.6 million, increased insurance of $1.8 million, and $619,000 of impairment charges related tothe write off of fixed assets at three of our domestic retail stores. The increase in expenses were primarily the result of our continuedexpansion of both our domestic and international retail operations, in which we added a total of net 29 stores, and establishing subsidiariesin Canada, the Netherlands, and Italy. During fiscal 2002 and 2003, we significantly increased the number of domestic and international retail stores, expanded our direct sellingefforts into Spain, the Benelux region, Canada, and Italy, and established our European distribution center in Belgium to provide inventoryfulfillment services to our international customers and our own retail stores. During this same period, we realized a decrease of 1.7 % and11.5% in our consolidated net sales for fiscal 2002 and 2003, respectively, when compared to the prior year. As a result of our expansionefforts, we have expanded our infrastructure with costs that are fixed in the short term. As result of the decrease in sales, coupled with anincrease in operating expenses associated with our expansion strategies, we realized a deleveraging of our expenses in fiscal 2003, whichmay continue into 2004. As such, we currently do not plan on entering any additional international markets and currently plan to open fourdomestic, and no international, retail stores in 2004. During the fourth quarter, we implemented some initial cost reductions based on our anticipated sales levels; however, we have not yetrealized the benefits of those reductions. We continue to review our cost structure to develop efficiencies within our operations and currentlyanticipate that any additional cost reduction strategies, if needed, will be made after the first quarter 2004 and will be based on our salesoutlook for the remainder of fiscal 2004. However, at this time we are currently unable to determine the extent, if any, of any anticipatedsavings in fiscal 2004 when compared to 2003.Interest expense Interest expense for fiscal 2003 was $8.8 million consistent with interest expense of $8.9 million in 2002. Interest expense is derivedfrom our convertible notes, mortgages on our distribution center and corporate office located in California, our capital lease obligations andinterest on amounts owed to our foreign manufacturers. Our total average debt levels and average interest rates have remained comparablefrom 2002 to 2003.Other income Other, net was an expense of $187,000 in 2003 compared to income of $1.6 million in 2002. The reduction in other, income was due toreduced foreign exchange gains and reduced rent earned from leasing office space at one of our administrative offices in 2003, whencompared to 2002.Income taxes We provided $1.5 million in income taxes for fiscal 2003 despite our generating a pretax loss. The tax provision was computed using theeffective tax rates applicable to each of our domestic and international taxable jurisdictions. The tax provided was the result of generating taxlosses in low tax rate jurisdictions and the inability to use those losses against income in higher rate jurisdictions. During 2002, our effectivetax rate was 37.6%, which is lower than the expected domestic rate of 40%, due to our international expansion into lower tax ratejurisdictions and our reinvestment of undistributed earnings from our non-U.S. subsidiaries, thereby indefinitely postponing their remittance.As such, we did not provide for deferred income taxes on accumulated undistributed earnings of our non-U.S. subsidiaries.30Table of ContentsYEAR ENDED DECEMBER 31, 2001 COMPARED TO THE YEAR ENDED DECEMBER 31, 2002Net 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 net sales which were $682.6 million for 2002, compared to $729.9 million in 2001. The decreasedsales is attributed to a 3.1% decrease in unit sales volume to 35.2 million pairs in 2002 compared to 36.3 million pairs in 2001 and a 3.5%decrease in the average selling price per pair to $19.39 in 2002 compared to $20.10 in 2001. Distributor net sales decreased 17.3% to$82.5 million in 2002 from $99.8 million in 2001 primarily due to decreased sales into the South American market place and the expansionof our international direct selling efforts, whose sales are now classified as international wholesale. International wholesale net salesincreased 119.1% in 2002 compared to 2001. The increase was primarily due to our direct sales efforts in place for the full year in 2002compared to approximately nine months in 2001. Domestic retail sales increased 24.8% in 2002 over 2001, due to the addition of 13 retail stores added during 2002. International retailsales increased 30.2% due to most stores being opened the entire 12 months period in 2002, compared to only a portion in 2001, and to alesser extent, new flagship stores opened in Frankfurt, Germany and Toronto, Canada during the fourth quarter of 2002. Our direct mailsales decreased over 50%, in 2002 compared to 2001 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. During the year ended December 31, 2002, we opened 13 domestic retails stores:five concept stores, five factory outlet stores, and three warehouse outlet stores.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 a 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 expense decreased $9.8 million in 2002primarily due to fewer domestic print ads, and cable TV ads, other selling expense reductions were realized in trade show expenses of$1.5 million, and catalog expenses of $4.9 million, from the discontinuance of our mail order catalog.General and administrative expenses General and administrative expenses for 2002 were $210.9 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), insurance ($2.2 million), travel($2.0 million) and depreciation charges (approximately $2.3 million) related to the addition of 13 retail stores and the full year’s effect of the26 stores added in 2001, infrastructure additions to support our direct selling efforts in the United Kingdom, Germany, France, and newsubsidiaries added in 2002, including Spain, Canada, and the Netherlands and, to a lesser extent, legal reserves and the move into ourinternally managed distribution center in Liege, Belgium in the fourth quarter of 2002. However, the expense increases noted were partiallyoffset by reduced temporary help costs (approximately $9.0 million) at our distribution facility in Ontario, California.31Table of Contents 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.Other income Other income for 2002 was $1.6 million compared to $1.3 million in 2001. The increase in other income was due to foreign exchangegains, 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.LIQUIDITY AND CAPITAL RESOURCES Our working capital at December 31, 2003 was $277.8 million, a decrease of $9.0 million from working capital of $286.8 million atDecember 31, 2002. Our cash and cash equivalents at December 31, 2003 were $113.5 million compared to $124.8 million atDecember 31, 2002. The change in net cash was the result of a decrease in cash provided by operating activities, primarily the result ofgenerating a net loss for fiscal 2003, cash used in investing activities of $24.1 million for capital expenditures related to our investments inour retail stores, international expansion and additional investments in intellectual property, and net cash used in financing activities relatedto the repayment of long term obligations. In 2003, our cash balances decreased $11.3 million, from $124.8 million at December 31, 2002 to $113.5 million at December 31, 2003.The significant impacts on cash flows in 2003 related to expenditures for certain property and equipment aggregating $20.7 million and theacquisition of our Canadian distributor for $2.3 million, offset by cash flows from operations of $12.3 million. During 2003, we focused onreducing inventories, which decreased by $11.9 million in 2003 as compared to 2002, and using that cash to reduce our accounts payableand accrued expenses, which decreased $11.7 million in 2003 compared to 2002. There were no significant changes in cash flow resultingfrom financing activities. Our main source of borrowings is our 4.50% convertible Subordinated notes aggregating $90.0 million. We have noborrowings outstanding under our line of credit and total cash flows used in financing activities were $0.9 million Net cash used in investing activities was $24.1 million for fiscal 2003, compared to $14.5 million in fiscal 2002. The increase in capitalexpenditures for fiscal 2003, compared to the same period in 2002, was due to the building of 26 domestic retail stores, which totaledapproximately $11.2 million, equipment and leasehold improvements at our international subsidiaries, international retail stores, and ourEuropean distribution center of $7.1 million. In addition, we spent $2.3 million related to the acquisition of our Canadian distributor, of which$1.3 million related to the repurchase of inventory. We initiated our direct selling efforts in Canada in the first quarter of 2003. During 2003, we continued to invest in our international expansion efforts by establishing subsidiaries in Canada, Italy and theNetherlands. These subsidiaries were established to support our direct efforts in those regions. We also invested in the expansion of ourretail stores by opening an additional 25 domestic and 6 international retail stores. These investments continued throughout fiscal 2003,despite our decrease in consolidated net sales, when compared to 2002. Our expansion efforts have increased our overhead structure,causing our operating expenses to become a larger portion of net sales in 2003 when compared to fiscal 2002. We currently believe that wehave an international presence in the most favorable international locations and have a retail presence in most major markets bothdomestically and internationally. Therefore during 2004, we currently do not plan on expanding our direct selling efforts into new internationalregions. In addition, we currently do not plan on opening any additional international retail stores in32Table of Contents2004 and currently have plans to open four domestic retail stores in 2004. We currently expect our capital expenditures for 2004 to beapproximately $4-6 million in total, which includes our domestic retail stores, minor capital improvements at our distribution centers andinvestments in information technology. We currently anticipate that our capital expenditures will be funded by cash flows from operations orfrom funds available from our secured line of credit, of which, there are currently no amounts outstanding. Net cash used in financing activities was $911,000 for fiscal 2003, compared to net cash provided by financing activities of $6.0 millionduring fiscal 2002. The decrease in net cash provided by financing activities was primarily due to the reduction in cash provided by theexercise of stock options, and prior year including the proceeds from the issuance of our 4.50% notes, offset by the repayment of our short-term borrowings. In April 2002, we issued $90.0 million aggregate principal amount of 4.50% Convertible Subordinated Notes due April 15, 2007. Thenotes are convertible into shares of our Class A Common Stock. Interest on the notes is paid semi-annually on April 15 and October 15 ofeach year. The notes are convertible at the option of the holder into shares of Class A Common Stock at a conversion rate of 38.5089 sharesof Class A Common Stock per $1,000 principal amount of notes, which is equivalent to a conversion price of approximately $25.968 pershare. The conversion rate is subject to adjustment. The notes may be converted at any time on or before the close of business on thematurity date, unless the notes have been previously redeemed or repurchased; provided, however, that if a note is called for redemption orrepurchase, the holder will be entitled to convert the notes at any time before the close of business on the date immediately preceding thedate fixed for redemption or repurchase, as the case may be. The notes are unsecured and subordinated to our present and future senior debt.The notes are also structurally subordinated in right of payment to all indebtedness and other liabilities of our subsidiaries. The indenturedoes not restrict our incurrence of indebtedness, including senior debt, or our subsidiaries’ incurrence of indebtedness. Net proceeds from thesale of the notes were $86.2 million. The refinancing of our short-term borrowings with long-term capital was done to provide us with long-term debt to provide for the future growth of the business. We have available a secured line of credit, as amended on December 31, 2003, permitting borrowings up to $150.0 million based uponeligible accounts receivable and inventories. Borrowings bear interest at the prime rate (4.0% at December 31, 2003) minus 0.50%, and theagreement expires on December 31, 2005. 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, 2003 were$3.8 million. Available borrowings under the line of credit at December 31, 2003 were $99.4 million and no amounts were outstanding atDecember 31, 2003 and 2002. We pay an unused line of credit fee of .25% annually. The agreement provides the following financialcovenants should the loan balance exceed 60% of all eligible accounts, that stockholders’ equity shall not decrease by more than 20% in anygiven calendar quarter; a tangible net worth be maintained as defined in the agreement; and limits the payment of dividends if in default ofany provision of the agreement. We were in compliance with these covenants at December 31, 2003. We believe that anticipated cash flows from operations, available borrowings under our revolving line of credit, cash on hand, proceedsfrom the issuance of the notes and our financing arrangements will be sufficient to provide us with the liquidity necessary to fund ouranticipated working capital and capital requirements through fiscal 2004. However, in connection with our current strategies, we will incursignificant working capital requirements and capital expenditures. Our future capital requirements will depend on many factors, including,but not limited to, the levels at which we maintain inventory, the market acceptance of our footwear, the success of our internationaloperations, the levels of promotion and advertising required to promote our footwear, the extent to which we invest in new product design andimprovements to our existing product design and the number and timing of new store openings. To the extent that available funds areinsufficient to fund our future activities, we may need to raise additional funds through public or private financing. We cannot be assured thatadditional financing will be available or that, if available, it can be obtained on terms favorable to our stockholders and us. Failure to obtainsuch financing could delay or prevent our planned expansion, which could adversely affect our business, financial condition and results ofoperations. In addition, if additional capital is raised through the sale of additional equity or convertible securities, dilution to our stockholderscould occur.Disclosure about Contractual Obligations and Commercial CommitmentsThe following table aggregates all material contractual obligations and commercial commitments as of December 31, 2003:33Table of Contents Payments Due by Period (In Thousands) Less than One to Three to More Than One Three Five Five Total Year Years Years Years Long-Term Obligations (1) $104,175 $4,050 $8,100 $92,025 — Other Long Term Debt 27,460 1,678 3,356 3,356 $19,070 Capital Lease Obligations 12,769 3,754 8,815 200 — Operating Lease Obligations (2) 223,104 31,206 58,086 47,122 86,690 Purchase Obligations (3) 200,600 200,600 — — — $568,108 $241,288 $78,357 $142,703 $105,760 We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structuredfinance or special purpose entities, which would have been established for the purpose of facilitating off-balance-sheet arrangements or othercontractually, narrow or limited purposes. As such, we are not exposed to any financing, liquidity, market or credit risk that could arise if wehad engaged in such relationships. (1) The long-term debt consists of our 4.50% convertible notes receivable due April 15, 2007, and related interest payments due in Apriland October of each year, unless converted into our Class A common stock as provided for in the indenture agreement. (2) Operating lease commitments consists primarily of real property leases for our retail stores, corporate offices, and distribution centers.These leases frequently include options, which permit us to extend beyond the terms of the initial fixed term. Payments for theselease terms are provided for by cash flows generated from operations or, if needed, by our $150,000,000 secured line of credit, forwhich no amounts were outstanding at December 31, 2003. (3) Purchase obligations includes the following (i) purchase orders for the purchase footwear, that may be cancelable in certain instancesgiven the timing of cancellation , of $153.5 million, (ii) outstanding letters credit of $3.8 million, and (iii) open purchase commitmentswith our foreign manufacturers for $43.3 million. We currently expect to fund these commitments with cash flows from operations.CRITICAL ACCOUNTING ESTIMATESManagement Discussion and Analysis of Financial Condition and Results of Operations is based upon our consolidated financialstatements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation ofthese financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, sales andexpenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various otherassumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about thecarrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates underdifferent assumptions or conditions.We believe the following critical accounting estimates are affected by more significant judgments used in the preparation of our consolidatedfinancial statements: revenue recognition; valuation allowances, inventory reserves, valuation of intangible and long-lived assets, litigationreserves, and valuations of deferred income taxes.Revenue Recognition. We derive revenue from the sale of footwear. In general, revenue is recognized upon shipment of the merchandise.Domestically, goods are shipped directly from our domestic distribution center in Ontario, California, and revenue is recognized uponshipment from the distribution center (FOB shipping point). For our international wholesale accounts, product is shipped direct from ourdistribution center in Liege, Belgium, and revenue is recognized upon shipment from the distribution center. For our distributor sales, thegoods are delivered directly from the independent factories to the distributors on an FOB shipping point basis and revenue is recognized uponshipment from the factory. In all of the above cases, each of the following have been met prior to revenue recognition: persuasive evidence ofan arrangement exists, delivery has occurred, the price is fixed or determinable and collectibility is reasonably assured.Allowance for bad debts, returns, and customer chargebacks. We insure selected customer account balances both greater than$200,000 and accepted by the insurance company should our customer not pay. We also provide a reserve against our receivables forestimated losses that may result from our customers’ inability to pay, and disputed and returned items. We offer normal trade discounts toour customers. On occasion we offer our wholesale accounts sales discounts based on various promotional programs, such as trade-showpromotions, product line discounts, and futures discounts. All sales are booked net of discount and are recorded at the time of revenuerecognition. All customer returns must have a return authorization number, once the product is returned and processed, we issue a credit tothe customer. We determine the amount of the reserve by analyzing known uncollectible accounts, aged receivables, economic conditions inthe customers’ country or industry,34Table of Contentshistorical losses and our customers’ credit-worthiness. Amounts later determined and specifically identified to be uncollectible are charged orwritten off against this reserve. To minimize the likelihood of uncollectibility, customers’ credit-worthiness is reviewed periodically based onexternal credit reporting services and our experience with the account and adjusted accordingly. Should a customer’s account become pastdue, we generally place a hold on the account and discontinue further shipments to that customer, minimizing further risk of loss. Thelikelihood of a material loss on an uncollectible account would be mainly dependent on deterioration in the overall economic conditions in aparticular country or environment. Reserves are fully provided for all probable losses of this nature. For receivables that are not specificallyidentified as high risk, we provide a reserve based upon a percent of sales for the last three months. This percentage is based on ourhistorical loss rate. A 1% change in this rate would not have a significant impact on our results of operations. Gross trade accounts receivablebalance was $106.7 million and the allowance for bad debts, returns, and customer chargebacks was $7.9 million at December 31, 2003.Inventory reserves. Inventories are stated at lower of cost or market. We review our inventory on a regular basis for excess and slowmoving inventory. Our review is based on inventory on hand, prior sales, and our expected net realizable value. Our analysis includes areview of inventory quantities on hand at period end in relation to year-to-date sales and projections for sales in the near future. The netrealizable value, or market value is determined based on our estimate of sales prices of such inventory through off-price or discount storechannels. A write down of inventory is considered permanent and creates a new cost basis for those units. The likelihood of any materialinventory write-down is dependent primarily on our expectation of future consumer demand for our product. A misinterpretation ormisunderstanding of future consumer demand for our product or the economy, or other failure to estimate correctly, could result in inventoryvaluation changes, either favorably or unfavorably, compared to the requirement determined to be appropriate as of the balance sheet date. AtDecember 31, 2003, our gross inventory value was $139.9 million, and our inventory reserve was $2.0 million.Valuation of long-lived assets. When circumstances warrant, we assess the impairment of long-lived assets that require us to makeassumptions and judgments regarding the carrying value of these assets. The assets are considered to be impaired if we determine that thecarrying value may not be recoverable based upon our assessment of the following events or changes in circumstances: • 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. In addition, we prepare a summary of store contributionfrom our retail stores to assess potential impairment of the leasehold improvements. Stores with negative contribution opened in excess oftwelve months are then reviewed in detail to determine if impairment exists. At December 31, 2003, we recorded an impairment charge forleasehold improvements at three of our retail stores totaling $619,000.Litigation reserves. Estimated amounts for claims that are probable and can be reasonably estimated are recorded as liabilities in ourconsolidated 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. We record a valuation allowance to reduce our deferred tax assets to the amount that is more likelythan not to be realized. The likelihood of a material change in our expected realization of our deferred tax assets depends on future taxableincome and the effectiveness of our tax planning strategies amongst the various domestic and international tax jurisdictions in which weoperate. We evaluate our projections of taxable income to determine the recoverability of our deferred tax assets and the need for anevaluation allowance.35Table of ContentsINFLATION 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 RATES 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 2003, 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.FUTURE ACCOUNTING CHANGESIn April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13,and Technical Corrections. SFAS No. 145 amends existing guidance on reporting gains and losses on the extinguishment of debt to prohibitthe classification of the gain or loss as extraordinary, as the use of such extinguishments have become part of the risk management strategyof many companies. SFAS No. 145 also amends SFAS No. 13 to require sale-leaseback accounting for certain lease modifications that haveeconomic effects similar to sale-leaseback transactions. The provisions of the Statement related to the rescission of Statement No. 4 isapplied in fiscal years beginning after May 15, 2002. Earlier application of these provisions is encouraged. The provisions of the Statementrelated to Statement No. 13 were effective for transactions occurring after May 15, 2002, with early application encouraged. The adoption ofSFAS No. 145 did not have any effect on our consolidated 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 did not have a material effect on our consolidated 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, which provides that cash consideration received from a vendor is presumed to be a reduction of theprices of the vendor’s products or services and should, therefore, be characterized as a reduction in cost of sales unless it is a payment forassets or services delivered to the vendor, in which case the cash consideration should be characterized as revenue, or unless it is areimbursement of costs incurred to sell the vendor’s products, in which case the cash consideration should be characterized as a reduction ofthat cost. EITF No. 02-16 became effective for us in the first quarter of 2003, and had no impact on our consolidated financial statements, aswe have historically accounted for vendor payments in accordance with the provisions of this standard.In November 2002, the FASB issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees,Including Indirect Guarantees of Indebtedness of Others, which addresses the disclosure to be made by a guarantor in its interim andannual financial statements about its obligations under guarantees. The disclosure requirements are effective for interim and annualfinancial statements ending after December 15, 2002. The Company does not have any material guarantees that require disclosure underFIN 45.FIN 45 also requires displaying the recognition of a liability by a guarantor at the inception of certain guarantees. FIN 45 requires theguarantor to recognize a liability for the non-contingent component of a guarantee, which is the obligation to stand ready to perform in theevent that specified triggering events or conditions occur. The initial measurement of this liability is the fair value of the guarantee atinception. The recognition of the liability is required even if it is not probable that payments will be required under the guarantee or if theguarantee was issued with a premium payment or as part of a transaction with multiple elements. The initial recognition and measurementprovisions are effective for all guarantees within the scope of FIN 45 issued or modified after December 31, 2002.36Table of ContentsAs noted above the Company has adopted the disclosure requirements of FIN 45 and will apply the recognition and measurement provisionsfor all guarantees entered into or modified after December 31, 2002. For the year ended December 31, 2003, the Company has not enteredinto any guarantees within the scope of FIN 45.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 FASB Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities, an Interpretation ofARB No. 51,” which addresses consolidation by business enterprises of variable interest entities (“VIEs”) either: (1) that do not have sufficientequity investment at risk to permit the entity to finance its activities without additional subordinated financial support, or (2) in which theequity investors lack an essential characteristic of a controlling financial interest. In December 2003, the FASB completed deliberations ofproposed modifications to FIN 46 (“Revised Interpretations”) resulting in multiple effective dates based on the nature as well as the creationdate of the VIE. VIEs created after January 31, 2003, but prior to January 1, 2004, may be accounted for either based on the originalinterpretation or the Revised Interpretations. VIEs created after January 1, 2004 must be accounted for under the Revised Interpretations.Special Purpose Entities (“SPEs”) created prior to February 1, 2003 may be accounted for under the original or revised interpretation’sprovisions. Non-SPEs created prior to February 1, 2003, should be accounted for under the Revised Interpretation’s provisions. The RevisedInterpretations are effective for periods after June 15, 2003 for VIEs in which the Company holds a variable interest it acquired beforeFebruary 1, 2003. For entities acquired or created before February 1, 2003, the Revised Interpretations are effective no later than the end ofthe first reporting period that ends after March 15, 2004, except for those VIEs that are considered to be special-purpose entities, for which theeffective date is no later that the end of the first reporting period that ends after December 31, 2003. The adoption of FIN 46 and the RevisedInterpretations has not and is not expected to have an impact on the consolidated financial statements.In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities andEquity.” SFAS No. 150 establishes standards on the classification and measurement of certain instruments with characteristics of bothliabilities and equity. SFAS No. 150 is generally effective for financial instruments entered into or modified after May 31, 2003, and otherwiseis effective at the beginning of the first interim period beginning after June 15, 2003. SFAS No. 150 requires the classification of any financialinstruments with a mandatory redemption feature, an obligation to repurchase equity shares, or a conditional obligation based on theissuance of a variable number of its equity shares, as a liability. The adoption of SFAS No. 150 did not have a material effect on ourconsolidated financial statements.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, 2003, no amounts were outstanding that were subject to changes in interest rates; however,the interest rate charged on our line of credit facility is based on the prime rate of interest and changes in the prime rate of interest will 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 valueof our inventory commitments. Also, inventory purchases of our products may be impacted by fluctuations in the exchange rates between theU.S. dollar and the local currencies of the contract manufacturers, which could have the effect of37Table of Contentsincreasing cost of goods sold in the future. We manage these risks by primarily denominating these purchases and commitments in U.S.dollars. We do not engage in hedging activities with respect to such exchange rate risks.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 DISCLOSURENone.ITEM 9A. CONTROLS AND PROCEDURES(a) Evaluation of disclosure controls and procedures The term “disclosure controls and procedures” refers to the controls and procedures of a company that are designed to ensure thatinformation to be disclosed by a company in the reports that it files under Rule 13a-14 of the Securities and Exchange Act of 1934 (the(“Exchange Act”) is recorded, processed, summarized, and reported within required time periods. As of the end of the period covered by thisAnnual Report on Form 10-K (the “Evaluation Date”), we carried out an evaluation under the supervision and with the participation of ourChief Executive Officer and Chief Financial Officer of the effectiveness of our disclosure controls and procedures. Based on that evaluation,Our Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, such controls and procedures wereeffective in ensuring that the required information will be disclosed on a timely basis in our periodic reports filed with the Securities andExchange Commission under the Exchange Act.(b) Changes in internal controlThere were no significant changes to our internal control over financial reporting or in other factors that could significantly affect our internalcontrols subsequent to the Evaluation Date.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 2003 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 2003 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 2003 fiscal year.ITEM 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 2003 fiscal year.38Table of ContentsITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required by this Item 14 is hereby incorporated by reference from our definitive proxy statement, to be filed pursuant toRegulation 14A within 120 days after the end of our 2003 fiscal year.PART IVITEM 15. 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 — The registrant filed one current report on Form 8-K during the three months ended December 31, 2003.On October 28, 2003, under Item 12 — Results of Operations and Financial Condition. Regarding the registrant’s announcement onOctober 23, 2003 of its financial results for the third quarter and nine months ended September 30, 2003. A copy of the press release wasfurnished as Exhibit 99.1 to the current report. Further, regarding the registrant’s conference call and audio web cast held on October 23,2003 regarding its financial results for the third quarter and nine months ended September 30, 2003. A transcript of the call and audio webcast was furnished as Exhibit 99.2 to the current report. (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 Securitiesand Exchange Commission on May 12, 1999). 3.1 Certificate of Incorporation (incorporated by reference to exhibit number 3.1 of the Registrant’s RegistrationStatement on Form S-1, as amended (File No. 333-60065), filed with the Securities and ExchangeCommission 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, as amended (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 RegistrationStatement on Form S-1, as amended (File No. 333-60065), filed with the Securities and ExchangeCommission on May 12, 1999). 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 Securitiesand Exchange Commission on May 12, 1999). 4.2 Purchase Agreement, dated April 14, 2002, between the Registrant and CIBC World Markets Corp., relating tothe 4.5% Convertible Subordinated Notes (incorporated by reference to exhibit number 4.1 of the Registrant’sForm 10-Q for the period ending June 30, 2002). 4.3 Indenture, dated April 9, 2002, between the Registrant and Wells Fargo Bank, National Association, asTrustee, relating to the 4.5% Convertible Subordinated Notes (incorporated by reference to exhibit number 4.2of the Registrant’s Form 10-Q for the period ending June 30, 2002). 4.4 Form of Specimen Restricted Global Security (incorporated by reference to exhibit number 4.3 of theRegistrant’s Form 10-Q for the period ending June 30, 2002). 4.5 Registration Rights Agreement, dated April 9, 2002, between the Registrant and CIBC World Markets Corp.,relating to the 4.5% Convertible Subordinated Notes (incorporated by reference to exhibit number 4.4 of theRegistrant’s Form 10-Q for the period ending June 30, 2002).39Table of Contents EXHIBIT NUMBER DESCRIPTION OF EXHIBIT 10.1 Amended and Restated 1998 Stock Option, Deferred Stock and Restricted Stock Plan (incorporated byreference to exhibit number 10.1 of the Registrant’s Registration Statement on Form S-1, as amended (FileNo. 333-60065), filed with 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 10.1of the Registrant’s Form 10-Q, for the period ending June 30, 2000). 10.3-10.5[Reserved]. 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 endingDecember 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’sForm 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 theperiod ending June 30, 1999). 10.8 Tax Indemnification Agreement dated June 8, 1999, between the Registrant and certain shareholders(incorporated by reference to exhibit number 10.8 of the Registrant’s Form 10-Q for the period ending June 30,1999). 10.9 Lease Agreement and Addendum, dated July 1, 1999, between the Registrant and Richard and Donna Piazza,regarding 1108-B Manhattan Avenue, Manhattan Beach, California (incorporated by reference to exhibitnumber 10.22 of the registrant’s Form 10-K for the year ending December 31, 1999). 10.9(a) Addendum No. 2, dated July 1, 1999, between the Registrant and Richard and Donna Piazza, regarding 1108-B Manhattan Avenue, Manhattan Beach, California. 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 RegistrationStatement on Form S-1, as amended (File No. 333-60065), filed with the Securities and ExchangeCommission on April 9, 1999). 10.10(a) Term Loan A Note, dated September 4, 1998, between the Registrant and Heller Financial, Inc. (incorporatedby reference to exhibit number 10.10(a) of the Registrant’s Registration Statement on Form S-1, as amended(File No. 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(incorporated by reference to exhibit number 10.10(c) of the Registrant’s Registration Statement on Form S-1,as amended (File No. 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,as amended (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 by reference to exhibit number 10.10(e) of the Registrant’s Form 10-K for the year endingDecember 31, 2000). 10.10(f) Fourth Amendment to Amended and Restated Loan and Security Agreement dated June 1, 2000 (incorporatedby reference 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). 10.10(h) Sixth Amendment to Amended and Restated Loan and Security Agreement dated June 12, 2002. 10.10(i) Seventh Amendment to Amended and Restated Loan and Security Agreement dated April 18, 2002. 10.10(j) Eighth Amendment to Amended and Restated Loan and Security Agreement dated September 30, 2002. 10.10(k) Ninth Amendment to Amended and Restated Loan and Security Agreement dated August 18, 2003.40Table of Contents EXHIBIT NUMBER DESCRIPTION OF EXHIBIT 10.10(l) Tenth Amendment to Amended and Restated Loan and Security Agreement dated December 31, 2003. 10.11 Lease Agreement, dated April 15, 1998, between the Registrant and Holt/Hawthorn and Victory Partners,regarding 228 Manhattan Beach Boulevard, Manhattan Beach, California (incorporated by reference to exhibitnumber 10.11 of the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-60065), filedwith the Securities and Exchange Commission on April 9, 1999). 10.12 Commercial Lease Agreement, dated February 19, 1997, between the Registrant and Richard and DonnaPiazza, regarding 1110 Manhattan Avenue, Manhattan Beach, California (incorporated by reference to exhibitnumber 10.12 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). 10.13 Lease Agreement and Addendum, dated June 12, 1998, between the Registrant and Richard and DonnaPiazza, regarding 1112 Manhattan Avenue, Manhattan Beach, California (incorporated by reference to exhibitnumber 10.13 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). 10.13(a) Addendum No. 2, dated June 12, 1998, between the Registrant and Richard and Donna Piazza, regarding1112 Manhattan Avenue, Manhattan Beach, California. 10.14 Lease Agreement, dated November 21, 1997, between the Registrant and The Prudential Insurance Companyof America, regarding 1661 South Vintage Avenue, Ontario, California (incorporated by reference to exhibitnumber 10.14 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). 10.14(a) First Amendment to Lease Agreement, dated April 26, 2002, between the Registrant and ProLogis California ILLC, 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). 10.15 Lease Agreements, dated November 21, 1997, between the Registrant and The Prudential InsuranceCompany of America, regarding 1777 South Vintage Avenue, Ontario, California (incorporated by reference toexhibit number 10.15 of the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-60065), filed with the Securities and Exchange Commission on July 29, 1998). 10.15(a) First Amendment to Lease Agreement, dated April 26, 2002, between the Registrant and Cabot IndustrialProperties, L.P. , regarding 1777 South Vintage Avenue, Ontario, California (incorporated by reference toexhibit number 10.15 of the Registrant’s Registration Statement on Form S-1, as amended (File No. 333-60065), filed with the Securities and Exchange Commission on July 29, 1998). 10.16 Commercial Lease Agreement, dated April 10, 1998, between the Registrant and Proficiency OntarioPartnership, regarding 5725 East Jurupa Street (incorporated by reference to exhibit number 10.16 of theRegistrant’s Registration Statement on Form S-1, as amended (File No. 333-60065), filed with the Securitiesand Exchange Commission on July 29, 1998). 10.17 Lease Agreement and Addendum, dated June 11, 1998, between the Registrant and Delores McNabb,regarding Suite 3 on the first floor of the north building, Suite 9 on the first floor of the south building at 904Manhattan Avenue, Manhattan Beach, California (incorporated by reference to exhibit number 10.17 of theRegistrant’s Registration Statement on Form S-1, as amended (File No. 333-60065), filed with the Securitiesand Exchange Commission on April 9, 1999). 10.18 Lease Agreement and Addendum, dated September 14, 1998, between the Registrant and Delores McNabb,regarding Suites 3, 4 and 5 on the second floor of the north building at 904 Manhattan Avenue, ManhattanBeach, California. 10.18(a) Lease Agreement and Addendum, dated April 15, 2000, between the Registrant and Delores McNabb,regarding Suites 7, 8 and 9 on the second floor of the south building at 904 Manhattan Avenue, ManhattanBeach, California. 10.19Standard 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 ofproperty located at 1670 South Champagne Avenue, Ontario, California (incorporated by reference to exhibit number 10.19 of the 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.,41Table of Contents EXHIBIT NUMBER DESCRIPTION OF EXHIBIT regarding 1670 South Champagne Avenue, Ontario, California (incorporated by reference to exhibit number10.20 of the 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 (a wholly 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 endingDecember 31, 2000). 10.22 Purchase and Sale Agreement with Escrow Instructions, dated November 13, 2000, between the Registrantand Pacifica California/Apollo, LLC, for the purchase of property located at 225 South Sepulveda Boulevard,Manhattan Beach, California (incorporated by reference to exhibit number 10.22 of the Registrant’s Form 10-Kfor the year ending December 31, 2000). 10.22(a) First Amendment to Purchase and Sale Agreement, dated November 29, 2000, between the Registrant andPacifica California/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 ending December 31, 2000). 10.23 Promissory Note, dated December 27, 2000, between the Registrant and Washington Mutual Bank, FA, forthe purchase of property located at 225 South Sepulveda Boulevard, Manhattan Beach, California (incorporatedby reference 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 (incorporatedby reference 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 InsuranceCompany, for the purchase of property located at 1670 South Champagne Avenue, Ontario, California(incorporated by reference to exhibit number 10.25 of the Registrant’s Form 10-K for the year endingDecember 31, 2000). 10.26 Promissory Note, dated December 21, 2000, between Yale Investments, LLC, and MONY Life InsuranceCompany, for the purchase of property located at 1670 Champagne Avenue, Ontario, California (incorporatedby reference to exhibit 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). 10.27(a) First Amendment to Lease Agreement, dated October 26, 2000, between the Registrant and ManhattanCorners, LLC, regarding 1100 Highland Avenue, Manhattan Beach, California. 10.28 Lease Agreement, dated April 10, 2001, between the Registrant and ProLogis California I LLC, regarding 4100East Mission Boulevard, Ontario, California (incorporated by reference to exhibit number 10.28 of theRegistrant’s Form 10-K for the year ending December 31, 2001). 10.28(a) First Amendment to Lease Agreement, dated October 22, 2003, between the Registrant and ProLogisCalifornia I LLC, regarding 4100 East Mission Boulevard, Ontario, California. 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(incorporated by reference to exhibit number 10.29 of the Registrant’s Form 10-K for the year endingDecember 31, 2002). 21.1 Subsidiaries of the Registrant 23.1 Independent Auditors Consent 24.1 Power of Attorney (included on signature page) 33.1 Certification of the Chief Executive Officer pursuant Securities Exchange Act Rule 13a-14(a) 31.2 Certification of the Chief Financial Officer pursuant Securities Exchange Act Rule 13a-14(a) 32 Certification pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 200242Table 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 12th day ofMarch 2004. SKECHERS U.S.A., INC. By: /S/ ROBERT GREENBERG Robert Greenberg Chairman 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 12, 2004 /S/ MICHAEL GREENBERGMichael Greenberg President and Director March 12, 2004 /S/ DAVID WEINBERGDavid Weinberg Executive Vice President, Chief Financial Officer and Director(Principal Financial and Accounting Officer) March 12, 2004 /S/ JEFFREY GREENBERGJeffrey Greenberg Director March 12, 2004 J. Geyer Kosinski Director March , 2004 /S/ FREDERICK H. SCHNEIDER, JR.Frederick H. Schneider, Jr. Director March 12, 2004 Richard Siskind Director March , 200443Table of ContentsSKECHERS U.S.A., INC.INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE Independent Auditors’ Report F-2 Consolidated Balance Sheets — December 31, 2002 and 2003 F-3 Consolidated Statements of Operations — Three years ended December 31, 2003 F-4 Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss)- Threeyears ended December 31, 2003 F-5 Consolidated Statements of Cash Flows — Three years ended December 31, 2003 F-6 Notes to Consolidated Financial Statements F-7 F-1Table 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, 2002 and 2003, and the results of their operations and their cash flows for each ofthe years in the three-year period ended December 31, 2003, 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./s/ KPMG LLPLos Angeles, CaliforniaFebruary 19, 2004F-2Table of ContentsSKECHERS U.S.A., INC.CONSOLIDATED BALANCE SHEETSDECEMBER 31, 2002 AND 2003(IN THOUSANDS, EXCEPT PER SHARE DATA)ASSETS 2002 2003 Current assets: Cash and cash equivalents $124,830 $113,479 Trade accounts receivable, less allowances of $8,498 in 2002 and $7,861 in 2003 97,419 98,751 Due from officers and employees 617 623 Other receivables 7,144 3,910 Total receivables 105,180 103,284 Inventories 147,984 137,917 Prepaid expenses and other current assets 14,779 12,366 Deferred tax assets 703 5,621 Total current assets 393,476 372,667 Property and equipment, at cost, less accumulated depreciation and amortization 83,666 86,324 Intangible assets, at cost, less applicable amortization 356 2,006 Other assets, at cost 5,658 5,536 $483,156 $466,533 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Current installments of long-term borrowings $2,442 $3,226 Accounts payable 88,578 78,725 Accrued expenses 15,696 12,881 Total current liabilities 106,716 94,832 4.50% convertible subordinated notes 90,000 90,000 Long-term borrowings, excluding current installments 27,204 26,047 Total liabilities 223,920 210,879 Commitments and contingencies Stockholders’ equity: Preferred stock, $.001 par value. Authorized 10,000 shares; none issued andoutstanding — — Class A Common stock, $.001 par value. Authorized 100,000 shares; issued andoutstanding 18,369 and 19,116 shares at December 31, 2002 and 2003, respectively 18 19 Class B Common stock, $.001 par value. Authorized 60,000 shares; issued andoutstanding 19,317 and 18,886 shares at December 31, 2002 and 2003, respectively 19 19 Additional paid-in capital 102,109 105,272 Accumulated other comprehensive income 3,016 8,137 Retained earnings 154,074 142,207 Total stockholders’ equity 259,236 255,654 $483,156 $466,533 See accompanying notes to consolidated financial statements.F-3Table of ContentsSKECHERS U.S.A., INC.CONSOLIDATED STATEMENTS OF OPERATIONSTHREE YEARS ENDED DECEMBER 31, 2001, 2002, and 2003(IN THOUSANDS, EXCEPT PER SHARE DATA) 2001 2002 2003 Net sales $960,385 $943,582 $834,976 Cost of sales 554,205 556,909 517,290 Gross profit 406,180 386,673 317,686 Royalty income, net (303) 1,145 4,170 405,877 387,818 321,856 Operating expenses: Selling 111,401 94,274 84,653 General and administrative 205,989 210,889 238,550 317,390 305,163 323,203 Earnings (loss) from operations 88,487 82,655 (1,347) Other income (expense): Interest, net (13,852) (8,927) (8,839) Other, net 1,320 1,613 (187) (12,532) (7,314) (9,026) Earnings (loss) before income taxes 75,955 75,341 (10,373)Income taxes 28,685 28,305 1,494 Net earnings (loss) $47,270 $47,036 $(11,867) Net earnings (loss) per share: Basic $1.30 $1.26 $(0.31) Diluted $1.24 $1.20 $(0.31)Weighted-average shares: Basic 36,409 37,275 37,840 Diluted 38,059 40,854 37,840 See accompanying notes to consolidated financial statements.F-4Table of ContentsSKECHERS U.S.A., INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)THREE YEARS ENDED DECEMBER 31, 2001, 2002, AND 2003(IN THOUSANDS)See accompanying notes to consolidated financial statements COMMON STOCK SHARES AMOUNT ACCUMULATED ADDITIONAL OTHER TOTAL PAID-IN COMPREHENSIVE RETAINED STOCKHOLDERS' CLASS A CLASS B CLASS A CLASS B CAPITAL INCOME EARNINGS EQUITY Balance at December 31,2000 10,789 24,805 $10 $25 $74,243 $59,768 $134,046 Comprehensive income: Net earnings — — — — — — 47,270 47,270 Foreign currencytranslation adjustment — — — — — $33 — 33 Proceeds from issuance ofcommon stock under theemployee stock purchaseplan 136 — — — 1,689 — — 1,689 Proceeds from issuance ofcommon stock under theemployee stock option plan 1,081 — 1 — 7,679 — — 7,680 Tax effect of non-qualifiedstock options — — — — 8,298 — — 8,298 Conversion of Class Bcommon stock into Class Acommon stock 3,323 (3,323) 4 (4) — — — 0 Balance at December 31,2001 15,329 21,482 15 21 91,909 33 107,038 199,016 Comprehensive income: Net earnings — — — — — — 47,036 47,036 Foreign currencytranslation adjustment — — — — — 2,983 — 2,983 Contribution of commonstock to the 401(k) Plan 48 — — — 702 — — 702 Proceeds from issuance ofcommon stock under theemployee stock purchaseplan 175 — — — 1,777 — — 1,777 Proceeds from issuance ofcommon stock under theemployee stock option plan 652 — 1 — 4,674 — — 4,675 Tax effect of non-qualifiedstock options — — — — 3,047 — — 3,047 Conversion of Class Bcommon stock into Class Acommon stock 2,165 (2,165) 2 (2) — — — — Balance at December 31,2002 18,369 19,317 18 19 102,109 3,016 154,074 259,236 Comprehensive income(loss): Net loss — — — — — — (11,867) (11,867) Foreign currencytranslation adjustment — — — — — 5,121 — 5,121 Deferred compensation — — — — 123 — — 123 Contribution of commonstock to the 401(k) Plan 83 — — — 707 — — 707 Proceeds from issuance ofcommon stock under theemployee stock purchaseplan 196 — — — 1,319 — — 1,319 Proceeds from issuance ofcommon stock under theemployee stock option plan 37 — — — 190 — — 190 Tax effect of non-qualifiedstock options — — — — 824 — — 824 Conversion of Class Bcommon stock into Class Acommon stock 431 (431) 1 — — — — 1 Balance at December 31,2003 19,116 18,886 $19 $19 $105,272 $8,137 $142,207 $255,654 F-5Table of ContentsSKECHERS U.S.A., INC.CONSOLIDATED STATEMENTS OF CASH FLOWSTHREE YEARS ENDED DECEMBER 31, 2001, 2002, and 2003(IN THOUSANDS) 2001 2002 2003 Cash flows from operating activities: Net earnings (loss) $47,270 $47,036 $(11,867) Adjustments to reconcile net earnings (loss) to net cash provided by(used in) operating activities: Depreciation and amortization of property and equipment 15,202 17,428 21,123 Amortization of deferred financing costs — 541 765 Amortization of intangible assets 101 101 475 Provision for bad debts and returns 5,507 4,963 7,317 Tax benefit of non-qualified stock options 8,298 3,047 824 Non cash stock compensation — — 123 Deferred taxes (390) 4,101 (4,918) Loss on disposal of equipment 983 137 730 (Increase) decrease in assets: Receivables (30,437) 13,660 (4,570) Inventories (45,951) 9,825 11,852 Prepaid expenses and other current assets (11,238) 2,973 2,593 Other assets 429 197 (396) Increase (decrease) in liabilities: Accounts payable 4,633 11,372 (8,890) Accrued expenses 3,873 1,433 (2,842) Net cash provided by (used in) operating activities (1,720) 116,814 12,319 Cash flows used in investing activities: Capital expenditures (31,519) (14,520) (20,664) Acquisition of Canadian distributor — — (2,344) Purchase of intellectual property — — (1,125) Proceeds from the sales of property and equipment — — 16 Net cash used in investing activities (31,519) (14,520) (24,117) Cash flows from financing activities: Net proceeds from the sales of stock through employee stock purchaseplan and the exercise of stock options 9,369 6,452 1,509 Net proceeds (payments) related to short-term borrowings 34,421 (84,175) — Payments on long-term debt (3,811) (2,453) (2,420) Proceeds from the issuance of convertible subordinated Notes, net ofoffering costs — 86,175 — Net cash provided by (used in) financing activities 39,979 5,999 (911) Net increase (decrease) in cash 6,740 108,293 (12,709) Effect of exchange rates on cash 33 983 1,358 Cash and cash equivalents at beginning of year 8,781 15,554 124,830 Cash and cash equivalents at end of year $15,554 $124,830 $113,479 Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $13,613 $8,283 $8,451 Income taxes 27,220 19,192 4,267 SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES: 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. During 2003, the Company issued 83,351 shares of Class A common stock to the Company’s 401k plan with a value of approximately$709,000. In addition, the Company acquired equipment aggregating $2,260,000 under capital lease obligations.See accompanying notes to consolidated financial statements.F-6Table of ContentsSKECHERS U.S.A., INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2002 AND 2003(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. Certain reclassifications have been made to prioryear amounts to conform to current year presentation. (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 threeintegrated retail formats. Our three distinct retail formats are as follows: Concept Stores. Our concept stores are located in marquee street locations and high performing regional malls, promoteawareness of the Skechers brand and showcase a broad assortment of our in-season footwear styles. The products offered in ourconcept stores are full price in season product and typically attract fashion conscious customers. Factory Outlet Stores. Our factory outlet stores are generally located in manufacturers’ outlet centers and provide opportunities tosell an assortment of in-season, discontinued and excess merchandise at lower price points. Warehouse Outlet Stores. Our freestanding warehouse outlet stores appeal to our most value conscious customers and enable usto liquidate excess merchandise, discontinued lines and odd-size inventory in a cost-efficient manner. DISTRIBUTORS. Internationally, we sell our footwear to our foreign distributors who distribute such footwear to department storesand specialty 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 from retail sales at the point of sale. The Company recognizes revenue on wholesale sales when products are shipped and the customer takes title and assumes risk of loss,collection of relevant receivable is probable, persuasive evidence of an arrangement exists and the sales price is fixed or determinable.Allowances for estimated returns, discounts, doubtful accounts and chargebacks are provided for when related revenue is recorded. Amountsbilled for shipping and handling costs are recorded as a component of net sales. Related costs paid to third-party shipping companies arerecorded as a cost of sales. Revenues from royalty and licensing 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-7Table of Contents (e) Foreign Currency Translation The Company considers the U.S. dollar as its 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: 2001 2002 2003 Net earnings (loss) $47,270 $47,036 $(11,867)Accumulated other comprehensive income: Foreign currency translation adjustments 33 2,983 5,121 Total comprehensive income (loss) $47,303 $50,019 $(6,746) Accumulated other comprehensive income $33 $3,016 $8,137 (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. Reserves are estimated based upon inventory on hand, historical sales activity, and the expected net realizablevalue. The net realizable value is determined based upon estimated sales prices of such inventory through off-price or discount storechannels. (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. A valuation allowance is recorded to reduce deferred taxes to the amount that is more likely than not to berealized. (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, which ever isshorter (i) SFAS No. 142, “Goodwill and Other Intangible Assets,” eliminates the requirement to amortize goodwill and indefinite-livedintangible assets, requiring instead that those assets be measured for impairment at least annually, and more often when events indicatethat impairment exists. Intangible assets with finite lives will continue to be amortized over their useful lives. Intangible assets, all subject toamortization, as of December 31, 2002 and 2003 are as follows (in thousands): December 31, 2002 2003 Intellectual property $— $1,125 Other intangibles — 1,000 Trademarks 1,050 1,050 Less accumulated amortization (694) (1,169) $356 $2,006 F-8Table of Contents (j) Long-Lived Assets 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 theestimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimatedfuture cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of theasset. The Company recognized impairment charges of $619,000 during the year ended December 31, 2003. The impairment chargesrelated to the write down of fixed assets at three company owned retail stores. (k) 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, 2001, 2002 and 2003 was approximately $86,625,000, $76,824,000 and$71,717,000, respectively. Prepaid advertising costs at December 31, 2002 and 2003 were $1,114,000 and $844,000, respectively. Prepaidamounts outstanding at December 31, 2002 and 2003 represents the unamortized portion of endorsement contracts and advertising in tradepublications which had not run as of December 31, 2002 and 2003, respectively. (l) Earnings Per ShareBasic earnings per share represents net earnings (loss) divided by the weighted average number of common shares outstanding for theperiod. Diluted earnings (loss) per share, in addition to the weighted average determined for basic earnings (loss) per share, includespotential common shares which would arise from the exercise of stock options using the treasury stock method, and the conversion of theCompany’s 4.50% Convertible Subordinated Notes for the period outstanding since their issuance in April 2002, if their effects are dilutive.The following is a reconciliation of net earnings (loss) and weighted average common shares outstanding for purposes of calculating basicearnings per share (in thousands): Fiscal Year Ended December 31, Basic earnings per share 2001 2002 2003 Net earnings (loss) $47,270 $47,036 $(11,867)Weighted average common shares outstanding 36,409 37,275 37,840 Basic earnings per share $1.30 $1.26 $(0.31)The following is a reconciliation of net earnings (loss) and weighted average common shares outstanding for purposes of calculating dilutedearnings (loss) per share (in thousands): Fiscal Year Ended December 31, Diluted earnings per share 2001 2002 2003 Net earnings (loss) $47,270 $47,036 $(11,867)After tax effect of interest expense on 4.50% convertiblesubordinated notes — 1,832 — Earnings (loss) for purposes of computing diluted earnings pershare $47,270 $48,868 $(11,867) Weighted average common shares outstanding 36,409 37,275 37,840 Dilutive stock options 1,650 1,063 — Weighted average assumed conversion of 4.50% convertiblesubordinated notes — 2,516 — Weighted average common shares outstanding 38,059 40,854 37,840 Diluted earnings per share $1.24 $1.20 $(0.31) F-9Table of Contents Options to purchase 279,500 and 931,922 shares of common stock at prices ranging from $15.50 to $29.45 were outstanding atDecember 31, 2001 and 2002, respectively, but were not included in the computation of diluted earnings per share because the options’exercise price was greater than the average market price of the common shares and therefore their inclusion would be anti-dilutive. Optionsto purchase 5,232,487 shares of common stock at prices ranging from $2.78 to $24.00 were outstanding at December 31, 2003, but werenot included in the computation of the loss per share for the year ending December 31, 2003, because their effect would have been anti-dilutive. The impact from the assumed conversion of the 4.50% convertible subordinated notes in 2003 was anti-dilutive and, thereforeexcluded from the 2003 calculation. (m) 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), as amended. Under the provisions of SFAS 123, the Company has elected tocontinue to measure compensation cost for employees and nonemployee directors of the Company under the intrinsic value method of APBNo. 25 and comply with the pro forma disclosure requirements under SFAS 123. The Company applies the fair value techniques of SFAS123 to measure compensation cost for options/warrants granted to nonemployees.The following table illustrates the effects on net earnings (loss) had the fair value-based method been applied to all outstanding and unvestedawards in each period (in thousands). 2001 2002 2003 Net earnings (loss), as reported $47,270 $47,036 $(11,867)Deduct total stock-based employee compensationexpense under fair value- based method for allawards (9,201) (8,746) (6,231) Pro forma net earnings (loss) for basic pro formaearnings per share 38,069 38,290 (18,098)Add back interest on 4.50% debentures, net of tax — 1,832 — Pro forma net earnings (loss) for diluted pro formaearnings per share $38,069 $40,122 $(18,098) Pro forma net earnings (loss) per share: Basic $1.05 $1.03 $(0.48) Diluted 1.00 0.98 (0.48) Pro forma basic net earnings (loss) per share represents net pro forma earnings (loss) divided by the weighted average number ofcommon shares outstanding for the period. Pro forma diluted earnings (loss) per share, in addition to the weighted average determined forpro forma basic earnings (loss) per share, includes common stock equivalents which would arise from the exercise of stock options using thetreasury stock method, and assumes the conversion of the Company’s 4.50% Convertible Subordinated Notes for the period outstandingsince their issuance in April 2002, if their effects are dilutive. (n) 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. (o) Product Design and Development Costs The Company charges all product design and development costs to expense when incurred. Product design and development costsaggregated approximately $5,493,000, $5,984,000 and $6,096,000 during the years ended December 31, 2001, 2002 and 2003,respectively. (p) Fair Value of Financial InstrumentsF-10Table of Contents 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, 2003 was $82.1 million, based on theprice of the debt in the public market, compared to a carrying value of $90.0 million. (q) New Accounting StandardsIn April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13,and Technical Corrections. SFAS No. 145 amends existing guidance on reporting gains and losses on the extinguishment of debt to prohibitthe classification of the gain or loss as extraordinary, as the use of such extinguishments have become part of the risk management strategyof many companies. SFAS No. 145 also amends SFAS No. 13 to require sale-leaseback accounting for certain lease modifications that haveeconomic effects similar to sale-leaseback transactions. The provisions of the Statement related to the rescission of Statement No. 4 isapplied in fiscal years beginning after May 15, 2002. Earlier application of these provisions is encouraged. The provisions of the Statementrelated to Statement No. 13 were effective for transactions occurring after May 15, 2002, with early application encouraged. The adoption ofSFAS No. 145 did not have a material effect on our consolidated financial statements.In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force(EITF) Issue 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity. The provisions of thisStatement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. Theadoption of SFAS No. 146 did not have a material effect on our consolidated 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, which provides that cash consideration received from a vendor is presumed to be a reduction ofthe prices of the vendor’s products or services and should, therefore, be characterized as a reduction in cost of sales unless it is a payment forassets or services delivered to the vendor, in which case the cash consideration should be characterized as revenue, or unless it is areimbursement of costs incurred to sell the vendor’s products, in which case the cash consideration should be characterized as a reduction ofthat cost. EITF No. 02-16 became effective for us in the first quarter of 2003, and had no impact on our consolidated financial statements, aswe have historically accounted for vendor payments in accordance with the provisions of this standard.In November 2002, the FASB issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees,Including Indirect Guarantees of Indebtedness of Others, which addresses the disclosure to be made by a guarantor in its interim andannual financial statements about its obligations under guarantees. The disclosure requirements are effective for interim and annualfinancial statements ending after December 15, 2002. The Company does not have any material guarantees that require disclosure underFIN 45.FIN 45 also requires displaying the recognition of a liability by a guarantor at the inception of certain guarantees. FIN 45 requires theguarantor to recognize a liability for the non-contingent component of a guarantee, which is the obligation to stand ready to perform in theevent that specified triggering events or conditions occur. The initial measurement of this liability is the fair value of the guarantee atinception. The recognition of the liability is required even if it is not probable that payments will be required under the guarantee or if theguarantee was issued with a premium payment or as part of a transaction with multiple elements. The initial recognition and measurementprovisions are effective for all guarantees within the scope of FIN 45 issued or modified after December 31, 2002.As noted above the Company has adopted the disclosure requirements of FIN 45 and will apply the recognition and measurement provisionsfor all guarantees entered into or modified after December 31, 2002. For the year ended December 31, 2003, the Company did not enter intoany guarantees within the scope of FIN 45.In January 2003, the FASB issued FASB Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities, an Interpretation ofARB No. 51,” which addresses consolidation by business enterprises of variable interest entities (“VIEs”) either: (1) that do not havesufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support, or (2) in whichthe equity investors lack an essential characteristic of a controlling financial interest. InF-11Table of ContentsDecember 2003, the FASB completed deliberations of proposed modifications to FIN 46 (“Revised Interpretations”) resulting in multipleeffective dates based on the nature as well as the creation date of the VIE. VIEs created after January 31, 2003, but prior to January 1, 2004,may be accounted for either based on the original interpretation or the Revised Interpretations. VIEs created after January 1, 2004 must beaccounted for under the Revised Interpretations. Special Purpose Entities (“SPEs”) created prior to February 1, 2003 may be accounted forunder the original or revised interpretation’s provisions. Non-SPEs created prior to February 1, 2003, should be accounted for under theRevised Interpretation’s provisions. The Revised Interpretations are effective for periods after June 15, 2003 for VIEs in which the Companyholds a variable interest it acquired before February 1, 2003. For entities acquired or created before February 1, 2003, the RevisedInterpretations are effective no later than the end of the first reporting period that ends after March 15, 2004, except for those VIEs that areconsidered to be special-purpose entities, for which the effective date is no later that the end of the first reporting period that ends afterDecember 31, 2003. The adoption of FIN 46 and the Revised Interpretations has not and is not expected to have an impact on theconsolidated financial statements.In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities andEquity.” SFAS No. 150 establishes standards on the classification and measurement of certain instruments with characteristics of bothliabilities and equity. SFAS No. 150 is generally effective for financial instruments entered into or modified after May 31, 2003, and otherwiseis effective at the beginning of the first interim period beginning after June 15, 2003. SFAS No. 150 requires the classification of any financialinstruments with a mandatory redemption feature, an obligation to repurchase equity shares, or a conditional obligation based on theissuance of a variable number of its equity shares, as a liability. The adoption of SFAS No. 150 did not have a material effect on theconsolidated financial statements.(2) PROPERTY AND EQUIPMENT Property and equipment at December 31, is summarized as follows (in thousands): 2002 2003 Land $12,358 $12,358 Buildings and improvements 21,144 21,445 Furniture, fixtures and equipment 55,431 68,141 Leasehold improvements 41,149 50,262 Total property and equipment 130,082 152,206 Less accumulated depreciation and amortization 46,416 65,882 Property and equipment, net $83,666 $86,324 (3) ACCRUED EXPENSES Accrued expenses at December 31, is summarized as follows (in thousands): 2002 2003 Accrued inventory purchases $6,814 $3,401 Accrued payroll and related taxes 6,327 6,796 Taxes payable 1,397 75 Accrued interest 839 839 Other accrued liabilities 319 1,770 Accrued expenses $15,696 $12,881 (4) SHORT-TERM BORROWINGSThe Company has available a secured line of credit, as amended on December 31, 2003, permitting borrowings up to $150.0 million basedupon eligible accounts receivable and inventories. Borrowings bear interest at the prime rate (4.0% at December 31, 2003) minus 0.50%,and the agreement expires on December 31, 2005. The agreement provides for the issuance of letters of credit up to a maximum of$30.0 million of which 50% decreases the amount available for borrowings under the agreement. Outstanding letters of credit atDecember 31, 2003 were $3.8 million. Available borrowings under the line of credit at December 31, 2003 were $99.4 million and noamounts were outstanding at December 31, 2003 and 2002. The Company pays an unused line of credit fee of .25% annually. Theagreement provides the following financial covenants should the loan balance exceed 60% of all eligible accounts, that stockholders’ equityshall not decrease by more than 20% in any given calendar quarter, contains a tangible net worth requirement asF-12Table of Contentsdefined in the agreement, and limits the payment of dividends if in default of any provision of the agreement. The Company was incompliance with these covenants at December 31, 2003.(5) LONG-TERM BORROWINGS Long-term debt at December 31, 2002 and 2003 is as follows (in thousands): 2002 2003 4.50% Convertible Subordinated Notes due April 15, 2007 (see below) $90,000 $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 10,558 10,388 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 7,702 7,615 Capital lease obligation, due in aggregate monthly installments of $195 (includes principal andinterest, interest rate of 7.66%, secured by equipment, balloon payment of $4,431 dueFebruary 2006 (see note 10) 9,847 8,208 Capital lease obligation, due in quarterly installments of $171.6 (includes principal andinterest), fixed rate of interest at 7.0%, secured by property, through July 2007 (see note 10) — 2,052 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) 1,539 1,010 119,646 119,273 Less current installments 2,442 3,226 $117,204 $116,047 The aggregate maturities of long-term borrowings at December 31, 2003 are as follows: 2004 $3,226 2005 3,057 2006 5,668 2007 90,552 2008 377 Thereafter 16,393 $119,273 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, and commenced on October 15, 2002. The Notes are convertible at the option of the holder into shares of Class Acommon stock at a conversion rate of 38.5089 shares of Class A common stock per $1,000 principal amount of Notes, which is equivalent toa conversion price of approximately $25.968 per share. The conversion rate is subject to adjustment under certain specific circumstances.The Notes may be converted at any time on or before the close of business on the maturity date, unless the Notes have been previouslyredeemed or repurchased; provided, however, that if a Note is called for redemption or repurchase, the holder will be entitled to convert theNotes at any time before the close of business on the date immediately preceding the date fixed for redemption or repurchase, as the casemay be. The Notes are unsecured and subordinated to our present and future Senior Debt, as defined in the indenture. The Notes are alsostructurally subordinated in right of payment to all indebtedness and other liabilities of the Company’s subsidiaries. The indenture underwhich the Notes were issued does not restrict the incurrence of indebtedness, including Senior Debt, or the subsidiaries’ incurrence ofindebtedness. Net proceeds from the issuance of the Notes were $86.2 million, of which $65.0 million was used to repay amounts owingunder the Company’s line of credit and the remaining proceeds were used for working capital. The costs associated with the issuance of theNotes, approximately $3.8 million, are amortized using the effective interest method over the life of the Notes and are included in interestexpense as amortized.F-13Table of Contents(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 a permitted transferee. During 2002 and 2003 certain Class B stockholders converted 2,164,554 and 431,056 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. In May 2003, stockholders approved an amendment to the plan to increases the number of Class A commonstock authorized for issuance under the plan to 11,215,154. 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, 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 Granted 267,500 7.99 Exercised (36,491) 5.21 Canceled (427,905) 11.27 Outstanding at December 31, 2003 5,232,487 $10.75 Options available for grant at December 31, 2003 3,791,424 The following table summarizes information about stock options outstanding and exercisable at December 31, 2003:F-14Table of Contents OPTIONS OUTSTANDING OPTIONS EXERCISABLE WEIGHTED NUMBER WEIGHTED WEIGHTED NUMBER AVERAGERANGE OF OUTSTANDING AVERAGE REMAINING AVERAGE EXERCISABLE AT EXERCISEEXERCISE PRICE DECEMBER 31, 2003 CONTRACTUAL LIFE EXERCISE PRICE DECEMBER 31, 2003 PRICE $2.78 to $8.83 1,935,191 7.8 years $6.35 1,124,947 $5.80 $8.84 to $11.78 1,560,379 6.8 years 10.72 1,144,764 10.73 $11.79 to$20.61 1,436,167 6.7 years 14.04 1,227,129 13.81 $20.62 to$24.00 300,750 7.0 years 23.55 214,500 23.70 5,232,487 7.2 years 10.75 3,711,340 $11.00 At December 31, 2001, 2002 and 2003, the number of options exercisable for each year was 1,249,681, 2,436,449, and 3,711,340respectively. The weighted-average exercise price of those options was $11.06, $10.98 and $11.00 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 2001, 2002 and 2003, 135,600 and 175,098 and 195,893 shares were issued under the 1998 Stock PurchasePlan for which the Company received $1,689,000, $1,777,000, and $1,319,000, 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 option pricingmodel. The weighted-average assumptions used for grants were as follows: 2001 2002 2003 Dividend yield — — — Expected volatility 80% 82% 77%Risk-free interest rate 4.2% 2.7% 2.5%Expected life of option 5 5 5 The weighted-average fair value per share of options granted during 2001, 2002, and 2003 were $9.55, $5.02, and $4.95, respectively.(7) INCOME TAXES The provisions for income tax expense were as follows (in thousands): 2001 2002 2003 Actual income taxes: Federal: Current $24,134 $20,031 $4,956 Deferred 16 3,398 (3,223) Total federal 24,150 23,429 1,733 State: Current 4,627 3,592 1,139 Deferred (406) 703 (570) Total state 4,221 4,295 569 Foreign : Current 314 581 317 Deferred  — — (1,125) Total actual income taxes $28,685 $28,305 $1,494 Income taxes differs from the statutory tax rate as applied to earnings before income taxes as follows (in thousands):F-15Table of Contents 2001 2002 2003 Expected income tax expense $26,584 $26,364 $(3,594)State income tax, net of federal benefit 2,744 2,767 240 Rate differential on foreign income (822) (1,003) 4,358 Non-deductible expenses 387 422 342 Other (208) (245) 148 Total provision for income taxes $28,685 $28,305 $1,494 The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities atDecember 31, 2002 and 2003 are presented below (in thousands): DEFERRED TAX ASSETS: 2002 2003 Inventories $2,221 $2,649 Accrued expenses 1,354 2,066 Receivables 1,491 2,563 Property and equipment — 1,585 Loss carryforward — 1,126 Other 163 — Total deferred tax assets 5,229 9,989 Deferred tax liabilities: Prepaid expenses 2,401 3,071 Deferred revenue 1,092 1,114 Property and equipment 843 — Other 190 183 Total deferred tax liabilities 4,526 4,368 Net deferred tax assets $703 $5,621 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 (loss) before taxes was $69.7 million, $69.3 million, and $2.0 million for the years ended December 31, 2001,2002, and 2003, respectively. The corresponding income (loss) before taxes for non-U.S. based operations was $6.3, $6.0, and ($12.4)million for the years ended December 31, 2001, 2002, and 2003, respectively. The Company has not provided withholding and U.S. federal income taxes on approximately $5.6 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 for the foreseeable future.(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 $86,801,000 and$83,054,000 before allowances for bad debts and sales returns, and chargebacks at December 31, 2002 and 2003, respectively, whichgenerally do not require collateral from customers. Foreign accounts receivable amounted to $19,116,000 and $23,558,000 before allowancefor bad debts, sales returns, and chargebacks at December 31, 2002 and 2003, respectively, which generally are collateralized by letters ofcredit. International net sales amounted to $121,001,000, $134,955,000 and $132,031,000 for the years ended December 31, 2001, 2002and 2003, respectively. The Company’s credit losses due to write-off’s for the years ended December 31, 2001, 2002 and 2003 were$3,546,000, $2,654,000 and $7,955,000 respectively, and did not significantly differ from management’s expectations. Net sales to customers in the United States of America exceeded 80% of total net sales for each of the years in the three-year period endedDecember 31, 2003. Assets located outside of the United States of America consists primarily of cash, accountsF-16Table of Contentsreceivable, inventory, property and equipment, and other assets and totaled $66,850,000 and $92,341,000, at December 31, 2002 and2003, respectively. During 2001, 2002 and 2003, no customer accounted for 10% or more of net sales. No one customer accounted for greater than 10% oftrade accounts receivable at December 31, 2002. At December 31, 2003, one customer accounted for 10.6% of net trade receivables. During 2001, the Company had four manufacturers that accounted for between 7.9% and 19.9%, each, of total purchases. During 2002,the company had four manufacturers that accounted for between 9.3% and 22.7%, each, of total purchases. During 2003, the company hadfour manufacturers that accounted for between 7.4% and 24.6%, 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 $702,000, $709,000 and $764,000 for the years ended December 31, 2001, 2002and 2003, respectively. As its contribution to the plan in 2002 and 2003, the Company issues 83,351 and 93,692 shares of its Class Acommon stock, the shares were issued in the first quarter of 2003 and 2004, respectively. The shares contributed to the plan contain certainrestrictions regarding the subsequent sales of those shares.(10) COMMITMENTS AND CONTINGENCIES (a) Leases The Company leases facilities under operating lease agreements expiring through July 2027. The Company pays taxes, maintenanceand insurance, in addition to the lease obligation. 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, 2001, 2002 and 2003approximated $18,014,000, $22,167,000 and $29,038,000 respectively. The Company also leases certain property and equipment under capital lease agreements requiring monthly installment paymentsthrough July 2007. The cost of this property and equipment was $17,970,000 with a net book value of $6,678,000 at December 31, 2003. Future minimum lease payments under noncancellable leases at December 31, 2002 are as follows (in thousands): CAPITAL OPERATING LEASES LEASES Year ending December 31: 2004 $3,754 $31,206 2005 3,404 29,983 2006 5,411 28,103 2007 200 25,853 2008 — 21,269 Thereafter — 86,690 12,769 $223,104 Less imputed interest 1,499 Present value of net minimum lease payments $11,270 F-17Table of Contents The Company leases office space to unrelated third parties under noncancellable operating leases expiring through November 2009,annual rentals are approximately $56,000 for the each of the years ended December 31, 2004 through 2008, and $50,000 thereafter. (b) LitigationOn 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 is unable to determine the extent, if any, of any liability however, and does notbelieve that an adverse result would have a material effect on Skechers’ consolidated 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. On October 15, 2003, the parties settled the suit and all written documentation has been executed. The terms of thesettlement are confidential and did not have a material effect on Skechers’ consolidated financial position or results of operations.On March 25, 2003, a shareholder securities class action complaint captioned HARVEY SOLOMON v. SKECHERS USA, INC. et al. wasfiled against Skechers and certain of its officers and directors in the United States District Court for the Central District of California (CaseNo. 03-2094 DDP). On April 2, 2003, a shareholder securities class action complaint captioned CHARLES ZIMMER v. SKECHERS USA,INC. et al. was filed against Skechers and certain of its officers and directors in the United States District Court for the Central District ofCalifornia (Case No. 03-2296 PA). On April 15, 2003, a shareholder securities class action complaint captioned MARTIN H. SIEGEL v.SKECHERS USA, INC. et al. was filed against Skechers and certain of its officers and directors in the United States District Court for theCentral District of California (Case No 03-2645 RMT). On May 6, 2003, a shareholder securities class action complaint captioned ADAM D.SAPHIER v. SKECHERS USA, INC. et al. was served on Skechers and certain of its officers and directors in the United States District Courtfor the Central District of California (Case No. 03-3011 FMC). On May 9, 2003, a shareholders securities class action complaint captionedLARRY L. ERICKSON v. SKECHERS USA, INC. et al. was served on Skechers and certain of its officers and directors in the United StatesDistrict Court for the Central District of California (Case No. 03-3101 SJO). Each of these class action complaints alleged violations of thefederal securities laws on behalf of persons who purchased publicly traded securities of SKECHERS between April 3, 2002 and December 9,2002. In July 2003, the court in these federal securities class actions, all pending in the United States District Court for the Central District ofCalifornia, ordered the cases consolidated and a consolidated complaint to be filed and served. On September 25, 2003, the plaintiffs filed aconsolidated complaint entitled In re SKECHERS USA, Inc. Securities Litigation, Case No. CV-03-2094-PA in the United States DistrictCourt for the Central District of California, consolidating all of the federal securities actions above. The complaint names as defendantsSKECHERS and certain officers and directors and alleges violations of the federal securities laws and breach of fiduciary duty on behalf ofpersons who purchased publicly traded securities of SKECHERS between April 3, 2002 and December 9, 2002. The complaint seekscompensatory damages, interest, attorneys’ fees and injunctive and equitable relief. While it is too early to predict the outcome of thelitigation, the Company believes the suit is without merit and intends to vigorously defend the suit. On April 3, 2003, a shareholder derivative complaint captioned BRADFORD MITCHELL v. JEFFREY GREENBERG et al. was filedagainst Skechers and certain of its officers in the Superior Court of the State of California, Los Angeles County (CaseF-18Table of ContentsNo. BC 293317). On April 3, 2003, a shareholder derivative complaint captioned GEORGIA MANOLAS v. JEFFREY GREENBERG et al.was filed against Skechers and certain of its officers in the Superior Court of the State of California, Los Angeles County (CaseNo. BC293388). On April 8, 2003, a shareholder derivative complaint captioned JEFF GRAVITTER v. ROBERT Y. GREENBERG was filedagainst Skechers and certain of its officers in the Superior Court of the State of California, Los Angeles County (Case No. BC293561). Eachof these class action complaints included allegations of violations of California Corporation Code § 25402 and breach of fiduciary duty. OnAugust 29, 2003, the plaintiffs in these state derivative actions filed a consolidated complaint entitled In re SKECHERS USA, Inc. DerivativeLitigation, Case No. BC-293317, in the Superior Court of the State of California, Los Angeles County, consolidating all of the state derivativeactions above. The complaint alleges violations of California Corporation Code § 25402, breaches of fiduciary duty, waste of corporate assetsand unjust enrichment. The complaint seeks compensatory damages, treble damages, disgorgement of profits, imposition of a constructivetrust, equitable and injunctive relief, and costs. While it is too early to predict the outcome of the litigation, the Company believes the suit iswithout merit and intends to vigorously defend against the claims.On July 11, 2003 MG Footwear Inc., commenced a lawsuit against Skechers in the United States District Court for the District of NewJersey, MG FOOTWEAR, LLC v. SKECHERS USA, INC., Case No. 03-3252 (DMC), alleging inducement of breach of contract andinterference with contractual relations between MG Footwear and Yakira, LLC. The suit seeks $50 million dollars in punitive damages. Thematter was stayed pending the outcome of a related arbitration between MG Footwear and Yakira, LLC.. The Company plans on defendingthe allegations vigorously and believes the claims are without merit. Nonetheless, it is too early to predict the outcome and predict whetherthe outcome will have an adverse impact on the Company’s consolidated financial statements or results of operations.We occasionally become involved in litigation arising from the normal course of business, with respect to the above cases, we are unable todetermine the extent of any liability that may arise. Other than the foregoing, we have no reason to believe that any liability with respect topending legal actions, individually or in the aggregate, will have a material adverse effect on the Company’s consolidated financialstatements or results of operations. (c) Purchase Commitments At December 31, 2003, the Company had purchase commitments of approximately $153,500,000 for the purchase of footwear. 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% and 1.5% per 30 to 60 day term. The amountsoutstanding under these arrangements at December 31, 2002 and 2003 were $51,411,000 and $43,314,000, respectively, which areincluded in accounts payable in the accompanying consolidated balance sheets. Interest expense incurred by the Company under thesearrangements amounted to $5,900,000 in 2001, $2,278,000 in 2002, and $1,883,000 in 2003.(11) SEGMENT INFORMATIONIn accordance with the requirement of SFAS 131, “Disclosures about Segments of an Enterprise and Related Information,” theCompany’s reportable business segments and respective accounting policies of the segments are the same as described in Note 1. Thecompany has two reportable segments– domestic wholesale and distributor sales. Our other wholesale distribution channel, internationalwholesale, does not have similar economic characteristics since the margins, customer base, and distribution channels are different. Inaddition, each of our retail store formats, Concept, Factory Outlet, and Warehouse Outlet stores, have a different (i) mix of product offerings,(ii) price points, (iii) gross margins, (iv) demographics of the store location, and (v) physical store size and layout. The Company reports thesesegments in the all other category. Management evaluates segment performance based primarily on net sales 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, distributor segment, and the all other segments on a combined basis were as follows (inthousands).F-19Table of Contents 2001 2002 2003 Net sales Domestic wholesale $729,871 $682,593 $562,924 Distributor 99,780 82,497 70,380 All other 130,734 178,492 201,672 $960,385 $943,582 $834,976 Gross profit Domestic wholesale $298,179 $262,441 $185,849 Distributor 34,824 25,692 23,827 All other 73,177 98,540 108,010 $406,180 $386,673 $317,686 Assets Domestic wholesale $304,819 $363,777 $315,528 Distributor 34,167 41,284 48,698 All other 68,500 78,095 102,307 $407,486 $483,156 $466,533 Our distributor segment has intersegment sales to other distribution channels totaling $17.6, $37.0, and $45.3 million for the three yearsended December 31, 2001, 2002, and 2003, respectively, that are not included in the above net sales amounts.(12) SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Summarized unaudited financial data are as follows (in thousands): 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) 2003 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 Net sales $208,593 $229,278 $221,821 $175,284 Gross profit 90,318 89,595 78,638 59,135 Net earnings (loss) 8,461 (2,125) (5,860) (12,343) Net earnings (loss) per share: Basic $.22 $(.06) $(.15) $(.33) Diluted .22 (.06) (.15) (.33) F-20Table of ContentsSKECHERS U.S.A., INC.SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTSYEARS ENDED DECEMBER 31, 2001, 2002, AND 2003 BALANCE AT CHARGED TO DEDUCTIONS BALANCE BEGINNING OF COSTS AND AND AT ENDDESCRIPTION PERIOD EXPENSES WRITE-OFFS OF PERIOD 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 As of December 31, 2003: Allowance for chargebacks $3,831,000 $1,276,000 $(4,087,000) $1,020,000 Allowance for doubtful accounts 1,627,000 306,000 (734,000) 1,199,000 Reserve for sales returns and allowances 3,040,000 5,736,000 (3,134,000) 5,642,000  Exhibit 10.9(a) ADDENDUM #2 TO STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE - MODIFIED NET BY AND BETWEEN RICHARD AND DONNA PIAZZA, TRUSTEES OF THE PIAZZA FAMILY TRUST ("LESSOR") AND SKECHERS U.S.A., INC. ("LESSEE")THIS ADDENDUM shall modify, delete from and add and replace by substitution tothe STANDARD INDUSTRIAL/COMMERICAL MULTI-TENANT LEASE -- MODIFIED NET, datedJuly 1, 1999, for the Premises commonly known as 1108 (1108B) Manhattan Avenue,Manhattan Beach, California ("Lease"). Where any Article, Paragraph,Subparagraph or Clause of the Lease thereof is modified or deleted by thisAddendum, the unaltered provisions of that Article, Paragraph, Subparagraph orClause shall remain in effect. If and to the extent that this Addendum isinconsistent with the Lease, this Addendum shall control.58. OPTION. Notwithstanding anything contained in the Lease to the contrary,Lessee shall have an additional one (1) time option to extend the term of theLease for an additional five (5) years (i.e., March 1, 2007 to February 28,20012) pursuant and subject to the terms, covenants and conditions of the lease,except that the Base Rent shall be determined pursuant to Paragraph 50. Lesseeshall provide written notice to Lessor of Lessee's intention to extend the Leasepursuant to this Option prior to the expiration of the Original Term at leaseone hundred eighty (180) days but not more than tow hundred seventy (270) daysprior to such expiration. All other provisions related to the payment of rentunder the terms of the Lease shall remain in full force and effect.59. AUTHORIZATION FOR CONSTRUCTION. Lessor authorizes Lessee to commenceconstruction of the Tenant Improvements to the Premises in line with and subjectto the restriction contained hereinafter. In conjunction with thisauthorization, Lessee acknowledges its sole responsibility for such constructionand hereby acknowledges Lessor's recordation of a Notice of Non Responsibilityby Owner in reference thereto.60. CONSTRUCTION DURING LEASE. Lessee agrees not to make any changes that willcompromise or negate the Premises from its original purpose as a restaurant andLessee further agrees that during the Original Term and any Option Periodthereafter, Lessee shall not modify, improve or disturb the Premises such thatthe applicable provision of the Site Operational Restrictions provided inCondition 7 of the City of Manhattan Beach's Planning Commission Resolutionregarding the Master Use Permit ("MUO") approved November 9, 1994 per ResolutionPC-94 would be violated, a copy of which can be provided upon request ("CityResolution"). Lessee further agrees to pay any fees or costs in order tomaintain temporary Conditional Use Permit ("CUP"), issued and approved pursuantto Condition 31 of the aforementioned City Resolution, for office space on ayearly basis, through the remainder of the Lease, including all Option Terms.61. REVIEW OF PLANS. In order to ensure compliance with Paragraph 60 and inaddition to any provisions related hereto in the Lease, Lessee agrees to provideLessor with a copy of any plans, drawings, blueprints or other constructiondocuments which show the proposed improvements to the Premises ("Plans"). Lesseeshall have the right to review such Plans and reasonably object to any design orspecification which would conflict with or otherwise disturb the restrictions ofCity Resolution. 1 of 2Piazza/GMAddendum/Lease(1108)62. PROPERTY TAX. Notwithstanding anything in the Lease to the contrary, Lesseeagrees to pay any increase in property tax due to improvements made by Lessee.63. ACKNOWLEDGMENT OF THE PARTIES. Lessor and Lessee acknowledge that theparties have entered into separate Commercial Lease Agreements for those certainportions of the Building commonly known as 1110 Manhattan Avenue, ManhattanBeach, California ("Upstairs Space") and 1112 Manhattan Avenue, Manhattan Beach,California. Said Leases have corresponding options to extend the original termsof the Leases through 2012. IN WITNESS WHEREOF, the parties have executed this Sublease as of thedate first above written.LESSOR: LESSEE:PIAZZA FAMILY TRUST SKECHERS U.S.A., INC.DATED MARCH 1, 1993 A DELAWARE CORPORATION/s/ RICHARD J. PIAZZA /s/ PETER F. MOW---------------------------------- ------------------------------------RICHARD J. PIAZZA, TRUSTEE PETER F. MOW VICE PRESIDENT OF REAL ESTATE AND CONSTRUCTION/s/ DONNA J. PIAZZA---------------------------------- DONNA J. PIAZZA, TRUSTEE 2 of 2Piazza/GMAddendum/Lease(1108) EXHIBIT 10.10(h) SIXTH AMENDMENT TO LOAN AND SECURITY AGREEMENT This Sixth Amendment to that certain Amended and Restated Loan andSecurity Agreement ("Amendment") is made and entered into as of June 12, 2002,by and between Skechers U.S.A., Inc. ("Borrower") and The CIT Group/CommercialServices, Inc. ("CIT"), successor by purchase to the Commercial ServicesDivision of Heller Financial, Inc., as Agent and as Lender ("Agent"). Allcapitalized terms used herein and not otherwise defined shall have the meaningsassigned to such terms in the Amended and Restated Loan and Security Agreement. WHEREAS, Agent and Borrower are parties to a certain Amended andRestated Loan and Security Agreement, dated September 4, 1998 and all amendmentsthereto (the "Agreement"); and WHEREAS, Borrower and Agent desire to amend the Agreement ashereinafter set forth; NOW THEREFORE, for good and valuable consideration, the receipt andsufficiency of which are hereby acknowledged, the parties hereto hereby agree asfollows: SECTION 1. AMENDMENT1.1 Delete the first paragraph of subsection 2.1(B) of the Agreement in its entirety and substitute the following: (B) Revolving Loan: Each Lender, severally, agrees to lend to Borrower from time to time its Pro Rata Share of each Revolving Advance. The aggregate amount of all Revolving Loan Commitments shall not exceed at any time $200,000,000 as reduced by subsection 2.4(B). Amounts borrowed under this subsection 2.1(B) may be repaid and reborrowed at any time prior to the earlier of (i) the termination of the Revolving Loan Commitment pursuant to subsection 8.3 or (ii) the Termination Date; provided, however that Borrower shall reduce the Revolving Loan to an amount not greater than the Cleanup Amount for at least one Business Day each consecutive twenty-one (21) day period. Except as otherwise provided herein, no Lender shall have any obligation to make a Revolving Advance to the extent such Revolving Advance would cause the Revolving Loan (after giving effect to any immediate application of the proceeds thereof) to exceed the Maximum Revolving Loan Amount.1.2 Delete subsection 2.1(B)(2) of the Agreement in its entirety and substitute the following: (2) "Borrowing Base" means, as of any date of determination, an amount equal to the sum of (a) 85% of Eligible Accounts plus (b) the lesser of (i) $100,000,000 and (ii) 60% of Eligible Inventory (excluding Eligible Retail Inventory) plus (c) the lesser of (i) $2,000,000 and (ii) fifty percent (50%) of the Eligible Retail Inventory plus (d) the Overadvance Amount; and less (e) in each case such reserves as Agent in its reasonable discretion may elect to establish.1.3 Add the following at the end of the definition of "Eligible Accounts" set forth in Section 2.1(C) of the Agreement: Borrower, Agent and the Lenders hereby agree that with respect to determining eligibility of Accounts arising from Borrower's rights to payment under that certain Credit Approved Receivables Purchasing Agreement dated as of May 31, 2000 between CIT and Borrower, as amended (the "CARPA"), the foregoing criteria shall be applied to the underlying Account purchased by CIT from Borrower pursuant to the CARPA arising from the sale of goods or the rendering of services by Borrower.1.4 Delete Section 9.5(B) of the Agreement in its entirety and substitute the following: (B) Each Lender may sell participations in all or any part of any Loans made by it to another Person; provided that, any such participation shall be in a minimum amount of $5,000,000; and provided further, that, all amounts payable by Borrower hereunder shall be determined as if that Lender had not sold such participation. Borrower hereby acknowledges and agrees that the participant under each participation shall for purposes of subsections 2.8, 2.9, 2.10, 9.6 and 10.2 be considered to be a "Lender". No such participant shall sell, pledge, assign, sub-participate or otherwise transfer its rights or duties under its participation agreement, without the prior written consent of Agent and Borrower; except to a parent, subsidiary or affiliate of such participant upon prior written notice to Agent and no such sale, pledge, assignment, sub-participation or other transfer shall release such participant from its obligations and liabilities under the Participation Agreement. Notwithstanding the foregoing, in the event of a sale of substantially all of the loan portfolio of any such participant to another financial institution, such participant may with thirty (30) days notice to Agent sell or assign or otherwise transfer its rights or duties under its participation agreement to such financial institution.1.5 Delete the definition of "Accounts" set forth in Section 11.1 of the Agreement in its entirety and substitute the following: "Accounts" means all "accounts" (as defined in the UCC), accounts receivable, contract rights and general intangibles relating thereto, notes, drafts and other forms of obligations owed to or owned by Borrower arising or resulting from the sale of goods or the rendering of services, whether or not earned by performance, including, without limitation, any rights to payment under that certain Credit Approved Receivables Purchasing Agreement dated as of May 31, 2000 between CIT and Borrower, as amended.1.6 Delete the definition of "Letter of Credit Reserve" set forth in Section 11.1 of the Agreement in its entirety and substitute the following: "Letter of Credit Reserve" means, at any time, an amount equal to (a) 50% of the aggregate amount of Letter of Credit Liability to the extent that such amount is $1,000,000 or less, plus (b) 75% of the aggregate amount of Letter of Credit Liability to the extent that such amount exceeds $1,000,000, plus (c) without duplication, the aggregate amount theretofore paid by Agent or any Lender under Lender Letters of Credit and not debited to the Loan Account pursuant to subsection 2.1(G)(2) or otherwise reimbursed by Borrower.1.7 Add the following definition of "Tangible Net Worth" to Section 11.1 of the Agreement in proper alphabetical order: "Tangible Net Worth" of any Person means as of any date, an amount equal to: (a) Net Worth of such Person; less (b) Intangible Assets of such Person; less (c) prepaid expenses of such Person in excess of $250,000; less (d) all obligations owed to such Person by any Affiliate of such Person or any of its Subsidiaries; and less (e) all loans by such Person to its officers, stockholders, Subsidiaries or employees (determined in each case in conformity with GAAP); plus (f) the outstanding amount of Subordinated Debt.1.8 Add the Financial Covenants Rider attached hereto as the "Financial Covenants Rider" to the Agreement and reinsert all references in the Agreement to the Financial Covenants Rider or the financial covenants represented thereby previously deleted by the Fifth Amendment to Loan and Security Agreement dated as of July 11, 2001 between CIT and Borrower. 2 SECTION 2. RATIFICATION OF AGREEMENT2.1 To induce CIT to enter into this Amendment, Borrower represents and warrants that after giving effect to this Amendment, no violation of the terms of the Agreement exist and all representations and warranties contained in the Agreement are true, correct and complete in all material respects on and as of the date hereof.2.2 Except as expressly set forth in this Amendment, the terms, provisions and conditions of the Agreement are unchanged, and said Agreement, as amended, shall remain in full force and effect and is hereby confirmed and ratified. SECTION 3. COUNTERPARTS This Amendment may be executed in any number of counterparts, and allsuch counterparts taken together shall be deemed to constitute one and the sameinstrument. Signature pages may be detached from counterpart documents andreassembled to form duplicate executed originals. This Amendment shall becomeeffective as of the date hereof upon the execution of the counterparts hereof byBorrower, Guarantor and CIT. SECTION 4. GOVERNING LAW THIS AMENDMENT SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED ANDENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA. SECTION 5. ACKNOWLEDGMENT AND CONSENT BY GUARANTORS Each Guarantor hereby acknowledges that it has read this Amendment andconsents to the terms thereof and further hereby confirms and agrees that,notwithstanding the effectiveness of this Amendment, the obligations of suchGuarantor under its respective guaranty shall not be impaired or affected andthe guaranties are, and shall continue to be, in full force and effect and arehereby confirmed and ratified in all respects. Witness the execution hereof by the respective duly authorized officersof the undersigned as of the date first above written. THE CIT GROUP/COMMERCIAL SERVICES, INC., as Agent and as Lender By: /s/ William F. Elliott ------------------------------ Title: Vice President SKECHERS U.S.A., INC.ATTEST: /s/ Philip Paccione By: /s/ David Weinberg------------------------------- ------------------------------Secretary Title: Chief Financial Officer(SIGNATURES CONTINUED ON PAGE 3) 3 GUARANTOR: SKECHERS USA, INC. II, a Delaware corporation By: /s/ David Weinberg ------------------------------ Title: Chief Financial Officer SKECHERS BY MAIL, INC., a Delaware corporation By: /s/ Philip Paccione ------------------------------ Title: Corporate Secretary 4 FINANCIAL COVENANTS RIDERThis Financial Covenants Rider is attached and made a part of that certainAmended and Restated Loan and Security Agreement, dated as of September 4, 1998and entered into among Borrower, Agent and Lenders.Tangible Net Worth. Borrower shall maintain Tangible Net Worth of at least$125,000,000 at all times. 5 EXHIBIT 10.10(i) SEVENTH AMENDMENT TO LOAN AND SECURITY AGREEMENT This Seventh Amendment to that certain Amended and Restated Loan andSecurity Agreement ("Amendment") is made and entered into as of April 18, 2002,by and between Skechers U.S.A., Inc. ("Borrower") and The CIT Group/CommercialServices, Inc. ("CIT"), successor by purchase to the Commercial ServicesDivision of Heller Financial, Inc., as Agent and as Lender ("Agent"). Allcapitalized terms used herein and not otherwise defined shall have the meaningsassigned to such terms in the Amended and Restated Loan and Security Agreement. WHEREAS, Agent and Borrower are parties to a certain Amended andRestated Loan and Security Agreement, dated September 4, 1998 and all amendmentsthereto (the "Agreement"); and WHEREAS, Borrower and Agent desire to amend the Agreement ashereinafter set forth; NOW THEREFORE, for good and valuable consideration, the receipt andsufficiency of which are hereby acknowledged, the parties hereto hereby agree asfollows: SECTION 1. AMENDMENT1.1 Add the following new third paragraph at the end of subpart (A) of subsection 2.2: Interest will be credited as of the last day of each month based on the daily credit balances in your account for that month, at a rate three and three-quarters of one percent (3.75%) per annum below the Base Rate being used to calculate interest for the period.1.2 Delete the third sentence of subpart (B) of subsection 2.2 and substitute the following new sentence: Interest on Base Rate Loans and all other Obligations shall be payable to Agent for benefit of Lenders monthly in arrears on the last day of each month, on the date of any prepayment of Loans, and at maturity, whether by acceleration or otherwise. SECTION 2. RATIFICATION OF AGREEMENT 2.1 To induce CIT to enter into this Amendment, Borrowerrepresents and warrants that after giving effect to this Amendment, no violationof the terms of the Agreement exist and all representations and warrantiescontained in the Agreement are true, correct and complete in all materialrespects on and as of the date hereof. 2.2 Except as expressly set forth in this Amendment, the terms,provisions and conditions of the Agreement are unchanged, and said Agreement, asamended, shall remain in full force and effect and is hereby confirmed andratified. SECTION 3. COUNTERPARTS; EFFECTIVENESS This Amendment may be executed in any number of counterparts, and allsuch counterparts taken together shall be deemed to constitute one and the sameinstrument. Signature pages may be detached from counterpart documents andreassembled to form duplicate executed originals. This Amendment shall becomeeffective as of the date hereof upon the execution of the counterparts hereof byBorrower, Guarantor and CIT. SECTION 4. GOVERNING LAW THIS AMENDMENT SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED ANDENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA. SECTION 5. ACKNOWLEDGMENT AND CONSENT BY GUARANTORS Each Guarantor hereby acknowledges that it has read this Amendment andconsents to the terms thereof and further hereby confirms and agrees that,notwithstanding the effectiveness of this Amendment, the obligations of suchGuarantor under its respective guaranty shall not be impaired or affected andthe guaranties are, and shall continue to be, in full force and effect and arehereby confirmed and ratified in all respects. Witness the execution hereof by the respective duly authorized officersof the undersigned as of the date first above written. THE CIT GROUP/COMMERCIAL SERVICES, INC., as Agent and as Lender By: /s/ William F. Elliott ------------------------------ Title: Vice President SKECHERS U.S.A., INC.ATTEST: /s/ Philip G. Paccione By: /s/ David Weinberg--------------------------------- -------------------------------Secretary Title: CFO GUARANTOR: SKECHERS USA, INC. II, a Delaware corporation By: /s/ David Weinberg ------------------------------ Title: CFO SKECHERS BY MAIL, INC., a Delaware corporation By: /s/ David Weinberg ------------------------------ Title: CFO 2 EXHIBIT 10.10(j) EIGHTH AMENDMENT TO LOAN AND SECURITY AGREEMENT This Eighth Amendment to that certain Amended and Restated Loan andSecurity Agreement ("Amendment") is made and entered into as of September 30,2002, by and between Skechers U.S.A., Inc. ("Borrower") and The CITGroup/Commercial Services, Inc. ("CIT"), successor by purchase to the CommercialServices Division of Heller Financial, Inc., as Agent and as Lender ("Agent").All capitalized terms used herein and not otherwise defined shall have themeanings assigned to such terms in the Amended and Restated Loan and SecurityAgreement. WHEREAS, Agent and Borrower are parties to a certain Amended andRestated Loan and Security Agreement, dated September 4, 1998 and all amendmentsthereto (the "Agreement"); and WHEREAS, Borrower and Agent desire to amend the Agreement ashereinafter set forth; NOW THEREFORE, for good and valuable consideration, the receipt andsufficiency of which are hereby acknowledged, the parties hereto hereby agree asfollows: SECTION 1. AMENDMENT1.1 Delete the definition of "Letter of Credit Reserve" set forth in Section 11.1 of the Agreement in its entirety and substitute the following: "Letter of Credit Reserve" means, at any time, an amount equal to (a) 50% of the aggregate amount of Letter of Credit Liability to the extent that such amount is $1,000,000 or less, plus (b) 75% of the aggregate amount of Bank Acceptances to the extent that such amount exceeds $1,000,000, plus (c) without duplication, the aggregate amount theretofore paid by Agent or any Lender under Lender Letters of Credit and not debited to the Loan Account pursuant to subsection 2.1(G)(2) or otherwise reimbursed by Borrower. SECTION 2. RATIFICATION OF AGREEMENT2.1 To induce CIT to enter into this Amendment, Borrower represents and warrants that after giving effect to this Amendment, no violation of the terms of the Agreement exist and all representations and warranties contained in the Agreement are true, correct and complete in all material respects on and as of the date hereof.2.2 Except as expressly set forth in this Amendment, the terms, provisions and conditions of the Agreement are unchanged, and said Agreement, as amended, shall remain in full force and effect and is hereby confirmed and ratified. SECTION 3. COUNTERPARTS This Amendment may be executed in any number of counterparts, and allsuch counterparts taken together shall be deemed to constitute one and the sameinstrument. Signature pages may be detached from counterpart documents andreassembled to form duplicate executed originals. This Amendment shall becomeeffective as of the date hereof upon the execution of the counterparts hereof byBorrower, Guarantor and CIT. SECTION 4. GOVERNING LAW THIS AMENDMENT SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED ANDENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA. SECTION 5. ACKNOWLEDGMENT AND CONSENT BY GUARANTORS Each Guarantor hereby acknowledges that it has read this Amendment andconsents to the terms thereof and further hereby confirms and agrees that,notwithstanding the effectiveness of this Amendment, the obligations of suchGuarantor under its respective guaranty shall not be impaired or affected andthe guaranties are, and shall continue to be, in full force and effect and arehereby confirmed and ratified in all respects. Witness the execution hereof by the respective duly authorized officersof the undersigned as of the date first above written. THE CIT GROUP/COMMERCIAL SERVICES, INC., as Agent and as Lender By: /s/ William F. Elliott ------------------------------ Title: Vice President SKECHERS U.S.A., INC.ATTEST: /s/ Philip Paccione By: /s/ David Weinberg-------------------------------------------- ------------------------------Secretary Title: CFO GUARANTOR: SKECHERS USA, INC. II, a Delaware corporation By: /s/ David Weinberg ------------------------------ Title: CFO SKECHERS BY MAIL, INC., a Delaware corporation By: /s/ David Weinberg ------------------------------ Title: CFO 2 EXHIBIT 10.10(k) NINTH AMENDMENT TO LOAN AND SECURITY AGREEMENT This Ninth Amendment to that certain Amended and Restated Loan andSecurity Agreement ("Amendment") is made and entered into as of August 18, 2003,by and between Skechers U.S.A., Inc. ("Borrower") and The CIT Group/CommercialServices, Inc. ("CIT"), successor by purchase to the Commercial ServicesDivision of Heller Financial, Inc., as Agent and as Lender ("Agent"). Allcapitalized terms used herein and not otherwise defined shall have the meaningsassigned to such terms in the Amended and Restated Loan and Security Agreement. WHEREAS, Agent and Borrower are parties to a certain Amended andRestated Loan and Security Agreement, dated September 4, 1998 and all amendmentsthereto (the "Agreement"); and WHEREAS, Borrower and Agent desire to amend the Agreement ashereinafter set forth; NOW THEREFORE, for good and valuable consideration, the receipt andsufficiency of which are hereby acknowledged, the parties hereto hereby agree asfollows: SECTION 1. AMENDMENT1.1 Delete sub-section titled "Trade Names" on Schedule 4.6 of the Agreement in its entirety and substitute the following new sub-section titled "Trade Names": Trade Names: (As of even date herein) Michelle K Mark Nason 310 Global Brands Marc Ecko Footwear Cross Colors (Released) Karl Kani (Released) Skechers Skechers Sport Skechers Collections SECTION 2. RATIFICATION OF AGREEMENT2.1 To induce CIT to enter into this Amendment, Borrower represents and warrants that after giving effect to this Amendment, no violation of the terms of the Agreement exist and all representations and warranties contained in the Agreement are true, correct and complete in all material respects on and as of the date hereof.2.2 Except as expressly set forth in this Amendment, the terms, provisions and conditions of the Agreement are unchanged, and said Agreement, as amended, shall remain in full force and effect and is hereby confirmed and ratified. SECTION 3. COUNTERPARTS This Amendment may be executed in any number of counterparts, and allsuch counterparts taken together shall be deemed to constitute one and the sameinstrument. Signature pages may be detached from counterpart documents andreassembled to form duplicate executed originals. This Amendment shall becomeeffective as of the date hereof upon the execution of the counterparts hereof byBorrower, Guarantor and CIT. SECTION 4. GOVERNING LAW THIS AMENDMENT SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED ANDENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA. SECTION 5. ACKNOWLEDGMENT AND CONSENT BY GUARANTORS Each Guarantor hereby acknowledges that it has read this Amendment andconsents to the terms thereof and further hereby confirms and agrees that,notwithstanding the effectiveness of this Amendment, the obligations of suchGuarantor under its respective guaranty shall not be impaired or affected andthe guaranties are, and shall continue to be, in full force and effect and arehereby confirmed and ratified in all respects. Witness the execution hereof by the respective duly authorized officersof the undersigned as of the date first above written. THE CIT GROUP/COMMERCIAL SERVICES, INC., as Agent and as Lender By: /s/ William F. Elliott ------------------------------ Title: Vice President SKECHERS U.S.A., INC.ATTEST: /s/ Philip Paccione By: /s/ David Weinberg----------------------------------- ------------------------------Secretary Title: CFO GUARANTOR: SKECHERS USA, INC. II, a Delaware corporation By: /s/ David Weinberg ------------------------------ Title: CFO SKECHERS BY MAIL, INC., a Delaware corporation By: /s/ David Weinberg ------------------------------- Title: CFO 2 Exhibit 10.10(l) TENTH AMENDMENT TO LOAN AND SECURITY AGREEMENT This Tenth Amendment to that certain Amended and Restated Loan andSecurity Agreement ("Amendment") is made and entered into as of December 31,2003, by and between Skechers U.S.A., Inc. ("Borrower") and The CITGroup/Commercial Services, Inc. ("CIT"), successor by purchase to the CommercialServices Division of Heller Financial, Inc., as Agent and as Lender ("Agent").All capitalized terms used herein and not otherwise defined shall have themeanings assigned to such terms in the Amended and Restated Loan and SecurityAgreement. WHEREAS, Agent and Borrower are parties to a certain Amended andRestated Loan and Security Agreement, dated September 4, 1998 and all amendmentsthereto (the "Agreement"); and WHEREAS, Borrower and Agent desire to amend the Agreement as hereinafterset forth; NOW THEREFORE, for good and valuable consideration, the receipt andsufficiency of which are hereby acknowledged, the parties hereto hereby agree asfollows: SECTION 1. AMENDMENT1.1 Delete the first paragraph of subsection 2.1(B) in its entirety and substitute the following: Revolving Loan: Each Lender, severally, agrees to lend to Borrower from time to time its Pro Rata Share of each Revolving Advance. The aggregate amount of all Revolving Loan Commitments shall not exceed at any time $150,000,000 as reduced by subsection 2.4(B). Amounts borrowed under this subsection 2.1(B) may be repaid and reborrowed at any time prior to the earlier of (i) the termination of the Revolving Loan Commitment pursuant to subsection 8.3 or (ii) the Termination Date; provided, however that Borrower shall reduce the Revolving Loan to an amount not greater than the Cleanup Amount for at least one Business Day each consecutive twenty-one (21) day period. Except as otherwise provided herein, no Lender shall have any obligation to make a Revolving Advance to the extent such Revolving Advance would cause the Revolving Loan (after giving effect to any immediate application of the proceeds thereof) to exceed the Maximum Revolving Loan Amount.1.2 Delete subsection 2.1(B)(2) in its entirety and substitute the following: (2) "Borrowing Base" means, as of any date of determination, an amount equal to the sum of (a) 85% of Eligible Accounts plus (b) the lesser of (i) $75,000,000 and (ii) 60% of Eligible Inventory (excluding Eligible Retail Inventory) ; and (c) less in each case such reserves as Agent in its reasonable discretion may elect to establish.1.3 Add the following sentence to the end of Section 6. Financial Covenants: Financial Covenants contained in the Financial Covenant Rider shall not be reviewed unless the loan exceeds sixty percent (60%) of all Eligible Accounts.1.4 Delete subsection (A) of the Financial Covenants Rider in its entirety and substitute the following: (A) Tangible Net Worth. On and after January 1, 2004, Borrower shall maintain Tangible Net Worth of at least $250,000,000.00 as at the end of each Fiscal Month.1.5 Delete subsection (B) of the Financial Covenants Rider in its entirety and substitute the following: (B) Working Capital. On and after January 1, 2004, Borrower shall maintain Working Capital of at least $200,000,000.00 as at the end of each Fiscal Month.1.6 Delete subsection 2.5 in its entirety and substitute the following new subsection: 2.5 Term of this Agreement. This Agreement shall be effective until December 31, 2005 (the "Original Term") and shall automatically renew from year to year thereafter (each such year a "Renewal Term") unless terminated by (a) Borrower giving to Agent or (b) any Lender giving to Borrower and Agent not less than 60 days prior written notice of its intention to terminate at the end of the Original Term or at the end of any Renewal Term (the "Termination Date"). The Commitments shall terminate (unless earlier terminated) upon the earlier of (i) the occurrence of an event specified in subsection 8.3 or (ii) the Termination Date. Upon termination in accordance with subsection 8.3 or on the Termination Date, all Obligations shall become immediately due and payable without notice or demand. Notwithstanding any termination, until all Obligations have been fully paid and satisfied, Agent, on behalf of Lenders, shall be entitled to retain security interests in and liens upon all Collateral, and even after payment of all Obligations hereunder, Borrower's obligation to indemnify Agent and each Lender in accordance with the terms hereof shall continue. SECTION 2. RATIFICATION OF AGREEMENT2.1 To induce CIT to enter into this Amendment, Borrower represents and warrants that after giving effect to this Amendment, no violation of the terms of the Agreement exist and all representations and warranties contained in the Agreement are true, correct and complete in all material respects on and as of the date hereof.2.2 Except as expressly set forth in this Amendment, the terms, provisions and conditions of the Agreement are unchanged, and said Agreement, as amended, shall remain in full force and effect and is hereby confirmed and ratified. SECTION 3. COUNTERPARTS This Amendment may be executed in any number of counterparts, and allsuch counterparts taken together shall be deemed to constitute one and the sameinstrument. Signature pages may be detached from counterpart documents andreassembled to form duplicate executed originals. This Amendment shall becomeeffective as of the date hereof upon the execution of the counterparts hereof byBorrower, Guarantor and CIT. SECTION 4. GOVERNING LAW THIS AMENDMENT SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCEDIN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA. SECTION 5. ACKNOWLEDGMENT AND CONSENT BY GUARANTORS Each Guarantor hereby acknowledges that it has read this Amendment andconsents to the terms thereof and further hereby confirms and agrees that,notwithstanding the effectiveness of this Amendment, the obligations of suchGuarantor under its respective guaranty shall not be impaired or affected andthe guaranties are, and shall continue to be, in full force and effect and arehereby confirmed and ratified in all respects. Witness the execution hereof by the respective duly authorized officersof the undersigned as of 2the date first above written. THE CIT GROUP/COMMERCIAL SERVICES, INC., as Agent and as Lender By: /s/ William F. Elliott ----------------------------------- Title: Vice President ---------------------------------- SKECHERS U.S.A., INC.ATTEST: /s/Philip G. Paccione By: /s/ David Weinberg ------------------------- ---------------------------------- Secretary Title: EVP ------------------------- ---------------------------------- GUARANTOR: SKECHERS USA, INC. II, a Delaware corporation By: /s/ David Weinberg --------------------------------- Title: EVP --------------------------------- SKECHERS BY MAIL, INC., a Delaware corporation By: /s/ David Weinberg --------------------------------- Title: EVP --------------------------------- 3 Exhibit 10.13(a) ADDENDUM #2 TO STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE - MODIFIED NET BY AND BETWEEN RICHARD AND DONNA PIAZZA, TRUSTEES OF THE PIAZZA FAMILY TRUST ("LESSOR") AND SKECHERS U.S.A., INC. ("LESSEE")THIS ADDENDUM shall modify, delete from and add and replace by substitution tothe STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE - MODIFIED NET, dated June12, 1998, for the Premises commonly known as 1112 Manhattan Avenue, ManhattanBeach, California ("Lease"). Where any Article, Paragraph, Subparagraphor Clauseof the Lease thereof is modified or deleted by this Addendum, the unalteredprovisions of that article, Paragraph, Subparagraph or Clause shall remain ineffect. If and to the extent that this Addendum is inconsistent with the Lease,this Addendum shall control. 62. ADDITIONAL SPACE. The additional patio space of approximately 297 square feet shall be rented at a rate of $3.00 per square foot/per month for a total $891.00 per month, and which shall be added to and become a part of the Premises and effective as of March 1, 2002. 63. OPTION. Notwithstanding anything contained in the Lease to the contrary, Lessee shall have an additional one (1) time option to extend the term of the Lease for an additional five (5) years (i.e., March 1, 2007 to February 28, 2012) pursuant and subject to the terms, covenants and conditions of the Lease, except that the Base Rent shall be determined pursuant to Paragraph 50. Lessee shall provide written notice to Lessor of Lessee's intention to extend the Lease pursuant to this Option prior to the expiration of the Original Term at least one hundred eighty (180) days but not more than two hundred seventy (270) days prior to such expiration. All other provisions related to the payment of rent under the terms of the Lease shall remain in full force and effect. 64. AUTHORIZATION FOR CONSTRUCTION. Lessor authorizes Lessee to commence construction of the Tenant Improvements to the Premises in line with and subject to the restrictions contained hereinafter. In conjunction with this authorization, Lessee acknowledges its sole responsibility for such construction and hereby acknowledges Lessor's recordation of a Notice of NonResponsibility by Owner in reference thereto. 65. CONSTRUCTION DURING LEASE. Lessee agrees not to make any changes that will compromise or negate the Premises from its original purpose as a restaurant and Lessee further agrees that during the Original Term and any Option Period thereafter, Lessee shall not modify, improve or disturb the Premises such that the applicable provision of the site Operational Restrictions provided in Condition 7 of the City of Manhattan Beach's Planning Commission Resolution regarding the Master Use Permit ("MUP") approved November 9, 1994 per Resolution PC-94 would be 1 of 2Piazza/GMAddendum/Lease(1108) violated, a copy of which can be provided upon request ("City Resolution"). Lessee further agrees to pay any fees or costs in order to maintain temporary Conditional Use Permit ("CUP"), issued and approved pursuant to Condition 31 of the aforementioned City Resolution, for office space on a yearly basis, through the remainder of Lease, including all Option Terms. 66. REVIEW OF PLANS. In order to ensure compliance with Paragraph 60 and in addition to any provisions related hereto in the Lease, Lessee agrees to provide Lessor with a copy of any plans, drawings, blueprints or other construction documents which show the proposed improvements to the Premises ("Plans") Lessee shall have the right to review such Plans and reasonably object to any design or specification which would conflict with or otherwise disturb the restrictions of City Resolution. 67. PROPERTY TAX. Notwithstanding anything in the Lease to the contrary, Lessee agrees to pay any increase in property tax due to improvements made by Lessee. 68. ACKNOWLEDGMENT OF THE PARTIES. Lessor and lessee acknowledge that parties have entered into separate Commercial Lease Agreements for those certain portions of the Building commonly known as 1110 Manhattan Avenue, Manhattan Beach, California ("Upstairs Space") and 1108 Manhattan Avenue, Manhattan Beach, California. Said Leases have corresponding options to extend the original terms of the Leases through 2012.IN WITNESS WHEREOF, the parties have executed this Sublease as of the date firstabove written.LESSOR: LESSEE:PIAZZA FAMILY TRUST SKECHERS U.S.A., INC.,DATED MARCH 1, 1993 A DELAWARE CORPORATION/s/ RICHARD J. PIAZZA /s/ PETER F. MOW------------------------------- -----------------------------------Richard J. Piazza, trustee Peter F. Mow Vice President of Real Estate and Construction/s/ DONNA J. PIAZZA-------------------------------Donna J. Piazza, trustee 2 of 2Piazza/GMAddendum/Lease(1108) EXHIBIT 10.18 LEASE THIS LEASE, dated this 10th day of SEPTEMBER, 1998 by and betweenDOLORES L. MC NABB (hereinafter "Landlord"), and SKECHERS USA, INC. a Californiacorporation thereinafter "Tenant"). WITNESSETH:ARTICLE 1. PREMISES LEASED. In consideration of the rent and other charges herein specified to bepaid and the covenants and conditions to be observed and performed by Tenant.Landlord does hereby lease to Tenant and Tenant does hereby lease from Landlordthose premises hereinafter referred to as "said premises" within the officebuilding commonly known and designated as OFFICES #3, 4, and 5, second floor,north building 904 Manhattan Avenue, Manhattan Beach, CAARTICLE 2. TERM OF LEASE AND DELIVERY OF PREMISES. The term of this Lease shall be for 5 years 9 1/2 months commencing onthe 15th day of September, 1998, and ending on the 30 day of June, 2004.OPTIONS TO EXTEND - See Paragraph A on Exhibit "A" attached hereto. If Landlord, for any reason whatsoever, cannot deliver possession ofthe said premises to Tenant within __________ days after the commencement of theterm hereof, this Lease shall not be void or voidable, nor shall Landlord beliable to Tenant for any loss or damage resulting therefrom, but in that eventall rent shall be abated during the period between the commencement of the saidterm and the time when Landlord delivers possession.ARTICLE 3. RENT See Exhibit "A"ARTICLE 4. USE. Said premises shall be occupied and used by Tenant solely for thepurposes of conducting therein the business stated in Exhibit "A". In additionthereto: A. No use shall be made or permitted of said premises or any part thereof, nor acts done which shall constitute a nuisance or unreasonable annoyance to other tenants in the office park complex nor which shall violate, make inoperative or increase the existing rate of any insurance policy held by or for the benefit of Landlord. B. Tenant shall at all times comply with all governmental rules, regulations, ordinances, statute and is now in force or which may hereafter be enforced pertaining to said premises and to Tenant's use thereof, and a finding of guilty by a competent court for any violation thereof shall be conclusively deemed a default under this paragraph.ARTICLE 5. LANDLORD SERVICES. Landlord will provide services during reasonable hours of generallyrecognized business days to be determined by Landlord, and subject to the rulesand regulations as set forth in Exhibit "A", as follows: A. Heat and air-conditioning during the customary hours as stipulated in the Rules and Regulations. B. Electric current for ordinary lighting requirements and for ordinary business appliances such as typewriters and adding machines. Landlord shall not be required to furnish electrical power to operate electrical motors of larger than fractional horsepower. Landlord shall make additional charges for service if Tenant has greater than normal requirements for such services. C. Tenant shall pay for all water, gas, electricity, light, power and other utilities supplied to the Premises, together with any taxes thereon. If any such services are not separately metered to Tenant, Tenant shall pay a reasonable proportion to be determined by Landlord of all charges jointly metered with other premises. Replacement of fluorescent tubes in the standard lighting fixtures installed in the premises by Landlord shall be provided as required and billed to Tenant. Landlord, however, shall not be liable for failure to furnish any of the foregoing where such failure is caused by conditions beyond the control of Landlord or by accidents, repairs or strikes; nor shall such failure constitute an eviction; nor shall Landlord be liable under any circumstances except where caused by Landlord's negligence, for loss or damage to property however occurring through or in connection with or incidental to the furnishing of any of the foregoing.ARTICLE 6. PARKING. See Exhibit "A" Landlord agrees at its own expense to construct and maintain, or causeto be constructed and maintained, an automobile parking area and to maintain andoperate, or cause to be maintained and operated, said automobile parking areaduring the term of this Lease for the benefit and use of Tenant, its employees,customers and patrons and for other tenants and occupants of the office complex.Wherever the words "automobile parking area" are used in this Lease, it isintended that the same shall include the automobile parking stalls, driveways,entrances and exits and sidewalks, pedestrian passageways in conjunctiontherewith and other areas designated for parking. Landlord shall keep saidautomobile parking area in a neat, clean and orderly condition, landscaped, andshall repair any damage to the facilities thereof. Nothing contained hereinshall be deemed to create liability upon Landlord for any damage to motorvehicles of customers or employees or from loss of property from within suchmotor vehicles, unless caused by the negligence of Landlord, its agents,servants and employees. Landlord shall also have the right to establish, andfrom time to time change, alter and amend, and to enforce against all users ofsaid automobile parking area such reasonable rules and regulations (tenant, itsemployees, customers and patrons from parking within specific portionstherefrom) as may be deemed necessary and advisable for the proper and efficientoperation and maintenance of said automobile parking area. The rules andregulations herein provided shall include, without limitation, the hours duringwhich the automobile parking area shall be open for use. Landlord shall at all times during the term of this Lease have the soleand exclusive control of the automobile parking area, and may at any time andfrom time to time during the term hereof exclude and restrain any person fromuse or occupancy thereof; excepting, however, bona fide customers, patrons andservice-suppliers of Tenant and other tenants of Landlord who make use of saidarea in accordance with any rules and regulations established by Landlord fromtime to time with respect thereto. The rights of Tenant referred to in thisArticle shall at all times be subject to the rights of Landlord and the othertenants of Landlord, to use the same in common with Tenant, and it shall be theduty of Tenant to keep all of said area free and clear of any obstructioncreated or permitted by Tenant or resulting from Tenant's operations and topermit the use of any of said area only for normal parking and ingress andegress by said customers, patrons and service-suppliers to and from the officepark complex. Tenant shall assume sole responsibility for satisfying the requirementsof the Environmental Protection Agency, or similar agencies, with respect totheir proportionate share of the parking areas.ARTICLE 7. ALTERATIONS AND REPAIRS. Tenant shall not make or suffer to be made any alterations, additionsor improvements to or of said premises or any part thereof without the writtenconsent of Landlord first had and obtained and any alterations, additions orimprovements to or of said premises, except movable furniture and tradefixtures, shall at once become a part of the realty and belong to Landlord. Inthe event Landlord consents to the making of any alteration, additions orimprovements to said premises by Tenant, the same shall be made by Tenant atTenant's sole cost and expense and any contractor or person selected by Tenantto make the same must first be approved of in writing by Landlord. Upon theexpiration or sooner termination of the term, Tenant shall, upon demand byLandlord, at Tenant's sole cost and expense, forthwith and with all duediligence remove any alterations, additions or improvements made by Tenant,designated by Landlord to be removed, and Tenant shall forthwith and with alldue diligence at its sole cost and expense, repair any damage caused by suchremoval. By entry hereunder, Tenant accepts the premises as being in good,sanitary order, condition and repair Tenant shall at Tenant's sole cost andexpense keep said premises and every part thereof including glass in goodcondition and repair, damage thereto by fire, earthquake, act of God or theelements excepted, Tenant hereby waiving all rights to make repairs at theexpense of Landlord as provided by any law, statute or ordinance now orhereafter in effect. Tenant shall, upon the expiration or sooner termination ofthe term hereof, surrender said premises to Landlord in the same condition aswhen received, ordinary wear and tear and damage by fire, earthquake, act of Godor the elements excepted. It is specifically understood and agreed that Landlordhas no obligation and has made no promises to alter, remodel, improve, repair,decorate or paint said premises or any part thereof and that no representationsrespecting the conditions of said premises or the building of which saidpremises are a part have been made by Landlord to Tenant except as specificallyherein set forth. See Exhibit "A".ARTICLE 8. CHANGES OR ALTERATIONS BY LANDLORD Landlord reserves the right at any time and from time to time withoutthe same constituting an actual or constructive eviction and without incurringany liability to Tenant therefore or otherwise affecting Tenant's obligationsunder this Lease, to make such changes, alterations, additions, improvements,repairs or replacements in or to the office complex (including said premises ifrequired so to do by any law or regulation) and the fixtures and equipmentthereof, as well as in or to the plenum area (air space above the ceiling), andstairways thereof, as Landlord may deem necessary or desirable, and to changethe arrangement or location of entrances or passageways, doors and corridors,provided, however, that there be no unreasonable obstruction of the right ofaccess to, or unreasonable interference with the use and enjoyment of saidpremises by Tenant.ARTICLE 9. LANDLORD'S NONLIABILITY Landlord shall no be liable for any loss or damage to the goods, wares,merchandise and other property of Tenant in, upon or about said premises or forany injury to the person (including death) of Tenant or its employees, agents,subtenants or invitees or other persons, caused by any use thereof, or arisingfrom any accident or fire orother casualty thereon or from any other cause whatsoever, unless caused byLandlord's negligence, nor shall Landlord be liable for any such loss, damage orinjury occurring anywhere in the office park complex and caused by the act orneglect of Tenant, its agents or employees; and Tenant hereby waives on itsbehalf all claims against Landlord for any such loss or injury and hereby agreesto indemnify and save Landlord harmless from all liability for any such loss,damage or injury and in the event action is brought against Landlord on accountof such loss, damage or liability and Landlord elects not to accept Tenant'sproffered defense of such action, Tenant shall nevertheless pay the cost ofLandlord's reasonable attorney's fees incurred in connection therewith.ARTICLE 10. INSURANCE. All insurance provided for herein shall name Landlord as an additionalinsured as its interest may appear. Policies will provide a 30-day writtennotice to Landlord in the event of cancellation by Tenant's insurance company. Tenant agrees to maintain statutory Workmen's Compensation Insuranceand comprehensive public liability insurance with the following minimum limits:combined single limit coverage of not less than $1,000,000 with respect topersonal injury death or property damage resulting from any one occurrence: theminimum limits shall not, however limit the liability of Tenant hereunder. It shall be Tenant's responsibility to maintain full "ALL RISK"insurance on its property and rental value and glass insurance on said premises. It shall be Landlord's responsibility to insure said premises againstfire and extended coverage damage. So long as their respective insurers so permit, Tenant and Landlordhereby mutually waive their respective rights of recovery against each other forany loss insured by fire, extended coverage and other property insurancepolicies existing for the benefit of the respective party. Each party shallobtain any special endorsements, if required by their insurer, to evidencecompliance with the aforementioned waiver. Certificates of insurance stating the above will be provided toLandlord by Tenant.ARTICLE 11. ASSIGNMENT AND SUBLETTING. A. Tenant shall not transfer or assign this Lease, or any right or interest hereunder, nor sublet said premises or any part thereof, without the prior written consent (which consent shall not be unreasonable withheld) and approval of Landlord provided, however, that such consent shall not be unreasonably withheld so long as (i) the proposed assignee or sublessee is as financially and morally responsible as Tenant and (ii) evidence satisfactory to Landlord is offered to show that the proposed assignee or sublessee is likely to conduct on said premises a business of a quality substantially equal to that conducted by Tenant. No transfer or assignment, whether voluntary or involuntary, by operation of law, under legal process or proceedings, by receivership, in bankruptcy, or otherwise, and no subletting shall be valid or effective without such prior written consent and approval. Should Tenant attempt to make or suffer to be made any such transfer, assignment or subletting, except as aforesaid, or should any of Tenant's rights under this Lease be sold or otherwise transferred by or under court order or legal process or otherwise or should Tenant be adjudged insolvent or bankrupt, then and in any of the foregoing events Landlord may, at its option, terminate this Lease forthwith by written notice thereof to Tenant. Should Landlord consent to any such transfer, assignment or subletting, such consent shall not constitute a waiver of any of the restrictions of this Article and the same shall apply to each successive transfer, assignment or subletting hereunder, if any. B. If Tenant hereunder is a corporation, an unincorporated association, or a partnership, the transfer, assignment or hypothecation of any stock or interest in such corporation, association or partnership in the aggregate in excess of Forty-nine percent (49%) shall be deemed an assignment within the meaning and provisions of this Article; provided, however, a transfer or assignment of any such stock or interest by a shareholder or member to his spouse, children or grandchildren is excepted from the foregoing provision.ARTICLE 12. RIGHT OF ENTRY. Landlord reserves and shall at any time and at all times have the rightto enter upon said premises to inspect the same, and perform any service to beprovided by Landlord to Tenant hereunder, to submit said premises to prospectivepurchasers or tenants, to post notices of nonresponsibility, and to alter,improve or repair said premises and any portion of the building of which saidpremises are a part, without abatement of rent, and may for that purpose erectscaffolding and other necessary structures where reasonably required by thecharacter of the work to be performed, always providing the entrance to saidpremises shall not be blocked thereby, and further providing that the businessof Tenant shall not be interfered with unreasonably. Tenant hereby waives anyclaim for damages for any injury or inconvenience to or interference withTenant's business, any loss of occupancy or quiet enjoyment of said premises,and any other loss occasioned thereby. For each of the aforesaid purposes,Landlord shall at all times have and retain a key with which to unlock all ofthe doors in, upon and about said premises, excluding Tenant's vaults and safes,and Landlord shall have the right to use any and all means which Landlord maydeem proper to open said doors in an emergency, in order to obtain entry to saidpremises, and any entry to the premises obtained by landlord by any of saidmeans, or otherwise, shall not under any circumstances be construed or deemed tobe a forcible or unlawful entry into, or a detainer of said premises, or aneviction of Tenant from said premises or any portion thereof.ARTICLE 13. BANKRUPTCY-INSOLVENCY. Tenant agrees that in the event all or substantially all of Tenant'sassets are placed in the hands of a receiver or trustee, and such receivershipor trusteeship continues for a period of 30 days, or should Tenant make anassignment for the benefit of creditors or be adjudicated a bankrupt, or shouldTenant institute any proceedings under the Bankruptcy Act or under any amendmentthereof which may hereafter be enacted, or under any other act relating to thesubject of bankruptcy wherein Tenant seeks to be adjudicated a bankrupt, or tobe discharged of its debts, or to effect a plan of liquidation, composition orreorganization, or should any involuntary proceeding be filed against the Tenantunder any such bankruptcy laws and Tenant consents thereto or acquiesces thereinby pleading or default, then this Lease or any interest in and to said premisesshall not become an asset in any of such proceedings and, in any such event andin addition to any and all rights or remedies of Landlord hereunder, or by lawprovided, it shall be lawful for Landlord to declare the Term hereof ended andto re-enter said premises and take possession thereof and remove all personstherefrom, Tenant shall have no further claim thereon or hereunder.ARTICLE 14. LIENS. Tenant shall not permit to be enforced against said premises, or anypart thereof, any mechanics', material-men's, contractors' or other liensarising from, or any claims for damages growing out of, any work or repair oralteration as herein authorized or otherwise arising (except from the actions ofLandlord), and Tenant shall pay or cause to be paid all of said liens and claimsbefore any action is brought to enforce the same against Landlord or saidpremises: and Tenant agrees to indemnify and hold Landlord and said premisesfree and harmless from all liability for any and all such liens and claims andall costs and expenses in connection therewith. Tenant shall give Landlord noless than 20 days prior notice in writing commencing construction of any kind onthe premises so that Landlord may post notices of nonresponsibility.ARTICLE 15. LANDLORD PAYING CLAIMS. Should Tenant fail to pay and discharge, when due and payable, any taxor assessment, or any premium or other charge in connection with any insurancepolicy or policies which Tenant is obligated to pay, or any lien or claim forlabor or material employed or used in, or any claim for damages arising out ofthe repair, alterations, maintenance and use of said premises, as provided inthis Lease, after 10 days written notice from Landlord, the Landlord may, at itsoption, and without waiving or releasing Tenant from any of Tenant's obligationshereunder, pay any such tax, assessment, lien, claim, insurance premium orcharge, or settle or discharge any action therefore or satisfy any judgmentthereon. All costs, expenses and other sums, incurred or paid by Landlord inconnection therewith, together with interest at the rate of 10% per annum onsuch costs, expenses and sums from the date incurred or paid by Landlord, shallbe deemed to be additional rent hereunder and shall be paid by Tenant with andat the same time as the next installment of rent hereunder, and any defaulttherein shall constitute a breach of the covenants and conditions of this Lease.ARTICLE 16. DESTRUCTION OF PREMISES. A. In the event the building of which said premises are a part is damaged by fire, or perils covered by insurance, the Landlord shall: 1. In the event of total destruction, within a period of 90 days thereafter, commence repair, reconstruction and restoration of said building and prosecute the same diligently to completion, in which event this Lease shall continue in full force and effect; or within said 90 day period elect not to so repair, reconstruct or restore said building, in which event this Lease shall cease and terminate. In either event, Landlord shall give the Tenant written notice of its intention within said 90 day period. In the event Landlord elects not to restore said building, this Lease shall be deemed to have terminated as of the date of such total destruction. 2. In the event of a partial destruction of the building to an extent not exceeding 25% of the full insurable value thereof and if the damage thereto is such that the building may be repaired, reconstructed or restored within a period of 90 days from the date of the happening of such casualty and Landlord will receive insurance proceeds sufficient to cover the costs of such repairs, Landlord shall commence and proceed diligently with the work of repair, reconstruction and restoration and the Lease shall continue in full force and effect; or if such work or repair, reconstruction and restoration is such as to require a period longer than 90 days or exceed 25% of the full insurable value thereof, or if said insurance proceeds will not be sufficient to cover the cost of such repairs, Landlord may either elect to so repair, reconstruct and restore and the Lease shall continue in full force and effect, or Landlord may elect not to repair, reconstruct or restore and the Lease shall in such event terminate. Under any of the conditions of this subparagraph, Landlord shall give written notice to Tenant of its intention within the period of 90 days. In the event Landlord elects not to restore said building, this Lease shall be deemed to have terminated as of the date of such partial destruction. B. Upon any termination of this Lease under any of the provisions of this Article, the parties shall be released thereby without further obligation to the other coincident with the surrender of possession of the premises to Landlord except for items which have theretofore accrued and are then unpaid. C. In the event of repair, reconstruction and restoration as herein provided, the rental provided to be paid under this Lease shall be abated proportionately in the ratio which the Tenant's use of said premises is impaired during the period of such repair, reconstruction or restoration. Tenant shall not be entitled to any compensation or damages for loss in the use of the whole or any part of said premises and/or any inconvenience or annoyance occasioned by any such damage, repair, reconstruction or restoration. D. Tenant shall not be released from any of its obligations under this Lease except to the extent and upon the conditions expressly stated in this Article. Notwithstanding anything to the contrary contained in this Article, should Landlord be delayed or prevented from repairing or restoring said damaged premises within on (1) year after the occurrence of such damage or destruction by reason of acts of God, war, governmental restrictions, inability to procure the necessary labor or materials, or other cause beyond the control of Landlord, Landlord shall be relieved of its obligation to make such repairs or restoration and Tenant shall be released from its obligations under this Lease as of the end of said one (1) year period. E. In the event that damage is due to any other cause than set forth in Paragraph A above, Landlord may elect to terminate this Lease. F. It is understood that if Landlord is obligated to or elects to repair or restore as herein provided, Landlord shall be obligated to make repairs or restoration only of those portions of said building and said premises which were originally provided at Landlord's expense; and the repair and restoration of items not provided at Landlord's expense shall be the obligation of Tenant.ARTICLE 17. LATE PAYMENTS.See Exhibit "A"ARTICLE 18. REMEDIES. Should Tenant at any time be in default hereunder with respect to anyrental payments or other charges payable by Tenant hereunder, and should suchdefault continue for a period of 10 days after written notice from Landlord, orshould Tenant be in default in performance of any other of its promises,covenants or agreements herein contained (other than any breach under theArticle entitled "Assignment and Subletting" for which immediate notice oftermination may be given) and should such default continue for 30 days afterwritten notice thereof from Landlord to Tenant specifying the particulars ofsuch default, or should Tenant vacate or abandon the premises, this Lease shallremain in full force and effect, provided, however, that in any of such eventsand in addition to any or all other rights or remedies of Landlord hereunder orby the law provided, it shall be, at the option of Landlord: A. The right of Landlord to declare the term hereof ended and to re-enter said premises and take possession thereof and remove all persons therefrom, and Tenant shall have no further claim thereon on thereunder; or B. The right of Landlord, even though it may have brought an action to collect rent and other charges without terminating this Lease, to thereafter elect to terminate this Lease and all of the rights of Tenant in or to said premises; or C. The right of Landlord, without terminating this Lease, to begin an action or actions to collect rent and other charges hereunder which are from time to time past due and unpaid; it being understood that the bringing of such action or actions shall not terminate this Lease unless notice of termination is given. Should Landlord elect to terminate this Lease, Landlord shall beentitled to recover from the Tenant as damages: (1) the worth at the time ofaward of the amount by which the unpaid rent for the balance of the term afterthe time of award exceeds the amount of such rental loss for the same periodthat Tenant proves could be reasonably avoided (ii) the cost of recovering saidpremises to the condition required in the Article entitled "Removal" and (iii)such other amounts as are provided for in Section 1951.2 of the California CivilCode If Landlord shall elect to re-enter said premises, Landlord shall notbe liable for damages by reason of such re-entry. Notwithstanding any other provision of this Article, Landlord agreesthat if the default complained of, other than for the payment of monies, is ofsuch a nature that the same cannot be cured within the 30 day period specifiedabove, then such default shall be deemed to be cured if the Tennant within sucha period shall have commenced the curing thereof and shall continue thereafterwithal the diligence to cause such curing and does so complete the same with theuse of such diligence. All rights, options and remedies of Landlord contained in the Leaseshall be construed and held to be cumulative, and no on e of them shall beexclusive of the other, and Landlord shall have the right to pursue anyone orall of such remedies or any other remedy or relief which may be provided by law,whether or not stated in this Lease. No waiver or any default of Tenanthereunder shall be implied from any acceptance by Landlord or any rentor other payments due hereunder or any omission by Landlord to take any actionor account of such default if such default persists or is repeated, and noexpress waiver shall affect default other than as specified in said waiver. Theconsent or approval by Landlord to or of any act by Tenant requiring Landlord'sconsent or approval shall not be deemed to waive or render unnecessaryLandlord's consent or approval to or any of subsequent similar acts by Tenant.ARTICLE 19. SECURITY DEPOSIT. Tenant has deposited with Landlord the sum in the attached Exhibit "A"as security for the full performance of the provision s of this Lease. If Tenantdefaults in any particular, Landlord may use or retain the whole or any part ofthe security in lieu of any sum due Landlord including repair of damages orcleaning of the premises upon termination or to defray any expense or damagesreasonably incurred by treason of the default, and Tenant shall on demand pay toLandlord a like sum as additional security. If Tenant is not in default at thetermination of this Lease, Landlord shall return the deposit to Tenant and maydo this by either paying this sum to Tenant or crediting it against the lastpayment(s) of rent. Landlord's obligation respecting the deposit is that of adebtor, not a trustee, the fund my be commingled to dissipate, or both and notinterest shall accrue thereon,ARTICLE 20. ATTORNEY'S FEES. In the event that any action shall be instituted by either of theparties hereto for the enforcement of any of its rights or remedies in and underthis Lease, the party in whose favor judgment shall be rendered shall beentitled to recover from the other party all costs incurred by said prevailingparty in said action, including reasonable attorney's fees to be fixed by thecourt therein.ARTICLE 21. REMOVAL A. Personal Property. Upon the expiration of the Term of this Lease, or upon any earlier termination of this Lease, Tenant shall quit and surrender possession of the said premises to Landlord in the same condition as upon delivery of possession to Tennant hereunder, reasonable wear and tar and damage by fire, acts of God, the elements and unavoidable casualty excepted. Before surrendering possession of said premises as aforesaid, Tenant shall, without expense to Landlord, remove or cause to be removed from said premises all signs, furnishings, equipment, trade fixtures, merchandise and other personal property placed therein. And all rubbish and debris, and Tenant shall repair all damage to said premises resulting g from such removal. If requested by Landlord, Tenant shall execute, acknowledge and deliver to Landlord an instrument in writing releasing and quitclaiming to Landlord all tights, title an interest in Tenant in and to said premises by reason of this lease or otherwise. If Tenant fails to remove any of its sins, furnishings, equipment, trade fixtures, merchandise, or other personal property within 10 days after the expiration or termination of this Lease, then Landlord may, at its sole option (1) treat Tenant as a holdover, in which even the provision of the Article of this Lease regarding Holding Over shall apply: (ii) deem any and all of such items abandoned and the sole property of Landlord, or (iii) remove any or all of such items and dispose of same to any manner or store same for Tenant, in which event the expense of such disposition or storage shall be borne by Tenant and shall be immediately due and payable. B. Fixtures, Equipment and Improvements. All fixtures, equipment improvements and appurtenances attached to or built into said premises prior to or during the Term, whether by Landlord at its expense or a the expense of Tenant or both, shall be and remain part of said premises and shall not be removed b Tenant at the end of the Term unless otherwise expressly provided for in this Lease. Such fixtures, equipment, improvements and appurtenances shall include by not be limited to" all floor coverings, drapes, paneling, molding, doors vaults (exclusive of vault doors), plumbing systems, electrical systems, lighting systems, cooling systems, ventilation systems, sprinkling systems, silencing equipment, communication systems, all fixtures and outlets for the systems mentioned above and for all telephone, radio, telegraph and television purposes, and any special flooring or ceiling installations.ARTICLE 22. PAYMENTS AND NOTICES. A. Payments of Rent: The rent specified herein shall be paid to Landlord or to such other person or persons or at such other address or addresses as Landlord hereafter may designate by written notice to Tenant. Payment of rent to any person or persons so designated by Landlord shall exonerate Tenant from all responsibility therefore or for the proper distribution thereof. B. Notices. Any notice or demands which may or must be given by either party to the other hereunder shall be deemed to have been duly given when made by personal service or in writing and deposited for mailing by United States mail, postage prepaid, addressed as following or to such other place as the partied may hereafter in writing direct. To Landlord: At the address set forth on the signature page of this Lease To Tenant: At the address set forth on the signature page of this LeaseARTICLE 23. EMINENT DOMAIN A. Definition of Terms. The terms "total taking" as used in this Article means the taking of the entire premises under the power of eminent domain or a taking of so much of said premises as to prevent or substantially impair the conduct of Tenant's business therein. The term "partial taking" means the taking of a portion only of said premises which does not constitute a total taking as above defined B. Total Taking. If during the term here of, there shall be a total taking by public authority under the power of eminent domain, then the leasehold estate of Tenant in and to said premises shall cease and terminate as of the dated actual physical possession thereof shall be so taken. C. Partial Taking. If during said term there shall be a partial taking of said premises, this Lease shall terminate as to the portion of said premises taken upon the date upon which actual possession of said premises is taken pursuant to said eminent domain proceedings, but said Lease shall continue in force and effect as to the remainder of said premises. The minimum guaranteed rental payable by Tenant for the balance of said term shall be abated in the ration that the square footage of floor area of said premises taken bears to the total floor area of said premises at the time of such taking. D. Taking of Parking Area. In the event there shall be a taking of the parking area such that Landlord can no longer comply with applicable municipal parking ordinances or similar regulations of other public agencies Landlord may substitute therefore reasonably equivalent parking in a location reasonably close to said premises: provided that if Landlord fails to make such substitution within a reasonable time following such taking. Tenant may, at its option, terminate this Lease by notice to Landlord. If this Lease is not so terminated by Tenant, there shall be no reduction, change or abatement of any rent or other charge payable by Tenant hereunder and this Lease shall continue in full force and effect. E. Allocation of Award. All compensation and damages awarded for the taking of said premises, or any portion or portions thereof, shall, except as otherwise herein provided, belong to and be the sole property of Landlord, and Tenant shall not have any claim or be entitled to any award for the diminution in value of its leasehold hereunder or for the value of any unexpired term of this Lease": provided, however, Tenant shall be entitled to any award that may be made for the taking of or injury to or on account of any cost or loss Tenant may sustain in the removal of Tenant's merchandise, fixtures, equipment and furnishings. F. Effect of Termination. If this Lease is terminated, in whole or in part pursuant, to any of the provisions of this Article, all rentals and other charges payable by Tenant to Landlord hereunder and attributable to the premises taken, shall be paid up to the date upon which actual physical possession shall be taken by the condemner and the parties shall thereupon be released form all further liability in relation thereto. G. Voluntary Sales. A voluntary sale by Landlord to any pubic body or agency having the power of eminent domain, either under threat of condemnation or while condemnation proceedings are pending, shall be deemed to be a taking under the power of eminent domain for the purpose of this Article.ARTICLE 24. HOLDING OVER. This Lease shall terminate and become null and void without furthernotice upon the expiration of the Term herein specified, and any holding over byTenant after such expiration shall not constitute a renewal thereof, to giveTenant any rights under this Lease, except as otherwise herein provided, itbeing understood and agreed that this Lease cannot be renewed, extended or inany manner modified except in writing signed by both parties hereto: provided,however, that nothing in the Article shall be construed to alter or impair theprovisions of Article 231 hereof. If Tenant shall hold over for any period afterthe expiration of said Term, Landlord may, at it's option, exercise by writtennotice to Tenant, treat Tenant as a tenant from month-to-month commencing on the1st day following the expiration of this Lease and subject to the terms andcondition herein contained except that the Basic Rental portion of the monthlyrental, which shall b payable in advance shall be 150$% of said Basic Rentalapplicable to the date of expiration. If Tenant ails to surrender the premisesupon the expiration of the Lease despite demand to do so by Landlord, Tenantshall indemnify and hold Landlord harmless from all loss or liability includingwithout limitation, any claims made by any succeeding Tenant founded on orresulting from such failure to surrender,ARTICLE 25. SUBORDINATION AND STATEMENT OF TENANT. The rights of Tenant under this Lease are and shall be subject to andsubordinate to all present and future ground or underlying Leases and amendmentsthereto, the declaration and recording of covenants, conditions and restrictionsrelating to the office complex and operation thereof, and the lien of anymortgage and/or any deed or trust or other encumbrance which now exists or mayhereafter affect said premises together with all renewals, modifications,consolidations, replacements or extensions thereof: Tenant covenants and agreethat it will execute without further consideration any and all instrumentsdesired by Landlord subordinating in the manner requested by Landlord thisLease; provided that any Lienor or encumbrancor relying on such subordination orsuch additionalagreements will covenant with Tenant that this Lease shall remain in full forceand effect, and tenant shall not be disturbed in the event of sale orforeclosure so long as Tenant is not in default hereunder. Tenant agrees toattorney to the successor in interest of landlord following any transfer of suchinterest either voluntarily or by operation of law and to recognize suchsuccessor as Landlord under this Lease. However, if Landlord so elects, thisLease shall be deemed prior to lien to any mortgage, deed of trust or otherencumbrance upon or including the premises regardless of date of recording andTenant will execute a statement in writing to such effect at Landlord's request.Landlord is hereby irrevocably appointed and authorized as agent andattorney-in-fact of Tenant to execute all subordination instruments in the eventTenant fails to execute said instruments within five (5) days after notice formLandlord demanding the execution thereof. Statement of Tenant. Tenant shall, at any time and from time to time,upon not less that 10 (10) days prior written notice by Landlord, execute,acknowledge, and deliver to Landlord a statement in writing certifying that thislease is unmodified and in full force and effect (or, if there has been anymodification thereof, that the same is in full force and effect as modified andstating the modification or modifications) and that Landlord is not in default,except as specified in such statement, in regard to any of its covenants orobligations under this Lease, and further setting forth the dated to which allsums payable as rental hereunder have been paid in advance, if any, and suchother statements relating to delivery and acceptance of the premises asLandlord's lender, Lienor, encoumbrancor or purchaser may require.ARTICLE 26. TRANSFER BY LANDLORD. The term "landlord" as used in this Lease, so far as covenants orobligations on the part of Landlord are concerned, shall mean and include onlythe owner or owners at the time in question of the fee ownership or primeleasehold estate in said premises, and in the event of any transfer or transfersof the title to said premises, Landlord herein named (and in case of anysubsequent transfers or conveyances, the then grantor), except as hereinafterprovided, shall be automatically freed and relieved from and after the date ofsuch transfer or conveyance, of all personal liability as respected toperformances of any covenants or obligations on the part of Landlord containedin this Leas thereafter to be performed; provided that any funds in which Tenanthas an interest which are in the hands of such Landlord or the then grantor atthe time of such transfer shall be turned over to the grantee, and any amountthen due and payable to Tenant by Landlord or the then grantor under anyprovisions of this Lease shall be paid to Tenant. It is intended hereby that thecovenants and obligations contained in this Lease on the part of Landlord,shall, subject to the foregoing, be binding on Landlord, it's successors andassigns, only during and in respect of their respective successive periods ofownership.ARTICLE 27. MODIFICATION FOR LENDER If, in connection with obtaining financing for this office parkcomplex, the lender shall request reasonable modifications in the lease as acondition to such financing. Tenant will not unreasonably withhold, delay ordefer its consent thereto, provided that such modifications to not increase theobligations of Tenant hereunder or materially adversely affect the leaseholdinterested hereby created.ARTICLE 28. INABILITY TO PERFORM. This Lease and the obligations of Tenant to pay rent hereunder and tokeep, observe and perform all the other terms, covenants, conditions, provisionsand agreements of this Lease on the part of Tenant to be kept, observed orperformed shall in no way be affected, impaired or excused because Landlord isunable to fulfill any of its obligations under this Lease or to supply, or isdelayed in supplying any service expressly or impliedly to be supplied or isunable to supply, or is delayed in supplying any equipment or fixtures, ifLandlord is prevented or delayed from doing so by reason of strike or labortroubles, unavailability of materials or any other cause beyond the control ofLandlord.ARTICLE 29. SURRENDER OR CANCELLATION. The voluntary or other surrender of this Lease by Tenant, or a mutualcancellation thereof, shall not work a merger, and shall, at the option ofLandlord, terminate all or any existing subleases or may at the option ofLandlord, operate as an assignment to Landlord or any or all of such subleasesARTICLE 30. RULES AND RETULATIONS. Tenant agrees to obey the rules an regulations in Exhibit "A" as wellas such reasonable rules and regulations as may b hereafter adopted by Landlordfor the safety, care and cleanliness of the office park complex and saidpremises and the preservation of good order thereon. Landlord shall not beresponsible to Tenant for the nonperformance by any other Tenant or occupant ofthe office park complex of any of said rules and regulations.ARTICLE 31. SCOPE AND AMENDMENT. This Lease is and shall be considered to be the only agreement betweenthe parties hereto. All negotiations and oral agreements acceptable to bothparties are included herein. No amendment or other modification of this Leaseshall be effective unless in writing.ARTICLE 32. SAFETY AND HEALTH. Tenant covenants at all times during the Term of this Lease to complywith the requirements of the Occupational Safety and Health act of 1970, 29U.S.C. Section 651 et seq and any analogous legislation in California(collectively, the "Act"), to the extent that the Act applies to said premisesand any activities thereon and without limiting the generality of the foregoing,Tenant covenants to maintain all working areas, all machinery, structures,electrical facilities and the like upon said premises in any condition thatfully complies with the requirements of the Act, including such requirements aswould be applicable with respect to agents, employees or contractors of Landlordwho may from time to time be present upon said premises, and Tenant agrees toindemnify and hold harmless Landlord from any liability, claims or damagesarising as a result of a breach of the foregoing covenant and from all costs,expenses and charges arising therefrom including, without limitation, attorneys'fees and court costs incurred by Landlord in connection therewith, whichindemnity shall survive the expiration or termination of this Lease.ARTICLE 33. MISCELLANEOUS. Time is of the essence of this Lease. The Article headings herein areused only for the purpose of convenience and shall not be deemed to contain orlimit the subject matter of the Articles hereof, nor to be considered in theconstruction thereof. Each and all of the obligations, covenants, conditions andrestrictions of this Lease shall inure to the benefit of and be binding upon andenforceable against, as the case may require, the successors and assigns ofLandlord, and subject to the restrictions against assignments and subletting inthis Lease contained, any authorized assignee, transferee, sublessee and othersuccessor in interest of Tenant. In this Lease the neuter gender includes the feminine and masculine andthe singular number includes the plural wherever the context so requires. The term "Tenant" as used in this Lease shall mean and include eachperson who executes this Lease, jointly and severally, and the act of or noticefrom, or notice or refund to, or the signature of, any one or more of suchpersons, with respect to the tenancy or this Lease, including, but not limitedto, any renewal, extensions, expiration, termination or modification of thisLease, shall be binding upon each and all of the persons executing this Lease asTenant with the same force and effect as if each and all of them had so acted orso given or received such notice or refund or so signed. IN WITNESS WHEREOF, the parties hereto have caused this Lease to beexecuted on the date hereinafter set forth, following their respectivesignatures.By: /s/ Dolores L. McNabb SKECHERS USA, INC., ---------------------------------- a Delaware Corporation By: /s/ David Weinberg -----------------------------------Date: September 10, 1998 Date: September 14, 1998Address: P.O. Box 10001 Address: 228 Manhattan Beach Boulevard Torrance, CA 90505 Manhattan Beach, CA 90266______________________________________ ___________________________________ "Landlord" "Tenant"ALL RENTS ARE DUE ON OR BEFORE THE 1ST OF EACH MONTH AND MAILS TO:D.L. MC NABBP.O. BOX 10001TORRANCE, CA 90505 RULES AND REGULATIONS 1 No sign, placard, picture, advertisement, name or notice shall beinscribed, displayed or printed or affixed on or to any part of the outside orinside of any building without the written consent of Landlord first had andobtained, and Landlord shall have the right to remove any such sign, placard,picture, advertisement, name or notice without notice to and at the expense ofTenant. All signs or lettering on doors or buildings shall conform to uniformspecifications and standards established by Landlord and shall be printed,painted and affixed by Landlord and billed to Tenant. Tenant shall not place anything or allow anything to be placed near theglass of any window, door, partition or wall which may appear unsightly fromoutside said premises; provided, however, that Landlord is to furnish andinstall a building standard window drapery at all exterior windows. 2 Tenant shall not obtain for use upon the premises ice, drinking water,towel and other similar services or accept barbering or bootblacking services onthe premises, except from persons authorized by Landlord and at the hours andunder regulations fixed by Landlord. 3 The bulletin board or directory of the building, if any, will beprovided exclusively for the display of the name and location of Tenant only,and Landlord reserves the right to exclude any other names therefrom. 4 The sidewalks, halls, passages, entrances, and stairways shall not beobstructed or used by Tenant for any purpose other than for ingress and egress.The halls, passages, exits, entrances, stairways, balconies and roofs are notfor the use of the general public and Landlord shall in all cases retain theright to control and prevent access thereto by all persons whose presence in thejudgment of Landlord shall be prejudicial to the safety, character, reputationand interests of the premises and tenants, provided that nothing hereincontained shall be construed to prevent such access to persons with whom Tenantnormally deals in the ordinary course of Tenant's business unless such personsare engaged in illegal activities. Neither Tenant nor employees or invitees ofTenant shall go upon the roof of any building. 5 Tenant shall not alter any lock nor install any new or additional locksor any bolts on any door of said premises. 6 The toilet rooms, urinals, wash bowls and other apparatus shall not beused for any purpose other than that for which they were constructed and noforeign substance of any kind whatsoever shall be thrown therein. The expense ofany breakage, stoppage or damage resulting from the violation of this rule shallbe borne by Tenant. 7 Tenant shall not overload the floor of said premises or mark, drivenails (normal decorating excepted), screw or drill into the partitions, woodworkor plaster or in any way deface said premises. 8 No equipment of any kind shall be brought into any building without theconsent of Landlord, and any moving of furniture, freight and equipment into orout of any building shall be done at such time and in such manner as Landlordshall designate. Landlord shall have the right to prescribe the weight, size andposition of all safes and other heavy equipment brought into any building andalso the times and manner of moving the same in and out of the building. Safesor other heavy objects shall, if considered necessary by Landlord, stand on woodstrips of such thickness as is necessary to properly distribute the weight.Landlord will not be responsible for loss of or damage to any such safe orproperty from any cause and all damage done to the building by moving ormaintaining any such safe or other property shall be repaired at the expense ofTenant. 9 Cleaning of carpets and windows shall be the responsibility of Tenantand shall be paid by Tenant. 10Tenant shall not use, keep or permit to be used or kept, any foul or noxious gasor substance in said premises, or permit or suffer said premises to be occupiedor used in a manner offensive or objectionable to Landlord or other occupants ofany building by reason of noise, odors and/or vibrations, or interfere in anyway with the other tenants or those having business therein, nor shall anyanimals or birds be brought in or kept in or about said premises. 11 Tenant shall not use, keep or permit to be used any of the areas withinthe office complex in any manner which shall cause litter and/or defacing of thebuildings, other improvements or landscaping. Tenant agrees that as far as ispractical and reasonable, to require its employees and invitees to conform tothe rules and regulations set out herein and any additional rules andregulations which are hereafter adopted. 12 All pedestrian traffic within the office complex shall be limited topaved streets and sidewalks and areas specifically designated or approved byLandlord for such uses, e.g., lunch areas, etc. 13 Said premises shall not be used for the storage of merchandise, forwashing clothes, for lodging or cooking in conjunction therewith, or for anyimproper, objectionable or immoral purposes. 14 Tenant shall not use or keep in said premises or the building anykerosene, gasoline or inflammable or combustible fluid or material, or use anymethod of heating or air-conditioning other than that supplied or approved inwriting by Landlord. 15 Landlord will direct electricians as to where and how telephone andtelegraph wires are to be introduced. No boring or cutting for wires will beallowed without the consent of Landlord. The location of telephones, call boxesand other office equipment affixed to said premises shall be subject to theapproval of Landlord. Landlord reserves the right to enter upon said premisesfor the purpose of installing additional electrical wiring and/or otherutilities for benefit of Tenant or adjoining tenants. 16 Tenant, upon termination of the tenancy, shall deliver to Landlord thekeys to offices and rooms which shall have been furnished Tenant or which Tenantshall have had made, and in the event of loss of any keys so furnished, Tenantshall pay Landlord therefore. 17 Tenant shall not lay linoleum, tile, carpet or other similar floorcovering so that the same shall be affixed to the floor of said premises in anymanner except as approved by Landlord. The expense of repairing any damageresulting from a violation of this rule or removal of any floor covering shallbe borne by Tenant. 18 If deemed necessary by Landlord, access on Saturdays, Sundays and legalholidays, and on other days between the hours of 6:00 p.m. and 8:00 a.m. thefollowing day, to the office complex, or to the halls, corridors, or stairwaysin any of the building, or to said premises may be refused unless the personseeking access is known to the person or employee in charge, has a pass, or isproperly identified. Landlord shall in no case be liable for damages for anyerror with regard to the admission to or exclusion from the office complex ofany person. In case of invasion, mob, riot, public excitement, or othercommotion, Landlord reserves the right to prevent access to the office complexduring the continuance of the same by closing the doors or otherwise, for thesafety of the tenants and protection of property. 19 Tenant shall see that the doors of said premises are closed andsecurity locked before leaving the building. Tenant must observe strict care andcaution to assure that all water faucets or water apparatus are entirely shutoff before Tenant or Tenant's employees leave said premises, and that allelectrical switches shall likewise be shut off to prevent waste or damage. 20 Landlord reserves the right to exclude or expel from the office parkcomplex any person who, in the judgment of Landlord, is intoxicated or under theinfluence of liquor or drugs, or who shall in any manner do any act in violationof any of the rules and regulations. 21 No vending machine or machines of any description shall be installed,maintained or operated upon said premises without the written consent ofLandlord. 22 Landlord shall have the right, exercisable without notice and withoutliability to Tenant, to charge the name and the street address of the buildingof which said premises are a part. 23 The parking areas within the office complex shall be used solely forpassenger type vehicles during normal office hours and the parking of trucks,trailers, recreational vehicles and campers is specifically prohibited. Novehicle of any type shall be stored within the parking areas at any time. In theevent that a vehicle is disabled, it shall be removed within 48 hours. Thereshall be no "For Sale" or other advertising signs on or about any parkedvehicle. All vehicles shall be parked in the designated parking areas inconformance with all signs and other markings. 24 Tenant shall not place any improvements or movable objects includingantennas, outdoor furniture, etc. in the parking areas, landscaped area or otherareas outside of said premises, or on the roof of said premises. 25 "Office complex" refers to the entire office building development ofLandlord. 26Landlord reserves the right to make such other rules and regulations as in itsjudgment may be for the safety, care and cleanliness of said premises and theoffice complex for the preservation of good order therein. Tenant agrees toabide by all such rules and regulations hereinabove stated and any additionalrules and regulations which are adopted. ADDENDUM TO LEASE FOR PREMISES COMMONLY KNOWN AND DESIGNATED AS: OFFICES #3, 4, AND 5, SECOND FLOOR OF THE NORTH BUILDING 904 MANHATTAN AVENUE, MANHATTAN BEACH, CALIFORNIA This Addendum to Lease executed on September __, 1998, by and betweenDOLORES MCNABB, as Landlord, and SKECHERS USA, INC., as Tenant, is an integralpart of said Lease as if full set forth therein. A. OPTION TO EXTEND LEASE TERM. So long as Tenant has fully performed all the obligations on its part tobe performed, Landlord hereby grants to Tenant two (2) consecutive options toextend this lease for five (5) years each, on the same terms and conditions asare contained herein except as to increases in real estate taxes as hereinafterprovided. It is contemplated that Tenant's occupancy shall be continuous;therefore, in the event Tenant fails to exercise any of the options grantedherein, the remaining options shall immediately expire and be of no furtherforce or effect. The parties specifically acknowledge that the Lease rent termsprovide for annual increases of 3%. Such increases shall continue to be appliedannually during each and every option exercised hereunder. Tenant shall exercise each such option by delivering written notice toLandlord at least six (6) months, but not more than twelve (12) months, prior tothe end of each five (5) year term. TIME IS OF THE ESSENCE in regard to thedelivery of the notice. In the event Tenant fails to deliver written notice asherein provided, the options granted herein shall expire and be of no furtherforce or effect. B. RENT. Tenant shall pay to Landlord rent, free from all claims, demands orset-offs against Landlord of any kind or character whatsoever, except asotherwise expressly provided to the contrary, in advance, in the amount of$167,945.82, payable $3,375 on execution of this lease and thereafter on thefirst day of each month as follows: November 1, 1998 to September 30, 1999 $2250.00 per month October 1, 1999 to September 30, 2000 $2317.50 per month October 1, 2000 to September 30, 2001 $2387.00 per month October 1, 2001 to September 30, 2002 $2458.61 per month October 1, 2002 to September 30, 2003 $2532.37 per month October 1, 2003 to June 30, 2004 $2608.34 per month LATE PAYMENTS: In the event that Tenant shall fail to pay to Landlordwithin 5 days of the date when due, any payment owing to Landlord pursuant tothe terms of this lease, Tenant shall pay Landlord a late charge in the amountof ten percent (10%) of the rent payment then due in addition to said rent. SQUARE FOOTAGE DISCLAIMER: The parties hereto hereby acknowledge thatduring the negotiations for this Lease, the parties discussed the rent as afunction of an amount per square feet of rentable space. Prior to the executionof this Lease, Tenant has had the opportunity to inspect the space and satisfyitself as to the size and suitability of the space for its intended purposes.The parties hereto hereby agree the above dollar figures of rent shall be dueand payable regardless of the actual square feet in the demised premises andTenant acknowledges that Landlord makes no representation or warranty as to theactual size of the premises. Any discussions concerning a rental per square footof space is superceded by this provision. C. USE. The sole permitted use of the premises shall be commercial office andrelated activities. D. REAL ESTATE TAXES-OPTION PERIODS. Upon the exercise of the options hereinabove provided for, Tenant agreesto pay during the term of each such option period, or periods, as the case maybe, its pro rata share of any increase in real estate taxes and assessmentslevied or imposed against the real property of which the demised premises are apart over an above the taxes imposed on said real property during the fifth yearof the original term of this Lease (the base year). The parties heretoacknowledge and agree that Tenant occupies approximately 12.5% of the buildingand agree that for purposes of this provision that Tenant shall pay 12.5% of anysuch increase. Landlord shall provide Tenant with a copy of the tax bill for thesixth year (the base year) of the initial term along with a copy of the tax billfor each year during any option period that Tenant continues in possession underthis Lease. Tenant shall pay to Landlord one half of its pro rata share (12.5%)of such increase on or before December 10 of each year and the remaining on halfof its pro rata share (12.5%) on or before April 10 of each year. E. AIR CONDITIONING REPAIR AND MAINTENANCE. Landlord has provided an air conditioner that services Offices 1, 2, 3, 4and 5 on the second floor of the north building. Tenant hereby agrees that itwill pay any and all costs related to the repair and maintenance of said airconditioner. Further, the parties hereby the air conditioner servicing Offices 1through 5 is on Landlord's house meter and the gas servicing said Offices is notseparately metered. The parties hereby agree that a reasonable estimate of the monthly electrical and gas costs for Office #3, 4, and 5 is $175.00. Tenanthereby pay to Landlord $175.00 per month as reimbursement for such costs. Eachyear during the term of this Lease, such monthly amount shall be increased by 3%to reflect the anticipated general increase in costs. In the event electricalcosts are increased substantially for any reason that makes the above sumunrealistic, as increased annually, the parties agree such sum shall beincreased in an amount that reflects such substantial increase in such costs.Tenant may, at its discretion, elect to install separate meters for the gas andelectric, at its sole and exclusive expense, and pay the utility costs forOffices 3, 4, and 5 directly. Tenant acknowledges that concurrent with theinstallation of the electrical meter, it would also have to install a separateair conditioner in order to isolate the expenses to said Offices #3, 4, and 5. Air Conditioning to Offices #3, 4 and 5 shall be provided between thehours of 7:30 A.M. and 5:30 P.M. Monday through Friday or each week. F. SECURITY DEPOSIT Tenant shall pay Landlord on execution of this Lease the sum of $4,500.00as a security deposit in accordance with the provisions of Paragraph 19 of theLease. G. PARKING Landlord hereby grants to Tenant the exclusive use of one (1) parking, thelocation of which will be designated by Landlord. H. RULES AND REGULATIONS The Rules and regulations attached hereto are hereby incorporated by thisreference as if fully set forth herein and shall be an integral part of thisLease. I. ASSIGNMENT Notwithstanding the provisions of Paragraph 11 of the Lease, no consentfrom Landlord shall be required for the assignment of this Lease under thefollowing circumstances, each of which shall be considered a PermittedAssignment: (1) the transfer of stock of Tenant to members of the immediate family of a shareholder of Tenant, to a living trust for estate-planning purposes,or by will or intestacy; or, (2) Tenant sells or offers for sale its voting stock to the public in accordance with the qualifications or registration requirements of the State of California and the Security Act of 1933, as amended. H. TENANT'S RIGHT TO TERMINATE IN THE EVENT OF DESTRUCTION OF THE PREMISES Notwithstanding the provisions of Paragraph 16. DESTRUCTION OF PREMISES ofthe Lease, in the event Landlord cannot complete the repairs and returnpossession to Tenant within a period of six (6) months, Tenant shall have theoption of terminating this Lease. Notice of such election to terminate shall begiven by Tenant to Landlord within ten (10) days of Tenant's receipt of writtennotice from Landlord that the repair period is projected to exceed six (6)months. In the event Tenant fails to so notify Landlord in writing, this rightto terminate shall expire. I. MUTUAL INDEMNIFICATION Tenant Agrees to defend, with counsel reasonably satisfactory to Landlord,indemnify and hold harmless, Landlord, its agents, employees, officers,directors, shareholders, partners, members and representatives (collectively"Landlord") from and against any and all loss, cost, action liability, damage orexpense, including but not limited to, penalties, fines, attorneys' fees orcosts (collectively "claims"), to any person, property or entity resulting fromthe following: (i) the negligence or wilful misconduct of Tenant, its agents,employees or contractors; (ii) Tenant's default or breach of any of the termsand conditions of this Lease; and (iii) any occurrences within the Premises, notresulting from the negligence or wilful misconduct of Landlord, its agents,employees or contractors. Landlord agrees to defend, with counsel reasonably satisfactory to Tenant,indemnify and hold harmless, Tenant, its agents, employees, officers, directors,shareholders, partners, members and representatives (collectively "Tenant") fromand against any and all loss, cost, action, liability, damage or expense,including but not limited to, penalties, fines, attorneys' fees or costs(collectively "claims"), to any person, property or entity resulting from thefollowing: (i) the negligence or wilful misconduct of Landlord, its agents,employees or contracts; (ii) Landlord's default or breach of any of the termsand conditions of this Lease; and (iii) any occurrences within the Premises, notresulting from the negligence or wilful misconduct of Tenant, its agents,employees or contractors. Notwithstanding the foregoing, however, because Landlord is required tomaintain property insurance on the Building, and because of the existence ofwaivers of subrogation set forth in this Lease, Landlord hereby agrees todefend, indemnify and hold Tenant harmless on any Claims to the extent suchclaim is covered by such insurance, even if resulting from the negligent acts,omissions or misconduct of Tenant or those of its agents, employees orcontractors. Similarly, since Tenant must carry insurance to cover its personalproperty within the premises, and because of the waivers of subrogation setforth n this Lease, Tenant hereby agrees to defend, indemnify and hold Landlordharmless from any claims to the extent any such claim is covered by suchinsurance, even if resulting from the negligent acts, omissions or misconduct ofLandlord or those of its agents, employees or contractors. The provisions ofthis section shall survive the expiration or sooner termination of the Leasewith respect to any occurrences, claims or liabilities occurring prior to suchexpiration or termination.LANDLORD TENANTDOLORES MCNABB SKECHERS USA, INC., a California corporation/s/ DOLORES L. MCNABB by: /s/ DAVID WEINBERG --------------------------- ---------------------------Date: September 10, 1998 by: David Weinberg, CFO --------------------------- Date: September 14, 1998 EXHIBIT 10.18(a) LEASE THIS LEASE, dated this 14th day of APRIL, 2000 by and between DOLORESL. MC NABB (hereinafter "Landlord"), and SKECHERS USA, INC. a Californiacorporation thereinafter "Tenant"). WITNESSETH:ARTICLE 1. PREMISES LEASED. In consideration of the rent and other charges herein specified to bepaid and the covenants and conditions to be observed and performed by Tenant.Landlord does hereby lease to Tenant and Tenant does hereby lease from Landlordthose premises hereinafter referred to as "said premises" within the officebuilding commonly known and designated as OFFICES #7, 8, and 9, second floor,south building 904 Manhattan Avenue, Manhattan Beach, CA__90266___.ARTICLE 2. TERM OF LEASE AND DELIVERY OF PREMISES. The term of this Lease shall be for FIVE (4), THREE (3) MONTHScommencing on the 1st day of APRIL 2000, and ending on the 30th day of June,2004. If Landlord, for any reason whatsoever, cannot deliver possession ofthe said premises to Tenant within __15__ days after the commencement of theterm hereof, this Lease shall not be void or voidable, nor shall Landlord beliable to Tenant for any loss or damage resulting therefrom, but in that eventall rent shall be abated during the period between the commencement of the saidterm and the time when Landlord delivers possession.ARTICLE 3. RENT See Exhibit "A"ARTICLE 4. USE. Said premises shall be occupied and used by Tenant solely for thepurposes of conducting therein the business stated in Exhibit "A". In additionthereto: A. No use shall be made or permitted of said premises or any part thereof, nor acts done which shall constitute a nuisance or unreasonable annoyance to other tenants in the office park complex nor which shall violate, make inoperative or increase the existing rate of any insurance policy held by or for the benefit of Landlord. B. Tenant shall at all times comply with all governmental rules, regulations, ordinances, statute and is now in force or which may hereafter be enforced pertaining to said premises and to Tenant's use thereof, and a finding of guilty by a competent court for any violation thereof shall be conclusively deemed a default under this paragraph.ARTICLE 5. LANDLORD SERVICES. Landlord will provide services during reasonable hours of generallyrecognized business days to be determined by Landlord, and subject to the rulesand regulations as set forth in Exhibit "A", as follows: A. Heat and air-conditioning during the customary hours as stipulated in the Rules and Regulations. B. Electric current for ordinary lighting requirements and for ordinary business appliances such as typewriters and adding machines. Landlord shall not be required to furnish electrical power to operate electrical motors of larger than fractional horsepower. Landlord shall make additional charges for service if Tenant has greater than normal requirements for such services. C. Tenant shall pay for all water, gas, electricity, light, power and other utilities supplied to the Premises, together with any taxes thereon. If any such services are not separately metered to Tenant, Tenant shall pay a reasonable proportion to be determined by Landlord of all charges jointly metered with other premises. Replacement of fluorescent tubes in the standard lighting fixtures installed in the premises by Landlord shall be provided as required and billed to Tenant. Landlord, however, shall not be liable for failure to furnish any of the foregoing where such failure is caused by conditions beyond the control of Landlord or by accidents, repairs or strikes; nor shall such failure constitute an eviction; nor shall Landlord be liable under any circumstances except where caused by Landlord's negligence, for loss or damage to property however occurring through or in connection with or incidental to the furnishing of any of the foregoing.ARTICLE 6. PARKING. See Exhibit "A" Landlord agrees at its own expense to construct and maintain, or causeto be constructed and maintained, an automobile parking area and to maintain andoperate, or cause to be maintained and operated, said automobile parking areaduring the term of this Lease for the benefit and use of Tenant, its employees,customers and patrons and for other tenants and occupants of the office complex.Wherever the words "automobile parking area" are used in this Lease, it isintended that the same shall include the automobile parking stalls, driveways,entrances and exits and sidewalks, pedestrian passageways in conjunctiontherewith and other areas designated for parking. Landlord shall keep saidautomobile parking area in a neat, clean and orderly condition, landscaped, andshall repair any damage to the facilities thereof. Nothing contained hereinshall be deemed to create liability upon Landlord for any damage to motorvehicles of customers or employees or from loss of property from within suchmotor vehicles, unless caused by the negligence of Landlord, its agents,servants and employees. Landlord shall also have the right to establish, andfrom time to time change, alter and amend, and to enforce against all users ofsaid automobile parking area such reasonable rules and regulations (tenant, itsemployees, customers and patrons from parking within specific portionstherefrom) as may be deemed necessary and advisable for the proper and efficientoperation and maintenance of said automobile parking area. The rules andregulations herein provided shall include, without limitation, the hours duringwhich the automobile parking area shall be open for use. Landlord shall at all times during the term of this Lease have the soleand exclusive control of the automobile parking area, and may at any time andfrom time to time during the term hereof exclude and restrain any person fromuse or occupancy thereof; excepting, however, bona fide customers, patrons andservice-suppliers of Tenant and other tenants of Landlord who make use of saidarea in accordance with any rules and regulations established by Landlord fromtime to time with respect thereto. The rights of Tenant referred to in thisArticle shall at all times be subject to the rights of Landlord and the othertenants of Landlord, to use the same in common with Tenant, and it shall be theduty of Tenant to keep all of said area free and clear of any obstructioncreated or permitted by Tenant or resulting from Tenant's operations and topermit the use of any of said area only for normal parking and ingress andegress by said customers, patrons and service-suppliers to and from the officepark complex. Tenant shall assume sole responsibility for satisfying the requirementsof the Environmental Protection Agency, or similar agencies, with respect totheir proportionate share of the parking areas.ARTICLE 7. ALTERATIONS AND REPAIRS. Tenant shall not make or suffer to be made any alterations, additionsor improvements to or of said premises or any part thereof without the writtenconsent of Landlord first had and obtained and any alterations, additions orimprovements to or of said premises, except movable furniture and tradefixtures, shall at once become a part of the realty and belong to Landlord. Inthe event Landlord consents to the making of any alteration, additions orimprovements to said premises by Tenant, the same shall be made by Tenant atTenant's sole cost and expense and any contractor or person selected by Tenantto make the same must first be approved of in writing by Landlord. Upon theexpiration or sooner termination of the term, Tenant shall, upon demand byLandlord, at Tenant's sole cost and expense, forthwith and with all duediligence remove any alterations, additions or improvements made by Tenant,designated by Landlord to be removed, and Tenant shall forthwith and with alldue diligence at its sole cost and expense, repair any damage caused by suchremoval. By entry hereunder, Tenant accepts the premises as being in good,sanitary order, condition and repair Tenant shall at Tenant's sole cost andexpense keep said premises and every part thereof including glass in goodcondition and repair, damage thereto by fire, earthquake, act of God or theelements excepted, Tenant hereby waiving all rights to make repairs at theexpense of Landlord as provided by any law, statute or ordinance now orhereafter in effect. Tenant shall, upon the expiration or sooner termination ofthe term hereof, surrender said premises to Landlord in the same condition aswhen received, ordinary wear and tear and damage by fire, earthquake, act of Godor the elements excepted. It is specifically understood and agreed that Landlordhas no obligation and has made no promises to alter, remodel, improve, repair,decorate or paint said premises or any part thereof and that no representationsrespecting the conditions of said premises or the building of which saidpremises are a part have been made by Landlord to Tenant except as specificallyherein set forth. See Exhibit "A".ARTICLE 8. CHANGES OR ALTERATIONS BY LANDLORD Landlord reserves the right at any time and from time to time withoutthe same constituting an actual or constructive eviction and without incurringany liability to Tenant therefore or otherwise affecting Tenant's obligationsunder this Lease, to make such changes, alterations, additions, improvements,repairs or replacements in or to the office complex (including said premises ifrequired so to do by any law or regulation) and the fixtures and equipmentthereof, as well as in or to the plenum area (air space above the ceiling), andstairways thereof, as Landlord may deem necessary or desirable, and to changethe arrangement or location of entrances or passageways, doors and corridors,provided, however, that there be no unreasonable obstruction of the right ofaccess to, or unreasonable interference with the use and enjoyment of saidpremises by Tenant.ARTICLE 9. LANDLORD'S NONLIABILITY Landlord shall no be liable for any loss or damage to the goods, wares,merchandise and other property of Tenant in, upon or about said premises or forany injury to the person (including death) of Tenant or its employees, agents,subtenants or invitees or other persons, caused by any use thereof, or arisingfrom any accident or fire or other casualty thereon or from any other causewhatsoever, unless caused by Landlord's negligence, nor shall Landlord be liablefor any such loss, damage or injury occurring anywhere in the office parkcomplex and causedby the act or neglect of Tenant, its agents or employees; and Tenant herebywaives on its behalf all claims against Landlord for any such loss or injury andhereby agrees to indemnify and save Landlord harmless from all liability for anysuch loss, damage or injury and in the event action is brought against Landlordon account of such loss, damage or liability and Landlord elects not to acceptTenant's proffered defense of such action, Tenant shall nevertheless pay thecost of Landlord's reasonable attorney's fees incurred in connection therewith.ARTICLE 10. INSURANCE. All insurance provided for herein shall name Landlord as an additionalinsured as its interest may appear. Policies will provide a 30-day writtennotice to Landlord in the event of cancellation by Tenant's insurance company. Tenant agrees to maintain statutory Workmen's Compensation Insuranceand comprehensive public liability insurance with the following minimum limits:combined single limit coverage of not less than $1,000,000 with respect topersonal injury death or property damage resulting from any one occurrence: theminimum limits shall not, however limit the liability of Tenant hereunder. It shall be Tenant's responsibility to maintain full "ALL RISK"insurance on its property and rental value and glass insurance on said premises. It shall be Landlord's responsibility to insure said premises againstfire and extended coverage damage. So long as their respective insurers so permit, Tenant and Landlordhereby mutually waive their respective rights of recovery against each other forany loss insured by fire, extended coverage and other property insurancepolicies existing for the benefit of the respective party. Each party shallobtain any special endorsements, if required by their insurer, to evidencecompliance with the aforementioned waiver. Certificates of insurance stating the above will be provided toLandlord by Tenant.ARTICLE 11. ASSIGNMENT AND SUBLETTING. A. Tenant shall not transfer or assign this Lease, or any right or interest hereunder, nor sublet said premises or any part thereof, without the prior written consent (which consent shall not be unreasonable withheld) and approval of Landlord provided, however, that such consent shall not be unreasonably withheld so long as (i) the proposed assignee or sublessee is as financially and morally responsible as Tenant and (ii) evidence satisfactory to Landlord is offered to show that the proposed assignee or sublessee is likely to conduct on said premises a business of a quality substantially equal to that conducted by Tenant. No transfer or assignment, whether voluntary or involuntary, by operation of law, under legal process or proceedings, by receivership, in bankruptcy, or otherwise, and no subletting shall be valid or effective without such prior written consent and approval. Should Tenant attempt to make or suffer to be made any such transfer, assignment or subletting, except as aforesaid, or should any of Tenant's rights under this Lease be sold or otherwise transferred by or under court order or legal process or otherwise or should Tenant be adjudged insolvent or bankrupt, then and in any of the foregoing events Landlord may, at its option, terminate this Lease forthwith by written notice thereof to Tenant. Should Landlord consent to any such transfer, assignment or subletting, such consent shall not constitute a waiver of any of the restrictions of this Article and the same shall apply to each successive transfer, assignment or subletting hereunder, if any. B. If Tenant hereunder is a corporation, an unincorporated association, or a partnership, the transfer, assignment or hypothecation of any stock or interest in such corporation, association or partnership in the aggregate in excess of Forty-nine percent (49%) shall be deemed an assignment within the meaning and provisions of this Article; provided, however, a transfer or assignment of any such stock or interest by a shareholder or member to his spouse, children or grandchildren is excepted from the foregoing provision.ARTICLE 12. RIGHT OF ENTRY. Landlord reserves and shall at any time and at all times have the rightto enter upon said premises to inspect the same, and perform any service to beprovided by Landlord to Tenant hereunder, to submit said premises to prospectivepurchasers or tenants, to post notices of nonresponsibility, and to alter,improve or repair said premises and any portion of the building of which saidpremises are a part, without abatement of rent, and may for that purpose erectscaffolding and other necessary structures where reasonably required by thecharacter of the work to be performed, always providing the entrance to saidpremises shall not be blocked thereby, and further providing that the businessof Tenant shall not be interfered with unreasonably. Tenant hereby waives anyclaim for damages for any injury or inconvenience to or interference withTenant's business, any loss of occupancy or quiet enjoyment of said premises,and any other loss occasioned thereby. For each of the aforesaid purposes,Landlord shall at all times have and retain a key with which to unlock all ofthe doors in, upon and about said premises, excluding Tenant's vaults and safes,and Landlord shall have the right to use any and all means which Landlord maydeem proper to open said doors in an emergency, in order to obtain entry to saidpremises, and any entry to the premises obtained by landlord by any of saidmeans, or otherwise, shall not under any circumstances be construed or deemed tobe a forcible or unlawful entry into, or a detainer of said premises, or aneviction of Tenant from said premises or any portion thereof.ARTICLE 13. BANKRUPTCY-INSOLVENCY. Tenant agrees that in the event all or substantially all of Tenant'sassets are placed in the hands of a receiver or trustee, and such receivershipor trusteeship continues for a period of 30 days, or should Tenant make anassignment for the benefit of creditors or be adjudicated a bankrupt, or shouldTenant institute any proceedings under the Bankruptcy Act or under any amendmentthereof which may hereafter be enacted, or under any other act relating to thesubject of bankruptcy wherein Tenant seeks to be adjudicated a bankrupt, or tobe discharged of its debts, or to effect a plan of liquidation, composition orreorganization, or should any involuntary proceeding be filed against the Tenantunder any such bankruptcy laws and Tenant consents thereto or acquiesces thereinby pleading or default, then this Lease or any interest in and to said premisesshall not become an asset in any of such proceedings and, in any such event andin addition to any and all rights or remedies of Landlord hereunder, or by lawprovided, it shall be lawful for Landlord to declare the Term hereof ended andto re-enter said premises and take possession thereof and remove all personstherefrom, Tenant shall have no further claim thereon or hereunder.ARTICLE 14. LIENS. Tenant shall not permit to be enforced against said premises, or anypart thereof, any mechanics', material-men's, contractors' or other liensarising from, or any claims for damages growing out of, any work or repair oralteration as herein authorized or otherwise arising (except from the actions ofLandlord), and Tenant shall pay or cause to be paid all of said liens and claimsbefore any action is brought to enforce the same against Landlord or saidpremises: and Tenant agrees to indemnify and hold Landlord and said premisesfree and harmless from all liability for any and all such liens and claims andall costs and expenses in connection therewith. Tenant shall give Landlord noless than 20 days prior notice in writing commencing construction of any kind onthe premises so that Landlord may post notices of nonresponsibility.ARTICLE 15. LANDLORD PAYING CLAIMS. Should Tenant fail to pay and discharge, when due and payable, any taxor assessment, or any premium or other charge in connection with any insurancepolicy or policies which Tenant is obligated to pay, or any lien or claim forlabor or material employed or used in, or any claim for damages arising out ofthe repair, alterations, maintenance and use of said premises, as provided inthis Lease, after 10 days written notice from Landlord, the Landlord may, at itsoption, and without waiving or releasing Tenant from any of Tenant's obligationshereunder, pay any such tax, assessment, lien, claim, insurance premium orcharge, or settle or discharge any action therefore or satisfy any judgmentthereon. All costs, expenses and other sums, incurred or paid by Landlord inconnection therewith, together with interest at the rate of 10% per annum onsuch costs, expenses and sums from the date incurred or paid by Landlord, shallbe deemed to be additional rent hereunder and shall be paid by Tenant with andat the same time as the next installment of rent hereunder, and any defaulttherein shall constitute a breach of the covenants and conditions of this Lease.ARTICLE 16. DESTRUCTION OF PREMISES. A. In the event the building of which said premises are a part is damaged by fire, or perils covered by insurance, the Landlord shall: 1. In the event of total destruction, within a period of 90 days thereafter, commence repair, reconstruction and restoration of said building and prosecute the same diligently to completion, in which event this Lease shall continue in full force and effect; or within said 90 day period elect not to so repair, reconstruct or restore said building, in which event this Lease shall cease and terminate. In either event, Landlord shall give the Tenant written notice of its intention within said 90 day period. In the event Landlord elects not to restore said building, this Lease shall be deemed to have terminated as of the date of such total destruction. 2. In the event of a partial destruction of the building to an extent not exceeding 25% of the full insurable value thereof and if the damage thereto is such that the building may be repaired, reconstructed or restored within a period of 90 days from the date of the happening of such casualty and Landlord will receive insurance proceeds sufficient to cover the costs of such repairs, Landlord shall commence and proceed diligently with the work of repair, reconstruction and restoration and the Lease shall continue in full force and effect; or if such work or repair, reconstruction and restoration is such as to require a period longer than 90 days or exceed 25% of the full insurable value thereof, or if said insurance proceeds will not be sufficient to cover the cost of such repairs, Landlord may either elect to so repair, reconstruct and restore and the Lease shall continue in full force and effect, or Landlord may elect not to repair, reconstruct or restore and the Lease shall in such event terminate. Under any of the conditions of this subparagraph, Landlord shall give written notice to Tenant of its intention within the period of 90 days. In the event Landlord elects not to restore said building, this Lease shall be deemed to have terminated as of the date of such partial destruction. B. Upon any termination of this Lease under any of the provisions of this Article, the parties shall be released thereby without further obligation to the other coincident with the surrender of possession of the premises to Landlord except for items which have theretofore accrued and are then unpaid. C. In the event of repair, reconstruction and restoration as herein provided, the rental provided to be paid under this Lease shall be abated proportionately in the ratio which the Tenant's use of said premises is impaired during the period of such repair, reconstruction or restoration. Tenant shall not be entitled to any compensation or damages for loss in the use of the whole or any part of said premises and/or any inconvenience or annoyance occasioned by any such damage, repair, reconstruction or restoration. D. Tenant shall not be released from any of its obligations under this Lease except to the extent and upon the conditions expressly stated in this Article. Notwithstanding anything to the contrary contained in this Article, should Landlord be delayed or prevented from repairing or restoring said damaged premises within on (1) year after the occurrence of such damage or destruction by reason of acts of God, war, governmental restrictions, inability to procure the necessary labor or materials, or other cause beyond the control of Landlord, Landlord shall be relieved of its obligation to make such repairs or restoration and Tenant shall be released from its obligations under this Lease as of the end of said one (1) year period. E. In the event that damage is due to any other cause than set forth in Paragraph A above, Landlord may elect to terminate this Lease. F. It is understood that if Landlord is obligated to or elects to repair or restore as herein provided, Landlord shall be obligated to make repairs or restoration only of those portions of said building and said premises which were originally provided at Landlord's expense; and the repair and restoration of items not provided at Landlord's expense shall be the obligation of Tenant.ARTICLE 17. LATE PAYMENTS.See Exhibit "A"ARTICLE 18. REMEDIES. Should Tenant at any time be in default hereunder with respect to anyrental payments or other charges payable by Tenant hereunder, and should suchdefault continue for a period of 10 days after written notice from Landlord, orshould Tenant be in default in performance of any other of its promises,covenants or agreements herein contained (other than any breach under theArticle entitled "Assignment and Subletting" for which immediate notice oftermination may be given) and should such default continue for 30 days afterwritten notice thereof from Landlord to Tenant specifying the particulars ofsuch default, or should Tenant vacate or abandon the premises, this Lease shallremain in full force and effect, provided, however, that in any of such eventsand in addition to any or all other rights or remedies of Landlord hereunder orby the law provided, it shall be, at the option of Landlord: A. The right of Landlord to declare the term hereof ended and to re-enter said premises and take possession thereof and remove all persons therefrom, and Tenant shall have no further claim thereon on thereunder; or B. The right of Landlord, even though it may have brought an action to collect rent and other charges without terminating this Lease, to thereafter elect to terminate this Lease and all of the rights of Tenant in or to said premises; or C. The right of Landlord, without terminating this Lease, to begin an action or actions to collect rent and other charges hereunder which are from time to time past due and unpaid; it being understood that the bringing of such action or actions shall not terminate this Lease unless notice of termination is given. Should Landlord elect to terminate this Lease, Landlord shall beentitled to recover from the Tenant as damages: (1) the worth at the time ofaward of the amount by which the unpaid rent for the balance of the term afterthe time of award exceeds the amount of such rental loss for the same periodthat Tenant proves could be reasonably avoided (ii) the cost of recovering saidpremises to the condition required in the Article entitled "Removal" and (iii)such other amounts as are provided for in Section 1951.2 of the California CivilCode If Landlord shall elect to re-enter said premises, Landlord shall notbe liable for damages by reason of such re-entry. Notwithstanding any other provision of this Article, Landlord agreesthat if the default complained of, other than for the payment of monies, is ofsuch a nature that the same cannot be cured within the 30 day period specifiedabove, then such default shall be deemed to be cured if the Tennant within sucha period shall have commenced the curing thereof and shall continue thereafterwithal the diligence to cause such curing and does so complete the same with theuse of such diligence. All rights, options and remedies of Landlord contained in the Leaseshall be construed and held to be cumulative, and no on e of them shall beexclusive of the other, and Landlord shall have the right to pursue anyone orall of such remedies or any other remedy or relief which may be provided by law,whether or not stated in this Lease. No waiver or any default of Tenanthereunder shall be implied from any acceptance by Landlord or any rent or otherpayments due hereunder or any omission by Landlord to take any action or accountof such default if such default persists or is repeated, and no express waivershall affect default other than as specified in said waiver. Theconsent or approval by Landlord to or of any act by Tenant requiring Landlord'sconsent or approval shall not be deemed to waive or render unnecessaryLandlord's consent or approval to or any of subsequent similar acts by Tenant.ARTICLE 19. SECURITY DEPOSIT. Tenant has deposited with Landlord the sum in the attached Exhibit "A"as security for the full performance of the provision s of this Lease. If Tenantdefaults in any particular, Landlord may use or retain the whole or any part ofthe security in lieu of any sum due Landlord including repair of damages orcleaning of the premises upon termination or to defray any expense or damagesreasonably incurred by treason of the default, and Tenant shall on demand pay toLandlord a like sum as additional security. If Tenant is not in default at thetermination of this Lease, Landlord shall return the deposit to Tenant and maydo this by either paying this sum to Tenant or crediting it against the lastpayment(s) of rent. Landlord's obligation respecting the deposit is that of adebtor, not a trustee, the fund my be commingled to dissipate, or both and notinterest shall accrue thereon,ARTICLE 20. ATTORNEY'S FEES. In the event that any action shall be instituted by either of theparties hereto for the enforcement of any of its rights or remedies in and underthis Lease, the party in whose favor judgment shall be rendered shall beentitled to recover from the other party all costs incurred by said prevailingparty in said action, including reasonable attorney's fees to be fixed by thecourt therein.ARTICLE 21. REMOVAL A. Personal Property. Upon the expiration of the Term of this Lease, or upon any earlier termination of this Lease, Tenant shall quit and surrender possession of the said premises to Landlord in the same condition as upon delivery of possession to Tennant hereunder, reasonable wear and tar and damage by fire, acts of God, the elements and unavoidable casualty excepted. Before surrendering possession of said premises as aforesaid, Tenant shall, without expense to Landlord, remove or cause to be removed from said premises all signs, furnishings, equipment, trade fixtures, merchandise and other personal property placed therein. And all rubbish and debris, and Tenant shall repair all damage to said premises resulting g from such removal. If requested by Landlord, Tenant shall execute, acknowledge and deliver to Landlord an instrument in writing releasing and quitclaiming to Landlord all tights, title an interest in Tenant in and to said premises by reason of this lease or otherwise. If Tenant fails to remove any of its sins, furnishings, equipment, trade fixtures, merchandise, or other personal property within 10 days after the expiration or termination of this Lease, then Landlord may, at its sole option (1) treat Tenant as a holdover, in which even the provision of the Article of this Lease regarding Holding Over shall apply: (ii) deem any and all of such items abandoned and the sole property of Landlord, or (iii) remove any or all of such items and dispose of same to any manner or store same for Tenant, in which event the expense of such disposition or storage shall be borne by Tenant and shall be immediately due and payable. B. Fixtures, Equipment and Improvements. All fixtures, equipment improvements and appurtenances attached to or built into said premises prior to or during the Term, whether by Landlord at its expense or a the expense of Tenant or both, shall be and remain part of said premises and shall not be removed b Tenant at the end of the Term unless otherwise expressly provided for in this Lease. Such fixtures, equipment, improvements and appurtenances shall include by not be limited to" all floor coverings, drapes, paneling, molding, doors vaults (exclusive of vault doors), plumbing systems, electrical systems, lighting systems, cooling systems, ventilation systems, sprinkling systems, silencing equipment, communication systems, all fixtures and outlets for the systems mentioned above and for all telephone, radio, telegraph and television purposes, and any special flooring or ceiling installations.ARTICLE 22. PAYMENTS AND NOTICES. A. Payments of Rent: The rent specified herein shall be paid to Landlord or to such other person or persons or at such other address or addresses as Landlord hereafter may designate by written notice to Tenant. Payment of rent to any person or persons so designated by Landlord shall exonerate Tenant from all responsibility therefore or for the proper distribution thereof. B. Notices. Any notice or demands which may or must be given by either party to the other hereunder shall be deemed to have been duly given when made by personal service or in writing and deposited for mailing by United States mail, postage prepaid, addressed as following or to such other place as the partied may hereafter in writing direct. To Landlord: At the address set forth on the signature page of this Lease To Tenant: At the address set forth on the signature page of this LeaseARTICLE 23. EMINENT DOMAIN A. Definition of Terms. The terms "total taking" as used in this Article means the taking of the entire premises under the power of eminent domain or a taking of so much of said premises as to prevent or substantially impair the conduct of Tenant's business therein. The term "partial taking" means the taking of a portion only of said premises which does not constitute a total taking as above defined B. Total Taking. If during the term here of, there shall be a total taking by public authority under the power of eminent domain, then the leasehold estate of Tenant in and to said premises shall cease and terminate as of the dated actual physical possession thereof shall be so taken. C. Partial Taking. If during said term there shall be a partial taking of said premises, this Lease shall terminate as to the portion of said premises taken upon the date upon which actual possession of said premises is taken pursuant to said eminent domain proceedings, but said Lease shall continue in force and effect as to the remainder of said premises. The minimum guaranteed rental payable by Tenant for the balance of said term shall be abated in the ration that the square footage of floor area of said premises taken bears to the total floor area of said premises at the time of such taking. D. Taking of Parking Area. In the event there shall be a taking of the parking area such that Landlord can no longer comply with applicable municipal parking ordinances or similar regulations of other public agencies Landlord may substitute therefore reasonably equivalent parking in a location reasonably close to said premises: provided that if Landlord fails to make such substitution within a reasonable time following such taking. Tenant may, at its option, terminate this Lease by notice to Landlord. If this Lease is not so terminated by Tenant, there shall be no reduction, change or abatement of any rent or other charge payable by Tenant hereunder and this Lease shall continue in full force and effect. E. Allocation of Award. All compensation and damages awarded for the taking of said premises, or any portion or portions thereof, shall, except as otherwise herein provided, belong to and be the sole property of Landlord, and Tenant shall not have any claim or be entitled to any award for the diminution in value of its leasehold hereunder or for the value of any unexpired term of this Lease": provided, however, Tenant shall be entitled to any award that may be made for the taking of or injury to or on account of any cost or loss Tenant may sustain in the removal of Tenant's merchandise, fixtures, equipment and furnishings. F. Effect of Termination. If this Lease is terminated, in whole or in part pursuant, to any of the provisions of this Article, all rentals and other charges payable by Tenant to Landlord hereunder and attributable to the premises taken, shall be paid up to the date upon which actual physical possession shall be taken by the condemner and the parties shall thereupon be released form all further liability in relation thereto. G. Voluntary Sales. A voluntary sale by Landlord to any pubic body or agency having the power of eminent domain, either under threat of condemnation or while condemnation proceedings are pending, shall be deemed to be a taking under the power of eminent domain for the purpose of this Article.ARTICLE 24. HOLDING OVER. This Lease shall terminate and become null and void without furthernotice upon the expiration of the Term herein specified, and any holding over byTenant after such expiration shall not constitute a renewal thereof, to giveTenant any rights under this Lease, except as otherwise herein provided, itbeing understood and agreed that this Lease cannot be renewed, extended or inany manner modified except in writing signed by both parties hereto: provided,however, that nothing in the Article shall be construed to alter or impair theprovisions of Article 231 hereof. If Tenant shall hold over for any period afterthe expiration of said Term, Landlord may, at it's option, exercise by writtennotice to Tenant, treat Tenant as a tenant from month-to-month commencing on the1st day following the expiration of this Lease and subject to the terms andcondition herein contained except that the Basic Rental portion of the monthlyrental, which shall b payable in advance shall be 150$% of said Basic Rentalapplicable to the date of expiration. If Tenant ails to surrender the premisesupon the expiration of the Lease despite demand to do so by Landlord, Tenantshall indemnify and hold Landlord harmless from all loss or liability includingwithout limitation, any claims made by any succeeding Tenant founded on orresulting from such failure to surrender,ARTICLE 25. SUBORDINATION AND STATEMENT OF TENANT. The rights of Tenant under this Lease are and shall be subject to andsubordinate to all present and future ground or underlying Leases and amendmentsthereto, the declaration and recording of covenants, conditions and restrictionsrelating to the office complex and operation thereof, and the lien of anymortgage and/or any deed or trust or other encumbrance which now exists or mayhereafter affect said premises together with all renewals, modifications,consolidations, replacements or extensions thereof: Tenant covenants and agreethat it will execute without further consideration any and all instrumentsdesired by Landlord subordinating in the manner requested by Landlord thisLease; provided that any Lienor or encumbrancor relying on such subordination orsuch additional agreements will covenant with Tenant that this Lease shallremain in full force and effect, and tenant shall not bedisturbed in the event of sale or foreclosure so long as Tenant is not indefault hereunder. Tenant agrees to attorney to the successor in interest oflandlord following any transfer of such interest either voluntarily or byoperation of law and to recognize such successor as Landlord under this Lease.However, if Landlord so elects, this Lease shall be deemed prior to lien to anymortgage, deed of trust or other encumbrance upon or including the premisesregardless of date of recording and Tenant will execute a statement in writingto such effect at Landlord's request. Landlord is hereby irrevocably appointedand authorized as agent and attorney-in-fact of Tenant to execute allsubordination instruments in the event Tenant fails to execute said instrumentswithin five (5) days after notice form Landlord demanding the execution thereof. Statement of Tenant. Tenant shall, at any time and from time to time,upon not less that 10 (10) days prior written notice by Landlord, execute,acknowledge, and deliver to Landlord a statement in writing certifying that thislease is unmodified and in full force and effect (or, if there has been anymodification thereof, that the same is in full force and effect as modified andstating the modification or modifications) and that Landlord is not in default,except as specified in such statement, in regard to any of its covenants orobligations under this Lease, and further setting forth the dated to which allsums payable as rental hereunder have been paid in advance, if any, and suchother statements relating to delivery and acceptance of the premises asLandlord's lender, Lienor, encoumbrancor or purchaser may require.ARTICLE 26. TRANSFER BY LANDLORD. The term "landlord" as used in this Lease, so far as covenants orobligations on the part of Landlord are concerned, shall mean and include onlythe owner or owners at the time in question of the fee ownership or primeleasehold estate in said premises, and in the event of any transfer or transfersof the title to said premises, Landlord herein named (and in case of anysubsequent transfers or conveyances, the then grantor), except as hereinafterprovided, shall be automatically freed and relieved from and after the date ofsuch transfer or conveyance, of all personal liability as respected toperformances of any covenants or obligations on the part of Landlord containedin this Leas thereafter to be performed; provided that any funds in which Tenanthas an interest which are in the hands of such Landlord or the then grantor atthe time of such transfer shall be turned over to the grantee, and any amountthen due and payable to Tenant by Landlord or the then grantor under anyprovisions of this Lease shall be paid to Tenant. It is intended hereby that thecovenants and obligations contained in this Lease on the part of Landlord,shall, subject to the foregoing, be binding on Landlord, it's successors andassigns, only during and in respect of their respective successive periods ofownership.ARTICLE 27. MODIFICATION FOR LENDER If, in connection with obtaining financing for this office parkcomplex, the lender shall request reasonable modifications in the lease as acondition to such financing. Tenant will not unreasonably withhold, delay ordefer its consent thereto, provided that such modifications to not increase theobligations of Tenant hereunder or materially adversely affect the leaseholdinterested hereby created.ARTICLE 28. INABILITY TO PERFORM. This Lease and the obligations of Tenant to pay rent hereunder and tokeep, observe and perform all the other terms, covenants, conditions, provisionsand agreements of this Lease on the part of Tenant to be kept, observed orperformed shall in no way be affected, impaired or excused because Landlord isunable to fulfill any of its obligations under this Lease or to supply, or isdelayed in supplying any service expressly or impliedly to be supplied or isunable to supply, or is delayed in supplying any equipment or fixtures, ifLandlord is prevented or delayed from doing so by reason of strike or labortroubles, unavailability of materials or any other cause beyond the control ofLandlord.ARTICLE 29. SURRENDER OR CANCELLATION. The voluntary or other surrender of this Lease by Tenant, or a mutualcancellation thereof, shall not work a merger, and shall, at the option ofLandlord, terminate all or any existing subleases or may at the option ofLandlord, operate as an assignment to Landlord or any or all of such subleasesARTICLE 30. RULES AND RETULATIONS. Tenant agrees to obey the rules an regulations in Exhibit "A" as wellas such reasonable rules and regulations as may b hereafter adopted by Landlordfor the safety, care and cleanliness of the office park complex and saidpremises and the preservation of good order thereon. Landlord shall not beresponsible to Tenant for the nonperformance by any other Tenant or occupant ofthe office park complex of any of said rules and regulations.ARTICLE 31. SCOPE AND AMENDMENT. This Lease is and shall be considered to be the only agreement betweenthe parties hereto. All negotiations and oral agreements acceptable to bothparties are included herein. No amendment or other modification of this Leaseshall be effective unless in writing.ARTICLE 32. SAFETY AND HEALTH. Tenant covenants at all times during the Term of this Lease to complywith the requirements of the Occupational Safety and Health act of 1970, 29U.S.C. Section 651 et seq and any analogous legislation in California(collectively, the "Act"), to the extent that the Act applies to said premisesand any activities thereon and without limiting the generality of the foregoing,Tenant covenants to maintain all working areas, all machinery, structures,electrical facilities and the like upon said premises in any condition thatfully complies with the requirements of the Act, including such requirements aswould be applicable with respect to agents, employees or contractors of Landlordwho may from time to time be present upon said premises, and Tenant agrees toindemnify and hold harmless Landlord from any liability, claims or damagesarising as a result of a breach of the foregoing covenant and from all costs,expenses and charges arising therefrom including, without limitation, attorneys'fees and court costs incurred by Landlord in connection therewith, whichindemnity shall survive the expiration or termination of this Lease.ARTICLE 33. MISCELLANEOUS. Time is of the essence of this Lease. The Article headings herein areused only for the purpose of convenience and shall not be deemed to contain orlimit the subject matter of the Articles hereof, nor to be considered in theconstruction thereof. Each and all of the obligations, covenants, conditions andrestrictions of this Lease shall inure to the benefit of and be binding upon andenforceable against, as the case may require, the successors and assigns ofLandlord, and subject to the restrictions against assignments and subletting inthis Lease contained, any authorized assignee, transferee, sublessee and othersuccessor in interest of Tenant. In this Lease the neuter gender includes the feminine and masculine andthe singular number includes the plural wherever the context so requires. The term "Tenant" as used in this Lease shall mean and include eachperson who executes this Lease, jointly and severally, and the act of or noticefrom, or notice or refund to, or the signature of, any one or more of suchpersons, with respect to the tenancy or this Lease, including, but not limitedto, any renewal, extensions, expiration, termination or modification of thisLease, shall be binding upon each and all of the persons executing this Lease asTenant with the same force and effect as if each and all of them had so acted orso given or received such notice or refund or so signed. IN WITNESS WHEREOF, the parties hereto have caused this Lease to beexecuted on the date hereinafter set forth, following their respectivesignatures. SKECHERS U.S.A., INC., a Delaware corporationBy: /s/ Dolores L. McNabb By: /s/ Michael Greenberg ----------------------------- ----------------------------------Date: April 15, 2000 Date: April 14, 2000Address: P.O. Box 10001 Address: 228 Manhattan Beach Boulevard Torrance, CA 90505 Manhattan Beach, CA 90266_________________________________ ________________________________ "Landlord" "Tenant"ALL RENTS ARE DUE ON OR BEFORE THE 1ST OF EACH MONTH AND MAILES TO:D.L. MC NABBP.O. BOX 10001TORRANCE, CA 90505 RULES AND REGULATIONS 1 No sign, placard, picture, advertisement, name or notice shall beinscribed, displayed or printed or affixed on or to any part of the outside orinside of any building without the written consent of Landlord first had andobtained, and Landlord shall have the right to remove any such sign, placard,picture, advertisement, name or notice without notice to and at the expense ofTenant. All signs or lettering on doors or buildings shall conform to uniformspecifications and standards established by Landlord and shall be printed,painted and affixed by Landlord and billed to Tenant. Tenant shall not place anything or allow anything to be placed near theglass of any window, door, partition or wall which may appear unsightly fromoutside said premises; provided, however, that Landlord is to furnish andinstall a building standard window drapery at all exterior windows. 2 Tenant shall not obtain for use upon the premises ice, drinking water,towel and other similar services or accept barbering or bootblacking services onthe premises, except from persons authorized by Landlord and at the hours andunder regulations fixed by Landlord. 3 The bulletin board or directory of the building, if any, will beprovided exclusively for the display of the name and location of Tenant only,and Landlord reserves the right to exclude any other names therefrom. 4 The sidewalks, halls, passages, entrances, and stairways shall not beobstructed or used by Tenant for any purpose other than for ingress and egress.The halls, passages, exits, entrances, stairways, balconies and roofs are notfor the use of the general public and Landlord shall in all cases retain theright to control and prevent access thereto by all persons whose presence in thejudgment of Landlord shall be prejudicial to the safety, character, reputationand interests of the premises and tenants, provided that nothing hereincontained shall be construed to prevent such access to persons with whom Tenantnormally deals in the ordinary course of Tenant's business unless such personsare engaged in illegal activities. Neither Tenant nor employees or invitees ofTenant shall go upon the roof of any building. 5 Tenant shall not alter any lock nor install any new or additional locksor any bolts on any door of said premises. 6 The toilet rooms, urinals, wash bowls and other apparatus shall not beused for any purpose other than that for which they were constructed and noforeign substance of any kind whatsoever shall be thrown therein. The expense ofany breakage, stoppage or damage resulting from the violation of this rule shallbe borne by Tenant. 7 Tenant shall not overload the floor of said premises or mark, drivenails (normal decorating excepted), screw or drill into the partitions, woodworkor plaster or in any way deface said premises. 8 No equipment of any kind shall be brought into any building without theconsent of Landlord, and any moving of furniture, freight and equipment into orout of any building shall be done at such time and in such manner as Landlordshall designate. Landlord shall have the right to prescribe the weight, size andposition of all safes and other heavy equipment brought into any building andalso the times and manner of moving the same in and out of the building. Safesor other heavy objects shall, if considered necessary by Landlord, stand on woodstrips of such thickness as is necessary to properly distribute the weight.Landlord will not be responsible for loss of or damage to any such safe orproperty from any cause and all damage done to the building by moving ormaintaining any such safe or other property shall be repaired at the expense ofTenant. 9 Cleaning of carpets and windows shall be the responsibility of Tenantand shall be paid by Tenant. 10Tenant shall not use, keep or permit to be used or kept, any foul or noxious gasor substance in said premises, or permit or suffer said premises to be occupiedor used in a manner offensive or objectionable to Landlord or other occupants ofany building by reason of noise, odors and/or vibrations, or interfere in anyway with the other tenants or those having business therein, nor shall anyanimals or birds be brought in or kept in or about said premises. 11 Tenant shall not use, keep or permit to be used any of the areas withinthe office complex in any manner which shall cause litter and/or defacing of thebuildings, other improvements or landscaping. Tenant agrees that as far as ispractical and reasonable, to require its employees and invitees to conform tothe rules and regulations set out herein and any additional rules andregulations which are hereafter adopted. 12 All pedestrian traffic within the office complex shall be limited topaved streets and sidewalks and areas specifically designated or approved byLandlord for such uses, e.g., lunch areas, etc. 13 Said premises shall not be used for the storage of merchandise, forwashing clothes, for lodging or cooking in conjunction therewith, or for anyimproper, objectionable or immoral purposes. 14 Tenant shall not use or keep in said premises or the building anykerosene, gasoline or inflammable or combustible fluid or material, or use anymethod of heating or air-conditioning other than that supplied or approved inwriting by Landlord. 15 Landlord will direct electricians as to where and how telephone andtelegraph wires are to be introduced. No boring or cutting for wires will beallowed without the consent of Landlord. The location of telephones, call boxesand other office equipment affixed to said premises shall be subject to theapproval of Landlord. Landlord reserves the right to enter upon said premisesfor the purpose of installing additional electrical wiring and/or otherutilities for benefit of Tenant or adjoining tenants. 16 Tenant, upon termination of the tenancy, shall deliver to Landlord thekeys to offices and rooms which shall have been furnished Tenant or which Tenantshall have had made, and in the event of loss of any keys so furnished, Tenantshall pay Landlord therefore. 17 Tenant shall not lay linoleum, tile, carpet or other similar floorcovering so that the same shall be affixed to the floor of said premises in anymanner except as approved by Landlord. The expense of repairing any damageresulting from a violation of this rule or removal of any floor covering shallbe borne by Tenant. 18 If deemed necessary by Landlord, access on Saturdays, Sundays and legalholidays, and on other days between the hours of 6:00 p.m. and 8:00 a.m. thefollowing day, to the office complex, or to the halls, corridors, or stairwaysin any of the building, or to said premises may be refused unless the personseeking access is known to the person or employee in charge, has a pass, or isproperly identified. Landlord shall in no case be liable for damages for anyerror with regard to the admission to or exclusion from the office complex ofany person. In case of invasion, mob, riot, public excitement, or othercommotion, Landlord reserves the right to prevent access to the office complexduring the continuance of the same by closing the doors or otherwise, for thesafety of the tenants and protection of property. 19 Tenant shall see that the doors of said premises are closed andsecurity locked before leaving the building. Tenant must observe strict care andcaution to assure that all water faucets or water apparatus are entirely shutoff before Tenant or Tenant's employees leave said premises, and that allelectrical switches shall likewise be shut off to prevent waste or damage. 20 Landlord reserves the right to exclude or expel from the office parkcomplex any person who, in the judgment of Landlord, is intoxicated or under theinfluence of liquor or drugs, or who shall in any manner do any act in violationof any of the rules and regulations. 21 No vending machine or machines of any description shall be installed,maintained or operated upon said premises without the written consent ofLandlord. 22 Landlord shall have the right, exercisable without notice and withoutliability to Tenant, to charge the name and the street address of the buildingof which said premises are a part. 23 The parking areas within the office complex shall be used solely forpassenger type vehicles during normal office hours and the parking of trucks,trailers, recreational vehicles and campers is specifically prohibited. Novehicle of any type shall be stored within the parking areas at any time. In theevent that a vehicle is disabled, it shall be removed within 48 hours. Thereshall be no "For Sale" or other advertising signs on or about any parkedvehicle. All vehicles shall be parked in the designated parking areas inconformance with all signs and other markings. 24 Tenant shall not place any improvements or movable objects includingantennas, outdoor furniture, etc. in the parking areas, landscaped area or otherareas outside of said premises, or on the roof of said premises. 25 "Office complex" refers to the entire office building development ofLandlord. 26Landlord reserves the right to make such other rules and regulations as in itsjudgment may be for the safety, care and cleanliness of said premises and theoffice complex for the preservation of good order therein. Tenant agrees toabide by all such rules and regulations hereinabove stated and any additionalrules and regulations which are adopted. EXHIBIT "A" ADDENDUM TO LEASE FOR PREMISES COMMONLY KNOWN AND DESIGNATED AS: OFFICES #7, 8, AND 9, SECOND FLOOR OF THE SOUTH BUILDING 904 MANHATTAN AVENUE, MANHATTAN BEACH, CALIFORNIA This Addendum to Lease executed on March _____, 2000, by and betweenDOLORES MCNABB, as Landlord, and SKECHERS U.S.A., Inc., a Delaware corporation,as Tenant, is an integral part of said Lease as if fully set forth therein. A. OPTION TO EXTEND LEASE TERM. So long as Tenant has fully performed all the obligations on its part tobe performed, Landlord hereby grants to Tenant two (2) consecutive options toextend this lease for five (5) years each, on the same terms and conditions asare contained herein except as to increases in real estate taxes as hereinafterprovided. It is contemplated that Tenant's occupancy shall be continuous;therefore, in the event Tenant fails to exercise any of the options grantedherein, the remaining options shall immediately expire and be of no furtherforce or effect. The parties specifically acknowledge that the Lease rent termsprovide for annual increases of 3%. Such increases shall continue to be appliedannually during each and every option exercised hereunder. Tenant shall exercise each such option by delivering written notice toLandlord at least six (6) months, but not more that twelve (12) months, prior tothe end of each five (5) year term. TIME IS OF THE ESSENCE IN REGARD TO THEDELIVERY OF THE NOTICE. In the event Tenant fails to deliver written notice asherein provided, the options granted herein shall expire and be of no furtherforce or effect. B. RENT. Tenant shall pay to Landlord rent, free from all claims, demands orset-offs against Landlord of any kind or character whatsoever, except asotherwise expressly provided to the contrary, in advance, in the amount of$199,804.15, payable $3,800.00 on execution of this lease and thereafter on thefirst day of each month (except May 1, 2000) as follows: June 1, 2000 to March 31, 2001 $3,800.00 per month April 1, 2001 to March 31, 2002 $3,914.00 per month April 1, 2002 to March 31, 2003 $4,031.42 per month April 1, 2003 to March 31, 2004 $4,152.36 per month April 1, 2004 to June 30, 2004 $4,276.93 per monthLandlord agrees that Tenant shall be given possession on April, 2000 to installsuch tenant improvements as it deems necessary and proper for its purposes,however, nothing in this paragraph shall eliminate the requirement that Tenantobtain Landlord's approval prior to making any such tenant improvements. LATE PAYMENTS: In the event that Tenant shall fail to pay to landlordwithin 5 days of the date when due, any payment owing to Landlord pursuant tothe terms of this Lease, Tenant shall pay Landlord a late charge in the amountof ten percent (10%) of the rent payment then due in addition to said rent. SQUARE FOOTAGE DISCLAIMER: The parties hereto hereby acknowledge thatduring the negotiations for this Lease, the parties discussed the rent as afunction of an amount per square feet of rentable space. Prior to the executionof this Lease, Tenant has had the opportunity to inspect the space and satisfyitself as to the size and suitability of the space for its intended purposes.The parties hereto hereby agree the above dollar figures of rent shall be dueand payable regardless of the actual square feet in the demised premises andTenant acknowledges that Landlord makes no representation or warranty as to theactual size of the premises. Any discussions concerning a rental per square footof space is superceded by this provision. C. USE. The sole permitted use of the premised shall be commercial office andrelated activities. D. REAL ESTATE TAXES-OPTION PERIODS Upon the exercise of the options hereinabove provided for, Tenant agreesto pay during the term of each such option period, or periods, as the case maybe, its pro rata share of any increase in real estate taxes and assessmentslevied or imposed against the real property of which the demised premises are apart over an above the taxes imposed on said real property during the fifth yearof the original term of this Lease (the base year). The parties heretoacknowledge and agree that Tenant occupies approximately 20% of the building andagree that for purposes of this provision that Tenant shall pay 20% of any suchincrease. Landlord shall provide Tenant with a copy of the tax bill for thefiscal year July 2003- June 2004 (the base year) of the initial term along witha copy of the tax bill for each year during any option period that Tenantcontinues in possession under this Lease. Tenant shall pay to Landlord one halfof its pro rata share (20%) of such increase on or before December 10 of eachyear and the remaining on half of its pro rata share (20%) on or before April 10of each year. E. AIR CONDITIONING REPAIR AND MAINTENANCE. Landlord has provided an air conditioner in good working condition thatservices Officers 7, 8 and 9 on the second floor of the south building. Tenanthereby agrees that it will pay any and all costs related to the repair andmaintenance of said air conditioner. F. SECURITY DEPOSIT Tenant shall pay Landlord on execution of this Lease the sum of $4,000.00as a security deposit in accordance with the provisions of Paragraph 19 of thelease. G. PARKING Landlord hereby grants to Tenant the exclusive use of one (1) parkingspace, the location of which will be designated by Landlord. H. RULES AND REGULATIONS The Rules and regulations attached hereto and hereby incorporated by thisreference as if fully set forth herein and shall be an integral part of thisLease. I. ASSIGNMENT Notwithstanding the provisions of Paragraph 11 of the Lease, no consentfrom Landlord shall be required for the assignment of this Lease under thefollowing circumstances, each of which shall be considered a PermittedAssignment: (1) the transfer of stock of Tenant to members of the immediate family of a shareholder of Tenant, to a living trust for estate-planning purposes, or by will or intestacy, or, (2) Tenant sells or offers for sale its voting stock to the public in accordance with the qualifications or registration requirements of the State of California and the Security Act of 1933, as amended. H. TENANT'S RIGHT TO TERMINATE IN THE EVENT OF DESTRUCTION OF THE PREMISES Notwithstanding the provisions of Paragraph 16. DESTRUCTION OF PREMISES ofthe Lease, in the event Landlord cannot complete the repairs and returnpossession to Tenant within a period of six (6) months, Tenant shall have theoption of terminating this Lease. Notice of such election to terminate shall begiven by Tenant to landlord within ten (10) days of Tenant's receipt of writtennotice from Landlord that the repair period is projected to exceed (6) months.In the event Tenant fails to so notify Landlord in writing, this right toterminate shall expire. I. MUTUAL INDEMNIFICATION Tenant Agrees to defend, with counsel reasonably satisfactory to Landlord,indemnify and hold harmless, Landlord, its agents, employees, officers,directors, shareholders, partners, members and representatives (collectively"Landlord") from and against any and all loss, cost, action liability, damage orexpense, including but not limited to, penalties, fines, attorneys' fees orcosts (collectively "claims"), to any person, property or entity resulting fromthe following: (i) the negligence or wilful misconduct of Tenant, its agents,employees or contractors; (ii) Tenant's default or breach of any of the termsand conditions of this Lease; and (iii) any occurrences within the Premises, notresulting from the negligence or wilful misconduct of Landlord, its agents,employees or contractors.Landlord agrees to defend with counsel reasonably satisfactory to Tenant,indemnify and hold harmless, Tenant, its agents, employees, officers, directors,shareholders, partners, members and representatives (collectively "Tenant") fromand against any and all loss, costs, action, liability, damage or expense,including but not limited to, penalties, fines, attorneys' fees or costs(collectively "claims"), to any person, property or entity resulting from thefollowing: (i) the negligence or wilful misconduct of Landlord, its agents,employees or contractors; (ii) Landlord's default or breach of any of the termsand conditions of this Lease; and (iii) any occurrences within the Premises, notresulting from the negligence or wilful misconduct of Tenant its agents, employees or contractors. Notwithstanding the foregoing, however, because Landlord is required tomaintain property insurance on the Building, and because of the existence ofwaivers of subrogation set forth in this Lease, Landlord hereby agrees todefend, indemnify and hold Tenant harmless on any Claims to the extent suchclaim is covered by such insurance, even if resulting from the negligent acts,omissions or misconduct of Tenant or those of its agents, employees orcontractors. Similarly, since Tenant must carry insurance to cover its personalproperty within the premises, and because of the waivers of subrogation setforth in this Lease, Tenant hereby agrees to defend, indemnify and hold Landlordharmless from any claims to the extent any such claim is covered by suchinsurance, if resulting from the negligent acts, omissions or misconduct ofLandlord or those of its agents, employees or contractors. The provisions ofthis section shall survive the expiration or sooner termination of the Leasewith respect to any occurrences, claims or liabilities occurring prior to suchexpiration or termination.LANDLORD TENANTDOLORES MCNABB SKECHERS USA, INC., a Delaware corporationDelores L. McNabb by /s/ Michael Greenberg--------------------------- -------------------------Date April 15, 2000 by Michael Greenberg ---------------------- ------------------------- Date 4/14, 2000 ----------------------- EXHIBIT 10.27(a) FIRST AMENDMENT TO LEASEThis First Amendment to Lease ("First Amendment") is entered into on October26th 2000 by and between MANHATTAN CORNERS, LLC a California LimitedLiability Company ("Lessor") and SKECHERS. U.S.A., INC A Delaware Corporation("Lessee") with reference to the following facts and objectives. A. On April 28, 2000, Lessor and Lessee executed that certain Standard Industrial/Commercial Single-Tenant Lease-Net (The "Lease") to the premises located 1100 Highland Avenue, Manhattan Beach, California (the "Premises"). B. The parties now desire to amend the Lease in certain Particulars. Now, therefore, the parties agree as follows: 1. Amendment to Lease. The parties hereby amend the Lease in thefollowing particulars only Commencement Date. The parties agree that the Commencement Date as setforth in the Lease shall be November 1, 2000. Lessee acknowledges that it hasreceived possession of the Premises and that its obligations to pay Base Rentshall commence on November 1, 2000. The parties further acknowledge that Lessorhas been unable to obtain all required governmental approvals and sign offs forits construction of the Premises, due to Lessee's continuing tenant improvementwork. The parties agree to cooperate in good faith, to enable Lessee to completeits improvement fork, and to enable Lessor to obtain all necessary governmentalapprovals and sign-offs and a Certificate of Occupancy. Lessee agrees to keepLessor apprised of the progress of its tenant improvement work, so thatappropriate governmental inspections can be schedule and completed in a timelymanner. Additionally, Lessor agrees that from the date Lessee ha completed itstenant improvement work and notified Lessor thereof, Lessor will proceeddiligently to complete its work and to obtain all necessary governmentalapproval and sign-offs and a Certificate of Occupancy. Furthermore, in the eventthat Lessor has not obtained all necessary governmental approval and sign-offswithin the hundred (100) days from the date that Lessee has notified Lessor ofthe completion of Lessee's work, then Lessee shall be entitled to terminate thisLease upon twenty (20) days prior written notice to Lessor. In the even thatLessor is able to complete its work and obtain all necessary governmentalapproval and sign-offs during this twenty (20) day period, then the notice oftermination shall automatically be deemed revoked. Lessee's rights to terminatethe Lease pursuant to the above provisions is in addition to any and all otherremedies, at law or in equity, that Lessee may have. 2. No Other Changes. Except as expressly amended hereby, all otherterms and conditions of the Lease shall remain unchanged and in full force andeffect. Executed on the date first above written at Manhattan Beach,CaliforniaLESSOR: MANHATTAN CORNERS, LLC LESSEE: SKECHERS U.S.A., INCA California Limited Liability Company A Delaware CorporationBy: /s/ Kenneth R. Ziegler By: /s/ Michael Greenberg ---------------------------- ------------------------------- KENNETH R. ZIEGLER MICHAEL GREENBERGIts: General Manager Its: President By: /s/ Philip G. Paccione ------------------------------- Its: Vice President Exhibit 10.28(a) FIRST AMENDMENT TO LEASETHIS FIRST AMENDMENT TO LEASE is made this 22nd day of October, 2003, by andbetween ProLogis California I LLC, hereinafter referred to as "Landlord," andSkechers U.S.A., Inc., hereinafter referred to as "Tenant." WITNESSETH:WHEREAS, Landlord and Tenant entered into that certain Lease dated April 10,2001 (the "Lease") for a 763,228 square foot space known and numbered as 4100 E.Mission Blvd., Ontario, CA 91761 (the "Premises");AND WHEREAS, Landlord is exercising Landlord's Recapture Right and defined inthe Lease:AND WHEREAS, the parties hereto now desire to amend and modify said Lease morefully as hereinafter set forth. AGREEMENT:NOW THEREFORE, in consideration of the Premises and the mutual covenantshereinafter contained the parties hereto agree as follows:1. Effective October 12, 2003, the Premises shall be reduced by 1,391 square feet to a revised approximate size of 761,837 square feet and the approximately six (6) parking stalls in front of Landlord's Office Space shall be allocated to said space.2. Monthly Base Net Rent shall be adjusted as follows: October 1, 2003 - October 31, 2003 $217,264.24 November 1, 2003 - May 31, 2006 $217,123.57 June 1, 2006 - November 30, 2008 $236,169.79 December 1, 2008 - May 31, 2011 $251,405.97 3. Effective October 12, 2003, Tenant's proportionate share of the Building and Project shall be 99.82%.4. Pursuant to Addendum 4 of the Lease, Landlord shall build Landlord's Office Space (see attached Exhibit A) in the recaptured area at its own expense, and all utilities shall be separately metered (except for water and sewer which shall be jointly metered). Landlord agrees to use reasonable efforts to not disrupt Tenant's business while Landlord is constructing Landlord's Office Space, and Tenant agrees to use reasonable efforts not to disrupt Landlord in its construction of Landlord's Office Space.5. Except as herein amended, the terms and conditions of the Lease and any amendments thereto, shall continue in full force and effect and the lease as amended herein is hereby ratified and affirmed by Landlord and Tenant.IN WITNESS WHEREOF, the parties hereto have executed this First Amendment tolease in multiple counterparts, each of which shall have the force and effect ofan original.TENANT LANDLORDSKECHERS U.S.A., INC. PROLOGIS CALIFORNIA I LLCBy: /s/ DAVID WEINBERG By: /s/ LARRY H. HARMSEN ------------------------------ -------------------------------Name: David Weinberg Name: Larry H. Harmsen ---------------------------- -----------------------------Title: Executive Vice President Title: Senior Vice President Chief Financial Officer ---------------------------- ---------------------------  Exhibit 21.1Subsidiaries of the Registrant Name 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 Italy310 Global Brands, Inc. Delaware  Exhibit 23.1Independent Auditors’ ConsentThe Board of DirectorsSkechers U.S.A., Inc.:We consent to incorporation by reference in the registration statement (No. 333-71114) on Form S-8 of Skechers U.S.A., Inc. of our reportdated February 19, 2004, relating to the consolidated balance sheets of Skechers U.S.A., Inc. and subsidiaries as of December 31, 2003 and2002, and the related consolidated statements of operations, stockholders’ equity and comprehensive income (loss), and cash flows for eachof the years in the three-year period ended December 31, 2003, and the related financial statement schedule, which report appears in theDecember 31, 2003, annual report on Form 10-K of Skechers U.S.A., Inc./s/ KPMG LLPLos Angeles, CaliforniaMarch 11, 2004  Exhibit 31.1Certification of CEO Pursuant toSecurities Exchange Act Rules 13a-14(a) and 15d-14(a)as Adopted Pursuant toSection 302 of the Sarbanes-Oxley Act of 2002I, Robert Greenberg, Chief Executive Officer of Skechers U.S.A., Inc. certify that:1. I have reviewed this annual report on Form 10-K Skechers U.S.A., Inc.2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary tomake the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periodcovered by this 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 thisreport.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-15(e) and 15d-15(e)) for the registrant and we have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known tous by others within those entities, particularly during the period in which this annual report is being prepared; b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions aboutthe effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on suchevaluation; and c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’smost recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report that has materially affected or isreasonably likely to materially affect, the registrant’s internal control over financial reporting; and5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financialreporting, to the registrant’s auditors and to the audit committee of the registrant’s board of directors (or persons performing the equivalentfunctions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’sinternal control over financial reporting.Date: March 12, 2004 /S/ ROBERT GREENBERG Robert Greenberg, Chief Executive Officer44 Exhibit 31.2Certification of CFO Pursuant toSecurities Exchange Act Rules 13a-14(a) and 15d-14(a)as Adopted Pursuant toSection 302 of the Sarbanes-Oxley Act of 2002I, David Weinberg, the Chief Financial Officer of Skechers U.S.A., Inc. certify that:1. I have reviewed this annual report on Form 10-K Skechers U.S.A., Inc.2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary tomake the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periodcovered by this 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 thisreport.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-15(e) and 15d-15(e)) for the registrant and we have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known tous by others within those entities, particularly during the period in which this annual report is being prepared; c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions aboutthe effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on suchevaluation; and c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’smost recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report that has materially affected or isreasonably likely to materially affect, the registrant’s internal control over financial reporting; and5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financialreporting, to the registrant’s auditors and to the audit committee of the registrant’s board of directors (or persons performing the equivalentfunctions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’sinternal control over financial reporting.Date: March 12, 2004 /S/ DAVID WEINBERG David Weinberg, Executive Vice President and Chief Financial Officer45 Exhibit 32CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report of Skechers U.S.A., Inc. (the “Company”) on Form 10-K for the year ending December 31, 2002 as filedwith the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned, in the capacities and on the dateindicated below, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act 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 theCompany./S/ ROBERT GREENBERGRobert GreenbergChief Executive Officer(Principal Executive Officer)March 12, 2004/S/ DAVID WEINBERGDavid WeinbergChief Financial Officer(Principal Financial and Accounting Officer)March 12, 2004A SIGNED ORIGINAL OF THIS WRITTEN STATEMENT REQUIRED BY THE SECTION 906 HASBEEN PROVIDED TO THE COMPANY AND WILL BE RETAINED BY THE COMPANY AND FURNISHEDTO THE SECURITIES AND EXCHANGE COMMISSION OR ITS STAFF UPON REQUEST. 

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