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+cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing
+0000742278,RES,RPC INC,10-K,2004-03-09,2003-12-31,2004-03-09T21:25:03.000Z,0001188112-04-000303,t10k-1773a.txt,10-K,266781,0,0,https://www.sec.gov/Archives/edgar/data/742278/000118811204000303/t10k-1773a.txt,https://www.sec.gov/Archives/edgar/data/742278/000118811204000303/,2003,2003,1

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+ITEM 1. BUSINESS
+ORGANIZATION
+RPC is a Delaware corporation originally organized in 1984 as a holding company
+for several oilfield services companies and is headquartered in Atlanta,
+Georgia. Effective February 28, 2001, RPC completed the spin-off of its
+powerboat manufacturing business through a distribution of shares of Marine
+Products Corporation ("Marine Products") (MPX:AMEX).
+OVERVIEW
+RPC provides a broad range of specialized oilfield services and equipment
+primarily to independent and major oil and gas companies engaged in the
+exploration, production and development of oil and gas properties throughout the
+United States, including the Gulf of Mexico, mid-continent, southwest and Rocky
+Mountain regions, and in selected international markets. The services and
+equipment provided include, among other things, (1) pressure pumping services,
+(2) snubbing services, (3) coiled tubing services, (4) nitrogen services, (5)
+the rental of drill pipe and other specialized oilfield equipment, (6)
+firefighting and well control, and (7) marine services. RPC acts as a holding
+company for its operating business units, Cudd Pressure Control, Patterson
+Services, Bronco Oilfield Services (acquired in April 2003), Thru-Tubing
+Solutions, Well Control School, International Hammer and others.
+BUSINESS SEGMENTS
+RPC's service lines have been aggregated into two reportable oil and gas
+services business segments - Technical Services and Support Services - because
+of the similarities between the financial performance and approach to managing
+the service lines within each of the segments, as well as the economic and
+business conditions impacting their business activity levels. The Other business
+segment aggregates information concerning RPC's business units that do not
+qualify for separate segment reporting, including an overhead crane fabricator
+and an interactive training software developer.
+Technical Services include RPC's oil and gas service lines that utilize people
+and equipment to perform value-added completion, production and maintenance
+services directly to a customer's well. The demand for these services is
+generally influenced by customers' decisions to invest capital toward initiating
+production in an oil or natural gas well, improving production flows in an
+existing formation, or to address well control issues. This business segment
+consists primarily of pressure pumping, snubbing, coiled tubing, nitrogen, well
+control, down-hole tools, wire line, fluid pumping and casing installation
+services. The principal markets for this business segment include the United
+States, including the Gulf of Mexico, mid-continent, southwest and Rocky
+Mountain regions, and international locations including primarily Africa, Latin
+America, Middle East, and Canada. Customers include major multi-national and
+independent oil and gas producers, and selected nationally owned oil companies.
+Support Services include RPC's oil and gas service lines that primarily provide
+equipment for customer use or services to assist customer operations. The
+equipment and services include drill pipe and related tools, pipe handling,
+inspection and storage services, work platform marine vessels and oilfield
+training services. The demand for these services tends to be influenced
+primarily by customer drilling-related activity levels. The principal markets
+2
+for this segment include the United States, Gulf of Mexico and mid-continent
+regions. Customers primarily include domestic operations of major multi-national
+and independent oil and gas producers.
+TECHNICAL SERVICES
+The following is a description of the primary service lines conducted within the
+Technical Services business segment:
+PRESSURE PUMPING. Pressure pumping services, which accounted for approximately
+29 percent of revenues during 2003, are provided to customers throughout the
+Gulf Coast and mid-continent regions of the United States and are generally
+utilized in production. Pressure pumping services involve using complex, truck
+or skid-mounted equipment designed and constructed for each specific pumping
+service offered. The mobility of this equipment permits pressure pumping
+services to be performed in varying geographic areas. Principal materials
+utilized in the pressure pumping business include fracturing proppants, acid and
+bulk chemical additives. Generally, these items are available from several
+suppliers, and the Company utilizes more than one supplier for each item.
+Pressure pumping services offered include:
+Fracturing - Fracturing services are performed to stimulate production of
+oil and natural gas by increasing the permeability of a formation. The
+fracturing process consists of pumping a fluid gel into a cased well at
+sufficient pressure to fracture the formation at desired depths. Sand,
+bauxite or synthetic proppant, which is suspended in the gel, is pumped
+into the fracture. When the pressure is released at the surface, the fluid
+gel returns to the well, but the proppant remain in the fracture, thus
+keeping it open so that oil and natural gas can flow through the fracture
+into the well. In some cases, fracturing is performed in formations with a
+high amount of carbonate rock by an acid solution pumped under pressure
+without a proppant or with small amounts of proppant.
+Acidizing - Acidizing services are also performed to stimulate production
+of oil and natural gas, but they are used in wells that have undergone
+formation damage due to the buildup of various materials that block the
+formation. Acidizing entails pumping large volumes of specially formulated
+acids into reservoirs to dissolve barriers and enlarge crevices in the
+formation, thereby eliminating obstacles to the flow of oil and natural
+gas. Acidizing services can also enhance production in limestone
+formations.
+SNUBBING. Snubbing, which accounted for approximately 11 percent of 2003
+revenues, involves using a hydraulic workover rig that permits an operator to
+repair damaged casing, production tubing and down-hole production equipment in a
+high-pressure environment. A snubbing unit makes it possible to remove and
+replace down-hole equipment in a pressurized environment. Customers benefit
+because these operations can be performed without removing the pressure from the
+well, which stops production and can damage the formation, and because a
+snubbing rig can perform many applications at a lower cost than other
+alternatives. Since snubbing is a very hazardous process that entails high risk,
+the snubbing segment of the oil and gas services industry is limited to a
+relatively few operators who have the experience and knowledge required to
+perform such services safely and efficiently.
+COILED TUBING. Coiled tubing services, which accounted for approximately 11
+percent of 2003 revenues, involve the injection of coiled tubing into wells to
+perform various applications and functions for use principally in well-servicing
+operations. Coiled tubing is a flexible steel pipe with a diameter of less than
+five inches manufactured in continuous lengths of thousands of feet and wound or
+coiled around a large reel. It can be inserted through existing production
+tubing and used to perform workovers without using a larger, more costly
+workover rig. Principal advantages of employing coiled tubing in a workover
+include: (i) not having to "shut-in" the well during such operations, (ii) the
+ability to reel continuous coiled tubing in and out of a well significantly
+faster than conventional pipe, (iii) the ability to direct fluids into a
+wellbore with more precision, and (iv) enhanced access to remote or offshore
+fields due to the smaller size and mobility of a coiled tubing unit.
+NITROGEN. There are a number of uses for nitrogen, an inert, non-combustible
+element, in providing services to oilfield customers and industrial users
+outside of the oilfield. For our oilfield customers, nitrogen can be used to
+clean drilling and production pipe and displace fluids in various drilling
+applications. It also can be used to create a fire-retardant environment in
+hazardous blowout situations and as a fracturing medium for our fracturing
+service line. In addition to fracturing, nitrogen serves as a complement to our
+snubbing and coiled tubing service lines. For non-oilfield industrial users,
+nitrogen can be used to purge pipelines and create a non-combustible
+environment. RPC stores and transports nitrogen and has a number of pumping unit
+configurations that inject nitrogen in its various applications. Some of these
+pumping units are set up for use on offshore platforms or inland waters. RPC
+purchases its nitrogen in liquid form from several suppliers and believes that
+these sources of supply are adequate.
+WELL CONTROL. Cudd Pressure Control specializes in responding to and controlling
+oil and gas well emergencies, including blowouts and well fires domestically and
+internationally. In connection with these services, Cudd, along with Patterson
+Services, has the capacity to supply the equipment, expertise and personnel
+3
+necessary to restore affected oil and gas wells to production. In the last seven
+years, the Company has responded to well control situations in several
+international locations including Argentina, Australia, Bolivia, Colombia,
+Egypt, India, Peru, Taiwan and Venezuela.
+The Company's professional firefighting staff has more than 300 years of
+aggregate industry experience in responding to well fires and blowouts. This
+team of 16 experts responds to well control projects where hydrocarbons are
+escaping from a well bore, regardless of whether a fire has occurred. In the
+most critical situations, there are explosive fires, the destruction of drilling
+and production facilities, substantial environmental damage and the loss of
+hundreds of thousands of dollars per day in well operators' production revenue.
+Since these events ordinarily arise from equipment failures or human error, it
+is impossible to predict accurately the timing or scope of this work.
+Additionally, less critical events frequently occur in connection with the
+drilling of new wells in high-pressure reservoirs. In these situations, the
+Company is called upon to supervise and assist in the well control effort so
+that drilling operations can resume as promptly as safety permits.
+DOWN-HOLE TOOLS. ThruTubing Solutions ("TTS"), a division of the Company,
+provides services and proprietary down-hole motors and fishing tools to
+operators and service companies in drilling and production operations. TTS'
+experience providing reliable tool services allows it to work in a pressure
+environment with virtually any coiled tubing unit or snubbing unit that is
+equipped for the task.
+WIRELINE SERVICES. A wireline unit is a spooled wire that can be unwound and
+lowered into a well carrying various types of tools. Wireline services are used
+for a variety of purposes, such as accessing a well to assist in data
+acquisition or logging activities, fishing tool operations to retrieve lost or
+broken equipment, pipe recovery and remedial activities. In addition, wireline
+services are an integral part of the plug and abandonment process, near the end
+of the life cycle of a well.
+CASING AND LAYDOWN. Casing and laydown principally consists of installing casing
+and production tubing into a wellbore. Casing is run to protect the structural
+integrity of the wellbore and to seal various production zones in the well.
+These services are normally provided during the drilling phase of a well.
+Production tubing is then run inside the casing. Oil and natural gas are
+produced through the tubing. These services are provided during the completion
+or workover phases of a well.
+TORQUE-TURN. Torque-Turn is used on casing and tubing in the deeper, higher
+pressure gas wells where connection integrity and leak resistance are most
+critical. By monitoring the makeup of connections with both torque and turns
+simultaneously, optimum bearing pressure is achieved between the connection. The
+level of bearing pressure directly affects the leak resistance of the
+connection. The use of the torque-turn system allows the maximum bearing
+pressure to be achieved without permanently deforming the tubular material.
+FISHING. The Company started a fishing service line in late 2003. Fishing
+involves the use of specialized tools and procedures to retrieve lost equipment
+from a well. It is a service required by oil and gas operators who have lost
+equipment in a well. Well production typically ceases until the lost equipment
+can be retrieved. In some cases, the Company creates customized tools to perform
+a fishing operation. The customized tools are maintained by the Company after
+the particular fishing job for future use if a similar need arises.
+SUPPORT SERVICES
+The following is a description of the primary service lines conducted within the
+Support Services business segment:
+RENTAL TOOLS. RPC rents specialized equipment for use with onshore and offshore
+oil and gas well drilling, completion and workover activities. The drilling and
+operation of oil and gas wells generally require a variety of equipment. The
+equipment needed is in large part determined by the geological features of the
+production zone and the size of the well itself. As a result, operators and
+drilling contractors often find it more economical to supplement their tool and
+tubulars inventories with rental items instead of owning a complete inventory.
+RPC is strategically located to serve the major staging points for oil and gas
+activities in the Gulf of Mexico and mid-continent regions.
+RPC, through Patterson Rental Tools, offers a broad range of rental tools
+including:
+Blowout Preventors High Pressure Manifolds
+Coflexip Hoses Hydraulic Torque Wrenches
+Drill Collars Power Tongs
+Drill Pipe Pressure Control Equipment
+Production Related Rental Tools Test Pumps
+Gravel Pack Equipment Tubing
+Handling Tools Tubulars
+Hevi-wate Pipe Tubular Handling Tools
+4
+MARINE SERVICES. A liftboat is a self-propelled, self-elevating work platform
+with legs, cranes and living accommodations. Our fleet consists of four
+liftboats, two of which have leg lengths of 200 feet. Upon arriving at a
+destination, a liftboat hydraulically lowers its legs until they are positioned
+on the ocean floor, and then jacks up until the work platform is sufficiently
+above the water level. Once positioned, the stability, open deck area, crane
+capacity, and relatively low cost of operation make liftboats ideal work
+platforms for a wide range of offshore activities, including platform
+construction, plug and abandonment services, and other non-oilfield related
+construction work. Our liftboats have either one or two cranes with lift
+capacities up to 75 tons. A liftboat's capability to reposition at a work site
+or to move to another work location within a short timeframe adds to its
+versatility. In addition, liftboat services are also highly complementary to
+RPC's service lines within the Technical Services business segment as it relates
+to providing services offshore.
+PIPE INSPECTION AND HANDLING SERVICES. Pipe inspection services involve the
+inspection and testing of the integrity of pipe used in oil and gas wells. These
+services are provided primarily at RPC's inspection yards located on a water
+channel near Houston, Texas, and in Morgan City, Louisiana. Customers rely on
+tubular inspection services to avoid failure of in-service tubing, casing,
+flowlines, and drill pipe. Such tubular failures are expensive and, in some
+cases, catastrophic. RPC's yard in Houston, Texas is equipped with bulkhead
+waterfronts, large capacity cranes, specially designed forklifts and a
+computerized inventory system to serve a variety of other storage and handling
+services that can serve both oilfield and non-oilfield customers.
+WELL CONTROL SCHOOL. Well Control School provides industry and government
+accredited training for the oil and gas industry both in the United States and
+in several international locations. Well Control School provides this training
+in various formats including conventional classroom training, interactive
+computer training and mobile simulator training. Well Control School also
+develops customized training solutions for clients.
+ENERGY PERSONNEL INTERNATIONAL. Energy Personnel International provides drilling
+and production engineers, project management specialists and workover
+specialists on a consulting basis to the oil and gas industry to meet customers'
+needs for staff engineering and wellsite management.
+INDUSTRY
+UNITED STATES. RPC provides its services to its domestic customers through a
+network of locations strategically positioned to serve the Gulf of Mexico, the
+mid-continent, the southwest and the Rocky Mountains production fields. Demand
+for RPC's services in the U.S. tends to be extremely volatile and fluctuates
+with current and projected price levels of oil and natural gas and activity
+levels in the oil and gas industry. Customer activity levels are influenced by
+their decisions about capital investment toward the development and production
+of oil and gas reserves.
+Due to aging oilfields and lower-cost sources of oil internationally, drilling
+activity in the U.S. has declined more than 75 percent from its peak in 1981.
+Record low drilling activity levels were experienced in 1986, 1992 and again in
+1999, with April 1999 recording the lowest U.S. drilling rig count in the
+industry's history.
+At the end of 2002, there were 862 domestic working drilling rigs, down 33
+percent from the third quarter 2001 peak. U.S. domestic drilling activity in
+2003 declined in the beginning of the first quarter, but began a gradual
+recovery in the first quarter and rose during the year to a high at the end of
+the year of 1,126. This represents a 31 percent increase over the beginning of
+2003, but was still 13 percent lower than the 2001 peak. The price of natural
+gas rose by 64 percent during 2003 and the price of oil rose by 19 percent
+during the period, but drilling activity was not as highly correlated with these
+increases in commodity prices as in past cycles.
+Historically, gas drilling rigs have typically represented just over 50 percent
+of the total drilling rig count. However, gas-directed drilling rigs averaged
+approximately 85 percent of the total domestic drilling rig count during 2003.
+Demand for natural gas is continuing to rise, primarily as a result of increased
+emphasis on gas-fired power generation. Also, unlike oil, foreign imports do not
+compete with domestic production. This lack of foreign competition tends to keep
+prices high. Based on the current demand for natural gas as well as the high
+well depletion rates experienced over the past several years, it is anticipated
+that gas-directed drilling will represent at least 80 percent of the total
+drilling rig count in the foreseeable future. The demand for RPC's services is
+driven more by gas-directed drilling than oil-directed drilling, because our
+services are more applicable to deeper, higher pressure wells, which tend to be
+the wells that produce natural gas.
+Thus, in North America the demand for our services and products associated with
+natural gas development is currently more robust than demand related to oil
+drilling. Drilling activity and demand for our services has started to increase
+and is expected to continue to increase as the domestic economy improves and
+current storage levels of natural gas decrease.
+5
+INTERNATIONAL. RPC has operated in several countries including the major
+international oil and natural gas producing areas of Algeria, Argentina,
+Bolivia, Canada, Cameroon, Colombia, Gabon, Indonesia, Mexico and Venezuela.
+During 2003, RPC performed well control work in Colombia and snubbing work in
+Cameroon, Canada and Gabon, and realized an immaterial amount of revenues
+through Well Control School in Venezuela and Argentina. We are evaluating new
+business opportunities in each of these markets and may resume our operations in
+one or all of these markets.
+Beginning in the second quarter of 2002 and throughout 2003, the Company had
+less international revenues than it had in the previous five years. As part of a
+focus on developing other international opportunities, the Company is beginning
+work in Kuwait and Egypt during the first quarter of 2004.
+RPC provides services to its international customers through wholly-owned
+foreign subsidiaries or branch locations. The international market is somewhat
+less volatile than the U.S. market although prone to political uncertainties,
+including the risk of civil unrest and conflicts. Due to the significant
+investment requirement and complexity of international projects, customers'
+drilling decisions relating to such projects tend to be evaluated and monitored
+with a longer-term perspective with regard to oil and natural gas pricing.
+Additionally, the international market is dominated by major oil companies and
+national oil companies which tend to have different objectives and more
+operating stability than the typical independent oil and gas producer in the
+U.S. Pursuing selective international opportunities for revenue growth continues
+to be a strong emphasis for RPC. Refer to Note 13 in the Notes to Consolidated
+Financial Statements for further information on international operations.
+GROWTH STRATEGIES
+RPC's primary objective is to generate excellent long-term returns on investment
+through the effective and conservative management of its invested capital, thus
+yielding strong cash flow and asset appreciation. This objective will be pursued
+through strategic investments and opportunities designed to enhance the
+long-term value of RPC while improving market share, product offerings and the
+profitability of existing businesses. Growth strategies are focused on selected
+areas and markets in which we believe there exist opportunities for higher
+growth, market penetration, or enhanced returns achieved through consolidations
+or through providing proprietary value-added products and services. RPC intends
+to focus on specific market segments in which it believes that it has a
+competitive advantage or there exists significant growth potential.
+RPC seeks to expand its service capabilities through a combination of internal
+growth, acquisitions, joint ventures and strategic alliances. Because of the
+fragmented nature of the oil and gas services industry, RPC believes a number of
+attractive acquisition opportunities exist.
+CUSTOMERS
+Demand for RPC's services and products depends primarily upon the number of oil
+and natural gas wells being drilled, the depth and drilling conditions of such
+wells, the number of well completions and the level of workover activity
+worldwide. RPC's principal customers consist of major and independent oil and
+natural gas producing companies. During 2003, RPC provided oilfield services to
+several hundred customers, none of which accounted for more than 10 percent of
+consolidated revenues. While the loss of certain of RPC's largest customers
+could have a material adverse effect on Company revenues and operating results
+in the near term, management believes RPC would be able to obtain other
+customers for its services in the event of a loss of any of its largest
+customers. Sales are generated by RPC's sales force and through referrals from
+existing customers. With the exception of certain international customers, there
+are no long-term written contracts for services or equipment. Due to the short
+lead time between ordering services or equipment and providing services or
+delivering equipment, there is no significant sales backlog.
+COMPETITION
+RPC operates in highly competitive areas of the oilfield services industry. The
+products and services of each of RPC's principal industry segments are sold in
+highly competitive markets, and its revenues and earnings are affected by
+changes in prices for our services, fluctuations in the level of activity in
+major markets, general economic conditions and governmental regulation. RPC
+competes with many large and small oilfield industry competitors, including the
+largest integrated oilfield services companies. RPC believes that the principal
+competitive factors in the market areas that it serves are product and service
+quality and availability, reputation for safety and technical proficiency and
+price.
+The oil and gas services business includes a small number of dominant global
+competitors including Halliburton Energy Services, a division of Halliburton
+Company, and Schlumberger Ltd., and a significant number of locally oriented
+businesses, many of which tend to be viable acquisition targets.
+6
+FACILITIES/EQUIPMENT
+RPC's equipment consists primarily of oil and gas services equipment used either
+in servicing customer wells or provided on a rental basis for customer use.
+Substantially all of this equipment is Company owned and unencumbered. RPC both
+owns and leases regional and district facilities from which its oilfield
+services are provided to land-based and offshore customers. RPC's principal
+executive offices in Atlanta, Georgia are leased. The Company has two
+administrative buildings, one in Houston, Texas that includes the Company's
+operations, sales and marketing headquarters, and one in Houma, Louisiana that
+houses certain administrative functions. RPC believes that its facilities are
+adequate for its current operations. RPC also owns and operates four offshore
+liftboats. For additional information with respect to RPC's lease commitments,
+see Note 10 of the Notes to Consolidated Financial Statements.
+GOVERNMENTAL REGULATION
+RPC's business is significantly affected by state, federal and foreign laws and
+other regulations relating to the oil and gas industry, as well as laws and
+regulations relating to worker safety and environmental protection. RPC cannot
+predict the level of enforcement of existing laws and regulations or how such
+laws and regulations may be interpreted by enforcement agencies or court
+rulings, whether additional laws and regulations will be adopted, or the effect
+such changes may have on it, its businesses or financial condition.
+In addition, our customers are affected by laws and regulations relating to the
+exploration for and production of natural resources such as oil and natural gas.
+These regulations are subject to change, and new regulations may curtail or
+eliminate our customers' activities in certain areas where we currently operate.
+We cannot determine the extent to which new legislation may impact our
+customers' activity levels, and ultimately, the demand for our services.
+INTELLECTUAL PROPERTY
+RPC uses several patented items in its operations, which management believes are
+important but are not indispensable to RPC's operations. Although RPC
+anticipates seeking patent protection when possible, it relies to a greater
+extent on the technical expertise and know-how of its personnel to maintain its
+competitive position.
+AVAILABILITY OF FILINGS
+RPC makes available, free of charge, on its website, WWW.RPC.NET, its annual
+report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
+8-K, and all amendments to those reports on the same day as they are filed with
+the Securities and Exchange Commission and has done so since November 15, 2002.
+RISK FACTORS
+DEMAND FOR OUR PRODUCTS AND SERVICES IS AFFECTED BY THE VOLATILITY OF OIL
+PRICES.
+Oil prices affect demand throughout the oil and natural gas industry, including
+the demand for our products and services. Our business depends in large part on
+the conditions of the oil and gas industry, and specifically on the capital
+investments of our customers related to the exploration and production of oil
+and natural gas. When these capital investments decline, our customers' demand
+for our services declines.
+Although the production sector of the oil and gas industry is less immediately
+affected by changing prices, and, as a result, less volatile than the
+exploration sector, producers react to declining oil and gas prices by
+curtailing capital spending, which would adversely affect our business. A
+prolonged low level of activity in the oil and gas industry will adversely
+affect the demand for our products and services and our financial condition and
+results of operations.
+THE RELATIONSHIP BETWEEN THE PRICES OF OIL AND NATURAL GAS AND OUR CUSTOMERS'
+DRILLING AND PRODUCTION ACTIVITIES MAY NOT BE HIGHLY CORRELATED IN THE FUTURE.
+Historically, a rise in the prices of oil and natural gas has led to an
+immediate increase in our customers' drilling and production activities as
+measured by the domestic rig count. During 2003, the price of natural gas rose
+by 64 percent and the price of oil rose by 19 percent. Although drilling
+activity rose as well, it was not as highly correlated with the prices of oil
+and natural gas as in past industry cycles. If this correlation continues to be
+weak in the future, then it is possible that increases in the prices of oil and
+natural gas will not lead to an increase in our customers' activities, and our
+future operating results could be negatively impacted.
+WE MAY BE UNABLE TO COMPETE IN THE HIGHLY COMPETITIVE OIL AND GAS INDUSTRY IN
+THE FUTURE.
+We operate in highly competitive areas of the oilfield services industry. The
+products and services of each of our principal industry segments are sold in
+highly competitive markets, and our revenues and earnings may be affected by the
+following factors: changes in competitive prices, fluctuations in the level of
+activity in major markets, general economic conditions, and governmental
+regulation. We compete with the oil and gas industry's many large and small
+industry competitors, including the largest integrated oilfield service
+providers. We believe that the principal competitive factors in the market
+7
+areas that we serve are product and service quality and availability, reputation
+for safety, technical proficiency and price. Although we believe that our
+reputation for safety and quality service is good, we cannot assure you that we
+will be able to maintain our competitive position.
+WE MAY BE UNABLE TO IDENTIFY OR COMPLETE ACQUISITIONS.
+Acquisitions have been and will continue to be a key element of our business
+strategy. We cannot assure you that we will be able to identify and acquire
+acceptable acquisition candidates on terms favorable to us in the future. We may
+be required to incur substantial indebtedness to finance future acquisitions and
+also may issue equity securities in connection with such acquisitions. The
+issuance of additional equity securities could result in significant dilution to
+our stockholders. We cannot assure you that we will be able to consolidate
+successfully the operations and assets of any acquired business with our own
+business. Any inability on our part to consolidate and manage the growth from
+acquired businesses could have a material adverse effect on our results of
+operations and financial condition.
+OUR OPERATIONS ARE AFFECTED BY ADVERSE WEATHER CONDITIONS.
+Our operations are directly affected by the weather conditions in the Gulf of
+Mexico and Gulf Coast regions. Due to seasonal differences in weather patterns,
+our crews may operate more days in some periods than others. Rainy weather,
+hurricanes and other storms prevalent in the Gulf of Mexico and along the Gulf
+Coast throughout the year may also affect our operations. Accordingly, our
+operating results may vary from quarter to quarter, depending on factors outside
+of our control.
+OUR INABILITY TO ATTRACT AND RETAIN SKILLED WORKERS MAY IMPAIR GROWTH POTENTIAL
+AND PROFITABILITY.
+Our ability to remain productive and profitable will depend substantially on our
+ability to attract and retain skilled workers. Our ability to expand our
+operations is in part impacted by our ability to increase our labor force. The
+demand for skilled oilfield employees is high, and the supply is very limited. A
+significant increase in the wages paid by competing employers could result in a
+reduction in our skilled labor force, increases in the wage rates paid by us, or
+both. If either of these events occurred, our capacity and profitability could
+be diminished, and our growth potential could be impaired.
+OUR CONCENTRATION OF CUSTOMERS IN ONE INDUSTRY MAY IMPACT OVERALL EXPOSURE TO
+CREDIT RISK.
+Substantially all of our customers are engaged in the energy industry. This
+concentration of customers in one industry may impact our overall exposure to
+credit risk, either positively or negatively, in that customers may be similarly
+affected by changes in economic and industry conditions. We perform ongoing
+credit evaluations of our customers and do not generally require collateral in
+support of our trade receivables.
+OUR BUSINESS HAS POTENTIAL LIABILITY FOR LITIGATION, PERSONAL INJURY AND
+PROPERTY DAMAGE CLAIMS ASSESSMENTS.
+Our operations involve the use of heavy equipment and exposure to inherent
+risks, including blowouts, explosions and fires. If any of these events were to
+occur, it could result in liability for personal injury and property damage,
+pollution or other environmental hazards or loss of production. Litigation may
+arise from a catastrophic occurrence at a location where our equipment and
+services are used. This litigation could result in large claims for damages. The
+frequency and severity of such incidents will affect our operating costs,
+insurability and relationships with customers, employees and regulators. These
+occurrences could have a material adverse effect on us. We maintain what we
+believe is prudent insurance protection. We cannot assure you that we will be
+able to maintain adequate insurance in the future at rates we consider
+reasonable or that our insurance coverage will be adequate to cover future
+claims and assessments that may arise.
+OUR OPERATIONS MAY BE ADVERSELY AFFECTED IF WE ARE UNABLE TO COMPLY WITH
+REGULATORY AND ENVIRONMENTAL LAWS.
+Our business is significantly affected by stringent environmental laws and other
+regulations relating to the oil and gas industry and by changes in such laws and
+the level of enforcement of such laws. We are unable to predict the level of
+enforcement of existing laws and regulations, how such laws and regulations may
+be interpreted by enforcement agencies or court rulings, or whether additional
+laws and regulations will be adopted. The adoption of laws and regulations
+curtailing exploration and development of oil and gas fields in our areas of
+operations for economic, environmental or other policy reasons would adversely
+affect our operations by limiting demand for our services. We also have
+potential environmental liabilities with respect to our offshore and onshore
+operations, and could be liable for cleanup costs, or environmental and natural
+resource damage due to conduct that was lawful at the time it occurred, but is
+later ruled to be unlawful. We also may be subject to claims for personal injury
+and property damage due to the generation of hazardous substances in connection
+with our operations. We believe that our present operations substantially comply
+with applicable federal and state pollution control and environmental protection
+laws and regulations. We also believe that compliance with such laws has had no
+material adverse effect on our operations to date. However, such environmental
+laws are changed frequently. We are unable to predict whether environmental laws
+will, in the future, materially adversely affect our operations and financial
+condition. Penalties for noncompliance with these laws may include cancellation
+of permits, fines, and other corrective actions, which would negatively affect
+our future financial results.
+8
+OUR INTERNATIONAL OPERATIONS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
+BUSINESS.
+Our operations in various countries including, but not limited to, Africa,
+Canada and Latin America are subject to risk. These risks include, but are not
+limited to, political changes, expropriation, currency restrictions and changes
+in currency exchange rates, taxes, and boycotts and other civil disturbances.
+Although it is impossible to predict the likelihood of such occurrences or their
+effect on our operations, our management believes that these risks are
+acceptable. However, the occurrence of any one of these events could have a
+material adverse effect on our operations.
+OUR COMMON STOCK PRICE HAS BEEN VOLATILE.
+Historically, the market price of common stock of companies engaged in the oil
+and gas services industry has been highly volatile. Likewise, the market price
+of our common stock has varied significantly in the past.
+OUR MANAGEMENT HAS A SUBSTANTIAL OWNERSHIP INTEREST, AND PUBLIC SHAREHOLDERS MAY
+HAVE NO EFFECTIVE VOICE IN THE MANAGEMENT OF THE COMPANY.
+The Company has elected the "Controlled Corporation" exemption under Rule 303A
+of the New York Stock Exchange ("NYSE") Company Guide. The Company is a
+"Controlled Corporation" because a group that includes the Company's Chairman of
+the Board, R. Randall Rollins and his brother, Gary W. Rollins, who is also a
+director of the Company, and certain companies under their control, controls in
+excess of fifty percent of the Company's voting power. As a "Controlled
+Corporation", the Company need not comply with certain NYSE rules including
+those requiring a majority of independent directors.
+RPC's executive officers, directors and their affiliates hold directly or
+through indirect beneficial ownership, in the aggregate, approximately 65
+percent of RPC's outstanding common stock. As a result, these stockholders
+effectively control the operations of RPC, including the election of directors
+and approval of significant corporate transactions such as acquisitions. This
+concentration of ownership could also have the effect of delaying or preventing
+a third party from acquiring control over the Company at a premium. In addition,
+the availability of RPC's common stock to the investing public may be limited to
+those shares not held by the executive officers, directors and their affiliates,
+which could negatively impact RPC's stock trading prices and affect the ability
+of minority stockholders to sell their shares. Future sales by executive
+officers, directors and their affiliates of all or a portion of their shares
+could also negatively affect the trading price of our common stock.

raw/filings/0000742278/2003/0001188112-04-000303/item13.txt

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+ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
+Information concerning certain relationships and related party transactions is
+included in the RPC Proxy for its 2004 Annual Meeting of Stockholders, in the
+sections titled, "Certain Relationships and Related Party Transactions" and
+"Compensation Committee Interlocks and Insider Participation." This information
+is incorporated herein by reference.

raw/filings/0000742278/2003/0001188112-04-000303/item9a.txt

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+ITEM 9A. CONTROLS AND PROCEDURES
+EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES - The Company maintains
+disclosure controls and procedures that are designed to ensure that information
+required to be disclosed in its Exchange Act reports is recorded, processed,
+summarized and reported within the time periods specified in the Commission's
+rules and forms, and that such information is accumulated and communicated to
+its management, including the Chief Executive Officer and Chief Financial
+Officer, as appropriate, to allow timely decisions regarding required
+disclosure.
+As of the end of the period covered by this report, December 31, 2003 (the
+"Evaluation Date"), the Company carried out an evaluation, under the supervision
+and with the participation of its management, including the Chief Executive
+Officer and Chief Financial Officer, of the effectiveness of the design and
+operation of its disclosure controls and procedures. Based upon this evaluation,
+the President and Chief Executive Officer and the Chief Financial Officer
+concluded that the Company's disclosure controls and procedures were effective
+as of the Evaluation Date.
+CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING - There were no changes in
+the Company's internal control over financial reporting that occurred during the
+Company's most recent fiscal quarter that have materially affected, or are
+reasonably likely to materially affect, the Company's internal control over
+financial reporting.
+42
+PART III

raw/filings/0000742278/2003/0001188112-04-000303/rp_note.txt

@@ -0,0 +1,25 @@
+NOTE 12: RELATED PARTY TRANSACTIONS
+Effective with the spin-off, the Company established a cash balance at Marine
+Products of approximately $15 million by transferring a total of $13.8 million
+in cash and marketable securities. Effective February 28, 2001, the Company
+began providing certain administrative services to Marine Products. The service
+agreements are more fully described in Note 2. Charges from the Company (or from
+corporations that are subsidiaries of the Company) for such services aggregated
+approximately $496,000 in 2003, $588,000 in 2002 and $868,000 in 2001. The
+Company's directors are also directors of Marine Products and certain officers
+are employees of both the Company and Marine Products.
+The Company periodically purchases in the ordinary course of business products
+or services from vendors, who are owned by significant officers or shareholders,
+or affiliated with the directors of RPC. The total amounts paid to these
+affiliated parties were approximately $1,058,000 in 2003 and $502,000 in 2002.
+In addition, during 2003 and 2002, the overhead crane fabrication division of
+RPC recorded $171,000 and $332,000 in revenues from the powerboat manufacturing
+segment that is now a subsidiary of Marine Products pursuant to the spin-off,
+related to the sale, installation and service of overhead cranes.
+RPC sponsors a multiple employer plan that includes Marine Products. Following
+the spin-off, RPC charged Marine Products for, and Marine Products has been
+obligated to pay, its allocable share of pension costs and the associated
+funding obligation related to the prior service liabilities of Chaparral
+employees. Effective December 2003, the related prior service liabilities
+totaling $3,314,000 and pension assets totaling $2,517,000 were transferred
+within the multiple employer plan from RPC to Marine Products.

raw/filings/0000742278/2003/0001188112-04-000303/rpt_disclosure.txt

@@ -0,0 +1,28 @@
+CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
+Effective February 28, 2001, the Company began providing certain
+administrative services to Marine Products. The service agreements between
+Marine Products and the Company provide for the provision of services on a cost
+reimbursement basis and may be terminated upon six months notice. The services
+covered by these agreements include administration of certain employee benefit
+programs and other administrative services. Charges from the Company (or from
+corporations which are subsidiaries of the Company) for such services aggregated
+approximately $496,000 in 2003. During 2003, a division of RPC conducted
+business with Chaparral Boats, Inc. ("Chaparral"), a subsidiary of Marine
+Products. The Company recorded $171,000 in revenues from Chaparral related to
+the sale, installation and service of overhead cranes.
+During 2003, a subsidiary of RPC conducted business with companies owned by
+LOR, Inc. The officers, directors and stockholders of LOR, Inc. include Mr.
+Randall Rollins, Chairman, and Mr. Gary W. Rollins,
+10
+Director. In 2003, payments totaling approximately $871,000 were made to these
+LOR, Inc. companies for the purchase of parts and repair services related to
+certain of RPC's oilfield operating equipment. RPC believes the charges incurred
+by its subsidiary are at least as favorable as the charges that would have been
+incurred for similar services from unaffiliated third parties.
+RPC sponsors a multiple employer benefit plan that includes Marine
+Products. Following the spin-off, RPC charged Marine Products for, and Marine
+Products has been obligated to pay, its allocable share of pension costs and the
+associated funding obligation related to the prior service liabilities of
+Chaparral employees. Effective December 2003, the related prior service
+liabilities totaling $3,314,000 and pension assets totaling $2,517,000 were
+transferred within the multiple employer plan from RPC to Marine Products.

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raw/filings/0000742278/2004/0001167966-05-000383/rp_note.txt

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+11: Related Party Transactions 
+Marine
+Products Corporation 
+Effective
+February 28, 2001, the Company spun-off the business conducted through Chaparral
+Boats, Inc. (“Chaparral”), RPC’s former powerboat manufacturing segment. RPC
+accomplished the spin-off by contributing 100 percent of the issued and
+outstanding stock of Chaparral to Marine Products Corporation (a Delaware
+corporation) (“Marine Products”), a newly formed wholly-owned subsidiary of RPC,
+and then distributing the common stock of Marine Products to RPC stockholders.
+In conjunction with the spin-off, RPC and Marine Products entered into various
+agreements that define the companies’ relationship. 
+In
+accordance with a Transition Support Services Agreement, which may be terminated
+by either party, RPC provides certain administrative services, including
+financial reporting and income tax administration, acquisition assistance, etc.,
+to Marine Products. Charges from the Company (or from corporations that are
+subsidiaries of the Company) for such services aggregated approximately $546,000
+in 2004, $496,000 in 2003 and $588,000 in 2002. The Company’s directors are also
+directors of Marine Products and certain officers are employees of both the
+Company and Marine Products. 
+The
+Employee Benefits Agreement provides for, among other things, Marine Products to
+participate in two RPC sponsored benefit plans, specifically, the defined
+contribution 401(k) plan and the defined benefit pension plan. 
+The Tax
+Sharing and Indemnification Agreement provides for, among other things, the
+treatment of income tax matters for periods through the date of the spin-off and
+responsibility for any adjustments as a result of audit by any taxing authority.
+The general terms provide for the indemnification for any tax detriment incurred
+by one party caused by the other party’s action. The amounts transferred as
+settlements from RPC to Marine
+Products totaled approximately $19,000 in 2004, $0 in 2003 and $140,000
+in 2002. 
+Other 
+The
+Company periodically purchases in the ordinary course of business products or
+services from suppliers, who are owned by significant officers or shareholders,
+or affiliated with the directors of RPC. The total amounts paid to these
+affiliated parties were approximately $529,000 in 2004, $1,058,000 in 2003 and
+$502,000 in 2002. In addition, the overhead crane fabrication division of RPC
+recorded $171,000 in 2003 and $332,000 in 2002 in revenues from the powerboat
+manufacturing segment that is now a subsidiary of Marine Products pursuant to
+the spin-off, related to the sale, installation and service of overhead cranes.
+RPC
+receives certain administrative services and rents office space from Rollins,
+Inc. (a company of which Mr. R. Randall Rollins is also Chairman). The service
+agreements between Rollins, Inc. and the Company provide for the provision of
+services on a cost reimbursement basis and are terminable on six months notice.
+The services covered by these agreements include office space, administration of
+certain employee benefit programs, and other administrative services. Charges to
+the Company (or to corporations which are subsidiaries of the Company) for such
+services and rent aggregated $76,000 in 2004 and $105,000 in 2003. 
+Note

raw/filings/0000742278/2004/0001167966-05-000383/rpt_disclosure.txt

@@ -0,0 +1,16 @@
+CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS 
+Effective with the spin-off in 2001, the Company
+began providing certain administrative services to Marine Products. The service agreements between Marine Products and the Company provide for the
+provision of services on a cost reimbursement basis and may be terminated upon six months notice. The services covered by these agreements include
+administration of certain employee benefit programs and other administrative services. Charges from the Company (or from corporations which are
+subsidiaries of the Company) for such services aggregated approximately $546,000 in 2004. 
+During 2004, a subsidiary of RPC conducted business
+with companies owned by LOR, Inc. Mr. R. Randall Rollins, Chairman, and Mr. Gary W. Rollins, Director are officers, directors and controlling
+stockholders of LOR, Inc. In 2004, payments totaling approximately $529,000 were made to these LOR, Inc. companies for the purchase of parts and repair
+services related to certain of RPC’s oilfield operating equipment. RPC believes the charges incurred by its subsidiary are at least as favorable
+as the charges that would have been incurred for similar services from unaffiliated third parties. 
+RPC receives certain administrative services
+including an allocation for office space from Rollins. The service agreements between Rollins and the Company provide for the provision of services on
+a cost reimbursement basis and are terminable on six months notice. The services covered by these agreements include office space, administration of
+certain employee benefit programs, and other administrative services. Charges to the Company (or to corporations which are subsidiaries of the Company)
+for such services and rent aggregated $76,000 in 2004.

raw/filings/0000742278/2005/0001188112-06-000661/filing_metadata.csv

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raw/filings/0000742278/2005/0001188112-06-000661/rp_note.txt

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+11: Related Party Transactions 
+Marine
+Products Corporation 
+Effective
+February 28, 2001, the Company spun-off the business conducted through Chaparral
+Boats, Inc. (“Chaparral”), RPC’s former powerboat manufacturing segment. RPC
+accomplished the spin-off by contributing 100 percent of the issued and
+outstanding stock of Chaparral to Marine Products Corporation (a Delaware
+corporation) (“Marine Products”), a newly formed wholly-owned subsidiary of RPC,
+and then distributing the common stock of Marine Products to RPC stockholders.
+In conjunction with the spin-off, RPC and Marine Products entered into various
+agreements that define the companies’ relationship. 
+In
+accordance with a Transition Support Services agreement, which may be terminated
+by either party, RPC provides certain administrative services, including
+financial reporting and income tax administration, acquisition assistance,
+etc.,
+to Marine Products. Charges from the Company (or from corporations that are
+subsidiaries of the Company) for such services aggregated approximately $616,000
+in 2005, $546,000 in 2004 and $496,000 in 2003. The Company’s directors are also
+directors of Marine Products and all of the executive officers are employees
+of
+both the Company and Marine Products. 
+The
+Tax
+Sharing and Indemnification Agreement provides for, among other things, the
+treatment of income tax matters for periods through February 28, 2001, the
+date
+of the spin-off, and responsibility for any adjustments as a result of audits
+by
+any taxing authority. The general terms provide for the indemnification for
+any
+tax detriment incurred by one party caused by the other party’s action. In
+accordance with the agreement, RPC transferred approximately $19,000 in 2004
+to
+Marine Products for tax settlements. 
+Other 
+The
+Company periodically purchases in the ordinary course of business products
+or
+services from suppliers, who are owned by significant officers or shareholders,
+or affiliated with the directors of RPC. The total amounts paid to these
+affiliated parties were approximately $926,000 in 2005, $529,000 in 2004 and
+$1,058,000 in 2003. In addition, the overhead crane fabrication division of
+RPC
+(sold April 2004) recorded $171,000 in 2003 in revenues from the powerboat
+manufacturing segment that is now a subsidiary of Marine Products pursuant
+to
+the spin-off, related to the sale, installation and service of overhead cranes.
+RPC
+receives certain administrative services and rents office space from Rollins,
+Inc. (a company of which Mr. R. Randall Rollins is also Chairman and which
+is
+otherwise affiliated with RPC). The service agreements between Rollins, Inc.
+and
+the Company provide for the provision of services on a cost reimbursement basis
+and are terminable on six months notice. The services covered by these
+agreements include office space, administration of certain employee benefit
+programs, and other administrative services. Charges to the Company (or to
+corporations which are subsidiaries of the Company) for such services and rent
+aggregated to $71,000 in 2005, $76,000 in 2004 and $105,000 in 2003.
+Note

raw/filings/0000742278/2005/0001188112-06-000661/rpt_disclosure.txt

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+Related Party Transactions Policy provides that related party transactions,
+as
+defined in Regulation S-K, Item 404(a) must be reviewed, approved and/or
+ratified by our Nominating and Corporate Governance Committee. As set forth
+in
+our Code, our Nominating and Corporate Governance Committee has the
+responsibility to ensure that it only approve or ratify related party
+transactions that are in compliance with applicable law, consistent with
+the
+Company’s corporate governance policies (including those relative to conflicts
+of interest and usurpation of corporate opportunities) and on terms that
+are
+deemed to be fair to the Company. The Committee has the authority to hire
+legal,
+accounting, financial or other advisors as it may deem necessary or desirable
+and/or to delegate responsibilities to executive officers of the Company
+in
+connection with discharging its duties. A copy of the Code is available on
+our
+website at www.rpc.net, under the Governance section. All related party
+transactions for fiscal year ended December 31, 2006 were reviewed, approved
+and/or ratified by the Nominating & Corporate Governance Committee in
+accordance with the Code. 
+INDEPENDENT

raw/filings/0000742278/2007/0001188112-08-000719/filing_metadata.csv

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raw/filings/0000742278/2007/0001188112-08-000719/item1.txt

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+Item 1. Business 
+Organization and Overview 
+RPC is a Delaware corporation
+originally organized in 1984 as a holding company for several oilfield services companies and is headquartered in Atlanta, Georgia. 
+RPC provides a broad range of
+specialized oilfield services and equipment primarily to independent and major oil and gas companies engaged in the exploration, production and
+development of oil and gas properties throughout the United States, including the Gulf of Mexico, mid-continent, southwest and Rocky Mountain regions,
+and in selected international markets. The services and equipment provided include, among others, (1) pressure pumping services, (2) snubbing services
+(also referred to as hydraulic workover services), (3) coiled tubing services, (4) nitrogen services, (5) the rental of drill pipe and other
+specialized oilfield equipment, (6) downhole tool rental services and (7) firefighting and well control. RPC acts as a holding company for its
+operating units, Cudd Energy Services, Patterson Rental and Fishing Tools, Bronco Oilfield Services, Thru Tubing Solutions, Well Control School, and
+others. As of December 31, 2007, RPC had approximately 2,370 employees. 
+2 
+Business Segments 
+RPC’s service lines have been
+aggregated into two reportable oil and gas services business segments, Technical Services and Support Services, because of the similarities between the
+financial performance and approach to managing the service lines within each of the segments, as well as the economic and business conditions impacting
+their business activity levels. 
+Technical Services include RPC’s
+oil and gas service lines that utilize people and equipment to perform value-added completion, production and maintenance services directly to a
+customer’s well. The demand for these services is generally influenced by customers’ decisions to invest capital toward initiating production
+in a new oil or natural gas well, improving production flows in an existing formation, or to address well control issues. This business segment
+consists primarily of pressure pumping, snubbing, coiled tubing, nitrogen, well control, downhole tools, wireline, fluid pumping and casing
+installation services (until its sale in August 2005). The principal markets for this business segment include the United States, including the Gulf of
+Mexico, mid-continent, southwest and Rocky Mountain regions, and contract or project work in selected international locations in the last three years
+including primarily Africa, Canada, China, Eastern Europe, Latin America and the Middle East. Customers include major multi-national and independent
+oil and gas producers, and selected nationally owned oil companies. 
+Support Services include RPC’s oil
+and gas service lines that primarily provide equipment for customer use or services to assist customer operations. The equipment and services include
+drill pipe and related tools, pipe handling, pipe inspection and storage services, and oilfield training services. The demand for these services tends
+to be influenced primarily by customer drilling-related activity levels. The principal markets for this segment include the United States, including
+the Gulf of Mexico, mid-continent and Rocky Mountain regions and project work in selected international locations in the last three years including
+primarily Canada, Latin America and the Middle East. Customers primarily include domestic operations of major multi-national and independent oil and
+gas producers, and selected nationally owned oil companies. 
+Technical Services 
+The following is a description of the
+primary service lines conducted within the Technical Services business segment: 
+Pressure Pumping. Pressure pumping
+services, which accounted for approximately 40 percent of 2007 revenues, 38 percent of 2006 revenues and 37 percent of 2005 revenues, are provided to
+customers throughout the Gulf Coast, mid-continent and Rocky Mountain regions of the United States and are generally utilized to initiate production in
+new or enhance production in existing customer wells. Pressure pumping services involve using complex, truck or skid-mounted equipment designed and
+constructed for each specific pumping service offered. The mobility of this equipment permits pressure pumping services to be performed in varying
+geographic areas. Principal materials utilized in the pressure pumping business include fracturing proppants, acid and bulk chemical additives.
+Generally, these items are available from several suppliers, and the Company utilizes more than one supplier for each item. Pressure pumping services
+offered include: 
+Fracturing — Fracturing services
+are performed to stimulate production of oil and natural gas by increasing the permeability of a formation. The fracturing process consists of pumping
+nitrogen or a fluid gel into a cased well at sufficient pressure to fracture the formation at desired depths. Sand, bauxite or synthetic proppant,
+which is suspended in the gel, is pumped into the fracture. When the pressure is released at the surface, the fluid gel returns to the well, but the
+proppant remain in the fracture, thus keeping it open so that oil and natural gas can flow through the fracture into the well. In some cases,
+fracturing is performed in formations with a high amount of carbonate rock by an acid solution pumped under pressure without a proppant or with small
+amounts of proppant. 
+Acidizing — Acidizing services are
+also performed to stimulate production of oil and natural gas, but they are used in wells that have undergone formation damage due to the buildup of
+various 
+3 
+materials that block the formation.
+Acidizing entails pumping large volumes of specially formulated acids into reservoirs to dissolve barriers and enlarge crevices in the formation,
+thereby eliminating obstacles to the flow of oil and natural gas. Acidizing services can also enhance production in limestone
+formations. 
+Snubbing. Snubbing (also referred to as
+hydraulic workover services), which accounted for approximately 10 percent of 2007 revenues and 11 percent of 2006 and 2005 revenues, involves using a
+hydraulic workover rig that permits an operator to repair damaged casing, production tubing and downhole production equipment in a high-pressure
+environment. A snubbing unit makes it possible to remove and replace downhole equipment while maintaining pressure in the well. Customers benefit
+because these operations can be performed without removing the pressure from the well, which stops production and can damage the formation, and because
+a snubbing rig can perform many applications at a lower cost than other alternatives. Because this service involves a very hazardous process that
+entails high risk, the snubbing segment of the oil and gas services industry is limited to a relatively few operators who have the experience and
+knowledge required to perform such services safely and efficiently. 
+Coiled Tubing. Coiled tubing services,
+which accounted for approximately nine percent of 2007 revenues and 10 percent of 2006 and 2005 revenues, involve the injection of coiled tubing into
+wells to perform various applications and functions for use principally in well-servicing operations. Coiled tubing is a flexible steel pipe with a
+diameter of less than four inches manufactured in continuous lengths of thousands of feet and wound or coiled around a large reel. It can be inserted
+through existing production tubing and used to perform workovers without using a larger, more costly workover rig. Principal advantages of employing
+coiled tubing in a workover operation include: (i) not having to “shut-in” the well during such operations, (ii) the ability to reel
+continuous coiled tubing in and out of a well significantly faster than conventional pipe, (iii) the ability to direct fluids into a wellbore with more
+precision, and (iv) enhanced access to remote or offshore fields due to the smaller size and mobility of a coiled tubing unit compared to a workover
+rig. There are several manufacturers of flexible steel pipe used in coiled tubing services, and the Company believes that its sources of supply are
+adequate. 
+Nitrogen. Nitrogen accounted for
+approximately seven percent of 2007 revenues, and eight percent of 2006 and 2005 revenues. There are a number of uses for nitrogen, an inert,
+non-combustible element, in providing services to oilfield customers and industrial users outside of the oilfield. For our oilfield customers, nitrogen
+can be used to clean drilling and production pipe and displace fluids in various drilling applications. It also can be used to create a fire-retardant
+environment in hazardous blowout situations and as a fracturing medium for our fracturing service line. In addition, nitrogen can be complementary to
+our snubbing and coiled tubing service lines, because it is a non-corrosive medium and is frequently injected into a well using coiled tubing. Nitrogen
+is complementary to our pressure pumping service line as well, because foam-based nitrogen stimulation is appropriate in certain sensitive formations
+in which the fluids used in fracturing or acidizing would damage a customer’s well. 
+For non-oilfield industrial users,
+nitrogen can be used to purge pipelines and create a non-combustible environment. RPC stores and transports nitrogen and has a number of pumping unit
+configurations that inject nitrogen in its various applications. Some of these pumping units are set up for use on offshore platforms or inland waters.
+RPC purchases its nitrogen in liquid form from several suppliers and believes that these sources of supply are adequate. 
+Well Control. Cudd Pressure Control
+specializes in responding to and controlling oil and gas well emergencies, including blowouts and well fires, domestically and internationally. In
+connection with these services, Cudd, along with Patterson Services, has the capacity to supply the equipment, expertise and personnel necessary to
+restore affected oil and gas wells to production. In the last nine years, the Company has responded to well control situations in several international
+locations including Algeria, Argentina, Australia, Bolivia, Canada, Colombia, Egypt, India, Kuwait, Peru, Qatar, Taiwan, Trinidad and
+Venezuela. 
+The Company’s professional
+firefighting staff has many years of aggregate industry experience in responding to well fires and blowouts. This team of 11 experts responds to well
+control situations where 
+4 
+hydrocarbons are escaping from a
+well bore, regardless of whether a fire has occurred. In the most critical situations, there are explosive fires, the destruction of drilling and
+production facilities, substantial environmental damage and the loss of hundreds of thousands of dollars per day in well operators’ production
+revenue. Since these events ordinarily arise from equipment failures or human error, it is impossible to predict accurately the timing or scope of this
+work. Additionally, less critical events frequently occur in connection with the drilling of new wells in high-pressure reservoirs. In these
+situations, the Company is called upon to supervise and assist in the well control effort so that drilling operations can resume as promptly as safety
+permits. 
+Downhole Tools. Thru Tubing Solutions
+(“TTS”) provides services and proprietary downhole motors, fishing tools and other specialized downhole tools and processes to operators and
+service companies in drilling and production operations. TTS’ experience providing reliable tool services allows it to work in a pressurized
+environment with virtually any coiled tubing unit or snubbing unit that is equipped for the task. 
+Wireline Services. Wireline is
+classified into two types of services: slick or braided line and electric line. In both, a spooled wire is unwound and lowered into a well, conveying
+various types of tools or equipment. Slick or braided line services use a non-conductive line primarily for jarring objects into or out of a well, as
+in fishing or plug-setting operations. Electric line services lower an electrical conductor line into a well allowing the use of electrically-operated
+tools such as perforators, bridge plugs and logging tools. Wireline services can be an integral part of the plug and abandonment process, near the end
+of the life cycle of a well. 
+Fishing. Fishing involves the use of
+specialized tools and procedures to retrieve lost equipment from a well drilling operation and producing wells. It is a service required by oil and gas
+operators who have lost equipment in a well. Oil and natural gas production from an affected well typically declines until the lost equipment can be
+retrieved. In some cases, the Company creates customized tools to perform a fishing operation. The customized tools are maintained by the Company after
+the particular fishing job for future use if a similar need arises. 
+Support Services 
+The following is a description of the
+primary service lines conducted within the Support Services business segment: 
+Rental Tools. Rental tools accounted
+for approximately 13 percent of 2007 and 2006 revenues and 10 percent of 2005 revenues. The Company rents specialized equipment for use with onshore
+and offshore oil and gas well drilling, completion and workover activities. The drilling and subsequent operation of oil and gas wells generally
+require a variety of equipment. The equipment needed is in large part determined by the geological features of the production zone and the size of the
+well itself. As a result, operators and drilling contractors often find it more economical to supplement their tool and tubular inventories with rental
+items instead of owning a complete inventory. The Company’s facilities are strategically located to serve the major staging points for oil and gas
+activities in the Gulf of Mexico, mid-continent region and Rocky Mountains. 
+Patterson Rental Tools offers a broad
+range of rental tools including: 
+Blowout
+Preventors 
+Diverters 
+High Pressure
+Manifolds and valves 
+Drill
+Pipe 
+Hevi-wate Drill
+Pipe 
+Drill
+Collars 
+Tubing 
+Handling Tools 
+Production
+Related Rental Tools 
+Coflexip Hoses 
+Pumps 
+Oilfield Pipe Inspection Services, Pipe
+Management and Pipe Storage. Pipe inspection services include Full Body Electromagnetic and Phased Array Ultrasonic inspection of pipe used in oil and
+gas wells. These services are provided at both the Company’s inspection facilities and at pipe mills in 
+5 
+accordance with negotiated sales
+and/or service contracts. Our customers are major oil companies and steel mills, for which we provide in-house inspection services, inventory
+management and process control of tubing, casing, and drill pipe. Our locations in Channelview, Texas and Morgan City, Louisiana are equipped with
+large capacity cranes, specially designed forklifts and a computerized inventory system to serve a variety of storage and handling services for both
+the oilfield and non-oilfield customers. 
+Well Control School. Well Control
+School provides industry and government accredited training for the oil and gas industry both in the United States and in several international
+locations. Well Control School provides this training in various formats including conventional classroom training, interactive computer training
+including training delivered over the internet, and mobile simulator training. 
+Energy Personnel International. Energy
+Personnel International provides drilling and production engineers, well site supervisors, project management specialists, and workover and completion
+specialists on a consulting basis to the oil and gas industry to meet customers’ needs for staff engineering and wellsite
+management. 
+Refer to Note 12 in the Notes to the
+Consolidated Financial Statements for additional financial information on our business segments. 
+Industry 
+United States. RPC provides its
+services to its domestic customers through a network of facilities strategically located to serve the Gulf of Mexico, the mid-continent, the southwest
+and the Rocky Mountains production fields. Demand for RPC’s services in the U.S. tends to be extremely volatile and fluctuates with current and
+projected price levels of oil and natural gas and activity levels in the oil and gas industry. Customer activity levels are influenced by their
+decisions about capital investment toward the development and production of oil and gas reserves. 
+Due to aging oilfields and lower-cost
+sources of oil internationally, the drilling rig count in the U.S. has declined more than 61 percent from its peak in 1981. Due to enhanced technology,
+however, more wells are being drilled and the domestic production of oil and natural gas remains roughly equivalent to prior years. Record low drilling
+activity levels were experienced in 1986, 1992, 1999 (with April 1999 recording the lowest U.S. drilling rig count in the industry’s history) and
+again in 2002. At the beginning of 2007, there were 1,695 domestic working drilling rigs, up 31 percent from the third quarter 2001 peak during that
+industry cycle. U.S. domestic drilling activity steadily rose during the first three quarters of 2007 and peaked in the third quarter at a rig count of
+1,829, which was 41 percent higher than the third quarter 2001 peak. In 2007 the average rig count of 1,768 increased seven percent compared to the
+prior year. During 2007 the average price of natural gas increased by approximately four percent, and the average price of oil increased by almost 10
+percent. The price of oil increased tremendously during the fourth quarter due to increased demand in developing countries and continued political
+turmoil in many oil-producing regions of the world. The change in domestic drilling activity was consistent with the change in the prices of oil and
+natural gas, especially when the respective percentages of domestic drilling activity which relate to oil and natural gas are considered. We believe
+that the current prices of oil and natural gas are high enough to encourage our customers to undertake exploration and production activities, and that
+our customers believe that in the long-term, the prices of oil and natural gas will remain high enough to yield profitable returns for their
+exploration and production investments. 
+Gas drilling rigs have represented an
+increasing percentage of the total drilling rig count, and have represented at least 80 percent of the drilling rig count each year since 2001. In
+2007, gas drilling rigs represented 83 percent of total drilling activity. Demand for natural gas is continuing to rise, primarily as a result of
+increased emphasis on gas-fired power generation. Also, unlike oil, foreign imports of natural gas do not compete with domestic production. This lack
+of foreign competition tends to keep prices high. Based on current demand levels for natural gas as well as the high oil and gas well depletion rates
+experienced over the past several years, it is anticipated that gas-directed drilling will represent at least 80 percent of the total drilling rig
+count in the foreseeable future. The demand for RPC’s services is driven 
+6 
+more by gas-directed drilling than
+oil-directed drilling, because our services are more applicable to deeper, higher pressure wells, which tend to be the wells that produce natural gas.
+In addition, there are certain types of gas wells being drilled in the U.S. domestic market for which there is a higher demand for RPC’s services.
+Known as either directional or horizontal wells, these natural gas wells are more difficult and costly to complete. Because they are drilled through a
+narrow formation, they require additional stimulation when they are completed, and since they are not drilled in a straight vertical direction from the
+Earth’s surface, they require tools and drilling mechanisms that are flexible, rather than rigid, and can be steered once they are downhole.
+Specifically, these types of wells require RPC’s pressure pumping and coiled tubing services, as well as our downhole tools and
+services. 
+Thus, in North America the demand for
+our services and products associated with natural gas development is currently more robust than demand related to oil drilling. Drilling activity and
+demand for our services remain strong and should continue to be robust if economic conditions remain stable. 
+International. RPC has historically
+operated in several countries outside of the United States, although international revenues have never accounted for more than 10 percent of total
+revenues. Over the past several years, RPC has increased its focus on developing international opportunities, although our equipment investments over
+the last couple of years has emphasized domestic rather than international expansion. International revenues for 2007 increased due to higher customer
+activity levels in Argentina, Canada and Turkmenistan. During 2007, RPC performed snubbing work in Cameroon, China, Egypt, Gabon, Hungary and
+Turkmenistan, among other countries. We also provided rental tools, well control services, downhole motors, fishing tool services and oilfield training
+to customers located in Algeria, Angola, Argentina, Australia, Bolivia, Canada, China, Ecuador, India, Indonesia, Mexico, Peru, Qatar, the United
+Kingdom and Venezuela. We continue to focus on the development of international opportunities in these and other markets, although we believe that it
+will continue to be less than 10 percent of total revenues. 
+RPC provides services to its
+international customers through branch locations or wholly-owned foreign subsidiaries. The international market is prone to political uncertainties,
+including the risk of civil unrest and conflicts. However, due to the significant investment requirement and complexity of international projects,
+customers’ drilling decisions relating to such projects tend to be evaluated and monitored with a longer-term perspective with regard to oil and
+natural gas pricing, and therefore have the potential to be more stable than most U.S. domestic operations. Additionally, the international market is
+dominated by major oil companies and national oil companies which tend to have different objectives and more operating stability than the typical
+independent oil and gas producer in the U.S. Predicting the timing and duration of contract work is not possible. Pursuing selective international
+opportunities for revenue growth continues to be a strong emphasis for RPC. Refer to Note 12 in the Notes to Consolidated Financial Statements for
+further information on our international operations. 
+Growth Strategies 
+RPC’s primary objective is to
+generate excellent long-term returns on investment through the effective and conservative management of its invested capital, thus yielding strong cash
+flow and asset appreciation. This objective continues to be pursued through strategic investments and opportunities designed to enhance the long-term
+value of RPC while improving market share, product offerings and the profitability of existing businesses. Growth strategies are focused on selected
+areas and markets in which we believe there exist opportunities for higher growth, market penetration, or enhanced returns achieved through
+consolidations or through providing proprietary value-added products and services. RPC intends to focus on specific market segments in which it
+believes that it has a competitive advantage or there exists significant growth potential. 
+RPC seeks to expand its service
+capabilities through a combination of internal growth, acquisitions, joint ventures and strategic alliances. Because of the fragmented nature of the
+oil and gas services industry, RPC believes a number of attractive acquisition opportunities exist. Although current price
+expectations 
+7 
+reduce the near-term possibility of
+completing a transaction, we believe we generate better returns growing organically in service lines and geographic locations in which we have
+experience and presence. 
+RPC has traditionally had a
+conservative capital structure with minimal debt. During 2006, however, we established a new revolving credit facility to fund the purchase of
+revenue-producing equipment and other working capital requirements to pursue our growth plan. We pursued this capital source because of the high
+returns on investment that had been generated by many of our service lines during the previous several years, and because of the low cost and ready
+availability of debt capital. By the end of 2007, purchases of revenue-producing equipment under our growth plan were substantially complete, and we
+believe that the high returns on investment generated by many of our service lines will continue, thus justifying the funding of these expenditures
+with debt. At the end of 2007, RPC’s debt levels easily complied with the debt covenants in our revolving credit agreement and were conservative
+compared to a number of our peers. 
+Customers 
+Demand for RPC’s services and
+products depends primarily upon the number of oil and natural gas wells being drilled, the depth and drilling conditions of such wells, the number of
+well completions and the level of production enhancement activity worldwide. RPC’s principal customers consist of major and independent oil and
+natural gas producing companies. During 2007, RPC provided oilfield services to several hundred customers, none of which accounted for more than 10
+percent of consolidated revenues. While the loss of certain of RPC’s largest customers could have a material adverse effect on Company revenues
+and operating results in the near term, management believes RPC would be able to obtain other customers for its services in the event of a loss of any
+of its largest customers. Sales are generated by RPC’s sales force and through referrals from existing customers. There are long-term written
+contracts for services and equipment with certain international and domestic customers, although revenues earned under such contracts are a small
+percentage of total revenues. Due to the short lead time between ordering services or equipment and providing services or delivering equipment, there
+is no significant sales backlog in most of our service lines. 
+Competition 
+RPC operates in highly competitive
+areas of the oilfield services industry. RPC’s products and services are sold in highly competitive markets, and its revenues and earnings are
+affected by changes in prices for our services, fluctuations in the level of customer activity in major markets, general economic conditions and
+governmental regulation. RPC competes with many large and small oilfield industry competitors, including the largest integrated oilfield services
+companies. RPC believes that the principal competitive factors in the market areas that it serves are product and service quality and availability,
+reputation for safety and technical proficiency, and price. 
+The oil and gas services industry
+includes a small number of dominant global competitors including, among others, Halliburton Energy Services Group, a division of Halliburton Company,
+BJ Services Company and Schlumberger Ltd., and a significant number of locally oriented businesses. 
+Facilities/Equipment 
+RPC’s equipment consists primarily
+of oil and gas services equipment used either in servicing customer wells or provided on a rental basis for customer use. Substantially all of this
+equipment is Company owned. RPC purchases oilfield service equipment from a limited number of manufacturers. These manufacturers of our oilfield
+service equipment may not be able to meet our requests for timely delivery during periods of high demand which may result in delayed deliveries of
+equipment and higher prices for equipment. During 2007, the Company experienced a delay of new equipment deliveries due to high manufacturing backlogs
+resulting from high demand; however, as of the end of 2007 we have received the majority of this equipment and expect to receive the remainder by the
+end of the first quarter of 2008. 
+8 
+RPC both owns and leases regional and
+district facilities from which its oilfield services are provided to land-based and offshore customers. RPC’s principal executive offices in
+Atlanta, Georgia are leased. The Company has two primary administrative buildings, one in Houston, Texas that includes the Company’s operations,
+engineering, sales and marketing headquarters, and one in Houma, Louisiana that includes certain administrative functions. RPC believes that its
+facilities are adequate for its current operations but as the business continues to grow, we are evaluating the need for additional facilities. For
+additional information with respect to RPC’s lease commitments, see Note 9 of the Notes to Consolidated Financial Statements. 
+Governmental Regulation 
+RPC’s business is affected by
+state, federal and foreign laws and other regulations relating to the oil and gas industry, as well as laws and regulations relating to worker safety
+and environmental protection. RPC cannot predict the level of enforcement of existing laws and regulations or how such laws and regulations may be
+interpreted by enforcement agencies or court rulings, whether additional laws and regulations will be adopted, or the effect such changes may have on
+it, its businesses or financial condition. 
+In addition, our customers are affected
+by laws and regulations relating to the exploration for and production of natural resources such as oil and natural gas. These regulations are subject
+to change, and new regulations may curtail or eliminate our customers’ activities in certain areas where we currently operate. We cannot determine
+the extent to which new legislation may impact our customers’ activity levels, and ultimately, the demand for our services. 
+Intellectual Property 
+RPC uses several patented items in its
+operations, which management believes are important but are not indispensable to RPC’s success. Although RPC anticipates seeking patent protection
+when possible, it relies to a greater extent on the technical expertise and know-how of its personnel to maintain its competitive
+position. 
+Availability of Filings 
+RPC makes available, free of charge, on
+its website, www.rpc.net, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those
+reports on the same day as they are filed with the Securities and Exchange Commission. 
+1A. Risk Factors 
+Demand for our products and services is affected by the
+volatility of oil and natural gas prices. 
+Oil prices affect demand throughout the
+oil and natural gas industry, including the demand for our products and services. Our business depends in large part on the conditions of the oil and
+gas industry, and specifically on the capital investments of our customers related to the exploration and production of oil and natural gas. When these
+capital investments decline, our customers’ demand for our services declines. 
+Although the production sector of the
+oil and gas industry is less immediately affected by changing prices, and, as a result, less volatile than the exploration sector, producers react to
+declining oil and gas prices by curtailing capital spending, which would adversely affect our business. A prolonged low level of customer activity in
+the oil and gas industry will adversely affect the demand for our products and services and our financial condition and results of
+operations. 
+9 
+The relationship between the prices of oil and natural gas and
+our customers’ drilling and production activities may not be highly correlated in the future. 
+Historically, a rise in the prices of
+oil and natural gas has led to an immediate increase in our customers’ drilling and production activities as measured by the domestic rig count.
+However, this relationship has not been as strong in the recent past as it was historically, due in part to limited drilling rig capacity in the United
+States. If this correlation is weak in the future, then it is possible that increases in the prices of oil and natural gas will not lead to an increase
+in our customers’ activities, and our future operating results could be negatively impacted. 
+We may be unable to compete in the highly competitive oil and
+gas industry in the future. 
+We operate in highly competitive areas
+of the oilfield services industry. The products and services in our industry segments are sold in highly competitive markets, and our revenues and
+earnings may be affected by the following factors: changes in competitive prices, fluctuations in the level of activity in major markets, general
+economic conditions, and governmental regulation. We compete with the oil and gas industry’s many large and small industry competitors, including
+the largest integrated oilfield service providers. We believe that the principal competitive factors in the market areas that we serve are product and
+service quality and availability, reputation for safety, technical proficiency and price. Although we believe that our reputation for safety and
+quality service is good, we cannot assure you that we will be able to maintain our competitive position. 
+We may be unable to identify or complete
+acquisitions. 
+Acquisitions have been and will
+continue to be a key element of our business strategy. We cannot assure you that we will be able to identify and acquire acceptable acquisition
+candidates on terms favorable to us in the future. We may be required to incur substantial indebtedness to finance future acquisitions and also may
+issue equity securities in connection with such acquisitions. The issuance of additional equity securities could result in significant dilution to our
+stockholders. We cannot assure you that we will be able to integrate successfully the operations and assets of any acquired business with our own
+business. Any inability on our part to integrate and manage the growth from acquired businesses could have a material adverse effect on our results of
+operations and financial condition. 
+Our operations are affected by adverse weather
+conditions. 
+Our operations are directly affected by
+the weather conditions in several domestic regions, including the Gulf of Mexico, the Gulf Coast, the mid-continent and the Rocky Mountains. Hurricanes
+and other storms prevalent in the Gulf of Mexico and along the Gulf Coast during certain times of the year may also affect our operations, and severe
+hurricanes may affect our customers’ activities for a period of several years. While the impact of these storms may increase the need for certain
+of our services over a longer period of time, such storms can also decrease our customers’ activities immediately after they occur. Such
+hurricanes may also affect the prices of oil and natural gas by disrupting supplies in the short term, which may increase demand for our services in
+geographic areas not damaged by the storms. Prolonged rain, snow or ice in many of our locations may temporarily prevent our crews and equipment from
+reaching customer work sites. Due to seasonal differences in weather patterns, our crews may operate more days in some periods than others.
+Accordingly, our operating results may vary from quarter to quarter, depending on the impact of these weather conditions. 
+Our inability to attract and retain skilled workers may impair
+growth potential and profitability. 
+Our ability to remain productive and
+profitable will depend substantially on our ability to attract and retain skilled workers. Our ability to expand our operations is in part impacted by
+our ability to increase our labor force. The demand for skilled oilfield employees is high, and the supply is very limited. A significant increase in
+the wages paid by competing employers could result in a reduction in our skilled 
+10 
+labor force, increases in the wage
+rates paid by us, or both. If either of these events occurred, our capacity and profitability could be diminished, and our growth potential could be
+impaired. 
+Our concentration of customers in one industry may impact
+overall exposure to credit risk. 
+Substantially all of our customers
+operate in the energy industry. This concentration of customers in one industry may impact our overall exposure to credit risk, either positively or
+negatively, in that customers may be similarly affected by changes in economic and industry conditions. We perform ongoing credit evaluations of our
+customers and do not generally require collateral in support of our trade receivables. 
+Our business has potential liability for litigation, personal
+injury and property damage claims assessments. 
+Our operations involve the use of heavy
+equipment and exposure to inherent risks, including blowouts, explosions and fires. If any of these events were to occur, it could result in liability
+for personal injury and property damage, pollution or other environmental hazards or loss of production. Litigation may arise from a catastrophic
+occurrence at a location where our equipment and services are used. This litigation could result in large claims for damages. The frequency and
+severity of such incidents will affect our operating costs, insurability and relationships with customers, employees and regulators. These occurrences
+could have a material adverse effect on us. We maintain what we believe is prudent insurance protection. We cannot assure you that we will be able to
+maintain adequate insurance in the future at rates we consider reasonable or that our insurance coverage will be adequate to cover future claims and
+assessments that may arise. 
+Our operations may be adversely affected if we are unable to
+comply with regulatory and environmental laws. 
+Our business is significantly affected
+by stringent environmental laws and other regulations relating to the oil and gas industry and by changes in such laws and the level of enforcement of
+such laws. We are unable to predict the level of enforcement of existing laws and regulations, how such laws and regulations may be interpreted by
+enforcement agencies or court rulings, or whether additional laws and regulations will be adopted. The adoption of laws and regulations curtailing
+exploration and development of oil and gas fields in our areas of operations for economic, environmental or other policy reasons would adversely affect
+our operations by limiting demand for our services. We also have potential environmental liabilities with respect to our offshore and onshore
+operations, and could be liable for cleanup costs, or environmental and natural resource damage due to conduct that was lawful at the time it occurred,
+but is later ruled to be unlawful. We also may be subject to claims for personal injury and property damage due to the generation of hazardous
+substances in connection with our operations. We believe that our present operations substantially comply with applicable federal and state pollution
+control and environmental protection laws and regulations. We also believe that compliance with such laws has had no material adverse effect on our
+operations to date. However, such environmental laws are changed frequently. We are unable to predict whether environmental laws will, in the future,
+materially adversely affect our operations and financial condition. Penalties for noncompliance with these laws may include cancellation of permits,
+fines, and other corrective actions, which would negatively affect our future financial results. 
+Our international operations could have a material adverse
+effect on our business. 
+Our operations in various countries
+including, but not limited to, Africa, Canada, China, Eastern Europe, Latin America and the Middle East are subject to risks. These risks include, but
+are not limited to, political changes, expropriation, currency restrictions and changes in currency exchange rates, taxes, and boycotts and other civil
+disturbances. The occurrence of any one of these events could have a material adverse effect on our operations. 
+11 
+Our common stock price has been volatile. 
+Historically, the market price of
+common stock of companies engaged in the oil and gas services industry has been highly volatile. Likewise, the market price of our common stock has
+varied significantly in the past. 
+Our management has a substantial ownership interest, and
+public shareholders may have no effective voice in the management of the Company. 
+The Company has elected the
+“Controlled Corporation” exemption under Rule 303A of the New York Stock Exchange (“NYSE”) Company Guide. The Company is a
+“Controlled Corporation” because a group that includes the Company’s Chairman of the Board, R. Randall Rollins and his brother, Gary W.
+Rollins, who is also a director of the Company, and certain companies under their control, controls in excess of fifty percent of the Company’s
+voting power. As a “Controlled Corporation,” the Company need not comply with certain NYSE rules including those requiring a majority of
+independent directors. 
+RPC’s executive officers,
+directors and their affiliates hold directly or through indirect beneficial ownership, in the aggregate, approximately 72 percent of RPC’s
+outstanding shares of common stock. As a result, these stockholders effectively control the operations of RPC, including the election of directors and
+approval of significant corporate transactions such as acquisitions and other matters requiring stockholder approval. This concentration of ownership
+could also have the effect of delaying or preventing a third party from acquiring control over the Company at a premium. 
+Our management has a substantial ownership interest, and the
+availability of the Company’s common stock to the investing public may be limited. 
+The availability of RPC’s common
+stock to the investing public may be limited to those shares not held by the executive officers, directors and their affiliates, which could negatively
+impact RPC’s stock trading prices and affect the ability of minority stockholders to sell their shares. Future sales by executive officers,
+directors and their affiliates of all or a portion of their shares could also negatively affect the trading price of our common stock. 
+Provisions in RPC’s Certificate of Incorporation and
+Bylaws may inhibit a takeover of RPC. 
+RPC’s certificate of
+incorporation, bylaws and other documents contain provisions including advance notice requirements for shareholder proposals and staggered terms of
+office for the Board of Directors. These provisions may make a tender offer, change in control or takeover attempt that is opposed by RPC’s Board
+of Directors more difficult or expensive. 
+Some of our equipment and several types of materials used in
+providing our services are available from a limited number of suppliers. 
+We purchase equipment provided by a
+limited number of manufacturers who specialize in oilfield service equipment. During periods of high demand, these manufacturers may not be able to
+meet our requests for timely delivery, resulting in delayed deliveries of equipment and higher prices for equipment. There are a limited number of
+suppliers for certain materials used in pressure pumping services, our largest service line. While these materials are generally available, supply
+disruptions can occur due to factors beyond our control. Such disruptions, delayed deliveries, and higher prices can limit our ability to provide
+services, or increase the costs of providing services, thus reducing our revenues and profits. 
+We have used outside financing to accomplish our growth
+strategy, and outside financing may become unavailable or may be unfavorable to us. 
+Our business requires a great deal of
+capital in order to maintain our equipment and increase our fleet of equipment to expand our operations, and we have access to our $250 million credit
+facility to fund our capital requirements. Our existing credit facility bears interest at a floating rate, which exposes us to 
+12 
+market risks as interest rates
+rise. If our existing capital resources become unavailable, inadequate or unfavorable for purposes of funding our capital requirements, we would need
+to raise additional funds through alternative debt or equity financings to maintain our equipment and continue our growth. Such additional financing
+sources may not be available when we need them, or may not be available on favorable terms. If we fund our growth through the issuance of public
+equity, the holdings of shareholders will be diluted. If capital generated either by cash provided by operating activities or outside financing is not
+available or sufficient for our needs, we may be unable to maintain our equipment, expand our fleet of equipment, or take advantage of other
+potentially profitable business opportunities, which could reduce our future revenues and profits.

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+Item 13. Certain Relationships and Related Party
+Transactions and Director Independence 
+Information concerning certain
+relationships and related party transactions will be included in the RPC Proxy Statement for its 2008 Annual Meeting of Stockholders, in the sections
+titled, “Certain Relationships and Related Party Transactions.” Information regarding director independence will be included in the RPC Proxy
+Statement for its 2008 Annual Meeting of Stockholders in the section titled “Director Independence and NYSE Requirements.” This information
+is incorporated herein by reference.

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+Item 9A. Controls and Procedures 
+Evaluation of disclosure controls and
+procedures — The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its
+Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms, and
+that such information is accumulated and communicated to its management, including the Chief Executive Officer and Chief Financial Officer, as
+appropriate, to allow timely decisions regarding required disclosure. 
+As of the end of the period covered by
+this report, December 31, 2007 (the “Evaluation Date”), the Company carried out an evaluation, under the supervision and with the
+participation of its management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of
+its disclosure controls and procedures. Based upon this evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the
+Company’s disclosure controls and procedures were effective at a reasonable assurance level as of the Evaluation Date. 
+Management’s report on internal
+control over financial reporting — Management is responsible for establishing and maintaining adequate internal control over financial reporting,
+as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Management’s report on internal control over financial reporting is
+included on page 31 of this report. Grant Thornton LLP, the Company’s independent registered public accounting firm, has audited management’s
+assessment of the effectiveness of internal control as of December 31, 2007 and issued a report thereon which is included on page 32 of this
+report. 
+Changes in internal control over
+financial reporting — Management’s evaluation of changes in internal control did not identify any changes in the Company’s internal
+control over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably
+likely to materially affect, the Company’s internal control over financial reporting.

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+Note 11: Related Party
+Transactions 
+Related Party Transactions 
+Marine Products Corporation 
+Effective February 28, 2001, the
+Company spun-off the business conducted through Chaparral Boats, Inc. (“Chaparral”), RPC’s former powerboat manufacturing segment. RPC
+accomplished the spin-off by contributing 100 percent of the issued and outstanding stock of Chaparral to Marine Products Corporation (a Delaware
+corporation) (“Marine Products”), a newly formed wholly-owned subsidiary of RPC, and then distributing the common stock of Marine Products to
+RPC stockholders. In conjunction with the spin-off, RPC and Marine Products entered into various agreements that define the companies’
+relationship. 
+In accordance with a Transition Support
+Services agreement, which may be terminated by either party, RPC provides certain administrative services, including financial reporting and income tax
+administration, acquisition assistance, etc., to Marine Products. Charges from the Company (or from corporations that are subsidiaries of the Company)
+for such services aggregated approximately $957,000 in 2007, $739,000 in 2006 and $616,000 in 2005. The Company’s receivable due from Marine
+Products for these services as of 
+56 
+NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
+(Continued) 
+RPC, Inc. and Subsidiaries 
+Years ended December 31, 2007, 2006 and 2005 
+December 31, 2007 and 2006 was
+approximately $223,000 and $236,000. The Company’s directors are also directors of Marine Products and all of the executive officers are employees
+of both the Company and Marine Products. 
+The Tax Sharing and Indemnification
+Agreement provides for, among other things, the treatment of income tax matters for periods through February 28, 2001, the date of the spin-off, and
+responsibility for any adjustments as a result of audits by any taxing authority. The general terms provide for the indemnification for any tax
+detriment incurred by one party caused by the other party’s action. 
+Other 
+The Company periodically purchases in
+the ordinary course of business products or services from suppliers, who are owned by significant officers or shareholders, or affiliated with the
+directors of RPC. The total amounts paid to these affiliated parties were approximately $1,035,000 in 2007, $1,248,000 in 2006 and $926,000 in
+2005. 
+RPC receives certain administrative
+services and rents office space from Rollins, Inc. (a company of which Mr. R. Randall Rollins is also Chairman and which is otherwise affiliated with
+RPC). The service agreements between Rollins, Inc. and the Company provide for the provision of services on a cost reimbursement basis and are
+terminable on six months notice. The services covered by these agreements include office space, administration of certain employee benefit programs,
+and other administrative services. Charges to the Company (or to corporations which are subsidiaries of the Company) for such services and rent totaled
+$72,000 in 2007, $70,000 in 2006 and $71,000 in 2005.

raw/filings/0000742278/2007/0001188112-08-000719/rpt_disclosure.txt

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+Related Party Transactions. Copies are also available in print,
+without charge, to any shareholder who requests one by writing to: The
+Secretary, RPC, Inc., 2170 Piedmont Road NE, Atlanta, Georgia
+30324. 
+Code
+of Business Conduct 
+The
+Company has adopted a Code of Business Conduct applicable to all directors,
+officers and employees generally, as well as a Code of Business Conduct and
+Ethics for Directors and Executive Officers and Related Party Transaction Policy
+applicable to the principal executive officer, principal financial officer, and
+directors. Both codes are available on the Company’s website at www.rpc.net under the
+Governance section. Copies are also available in print, without
+charge, to any shareholder who requests one by writing to: The Secretary, RPC,
+Inc., 2170 Piedmont Road NE, Atlanta, Georgia 30324. 
+Director
+Communications 
+The
+Company also has a process for interested parties, including stockholders, to
+send communications to the Board of Directors, Presiding Director, any of the
+Board Committees or the non-management directors as a group. Such
+communications should be addressed as follows: 
+Mr.
+Henry B. Tippie 
+c/o
+Internal Audit Department 
+RPC,
+Inc. 
+2801
+Buford Highway, Suite 520 
+Atlanta,
+Georgia 30329. 
+10 
+The above
+instructions for communications with the directors are also posted on our
+website at www.rpc.net under the
+Governance section. All communications received from interested
+parties are forwarded to the Board of Directors. Any communication
+addressed solely to the Presiding Director or the non-management directors will
+be forwarded directly to the appropriate addressee(s). 
+COMPENSATION

raw/filings/0000742278/2012/0001188112-13-000533/filing_metadata.csv

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+cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing
+0000742278,RES,RPC INC,10-K,2013-03-01,2012-12-31,2013-03-01T20:46:31.000Z,0001188112-13-000533,t75666_10k.htm,FORM 10-K,12730361,1,0,https://www.sec.gov/Archives/edgar/data/742278/000118811213000533/t75666_10k.htm,https://www.sec.gov/Archives/edgar/data/742278/000118811213000533/,2012,2012,1

raw/filings/0000742278/2012/0001188112-13-000533/item1.txt

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+Item 1. Business 
+Organization and Overview 
+RPC is a Delaware corporation originally organized in 1984 as a holding company for several oilfield services companies and is headquartered in Atlanta, Georgia. 
+RPC provides a broad range of specialized oilfield services and equipment primarily to independent and major oil and gas companies engaged in the exploration, production and development of oil and gas properties throughout the United States, including the southwest, mid-continent, Gulf of Mexico, Rocky Mountain and Appalachian regions, and in selected international markets. The services and equipment provided include, among others, (1) pressure pumping services, (2) downhole tool services (3) coiled tubing services, (4) snubbing services (also referred to as hydraulic workover services), (5) nitrogen services, (6) the rental of drill pipe and other specialized oilfield equipment, and (7) well control. RPC acts as a holding company for its operating units, Cudd Energy Services, Patterson Rental and Fishing Tools, Bronco Oilfield Services, Thru Tubing Solutions, Well Control School, and others. As of December 31, 2012, RPC had approximately 3,600 employees. 
+Business Segments 
+RPC’s service lines have been aggregated into two reportable oil and gas services business segments, Technical Services and Support Services, because of the similarities between the financial performance and approach to managing the service lines within each of the segments, as well as the economic and business conditions impacting their business activity levels. 
+2 
+During 2012, approximately one percent of RPC’s consolidated revenues were generated from offshore operations in the U.S. Gulf of Mexico. In addition, approximately one percent of RPC’s consolidated revenues were generated from offshore operations in the offshore territory of New Zealand. We also estimate that 57 percent of our 2012 revenues were related to drilling and production activities for oil, and 43 percent were related to drilling and production activities for natural gas. 
+Technical Services include RPC’s oil and gas service lines that utilize people and equipment to perform value-added completion, production and maintenance services directly to a customer’s well. The demand for these services is generally influenced by customers’ decisions to invest capital toward initiating production in a new oil or natural gas well, improving production flows in an existing formation, or to address well control issues. This business segment consists primarily of pressure pumping, downhole tools, coiled tubing, snubbing, nitrogen, well control, wireline and fishing. The principal markets for this business segment include the United States, including the southwest, mid-continent, Gulf of Mexico, Rocky Mountain and Appalachian regions, and in selected international markets. Customers include major multi-national and independent oil and gas producers, and selected nationally owned oil companies. 
+Support Services include RPC’s oil and gas service lines that primarily provide equipment for customer use or services to assist customer operations. The equipment and services include drill pipe and related tools, pipe handling, pipe inspection and storage services, and oilfield training services. The demand for these services tends to be influenced primarily by customer drilling-related activity levels. The principal markets for this segment include the United States, including the Gulf of Mexico, mid-continent, Rocky Mountain and Appalachian regions and project work in selected international locations in the last three years including primarily Canada, Latin America and the Middle East. Customers primarily include domestic operations of major multi-national and independent oil and gas producers, and selected nationally owned oil companies. 
+Technical Services 
+The following is a description of the primary service lines conducted within the Technical Services business segment: 
+Pressure Pumping . Pressure pumping services, which accounted for approximately 53 percent of 2012 revenues, 55 percent of 2011 revenues and 48 percent of 2010 revenues are provided to customers throughout Texas, and the Appalachian and mid-continent and Rocky Mountain regions of the United States. We primarily provide these services to customers in order to enhance the initial production of hydrocarbons in formations that have low permeability. Pressure pumping services involve using complex, truck or skid-mounted equipment designed and constructed for each specific pumping service offered. The mobility of this equipment permits pressure pumping services to be performed in varying geographic areas. Principal materials utilized in the pressure pumping business include fracturing proppants, acid and bulk chemical additives. Generally, these items are available from several suppliers, and the Company utilizes more than one supplier for each item. Pressure pumping services offered include: 
+Fracturing — Fracturing services are performed to stimulate production of oil and natural gas by increasing the permeability of a formation. Fracturing is particularly important in shale formations, which have low permeability, and unconventional completion, because the formation containing hydrocarbons is not concentrated in one area and requires multiple fracturing operations. The fracturing process consists of pumping fluid gel and sometimes nitrogen into a cased well at sufficient pressure to fracture the formation at desired locations and depths. Sand, bauxite or synthetic proppant, which is often suspended in gel, is pumped into the fracture. When the pressure is released at the surface, the fluid gel returns to the well surface, but the proppant remains in the fracture, thus keeping it open so that oil and natural gas can flow through the fracture into the production tubing and ultimately the well surface. In some cases, fracturing is performed in formations with a high amount of carbonate rock by an acid solution pumped under pressure without a proppant or with small amounts of proppant. 
+Acidizing — Acidizing services are also performed to stimulate production of oil and natural gas, but they are used in wells that have undergone formation damage due to the buildup of various materials that block the formation. Acidizing entails pumping large volumes of specially formulated acids into reservoirs to dissolve barriers and enlarge crevices in the formation, thereby eliminating obstacles to the flow of oil and natural gas. Acidizing services can also enhance production in limestone formations. 
+Downhole Tools . Thru Tubing Solutions (“TTS”) accounted for approximately 14 percent of 2012 revenues and 12 percent of 2011 and 2010 revenues. TTS provides services and proprietary downhole motors, fishing tools and other specialized downhole tools and processes to operators and service companies in drilling and production operations, including casing perforation at the completion stage of an oil or gas well. The services that TTS provides are especially suited for unconventional drilling and completion activities. TTS’ experience providing reliable tool services allows it to work in a pressurized environment with virtually any coiled tubing unit or snubbing unit. 
+3 
+Coiled Tubing . Coiled tubing services, which accounted for approximately 11 percent of 2012 and 2011 revenues, and 10 percent of 2010 revenues, involve the injection of coiled tubing into wells to perform various applications and functions for use principally in well-servicing operations and more recently to facilitate completion of horizontal wells. Coiled tubing is a flexible steel pipe with a diameter of less than four inches manufactured in continuous lengths of thousands of feet and wound or coiled around a large reel. It can be inserted through existing production tubing and used to perform workovers without using a larger, more costly workover rig. Principal advantages of employing coiled tubing in a workover operation include: (i) not having to “shut-in” the well during such operations, (ii) the ability to reel continuous coiled tubing in and out of a well significantly faster than conventional pipe, (iii) the ability to direct fluids into a wellbore with more precision, and (iv) enhanced access to remote or offshore fields due to the smaller size and mobility of a coiled tubing unit compared to a workover rig. Increasingly, coiled tubing units are also used to support completion activities in directional and horizontal wells. Such completion activities usually require multiple entrances in a wellbore in order to complete multiple fractures in a pressure pumping operation. A coiled tubing unit can accomplish this type of operation because its flexibility allows it to be steered in a direction other than vertical, which is necessary in this type of wellbore. At the same time, the strength of the coiled tubing string allows various types of tools or motors to be conveyed into the well effectively. The uses for coiled tubing in directional and horizontal wells have been enhanced by improved fabrication techniques and higher-diameter coiled tubing which allows coiled tubing units to be used effectively over greater distances, thus allowing them to function in more of the completion activities currently taking place in the U.S. domestic market. There are several manufacturers of flexible steel pipe used in coiled tubing services, and the Company believes that its sources of supply are adequate. 
+Snubbing . Snubbing (also referred to as hydraulic workover services), which accounted for approximately four percent of 2012 and 2011 revenues, and five percent of 2010 revenues, involves using a hydraulic workover rig that permits an operator to repair damaged casing, production tubing and downhole production equipment in a high-pressure environment. A snubbing unit makes it possible to remove and replace downhole equipment while maintaining pressure on the well. Customers benefit because these operations can be performed without removing the pressure from the well, which stops production and can damage the formation, and because a snubbing rig can perform many applications at a lower cost than other alternatives. Because this service involves a very hazardous process that entails high risk, the snubbing segment of the oil and gas services industry is limited to a relative few operators who have the experience and knowledge required to perform such services safely and efficiently. Increasingly, snubbing units are used for unconventional completions at the outer reaches of long wellbores which cannot be serviced by coiled tubing because coiled tubing has a more limited range than drill pipe conveyed by a snubbing unit. 
+Nitrogen . Nitrogen accounted for approximately four percent of 2012 and 2011 revenues, and five percent of 2010 revenues. There are a number of uses for nitrogen, an inert, non-combustible element, in providing services to oilfield customers and industrial users outside of the oilfield. For our oilfield customers, nitrogen can be used to clean drilling and production pipe and displace fluids in various drilling applications. Increasingly, it is used as a displacement medium to increase production in older wells in which production has depleted. It also can be used to create a fire-retardant environment in hazardous blowout situations and as a fracturing medium for our fracturing service line. In addition, nitrogen can be complementary to our snubbing and coiled tubing service lines, because it is a non-corrosive medium and is frequently injected into a well using coiled tubing. Nitrogen is complementary to our pressure pumping service line as well, because foam-based nitrogen stimulation is appropriate in certain sensitive formations in which the fluids used in fracturing or acidizing would damage a customer’s well. 
+For non-oilfield industrial users, nitrogen can be used to purge pipelines and create a non-combustible environment. RPC stores and transports nitrogen and has a number of pumping unit configurations that inject nitrogen in its various applications. Some of these pumping units are set up for use on offshore platforms or inland waters. RPC purchases its nitrogen in liquid form from several suppliers and believes that these sources of supply are adequate. 
+Well Control . Cudd Energy Services specializes in responding to and controlling oil and gas well emergencies, including blowouts and well fires, domestically and internationally. In connection with these services, Cudd Energy Services, along with Patterson Services, has the capacity to supply the equipment, expertise and personnel necessary to restore affected oil and gas wells to production. During the past several years, the Company has responded to well control situations in several international locations including Algeria, Argentina, Australia, Bolivia, Canada, Colombia, Egypt, Kuwait, Libya, Mexico, Qatar, Taiwan, Trinidad, Turkmenistan, Tanzania, Abu Dhabi and Venezuela. 
+The Company’s professional firefighting staff has many years of aggregate industry experience in responding to well fires and blowouts. This team of experts responds to well control situations where hydrocarbons are escaping from a well bore, regardless of whether a fire has occurred. In the most critical situations, there are explosive fires, the destruction of drilling and production facilities, substantial environmental damage and the loss of hundreds of thousands of dollars per day in well operators’ production revenue. Since these events ordinarily arise from equipment failures or human error, it is impossible to predict accurately the timing or scope of this work. Additionally, less critical events frequently occur in connection with the drilling of new wells in high-pressure reservoirs. In these situations, the Company is called upon to supervise and assist in the well control effort so that drilling operations can resume as promptly as safety permits. 
+4 
+Wireline Services . Wireline is classified into two types of services: slick or braided line and electric line. In both, a spooled wire is unwound and lowered into a well, conveying various types of tools or equipment. Slick or braided line services use a non-conductive line primarily for jarring objects into or out of a well, as in fishing or plug-setting operations. Electric line services lower an electrical conductor line into a well allowing the use of electrically-operated tools such as perforators, bridge plugs and logging tools. Wireline services can be an integral part of the plug and abandonment process, near the end of the life cycle of a well. 
+Fishing . Fishing involves the use of specialized tools and procedures to retrieve lost equipment from a well drilling operation and producing wells. It is a service required by oil and gas operators who have lost equipment in a well. Oil and natural gas production from an affected well typically declines until the lost equipment can be retrieved. In some cases, the Company creates customized tools to perform a fishing operation. The customized tools are maintained by the Company after the particular fishing job for future use if a similar need arises. 
+Support Services 
+The following is a description of the primary service lines conducted within the Support Services business segment: 
+Rental Tools . Rental tools accounted for approximately five percent of 2012 revenues, six percent of 2011 revenues and eight percent of 2010 revenues. The Company rents specialized equipment for use with onshore and offshore oil and gas well drilling, completion and workover activities. The drilling and subsequent operation of oil and gas wells generally require a variety of equipment. The equipment needed is in large part determined by the geological features of the production zone and the size of the well itself. As a result, operators and drilling contractors often find it more economical to supplement their tool and tubular inventories with rental items instead of owning a complete inventory. The Company’s facilities are strategically located to serve the major staging points for oil and gas activities in the Gulf of Mexico, mid-continent region, Appalachian region and the Rocky Mountains. 
+Patterson Rental Tools offers a broad range of rental tools including: 
+Blowout Preventors 
+Diverters 
+High Pressure Manifolds and Valves 
+Drill Pipe 
+Hevi-wate Drill Pipe 
+Drill Collars 
+Tubing 
+Handling Tools 
+Production Related Rental Tools 
+Coflexip Hoses 
+Pumps 
+Wear Knot TM Drill Pipe 
+Oilfield Pipe Inspection Services, Pipe Management and Pipe Storage . Pipe inspection services include Full Body Electromagnetic and Phased Array Ultrasonic inspection of pipe used in oil and gas wells. These services are provided at both the Company’s inspection facilities and at independent tubular mills in accordance with negotiated sales and/or service contracts. Our customers are major oil companies and steel mills, for which we provide in-house inspection services, inventory management and process control of tubing, casing and drill pipe. Our locations in Channelview, Texas and Morgan City, Louisiana are equipped with large capacity cranes, specially designed forklifts and a computerized inventory system to serve a variety of storage and handling services for both oilfield and non-oilfield customers. 
+Well Control School . Well Control School provides industry and government accredited training for the oil and gas industry both in the United States and in limited international locations. Well Control School provides training in various formats including conventional classroom training, interactive computer training including training delivered over the internet, and mobile simulator training. 
+Energy Personnel International . Energy Personnel International provides drilling and production engineers, well site supervisors, project management specialists, and workover and completion specialists on a consulting basis to the oil and gas industry to meet customers’ needs for staff engineering and well site management. 
+Refer to Note 12 in the Notes to the Consolidated Financial Statements for additional financial information on our business segments. 
+Industry 
+United States . RPC provides its services to its domestic customers through a network of facilities strategically located to serve oil and gas drilling and production activities of its customers in the Gulf of Mexico, the mid-continent, the southwest, the Rocky Mountains and the Appalachian regions. Demand for RPC’s services in the U.S. tends to be extremely volatile and fluctuates with current and projected price levels of oil and natural gas and activity levels in the oil and gas industry. Customer activity levels are influenced by their decisions about capital investment toward the development and production of oil and gas reserves. 
+5 
+Due to aging oilfields and lower-cost sources of oil internationally, the drilling rig count in the U.S. has declined by approximately 61 percent from its peak in 1981. However, due to recently enhanced technology, more wells are being drilled, and these wells are increasingly productive. For these reasons, the domestic production of natural gas has risen to record levels, and the domestic production of crude oil is at the highest level since 1993. Oil and gas industry activity levels have historically been volatile, experiencing multiple cycles, including down cycle troughs in 1986, 1992, 1999 (with April 1999 recording the lowest U.S. drilling rig count in the industry’s history), 2002 and again in 2009. 
+The rig count during the peak of the most recent cycle occurred at the end of the third quarter of 2008, and began to decline sharply during the fourth quarter of 2008. U.S. domestic drilling activity declined by 57 percent from the third quarter of 2008 to the second quarter of 2009, which was the steepest annualized decline rate in the industry’s history. Between the second quarter of 2009 and the fourth quarter of 2011, U.S. domestic drilling activity increased by 129 percent before declining gradually throughout the remainder of 2011 and 2012. At the end of 2012, the U.S. domestic rig count was approximately 100 percent higher than the cyclical trough recorded during the second quarter of 2009. 
+The fluctuations in domestic drilling activity since 2008 are consistent with the changes in the prices of oil and natural gas, the overall economic recovery following the recession in 2008 and 2009, and the financial returns from drilling in unconventional shale plays during the past several years. During 2012 the average price of natural gas decreased by approximately 31 percent and the price of benchmark natural gas liquids decreased by approximately 31 percent compared to prior year. The average price of oil decreased by less than one percent during 2012 compared to 2011. The current high price of oil has increased the attractiveness of drilling for oil and petroleum liquids in several unconventional basins in the U.S. domestic market, while recent prices of natural gas have resulted in declining activities in natural gas directed basins. During 2012, oil-directed drilling activity increased, almost completely offsetting the decrease in natural gas-directed drilling that occurred during the year. The price of natural gas liquids has become an increasingly important determinant of our customers’ activity levels, since it is produced in many of the shale resource plays which also produce oil, and production of various natural gas liquids has increased to a level comparable to that of natural gas. The price of benchmark natural gas liquids peaked during the third quarter of 2008, and declined by approximately 69 percent during the third and fourth quarters of 2008. Thereafter, the price of benchmark natural gas liquids climbed steadily until the third quarter of 2011, but declined by 45 percent by the end of 2012. Although the price of natural gas remains low and natural gas-directed drilling activity has declined to its lowest level in almost 14 years, we continue to believe in the long-term growth opportunities for our business due to the continued high demand for hydrocarbons. Futhermore, we note that the techniques used to extract oil and natural gas in the U.S. domestic market increasingly require the types of services that RPC provides to its customers. 
+From 2001 to 2009, gas drilling rigs represented over 80 percent of the drilling rig count. In 2010, the percentage of drilling rigs drilling for natural gas began to decline, and by the end of 2012 represented only approximately 24 percent of total drilling activity. Although the demand for natural gas has remained stable, the price of natural gas has remained low in recent years due to increased domestic reserves and productivity of new wells. The price of natural gas has risen slightly early in 2013, but remains too low to attract renewed natural gas drilling in unconventional shale plays. In spite of declining drilling activity, U.S. natural gas production reached a record level early in 2013, so we expect that natural gas prices will remain low until supply and demand fundamentals align. In contrast, the price of oil remains high, and producers are exploiting resource plays that are economical at current high oil prices. The long-term demand outlook for natural gas is still favorable because, unlike oil, foreign imports of natural gas do not compete with domestic production to a meaningful degree. This lack of foreign competition tends to keep prices high enough to ensure that domestic drilling and production will continue at certain minimum levels. Because of these factors, we anticipate that oil-directed drilling will continue to represent the majority of the total drilling rig count for the immediate future. 
+There are certain types of wells being drilled in the U.S. domestic market for which there is a higher demand for RPC’s services. Known as either directional or horizontal wells, these wells are more difficult and costly to complete. They have become an increasingly large percentage of the U.S. domestic market, and since the third quarter of 2008, have consistently comprised the majority of U.S. domestic drilling. Because they are drilled through a typically narrow and relatively impermeable formation such as shale, they require additional stimulation when they are completed. Also, many of these formations require high pumping rates of stimulation fluids under high pressures, which in turn requires a great deal of pressure pumping horsepower to complete the well. Furthermore, since they are not drilled in a straight vertical direction from the Earth’s surface, they require tools and drilling mechanisms that are flexible, rather than rigid, and can be steered once they are downhole. Specifically, these types of wells require RPC’s pressure pumping and coiled tubing services, as well as our downhole tools and services. 
+6 
+International. RPC has historically operated in several countries outside of the United States, although international revenues have never accounted for more than 10 percent of total revenues. RPC’s equipment investments over the last several years have emphasized domestic rather than international expansion because of higher expected financial returns. International revenues for 2012 increased compared to 2011 due to higher customer activity levels in Canada, China, Mexico and New Zealand, and in the aggregate accounted for approximately four percent of consolidated RPC revenues. International revenues in 2012 compared to 2011 decreased in Australia, Gabon and Saudi Arabia. During 2012, RPC provided snubbing, well control and oilfield training services in several countries including China, Gabon and New Zealand. We also provided downhole motors and tools in Canada, Mexico, China and Tunisia. We continue to focus on the selective development of international opportunities in these and other markets, although we believe that it will continue to be less than 10 percent of total revenues in 2013. 
+RPC provides services to its international customers through branch locations or wholly owned foreign subsidiaries. The international market is prone to political uncertainties, including the risk of civil unrest and conflicts. However, due to the significant investment requirement and complexity of international projects, customers’ drilling decisions relating to such projects tend to be evaluated and monitored with a longer-term perspective with regard to oil and natural gas pricing, and therefore have the potential to be more stable than most U.S. domestic operations. Additionally, the international market is dominated by major oil companies and national oil companies which tend to have different objectives and more operating stability than the typical independent oil and gas producer in the U.S. Predicting the timing and duration of contract work is not possible. Refer to Note 12 in the Notes to Consolidated Financial Statements for further information on our international operations. 
+Growth Strategies 
+RPC’s primary objective is to generate excellent long-term returns on investment through the effective and conservative management of its invested capital to generate strong cash flow. This objective continues to be pursued through strategic investments and opportunities designed to enhance the long-term value of RPC while improving market share, product offerings and the profitability of existing businesses. Growth strategies are focused on selected customers and markets in which we believe there exist opportunities for higher growth, customer and market penetration, or enhanced returns achieved through consolidations or through providing proprietary value-added products and services. RPC intends to focus on specific market segments in which it believes that it has a competitive advantage and on potential large customers who have a long-term need for our services in markets in which we operate. 
+RPC seeks to expand its service capabilities through a combination of internal growth, acquisitions, joint ventures and strategic alliances. Because of the fragmented nature of the oil and gas services industry, RPC believes a number of acquisition opportunities exist. However, the favorable long-term outlook for our industry and the strong historical profitability of many potential acquisitions has encouraged potential sellers of businesses to expect high prices for their businesses. Due to these high valuations and the potential difficulty of integrating acquired businesses into our existing operations, we believe we generate better returns on investments growing organically in service lines and geographic locations in which we have experience and presence. We will continue to be selective in pursuing growth through acquisitions of existing businesses. 
+RPC has a revolving credit facility to fund the purchase of revenue-producing equipment and other working capital requirements. At December 31, 2012, this facility had a remaining term of almost three years. We have pursued this capital source because of the high returns on investment that have been generated by many of our service lines during the previous several years, and because of the low cost and ready availability of debt capital. During 2011 and the first two quarters of 2012, we purchased additional revenue-producing equipment to support high industry activity levels. Our scheduled purchases of equipment declined during the third and fourth quarters of 2012 as industry activity levels declined, pricing for our services became increasingly competitive, and the anticipated near-term financial returns of a larger fleet of revenue-producing equipment also declined. The outstanding balance on our credit facility at the end of 2012 was lower than at the end of the prior year due to a reduction in capital expenditures and working capital, and our level of debt continues to be conservative compared to a number of our peers. 
+Customers 
+Demand for RPC’s services and products depends primarily upon the number of oil and natural gas wells being drilled, the depth and drilling conditions of such wells, the number of well completions and the level of production enhancement activity worldwide. RPC’s principal customers consist of major and independent oil and natural gas producing companies. During 2012, RPC provided oilfield services to several hundred customers, none of which accounted for more than 10 percent of revenues. 
+Sales are generated by RPC’s sales force and through referrals from existing customers. Over the past three years we have entered into several agreements, with terms beyond one year, to provide services to certain domestic customers. We monitor closely the financial condition of these customers, their capital expenditure plans, and other indications of their drilling and completion activities. Due to the short lead time between ordering services or equipment and providing services or delivering equipment, there is no significant sales backlog in most of our service lines. 
+7 
+Competition 
+RPC operates in highly competitive areas of the oilfield services industry. Our products and services are sold in highly competitive markets, and the revenues and earnings generated are affected by changes in prices for our services, fluctuations in the level of customer activity in major markets, general economic conditions and governmental regulation. RPC competes with many large and small oilfield industry competitors, including the largest integrated oilfield services companies. Strong oilfield activity during the past several years and the availability of capital have encouraged several new, smaller companies to seek debt and equity capital and accelerate their growth rates. The presence of these new competitors has increased competitive pricing pressures as domestic oilfield activity has moderated during the third and fourth quarters of 2012. RPC believes that the principal competitive factors in the market areas that it serves are product availability and quality of our equipment and raw materials used to provide our services, service quality, reputation for safety and technical proficiency, and price. 
+The oil and gas services industry includes a small number of dominant global competitors including, among others, Halliburton Energy Services Group, a division of Halliburton Company, Baker Hughes and Schlumberger Ltd., and a significant number of locally oriented businesses. 
+Facilities/Equipment 
+RPC’s equipment consists primarily of oil and gas services equipment used either in servicing customer wells or provided on a rental basis for customer use. Substantially all of this equipment is Company owned. RPC purchases oilfield service equipment from a limited number of manufacturers. These manufacturers of our oilfield service equipment may not be able to meet our requests for timely delivery during periods of high demand which may result in delayed deliveries of equipment and higher prices for equipment. 
+RPC both owns and leases regional and district facilities from which its oilfield services are provided to land-based and offshore customers. RPC’s principal executive offices in Atlanta, Georgia are leased. The Company has two primary administrative buildings, one it leases in The Woodlands, Texas that includes the Company’s operations, engineering, sales and marketing headquarters, and one it owns in Houma, Louisiana that includes certain administrative functions. RPC believes that its facilities are adequate for its current operations. For additional information with respect to RPC’s lease commitments, see Note 9 of the Notes to Consolidated Financial Statements. 
+Governmental Regulation 
+RPC’s business is affected by state, federal and foreign laws and other regulations relating to the oil and gas industry, as well as laws and regulations relating to worker safety and environmental protection. RPC cannot predict the level of enforcement of existing laws and regulations or how such laws and regulations may be interpreted by enforcement agencies or court rulings, whether additional laws and regulations will be adopted, or the effect such changes may have on it, its businesses or financial condition. 
+In addition, our customers are affected by laws and regulations relating to the exploration for and production of natural resources such as oil and natural gas. These regulations are subject to change, and new regulations may curtail or eliminate our customers’ activities in certain areas where we currently operate. We cannot determine the extent to which new legislation may impact our customers’ activity levels, and ultimately, the demand for our services. 
+Intellectual Property 
+RPC uses several patented items in its operations, which management believes are important but are not indispensable to RPC’s success. Although RPC anticipates seeking patent protection when possible, it relies to a greater extent on the technical expertise and know-how of its personnel to maintain its competitive position. 
+Availability of Filings 
+RPC makes available, free of charge, on its website, www.rpc.net, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports on the same day as they are filed with the Securities and Exchange Commission.

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+Item 13. Certain Relationships and Related Party Transactions and Director Independence 
+Information concerning certain relationships and related party transactions will be included in the RPC Proxy Statement for its 2013 Annual Meeting of Stockholders, in the sections titled, “Certain Relationships and Related Party Transactions.” Information regarding director independence will be included in the RPC Proxy Statement for its 2013 Annual Meeting of Stockholders in the section titled “Director Independence and NYSE Requirements.” This information is incorporated herein by reference.

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+Item 9A. Controls and Procedures 
+Evaluation of disclosure controls and procedures — The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms, and that such information is accumulated and communicated to its management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. 
+As of the end of the period covered by this report, December 31, 2012 (the “Evaluation Date”), the Company carried out an evaluation, under the supervision and with the participation of its management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. Based upon this evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at a reasonable assurance level as of the Evaluation Date. 
+Management’s report on internal control over financial reporting — Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Management’s report on internal control over financial reporting is included on page 29 of this report. Grant Thornton LLP, the Company’s independent registered public accounting firm, has audited the effectiveness of internal control as of December 31, 2012 and issued a report thereon which is included on page 30 of this report. 
+Changes in internal control over financial reporting — Management’s evaluation of changes in internal control did not identify any changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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+Note 11: Related Party Transactions 
+Related Party Transactions 
+Marine Products Corporation 
+Effective in 2001, the Company spun off the business conducted through Chaparral Boats, Inc. (“Chaparral”), RPC’s former powerboat manufacturing segment. RPC accomplished the spin-off by contributing 100 percent of the issued and outstanding stock of Chaparral to Marine Products Corporation (a Delaware corporation) (“Marine Products”), a newly formed wholly owned subsidiary of RPC, and then distributing the common stock of Marine Products to RPC stockholders. In conjunction with the spin-off, RPC and Marine Products entered into various agreements that define the companies’ relationship. 
+In accordance with a Transition Support Services agreement, which may be terminated by either party, RPC provides certain administrative services, including financial reporting and income tax administration, acquisition assistance, etc., to Marine Products. Charges from the Company (or from corporations that are subsidiaries of the Company) for such services aggregated approximately $544,000 in 2012, $639,000 in 2011 and $689,000 in 2010. The Company’s receivable due from Marine Products for these services was approximately $94,000 as of December 31, 2012 and was approximately $3,000 as of December 31, 2011. The Company’s directors are also directors of Marine Products and all of the executive officers are employees of both the Company and Marine Products. 
+Other 
+The Company periodically purchases in the ordinary course of business products or services from suppliers, who are owned by significant officers or stockholders, or affiliated with the directors of RPC. The total amounts paid to these affiliated parties were approximately $1,676,000 in 2012, $1,469,000 in 2011 and $551,000 in 2010. 
+RPC receives certain administrative services and rents office space from Rollins, Inc. (a company of which Mr. R. Randall Rollins is also Chairman and which is otherwise affiliated with RPC). The service agreements between Rollins, Inc. and the Company provide for the provision of services on a cost reimbursement basis and are terminable on six months notice. The services covered by these agreements include office space, administration of certain employee benefit programs, and other administrative services. Charges to the Company (or to corporations which are subsidiaries of the Company) for such services and rent totaled $83,000 in 2012, $102,000 in 2011 and $94,000 in 2010. 
+A group that includes the Company’s Chairman of the Board, R. Randall Rollins and his brother Gary W. Rollins, who is also a director of the Company, and certain companies under their control, controls in excess of fifty percent of the Company’s voting power.

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+CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS 
+Effective with the spin-off in 2001, the Company began providing certain administrative services to Marine Products. The service agreements between Marine Products and the Company provide for the provision of services on a cost reimbursement basis and may be terminated upon six months notice. The services covered by these agreements include administration of certain employee benefit programs and other administrative services. Charges from the Company (or from corporations which are subsidiaries of the Company) for such services aggregated approximately $544,000 in 2012. 
+During 2012, a subsidiary of RPC conducted business with companies owned by LOR, Inc. Mr. R. Randall Rollins, Chairman, and Mr. Gary W. Rollins, Director, are officers, directors and controlling stockholders of LOR, Inc. In 2012, payments totaling approximately $1,676,000 were made to these LOR, Inc. companies primarily for the purchase of parts and repair services related to certain of RPC’s oilfield operating equipment. RPC believes the charges incurred by its subsidiary are at least as favorable as the charges that would have been incurred for similar services from unaffiliated third parties. 
+RPC receives certain administrative services including an allocation for office space from Rollins. The service agreements between Rollins and the Company provide for the provision of services on a cost reimbursement basis and are terminable on six months notice. The services covered by these agreements include office space, administration of certain employee benefit programs, and other administrative services. Charges to the Company (or to corporations which are subsidiaries of the Company) for such services and rent aggregated approximately $83,000 in 2012. 
+25 
+A group that includes the Company’s Chairman of the Board, R. Randall Rollins, his brother Gary W. Rollins who is also a director, and certain companies under their control, possesses in excess of fifty percent of the Company’s voting power. Please refer to the discussion above under the heading, “Corporate Governance and Board of Directors Committees and Meetings, Director Independence and NYSE Requirements, Controlled Company Exemption.” The group discussed above also controls in excess of fifty percent of Marine Products’ voting power. 
+Our Code of Business Conduct and Ethics for Directors and Executive Officers and Related Party Transactions Policy provides that related party transactions, as defined in Regulation S-K, Item 404(a) must be reviewed, approved and/or ratified by our Nominating and Corporate Governance Committee. As set forth in our Code, our Nominating and Corporate Governance Committee has the responsibility to ensure that it only approves or ratifies related party transactions that are in compliance with applicable law, consistent with the Company’s corporate governance policies (including those relative to conflicts of interest and usurpation of corporate opportunities) and on terms that are deemed to be fair to the Company. The Committee has the authority to hire legal, accounting, financial or other advisors as it may deem necessary or desirable and/or to delegate responsibilities to executive officers of the Company in connection with discharging its duties. A copy of the Code is available on our website at www.rpc.net under the Governance section. All related party transactions for the fiscal year ended December 31, 2012 were reviewed, approved and/or ratified by the Nominating and Corporate Governance Committee in accordance with the Code.

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+cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing
+0001065837,SKX,SKECHERS USA INC,10-K405,2001-04-02,2000-12-31,2001-04-02T04:00:00.000Z,0000950148-01-000517,v70157e10-k405.txt,FORM 10-K405,581791,0,0,https://www.sec.gov/Archives/edgar/data/1065837/000095014801000517/v70157e10-k405.txt,https://www.sec.gov/Archives/edgar/data/1065837/000095014801000517/,2000,2000,1

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+ITEM 1. BUSINESS
+Certain information contained in this report constitutes forward-looking
+statements which involve risks and uncertainties including, but not limited to,
+information with regard to our plans to increase the number of retail locations
+and styles of footwear, the maintenance of customer accounts and expansion of
+business with such accounts, the successful implementation of our strategies,
+future growth and growth rates and future increases in net sales, expenses,
+capital expenditures and net earnings. The words "believes," "anticipates,"
+"plans," "expects," "endeavors," "may," "will," "intends," "estimates," and
+similar expressions are intended to identify forward-looking statements. These
+forward-looking statements involve risks and uncertainties, and our actual
+results could differ materially from those anticipated in these forward-looking
+statements as a result of certain factors, including, but not limited to, those
+set forth under "Risk Factors" and elsewhere in this Report.
+GENERAL
+Skechers U.S.A., Inc. ("Skechers") designs and markets branded contemporary
+casual, active, rugged and lifestyle footwear for men, women and children. Our
+objective is to become a leading source of contemporary casual and active
+footwear while ensuring the longevity of both Skechers and the Skechers brand
+name through controlled, well managed growth. We strive to achieve this
+objective by developing and offering a balanced assortment of basic and
+fashionable merchandise across a wide spectrum of product categories and styles,
+while maintaining a diversified, low-cost sourcing base and controlling the
+growth of our distribution channels. We sell our products to department stores
+such as Nordstrom, Macy's, Dillards, Robinsons-May, and JC Penney and specialty
+retailers such as Footlocker, Lady Footlocker, Kid's Footlocker, Famous
+Footwear, Genesco's Journeys and Jarman chains, and Footaction U.S.A. We also
+own and operate Skechers' retail stores and sell product directly to consumers
+through mail order and web site distribution. We, through major international
+distributors, sell our products in over 100 countries and territories, with the
+exception of France and Germany where we sell directly to department stores and
+specialty retailers.
+Our product offerings of men's, women's and children's footwear appeal to a
+broad customer base between the ages of 5 and 40 years. Our strategy of
+providing a growing and balanced assortment of quality basic footwear and
+seasonal and fashion footwear with progressive styling at competitive prices
+gives Skechers this broader based customer appeal. Our men's and women's
+footwear are primarily designed with the active, youthful lifestyle of the 12 to
+25 year old age group in mind. Our product offerings include casual and utility
+oxfords, loggers, boots and demi-boots; skate, street and fashion sneakers;
+hikers, trail runners and joggers; sandals, slides and other open-toe footwear;
+and dress casual shoes.
+Our management and design team collectively possess extensive experience in
+the footwear industry. Robert Greenberg and Michael Greenberg, the Chairman of
+the Board and President, respectively, founded Skechers in 1992. Prior to that
+time, Robert Greenberg co-founded L.A. Gear, Inc. ("L.A. Gear") and, together
+with a management team which included Michael Greenberg, was instrumental in
+L.A. Gear's growth until his resignation in early 1992. The Greenbergs are
+joined on the management team by several design, merchandise, production, and
+marketing executives with experience in a broad range of industries. We believe
+this core group comprises an effective and efficient management and design team
+with the experience to recognize and respond to emerging consumer trends and
+demands.
+FOOTWEAR
+Skechers offers men's, women's and children's footwear in a broad range of
+styles, fabrics and colors. We offer a broad selection of categories in an
+effort to maximize our ability to respond to changing fashion trends and
+consumer preferences as well as to limit our exposure to any specific style. We
+believe that our products and brand offer a broad appeal to men, women and
+children.
+We introduced our first footwear line with the Skechers brand name in
+December 1992. Since that time, we have expanded our product offerings and grown
+our net sales while substantially increasing the breadth and penetration of our
+account base. We currently categorize our footwear into six product lines: (i)
+Skechers USA, (ii) Skechers Sport, (iii) Skechers Collection, (iv) Skechers
+Kids, (v) Somethin' Else from Skechers, and (vi) Skechers by Michelle K. These
+general product lines are offered in varying styles for men, women and children
+(except for Skechers Collection which is currently offered in men's styles only
+and Somethin' Else from Skechers and Skechers by Michelle K which are offered in
+women's styles only).
+Skechers USA. Our Skechers USA category includes four types of footwear: (i)
+Sport Utility, (ii) Utility, (iii) Classics, and (iv) Hikers. The Sport Utility
+category includes generally "Black & Brown" boots and shoes that have a rugged,
+less refined design with industrial-inspired fashion features. This category is
+defined by the heavy-lugged outsole and value-oriented materials employed in the
+uppers. Uppers are typically constructed of oiled suede and "Crazy Horse" or
+distressed leathers which enhance the rugged appearance of the boots and oxfords
+of this category. We design and price this category to appeal primarily to young
+men with broad acceptance
+3
+4
+across age groups. Suggested retail price points range from $45.00 to $70.00 for
+this category. Our Utility styles consist of a single category of boots that are
+designed to meet the functional demands of a work boot but are marketed as
+casual footwear. The outsoles of this category are designed to be durable and
+wearable with Goodyear welted, hardened rubber outsoles. Uppers are constructed
+of thicker, better grades of heavily oiled leathers. Utility boots may include
+steel toes, water-resistant or water-proof construction and/or materials, padded
+collars and Thermolite insulation. Styles include logger boots and demi-boots,
+engineer boots, motorcycle boots and six- and eight-eyelet work boots. Suggested
+retail price points range from $80.00 to $100.00 for this category. The Classics
+styles include comfort oriented design and performance features. Boots and shoes
+in this category employ softer outsoles which are often constructed of polyvinyl
+carbon ("PVC"). The more refined design of this footwear employs better grades
+of leather and linings than those used in our Sport Utility boots and shoes.
+Uppers are generally constructed of grizzly leather or highly-finished leather
+that produces a waxy shine. Designs are sportier than the Sport Utility category
+and feature oxfords, wingtips, monkstraps, demi-boots and boots. Suggested
+retail price points range from $55.00 to $75.00 for this category. Our Hiker
+styles consist of a single category of boots and demi-boots that include many
+comfort and technical performance features that distinguish this footwear as
+Hikers. We market this footwear primarily on the basis of style and comfort
+rather than on technical performance. However, many of the technical performance
+features in the Hikers contribute to the level of comfort this footwear
+provides. Outsoles generally consist of molded and contoured hardened rubber.
+Many designs may include gussetted tongues to prevent penetration of water and
+debris, cushioned mid-soles, motion control devices such as heel cups,
+water-resistant or water-proof construction and materials and heavier, more
+durable hardware such as metal D-rings instead of eyelets. Uppers are generally
+constructed of heavily oiled nubuck and full-grain leathers. Suggested retail
+price points range from $55.00 to $100.00 for this category.
+Skechers Sport. Skechers Sport or "Active Street" footwear includes skate
+sneakers, joggers, trail runners, sport hikers and multi-functional shoes
+inspired by cross-trainers. We distinguish our Skechers Sport category by its
+technical performance inspired looks; however, generally we do not promote the
+technical performance features of these shoes. Certain of our skate sneakers are
+designed with the technical performance features necessary for competitive level
+skateboarding. The skate sneaker styles ("Street Sneaker") are designed to
+appeal to the teenager whose casual shoe of choice is a skate or street sneaker
+and is intended to be retailed through specialty casual shoe stores and
+department stores. The other Skechers Sport footwear styles include comfort
+performance not available in the Street Sneaker styles. The Skechers Sport
+designs are light-weight constructions that include cushioned heels,
+polyurethane mid-soles, phylon and other synthetic outsoles and white leather or
+synthetic uppers such as durabuck and cordura and ballistic nylon mesh. The
+Skechers Sport features electric and technically inspired hues in addition to
+the traditional athletic white. Skechers Sport is marketed through traditional
+athletic footwear specialty retailers as well as basic existing accounts.
+Suggested retail price points range from $40.00 to $65.00 for this category.
+Skechers Collection. The Skechers Collection features dress casual shoes
+designed to complement a young man's semi-formal attire. This category features
+more sophisticated designs influenced, in part, by prevailing trends in Italy
+and other European countries. As such, this footwear is more likely than other
+categories to be sourced from Italy and Portugal. Outsoles project a sleeker
+profile, while uppers are constructed of glossy, "box" leather and aniline,
+resulting in a highly polished appearance. Designs include monkstraps, wingtips,
+oxfords, cap toes and demi-boots and often feature blind-eyelets to enhance the
+sophisticated nature of the styling. Suggested retail price points range from
+$85.00 to $130.00 for this category.
+Skechers Kid's. The Skechers Kid's line features a range of products
+including boots, shoes and sneakers and is comprised primarily of shoes that are
+designed like their adult counterparts but in "takedown" versions, so that the
+younger set can wear the same popular styles as their older siblings and
+schoolmates. This "takedown" strategy maintains the integrity of the product in
+the premium leathers, hardware and outsoles without the attendant costs involved
+in designing and developing new products. In addition, we also adapt current
+fashion from our men's and women's lines by modifying designs and choosing
+colors and materials that are more suitable to the playful image we have
+established in the children's footwear market. We also have a Skechers Lights
+category, which is a line of lighted footwear combining sequencing patterns and
+lights in the outsole and other areas of the shoes. Our children's footwear is
+offered at retail prices ranging from $20.00 to $50.00.
+Somethin' Else from Skechers. The Somethin' Else from Skechers line,
+introduced in February 2001, is a young women's line that features an array of
+stylish shoes, boots and sandals for females between the ages of 12 and 24. This
+new line is expected to be available to consumers beginning Fall 2001. We
+designed the line to be a complementary line for the junior customer who already
+wears Skechers USA and Skechers Sport styles.
+Skechers by Michelle K. The Skechers by Michelle K line, also introduced in
+February 2001, is a new dress casual junior line for trend-savvy young women
+between the ages of 18 and 34. This new line is expected to be available in Fall
+2001.
+We offer sandalized footwear which features open-toe and open-side
+constructions consistent with our offerings in the Skechers USA, Skechers Sport
+and Skechers Collection categories of footwear. Such footwear includes
+fisherman's sandals, shower sandals, beach sandals, slides, comfort-oriented
+land sandals and technically-inspired water sport sandals. Sandalized footwear
+includes both
+4
+5
+leather and synthetic constructions and may feature suede footbeds with
+form-fitting mid-soles. We typically deliver our sandalized footwear to
+retailers from February to August. Suggested retail price points range from
+$20.00 to $60.00 for this category.
+PRODUCT DESIGN AND DEVELOPMENT
+We believe that our product success is related in a large part to our ability
+to recognize trends in the footwear markets and to design products which
+anticipate and accommodate consumers' ever-evolving preferences. We strive to
+analyze, interpret and translate current and emerging lifestyle trends.
+Lifestyle trend information is compiled by our designers through various methods
+designed to monitor changes in culture and society, including (i) review and
+analysis of modern music, television, cinema, clothing, alternative sports and
+other trend-setting media, (ii) travel to domestic and international fashion
+markets to identify and confirm current trends, (iii) consultation with our
+retail customers for information on current retail selling trends, (iv)
+participation in major footwear trade shows to stay abreast of popular brands,
+fashions and styles and (v) subscription to various fashion and color
+information services. In addition, a key component of our design philosophy is
+to continually reinterpret both our basic and current successful styles in the
+Skechers image.
+We intend to continue to leverage our reputation for quality products and our
+relationships with retailers through, among other things, the introduction of
+new styles in our existing and new categories of footwear. Also, we believe our
+in stock inventory program enhances our position with retailers. This program
+increases the availability of our best-selling products, which we believe has
+contributed to more consistent product flow to our retail customers and an
+increased ability to respond to reorder demand.
+Offer a Breadth of Innovative Products. We have continued to broaden our
+product line in an effort to reach a larger consumer base. In addition,
+offering a broader range of products allows us to increase sales to our current
+customer and consumer base. We offer a wide variety of different styles of
+footwear generally in three to four different colors and material variations and
+typically in 10 to 12 different sizes. These styles span a broad spectrum of
+product categories ranging from skate and street sneakers to fashion sneakers,
+from steel toe boots with heavy-lugged soles to casual dress shoes for men. We
+have developed this breadth of merchandise offerings in an effort to improve our
+ability to respond to changing fashion trends and customer preferences, as well
+as to limit our exposure to any single industry participant. We do not believe
+that any single industry participant competes directly with us across our entire
+product offering. Although major new product introductions take place in advance
+of both the spring and the fall selling seasons, we typically introduce new
+designs in to our existing lines every 30 to 60 days to keep current with
+emerging trends.
+Design Team. All of our footwear is designed with an active, youthful
+lifestyle in mind. The design team's primary mandate is to design shoes
+marketable to the 12 to 25 year old consumer. While these designs are
+contemporary in styling, we believe that substantially all of the line appeals
+to the broader 5 to 40 year old consumer. Although many of our shoes have
+performance features, such as hikers, trail runners, skate sneakers and joggers,
+we generally do not position our shoes in the marketplace as technical
+performance shoes. Our principal goal in product design is to generate new and
+exciting footwear with contemporary and progressive style features and comfort
+enhancing performance features. We do not believe that technology is a
+differentiating factor in marketing footwear in the casual shoe industry.
+The footwear design process typically begins about nine months before the
+start of a season. Skechers' products are designed and developed by our in-house
+staff. We also utilize outside design firms on an item-specific basis to
+supplement our design efforts. Separate design teams focus on each of the men's,
+women's and children's categories, and report to our senior design executives.
+The design process is extremely collaborative; members of the design staff meet
+weekly with the heads of retail and merchandising, sales, production and
+sourcing to further refine Skechers' products to meet the particular needs of
+our markets.
+After the design team arrives at a consensus regarding the fashion themes for
+the coming season, the group then translates these themes into Skechers
+products. These interpretations include variations in product color, material
+structure and decoration, which are arrived at after close consultation with our
+production department. Prototype blueprints and specifications are created and
+forwarded to our prototype manufacturers located in Taiwan, which then forward
+design prototypes back to our domestic design team. New design concepts are
+often also reviewed by our major retail customers. Customer input not only
+allows us to measure consumer reaction to the latest designs, but also affords
+us an opportunity to foster deeper and more collaborative relationships with our
+customers. Our design team can easily and quickly modify and refine a design
+based on customer input.
+SOURCING
+A substantial portion of our products are produced in China. To date,
+products have been purchased in U.S. Dollars, although we cannot assure you that
+this will continue to be the case. We do not own or operate any manufacturing
+facilities. We believe the use of independent manufacturers increases our
+production flexibility and capacity while at the same time substantially
+reducing capital expenditures and avoiding the cost of managing a large
+production work force. We finance our production activities in part through the
+use of interest-bearing open purchase arrangements with certain of our Asian
+manufacturers. These facilities currently bear interest
+5
+6
+at a rate between 1.0% and 2.0% for 30 to 60 days financing, depending on the
+factory. We believe that the use of these arrangements affords us additional
+liquidity and flexibility. While we have long-standing relationships with many
+of our manufacturers and believe our relationships to be good, there are no
+long-term contracts between us and any of our manufacturers.
+We maintain an in-stock position for selected styles of footwear in order
+to minimize the time necessary to fill customer orders. In order to maintain an
+in-stock position, we place orders for selected footwear with our manufacturers
+prior to the time we receive customers' orders for such footwear. In order to
+reduce the risk of overstocking, we seek to assess demand for our products by
+soliciting input from our customers and monitoring retail sell-through. In
+addition, we analyze historical and current sales and market data to develop
+internal product quantity forecasts which helps reduce inventory risks.
+Asian Office. To safeguard product quality and consistency, we oversee the
+key aspects of the production process from prototyping through production to
+finished product. Monitoring is performed by our domestic production department
+and from our offices in China and Taiwan. We believe that our Asian presence
+allows us to negotiate supplier and manufacturer arrangements more effectively,
+decrease product turnaround time, and ensure timely delivery of finished
+footwear. In addition, we require our manufacturers to certify that neither
+convict, forced, indentured labor (as defined under U.S. law) nor child labor
+(as defined by the manufacturer's country) is used in the production process,
+that compensation will be paid according to local law and that the factory is in
+compliance with local safety regulations.
+Factories. Manufacturers are selected in large part on the basis of our prior
+experience with the manufacturer and the amount of available production
+capacity. We attempt to monitor our selection of independent factories to ensure
+that no one manufacturer is responsible for a disproportionate amount of our
+merchandise. We also seek to use, whenever possible, manufacturers that have
+previously produced our footwear, which we believe enhances continuity and
+quality while controlling production costs. In addition, we source product for
+styles that account for a significant percentage of our net sales from at least
+four different manufacturers. For the year ended December 31, 2000, we had four
+manufacturers which accounted for between 9% and 20%, each, of total purchases.
+Quality Control. We believe that quality control is an important and
+effective means of maintaining the quality and reputation of our products. Our
+quality control program is designed to ensure that finished goods not only meet
+our established design specifications, but also that all goods bearing our
+trademarks meet our standards for quality. Quality control personnel perform an
+array of inspection procedures at various stages of the production process,
+including examination and testing of (i) prototypes of key raw materials prior
+to manufacture, (ii) samples and materials at various stages of production and
+(iii) final products prior to shipment. Our employees are on-site at each
+of our major manufacturers to oversee key phases of production. In
+addition, unannounced visits to the manufacturing sites, to further monitor
+compliance with our manufacturing specifications, are made by our employees
+and agents.
+MARKETING AND PROMOTION
+Our marketing focus is to maintain and enhance recognition of the Skechers
+brand name as a casual, active youthful brand that stands for quality, comfort
+and design innovation. Senior management is directly involved in shaping our
+image and our advertising and promotional activities. Towards this end, we
+endeavor to spend between 8% and 10% of annual net sales in the marketing of
+our footwear through an integrated effort of advertising, promotions,
+public relations, trade shows and other marketing efforts, which we believe
+substantially heightens brand awareness.
+Advertising. We believe that our success to date is due in large part to our
+advertising strategies and methods. Our in-house marketing and advertising team
+has developed a comprehensive program to promote the Skechers brand name through
+lifestyle and image advertising. We have made a conscious effort to avoid the
+association of the Skechers name with any single category of shoe to provide
+merchandise flexibility and to aid the ability to take the brand and product
+design in the direction of evolving footwear fashions and consumer preferences.
+We use a variety of media for our national advertising. Print efforts are
+represented by one and two page ads displayed in popular fashion and lifestyle
+consumer publications that appeal to our target customer group. Our progressive
+television advertisements are primarily produced in-house and air frequently on
+top television shows. Different advertisements are created for each of the 5 to
+9, 10 to 24 and 25 to 35 year old consumer groups.
+Certain of our retail accounts feature "in-store shop" formats in which we
+provide fixtures, signage and visual merchandise assistance in a dedicated floor
+space within the store. The design of our "in store shop" utilizes our distinct
+advertising strategies to promote brand recognition and differentiate our
+presence in the store from that of our competition. The installation
+of these "in-store shops" enables us to establish premium locations within the
+retailers and we believe it aids in increased sell-through and higher maintained
+margins for our customers. Our in-house display merchandising department
+supports retailers and distributors by developing point-of-purchase advertising
+to further promote our products in stores and to leverage the brand recognition
+at the retail level.
+6
+7
+Promotions. Our in-house promotions department is also responsible for
+building national brand name recognition. Teaming up with national retailers and
+radio stations, the promotions department is responsible for cross promotions,
+which help draw customers to retail store locations.
+Public Relations. Our in-house public relations department is also
+responsible for increasing our media exposure. Our objective is to communicate
+the Skechers image to the public and news media through the active solicitation
+of fashion editorial placements, arranging interviews for our key personnel and
+coordinating local publicity and special event programs for us. During 2000, we
+received notable press coverage in print publications including the New York
+Times, the Los Angeles Times, Investors Business Daily and BusinessWeek.
+Skechers was noted in the press in BusinessWeek's top 100 hot growth companies
+and ranked in the number five position; for receiving Footwear Plus' Young
+Women's Excellence in Design award; and, in DNR, as a top footwear brand for the
+Generation Y male. With our strategy tied to promoting the newest styles
+produced by the product development team, our products are often featured in
+fashion and pop culture magazines and in a select group of films and popular
+television shows.
+Endorsements. In 2000, we signed our first celebrity endorsement agreements
+in an effort to strategically leverage and market the Skechers brand to specific
+consumer groups. We signed singer Britney Spears for an international (worldwide
+excluding the United States) print media campaign through June 2002. We signed
+actor Matt Dillon for a Skechers Collection print media campaign, which will
+appear in magazines through January 2002. We also signed actor Rob Lowe for a
+limited term print media campaign. From time to time, we may sign other
+celebrities to endorse the brand and to strategically focus marketing, but there
+are currently no other endorsements planned.
+Trade Shows. To showcase the Skechers product to footwear buyers, we
+exhibited at 21 trade shows during 2000. We pride ourselves on having innovative
+and dynamic exhibits on the show floor. Designed in-house, our state-of-the-art
+trade show exhibits feature the latest products and provide a stage show
+featuring progressive music and nightclub lighting.
+Electronic Commerce and Mail-Order Catalog. During 2000, we continued the
+production and distribution of our mail order catalog. The mail order catalog
+offers a selection of the most popular products sold at retail. Concurrent with
+the distribution of each catalog, our interactive website (www.skechers.com) is
+expanded to include the offerings of the current catalog. Our website also
+features photos, interviews and information on Skechers-sponsored events. Our
+website and mail-order catalog are intended to further enhance the Skechers
+brand image.
+DISTRIBUTION CHANNELS
+We have implemented a strategy of controlling the growth of the distribution
+channels through which our products are sold in order to protect the Skechers
+brand name, properly service customer accounts and better manage the growth of
+the business. We have limited distribution of our product to those retailers
+that we believe can best support the Skechers brand name in the market. By
+focusing on our existing accounts, we can deepen our relationships with our
+existing customers by providing a heightened level of customer service. We
+believe close relationships with our customers help us to maximize our (i)
+retail sell-through, (ii) maintained margins, (iii) inventory turns, (iv) and
+reduce our inventory markdowns and customer returns and allowances.
+Sales and Field Service Representatives. As of February 28, 2001, we had 102
+and 15 sales and field service representatives, respectively. Each of the sales
+representatives is compensated on a salary plus commission basis; the
+representatives sell Skechers products exclusively. Senior management is
+actively involved in selling to and maintaining relationships with our major
+retail accounts. For the year ended December 31, 2000, the top five sales
+persons accounted for 36.1% of our net domestic wholesale sales. One of these
+salespersons generated 14.0% of our net domestic wholesale sales for the year
+ended December 31, 2000.
+The field service representatives ensure proper presentation of our
+merchandise and point-of-purchase marketing materials. Our sales and field
+service personnel work closely with the accounts to coordinate the appropriate
+inventory level and product mix that should be carried in each store in an
+effort to help retail sell-through and enhance the customer's product margin.
+Such information is then used as a basis for developing sales projections and
+product needs for such customers. This information in turn assists us with
+scheduling production. Along with a staff of in-house customer service
+employees, we are committed to achieving customer satisfaction and to building a
+loyal customer base by providing a high level of knowledgeable, attentive and
+personalized customer service.
+Concept Stores. As of December 31, 2000, we operated 24 concept stores at
+marquee locations in major metropolitan cities. The stores are typically
+designed to create a distinctive Skechers look and feel and enhance customer
+association of the Skechers brand with current youthful lifestyle trends and
+styles. The concept stores feature modern music and lighting and present an open
+floor design to allow customers to readily view the merchandise on display.
+These concept stores serve a threefold purpose in our operating strategy. First,
+concept stores showcase a wide range of our product offerings for the current
+season, providing the customer with the entire product story. In contrast, we
+estimate that our average retail customer carries no more than 5.0% of the
+complete Skechers line.
+7
+8
+Second, retail locations are generally chosen to generate maximum marketing
+value for the Skechers brand name through signage and store front presentation.
+Third, our concept stores also serve as marketing and product testing venues by
+providing rapid product feedback. We believe that product sell-through
+information derived from our concept stores enables our sales, merchandising and
+production staff to respond quickly to market changes and new product
+introductions. We occasionally order limited production runs which may initially
+be tested in Skechers' concept stores. By working closely with store personnel,
+we obtain customer feedback that often influences product design and
+development. We believe that sales in our retail stores can help forecast sales
+in national retail stores. Such responses serve to augment sales and limit our
+inventory markdowns and customer returns and allowances. We adjust our product
+and sales strategy based upon seven to 14 days of retail sales information.
+We seek to instill enthusiasm and dedication in our concept store management
+personnel and sales associates through incentive programs and regular
+communication with store personnel. Sales associates receive commissions on
+sales with a guaranteed minimum compensation. Concept store managers receive
+base compensation plus incentive compensation based on sales. We have
+well-established concept store operating policies and procedures and utilizes an
+in-store training regimen for all new store employees. Merchandise presentation
+instructions and detailed product descriptions also are provided to sales
+associates to enable them to gain familiarity with Skechers product offerings.
+Factory and Warehouse Outlet Stores. As of December 31, 2000, we also
+operated 28 factory and warehouse outlet stores that enable us to liquidate
+excess, discontinued and odd-size inventory in a cost-efficient manner.
+Inventory in these stores is supplemented by certain first-line styles sold at
+full retail price points. The factory outlet stores are generally located in
+manufacturers' outlet centers throughout the country. Our factory outlet stores
+have enabled us to increase sales in certain geographic markets where our
+products were not previously available and to consumers who favor value-oriented
+retailers. The outlets provide opportunities for us to sell discontinued and
+excess merchandise, thereby reducing the need to sell such merchandise to
+discounters at excessively low prices. Our free-standing warehouse outlet stores
+enable us to liquidate other excess merchandise, discontinued lines and odd
+sizes. We strive to geographically position our factory and warehouse outlet
+stores to areas not supported by traditional footwear retailers that would carry
+our brand.
+Other Direct Distribution Outlets. Our mail-order catalog and website act as
+sales vehicles. We believe that these distribution channels will not become a
+significant portion of total revenues for us in the near term; however, we
+believe that they may present attractive long-term opportunities with minimal
+near-term costs.
+INTERNATIONAL OPERATIONS
+Although our primary focus is on the domestic market, we presently market our
+products in countries and territories in Europe, Asia and selected other foreign
+regions. We derive revenues and earnings from outside the United States from
+three principal sources: (i) sales of our footwear directly to foreign
+distributors who distribute such footwear to department stores and specialty
+retail stores, (ii) in France and Germany, we sell footwear directly to
+department stores and specialty retail stores and (iii) to a lesser extent,
+royalties from licensees who manufacture and distribute our products outside the
+United States.
+We believe that international distribution of our products may represent a
+significant opportunity to increase revenues and profits. Although we are in the
+early stages of our international expansion, our products are currently sold in
+more than 100 countries and territories. Our goal is to increase international
+sales, through both foreign distributors and directly, by heightening our
+international marketing presence in those countries. During 2000, we continued
+our international advertising campaigns, which are designed to establish
+Skechers as a global brand synonymous with casual shoes. We are also exploring
+further direct sales to retailers in certain European countries. In February
+2001, we announced the creation of Skechers USA Ltd., a subsidiary with its
+headquarters in London, England. Skechers USA Ltd. will organize its operations
+in the United Kingdom and Ireland and establish direct control over wholesale
+distribution, merchandising, and marketing in that region. In addition, we are
+selectively opening flagship retail stores internationally on our own or through
+joint ventures. In February and March 2001, we opened our first flagship retail
+stores on Oxford Street in London and in the prestigious Centro Mall in
+Oberhausen, Germany, respectively. We also plan to open a flagship store at the
+Forum Les Halles in Paris by the end of Spring 2001.
+DISTRIBUTION FACILITY
+We believe that strong distribution support is a critical factor in our
+operations. Once manufactured, our products are packaged in shoe boxes bearing
+bar codes and either shipped to our approximately 962,000 square feet of
+Skechers managed distribution centers located in Ontario, California, or shipped
+directly from the manufacturer to our international customers. During 2000, we
+increased our distribution capacity with the purchase of an approximately
+264,000 square foot distribution center located in Ontario, California. We lease
+the remaining distribution space of approximately 698,000 square feet.
+8
+9
+POTENTIAL LICENSING ARRANGEMENTS
+We believe that selective licensing of the Skechers brand name to
+non-footwear-related manufacturers may broaden and enhance the Skechers image
+without requiring significant capital investments or additional incremental
+operating expenses by us. From time to time, we have experimented with certain
+manufacturers on a very limited basis to study the potential impact of licensing
+the brand. We periodically review potential internationally licensing
+arrangements for footwear in various geographical regions that present favorable
+business opportunities. We believe that revenues from licensing agreements will
+not provide a significant portion of our net revenues in the near term; however,
+we believe that licensing arrangements may present attractive long-term
+opportunities with minimal near-term costs.
+BACKLOG
+We generally receive the bulk of our orders for each of the spring and fall
+seasons a minimum of three months prior to the date the products are shipped to
+customers. At December 31, 2000, our backlog was $221.6 million, compared to
+$121.7 million at December 31, 1999. While backlog orders are subject to
+cancellation by customers, we have not experienced significant cancellation of
+orders in the past and we expect that substantially all the orders will be
+shipped in fiscal 2001. However, for a variety of reasons, including the timing
+of shipments, product mix of customer orders and the amount of in-season orders,
+backlog may not be a reliable measure of future sales for any succeeding period.
+INTELLECTUAL PROPERTY RIGHTS
+We own and utilize a variety of trademarks, including the Skechers trademark.
+We have a significant number of both registrations and pending applications for
+our trademarks in the United States. In addition, we have trademark
+registrations and trademark applications in approximately 81 foreign countries.
+We also have design patents, and pending design and utility patent applications,
+in both the United States and various foreign countries. We continuously look to
+increase the number of our patents and trademarks, both domestically and
+internationally, where necessary to protect valuable intellectual property. We
+regard our trademarks and other intellectual property as valuable assets and
+believe that they have significant value in the marketing of our products. We
+vigorously protect our trademarks against infringement, including through the
+use of cease and desist letters, administrative proceedings and lawsuits.
+We rely on trademark, patent, copyright, trade secret protection,
+non-disclosure agreements and licensing arrangements to establish, protect and
+enforce intellectual property rights in our logos, tradenames and in the
+design of our products. In particular, we believe that our future success will
+largely depend on our ability to maintain and protect the Skechers trademark.
+Despite our efforts to safeguard and maintain our intellectual property rights,
+we cannot assure you that we will be successful in this regard. We cannot assure
+you that third parties will not assert intellectual property claims against us
+in the future. Furthermore, we cannot assure you that our trademarks, products
+and promotional materials or other intellectual property rights do not or will
+not violate the intellectual property rights of others, that our intellectual
+property would be upheld if challenged, or that we would, in such an event, not
+be prevented from using our trademarks or other intellectual property rights.
+Such claims, if proven, could materially and adversely affect our business,
+financial condition and results of operations. In addition, although any such
+claims may ultimately prove to be without merit, the necessary management
+attention to and legal costs associated with litigation or other resolution of
+future claims concerning trademarks and other intellectual property rights could
+materially and adversely affect our business, financial condition and results of
+operations. We have sued and have been sued by third parties for infringement of
+intellectual property. It is our opinion that none of these claims have
+materially impaired our ability to utilize our trademarks.
+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, we cannot assure you that
+these efforts will be successful or that the costs associated with protecting
+our rights in certain jurisdictions will not be prohibitive. From time to time,
+we discover products in the marketplace that are counterfeit reproductions of
+our products or that otherwise infringe upon intellectual property rights held
+by us. We cannot assure you that actions taken by us to establish and protect
+our trademarks and other intellectual property rights will be adequate to
+prevent imitation of our products by others or to prevent others from seeking to
+block sales of our products as violating trademarks and intellectual property
+rights. If we are unsuccessful in challenging a third party's products on the
+basis of infringement of our intellectual property rights, continued sales of
+such products by that or any other third party could adversely impact the
+Skechers brand, result in the shift of consumer preferences away from us and
+generally have a material adverse effect on our business, financial condition
+and results of operations.
+9
+10
+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 range
+of products, our products compete with other branded products within their
+product category as well as with private label products sold by retailers,
+including some 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, Steven Madden, Ltd. and Wolverine World Wide, Inc. Our
+athletic shoes compete with brands of athletic footwear offered by companies
+such as Nike, Inc., Reebok International Ltd., Adidas-Salomon AG and New
+Balance. Our children's shoes compete with brands of children's footwear offered
+by The Stride Rite Corporation. In varying degrees, depending on the product
+category involved, we compete on the basis of style, price, quality, comfort and
+brand name prestige and recognition, among other considerations. These and other
+competitors pose challenges to our market share in our major domestic markets
+and may make it more difficult to establish Skechers in Europe, Asia and other
+international regions. We also compete with numerous manufacturers, importers
+and distributors of footwear for the limited shelf space available for the
+display of such products to the consumer. Moreover, the general availability of
+contract manufacturing capacity allows ease of access by new market entrants.
+Many of our competitors are larger, have achieved greater recognition for their
+brand names, have captured greater market share and/or have substantially
+greater financial, distribution, marketing and other resources than us. We
+cannot assure you that we will be able to compete successfully against present
+or future competitors or that competitive pressures faced by us will not have a
+material adverse effect on our business, financial condition and results of
+operations.
+EMPLOYEES
+As of February 28, 2001, we employed 1,666 persons, 917 of which were
+employed on a full-time basis and 749 of which 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. We offer our
+employees a discount on Skechers merchandise to encourage enthusiasm for the
+product and Skechers loyalty.
+RISK FACTORS
+In addition to the other information in this Form 10-K, the following
+factors should be considered in evaluating us and our business.
+OUR FUTURE SUCCESS DEPENDS ON OUR ABILITY TO RESPOND TO CHANGING CONSUMER
+DEMANDS AND TO IDENTIFY AND INTERPRET FASHION TRENDS.
+The footwear industry is subject to rapidly changing consumer demands and
+fashion trends. Accordingly, we must identify and interpret fashion trends and
+respond in a timely manner. If we do not continue to meet changing consumer
+demands or develop successful styles in the future, then we may not be
+successful. Sometimes, we must make decisions about product designs several
+months in advance. If we fail to anticipate, identify or react appropriately to
+changes in styles and trends our failure may result in lower sales, excess
+inventories, higher inventory markdowns, and impaired brand image.
+A failure to anticipate trends may also lead to lower gross margins as a
+percentage of net sales since we may have to provide allowances and discounts to
+retailers. Conversely, if we fail to anticipate consumer demand for our
+products, we may experience inventory shortages. Inventory shortages might delay
+shipments to customers, negatively impact retailer and distributor
+relationships, and diminish brand loyalty.
+CONSUMERS MAY CONSIDER OUR BRAND OUTMODED.
+Even if we react appropriately to changes in consumer preferences, there is
+always a risk that consumers may consider our brand image to be outmoded or
+associate the brand with styles of footwear that are no longer popular. As a
+result of these risks, several footwear companies have experienced periods of
+rapid growth in revenues and earnings followed by periods of declining sales and
+losses which, in some cases, have resulted in a decision to cease doing
+business.
+OUR NEW STYLES OF FOOTWEAR MAY NOT BE POPULAR.
+We intend to market new lines of footwear in the future. Demand for and
+market acceptance of these new products are uncertain. In addition, achieving
+market acceptance for new products may require substantial marketing efforts. We
+cannot be sure that our marketing efforts will be successful or that we will
+have the funds necessary to sufficiently market the new products. Our growth and
+profitability could be materially and adversely impacted if our marketing
+efforts and new products are not successful.
+10
+11
+OUR BUSINESS MAY BE ADVERSELY AFFECTED IF ANY STYLE OF FOOTWEAR REPRESENTS A
+SUBSTANTIAL PORTION OF OUR NET SALES.
+If consumer demand for a style or group of styles that represents a
+substantial portion of our net sales decreases then our business may be
+adversely affected. In the past, we have experienced decreased consumer demand
+for a style of footwear that represented a significant portion of our sales and
+our gross sales were adversely affected as a result. This style no longer
+represents a significant portion of our sales. We now offer a broad range of
+products and no style comprised over 10% of our gross wholesale sales, net of
+discounts, for the year ended December 31, 2000. Nonetheless, it is always
+possible that fluctuations in sales of styles that represent a significant
+portion of our net sales will occur in the future. Such fluctuations could have
+harm our business.
+IF WE FAIL TO MANAGE OUR GROWTH EFFECTIVELY, IT COULD HAVE AN ADVERSE EFFECT ON
+OUR BUSINESS.
+In the past, we have experienced rapid growth and we intend to continue to
+pursue an aggressive growth strategy by expanding our marketing and promotion
+efforts, frequently introducing new products, broadening our lines of casual and
+performance footwear, and increasing our international market. Our growth
+strategy may place a significant strain on our finances, management and other
+resources. Our future performance will depend on various factors, including our
+ability to manage increased sales and additional retail stores, manage change in
+our domestic and international operations, attract, train, manage and retain
+management, sales, marketing and other key personnel, and continue to improve
+our operational and financial control systems, infrastructure and management
+information systems. We cannot be sure that these expansion efforts will be
+successfully completed or that they will not interfere with existing operations.
+If our management cannot manage growth effectively it could harm our business.
+WE MAY BE UNABLE TO SUSTAIN OUR PRIOR RATE OF GROWTH.
+We have grown quickly since we started our business. Our net sales
+increased at a compound annual growth rate of 39.7% from $90.8 million in 1994
+to $675.0 million in 2000. From 1999 to 2000, we experienced a 59% increase in
+net sales and 109% increase in earnings from operations. Our future rate of
+growth will depend upon, among other things, the continued success of our
+efforts to expand our footwear offerings and distribution channels. Our
+profitability in any calendar quarter depends, in part, upon the timing and
+level of advertising and trade show expenditures, and shipments of seasonal
+merchandise. Our rate of growth may decline or we may not be profitable in any
+quarter of any succeeding fiscal year. Furthermore, as our business becomes
+larger, we may not be able to maintain our prior growth rate. Our current growth
+strategy includes further penetration of existing retail accounts, opening
+retail stores in selected locations, increasing our international operations,
+and distributing in countries where we have little distribution experience or
+where our brand name is not well known. Our future success depends on various
+factors, including (i) the strength of our brand name, (ii) market success of
+current and new products, (iii) competitive conditions and our ability to manage
+increased sales and additional retail stores, (iv) the availability of desirable
+locations, and (v) increasing sales to existing customers. We cannot assure you
+that our current growth strategy or other growth strategies will be successful
+or that our sales or earnings will increase as a result of the implementation of
+such efforts.
+OUR BUSINESS MAY BE NEGATIVELY IMPACTED AS A RESULT OF CHANGES IN THE ECONOMY.
+Our industry is dependent on the general economic environment and levels of
+consumer spending which affect not only the ultimate consumer, but also
+retailers, our primary direct customers. Purchases of footwear tend to decline
+in periods of recession or uncertainty regarding future economic prospects, when
+consumer spending, particularly on discretionary items, declines. We may not be
+able to increase our sales to existing customers, open and operate new retail
+stores or increase our international operations on a profitable basis or improve
+our earnings from operations as a percentage of net sales. As a result, our
+operating results may be adversely affected by downward trends in the economy or
+the occurrence of events that adversely affect the economy in general.
+Furthermore, in anticipation of continued increases in net sales, we have
+significantly expanded our infrastructure and workforce to achieve economies of
+scale. Because these expenses are fixed in the short term, operating results and
+margins could be adversely impacted if we do not continue to grow as
+anticipated.
+OUR INTERNATIONAL SALES AND OPERATIONS COULD ADVERSELY EFFECT OUR BUSINESS.
+Substantially all of our net sales for the year ended December 31, 2000
+were derived from sales of footwear manufactured in other foreign countries,
+with most manufactured in China. We also sell our footwear in several foreign
+countries and plan to increase our international sales efforts as part of our
+growth strategy. Foreign manufacturing and sales are subject to a number of
+risks, including (i) work stoppages, (ii) transportation delays, (iii) changing
+economic conditions, (iv) expropriation, (v) international political tension,
+(vi) political and social unrest, (vii) nationalization, (viii) the imposition
+of tariffs, (ix) import and export controls and other nontariff barriers, (x)
+exposure to different legal standards (particularly with respect to intellectual
+property), (xi) compliance with foreign laws, and (xii) changes in domestic and
+foreign governmental policies. Each of these risks could harm our business.
+11
+12
+In addition, if we, or our suppliers, violate U.S. laws or regulations we
+may be subjected to extra duties, significant monetary penalties, the seizure
+and the forfeiture of the products we are attempting to import or the loss of
+our import privileges. Possible violations of U.S. 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 under U.S. or
+foreign laws. These risks could render our conduct of business in a particular
+country undesirable or impractical and have a negative impact on our business,
+financial condition and results of operations. We continue to monitor the
+political and economic stability of the Asian countries with which we conduct
+business.
+WE COULD BE ADVERSELY AFFECTED IF THE CHINESE GOVERNMENT CHANGES ITS POLICIES
+TOWARDS THE UNITED STATES OR NATIONALIZES PRIVATE ENTERPRISE.
+Over the past several years, the Chinese government has pursued economic
+reform policies and has encouraged greater private economic activity and
+economic decentralization. The Chinese government may not continue to pursue
+these policies or may significantly alter them to our detriment from time to
+time without notice. Manufacturers with whom we work could be affected by
+changes in policies by the Chinese government resulting in changes in laws,
+regulations, or their interpretation, the imposition of confiscatory taxation,
+restrictions on currency conversion or imports, and changes in the sources of
+supply. These risks could harm our business.
+WE COULD SUFFER LOSSES FROM CORRUPT OR FRAUDULENT BUSINESS PRACTICES.
+Conducting business in China is inherently risky. Corruption, extortion,
+bribery, pay-offs, theft and other fraudulent practices are common in China. We
+could suffer losses from these practices if we do not implement successful
+preventative measures.
+WE COULD BE ADVERSELY BE AFFECTED BY CURRENCY FLUCTUATIONS.
+Even though we have not experienced material losses as a result of
+fluctuations in the value of foreign currencies, our net sales and cost of goods
+sold are denominated in U.S. Dollars and we do not engage in currency hedging,
+therefore we could be adversely affected by currency fluctuations in the future.
+TRADE RESTRICTIONS COULD HARM OUR BUSINESS.
+Our products are subject to certain quotas and restrictions on foreign
+products in some of the foreign countries where our footwear is sold. To date,
+these quotas have not had a material adverse effect on our business, financial
+condition or results of operations. However, the quotas or restrictions may be
+modified or altered at any time. In addition, countries where our products are
+manufactured may impose new quotas or adjust existing quotas or other
+restrictions on exported products. The United States might also impose new
+duties, tariffs and other restrictions on imported products, any of which could
+have a material adverse effect on our business, financial condition and results
+of operations. New duties, tariffs or other restrictions could also affect our
+ability to import products at our current levels or at increased levels and,
+consequently, harm our business. If tariffs or duties on our products are raised
+or made more restrictive, it may result in higher costs and could negatively
+impact our business.
+WE DEPEND ON CONTRACT MANUFACTURERS.
+Our footwear products are currently manufactured by independent contract
+manufacturers. For the year ended December 31, 2000, the top four manufacturers
+of our manufactured products produced approximately 9%-20% each of total
+purchases. We do not have long-term contracts with manufacturers and we compete
+with other footwear companies for production facilities. Although we have
+established close working relationships with our principal manufacturers, we
+must maintain those relationships and develop new relationships with additional
+manufacturers. It is possible that we may experience difficulties with these
+manufacturers, including reductions in the availability of production capacity,
+failure to meet our quality control standards, failure to meet production
+deadlines or increased manufacturing costs. This could result in cancellation of
+orders, refusal to accept deliveries or a reduction in purchase prices, any of
+which could harm our business.
+If our current manufacturers cease doing business with us, we could
+experience an interruption in the manufacture of our products, which could have
+a material adverse effect on our business, financial condition and results of
+operations. Although we believe that we could find alternative manufacturers
+within 90 to 120 days, new manufacturing relationships involve various
+uncertainties, including payment terms, costs of manufacturing, adequacy of
+manufacturing capacity, quality control, and timeliness of delivery. We may be
+unable to establish new manufacturing relationships that will be as favorable as
+the relationships we have now. If we are unable to provide products consistent
+with our standards or the manufacture of our footwear is delayed, our business
+could be harmed.
+12
+13
+OUR BUSINESS COULD BE NEGATIVELY IMPACTED IF OUR CONTRACT MANUFACTURERS VIOLATE
+THE LAW.
+We require our independent contract manufacturers to operate in compliance
+with applicable laws and regulations. We also require our manufacturers to
+certify that neither convict, forced, indentured labor (as defined under U.S.
+law) nor child labor (as defined by the manufacturer's country) is used in the
+production process, that compensation will be paid in accordance with local law
+and that the factory is in compliance with local safety regulations. Although we
+promote ethical business practices and our sourcing personnel periodically visit
+and monitor the operations of our independent contract manufacturers, we do not
+control these vendors or their labor practices. If one of our independent
+contract manufacturers violates the labor or other laws, it could result in
+adverse publicity for us and harm our business. In addition, if the United
+States Customs Service determines that laws or regulations have been violated or
+that we failed to exercise reasonable care in our obligations to comply with
+these laws or regulations we may incur significant penalties that maybe monetary
+or otherwise.
+WE ARE DEPENDENT ON KEY CUSTOMERS.
+During the year ended December 31, 2000, our net sales to our five largest
+customers accounted for approximately 26.5% of total net sales. No one customer
+accounted for 10.0% or more of net sales during the year ended December 31,
+2000. Although we have long-term relationships with many of our customers, our
+customers do not have a contractual obligation to purchase our products and we
+cannot be certain that we will be able to retain our existing major customers.
+Furthermore, the retail industry has experienced consolidation, contractions and
+closings. If there are further consolidations, contractions or closings in the
+future, we may lose customers or be unable to collect accounts receivables of
+major customers in excess of amounts that we have insured. As of December 31,
+2000, we had one customer that accounted for 15.3% of trade accounts receivable.
+If we lose a major customer, experience a significant decrease in sales to a
+major customer, or are unable to collect the accounts receivable of a major
+customer in excess of amounts insured, our business could be harmed.
+WE DO NOT HAVE NON-COMPETITION AGREEMENTS WITH OUR SALESPERSONS.
+We have entered into employment agreements with each of our salespersons.
+Although these employment agreements require our salespersons to keep certain
+information confidential, we have not entered into separate non-competition
+agreements with them. In addition, if a salesperson leaves or is terminated,
+service may be disrupted to the customers who were serviced by this salesperson.
+These factors could harm our business.
+SEASONAL FLUCTUATIONS IN DEMAND FOR FOOTWEAR AND DELIVERY DELAYS MAY AFFECT OUR
+QUARTERLY NET SALES.
+Sales of footwear products have historically been somewhat seasonal in
+nature with the strongest sales generally occurring in the third and fourth
+quarters. During 2000, we continued to address seasonal fluctuations by
+introducing new styles that addressed seasonal demands. We have experienced and
+expect to continue to experience some variability in our net sales, operating
+results and net earnings on a quarterly basis.
+Our domestic customers generally assume responsibility for scheduling
+pickup and delivery of purchased products. Delays in scheduling or pickup which
+are beyond our control could materially negatively impact our net sales and
+results of operations for any given quarter. We believe the factors which
+influence this variability include (i) the timing of our introduction of new
+footwear products, (ii) the level of consumer acceptance of new and existing
+products, (iii) general economic and industry conditions that affect consumer
+spending and retail purchasing, (iv) the timing of the placement, cancellation
+or pickup of customer orders, (v) increases in the number of employees and
+overhead to support growth, (vi) the timing of expenditures in anticipation of
+increased sales and customer delivery requirements, (vii) the number and timing
+of new retail store openings, and (viii) actions by competitors. Due to these
+and other factors, the results for any particular quarter are not necessarily
+indicative of results for the full year. This cycle and any related fluctuations
+in consumer demand could have a material adverse effect on our business,
+financial condition and results of operations.
+IF WE FAIL TO MAINTAIN APPROPRIATE LEVELS OF INVENTORY, OUR BUSINESS COULD BE
+HARMED.
+We place orders with our manufacturers for some of our products prior to
+the time we receive all of our customers' orders. We do this to minimize
+purchasing costs, the time necessary to fill customer orders, and the risk of
+non-delivery. We also maintain an inventory of certain products that we
+anticipate will be in greater demand. However, we cannot assure you that we will
+be able to sell the products we have ordered in advance from manufacturers or
+that we have in our inventory. Inventory levels in excess of customer demand may
+result in inventory write-downs and the sale of excess inventory at discounted
+prices could significantly impair our brand image and could have a material
+adverse effect on our business, financial condition and results of operations.
+13
+14
+WE MAY HAVE SIGNIFICANT CAPITAL REQUIREMENTS AND EXPENDITURES AS A RESULT OF OUR
+AGGRESSIVE GROWTH STRATEGY.
+We expect that cash flow from operations, available borrowings under our
+revolving line of credit, cash on hand and our financing arrangements will be
+sufficient to provide us with the liquidity to fund our anticipated working
+capital and capital requirements through 2001. We will, however, have
+significant working capital requirements and capital expenditures as a result of
+our aggressive growth strategy. Our future capital requirements will depend on
+factors such as (i) the levels at which we maintain inventory, (ii) the market
+acceptance of our footwear, (iii) the levels of promotion and advertising
+required to promote our footwear, (iv) the extent to which we invest in new
+product design, (v) improvements to our existing product design, and (vi) the
+number and timing of new store openings.
+If available funds are insufficient to fund our future activities, we may
+need to raise additional funds through public or private financing. We cannot be
+sure that additional financing will be available or that, if available, it can
+be obtained on terms that will be favorable to us. If we fail to obtain such
+financing, we may not be able to complete our planned expansion and our business
+could be harmed. In addition, if we raise additional capital through the sale of
+additional equity or convertible securities, our stockholders' ownership may be
+diluted.
+WE DEPEND ON KEY PERSONNEL TO MANAGE OUR BUSINESS EFFECTIVELY IN A RAPIDLY
+CHANGING MARKET, AND IF WE ARE UNABLE TO RETAIN EXISTING PERSONNEL, OUR BUSINESS
+COULD BE HARMED.
+Our future success depends upon the continued services of Robert Greenberg,
+Chairman of the Board and Chief Executive Officer, Michael Greenberg, President,
+and David Weinberg, Executive Vice President and Chief Financial Officer. Each
+of these officers currently has a three-year employment contract with us, each
+agreement was entered into on June 14, 1999. These agreements do not have
+non-competition provisions upon termination of employment. The loss of the
+services of any of these individuals or any other key employee could have a
+material adverse effect on our business, financial condition and results of
+operations. We maintain $5.0 million of "key man" life insurance on the life of
+Robert Greenberg. Our future success also depends on our ability to identify,
+attract and retain additional qualified personnel. Competition for employees in
+our industry is intense. Furthermore, we may not be successful in identifying,
+attracting and retaining qualified employees in the future. The loss of key
+employees or the inability to hire or retain qualified employees in the future
+could harm our business.
+ONE PRINCIPAL STOCKHOLDER IS ABLE TO CONTROL SUBSTANTIALLY ALL MATTERS REQUIRING
+A VOTE OF OUR STOCKHOLDERS.
+Robert Greenberg, Chairman of the Board and Chief Executive Officer,
+beneficially owns 72.7% of our outstanding Class B Common Stock. The holders of
+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 share while holders
+of Class B Common Stock are entitled to ten votes per share on all matters
+submitted to a vote of the stockholders. As a result, Mr. Greenberg holds
+approximately 69.0% of the aggregate number of votes eligible to be cast by our
+stockholders. Therefore, Mr. Greenberg is able to control substantially all
+matters requiring approval by our stockholders. Matters that require the
+approval of our stockholders include the election of directors and the approval
+of mergers or other business combination transactions. Mr. Greenberg also has
+control over our management and affairs. As a result of such control, certain
+transactions are not possible without the approval of Mr. Greenberg, including,
+proxy contests, tender offers, open market purchase programs, or other
+transactions that can give our stockholders the opportunity to realize a premium
+over the then-prevailing market prices for their shares of Class A Common Stock.
+The differential in the voting rights may adversely affect the value of the
+Class A Common Stock to the extent that investors or any potential future
+purchaser view the superior voting rights of the 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
+such a transaction would be beneficial to our stockholders. Mr. Greenberg's
+substantial beneficial ownership position, together with the authorization of
+Preferred Stock, the disparate voting rights between the Class A and Class B
+Common Stock, the classification of the Board of Directors and the lack of
+cumulative voting in our certificate of incorporation and bylaws, may have the
+effect of delaying, deferring or preventing a change in control, may discourage
+bids for our Class A Common Stock at a premium over the market price of the
+Class A Common Stock and may adversely affect the market price of the Class A
+Common Stock.
+WE CANNOT ASSURE YOU THAT THE TRADING MARKET FOR OUR CLASS A COMMON STOCK WILL
+REMAIN ACTIVE, AND THE PRICE OF OUR STOCK MAY BE VOLATILE.
+The market price of our Class A Common Stock has been extremely volatile.
+During 2000, our Class A Common Stock reached a high of $19.94 per share and a
+low of $3.25. On December 31, 2000, the closing market price was $15.50 per
+share. The market
+14
+15
+price for shares of our Class A Common Stock may continue to fluctuate based
+upon a number of factors, including, without limitation (i) business
+performance, (ii) news announcements, (iii) quarterly fluctuations in our
+financial results, (iv) changes in earnings estimates, (v) recommendations by
+analysts, (vi) changes in general economic and market conditions, or (vii) a
+failure to meet the expectations of securities analysts or investors in a future
+quarter. These same factors could have a material adverse effect on the market
+price of our Class A Common Stock.
+THE SALES OF SUBSTANTIAL AMOUNTS OF OUR CLASS A COMMON STOCK IN THE PUBLIC
+MARKET OR THE PROSPECT OF SUCH SALES COULD MATERIALLY AND ADVERSELY AFFECT THE
+MARKET PRICE OF THE CLASS A COMMON STOCK.
+As of March 26, 2001, we had outstanding 12,546,972 shares of Class A
+Common Stock. In addition, we had outstanding 23,505,451 shares of Class B
+Common Stock, all of which are convertible into Class A Common Stock on a
+share-for-share basis at the election of the holder or upon transfer or
+disposition to certain persons. The 12,546,972 shares of Class A Common Stock
+are eligible for sale in the public market without restriction. The 23,505,451
+shares of Class B Common Stock are restricted in nature and are saleable
+pursuant to Rule 144 under the Securities Act of 1933.
+As of March 26, 2001, Robert Greenberg, Chairman of the Board and Chief
+Executive Officer, and Michael Greenberg, President, beneficially own an
+aggregate of 18,948,619 shares of Class B Common Stock. Robert and Michael
+Greenberg have also received certain registration rights to sell shares of Class
+A Common Stock which will be issuable upon conversion of their shares of Class B
+Common Stock in the public market. Shares of Class A Common Stock reserved for
+issuance pursuant to our Stock Option Plan and the 1998 Employee Stock Purchase
+Plan have also been registered under the Securities Act of 1933.
+SPECIAL NOTE ON FORWARD LOOKING STATEMENTS AND REPORTS PREPARED BY ANALYSTS.
+The Form 10-K contains or incorporates forward-looking statements. You can
+identify these forward-looking statements by our use of the words "believes,"
+"anticipates," "plans," "expects," "endeavors," "may," "will," "intends,"
+"estimates" and similar expressions, whether in the negative or affirmative.
+Although we believe that these forward-looking statements reflect our plans,
+intentions and expectations reasonably, we may not actually achieve these plans,
+intentions or expectations. In addition, the risks included here are not
+exhaustive. Other sections of this report may include additional factors which
+could adversely impact our business and financial performance. Moreover, we
+operate in a very competitive and rapidly changing environment. New risk factors
+emerge from time to time and we cannot predict all such risk factors, nor can we
+assess the impact of all such risk factors on our business or the extent to
+which any factor, or combination of factors, may cause actual results to differ
+materially from those contained in any forward looking statements. Given these
+risks and uncertainties, investors should not place undue reliance on
+forward-looking statements as a prediction of actual results. Investors should
+also be aware that while we do, from time to time, communicate with securities
+analysts, we do not disclose any material non-public information or other
+confidential commercial information to them. Accordingly, individuals should not
+assume that we agree with any statement or report issued by any analyst,
+regardless of the content of the report. Thus, to the extent that reports issued
+by securities analysts contain any projections, forecasts or opinions, such
+reports are not our responsibility.

raw/filings/0001065837/2000/0000950148-01-000517/item13.txt

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+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 14A within 120 days after the end of our 2000 fiscal year.
+25
+26

raw/filings/0001065837/2000/0000950148-01-000517/rpt_disclosure.txt

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+CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
+Shares of Class A Common Stock issuable upon conversion of shares of Class
+B Common Stock held by the Greenberg Family Trust and Michael Greenberg,
+President of the Company, are subject to certain registration rights. The
+Company entered into a registration rights agreement with the Greenberg Family
+Trust and Michael Greenberg pursuant to which the Company agreed that it will,
+on up to two separate occasions per year, register up to one-third of the shares
+of Class A Common Stock issuable upon conversion of their Class B Common Stock
+beneficially owned as of the closing of the Company's initial public offering of
+its Class A Common Stock by each such stockholder in any one year, provided,
+among other conditions, that the underwriters of any such offering have the
+right to limit the number of shares included in such registration. The Company
+also agreed that, if it shall cause to be filed with the Securities and Exchange
+Commission a registration statement, each such stockholder shall have the right
+to include up to one-third of the shares of Class A Common Stock issuable upon
+conversion of their Class B Common Stock beneficially owned as of the closing of
+the Company's initial public offering of its Class A Common Stock by each of
+them in such registration statement provided, among other conditions, that the
+underwriters of any such offering have the right to limit the number of shares
+included in such registration. All expenses of such registrations shall be at
+the Company's expense.
+John Quinn, a director of the Company, is a principal of the law firm of
+Riordan & McKinzie which provides legal services to the Company. During 2000,
+the Company was charged $181,111 by Riordan & McKinzie for providing legal
+services.
+The Company has entered into employment agreements with certain executive
+officers. See "Executive Compensation -- Employment Agreements."
+The Company believes that all of the foregoing transactions were on terms
+no less favorable than those that could have been received from unrelated third
+parties.
+14
+17

raw/filings/0001065837/2001/0000950148-02-000847/filing_metadata.csv

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+cik,ticker,company_name,form,filing_date,report_date,acceptance_datetime,accession_number,primary_document,primary_doc_description,size,is_xbrl,is_inline_xbrl,document_url,filing_index_url,year,fiscal_year,is_primary_filing
+0001065837,SKX,SKECHERS USA INC,10-K405,2002-04-01,2001-12-31,2002-04-01T05:00:00.000Z,0000950148-02-000847,v80061e10-k405.txt,"FORM 10-K405 FOR DECEMEBER 31, 2001",544635,0,0,https://www.sec.gov/Archives/edgar/data/1065837/000095014802000847/v80061e10-k405.txt,https://www.sec.gov/Archives/edgar/data/1065837/000095014802000847/,2001,2001,1

raw/filings/0001065837/2001/0000950148-02-000847/item1.txt

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+ITEM 1. BUSINESS
+Certain information contained in this report constitutes forward-looking
+statements which involve risks and uncertainties including, but not limited to,
+information with regard to our plans to increase the number of retail locations
+and styles of footwear, the maintenance of customer accounts and expansion of
+business with such accounts, the successful implementation of our strategies,
+future growth and growth rates and future increases in net sales, expenses,
+capital expenditures and net earnings. The words "believes," "anticipates,"
+"plans," "expects," "endeavors," "may," "will," "intends," "estimates," and
+similar expressions are intended to identify forward-looking statements. These
+forward-looking statements involve risks and uncertainties, and our actual
+results could differ materially from those anticipated in these forward-looking
+statements as a result of certain factors, including, but not limited to, those
+set forth under "Risk Factors" and elsewhere in this Report.
+GENERAL
+We design and market a collection of contemporary footwear for men, women
+and children under the Skechers brand, one of the most recognized names in the
+footwear industry. Our footwear reflects a combination of style, quality and
+value that appeals to a broad range of customers. Our shoes are sold through a
+wide range of department stores and leading specialty stores, a growing network
+of our own retail stores and our e-commerce website. Our objective is to
+continue to profitably grow our domestic operations, while leveraging our brand
+name to expand internationally.
+We seek to offer consumers a collection of fashionable footwear that
+satisfies their casual, active and dress footwear needs. Our product line
+currently consists of over 1,500 active styles that are organized in seven
+distinct collections. Our core customer is a style-conscious consumer between
+the ages of 12 and 25 who is attracted to our youthful brand image and fashion
+forward designs. Over the last several years, we have introduced and expanded
+several footwear lines that have broadened our customer base. These shoes
+combine styling themes found elsewhere in our product line with colors and
+materials that reflect a playful image appropriate for children. We have also
+recently introduced or expanded several other lines such as Skechers Collection
+and Skechers by Michelle K that appeal to young adults interested in
+sophisticated fashions for the workplace and social occasions.
+We believe that a well-recognized brand is an important element for success
+in the footwear business. We have aggressively promoted the Skechers brand
+through a comprehensive marketing campaign. This ongoing program has included
+endorsements from celebrities such as Britney Spears, Rick Fox, Robert Downey,
+Jr., Matt Dillon and Rob Lowe, print advertisements in publications such as GQ,
+Vogue and Seventeen and commercials aired on major networks and leading cable
+channels such as MTV, ESPN and Nickelodeon. We believe that this campaign, which
+is image oriented rather than product specific, has resulted in a high level of
+recognition of the Skechers brand across a variety of footwear categories.
+Product Lines
+In December 1992, we introduced our first Skechers-branded line called
+Skechers Sport Utility Footwear. Since that time, we have expanded our product
+offerings and grown our net sales while substantially increasing the breadth and
+penetration of our account base. Each of our product lines benefits from the
+umbrella of the Skechers brand, which is recognized for contemporary and
+progressive styling, quality, comfort, and affordability. To promote innovation
+and brand relevance, we manage our product lines separately by utilizing
+dedicated design and marketing teams. Our product lines share back office
+services in order to limit our operating expenses and fully utilize our
+management's vast experience in the footwear industry.
+Skechers USA. Our Skechers USA category for men and women includes six types
+of footwear: (i) Casuals, (ii) Utility, (iii) Steel Toe, (iv) Classics, (v)
+Outdoor, and (vi) Comfort (for men only).
+- The Casuals category includes "Black & Brown" boots and shoes that
+generally have a rugged, less refined design - some with
+industrial-inspired fashion features. This category is defined by the
+heavy-lugged outsole and value-oriented materials employed in the
+uppers. We design and price this category to appeal primarily to young
+persons with broad acceptance across age groups. Suggested retail price
+points range from $45.00 to $70.00 for this category.
+3
+- Our Utility styles consist of a single category of boots that are
+designed to meet the functional demands of a work boot but are marketed
+as casual footwear. The Utility outsoles are designed to be durable and
+wearable with Goodyear welted and hardened rubber outsoles. Uppers are
+constructed of thicker, better grades of heavily oiled leathers, and may
+include water-resistant or waterproof construction and/or materials,
+padded collars and Thermolite insulation. Styles include logger boots
+and demi-boots, engineer boots, motorcycle boots and six- and
+eight-eyelet work boots. Suggested retail price points range from $80.00
+to $100.00 for this category.
+- Steel Toe, an expanded category within Skechers USA, includes boots,
+shoes and athletic sneakers with steel toe construction. This category
+is designed for men and women whose jobs have certain safety
+requirements. Suggested retail price points range from $45.00 to $100.00
+for this category.
+- The Classics category of boots and shoes employ softer outsoles, which
+are often constructed of polyvinyl carbon ("PVC"). The more refined
+design of this footwear utilizes better grades of leather and linings.
+Designs are sportier than the Casuals category and feature oxfords,
+wingtips, monk straps, demi-boots and boots. Suggested retail price
+points range from $55.00 to $75.00 for this category.
+- Our Outdoor styles primarily consist of hiker-influenced constructions
+that include boots and shoes. While this category includes many comfort
+and technical performance features, we market it primarily on the basis
+of style and comfort rather than on performance. However, many of the
+technical performance features in the Outdoor category contribute to the
+level of comfort this footwear provides. Outsoles generally consist of
+molded and contoured hardened rubber. Many designs may include gussetted
+tongues to prevent penetration of water and debris, cushioned mid-soles,
+motion control devices such as heel cups, water-resistant or water-proof
+construction and materials and heavier, more durable hardware such as
+metal D-rings instead of eyelets. Uppers are generally constructed of
+heavily oiled nubuck and full-grain leathers. Suggested retail price
+points range from $55.00 to $100.00 for this category.
+- Launched in stores in Fall 2001, Skechers Comfort is the latest category
+of Skechers USA. With comfortable outsoles, more cushioned insoles and
+leather uppers, the line of stylish casuals is for trend-savvy men of
+all ages who want more edge in their black and brown footwear. Skechers
+Comfort is intended to be available in many of the same stores that
+carry Skechers USA as well as additional mid-tier and better department
+stores. Suggested retail price points range from $55.00 to $75.00 for
+this category.
+Skechers Sport. Our Skechers Sport footwear for men and women includes (i)
+Joggers, Trail runners, Sport hikers, "Terrainers" (multi-functional shoes
+inspired by cross-trainers), (ii) Court, and (iii) "Street" active sneakers. We
+distinguish our Skechers Sport category by its technical performance-inspired
+looks; however, generally we do not promote the technical performance features
+of these shoes.
+- Our Jogger, Trail runner, Sport hiker and Terrainer designs are
+lightweight constructions that include cushioned heels, polyurethane
+midsoles, phylon and other synthetic outsoles, and white 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
+category features earth tones and athletic-inspired hues with popular
+colors in addition to the traditional athletic white. The Jogger, Trail
+runner, Sport hiker and Terrainer styles are marketed through athletic
+footwear specialty retailers as well as basic existing accounts.
+Suggested retail price points range from $40 to $80 for this
+category.
+- The Court category is inspired from classic court shoes and includes
+technical features, but is not meant to be a performance shoe. The court
+shoes feature lightweight constructions that include polyurethane and
+phylon midsoles, rubber low-profile outsoles, and some with heel airbag
+inserts for additional comfort and performance. The uppers are mostly
+mid-cut with some low tops, and constructed with better quality smooth,
+full-grain and tumbled leathers, typically in white. The court styles
+are marketed through athletic footwear specialty retailers as well as
+basic existing accounts. Suggested retail price points range from $40.00
+to $70.00 for this category.
+- Street active sneakers are everyday, everywhere casual shoes for females
+of all ages. Active sneakers are intended to be retailed through
+specialty casual shoe stores and department stores. Suggested retail
+price points range from $40.00 to $65.00 for this category.
+4
+Skechers Collection. The Skechers Collection line features stylish dress
+casual, dress and EuroSport shoes for the fashion-forward young male consumer.
+With some basic "essential" styles, this category is primarily comprised of more
+sophisticated designs influenced, in part, by prevailing trends in Italy and
+other European countries. As such, this footwear is more likely than other
+categories to be sourced from Italy and Portugal. The dress and dress casuals
+include classic tailored and fashion-forward square, rounder and pointed lasts
+in a variety of styles, such as bicycle toes, monk straps, wingtips, oxfords,
+cap toes, demi-boots and boots. The outsoles project a sleeker profile and can
+be either man-made or leather. The uppers are in high-quality leathers including
+glossy, "box," and aniline. Inspired by the latest in European fashion,
+EuroSport blends classic dress casual styling with sport to create a versatile
+and comfortable casual shoe. First delivered in 2001, EuroSport is marked by
+details, high-quality leathers and suede in multiple colorations, and
+sport-inspired rubber outsoles. We have promoted Skechers Collection with
+advertising campaigns featuring Rick Fox, Robert Downey, Jr., Matt Dillon and
+Robe Lowe. Suggested retail price points range from $65.00 to $155.00 for this
+category.
+Skechers Kids. The Skechers Kids line features a range of products including
+boots, shoes and sneakers. Comprised primarily of shoes that are designed like
+their adult counterparts but in "takedown" versions, the line offers the younger
+set the same popular styles as their older siblings and schoolmates. This
+"takedown" strategy maintains the product integrity with premium leathers,
+hardware and outsoles without the attendant costs involved in designing and
+developing new products. In addition, we adapt current fashion from our men's
+and women's lines by modifying designs and choosing colors and materials that
+are more suitable to the playful image we have established in the children's
+footwear market. Skechers Kids includes variations on Skechers Sport, Skechers
+USA and Skechers Collection adult shoes. Unique to Skechers Kids is S-Lights, a
+line of lighted footwear combining sequencing patterns and lights in the outsole
+and other areas of the shoes. Our children's footwear is offered at retail
+prices ranging from $20.00 to $50.00.
+Somethin' Else from Skechers. Launched in stores in Fall 2001, Somethin'
+Else from Skechers is a junior line that features an array of stylish shoes,
+boots and sandals. We target to 12- to 25-year old style conscious females, and
+Somethin' Else from Skechers is focused on current styling with numerous details
+and various silhouettes - including wedges and sculpted wedges. Many of the
+boots and shoes are made from more affordable materials such as man-made
+leather. Somethin' Else from Skechers is designed to be a complementary line for
+juniors who already wear Skechers USA and Skechers Sport styles. Suggested
+retail price points range from $20.00 to $70.00 for this category.
+Skechers by Michelle K. The Skechers by Michelle K line, also launched in
+stores in Fall 2001, is a designer line for trend-savvy young women between the
+ages of 18 and 34. A signature line from our head designer, Michelle Kelchak,
+the category is comprised of high fashion boots, shoes and sandals. Noticing a
+hole in the market for affordable high-fashion footwear, Michelle and her team
+of designers have created a line reflective of the latest European, Asian and
+American trends at a reasonable price and of the highest quality. Most styles
+are crafted in Italy, Portugal and Spain, with others made in Brazil. Skechers
+by Michelle K is marked by high-grade leathers, fine detailing and design and
+flattering silhouettes, including sculpted heels and lower kitten heels.
+Suggested retail price points range from $60.00 to $250.00 for this category.
+4 Wheelers by Skechers. Launched in stores in Fall 2001, 4 Wheelers by
+Skechers is a line of technical fashion roller skates for men, women and
+children. The skates incorporate our most popular sneaker uppers, including the
+Energy and Energy II, on quality aluminum and nylon chassis and polyurethane
+wheels. The uppers are in cool color combinations and feature fashion details
+such as glimmer trim for some women and girls' styles. Technical features
+include: full precision ABEC-1, 3 and 5 bearings, unique heel brake for easy
+control, durable chassis, controllable steering, and reinforced upper. Designed
+for the entire family, 4 Wheelers by Skechers are street skates that can be worn
+indoors, and are ideal for fun and fitness. We have promoted 4 Wheelers by
+Skechers with an advertising campaign featuring Britney Spears. Suggested retail
+price points for adults range from $80.00 to $100.00, and for children from
+$60.00 to $75.00.
+In addition to the previously mentioned lines, we offer seasonal sandalized
+footwear, which features open-toe and open-side constructions consistent with
+our offerings in the Skechers USA, Skechers Sport and Skechers Collection
+categories of footwear. Such footwear includes fisherman's sandals, shower
+sandals, beach sandals, slides, comfort-oriented land sandals and technically
+inspired water sport sandals. Sandalized footwear includes both leather and
+synthetic constructions and may feature suede footbeds with form-fitting
+midsoles. We typically deliver our sandalized footwear to retailers from
+February to August. Suggested retail price points range from $20.00 to $60.00
+for this category.
+PRODUCT DESIGN AND DEVELOPMENT
+Our principal goal in product design is to generate new and exciting
+footwear with contemporary and progressive styles and comfort enhancing
+performance features. All of our footwear is designed with an active, youthful
+lifestyle in mind. We design most
+5
+new styles to be fashionable and marketable to the 12 to 25 year old consumer,
+while substantially all of our lines appeal to the broader range of 5 to 40 year
+old consumers. While many of our shoes have performance features, we generally
+do not position our shoes in the marketplace as technical performance shoes.
+We believe that our product success is related in a large part to our
+ability to recognize trends in the footwear markets and to design products that
+anticipate and accommodate consumers' ever-evolving preferences. We strive to
+analyze, interpret and translate current and emerging lifestyle trends.
+Lifestyle trend information is compiled by our designers through various methods
+designed to monitor changes in culture and society, including (1) review and
+analysis of modern music, television, cinema, clothing, alternative sports and
+other trend-setting media, (2) travel to domestic and international fashion
+markets to identify and confirm current trends, (3) consultation with our retail
+customers for information on current retail selling trends, (4) participation in
+major footwear trade shows to stay abreast of popular brands, fashions and
+styles and (5) subscription to various fashion and color information services.
+In addition, a key component of our design philosophy is to continually
+reinterpret our successful styles in the Skechers image.
+The footwear design process typically begins about nine months before the
+start of a season. Our products are designed and developed by our in-house
+staff. To promote innovation and brand relevance, we utilize dedicated design
+teams that focus on each of the men's, women's and children's categories, and
+report to our senior design executives. In addition, we utilize outside design
+firms on an item-specific basis to supplement our design efforts. The design
+process is extremely collaborative; members of the design staff meet weekly with
+the heads of retail and merchandising, sales, production and sourcing to further
+refine our products to meet the particular needs of our markets.
+After a design team arrives at a consensus regarding the fashion themes for
+the coming season, the designers then translate these themes into our products.
+These interpretations include variations in product color, material structure
+and decoration, which are arrived at after close consultation with our
+production department. Prototype blueprints and specifications are created and
+forwarded to our prototype manufacturers located in Taiwan, which then forward
+design prototypes back to our domestic design team. New design concepts are
+often also reviewed by our major retail customers. Customer input not only
+allows us to measure consumer reaction to the latest designs, but also affords
+us an opportunity to foster deeper and more collaborative relationships with our
+customers. Our design teams can easily and quickly modify and refine a design
+based on customer input.
+We occasionally order limited production runs which may initially be tested
+in our concept stores. By working closely with store personnel, we obtain
+customer feedback that often influences product design and development. We
+believe that sales in our concept stores can help forecast sales in national
+retail stores. We strive to determine within seven to 14 days after initial
+introduction of a product whether there is substantial demand for the style,
+thereby aiding us in our sourcing decisions. Styles that have substantial
+consumer appeal are highlighted in upcoming collections or offered as part of
+our periodic style offerings. The ability to initially test our products allows
+us to discontinue less popular styles after only a limited production run which
+affords us an indicator of future production and a hedge to fashion risks. Also,
+we strive to monitor five- and 10-week trailing trends of orders of our retail
+account base in order to manage future production of styles that are increasing
+or decreasing in popularity. Generally, the production process takes
+approximately six months from design concept to commercialization.
+SOURCING
+Factories. Our products are produced by independent contract manufacturers
+primarily located in China and, to a lesser extent, in Italy, the Philippines,
+Brazil and various other countries. Substantially all of our products are
+manufactured in China. We do not own or operate any manufacturing facilities. We
+believe the use of independent manufacturers increases our production
+flexibility and capacity while at the same time substantially reduces capital
+expenditures and avoids the costs of managing a large production work force.
+We seek to use, whenever possible, manufacturers that have previously
+produced our footwear, which we believe enhances continuity and quality while
+controlling production costs. We attempt to monitor our selection of independent
+factories to ensure that no one manufacturer is responsible for a
+disproportionate amount of our merchandise. We source product for styles that
+account for a significant percentage of our net sales from at least four
+different manufacturers. During 2001, we had four manufacturers that accounted
+for approximately 51.9% of total purchases. No one manufacturer accounted for
+20.0% or more of our total purchases for this period. To date, we have not
+experienced difficulty in obtaining manufacturing services.
+We maintain an in-stock position for selected styles of footwear in order to
+minimize the time necessary to fill customer orders. In order to maintain an
+in-stock position, we place orders for selected footwear with our manufacturers
+prior to the time we receive customers' orders for such footwear. In order to
+reduce the risk of overstocking, we seek to assess demand for our products by
+6
+soliciting input from our customers and monitoring retail sell-through. In
+addition, we analyze historical and current sales and market data to develop
+internal product quantity forecasts which helps reduce inventory risks.
+We finance our production activities in part through the use of
+interest-bearing open purchase arrangements with certain of our Asian
+manufacturers. These facilities currently bear interest at a rate between 0.5%
+and 1.5% for 30 to 60 days financing, depending on the factory. We believe that
+the use of these arrangements affords us additional liquidity and flexibility.
+While we have long-standing relationships with many of our manufacturers and
+believe our relationships to be good, there are no long-term contracts between
+us and any of our manufacturers.
+Production Oversight. To safeguard product quality and consistency, we
+oversee the key aspects of production from initial prototype manufacture through
+initial production runs to final manufacture. Monitoring is performed
+domestically by our in-house production department and in Asia through an
+approximately 130-person staff working from our offices in China and Taiwan. We
+believe that our Asian presence allows us to negotiate supplier and manufacturer
+arrangements more effectively, decrease product turnaround time, and ensure
+timely delivery of finished footwear. In addition, we require our manufacturers
+to certify that neither convict, forced, indentured labor (as defined under U.S.
+law) nor child labor (as defined by the manufacturer's country) is used in the
+production process, that compensation 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. Our
+quality control program is designed to ensure that finished goods not only meet
+our established design specifications, but also that all goods bearing our
+trademarks meet our standards for quality. Quality control personnel perform an
+array of inspection procedures at various stages of the production process,
+including examination and testing of prototypes of key raw materials prior to
+manufacture, samples and materials at various stages of production and final
+products prior to shipment. Our employees are on-site at each of our major
+manufacturers to oversee key phases of production. In addition, unannounced
+visits to the manufacturing sites, to further monitor compliance with our
+manufacturing specifications, are made by our employees and agents.
+ADVERTISING AND MARKETING
+Our advertising and marketing focus is to maintain and enhance recognition
+of the Skechers brand name as a casual, active youthful brand that stands for
+quality, comfort and design innovation. Senior management is directly involved
+in shaping our image and the conception, development and implementation of our
+advertising and marketing activities. We have and continue to increase our
+advertising budget consistent with projected sales, which has included such
+avenues as magazines, television, trade shows, billboards, and buses. We
+endeavor to spend approximately 8% to 10% of annual net sales in the marketing
+of Skechers footwear through advertising, promotions, public relations, trade
+shows and other marketing efforts.
+Advertising
+Substantially all of our advertising is conceived and designed by our
+in-house staff. By retaining our advertising functions in-house, we believe that
+we are able to maintain a greater degree of control over both the creative
+process and the integrity of the Skechers brand image, while realizing
+substantial cost savings compared to using outside agencies.
+We believe that our success to date is due in large part to our advertising
+strategies and methods. Our in-house advertising team has developed a
+comprehensive program to promote the Skechers brand name through lifestyle and
+image advertising. While all advertisements feature our footwear, our
+advertisements generally seek to build and increase brand awareness by linking
+the Skechers brand to youthful, contemporary lifestyles and attitudes rather
+than to market a particular footwear product. We have made a conscious effort to
+avoid the association of the Skechers name with any single category of shoe to
+provide merchandise flexibility and to aid the ability to take the brand and
+product design in the direction of evolving footwear fashions and consumer
+preferences.
+We use a variety of media for our national advertising. Print efforts are
+represented by one and two page ads displayed in popular fashion and lifestyle
+consumer publications that appeal to our target customer group, such as Spin,
+Details, Seventeen, GQ, Vibe, Rolling Stone, Vogue and many others. Our
+progressive television advertisements are primarily produced in-house and air
+frequently on top television shows on major networks and the cable channels.
+Different advertisements are created for each of the 5 to 11, 12 to 24 and 25 to
+35 year old male and female consumer groups. Our in-house media buyer
+strategically selects during which program and in which geographic area certain
+of our commercials will air in order to reach the appropriate target audience.
+Endorsements. We believe that the high profile image and diverse appeal of
+each of our celebrity endorsements will help the Skechers brand reach new
+markets. In 2000, we signed our first celebrity endorsement agreements,
+including signing singer Britney Spears for an international (worldwide
+excluding the United States) print media campaign through June 2002. We expanded
+upon our
+7
+successful relationship with Britney Spears in 2002 by signing a three-year
+worldwide licensing agreement for her to promote our collection of Britney
+Spears 4 Wheelers, which is fashioned after our 4 Wheelers by Skechers line of
+technical fashion roller skates. We also recently signed professional basketball
+player and actor Rick Fox and actor Robert Downey, Jr. to separate limited term
+worldwide print media campaigns. We previously had similar relationships with
+actors Matt Dillon and Rob Lowe. From time to time, we may sign other
+celebrities to endorse our brand name and image and to strategically focus
+marketing of our products among specific consumer groups.
+Marketing and Promotions. By applying creative sales techniques to a broad
+spectrum of mediums, the marketing and promotions team develops Skechers brand
+name recognition, serving as a catalyst for increased product sales. Skechers
+promotional strategies have encompassed in-store specials, concert promotions,
+product tie-ins and giveaways, and collaborations with national retailers and
+radio stations. Our imaginative promotions draw customers to Skechers retail
+stores and to our retail partners' locations, which results in an expanded
+customer base and strong product sell-throughs.
+Public Relations. During 2001, we received notable press coverage in print
+publications, including a Forbes cover story and being ranked ninth in
+BusinessWeek's Top 100 Growth Companies. In addition, we were noted in Money,
+Vogue, Movieline, Entertainment Weekly, Elle and Sportswear International, among
+others. We have repeatedly received recognition in the footwear industry for our
+exciting and innovative products, including Excellence in Children's Design
+Award by Footwear Plus magazine. Skechers was awarded the 2001 "Corporate Vendor
+of the Year" and "Children's Vendor of the Year" awards from Shoe Carnival. The
+Shoe Carnival awards recognize brands that have the largest sales increases and
+profit margin in the shoe chains stores throughout the retail fiscal year. With
+our strategy tied to promoting the newest styles produced by our design and
+development teams, our products are often featured in fashion and pop culture
+magazines, and in a select group of films and popular television shows. For
+example, our shoes have been prominently displayed and referenced on The Today
+Show, Oprah, Good Morning America, Dharma & Greg and Malcolm in the Middle.
+Merchandising
+Our in-house display merchandising department supports retailers and
+distributors by developing point-of-purchase advertising to further promote our
+products in our wholesale customers' stores and to leverage recognition of the
+Skechers brand name at the retail level. Our field service representatives
+coordinate with our sales department to ensure better sell-through at the retail
+level. Our representatives communicate with and visit our wholesale customers on
+a regular basis to aid in the proper visual display of our merchandise and to
+distribute and display such point-of-purchase items as signage, packaging,
+displays, counter cards, banners and other visual merchandising displays. These
+materials mirror the look and feel of our national print advertising in order to
+reinforce brand image at the point-of-purchase. We believe these efforts help
+stimulate impulse sales and repeat purchases.
+Our merchandise personnel also work closely with our wholesale customers to
+ensure the optimal exposure of our products through our shop-in-shops, which are
+exclusive selling areas within stores that offer our products and incorporate
+Skechers signage and customized fixture designs. The shop-in-shop concept
+enhances brand recognition and ensures the consistent presentation of our
+products in our wholesale customers' stores. As of December 31, 2001, our
+wholesale customers' stores included more than 300 shop-in-shops. We plan to add
+additional shop-in-shops during 2002.
+Trade Shows. To best showcase our diverse products to footwear buyers across
+the nation, we exhibited at 23 trade shows during 2001. Our dynamic,
+state-of-the-art trade show exhibits, which are designed by our in-house
+architect and feature our latest product offerings, are specially planned and
+built to accommodate each trade show and are enhanced with lifestyle images that
+capture the image of our brand. By investing in innovative displays and
+individual 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 of
+our offerings, optimizing commitments and sales at the retail level. Our
+innovative exhibits continually win awards, including Best Booth Design at the
+World Shoe Association, February 2001.
+Internet. We also promote our brand image through our website at
+www.skechers.com to customers who directly access the Internet. This website
+currently enables us to present information on our products and store locations
+to consumers. The website is interactive, affording customers the ability to
+directly order products on the Internet and to allow us to receive and respond
+directly to customer feedback. Our website is intended to enhance the Skechers
+brand without the associated costs of advertising. Our website provides fashion
+information, provides a mechanism for customer feedback, promotes customer
+loyalty and further enhances the Skechers brand image through interactive
+content, photos, interviews and information on Skechers-sponsored events.
+8
+DOMESTIC SALES AND DISTRIBUTION CHANNELS
+Our products are sold in the United States through three primary
+distribution channels: to a network of wholesale accounts, in our own retail
+stores and, to a lesser extent, through electronic commerce on our interactive
+website. Each of these channels and the three distinct categories of our retail
+stores - concept stores, factory outlet stores and warehouse outlet stores -
+serves an integral function in the domestic distribution of our products.
+Wholesale Distribution
+As of December 31, 2001, we distributed our footwear to over 3,500
+wholesale accounts in the United States. We believe that our broad product line
+enables us to appeal to a variety of wholesale accounts, many of whom may
+operate stores within the same mall or other retail locations, because retailers
+can select those styles of ours that best satisfy the fashion, function and
+price criteria of their clients. Management has implemented a strategy of
+controlling the growth of our wholesale distribution channels. Our strategy is
+to continue offering our accounts the highest level of customer service so that
+our products will be more fully represented in existing retail locations and new
+locations within each account.
+We have approximately 100 sales and 15 field service representatives to
+service our wholesale accounts. In an effort to provide knowledgeable and
+personalized service to our wholesale accounts, the sales force is segregated
+into men's, women's and children's divisions. The men's and women's divisions
+have a combined six regional sales managers and the children's division has
+three dedicated regional sales managers. Additionally, Skechers by Michelle K,
+Skechers Collections, and 4 Wheelers by Skechers are each headed by its own
+national sales manager. Each of these sales managers reports to our Executive
+Vice President, Domestic U.S. Sales, who has over 20 years of experience in the
+branded consumer products industry. Each of the sales staff is compensated on a
+salary plus commission basis with none of the representatives selling
+competitive products. Senior management is actively involved in selling to and
+maintaining relationships with Skechers' major retail accounts.
+We believe that we have developed a loyal customer base of wholesale
+accounts through a heightened level of customer service. We believe that our
+close relationships with these accounts help us to maximize their retail
+sell-through, maintained margins and inventory turns which in turn minimizes our
+inventory markdowns and customer returns and allowances. Our field service
+representatives work with our wholesale accounts to ensure that our merchandise
+and point-of-purchase marketing materials are properly presented. Sales
+executives and merchandise personnel work closely with accounts to ensure the
+appropriate styles are purchased for specific accounts and for specific stores
+within those accounts as well as ensure that appropriate inventory levels are
+carried at each store. Such information is then utilized to help develop sales
+projections and determine the product needs of wholesale accounts. The value
+added services we provide our wholesale customers help us maintain strong
+relationships with our existing wholesale customers and attract potential new
+wholesale customers.
+Retail Stores
+We pursue our retail store strategy through our three integrated retail
+formats: the concept store, the factory outlet and the warehouse outlet store.
+Our three store format enables us to promote the full Skechers line in an
+attractive environment, appeal to a broad group of customers that are segmented
+by price points and manage inventory in an efficient and brand sensitive manner.
+In addition, most of our retail stores are profitable and have a positive effect
+on our operating results. As of December 31, 2001, we operated 29 concept
+stores, 29 factory outlet stores and 20 warehouse outlet stores in the United
+States. We plan to open between 10 to 15 retail stores during 2002.
+- Concept Stores. Our concept stores are located at either marquee
+street locations or in major shopping malls in large metropolitan
+cities. Our concept stores serve a threefold purpose in our
+operating strategy. First, concept stores serve as a showcase for a
+wide range of our product offerings for the current season,
+providing the customer with the entire product story. The concept
+stores feature modern music and lighting and present an open floor
+design to allow customers to readily view the merchandise on
+display. In contrast, we estimate that our average retail customer
+carries no more than 5.0% of the complete Skechers line. Second,
+retail locations are generally chosen to generate maximum marketing
+value for the Skechers brand name through signage, store front
+presentation and interior design. These locations include concept
+stores on 34th Street in New York City and in Santa Monica's Third
+Street Promenade. The stores are typically designed to create a
+distinctive Skechers look and feel and enhance customer association
+of the Skechers brand name with current youthful lifestyle trends
+and styles. Third, the concept stores serve as marketing and product
+testing venues that provide rapid product feedback from customers.
+We believe that product sell-through information
+9
+derived from our concept stores enables our sales, merchandising and
+production staff to respond to market changes and new product
+introductions. Such responses serve to augment sales and limit our
+inventory markdowns and customer returns and allowances. We strive
+to adjust our product and sales strategy based upon seven to 14 days
+of retail sales information.
+The prototypical Skechers concept store is approximately 2,500
+square feet although in certain selected markets we have opened
+concept stores as large as 7,000 square feet or as small as 1,100
+square feet. When deciding where to open concept stores, we identify
+top geographic markets in the larger metropolitan cities in the
+United States. When selecting a specific site, we evaluate the
+proposed sites' traffic pattern, co-tenancies, average sales per
+square foot achieved by neighboring concept stores, lease economics
+and other factors considered important within the specific location.
+If we are considering opening a 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 most concentrated. We
+believe that the strength of the Skechers brand name has enabled us
+to negotiate more favorable terms with shopping malls that want us
+to open up concept stores to attract customer traffic to these
+malls. We opened two new concept stores during 2000 and five new
+concept stores during 2001.
+- Factory Outlet Stores. Our factory outlet stores are generally
+located in manufacturers' outlet centers throughout the United
+States. Our factory outlet stores provide opportunities for us to
+sell discontinued and excess merchandise, thereby reducing the need
+to sell such merchandise to discounters at excessively low prices,
+which could otherwise compromise the Skechers brand image. Skechers
+factory outlet stores range in size from approximately 1,900 to
+6,000 square feet. Inventory in these stores is supplemented by
+certain first-line styles sold at full retail price points generally
+of $60.00 or lower. We opened five new factory outlet stores during
+2000 and 11 new factory outlet stores during 2001.
+- Warehouse Outlet Stores. Our free-standing warehouse outlet stores,
+which are located throughout the United States, enable us to
+liquidate excess merchandise, discontinued lines and odd-size
+inventory in a cost-efficient manner. Skechers warehouse outlet
+stores range in size from approximately 5,600 to 14,800 square feet.
+Our warehouse outlet stores enable us to sell discontinued and
+excess merchandise that would otherwise typically be sold to
+discounters at excessively low prices, thus compromising the
+Skechers brand image. We seek to open our warehouse outlet stores in
+areas that are in close proximity to our other retail stores in
+order to facilitate the timely transfer of inventory that we want to
+liquidate as soon as practicable. We opened three new warehouse
+outlet stores during 2000 and 10 new warehouse outlet stores during
+2001.
+Electronic Commerce. Our electronic commerce sales represented less than
+1.0% of total net sales for each of 2000 and 2001. Our website,
+www.skechers.com, is a virtual storefront that promotes the Skechers brand name.
+Designed as a customer center, our website showcases our products in an
+easy-to-navigate format, allowing customers to see and purchase our footwear.
+This virtual store has become a successful additional retail distribution
+channel, has improved customer service and is a fun and entertaining
+alternative-shopping environment.
+INTERNATIONAL OPERATIONS
+We market our products in countries and territories throughout the world. We
+generate revenues from outside the United States from three principal sources:
+(1) sales of our footwear directly to foreign distributors who distribute such
+footwear to department stores and specialty retail stores in Europe, Asia, Latin
+America, South America and numerous other countries and territories, (2) in
+France, Germany and the United Kingdom, we sell footwear directly to department
+stores and specialty retail stores and through retail stores that we own and
+operate and (3) to a lesser extent, royalties from licensees who manufacture
+and distribute our products outside the United States.
+We believe that international distribution of our products represents a
+significant opportunity to increase revenues and profits. Although we are in the
+early stages of our international expansion, our products are currently sold in
+more than 100 countries and territories around the world. We intend to further
+increase our share of the international footwear market by heightening our
+marketing presence in those countries through our international advertising
+campaigns, which are designed to establish Skechers as a global brand synonymous
+with casual shoes.
+10
+Europe
+We have historically sold our footwear to selected wholesale customers in
+Europe through our foreign distributors. In 2001, we expanded our European
+operations and began to directly sell our footwear to certain wholesale accounts
+and retail stores in Europe in an effort to increase profit margins and more
+effectively market and promote the Skechers brand name. We organized Skechers
+U.S.A. Ltd. in the United Kingdom and Ireland and opened the subsidiary's
+headquarters in London to establish direct control over wholesale distribution,
+merchandising, and marketing of our products in these countries. We also
+organized Skechers U.S.A. SAS with its office in Paris, France and Skechers
+U.S.A. Deutschland GmbH with its office in Dietzenbach, Germany, with each of
+these subsidiaries formed to establish direct control over our products in their
+respective countries of organization. In 2001, we began to utilize a contract
+warehouse located in Belgium to distribute our footwear to our customers and
+retail stores in France, Germany and the United Kingdom.
+Additionally, we are beginning to selectively open flagship retail stores
+internationally on our own or through joint ventures with local distributors. In
+the first three months of 2001, we opened our first European flagship retail
+stores on Oxford Street in London, at the Forum Les Halles in Paris and in the
+prestigious Centro Mall in Oberhausen, Germany. We intend to open additional
+wholly-owned flagship retail stores in the European Union (EU) countries and
+enter into agreements with distributors to operate flagship retail stores in
+non-EU countries.
+Asia
+In December 2001, we opened our first Asian flagship retail store in
+Kichijuoji, Japan by agreement with Japanese distributor Achilles Corporation.
+Achilles Corporation is responsible for the store's operations and selecting a
+broad collection of our products to sell to Japanese consumers. In order to
+maintain a globally consistent image, we provided architectural, graphic and
+visual guidance and materials for the design of the store, and we trained the
+local staff on our products and corporate culture. We intend to expand our
+international presence and global recognition of the Skechers brand name in Asia
+by continuing to sell our footwear to foreign distributors and opening flagship
+retail stores with distributors that have local market expertise.
+LICENSING
+We believe that selective licensing of the Skechers brand name to
+non-footwear-related manufacturers may broaden and enhance the Skechers brand
+image without requiring significant capital investments or additional
+incremental operating expenses by us. Our diverse group of products presents
+many potential licensing opportunities on terms with licensees that we believe
+will provide more effective manufacturing, distribution or marketing of products
+such as accessories, backpacks and children's clothing than could be achieved
+in-house; however, we intend to be selective in granting any use of the Skechers
+brand name for such licensed products. We believe that the strength of the
+Skechers brand name and the size of our business will enable us to attract
+premier licensing partners with a proven track record of brand sensitivity. We
+are also interested in exploring the possibility of licensing our other
+trademarks and trade names for use with non-footwear products that could enable
+us to successfully enter and compete in non-footwear markets that we would not
+be likely to succeed in using the Skechers brand name and without having to
+compromise the Skechers brand image. In addition, we periodically review
+potential international licensing arrangements for footwear in various
+geographical regions that present favorable business opportunities. We intend to
+maintain substantial control over the design, manufacturing specifications,
+advertising and distribution of any licensed products and to maintain a policy
+of evaluating any future licensing arrangements to ensure consistent
+representation of the Skechers image.
+DISTRIBUTION
+We believe that strong distribution support is a critical factor in our
+operations. Once manufactured, our products are packaged in shoe boxes bearing
+bar codes and are shipped either (1) to our approximately 1.4 million square
+feet of internally managed distribution center located in Ontario, California,
+(2) to an approximately 130,000 square foot contract warehouse located in Gent,
+Belgium for distribution to our European customers and retail stores or (3)
+directly from the manufacturer to our other international customers. Upon
+receipt at the central distribution centers, merchandise is inspected and
+recorded in our management information system and packaged according to
+customers' orders for delivery. Merchandise is shipped to the customer by
+whatever means the customer requests, which is usually by common carrier. The
+central distribution centers have multi-access docks, enabling us to receive and
+ship simultaneously and to pack separate trailers for shipments to different
+customers at the same time. We have an electronic data interchange system, or
+EDI system, to which some of our larger customers are linked. This system allows
+these customers to automatically place orders with us, thereby eliminating the
+time involved in transmitting and inputting orders, and includes direct billing
+and shipping information.
+11
+The following table sets forth a summary of the facilities that comprise our
+Ontario distribution center:
+ADDRESS STATUS SQUARE FOOTAGE
+------- ------ --------------
+1661 South Vintage Avenue Leased since November 1997 127,800
+1777 South Vintage Avenue Leased since November 1997 284,600
+1670 Champagne Avenue Owned since October 2000 263,700
+4100 East Mission Blvd. Leased since June 2001 763,300
+---------
+1,439,400(1)
+=========
+----------------
+(1) Excludes 285,600 square feet located at 5725 East Jurupa Street that we
+leased in April 1998 and occupied until we subleased the facility in June
+2001.
+We believe that we have the capacity at our Ontario distribution center to
+increase our current operations to meet projected demand, and if we should ever
+need to expand our distribution facilities to allow for further growth, we
+believe there is presently enough space available in close proximity that leads
+us to believe leasing or purchasing additional property will not be a problem in
+the foreseeable future.
+BACKLOG
+We generally receive the bulk of our orders for each of the spring and fall
+seasons a minimum of three months prior to the date the products are shipped to
+customers. As of December 31, 2001, our backlog was $222.2 million, compared to
+$221.6 million as of December 31, 2000. While backlog orders are subject to
+cancellation by customers, we have not experienced significant cancellation of
+orders in the past and we expect that substantially all the orders will be
+shipped in 2002. However, for a variety of reasons, including the timing of
+shipments, product mix of customer orders and the amount of in-season orders,
+backlog may not be a reliable measure of future sales for any succeeding period.
+INTELLECTUAL PROPERTY RIGHTS
+We own and utilize a variety of trademarks, including the Skechers
+trademark. We have a significant number of both registrations and pending
+applications for our trademarks in the United States. In addition, we have
+trademark registrations and trademark applications in approximately 85 foreign
+countries. We also have design patents, and pending design and utility patent
+applications, in both the United States and various foreign countries. We
+continuously look to increase the number of our patents and trademarks, both
+domestically and internationally, where necessary to protect valuable
+intellectual property. We regard our trademarks and other intellectual property
+as valuable assets and believe that they have significant value in the marketing
+of our products. We vigorously protect our trademarks against infringement,
+including through the use of cease and desist letters, administrative
+proceedings and lawsuits.
+We rely on trademark, patent, copyright, trade secret protection,
+non-disclosure agreements and licensing arrangements to establish, protect and
+enforce intellectual property rights in our logos, tradenames and in the design
+of our products. In particular, we believe that our future success will largely
+depend on our ability to maintain and protect the Skechers trademark. Despite
+our efforts to safeguard and maintain our intellectual property rights, we
+cannot assure you that we will be successful in this regard. Furthermore, we
+cannot assure you that our trademarks, products and promotional materials or
+other intellectual property rights do not or will not violate the intellectual
+property rights of others, that our intellectual property would be upheld if
+challenged, or that we would, in such an event, not be prevented from using our
+trademarks or other intellectual property rights. Such claims, if proven, could
+materially and adversely affect our business, financial condition and results of
+operations. In addition, although any such claims may ultimately prove to be
+without merit, the necessary management attention to and legal costs associated
+with litigation or other resolution of future claims concerning trademarks and
+other intellectual property rights could materially and adversely affect our
+business, financial condition and results of operations. We have sued and have
+been sued by third parties for infringement of intellectual property. It is our
+opinion that none of these claims have materially impaired our ability to
+utilize our intellectual property rights.
+The laws of certain foreign countries do not protect intellectual property
+rights to the same extent or in the same manner as do the laws 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 or the costs associated with protecting our rights in certain
+jurisdictions may be prohibitive. From time to time, we discover products in the
+marketplace that are counterfeit reproductions of our products or that
+12
+otherwise infringe upon intellectual property rights held by us. Actions taken
+by us to establish and protect our trademarks and other intellectual property
+rights may not be adequate to prevent imitation of our products by others or to
+prevent others from seeking to block sales of our products as violating
+trademarks and intellectual property rights. If we are unsuccessful in
+challenging a third party's products on the basis of infringement of our
+intellectual property rights, continued sales of such products by that or any
+other third party could adversely impact the Skechers brand, result in the shift
+of consumer preferences away from us and generally have a material adverse
+effect on our business, financial condition and 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 range
+of products, our products compete with other branded products within their
+product category as well as with private label products sold by retailers,
+including some 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, Steven Madden, Ltd. and Wolverine World Wide, Inc. Our
+athletic shoes compete with brands of athletic footwear offered by companies
+such as Nike, Inc., Reebok International Ltd., Adidas-Salomon AG and New
+Balance. Our children's shoes compete with brands of children's footwear offered
+by The Stride Rite Corporation. In varying degrees, depending on the product
+category involved, we compete on the basis of style, price, quality, comfort and
+brand name prestige and recognition, among other considerations. These and other
+competitors pose challenges to our market share in our major domestic markets
+and may make it more difficult to establish our products in Europe, Asia and
+other international regions. We also compete with numerous manufacturers,
+importers and distributors of footwear for the limited shelf space available for
+the display of such products to the consumer. Moreover, the general availability
+of contract manufacturing capacity allows ease of access by new market entrants.
+Many of our competitors are larger, have achieved greater recognition for their
+brand names, have captured greater market share and/or have substantially
+greater financial, distribution, marketing and other resources than us. We
+cannot assure you that we will be able to compete successfully against present
+or future competitors or that competitive pressures faced by us will not have a
+material adverse effect on our business, financial condition and results of
+operations.
+EMPLOYEES
+As of February 28, 2002, we employed 1,964 persons, 1,111 of which were
+employed on a full-time basis and 853 of which 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. We offer our
+employees a discount on Skechers merchandise to encourage enthusiasm for the
+product and Skechers loyalty.
+RISK FACTORS
+In addition to the other information in this Form 10-K, the following
+factors should be considered in evaluating us and our business.
+OUR FUTURE SUCCESS DEPENDS ON OUR ABILITY TO RESPOND TO CHANGING CONSUMER
+DEMANDS, IDENTIFY AND INTERPRET FASHION TRENDS AND SUCCESSFULLY MARKET NEW
+PRODUCTS.
+The footwear industry is subject to rapidly changing consumer demands and
+fashion trends. Accordingly, we must identify and interpret fashion trends and
+respond in a timely manner. Demand for and market acceptance of new products are
+uncertain and achieving market acceptance for new products generally requires
+substantial product development and marketing efforts and expenditures. If we do
+not continue to meet changing consumer demands and develop successful styles in
+the future, our growth and profitability will be negatively impacted. We
+frequently make decisions about product designs and marketing expenditures
+several months in advance of the time when consumer acceptance can be
+determined. If we fail to anticipate, identify or react appropriately to changes
+in styles and trends or are not successful in marketing new products, we could
+experience excess inventories, higher than normal markdowns or an inability to
+profitably sell our products. Because of these risks, a number of companies in
+the footwear industry specifically, and the fashion and apparel industry in
+general, have experienced periods of rapid growth in revenues and earnings and
+thereafter periods of declining sales and losses, which in some cases have
+resulted in companies in these industries ceasing to do business. Similarly,
+these risks could have a severe negative effect on our results of operations or
+financial condition.
+OUR BUSINESS AND THE SUCCESS OF OUR PRODUCTS COULD BE HARMED IF WE ARE UNABLE TO
+MAINTAIN OUR BRAND IMAGE.
+Our success to date has been due in large part to the strength of our brand.
+If we are unable to timely and appropriately respond to changing consumer
+demand, our brand name and brand image may be impaired. Even if we react
+appropriately to changes in
+13
+consumer preferences, consumers may consider our brand image to be outmoded or
+associate our brand with styles of footwear that are no longer popular. In the
+past, several footwear companies have experienced periods of rapid growth in
+revenues and earnings followed by periods of declining sales and losses. Our
+business may be similarly affected in the future.
+OUR BUSINESS COULD BE HARMED IF WE FAIL TO MAINTAIN PROPER INVENTORY LEVELS.
+We place orders with our manufacturers for some of our products prior to the
+time we receive all of our customers' orders. We do this to minimize purchasing
+costs, the time necessary to fill customer orders and the risk of non-delivery.
+We also maintain an inventory of certain products that we anticipate will be in
+greater demand. However, we may be unable to sell the products we have ordered
+in advance from manufacturers or that we have in our inventory. Inventory levels
+in excess of customer demand may result in inventory write-downs, and the sale
+of excess inventory at discounted prices could significantly impair our brand
+image and have a material adverse effect on our operating results and financial
+condition. Conversely, if we underestimate consumer demand for our products or
+if our manufacturers fail to supply the quality products that we require at the
+time we need them, we may experience inventory shortages. Inventory shortages
+might delay shipments to customers, negatively impact retailer and distributor
+relationships, and diminish brand loyalty.
+WE MAY BE UNABLE TO SUCCESSFULLY EXECUTE OUR GROWTH STRATEGY OR MANAGE OR
+SUSTAIN OUR GROWTH.
+We have grown quickly since we started our business. Our ability to grow in
+the future depends upon, among other things, the continued success of our
+efforts to expand our footwear offerings and distribution channels. However, our
+rate of growth may decline or we may not be profitable in future quarters or
+fiscal years. Furthermore, as our business becomes larger, we may not be able to
+maintain our historical growth rate or effectively manage our growth. We
+anticipate that as our business grows, we will have to improve and enhance our
+overall financial and managerial controls, reporting systems and procedures. We
+may be unable to successfully implement our current growth strategy or other
+growth strategies or effectively manage our growth, any of which would
+negatively impair our net sales and earnings.
+OUR BUSINESS MAY BE NEGATIVELY IMPACTED AS A RESULT OF CHANGES IN THE ECONOMY.
+Our business depends on the general economic environment and levels of
+consumer spending that affect not only the ultimate consumer, but also
+retailers, our primary direct customers. Purchases of footwear tend to decline
+in periods of recession or uncertainty regarding future economic prospects, when
+consumer spending, particularly on discretionary items, declines. During periods
+of recession or economic uncertainty, we may not be able to maintain or increase
+our sales to existing customers, make sales to new customers, open and operate
+new retail stores, maintain sales levels at our existing stores, maintain or
+increase our international operations on a profitable basis, or maintain or
+improve our earnings from operations as a percentage of net sales. As a result,
+our operating results may be adversely and materially affected by downward
+trends in the economy or the occurrence of events that adversely affect the
+economy in general. Furthermore, in anticipation of continued increases in net
+sales, we have significantly expanded our infrastructure and workforce to
+achieve economies of scale. Because these expenses are fixed in the short term,
+our operating results and margins will be adversely impacted if we do not
+continue to grow as anticipated. For example, due in large part to the slowdown
+in the global economy, our net sales for 2001 were lower than anticipated. This
+lower level of sales adversely affected our operating results for 2001 and could
+continue to do so in 2002 and beyond.
+ECONOMIC, POLITICAL, MILITARY OR OTHER EVENTS IN A COUNTRY WHERE WE MAKE
+SIGNIFICANT SALES OR HAVE SIGNIFICANT OPERATIONS COULD INTERFERE WITH OUR
+SUCCESS OR OPERATIONS THERE AND HARM OUR BUSINESS.
+We market and sell our products and services throughout the world. The
+September 11, 2001 attacks disrupted commerce throughout the United States and
+other parts of the world. The continued threat of similar attacks throughout the
+world and the military action taken by the United States and other nations may
+cause significant disruption to commerce throughout the world. To the extent
+that such disruptions further slow the global economy or, more particularly,
+result in delays or cancellations of purchase orders for our products, our
+business and results of operations could be materially adversely affected. We
+are unable to predict whether the threat of new attacks or the responses thereto
+will result in any long-term commercial disruptions or if such activities or
+responses will have a long-term material adverse effect on our business, results
+of operations or financial condition.
+14
+WE DEPEND UPON A RELATIVELY SMALL GROUP OF CUSTOMERS FOR A LARGE PORTION OF OUR
+SALES.
+During 2001, our net sales to our five largest customers accounted for
+approximately 25.7% of total net sales. No one customer accounted for 10.0% or
+more of our net sales during 2001. As of December 31, 2001, one customer
+accounted for 10.2% of our net trade accounts receivable. Although we have
+long-term relationships with many of our customers, our customers do not have a
+contractual obligation to purchase our products and we cannot be certain that we
+will be able to retain our existing major customers. Furthermore, the retail
+industry regularly experiences consolidation, contractions and closings. If
+there are further consolidations, contractions or closings in the future, we may
+lose customers or be unable to collect accounts receivables of major customers
+in excess of amounts that we have insured. If we lose a major customer,
+experience a significant decrease in sales to a major customer, or are unable to
+collect the accounts receivable of a major customer in excess of amounts
+insured, our business could be harmed.
+OUR OPERATING RESULTS COULD BE NEGATIVELY IMPACTED IF OUR SALES ARE CONCENTRATED
+IN ANY ONE STYLE OR GROUP OF STYLES.
+If any one style or group of similar styles of our footwear were to
+represent a substantial portion of our net sales, we could be exposed to risk
+should consumer demand for such style or group of styles decrease in subsequent
+periods. We attempt to hedge this risk by offering a broad range of products,
+and no style comprised over 5.0% of our gross wholesale sales for the years
+ended either December 31, 2000 or 2001. However, this may change in the future
+and fluctuations in sales of any given style that represents a significant
+portion of our future net sales could have a negative impact on our operating
+results.
+WE RELY ON INDEPENDENT CONTRACT MANUFACTURERS AND, AS A RESULT, ARE EXPOSED TO
+POTENTIAL DISRUPTIONS IN PRODUCT SUPPLY.
+Our footwear products are currently manufactured by independent contract
+manufacturers. During 2001, the top four manufacturers of our manufactured
+products produced approximately 51.9% of our total purchases, but none
+individually accounted for more than 20.0%. We do not have long-term contracts
+with manufacturers and we compete with other footwear companies for production
+facilities. We could experience difficulties with these manufacturers, including
+reductions in the availability of production capacity, failure to meet our
+quality control standards, failure to meet production deadlines or increased
+manufacturing costs. This could result in our customers canceling orders,
+refusing to accept deliveries or demanding reductions in purchase prices, any of
+which could have a negative impact on our cash flow and harm our business.
+If our current manufacturers cease doing business with us, we could
+experience an interruption in the manufacture of our products. Although we
+believe that we could find alternative manufacturers, we may be unable to
+establish relationships with alternative manufacturers that will be as favorable
+as the relationships we have now. For example, new manufacturers may have higher
+prices, less favorable payment terms, lower manufacturing capacity, lower
+quality standards or higher lead times for delivery. If we are unable to provide
+products consistent with our standards or the manufacture of our footwear is
+delayed or becomes more expensive, our business would be harmed.
+OUR INTERNATIONAL SALES AND MANUFACTURING OPERATIONS ARE SUBJECT TO THE RISKS OF
+DOING BUSINESS ABROAD, WHICH COULD AFFECT OUR ABILITY TO SELL OR MANUFACTURE OUR
+PRODUCTS IN INTERNATIONAL MARKETS, OBTAIN PRODUCTS FROM FOREIGN SUPPLIERS OR
+CONTROL THE COSTS OF OUR PRODUCTS.
+Substantially all of our net sales during 2001 were derived from sales of
+footwear manufactured in foreign countries, with most manufactured in China and,
+to a lesser extent, in Italy, the Philippines and Brazil. We also sell our
+footwear in several foreign countries and plan to increase our international
+sales efforts as part of our growth strategy. Foreign manufacturing and sales
+are subject to a number of risks, including:
+- political and social unrest;
+- changing economic conditions;
+- international political tension and terrorism;
+- work stoppages;
+- transportation delays;
+- loss or damage to products in transit;
+- expropriation;
+15
+- nationalization;
+- the imposition of tariffs and trade duties both international
+and domestically;
+- import and export controls and other nontariff barriers;
+- exposure to different legal standards (particularly with
+respect to intellectual property);
+- compliance with foreign laws; and
+- changes in domestic and foreign governmental policies.
+In particular, because substantially all of our products are manufactured in
+China, adverse change in trade or political relations with China or political
+instability in China would severely interfere with the manufacture of our
+products and would materially adversely affect our operations.
+In addition, if we, or our foreign manufacturers, violate United States or
+foreign laws or regulations, we may be subjected to extra duties, significant
+monetary penalties, the seizure and the forfeiture of the products we are
+attempting to import or the loss of our import privileges. Possible violations
+of United States or foreign laws or regulations could include inadequate record
+keeping of our imported product, misstatements or errors as to the origin, quota
+category, classification, marketing or valuation of our imported products,
+fraudulent visas, or labor violations. The effects of these factors could render
+our conduct of business in a particular country undesirable or impractical and
+have a negative impact on our operating results.
+OUR BUSINESS COULD BE HARMED IF OUR CONTRACT MANUFACTURERS, SUPPLIERS OR
+LICENSEES VIOLATE LABOR OR OTHER LAWS.
+We require our independent contract manufacturers, suppliers and licensees
+to operate in compliance with applicable United States and foreign laws and
+regulations. Manufacturers are required to certify that neither convicted,
+forced or indentured labor (as defined under United States law) nor child labor
+(as defined by the manufacturer's country) is used in the production process,
+that compensation is paid in accordance with local law and that their factories
+are in compliance with local safety regulations. Although we promote ethical
+business practices and our sourcing personnel periodically visit and monitor the
+operations of our independent contract manufacturers, suppliers and licensees,
+we do not control them or their labor practices. If one of our independent
+contract manufacturers, suppliers or licensees violates labor or other laws or
+diverges from those labor practices generally accepted as ethical in the United
+States, it could result in adverse publicity for us, damage our reputation in
+the United States, or render our conduct of business in a particular foreign
+country undesirable or impractical, any of which could harm our business.
+OUR PLANNED EXPANSION INVOLVES A NUMBER OF RISKS THAT COULD PREVENT OR DELAY THE
+SUCCESSFUL OPENING OF NEW STORES AS WELL AS IMPACT THE PERFORMANCE OF OUR
+EXISTING STORES.
+Our ability to open and operate new stores successfully depends on many
+factors, including, among others, our ability to:
+- identify suitable store locations, the availability of which
+is outside of our control;
+- negotiate acceptable lease terms, including desired tenant
+improvement allowances;
+- source sufficient levels of inventory to meet the needs of new
+stores;
+- hire, train and retain store personnel;
+- successfully integrate new stores into our existing
+operations; and
+- satisfy the fashion preferences in new geographic areas.
+In addition, many of our new stores will be opened in regions of the United
+States in which we currently have few or no stores. The expansion into new
+markets may present competitive, merchandising and distribution challenges that
+are different from those currently encountered in our existing markets. Any of
+these challenges could adversely affect our business and results of operations.
+In addition, to the extent our new store openings are in existing markets, we
+may experience reduced net sales volumes in existing stores in those markets.
+16
+MANY OF OUR RETAIL STORES DEPEND HEAVILY ON THE CUSTOMER TRAFFIC GENERATED BY
+SHOPPING AND FACTORY OUTLET MALLS OR BY TOURISM.
+Many of our concept stores are located in shopping malls and some of our
+factory outlet stores are located in manufacturers' outlet malls where we depend
+on obtaining prominent locations in the malls and the overall success of the
+malls to generate customer traffic. We cannot control the development of new
+malls, the availability or cost of appropriate locations within existing or new
+malls or the success of individual malls. Some of our concept stores occupy
+street locations which are heavily dependent on customer traffic generated by
+tourism. Any substantial decrease in tourism resulting from the September 11,
+2001 attacks, a downturn in the economy or otherwise, is likely to adversely
+affect sales in our existing stores, particularly those with street locations.
+The effects of these factors could hinder our ability to open retail stores in
+new markets or reduce sales of particular existing stores, which could
+negatively affect our operating results.
+OUR QUARTERLY REVENUES AND OPERATING RESULTS FLUCTUATE AS A RESULT OF A VARIETY
+OF FACTORS, INCLUDING SEASONAL FLUCTUATIONS IN DEMAND FOR FOOTWEAR AND DELIVERY
+DATE DELAYS, WHICH MAY RESULT IN VOLATILITY OF OUR STOCK PRICE.
+Our quarterly revenues and operating results have varied significantly in
+the past and can be expected to fluctuate in the future due to a number of
+factors, many of which are beyond our control. For example, sales of footwear
+products have historically been somewhat seasonal in nature with the strongest
+sales generally occurring in the third and fourth quarters. Also, delays in
+scheduling or pickup of purchased products by our domestic customers could
+negatively impact our net sales and results of operations for any given quarter.
+As a result of these specific and other general factors, our operating results
+will likely vary from quarter to quarter and the results for any particular
+quarter may not be necessarily indicative of results for the full year. Any
+shortfall in revenues or net income from levels expected by securities analysts
+and investors could cause a decrease in the trading price of our Class A common
+shares.
+WE FACE INTENSE COMPETITION, INCLUDING COMPETITION FROM COMPANIES WITH
+SIGNIFICANTLY GREATER RESOURCES THAN OURS, AND IF WE ARE UNABLE TO COMPETE
+EFFECTIVELY WITH THESE COMPANIES, OUR MARKET SHARE MAY DECLINE AND OUR BUSINESS
+COULD BE HARMED.
+We face intense competition in the footwear industry from other established
+companies. A number of our competitors have significantly greater financial,
+technological, engineering, manufacturing, marketing and distribution resources
+than we do. Their greater capabilities in these areas may enable them to better
+withstand periodic downturns in the footwear industry, compete more effectively
+on the basis of price and production and more quickly develop new products. In
+addition, new companies may enter the markets in which we compete, further
+increasing competition in the footwear industry.
+We believe that our ability to compete successfully depends on a number of
+factors, including the style and quality of our products and the strength of our
+brand name, as well as many factors beyond our control. We may not be able to
+compete successfully in the future, and increased competition may result in
+price reductions, reduced profit margins, loss of market share, and inability to
+generate cash flows that are sufficient to maintain or expand our development
+and marketing of new products, which would adversely impact the trading price of
+our Class A common shares.
+OBTAINING ADDITIONAL CAPITAL TO FUND OUR OPERATIONS AND FINANCE OUR GROWTH COULD
+MAKE IT DIFFICULT FOR US TO SERVICE OUR DEBT OBLIGATIONS.
+If our working capital needs exceed our current expectations, we may need to
+raise additional capital through public or private equity offerings or debt
+financings. If we cannot raise needed funds on acceptable terms, we may not be
+able to successfully execute our growth strategy, take advantage of future
+opportunities or respond to competitive pressures or unanticipated requirements.
+To the extent we raise additional capital by issuing debt, it may become
+difficult for us to meet debt service obligations. To the extent we raise
+additional capital by issuing equity securities, our stockholders may experience
+substantial dilution. Also, any new equity securities may have greater rights,
+preferences or privileges than our existing Class A common shares.
+WE DEPEND ON KEY PERSONNEL TO MANAGE OUR BUSINESS EFFECTIVELY IN A RAPIDLY
+CHANGING MARKET, AND IF WE ARE UNABLE TO RETAIN EXISTING PERSONNEL, OUR BUSINESS
+COULD BE HARMED.
+Our future success depends upon the continued services of Robert Greenberg,
+Chairman of the Board and Chief Executive Officer, Michael Greenberg, President,
+and David Weinberg, Executive Vice President and Chief Financial Officer. The
+loss of the services of any of these individuals or any other key employee could
+harm us. Our future success also depends on our ability to identify, attract and
+retain additional qualified personnel. Competition for employees in our industry
+is intense and we may not be successful in attracting and retaining such
+personnel.
+17
+OUR TRADEMARKS, DESIGN PATENTS AND OTHER INTELLECTUAL PROPERTY RIGHTS MAY NOT BE
+ADEQUATELY PROTECTED OUTSIDE THE U.S.
+We believe that our trademarks, design patents and other proprietary rights
+are important to our success and our competitive position. We devote substantial
+resources to the establishment and protection of our trademarks and design
+patents on a worldwide basis. In the course of our international expansion, we
+have, however, experienced conflicts with various third parties that have
+acquired or claimed ownership rights in certain trademarks similar to ours or
+have otherwise contested our rights to our trademarks. We have in the past
+successfully resolved these conflicts through both legal action and negotiated
+settlements, none of which we believe has had a material impact on our financial
+condition and results of operations. Nevertheless, we cannot assure you that the
+actions we have taken to establish and protect our trademarks and other
+proprietary rights outside the U.S. will be adequate to prevent imitation of our
+products by others or to prevent others from seeking to block sales of our
+products as a violation of the trademarks and proprietary rights of others.
+Also, we cannot assure you that others will not assert rights in, or ownership
+of, trademarks, designs and other proprietary rights of ours or that we will be
+able to successfully resolve these types of conflicts to our satisfaction. In
+addition, the laws of certain foreign countries may not protect proprietary
+rights to the same extent as do the laws of the U.S. We may face significant
+expenses and liability in connection with the protection of our intellectual
+property rights outside the U.S. and if we are unable to successfully protect
+our rights or resolve intellectual property conflicts with others, our business
+or financial condition may be adversely affected.
+OUR ABILITY TO COMPETE COULD BE JEOPARDIZED IF WE ARE UNABLE TO PROTECT OUR
+INTELLECTUAL PROPERTY RIGHTS OR IF WE ARE SUED FOR INTELLECTUAL PROPERTY
+INFRINGEMENT.
+We use trademarks on nearly all of our products and believe that having
+distinctive marks that are readily identifiable is an important factor in
+creating a market for our goods, in identifying us, and in distinguishing our
+goods from the goods of others. We consider our Skechers(R) and S Design(R)
+trademarks to be among our most valuable assets and we have registered these
+trademarks in many countries. In addition, we own many other trademarks, which
+we utilize in marketing our products. We continue to vigorously protect our
+trademarks against infringement. We also have a number of design patents
+covering components and features used in various shoes. We believe that our
+success depends primarily upon skills in design, research and development,
+production and marketing rather than upon our patent position. However, we have
+followed a policy of filing applications for United States and foreign patents
+on designs that we deem valuable.
+We believe that our patents and trademarks are generally sufficient to
+permit us to carry on our business as presently conducted. We cannot, however,
+know whether we will be able to secure patents or trademark protection for our
+intellectual property in the future or that protection will be adequate for
+future products. Further, we face the risk of ineffective protection of
+intellectual property rights in the countries where we source and distribute our
+products. We have been sued for patent and trademark infringement and cannot be
+sure that our activities do not and will not infringe on the proprietary rights
+of others. If we are compelled to prosecute infringing parties, defend our
+intellectual property, or defend ourselves from intellectual property claims
+made by others, we may face significant expenses and liability which could
+negatively impact our business or financial condition.
+ENERGY SHORTAGES, NATURAL DISASTERS OR A DECLINE IN ECONOMIC CONDITIONS IN
+CALIFORNIA COULD INCREASE OUR OPERATING EXPENSES OR ADVERSELY AFFECT OUR SALES
+REVENUE.
+A substantial portion of our operations are located in California, including
+37 of our retail stores, our headquarters in Manhattan Beach and our domestic
+distribution center in Ontario. Because California has and may in the future
+experience energy and electricity shortages, we may be subject to increased
+operating costs as a result of higher electricity and energy rates and may be
+subject to rolling blackouts which could interrupt our business. Any such impact
+could be material and adversely affect our profitability. In addition, because a
+significant portion of our net sales is derived from sales in California, a
+decline in the economic conditions in California, whether or not such decline
+spreads beyond California, could materially adversely affect our business.
+Furthermore, a natural disaster or other catastrophic event, such as an
+earthquake affecting California, could significantly disrupt our business. We
+may be more susceptible to these issues than our competitors whose operations
+are not as concentrated in California.
+ONE PRINCIPAL STOCKHOLDER IS ABLE TO CONTROL SUBSTANTIALLY ALL MATTERS REQUIRING
+A VOTE OF OUR STOCKHOLDERS AND HIS INTERESTS MAY DIFFER FROM THE INTERESTS OF
+OUR OTHER STOCKHOLDERS.
+As of December 31, 2001, Robert Greenberg, Chairman of the Board and Chief
+Executive Officer, beneficially owned 74.4% of our outstanding Class B common
+shares and members of Mr. Greenberg's immediate family beneficially owned the
+remainder of our outstanding Class B common shares. The holders of Class A
+common shares and Class B common shares have identical rights except
+18
+that holders of Class A common shares are entitled to one vote per share while
+holders of Class B common shares are entitled to ten votes per share on all
+matters submitted to a vote of our stockholders. As a result, as of December 31,
+2001, Mr. Greenberg held approximately 69.5% of the aggregate number of votes
+eligible to be cast by our stockholders and together with shares held by other
+members of his immediate family held approximately 93.4% of the aggregate number
+of votes eligible to be cast by our stockholders. Therefore, Mr. Greenberg is
+able to control substantially all matters requiring approval by our
+stockholders. Matters that require the approval of our stockholders include the
+election of directors and the approval of mergers or other business combination
+transactions. Mr. Greenberg also has control over our management and affairs. As
+a result of such control, certain transactions are not possible without the
+approval of Mr. Greenberg, including, proxy contests, tender offers, open market
+purchase programs, or other transactions that can give our stockholders the
+opportunity to realize a premium over the then-prevailing market prices for
+their shares of our Class A common shares. The differential in the voting rights
+may adversely affect the value of our Class A common shares to the extent that
+investors or any potential future purchaser view the superior voting rights of
+our Class B common shares to have value.
+OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY INHIBIT A TAKEOVER, WHICH MAY CAUSE A
+DECLINE IN THE VALUE OF OUR STOCK.
+Provisions of Delaware law, our certificate of incorporation, or our bylaws
+could make it more difficult for a third party to acquire us, even if closing
+such a transaction would be beneficial to our stockholders. Mr. Greenberg's
+substantial beneficial ownership position, together with the authorization of
+Preferred Stock, the disparate voting rights between the Class A common shares
+and Class B common shares, the classification of the Board of Directors and the
+lack of cumulative voting in our certificate of incorporation and bylaws, may
+have the effect of delaying, deferring or preventing a change in control, may
+discourage bids for our Class A common shares at a premium over the market price
+of the Class A common shares and may adversely affect the market price of the
+Class A common shares.
+SPECIAL NOTE ON FORWARD LOOKING STATEMENTS AND REPORTS PREPARED BY ANALYSTS.
+This Form 10-K contains forward-looking statements within the meaning of the
+Private Securities Litigation Reform Act of 1995, including statements with
+regards to our revenues, earnings, spending, margins, cash flow, orders,
+inventory, products, actions, plans, strategies and objectives. Forward-looking
+statements include, without limitation, any statement that may predict,
+forecast, indicate or simply state future results, performance or achievements,
+and may contain the words "believe," "anticipate," "expect," "estimate,"
+"intend," "plan," "project," "will be," "will continue," "will," "result,"
+"could," "may," "might," or any variations of such words with similar meanings.
+Any such statements are subject to risks and uncertainties that would cause our
+actual results to differ materially from those which are management's current
+expectations or forecasts. Such information is subject to the risk that such
+expectations or forecasts, or the assumptions underlying such exceptions or
+forecasts, become inaccurate. In addition, the risks included here are not
+exhaustive. Other sections of this report may include additional factors which
+could adversely impact our business and financial performance. Moreover, we
+operate in a very competitive and rapidly changing environment. New risk factors
+emerge from time to time and we cannot predict all such risk factors, nor can we
+assess the impact of all such risk factors on our business or the extent to
+which any factor, or combination of factors, may cause actual results to differ
+materially from those contained in any forward looking statements. Given these
+risks and uncertainties, investors should not place undue reliance on
+forward-looking statements as a prediction of actual results. Investors should
+also be aware that while we do, from time to time, communicate with securities
+analysts, we do not disclose any material non-public information or other
+confidential commercial information to them. Accordingly, individuals should not
+assume that we agree with any statement or report issued by any analyst,
+regardless of the content of the report. Thus, to the extent that reports issued
+by securities analysts contain any projections, forecasts or opinions, such
+reports are not our responsibility.

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+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 14A
+within 120 days after the end of our 2001 fiscal year.

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+CERTAIN RELATIONSHIPS AND RELATED
+TRANSACTIONS 
+Shares of Class A Common Stock issuable upon
+conversion of shares of Class B Common Stock held by the
+Greenberg Family Trust and Michael Greenberg, President of the
+Company, are subject to certain registration rights. The Company
+entered into a registration rights agreement with the Greenberg
+Family Trust and Michael Greenberg pursuant to which the Company
+agreed that it will, on up to two separate occasions per year,
+register up to one-third of the shares of Class A Common
+Stock issuable upon conversion of their Class B Common
+Stock beneficially owned as of the closing of the Company’s
+initial public offering of its Class A Common Stock by each
+such stockholder in any one year, provided, among other
+conditions, that the underwriters of any such offering have the
+right to limit the number of shares included in such
+registration. The Company also agreed that, if it shall cause to
+be filed with the Securities and Exchange Commission a
+registration statement, each such stockholder shall have the
+right to include up to one-third of the shares of Class A
+Common Stock issuable upon conversion of their Class B
+Common Stock beneficially owned as of the closing of the
+Company’s initial public offering of its Class A
+Common Stock by each of them in such registration statement
+provided, among other conditions, that the underwriters of any
+such offering have the right to limit the number of shares
+included in such registration. All expenses of such
+registrations shall be at the Company’s expense.
+Thomas J. Poletti, a director of the
+Company, is a partner of the law firm of Kirkpatrick &
+Lockhart, LLP which provides legal services to the Company. The
+Company paid $252,000 to Kirkpatrick & Lockhart, LLP
+for legal services that were provided to the Company in 2001.
+The Company has entered into employment
+agreements with certain executive officers. See “Executive
+Compensation — Employment Agreements.”
+The Company believes that all of the foregoing
+transactions were on terms no less favorable than those that
+could have been received from unrelated third parties.
+14
+Table of Contents