Skechers U.S.A. Annual Report 2007

Plain-text annual report

Table of ContentsUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549FORM 10-K(Mark One)  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT OF 1934For the fiscal year ended December 31, 2007OR o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ANDEXCHANGE ACT OF 1934For the transition period from to Commission File Number 001-14429SKECHERS U.S.A., INC.(Exact Name of Registrant as Specified in Its Charter) Delaware 95-4376145(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.) 228 Manhattan Beach Blvd., Manhattan Beach, California 90266(Address of Principal Executive Offices) (Zip Code)Registrant’s telephone number, including area code: (310) 318-3100Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange onTitle of Each Class Which RegisteredClass A Common Stock, $0.001 par value New York Stock ExchangeSecurities registered pursuant to Section 12(g) of the Act:None (Title of Class)Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  No oIndicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes  No oIndicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) 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 this Form 10-K or anyamendment to this Form 10-K. Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See thedefinitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):Large accelerated filer  Accelerated filer o Non-accelerated filer o(Do not check if a smaller reporting company) Smaller reporting company o Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No As of June 30, 2007, the aggregate market value of the voting and non-voting Class A and Class B Common Stock held by non-affiliates of the Registrant wasapproximately $957 million based upon the closing price of $29.20 of the Class A Common Stock on the New York Stock Exchange on such date.The number of shares of Class A Common Stock outstanding as of February 15, 2008: 33,009,788.The number of shares of Class B Common Stock outstanding as of February 15, 2008: 12,851,789.DOCUMENTS INCORPORATED BY REFERENCEPortions of the Registrant’s Definitive Proxy Statement issued in connection with the 2008 Annual Meeting of the Stockholders of the Registrant areincorporated by reference into Part III. SKECHERS U.S.A., INC.TABLE OF CONTENTS TO ANNUAL REPORT ON FORM 10-KFOR THE YEAR ENDED DECEMBER 31, 2007 PART I ITEM 1. BUSINESS 2 ITEM 1A. RISK FACTORS 14 ITEM 1B. UNRESOLVED STAFF COMMENTS 20 ITEM 2. PROPERTIES 20 ITEM 3. LEGAL PROCEEDINGS 20 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 20 PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIES 21 ITEM 6. SELECTED FINANCIAL DATA 23 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION 24 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 35 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 36 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 60 ITEM 9A. CONTROLS AND PROCEDURES 60 ITEM 9B. OTHER INFORMATION 61 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 63 ITEM 11. EXECUTIVE COMPENSATION 63 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATEDSTOCKHOLDER MATTERS 63 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 63 ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES 63 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES 63 EXHIBIT 10.3 EXHIBIT 10.15(b) EXHIBIT 10.16(b) EXHIBIT 10.16(c) EXHIBIT 10.16(d) EXHIBIT 21.1 EXHIBIT 23.1 EXHIBIT 31.1 EXHIBIT 31.2 EXHIBIT 32.1iTable of ContentsSPECIAL NOTE ON FORWARD LOOKING STATEMENTS This annual report on Form 10-K contains forward-looking statements that are made pursuant to the safe harbor provisions of the Private SecuritiesLitigation Reform Act of 1995, including statements with regards to future revenue, projected 2008 results, earnings, spending, margins, cash flow, orders,expected timing of shipment of products, inventory levels, future growth or success in specific countries, categories or market sectors, continued or expecteddistribution to specific retailers, liquidity, capital resources and market risk, strategies and objectives. Forward-looking statements include, without limitation,any statement that may predict, forecast, indicate or simply state future results, performance or achievements of our company, and can be identified by theuse of forward looking language such as “believe,” “anticipate,” “expect,” “estimate,” “intend,” “plan,” “project,” “will be,” “will continue,” “will result,”“could,” “may,” “might,” or any variations of such words with similar meanings. Any such statements are subject to risks and uncertainties that could causeactual results to differ materially from those which are management’s current expectations or forecasts. Such information is subject to the risk that suchexpectations or forecasts, or the assumptions underlying such expectations or forecasts, become inaccurate. Risk factors include but are not limited to the following: international, national and local general economic, political and market conditions; intensecompetition among sellers of footwear for consumers; changes in fashion trends and consumer demands; popularity of particular designs and categories ofproducts; the level of sales during the spring, back-to-school and holiday selling seasons; the ability to anticipate, identify, interpret or forecast changes infashion trends, consumer demand for our products and the various market factors described above; the ability of our company to maintain its brand image;the ability to sustain, manage and forecast our company’s growth and inventories; the ability to secure and protect trademarks, patents and other intellectualproperty; the loss of any significant customers, decreased demand by industry retailers and cancellation of order commitments; potential disruptions inmanufacturing related to overseas sourcing and concentration of production in China, including, without limitation, difficulties associated with politicalinstability in China, increases in labor or raw material costs, the occurrence of prolonged adverse weather conditions, a natural disaster or outbreak of apandemic disease in China, or electrical shortages, labor shortages or work stoppages that may lead to higher production costs, production delays and/ortransportation delays; changes in monetary controls and valuations of the Yuan by the Chinese government; increased costs of freight and transportation tomeet delivery deadlines; violation of labor or other laws by our independent contract manufacturers, suppliers or licensees; potential imposition of additionalduties, tariffs or other trade restrictions; business disruptions resulting from natural disasters such as an earthquake due to the location of our company’sdomestic warehouse, headquarters and a substantial number of retail stores in California; changes in business strategy or development plans; changes ineconomic conditions that could affect the Company’s ability to open retail stores in new markets and/or the sales performance of the Company’s existingstores; the ability to attract and retain qualified personnel; the disruption, expense and potential liability associated with existing or unanticipated futurelitigation; and other factors referenced or incorporated by reference in this report and other reports that we filed with the United States Securities and ExchangeCommission (the “SEC”). The risks included here are not exhaustive. Other sections of this report may include additional factors that could adversely impact our business andfinancial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and wecannot predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any factor, or combination offactors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investorsshould not place undue reliance on forward-looking statements as a prediction of actual results. Moreover, reported results shall not be considered anindication of our company’s future performance. Investors should also be aware that while we do, from time to time, communicate with securities analysts, wedo not disclose any material non-public information or other confidential commercial information to them. Accordingly, individuals should not assume that weagree with any statement or report issued by any analyst, regardless of the content of the report. Thus, to the extent that reports issued by securities analystscontain any projections, forecasts or opinions, such reports are not our responsibility.1Table of ContentsPART IITEM 1. BUSINESS We were incorporated in California in 1992 and reincorporated in Delaware in 1999. Throughout this annual report, we refer to Skechers U.S.A., Inc., aDelaware corporation, and its consolidated subsidiaries as “we,” “us,” “our,” “our company” and “Skechers” unless otherwise indicated. Our Internet websiteaddress is www.skechers.com. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, Form 3’s, 4’s and 5’s filed onbehalf of directors, officers and 10% stockholders, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the SecuritiesExchange Act of 1934 are available free of charge on our website as soon as reasonably practicable after we electronically file such material with, or furnish itto, the SEC. You can learn more about us by reviewing such filings on our website or at the SEC’s website at www.sec.gov.GENERAL We design and market Skechers-branded contemporary footwear for men, women and children under several unique lines. Our footwear reflects acombination of style, quality and value that appeals to a broad range of consumers. In addition to Skechers-branded lines, we also offer eight uniquelybranded designer, fashion and street-focused footwear lines for men, women and children. These lines are branded and marketed separately from Skechersand appeal to specific audiences. Our brands are sold through department stores, specialty stores, athletic retailers, and boutiques as well as our e-commercewebsite and our own retail stores. We operate 70 concept stores, 72 factory outlet stores and 35 warehouse outlet stores in the United States, and 14 conceptstores and two factory outlets internationally. Our objective is to profitably grow our operations worldwide while leveraging our recognizable Skechers brandthrough our strong product lines, innovative advertising and 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 coreconsumers are style-conscious 12 to 24 year-old men and women attracted to our youthful brand image and fashion forward designs. Many of our best-sellingand core styles are also developed for children with colors and materials that reflect a playful image appropriate for this demographic. We believe that brand recognition is an important element for success in the footwear business. We have aggressively promoted our brands throughcomprehensive marketing campaigns for men, women and children. During 2007, we continued our celebrity driven ads with platinum recording artist AshleeSimpson as our Skechers celebrity endorsee. We also developed television campaigns for our men’s, women’s and children’s lines, including our firstanimated campaign for Airators by Skechers and Cali Gear from Skechers. In 2007, our marketing for children focused on television spots, while our adultefforts utilized television, print and outdoor. Select fashion brands including Marc Ecko Footwear are supported by television commercials. Our Unltd. byMarc Ecko Rhino Red and Zoo York footwear lines are also supported through print ads developed by Marc Ecko. The Red by Marc Ecko line was alsosupported by print and television campaigns featuring platinum recording artist and actress JoJo, and High School Musical stars Ashley Tisdale and VanessaHudgens. Since we introduced our first line, Skechers USA Sport Utility Footwear, in December 1992, we have expanded our product offering and grown our netsales while substantially increasing the breadth and penetration of our account base. Our men’s, women’s and children’s Skechers-branded product linesbenefit from the Skechers reputation for contemporary and progressive styling, quality, comfort and affordability. Our lines that are not branded with theSkechers name benefit from our marketing support, quality management and expertise. To promote innovation and brand relevance, we manage our productlines separately by utilizing dedicated sales and design teams. Our product lines share back office services in order to limit our operating expenses and fullyutilize our management’s vast experience in the footwear industry.SKECHERS LINES Skechers USA. Our Skechers USA category for men and women includes five types of footwear: (i) Casuals, (ii) Dress Casuals, (iii) Comfort andLightweight (for men only), (iv) Outdoor (for men only) (v) Sandals and (vi) Casual Fusion. This category is generally sold through mid-tier retailers,department stores and some footwear specialty shops. • The Casuals line for men and women is defined by lugged outsoles and utilizes value-oriented and leather materials in the uppers. For men, theCasuals category includes “black and brown” boots, shoes and sandals that generally have a rugged urban design — some with industrial-inspiredfashion features. For women, the Casuals category includes basic “black and brown”2Table of Contents oxfords and slip-ons, lug outsole boots, and casual sandals. We design and price both the men’s and women’s categories to appeal primarily toyounger consumers with broad acceptance across age groups. • For men, the Dress Casuals category is comprised of basic “black and brown” men’s shoes that feature shiny leathers and dress details, but mayutilize traditional or lugged outsoles as well as value-oriented materials. For women, the Dress Casual line is comprised of trend-influenced stylizedboots and shoes, which may include leather uppers, shearling or faux fur lining or trim. • Skechers Comfort is a line of trend-right casuals for men who want all-day comfort without compromising style. Characteristics of the line includecomfortable outsoles, cushioned insoles and quality leather uppers. A category with unique features, we market and package the Skechers Comfortstyles in a shoe box that is distinct from that of other categories in the Skechers USA line of footwear. • Our Outdoor styles for men primarily consist of hiker-influenced constructions including boots and shoes. While this category includes manytechnical performance features, we market this category of footwear primarily on the basis of style and comfort. Outsoles generally consist of moldedand contoured hardened rubber. Many designs include gussetted tongues to prevent penetration of water and debris, cushioned mid-soles, motioncontrol devices such as heel cups, water-resistant or water-proof construction and materials, and more durable hardware such as metal D-ringsinstead of eyelets. Uppers are generally constructed of heavily oiled nubuck and full-grain leathers. • Our Sandals collection for men and women is designed with many of our existing and proven outsoles for our Casuals, Dress Casuals and CasualFusion lines, stylized with basic or core uppers as well as fresh looks. These styles are generally made with quality leather uppers, but may also bein canvas or fabric. • Our Casual Fusion line is comprised of low-profile, sport-influenced Euro casuals targeted at trend-conscious young men and women. The outsolesare primarily rubber and adopted from our men’s Sport and women’s Active lines. This collection features leather or nubuck uppers, but may alsoinclude mesh, and may be in shades of browns and beiges as well as in black, gray, greens and blues. Skechers Sport. Our Skechers Sport footwear for men and women includes: (i) Joggers, Trail Runners, Sport Hikers, Terrainers, (ii) Performance (formen only), (iii) Street Casuals and (iv) Sport Sandals. Our Skechers Sport category is distinguished by its technical performance-inspired looks; however,we generally do not promote the technical performance features of these shoes. Skechers Sport is typically sold through specialty shoe stores, department storesand athletic footwear retailers. • Our Jogger, Trail Runner, Sport Hiker and cross trainer-inspired Terrainer designs are lightweight constructions that include cushioned heels,polyurethane midsoles, phylon and other synthetic outsoles, as well as leather or synthetic uppers such as durabuck, cordura and nylon mesh.Careful attention is devoted to the design, pattern and construction of the outsoles, which vary greatly depending on the intended use. This categoryfeatures earth tones and athletic-inspired hues with contrasting pop colors such as lime green, orange and red in addition to traditional athletic white. • The Performance category is comprised of multi-purpose running shoes that are marketed as men’s lifestyle athletic footwear. Some styles include 3Mreflective accents, breathable upper construction, quality leathers, abrasion-resistant toe and heel cap, removable moisture wicking molded ethylvinyl acetate (“EVA”) sock liner, outsole forefoot flex grooves for improved flexibility, non-marking rubber lugs with impact dispersment technology(“IDT”), aggressive all terrain traction lugs, external torsion stabilizer and tuned dual-density molded EVA midsole with pronation control. • Street Casual incorporates lower profiles, classic details and skate, street and fusion influences in a collection of essential, basic casual sneakers.The uppers are designed in leather, suede, nubuck, canvas and/or mesh, and many include vulcanized outsoles. Street Casual is targeted to youngconsumers, but also appeals to a broader demographic. • Our Sport Sandals are primarily designed from existing Skechers Sport outsoles and may include many of the same sport features as our sneakerswith the addition of new technologies geared toward making a comfortable sport sandal. Sport sandals are designed as seasonal footwear for theconsumer who already wears our Skechers Sport sneakers. Skechers Active. A natural companion to Skechers Sport, Skechers Active has grown from a casual everyday line into a complete line of fusion and sportfusion sneakers for females of all ages. Marked by low-profile outsoles, the Active line is available in a multitude of colors as well as solid white or black, infabrics, leathers and meshes, and with various closures – traditional laces, zig-3Table of Contentszag and cross straps, among others. The line also now includes Mary Janes, sandals and open back styles. Active sneakers are typically retailed throughspecialty casual shoe stores and department stores. Skechers Cali. Launched in 2006, Skechers Cali is a line of sneakers, skimmers, wedges and sandals for young women designed to typify the Californialifestyle. The uppers are primarily in canvas, fabrics and leather with unique prints, some with patch details. The sandals range from dress casual looks tocasual to beach thongs. Skechers Cali is sold through specialty casual shoe stores and department stores. Skechers Work. Expanding on our heritage of cutting-edge utility footwear, Skechers Work offers a complete line of men’s and women’s casuals, fieldboots, hikers and athletic shoes. The Skechers Work line includes athletic-inspired, casual safety toe, and non-slip safety toe categories that may featurelightweight aluminum safety toe, electrical hazard, and slip-resistant technologies, as well as breathable, seam-sealed waterproof membranes. Designed for menand women with jobs that require certain safety requirements, these durable styles are constructed on high-abrasion, long wearing soles, and feature breathablelining, oil and abrasion resistant outsoles offering all-day comfort and prolonged durability. The uppers are comprised of high-quality leather, nubuck,trubuck and durabuck. Our safety toe athletic sneakers, boots, hikers, and casuals are ideal for environments requiring safety footwear and offer comfort andsafety in dry or wet conditions. Our slip-resistant boots, hikers, athletics, casuals and clogs are ideal for the service industry. Our safety toe products havebeen independently tested and certified to meet ASTM standards, and our slip-resistant soles have been tested pursuant to the Mark II testing method for slipresistance. Skechers Work is typically sold through department stores, athletic footwear retailers and specialty shoe stores, as well as marketed directly toconsumers through business-to-business channels. Skechers Kids. The Skechers Kids line includes: (i) Skechers Kids, which is a range of infants, toddlers, boys and girls boots, shoes and sneakers;(ii) S-Lights, which is lighted footwear for toddlers, boys and girls; (iii) Skechers Cali for Girls, which is trend-inspired boots, shoes, sandals and dresssneakers; (iv) Airators by Skechers; (v) Skechers Super Z-Strap; and (vi) Babiez by Skechers. Skechers Kids and Skechers Cali for Girls are comprisedprimarily of shoes that are designed as “takedowns” of their adult counterparts, allowing the younger set the opportunity to wear the same popular styles astheir older siblings and schoolmates. This “takedown” strategy maintains the product’s integrity by offering premium leathers, hardware and outsoles withoutthe attendant costs involved in designing and developing new products. In addition, we adapt current fashions from our men’s and women’s lines bymodifying designs and choosing colors and materials that are more suitable for the playful image that we have established in the children’s footwear market.Each Skechers Kids line is marketed and packaged separately with a distinct shoe box. Skechers Kids shoes are available at department stores and specialtyand athletic retailers. • The Skechers Kids line includes embellishments or adornments such as fresh colors and fabrics from our Skechers adult shoes. Some of thesestyles are also adapted for toddlers with softer, more pliable outsoles and for infants with soft, leather-sole crib shoes. • S-Lights is a line of sneakers and sandals with a combined pattern of lights on the outsole and other areas of the shoes. We market and package theS-Lights styles in a shoe box that is distinct from that of other categories in the Skechers Kids line of footwear. • Skechers Cali for Girls is a line of sneakers, skimmers and sandals for young women designed to typify the California lifestyle. The sneakers aredesigned primarily with canvas uppers in unique prints, some with patch details, on vulcanized outsoles. The skimmers and flats are designed withmany of the same upper materials and outsoles as the sneakers. • Airators by Skechers is a line of boys sneakers with a foot-cooling system designed to pump air from the heel through to the toes. • Skechers Super Z-Strap is a line of athletic styled sneakers with a unique “z” shaped closure system for easy closure. • Babiez by Skechers is a line of crib shoes for infants. The uppers and outsoles are designed in leather and are extremely flexible for newborn feet. Cali Gear by Skechers. Launched in 2007, Cali Gear by Skechers is a new line of nano liteTM molded footwear for men, women and children. Designedwith many of our signature outsoles as well as uppers, the lightweight footwear is available in a multitude of colors and patterns consistent with the Skechersimage. The majority of styles for children, as well as some adult styles, are available with Skechers Cali Bits, which are decorative accessories inserted intodesigned holes in the uppers. The Skechers Cali Bits are also4Table of Contentsavailable for purchase and include licensed properties such as The Simpsons and Spiderman. The Cali Gear footwear is also non-slip and odor-resistant.Primarily displayed on hanging fixtures and wall units, the footwear is available at department stores, footwear specialty chains and independents.FASHION AND STREET BRANDSThe Fashion and Street Division and its brands are marketed and packaged separately from Skechers. Unltd. by Marc Ecko, Rhino Red and Red by Marc Ecko. Unltd. by Marc Ecko is a line of men’s street-inspired traditional sneakers, fusion sneakersand urban-focused casuals. Rhino Red is a line of women’s classic and fashion-forward fusion sneakers sandals and Mary Janes for young women. Targetedto the street-savvy 18 to 34 year-old consumer, the footwear reflects Ecko Unltd.’s men’s apparel and the Ecko Red women’s apparel, and effectively utilizesthe globally recognized Rhino logo on the majority of sneakers and casuals. Within the Rhino Red line is the Red by Marc Ecko offering, a line of designerdress and dress casual footwear for the urban chic woman. The men’s and women’s footwear collections are designed in leather, canvas, mesh, as well asother materials. Unltd. by Marc Ecko for boys and Rhino Red for girls sneaker lines primarily consist of takedowns from the adult Marc Ecko footwear lineswith additional or different colorways geared toward children and that reflect the boys’ and girls’ Ecko Unltd. and Ecko Red clothing. The licensed brands aresold through select department stores and specialty retailers. Zoo York. Zoo York footwear is a line of action sports and lifestyle footwear for men. Zoo York footwear is designed by Marc Ecko Enterprises andborrows from the color palette and trends from Zoo York apparel that targets core skaters and those that embrace skate fashion. Zoo York footwear is availablein skate and specialty shops as well as select athletic and department stores. 310 Motoring. The 310 footwear collection for men utilizes top-quality leathers, a fashion-forward approach to design and comfort, and materials that arederived from 310 Motoring’s customized cars, including wood burl and carbon fiber. A multi-tiered approach, the line consists of high-end and high-designboots and shoes, sophisticated driving-inspired shoes and boots, and stylized athletics. 310 footwear is available in select department stores, specialty retailersand urban independents. Mark Nason and Siren by Mark Nason. Mark Nason is a sophisticated and fashion forward footwear collection, marketed to style-conscious men,designed to complement designer denim and dress casual wear. Primarily crafted and constructed in Italy, the Mark Nason collection is comprised of classicand modern boots, shoes and sandals with distinctive profiles and luxurious hand-distressed leathers. The Mark Nason line distinguishes itself with highquality individual styling and may utilize unique materials such as premium leathers, etched and tattooed leathers, hand-treated, hand-scraped and hand-cutleathers, hand-treated leather uppers and soles, snakeskin and eel skin. Siren by Mark Nason is the ultimate accompaniment to designer denim and casualcouture for discerning women. The line’s boots are fueled with bold profiles, alluring details and distinct textures. Handcrafted in Italy, the boots utilizepremium leathers, hand-treated details, leather outsoles, and some may include snakeskin and other exotic materials. The Mark Nason lines are available inbetter department stores and boutiques. SoHo Lab. Targeting 18 to 34 year-old trend-savvy women and men, SoHo Lab is comprised of stylish dress shoes, boots and sandals. The men’s SoHoLab collection includes classic tailored and fashion-forward lasts in a variety of styles. The women’s styles also include heels and flats. The footwear ismanufactured in Europe, Brazil and China. The men’s styles are typically sold in department stores, specialty stores and independent merchants, while thewomen’s styles are only available at Skechers retail stores.PRODUCT DESIGN AND DEVELOPMENT Our principal goal in product design is to generate new and exciting footwear in all of our product lines with contemporary and progressive styles andcomfort-enhancing performance features. Targeted to the active, youthful and style-savvy, we design most new styles to be fashionable and marketable to the12 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 forinfants and toddlers. While some of our shoes have performance features, we generally do not position our shoes in the marketplace as technical performanceshoes. We believe that our products’ success is related to our ability to recognize trends in the footwear markets and to design products that anticipate andaccommodate consumers’ ever-evolving preferences. We are able to quickly translate the latest fashion trends into stylish, quality footwear at a reasonableprice by analyzing and interpreting current and emerging lifestyle trends. Lifestyle trend information is compiled and analyzed by our designers from varioussources, including the review and analysis of modern music, television, cinema, clothing, alternative sports and other trend-setting media; traveling todomestic and international fashion markets to identify and confirm current trends; consulting with our retail and e-commerce customers for information oncurrent retail selling5Table of Contentstrends; participating in major footwear trade shows to stay abreast of popular brands, fashions and styles; and subscribing to various fashion and colorinformation services. In addition, a key component of our design philosophy is to continually reinterpret and develop our successful styles in our brands’image. The footwear design process typically begins about nine months before the start of a season. Our products are designed and developed primarily by our in-house design staff. To promote innovation and brand relevance, we utilize dedicated design teams, who report to our senior design executives and focus oneach of the men’s, women’s and children’s categories. In addition, we utilize outside design firms on an item-specific basis to supplement our internal designefforts. The design process is extremely collaborative, as members of the design staff frequently meet with the heads of retail, merchandising, sales,production and sourcing to further refine our products to meet the particular needs of the target market. After a design team arrives at a consensus regarding the fashion themes for the coming season, the designers then translate these themes into our products.These interpretations include variations in product color, material structure and embellishments, which are arrived at after close consultation with ourproduction department. Prototype blueprints and specifications are created and forwarded to our manufacturers for a design prototype. The design prototypesare then sent back to our design teams. Our major retail customers may also review these new design concepts. Customer input not only allows us to measureconsumer reaction to the latest designs, but also affords us an opportunity to foster deeper and more collaborative relationships with our customers. We alsooccasionally order limited production runs that may initially be tested in our concept stores. By working closely with store personnel, we obtain customerfeedback that often influences product design and development. Our design teams can easily and quickly modify and refine a design based on customer input.Generally, the production process can take six months to nine months from design concept to commercialization.SOURCING Factories. Our products are produced by independent contract manufacturers located primarily in China and, to a lesser extent, in Italy, Vietnam, Braziland various other countries. We do not own or operate any manufacturing facilities as we believe that the use of independent manufacturers substantiallyincreases our production flexibility and capacity while reducing capital expenditures and avoiding the costs of managing a large production work force. When possible, we seek to use manufacturers that have previously produced our footwear, which we believe enhances continuity and quality whilecontrolling production costs. We attempt to monitor our selection of independent factories to ensure that no one manufacturer is responsible for adisproportionate amount of our merchandise. We source product for styles that account for a significant percentage of our net sales from at least four differentmanufacturers. During 2007, four of our contract manufacturers accounted for approximately 58.4% of total purchases. One manufacturer accounted for29.7%, and two others each accounted for over 10.0% of our total purchases. To date, we have not experienced difficulty in obtaining manufacturing services. We finance our production activities in part through the use of interest-bearing open purchase arrangements with certain of our Asian manufacturers. Thesefacilities 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 thesearrangements afford us additional liquidity and flexibility. We do not have any long-term contracts with any of our manufacturers; however, we have long-standing relationships with many of our manufacturers and believe our relationships to be good. We closely monitor sales activity after initial introduction of a product in our concept stores to determine whether there is substantial demand for a style,thereby aiding us in our sourcing decisions. Styles that have substantial consumer appeal are highlighted in upcoming collections or offered as part of ourperiodic style offerings, while less popular styles can be discontinued after only a limited production run. We believe that sales in our concept stores can alsohelp forecast sales in national retail stores, and we share this sales information with our wholesale customers. Sales, merchandising, production andallocations management analyze historical and current sales and market data from our wholesale account base and our own retail stores to develop an internalproduct quantity forecast that allows us to better manage our future production and inventory levels. For those styles with high sell-through percentages, wemaintain an in-stock position to minimize the time necessary to fill customer orders by placing orders with our manufacturers prior to the time we receivecustomers’ orders for such footwear. Production Oversight. To safeguard product quality and consistency, we oversee the key aspects of production from initial prototype manufacturethrough initial production runs to final manufacture. Monitoring of all production is performed in the United States by our in-house production departmentand in Asia through an approximately 250-person staff working from our offices in China. We believe that our Asian presence allows us to negotiate supplierand manufacturer arrangements more effectively, decrease6Table of Contentsproduct turnaround time and ensure timely delivery of finished footwear. In addition, we require our manufacturers to certify that neither convicted, forced orindentured labor (as defined under U.S. law) nor child labor (as defined by law in the manufacturer’s country) is used in the production process, and thatcompensation will be 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 our products. Ourquality control program is designed to ensure that not only finished goods meet our established design specifications, but also that all goods bearing ourtrademarks meet our standards for quality. Our quality control personnel located in China perform an array of inspection procedures at various stages of theproduction process, including examination and testing of prototypes of key raw materials prior to manufacture, samples and materials at various stages ofproduction and final products prior to shipment. Our employees are on-site at each of our major manufacturers to oversee production. For some of our lowervolume manufacturers, our staff is on-site during significant production runs or we will perform unannounced visits to their manufacturing sites to furthermonitor compliance with our manufacturing specifications.ADVERTISING AND MARKETING With a marketing philosophy of “Unseen, Untold, Unsold,” we take a targeted approach to marketing to drive traffic, build brand recognition andproperly position our diverse lines within the marketplace. Senior management is directly involved in shaping our image and the conception, development andimplementation of our advertising and marketing activities. The focus of our marketing plan is print and television advertising, which is supported byoutdoor, trend-influenced marketing, public relations, promotions and in-store support. In addition, we utilize celebrity endorsers in our advertisements. Wealso believe our Internet websites and trade shows are effective marketing tools to both consumers and corporate accounts. We have historically budgetedadvertising as a percentage of projected net sales. Advertising. The majority of our advertising is conceptualized by our in-house design team. We believe that our advertising strategies, methods andcreative campaigns are directly related to our success. Through our lifestyle and image-driven advertising, we generally seek to build and increase brandawareness by linking the Skechers brand and our fashion and street brands to youthful, contemporary lifestyles and attitudes. We have built on this approachby featuring select styles in our lifestyle ads. In addition to our compelling Skechers lifestyle ads, we have also created product specific ads for our men’s linesto appeal to men as well as women who purchase footwear for men. Our ads are designed to provide merchandise flexibility and to facilitate the “brands andproduct designs” direction of evolving footwear fashions and consumer preferences. To further build brand awareness and influence consumer spending, we have selectively signed endorsement agreements with celebrities whom we believedwould reach new markets. In 2006, we signed pop star Ashlee Simpson to appear in Skechers marketing campaigns through 2007. In past years, we hadsimilar endorsement agreements for Skechers with singers Carrie Underwood, Christina Aguilera and Britney Spears, professional basketball player andactor Rick Fox, and actors Robert Downey, Jr., Matt Dillon and Rob Lowe. From time to time, we may sign other celebrities to endorse our brand name andimage 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 Mark Nason, 310, Marc Ecko andZoo York lines through individual unique print and/or television advertisements – some which may include celebrity endorsees. For Mark Nason, we havefocused on key-selling styles in product-driven ads that captured the brand’s essence. For the Marc Ecko footwear brands, Marc Ecko’s design team hascreated relevant targeted print and television commercials for men and women. These include a multi-media men’s campaign featuring our graffiti painted shoeas well as the first commercial for Unltd. by Marc Ecko for boys. In 2007, singer/actress JoJo became the new face of Rhino Red and appeared in print andoutdoor advertising and a television commercial, and in late 2007, High School Musical stars Ashley Tisdale and Vanessa Hudgens became the faces of Redby Marc Ecko, appearing in print campaigns. Television commercials have also been developed and are being run in 2008. With a targeted approach, our print ads appear regularly in popular fashion and lifestyle consumer publications, such as GQ, Cosmopolitan, Elle, Lucky,In Style, Seventeen, Maxim, Slam, Road & Track, and Complex, as well as in weekly publications such as People, Us Weekly, Star, Sports Illustrated andInTouch, among others. Our television commercials are produced both in-house and through producers we have utilized in the past and are familiar with our brands. In 2007, wedeveloped commercials for men, women and children for our Skechers brands, including our first animated spots for Airators by Skechers and Cali Gear bySkechers for kids. We have found these to be a cost-effective way to advertise during7Table of Contentskey national and cable programming in key selling seasons. Our media buyer strategically selects the ideal programs and geographic areas for our commercialsfor maximum consumer impact. Outdoor. In an effort to reach consumers where they shop and in high traffic areas as they travel to and from work or while running errands, we continuedour multi-level outdoor campaign that included kiosks in key malls across the United States, and billboards, transportation systems and telephone kiosks inNorth America and Europe. We believe these are effective and efficient ways to reach a broad range of consumers and leave a lasting impression of our manybrands. Trend-Influenced Marketing/Public Relations. Our public relations objectives are to secure product placement in key fashion magazines, place ourfootwear on the feet of trend-setting celebrities, and garner positive and accurate press on our company. Through our commitment to aggressively promote ourupcoming styles, our products are often featured in leading fashion and pop culture magazines, as well as in select films and popular television shows. Ourfootwear and our company have been prominently displayed and referenced on news and magazine shows including The Today Show, Good Day L.A.,Entertainment Tonight, and E!; and on television programs, including Law & Order, Entourage, and The Big Idea with Donny Deutsch, among others.We have also amassed an array of prominent product placements in magazines including Lucky, Seventeen, OK!, Teen Vogue, CosmoGirl, InStyle, Maxim,Slam, Dime and Footwear News. In addition, our brands have been associated with cutting edge events and select celebrities, and our product has been seenworn by trend-setters like Denis Leary, Chris Cornell, Debra Messing, Nicole Richie, Paris Hilton and Jamie Foxx, among others. Promotions. By applying creative sales techniques via a broad spectrum of mediums, our marketing team seeks to build brand recognition and drivetraffic to Skechers’ retail stores, websites and our retail partners’ locations. Skechers’ promotional strategies have encompassed in-store specials, charityevents, product tie-ins and giveaways, and collaborations with national retailers and radio stations. Our imaginative promotions are consistent with Skechers’imaging and lifestyle. Visual Merchandising. Our in-house visual merchandising department supports wholesale customers, distributors and our retail stores by developingdisplays that effectively leverage our products at the point of sale. Our point-of-purchase display items include signage, graphics, displays, counter cards,banners and other merchandising items for each of our brands. These materials mirror the look and feel of each brand and reinforce the image as well as drawconsumers into stores. Our visual merchandising coordinators (“VMC’s”) work with our sales force and directly with our customers to ensure better sell-through at the retail levelby generating greater consumer awareness through Skechers brand displays. Our VMC’s communicate with and visit our wholesale customers on a regularbasis to aid in proper display of our merchandise. They also run in-store promotions to enhance the sale of Skechers footwear and create excitementsurrounding the Skechers brand. We believe that these efforts help stimulate impulse sales and repeat purchases. Trade Shows. To better showcase our diverse products to footwear buyers in the United States and Europe, and to distributors around the world, weregularly exhibit at leading trade shows. Along with specialty trade shows, we exhibit at WSA’s The Shoe Show, FFANY, ASR and MAGIC in the UnitedStates, and GDS, MICAM, Bread & Butter, MODA, MIDEC and Who’s Next in Europe. Our dynamic, state-of-the-art trade show exhibits are developed byour in-house architect to showcase our latest product offerings in a lifestyle setting reflective of each of our brands. By investing in innovative displays andindividual rooms showcasing each line, our sales force can present a sales plan for each line and buyers are able to truly understand the breadth and depth ofour offerings, thereby optimizing commitments and sales at the retail level. For select non-Skechers branded lines such as 310, Zoo York and Marc EckoFootwear, we have created individual exhibits to ensure their brand integrity. Internet. We also promote our brands through our e-commerce websites www.skechers.com and www.soholab.com to consumers who access the Internet.We have also established a unique Internet website for Mark Nason (www.marknason.com) designed to serve primarily as a marketing tool. These websitescurrently enable us to present information on our products, provide a brand experience and store locations to consumers, and allow consumers the ability todirectly order products on the Internet. These sites also provide us a mechanism for customer feedback as well as allowing us to receive and respond directly toconsumer feedback. Our websites are intended to enhance the Skechers and fashion brands and increase sales through all our retail channels. Our websitesalso allow us to leverage our brand awareness at a lower cost than traditional distribution channels.PRODUCT DISTRIBUTION CHANNELS We have four reportable segments – domestic wholesale sales, international wholesale sales, retail sales and e-commerce sales. In the United States, ourproducts are available through a network of wholesale customers comprised of department, athletic and8Table of Contentsspecialty stores. Internationally, our products are available through wholesale customers in more than 100 countries and territories through our global networkof distributors and our Canadian, Brazilian, Asian and European subsidiaries. Skechers owns and operates retail stores both domestically and internationallythrough three integrated retail formats—concept, factory outlet and warehouse outlet stores. Each of these channels serves an integral function in the globaldistribution of our products. Fourteen distributors have opened 60 distributor-owned Skechers retail stores in 21 countries as of December 31, 2007. Domestic Wholesale. We distribute our footwear through the following domestic wholesale distribution channels: department stores, specialty stores,athletic shoe stores and independent retailers. Department stores and specialty retailers are the largest distribution channels, but we believe that we appeal to avariety of wholesale customers, many of whom may operate stores within the same retail location due to our distinct product lines and variety of styles, fromwhich retailers can select those lines and styles that best satisfy the fashion, function and price criteria of their specific customers. Management has a clearlydefined growth strategy for each of our channels of distribution. An integral component of our strategy is to offer our accounts the highest level of customerservice so that our products will be fully represented in existing retail locations and new locations of each customer. In an effort to provide knowledgeable and personalized service to our wholesale customers, the sales force is segregated by product line, each of which isheaded by a vice president or national sales manager. Reporting to each sales manager are knowledgeable account executives and territory managers. Our vicepresidents and national sales managers report to a senior vice president of sales. All of our vice presidents and national sales managers are compensated on asalary basis, while our account executives and territory managers are compensated on a commission basis. None of our domestic sales personnel sellscompeting products. We believe that we have developed a loyal customer base through exceptional customer service. We believe that our close relationships with these accountshelp us to maximize their retail sell-throughs. Our visual merchandise coordinators work with our wholesale customers to ensure that our merchandise andpoint-of-purchase marketing materials are properly presented. Sales executives and merchandise personnel work closely with accounts to ensure thatappropriate styles are purchased for specific accounts and for specific stores within those accounts as well as to ensure that appropriate inventory levels arecarried at each store. Such information is then utilized to help develop sales projections and determine the product needs of our wholesale customers. Thevalue-added services we provide our wholesale customers help us maintain strong relationships with our existing wholesale customers and attract potential newwholesale customers. International Wholesale. Our products are sold in more than 100 countries and territories throughout the world. We generate revenues from outside theUnited States from three principal sources: (i) direct sales to department stores and specialty retail stores through our subsidiaries in Canada, France,Germany, Spain, Italy, Portugal, Switzerland, Austria, Malaysia, Thailand, the Benelux Region, the United Kingdom and Brazil; (ii) sales to foreigndistributors who distribute our footwear to department stores and specialty retail stores in countries and territories across Eastern Europe, Asia, Latin America,South America, Africa, the Middle East and Australia, among other regions and (iii) to a lesser extent, royalties from licensees who manufacture and distributeour non-footwear products outside the United States. We believe that international distribution of our products represents a significant opportunity to increase sales and profits. We intend to further increase ourshare of the international footwear market by heightening our marketing in those countries in which we currently have a presence through our internationaladvertising campaigns, which are designed to establish Skechers as a global brand synonymous with trend-right casual shoes. • International Subsidiaries Europe We currently distribute product in most of Western Europe through the following subsidiaries: Skechers USA Ltd., with its offices and showroomsin London, England; Skechers S.a.r.l., with its offices and showrooms in Lausanne, Switzerland; Skechers USA France S.A.S., with its offices andshowrooms in Paris, France; Skechers USA Deutschland GmbH, with its offices and showrooms in Dietzenbach, Germany; Skechers USA Iberia,S.L., with its offices and showrooms in Madrid, Spain; Skechers USA Benelux B.V., with its offices and showrooms in Waalwijk, the Netherlands;and Skechers USA Italia S.r.l., with its offices and showroom in Verona, Italy.9Table of Contents Skechers-owned retail stores in Europe include eight concept stores and one factory outlet store located in five countries, including the key locationsof Oxford Street in London, Alstadt District in Düsseldorf and Kalverstraat Street in Amsterdam. To accommodate our European subsidiaries’ operations, we operate an approximately 240,000 square foot distribution center in Liege, Belgium. Thisdistribution center is currently used to store and deliver product to our subsidiaries and retail stores throughout Europe. Canada Merchandising and marketing of our product in Canada is managed by our wholly-owned subsidiary, Skechers USA Canada, Inc. with its officesand showrooms outside Toronto in Mississauga, Ontario. Product sold in Canada is primarily sourced from our U.S. distribution center in Ontario,California. We have two concept stores, one located in Toronto’s Eaton Centre, and one in the West Edmonton Mall and one factory outlet store located inToronto. Malaysia and Thailand Merchandising and marketing of our product in Asia is managed by two of our wholly-owned subsidiaries, Skechers Malaysia Sdn Bhd andSkechers (Thailand) Ltd. with their respective offices in Kuala Lumpur, Malaysia and Bangkok, Thailand. Product sold in Asia is primarily sourcedfrom a third party distribution center in Selangor, Malaysia. We have four concept stores, one located in Kuala Lumpur, Malaysia, two located inSelangor, Malaysia, and one in Bangkok, Thailand. Brazil Merchandising and marketing of our product in Brazil is managed by our wholly-owned subsidiary, Skechers Do Brasil Calcados LTDA., with itsoffices located in Sao Paulo, Brazil. Product sold in Brazil is primarily shipped directly from our contract manaufacturer’s factories in China andoccasionally from our U.S. distribution center in Ontario, California. • Distributors Outside of Western Europe and Canada, our footwear is distributed through an extensive network of more than 30 distributors, who sell our productsto department, athletic and specialty stores in more than 100 countries around the world. Through agreements with 14 of these distributors, 60distributor-owned Skechers retail stores are open in 21 countries, including 13 stores that were opened in 2007. One distributor-owned store was closedand two became company operated in 2007. STORE NUMBER OF REGION FORMAT STORES LOCATION(1)Asia Concept 4 Japan (2); Philippines; Taiwan Warehouse 4 Japan (4)Australia Concept 1 Sydney Warehouse 2 Melbourne, SydneyCentral America/South America Concept 34 Chile (10); Columbia (8); Ecuador; El Salvador; Guatemala (2); Panama (4);Peru (2); Venezuela (6)Eastern Europe Concept 7 Baltics (2); Greece; Poland; Russia (2); UkraineNorthern Europe Concept 1 FinlandMiddle East Concept 6 Saudi Arabia; UAE (5)South Africa Concept 1 Sandton (1) One store per location except as otherwise noted.10Table of Contents The distributors are responsible for their respective store’s operations, have ownership of their respective store’s assets and select the broad collectionof our products to sell to consumers in their regions. In order to maintain a globally consistent image, we provide architectural, graphic and visualguidance and materials for the design of the stores, and we train the local staff on our products and corporate culture. We intend to expand ourinternational presence and global recognition of the Skechers brand name by continuing to sell our footwear to foreign distributors and by openingflagship retail stores with distributors that have local market expertise. 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 product offering in an attractive environment that appeals to a broad group ofconsumers. In addition, most of our retail stores are profitable and have a positive effect on our operating results. As of February 15, 2008, we owned andoperated 70 concept stores, 72 factory outlet stores and 35 warehouse outlet stores in the United States, and 14 concept stores and two factory outlet storesinternationally. We closed three stores and opened 42 new stores in 2007. We plan to open an additional 25 to 30 stores by the end of 2008. • Concept Stores. Our concept stores are located at either marquee street locations or in major shopping malls in large metropolitan cities. Our concept stores have athreefold purpose in our operating strategy. First, concept stores serve as a showcase for a wide range of our product offering for the current season as weestimate that our average wholesale customer carries no more than 5% of the complete Skechers line in any one location. Our concept stores showcaseour products in a cutting-edge, open-floor setting, providing the customer with the complete Skechers story. Second, retail locations are generally chosento generate maximum marketing value for the Skechers brand name through signage, store front presentation and interior design. Domestic locationsinclude concept stores at Times Square and 34th Street in New York, Hollywood and Highland in Hollywood, Santa Monica’s Third Street Promenade,Dallas’ Northpark Center, Las Vegas’ Fashion Show Mall, Seattle’s Bellevue Square Mall, and Woodfield Mall outside Chicago. International locationsinclude Oxford Street in London, Alstadt District in Dusseldorf, Toronto’s Eaton Centre, Kalverstraat Street in Amsterdam. The stores are typicallydesigned to create a distinctive Skechers look and feel, and enhance customer association of the Skechers brand name with current youthful lifestyletrends and styles. Third, the concept stores serve as marketing and product testing venues. We believe that product sell-through information and rapidcustomer feedback derived from our concept stores enables our design, sales, merchandising and production staff to respond to market changes andnew product introductions. Such responses serve to augment sales and limit our inventory markdowns and customer returns and allowances. Weopened 24 domestic concept stores and four international concept stores, and we closed one domestic concept store and one international concept store in2007. The typical Skechers concept store is approximately 2,500 square feet, although in certain markets we have opened concept stores as large as 6,400square feet or as small as 1,500 square feet. When deciding where to open concept stores, we identify top geographic markets in the larger metropolitancities in the United States, Canada, Europe and Asia. When selecting a specific site, we evaluate the proposed sites’ traffic pattern, co-tenancies, salesvolume of neighboring concept stores, lease economics and other factors considered important within the specific location. If we are considering openinga concept store in a shopping mall, our strategy is to obtain space as centrally located as possible in the mall where we expect foot traffic to be mostconcentrated. We believe that the strength of the Skechers brand name has enabled us to negotiate more favorable terms with shopping malls that want usto open up concept stores to attract customer traffic to their venues. • Factory Outlet Stores. Our factory outlet stores are generally located in manufacturers’ direct outlet centers throughout the United States. In addition, we have twointernational outlet stores – one in Canada and one in England. Our factory outlet stores provide opportunities for us to sell discontinued and excessmerchandise, thereby reducing the need to sell such merchandise to discounters at excessively low prices and potentially compromise the Skechersbrand image. Skechers’ factory outlet stores range in size from approximately 1,900 to 9,000 square feet. Inventory in these stores is supplemented bycertain first-line styles sold at full retail price points. We opened 11 domestic factory outlet stores in 2007. • Warehouse Outlet Stores. Our free-standing warehouse outlet stores, which are located throughout the United States, enable us to liquidate excess merchandise, discontinuedlines and odd-size inventory in a cost-efficient manner. Skechers’ warehouse outlet stores range in size from approximately 5,200 to 13,500 square feet.Our warehouse outlet stores enable us to sell discontinued and excess11Table of Contentsmerchandise that would otherwise typically be sold to discounters at excessively low prices, which could otherwise compromise the Skechers brandimage. We seek to open our warehouse outlet stores in areas that are in close proximity to our concept stores in order to facilitate the timely transfer ofinventory that we want to liquidate as soon as practicable. We opened three new domestic warehouse outlet stores and closed one domestic warehousestore in 2007. Electronic Commerce. Our websites, www.skechers.com and www.soholab.com are virtual storefronts that promote the Skechers and street and fashionbrands. Our websites are designed to provide a positive shopping and brand experience, showcasing our products in an easy-to-navigate format, allowingconsumers to browse our selections and purchase our footwear. This virtual store has provided a convenient alternative-shopping environment and brandexperience. These websites have become an efficient and effective additional retail distribution channel, and have improved our customer service.LICENSING We believe that selective licensing of the Skechers brand name and our product line names to manufacturers may broaden and enhance the individualbrands without requiring significant capital investments or additional incremental operating expenses. Our multiple product lines plus additional subcategoriespresent many potential licensing opportunities on terms with licensees that we believe will provide more effective manufacturing, distribution or marketing ofnon-footwear products. We also believe that the reputation of Skechers and its history in launching brands has also enabled us to partner with reputable non-footwear brands in order to design and market their footwear. As of January 31, 2008, we had 24 active domestic and international licensing agreements in which we are the licensor. We have international licensingagreements for the design and distribution of men’s and women’s active apparel in Israel; men’s and women’s apparel in select European countries; bags inselect Central and South American countries; watches in the Philippines, and bags in China. Additionally, we have signed agreements to design, develop and market footwear for the street lifestyle apparel brands Ecko Unltd., Ecko Red, Red byMarc Ecko, and Zoo York under the Marc Ecko Enterprises umbrella.DISTRIBUTION FACILITIES AND OPERATIONS We believe that strong distribution support is a critical factor in our operations. Once manufactured, our products are packaged in shoe boxes bearing barcodes that are shipped either (i) to our five distribution centers located in Ontario, California, which measure in aggregate approximately 1.7 million square-feet; (ii) to our approximately 240,000 square-foot distribution center located in Liege, Belgium or (iii) directly from third-party manufacturers to our otherinternational customers and other international third party distribution centers. Upon receipt at either of the distribution centers, merchandise is inspected andrecorded in our management information system and packaged according to customers’ orders for delivery. Merchandise is shipped to customers by whatevermeans each customer requests, which is usually by common carrier. The distribution centers have multi-access docks, enabling us to receive and shipsimultaneously, and to pack separate trailers for shipments to different customers at the same time. We have an electronic data interchange system, or EDIsystem, to which some of our larger customers are linked. This system allows these customers to automatically place orders with us, thereby eliminating thetime involved in transmitting and inputting orders, and it includes direct billing and shipping information. During 2007, we entered into a lease to build a new approximately 1.8 million square foot distribution facility in Moreno Valley, California. Oncecompleted, we will occupy the facility under an eleven-year lease with one option to extend the lease four years followed by two options to extend the lease byadditional five-year terms, and we will move out of our existing distribution facilities in Ontario, California.BACKLOG As of December 31, 2007, our backlog was $416.5 million, compared to $322.9 million as of December 31, 2006. While backlog orders are subject tocancellation by customers, we have not experienced significant cancellation of orders in the past, and we expect that substantially all the orders will be shippedin 2008. However, for a variety of reasons, including changes in the economy, customer demand for our products, the timing of shipments, product mix ofcustomer orders, the amount of in-season orders and a shift towards tighter lead times within backlog levels, backlog may not be a reliable measure of futuresales for any succeeding period.12Table of ContentsINTELLECTUAL PROPERTY RIGHTS We own and utilize a variety of trademarks, including the Skechers trademark. We have a significant number of both registrations and pendingapplications for our trademarks in the United States. In addition, we have trademark registrations and trademark applications in approximately 80 foreigncountries. We also have design patents and pending design and utility patent applications in both the United States and approximately 25 foreign countries.We continuously look to increase the number of our patents and trademarks both domestically and internationally where necessary to protect valuableintellectual property. We regard our trademarks and other intellectual property as valuable assets and believe that they have significant value in the marketingof our products. We vigorously protect our trademarks against infringement, including through the use of cease and desist letters, administrative proceedingsand lawsuits. We rely on trademark, patent, copyright and trade secret protection, non-disclosure agreements and licensing arrangements to establish, protect and enforceintellectual property rights in our logos, tradenames and in the design of our products. In particular, we believe that our future success will largely depend onour ability to maintain and protect the Skechers trademark and other key trademarks. Despite our efforts to safeguard and maintain our intellectual propertyrights, we cannot be certain that we will be successful in this regard. Furthermore, we cannot be certain that our trademarks, products and promotionalmaterials or other intellectual property rights do not or will not violate the intellectual property rights of others, that our intellectual property would be upheld ifchallenged, or that we would, in such an event, not be prevented from using our trademarks or other intellectual property rights. Such claims, if proven, couldmaterially and adversely affect our business, financial condition and results of operations. In addition, although any such claims may ultimately prove to bewithout merit, the necessary management attention to and legal costs associated with litigation or other resolution of future claims concerning trademarks andother intellectual property rights could materially and adversely affect our business, financial condition and results of operations. We have sued and have beensued by third parties for infringement of intellectual property. It is our opinion that none of these claims has materially impaired our ability to utilize ourintellectual 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 of the United States.Although we continue to implement protective measures and intend to defend our intellectual property rights vigorously, these efforts may not be successful orthe costs associated with protecting our rights in certain jurisdictions may be prohibitive. From time to time we discover products in the marketplace that arecounterfeit reproductions of our products or that otherwise infringe upon intellectual property rights held by us. Actions taken by us to establish and protectour trademarks and other intellectual property rights may not be adequate to prevent imitation of our products by others or to prevent others from seeking toblock sales of our products as violating trademarks and intellectual property rights. If we are unsuccessful in challenging a third party’s products on the basisof infringement of our intellectual property rights, continued sales of such products by that or any other third party could adversely impact the Skechersbrand, result in the shift of consumer preferences away from our products and generally have a material adverse effect on our business, financial conditionand results of operations.COMPETITION Competition in the footwear industry is intense. Although we believe that we do not compete directly with any single company with respect to its entire rangeof products, our products compete with other branded products within their product category as well as with private label products sold by retailers, includingsome of our customers. Our utility footwear and casual shoes compete with footwear offered by companies such as The Timberland Company, Dr. Martens,Kenneth Cole Productions Inc., Steven Madden, Ltd., Wolverine World Wide, Inc., V.F. Corporation, and CROCS, Inc. Our athletic lifestyle shoes competewith footwear offered by companies such as Nike, Inc., adidas AG, Puma AG, New Balance Athletic Shoe, Inc. and K-Swiss Inc. Our children’s shoescompete with footwear offered by companies such as Collective Brands Inc. In varying degrees, depending on the product category involved, we compete onthe basis of style, price, quality, comfort and brand name prestige and recognition, among other considerations. These and other competitors pose challenges toour market share in our major domestic markets and may make it more difficult to establish our products in Europe, Asia and other international regions. Wealso compete with numerous manufacturers, importers and distributors of footwear for the limited shelf space available for the display of such products to theconsumer. Moreover, the general availability of contract manufacturing capacity allows ease of access by new market entrants. Many of our competitors arelarger, have been in existence for a longer period of time, have achieved greater recognition for their brand names, have captured greater market share and/orhave substantially greater financial, distribution, marketing and other resources than we do. We cannot be certain that we will be able to compete successfullyagainst present or future competitors, or that competitive pressures will not have a material adverse effect on our business, financial condition and results ofoperations.13Table of ContentsEMPLOYEES As of February 1, 2008, we employed 4,182 persons, 2,157 of whom were employed on a full-time basis and 2,025 of whom were employed on a part-time basis. None of our employees are subject to a collective bargaining agreement. We believe that our relations with our employees are satisfactory.ITEM 1A. RISK FACTORS In addition to the other information in this annual report, 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 And Interpret Fashion Trends AndSuccessfully Market New Products. The footwear industry is subject to rapidly changing consumer demands and fashion trends. Accordingly, we must identify and interpret fashion trendsand respond in a timely manner. Demand for and market acceptance of new products are uncertain and achieving market acceptance for new productsgenerally requires substantial product development and marketing efforts and expenditures. If we do not continue to meet changing consumer demands anddevelop successful styles in the future, our growth and profitability will be negatively impacted. We frequently make decisions about product designs andmarketing expenditures several months in advance of the time when consumer acceptance can be determined. If we fail to anticipate, identify or reactappropriately to changes in styles and trends or are not successful in marketing new products, we could experience excess inventories, higher than normalmarkdowns or an inability to profitably sell our products. Because of these risks, a number of companies in the footwear industry specifically, and others inthe fashion and apparel industry in general, have experienced periods of rapid growth in revenues and earnings and thereafter periods of declining sales andlosses, which in some cases have resulted in companies in these industries ceasing to do business. Similarly, these risks could have a material adverse 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 Our Brand Image. Our success to date has been due in large part to the strength of the Skechers brand, and to a lesser degree, the reputation of our fashion brands. If we areunable to timely and appropriately respond to changing consumer demand, our brand name and brand image may be impaired. Even if we react appropriatelyto changes in consumer preferences, consumers may consider our brand image to be outdated or associate our brand with styles of footwear that are no longerpopular. In the past, several footwear companies including ours 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 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 in the United States and other parts of the world that affectnot only the ultimate consumer, but also retailers, who are our primary direct customers. Purchases of footwear tend to decline in periods of recession oruncertainty regarding 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 and operate new retailstores, maintain sales levels at our existing stores, maintain or increase our international operations on a profitable basis, or maintain or improve our earningsfrom operations as a percentage of net sales. In addition, the continued threat of terrorist attacks throughout the world similar to those on September 11, 2001,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. As a result, our operating results may be adversely and materially affected by downward trends in the domestic economy orthe occurrence of events that slow the global economy or, more particularly, result in delays or cancellations of purchase orders for our products.Our Business Could Be Harmed If We Fail To Maintain Proper Inventory Levels. We place orders with our manufacturers for some of our products prior to the time we receive all of our customers’ orders. We do this to minimizepurchasing costs, the time necessary to fill customer orders and the risk of non-delivery. We also maintain an14Table of Contentsinventory of certain products that we anticipate will be in greater demand. However, we may be unable to sell the products we have ordered in advance frommanufacturers or that we have in our inventory. Inventory levels in excess of customer demand may result in inventory write-downs, and the sale of excessinventory at discounted prices could significantly impair our brand image and have a material adverse effect on our operating results and financial condition.Conversely, if we underestimate consumer demand for our products or if our manufacturers fail to supply the quality products that we require at the time weneed them, we may experience inventory shortages. Inventory shortages might delay shipments to customers, negatively impact retailer and distributorrelationships, and diminish brand loyalty.We Face Intense Competition, Including Competition From Companies With Significantly Greater Resources Than Ours, And If We Are UnableTo Compete Effectively With These Companies, Our Market Share May Decline And Our Business Could Be Harmed. We face intense competition in the footwear industry from other established companies. A number of our competitors have significantly greater financial,technological, engineering, manufacturing, marketing and distribution resources than we do. Their greater capabilities in these areas may enable them to betterwithstand periodic downturns in the footwear industry, compete more effectively on the basis of price and production and more quickly develop new products.In addition, new companies may enter the markets in which we compete, further increasing competition in the footwear industry. We believe that our ability to compete successfully depends on a number of factors, including the style and quality of our products and the strength of ourbrand name, as well as many factors beyond our control. We may not be able to compete successfully in the future, and increased competition may result inprice reductions, reduced profit margins, loss of market share and an inability to generate cash flows that are sufficient to maintain or expand our developmentand marketing of new products, which would adversely impact the trading price of our Class A Common Stock.We Depend Upon A Relatively Small Group Of Customers For A Large Portion Of Our Sales. During 2007, 2006 and 2005, our net sales to our five largest customers accounted for approximately 25.3%, 24.9%, and 25.4% of total net sales,respectively. No customer accounted for more than 10% of our net sales during 2007, 2006 and 2005. One customer accounted for 10.0% and 12.0% of nettrade receivables at December 31, 2007 and December 31, 2006, respectively. Although we have long-term relationships with many of our customers, ourcustomers do not have a contractual obligation to purchase our products and we cannot be certain that we will be able to retain our existing major customers.Furthermore, the retail industry regularly experiences consolidation, contractions and closings which may result in our loss of customers or our inability tocollect accounts receivable of major customers. If we lose a major customer, experience a significant decrease in sales to a major customer or are unable tocollect the accounts receivable of a major customer, our business could be harmed.We May Be Unable To Successfully Execute Our Growth Strategy Or Maintain Our Growth. Although our company has generally exhibited steady growth since we began operations, we had a decrease in net sales in the past and our rate of growthhas declined at times as well, and we may experience similar decreases in net sales or declines in rate of growth again in the future. Our ability to grow in thefuture depends upon, among other things, the continued success of our efforts to maintain our brand image and expand our footwear offerings and distributionchannels. As our business grows, we may need to improve and enhance our overall financial and managerial controls, reporting systems and procedures toeffectively manage our growth. We may be unable to successfully implement our current growth strategy or other growth strategies or effectively manage ourgrowth, any of which would negatively impact our business, results of operations and financial condition. Furthermore, in anticipation of continued increasesin net sales, we have significantly expanded our infrastructure and workforce to achieve economies of scale. Because these expenses are mostly fixed in theshort term, our operating results and margins will be adversely impacted if we do not continue to grow as anticipated.Our International Sales And Manufacturing Operations Are Subject To The Risks Of Doing Business Abroad, Particularly In China, WhichCould Affect Our Ability To Sell Or Manufacture Our Products In International Markets, Obtain Products From Foreign Suppliers Or ControlThe Costs Of Our Products. Substantially all of our net sales during the year ended December 31, 2007 were derived from sales of footwear manufactured in foreign countries, withmost manufactured in China and, to a lesser extent, in Italy, Vietnam and Brazil. We also sell our footwear in several foreign countries and plan to increase ourinternational sales efforts as part of our growth strategy. Foreign manufacturing and sales are subject to a number of risks, including the following: politicaland social unrest, including the military presence in Iraq and terrorism; changing economic conditions, including higher labor costs; increased costs of rawmaterials; currency exchange rate fluctuations; labor shortages and work stoppages; electrical shortages; transportation delays; loss or damage to products intransit; expropriation; nationalization; the adjustment, elimination or imposition of domestic and international duties, tariffs, quotas, import15Table of Contentsand export controls and other non-tariff barriers; exposure to different legal standards (particularly with respect to intellectual property); compliance withforeign laws; and changes in domestic and foreign governmental policies. We have not, to date, been materially affected by any such risks, but we cannotpredict the likelihood of such developments occurring or the resulting long-term adverse impact on our business, results of operations or financial condition. In particular, because most of our products are manufactured in China, the possibility of adverse changes in trade or political relations with China,political instability in China, increases in labor costs, the occurrence of prolonged adverse weather conditions or a natural disaster such as an earthquake ortyphoon in China, or the outbreak of a pandemic disease such as the Avian Flu in China could severely interfere with the manufacture and/or shipment of ourproducts and would have a material adverse effect on our operations. In addition, electrical shortages, labor shortages or work stoppages may extend theproduction time necessary to produce our orders, and there may be circumstances in the future where we may have to incur premium freight charges toexpedite the delivery of product to our customers. If we incur a significant amount of premium charges to airfreight product for our customers, our gross profitwill be negatively affected if we are unable to collect those charges.Currency Exchange Rate Fluctuations In China Could Result In Higher Costs And Decreased Margins. Our manufacturers located in China may be subject to the effects of exchange rate fluctuations should the Chinese currency not remain stable with the U.S.dollar. The value of the Chinese currency depends to a large extent on the Chinese government’s policies and China’s domestic and international economic andpolitical developments. Since 1994, the official exchange rate for the conversion of the Chinese currency was pegged to the U.S. dollar at a virtually fixed rateof approximately 8.28 Yuan per U.S. dollar. However, on July 21, 2005, the Chinese government revalued the Yuan by 2.1%, setting the exchange rate at 8.11Yuan per U.S. dollar, and adopted a more flexible system based on a trade-weighted basket of foreign currencies of China’s main trading partners. Under thenew “managed float” policy, the exchange rate of the Yuan may shift each day up to 0.3% in either direction from the previous day’s close, and as a result, theexchange rate measured 7.29 Yuan per U.S. dollar at December 31, 2007. The valuation of the Yuan may continue to increase incrementally over time shouldthe China central bank allow it to do so, which could significantly increase labor and other costs incurred in the production of our footwear in China,resulting in an adverse effect on our results of operations and financial condition.The Potential Imposition Of Additional Duties, Quotas, Tariffs And Other Trade Restrictions Could Have An Adverse Impact On Our Sales AndProfitability. All of our products manufactured overseas and imported into the United States, the European Union (“EU”) and other countries are subject to customsduties collected by customs authorities. Customs information submitted by us is routinely subject to review by customs authorities. We are unable to predictwhether additional customs duties, quotas, tariffs, anti-dumping duties, safeguard measures, cargo restrictions to prevent terrorism or other trade restrictionsmay be imposed on the importation of our products in the future. Such actions could result in increases in the cost of our products generally and mightadversely affect the sales and profitability of Skechers and the imported footwear industry as a whole.Our Quarterly Revenues And Operating Results Fluctuate As A Result Of A Variety Of Factors, Including Seasonal Fluctuations In Demand ForFootwear, Delivery Date Delays And Potential Fluctuations In Our Annualized Tax Rate, Which May Result In Volatility Of Our Stock Price. Our quarterly revenues and operating results have varied significantly in the past and can be expected to fluctuate in the future due to a number of factors,many of which are beyond our control. Our major customers generally have no obligation to purchase forecasted amounts and may cancel orders, changedelivery schedules or change the mix of products ordered with minimal notice and without penalty. As a result, we may not be able to accurately predict ourquarterly sales. In addition, sales of footwear products have historically been somewhat seasonal in nature with the strongest sales generally occurring in oursecond and third quarters for the back-to-school selling season. Back-to-school sales typically ship in June, July and August, and delays in the timing,cancellation, or rescheduling of these customer orders and shipments by our wholesale customers could negatively impact our net sales and results ofoperations for our second or third quarters. More specifically, the timing of when products are shipped is determined by the delivery schedules set by ourwholesale customers, which could cause sales to shift between our second and third quarters. Because our expense levels are partially based on ourexpectations of future net sales, our expenses may be disproportionately large relative to our revenues, and we may be unable to adjust spending in a timelymanner to compensate for any unexpected revenue shifts, which could have a material adverse effect on our operating results.16Table of Contents Our annualized tax rate is based on projections of our domestic and international operating results for the year, which we review and revise as necessary atthe end of each quarter, and it is highly sensitive to fluctuations in projected international earnings. Any quarterly fluctuations in our annualized tax rate thatmay occur could have a material impact on our quarterly operating results. As a result of these specific and other general factors, our operating results willlikely vary from quarter to quarter and the results for any particular quarter may not be necessarily indicative of results for the full year. Any shortfall inrevenues or net income from levels expected by securities analysts and investors could cause a decrease in the trading price of our Class A Common Stock.We Rely On Independent Contract Manufacturers And, As A Result, Are Exposed To Potential Disruptions In Product Supply. Our footwear products are currently manufactured by independent contract manufacturers. During 2007 and 2006, the top four manufacturers of ourproducts produced approximately 58.4% and 59.6% of our total purchases, respectively. One manufacturer accounted for 29.7% and 30.8% of totalpurchases during 2007 and 2006, respectively. Two other manufacturers each accounted for over 10.0% of our total purchases during 2007 and 2006. We donot have long-term contracts with our manufacturers, and we compete with other footwear companies for production facilities. We could experience difficultieswith these manufacturers, including reductions in the availability of production capacity, failure to meet our quality control standards, failure to meetproduction deadlines or increased manufacturing costs. In particular, manufacturers in China are facing a labor shortage as migrant workers seek better wagesand working conditions in farming and other vocations, and if this trend continues, our current manufacturers’ operations could be adversely affected. If our current manufacturers cease doing business with us, we could experience an interruption in the manufacture of our products. Although we believethat we could find alternative manufacturers, we may be unable to establish relationships with alternative manufacturers that will be as favorable as therelationships we have now. For example, new manufacturers may have higher prices, less favorable payment terms, lower manufacturing capacity, lowerquality standards or higher lead times for delivery. If we are unable to provide products consistent with our standards or the manufacture of our footwear isdelayed or becomes more expensive, this could result in our customers canceling orders, refusing to accept deliveries or demanding reductions in purchaseprices, any of which could have a material adverse effect on our business and results of operations.Our Business Could Be Harmed If Our Contract Manufacturers, Suppliers Or Licensees Violate Labor, Trade Or Other Laws. We require our independent contract manufacturers, suppliers and licensees to operate in compliance with applicable laws and regulations. Manufacturersare required to certify that neither convicted, forced or indentured labor (as defined under United States law) nor child labor (as defined by law in themanufacturer’s country) is used in the production process, that compensation is paid in accordance with local law and that their factories are in compliancewith local safety regulations. Although we promote ethical business practices and our sourcing personnel periodically visit and monitor the operations of ourindependent contract manufacturers, suppliers and licensees, we do not control them or their labor practices. If one of our independent contract manufacturers,suppliers or licensees violates labor or other laws or diverges from those labor practices generally accepted as ethical in the United States, it could result inadverse publicity for 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. In addition, if we, or our foreign manufacturers, violate United States or foreign trade laws or regulations, we may be subject to extra duties, significantmonetary penalties, the seizure and the forfeiture of the products we are attempting to import or the loss of our import privileges. Possible violations of UnitedStates or foreign laws or regulations could include inadequate record keeping of our imported products, misstatements or errors as to the origin, quota category,classification, marketing or valuation of our imported products, fraudulent visas or labor violations. The effects of these factors could render our conduct ofbusiness in a particular country undesirable or impractical and have a negative impact on our operating results.Our Operating Results Could Be Negatively Impacted If Our Sales Are Concentrated In Any One Style Or Group Of Styles. If any one style or group of similar styles of our footwear were to represent a substantial portion of our net sales, we could be exposed to risk shouldconsumer demand for such style or group of styles decrease in subsequent periods. We attempt to mitigate this risk by offering a broad range of products, andno style comprised over 5% of our gross wholesale sales during 2007 or 2006. However, this may change in the future and fluctuations in sales of any givenstyle that represents a significant portion of our future net sales could have a negative impact on our operating results.17Table of ContentsOur Strategies Involve A Number Of Risks That Could Prevent Or Delay Any Successful Opening Of New Stores As Well As Impact ThePerformance 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 ofinventory to meet the needs of new stores; hire, train and retain store personnel; successfully integrate new stores into our existing operations; and satisfy thefashion preferences in new geographic areas. In addition, some or a substantial number of new stores could be opened in regions of the United States in which we currently have few or no stores. Anyexpansion into new markets may present competitive, merchandising and distribution challenges that are different from those currently encountered in ourexisting markets. Any of these challenges could adversely affect our business and results of operations. In addition, to the extent that any new store openingsare in existing markets, we may experience reduced net sales volumes in existing stores in those markets.Many Of Our Retail Stores Depend Heavily On The Customer Traffic Generated By Shopping And Factory Outlet Malls Or By Tourism. Many of our concept stores are located in shopping malls and some of our factory outlet stores are located in manufacturers’ outlet malls where we dependon obtaining prominent locations and the overall success of the malls to generate customer traffic. We cannot control the development of new malls, theavailability or cost of appropriate locations within existing or new malls or the success of individual malls. Some of our concept stores occupy street locationsthat are heavily dependent on customer traffic generated by tourism. Any substantial decrease in tourism resulting from political, social or military events, adownturn in the economy 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 affect our operatingresults.We Depend On Key Personnel To Manage Our Business Effectively In A Rapidly Changing Market, And If We Are Unable To Retain ExistingPersonnel, 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 Operating Officer. The loss of the services of any of these individuals or any other keyemployee could harm us. Our future success also depends on our ability to identify, attract and retain additional qualified personnel. Competition foremployees in our industry is intense and we may not be successful in attracting and retaining such personnel.The Disruption, Expense And Potential Liability Associated With Existing And Unanticipated Future Litigation Against Us Could Have AMaterial Adverse Effect On Our Business, Results Of Operations And Financial Condition. We are subject to various legal proceedings and threatened legal proceedings from time to time as part of our business. We are not currently a party to anylegal proceedings or aware of any threatened legal proceedings, the adverse outcome of which, individually or in the aggregate, we believe would have a materialadverse effect on our business, results of operations or financial condition. However, any unanticipated litigation in the future, regardless of its merits, couldsignificantly divert management’s attention from our operations and result in substantial legal fees to us. Further, there can be no assurance that any actionsthat have been or will be brought against us will be resolved in our favor or, if significant monetary judgments are rendered against us, that we will have theability to pay such judgments. Such disruptions, legal fees and any losses resulting from these claims could have a material adverse effect on our business,results of operations and financial condition.Our Ability To Compete Could Be Jeopardized If We Are Unable To Protect Our Intellectual Property Rights Or If We Are Sued For IntellectualProperty Infringement. We believe that our trademarks, design patents and other proprietary rights are important to our success and our competitive position. We use trademarkson nearly all of our products and believe that having distinctive marks that are readily identifiable is an important factor in creating a market for our goods, inidentifying us and in distinguishing our goods from the goods of others. We consider our Skechers®, S in Shield Design® and Performance-S ShiftedDesign® trademarks to be among our most valuable assets, and we have registered these trademarks in many countries. In addition, we own many othertrademarks that we utilize in marketing our products. We also have a number of design patents and a limited number of utility patents covering componentsand features used18Table of Contentsin various shoes. We believe that our patents and trademarks are generally sufficient to permit us to carry on our business as presently conducted. While wevigorously protect our trademarks against infringement, we cannot assure you that we will be able to secure patents or trademark protection for our intellectualproperty in the future or that protection will be adequate for future products. Further, we have been sued for patent and trademark infringement and cannot besure that our activities do not and will not infringe on the intellectual property rights of others. If we are compelled to prosecute infringing parties, defend ourintellectual property or defend ourselves from intellectual property claims made by others, we may face significant expenses and liability as well as thediversion of management’s attention from our business, each of which could negatively impact our business or financial condition. In addition, the laws of foreign countries where we source and distribute our products may not protect intellectual property rights to the same extent as dothe laws of the United States. We cannot assure you that the actions we have taken to establish and protect our trademarks and other intellectual propertyrights outside the United States will be adequate to prevent imitation of our products by others or, if necessary, successfully challenge another party’scounterfeit products or products that otherwise infringe on our intellectual property rights on the basis of trademark or patent infringement. Continued sales ofthese products could adversely affect our sales and our brand and result in the shift of consumer preference away from our products. We may face significantexpenses and liability in connection with the protection of our intellectual property rights outside the United States, and if we are unable to successfully protectour rights or resolve intellectual property conflicts with others, our business or financial condition could be adversely affected.Natural Disasters Or A Decline In Economic Conditions In California Could Increase Our Operating Expenses Or Adversely Affect Our SalesRevenue. A substantial portion of our operations are located in California, including 46 of our retail stores, our headquarters in Manhattan Beach, our currentdomestic distribution center in Ontario and our future domestic distribution center in Moreno Valley. Because a significant portion of our net sales is derivedfrom sales in California, a decline in the economic conditions in California, whether or not such decline spreads beyond California, could materially adverselyaffect our business. Furthermore, a natural disaster or other catastrophic event, such as an earthquake or wild fires affecting California, could significantlydisrupt our business including the operation of our only domestic distribution center. We may be more susceptible to these issues than our competitors whoseoperations are not as concentrated in California.One Principal Stockholder Is Able To Control Substantially All Matters Requiring A Vote Of Our Stockholders And His Interests May DifferFrom The Interests Of Our Other Stockholders. As of December 31, 2007, Robert Greenberg, Chairman of the Board and Chief Executive Officer, beneficially owned 78.1% of our outstanding Class BCommon Stock and members of Mr. Greenberg’s immediate family beneficially owned the remainder of our outstanding Class B Common Stock. The holdersof Class A Common Stock and Class B Common Stock have identical rights except that holders of Class A Common Stock are entitled to one vote per sharewhile holders of Class B Common Stock are entitled to ten votes per share on all matters submitted to a vote of our stockholders. As a result, as ofDecember 31, 2007, Mr. Greenberg beneficially owned approximately 62.1% of the aggregate number of votes eligible to be cast by our stockholders, andtogether with shares beneficially owned by other members of his immediate family, he beneficially owned approximately 79.6% of the aggregate number ofvotes eligible to be cast by our stockholders. Mr. Greenberg may have different interests than our other stockholders, and because he is able to controlsubstantially all matters requiring approval by our stockholders, he may direct the operations of our business in a manner contrary to the interests of our otherstockholders. Matters that require the approval of our stockholders include the election of directors and the approval of mergers or other business combinationtransactions. Mr. Greenberg also has control over our management and affairs. As a result of such control, certain transactions are not possible without theapproval of Mr. Greenberg, including proxy contests, tender offers, open market purchase programs or other transactions that can give our stockholders theopportunity to realize a premium over the then-prevailing market prices for their shares of our Class A Common Stock. The differential in the voting rightsmay adversely affect the value of our Class A Common Stock to the extent that investors or any potential future purchaser view the superior voting rights ofour Class B Common Stock to have value.Our Charter Documents And Delaware Law May Inhibit A Takeover, Which May Cause A Decline In The Value 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 if closing sucha transaction would be beneficial to our stockholders. Mr. Greenberg’s substantial beneficial ownership position, together with the authorization of PreferredStock, the disparate voting rights between our Class A Common Stock and Class B Common Stock, the classification of our Board of Directors and the lackof cumulative voting in our certificate of incorporation and19Table of Contentsbylaws, may have the effect of delaying, deferring or preventing a change in control, may discourage bids for our Class A Common Stock at a premium overthe market price of the Class A Common Stock and may adversely affect the market price of our Class A Common Stock.ITEM 1B. UNRESOLVED STAFF COMMENTS None.ITEM 2. PROPERTIES Our corporate headquarters and additional administrative offices are located at four premises in Manhattan Beach, California, which consist of anaggregate of approximately 100,000 square feet. We own and lease portions of our corporate headquarters and administrative offices. The property leases expirebetween October 2010 and February 2012, with options to extend these leases in some cases, and the current aggregate annual rent for the leased property isapproximately $0.5 million. Also, construction commenced in 2005 on another corporate facility in Manhattan Beach, California that is expected to beapproximately 55,000 square feet. The exterior of the facility was completed in 2007, and we are currently working on the interior improvements and we expectto move in during 2008. Our U.S. distribution center consists of four leased facilities and one that we own, which are located in Ontario, California. The four leased facilitiesaggregate approximately 1,407,000 square feet, with an annual base rent of approximately $5.3 million. The owned distribution facility is approximately264,000 square feet. The property leases expire between May 2009 and May 2011, and these leases contain rent escalation provisions. During 2007, we enteredinto a lease to build a new approximately 1.8 million square foot distribution facility in Moreno Valley, California. Once completed, we will occupy the facilityunder an eleven-year lease with one option to extend the lease four years followed by two options to extend the lease by additional five-year terms, and we willmove out of our existing distribution facilities in Ontario, California. Base rent for the new facility will be $679,540 per month for month 1 through month60 and $788,267 per month for month 61 through month 132. Our European distribution center consists of a 240,000 square-foot facility in Liege, Belgium under a 25-year operating lease with base rent ofapproximately $1.3 million per year. The lease provides for first right of refusal on three facilities planned for development, allowing for expansion up to a totalof approximately 735,000 square feet. We believe that the capacity available to us within our lease agreement should allow for further growth of ourinternational operations. The lease agreement also provides for early termination rights at five-year intervals beginning in February 2007, pending notificationas prescribed in the lease, of which the first such right was not exercised. All of our domestic retail stores and showrooms are leased with terms expiring between February 2008 and January 2019. The leases provide for rentescalations tied to either increases in the lessor’s operating expenses, fluctuations in the consumer price index in the relevant geographical area or a percentage ofthe store’s gross sales in excess of the base annual rent. Total base rent expense related to our domestic retail stores and showrooms was $24.9 million for theyear ended December 31, 2007. We also lease all of our international administrative offices, retail stores and showrooms located in Brazil, Malaysia, Thailand, Canada, Switzerland,United Kingdom, Germany, France, Spain, Italy, and Netherlands. The property leases expire at various dates between February 2008 and September 2018.Total rent for the leased properties aggregated approximately $7.4 million for the year ended December 31, 2007.ITEM 3. LEGAL PROCEEDINGS See note 13 to the financial statements on page 56 of this annual report for a discussion of legal proceedings as required under applicable SEC disclosurerules and regulations.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 2007.20Table of ContentsPART IIITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OFEQUITY SECURITIES Our Class A Common Stock trades on the New York Stock Exchange 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. HIGH LOWYEAR ENDED DECEMBER 31, 2007 First Quarter $38.03 $31.95 Second Quarter 36.87 28.41 Third Quarter 30.44 17.36 Fourth Quarter 25.57 18.75 YEAR ENDED DECEMBER 31, 2006 First Quarter $25.04 $14.80 Second Quarter 28.35 21.19 Third Quarter 26.00 19.70 Fourth Quarter 33.58 23.51 HOLDERS As of February 1, 2008, there were 101 holders of record of our Class A Common Stock (including holders who are nominees for an undetermined numberof beneficial owners) and 16 holders of record of our Class B Common Stock. These figures do not include beneficial owners who hold shares in nomineename. The Class B Common Stock is not publicly traded but each share is convertible upon request of the holder into one share of Class A Common Stock.DIVIDEND POLICY Since our conversion from an S Corporation to a C Corporation prior to the initial public offering of our Class A Common Stock in 1999, earnings havebeen and will be retained for the foreseeable future in the operations of our business. We have not declared or paid any cash dividends on our Class ACommon 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 thegrowth and development of our business.EQUITY COMPENSATION PLAN INFORMATION Our equity compensation plan information is provided as set forth in Part III, Item 12 of this annual report.21Table of ContentsPERFORMANCE GRAPH The following graph demonstrates the total return to stockholders of our company’s Class A Common Stock from December 31, 2002 to December 31,2007, relative to the performance of the Russell 2000 Index, which includes our Class A Common Stock, and our peer group index, which consists of sevencompanies believed to be engaged in similar businesses: Nike, Inc., adidas AG, K-Swiss Inc., Kenneth Cole Productions, Inc., Steven Madden, Ltd., TheTimberland Company and Wolverine World Wide, Inc. The Stride Rite Corporation was removed from the peer group index because its stock is no longeractively traded after being acquired by Payless ShoeSource, Inc. in August 2007. The graph assumes an investment of $100 on December 31, 2002 in each of our company’s Class A Common Stock and the stocks comprising each ofthe Russell 2000 Index and the customized peer group index. Each of the indices assumes that all dividends were reinvested. The stock performance of ourcompany’s Class A Common Stock shown on the graph is not necessarily indicative of future performance. We will not make nor endorse any predictions asto our future stock performance. Company/Index 12/31/02 12/31/03 12/31/04 12/31/05 12/31/06 12/31/07 Skechers U.S.A., Inc. $100.00 $96.00 $152.65 $180.45 $392.34 $229.80 Russell 2000 100.00 147.25 174.24 182.18 215.64 212.26 Custom Peer Group 100.00 153.96 203.47 202.10 227.13 288.77 22Table of ContentsITEM 6. SELECTED FINANCIAL DATA The following tables set forth our company’s selected consolidated financial data as of and for each of the years in the five-year period ended December 31,2007 and should be read in conjunction with our audited consolidated financial statements and notes thereto included under Part II, Item 8 of this annualreport.(In thousands, except net earnings (loss) per share) YEARS ENDED DECEMBER 31,STATEMENT OF EARNINGS DATA: 2007 2006 2005 2004 2003Net sales $1,394,181 $1,205,368 $1,006,477 $920,322 $834,976 Gross profit 599,989 523,346 420,482 370,857 317,686 Earnings (loss) from operations 112,930 112,544 76,296 49,245 (1,347)Earnings (loss) before income taxes 118,305 112,648 72,797 38,720 (10,373)Net earnings (loss) 75,686 70,994 44,717 23,553 (11,867)Net earnings (loss) per share:(1) Basic 1.67 1.73 1.13 0.61 (0.31)Diluted 1.63 1.59 1.06 0.59 (0.31)Weighted average shares:(1) Basic 45,262 41,079 39,686 38,638 37,840 Diluted 46,741 46,139 44,518 39,800 37,840 AS OF DECEMBER 31,BALANCE SHEET DATA: 2007 2006 2005 2004 2003Working capital $523,888 $450,787 $361,210 $313,883 $275,124 Total assets 827,977 737,053 581,957 518,653 466,533 Long-term debt, excluding current portion 16,462 106,805 107,288 113,038 116,047 Stockholders’ equity 626,663 449,087 343,830 294,895 255,654 (1) Basic earnings (loss) per share represents net earnings (loss) divided by the weighted-average number of common shares outstanding for the period.Diluted earnings (loss) per share, in addition to the weighted average determined for basic earnings per share, reflects the potential dilution that couldoccur if options to issue common stock were exercised or converted into common stock and assumes the conversion of our 4.50% convertiblesubordinated notes for the period outstanding since their issuance in April 2002 until their conversion in February 2007, unless their inclusion would beanti-dilutive.23Table of ContentsITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONGENERAL We design, market and sell contemporary footwear for men, women and children under the Skechers brand as well as eight other fashion and streetbrands. Our footwear is sold through a wide range of department stores and leading specialty retail stores, mid-tier retailers, boutiques, our own retail stores,distributor-owned international retail stores and our e-commerce website. Our objective is to continue to profitably grow our domestic operations whileleveraging our brand name to expand internationally. Our operations are organized along our distribution channels, and we have the following four reportable sales segments – domestic wholesale sales,international wholesale sales, retail sales and e-commerce sales. We evaluate segment performance based primarily on net sales and gross margins. See detailedsegment information in note 14 to our consolidated financial statements included under Part II, Item 8 of this annual report.FINANCIAL OVERVIEW Skechers achieved record revenue during 2007. Our net sales for 2007 were $1.394 billion, an increase of $188.8 million or 15.7% percent over net salesof $1.205 billion in 2006. Diluted earnings per share were $1.63, which reflected a 2.5% increase over the $1.59 reported in the prior year. Working capitalwas $523.9 million at December 31, 2007, an increase of $73.1 million from working capital of $450.8 million at December 31, 2006. Cash and short-terminvestments increased by $83.5 million to $304.0 million in 2007 compared to $220.5 million at December 31, 2006, primarily due to our 2007 earnings. Our domestic wholesale segment is our largest distribution channel comprising 59.6%, 64.1%, and 63.0% of our consolidated net sales for the years endedDecember 31, 2007, 2006 and 2005, respectively. Our international wholesale sales comprised 19.2%, 15.2%, and 16.3% of our consolidated net sales for theyears ended December 31, 2007, 2006 and 2005, respectively. Retail sales comprised 20.0%, 19.7%, and 20.0% of our consolidated net sales for the yearsended December 31, 2007, 2006 and 2005, respectively, of which our domestic retail sales comprised 18.3%, 18.1%, and 18.4% of our consolidated net salesfor the years ended December 31, 2007, 2006 and 2005, respectively. Our international retail sales did not comprise more than 10% of our consolidated netsales in 2007, 2006 or 2005. Domestic wholesale unit sales volume increased 8.7% to 43.2 million pairs in 2007 from 39.8 million pairs in 2006, and our average selling price per pairdecreased 1.2% to $19.22 in 2007 from $19.44 in 2006. The decrease in average selling price per pair and increase in unit sales volume were primarily due tothe introduction of our Cali Gear line.2007 INITIATIVES Our positive results for 2007 were driven by focusing on our core strengths and initiatives for the year, which included: New product design and delivery. Our success depends on our ability to frequently introduce new styles and product lines as well as to design productsin anticipation of consumers’ ever-evolving preferences. This includes building our existing product lines with updates to proven sellers as well as creatingnew styles that we believe will become core to these lines in upcoming seasons. In 2007, we focused primarily on key sellers in our current divisions,launching our Cali Gear line and eliminating underperforming brands. During 2007, we discontinued three of our fashion lines—Michelle K, Avirex andKitson footwear. Building our brands. As a marketing-driven company, we consistently focus on advertising our brands in targeted publications, on key televisionprogramming and in high traffic areas in better malls. During 2007, we increased our exposure on TV with more campaigns targeted to men, women andchildren for Skechers and our fashion brands. This included our first animated spot for Airators by Skechers. We also utilized the power of celebrities forSkechers and several of our fashion lines. Develop our infrastructure to support continued growth. During 2007, we entered into a lease agreement to build a new approximately 1.8 millionsquare foot distribution facility to consolidate all of our domestic distribution facilities into one location. Once this new facility is built, we will move out ofour five existing distribution facilities in Ontario, California.24Table of Contents Further grow our company-owned retail business. With a focus on profitably growing our retail business, we increased our store count by 39 stores in2007, and we saw single digit comparable store sales growth in our domestic retail business during 2007 despite a challenging retail environment. Further develop our international businesses. In 2007, we continued to focus on improving our international operations by (i) increasing our customerbase within our existing subsidiary business; (ii) increasing the product count within each account; (iii) delivering the right product into the right markets;(iv) launching the Marc Ecko and Zoo York branded lines in select global markets, including through our European subsidiaries and (v) establishing newopportunities for growth by entering new markets and growing in existing markets. We also increased our direct selling effort by opening subsidiaries inBrazil, Malaysia and Thailand as well as increasing our distributor network into Scandinavia and the Ukraine.OUTLOOK FOR 2008 We will continue to focus our product offering in 2008 with new products, such as our Cali Gear line, which do not directly compete with our existingbrands and allow us the opportunity to broaden the targeted demographic profile of our consumer base, increase our shelf space and open new doors withoutdetracting from existing business. In addition, we will continue to grow our international business with the goal of increasing that business to 25% to 30% ofour total business. We are also seeking to increase our global presence through a joint venture agreement in China. We will also continue to expand our retaildistribution channel by opening another 25 to 30 company-owned stores in 2008.YEAR ENDED DECEMBER 31, 2007 COMPARED TO THE YEAR ENDED DECEMBER 31, 2006Net sales Net sales for 2007 were $1.394 billion, an increase of $188.8 million, or 15.7%, over net sales of $1.205 billion in 2006. The increase in net sales wasdue to increased international wholesale sales, domestic wholesale sales, and retail sales primarily due to acceptance of new designs and styles for our in-season product including sport fusion, casual fusion footwear and the introduction of our Cali Gear footwear. The increase in net sales was also due growthwithin the domestic retail segment from an increased store base as well as positive domestic and international comparative store sales increases (i.e., stores openfor at least one year). Our domestic wholesale segment increased 7.5%, or $58.3 million, to $831.2 million compared to $772.9 million in 2006. The increase in domesticwholesale segment net sales came on an 8.7% unit sales volume increase to 43.2 million pairs from 39.8 million pairs in 2006. The strongest increases indomestic wholesale came in our Women’s Active, Men’s USA, and Kids lines, along with the introduction of our Cali Gear line. Our average selling price perpair decreased 1.2% to $19.22 from $19.44 in 2006. Our international wholesale segment sales increased $83.9 million to $267.6 million in 2007, a 45.7% increase over sales of $183.7 million in 2006. Ourinternational wholesale sales consist of direct subsidiary sales – those we make to department stores and specialty retailers — and sales to our distributorswho in turn sell to department stores and specialty retailers in various international regions where we do not sell direct. Direct subsidiary sales increased $49.9million, or 53.1%, to $144.0 million compared to net sales of $94.1 million in 2006. The increase in direct subsidiary sales was primarily due to increasedsales into UK, Canada, Benelux, and Germany. Our distributor sales increased $34.0 million to $123.6 million in 2007, a 37.9% increase over sales of$89.6 million in 2006. This was primarily due to increased sales to our distributors in Russia, Panama, Serbia and Japan. Our retail segment sales increased $42.0 million to $279.4 million in 2007, a 17.7% increase over sales of $237.4 million in 2006. The increase in retailsales was due to a net increase of 36 domestic stores, increased sales across all three store formats and positive comparable store sales. During 2007, weopened 42 new stores and closed three stores. These new stores contributed $16.9 million in net sales during 2007 as compared to new store sales of$10.0 million for 22 other stores opened in 2006. Of our new store additions, 28 were concept stores, 11 were outlet stores, and three were warehouse stores. Inaddition, during 2007, we realized positive comparable store sales increases in our domestic retail stores of 5.1% and 16.7% in our international retail stores.Our domestic retail sales increased 17.5% due to positive comparable sales and having 22 retail stores that were opened in 2006 being open the entire year in2007. Our international retail sales increased 20.2% in 2007 compared to 2006, due to increased comparable sales, the opening of three additional stores, aswell as favorable currency translation adjustments. We had 177 domestic retail stores as of February 15, 2008, and we believe that we have a presence in most major domestic markets. We currently plan toopen approximately 25 to 30 domestic retail stores in 2008. During 2007, we closed two under-performing domestic retail stores, while we closed three in 2006.We periodically review all of our stores for impairment. During25Table of Contents2007 and 2006, we did not record an impairment charge. Further, we carefully review our under-performing stores and may consider the non-renewal of leasesupon completion of the current term of the applicable lease. Our e-commerce sales increased $4.5 million to $15.9 million in 2007, a 40.2% increase over sales of $11.4 million in 2006. Our e-commerce sales madeup 1% of our consolidated net sales in both 2007 and 2006.Gross profit Gross profit for 2007 increased $76.7 million to $600.0 million as compared to $523.3 million in 2006. Gross profit as a percentage of net sales, or grossmargin, decreased to 43.0% in 2007 from 43.4% in 2006. This gross margin decrease was the result of the decrease in domestic wholesale margins and adecrease in retail margins to 61.5% in 2007 from 63.8% in 2006. This was partially offset by the increase in international wholesale margins, whichincreased to 37.3% in 2007 from 35.4% in 2006. Our domestic wholesale segment increased $19.2 million, or 6.4%, to $320.4 million in 2006 compared to $301.2 million in 2006. Domestic wholesalemargins decreased to 38.5% in 2007 from 39.0% for 2006. The decrease in domestic wholesale margins was due to lower average selling prices related to theintroduction of our Cali Gear line and lower margins from closing out our discontinued fashion brands. Gross profit for our international wholesale segment increased $34.8 million, or 53.4%, to $99.8 million for 2007 compared to $65.0 million in 2006.Gross margins were 37.3% for 2007 compared to 35.4% in 2006. Gross margins for our direct subsidiary sales were 45.0% in 2007 as compared to 42.4% in2006. Gross margins for our distributor sales were 28.2% in 2007 as compared to 28.1% in 2006. The increase in gross margins for the internationalwholesale segment was due to increased subsidiary sales, which achieve higher gross margins than our international wholesale sales through our foreigndistributors. Gross profit for our retail segment increased $20.4 million, or 13.4%, to $171.8 million in 2007 as compared to $151.4 million in 2006. This increase ingross profit was due to 22 stores that were opened in 2006 being open the entire year in 2007 and positive comparable store sales increases of 16.7% and 5.1%in our international and domestic stores, respectively. During 2007, we opened 38 new domestic stores, and closed two other domestic stores. Gross marginsdecreased to 61.5% in 2007 as compared to 63.8% in 2006. Again, the decrease in margins was due to lower average selling prices related to the introduction ofour Cali Gear line and lower margins from closing out our discontinued fashion brands. Our cost of sales includes the cost of footwear purchased from our manufacturers, royalties, duties, quota costs, inbound freight (including ocean, air andfreight from the dock to our distribution centers), broker fees and storage costs. Because we include expenses related to our distribution network in general andadministrative expenses while some of our competitors may include expenses of this type in cost of sales, our gross margins may not be comparable, and wemay report higher gross margins than some of our competitors in part for this reason.Licensing Net licensing royalties increased $0.1 million, or 1.6%, to $4.2 million for 2007 compared to $4.1 million in 2006.Selling expenses Selling expenses increased by $16.6 million, or 15.1%, to $126.5 million for 2007 from $109.9 million in 2006. As a percentage of net sales, sellingexpenses were 9.1% in 2007 and 2006. The increase in selling expenses was primarily due to increased television and print advertising of $14.5 million andincreased promotional costs of $2.4 million due to the launch of our Cali Gear line. Selling expenses consist primarily of the following: sales representativesample costs, sales commissions, trade shows, advertising and promotional costs, which may include television and ad production costs, and expensesassociated with marketing materials.General and administrative expenses General and administrative expenses increased by $59.7 million, or 19.6%, to $364.7 million for 2007 from $305.0 million in 2006. As a percentage ofsales, general and administrative expenses were 26.2% and 25.3% in 2007 and 2006, respectively. The increase in general and administrative expenses wasprimarily due to increased salaries and wages of $19.3 million, which includes stock compensation costs of $1.1 million, higher rent expense of $8.5 milliondue to the opening of 42 retail stores, and increased warehouse and distribution costs of $8.2 million and increased temporary help of $5.1 million due toincreased sales and the addition26Table of Contentsof another domestic distribution facility. In addition, the expenses related to our distribution network, including the functions of purchasing, receiving,inspecting, allocating, warehousing and packaging of our products totaled $97.6 million and $77.6 million for 2007 and 2006, respectively. The$20.0 million increase was due in part to the addition of our fifth domestic distribution facility in Ontario, California and its functional integration with theexisting domestic distribution facility, as well as increased sales volume. General and administrative expenses consist primarily of the following: salaries, wages and related taxes, various overhead costs associated with ourcorporate staff , stock-based compensation, domestic and international retail operations, non-selling related costs of our international operations, costsassociated with our domestic and European distribution centers, professional fees related to both legal and accounting, insurance, and depreciation andamortization, asset impairment, amongst other expenses. Our distribution network related costs are included in general and administrative expenses and are notallocated to specific segments. We believe that we have established our presence in most major domestic and international retail markets. We opened 38 domestic retail stores and fourinternational retail stores in 2007, while closing two domestic stores and one international store. We currently plan to open between 25 and 30 domestic storesin 2008. In addition, we plan to continue to pursue opportunistic international retail store locations. We continue to review our cost structure to develop efficiencies within our operations; however, we believe that our current cost structure is consistent withour anticipated sales levels in 2008.Interest income Interest income for 2007 increased $1.6 million to $10.0 million as compared to $8.4 million for the same period in 2006. The increase in interest incomeresulted from higher average cash and investment balances during 2007 when compared to the same period in 2006 and interest received on a legal settlement in2007. Interest income earned on our short-term investment balances was primarily tax exempt.Interest expense Interest expense for 2007 decreased $4.4 million to $4.8 million as compared to $9.2 million for the same period in 2006. The decrease in interest expensewas primarily due to the conversion of our 4.5% convertible subordinated notes to shares of our Class A common stock on or prior to February 20, 2007.Interest expense was incurred on mortgages on our distribution center and our corporate office located in Manhattan Beach, California, and amounts owed toour foreign manufacturers.Other income (expense) Other income, net for 2007 decreased $0.9 million to $0.1 million as compared to $1.0 million for the same period in 2006. The decrease in other incomewas mainly due to foreign currency losses.Income taxes The effective tax rate for 2007 was 36.0% as compared to 37.0% in 2006. Income tax expense for 2007 was $42.6 million compared to $41.7 million for2006. The tax provision was computed using the effective tax rates applicable to each of our domestic and international taxable jurisdictions. The 2007 rate isslightly lower than the expected domestic rate of approximately 40% due to our non-U.S. subsidiary earnings in lower tax rate jurisdictions and ourreinvestment of undistributed earnings from our non-U.S. subsidiaries, thereby indefinitely postponing their remittance to the U.S. parent. As such, we didnot provide for deferred income taxes on accumulated undistributed earnings of our non-U.S. subsidiaries. As of December 31, 2007, withholding and U.S.taxes have not been recorded on approximately $15.5 million of cumulative undistributed earnings.YEAR ENDED DECEMBER 31, 2006 COMPARED TO THE YEAR ENDED DECEMBER 31, 2005Net sales Net sales for 2006 were $1.205 billion, an increase of $198.9 million, or 19.8%, over net sales of $1.006 billion in 2005. The increase in net sales wasdue to increased domestic wholesale sales, retail sales and international wholesale sales. The increase in sales was a result of increased demand for our in-season products and broader acceptance of our new lines, including sport fusion and casual fusion footwear.27Table of Contents Our domestic wholesale segment increased 21.9%, or $138.6 million, to $772.9 million compared to $634.3 million in 2005. The increase in domesticwholesale segment net sales came on a 15.6% unit sales volume increase to 39.8 million pairs from 34.4 million pairs in 2005. The strongest increases came inour Women’s Active, Men’s USA, and Kids lines. Our average selling price per pair increased 5.4% to $19.44 from $18.45 in 2005. Our international wholesale segment sales increased $20.2 million to $183.7 million in 2006, a 12.3% increase over sales of $163.5 million in 2005.Direct subsidiary sales increased $10.7 million, or 12.8%, to $94.1 million compared to net sales of $83.4 million in 2005. The increase in direct subsidiarysales was primarily due to increased sales into UK, Germany, Benelux, and Canada. Our distributor sales increased $9.5 million to $89.6 million in 2006,an 11.8% increase over sales of $80.1 million in 2005. This was primarily due to increased sales to our distributors in Panama, Russia and Serbia. Our retail segment sales increased $35.8 million to $237.4 million in 2006, a 17.8% increase over sales of $201.6 million in 2005. The increase in retailsales was due to a net increase of 20 stores, increased sales across all three store formats and positive comparable store sales. During 2006, we opened 22 newdomestic stores and one international store, and we closed three other domestic stores. These new stores contributed $10.0 million in net sales during 2006 ascompared to new store sales of $4.6 million for eleven other stores opened in 2005. Of our new store additions, 14 were concept stores, eight were outlet stores,and one was a warehouse store. In addition, during 2006, we realized positive comparable store sales increases in our domestic retail stores of 10.7% and14.6% in our international retail stores. Our domestic retail sales increased 17.3% due to positive comparable sales and having seven retail stores that wereopened in 2005 being open the entire year in 2006. Our international retail sales increased 22.6% in 2006 compared to 2005, due to increased comparablesales, the opening of one additional store, as well as favorable currency translation adjustments. During 2006, we closed three under-performing retail stores, which was the same number closed in 2005. During 2006, we did not record an impairmentcharge. During 2005, we recorded an impairment charge of $0.9 million related to leasehold improvements for two of our stores. Our e-commerce sales increased $4.4 million to $11.4 million in 2006, a 61.3% increase over sales of $7.0 million in 2005. Our e-commerce sales made upless than 1% of our consolidated net sales in both 2006 and 2005.Gross profit Gross profit for 2006 increased $102.8 million to $523.3 million as compared to $420.5 million in 2005. Gross profit as a percentage of net sales, or grossmargin, increased to 43.4% in 2006 from 41.8% in 2005. This gross margin increase was primarily the result of increased retail margins to 63.8% in 2006from 61.5% in 2005. This was partially offset by the decrease in international wholesale margins, which decreased to 35.4% in 2006 from 37.2% in 2005.Increased margins were a result of increased sales volume in our higher margin in-season products and broader acceptance of our new lines, including sportfusion and casual fusion footwear. Our domestic wholesale segment gross margin increased $68.8 million, or 29.6%, to $301.2 million in 2006 compared to $232.4 million in 2005.Domestic wholesale margins increased to 39.0% in 2006 from 36.6% for 2005. Gross profit for our international wholesale segment increased $4.2 million, or 7.0%, to $65.0 million for 2006 compared to $60.8 million in 2005. Grossmargins were 35.4% for 2006 compared to 37.2% in 2005. International wholesale sales through our foreign subsidiaries achieve higher gross margins thanour international wholesale sales through our foreign distributors. Gross margins for our direct subsidiary sales were 42.4% in 2006 as compared to 44.0% in2005. Gross margins for our distributor sales were 28.1% in 2006 as compared to 30.1% in 2005. The decrease in gross margins was primarily due toincreased discounts and allowances. Gross profit for our retail segment increased $27.5 million, or 22.2%, to $151.4 million in 2006 as compared to $123.9 million in 2005. This increase ingross profit was due to eleven stores that were opened in 2005 being open the entire year in 2006 and positive comparable store sales increases of 14.6% and10.7% in our international and domestic stores, respectively. During 2006, we opened 22 new domestic stores, one international store and closed three otherdomestic stores. Gross margins increased to 63.8% in 2006 as compared to 61.5% in 2005. Again, increased margins were a result of increased sales volumein our higher margin in-season products and broader acceptance of our new lines, including sport fusion and casual fusion footwear.28Table of ContentsLicensing Net licensing royalties decreased $2.5 million, or 37.9%, to $4.1 million for 2006 as compared to $6.6 million in 2005. The decrease in net licensingroyalties is primarily the result of decreased royalty revenue associated with our various licensing agreements.Selling expenses Selling expenses increased by $28.5 million, or 35.0%, to $109.9 million for 2006 from $81.4 million in 2005. As a percentage of net sales, sellingexpenses were 9.1% and 8.1% in 2006 and 2005, respectively. The increase in selling expenses was primarily due to increased media advertising expenses of$22.1 million, increased sales commissions of $3.4 million due to higher revenues, and higher trade show expenses of $2.8 million.General and administrative expenses General and administrative expenses increased by $35.6 million, or 13.2%, to $305.0 million for 2006 from $269.4 million in 2005. As a percentage ofsales, general and administrative expenses were 25.3% and 26.8% in 2006 and 2005, respectively. The increase in general and administrative expenses wasprimarily due to increased salaries and wages of $21.2 million, which includes stock compensation costs of $2.0 million due to the adoption of SFAS 123(R)in January 2006, increased outside services of $3.5 million, higher rent expense of $3.2 million due to the opening of 23 retail stores, and increased warehouseand distribution costs of $3.0 million resulting from increased sales. In addition, the expenses related to our distribution network, including the functions ofpurchasing, receiving, inspecting, allocating, warehousing and packaging of our products totaled $77.6 million and $70.5 million for 2006 and 2005,respectively. We did not record any impairment charges in 2006. In 2005, impairment charges of $0.9 million related to the write-off of leaseholdimprovements at one of our domestic retail stores and one international retail store.Interest income Interest income for 2006 increased $4.0 million to $8.4 million as compared to $4.4 million for the same period in 2005. The increase in interest incomeresulted from higher interest rates and higher average cash and investment balances during 2006 when compared to the same period in 2005.Interest expense Interest expense was $9.2 million for both 2006 and 2005. Interest expense is incurred on our convertible notes, mortgages on our distribution center andour corporate office located in Manhattan Beach, California, our capital lease obligations, and interest on amounts owed to our foreign manufacturers.Other income (expense) Other income, net decreased $0.3 million to $1.0 million for 2006 as compared to $1.3 million in 2005. The decrease in other income was mainly due tolower recoveries related to the settlement of various lawsuits during 2006 as compared to 2005, offset by foreign currency gains.Income taxes The effective tax rate for 2006 was 37.0% as compared to 38.6% in 2005. Income tax expense for 2006 was $41.7 million compared to $28.1 million for2005. The tax provision was computed using the effective tax rates applicable to each of our domestic and international taxable jurisdictions. The 2006 rate isslightly lower than the expected domestic rate of approximately 40% due to our non-U.S. subsidiary earnings in lower tax rate jurisdictions and ourreinvestment of undistributed earnings from our non-U.S. subsidiaries, thereby indefinitely postponing their remittance to the U.S. parent. As such, we didnot provide for deferred income taxes on accumulated undistributed earnings of our non-U.S. subsidiaries. As of December 31, 2006, withholding and U.S.taxes have not been provided on approximately $6.0 million of cumulative undistributed earnings.29Table of ContentsLIQUIDITY AND CAPITAL RESOURCES Our working capital at December 31, 2007 was $523.9 million, an increase of $73.1 million from working capital of $450.8 million at December 31,2006. Our cash and cash equivalents at December 31, 2007 were $199.5 million compared to $160.5 million at December 31, 2006. The increase in cashand cash equivalents of $39.0 million was the result of our cash flow from operations of $101.4 million and proceeds of $8.2 million from stock optionsexercised, which was offset by utilizing excess cash to purchase $44.5 million of short-term investments and capital expenditures of $31.2 million. During 2007, our operating activities generated $101.4 million in net cash compared to cash provided by operating activities of $26.0 million for 2006.The significant increase in our operating cash flows for 2007, when compared to 2006, was mainly the result of our earnings and lower accounts receivablebalances, which was partially offset by a smaller decrease in accounts payable in 2007 compared to 2006. Net cash used in investing activities was $75.7 million for 2007 as compared to $87.6 million in 2006. During 2007, we purchased $44.5 million inshort-term investments to better utilize our cash balances. Capital expenditures for 2007 were approximately $31.2 million, of which $7.1 million related to theconstruction of our new corporate headquarters and the balance primarily consisted of new store openings and remodels. This was compared to capitalexpenditures of $27.6 million in the prior year, which primarily consisted of new store openings and remodels and warehouse equipment upgrades. During2005, we entered into a construction agreement with Morley Construction Company for the construction of our third owned corporate facility in ManhattanBeach, California. The agreement has a maximum payment clause in which Morley agreed that the construction cost of the facility will not exceed$18.1 million plus change orders of $1.7 million, of which $19.2 million was incurred at December 31, 2007. The exterior of the facility was completed in2007, and while we are currently working on the interior improvements, we expect to move in during 2008. Excluding the construction of our corporateheadquarters and our new distribution center in Moreno Valley, California, we expect our ongoing capital expenditures for 2008 to be approximately$25.0 million, which includes opening between 25 to 30 domestic retail stores and investments in information technology. We are currently in the process ofdesigning and purchasing the equipment to be used in our new distribution center and estimate the cost of this equipment to be between $75.0 million and$85.0 million. We currently anticipate that our capital expenditure requirements will be funded through our operating cash flows, current cash and short-terminvestments on hand, or available lines of credit. Net cash provided by financing activities was $9.9 million during 2007 compared to net cash provided by financing activities of $22.9 million during2006. The decrease in cash provided by financing activities was due to lower proceeds from the issuance of Class A common stock upon the exercise of stockoptions during the year ended December 31, 2007 as compared to the prior year. In April 2002, we issued $90.0 million aggregate principal amount of 4.50% convertible subordinated notes due April 15, 2007. On January 19, 2007, wecalled these notes for redemption. The redemption date was February 20, 2007. The aggregate principal amount of notes outstanding was $90.0 million.Holders of $89.969 million principal amount of the notes converted their notes into shares of our Class A common stock prior to the redemption date, whichincluded $2.5 million of principal amount of the notes held by us. As a result of these conversions, 3,464,594 shares of Class A common stock were issuedto holders of the notes, which included 96,272 shares issued to us that were immediately retired. In connection with these conversions, we paid approximately$500 in cash to holders who elected to convert their notes, which represented cash paid in lieu of fractional shares. In addition, we paid approximately $32,000to holders who redeemed their notes, which represented the redemption price of 100.9% of $31,000 principal amount of the notes plus accrued interest. We have outstanding debt of $16.9 million that primarily relates to notes payable for one of our distribution center warehouses and one of ouradministrative offices, which notes are secured by the respective properties. On May 31, 2006, we amended our secured line of credit, which permits our company and certain of our subsidiaries to borrow up to $150.0 millionbased upon eligible accounts receivable and inventory, which line of credit can be increased to $250.0 million at our request. Borrowings bear interest at theborrowers’ election based on either the prime rate or the London Interbank Offered Rate (“LIBOR”). Prime rate loans will bear interest at a rate equal toJPMorgan Chase Bank’s publicly announced prime rate less up to 0.50%. LIBOR loans will bear interest at a rate equal to the applicable LIBOR plus up to anadditional 1.75%. We pay a monthly unused line of credit fee of 0.25% per annum. The loan agreement, which expires on May 31, 2011, provides for theissuance of letters of credit up to a maximum of $30.0 million. The loan agreement contains customary affirmative and negative covenants for secured creditfacilities of this type, including a financial covenant requiring a fixed charge coverage ratio of not less than 1.1 at the end of each quarter if excess availabilityof eligible account receivable and inventory is less than $50.0 million at any time during such quarter. Excess availability was not less than $50.0 millionduring the year-ended December 31, 2007; hence, the fixed charge ratio30Table of Contentsrequirement was not applicable at such date. No amounts were outstanding and we were in compliance with all other covenants of the loan agreement atDecember 31, 2007. We had $9.6 million of outstanding letters of credit as December 31, 2007. We believe that anticipated cash flows from operations, available borrowings under our secured line of credit, cash on hand, short-term investments andour financing arrangements will be sufficient to provide us with the liquidity necessary to fund our anticipated working capital and capital requirementsthrough 2008. However, in connection with our current strategies, we will incur significant working capital requirements and capital expenditures. Our futurecapital requirements will depend on many factors, including, but not limited to, costs associated with moving to a new distribution facility, the levels at whichwe maintain inventory, the market acceptance of our footwear, the success of our international operations, the levels of promotion and advertising required topromote our footwear, the extent to which we invest in new product design and improvements to our existing product design, acquisition of other brands orcompanies, and the number and timing of new store openings. To the extent that available funds are insufficient to fund our future activities, we may need toraise additional funds through public or private financing of debt or equity. We cannot be assured that additional financing will be available or that, ifavailable, it can be obtained on terms favorable to our stockholders and us. Failure to obtain such financing could delay or prevent our planned expansion,which could adversely affect our business, financial condition and results of operations. In addition, if additional capital is raised through the sale ofadditional equity or convertible securities, dilution to our stockholders could occur.DISCLOSURE ABOUT CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTSThe following table aggregates all material contractual obligations and commercial commitments as of December 31, 2007: Payments Due by Period (In Thousands) Less than One to Three to More Than One Three Five Five Total Year Years Years Years Other long-term debt $21,082 $1,783 $3,567 $15,732 — Operating lease obligations (1) 411,576 47,124 106,339 81,496 $176,617 Purchase obligations (2) 239,523 239,523 — — — Construction contract (3) 663 663 — — — Minimum payments related to our licensing arrangements 41,110 10,055 15,655 15,400 — $713,954 $299,148 $125,561 $112,628 $176,617 (1) Operating lease obligations consists primarily of real property leases for our retail stores, corporate offices and distribution centers. These leasesfrequently include options that permit us to extend beyond the terms of the initial fixed term. Payments for these lease terms are provided for by cashflows generated from operations or, if needed, by our $150.0 million secured line of credit, for which no amounts were outstanding at December 31,2007. (2) Purchase obligations includes the following: (i) accounts payable balances for the purchase of footwear of $81.3 million, (ii) outstanding letters of creditof $9.6 million and (iii) open purchase commitments with our foreign manufacturers for $148.7 million. We currently expect to fund thesecommitments with cash flows from operations and/or cash on hand. (3) During 2005, we entered into a construction agreement with Morley Construction Company for the construction of our third owned corporate facility inManhattan Beach, California. The agreement has a maximum payment clause in which Morley agrees that the construction cost of the core and shell ofthe facility will not exceed $18.1 million plus change orders of $1.7 million, of which $19.2 million was incurred at December 31, 2007. The exteriorof the facility was completed in 2007, and we are currently working on the interior improvements and we expect to move in during 2008.OFF-BALANCE SHEET ARRANGEMENTS We do not have any relationships with unconsolidated entities or financial partnerships such as entities often referred to as structured finance or specialpurpose entities that would have been established for the purpose of facilitating off-balance-sheet arrangements or for other contractually narrow or limitedpurposes. As such, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.31Table of ContentsCRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our consolidated financial statements, which havebeen prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statementsrequires us to make estimates and judgments that affect the reported amounts of assets, liabilities, sales and expenses, and related disclosure of contingentassets and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under thecircumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent fromother sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting estimates are affected by more significant judgments used in the preparation of our consolidated financialstatements: revenue recognition, allowance for bad debts, returns, sales allowances and customer chargebacks, inventory write-downs, valuation of long-livedassets, litigation reserves, valuations of deferred income taxes, uncertain tax positions, foreign currency translation and stock-based compensation. Revenue Recognition. We derive income from the sale of footwear and royalties earned from licensing the Skechers brand. Domestically, goods areshipped Free on Board (“FOB”) shipping point directly from our domestic distribution center in Ontario, California. For our European international wholesalecustomers, product is shipped FOB shipping point direct from our distribution center in Liege, Belgium. For our distributor sales, the goods are generallydelivered directly from the independent factories to our distributors’ freight forwarders on a Free Named Carrier (“FCA”) basis. We recognize revenue onwholesale sales when products are shipped and the customer takes title and assumes risk of loss, collection of relevant receivable is probable, persuasiveevidence of an arrangement exists and the sales price is fixed or determinable. This generally occurs at time of shipment. Allowances for estimated returns,discounts, doubtful accounts and chargebacks are provided for when related revenue is recorded. Related costs paid to third-party shipping companies arerecorded as a cost of sales. We recognize revenue from retail sales at the point of sale. Royalty income is earned from our licensing arrangements. Upon signing a new licensing agreement, we receive up-front fees, which are generallycharacterized as prepaid royalties. These fees are initially deferred and recognized as revenue as earned (i.e., as licensed sales are reported to the company or ona straight line basis over the term of the agreement). The first calculated royalty payment is based on actual sales of the licensed product. Typically, at eachquarter end we receive correspondence from our licensees indicating what the actual sales for the period were. This information is used to calculate and accruethe related royalties currently receivable based on the terms of the agreement. Allowance for bad debts, returns, sales allowances and customer chargebacks. We provide a reserve against our receivables for estimated losses thatmay result from our customers’ inability to pay. To minimize the likelihood of uncollectibility, customers’ credit-worthiness is reviewed periodically based onexternal credit reporting services and our experience with the account, and it is adjusted accordingly. When a customer’s account become past due, we generallyplace a hold on the account and discontinue further shipments to that customer, minimizing further risk of loss. We determine the amount of the reserve byanalyzing known uncollectible accounts, aged receivables, economic conditions in the customers’ country or industry, historical losses and our customers’credit-worthiness. Amounts later determined and specifically identified to be uncollectible are charged or written off against this reserve. We also reserve for potential disputed amounts or chargebacks with our customers. Our chargeback reserve is based on a collectibility percentage based onfactors such as historical trends, current economic conditions, and nature of the chargeback receivables. We also reserve for potential sales returns andallowances based on historical trends. The likelihood of a material loss on an uncollectible account would be mainly dependent on deterioration in the overall economic conditions in a particularcountry or environment. Reserves are fully provided for all probable losses of this nature. For receivables that are not specifically identified as high risk, weprovide a reserve based upon a percent of sales for the preceding two months. This percentage is based on our historical loss rate. Gross trade accountsreceivable balance was $177.7 million and the allowance for bad debts, returns, sales allowances and customer chargebacks was $10.3 million atDecember 31, 2007. Inventory write-downs. Inventories are stated at the lower of cost or market. We review our inventory on a regular basis for excess and slow movinginventory. Our review is based on inventory on hand, prior sales and our expected net realizable value. Our analysis includes a review of inventory quantitieson hand at period end in relation to year-to-date sales and projections for sales in the near future. The net realizable value, or market value, is determined basedon our estimate of sales prices of such inventory through off-price or discount store channels. A write-down of inventory is considered permanent and creates anew cost basis for those units. The likelihood of any material inventory write-down is dependent primarily on our expectation of future consumer demand forour32Table of Contentsproduct. A misinterpretation or misunderstanding of future consumer demand for our product or of the economy, or other failure to estimate correctly, couldresult in inventory valuation changes, either favorably or unfavorably, compared to the requirement determined to be appropriate as of the balance sheet date.At December 31, 2007, our gross inventory value was $206.1 million and our inventory reserve was $1.9 million. Valuation of long-lived assets. When circumstances warrant, we assess the impairment of long-lived assets that require us to make assumptions andjudgments regarding the carrying value of these assets. The assets are considered to be impaired if we determine that the carrying value may not be recoverablebased upon our assessment of the following events or changes in circumstances: • the asset’s ability to continue to generate income; • any loss of legal ownership or title to the asset(s); • any significant changes in our strategic business objectives and utilization of the asset(s); or • the impact of significant negative industry or economic trends. If the assets are considered to be impaired, the impairment we recognize is the amount by which the carrying value of the assets exceeds the fair value of theassets. In addition, we base the useful lives and related amortization or depreciation expense on our estimate of the period that the assets will generate revenuesor otherwise be used by us. If a change were to occur in any of the above-mentioned factors or estimates, the likelihood of a material change in our reportedresults would increase. In addition, we prepare a summary of store contribution from our domestic retail stores to assess potential impairment of the fixedassets and leasehold improvements. Stores with negative contribution opened in excess of twenty-four months are then reviewed in detail to determine ifimpairment exists. For the year ended December 31, 2007, we did not record an impairment charge. Litigation reserves. Estimated amounts for claims that are probable and can be reasonably estimated are recorded as liabilities in our consolidated balancesheets. The likelihood of a material change in these estimated reserves would depend on new claims as they may arise and the favorable or unfavorableoutcome of the particular litigation. Both the amount and range of loss on a large portion of the remaining pending litigation is uncertain. As such, we areunable to make a reasonable estimate of the liability that could result from unfavorable outcomes in litigation. As additional information becomes available, wewill assess the potential liability related to our pending litigation and revise our estimates. Such revisions in our estimates of the potential liability couldmaterially impact our results of operations and financial position. Valuation of deferred income taxes. We record a valuation allowance when necessary 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 taxable income and theeffectiveness of our tax planning strategies amongst the various domestic and international tax jurisdictions in which we operate. We evaluate our projections oftaxable income to determine the recoverability of our deferred tax assets and the need for a valuation allowance. As of December 31, 2007, we had net deferredtax assets of $23.3 million reduced by a valuation allowance of $0.7 million against loss carry-forwards not expected to be utilized by certain foreignsubsidiaries. Uncertain tax positions. Effective January 1, 2007, we adopted the provisions of Financial Accounting Standards Board Interpretation No. 48 (“FIN48”), Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109 “Accounting for Income Taxes” (“SFAS 109”), whichcontains a two-step process for recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109. The first step is todetermine whether or not a tax benefit should be recognized. A tax benefit will be recognized if the weight of available evidence indicates that the tax position ismore likely than not to be sustained upon examination by the relevant tax authorities, assuming the tax authorities have full knowledge of all the relevantinformation. The second step is to measure the tax benefit of those tax positions meeting the more-likely-than-not recognition threshold. The tax benefit ismeasured at the largest amount of benefit that is more than 50% likely of being realized upon ultimate settlement with the tax authorities. The recognition andmeasurement of benefits related to our tax positions requires significant judgment as uncertainties often exist with respect to new laws, new interpretations ofexisting laws, and rulings by taxing authorities. We recognized approximately a $3.4 million increase in the liability for unrecognized tax benefits, which wasaccounted for as a reduction to the January 1, 2007 balance of retained earnings.33Table of Contents Foreign currency translation. Our international operations generally use their respective local currencies as their functional currency. In accordance withStatement of Financial Accounting Standards No. 52, “Foreign Currency Translation” (“SFAS 52”), revenues and expenses from our internationalsubsidiaries are translated using the monthly average exchange rates in effect for the period in which such revenues and expenses occur. Internationalsubsidiaries that use their local currency as their functional currency translate their assets and liabilities using current rates of exchange at the balance sheetdate. The resulting translation gains and losses for such subsidiaries are included within accumulated other comprehensive income as a separate component ofstockholders’ equity. One international subsidiary has a functional currency of the U.S. dollar. Resulting remeasurement gains and losses from thissubsidiary are included in the determination of net earnings. A substantial portion of our intercompany loans are considered long-term investments and thegains or losses from currency fluctuations are included as a component of translation adjustment in other comprehensive income. Stock-based compensation. Beginning on January 1, 2006, we implemented and adopted a new critical accounting policy, Financial AccountingStandards No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123(R)”), which requires us to recognize compensation for stock options, nonvestedshares and employee stock purchase plan (“ESPP”) shares at fair value. Under the fair value recognition provisions for SFAS 123(R), stock-basedcompensation cost is estimated at the grant date based on the fair value of the awards expected to vest and recognized as expense ratably over the requisiteservice period of the award. We have used the Black-Scholes valuation model to estimate the fair value of our stock option awards, which requires variousjudgmental assumptions including estimating stock price volatility, forfeiture rates, and expected life. Our computation of expected volatility is based onhistorical volatility. In addition, we consider many factors when estimating expected forfeitures and expected life, including types of awards, employee class,and historical experience. If any of the assumptions used in the Black-Scholes model change significantly, stock-based compensation expense may differmaterially in the future from that recorded in the current period. We adopted SFAS 123(R) using the modified prospective method which requires theapplication of the accounting standard as of January 1, 2006. Stock compensation expense as a result of SFAS 123(R) was recorded to general andadministrative expenses and was $1.1 million and $2.0 million for the year ended December 31, 2007 and 2006, respectively. In accordance with the modifiedprospective method, the consolidated financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123(R).The impact of the adoption is discussed in note 7 to the Consolidated Financial Statements.INFLATION We do not believe that the relatively moderate rates of inflation experienced in the United States over the last three years have had a significant effect on oursales or profitability. However, we cannot accurately predict the effect of inflation on future operating results. Although higher rates of inflation have beenexperienced in a number of foreign countries in which our products are manufactured, we do not believe that inflation has had a material effect on our sales orprofitability. While we have been able to offset our foreign product cost increases by increasing prices or changing suppliers in the past, we cannot assure youthat we will be able to continue to make such increases or changes in the future.EXCHANGE RATES We receive U.S. dollars for substantially all of our product sales and our royalty income. Inventory purchases from offshore contract manufacturers areprimarily denominated in U.S. dollars; however, purchase prices for our products may be impacted by fluctuations in the exchange rate between the U.S.dollar and the local currencies of the contract manufacturers, which may have the effect of increasing our cost of goods in the future. During 2007 and 2006,exchange rate fluctuations did not have a material impact on our inventory costs. We do not engage in hedging activities with respect to such exchange rate risk.FUTURE ACCOUNTING CHANGES In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards Statement No. 160“Accounting for Noncontrolling Interests” (“SFAS 160”), which clarifies the classification of noncontrolling interests in consolidated statements of financialposition and the accounting for and reporting of transactions between the reporting entity and holders of such noncontrolling interests. SFAS 160 will beeffective for fiscal years beginning after December 15, 2008. We are currently evaluating the impact of this standard on our Consolidated FinancialStatements; however, we do not expect that the adoption of SFAS 160 will have a material impact on our financial condition or results of operations. In December 2007, the FASB issued Statement of Financial Accounting Standards Statement No. 141(R) “Applying the Acquisition Method (“SFAS141(R)”), which clarifies the accounting for a business combination and requires an acquirer to recognize the assets acquired, the liabilities assumed, and anynoncontrolling interest in the acquiree at the acquisition date, measured at their34Table of Contentsfair values as of that date. SFAS 141(R) will be effective for fiscal years beginning after December 15, 2008. We are currently evaluating the impact of thisstandard on our Consolidated Financial Statements; however, we do not expect that the adoption of SFAS 141(R) will have a material impact on our financialcondition or results of operations. In February 2007, the FASB issued Statement of Financial Accounting Standards Statement No. 159 “The Fair Value Option for Financial Assets andFinancial Liabilities, Including an amendment of FASB Statement No. 115” (“SFAS 159”), which provides companies with an option to report selectedfinancial assets and liabilities at fair value. Furthermore, SFAS 159 establishes presentation and disclosure requirements designed to facilitate comparisonsbetween companies that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 will be effective for fiscal yearsbeginning after November 15, 2007. We are currently evaluating the impact of this standard on our Consolidated Financial Statements; however, we do notexpect that the adoption of SFAS 159 will have a material impact on our financial condition or results of operations. In September 2006, the FASB issued Statement of Financial Accounting Standards Statement No. 157 “Fair Value Measurements”, (“SFAS 157”). Thestandard provides guidance for using fair value to measure assets and liabilities. The standard also responds to investors’ requests for expanded informationabout the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair valuemeasurements on earnings. The standard applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. The standarddoes not expand the use of fair value in any new circumstances. Statement 157 is effective for financial statements issued for fiscal years beginning afterNovember 15, 2007, and interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact of this standard on ourConsolidated Financial Statements; however, we do not expect that the adoption of SFAS 157 will have a material impact on our financial condition or resultsof operations.ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKMARKET RISK Market risk is the potential loss arising from the adverse changes in market rates and prices, such as interest rates, marketable debt security prices andforeign currency exchange rates. Changes in interest rates, marketable debt security prices and changes in foreign currency exchange rates have and will havean impact on our results of operations. We do not hold any derivative securities that require fair value presentation under FASB Statement No. 133. Market risk and interest rate fluctuations. Our short-term investments consist of corporate and municipal debt and preferred stock auction ratesecurities. Recently, several auctions have failed as a result of illiquidity and imbalance in order flow for auction rate securities. A failed auction is not anindication of an increased credit risk or a reduction in the underlying collateral, however, parties wishing to sell securities could not do so. Based on currentmarket conditions, it is not known when or if the capital markets will come back into balance to achieve successful auctions for these securities. If theseauctions continue to fail, it could result in our holding securities beyond their next scheduled auction reset dates and will limit the short-term liquidity of theseinvestments. We currently believe these securities are not significantly impaired, primarily due to the collateral underlying these securities and/or thecreditworthiness of the issuer. Based on our expected operating cash flows, and our other sources and uses of cash, we do not anticipate that the potential lackof liquidity on these investments will affect our ability to execute our current business plan. The interest rate charged on our line of credit facility is based on either the prime rate of interest or the LIBOR, and changes in the either of these rates ofinterest could have an effect on the interest charged on our outstanding balances. At December 31, 2007, no amounts were outstanding that were subject tochanges in interest rates. Foreign exchange rate fluctuations. We face market risk to the extent that changes in foreign currency exchange rates affect our non-U.S. dollarfunctional currency foreign subsidiary’s revenues, expenses, assets and liabilities. In addition, changes in foreign exchange rates may affect the value of ourinventory commitments. Also, inventory purchases of our products may be impacted by fluctuations in the exchange rates between the U.S. dollar and thelocal currencies of the contract manufacturers, which could have the effect of increasing the cost of goods sold in the future. We manage these risks byprimarily denominating these purchases and commitments in U.S. dollars. We do not engage in hedging activities with respect to such exchange rate risks.35Table of ContentsITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAINDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE Page REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 37 CONSOLIDATED BALANCE SHEETS 39 CONSOLIDATED STATEMENTS OF EARNINGS 40 CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME 41 CONSOLIDATED STATEMENTS OF CASH FLOWS 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 43 SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS 64 36Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMThe Board of Directors and StockholdersSkechers U.S.A., Inc.: We have audited the accompanying consolidated balance sheets of Skechers U.S.A., Inc. and subsidiaries as of December 31, 2007 and 2006, and therelated consolidated statements of earnings, stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year periodended December 31, 2007. In connection with our audits of the consolidated financial statements, we also have audited the related financial statement schedule.These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to expressan opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our auditsprovide 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 of Skechers U.S.A., Inc.and subsidiaries as of December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the years in the three-year period endedDecember 31, 2007, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, whenconsidered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. As discussed in note 7 to the consolidated financial statements, effective January 1, 2006 the Company adopted the provisions of Statement of FinancialAccounting Standards No. 123 (revised 2004), Share-Based Payment. As discussed in note 10 to the consolidated financial statements, effective January 1,2007 the Company adopted the provisions of Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Skechers U.S.A. Inc’s.,internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control—Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 28, 2008 expressed an unqualified opinion onthe effectiveness of the Company’s internal control over financial reporting./s/ KPMG LLPLos Angeles, CaliforniaFebruary 28, 200837Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMThe Board of Directors and StockholdersSkechers U.S.A., Inc.: We have audited Skechers U.S.A., Inc’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Skechers U.S.A., Inc’s. managementis responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financialreporting. Our responsibility is to express an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in allmaterial respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weaknessexists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performingsuch other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal controlover financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are beingmade only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate. In our opinion, Skechers U.S.A., Inc. maintained in all material respects effective internal control over financial reporting as of December 31, 2007, basedon criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO). We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balancesheets of Skechers U.S.A., Inc. and subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of earnings, stockholders’ equityand comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2007, and the related financial statementschedule, and our report dated February 28, 2008 expressed an unqualified opinion on those consolidated financial statements and financial statementschedule./s/ KPMG LLPLos Angeles, CaliforniaFebruary 28, 200838Table of ContentsSKECHERS U.S.A., INC.CONSOLIDATED BALANCE SHEETS(In thousands) December 31, December 31, 2007 2006 ASSETS Current Assets: Cash and cash equivalents $199,516 $160,485 Short-term investments 104,500 60,000 Trade accounts receivable, less allowances of $10,284 in 2007 and $10,558 in 2006 167,406 177,740 Other receivables 10,520 8,035 Total receivables 177,926 185,775 Inventories 204,211 200,877 Prepaid expenses and other current assets 13,993 15,321 Deferred tax assets 8,594 9,490 Total current assets 708,740 631,948 Property and equipment, at cost, less accumulated depreciation and amortization 98,400 87,645 Intangible assets, less accumulated amortization 78 633 Deferred tax assets 13,983 11,984 Other assets, at cost 6,776 4,843 TOTAL ASSETS $827,977 $737,053 LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities: Current installments of long-term borrowings 437 576 Accounts payable 164,466 161,150 Accrued expenses 19,949 19,435 Total current liabilities 184,852 181,161 4.50% convertible subordinated notes — 89,969 Long-term borrowings, excluding current installments 16,462 16,836 Total liabilities 201,314 287,966 Commitments and contingencies Stockholders’ equity: Preferred Stock, $.001 par value; 10,000 authorized; none issued and outstanding — — Class A Common Stock, $.001 par value; 100,000 shares authorized; 32,992 and 28,103 shares issued andoutstanding at December 31, 2007 and 2006, respectively 33 28 Class B Common Stock, $.001 par value; 60,000 shares authorized; 12,852 and 13,768 shares issued andoutstanding at December 31, 2007 and 2006, respectively 13 14 Additional paid-in capital 258,084 156,374 Accumulated other comprehensive income 14,763 11,200 Retained earnings 353,770 281,471 Total stockholders’ equity 626,663 449,087 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $827,977 $737,053 See accompanying notes to consolidated financial statements.39Table of ContentsSKECHERS U.S.A., INC.CONSOLIDATED STATEMENTS OF EARNINGS(In thousands, except per share data) Years ended December 31, 2007 2006 2005 Net sales $1,394,181 $1,205,368 $1,006,477 Cost of sales 794,192 682,022 585,995 Gross profit 599,989 523,346 420,482 Royalty income, net 4,179 4,114 6,628 604,168 527,460 427,110 Operating expenses: Selling 126,527 109,886 81,378 General and administrative 364,711 305,030 269,436 491,238 414,916 350,814 Earnings from operations 112,930 112,544 76,296 Other income (expense): Interest income 10,040 8,351 4,368 Interest expense (4,763) (9,227) (9,154)Other, net 98 980 1,287 5,375 104 (3,499)Earnings before income taxes 118,305 112,648 72,797 Income tax expense 42,619 41,654 28,080 Net earnings $75,686 $70,994 $44,717 Net earnings per share: Basic $1.67 $1.73 $1.13 Diluted $1.63 $1.59 $1.06 Weighted average shares: Basic 45,262 41,079 39,686 Diluted 46,741 46,139 44,518 See accompanying notes to consolidated financial statements.40Table of ContentsSKECHERS U.S.A., INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME(In thousands) SHARES AMOUNT ACCUMULATED CLASS A CLASS B CLASS A CLASS B ADDITIONAL OTHER TOTAL COMMON COMMON COMMON COMMON PAID-IN COMPREHENSIVE RETAINED STOCKHOLDERS’ STOCK STOCK STOCK STOCK CAPITAL INCOME EARNINGS EQUITY Balance at December 31,2004 22,234 17,011 $22 $17 $117,091 $12,005 $165,760 $294,895 Comprehensive income: Net earnings — — — — — — 44,717 44,717 Foreign currencytranslationadjustment — — — — — (4,966) — (4,966)Total comprehensive income 39,751 Contribution of commonstock to the 401(k) Plan 59 — — — 767 — — 767 Proceeds from issuance ofcommon stock underthe employee stockpurchase plan 135 — — — 1,550 — — 1,550 Proceeds from issuance ofcommon stock underthe employee stockoption plan 594 — 1 — 5,365 — — 5,366 Tax benefit of stockoptions exercised — — — — 1,501 — — 1,501 Conversion of Class BCommon Stock intoClass A Common Stock 360 (360) — — — — — — Balance at December 31,2005 23,382 16,651 $23 $17 $126,274 $7,039 $210,477 $343,830 Comprehensive income: Net earnings — — — — — — 70,994 70,994 Foreign currencytranslationadjustment — — — — — 4,161 — 4,161 Total comprehensive income 75,155 Stock compensationexpense — — — — 2,029 — — 2,029 Proceeds from issuance ofcommon stock underthe employee stockpurchase plan 122 — 1 — 1,907 — — 1,908 Proceeds from issuance ofcommon stock underthe employee stockoption plan 1,716 — 1 — 17,054 — — 17,055 Tax benefit of stockoptions exercised — — — — 9,110 — — 9,110 Conversion of Class BCommon Stock intoClass A Common Stock 2,883 (2,883) 3 (3) — — — — Balance at December 31,2006 28,103 13,768 $28 $14 $156,374 $11,200 $281,471 $449,087 Comprehensive income: Net earnings — — — — — — 75,686 75,686 Foreign currencytranslationadjustment — — — — — 3,563 — 3,563 Total comprehensive income 79,249 Cumulative effect ofaccounting change -adjustment to retainedearnings upon adoptionof FIN 48 — — — — — — (3,387) (3,387)Redemption of convertiblesubordinated notes 3,368 — 3 — 88,743 — — 88,746 Stock compensationexpense — — — — 1,081 — — 1,081 Proceeds from issuance ofcommon stock underthe employee stockpurchase plan 99 — — — 2,066 — — 2,066 Proceeds from issuance ofcommon stock underthe employee stockoption plan 506 — 1 — 6,126 — — 6,127 Tax benefit of stockoptions exercised — — — — 3,694 — — 3,694 Conversion of Class BCommon Stock intoClass A Common Stock 916 (916) 1 (1) — — — — Balance at December 31,2007 32,992 12,852 $33 $13 $258,084 $14,763 $353,770 $626,663 See accompanying notes to consolidated financial statements41Table of ContentsSKECHERS U.S.A., INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands) Years ended December 31, 2007 2006 2005 Cash flows from operating activities: Net earnings $75,686 $70,994 $44,717 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization of property and equipment 17,220 16,203 22,070 Amortization of deferred financing costs 95 765 765 Amortization of intangible assets 437 502 523 Provision for bad debts and returns 1,610 4,591 2,882 Tax benefits from stock-based compensation 1,456 4,144 1,501 Non cash stock compensation 1,081 2,030 — Provision for deferred taxes (1,102) (6,382) (6,322)Loss on disposal of equipment 272 299 170 (Increase) decrease in assets: Receivables 7,948 (47,994) (22,106)Inventories (3,045) (64,364) 13,202 Prepaid expenses and other current assets 1,417 (3,530) (871)Other assets (1,671) 1,340 (2,476)Increase (decrease) in liabilities: Accounts payable 2,956 49,563 13,777 Accrued expenses (3,005) (2,122) 7,664 Net cash provided by operating activities 101,355 26,039 75,496 Cash flows used in investing activities: Capital expenditures (31,175) (27,560) (13,627)Purchases of short-term investments (249,450) (113,100) — Maturities of short-term investments 204,950 53,100 — Net cash used in investing activities (75,675) (87,560) (13,627)Cash flows from financing activities: Net proceeds from the issuances of stock through employee stock purchase plan and theexercise of stock options 8,193 18,963 6,916 Excess tax benefits from stock-based compensation 2,238 4,966 — Payments on long-term debt (520) (1,008) (7,660)Net cash provided by (used in) financing activities 9,911 22,921 (744)Net increase (decrease) in cash and cash equivalents 35,591 (38,600) 61,125 Effect of exchange rates on cash and cash equivalents 3,440 2,078 (1,771)Cash and cash equivalents at beginning of year 160,485 197,007 137,653 Cash and cash equivalents at end of year $199,516 $160,485 $197,007 Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $4,714 $8,560 $8,374 Income taxes 41,481 47,064 27,914 SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES: The Company issued 59,203 shares of Class A Common Stock to the Company’s 401(k) plan, with a value of $767,000 for the year ended December 31,2005. No shares of Class A Common Stock were issued to the Company’s 401(k) plan in 2006 or 2007. The Company issued approximately 3.5 millionshares of Class A common stock to note holders upon conversion of our 4.50% convertible subordinated debt with a carrying value of $89,969 for the yearended December 31, 2007.See accompanying notes to consolidated financial statements.42Table of ContentsSKECHERS U.S.A., INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2007, 2006 and 2005 (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 and an e-commercebusiness. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States and include theaccounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. (b) Use of Estimates Management has made a number of estimates and assumptions relating to the reporting of assets, liabilities, revenues and expenses and the disclosure ofcontingent assets and liabilities to prepare these consolidated financial statements in conformity with accounting principles generally accepted in the UnitedStates. Significant areas requiring the use of management estimates relate primarily to the revenue recognition, allowance for bad debts, returns, salesallowances and customer chargebacks, inventory write-downs, valuation of long-lived assets, litigation reserves, valuation of deferred income taxes, uncertaintax positions, foreign currency translation and stock-based compensation. Actual results could differ from those estimates. (c) Business Segment Information Skechers operations and segments are organized along its distribution channels and consists of the following: domestic wholesale, international wholesale,retail and e-commerce sales. Information regarding these segments is summarized in Note 14 to the Consolidated Financial Statements. (d) Revenue Recognition The Company recognizes revenue on wholesale sales when products are shipped and the customer takes ownership and assumes risk of loss, collection ofthe relevant receivable is probable, persuasive evidence of an arrangement exists and the sales price is fixed or determinable. This generally occurs at the timeof shipment. Allowances for estimated returns, sales allowances, discounts, doubtful accounts and chargebacks are provided for when related revenue isrecorded. Related costs paid to third-party shipping companies are recorded as a cost of sales. The Company recognizes revenue from retail sales at the point ofsale. Net royalty income is earned from our licensing arrangements. Upon signing a new licensing agreement, we receive up-front fees, which are generallycharacterized as prepaid royalties. These fees are initially deferred and recognized as revenue as earned based on the terms of the contract (i.e., as licensed salesare reported to the company or on a straight line basis over the term of the agreement). The first calculated royalty payment is based on actual sales of thelicensed product. Typically, at each quarter end we receive correspondence from our licensees indicating what the actual sales for the period were. Thisinformation is used to calculate and accrue the related royalties based on the terms of the agreement. (e) Cash and Cash Equivalents Cash and 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 be cash equivalents. (f) Short–Term Investments In general, investments with original maturities of greater than three months and remaining maturities of less than one year are classified as short-terminvestments. Highly liquid investments with maturities beyond one year may also be classified as short-term based on their liquidity, management’s intentionsand because such marketable securities represent the investment of cash that is available for current operations. Short-term investments consist of auction ratesecurities, which are corporate and municipal debt securities and preferred stocks which have underlying long-term maturities or preferred equity; however,they are traded and interest rates reset through a modified Dutch auction at predetermined short-term intervals of between 7 and 90 days.43Table of Contents Recently, several auctions have failed as a result of illiquidity and the imbalance in order flow for auction rate securities. An auction failure means that theparties wishing to sell securities could not do so. Accordingly, there is no assurance that future auctions will continue to succeed, and as a result, our ability toliquidate our investments in the near term may be limited or may not exist. A failed auction is not an indication of an increased credit risk or a reduction in theunderlying collateral. These securities are considered available-for-sale and recorded on the Company’s consolidated financial statements at fair market value,with the unrealized gains and losses, net of tax, included in stockholders’ equity. (g) Foreign Currency Translation In accordance with SFAS 52, certain international operations use the respective local currencies as their functional currency, while other internationaloperations use the U.S. Dollar as their functional currency. The Company considers the U.S. dollar as its functional currency. The Company operatesinternationally through several foreign subsidiaries. Translation adjustments for these subsidiaries are included in other comprehensive income. Additionally,one international subsidiary, Skechers S.a.r.l. located in Switzerland, operates with a functional currency of the U.S. dollar. Resulting remeasurement gainsand losses from this subsidiary are included in the determination of net earnings (loss). 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 average rate of exchange duringthe period. Translation of intercompany loans of a long-term investment nature are included as a component of translation adjustment in other comprehensiveincome. (h) Inventories Inventories, principally finished goods, are stated at the lower of cost (based on the first-in, first-out method) or market. The Company provides forestimated losses from obsolete or slow-moving inventories and writes down the cost of inventory at the time such determinations are made. Reserves areestimated based upon inventory on hand, historical sales activity, and the expected net realizable value. The net realizable value is determined based uponestimated sales prices of such inventory through off-price or discount store channels. (i) Income Taxes The Company accounts for income taxes in accordance with SFAS 109, which requires that the Company recognize deferred tax liabilities for taxabletemporary differences and deferred assets for deductible temporary differences and operating loss carry-forwards using enacted tax rates in effect in the yearsthe differences are expected to reverse. Deferred income tax benefit or expense is recognized as a result of changes in net deferred tax assets or deferred taxliabilities. A valuation allowance is recorded when it is more likely than not that some or all of any deferred tax assets will not be realized. Effective January 1, 2007, we adopted the provisions of FIN 48, which contains a two-step process for recognizing and measuring uncertain tax positionsaccounted for in accordance with SFAS No. 109. The first step is to determine whether or not a tax benefit should be recognized. A tax benefit will berecognized if the weight of available evidence indicates that the tax position is more likely than not to be sustained upon examination by the relevant taxauthorities, The recognition and measurement of benefits related to our tax positions requires significant judgment as uncertainties often exist with respect tonew laws, new interpretations of existing laws, and rulings by taxing authorities. Differences between actual results and our assumptions, or changes in ourassumptions in future periods, are recorded in the period they become known. (j) Depreciation and Amortization Depreciation and amortization of property and equipment is computed using the straight-line method based on the following estimated useful lives: Buildings 20 yearsBuilding improvements 10 yearsFurniture, fixtures and equipment 5 yearsLeasehold improvements Useful life or remaining lease term, which ever is shorter44Table of Contents (k) Intangible Assets Goodwill and indefinite-lived intangible assets are measured for impairment at least annually, and more often when events indicate that impairment exists.Intangible assets with finite lives continue to be amortized over their useful lives ranging from 5–10 years, generally on a straight-line basis. Intangible assets,all subject to amortization, as of December 31, 2007 and 2006 are as follows (in thousands): 2007 2006 Intellectual property $1,250 $1,250 Other intangibles 1,000 1,000 Trademarks 1,050 1,050 Less accumulated amortization (3,222) (2,667)Total Intangible Assets $78 $633 (l) Long-Lived Assets Long-lived assets such as property and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events orchanges in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by acomparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount ofan asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fairvalue of the asset. The Company recognized impairment charges of approximately $0.9 million 2005. The Company did not record an impairment charge in2006 or 2007. The impairment charges in 2005 related to the write down of leasehold improvements of under-performing company owned retail stores. Fairvalue was based on estimated future cash flows. (m) 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 theyears ended December 31, 2007, 2006 and 2005 was approximately $99.2 million, $83.0 million, and $58.2 million, respectively. Prepaid advertising costsat December 31, 2007 and 2006 were $0.8 million and $3.0 million, respectively. Prepaid amounts outstanding at December 31, 2007 and 2006 represent theunamortized portion of endorsement contracts and advertising in trade publications which had not run as of December 31, 2007 and 2006, respectively. (n) Earnings Per Share Basic earnings per share represents net earnings divided by the weighted average number of common shares outstanding for the period. Diluted earnings pershare, in addition to the weighted average determined for basic earnings per share, includes potential common shares which would arise from the exercise ofstock options using the treasury stock method, and the conversion of the Company’s 4.50% convertible subordinated notes for the period outstanding sincetheir issuance in April 2002 until their conversion in February 2007, if their effects are dilutive. The following is a reconciliation of net earnings and weighted average common shares outstanding for purposes of calculating earnings per share (inthousands): Years Ended December 31,Basic earnings per share 2007 2006 2005Net earnings $75,686 $70,994 $44,717 Weighted average common shares outstanding 45,262 41,079 39,686 Basic earnings per share $1.67 $1.73 $1.13 45Table of Contents Years Ended December 31, Diluted earnings per share 2007 2006 2005 Net earnings $75,686 $70,994 $44,717 After tax effect of interest expense on 4.50% convertible subordinated notes 361 2,553 2,487 Earnings for purposes of computing diluted earnings per share $76,047 $73,547 $47,204 Weighted average common shares outstanding 45,262 41,079 39,686 Dilutive stock options 1,121 1,594 1,366 Weighted average assumed conversion of 4.50% convertible subordinated notes 358 3,466 3,466 Weighted average common shares outstanding 46,741 46,139 44,518 Diluted earnings per share $1.63 $1.59 $1.06 Options to purchase 764,500 shares of Class A common stock at prices ranging from $2.78 to $24.00 that were outstanding at December 31, 2005 werenot included in the computation of diluted earnings per share because the options’ exercise prices were greater than the average market price of the commonshares and therefore their inclusion would have been anti-dilutive. There were no options excluded from the calculation at December 31, 2006 or 2007. (o) Product Design and Development Costs The Company charges all product design and development costs to expense when incurred. Product design and development costs aggregated approximately$9.2 million, $8.3 million, and $6.0 million during the years ended December 31, 2007, 2006 and 2005, respectively. (p) Fair Value of Financial Instruments The carrying amount of the Company’s financial instruments, which principally include cash and cash equivalents, short-term investments, accountsreceivable, accounts payable and accrued expenses, approximates fair value due to the relatively short maturity of such instruments. The carrying amount of the Company’s long-term borrowings approximates the fair value based upon current rates and terms available to the Company forsimilar debt. (q) New Accounting Standards In December 2007, the FASB issued SFAS 160 “Accounting for Noncontrolling Interests”, which clarifies the classification of noncontrolling interests inconsolidated statements of financial position and the accounting for and reporting of transactions between the reporting entity and holders of suchnoncontrolling interests. SFAS 160 will be effective for fiscal years beginning after December 15, 2008. We are currently evaluating the impact of thisstandard on our Consolidated Financial Statements; however, we do not expect that the adoption of SFAS 160 will have a material impact on our financialcondition or results of operations. In December 2007, the FASB issued SFAS 141(R) “Applying the Acquisition Method”, which clarifies the accounting for a business combination andrequires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured attheir fair values as of that date. SFAS 141(R) will be effective for fiscal years beginning after December 15, 2008. We are currently evaluating the impact ofthis standard on our Consolidated Financial Statements; however, we do not expect that the adoption of SFAS 141(R) will have a material impact on ourfinancial condition or results of operations. In February 2007, the FASB issued SFAS 159 “The Fair Value Option for Financial Assets and Financial Liabilities, Including an amendment ofFASB Statement No. 115”, which provides companies with an option to report selected financial assets and liabilities at fair value. Furthermore, SFAS 159establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes forsimilar types of assets and liabilities. SFAS 159 will be effective for fiscal years beginning after November 15, 2007. We are currently evaluating the impactof this standard on our Consolidated Financial46Table of ContentsStatements; however, we do not expect that the adoption of SFAS 159 will have a material impact on our financial condition or results of operations. In September 2006, the FASB issued SFAS 157 “Fair Value Measurements”, which provides guidance for using fair value to measure assets andliabilities. The standard also responds to investors’ requests for expanded information about the extent to which companies measure assets and liabilities atfair value, the information used to measure fair value, and the effect of fair value measurements on earnings. The standard applies whenever other standardsrequire (or permit) assets or liabilities to be measured at fair value. The standard does not expand the use of fair value in any new circumstances. Statement157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Earlyadoption is permitted. We are currently evaluating the impact of this standard on our Consolidated Financial Statements; however, we do not expect that theadoption of SFAS 157 will have a material impact on our financial condition or results of operations. (2) SHORT TERM INVESTMENTS Short-term investments consist of certain marketable equity securities and other investments aggregating $104.5 million and $60.0 million at December 31,2007 and 2006, respectively, and are included in current assets in the accompanying consolidated balance sheets. Investments in highly liquid debt securities,municipal bonds and preferred stock are stated at fair value, which approximates cost. Unrealized gains and losses related to marketable equity securities atDecember 31, 2007 and 2006 were negligible. Our available-for-sale securities at December 31, 2007 consisted of $78.8 million of auction rate preferred stocks and $25.7 million of auction ratemunicipal and corporate bonds whereby interest rates are reset on a recurring basis of between 7 and 90 days. The auction rate preferred stocks arecollateralized by portfolios of municipal bonds issued by various state and local governments, and the fair value of the underlying collateral is required to bemaintained at 200% of the amount of preferred stock. While all of the auctions involving all of the securities were successful during January 2008, theauctions failed in February 2008, resulting in our continuing to hold such securities. These failed auction are not an indication of an increased credit risk or areduction in the underlying collateral, however it means that parties wishing to sell these securities could not do so. Based on current market conditions, it isnot known when or if the capital markets will come back into balance to achieve successful auctions related for these securities. As of February 22, 2008,including the securities involved in failed auctions, we held $110.7 million of these auction rate securities. (3) PROPERTY AND EQUIPMENT Property and equipment at December 31, 2007 and 2006 is summarized as follows (in thousands): 2007 2006 Land $14,358 $14,358 Buildings and improvements 56,012 49,454 Furniture, fixtures and equipment 85,354 81,164 Leasehold improvements 79,377 66,708 Total property and equipment 235,101 211,684 Less accumulated depreciation and amortization 136,701 124,039 Property and equipment, net $98,400 $87,645 The Company capitalized $0.9 million and $0.3 million of interest expense during 2007 and 2006, respectively relating to the construction of our corporateheadquarters.47Table of Contents (4) ACCRUED EXPENSESAccrued expenses at December 31, 2007 and 2006 are summarized as follows (in thousands): 2007 2006 Accrued inventory purchases $3,937 $4,678 Accrued payroll and related taxes 14,919 13,914 Income taxes payable 1,058 — Accrued interest 35 843 Accrued expenses $19,949 $19,435 (5) SHORT-TERM BORROWINGS On May 31, 2006, the Company amended its secured line of credit, which permits the Company and certain of its subsidiaries to borrow up to$150.0 million based upon eligible accounts receivable and inventory, which line can be increased to $250.0 million at our request. Borrowings bear interest atthe borrowers’ election based on either the prime rate or LIBOR. Prime rate loans will bear interest at a rate equal to JPMorgan Chase Bank’s publiclyannounced prime rate less up to 0.50%. LIBOR loans will bear interest at a rate equal to the applicable LIBOR plus up to an additional 1.75%. The Companypays a monthly unused line of credit fee of 0.25% per annum. The loan agreement, which expires on May 31, 2011, provides for the issuance of letters ofcredit up to a maximum of $30.0 million. The loan agreement contains customary affirmative and negative covenants for secured credit facilities of this type,including a financial covenant requiring a fixed charge coverage ratio of not less than 1.1 at the end of each quarter if excess availability of eligible accountreceivable and inventory is less than $50.0 million at any time during such quarter. Excess availability was not less than $50.0 million during the threemonths ended December 31, 2007; hence, the fixed charge ratio requirement was not applicable at such date. No amounts were outstanding and the Companywas in compliance with all other covenants of the loan agreement at December 31, 2007. The Company had $9.6 million and $10.0 million of outstandingletters of credit as of December 31, 2007 and 2006, respectively. (6) LONG-TERM BORROWINGS Long-term debt at December 31, 2007 and 2006 is as follows (in thousands): 2007 2006 4.50% convertible subordinated notes due April 15, 2007 (see below) — $90,000 Note payable to bank, due in monthly installments of $82.2 (includes principal and interest), fixed rate interest at7.79%, secured by property, balloon payment of $8,716 due January 2011 $9,557 9,790 Note payable to bank, due in monthly installments of $57.6 (includes principal and interest), fixed rate interest at7.89%, secured by property, balloon payment of $6,776 due February 2011 7,268 7,383 Capital lease obligations 74 208 Subtotal 16,899 107,381 Less current installments 437 576 Total long-term debt $16,462 $106,805 The aggregate maturities of long-term borrowings at December 31, 2007 are as follows: 2008 $437 2009 395 2010 427 2011 15,640 $16,899 48Table of Contents On January 19, 2007, we called our 4.5% convertible subordinated notes for redemption. The redemption date was February 20, 2007. The aggregateprincipal amount of notes outstanding was $90.0 million. Holders of $89.969 million principal amount of the notes, which included $2.5 million ofprincipal amount of the notes held by us, converted their notes into shares of our Class A Common Stock prior to the redemption date. As a result of theseconversions, 3,464,594 shares of Class A Common Stock were issued to holders of the notes, which included 96,272 shares issued to the Company thatwere immediately retired. In connection with these conversions, the Company paid approximately $500 in cash to holders who elected to convert their notes,which represented cash paid in lieu of fractional shares. In addition, the Company paid approximately $32,000 to holders who redeemed their notes, whichrepresented the redemption price of 100.9% of $31,000 principal amount of the notes plus accrued interest. As a result of the subsequent conversion of$89.969 million of the notes into equity, the Company has classified such amount as a long-term liability at December 31, 2006, under Statement ofFinancial Accounting Standards No. 6, Classification of Short-Term Obligations Expected to Be Refinanced an amendment of ARB No. 43, Chapter 3. The Company’s long-term debt obligations contain both financial and non-financial covenants, including cross default provisions. The Company is incompliance with all its material non-financial covenants, including any cross default provisions, and financial covenants of our long-term debt as ofDecember 31, 2007. (7) STOCK COMPENSATION (a) Impact of the adoption of SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123(R)”) On January 1, 2006, the Company adopted SFAS 123(R) using the modified prospective transition method. Previously, the Company had followedAccounting Principles Board, Opinion No. 25, “Accounting for Stock Issued to Employees,” (“APB 25”), and accounted for employee stock options atintrinsic value. Accordingly, during the year ended December 31, 2006, we recorded stock-based compensation expense for awards granted prior to, but notyet vested as of, January 1, 2006, as if the fair value method required for pro forma disclosure under SFAS 123 were in effect for expense recognitionpurposes, adjusted for estimated forfeitures. For stock-based awards granted after January 1, 2006, we have recognized compensation expense based on thegrant date fair value using the Black-Scholes valuation model. For these awards, we have recognized compensation expense on a straight-line basis. As SFAS123(R) requires that stock-based compensation expense be based on awards that are ultimately expected to vest, stock-based compensation for the year endedDecember 31, 2007 and 2006 has been reduced for estimated forfeitures. For the year ended December 31, 2007 and 2006, stock compensation expense as aresult of SFAS 123(R) was $1.1 million and $2.0 million, respectively, and was recorded to general and administrative expenses which represented areduction of earnings before income taxes in the same amount. The impact to 2007 and 2006 net income was a reduction of $0.9 million and $1.6 million,respectively. No stock compensation expense was recorded during 2005. (b) Equity Incentive Plans In January 1998, the Company’s Board of Directors adopted the 1998 Stock Option, Deferred Stock and Restricted Stock Plan for the grant of qualifiedincentive stock options (“ISOs”), non qualified stock options and deferred and restricted stock (the “Equity Incentive Plan”). The exercise price for any optiongranted 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 tothe plan to increase the number of shares of Class A Common Stock authorized for issuance under the plan to 8,215,154. In May 2003, stockholdersapproved an amendment to the plan to increase the number of shares of Class A Common Stock authorized for issuance under the plan to 11,215,154.Option awards are generally granted with an exercise price equal to the market price of the Company’s stock at the date of grant. Stock option awards generallybecome exercisable over a four-year graded vesting period and expire ten years from the date of grant. On April 16, 2007, the Company’s Board of Directors adopted the 2007 Incentive Award Plan (the “2007 Plan”), and the 2007 Plan became effective uponapproval by the Company’s stockholders on May 24, 2007. The Company’s Board of Directors terminated the Equity Incentive Plan as of May 24, 2007,with no additional granting of awards being permitted thereafter, although any awards then outstanding under the Equity Incentive Plan remain in forceaccording to the terms of the terminated plan and the applicable award agreements. A total of 7,500,000 shares of Class A Common Stock are reserved forissuance under the 2007 Plan, which provides for grants of stock options, restricted stock and various other types of awards as described in the plan to theemployees, consultants and directors of the Company and its subsidiaries. The 2007 Plan is administered by the Compensation Committee of the Company’sBoard of Directors. Prior to adopting SFAS 123(R), we presented all tax benefits resulting from the exercise of stock options as operating cash flows in the Statement of CashFlows. SFAS 123(R) requires cash flows resulting from excess tax benefits to be classified as a part of cash49Table of Contentsflows from financing activities. Excess tax benefits are realized from tax deductions for exercised options and vesting of nonvested stock in excess of thedeferred tax assets attributable to stock compensation costs for such options. As a result of adopting SFAS 123(R), $2.2 million and $5.0 million of excesstax benefits for the year-ended December 31, 2007 and 2006 have been classified as a financing cash inflow. Cash received from stock option exercises for theyear-ended December 31, 2007, 2006 and 2005 was $6.1 million, $17.1 million and $5.4 million, respectively. The actual tax benefit realized for the taxdeductions from option exercise of stock options and vesting of nonvested shares totaled $3.4 million, $9.3 million and $1.5 million for the year-endedDecember 31, 2007, 2006 and 2005, respectively. The total income tax benefit recognized for stock-based compensation costs was $0.1 million and$0.4 million for the year ended December 31, 2007 and 2006, respectively. No income tax benefit for stock-based compensation costs was recognized for theyear ended December 31, 2005. The impact of SFAS 123(R) stock-based compensation expense was a reduction of $0.02 earnings per basic and per dilutedshare for the year ended December 31, 2007. The impact of SFAS 123(R) stock-based compensation expense was a reduction of $0.05 earnings per basic and$0.04 per diluted share for the year ended December 31, 2006. The Company plans to issue new shares for stock options exercised and nonvested shares thatvest. (c) Valuation Assumptions For pro forma net earnings purposes, the fair value of each option is estimated on the date of grant using the Black-Scholes option pricing model that usesthe assumptions noted in the following table. Expected volatility is based on historical share price data. The Company uses historical employee exercise andcancellation data to estimate expected term and forfeiture rates. The risk-free rate is based on U.S. Treasury yields in effect at the time of grant. Employees thathave similar historical exercise behavior are considered separately for valuation purposes. Option valuation methods require the input of highly subjectiveassumptions including the expected stock price volatility, expected term and forfeiture rate. Because the Black-Scholes based option valuation modelsincorporate ranges of assumptions for inputs, those inputs are disclosed in the table as follows: 2006 2005 Dividend yield — — Expected volatility 62% 71%Risk-free interest rate 4.52% 3.88%Expected life of option 7 5 There were no ISO’s granted during 2007. Using the Black-Scholes option valuation model the weighted-average fair value per share of options grantedduring 2006 and 2005 was $12.70, and $8.28, respectively. The total intrinsic value of options exercised during 2007, 2006 and 2005 was $9.9 million,$25.5 million, and $4.0 million, respectively. (d) Stock-Based Payment Awards Shares subject to option under the Equity Incentive Plan were as follows: WEIGHTED SHARES OPTION EXERCISE PRICE Outstanding at December 31, 2004 4,975,341 $10.90 Granted 35,000 13.52 Exercised (593,671) 9.04 Canceled (207,233) 14.89 Outstanding at December 31, 2005 4,209,437 10.98 Granted 15,000 19.49 Exercised (1,711,945) 9.96 Canceled (26,910) 10.35 Outstanding at December 31, 2006 2,485,582 11.74 Granted — Exercised (501,874) 12.23 Canceled (21,952) 16.86 Outstanding at December 31, 2007 1,961,756 $11.56 Options available for grant at December 31, 2007 3,258,209 50Table of Contents As of December 31, 2007, there was approximately $0.3 million of total unrecognized compensation cost related to unvested stock options and restrictedstock granted under our Equity Incentive Plan. That cost is expected to be recognized over a weighted average period of 1 year. The total fair value of sharesvested during the period ended December 31, 2007 was $1.1 million. The following table summarizes information about stock options outstanding andexercisable at December 31, 2007: OPTIONS OUTSTANDING OPTIONS EXERCISABLE WEIGHTED NUMBER WEIGHTED WEIGHTED NUMBER AVERAGERANGE OF OUTSTANDING AVERAGE REMAINING AVERAGE EXERCISABLE AT EXERCISEEXERCISE PRICE DECEMBER 31, 2007 CONTRACTUAL LIFE EXERCISE PRICE DECEMBER 31, 2007 PRICE$2.78 to $3.94 29,812 2.1 years $3.93 29,812 $3.93 $6.95 to $9.28 717,873 5.4 years 7.46 717,873 7.46 $10.48 to $15.50 1,047,355 3.0 years 12.65 1,033,355 12.64 $19.19 to $24.00 166,716 3.1 years 23.71 166,716 23.71 1,961,756 3.9 years $11.56 1,947,756 $11.55 As of December 31, 2007, 2006 and 2005, the number of options exercisable for each year was 1,947,756, 2,261,707, and 3,718,812, respectively. Theweighted-average exercise price of those options was $11.55, $11.97, and $11.27, respectively. The total intrinsic value of options outstanding andexercisable at December 31, 2007 was $16.3 million and $16.2 million, respectively. The total intrinsic value of options outstanding and exercisable atDecember 31, 2006 was $29.2 million and $27.1 million, respectively. The aggregate intrinsic value is calculated as the difference between the exercise priceof the underlying awards and the quoted price of our common stock for the 1.8 million options that were in-the-money at December 31, 2007. A summary of the status and changes of our nonvested shares related to our Equity Incentive Plan as of and during the period ended December 31, 2007 ispresented below: WEIGHTED AVERAGE GRANT-DATE FAIR SHARES VALUENonvested at December 31, 2006 17,333 $16.38 Granted 2,500 29.26 Vested (4,666) 17.00 Nonvested at December 31, 2007 15,167 $18.32 The nonvested shares generally vest over a four-year graded vesting period and expire ten years from the date of grant. (e) Stock Purchase Plans Effective July 1, 1998, the Company’s Board of Directors adopted the 1998 Employee Stock Purchase Plan (the “1998 ESPP”). The 1998 ESPPprovides that a total of 2,781,415 shares of Class A Common Stock are reserved for issuance under the plan. The 1998 ESPP, which is intended to qualifyas an “employee stock purchase plan” under Section 423 of the Internal Revenue Code of 1986, as amended, is implemented utilizing six-month offeringswith purchases occurring at six-month intervals. The 1998 ESPP administration is overseen by the Board of Directors. Employees are eligible to participate ifthey are employed by the Company for at least 20 hours per week and more than five months in any calendar year. The 1998 ESPP permits eligible employeesto purchase Class A Common Stock through payroll deductions, which may not exceed 15% of an employee’s compensation. The price of Class A CommonStock purchased under the 1998 ESPP is 85% of the lower of the fair market value of the Class A Common Stock at the beginning of each six-month offeringperiod or on the applicable purchase date. Employees may end their participation in an offering at any time during the offering period. The Board may at anytime amend or terminate the 1998 ESPP, except that no such amendment or termination may adversely affect shares previously granted under the 1998 ESPP.During 2007, 2006 and 2005, 98,349, 121,378, and 135,387 shares were issued, respectively, under the 1998 ESPP for which the Company receivedapproximately $2.1 million, $1.9 million, and $1.6 million, respectively.51Table of Contents On April 16, 2007, the Company’s Board of Directors adopted the 2008 Employee Stock Purchase Plan (the “2008 ESPP”), and the Company’sstockholders approved the 2008 ESPP on May 24, 2007. The 2008 ESPP became effective on January 1, 2008, and the Company’s Board of Directorsterminated the 1998 ESPP as of such date, with no additional granting of rights being permitted under the 1998 ESPP. The 2008 ESPP provides that a totalof 3,000,000 shares of Class A Common Stock are reserved for issuance under the plan. This number of shares that may be made available for sale is subjectto automatic increases on the first day of each fiscal year during the term of the 2008 ESPP as provided in the plan. The 2008 ESPP is intended to qualify asan “employee stock purchase plan” under Section 423 of the Internal Revenue Code of 1986, as amended. The terms of the 2008 ESPP, which aresubstantially similar to those of the 1998 ESPP, permit eligible employees to purchase Class A Common Stock at six-month intervals through payrolldeductions, which may not exceed 15% of an employee’s compensation. The price of Class A Common Stock purchased under the 2008 ESPP is 85% of thelower of the fair market value of the Class A Common Stock at the beginning of each six-month offering period or on the applicable purchase date. The 2008ESPP is administered by the Company’s Board of Directors. (f) Pro Forma Information for Periods Prior to the Adoption of SFAS 123(R) The following table illustrates the effects on net earnings if compensation cost for the Company’s stock option plans and its stock purchase plans had beendetermined based on the estimated fair value at the grant dates for awards under those plans consistent with the fair value method of SFAS 123 utilizing theBlack-Scholes option-pricing model in each period (in thousands): 2005 Net earnings, as reported $44,717 Deduct total stock-based employee compensation expense under fair value-based method for all awards, net of related tax effects (1,853)Pro forma net earnings for basic pro forma earnings per share 42,864 Add back interest on 4.50% debentures, net of tax 2,487 Pro forma net earnings for diluted pro forma earnings per share $45,351 Pro forma net earnings per share: Basic $1.08 Diluted 1.02 Pro forma basic net earnings per share represents net pro forma earnings divided by the weighted average number of common shares outstanding for theperiod. Pro forma diluted earnings per share, in addition to the weighted average determined for pro forma basic earnings per share, includes the dilutive effectof potentially dilutive securities which would arise from the exercise of stock options using the treasury stock method, and assumes the conversion of theCompany’s 4.50% convertible subordinated notes if their effects are dilutive. (8) STOCKHOLDERS’ EQUITYStock Issuances The authorized capital stock of the Company consists of 100,000,000 shares of Class A Common Stock, par value $.001 per share, 60,000,000 shares ofClass B Common Stock, par value $.001 per share, and 10,000,000 shares of preferred stock, $.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 ACommon Stock is entitled to one vote per share, while the Class B Common Stock is entitled to ten votes per share on all matters submitted to a vote ofstockholders. The shares of Class B Common Stock are convertible at any time at the option of the holder into shares of Class A Common Stock on a share-for-share basis. In addition, shares of Class B Common Stock will be automatically converted into a like number of shares of Class A Common Stock uponany transfer to any person or entity which is not a permitted transferee. During 2007, 2006 and 2005 certain Class B stockholders converted 916,400, 2,883,000, and 360,000 shares, respectively, of Class B Common Stockto Class A Common Stock.52Table of Contents (9) TOTAL OTHER INCOME (EXPENSE), NET Other income (expense), net at December 31, 2007, 2006 and 2005 is summarized as follows (in thousands): 2007 2006 2005 Gain (loss) on foreign currency transactions $(295) $116 $(351)Legal settlements 393 864 1,638 Total other income, net $98 $980 $1,287 (10) INCOME TAXES The provisions for income tax expense were as follows (in thousands): 2007 2006 2005 Federal: Current $33,354 $38,252 $27,562 Deferred (301) (4,451) (4,157)Total federal 33,053 33,801 23,405 State: Current 7,255 7,398 5,417 Deferred (66) (586) (588)Total state 7,189 6,812 4,829 Foreign : Current 2,686 2,192 1,423 Deferred (309) (1,151) (1,577)Total foreign 2,377 1,041 (154)Total income taxes $42,619 $41,654 $28,080 Income taxes differ from the statutory tax rates as applied to earnings before income taxes as follows (in thousands): 2007 2006 2005 Expected income tax expense $41,407 $39,427 $25,479 State income tax, net of federal benefit 4,444 4,611 3,585 Rate differential on foreign income (3,119) (379) (720)Exempt income (1,026) (260) — Non-deductible expenses 464 949 321 Change in valuation allowance 194 (967) (974)Other 255 (1,727) 389 Total provision for income taxes $42,619 $41,654 $28,080 53Table of Contents The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities at December 31, 2007 and2006 are presented below (in thousands): 2007 2006 DEFERRED TAX ASSETS: Deferred tax assets — current: Inventory adjustments $2,555 $2,991 Accrued expenses 6,540 4,661 Allowances for bad debts and chargebacks 2,570 4,732 Total current assets 11,665 12,384 Deferred tax assets — long term: Depreciation on property and equipment 11,441 9,633 Loss carryforwards 3,133 2,737 Valuation allowance (682) (488)Stock-based compensation 91 102 Total long term assets 13,983 11,984 Total deferred tax assets 25,648 24,368 Deferred tax liabilities — current: Prepaid expenses 3,071 2,710 Other — 184 Total deferred tax liabilities 3,071 2,894 Net deferred tax assets $22,577 $21,474 Management believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize the net deferred taxassets. Consolidated U.S. income before income taxes was $101.4 million, $104.8 million, and $66.0 million for the years ended December 31, 2007, 2006 and2005, respectively. The corresponding income before income taxes for non-U.S. based operations was $16.9 million, $7.8 million, and $6.8 million for theyears ended December 31, 2007, 2006 and 2005, respectively. As of December 31, 2007 and 2006, Skechers had combined foreign operating loss carry-forwards available to reduce future taxable income ofapproximately $8.7 million and $7.4 million, respectively. Some of these net operating losses expire beginning in 2011, however others can be carried forwardindefinitely. As of December 31, 2007 and 2006, a valuation allowance against deferred tax assets of $0.7 million and $0.5 million, respectively, had been setup for those loss carry-forwards not expected to be fully utilized in reducing future taxable income. As of December 31, 2007, withholding and U.S. taxes have not been provided on approximately $15.5 million of cumulative undistributed earnings of theCompany’s non-U.S. subsidiaries because the Company intends to indefinitely reinvest these earnings in its non-U.S. subsidiaries. We adopted the provisions FIN 48 on January 1, 2007. As a result of the implementation of FIN 48, we recognized approximately a $3.4 million increase inthe liability for unrecognized tax benefits, which was accounted for as a reduction to the January 1, 2007 balance of retained earnings. A reconciliation of thebeginning and ending amount of unrecognized tax benefits is as follows: Balance as of January 1, 2007 $11,241 Additions based on current year tax positions 6,836 Additions for prior year tax positions 1,015 Reductions for prior year tax positions (287)Settlement of uncertain tax positions (504)Reductions related to lapse of statute of limitations (36)Balance at December 31, 2007 $18,265 If recognized, the entire amount of unrecognized tax benefits would be recorded as a reduction in income tax expense.54Table of Contents Estimated interest and penalties related to the underpayment of income taxes are classified as a component of income tax expense and totaled $0.5 million,$0.1 million, and $0.1 million for the years ended December 31, 2007, 2006 and 2005, respectively. Accrued interest and penalties were $1.3 million and$1.1 million as of December 31, 2007 and December 31, 2006, respectively. The Company files income tax returns in the U.S. federal jurisdiction and various state, local and foreign jurisdictions. The Company has completed U.S.federal audits through 2003, and is not currently under examination by the United States Internal Revenue Service (the “IRS”); however the company is underexamination by a number of states. It is reasonably possible that most or all of these examinations could be settled within the next twelve months which wouldreduce the balance of 2007 and prior year unrecognized tax benefits by $1.2 million. With few exceptions, the Company is no longer subject to state, local or non-U.S. income tax examinations by tax authorities for years before 2004. Taxyears 2004 through 2006 remain open to examination by the U.S. federal, state, and foreign taxing jurisdictions under which we are subject. It is reasonablypossible that the statute of limitations for the 2004 tax year will lapse for the U.S. federal and most state tax jurisdictions during 2008, which would reduce thebalance of 2007 and prior year unrecognized tax benefits by $2.5 million. We have applied for advanced pricing agreements with various tax authorities related to the pricing of certain intercompany transactions. It is reasonablypossible that we will receive final decisions on these applications within the next twelve months which would reduce the balance of 2007 and prior yearunrecognized tax benefits by $11.2 million, and, depending on how it is resolved, that reduction may or may not impact earnings. If the advanced pricingagreements are not resolved in 2008, we will continue to add to the unrecognized tax benefits, as we did in 2006 and 2007, and that increase could beapproximately $8.0 million to $10.0 million. (11) BUSINESS AND CREDIT CONCENTRATIONS The Company operates in the footwear industry and generates most of its sales in the United States, although its products are sold into various foreigncountries. The footwear industry is impacted by the general economy. Changes in the marketplace may significantly affect management’s estimates and theCompany’s performance. Management performs regular evaluations concerning the ability of its customers to satisfy their obligations and provides forestimated doubtful accounts. Domestic accounts receivable, which generally do not require collateral from customers, amounted to $110.3 million and$141.7 million before allowances for bad debts and sales returns, and chargebacks at December 31, 2007 and 2006, respectively. Foreign accounts receivable,which generally are collateralized by letters of credit, amounted to $67.4 million and $46.6 million before allowance for bad debts, sales returns, andchargebacks at December 31, 2007 and 2006, respectively. International net sales amounted to $291.3 million, $203.3 million, and $179.6 million for theyears ended December 31, 2007, 2006 and 2005, respectively. The Company’s credit losses due to write-off’s for the years ended December 31, 2007, 2006and 2005 were $1.6 million, $4.6 million, and $2.9 million respectively, and did not significantly differ from management’s expectations. Net sales to customers in North America exceeded 75% of total net sales for each of the years in the three-year period ended December 31, 2007. Assetslocated outside the United States consist primarily of cash, accounts receivable, inventory, property and equipment, and other assets. Net assets held outsidethe United States were $126.1 million and $119.1 million at December 31, 2007 and 2006, respectively. During 2007, 2006, and 2005, no customer accounted for 10% or more of net sales. One customer accounted for 10.0%, 12.0% and 10.3% of net tradereceivables at December 31, 2007, 2006 and 2005, respectively. During 2007, 2006 and 2005, our net sales to our five largest customers were approximately25.3%, 24.9%, and 25.4%, respectively. During 2007, the Company had four manufacturers which accounted for between 7.9% and 29.7% of total purchases. During 2006, the Company hadfour manufacturers which accounted for between 8.9% and 30.8% of total purchases. During 2005, the Company had four manufacturers which accountedfor between 7.9% and 32.4% of total purchases. Most of the Company’s products are produced in China. The Company’s operations are subject to the customary risks of doing business abroad,including, but not limited to, currency fluctuations, custom duties and related fees, various import controls and other monetary barriers, restrictions on thetransfer of funds, labor unrest and strikes and, in certain parts of the world, political instability. The Company believes it has acted to reduce these risks bydiversifying manufacturing among various factories. To date, these risk factors have not had a material adverse impact on the Company’s operations.55Table of Contents (12) BENEFIT PLAN The Company has adopted a profit sharing plan covering all employees who are 21 years of age and have completed six months of service. Employees maycontribute up to 15.0% of annual compensation. Company contributions to the plan are discretionary and vest over a six year period. The Company’s contributions to the plan amounted to $1.2 million, $1.1 million, and $0.8 million for the years ended December 31, 2007, 2006 and2005, respectively. For 2006 and 2007, the Company made a cash contribution. For its contribution to the plan for 2005, the Company issued 59,203, sharesof its Class A Common Stock. The shares contributed to the plan contain certain restrictions regarding the subsequent sales of those shares. (13) COMMITMENTS AND CONTINGENCIES (a) Construction During 2005, we entered into a construction agreement with Morley Construction Company for the construction of our third corporate facility in ManhattanBeach, California. The agreement has a maximum payment clause in which Morley agrees that the construction cost of the facility will not exceed$18.1 million plus change orders of $1.7 million, of which $19.2 million was incurred as of December 31, 2007. The exterior of the facility was completed in2007, and while we are currently working on the interior improvements, we expect to move in during 2008. (b) Leases The Company leases facilities under operating lease agreements expiring through July 2027. The Company pays taxes, maintenance and insurance inaddition to the lease obligation. The Company also leases certain equipment and automobiles under operating lease agreements expiring at various dates throughApril 2007. Rent expense for the years ended December 31, 2007, 2006 and 2005 approximated $48.9 million, $40.4 million, and $37.2 million, respectively. The Company also leases certain property and equipment under capital lease agreements requiring monthly installment payments through February 2010.The cost of this property and equipment was $0.1 million with a net book value of $0.1 million at December 31, 2007. The cost of this property andequipment was $2.0 million with a net book value of $0.5 million at December 31, 2006. Amortization of these assets is included in depreciation expense inthe accompanying consolidated statements of cash flows. Minimum lease payments, which takes into account escalation clauses, are recognized on a straight-line basis over the minimum lease term. Subsequentadjustments to our lease payments due to changes in an existing index, usually the consumer price index, are typically included in our calculation of theminimum lease payments when the adjustment is known. Reimbursements for leasehold improvements are recorded as liabilities and are amortized over thelease term. Lease concessions, in our case usually a free rent period, are considered in the calculation of our minimum lease payments for the minimum leaseterm.Future minimum lease payments under noncancellable leases at December 31, 2007 are as follows (in thousands): CAPITAL OPERATING LEASES LEASES Year ending December 31: 2008 $74 $47,124 2009 6 55,068 2010 — 51,271 2011 — 44,559 2012 — 36,937 Thereafter — 176,617 80 $411,576 Less imputed interest 6 Present value of net minimum lease payments $74 56Table of Contents (c) Litigation The Company recognizes legal expense in connection with loss contingencies as incurred. On March 25, 2003, a shareholder securities class action complaint captioned HARVEY SOLOMON v. SKECHERS USA, INC. et al. was filed againstthe Company and certain of its officers and directors in the United States District Court for the Central District of California (Case No. 03-2094 DDP). OnApril 2, 2003, a shareholder securities class action complaint captioned CHARLES ZIMMER v. SKECHERS USA, INC. et al. was filed against theCompany and certain of its officers and directors in the United States District Court for the Central District of California (Case No. 03-2296 PA). OnApril 15, 2003, a shareholder securities class action complaint captioned MARTIN H. SIEGEL v. SKECHERS USA, INC. et al. was filed against theCompany and certain of its officers and directors in the United States District Court for the Central District of California (Case No 03-2645 RMT). OnMay 6, 2003, a shareholder securities class action complaint captioned ADAM D. SAPHIER v. SKECHERS USA, INC. et al. was served on the Companyand certain of its officers and directors in the United States District Court for the Central District of California (Case No. 03-3011 FMC). On May 9, 2003, ashareholders securities class action complaint captioned LARRY L. ERICKSON v. SKECHERS USA, INC. et al. was served on the Company and certain ofits officers and directors in the United States District Court for the Central District of California (Case No. 03-3101 SJO). Each of these class actioncomplaints alleged violations of the federal securities laws on behalf of persons who purchased publicly traded securities of the Company 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 CentralDistrict of California, 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 District Court for the CentralDistrict of California, consolidating all of the federal securities actions above. The complaint names as defendants the Company and certain officers anddirectors and alleges violations of the federal securities laws and breach of fiduciary duty on behalf of persons who purchased publicly traded securities of theCompany between April 3, 2002 and December 9, 2002. The complaint seeks compensatory damages, interest, attorneys’ fees and injunctive and equitablerelief. The Company moved to dismiss the consolidated complaint in its entirety. On May 10, 2004, the court granted the Company’s motion to dismiss withleave for plaintiffs to amend the complaint. On August 9, 2004, plaintiffs filed a first amended consolidated complaint for violations of the federal securitieslaws. The allegations and relief sought were virtually identical to the original consolidated complaint. The Company has moved to dismiss the first amendedconsolidated complaint and the motion was set for hearing on December 6, 2004. On March 21, 2005, the court granted the motion to dismiss the firstamended consolidated complaint with leave for plaintiffs to amend one final time. On April 7, 2005, plaintiffs elected to stand on the first amendedconsolidated complaint and requested entry of judgment so that an appeal from the court’s ruling could be taken. On April 26, 2005, the court enteredjudgment in favor of the Company and the individual defendants, and on May 3, 2005, plaintiffs filed an appeal with the United States Court of Appeals forthe Ninth Circuit. As of the filing date of the Company’s quarterly report for the first quarter of 2007, all briefing by the parties had been completed, and ahearing date had been scheduled for April 18, 2007, but the court took it off calendar pending a decision from the United States Supreme Court in anothermatter on the grounds that the decision from the Supreme Court could affect the outcome of the appeal. The United States Supreme Court handed down itsdecision in that matter on September 20, 2007. The parties prepared briefs based on that decision and oral arguments were presented before the Ninth Circuiton November 6, 2007. Discovery has not commenced in the underlying action. While it is too early to predict the outcome of the appeal and any subsequentlitigation, the Company continues to believe the suit is without merit and continues to vigorously defend against the claims. On March 15, 2007, the Company filed a lawsuit against Vans, Inc. in the U.S. District Court for the Central District of California (Case No. CV 07-10703 (PLA)) seeking a declaration, inter alia, that certain of its footwear designs do not infringe Vans’ claimed checkerboard design and waffle outsole designtrademarks. On April 4, 2007, in its answer to the Company’s complaint, Vans filed counter-claims and cross-claims against the Company and EckoUnlimited, Inc., respectively, for trademark infringement, trademark dilution, unfair competition and misappropriation. Vans is seeking, inter alia,compensatory, treble and punitive damages, profits, attorneys’ fees and costs, and injunctive relief against the Company to prevent any future sales anddistribution of footwear that allegedly bears a design similar to Vans’ checkerboard design or waffle outsole design. On November 20, 2007, the court deniedVans’ preliminary injunction, and Vans appealed this ruling on December 20, 2007. While it is too early to predict the outcome of the litigation, the Companybelieves that it has meritorious defenses to the claims asserted by Vans and intends to defend against those claims vigorously. The Company has no reason to believe that any liability with respect to pending legal actions, individually or in the aggregate, will have a material adverseeffect on the Company’s consolidated financial statements or results of operations. The Company occasionally becomes involved in litigation arising from thenormal course of business, and management is unable to determine the extent of any liability that may arise from unanticipated future litigation.57Table of Contents (d) Product and Other Financing The Company finances production activities in part through the use of interest-bearing open purchase arrangements with certain of its internationalmanufacturers. These arrangements currently bear interest at rates between 0% and 1.5% per 30 to 60 day term. The amounts outstanding under thesearrangements at December 31, 2007 and 2006 were $81.3 million and $85.0 million, respectively, which are included in accounts payable in theaccompanying consolidated balance sheets. Interest expense incurred by the Company under these arrangements amounted to $3.3 million in 2007,$2.9 million in 2006, and $2.3 million in 2005. The Company has contractual commitments relating to licensing arrangements of $41.1 million through2012 and open purchase commitments with our foreign manufacturers of $148.7 million which are not included in the accompanying consolidated balancesheets. The company is currently in the process of designing and purchasing the equipment to be used in its new distribution center. The total cost of thisequipment is expected to be between $75.0 million and $85.0 million. (e) Tax Contingencies See discussion regarding the liability for unrecognized tax benefits in Footnote 10 Income Taxes. (14) SEGMENT INFORMATION We have four reportable segments – domestic wholesale sales, international wholesale sales, retail sales, and e-commerce sales. Management evaluatessegment performance based primarily on net sales and gross margins. All other costs and expenses of the Company are analyzed on an aggregate basis, andthese costs are not allocated to the Company’s segments. Net sales, gross margins and identifiable assets for the domestic wholesale segment, internationalwholesale, retail, and the e-commerce segment on a combined basis were as follows (in thousands): 2007 2006 2005 Net sales Domestic wholesale $831,235 $772,920 $634,294 International wholesale 267,648 183,687 163,523 Retail 279,361 237,390 201,610 E-commerce 15,937 11,371 7,050 Total $1,394,181 $1,205,368 $1,006,477 2007 2006 2005 Gross profit Domestic wholesale $320,364 $301,215 $232,401 International wholesale 99,759 65,034 60,758 Retail 171,758 151,456 123,928 E-commerce 8,108 5,641 3,395 Total $599,989 $523,346 $420,482 2007 2006 Identifiable assets Domestic wholesale $629,377 $563,956 International wholesale 118,195 108,210 Retail 80,250 64,634 E-commerce 155 253 Total $827,977 $737,053 58Table of Contents 2007 2006 Additions to property, plant and equipment Domestic wholesale $11,371 $17,453 International wholesale 1,346 348 Retail 18,458 9,759 Total $31,175 $27,560 Geographic InformationThe following summarizes our operations in different geographic areas for the year indicated: 2007 2006 2005 Net Sales (1) United States $1,102,895 $1,002,022 $826,920 Canada 38,060 25,276 18,350 Other International (2) 253,226 178,070 161,207 Total $1,394,181 $1,205,368 $1,006,477 2007 2006 Long-lived Assets United States $96,044 $81,161 Canada 343 764 Other International (2) 2,013 5,720 Total $98,400 $87,645 (1) The Company has subsidiaries in Canada, United Kingdom, Germany, France, Spain, Italy, Netherlands, Brazil, Thailand and Malaysia thatgenerate net sales within those respective countries and in some cases the neighboring regions. The Company also has a subsidiary in Switzerland thatgenerates net sales from that country in addition to net sales to our distributors located in numerous non-European countries. Net sales are attributable togeographic regions based on the location of the Company subsidiary. (2) Other international consists of Brazil, Malaysia, Thailand, Switzerland, United Kingdom, Germany, France, Spain, Italy, and Netherlands. (15) RELATED PARTY TRANSACTIONS The Company paid approximately $175,000, $177,000 and $47,000 during 2007, 2006 and 2005, respectively, to the Manhattan Inn OperatingCompany, LLC (“MIOC”) for lodging, food and events including the Company’s holiday party at the Shade Hotel, which is owned and operated by MIOC.Michael Greenberg, President and a director of the Company, owns a 12% beneficial ownership interest in MIOC, and four other officers, directors and vicepresidents of the Company own in aggregate an additional 5% beneficial ownership in MIOC. The Company had no outstanding accounts receivable orpayable with MIOC or the Shade Hotel at December 31, 2007. The Company had receivables from officers and employees of $0.3 million and $0.5 million at December 31, 2007 and 2006, respectively. These amountsprimarily relate to travel advances and incidental personal purchases on Company-issued credit cards that are not business-related expenses. These receivablesare short-term and are expected to be repaid within a reasonable period of time. We had no other significant transactions with or payables to officers, directors or significant shareholders of the Company.59Table of Contents (16) SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Summarized unaudited financial data are as follows (in thousands): 2007 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31Net sales $344,896 $352,211 $395,033 $302,041 Gross profit 149,039 152,028 171,670 127,252 Net earnings 23,900 14,948 24,744 12,095 Net earnings per share: Basic $0.54 $0.33 $0.54 $0.26 Diluted 0.52 0.32 0.53 0.26 2006 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31Net sales $277,565 $292,183 $331,126 $304,494 Gross profit 118,374 130,736 146,303 127,933 Net earnings 16,598 17,616 22,199 14,582 Net earnings per share: Basic $0.41 $0.43 $0.54 $0.35 Diluted 0.38 0.40 0.49 0.33 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.ITEM 9A. CONTROLS AND PROCEDURES Attached as exhibits to this annual report on Form 10-K are certifications of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”),which are required in accordance with Rule 13a-14 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). This “Controls and Procedures”section includes information concerning the controls and controls evaluation referred to in the certifications.EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES The term “disclosure controls and procedures” refers to the controls and other procedures of a company that are designed to provide reasonable assurancethat information required to be disclosed by a company in the reports that it files or submits under the Exchange Act, is recorded, processed, summarized andreported within required time periods. We have established disclosure controls and procedures to ensure that material information relating to Skechers and itsconsolidated subsidiaries is made known to the officers who certify our financial reports, as well as other members of senior management and the Board ofDirectors, to allow timely decisions regarding required disclosures. As of the end of the period covered by this annual report on Form 10-K, we carried out anevaluation under the supervision and with the participation of our management, including our CEO and CFO, of the effectiveness of the design and operationof our disclosure controls and procedures pursuant to Rule 13a-15 of the Exchange Act. Based upon that evaluation, our CEO and CFO concluded that ourdisclosure controls and procedures are effective.MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act. Internal control over financial reporting includes those policies and procedures that (i)60Table of Contentspertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) providereasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accountingprinciples, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) providereasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect onour financial statements. We conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – IntegratedFramework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our evaluation under the framework inInternal Control- Integrated Framework, our management has concluded that as of December 31, 2007, our internal control over financial reporting iseffective. Our independent registered public accountants, KPMG LLP, audited the financial statements included in this annual report on Form 10-K and have issuedan attestation report on the effectiveness of our internal control over financial reporting as of December 31, 2007, which is included in Part II, Item 8 of thisannual report on Form 10-K.INHERENT LIMITATIONS ON EFFECTIVENESS OF CONTROLS Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or ourinternal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provideonly reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there areresource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems,no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances offraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and thatbreakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two ormore people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood offuture events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of anyevaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions ordeterioration in the degree of compliance with policies or procedures.CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING There were no significant changes to our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect,our internal controls over financial reporting during the fourth quarter of 2007, we have completed our efforts regarding compliance with Section 404 of theSarbanes-Oxley Act of 2002 for the year ended December 31, 2007. The results of our evaluation are discussed above in Management’s Report on InternalControl Over Financial Reporting.ITEM 9B. OTHER INFORMATION On January 18, 2008, our Compensation Committee approved the 2008 annual incentive compensation formulae for our executive management, includingthe “Named Executive Officers” (as defined in Item 402 of Regulation S-K), which will allow for executive management to earn incentive compensation on aquarterly basis in the event that certain specified performance goals are achieved under our 2006 Annual Incentive Compensation Plan (the “2006 Plan”). Thepurpose is to provide our executive management with the opportunity to earn incentive compensation based on our financial performance by linking incentiveaward opportunities to the achievement of certain performance goals. The Compensation Committee approved the business criteria to be used in the formulae to calculate the incentive compensation to be paid to our executivemanagement on a quarterly basis for 2008. The business criteria that will be used to calculate the incentive compensation of Robert Greenberg (Chairman andChief Executive Officer), Michael Greenberg (President), David Weinberg (Chief Operating Officer) and Mark Nason (Executive Vice President of ProductDevelopment) are our net sales and net earnings, while our net sales will be used for calculating the incentive compensation of Fred Schneider (Chief FinancialOfficer). The Compensation Committee believes that each of these criteria provides an accurate and comprehensive measure of our annual performance. The potential payments of incentive compensation to our executive management, including the Named Executive Officers, are performance-driven andtherefore completely at risk. The payment of any incentive compensation is conditioned on our company61Table of Contentsachieving at least certain threshold performance levels of the business criteria approved by the Compensation Committee, and no payments will be made to theNamed Executive Officers if the threshold performance levels are not met. Any incentive compensation to be paid to the Named Executive Officers in excess ofthe threshold amounts are based on the Compensation Committee’s pre-approved business criteria and formulae for the respective Named Executive Officers.In approving the percentages that will be used in the formulae to calculate the Named Executive Officers’ potential payments of incentive compensation for2008, the Compensation Committee considered each Named Executive Officer’s position, responsibilities and prospective contribution to the attainment of theCompany’s specified performance goals. The threshold performance levels for 2008 are “attainable,” and additional incentive compensation may be earnedbased on our company’s financial performance exceeding increasingly challenging levels of performance goals, none of which is certain to be achieved.Consistent with the prior year, the Compensation Committee did not place a maximum limit on the incentive compensation that may be earned by the NamedExecutive Officers in 2008, although the maximum amount of incentive compensation that any Named Executive Officer may earn in a 12-month period underthe 2006 Plan is $5,000,000.62Table of ContentsPART 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 to Regulation 14Awithin 120 days after the end of our 2007 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 to Regulation 14Awithin 120 days after the end of our 2007 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 to Regulation 14Awithin 120 days after the end of our 2007 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 to Regulation 14Awithin 120 days after the end of our 2007 fiscal year.ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The information required by this Item 14 is hereby incorporated by reference from our definitive proxy statement, to be filed pursuant to Regulation 14Awithin 120 days after the end of our 2007 fiscal year.PART IVITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES1. Financial Statements: See “Index to Consolidated Financial Statements and Financial Statement Schedule” in Part II, Item 8 on page 36 of this annualreport on Form 10-K.2. Financial Statement Schedule: See “Schedule II—Valuation and Qualifying Accounts” on page 64 of this annual report on Form 10-K.3. Exhibits: The exhibits listed in the accompanying “Index to Exhibits” are filed or incorporated by reference as part of this Form 10-K.63Table of ContentsSCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS(in thousands)Years Ended December 31, 2007, 2006 and 2005 BALANCE AT CHARGED TO DEDUCTIONS BALANCE BEGINNING OF COSTS AND AND AT ENDDESCRIPTION PERIOD EXPENSES WRITE-OFFS OF PERIODYear-ended December 31, 2005: Allowance for chargebacks $578 $368 $(323) $623 Allowance for doubtful accounts 1,887 870 (792) 1,965 Reserve for sales returns and allowances 3,578 1,644 (614) 4,608 Year-ended December 31, 2006: Allowance for chargebacks $623 $1,237 $(359) $1,501 Allowance for doubtful accounts 1,965 1,307 (573) 2,699 Reserve for sales returns and allowances 4,608 2,047 (297) 6,358 Year-ended December 31, 2007: Allowance for chargebacks $1,501 $1,684 $(613) $2,572 Allowance for doubtful accounts 2,699 284 (635) 2,348 Reserve for sales returns and allowances 6,358 (358) (636) 5,364 See accompanying report of independent registered public accounting firm64Table of ContentsINDEX TO EXHIBITS EXHIBIT NUMBER DESCRIPTION OF EXHIBIT3.1 Amended and Restated Certificate of Incorporation dated April 29, 1999 (incorporated by reference to exhibit number 3.1 of the Registrant’sRegistration Statement on Form S-1, as amended (File No. 333-60065), filed with the Securities and Exchange Commission on May 12, 1999). 3.2 Bylaws dated May 28, 1998 (incorporated by reference to exhibit number 3.2 of the Registrant’s Registration Statement on Form S-1 (FileNo. 333-60065) filed with the Securities and Exchange Commission on July 29, 1998). 3.2(a) Amendment to Bylaws dated as of April 8, 1999 (incorporated by reference to exhibit number 3.2(a) of the Registrant’s Form 10-K for the yearended December 31, 2005). 3.2(b) Second Amendment to Bylaws dated as of December 18, 2007 (incorporated by reference to exhibit number 3.1 of the Registrant’s Form 8-Kfiled with the Securities and Exchange Commission on December 20, 2007). 4.1 Form of Specimen Class A Common Stock Certificate (incorporated by reference to exhibit number 4.1 of the Registrant’s Registration Statementon Form S-1, as amended (File No. 333-60065), filed with the Securities and Exchange Commission on May 12, 1999). 4.2 Indenture, dated April 9, 2002, between the Registrant and Wells Fargo Bank, National Association, as Trustee, relating to the 4.5%Convertible Subordinated Notes (incorporated by reference to exhibit number 4.2 of the Registrant’s Form 10-Q for the quarter ended June 30,2002). 4.3 Form of Specimen Restricted Global Security (incorporated by reference to exhibit number 4.3 of the Registrant’s Form 10-Q for the quarterended June 30, 2002). 10.1** Amended and Restated 1998 Stock Option, Deferred Stock and Restricted Stock Plan (incorporated by reference to exhibit number 10.1 of theRegistrant’s Registration Statement on Form S-1 (File No. 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 exhibitnumber 4.4 of the Registrant’s Registration Statement on Form S-8 (File No. 333-71114), filed with the Securities and Exchange Commission onOctober 5, 2001). 10.1(b)** Amendment No. 2 to Amended and Restated 1998 Stock Option, Deferred Stock and Restricted Stock Plan (incorporated by reference to exhibitnumber 4.5 of the Registrant’s Registration Statement on Form S-8 (File No. 333-135049), filed with the Securities and Exchange Commissionon June 15, 2006). 10.1(c)** Amendment No. 3 to Amended and Restated 1998 Stock Option, Deferred Stock and Restricted Stock Plan (incorporated by reference to exhibitnumber 10.1 of the Registrant’s Form 8-K filed with the Securities and Exchange Commission on February 23, 2007). 10.2** 2007 Incentive Award Plan (incorporated by reference to exhibit number 10.1 of the Registrant’s Form 8-K filed with the Securities and ExchangeCommission on May 24, 2007). 10.3** Form of Restricted Stock Agreement under 2007 Incentive Award Plan. 10.4** 2008 Employee Stock Purchase Plan (incorporated by reference to exhibit number 10.2 of the Registrant’s Form 8-K filed with the Securities andExchange Commission on May 24, 2007). 10.5** 2006 Annual Incentive Compensation Plan (incorporated by reference to Appendix A of the Registrant’s Definitive Proxy Statement filed with theSecurities and Exchange Commission on May 1, 2006).65Table of Contents EXHIBIT NUMBER DESCRIPTION OF EXHIBIT10.6** Indemnification Agreement dated June 7, 1999 between the Registrant and its directors and executive officers (incorporated by reference toexhibit number 10.6 of the Registrant’s Form 10-K for the year ended December 31, 1999). 10.6(a)** List of Registrant’s directors and executive officers who entered into Indemnification Agreement referenced in Exhibit 10.6 with the Registrant(incorporated by reference to exhibit number 10.6(a) of the Registrant’s Form 10-K for the year ended December 31, 2005). 10.7 Registration Rights Agreement dated June 9, 1999, between the Registrant, the Greenberg Family Trust and Michael Greenberg (incorporated byreference to exhibit number 10.7 of the Registrant’s Form 10-Q for the quarter ended June 30, 1999). 10.8 Tax Indemnification Agreement dated June 8, 1999, between the Registrant and certain shareholders (incorporated by reference to exhibitnumber 10.8 of the Registrant’s Form 10-Q for the quarter ended June 30, 1999). 10.9 Second Amended and Restated Loan and Security Agreement, dated May 31, 2006, by and among the Registrant and certain of its subsidiariesthat are also borrowers under the Agreement, certain of its subsidiaries who are guarantors under the Agreement, and certain lenders includingThe CIT Group/Commericial Services, Inc., which acts as agent for the lenders (incorporated by reference to exhibit number 10.1 of theRegistrant’s Form 8-K filed with the Securities and Exchange Commission on June 6, 2006). 10.10 Promissory Note, dated December 27, 2000, between the Registrant and Washington Mutual Bank, FA, for the purchase of property located at225 South Sepulveda Boulevard, Manhattan Beach, California (incorporated by reference to exhibit number 10.23 of the Registrant’s Form 10-K for the year ended December 31, 2000). 10.11 Loan Agreement, dated December 21, 2000, between Yale Investments, LLC, and MONY Life Insurance Company, for the purchase ofproperty located at 1670 South Champagne Avenue, Ontario, California (incorporated by reference to exhibit number 10.25 of the Registrant’sForm 10-K for the year ended December 31, 2000). 10.12 Promissory Note, dated December 21, 2000, between Yale Investments, LLC, and MONY Life Insurance Company, for the purchase ofproperty located at 1670 Champagne Avenue, Ontario, California (incorporated by reference to exhibit number 10.26 of the Registrant’sForm 10-K for the year ended December 31, 2000). 10.13 Agreement dated August 25, 2005 between Duncan Investments, LLC, a wholly owned subsidiary of the Registrant, and Morley ConstructionCompany regarding 330 South Sepulveda Boulevard, Manhattan Beach, California (incorporated by reference to exhibit number 10.1 of theRegistrant’s Form 8-K filed with the Securities and Exchange Commission on August 29, 2005). 10.14 General Conditions of the Contract for Construction regarding 330 South Sepulveda Boulevard, Manhattan Beach, California (incorporated byreference to exhibit number 10.2 of the Registrant’s Form 8-K filed with the Securities and Exchange Commission on August 29, 2005). 10.15 Lease Agreement, dated November 21, 1997, between the Registrant and The Prudential Insurance Company of America, regarding 1661South Vintage Avenue, Ontario, California (incorporated by reference to exhibit number 10.14 of the Registrant’s Registration Statement onForm S-1 (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 ProLogis California I LLC, regarding 1661 SouthVintage Avenue, Ontario, California (incorporated by reference to exhibit number 10.14(a) of the Registrant’s Form 10-K for the year endedDecember 21, 2002). 10.15(b) Second Amendment to Lease Agreement, dated December 10, 2007, between the Registrant and ProLogis California I LLC, regarding 1661South Vintage Avenue, Ontario, California.66Table of Contents EXHIBIT NUMBER DESCRIPTION OF EXHIBIT10.16 Lease Agreement, dated November 21, 1997, between the Registrant and The Prudential Insurance Company of America, regarding 1777 SouthVintage Avenue, Ontario, California (incorporated by reference to exhibit number 10.15 of the Registrant’s Registration Statement on Form S-1(File No. 333-60065) filed with the Securities and Exchange Commission on July 29, 1998). 10.16(a) First Amendment to Lease Agreement, dated April 26, 2002, between the Registrant and Cabot Industrial Properties, L.P., regarding 1777 SouthVintage Avenue, Ontario, California (incorporated by reference to exhibit number 10.15(a) of the Registrant’s Form 10-K for the year endedDecember 21, 2002). 10.16(b) Second Amendment to Lease Agreement, dated May 14, 2002, between the Registrant and Cabot Industrial Properties, L.P., regarding 1777South Vintage Avenue, Ontario, California. 10.16(c) Third Amendment to Lease Agreement, dated May 7, 2007, between the Registrant and Cabot Industrial Properties, L.P., regarding 1777 SouthVintage Avenue, Ontario, California. 10.16(d) Fourth Amendment to Lease Agreement, dated November 10, 2007, between the Registrant and Cabot Industrial Properties, L.P., regarding 1777South Vintage Avenue, Ontario, California. 10.17 Lease Agreement, dated April 10, 2001, between the Registrant and ProLogis California I LLC, regarding 4100 East Mission Boulevard,Ontario, California (incorporated by reference to exhibit number 10.28 of the Registrant’s Form 10-K for the year ended December 31, 2001). 10.17(a) First Amendment to Lease Agreement, dated October 22, 2003, between the Registrant and ProLogis California I LLC, regarding 4100 EastMission Boulevard, Ontario, California (incorporated by reference to exhibit number 10.28(a) of the Registrant’s Form 10-K for the year endedDecember 31, 2003). 10.18 Lease Agreement, dated February 8, 2002, between Skechers International, a subsidiary of the Registrant, and ProLogis Belgium II SPRL,regarding ProLogis Park Liege Distribution Center I in Liege, Belgium (incorporated by reference to exhibit number 10.29 of the Registrant’sForm 10-K for the year ended December 31, 2002). 10.19 Lease Agreement dated September 25, 2007 between the Registrant and HF Logistics I, LLC, regarding distribution facility in Moreno Valley,California (incorporated by reference to exhibit number 10.1 of the Registrant’s Form 8-K filed with the Securities and Exchange Commission onSeptember 27, 2007). 10.20** Amended and Restated 1998 Employee Stock Purchase Plan (incorporated by reference to exhibit number 10.1 of the Registrant’s Form 10-Q,for the quarter ended June 30, 2000). 21.1 Subsidiaries of the Registrant. 23.1 Consent of Independent Registered Public Accounting Firm. 31.1 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). 32.1 Certification pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ** Management contract or compensatory plan or arrangement required to be filed as an exhibit.67Table 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 to be signed on itsbehalf by the undersigned, thereunto duly authorized, in the City of Manhattan Beach, State of California on the 29th day of February 2008. SKECHERS U.S.A., INC. By: /S/ ROBERT GREENBERG Robert Greenberg Chairman of the Board andChief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and inthe capacities and on the dates indicated. SIGNATURE TITLE DATE /S/ ROBERT GREENBERGRobert Greenberg Chief Executive Officer(Principal Executive Officer) February 29, 2008 /S/ MICHAEL GREENBERGMichael Greenberg President and Director February 29, 2008 /S/ DAVID WEINBERGDavid Weinberg Executive Vice President, Chief Operating Officerand Director February 29, 2008 /S/ FREDERICK H. SCHNEIDERFrederick H. Schneider Chief Financial Officer(Principal Financial and Accounting Officer) February 29, 2008 /S/ JEFFREY GREENBERGJeffrey Greenberg Director February 29, 2008 /S/ J. GEYER KOSINSKIJ. Geyer Kosinski Director February 29, 2008 /S/ MORTON D. ERLICHMorton D. Erlich Director February 29, 2008 /S/ RICHARD SISKINDRichard Siskind Director February 29, 200868 Exhibit 10.3SKECHERS U.S.A., INC.2007 INCENTIVE AWARD PLANRESTRICTED STOCK AGREEMENT Skechers U.S.A., Inc., a Delaware corporation (the “Company”), pursuant to its 2007 Incentive Award Plan (the “Plan”), hereby grants to the individuallisted below (“Participant”), the number of shares of the Company’s Class A Common Stock, par value $0.001 per share, set forth below (the “Shares”).This Restricted Stock Award is subject to all of the terms and conditions set forth in this Restricted Stock Agreement (the “Agreement”) (including withoutlimitation the Restrictions on the Shares set forth in the Agreement) and the Plan, each of which are incorporated herein by reference. Capitalized terms usedbut not otherwise defined herein shall have the meanings ascribed to such terms in the Plan.I. NOTICE OF RESTRICTED STOCK AWARD Participant: Grant Date: Total Number of Shares of Restricted Stock: Vesting Schedule: II. AGREEMENTARTICLE I.GENERAL 1.1 Incorporation of Terms of Plan. The Award is subject to the terms and conditions of the Plan which are incorporated herein by reference. In the event ofany inconsistency between the Plan and this Agreement, the terms of the Plan shall control.ARTICLE II.AWARD OF RESTRICTED STOCK 2.1 Award of Restricted Stock. (a) Award. In consideration of the Participant’s agreement to remain in the service or employ of the Company or one of its Subsidiaries, and for othergood and valuable consideration, the Company issues to the Participant the Award of Restricted Stock described in this Agreement (the “Award”). The numberof Shares of Restricted Stock subject to the Award is set forth in the Notice of Restricted Stock Award above. (b) Book Entry Form. At the sole discretion of the Committee, the Shares will be issued in either (i) uncertificated form, with the Shares recorded in thename of the Participant in the1 books and records of the Company’s transfer agent with appropriate notations to the extent that the Shares remain subject to the Restrictions (as definedbelow); or (ii) certificate form subject to the terms of Sections 2.1(c) and (d). (c) Legend. Certificates representing Shares issued pursuant to this Agreement shall, until all restrictions on transfer imposed pursuant to thisAgreement lapse or shall have been removed and new certificates are issued, bear the following legend (or such other legend as shall be determined by theCommittee):“THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN VESTING REQUIREMENTS AND MAY BESUBJECT TO FORFEITURE UNDER THE TERMS OF THAT CERTAIN RESTRICTED STOCK AGREEMENT, DATED ___, 20___BY ANDBETWEEN SKECHERS U.S.A., INC. AND THE REGISTERED OWNER OF SUCH SHARES, AND SUCH SHARES MAY NOT BE,DIRECTLY OR INDIRECTLY, OFFERED, TRANSFERRED, SOLD, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSEDOF UNDER ANY CIRCUMSTANCES, EXCEPT PURSUANT TO THE PROVISIONS OF SUCH AGREEMENT.” (d) Escrow. The Secretary of the Company or such other escrow holder as the Committee may appoint may retain physical custody of the certificatesrepresenting the Shares until all of the restrictions on transfer imposed pursuant to this Agreement lapse or shall have been removed. In such event theParticipant shall not retain physical custody of any certificates representing unvested Shares issued to the Participant. 2.2 Restrictions. (a) Forfeiture of Shares Subject to Restrictions. In the event that the Participant’s employment with the Company is terminated for any reason, theParticipant shall thereupon automatically forfeit any and all Shares then subject to Restrictions and the Participant’s rights in any Restricted Stock thensubject to Restrictions shall terminate. For purposes of this Agreement, “Restrictions” shall mean the restrictions on sale or other transfer set forth inSection 3.1 and the exposure to forfeiture set forth in this Section 2.2(a). (b) Vesting and Lapse of Restrictions. Subject to Section 2.2(a), the Award shall vest and the Restrictions shall lapse in accordance with the vestingschedule set forth in the Notice of Restricted Stock Award above. (c) Accelerated Vesting. In the event of a Change in Control, the Award shall vest and the Restrictions shall lapse with respect to all of the Shares subjectthereto immediately prior to the consummation of such Change in Control. (d) Tax Withholding. The Company shall have the authority and the right to deduct or withhold or require the Participant to remit to the Company allamounts sufficient to satisfy federal state and local taxes required by law to be withheld with respect to the issuance, vesting, lapse of Restrictions or paymentof the Restricted Stock. The Committee may in its discretion and in satisfaction of the foregoing requirement allow the Participant to elect to have the Companywithhold shares of Stock otherwise issuable or vesting under the Award (or allow the return of shares of Stock) having a Fair Market Value equal to the sumsrequired to be withheld. Notwithstanding any other provision of the Plan or this Agreement, the number of shares of Stock which may be withheld withrespect to the issuance, vesting, lapse of Restrictions or payment of the Restricted Stock in order to satisfy the Participant’s2 federal and state income and payroll tax liabilities with respect to the issuance, vesting, lapse of Restrictions or payment of the Restricted Stock shall be limitedto the number of shares which have a Fair Market Value on the date of withholding or repurchase equal to the aggregate amount of such liabilities based on theminimum statutory withholding rates for federal and state income and payroll tax purposes that are applicable to such supplemental taxable income.ARTICLE III.OTHER PROVISIONS 3.1 Restricted Stock Not Transferable. No Shares that are subject to the Restrictions or any interest or right therein or part thereof shall be liable for thedebts, contracts or engagements of the Participant or his successors in interest or shall be subject to disposition by transfer, alienation, anticipation, pledge,encumbrance, assignment or any other means whether such disposition be voluntary or involuntary or by operation of law by judgment, levy, attachment,garnishment or any other legal or equitable proceedings (including bankruptcy), and any attempted disposition thereof shall be null and void and of no effect;provided, however, that this Section 3.1 notwithstanding, with the consent of the Committee, such Shares may be transferred to certain persons or entitiesrelated to Participant, including but not limited to members of Participant’s family, charitable institutions or trusts or other entities whose beneficiaries orbeneficial owners are members of Participant’s family, and/or charitable institutions, or to such other persons or entities as may be expressly approved by theCommittee, pursuant to any such conditions and procedures the Committee may require. Notwithstanding the foregoing, in no event shall any Shares subjectto the Restrictions be transferable by the Participant to a third party (other than the Company) for consideration. 3.2 Rights as Stockholder. Except as otherwise provided herein, upon the Grant Date the Participant shall have all the rights of a stockholder with respect tothe Shares, subject to the Restrictions herein, including the right to vote the Shares and the right to receive any cash or stock dividends paid to or made withrespect to the Shares. 3.3 Not a Contract of Employment. Nothing in this Agreement or in the Plan shall confer upon the Participant any right to continue to serve as an employeeor other service provider of the Company or any of its Subsidiaries. 3.4 Governing Law. The laws of the State of Delaware shall govern the interpretation, validity, administration, enforcement and performance of the terms ofthis Agreement regardless of the law that might be applied under principles of conflicts of laws. 3.5 Conformity to Securities Laws. The Participant acknowledges that the Plan and this Agreement are intended to conform to the extent necessary with allprovisions of the Securities Act and the Exchange Act, and any and all regulations and rules promulgated thereunder by the Securities and ExchangeCommission, including without limitation Rule 16b-3 under the Exchange Act. Notwithstanding anything herein to the contrary, the Plan shall beadministered, and this Award is granted, only in such a manner as to conform to such laws, rules and regulations. To the extent permitted by applicable law,the Plan and this Agreement shall be deemed amended to the extent necessary to conform to such laws, rules and regulations. 3.6 Amendment, Suspension and Termination. To the extent permitted by the Plan, this Agreement may be wholly or partially amended or otherwisemodified, suspended or terminated at any time or from time to time by the Committee or the Board, provided, that, except as may otherwise be3 provided by the Plan, no amendment, modification, suspension or termination of this Agreement shall adversely effect the Award in any material way withoutthe prior written consent of the Participant. 3.7 Notices. Notices required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon depositin the United States mail by certified mail, with postage and fees prepaid, addressed to the Participant to his address shown in the Company records, and tothe Company at its principal executive office. 3.8 Successors and Assigns. The Company may assign any of its rights under this Agreement to single or multiple assignees, and this Agreement shallinure to the benefit of the successors and assigns of the Company. Subject to the restrictions on transfer herein set forth, this Agreement shall be binding uponParticipant and his or her heirs, executors, administrators, successors and assigns.[Signature page follows]4 By his or her signature and the Company’s signature below, Participant agrees to be bound by the terms and conditions of the Plan and this Agreement.Participant has reviewed the Plan and this Agreement in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Agreementand fully understands all provisions of the Plan and this Agreement. Participant hereby agrees to accept as binding, conclusive and final all decisions orinterpretations of the Committee upon any questions arising under the Plan or this Agreement. If Participant is married, his or her spouse has signed theConsent of Spouse attached to this Agreement as Exhibit A. SKECHERS U.S.A., INC.: PARTICIPANT: By: By: Print Name: Print Name:[Participant] Title: Address: 5 EXHIBIT A TO RESTRICTED STOCK AGREEMENTCONSENT OF SPOUSE I, _____________, spouse of [Participant], have read and approve the foregoing Agreement. In consideration of issuing to my spouse the shares of theClass A Common Stock of Skechers U.S.A., Inc. set forth in the Agreement, I hereby appoint my spouse as my attorney-in-fact in respect to the exercise ofany rights under the Agreement and agree to be bound by the provisions of the Agreement insofar as I may have any rights in said Agreement or any shares ofthe common stock of Skechers U.S.A., Inc. issued pursuant thereto under the community property laws or similar laws relating to marital property in effectin the state of our residence as of the date of the signing of the foregoing Agreement. Dated: , Signature of SpouseA-1 EXHIBIT 10.15(b)SECOND AMENDMENT TO LEASE THIS SECOND AMENDMENT to Lease (“Second Amendment”) is dated for reference purposes December 10th, 2007 and is entered into by and betweenProLogis California I LLC (“Landlord”), and Skechers USA, Inc (“Tenant”).RECITALS WHEREAS Landlord and Tenant executed that certain lease dated November 21, 1997, a First Amendment to Lease dated April 26, 2002 (collectively, the“Lease”) whereby Landlord leased to Tenant those certain Premises comprised of approximately 127,799 square feet commonly known as 1661 S. VintageAvenue, Ontario, California 91761 (the “Premises”). Capitalized terms used and not otherwise defined herein shall have the meanings given those terms in theoriginal Lease dated November 21, 1997, and or subsequent amendments, as applicable. WHEREAS Tenant and Landlord desire to amend the Lease, including but not limited to the extension of the Lease Term, pursuant to this SecondAmendment to Lease. NOW, THEREFORE, for valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties agree to amend the Lease asfollows:1.Term: The Term shall be extended for One year (1) and six (6) months and shall commence on December 1, 2007 and shall expire onMay 31, 2009. The monthly triple net Base Rent during the extended Term shall be as follows: Months Monthly Base Rent December 1, 2007-May 31, 2009 $48,563.62/Mo./NNN2.Other Terms andConditions:All other terms of the Lease shall remain unmodified and in full force and effect. IN WITNESS WHEREOF, the parties hereto have signed this Second Amendment to Lease as of the day and year first above written. TENANT:SKECHERS USA, INC By: /s/ David Weinberg Name: David Weinberg Title: Chief Operating OfficerLANDLORD:PROLOGIS CALIFORNIA I LLCa Delaware limited liability companyBy ProLogis, a Maryland real estateinvestment trust, its Managing member By: /s/ W. Scott Lamson Name: W. Scott Lamson Title: Senior Vice President Exhibit 10.16(b)SECOND AMENDMENT TO LEASE THIS SECOND AMENDMENT TO LEASE, dated this 14th day of May, 2002, between CABOT INDUSTRIAL PROPERTIES, L.P., a Delawarelimited partnership (“Landlord”) and SKECHERS USA, INC., a Delaware corporation (“Tenant”), for the premises located in the City of Ontario, County ofSan Bernardino, State of California, commonly known as 1777 S.Vintage Avenue (the “Premises”).W I T N E S S E T H : WHEREAS, Landlord and Tenant entered into that certain Lease dated November 21, 1997 and that certain First Amendment to Lease dated April 26,2002 (hereinafter collectively referred to as the “Lease”); and WHEREAS, Landlord and Tenant desire to clarify their agreement involving Tenant’s desire to replace the existing warehouse lighting system and toamend the Lease as more fully set forth below. NOW, THEREFORE, in consideration of the mutual covenants and conditions contained herein and other good and valuable consideration, the receiptand sufficiency of which is hereby acknowledged, the parties agree as follows:1. Definitions. Unless otherwise specifically set forth herein, all capitalized terms herein shall have the same meaning as set forth in the Lease. 2. Warehouse Lighting. Tenant intends to replace the lighting system and fixtures servicing the warehouse portion of the Premises with a new system andfixtures (“Replacement Lighting System”). In contracting for the Replacement Lighting System, Tenant intends to enter into an operating lease with athird party, at the end of which Tenant will have the option of purchasing the Replacement Lighting System and to keep it in the Premises. If Tenantpurchases the Replacement Lighting System, it is understood that it shall become property of Landlord and remain upon and be surrendered with thePremises at the expiration of the Term. If Tenant does not purchase the Replacement Lighting System, Tenant shall restore the warehouse lighting to thesame condition as existed prior to Tenant’s installation of the Replacement Lighting System. 3. Incorporation. Except as modified herein, all other terms and conditions of the Lease between the parties above described, shall continue in full force andeffect. 4. Limitation of Landlord’s Liability. It is expressly understood and agreed that none of Landlord’s covenants, undertakings or agreements made in thisAmendment or the Lease are made or intended as personal covenants, undertakings or agreements by Landlord, and any liability of Landlord fordamages for breach or nonperformance by Landlord or otherwise arising under or in connection with this Amendment or the Lease or the relationship ofLandlord and Tenant hereunder, shall be collectible only out of Landlord’s interest in the Land and the Building, in each case as the same may then beencumbered, and no personal liability is assumed by, nor at any time may be asserted against, Landlord, or its shareholders, officers, directors,employees, agents, legal representatives, successors or assigns, all such liability, if any, being expressly waived and released by Tenant.IN WITNESS WHEREOF, Landlord and Tenant have executed the Amendment as of the day and year first written above. LANDLORD: TENANT: CABOT INDUSTRIAL PROPERTIES, L.P., SKECHERS USA, INC., a Delaware a Delaware limited partnership corporation By: Cabot Industrial Trust, a Maryland realestate investment trust,its General Partner By: /s/ David Weinberg By: RREEF America L.L.C., a Delaware Title: CFO limited liability company, its Date: 5/23/02 Authorized Agent By: /s/ Daniel J. Schmidt By: /s/ Philip Paccione Daniel J. Schmidt Title: Vice President Title: Executive VP & General Counsel Date: 5/29/02 Date: 5/23/02 Address: 1777 S. Vintage Avenue Ontario, CA 91761 Exhibit 10.16(c)THIRD AMENDMENT TO LEASE THIS AMENDMENT, dated this 7th day of May, 2007, between CLP INDUSTRIAL PROPERTIES, LLC, a Delaware Limited Liability Company(“Lessor”) and SKECHERS USA, INC., a Delaware corporation (“Lessee”), for the premises located in the City of Ontario, County of San Bernardino, Stateof California, commonly known as 1777 S. Vintage Avenue (the “Premises”).WITNESSETH: WHEREAS, Lessor’s Predecessor, CABOT INDUSTRIAL PROPERTIES, L.P., a Delaware corporation, and Lessee, entered into that certain Leasedated November 21, 1997, the First Amendment to Lease dated April 26, 2002, and Second Amendment to Lease dated May 14, 2002 (hereinafter collectivelyreferred to as the “Lease”); and WHEREAS, Lessor and Lessee desire to amend the Lease as more fully set forth below. NOW, THEREFORE, in consideration of the mutual covenants and conditions contained herein and other good and valuable consideration, the receiptand sufficiency of which is hereby acknowledged, the parties agree as follows: 1. Definitions. Unless otherwise specifically set forth herein, all capitalized terms herein shall have the same meaning as set forth in the Lease. 2. Term: Paragraph 2, Term, of the First Amendment to Lease, shall be deleted in its entirety and the following substituted therefore: The term of the Leaseshall be extended until and shall terminate on, May 31, 2009, which shall be deemed to be the Expiration Date for all purposes under the Lease. 3. Base Rental: Paragraph 5, Base Rental, of the First Amendment to Lease, shall be amended effective December 1, 2007 as follows: Period Rentable Square Annual Rent Annual Rent Monthly Installmentfrom through Footage Per Square Foot Base Rent of Base Rent12/1/2007 5/31/2009 284,559 $5.10 $1,451,250.90 $120,937.58 4. Renewable Option. The Renewal Option set forth in the First Amendment to Lease is hereby deleted and terminated and Lessee shall have not rights toexercise the Option as set forth therein.[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]Page 1 of 3 5. Authority. Paragraph 44, of the Lease shall be deleted in its entirety and the following substituted therefore: Lessee’s Authority (OFAC): If Lessee signsas a corporation, partnership, trust or other legal entity each of the persons executing this Lease on behalf of Lessee represents and warrants that Lessee hasbeen and is qualified to do business in the state in which the Building is located, that the entity has full right and authority to enter into this Lease, and that allpersons signing on behalf of the entity were authorized to do so by appropriate actions. Lessee agrees to deliver to Lessor, simultaneously with the delivery ofthis Lease, a corporate resolution, proof of due authorization by partners, opinion of counsel or other appropriate documentation reasonably acceptable toLessor evidencing the due authorization of Lessee to enter into this Lease.Lessee hereby represents and warrants that neither Lessee, nor any person or entities holding any legal or beneficial interest whatsoever in Lessee, are (i) thetarget of any sanctions program that is established by Executive Order of the President or published by the Office of Foreign Assets Control, U.S. Departmentof the Treasury (“OFAC”); (ii) designated by the President or OFAC pursuant to the Trading with the Enemy Act, 50 U.S.C. App. § 5, the InternationalEmergency Economic Powers Act, 50 U.S.C. §§ 1701-06, the Patriot Act, Public Law 107-56, Executive Order 13224 (September 23, 2001) or anyExecutive Order of the President issued pursuant to such statues; or (iii) named on the following list that is published by OFAC: “List of Specially DesignatedNationals and Blocked Persons.” If the foregoing representation is untrue at any time during the Term, an Event of Default will be deemed to have occurred,without the necessity of notice to Lessee. 6. Financial Statements and Credit: At Lessor’s request, Lessee shall deliver to Lessor a copy, certified by an officer of Lessee as being a true and correctcopy, of Lessee’s most recent audited financial statement, or if unaudited, certified by Lessee’s chief financial officer as being true, complete and correct in allmaterial respects. Lessee hereby authorizes Lessor to obtain one or more credit reports on Lessee at any time, and shall execute such further authorizations asLessor may reasonably require in order to obtain a credit report. 7. Broker Indemnification. Lessee represents and warrants to Lessor that no real estate broker, agent, commissioned salesperson or other person hasrepresented Lessee in the negotiations of this Agreement, other than CB Richard Ellis and RREEF Management Company. Lessor agrees to pay allcommissions due the foregoing broker. Lessee agrees to indemnify and hold Lessor harmless from and against any claim for any such commissions, fees orother form of compensation by any such third party claiming through the Lessee, including, without limitation, any and all claims, causes of action,damages, costs and expenses, including attorneys’ fees associated therewith.[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]Page 2 of 3 8. Incorporation. Except as modified herein, all other terms and conditions of the Lease between the parties above described, as attached hereto, shallcontinue in full force and effect. 9. Limitation of Lessor’s Liability. Redress for any claim against Lessor under this Amendment and the Lease shall be limited to and enforceable onlyagainst and to the extent of Lessor’s interest in the Building. The obligations of Lessor under this Amendment and the Lease are not intended to be and shall notbe personally binding on, nor shall any resort be had to the private properties of, any of its or its investment manager’s trustees, directors, officers, partners,beneficiaries, members, stockholders, employees, or agents, and in no case shall Lessor be liable to Lessee hereunder for any lost profits, damage to business,or any form of special, indirect or consequential damages. IN WITNESS WHEREOF, Lessor and Lessee have executed the Amendment as of the day and year first written above.Page 3 of 3LESSOR:CLP INDUSTRIAL PROPERTIES, LLC,a Delaware limited liability companyBY: RREEF Management company, aDelaware corporation, Authorized Agent By: /s/ Elaine M. Seaholm Name: Elaine M. Seaholm Title: Vice President/District Manager Dated: 5/21/07LESSEE:SKECHERS USA, INC., a Delawarecorporation By: Name: Title: Dated: By: /s/ David Weinberg Name: David Weinberg Title: COO/Executive VP Dated: 5-11-07 Exhibit 10.16(d)FOURTH AMENDMENT TO LEASE THIS AMENDMENT, dated this 10th day of November, 2007, between CLP INDUSTRIAL PROPERTIES, LLC, a Delaware Limited LiabilityCompany (“Lessor”) and SKECHERS USA, INC., a Delaware corporation (“Lessee”), for the premises located in the City of Ontario, County of SanBernardino, State of California, commonly known as 1777 S. Vintage Avenue (the “Premises”).WITNESSETH: WHEREAS, Lessor and Lessee, entered into that certain Lease dated November 21, 1997, the First Amendment to Lease dated April 26, 2002, theSecond Amendment to Lease dated May 14, 2002, and the Third Amendment to Lease dated May 7, 2007, (hereinafter collectively referred to as the “Lease”);and WHEREAS, Lessor and Lessee desire to amend the Lease as more fully set forth below. NOW THEREFORE, in consideration of the mutual covenants and conditions contained herein and other good and valuable consideration, the receiptand sufficiency of which is hereby acknowledged, the parties agree as follows: 1. Definitions. Unless otherwise specifically set forth herein, all capitalized terms herein shall have the same meaning as set forth in the Lease. 2. Renewal Option. Lessee shall, provided the Lease is in full force and effect and Lessee is not in default under any of the other terms and conditions of theLease at the time of notification or commencement, have one (1) option to renew this Lease for a term of six (6) months, for the portion of the Premises beingleased by Lessee as of the date the renewal term is to commence, on the same terms and conditions set forth in the Lease, except as modified by the terms,covenants and conditions as set forth below: a. If Lessee elects to exercise said option, then Lessee shall provide Lessor with written notice no earlier than the date which is nine (9) months prior tothe expiration of the then current term of the Lease but no later than the date which is six (6) months prior to the expiration of the then current term ofthis Lease. If Lessee fails to provide such notice, Lessee shall have no further or additional right to extend or renew the term of the Lease.[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]Page 1 of 3 b. The Annual Rent and Monthly Installment shall increase effective June 1, 2009 as follows: Period Rentable Square Annual Rent Annual Rent Monthly Installmentfrom through Footage Per Square Foot Base Rent of Base Rent6/1/2009 11/30/2009 284,559 $5.40 $1,536,618.60 $128,051.55 c. This option is not transferable; the parties hereto acknowledge and agree that they intend that the aforesaid option to renew this Lease shall be“personal” to Lessee as set forth above and that in no event will any assignee or sublessee have any rights to exercise the aforesaid option to renew. d. As each renewal option provided for above is exercised, the number of renewal options remaining to be exercised is reduced by one and upon exerciseof the last remaining renewal option Lessee shall have no further right to extend the term of the Lease. 3. Broker Indemnification. Lessee represents and warrants to Lessor that no real estate broker, agent, commissioned salesperson or other person hasrepresented Lessee in the negotiations of this Amendment, other than CB Richard Ellis and RREEF Management Company. In the event Lessee exercises itOption to Renew as set forth herein, Lessor agrees to pay all commissions due the foregoing broker. Lessee agrees to indemnify and hold Lessor harmless fromand against any claim for any such commissions, fees or other form of compensation by any such third party claiming through the Lessee, including,without limitation, any and all claims, causes of action, damages, costs and expenses, including attorneys’ fees associated therewith. 4. Incorporation. Except as modified herein, all other terms and conditions of the Lease between the parties above described, as attached hereto, shallcontinue in full force and effect. 5. Limitation of Lessor’s Liability. Redress for any claim against Lessor under this Amendment and the Lease shall be limited to and enforceable onlyagainst and to the extent of Lessor’s interest in the Building. The obligations of Lessor under this Amendment and the Lease are not intended to be and shall notbe personally binding on, nor shall any resort be had to the private properties of, any of its or its investment manager’s trustees, directors, officers, partners,beneficiaries, members, stockholders, employees, or agents, and in no case shall Lessor be liable to Lessee hereunder for any lost profits, damage to business,or any form of special, indirect or consequential damages.Page 2 of 3 IN WITNESS WHEREOF, Lessor and Lessee have executed the Amendment as of the day and year first written above.Page 3 of 3LESSOR:CLP INDUSTRIAL PROPERTIES, LLC,a Delaware limited liability companyBY: RREEF Management company, aDelaware corporation, Authorized Agent By: /s/ Elaine M. Seaholm Name: Elaine M. Seaholm Title: Vice President/District Manager Dated: 2/5/08LESSEE:SKECHERS USA, INC., a Delawarecorporation By: /s/ David Weinberg Name: David Weinberg Title: Chief Operating Officer Dated: 2-1-08 By: /s/ Fred Schneider Name: Fred Schneider Title: Chief Financial Officer Dated: 2-1-08 Exhibit 21.1SUBSIDIARIES OF THE REGISTRANT Name of Subsidiary State/Country of Incorporation/Organization Skechers U.S.A., Inc. II DelawareSkechers By Mail, Inc. Delaware310 Global Brands, Inc. DelawareSports Brand Corporation DelawareSkechers USA Ltd. EnglandSkechers USA Canada Inc. CanadaSkechers USA Iberia, S.L. SpainSkechers USA Deutschland GmbH GermanySkechers USA France SAS FranceSkechers EDC SPRL BelgiumSkechers USA Benelux B.V NetherlandsSkechers USA Italia S.r.l ItalySkechers S.a.r.l. SwitzerlandSkechers Footwear (Dongguan) Co., Ltd. ChinaSkechers Holdings Jersey Limited JerseySkechers USA Mauritius 10 MauritiusSkechers USA Mauritius 90 MauritiusSkechers China Business Trust ChinaSkechers Holdings Mauritius MauritiusSkechers Singapore Pte. LTD SingaporeSkechers (Thailand) Ltd. ThailandSkechers Do Brasil Calcados LTDA BrazilSkechers Japan YK JapanSkechers Malaysia Sdn Bhd MalaysiaSkechers Trading (Shanghai) Co. Ltd. ChinaSkechers China Limited Hong KongSkechers International JerseySkechers International II JerseySkechers Collection, LLC CaliforniaSkechers Sport, LLC CaliforniaYale Investments, LLC DelawareDuncan Investments, LLC California Exhibit 23.1Consent of Independent Registered Public Accounting FirmThe Board of DirectorsSkechers U.S.A., Inc.:We consent to the incorporation by reference in the registration statements (Nos. 333-71114, 333-87011, 333-135049 and 333-147095) on Form S-8 ofSkechers U.S.A., Inc. of our reports dated February 28, 2008, with respect to the consolidated balance sheets of Skechers U.S.A., Inc. and subsidiaries as ofDecember 31, 2007 and 2006, and related consolidated statements of earnings, stockholders’ equity and comprehensive income, and cash flows for each ofthe years in the three-year period ended December 31, 2007, and the related financial statement schedule, and the effectiveness of internal control over financialreporting as of December 31, 2007, which reports appear in the December 31, 2007 annual report on Form 10-K of Skechers U.S.A., Inc. Our report on theconsolidated financial statements refers to the adoption of Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment andFinancial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes./s/ KPMG LLP Los Angeles, CaliforniaFebruary 28, 2008 Exhibit 31.1CERTIFICATIONI, Robert Greenberg, certify that:1. I have reviewed this annual report on Form 10-K for the year ended December 31, 2007 of 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 to make the statementsmade, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in ExchangeAct Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrantand have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensurethat material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness ofthe disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscalquarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, theregistrant’s internal control over financial reporting; and5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely toadversely 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’s internal control overfinancial reporting.Date: February 29, 2008 /S/ ROBERT GREENBERG Robert Greenberg Chief Executive Officer Exhibit 31.2CERTIFICATIONI, Frederick H. Schneider, certify that:1. I have reviewed this annual report on Form 10-K for the year ended December 31, 2007 of 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 to make the statementsmade, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in ExchangeAct Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrantand have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensurethat material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness ofthe disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscalquarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, theregistrant’s internal control over financial reporting; and5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely toadversely 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’s internal control overfinancial reporting.Date: February 29, 2008 /S/ FREDERICK H. SCHNEIDER Frederick H. Schneider Chief Financial Officer Exhibit 32.1CERTIFICATION 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 ended December 31, 2007 as filed with theSecurities and Exchange Commission on the date hereof (the “Report”), each of the undersigned, in the capacities and on the date indicated below, herebycertifies, 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 the Company. /S/ ROBERT GREENBERG Robert Greenberg Chief Executive Officer(Principal Executive Officer) February 29, 2008 /S/ FREDERICK H. SCHNEIDER Frederick H. Schneider Chief Financial Officer(Principal Financial and Accounting Officer) February 29, 2008 A SIGNED ORIGINAL OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906 HAS BEENPROVIDED TO THE COMPANY AND WILL BE RETAINED BY THE COMPANY AND FURNISHED TOTHE SECURITIES AND EXCHANGE COMMISSION OR ITS STAFF UPON REQUEST.

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