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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
+0000893538,SM,SM Energy Co,10-K,2002-03-19,2001-12-31,2002-03-19T05:00:00.000Z,0000893538-02-000009,asci1201_10k.htm,12/01 10-K,721181,0,0,https://www.sec.gov/Archives/edgar/data/893538/000089353802000009/asci1201_10k.htm,https://www.sec.gov/Archives/edgar/data/893538/000089353802000009/,2001,2001,1

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+ITEM 1. BUSINESS
+Background
+St. Mary Land & Exploration Company is an independent energy
+company engaged in the exploration, development, acquisition and production of
+natural gas and crude oil. St. Mary was founded in 1908 and incorporated in
+Delaware in 1915. Our operations are focused in the following five core
+operating areas in the United States:
+o the Mid-Continent region in western Oklahoma and northern Texas;
+o the ArkLaTex region that spans northern Louisiana and portions of
+eastern Texas, Arkansas and Mississippi;
+o the onshore Gulf Coast and offshore Gulf of Mexico;
+o the Williston Basin in eastern Montana and western North Dakota; and
+o the Permian Basin in eastern New Mexico and western Texas.
+As of December 31, 2001, we had estimated proved reserves of
+approximately 23.7 MMBbls of oil and 241.2 Bcf of natural gas, or a total of
+383.2 BCFE, 86% of which were proved developed and 63% of which were natural
+gas, with a PV-10 value of $363.8 million. For the year ended December 31, 2001,
+we produced 54.1 BCFE representing average daily production of 148.2 MMCFE per
+day.
+We focus our resources in selected domestic basins where we believe
+that our expertise in geology, geophysics and drilling and completion techniques
+provides us with competitive advantages. We have assembled a balanced program of
+low-to-medium-risk development and exploitation projects to provide the
+foundation for steady growth. In addition, we have a portfolio of higher-risk
+higher-potential exploration projects that we believe could significantly
+increase our reserves and production. We measure and rank our investment
+decisions based on their risk-adjusted impact on per share value. In the past,
+we have sold selected assets when we believed attractive prices were available,
+and we will continue to evaluate such opportunities in the future.
+We seek to develop our existing property base and acquire acreage with
+additional potential in our core areas. From January 1, 1999 through December
+31, 2001, we participated in the drilling and recompletion of 622 gross wells
+with an average success rate of 83%. During that same period we added estimated
+proved reserves of 347 BCFE at an average finding cost of $1.15 per MCFE. Our
+average annual production replacement was 251% during this three-year period,
+and our production has grown at an average rate of 18% per year over the same
+time period.
+1
+As of December 31, 2001, we had an acreage position of 1,192,077 gross
+(539,658 net) acres of which 620,540 gross (347,432 net) acres were undeveloped.
+For 2002 we have budgeted capital expenditures of $104.0 million for ongoing
+development, exploitation and exploration programs in our core operating areas
+and $60.0 million for acquisitions of oil and gas properties and acreage.
+Our principal offices are located at 1776 Lincoln Street, Suite 1100,
+Denver, Colorado 80203, and our telephone number is (303) 861-8140.
+Business Strategy
+Our objective is to build stockholder value through consistent economic
+growth in reserves and production that increase net asset value per share, cash
+flow per share and earnings per share. The principal elements of our strategy
+are as follows:
+o Maintain Focused Geographic Operations. We focus on exploration,
+development and acquisition activities in five core operating areas
+where we have built a balanced portfolio of proved reserves,
+development drilling opportunities and higher-risk higher-potential
+exploration prospects. We believe that our leasehold position is a
+strategic asset. Our senior technical managers, each possessing over
+20 years of experience, head up regional technical offices located
+near core properties and are supported by centralized administration
+in our Denver office. We believe that our long-standing presence,
+our established networks of local industry relationships and our
+acreage holdings in our core operating areas provide us with a
+competitive advantage. In addition, we believe that we can continue
+to expand our operations without the need to proportionately
+increase the number of employees.
+o Continue Exploitation and Development of Existing Properties. We use
+our comprehensive base of geological, geophysical, engineering and
+production experience in each of our core operating areas to source
+prospects for our ongoing low-to-medium-risk development and
+exploitation programs. We conduct detailed geologic studies and use
+an array of technologies and tools including 2-D and 3-D seismic
+imaging, hydraulic fracturing and reservoir stimulation techniques,
+and specialized logging tools to enhance the potential of our
+existing properties. In 2001 we participated in the drilling and
+recompletion of 252 gross drilling wells with an 83% success rate.
+o Pursue Higher-Risk Higher-Potential Exploration Projects. We have
+allocated approximately 15% of our 2002 drilling and exploration
+capital expenditures budget to higher-risk higher-potential
+exploration projects and unconventional gas projects. Our strategy
+is to test several of these prospects each year that in total have
+the potential to significantly increase our reserves. We seek to
+invest in a diversified mix of exploration projects and generally
+limit our capital exposure by participating with other experienced
+industry partners. We plan to test several of these prospects in the
+Gulf Coast region and Rocky Mountain area during 2002.
+o Make Selective Acquisitions. We seek to make selective niche
+acquisitions of oil and gas properties that complement our existing
+operations, offer economies of scale and provide further
+development, exploitation and exploration opportunities based on
+proprietary geologic concepts. We believe that the focus on smaller,
+2
+negotiated transactions where we have specialized geologic knowledge
+or operating experience has enabled us to acquire attractively
+priced and under-exploited properties. In addition, we will pursue
+corporate acquisitions that we believe will be accretive. Examples
+of this type of acquisition include our 1999 Nance Petroleum
+Corporation and King Ranch Energy, Inc. acquisitions, both of which
+were completed for stock. We believe that 2002 will be a very active
+year for the divestiture of oil and gas properties by larger and/or
+financially leveraged industry participants. We have budgeted $60.0
+million for acquisitions in 2002.
+o Control Operations. We believe it is important to control geologic
+and operational decisions as well as the timing of those decisions.
+At December 31, 2001, we operated 58% of our properties on a volume
+basis and 54% on a PV-10 value basis. We are the operator of
+properties representing approximately 73% of our 2002 drilling
+capital budget.
+o Maintain Financial Flexibility. Conservative use of financial
+leverage has long been a critical element of our strategy. We
+believe that maintaining a strong balance sheet is a significant
+competitive advantage that enables us to pursue acquisition and
+other opportunities, especially in weaker price environments. It
+also provides us with the financial resources to weather periods of
+volatile commodity prices or escalating costs.
+Significant Developments Since December 31, 2000
+o 2001 Acquisition of Oil and Gas Properties. In November 2001 St.
+Mary completed a $40.5 million acquisition of properties from
+Choctaw II Oil & Gas, Ltd. The properties are located in our
+Williston Basin core area and the Green River Basin in Wyoming and
+produce approximately 1,200 barrels of oil and 4,600 Mcf of gas per
+day.
+o Increase in 2001 Year-End Reserves. As of December 31, 2001 proved
+reserves increased 9% from December 31, 2000 levels to 383.2 BCFE.
+St. Mary added 35.7 BCFE through acquisitions for cash and 78.6 BCFE
+from drilling activities. There were net downward revisions of
+previous reserves totaling 24.4 BCFE consisting of 32.1 BCFE due to
+price revisions, partially offset by 7.7 BCFE in positive
+performance revisions.
+o 2001 Acquisition of Coalbed Methane Prospects. In 2001 we acquired
+leases covering 115,000 acres in which we own an average 92% working
+interest in the Hanging Woman Basin of Montana and Wyoming for
+prospective coalbed methane development. We have drilled an 18-well
+pilot program and are evaluating its results. We are also currently
+investigating permitting and environmental issues related to these
+prospects. We will be unable to determine the future potential of
+these prospects until we have completed the evaluation of our pilot
+program and have resolved all such permitting and environmental
+issues. An environmental public interest group has filed a lawsuit
+against the federal Bureau of Land Management seeking to cancel
+certain federal leases related to coalbed methane development in
+Montana, which could affect 46,000 of our 115,000 leased acres. We
+will monitor this lawsuit as part of our investigation of
+environmental issues related to these prospects.
+3
+o Senior Convertible Notes. In March 2002 we issued in a private
+placement a total of $100.0 million of our 5.75% senior convertible
+notes due 2022 with a 1/2% contingent interest provision. We
+received net proceeds, after deducting the initial purchasers'
+discount and estimated offering expenses payalbe by us, of $96.7
+million. The Notes are general unsecured obligations and rank on a
+parity in right of payment with all our existing and future senior
+indebtedness and other general unsecured obligations, and are senior
+in right of payment with all our future subordinated indebtedness.
+The Notes are convertible into our common stock at a conversion
+price of $26.00 per share, subject to adjustment. We can redeem the
+Notes with cash in whole or in part at a repurchase price of 100% of
+the principal amount plus accrued and unpaid interest beginning on
+March 20, 2007. The note holders have the option of requiring us to
+repurchase the Notes for cash at 100% of the principal amount plus
+accrued and unpaid interest upon (1) a change in control of St. Mary
+or (2) on March 20, 2007, March 15, 2012 and March 15, 2017. On
+March 20, 2007 we may pay the repurchase price with cash, shares of
+our common stock or any combination of cash and our common stock. We
+are not restricted from paying dividends, incurring debt, or issuing
+or repurchasing our securities under the indenture for the Notes.
+There are no financial covenants in the indenture . We used a
+portion of the net proceeds from the Notes to repay our credit
+facility balance and will use the remaining net proceeds to fund a
+portion of our 2002 capital budget.
+Major Customers
+During 2001 sales to Transok Gas Company accounted for 12.0% and sales
+to BP Amoco accounted for 11.3% of our total oil and gas production revenue.
+During 2000 sales to BP Amoco accounted for 22.3% of our total oil and gas
+production revenue. During 1999 sales to Transok accounted for 13.3% of our
+total oil and gas production revenue.
+Employees and Office Space
+As of December 31, 2001, St. Mary had 179 full-time employees. None of
+our employees is subject to a collective bargaining agreement. We consider our
+relations with our employees to be good. We lease approximately 42,660 square
+feet of office space in Denver, Colorado for our executive and administrative
+offices, of which 8,730 square feet is subleased. We also lease approximately
+14,990 square feet of office space in Tulsa, Oklahoma; approximately 11,740
+square feet in Shreveport, Louisiana; approximately 7,500 square feet in
+Lafayette, Louisiana; and approximately 15,830 square feet in Billings, Montana.
+Title to Properties
+Substantially all of our working interests are held pursuant to leases
+from third parties. A title opinion is usually obtained prior to the
+commencement of drilling operations on properties. We have obtained title
+opinions or conducted a thorough title review on substantially all of our
+producing properties and believe that we have satisfactory title to such
+properties in accordance with standards generally accepted in the oil and gas
+industry. Our properties are subject to customary royalty interests, liens for
+current taxes, and other burdens that we believe do not materially interfere
+with the use of or affect the value of such properties. We perform only a
+minimal title investigation before acquiring undeveloped properties.
+4
+Competition
+The oil and gas industry is intensely competitive. Competition is
+particularly intense in the acquisition of prospective oil and natural gas
+properties and oil and gas reserves. Our competitive position depends on our
+geological, geophysical and engineering expertise, our financial resources, and
+our ability to select, acquire and develop proved reserves. We believe that the
+locations of our leasehold acreage, our exploration, drilling and production
+capabilities and the experience of our management and that of our industry
+partners generally enable us to compete effectively in our core operating areas.
+However, we compete with a substantial number of major and independent oil and
+gas companies that have larger technical staffs and greater financial and
+operational resources than we do. Many of these companies not only engage in the
+acquisition, exploration, development and production of oil and natural gas
+reserves, but also have refining operations, market refined products and
+generate electricity. We also compete with other oil and natural gas companies
+in attempting to secure drilling rigs and other equipment necessary for drilling
+and completion of wells. Drilling equipment may be in short supply from time to
+time.
+Government Regulations
+Our business is subject to various federal, state and local laws and
+governmental regulations that may be changed from time to time in response to
+economic or political conditions. Matters subject to regulation include
+discharge permits for drilling operations, drilling bonds, reports concerning
+operations, the spacing of wells, unitization and pooling of properties,
+taxation and environmental protection. From time to time, regulatory agencies
+have imposed price controls and limitations on production by restricting the
+rate of flow of oil and gas wells below actual production capacity in order to
+conserve supplies of oil and gas.
+St. Mary's operations could result in liability for personal injuries,
+property damage, oil spills, discharge of hazardous materials, remediation and
+clean-up costs and other environmental damages. We could be liable for
+environmental damages caused by previous property owners. As a result,
+substantial liabilities to third parties or governmental entities may be
+incurred, and the payment of such liabilities could have a material adverse
+effect on our financial condition and results of operations. We maintain
+insurance coverage for our operations, including limited coverage for sudden
+environmental damages, but we do not believe that insurance coverage for
+environmental damage that occurs over time is available at a reasonable cost.
+Moreover, we do not believe that insurance coverage for the full potential
+liability that could be caused by sudden environmental damages is available at a
+reasonable cost. Accordingly, we may be subject to liability or may lose
+substantial portions of our properties in the event of certain environmental
+damages. St. Mary could incur substantial costs to comply with environmental
+laws and regulations.
+Energy Regulations. With respect to federal energy regulation, the
+transportation and sale for resale of natural gas in interstate commerce have
+historically been regulated pursuant to several laws enacted by Congress and
+regulations promulgated under these laws by the Federal Energy Regulatory
+Commission, or the FERC, and its predecessor. In the past the federal government
+has regulated the prices at which gas could be sold. Congress removed all price
+and non-price controls affecting wellhead sales of natural gas effective January
+1, 1993. However, Congress could reenact price controls in the future.
+Our sales of natural gas are affected by the availability, terms and
+cost of transportation. The price and terms of access to pipeline transportation
+are subject to extensive federal and state regulation. From 1985 to the present,
+several major regulatory changes have been implemented by Congress and the FERC
+5
+that affect the economics of natural gas production, transportation and sales.
+In addition, the FERC is continually proposing and implementing new rules and
+regulations affecting those segments of the natural gas industry that remain
+subject to the FERC's jurisdiction, most notably interstate natural gas
+transmission companies. These initiatives may also affect the intrastate
+transportation of gas under certain circumstances. The stated purpose of many of
+these regulatory changes is to promote competition among the various sectors of
+the natural gas industry, and these initiatives generally reflect more
+light-handed regulation.
+The ultimate impact of the complex rules and regulations issued by the
+FERC since 1985 cannot be predicted. In addition, many aspects of these
+regulatory developments have not become final but are still pending judicial and
+final FERC decisions. We cannot predict what further action the FERC will take
+on these matters. Some of the FERC's more recent proposals may, however,
+adversely affect the availability and reliability of interruptible
+transportation service on interstate pipelines. Additional proposals and
+proceedings that might affect the natural gas industry are pending before
+Congress and the courts. The natural gas industry historically has been very
+heavily regulated; therefore, there is no assurance that the less stringent
+regulatory approach recently pursued by the FERC and Congress will continue. We
+do not believe that we will be affected by any action taken materially
+differently than other natural gas producers and marketers with whom we compete.
+Our sales of crude oil, condensate and natural gas liquids are
+currently not regulated and are made at market prices. However, in a number of
+instances the ability to transport and sell such products are dependent on
+pipelines whose rates, terms and conditions of service are subject to FERC
+jurisdiction under the Interstate Commerce Act. Certain regulations implemented
+by the FERC in recent years could result in an increase in the cost of
+transportation service on certain petroleum product pipelines. We do not believe
+that these regulations affect us any differently than other producers of these
+products.
+Certain operations we conduct are on federal oil and gas leases that
+the Minerals Management Service administers. The MMS issues such leases through
+competitive bidding. These leases contain relatively standardized terms and
+require compliance with detailed MMS regulations and, for offshore leases,
+orders pursuant to the Outer Continental Shelf Lands Act, which are subject to
+change by the MMS. For offshore operations, lessees must obtain MMS approval for
+exploration plans and development and production plans prior to the commencement
+of such operations. In addition to permits required from other agencies such as
+the Coast Guard, the Army Corps of Engineers and the Environmental Protection
+Agency, lessees must obtain a permit from the MMS prior to the commencement of
+drilling. Lessees must also comply with detailed MMS regulations governing,
+among other things:
+o engineering and construction specifications for offshore production
+facilities;
+o safety procedures;
+o flaring of production;
+o plugging and abandonment of Outer Continental Shelf or OCS wells;
+o calculation of royalty payments and the valuation of production for
+this purpose; and
+o removal of facilities.
+6
+To cover the various obligations of lessees on the OCS, the MMS
+generally requires that lessees post substantial bonds or other acceptable
+assurances that such obligations will be met. The cost of such bonds or other
+surety can be substantial, and we cannot assure that we can continue to obtain
+bonds or other surety in all cases. Under certain circumstances the MMS may
+require our operations on federal leases to be suspended or terminated.
+Many of the states in which we conduct our oil and gas drilling and
+production activities regulate such activities by requiring, among other things,
+drilling permits and bonds and reports concerning operations. The laws of these
+states also govern a number of environmental and conservation matters, including
+the handling and disposing of waste material, plugging and abandonment of wells,
+restoration requirements, unitization and pooling of natural gas and oil
+properties and establishment of maximum rates of production from natural gas and
+oil wells. Some states prorate production to the market demand for oil and
+natural gas.
+Environmental Regulations. Our operations are subject to numerous laws
+and regulations governing the discharge of materials into the environment or
+otherwise relating to environmental protection. These laws and regulations may
+require the acquisition of a permit before drilling commences, restrict the
+types, quantities and concentration of various substances that can be released
+into the environment in connection with drilling and production activities,
+limit or prohibit drilling activities on certain lands lying within wilderness,
+wetlands and other protected areas, and impose substantial liabilities for
+pollution resulting from our operations.
+Public interest in the protection of the environment has increased
+dramatically in recent years. Onshore and offshore drilling in some areas has
+been opposed by environmental groups and, in some areas, has been restricted.
+Legislation has also been proposed in Congress from time to time that would
+reclassify certain oil and gas exploration and production wastes as "hazardous
+wastes," which would make the reclassified wastes subject to much more stringent
+handling, disposal and clean-up requirements. To the extent laws are enacted or
+other governmental action is taken that prohibits or restricts offshore drilling
+or imposes environmental protection requirements that result in increased costs
+to the natural gas and oil industry (both onshore and offshore), our business
+and prospects could be adversely affected. We believe that we are in substantial
+compliance with current applicable environmental laws and regulations and that
+continued compliance with existing requirements would not have a material
+adverse impact on us.
+Violation of environmental laws and regulations can lead to the
+imposition of administrative, civil or criminal penalties; remedial obligations;
+and in some instances injunctive relief. In addition, violations of
+environmental laws or the discharge of hazardous materials or oil could result
+in liability for personal injuries, property damage, remediation and cleanup
+costs, and other environmental damages. As a result, substantial liabilities to
+third parties or governmental entities may be incurred, and the payment of such
+liabilities could have a material adverse effect on our financial condition and
+results of operations.
+The Oil Pollution Act and regulations thereunder impose a variety of
+regulations on "responsible parties" related to the prevention of oil spills and
+liability for damages resulting from such spills in United States waters. A
+"responsible party" includes the owner or operator of an onshore facility,
+pipeline or vessel, or the lessee or permittee of the area in which an offshore
+facility is located. OPA assigns liability to each responsible party for oil
+cleanup costs and a variety of public and private damages. While liability
+limits apply in some circumstances, a party cannot take advantage of liability
+limits if the spill was caused by gross negligence or willful misconduct or
+resulted from violation of a federal safety, construction or operating
+regulation. Likewise, if the party fails to report a spill or to cooperate fully
+7
+in the cleanup, liability limits do not apply. Even if applicable, the liability
+limits for offshore facilities require the responsible party to pay all removal
+costs, plus up to $75 million in other damages. Few defenses exist to the
+liability imposed by OPA.
+OPA imposes ongoing requirements on a responsible party, including the
+preparation of oil spill response plans and proof of financial responsibility to
+cover environmental cleanup and restoration costs that could be incurred in
+connection with an oil spill. As amended by the Coast Guard Authorization Act of
+1996, OPA requires responsible parties of covered offshore facilities that have
+a worst case oil spill of more than 1,000 barrels to demonstrate financial
+responsibility in amounts ranging from at least $10 million in specified state
+waters to at least $35 million in federal outer continental shelf waters, with
+higher amounts of up to $150 million if a formal risk assessment indicates that
+a higher amount should be required based on specific risks posed by the
+operations or if the worst case oil-spill discharge volume possible at the
+facility may exceed the applicable threshold volumes specified under the final
+rule of the United States Department of the Interior Minerals Management
+Service. On August 11, 1998, the MMS enacted a final rule implementing these
+financial responsibility requirements. We do not anticipate that we will
+experience any difficulty in continuing to satisfy the MMS's requirements for
+demonstrating financial responsibility under OPA.
+The Federal Water Pollution Control Act, also known as the Clean Water
+Act, imposes restrictions and strict controls regarding the discharge of
+produced waters and other oil and gas wastes into navigable waters. Permits must
+be obtained to discharge pollutants to waters and to conduct construction
+activities in waters and wetlands. The FWPCA and similar state laws provide for
+civil, criminal and administrative penalties for any unauthorized discharges of
+pollutants and unauthorized discharges of reportable quantities of oil and other
+hazardous substances. Many state discharge regulations and the Federal National
+Pollutant Discharge Elimination System general permits prohibit the discharge of
+produced water and sand, drilling fluids, drill cuttings and certain other
+substances related to the oil and gas industry into coastal waters. Although the
+costs to comply with zero discharge mandates under federal or state law may be
+significant, the entire industry is expected to experience similar costs, and we
+believe that these costs will not have a material adverse impact on our results
+of operations or financial position. The United States Environmental Protection
+Agency has adopted regulations requiring certain oil and gas exploration and
+production facilities to obtain permits for storm water discharges. Costs may be
+associated with the treatment of wastewater or developing and implementing storm
+water pollution prevention plans.
+The Comprehensive Environmental Response, Compensation, and Liability
+Act, also known as the "Superfund" law, imposes liability, without regard to
+fault or the legality of the original conduct, on certain classes of persons
+that are considered to be responsible for the release of a "hazardous substance"
+into the environment. These persons, including the owner or operator of the
+disposal site or sites where the release occurred and companies that transported
+or disposed or arranged for the transport or disposal of the hazardous
+substances under CERCLA, may be subject to joint and several liability for the
+costs of cleaning up the hazardous substances that have been released into the
+environment and for damages to natural resources. It is not uncommon for
+neighboring landowners and other third parties to file claims for personal
+injury and property damage allegedly caused by the hazardous substances released
+into the environment.
+We generate both hazardous and nonhazardous solid wastes which are
+subject to requirements of the Federal Resource Conservation and Recovery Act
+and comparable state statutes. From time to time, the EPA has considered making
+changes in nonhazardous waste standards that would result in stricter disposal
+requirements for these wastes. Furthermore, it is possible that some wastes that
+8
+we generate that are currently classified as nonhazardous may be in the future
+be designated as "hazardous wastes," resulting in the wastes being subject to
+more rigorous and costly disposal requirements. Changes in applicable
+regulations may result in an increase in our capital expenditures or operating
+expenses.
+We currently own or lease, and have in the past owned or leased,
+onshore properties that for many years have been utilized for or associated with
+the exploration and production of oil and gas. Although we have utilized
+operating and disposal practices that were standard in the industry at the time,
+hydrocarbons or other wastes may have been disposed of or released on or under
+the properties owned or leased by us or on or under other locations where such
+wastes have been taken for disposal. These properties and the wastes disposed
+thereon may be subject to CERCLA, RCRA and analogous state laws. Under such
+laws, we could be required to remove or remediate previously disposed wastes
+(including waste disposed of or released by prior owners or operators) or
+property contamination (including groundwater contamination by prior owners or
+operators), or to perform remedial plugging or closure operations to prevent
+future contamination.
+Our operations are also subject to the Federal Clean Air Act and
+comparable state statutes. Amendments to the Clean Air Act adopted in 1990
+contain provisions that may result in the imposition of increasingly stringent
+pollution control requirements with respect to air emissions from the operations
+of stationary and mobile source equipment. Such air pollution control
+requirements may include specific equipment or technologies, permits with
+emissions and operational limitations, pre-approval of new or modified projects
+or facilities producing air emissions, and similar measures. Failure to comply
+with applicable air statutes or regulations may lead to the assessment of
+administrative, civil or criminal penalties, and/or result in the limitation or
+cessation of construction or operation of certain air emission sources.
+Risk Factors
+Risks Related to Our Business
+In addition to the other information set forth elsewhere in this Form
+10-K, the following factors should be carefully considered when evaluating St.
+Mary.
+Oil and natural gas prices are volatile, and an extended decline in prices would
+hurt our profitability and financial condition.
+Our revenues, operating results, profitability, future rate of growth
+and the carrying value of our oil and gas properties depend heavily on
+prevailing market prices for oil and gas. We expect the markets for oil and gas
+to continue to be volatile. Any substantial or extended decline in the price of
+oil or gas would have a material adverse effect on our financial condition and
+results of operations. It could reduce our cash flow and borrowing capacity, as
+well as the value and the amount of our oil and gas reserves. Lower prices may
+also reduce the amount of oil and gas that we can economically produce.
+Historically, the markets for oil and gas have been volatile, and they
+are likely to continue to be volatile. Wide fluctuations in oil and gas prices
+may result from relatively minor changes in the supply of and demand for oil and
+gas, market uncertainty and other factors that are beyond our control,
+including:
+o worldwide and domestic supplies of oil and natural gas;
+9
+o the ability of the members of the Organization of Petroleum
+Exporting Countries to agree to and maintain oil price and
+production controls;
+o political instability or armed conflict in oil or gas producing
+regions;
+o the price and level of foreign imports;
+o worldwide economic conditions;
+o marketability of production;
+o the level of consumer demand;
+o the price, availability and acceptance of alternative fuels;
+o the availability of pipeline capacity;
+o weather conditions; and
+o actions of federal, state, local and foreign authorities.
+These external factors and the volatile nature of the energy markets make it
+difficult to estimate future prices of oil and natural gas. Declines in oil and
+gas prices would reduce our revenue and could also reduce the amount of oil and
+gas that we can produce economically and, as a result, could have a material
+adverse effect on our financial condition, results of operations and reserves.
+Further, oil and gas prices do not necessarily move in tandem. Because
+approximately 63% of our proved reserves were natural gas reserves as of
+December 31, 2001, we are more susceptible to changes in natural gas prices.
+A material portion of our production, revenues and cash flows are derived from
+one field.
+Production from the Judge Digby Field accounted for approximately 16%
+of our total oil and gas production volumes during 2001. If the level of
+production from this field substantially declines other than through normal
+depletion over the expected reserve life, it could have a material adverse
+impact on our overall production levels and our revenues.
+Our future success depends on our ability to replace reserves that we produce.
+Our future success depends on our ability to find, develop and acquire
+oil and gas reserves that are economically recoverable. As of December 31, 2001
+our proved reserves would last for approximately 7.1 years if produced
+constantly at the 2001 rate of production. As a result, we must locate and
+develop or acquire new oil and gas reserves to replace those being depleted by
+production. We must do this even during periods of low oil and gas prices.
+Without successful exploration or acquisition activities, our reserves,
+production and revenues will decline rapidly. In addition, approximately 14% of
+our total estimated proved reserves at December 31, 2001 were undeveloped. By
+their nature, undeveloped reserves are less certain. Recovery of such reserves
+will require significant capital expenditures and successful drilling
+operations. We cannot assure you that we will be able to find and develop or
+acquire additional reserves at an acceptable cost.
+10
+Our producing property acquisitions carry significant risks.
+Our recent growth is due in part to, and our growth strategy relies in
+part on, acquisitions of producing properties and exploration and production
+companies. Successful acquisitions require an assessment of a number of factors
+beyond our control. These factors include recoverable reserves, future oil and
+gas prices, operating costs and potential environmental and other liabilities.
+These assessments are inexact and their accuracy is inherently uncertain. In
+connection with these assessments, we perform a review of the subject properties
+that we believe is generally consistent with industry practices. However, such a
+review will not reveal all existing or potential problems. In addition, our
+review may not permit us to become sufficiently familiar with the properties to
+fully assess their deficiencies and capabilities. We do not inspect every well.
+Even when we do inspect a well, we may not always discover structural,
+subsurface or environmental problems that may exist or arise.
+In connection with our acquisitions, we are generally not entitled to
+contractual indemnification for preclosing liabilities, including environmental
+liabilities. Normally, we acquire interests in properties on an "as is" basis
+with limited remedies for breaches of representations and warranties. In
+addition, competition for producing oil and gas properties is intense and many
+of our competitors have financial and other resources substantially greater than
+those available to us. Therefore, we cannot assure you that we will be able to
+acquire oil and gas properties that contain economically recoverable reserves or
+that we will acquire such properties at acceptable prices.
+Additionally, significant acquisitions can change the nature of our
+operations and business depending upon the character of the acquired properties,
+which may have substantially different operating and geological characteristics
+or be in different geographic locations than our existing properties. While it
+is our current intention to continue to concentrate on acquiring properties with
+development, exploitation and exploration potential located in our five core
+operating areas, we cannot assure you that in the future we will not decide to
+pursue acquisitions or properties located in other geographic regions. To the
+extent that such acquired properties are substantially different than our
+existing properties, our ability to efficiently realize the economic benefits of
+such transactions may be limited.
+We may not be able to successfully integrate future property or corporate
+acquisitions.
+We seek to make selective niche acquisitions of oil and gas properties,
+and we will pursue corporate acquisitions that we believe will be accretive.
+However, integrating acquired properties and businesses involves a number of
+special risks. These risks include the possibility that management may be
+distracted from normal business concerns by the need to integrate operations and
+systems and in retaining and assimilating additional employees. Any of these or
+other similar risks could lead to potential adverse short-term or long-term
+effects on our operating results. We cannot assure you that we will be able to
+obtain adequate funds for future property or corporate acquisitions,
+successfully integrate our future property or corporate acquisitions or that we
+will realize any of the anticipated benefits of the acquisitions.
+Substantial capital is required to replace and grow reserves.
+We make, and will continue to make, substantial expenditures to find,
+acquire, develop and produce oil and natural gas reserves. Our capital
+expenditures for oil and gas properties were $182.9 million for 2001 and $125.2
+million during 2000. We have budgeted total capital expenditures of $164.0
+million in 2002. With the net proceeds from the sale of senior convertible notes
+11
+in March 2002 (see Item 7., Management's Discussion and Analysis), cash provided
+by operating activities and borrowings under our credit facility, we believe we
+will have sufficient cash to fund budgeted capital expenditures in 2002. If
+additional development or attractive acquisition opportunities arise, we may
+consider other forms of financing, including the public offering or private
+placement of equity or debt securities. However, if oil and gas prices decrease
+or we encounter operating difficulties that result in our cash flow from
+operations being less than expected, we may have to reduce the capital we can
+spend in future years, unless we raise additional funds through debt or equity
+financing. We cannot assure you that debt or equity financing, cash generated by
+operations or borrowing capacity will be available to us on acceptable terms to
+meet these requirements.
+Future cash flows and the availability of financing will be subject to
+a number of variables, such as:
+o our success in locating and producing new reserves;
+o the level of production from existing wells; and
+o prices of oil and natural gas.
+Issuing equity securities to satisfy our financing requirements could
+cause substantial dilution to existing shareholders. Debt financing could lead
+to:
+o a substantial portion of our operating cash flow being dedicated to
+the payment of principal and interest;
+o us being more vulnerable to competitive pressures and economic
+downturns; and
+o restrictions on our operations.
+If our revenues were to decrease due to lower oil and natural gas
+prices, decreased production or other reasons, and if we could not obtain
+capital through our credit facility or otherwise, our ability to execute our
+development plans, replace our reserves or maintain production levels could be
+greatly limited.
+We may not obtain a bank credit facility borrowing base redetermination that
+adequately meets our anticipated financing needs.
+We have a long-term revolving credit facility with a bank group
+consisting of Bank of America, Comerica Bank-Texas and Wells Fargo Bank West.
+Under the facility, the maximum loan amount is $115.0 million. The amount
+actually available from time to time depends on a borrowing base that the
+lenders periodically redetermine based on the value of our oil and gas
+properties and other assets. Since we pay commitment fees based on the unused
+portion of the borrowing base, we have limited the borrowing base that we have
+accepted to correspond with our actual funding requirements. The accepted
+borrowing base under the facility as of December 31, 2001 was $100.0 million.
+12
+Our next borrowing base redetermination date is scheduled to occur on
+or about April 15, 2002. We cannot assure you that the banks will agree to a
+borrowing base redetermination that is adequate for our anticipated financing
+needs.
+If oil and gas prices decrease or exploration efforts are unsuccessful, we may
+be required to take additional writedowns.
+There is a risk that we will be required to write down the carrying
+value of our oil and gas properties. This could occur when oil and gas prices
+are low or if we have substantial downward adjustments to our estimated proved
+reserves, increases in our estimates of development costs or deterioration in
+our exploration results.
+We follow the successful efforts accounting method. All property
+acquisition costs and costs of exploratory and development wells are capitalized
+when incurred, pending the determination of whether proved reserves have been
+discovered. If proved reserves are not discovered with an exploratory well, the
+costs of drilling the well are expensed. All geological and geophysical costs on
+exploratory prospects are expensed as incurred. The capitalized costs of our oil
+and gas properties, on a field-by-field basis, may not exceed the estimated
+future net cash flows of that field. If capitalized costs exceed future net
+revenues we write down the costs of each such field to our estimate of fair
+market value. Unproved properties are evaluated at the lower of cost or fair
+market value. This type of charge will not affect our cash flow from operating
+activities, but it will reduce the book value of our stockholders' equity. We
+review the carrying value of our properties quarterly, based on prices in effect
+as of the end of each quarter or as of the time of reporting our results. Once
+incurred, a writedown of oil and gas properties is not reversible at a later
+date even if oil or gas prices increase. St. Mary incurred impairment and
+abandonment charges on proved and unproved properties of $4.7 million, $6.3
+million and $10.6 million in 2001, 2000 and 1999, respectively.
+Information concerning our reserves and future net revenue estimates is
+uncertain.
+There are numerous uncertainties inherent in estimating quantities of
+proved oil and natural gas reserves and their values, including many factors
+beyond our control. Estimates of proved undeveloped reserves, which comprise a
+significant portion of our reserves, are by their nature uncertain. The reserve
+data included in this Annual Report on form 10-K is estimated. Although we
+believe these estimates are reasonable, actual production, revenues and reserve
+expenditures will likely vary from estimates, and these variances may be
+material.
+Estimates of oil and natural gas reserves, by necessity, are
+projections based on geologic and engineering data, and there are uncertainties
+inherent in the interpretation of such data as well as the projection of future
+rates of production and the timing of development expenditures. Reserve
+engineering is a subjective process of estimating underground accumulations of
+oil and natural gas that are difficult to measure. The accuracy of any reserve
+estimate is a function of the quality of available data, engineering and
+geological interpretation and judgment. Estimates of economically recoverable
+oil and natural gas reserves and future net cash flows necessarily depend upon a
+number of variable factors and assumptions, such as historical production from
+the area compared with production from other producing areas, the assumed
+effects of regulations by governmental agencies and assumptions governing future
+oil and natural gas prices, future operating costs, severance and excise taxes,
+development costs and workover and remedial costs, all of which may in fact vary
+considerably from actual results. For these reasons, estimates of the
+economically recoverable quantities of oil and natural gas attributable to any
+particular group of properties, classifications of such reserves based on risk
+of recovery, and estimates of the future net cash flows may vary substantially.
+13
+Any significant variance in the assumptions could materially affect the
+estimated quantity and value of the reserves. Actual production, revenues and
+expenditures with respect to our reserves will likely vary from estimates, and
+such variances may be material. See "Business and Properties--Reserves."
+In addition, you should not construe PV-10 value as the current market
+value of the estimated oil and natural gas reserves attributable to our
+properties. We have based the PV-10 value on prices and costs as of the date of
+the estimate, in accordance with applicable regulations, whereas actual future
+prices and costs may be materially higher or lower. For example, values of our
+reserves at December 31, 2001 were estimated starting with a calculated weighted
+average sales price of $19.84 per barrel of oil (NYMEX) and $2.65 per MMBtu of
+gas (Gulf Coast spot price), then adjusted for quality and basis differentials.
+During 2001 our realized gas prices were as high as $7.86 per Mcf and as low as
+$2.21 per Mcf. Many factors will affect actual future net cash flows, including:
+o the amount and timing of actual production;
+o supply and demand for oil and natural gas;
+o curtailments or increases in consumption by natural gas purchasers;
+and
+o changes in governmental regulations or taxation.
+The timing of the production of oil and natural gas properties and of
+the related expenses affect the timing of actual future net cash flows from
+proved reserves and, thus, their actual present value. In addition, the 10%
+discount factor, which we are required to use to calculate PV-10 value for
+reporting purposes, is not necessarily the most appropriate discount factor
+given actual interest rates and risks to which our business or the oil and
+natural gas industry in general are subject. As a result, our actual future net
+cash flows could be materially different from the estimates included in this
+Annual Report on form 10-K.
+Our industry is highly competitive.
+Major oil companies, independent producers, and institutional and
+individual investors are actively seeking oil and gas properties throughout the
+world, along with the equipment, labor and materials required to operate
+properties. Many of our competitors have financial and technological resources
+vastly exceeding those available to us. Many oil and gas properties are sold in
+a competitive bidding process in which we may lack technological information or
+expertise available to other bidders. We cannot be sure that we will be
+successful in acquiring and developing profitable properties in the face of this
+competition.
+Exploration and development drilling may not result in commercially productive
+reserves.
+Oil and gas drilling and production activities are subject to numerous
+risks, including the risk that no commercially productive oil or natural gas
+will be found. The cost of drilling and completing wells is often uncertain, and
+oil and gas drilling and production activities may be shortened, delayed or
+canceled as a result of a variety of factors, many of which are beyond our
+control. These factors include:
+o unexpected drilling conditions;
+14
+o pressure or irregularities in formations;
+o equipment failures or accidents;
+o adverse weather conditions;
+o shortages in experienced labor;
+o compliance with governmental requirements; and
+o shortages or delays in the availability of drilling rigs and the
+delivery of equipment.
+The prevailing prices of oil and gas also affect the cost of and the
+demand for drilling rigs, production equipment and related services.
+We cannot assure you that the wells we drill will be productive or that
+we will recover all or any portion of our investment in such wells. The seismic
+data and other technologies we use do not allow us to know conclusively prior to
+drilling a well that oil or gas is present or may be produced economically. The
+cost of drilling, completing and operating a well is often uncertain, and cost
+factors can adversely affect the economics of a project. Drilling activities can
+result in dry wells or wells that are productive but do not produce sufficient
+net revenues after operating and other costs to cover initial drilling costs.
+Our future drilling activities may not be successful, nor can we be
+sure that our overall drilling success rate or our drilling success rate for
+activity within a particular area will not decline. Unsuccessful drilling
+activities could have a material adverse effect on our results of operations and
+financial condition. Also, we may not be able to obtain any options or lease
+rights in potential drilling locations that we identify. Although we have
+identified numerous potential drilling locations, we cannot be sure that we will
+ever drill them or that we will produce oil or natural gas from them or any
+other potential drilling locations.
+Our business is subject to operating hazards that could result in substantial
+losses.
+Oil and gas operations are subject to many risks, including well
+blowouts, craterings, explosions, uncontrollable flows of oil, natural gas or
+well fluids, fires, formations with abnormal pressures, pipeline ruptures or
+spills, pollution, releases of toxic gas and other environmental hazards and
+risks. If any of these hazards occurs, we could sustain substantial losses as a
+result of:
+o injury or loss of life;
+o severe damage to or destruction of property, natural resources and
+equipment;
+o pollution or other environmental damage;
+o clean-up responsibilities;
+o regulatory investigations and penalties; and/or
+o suspension of operations.
+15
+In addition, we may be liable for environmental damage caused by
+previous owners of property we own or lease. As a result, we may face
+substantial liabilities to third parties or governmental entities, which could
+reduce or eliminate funds available for exploration, development or acquisitions
+or cause us to incur losses. An event that is not fully covered by insurance
+could have a material adverse effect on our financial condition and results of
+operations.
+We maintain insurance against some, but not all, of these potential
+risks and losses. We may elect not to obtain insurance if we believe that the
+cost of available insurance is excessive relative to the risks presented. In
+addition, pollution and environmental risks generally are not fully insurable.
+If a significant accident or other event occurs and is not fully covered by
+insurance, it could adversely affect us.
+Other independent oil and gas companies' limited access to capital may change
+our exploration and development plans.
+Many independent oil and gas companies have limited access to the
+capital necessary to finance their activities. As a result, some of the other
+working interest owners of our wells may be unwilling or unable to pay their
+share of the costs of projects as they become due. These problems could cause us
+to change, suspend or terminate our drilling and development plans with respect
+to the affected project.
+Hedging transactions may limit our potential gains and involve other risks.
+To manage our exposure to price risks in the marketing of our oil and
+natural gas, we enter into commodity price risk management arrangements from
+time to time with respect to a portion of our current or future production.
+While intended to reduce the effects of volatile oil and natural gas prices,
+these transactions may limit our potential gains if oil or natural gas prices
+were to rise substantially over the price established by the hedge. In addition,
+such transactions may expose us to the risk of financial loss in certain
+circumstances, including instances in which:
+o our production is less than expected;
+o the counterparties to our futures contracts fail to perform under
+the contracts; or
+o a sudden, unexpected event materially impacts oil or natural gas
+prices.
+The terms of our hedging agreements may also require that we furnish
+cash collateral, letters of credit or other forms of performance assurance in
+the event that mark-to-market calculations result in settlement obligations by
+us to the counterparties, which would encumber our liquidity and capital
+resources.
+Our industry is heavily regulated.
+Federal, state and local authorities extensively regulate the oil and
+gas industry. Legislation and regulations affecting the industry are under
+constant review for amendment or expansion, raising the possibility of changes
+that may affect, among other things, the pricing or marketing of oil and gas
+production. Noncompliance with statutes and regulations may lead to substantial
+penalties, and the overall regulatory burden on the industry increases the cost
+of doing business and, in turn, decreases profitability. State and local
+authorities regulate various aspects of oil and gas drilling and production
+activities, including the drilling of wells (through permit and bonding
+requirements), the spacing of wells, the unitization or pooling of oil and gas
+16
+properties, environmental matters, safety standards, the sharing of markets,
+production limitations, plugging and abandonment, and restoration. Federal
+authorities regulate many of these same activities for our drilling and
+production operations in federal offshore waters. To cover the various
+obligations of leaseholders in federal waters, federal authorities generally
+require that leaseholders have substantial net worth or post bonds or other
+acceptable assurances that such obligations will be met. The cost of these bonds
+or other surety can be substantial, and we cannot assure you that we will be
+able to obtain bonds or other surety in all cases. Under some circumstances,
+federal authorities may require any of our operations on federal leases be
+suspended or terminated. Any such suspension or termination could materially
+adversely affect our financial condition and results of operations.
+We must comply with complex environmental regulations.
+Our operations are subject to complex and constantly changing
+environmental laws and regulations adopted by federal, state and local
+governmental authorities where we are engaged in exploration or production
+operations. New laws or regulations, or changes to current requirements, could
+have a material adverse effect on our business. We will continue to be subject
+to uncertainty associated with new regulatory interpretations and inconsistent
+interpretations between state and federal agencies. We could face significant
+liabilities to the government and third parties for discharges of oil, natural
+gas or other pollutants into the air, soil or water, and we could have to spend
+substantial amounts on investigations, litigation and remediation. We cannot be
+sure that existing environmental laws or regulations, as currently interpreted
+or enforced, or as they may be interpreted, enforced or altered in the future,
+will not materially adversely affect our results of operations and financial
+condition. As a result, we may face material indemnity claims with respect to
+properties we own or have owned.
+Our business depends on transportation facilities owned by others.
+The marketability of our oil and gas production depends in part on the
+availability, proximity and capacity of pipeline systems owned by third parties.
+The unavailability of or lack of available capacity on these systems and
+facilities could result in the shut-in of producing wells or the delay or
+discontinuance of development plans for properties. Although we have some
+contractual control over the transportation of our product, material changes in
+these business relationships could materially affect our operations. Federal and
+state regulation of oil and gas production and transportation, tax and energy
+policies, changes in supply and demand, pipeline pressures, damage to or
+destruction of pipelines and general economic conditions could adversely affect
+our ability to produce, gather and transport oil and natural gas.
+We depend on key personnel.
+Our success will continue to depend on the continued services of our
+executive officers and a limited number of other senior management and technical
+personnel with extensive experience and expertise in evaluating and analyzing
+producing oil and gas properties and drilling prospects, maximizing production
+from oil and gas properties and marketing oil and gas production. Loss of the
+services of any of these people could have a material adverse effect on our
+operations. We currently do not have employment agreements with our executive
+officers other than Mark Hellerstein, our Chief Executive Officer. We do not
+carry any key person life insurance policies.
+17
+Ownership of working interests, royalty interests and other interests by some of
+our officers and directors may create conflicts of interest.
+As a result of their prior employment with another company with which
+St. Mary engaged in a number of transactions, Ronald D. Boone, the Executive
+Vice President and Chief Operating Officer and a director of St. Mary, and two
+other vice presidents of St. Mary own working interests and royalty interests in
+many of St. Mary's properties, which were earned as part of the prior employer's
+employee benefit programs. Those persons have no royalty participation in any
+new St. Mary properties.
+Mr. Boone also owns 50% of Princeton Resources Ltd. and has a 33%
+interest in Baron Oil Corporation, entities that manage the oil and gas working
+and royalty interests which he acquired as a result of his prior employment.
+Although Mr. Boone does not manage these corporations, he may participate in any
+investment decisions made by them.
+David C. Dudley, a director of St. Mary, is Operating Manager of Dudley
+& Associates, LLC, a closely-held oil and gas exploration and production
+firm. From time to time we may compete with Mr. Dudley's firm for acquisition,
+exploitation, exploration or development prospects.
+As a result of these transactions and relationships, conflicts of
+interest may exist between these persons and us. Although these persons owe
+fiduciary duties to our stockholders and to us, we cannot assure you that
+conflicts of interest will always be resolved in our favor.
+Risks Related to Our Common Stock
+Our certificate of incorporation and bylaws have provisions that discourage
+corporate takeovers and could prevent shareholders from realizing a premium on
+their investment.
+Our certificate of incorporation and bylaws contain provisions that may
+have the effect of delaying or preventing a change of control. These provisions,
+among other things, provide for noncumulative voting in the election of the
+board of directors and impose procedural requirements on stockholders who wish
+to make nominations for the election of directors or propose other actions at
+stockholders' meetings. These provisions, alone or in combination with each
+other and with the rights plan described below, may discourage transactions
+involving actual or potential changes of control, including transactions that
+otherwise could involve payment of a premium over prevailing market prices to
+shareholders for their common stock
+On July 15, 1999, our board of directors adopted a stockholder rights
+plan. The plan is designed to enhance the board's ability to prevent an acquirer
+from depriving stockholders of the long-term value of their investment and to
+protect stockholders against attempts to acquire us by means of unfair or
+abusive takeover tactics. If the board of directors decides in accordance with
+its fiduciary obligations that the terms of a potential acquisition do not
+reflect the long-term value of St. Mary, under the plan the board of directors
+could allow the holder of each outstanding share of our common stock other than
+those held by the potential acquirer to purchase one additional share of our
+common stock with a market value of twice the exercise price. This prospective
+dilution to a potential acquirer would make the acquisition impracticable unless
+the terms were improved to the satisfaction of the board of directors. However,
+the existence of the plan may impede a takeover not supported by our board,
+including a takeover that may be desired by a majority of our stockholders or
+involving a premium over the prevailing stock price.
+18
+Our shares that are eligible for future sale may have an adverse effect on the
+price of our common stock.
+At January 31, 2002 we had 27,777,338 share of common stock
+outstanding. Of the shares outstanding, approximately 26,904,006 shares were
+freely tradable without substantial restriction or the requirement of future
+registration under the Securities Act. In addition, as of that date, options to
+purchase 2,151,445 shares were outstanding, of which 1,378,403 were exercisable.
+These options are exercisable at prices ranging from $9.25 to $33.3125 per
+share. In connection with the private placement of the Notes, our executive
+officers and directors have entered into lock-up agreements under which they
+have agreed not to offer or sell any shares of our common stock or similar
+securities for a period of 90 days from March 7, 2002 without the prior written
+consent of the initial purchasers of the Notes. The initial purchasers may at
+any time waive the terms of these lock-up agreements. Sales of substantial
+amounts of common stock, or a perception that such sales could occur, and the
+existence of options or warrants to purchase shares of commons stock at prices
+that may be below the then current market price of the common stock could
+adversely affect the market price of the common stock and could impair our
+ability to raise capital through the sale of our equity securities.
+Our Chairman of the Board and his extended family may be able to control us.
+Thomas E. Congdon, our Chairman of the Board, and members of his
+extended family currently own approximately 18% of the outstanding shares of our
+common stock. While no formal arrangements exist, these extended family members
+may be inclined to act in concert with Mr. Congdon on matters related to control
+of St. Mary, including for example the election of directors or response to an
+unsolicited bid to acquire St. Mary. Accordingly, Mr. Congdon and his family may
+be able to control or influence matters presented to our stockholders.
+We may not always pay dividends on our common stock.
+Although we have paid cash dividends to stockholders every year since
+1940 and we expect that our practice of paying dividends will continue, the
+payment of future dividends remains in the discretion of the board of directors
+and will continue to depend on our earnings, capital requirements, financial
+condition and other factors. In addition, the payment of dividends is subject to
+covenants in our bank credit facility, including the requirement that we
+maintain certain levels of stockholder's equity. The board of directors may
+determine in the future to reduce the current annual dividend rate of $0.10 per
+share or discontinue altogether the payment of dividends.
+Cautionary Statement about Forward-Looking Statements
+This Annual Report on Form 10-K includes certain statements that may be
+deemed to be "forward-looking statements" within the meaning of Section 27A of
+the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
+1934. All statements, other than statements of historical facts, included in
+this Form 10-K that address activities, events or developments that St. Mary's
+management expects, believes or anticipates will or may occur in the future are
+forward looking statements. Examples of forward-looking statements may include
+discussion of such matters as:
+o The amount and nature of future capital, development and exploration
+expenditures;
+19
+o The drilling of wells;
+o Reserve estimates and the estimates of both future net revenues and
+the present value of future net revenues that are included in their
+calculation;
+o Future oil and gas production estimates;
+o Repayment of debt;
+o Business strategies;
+o Expansion and growth of operations; and
+o Other similar matters such as those discussed in Management's
+Discussion and Analysis of Financial Condition and Results of
+Operations.
+These statements are based on certain assumptions and analyses made by us in
+light of our experience and our perception of historical trends, current
+conditions, expected future developments and other factors we believe are
+appropriate in the circumstances. Such statements are subject to a number of
+assumptions, risks and uncertainties, including such factors as the volatility
+and level of oil and natural gas prices, uncertainties in cash flow, expected
+acquisition benefits, production rates and reserve replacement, reserve
+estimates, drilling and operating risks, competition, litigation, environmental
+matters, the potential impact of government regulations, and other matters
+discussed under the caption "Risk Factors", many of which are beyond our
+control. Readers are cautioned that forward-looking statements are not
+guarantees of future performance and that actual results or developments may
+differ materially from those expressed or implied in the forward-looking
+statements.
+Glossary
+The terms defined in this section are used throughout this Form 10-K.
+2-D seismic or 2-D data. Seismic data that are acquired and processed to yield a
+two-dimensional cross-section of the subsurface.
+3-D seismic or 3-D data. Seismic data that are acquired and processed to yield a
+three-dimensional picture of the subsurface.
+Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume, used herein in
+reference to oil or other liquid hydrocarbons.
+Bcf. Billion cubic feet, used herein in reference to natural gas.
+BCFE. Billion cubic feet of gas equivalent. Gas equivalents are determined using
+the ratio of six Mcf of gas (including gas liquids) to one Bbl of oil.
+Behind pipe reserves. Estimated net proved reserves in a formation in which
+production casing has already been set in the wellbore but has not been
+perforated and production tested.
+20
+BOE. Barrels of oil equivalent. Oil equivalents are determined using the ratio
+of six Mcf of gas (including gas liquids) to one Bbl of oil.
+Development well. A well drilled within the proved area of an oil or gas
+reservoir to the depth of a stratigraphic horizon known to be productive in an
+attempt to recover proved undeveloped reserves.
+Dry hole. A well found to be incapable of producing either oil or gas in
+sufficient quantities to justify completion as an oil or gas well.
+Estimated net proved reserves. The estimated quantities of oil, gas and gas
+liquids which geological and engineering data demonstrate with reasonable
+certainty to be recoverable in future years from known reservoirs under existing
+economic and operating conditions.
+Exploratory well. A well drilled to find and produce oil or gas in an unproved
+area, to find a new reservoir in a field previously found to be productive of
+oil or gas in another reservoir, or to extend a known reservoir.
+Fee land. The most extensive interest that can be owned in land, including
+surface and mineral (including oil and gas) rights.
+Finding cost. Expressed in dollars per BOE. Finding costs are calculated by
+dividing the amount of total capital expenditures for oil and gas activities by
+the amount of estimated net proved reserves added during the same period
+(including the effect on proved reserves of reserve revisions).
+Gross acres. An acre in which a working interest is owned.
+Gross well. A well in which a working interest is owned.
+Hydraulic fracturing. A procedure to stimulate production by forcing a mixture
+of fluid and proppant (usually sand) into the formation under high pressure.
+This creates artificial fractures in the reservoir rock, which increases
+permeability and porosity.
+MBbl. One thousand barrels of oil or other liquid hydrocarbons.
+MMBbl. One million barrels of oil or other liquid hydrocarbons.
+MBOE. One thousand barrels of oil equivalent.
+MMBOE. One million barrels of oil equivalent.
+Mcf. One thousand cubic feet.
+MCFE. One thousand cubic feet of gas equivalent. Gas equivalents are determined
+using the ratio of six Mcf of gas (including gas liquids) to one Bbl of oil.
+MMcf. One million cubic feet.
+MMCFE. One million cubic feet of gas equivalent. Gas equivalents are determined
+using the ratio of six Mcf of gas (including gas liquids) to one Bbl of oil.
+21
+MMBtu. One million British Thermal Units. A British Thermal Unit is the heat
+required to raise the temperature of a one-pound mass of water one degree
+Fahrenheit.
+Net acres or net wells. The sum of the fractional working interests owned in
+gross acres or gross wells.
+Net asset value per share. The result of the fair market value of total assets
+less total liabilities, divided by the total number of outstanding shares of
+common stock.
+PV-10 value. The present value of estimated future gross revenue to be generated
+from the production of estimated net proved reserves, net of estimated
+production and future development costs, using prices and costs in effect as of
+the date indicated (unless such prices or costs are subject to change pursuant
+to contractual provisions), without giving effect to non-property related
+expenses such as general and administrative expenses, debt service and future
+income tax expenses or to depreciation, depletion and amortization, discounted
+using an annual discount rate of 10%.
+Productive well. A well that is producing oil or gas or that is capable of
+production.
+Proved developed reserves. Reserves that can be expected to be recovered through
+existing wells with existing equipment and operating methods.
+Proved undeveloped reserves. Reserves that are expected to be recovered from new
+wells on undrilled acreage, or from existing wells where a relatively major
+expenditure is required for recompletion.
+Recompletion. The completion for production of an existing wellbore in another
+formation from that in which the well has previously been completed.
+Reserve life. Expressed in years, represents the estimated net proved reserves
+at a specified date divided by forecasted production for the preceding 12-month
+period.
+Royalty. The interest paid to the owner of mineral rights expressed as a
+percentage of gross income from oil and gas produced and sold unencumbered by
+expenses.
+Royalty interest. An interest in an oil and gas property entitling the owner to
+shares of oil and gas production free of costs of exploration, development and
+production. Royalty interests are approximate and are subject to adjustment.
+Undeveloped acreage. Lease acreage on which wells have not been drilled or
+completed to a point that would permit the production of commercial quantities
+of oil and gas, regardless of whether such acreage contains estimated net proved
+reserves.
+Working interest. The operating interest that gives the owner the right to
+drill, produce and conduct operating activities on the property and to share in
+the production.
+22

raw/filings/0000893538/2001/0000893538-02-000009/item13.txt

@@ -0,0 +1,5 @@
+ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
+The information required by this Item is incorporated by reference to
+the information provided in St. Mary's definitive proxy statement for the 2002
+annual meeting of shareholders to be filed within 120 days from December 31,
+2001.

raw/filings/0000893538/2001/0000893538-02-000009/rpt_disclosure.txt

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+CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
+Set forth below is a description of transactions entered into between St.
+Mary and certain of its officers and directors during the last fiscal year. Some
+of these transactions will continue in effect and may result in conflicts of
+interest between St. Mary and these individuals. Although these persons owe
+fiduciary duties to St. Mary and its stockholders, we cannot assure you that
+conflicts of interest will always be resolved in favor of St. Mary.
+As a result of their prior employment with another company with which St.
+Mary engaged in a number of transactions, Ronald D. Boone, the Executive Vice
+President and Chief Operating Officer and a director of St. Mary, and two other
+vice presidents of St. Mary own royalty interests in many of St. Mary's
+properties, which were earned as part of the prior employer's employee benefit
+18
+programs. One vice president also owns certain working interests through
+participation in acquisitions made by his former employer. Those persons have no
+royalty participation in any new St. Mary properties.
+Mr. Boone also owns 25% of Princeton Energy LLC, which owns the oil and gas
+working interests that he acquired as a result of his prior employment. Although
+Mr. Boone does not manage this entity, he may participate in any investment
+decisions made by them.
+In July 2000, St. Mary made an interest-free loan of $200,000 to Robert T.
+Hanley at the time he was appointed Vice President - Business Development of St.
+Mary. The loan was made to enable Mr. Hanley to purchase a residence in Denver,
+Colorado in connection with St. Mary's relocation of Mr. Hanley to Denver from
+Billings, Montana, where housing costs are substantially lower. Mr. Hanley was
+previously Chief Financial Officer of Nance Petroleum Corporation, a wholly
+owned subsidiary that St. Mary acquired in June 1999, which has its principal
+offices in Billings. This loan was repaid in October 2002.
+St. Mary's by-laws provide that no director may pursue a business or
+investment opportunity for himself if he has obtained knowledge of such
+opportunity through his affiliation with the Company. Moreover, no officer or
+employee of St. Mary may pursue for his own account an oil and gas opportunity
+irrespective of the source of his knowledge of the opportunity unless (a) with
+respect to an officer of St. Mary, the interest has been approved by the board
+of directors and (b) with respect to a non-officer of St. Mary, such interest of
+the employee has been approved by a senior officer of St. Mary with full
+knowledge of such opportunity. These restrictions do not apply to the
+acquisition of less than one percent of the publicly traded stock of another
+company.

raw/filings/0000893538/2006/0001104659-07-013545/filing_metadata.csv

@@ -0,0 +1,2 @@
+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
+0000893538,SM,SM Energy Co,10-K,2007-02-23,2006-12-31,2007-02-23T22:21:23.000Z,0001104659-07-013545,a07-5298_110k.htm,10-K,4055015,0,0,https://www.sec.gov/Archives/edgar/data/893538/000110465907013545/a07-5298_110k.htm,https://www.sec.gov/Archives/edgar/data/893538/000110465907013545/,2006,2006,1

raw/filings/0000893538/2006/0001104659-07-013545/item1.txt

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+ITEM 1. BUSINESS 
+Background and
+Strategy 
+We are an independent oil and gas company engaged in
+the exploration, exploitation, development, acquisition and production of
+natural gas and crude oil. We were founded in 1908 and incorporated in Delaware
+in 1915. Our principal offices are located at 1776 Lincoln Street, Suite 700,
+Denver, Colorado 80203, and our telephone number is (303) 861-8140. 
+Our objective is to build stockholder value through
+consistent economic growth in reserves and production that increases net asset
+value per share. We seek to invest in oil and gas producing assets that result
+in a superior return on equity while preserving underlying capital, resulting
+in a return on equity to stockholders that reflects capital appreciation as
+well as the payment of cash dividends. 
+Our operations are
+focused in the following five core operating areas in the United States: 
+· The
+Rocky Mountain region is managed from our office in Billings, Montana. The oil
+and gas assets are located in the Williston Basin in eastern Montana and
+western North Dakota as well as the major producing basins in Wyoming. Recent
+activity in the northern Rockies includes drilling in the Middle Bakken
+formation, continued development in the Red River formation, and drilling
+horizontal prospects in the Mississippian formations of the Williston Basin,
+principally the Mission Canyon and Ratcliffe. As a follow-on to acquisitions
+made in the last several years, the Company has increased its activity in
+Wyoming, including development of legacy oil fields in the Big Horn and Wind
+River basins and gas development in the Greater Green River Basin. Our Rocky
+Mountain region also includes the development of coalbed methane reserves in
+the Hanging Woman Basin which is located in the northern Powder River Basin; 
+· The
+Mid-Continent region is comprised of properties in Oklahoma and northern Texas,
+primarily in the Anadarko and Arkoma basins. The most significant activity is
+in the Mayfield development area in Roger Mills and Beckham Counties in western
+Oklahoma and the horizontal Arkoma program in eastern Oklahoma, where we are
+pursuing a horizontal drilling program targeting the Wapanucka limestone,
+Cromwell sandstone, and Woodford shale formations. The Mid-Continent region is
+managed from our office in Tulsa, Oklahoma. Due to the specific technical
+expertise of the Mid-Continent team, the Company’s assets in Constitution Field
+in Jefferson County, Texas are also managed within this region; 
+· The
+ArkLaTex region spans northern Louisiana, southern Arkansas, Mississippi, and
+eastern Texas and is managed by our Shreveport, Louisiana office. Recent
+activity includes the horizontal limestone program targeting resources in the
+James and Glen Rose formations throughout the region. The ArkLaTex region also
+manages our interests in a significant vertical well development effort at the
+Elm Grove Field. Elm Grove continues to be a strong producing asset with recent
+incremental success in the field from Hosston formation recompletions. This
+region also oversees our interest in the Terryville Field where we plan to
+increase activity in 2007; 
+1 
+· The
+Permian Basin region in western Texas and eastern New Mexico includes our
+recently acquired interests in the Sweetie Peck Field in the Midland Basin. Our
+activities in this field target the producing formations of the Spraberry
+interval—including the Spraberry, Leonard, and Wolfcamp formations. Our legacy
+assets in the Permian include our waterflood projects at Parkway Delaware Unit
+and East Shugart Delaware Unit in New Mexico. We opened an office in Midland,
+Texas in February 2007 to manage our Permian assets; and 
+· The
+Gulf Coast region consists of onshore Texas and Louisiana properties and
+includes the Judge Digby Field in Pointe Coupee Parish, Louisiana, our fee
+property in St. Mary Parish, Louisiana, and a presence in the offshore
+Gulf of Mexico. The region is managed from our Houston, Texas office. This
+office has expertise in the utilization of 3-D seismic to identify direct
+hydrocarbon indicators (DHI) along the Gulf Coast and in the Gulf of Mexico. 
+As of December 31, 2006, we had estimated proved
+reserves of 74.2 MMBbl of oil and 482.5 Bcf of natural gas, for a total of 927.6 BCFE. This represents an increase in
+reserve volumes of 17 percent from
+the end of 2005. The increase in reserves results from our drilling program
+whereby we added 115.8 BCFE and from acquisitions that added 99.2 BCFE. We had
+net upward revisions of 14.1 BCFE, which was comprised of an upward performance
+revision of 66.3 BCFE and a downward price revision of 52.2 BCFE. These
+proved oil and gas reserves have a PV-10 value of $2.2 billion and a
+standardized measure value, including the effect of income taxes of $1.6
+billion. The percentage of proved
+developed reserves is 78 percent. The mix of natural gas reserves to oil
+reserves is 52 percent natural gas
+and 48 percent oil. Prices used to estimate oil and gas reserves were
+essentially flat for oil from a year earlier and down 44 percent year over year
+for natural gas, resulting in a decrease in PV-10 of 13 percent compared
+to last year. For the year ended December 31, 2006, we produced 92.8 BCFE, of which 61 percent was
+natural gas. This total production represents an average daily production of 254.2 M MCFE, a six percent increase from
+2005. 
+Our reserve replacement percentage for 2006, including
+the effect of 3.1 BCFE of asset sales, was 244 percent
+of production. The reserve replacement percentage was 247 percent when the
+effect of divestitures is excluded. We acquired 99.2 BCFE through acquisitions
+in 2006, the majority of which came through our Sweetie Peck acquisition that
+closed in December 2006. Excluding acquisitions and divestitures, our
+reserve replacement percentage was 140 percent. The percentage of proved
+undeveloped reserves increased from 18 percent at the end of 2005 to
+22 percent at December 31, 2006. This increase is directly related to
+the acquisition of proved undeveloped reserves associated with our Sweetie Peck
+acquisition, as well as recognition of increased per well proved undeveloped
+reserves in the ArkLaTex region due to continued success at Elm Grove. The
+increases were partially offset by the loss of proved undeveloped reserves in
+the Mid-Continent region attributable to the downward pricing revision
+referenced earlier. We believe the use of the term “reserve replacement
+percentage” is widely understood and utilized by those who make investment
+decisions related to the oil and gas exploration and production industry. Therefore,
+we believe this measure provides a useful basis of comparison to other
+companies and provides a measure of the growth of the Company. 
+In executing our business plan, we attempt to focus
+our resources in selected domestic basins where we believe our expertise in
+geology, geophysics, and drilling and completion techniques provide us with
+competitive advantages. In 2006, we spent $493.8 million in capital
+expenditures related to drilling activities, up 55 percent from the $319.3 million spent in 2005. This
+increase was due to a combination of increased activity throughout the Company
+and cost escalations throughout the year for drilling and field services. Additionally,
+we spent $28.8 million on leasehold interests during 2006, which is double that
+of the prior year. Our acquisition spending in 2006 was $282.9 million, which
+was a significant increase from the $ 87.8 million
+spent in 2005. The primary driver of the increase in acquisition spending was
+the $247.6 million Sweetie Peck acquisition in the Permian Basin which closed
+in December 2006. 
+2 
+Our total capital budget for 2007 is $821 million,
+which includes $721 million of exploration and development activities and $100
+million for acquisitions. We continue to believe that acquisitions play a key
+role in our future growth and we will evaluate properties for acquisition that
+are in our core areas of operations or in new basins where we believe we have
+operating expertise and can effectively execute operations. In the past few years we have placed a greater
+emphasis on growth through the drill bit and growing our inventory of drilling
+prospects. This shift has been partially an evolution of strategy and partially
+a reflection of the very competitive nature of the acquisition market in recent
+years. Our ability to make a significant acquisition in 2006 was a result of
+having strong relationships within the industry, a detailed understanding of
+the underlying geology, operations, and leasehold situation related to the
+acquisition, and the ability to transact the acquisition in a negotiated manner
+rather than through a broad auction process. 
+The increase in budgeted exploration and development
+spending for 2007 represents a roughly $200 million or 41 percent increase over
+2006. In our budgetary decisions, we measure and rank our projects based on
+their risk-adjusted estimated internal rate of return and return on investment.
+Balanced against this is the reality of lease term expirations, lease
+commitments, rig availability, permitting considerations and other operating
+aspects of managing an oil and gas company. Unlike the previous year, this year’s
+budget includes minimal cost escalations for drilling and field services. We
+believe we have begun to see a flattening of drilling and field service costs
+in our regions. The increase in our 2007 exploration and development budget is
+driven primarily by three factors. The first is an increase in Permian Basin
+spending that results from our planned execution of the drilling program
+associated with our Sweetie Peck acquisition. The second is an escalation of activity
+in our ArkLaTex region related to increased drilling and recompletion work in
+the Elm Grove Field together with an expansion of our horizontal limestone
+program in the James Lime formation. The third is an acceleration of the
+drilling program at our coalbed methane project at Hanging Woman Basin. Our
+base drilling program is a balanced program of low-to-medium-risk development
+and exploitation projects that provide a foundation for steady growth. We
+believe that the development of multi-year drilling programs in the
+Atoka/Granite Wash formations at Northeast Mayfield, the horizontal Arkoma
+Basin program targeting formations in the Wapanucka limestone, Cromwell
+sandstone, and Woodford shale, the Cotton Valley and Hosston plays at Elm Grove
+Field, our coalbed methane project in the Hanging Woman Basin, and the
+producing horizons of the Spraberry interval at the Sweetie Peck Field in the
+Permian Basin all help provide us with a core inventory of prospects for future
+development. We continue to work on developing or acquiring additional
+multi-year drilling programs in each of our regions. 
+As of December 31, 2006, we operated 67 percent
+of our properties on a reserve volume basis and 69 percent on a PV-10
+value basis. We plan to operate 72 percent of our exploration and development
+budget in 2007. We believe it is important to operate a significant amount of
+our asset base as it allows us to control geologic and operational decisions as
+well as the timing of those decisions. We began 2007 with 12 operated drilling
+rigs running and plan to increase the operated rig count to 18 rigs by
+year-end. 
+Our 2007 acquisition budget is lower on a percentage
+basis than in prior years, although we will continue to seek acquisitions of
+oil and gas properties that complement our existing operations, offer economies
+of scale and provide further development, exploitation, and exploration
+opportunities. We will focus on areas where we have specialized knowledge or
+operating expertise that enable us to acquire attractively priced properties. In
+2006, we acquired $282.9 million of oil and gas properties, most of which were
+purchased with cash from operations or with proceeds from our revolving credit
+facility. In 2006, we also closed a tax-deferred exchange of non-core assets in
+the Uinta Basin in Utah for oil and gas properties in Richland County, Montana.
+In addition to asset transactions, we have and will pursue corporate
+acquisitions that we believe are accretive to net asset value per share and
+that we are capable of integrating. In 2005, we acquired the stock of Agate
+Petroleum, Inc. for cash. Other examples of corporate acquisitions include
+the acquisition of Goldmark Engineering in 2004 for cash and the acquisitions
+of 
+3 
+Nance Petroleum
+Corporation and King Ranch Energy, Inc. in 1999, both of which were
+accomplished with the issuance of our common stock. The Flying J Oil &
+Gas Inc. property acquisition transaction completed in 2003 was not a corporate
+acquisition, yet we used a combination of restricted stock, a loan to Flying J,
+and options on our common stock for this transaction. When we consider the
+issuance of common stock for the acquisition of properties or a corporate
+entity, we base our investment decision primarily on the impact to net asset
+value per share. 
+We divest selected non-core assets when market
+conditions and prices are attractive. We will continue to evaluate such
+opportunities in the future when we believe it to be appropriate. During 2006,
+we sold properties with estimated proved reserves of 3.1 BCFE, or less than
+four-tenths of one percent of our reserves as of the beginning of the year. 
+In growing the Company, we seek to develop our
+existing property base and acquire acreage with additional potential in our
+core areas. From January 1, 2004 through December 31, 2006, we
+participated in the drilling of 1,493 gross wells with a success rate of 92
+percent. During this three-year period we added estimated proved reserves of
+596.3 BCFE at an average finding cost of $2.61 per MCFE. Not including the
+effect of divestitures, these results represent a three-year average reserve
+replacement percentage of 233 percent. Production has grown from an average
+daily rate of 206.0 MMCFE per day in 2004 to 254.2 MMCFE per day in 2006. 
+As of December 31, 2006, we had an acreage position
+of 2,244,488 gross (1,169,982 net) acres of which 1,272,789 gross (743,120 net)
+acres were undeveloped. Our percentage of undeveloped acreage on a gross and
+net basis is 57 percent and 64 percent, respectively. Our current leasehold
+position represents a seven percent increase on a gross acre basis and a six
+percent increase on a net acre basis from 2005. This growth in acreage is
+fundamental to our increasing emphasis on development of resource plays. In
+addition to our leased acreage position, we own 24,914 acres of fee
+properties in St. Mary Parish, Louisiana, of which 57 percent is
+undeveloped. Lastly, we have mineral servitudes representing 14,663 gross
+(9,868 net) acres in other portions of Louisiana, the majority of which is
+developed. We do not believe there are any substantial issues with respect to
+leasehold terms or expirations on our overall acreage holdings. We believe that
+our lease position provides a competitive advantage in certain locations and is
+a strategic asset for the Company. 
+Our senior technical managers in each region possess
+between 15 and 40 years of industry experience and lead fully-staffed regional
+technical offices that are supported by centralized administration from our
+corporate office in Denver. We use our comprehensive base of geological,
+geophysical, land, engineering, and production experience in each of our core
+operating areas to source prospects for our ongoing low-to-medium-risk
+development and exploitation programs. We conduct detailed geologic studies and
+use an array of technologies and tools including 2-D and 3-D
+seismic imaging, hydraulic fracturing and other reservoir stimulation
+techniques, horizontal drilling, secondary recovery, and specialized logging
+tools to enhance the potential of our existing properties. 
+Conservative use of financial leverage has long been a
+critical element of our strategy. We believe that maintaining a strong balance
+sheet is a significant competitive advantage that enables us to pursue
+acquisition and other opportunities, especially in weaker price environments. It
+also provides us with the financial resources to weather periods of volatile
+commodity prices or escalating costs. Our debt to book capitalization ratio was
+37 percent at the end of December 2006. Included in our outstanding
+debt as of year-end is $100.0 million of Senior Convertible Notes which are
+callable in March 2007. We have called these Convertible Notes for
+redemption. The date of redemption will be March 20, 2007. As the
+conversion price of the Convertible Notes is $13.00 per share, we fully expect
+that the note holders will force conversion of the Convertible Notes into
+approximately 7.7 million shares of common stock. The contemplated conversion
+of these Convertible Notes to equity would give us a pro forma debt to book
+capitalization ratio of 29 percent at December 31, 2006. 
+4 
+In summary, we believe
+that our dedication to making investment decisions based on net asset value per
+share, our long-standing geologic and engineering experience in the regions in
+which we operate, our appropriate application of technology, our established
+networks of local industry relationships, and our acreage holdings in our core
+operating areas all provide us with competitive advantages that we can use to
+continue growing the Company. 
+Significant
+Developments since December 31, 2005 
+· Senior Management Transition. During 2006, the Company
+underwent or announced personnel changes in the chief operating officer and
+chief executive officer roles. Doug York, our previous Chief Operating Officer,
+left the company in early 2006 to pursue other professional interests. Mark
+Hellerstein, our long-serving President and Chief Executive Officer, announced
+in mid-2006 his intention to retire from day-to-day management upon the
+successful transition of his duties to a successor. Tony Best, an executive
+with 28 years of experience in the oil and gas industry, joined the Company in June 2006
+as President and Chief Operating Officer. Mr. Hellerstein and Mr. Best
+worked together through the second half of 2006 to develop a succession plan
+whereby Mr. Best would succeed Mr. Hellerstein as Chief Executive
+Officer in February 2007. Mr. Hellerstein will continue to serve as
+the Chairman of the Board. With Mr. Best taking over the role of CEO, the
+Company hired Jay Ottoson in December 2006 as Executive Vice President and
+Chief Operating Officer. Mr. Ottoson has 22 years of operational and
+management experience in the oil and gas industry. 
+· 2006 Acquisition of Oil and Gas Properties. Our acquisitions
+of proved and unproved oil and gas properties in 2006 totaled $282.9 million. The
+most significant transaction was the purchase of oil and gas properties in the
+Sweetie Peck Field in the Permian Basin of west Texas for $247.6 million in December 2006.
+This acquisition represents the largest acquisition in our history and added
+78.0 BCFE of proved oil and gas reserves. The acquisition led to the opening of
+a new office in Midland, Texas in February 2007 and the hiring of
+personnel charged with managing these assets. The Company also had several
+smaller niche transactions throughout the year in the Mid-Continent, ArkLaTex,
+and Rocky Mountain regions. 
+· Significant
+Volatility in Commodity Prices. During 2006, the exploration and
+production sector was impacted by volatility in the prices for crude oil and
+natural gas. Our operations and financial condition are significantly impacted
+by these prices. We sell the majority of our natural gas on contracts which use
+first of the month (also frequently referred to as bid week) index pricing. The
+Inside FERC contract price for January 2006 was $11.45 per MMBtu but
+declined to $4.20 per MMBtu by October 2006, spending much of the period
+in the $6 to $7 per MMBtu range during the year. The average NYMEX price for
+natural gas was $7.26 per MMBtu for 2006. Our crude oil is sold on contracts
+that pay us the average of posted prices for the period in which the crude oil
+is sold. NYMEX crude oil began 2006 with an average January price of
+$65.54 per barrel and reached a high average price for the year of $74.46 per
+barrel in July as tensions in the Middle East escalated. The average NYMEX
+price for the year was $66.22 per barrel. We hedge a portion of our oil and gas
+production using swaps and collars. A gain of $44.7 million was realized on our
+natural gas hedges for the year and a loss of $16.5 million was realized on our
+oil hedges for the year. 
+· Repurchase
+of Common Stock. The Company evaluates the market price of our
+common stock relative to our internal assessment of net asset value per share. To
+the extent that the market price per share is below what we believe to be the
+net asset value per share, we will repurchase shares under the program. In April and
+May of 2006, we repurchased 3.3 million shares of our common stock in the
+open market for a weighted-average price of $37.09, per share including
+commissions. These shares were purchased under a share repurchase program
+approved by the Board. At the time we repurchased our shares, we entered into
+hedges for a commensurate amount of our 
+5 
+production that was
+represented by the share repurchase in order to lock in the discounted price at
+which our shares were trading. In the third quarter, the Board authorized a
+refresh to the number of shares available for repurchase to a total of six million
+shares. This six million share authorization to repurchase common stock remains
+available as of the date of this filing. 
+· Increase in 2006 Year-End
+Reserves. Proved reserves
+increased 17 percent to 927.6 BCFE at December 31, 2006, from 794.5 BCFE at December 31,
+2005. We added 115.8 BCFE from our drilling program and 99.2 BCFE from
+acquisitions. We had a 66.3 BCFE upward performance revision and a downward
+revision due to prices of 52.2 BCFE due to the decreased gas price at the end
+of 2006. We sold properties with reserves of 3.1 BCFE in 2006. 
+· Drilling
+Results. Reserve additions were driven principally from drilling
+results in the Rockies, Mid-Continent and ArkLaTex regions, with each region
+contributing approximately a quarter of the total reserve additions through
+drilling activities. The Gulf Coast realized reserve additions of
+11.9 BCFE through the successful execution of its DHI program, which
+resulted in six successful wells out of eight attempts during 2006. The 34.5
+BCFE increase in the Rockies can be attributed primarily to continued
+development of the Hanging Woman Basin coalbed methane project, as well as
+activities in the Bakken formation, various Mississippian formations, and the
+Red River formation. The Red River activity continues to provide reserve
+additions in the Rockies as we take advantage of 3-D seismic to identify
+structures. Our Mid-Continent reserve
+additions of 25.2 BCFE were primarily from continued development of the Northeast
+Mayfield area and the horizontal Arkoma program targeting the Wapanucka
+limestone, Cromwell Sandstone, and the Woodford shale. The ArkLaTex region grew
+from total proved reserves of 111.3 BCFE at the end of 2005 to
+159.5 BCFE this yearend. This is the second year in a row where reserves
+in this region grew in excess of 40 percent from the prior year. This growth is
+a reflection of the value we are deriving from the Elm Grove Field development
+through both initial completions into the Lower Cotton Valley formation and
+subsequent recompletions using coiled tubing assisted fracturing in the Hosston.
+Additionally, we had a successful year in our horizontal limestone program in
+east Texas and western Louisiana. 
+· Hedging of
+Oil and Natural Gas through 2011. Beginning in
+October 2005, we entered into financial derivative transactions to hedge
+oil and gas prices on a significant portion of our proved developed producing
+assets. These hedges have been placed in the form of zero-cost collars. We have also hedged specific production
+related to acquisitions made in 2006 as well as the forecasted production for
+our 2007 Northeast Mayfield development program using swap contracts. 
+Major Customers 
+During 2006, no customer
+individually accounted for 10 percent of the Company’s total oil and gas
+production revenue. During 2005, sales to Tesoro Refining and Marketing
+individually accounted for 13 percent of the Company’s total oil and gas
+production revenue. During 2004 sales to Tesoro Refining and Marketing
+individually accounted for 20 percent of the Company’s total oil and gas
+production revenue. 
+Employees and
+Office Space 
+As of February 16, 2007, we had 359 full-time
+employees. None of our employees are subject to a collective bargaining
+agreement, and we consider our relations with our employees to be good. We
+lease approximately 56,900 square feet of office space in Denver, Colorado for
+our executive and administrative offices, of which 9,500 square feet is
+subleased. We lease approximately 20,900 square feet of office space in Tulsa,
+Oklahoma; approximately 12,600 square feet in Shreveport, Louisiana;
+approximately 16,600 square feet in Houston, Texas; approximately 6,900 square
+feet in Midland, Texas; approximately 34,400 square feet in Billings, Montana;
+and approximately 2,000 square feet in Casper, Wyoming. 
+6 
+Title to Properties 
+Substantially all of our
+working interests are held pursuant to leases from third parties. A title
+opinion is usually obtained prior to the commencement of drilling operations. We
+have obtained title opinions or have conducted a thorough title review on
+substantially all of our producing properties and believe that we have
+satisfactory title to such properties in accordance with standards generally
+accepted in the oil and gas industry. The majority of the value of our
+properties is subject to a mortgage under our credit facility, customary
+royalty interests, liens for current taxes, and other burdens that we believe
+do not materially interfere with the use of or affect the value of such
+properties. We perform only a minimal title investigation before acquiring
+undeveloped leasehold. 
+Seasonality 
+Generally, but not always,
+the demand and price levels for natural gas increase during the colder winter
+months and decrease during the warmer summer months. To lessen seasonal demand
+fluctuations, pipelines, utilities, local distribution companies, and
+industrial users utilize natural gas storage facilities and forward purchase
+some of their anticipated winter requirements during the summer. However,
+increased summertime demand for electricity is beginning to place an increasing
+demand on storage volumes. Crude oil and the demand for heating oil are also
+impacted by generally higher prices in the winter. Seasonal anomalies such as
+mild winters sometimes lessen these fluctuations. The impact of seasonality has
+somewhat been exacerbated by the overall supply and demand economics related to
+crude oil because there is a narrow margin of production capacity in excess of
+existing worldwide demand. 
+Competition 
+The oil and gas industry
+is intensely competitive. This is particularly true in the acquisition of
+prospective oil and natural gas properties and oil and gas reserves. We believe
+that our leasehold position provides a sound foundation for a robust drilling
+program. Our competitive position also depends on our geological, geophysical,
+and engineering expertise, and our financial resources. We believe that the
+location of our leasehold acreage, our exploration, drilling, and production
+expertise, and the experience and knowledge of our management and industry
+partners enable us to compete effectively in our core operating areas. Notwithstanding
+our talents and assets, we still face stiff competition from a substantial
+number of major and independent oil and gas companies that have larger
+technical staffs and greater financial and operational resources than we do. Many
+of these companies not only engage in the acquisition, exploration,
+development, and production of oil and natural gas reserves, but also have
+refining operations, market refined products, own drilling rigs, and generate
+electricity. We also compete with other oil and natural gas companies in
+attempting to secure drilling rigs and other equipment necessary for the
+drilling and completion of wells. Consequently, drilling equipment may be in
+short supply from time to time. Currently, access to incremental drilling
+equipment in certain regions is difficult but is not, at this time, anticipated
+to have any material negative impact on our ability to deploy our drilling
+capital budget for 2007. We are seeing signs of loosening rig availability,
+although it is quite specific by region. Finally, we also compete for people. As
+drilling activities have accelerated, the need for talented people has grown at
+a time when the number of people available is constrained. 
+Government Regulations 
+Our business is subject to various federal, state, and
+local laws and governmental regulations that may be changed from time to time
+in response to economic or political conditions. Matters subject to regulation
+include the issuance of drilling permits, discharge permits for drilling
+operations, drilling bonds, reports concerning operations, the spacing of
+wells, unitization and pooling of properties, taxation, and environmental
+protection. From time to time, regulatory agencies have imposed price controls
+and 
+7 
+limitations on production
+by restricting the rate of flow of oil and gas wells below actual production
+capacity in order to conserve supplies of oil and gas. 
+Energy
+Regulations. Our sales of natural gas are
+affected by the availability, terms, and cost of transportation. The price and
+terms of access to pipeline transportation are subject to extensive federal and
+state regulation. While the rules and regulations of the Federal Energy
+Regulatory Commission (FERC) have in the past greatly affected the production
+and sale of natural gas, the direct impact on the upstream exploration and
+production segment of the energy industry has greatly diminished in favor of
+allowing market forces to set the price paid for natural gas production. FERC
+regulations continue to affect the midstream and transportation segments of the
+industry and thus can have an indirect impact of the sales price we receive for
+natural gas production. There is no assurance that the less stringent
+regulatory approach recently pursued by the FERC and Congress will continue. We
+do not believe that we will be more materially affected by any action taken by
+the FERC or Congress than other natural gas producers and marketers with whom
+we compete. 
+Certain operations
+we conduct involve federal minerals administered by the Minerals Management
+Service. The MMS issues leases covering such lands through competitive bidding.
+These leases contain relatively standardized terms and require compliance with
+federal laws and detailed MMS regulations. For offshore operations, lessees
+must obtain MMS approval for exploration plans and development and production
+plans prior to the commencement of such operations. In addition to permits
+required from other agencies such as the Coast Guard, the Army Corps of
+Engineers, and the Environmental Protection Agency, lessees must obtain a
+permit from the MMS prior to the commencement of drilling. Lessees must also
+comply with detailed MMS regulations governing, among other things: 
+· Engineering
+and construction specifications for offshore production facilities; 
+· safety
+procedures; 
+· flaring
+of production; 
+· plugging
+and abandonment of Outer Continental Shelf (OCS) wells; 
+· calculation
+of royalty payments and the valuation of production for this purpose; and 
+· removal
+of facilities. 
+To cover the various obligations of lessees on the
+OCS, the MMS generally requires that lessees post substantial bonds or other
+acceptable assurances that such obligations will be met. The cost of such bonds
+or other surety can be substantial, and we may not be able to continue to
+obtain bonds or other surety in all cases. Under certain circumstances the MMS
+may require our operations on federal leases to be suspended or terminated. 
+Many of the states in which we conduct our oil and gas
+drilling and production activities regulate such activities by requiring, among
+other things, drilling permits and bonds and reports concerning operations. The
+laws of these states also govern a number of environmental and conservation matters,
+including the handling and disposing of waste material, plugging and
+abandonment of wells, restoration requirements, unitization, pooling of natural
+gas and oil properties, and establishment of maximum rates of production from
+natural gas and oil wells. States generally have the ability to prorate
+production to the market demand for oil and natural gas; however, this is not
+currently occurring. 
+Environmental
+Regulations. Our
+operations are subject to numerous existing federal, state, and local laws and
+regulations governing environmental quality and pollution control. These laws
+and regulations may require that permits be obtained before drilling commences,
+restrict the types, quantities, and concentration of various substances that
+can be released into the environment in connection with drilling and production
+activities, and limit or prohibit drilling activities on certain lands lying
+within wilderness, 
+8 
+wetlands, and other
+protected areas, including areas containing endangered animal species. As a result,
+these laws and regulations may substantially increase the costs of exploring,
+developing, or producing oil and gas and may prevent or delay the commencement
+or continuation of a project. In addition, these laws and regulations may
+impose substantial clean-up, remediation, and other obligations in the event of
+any discharges or emissions in violation of such laws and regulations. 
+Our coalbed methane gas
+production from the Hanging Woman Basin is similar to our traditional natural
+gas production as to the physical producing facilities and the product produced.
+However, the subsurface mechanisms that allow the gas to move to the wellbore
+and the producing characteristics of coalbed methane wells are very different
+from traditional natural gas production. Unlike conventional gas wells, which
+require a porous and permeable reservoir, hydrocarbon migration, and a natural
+structural and/or stratigraphic trap, coalbed methane gas is trapped in the
+molecular structure of the coal itself until released by pressure changes
+resulting from the removal of in situ water. Frequently, coalbeds are partly or completely
+saturated with water. As the water is removed, internal pressures on the coal
+are decreased, allowing the gas to desorb from the coal and flow to the wellbore.
+Unlike traditional gas wells, new coalbed methane wells often produce water for
+several months and then, as the water production decreases, natural gas
+production increases. 
+Coalbed methane gas production
+in the Hanging Woman Basin requires state permits for the use of well-site pits
+and evaporation ponds for the disposal of produced water. Groundwater produced
+from the coal seams can generally be discharged into arroyos, surface waters,
+well-site pits, and evaporation ponds without a permit if it does not exceed
+surface discharge permit levels, and meets state and federal primary drinking
+water standards. All of these disposal options require an extensive third-party
+water sampling and laboratory analysis program to ensure compliance with state
+permit standards. Where water of lesser quality is involved or the wells
+produce water in excess of the applicable volumetric permit limits, additional
+disposal wells may have to be drilled to re-inject the produced water back into
+deep underground rock formations. 
+A portion of our acreage at
+Hanging Woman Basin is on federal lands, and a segment of these federal lands
+are in Montana. We are subject to delays in permitting associated with the
+completion of a supplemental Environmental Impact Statement covering the
+contemplation of phased development on Federal leases in Montana. We are also
+affected by considerations for sage grouse that are native to the area. Each of
+these issues has the potential to impact the timing of our permitting and
+drilling operations associated with development of our reserves at Hanging
+Woman Basin. 
+To date we have not
+experienced any material adverse effect on our operations from obligations
+under environmental laws and regulations. We believe that we are in substantial
+compliance with currently applicable environmental laws and regulations and
+that continued compliance with existing requirements would not have a material
+adverse impact on us. 
+Cautionary
+Information about Forward-Looking Statements 
+This Form 10-K
+contains “forward-looking statements” within the meaning of Section 27A of
+the Securities Act of 1933 and Section 21E of the Securities Exchange Act
+of 1934. All statements, other than statements of historical facts, included in
+this Form 10-K that address activities, events or developments that
+we expect, believe, or anticipate will or may occur in the future are
+forward-looking statements. The words “anticipate,” “assume,” “believe,” “budget,”
+“estimate,” “expect,” “forecast,” “intend,” “plan,” “project,” “will,” and
+similar expressions are intended to identify forward-looking statements. Forward-looking
+statements appear in a number of places in this Form 10-K, and
+include statements about such matters as: 
+· The
+amount and nature of future capital expenditures and the availability of
+capital resources to fund capital expenditures; 
+9 
+· the
+drilling of wells and other exploration and development plans, as well as
+possible future acquisitions; 
+· reserve
+estimates and the estimates of both future net revenues and the present value
+of future net revenues that are included in their calculation; 
+· future
+oil and gas production estimates; 
+· our
+outlook on future oil and gas prices; 
+· cash
+flows, anticipated liquidity, and the future repayment of debt; 
+· business
+strategies and other plans and objectives for future operations, including
+plans for expansion and growth of operations and our outlook on future
+financial condition or results of operations; and 
+· other
+similar matters such as those discussed in the “Management’s Discussion and
+Analysis of Financial Condition and Results of Operations” section of this Form 10-K. 
+Our forward-looking
+statements are based on assumptions and analyses made by us in light of our
+experience and our perception of historical trends, current conditions, expected
+future developments, and other factors that we believe are appropriate under
+the circumstances. These statements are subject to a number of known and
+unknown risks and uncertainties which may cause our actual results to differ
+materially from results expressed or implied by the forward-looking statements.
+These risks are described in the “Risk Factors” section of this Form 10-K,
+and include such factors as: 
+· The
+volatility and level of realized oil and natural gas prices; 
+· unexpected
+drilling conditions and results; 
+· unsuccessful
+exploration and development drilling; 
+· the
+availability and risks of economically attractive exploration, development, and
+property acquisition opportunities and any necessary financing; 
+· the
+risks of hedging strategies; 
+· lower
+prices realized on oil and gas sales resulting from our commodity price risk
+management activities; 
+· the
+uncertain nature of the expected benefits from the acquisition of oil and gas
+properties; 
+· production
+rates and reserve replacement; 
+· the
+imprecise nature of oil and gas reserve estimates; 
+· uncertainties
+inherent in projecting future rates of production from drilling activities and
+acquisitions; 
+· drilling
+and operating service availability; 
+· uncertainties
+in cash flow; 
+· the
+financial strength of hedge contract counterparties; 
+· the
+negative impact that lower oil and natural gas prices could have on our ability
+to borrow; 
+· our
+ability to compete effectively against other independent and major oil and gas
+companies; and 
+· litigation,
+environmental matters, the potential impact of government regulations, and the
+use of management estimates. 
+10 
+We caution you that
+forward-looking statements are not guarantees of future performance and that
+actual results or developments may differ materially from those expressed or
+implied in the forward-looking statements. Although we may from time to time
+voluntarily update our prior forward-looking statements, we disclaim any
+commitment to do so except as required by securities laws. 
+Available
+Information 
+Our Internet website address is www.stmaryland.com. Within
+our website’s financial information section we make available free of charge
+our annual reports on Form 10-K, quarterly reports on Form 10-Q,
+current reports on Form 8-K, and amendments to those reports filed
+with or furnished to the SEC under applicable securities laws. These materials
+are made available as soon as reasonably practical after we electronically file
+such materials with or furnish such materials to the SEC. 
+We also make available through our website’s corporate
+governance section our Corporate Governance Guidelines, Code of Business
+Conduct and Ethics, and the Charters for our Board of Directors’ Audit
+Committee, Compensation Committee, Executive Committee, and Nominating and
+Corporate Governance Committee. These documents are also available in print to
+any stockholder who requests them. Requests for these documents may be
+submitted to: 
+St. Mary Land & Exploration Company 
+Investor Relations 
+1776 Lincoln Street, Suite 700 
+Denver, Colorado 80203 
+Telephone: (303) 863-4322 
+http://www.stmaryland.com/investors/index.htm 
+Information on our website
+is not incorporated by reference into this Form 10-K and should not
+be considered part of this document. 
+Glossary 
+The terms defined in this section are used throughout
+this Form 10-K. 
+2-D seismic or 2-D
+data. Seismic
+data that is acquired and processed to yield a two-dimensional
+cross-section of the subsurface. 
+3-D seismic or 3-D
+data. Seismic
+data that is acquired and processed to yield a three-dimensional picture
+of the subsurface. 
+Bbl. One stock tank barrel, or 42 U.S. gallons liquid
+volume, used in reference to oil or other liquid hydrocarbons. 
+Bcf. Billion cubic feet, used in reference to natural gas. 
+BCFE. Billion cubic feet of gas equivalent. Gas equivalents
+are determined using the ratio of six Mcf of gas (including gas liquids) to one
+Bbl of oil. 
+BOE. Barrels of oil equivalent. Oil equivalents are
+determined using the ratio of six Mcf of gas (including gas liquids) to one Bbl
+of oil. 
+Development well. A well drilled within the proved area of an oil or gas
+reservoir to the depth of a stratigraphic horizon known to be productive. 
+Dry hole. A well found to be incapable of producing either oil
+or gas in sufficient commercial quantities to justify completion as an oil or
+gas well. 
+11 
+Exploratory well. A well drilled to find and produce oil or gas in an
+unproved area, to find a new reservoir in a field previously found to be
+productive of oil or gas in another reservoir, or to extend a known reservoir
+beyond its known horizon. 
+Farmout. An assignment of an interest in a drilling location
+and related acreage conditioned upon the drilling of a well on that location. 
+Fee land. The most extensive interest that can be owned in
+land, including surface and mineral (including oil and gas) rights. 
+Field. An area consisting of a single reservoir or multiple
+reservoirs all grouped on or related to the same individual geological
+structural feature or stratigraphic condition. 
+Finding cost. Expressed in dollars per BOE or MCFE. Finding costs
+are calculated by dividing the amount of total capital expenditures for oil and
+gas activities, including the effect of asset retirement obligations, by the
+amount of estimated net proved reserves added through discoveries, extensions,
+infill drilling, acquisitions, and revisions of previous estimates during the
+same period. The information for this calculation is included in the note
+regarding disclosures about oil and gas producing activities contained in the
+Notes to Consolidated Financial Statements included in this Form 10-K. 
+Formation. A succession of sedimentary beds that were deposited
+under the same general geologic conditions. 
+Gross acre. An acre in which a working interest is owned. 
+Gross well. A well in which a working interest is owned. 
+Horizontal wells. Wells which are drilled at angles greater than 70
+degrees from vertical. 
+Hydraulic fracturing. A procedure to stimulate production by forcing a
+mixture of fluid and proppant (usually sand) into the formation under high
+pressure. This creates artificial fractures in the reservoir rock, which
+increases permeability and porosity. 
+MBbl. One thousand barrels of oil or other liquid
+hydrocarbons. 
+MMBbl. One million barrels of oil or other liquid
+hydrocarbons. 
+MBOE. One thousand barrels of oil equivalent. Oil equivalents
+are determined using the ratio of six Mcf of gas (including gas liquids) to one
+Bbl of oil. 
+MMBOE. One million barrels of oil equivalent. Oil
+equivalents are determined using the ratio of six Mcf of gas (including gas
+liquids) to one Bbl of oil. 
+Mcf. One thousand cubic feet, used in reference to natural
+gas. 
+MCFE. One
+thousand cubic feet of gas equivalent. Gas equivalents are determined using the
+ratio of six Mcf of gas (including gas liquids) to one Bbl of oil. 
+MMcf. One million cubic feet, used in reference to natural
+gas. 
+MMCFE. One
+million cubic feet of gas equivalent. Gas equivalents are determined using the
+ratio of six Mcf of gas (including gas liquids) to one Bbl of oil. 
+MMBtu. One million British Thermal Units. A British Thermal
+Unit is the amount of heat required to raise the temperature of a one-pound
+mass of water by one degree Fahrenheit. 
+Net acres or net wells. The sum of our fractional working interests owned in
+gross acres or gross wells. 
+Net asset value per share. The result of the fair market value of total assets
+less total liabilities, divided by the total number of outstanding shares of
+common stock. 
+12 
+NYMEX. New
+York Mercantile Exchange. 
+OCS. Outer
+Continental Shelf in the Gulf of Mexico. 
+PV-10 value. The present value of estimated future gross revenue
+to be generated from the production of estimated net proved reserves, net of
+estimated production and future development costs, using prices and costs in
+effect as of the date indicated (unless such prices or costs are subject to
+change pursuant to contractual provisions), without giving effect to non-property
+related expenses such as general and administrative expenses, debt service and
+future income tax expenses or to depreciation, depletion, and amortization,
+discounted using an annual discount rate of 10 percent. While this measure does
+not include the effect of income taxes as it would in the use of the
+standardized measure calculation, it does provide an indicative representation
+of the relative value of the Company on a comparative basis to other companies
+and from period to period. 
+Productive well. A well that is producing oil or gas or that is
+capable of commercial production. 
+Proved developed reserves. Reserves that can be expected to be recovered through
+existing wells with existing equipment and operating methods. 
+Proved reserves. The estimated quantities of oil, gas and gas liquids
+which geological and engineering data demonstrate with reasonable certainty to
+be recoverable in future years from known reservoirs under existing economic
+and operating conditions. 
+Proved undeveloped
+reserves. Reserves
+that are expected to be recovered from new wells on undrilled acreage, or from
+existing wells where a relatively major expenditure is required for
+recompletion. 
+Recompletion. The completion in an existing wellbore in a formation
+other than that in which the well has previously been completed. 
+Reserve life. Expressed in years, represents the estimated net
+proved reserves at a specified date divided by actual production for the
+preceding 12-month period. 
+Reserve replacement
+percentage—excluding sales. The sum of reserve
+extensions and discoveries, reserve acquisitions, and reserve revisions of
+previous estimates for a specified period of time divided by production for
+that same period of time. This is believed to be a useful non-GAAP measure that
+is widely utilized within the exploration and production industry as well as by
+investors. It is an easily calculable number and is representative of the
+relative success a company is having in replacing its production from its
+declining asset base as well as its ability to grow the overall company. 
+Reserve replacement
+percentage—including sales. The sum of sales of
+reserves, reserve extensions and discoveries, reserve acquisitions, and reserve
+revisions of previous estimates for a specified period of time divided by
+production for that same period of time. This is believed to be a useful
+non-GAAP measure that is widely utilized within the exploration and production
+industry as well as by investors. It is an easily calculable number and is
+representative of the relative success a company is having in replacing its
+production from its declining asset base as well as its ability to grow the
+overall company. 
+Royalty. The share paid to the owner of mineral rights,
+expressed as a percentage of gross income from oil and gas produced and sold
+unencumbered by expenses relating to the drilling, completing, and operating of
+the affected well. 
+Royalty interest. An interest in an oil and gas property entitling the
+owner to shares of oil and gas production free of costs of exploration,
+development, and production operations. 
+Standardized measure of
+discounted future net cash flows. The
+discounted future net cash flows relating to proved reserves based on year-end
+prices, costs and statutory tax rates, and a 10 percent annual discount rate. The
+information for this calculation is included in the note regarding disclosures
+about oil and gas 
+13 
+producing activities
+contained in the Notes to Consolidated Financial Statements included in this Form 10-K. 
+Undeveloped acreage. Lease acreage on which wells have not been drilled or
+completed to a point that would permit the production of commercial quantities
+of oil and gas, regardless of whether such acreage contains estimated net
+proved reserves. 
+Working interest. The operating interest that gives the owner the right
+to drill, produce, and conduct operating activities on the property and to
+share in the production, sales, and costs.

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+ITEM 13. CERTAIN
+RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE 
+The information required
+by this Item is incorporated by reference to the information provided under the
+caption “Certain Relationships and Related Transactions” in St. Mary’s definitive
+proxy statement for the 2007 annual meeting of stockholders to be filed within
+120 days from December 31, 2006.

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+ITEM 9A. CONTROLS
+AND PROCEDURES 
+We maintain a system of disclosure controls and
+procedures that are designed to ensure that information required to be
+disclosed in our SEC reports is recorded, processed, summarized, and reported
+within the time periods specified in the SEC’s rules and forms, and to
+ensure that such information is accumulated and communicated to our management,
+including the Chief Executive Officer and the Chief Financial Officer, as
+appropriate, to allow timely decisions regarding required disclosure. 
+We carried out an
+evaluation, under the supervision and with the participation of our management,
+including the Chief Executive Officer and the Chief Financial Officer, of the
+effectiveness of the design and operation of our disclosure controls and
+procedures as of the end of the period covered by this Annual Report on Form 10-K.
+Based upon that evaluation, the Chief Executive Officer and the Chief Financial
+Officer concluded that our disclosure controls and procedures are effective for
+the purposes discussed above as of the end of the period covered by this Annual
+Report on Form 10-K. There was no change in our internal control
+over financial reporting that occurred during our most recent fiscal quarter
+that has materially affected, or is reasonably likely to materially affect, our
+internal control over financial reporting. 
+70 
+MANAGEMENT’S
+REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING 
+To the Stockholders’ of St. Mary Land &
+Exploration Company 
+Management of the
+Company is responsible for establishing and maintaining adequate internal
+control over financial reporting as defined in Rules 13a-15(f) and
+15d-15(f) under the Securities Exchange Act of 1934, as amended. The
+Company’s internal control over financial reporting is designed to provide
+reasonable assurance regarding the reliability of financial reporting and the
+preparation of financial statements for external purposes in accordance with
+generally accepted accounting principles. The Company’s internal control over
+financial reporting includes those policies and procedures that: 
+(i) pertain to the
+maintenance of records that, in reasonable detail, accurately and fairly
+reflect the transactions and dispositions of the assets of the Company; 
+(ii) provide reasonable
+assurance that transactions are recorded as necessary to permit preparation of
+financial statements in accordance with generally accepted accounting
+principles, and that receipts and expenditures of the Company are being made
+only in accordance with authorizations of management and directors of the
+Company; and 
+(iii) provide reasonable assurance
+regarding prevention or timely detection of unauthorized acquisition, use, or
+disposition of the Company’s assets that could have a material effect on the
+financial statements. 
+Because of the inherent limitations, internal control
+over financial reporting may not prevent or detect misstatements. Also,
+projections of any evaluation of effectiveness to future periods are subject to
+the risk that controls may become inadequate because of changes in conditions,
+or that the degree of compliance with the policies or procedures may
+deteriorate. 
+Management assessed the effectiveness of the Company’s
+internal control over financial reporting as of December 31, 2006. In
+making this assessment, management used the criteria set forth by the Committee
+of Sponsoring Organizations of the Treadway Commission in Internal
+Control — Integrated Framework . 
+Based on our assessment and those criteria, management
+believes that the Company maintained effective internal control over financial
+reporting as of December 31, 2006. 
+The
+Company’s independent registered public accounting firm has issued an
+attestation report on management’s assessment of the Company’s internal controls
+over financial reporting. That report immediately follows this report. 
+/s/ MARK
+A. HELLERSTEIN 
+/s/ DAVID W.
+HONEYFIELD 
+Mark A. Hellerstein 
+David W. Honeyfield 
+Chairman and CEO 
+Vice President—CFO, Secretary & Treasurer 
+February 22, 2007 
+February 22, 2007 
+71 
+REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
+FIRM 
+To the Board of Directors and Stockholders of 
+St. Mary Land & Exploration Company and Subsidiaries 
+We have audited management’s assessment, included in
+the accompanying Management’s Report on Internal Control over Financial
+Reporting, that St. Mary Land & Exploration Company and subsidiaries
+(the “Company”) maintained effective internal control over financial reporting
+as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the
+Committee of Sponsoring Organizations of the Treadway Commission. The Company’s
+management is responsible for maintaining effective internal control over
+financial reporting and for its assessment of the effectiveness of internal control
+over financial reporting. Our responsibility is to express an opinion on
+management’s assessment and an opinion on the effectiveness of the Company’s
+internal control over financial reporting based on our audit. 
+We conducted our audit in accordance with the
+standards of the Public Company Accounting Oversight Board (United States). Those
+standards require that we plan and perform the audit to obtain reasonable
+assurance about whether effective internal control over financial reporting was
+maintained in all material respects. Our audit included obtaining an
+understanding of internal control over financial reporting, evaluating
+management’s assessment, testing and evaluating the design and operating
+effectiveness of internal control, and performing such other procedures as we
+considered necessary in the circumstances. We believe that our audit provides a
+reasonable basis for our opinions. 
+A company’s internal control over financial reporting
+is a process designed by, or under the supervision of, the company’s principal
+executive and principal financial officers, or persons performing similar
+functions, and effected by the company’s board of directors, management, and
+other personnel to provide reasonable assurance regarding the reliability of
+financial reporting and the preparation of financial statements for external
+purposes in accordance with generally accepted accounting principles. A company’s
+internal control over financial reporting includes those policies and
+procedures that (1) pertain to the maintenance of records that, in
+reasonable detail, accurately and fairly reflect the transactions and
+dispositions of the assets of the company; (2) provide reasonable
+assurance that transactions are recorded as necessary to permit preparation of
+financial statements in accordance with generally accepted accounting
+principles, and that receipts and expenditures of the company are being made
+only in accordance with authorizations of management and directors of the
+company; and (3) provide reasonable assurance regarding prevention or
+timely detection of unauthorized acquisition, use, or disposition of the
+company’s assets that could have a material effect on the financial statements. 
+Because of the inherent limitations of internal
+control over financial reporting, including the possibility of collusion or
+improper management override of controls, material misstatements due to error
+or fraud may not be prevented or detected on a timely basis. Also, projections
+of any evaluation of the effectiveness of the internal control over financial
+reporting to future periods are subject to the risk that the controls may
+become inadequate because of changes in conditions, or that the degree of
+compliance with the policies or procedures may deteriorate. 
+In our opinion, management’s assessment that the
+Company maintained effective internal control over financial reporting as of December 31,
+2006, is fairly stated, in all material respects, based on the criteria
+established in Internal Control—Integrated Framework 
+issued by the Committee of Sponsoring Organizations of the Treadway Commission.
+Also in our opinion, the Company maintained, in all material respects,
+effective internal control over financial reporting as of December 31, 2006,
+based on the criteria established in Internal Control—Integrated
+Framework issued by the Committee of Sponsoring Organizations of the
+Treadway Commission. 
+72 
+We have also audited, in accordance with the standards
+of the Public Company Accounting Oversight Board (United States), the
+consolidated financial statements as of and for the year ended December 31,
+2006, of the Company, and our report dated February 22, 2007, expressed an
+unqualified opinion on those financial statements and includes an explanatory
+paragraph for the change in method of accounting for stock-based compensation
+and defined benefit pension plans. 
+/S/ DELOITTE & TOUCHE LLP 
+Denver, Colorado 
+February 22, 2007 
+73

raw/filings/0000893538/2006/0001104659-07-013545/rpt_disclosure.txt

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+CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 
+Policy on Transactions with Related Persons 
+The Company has adopted a written policy and procedures for the Audit Committee's review of any transaction, arrangement or relationship (including any
+indebtedness or guarantee of indebtedness) or series of similar transactions, arrangements or relationships in which (i) the Company is a participant, (ii) the aggregate amount involved
+will or may be expected to exceed $120,000, and (iii) a related person has or will have a direct or indirect material interest. For purposes of this policy, a "related person" means
+(i) any of our directors, executive officers or nominees for director, (ii) any stockholder that beneficially owns more than 5% of the Company's outstanding shares of common stock, and
+(iii) any immediate family member of the foregoing. The Audit Committee approves or ratifies only those transactions that it determines in good faith are in, or are not inconsistent with, the
+best interests of the Company and its stockholders. 
+In
+determining whether to approve or ratify a transaction, the Audit Committee takes into account the factors it deems appropriate, which may include, among others, the benefits to the
+Company, the availability of other sources for comparable products or services, the impact on a director's independence in the event the related person is a director, and the extent of the related
+person's interest in the transaction. The policy also provides for the delegation of its authority to the Chairman of the Audit Committee for any related person transaction requiring
+pre-approval or ratification between meetings of the Audit Committee. The Audit Committee reviews and assesses ongoing relationships with a related person on at least an annual basis to
+see that they are in compliance with the policy and remain appropriate. 
+In
+addition, St. Mary's By-Laws provide that no director, officer or employee may pursue for his or her own account a business or investment opportunity if he or she
+has obtained knowledge of such opportunity through his or her affiliation with the Company. In addition, no officer or employee of St. Mary may pursue for his or her own account an oil and gas
+opportunity as to which his or her knowledge of the opportunity was not obtained through his or her affiliation with the Company unless (a) with respect to an officer of St. Mary, the
+officer's pursuit of the opportunity has been approved by the Board of Directors and (b) with respect to a non-officer of St. Mary, the employee's pursuit of the opportunity
+has been approved by a senior officer of St. Mary with full knowledge of such opportunity. These restrictions do not apply to the acquisition of less than one percent of the publicly traded
+stock of another company. 
+Related Person Transactions 
+Set forth below is a description of a related transaction between St. Mary and one of its officers during the last fiscal year. Some of the aspects of this
+transaction will continue in effect and may result in conflicts of interest between St. Mary and the individual. We cannot assure you that conflicts of interest will always be resolved in favor
+of St. Mary. 
+57 
+As
+a result of interests acquired prior to any association with St. Mary, Robert L. Nance, an executive officer of St. Mary during 2007 who retired as an executive officer
+of St. Mary as of December 31, 2007, either personally or through Ronan, Inc., an entity in which he is a majority stockholder, owns working and overriding royalty interests in
+approximately 14 of the Company's oil and gas wells. Total revenues earned from these specific oil and gas properties by Mr. Nance and Ronan, Inc. in 2007, 2006, and 2005 are
+approximately $154,000, $206,000, and $238,000, respectively. The Audit Committee has reviewed this relationship and deemed this not to be in conflict with the Company's Policy and Procedures with
+Respect to Related Person Transactions, since the ownership was acquired prior to any relationship with St. Mary and because the amounts involved are not deemed significant to St. Mary
+as a whole.

raw/filings/0000893538/2008/0000893538-09-000012/filing_metadata.csv

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+0000893538,SM,SM Energy Co,10-K,2009-02-24,2008-12-31,2009-02-24T19:52:13.000Z,0000893538-09-000012,form123108_10k.htm,123108 10K,4517416,0,0,https://www.sec.gov/Archives/edgar/data/893538/000089353809000012/form123108_10k.htm,https://www.sec.gov/Archives/edgar/data/893538/000089353809000012/,2008,2008,1

raw/filings/0000893538/2008/0000893538-09-000012/rpt_disclosure.txt

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+CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 
+Policy on Transactions with Related Persons 
+The Company has adopted a written policy and procedures for the Audit Committee's review of any transaction, arrangement, or
+relationship (including any indebtedness or guarantee of indebtedness) or series of similar transactions, arrangements, or relationships in which (i) the Company is a participant,
+(ii) the aggregate amount involved will or may be expected to exceed $120,000, and (iii) a related person has or will have a direct or indirect material interest. For purposes of this
+policy, a "related person" means (i) any of our directors, executive officers or nominees for director, (ii) any stockholder that beneficially owns more than five percent of the
+Company's outstanding shares of common stock, and (iii) any immediate family member of the foregoing. The Audit Committee approves or ratifies only those transactions that it determines in good
+faith are in, or are not inconsistent with, the best interests of the Company and its stockholders. 
+In
+determining whether to approve or ratify a transaction, the Audit Committee takes into account the factors it deems appropriate, which may include, among others, the benefits to the
+Company, the availability of other sources for comparable products or services, the impact on a director's independence in the event the related person is a director, and the extent of the related
+person's interest in the transaction. The policy also provides for the delegation of its authority to the Chairman of the Audit Committee for any related person transaction requiring
+pre-approval or ratification between meetings of the Audit Committee. The Audit Committee reviews and assesses ongoing relationships with a related person on at least an annual basis to
+see that they are in compliance with the policy and remain appropriate. 
+In
+addition, the By-Laws provide that no director, officer, or employee may pursue for his or her own account a business or investment opportunity if he or she has obtained
+knowledge of such opportunity through his or her affiliation with the Company. In addition, no officer or employee of St. Mary may pursue for his or her own account an oil and gas opportunity
+as to which his or her knowledge of the opportunity was not obtained through his or her affiliation with the Company unless (a) with respect to an officer of St. Mary, the officer's
+pursuit of the opportunity has been approved by the Board of Directors, and (b) with respect to a non-officer of St. Mary, the employee's pursuit of the opportunity has been
+approved by a senior officer of St. Mary with full knowledge of such opportunity. These restrictions do not apply to the acquisition of less than one percent of the publicly traded stock of
+another company. 
+Related Person Transactions 
+Set forth below is a description of a related transaction between St. Mary and one of its directors during the last fiscal year.
+Some of the aspects of this transaction will continue in effect and may result in conflicts of interest between St. Mary and the individual. We cannot assure you that conflicts of interest will
+always be resolved in favor of St. Mary. 
+Mr. Hellerstein,
+who currently serves as Chairman of the Board of Directors of St. Mary and is retiring from the Board of Directors effective at the annual meeting on
+May 20, 2009, is a participant in the NPP as a result of his prior service to the Company as an executive officer, including service as President from 1992 to June 2006 and Chief Executive
+Officer from 1995 to February 2007. As a result of Mr. Hellerstein's vested participation interests in the NPP arising from his prior service, the Company made NPP payments to
+Mr. Hellerstein during 2008 in the total amount of $6,172,098. The Audit Committee has reviewed this relationship and determined that it is not in conflict with the Company's Policies and
+Procedures with Respect to Related Person Transactions, since Mr. Hellerstein's NPP participation interests were awarded to him while he was an employee of St. Mary in order to provide
+for future incentive bonus compensation for his services as an executive officer. For a description of the NPP, please see the section entitled "Net Profits Interest Bonus Plan (NPP)" in the
+"Compensation Discussion and Analysis" section of this proxy statement. 
+54 
+Table of Contents

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raw/filings/0001065837/2003/0000950148-04-000577/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 2003 fiscal year.
+38 
+Table of Contents

raw/filings/0001065837/2003/0000950148-04-000577/item9a.txt

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+ITEM 9A. CONTROLS AND PROCEDURES
+(a) Evaluation of disclosure controls and procedures
+The term “disclosure controls and procedures” refers to the controls and
+procedures of a company that are designed to ensure that information to be
+disclosed by a company in the reports that it files under Rule 13a-14 of the
+Securities and Exchange Act of 1934 (the (“Exchange Act”) is recorded,
+processed, summarized, and reported within required time periods. As of the
+end of the period covered by this Annual Report on Form 10-K (the “Evaluation
+Date”), we carried out an evaluation under the supervision and with the
+participation of our Chief Executive Officer and Chief Financial Officer of the
+effectiveness of our disclosure controls and procedures. Based on that
+evaluation, Our Chief Executive Officer and Chief Financial Officer have
+concluded that, as of the Evaluation Date, such controls and procedures were
+effective in ensuring that the required information will be disclosed on a
+timely basis in our periodic reports filed with the Securities and Exchange
+Commission under the Exchange Act.
+(b) Changes in internal control
+There were no significant changes to our internal control over financial
+reporting or in other factors that could significantly affect our internal
+controls subsequent to the Evaluation Date.
+PART III

raw/filings/0001065837/2003/0000950148-04-000577/rpt_disclosure.txt

@@ -0,0 +1,39 @@
+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 former director of the
+Company, is a partner of the law firm of Kirkpatrick &
+Lockhart, LLP which provides legal services to the Company. In
+February 2003, Mr. Poletti resigned as a director of the
+Company. During 2003, the Company paid $214,564 to
+Kirkpatrick & Lockhart, LLP for legal services that
+were provided to the Company.
+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.
+16

raw/filings/0001065837/2004/0000950129-05-002481/filing_metadata.csv

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raw/filings/0001065837/2004/0000950129-05-002481/item13.txt

@@ -0,0 +1,4 @@
+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 2004 fiscal year.

raw/filings/0001065837/2004/0000950129-05-002481/item9a.txt

@@ -0,0 +1,83 @@
+ITEM 9A. CONTROLS AND PROCEDURES 
+Attached as exhibits to this annual report on Form 10-K are certifications of our Chief
+Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), which are required in accordance
+with Rule 13a-14 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). This
+“Controls and Procedures” section includes information concerning the controls and controls
+evaluation referred to in the certifications. Part II, Item 8 of this annual report sets forth the
+report of KPMG LLP, our independent registered public accounting firm, regarding its audit of our
+internal control over financial reporting and of management’s assessment of internal control over
+financial reporting set forth below in this section.
+EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
+The term “disclosure controls and procedures” refers to the controls and procedures of a
+company that are designed to ensure that information required to be disclosed by a company in the
+reports that it files under the Exchange Act, is recorded, processed, summarized and reported
+within required time periods. We have established disclosure controls and procedures to ensure that
+material information relating to Skechers and its consolidated subsidiaries is made known to the
+officers who certify our financial reports, as well as other members of senior management and the
+Board of Directors, to allow timely decisions regarding required disclosures. As of the end of the
+period covered by this annual report on Form 10-K (the “Evaluation Date”), we carried out an
+evaluation under the supervision and with the participation of our management, including our CEO
+and CFO, of the effectiveness of the design and operation of our disclosure controls and procedures
+pursuant to Rule 13a-15 of the Exchange Act. Based upon that evaluation, our CEO and CFO concluded
+that our disclosure controls and procedures are effective in timely alerting them to material
+information related to our company that is required to be included in our periodic reports filed
+with the SEC under the Exchange Act.
+62
+Table of Contents 
+CHANGES IN INTERNAL CONTROL
+Although there were no significant changes to our internal controls or in other factors that
+could significantly affect our internal controls subsequent to the Evaluation Date, we have
+completed our efforts regarding compliance with Section 404 of the Sarbanes-Oxley Act of 2002 for
+our fiscal year ended December 31, 2004. The results of our evaluation are discussed below in
+Management’s Report on Internal Control Over Financial Reporting
+This effort included internal control documentation and review under the direction of senior
+management. During the course our evaluation, we reviewed identified data errors and control
+problems and confirmed that appropriate corrective actions, including process improvements, were
+undertaken. These improvements included formalization of policies and procedures, improved
+segregation of duties and additional monitoring controls. Many of the components of our internal
+controls are also evaluated on an ongoing basis by our Internal Audit Department and by other
+personnel in our Finance organization. The overall goals of these various evaluation activities are
+to monitor our internal controls, and to modify them as necessary. Our intent is to maintain the
+internal controls as dynamic systems that change as conditions warrant.
+MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
+Our management is responsible for establishing and maintaining adequate internal control over
+financial reporting, as such term is defined in Rule 13a-15(f)
+of the Exchange Act and in
+accordance with generally accepted accounting principles. Internal control over financial reporting
+includes those policies and procedures that (i) pertain to the maintenance of records that in
+reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of
+the company; (ii) provide reasonable assurance that transactions are recorded as necessary to
+permit preparation of financial statements in accordance with generally accepted accounting
+principles, and that receipts and expenditures of the company are being made only in accordance
+with authorizations of management and directors of the company; and (iii) provide reasonable
+assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition
+of the company’s assets that could have a material effect on the financial statements.
+We conducted an evaluation of the effectiveness of our internal control over financial
+reporting based on the framework in Internal Control – Integrated Framework issued by the Committee
+of Sponsoring Organizations of the Treadway Commission (COSO). Based on our evaluation under the
+framework in Internal Control- Integrated Framework, our management has concluded that as of
+December 31, 2004, our internal control over financial reporting is effective.
+Our independent registered public accountants, KPMG LLP, audited the financial statements
+included in this annual report on Form 10-K and have issued an attestation report on management’s
+assessment of the effectiveness of our internal control over financial reporting as of December
+31, 2004, which is included in Part II, Item 8 of this
+annual report on Form 10-K.
+INHERENT LIMITATIONS ON EFFECTIVENESS OF CONTROLS
+Our management, including our Chief Executive Officer and Chief Financial Officer, does
+not expect that our disclosure controls or our internal control over financial reporting will
+prevent or detect all error and all fraud. A control system, no matter how well designed and
+operated, can provide only reasonable, not absolute, assurance that the control system’s objectives
+will be met. The design of a control system must reflect the fact that there are resource
+constraints, and the benefits of controls must be considered relative to their costs. Further,
+because of the inherent limitations in all control systems, no evaluation of controls can provide
+absolute assurance that misstatements due to error or fraud will not occur or that all control
+issues and instances of fraud, if any, within the company have been detected. These inherent
+limitations include the realities that judgments in decision-making can be faulty and that
+breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the
+individual acts of some persons, by collusion of two or more people, or by management override of
+the controls. The design of any system of controls is based in part on certain assumptions about
+the likelihood of future events, and there can be no assurance that any design will succeed in
+achieving its stated goals under all potential future conditions. Projections of any evaluation of
+controls effectiveness to future periods are subject to risks. Over time, controls may become
+inadequate because of changes in conditions or deterioration in the degree of compliance with
+policies or procedures.

raw/filings/0001065837/2004/0000950129-05-002481/rpt_disclosure.txt

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+CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 
+As of March 31, 2005, Robert Greenberg, his children, and the Greenberg Family Trust
+beneficially own all of the Class B Common Stock and approximately 88.4% of the combined voting
+power of the Company’s Class A and Class B Common Stock. By virtue of this stock ownership, Robert
+Greenberg may be deemed to be a “control person” of the Company within the meaning of the rules and
+regulations promulgated under the Securities Act of 1933, as amended, and the Greenberg Family
+Trust influences the election of Robert Greenberg. Michael Greenberg, the Company’s President, and
+Jeffrey Greenberg, both of whom are members of the Board of Directors of the Company, are each
+beneficiaries of the Greenberg Family Trust. Additionally, Robert Greenberg, directly and
+indirectly through the Greenberg Family Trust, beneficially owns approximately 65.1% of the
+combined voting power of the Company’s Class A and Class B Common Stock. As a result, the Company
+is considered a “Controlled Company” under the NYSE Rules and is thereby exempt from certain
+listing requirements and regulations as set forth in the NYSE Rules.
+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 SEC 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.
+Jeffrey Greenberg, Jason Greenberg, Joshua Greenberg, Scott Greenberg and Jennifer Greenberg,
+who are the children of Robert Greenberg, Chairman of the Board and Chief Executive Officer of the
+Company, and are also the siblings of Michael Greenberg, President of the Company, were
+non-executive employees of the Company in 2004, and each of them received compensation that
+exceeded $60,000 for 2004.
+Richard Siskind, who is a director of the Company, founded R. Siskind & Company, which is a
+business that purchases brand name men’s and women’s apparel and accessories and redistributes
+those items to off-price retailers, and he is its sole shareholder, Chief Executive Officer,
+President and sole member of its Board of Directors. During 2004, the Company sold backpacks to R.
+Siskind & Company in the amount of $894,000. The Company had no outstanding accounts receivable
+from R. Siskind & Company at December 31, 2004.
+The Company believes that all of the foregoing relationships and transactions were reasonable
+and in the best interest of the Company.
+20
+Table of Contents

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raw/filings/0001065837/2005/0000950129-06-002711/item1.txt

@@ -0,0 +1,854 @@
+ITEM 1. BUSINESS 
+We were incorporated in California in 1992 and reincorporated in Delaware in 1999. Throughout
+this annual report, we refer to Skechers U.S.A., Inc., a Delaware corporation, and its consolidated
+subsidiaries as “we,” “us,” “our,” “our company” and “Skechers” unless otherwise indicated. Our
+Internet website address is www.skechers.com . Our annual report on Form 10-K, quarterly reports on
+Form 10-Q, current reports on Form 8-K, Form 3’s, 4’s and 5’s filed on behalf of directors,
+officers and 10% stockholders, and any amendments to those reports filed or furnished pursuant to
+Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge on our
+website as soon as reasonably practicable after we electronically file such material with, or
+furnish it to, the SEC. You can learn more about us by reviewing such filings on our website or at
+the SEC’s website at www.sec.gov .
+GENERAL
+We design and market Skechers-branded contemporary footwear for men, women and children under
+seven individual brand names. Our footwear reflects a combination of style, quality and value that
+appeals to a broad range of consumers. In addition to Skechers-branded lines, we also offer seven
+uniquely branded designer, fashion and street-focused footwear lines for men, women and children.
+These lines are branded and marketed separately from Skechers and appeal to specific audiences. Our
+brands are sold through department stores, specialty stores, athletic retailers, and boutiques as
+well as our e-commerce website and our own retail stores. We operate 34 concept stores, 56 factory
+outlet stores and 32 warehouse outlet stores in the United States, and 10 concept stores and two
+warehouse outlets internationally. Our objective is to profitably grow our operations worldwide
+while leveraging our recognizable Skechers brand through our strong product lines, innovative
+advertising and diversified distribution channels.
+We seek to offer consumers a vast array of fashionable footwear that satisfies their active,
+casual, dress casual and dress footwear needs. Our core consumers are style-conscious 12- to
+24-year-old men and women attracted to our youthful brand image and fashion forward designs. Many
+of our best-selling and core styles are also developed for children with colors and materials that
+reflect a playful image appropriate for this demographic.
+We believe that brand recognition is an important element for success in the footwear
+business. We have aggressively promoted our brands through comprehensive marketing campaigns for
+men, women and children. For Skechers in 2005, we capitalized on the popularity of American Idol
+winner and rising star Carrie Underwood in our domestic and international print advertising, and
+launched television sponsor spots for many of our Skechers branded lines as well as some of our
+uniquely branded lines. For Mark Nason, Michelle K and 310 Motoring, we also developed print ads,
+including ads featuring multi-platinum hip hop recording artist The Game for his signature 310
+footwear line. Our Marc Ecko Footwear is supported through print ads developed by Marc Ecko for the
+apparel lines Ecko Unltd. and Ecko Red. Our strategy continues to focus on print advertisements in
+targeted publications such as GQ, Lucky, Details, Seventeen, Maxim, People, Teen People, Teen
+Vogue, Slam, In Style, and many others.
+Since we introduced our first line, Skechers USA Sport Utility Footwear, in December 1992, we
+have expanded our product offering and grown our net sales while substantially increasing the
+breadth and penetration of our account base. Each of our seven Skechers-branded product lines
+benefits from the Skechers reputation for contemporary and progressive styling, quality, comfort
+and affordability. We have seven product lines currently in the marketplace that are not branded
+with the Skechers name that benefit from our marketing support, quality management and expertise.
+To promote innovation and brand relevance, we manage our product lines separately by utilizing
+dedicated sales and design 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 BRANDS
+Skechers USA. Our Skechers USA category for men and women includes five types of footwear: (i)
+Casuals, (ii) Dress Casuals, (iii) Comfort (for men only), (iv) Outdoor (for men only) and (v)
+Sport Fusion. This category is generally sold through mid-tier retailers, department stores and
+some footwear specialty shops.
+• 
+For men, the Casuals category includes “black and brown” boots and shoes that generally
+have a rugged urban design — some with industrial-inspired fashion features. This category
+is defined by the heavy-lugged outsole and value-oriented materials employed in the uppers
+as well as leather uppers. For women, the Casuals category includes basic “black and brown”
+oxfords 
+2
+Table of Contents 
+and slip-ons, lug outsole boots, and casual sandals. The women’s line also uses value-oriented
+materials, but a growing number of styles may also be designed in leather. We design and price
+both the men’s and women’s categories to appeal primarily to young persons with broad
+acceptance across age groups. 
+• 
+For men, the Dress Casuals category is comprised of basic “black and brown” men’s shoes
+that feature shiny leathers and dress details, but still utilize the heavy-lugged outsole
+and value-oriented materials. This category is designed and priced for young men seeking
+their first work or evening shoe. For women, the Dress Casual line is comprised of more
+stylized boots and shoes, which may include leather uppers, shearling or faux fur lining or
+trim, or which in general may be more trend-influenced. 
+• 
+Skechers Comfort is a line of trend-right casuals for men who want all-day comfort
+without compromising style. Characteristics of the line include comfortable outsoles,
+cushioned insoles and quality leather uppers. A category with unique features, we market and
+package the Skechers Comfort styles in a shoe box that is distinct from that of other
+categories in the Skechers USA line of footwear. 
+• 
+Our Outdoor styles for men primarily consist of hiker-influenced constructions including
+boots and shoes. While this category includes many technical performance features, we market
+this category of footwear primarily on the basis of style and comfort. Outsoles generally
+consist of molded and contoured hardened rubber. Many designs 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 more durable
+hardware such as metal D-rings instead of eyelets. Uppers are generally constructed of
+heavily oiled nubuck and full-grain leathers. We market and package the Outdoor styles in a
+shoe box that is distinct from that of other categories in the Skechers USA line of
+footwear. 
+• 
+Our Sport Fusion line is comprised of low-profile, sport-influenced Euro casuals targeted
+at trend-conscious young men and women. With many outsoles adopted from our men’s Sport and
+women’s Active lines, this line primarily features leather or nubuck uppers, but may also
+include mesh. 
+Skechers Sport. Our Skechers Sport footwear for men and women includes: (i) Joggers, Trail
+runners, Sport hikers, Terrainers, (ii) Performance (for men only), (iii) Street Casuals and (iv)
+Sport Sandals. Our Skechers Sport category is distinguished by its technical performance-inspired
+looks; however, we generally do not promote the technical performance features of these shoes.
+Skechers Sport is typically sold through specialty shoe stores, department stores and athletic
+footwear retailers.
+• 
+Our Jogger, Trail Runner, Sport Hiker and cross trainer-inspired Terrainer designs are
+lightweight constructions that include cushioned heels, polyurethane midsoles, phylon and
+other synthetic outsoles, as well as leather or synthetic uppers such as durabuck, cordura
+and nylon mesh. Careful attention is devoted to the design, pattern and construction of the
+outsoles, which vary greatly depending on the intended use. This category features earth
+tones and athletic-inspired hues with contrasting pop colors such as lime green, orange and
+red in addition to traditional athletic white. 
+• 
+The Performance category is comprised of multi-purpose running shoes that are marketed as
+men’s lifestyle athletic footwear. Some styles include 3M reflective accents, breathable
+upper construction, quality leathers, abrasion-resistant toe and heel cap, removable
+moisture wicking molded EVA sock liner, outsole forefoot flex grooves for improved
+flexibility, non-marking rubber lugs with impact dispersment technology (IDT), aggressive
+all terrain traction lugs, external torsion stabilizer and tuned dual-density molded ethyl
+vinyl acetate (EVA) midsole with pronation control. 
+• 
+Street Casual incorporates lower profiles, classic details and skate, street and fusion
+influences in a collection of essential, basic casual sneakers. The uppers are designed in
+leather, suede, nubuck, canvas and/or mesh. Street Casual is targeted to young consumers,
+but also appeals to a broader demographic. 
+• 
+Our Sport Sandals are primarily designed from existing Skechers Sport outsoles and may
+include many of the same sport features as our sneakers with the addition of new
+technologies geared toward making a comfortable sport sandal. Sport sandals are designed as
+seasonal footwear for the consumer who already wears our Skechers Sport sneakers. 
+Skechers Active. A natural companion to Skechers Sport, Skechers Active has grown from a
+casual everyday line into a complete line of fusion and sport fusion sneakers for females of all
+ages. Marked by low-profile outsoles, the Active line is available in a multitude of colors as well
+as solid white or black, in fabrics, leathers and meshes, and with various closures – traditional
+laces, zig-zag straps and cross straps, among others. The line also now includes Mary Jane, sandal
+and open back styles. Active sneakers are typically retailed through specialty casual shoe stores
+and department stores.
+3
+Table of Contents 
+Somethin’ Else from Skechers. Targeting 12- to 25-year-old trend-savvy females, the Somethin’
+Else from Skechers line is focused on current fashions through an array of stylish shoes, boots,
+heels and sandals. With a growing offering that includes flats, heeled boots, clogs and
+sport-influenced looks, the line is designed to meet junior consumers’ needs – from school to work
+to weekends – and is a complementary line for women who already wear Skechers USA, Skechers Active
+and Skechers Sport. Many styles are made from more affordable materials such as man-made leather,
+offering more young consumers the opportunity to buy trend-right shoes at a reasonable price. This
+line is typically sold through department and specialty stores.
+Collection by Skechers . The Collection by Skechers line is comprised of stylish dress shoes,
+dress casual shoes and sandals for the young fashion-forward male consumer. The looks include
+classic tailored and fashion-forward square, round and pointed lasts in a variety of styles, such
+as bicycle toes, monk straps, wingtips, oxfords, cap toes, demi-boots and boots. The outsoles
+project a sleeker profile and may be either leather or man-made. The uppers are quality leathers
+including glossy, box, distressed and aniline. Collection by Skechers is sold through specialty
+casual shoe stores and department stores.
+Skechers Work. Expanding on our heritage of cutting-edge utility footwear, Skechers Work
+offers a complete line of men’s and women’s sport oxfords, field boots, trail hikers and athletic
+shoes. The Skechers Work line includes the (i) Lightweight Aluminum Series (“LAS”), (ii) Steel Toe,
+(iii) Occupational and (iv) Slip-Resistant categories, which may feature electrical hazard,
+electrostatic-dissipative and slip-resistant technologies, as well as breathable, seam-sealed
+Hydroguard TM waterproof membranes. Our LAS, Steel Toe and Occupational products have
+been independently tested and certified to meet ASTM F 2412/2413-05; CSA Z195-02 or SATRA PM 77
+standards, and our slip-resistant soles have been tested pursuant to the James testing method for
+slip resistance. The uppers are in high-quality leather, nubuck, truebuck and durabuck. Constructed
+on high-abrasion, long wearing soles, the line is designed for men and women with jobs that require
+certain safety requirements. Skechers Work is primarily marketed through business-to-business
+channels, but is also available direct-to-consumers and through select department and specialty
+stores.
+• 
+Our LAS trail hikers and sport oxfords are exclusively designed for industry
+professionals who need lightweight, all-day footwear protection. Their innovative design
+includes a durable, ultra-lightweight safety toe, torque flex construction and high-grade
+materials for superior strength and comfort. 
+• 
+Our Steel Toe athletic sneakers, boots, hikers, oxfords and sport oxfords, which are
+ideal for environments requiring safety footwear. These durable styles feature breathable
+lining, oil and abrasion resistant outsoles and steel toe design for optimal protection,
+all-day comfort and prolonged durability. 
+• 
+Our Occupational boots, oxfords and hikers offer versatile features for those requiring
+utility, safety and comfort features, but who also want style. Designed with an array of
+textured uppers and colorways, the footwear capitalizes on function and comfort – from
+breathable lining to contoured insoles and abrasion-resistant outsoles for prolonged wear. 
+• 
+Our Slip-Resistant boots, athletics, sport and slip-on oxfords, and clogs are ideal for
+the service industry. These shoes offer comfort and safety in dry or wet conditions by
+utilizing breathable lining and James-tested slip, oil and abrasion resistant outsoles for
+optimal safety and reliability. 
+Skechers Kids. The Skechers Kids line includes: (i) Skechers Kids, which is a range of
+infants, toddlers, boys and girls boots, shoes and sneakers; (ii) S-Lights, which is lighted
+footwear for toddlers, boys and girls and (iii) Somethin’ Else from Skechers for Girls, which is
+trend-inspired boots, shoes, sandals and dress sneakers. Skechers Kids and Somethin’ Else from
+Skechers for Girls are comprised primarily of shoes that are designed as “takedowns” of their adult
+counterparts, allowing the younger set the opportunity to wear the same popular styles as their
+older siblings and schoolmates. This “takedown” strategy maintains the product’s integrity by
+offering premium leathers, hardware and outsoles without the attendant costs involved in designing
+and developing new products. In addition, we adapt current fashions from our men’s and women’s
+lines by modifying designs and choosing colors and materials that are more suitable for the playful
+image that we have established in the children’s footwear market. Skechers Kids shoes are
+available at department stores and specialty and athletic retailers.
+• 
+The Skechers Kids line includes embellishments or adornments such as fresh colors and
+fabrics from our Skechers adult shoes. Some of these styles are also adapted for toddlers
+with softer, more pliable outsoles, and for infants with soft, leather-sole crib shoes. 
+• 
+S-Lights is a line of sneakers and sandals with a combined pattern of lights on the
+outsole and other areas of the shoes. 
+4
+Table of Contents 
+• 
+Somethin’ Else from Skechers for Girls is a line of trend-right sandals, shoes, boots,
+street sneakers and dress casuals for young girls. For this line, we have taken many of our
+successful junior bottoms and tailored them to a younger demographic, lowering platforms
+and wedges as needed and creating all new upper treatments and colors on select styles. Many
+styles are made from more affordable materials such as man-made leather, offering young
+consumers the opportunity to buy stylish shoes at affordable prices. 
+FASHION AND STREET BRANDS
+The Fashion and Street Division and its brands are marketed separately from SKECHERS.
+Rhino Red and Unltd. by Marc Ecko. Rhino Red is a line of women’s classic and fashion-forward
+fusion sneakers and casual and dress causal heels and boots. Unltd. by Marc Ecko is a line of men’s
+street-inspired traditional sneakers, fusion sneakers and urban-focused casuals. Targeted to the
+street-savvy 18- to 34-year-old consumer, the footwear reflects Ecko Unltd.’s men’s apparel and the
+Ecko Red women’s apparel, and effectively utilizes the globally recognized Rhino logo on the
+majority of sneakers and casuals. Unltd. by Marc Ecko for boys and Rhino Red for girls sneaker
+lines primarily consist of takedowns from the adult Marc Ecko footwear lines with additional or
+different colorways geared toward children and that reflect the boys’ and girls’ Ecko Unltd. and
+Ecko Red clothing. The licensed brands are sold through select department stores and specialty
+retailers.
+310 Motoring. The 310 Motoring footwear collection utilizes top-quality leathers, a
+fashion-forward approach to design and comfort, and materials that are derived from 310 Motoring’s
+customized cars, including wood burl and carbon fiber. A multi-tiered approach, the line consists
+of high-end, cutting-edge athletics, heritage to high-design boots and shoes, and sophisticated
+driving-inspired shoes and boots for men and boys. 310 Motoring footwear is available in select
+department stores, specialty retailers and urban independents.
+In the last week of 2005, we launched multi-platinum hip hop recording artist The Game’s
+signature 310 sneaker, known as Hurricane by 310, in select specialty athletic stores. The initial
+Hurricane street athletic sneaker consists of one color and one style. Additional colors are
+planned to launch in the first quarter of 2006.
+Michelle K. Targeted toward stylish 18- to 34-year-old women, Michelle K is a signature
+designer line of fashion forward fusion sneakers, sporty boots and sandals. The Michelle K line is
+marked by a unique combination of materials, textures and colors. The line is available in select
+upscale department stores and better boutiques. It is sold internationally under the name Skechers
+by designer Michelle K. This brand also includes Michelle K Girl, a fashion-forward line,
+primarily comprised of fusion casual sneakers as well as boots and sandals marked by a unique
+combination of colors, materials, textures and embellishments.
+Mark Nason and Siren by Mark Nason. Mark Nason is a sophisticated and fashion forward footwear
+collection, marketed to style-conscious men, designed to complement designer denim and dress casual
+wear. Primarily crafted and constructed in Italy, the Mark Nason collection is comprised of classic
+and modern boots, shoes and sandals with distinctive profiles and luxurious hand-distressed
+leathers. The Mark Nason line distinguishes itself with high quality individual styling and may
+utilize unique materials such as premium leathers, etched and tattooed leathers, hand-treated,
+hand-scraped and hand-cut leathers, hand-treated leather uppers and soles, snakeskin and eel skin.
+Siren by Mark Nason, an uninhibited designer boot line for discerning women, was launched in the
+fourth quarter of 2005 as a response to the reaction of women to the men’s Mark Nason collection.
+The ultimate accompaniment to designer denim and casual couture, the line’s boots are fueled with
+bold profiles, alluring details and distinct textures. Handcrafted in Italy, the boots utilize
+premium leathers, hand-treated details, leather outsoles, and some may include snakeskin and other
+exotic materials. Mark Nason and Siren by Mark Nason are available in upscale department stores
+and better boutiques.
+Kitson . Launched in the fourth quarter of 2005, Kitson footwear is a line of fashion sneakers
+and sandals targeted to hip and trend-savvy women and girls. A licensed brand, Kitson is an
+ultra-hip Los Angeles boutique known for sparking the hottest and newest trends, and where young
+Hollywood celebrities come to shop. Kitson goods are must-have merchandise, featured in leading
+style and lifestyle magazines. Kitson footwear is available at the Kitson retail boutique, upscale
+department stores and other boutiques.
+PRODUCT DESIGN AND DEVELOPMENT
+Our principal goal in product design is to generate new and exciting footwear in all of our
+product lines with contemporary and progressive styles and comfort-enhancing performance features.
+Targeted to the active, youthful and style-savvy, we design most new styles to be fashionable and
+marketable to the 12- to 24-year old consumer, while substantially all of our lines appeal to the
+broader
+5
+Table of Contents 
+range of 5- to 40-year-old consumers, with an exclusive selection for infants and toddlers.
+While many of our shoes have performance features, we generally do not position our shoes in the
+marketplace as technical performance shoes.
+We believe that our products’ success is related to our ability to recognize trends in the
+footwear markets and to design products that anticipate and accommodate consumers’ ever-evolving
+preferences. We are able to quickly translate the latest footwear trends into stylish, quality
+footwear at a reasonable price by analyzing and interpreting current and emerging lifestyle trends.
+Lifestyle trend information is compiled and analyzed by our designers from various sources,
+including the review and analysis of modern music, television, cinema, clothing, alternative sports
+and other trend-setting media; traveling to domestic and international fashion markets to identify
+and confirm current trends; consulting with our retail customers for information on current retail
+selling trends; participating in major footwear trade shows to stay abreast of popular brands,
+fashions and styles; and subscribing to various fashion and color information services. In
+addition, a key component of our design philosophy is to continually reinterpret and develop our
+successful styles in our brand’s image.
+The footwear design process typically begins about nine months before the start of a season.
+Our products are designed and developed primarily by our in-house design staff. To promote
+innovation and brand relevance, we utilize dedicated design teams, who report to our senior design
+executives, and focus on each of the men’s, women’s and children’s categories. In addition, we
+utilize outside design firms on an item-specific basis to supplement our internal design efforts.
+The design process is extremely collaborative, as members of the design staff frequently meet with
+the heads of retail, merchandising, sales, production and sourcing to further refine our products
+to meet the particular needs of the target market.
+After a design team arrives at a consensus regarding the fashion themes for the coming season,
+the designers then translate these themes into our products. These interpretations include
+variations in product color, material structure and embellishments, which are arrived at after
+close consultation with our production department. Prototype blueprints and specifications are
+created and forwarded to our manufacturers for a design prototype. The design prototypes are then
+sent back to our design teams. Our major retail customers may also review these new design
+concepts. Customer input not only allows us to measure consumer reaction to the latest designs, but
+also affords us an opportunity to foster deeper and more collaborative relationships with our
+customers. We also occasionally order limited production runs that 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. Our design teams can easily and quickly modify and
+refine a design based on customer input. Generally, the production process can take six months to
+nine months from design concept to commercialization.
+SOURCING
+Factories. Our products are produced by independent contract manufacturers located primarily
+in China and, to a lesser extent, in Italy, Vietnam, Brazil and various other countries. We do not
+own or operate any manufacturing facilities as we believe that the use of independent manufacturers
+substantially increases our production flexibility and capacity while reducing capital expenditures
+and avoiding the costs of managing a large production work force.
+When possible, we seek to use manufacturers that have previously produced our footwear, which
+we believe enhances continuity and quality 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 2005, we
+had four manufacturers that accounted for approximately 59.7% of total purchases. One manufacturer
+accounted for 32.4%, and one other accounted for 11.2% of our total purchases during the year ended
+December 31, 2005. To date, we have not experienced difficulty in obtaining manufacturing services.
+We finance our production activities in part through the use of interest-bearing open purchase
+arrangements with certain of our Asian manufacturers. These facilities currently bear interest at a
+rate between 0% and 1.5% for 30 to 60 days financing, depending on the factory. We believe that the
+use of these arrangements affords us additional liquidity and flexibility. We do not have any
+long-term contracts with any of our manufacturers; however, we have long-standing relationships
+with many of our manufacturers and believe our relationships to be good.
+We closely monitor sales activity after initial introduction of a product in our concept
+stores to determine whether there is substantial demand for a style, thereby aiding us in our
+sourcing decisions. Styles that have substantial consumer appeal are highlighted in upcoming
+collections or offered as part of our periodic style offerings, while less popular styles can be
+discontinued after only a limited production run. We believe that sales in our concept stores can
+also help forecast sales in national retail stores, and
+6
+Table of Contents 
+we share this sales information with our wholesale accounts. Sales, merchandising, production
+and allocations management analyze historical and current sales and market data from our wholesale
+account base and our own retail stores to develop an internal product quantity forecast that allows
+us to better manage our future production and inventory levels. For those styles with high
+sell-through percentages, we maintain an in-stock position to minimize the time necessary to fill
+customer orders by placing orders with our manufacturers prior to the time we receive customers’
+orders for such footwear.
+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 of all production is performed in the United States by our in-house
+production department and in Asia through an approximately 165-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
+convicted, forced or indentured labor (as defined under U.S. law) nor child labor (as defined by
+the manufacturer’s country) is used in the production process, and 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 not only finished goods meet our established design specifications, but also that all
+goods bearing our trademarks meet our standards for quality. Our quality control personnel located
+in China and Taiwan 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 production. For some of our
+lower volume manufacturers, our staff is on-site during significant production runs or we will
+perform unannounced visits to their manufacturing sites to further monitor compliance with our
+manufacturing specifications.
+ADVERTISING AND MARKETING
+With a marketing philosophy of “Unseen, Untold, Unsold,” we take a targeted approach to
+marketing to drive traffic, build brand recognition and properly position our diverse lines within
+the marketplace. Senior management is directly involved in shaping our image and the conception,
+development and implementation of our advertising and marketing activities. The focus of our
+marketing plan is print and television advertising, which is supported by outdoor, trend-influenced
+marketing, public relations promotions and in-store support. In addition, we utilize celebrity
+endorsees in our advertisements. We also believe our Internet websites and trade shows are
+effective marketing tools to both consumers and corporate accounts. We have historically budgeted
+advertising as a percentage projected net sales. In 2005, we advertised in a more efficient manner
+while net sales increased, which resulted in advertising and marketing expenditures equaling 5.8%
+of our annual net sales, which was below our historical range of 8% to 10% of annual net sales.
+Advertising. The majority of our advertising is conceptualized by our in-house design team.
+In 2005, we utilized the creative services of an outside photographer to also design several key
+ads, from which our design team was able to create additional advertisements and marketing
+materials. This allowed us to take a new approach to our advertising while also maintaining control
+and integrity of the Skechers brand by building a relationship with one outside creative source yet
+still crafting ads in-house.
+We believe that our advertising strategies, methods and creative campaigns are directly
+related to our success. Through our lifestyle and image-driven advertising, we generally seek to
+build and increase brand awareness by linking the Skechers brand and our other brands to youthful,
+contemporary lifestyles and attitudes rather than to market a particular footwear product. In
+addition to our compelling Skechers lifestyle ads, we have also created product specific ads for
+our men’s lines to appeal to both men and women who purchase footwear for men. Our ads are designed
+with a broad approach to eliminate single categorization and to provide merchandise flexibility and
+to facilitate the “brands and product designs” direction of evolving footwear fashions and consumer
+preferences.
+To further build brand awareness and influence consumer spending, we have selectively signed
+endorsement agreements with celebrities whom we believed would reach new markets. Through the first
+half of 2005, we continued our international endorsement agreement with global superstar Christina
+Aguilera for our women’s lines. When the agreement expired at the end of June 2005, we signed 2005
+American Idol winner and rising star Carrie Underwood to appear in Skechers advertisements in
+support of our women’s lines. In recent years, we had similar endorsement agreements for Skechers
+with singer and actress Britney Spears, professional basketball player and actor Rick Fox, and
+actors Robert Downey, Jr., Matt Dillon and Rob Lowe. We also signed multi-platinum hip hop
+superstar The Game as well as the Oscar-nominated actor Terrence Howard to support our 310 Motoring
+brand. From time to
+7
+Table of Contents 
+time, we may sign other celebrities to endorse our brand name and image in order to
+strategically market our products among specific consumer groups in the future.
+In addition to advertising our Skechers branded lines through men’s, women’s and children’s
+ads, we also support our Michelle K, Mark Nason and 310 Motoring lines through individual unique
+print advertisements. For Michelle K and Mark Nason, we have focused on key-selling styles in
+product-driven ads that captured the brands’ essence. For 310 Motoring, we have created several
+lifestyle ads that reflected the high-end roots of this automotive inspired line, including ads
+featuring multi-platinum hip hop recording artist The Game for his signature 310 footwear line.
+Unltd. by Marc Ecko and Rhino Red advertisements are created and implemented by Ecko.Complex, LLC
+dba Ecko Unltd., the parent company of Ecko Unltd. and Ecko Red, which allows for exposure of our
+Mark Ecko footwear brands without us having to incur significant advertising costs.
+With a targeted approach, our print ads appear regularly in popular fashion and lifestyle
+consumer publications, such as GQ, Cosmopolitan, Elle, Lucky, Seventeen, Teen People, Maxim, Slam,
+Rolling Stone, and Complex, as well as in weekly publications such as People, Us Weekly, Star, and
+TV Guide, among others. Our television commercials are primarily produced in-house and air during
+key selling seasons. In 2005, we created product-driven sponsor spots for Skechers Sport Fusion
+for men and women, Skechers Sport for men, Skechers Work, and Skechers for boys and girls, as well
+as for Michelle K Girl and 310 Motoring. We have found these to be a cost-effective way to
+advertise during key national and cable programming. Our in-house media buyer strategically
+selects the ideal programs and geographic areas for our commercials for maximum consumer impact.
+Outdoor. In an effort to reach consumers where they shop and in high traffic areas as they
+travel to and from work or while running errands, we launched a multi-level outdoor campaign that
+included 800-plus mall kiosks, billboards, transportation systems and telephone kiosks. We believe
+these are effective and efficient ways to reach a broad range of consumers and leave a lasting
+impression of our Skechers branded lines.
+Trend-Influenced Marketing/Public Relations. Our public relations team’s objectives are to
+secure product placement in key fashion magazines, place our footwear on the feet of trend-setting
+celebrities, and garner positive and accurate press on our company. Through our commitment to
+aggressively promote our upcoming styles, our products are often featured in leading fashion and
+pop culture magazines, as well as in select films and popular television shows. Our footwear has
+been prominently displayed and referenced on news and magazine shows including The Today Show , Good
+Day L.A., Country Music Television, and E! Style ; and on entertainment shows, including Law &
+Order, Fear Factor, and The Dr. Phil Show , among others. We have also amassed an array of prominent
+product placements in magazines including Lucky , Seventeen , Teen People, Teen Vogue, CosmoGirl,
+InStyle, Stuff, Maxim, Slam, Cargo, Dime and Footwear News . In addition, our brands have been
+associated with cutting edge events and select celebrities, and our product has been seen worn by
+trend-setters like Denis Leary, Eva Longoria, Black Eyed Peas, Big & Rich, Sugarland, Drew
+Barrymore, John Corbett, Halle Berry, Ice-T, Paris Hilton and Jamie Foxx, among others.
+Promotions. By applying creative sales techniques via a broad spectrum of mediums, our
+marketing team seeks to build brand recognition and drive traffic to Skechers’ retail stores and
+our retail partners’ locations. Skechers’ promotional strategies have encompassed in-store
+specials, concert promotions, charity events, product tie-ins and giveaways, and collaborations
+with national retailers and radio stations. Our imaginative promotions are consistent with
+Skechers’ imaging and lifestyle.
+Visual Merchandising. Our in-house visual merchandising team supports wholesale accounts,
+distributors and our retail stores by developing displays that effectively leverage our products at
+the point of purchase. Our point-of-purchase display items include signage, graphics, displays,
+counter cards, banners and other merchandising items. These materials mirror the look and feel of
+our national print advertising in order to reinforce brand image at the point-of-purchase.
+Our visual merchandising coordinators (“VMC’s”) work with our sales force and directly with
+our customers to ensure better sell-through at the retail level by generating greater consumer
+awareness through Skechers brand displays. Our VMC’s communicate with and visit our wholesale
+customers on a regular basis to aid in proper display of our merchandise. They also run in-store
+promotions to enhance the sale of Skechers footwear and create excitement surrounding the Skechers
+brand. We believe that these efforts help stimulate impulse sales and repeat purchases.
+Trade Shows. To better showcase our diverse products to footwear buyers in the United States
+and Europe, and to distributors around the world, we regularly exhibit at the leading trade shows.
+Along with specialty trade shows, we exhibit at WSA’s The Shoe Show, FFANY and MAGIC in the United
+States, and GDS, MICAM, Bread & Butter, and Who’s Next in Europe. Our dynamic, state-of-the-art
+trade show exhibits are developed by our in-house architect to showcase our latest product
+offerings in a lifestyle setting reflective of each of our brands. By investing in innovative
+displays and individual rooms showcasing each line, our sales force can
+8
+Table of Contents 
+present a sales plan for each line and buyers are able to truly understand the breadth and
+depth of our offerings, thereby optimizing commitments and sales at the retail level. For select
+non-Skechers branded lines such as Michelle K, 310 Motoring and our Marc Ecko footwear lines, we
+have created individual exhibits to ensure the brand integrity. Our innovative exhibits have won
+numerous awards over the years, including Best Booth Design at the WSA Shoe Show, February 2001 and
+February 2003, and for our Unltd. by Marc Ecko and Rhino Red booth in August 2004 and February
+2005. For FFANY, we show in our own New York showroom as is common during this show.
+Internet.
+We also promote our brand image through our e-commerce
+website, www.skechers.com , to
+consumers who access the Internet. This website currently enables us to present information on our
+products and store locations to consumers. Our website is interactive, affording consumers the
+ability to directly order products on the Internet, and it provides us a mechanism for customer
+feedback as well as allowing us to receive and respond directly to consumer feedback. Our website
+is intended to enhance the Skechers brand without the associated costs of advertising.
+Along with www.skechers.com, we have also established unique Internet websites for Michelle K
+(www.michellek.com), Mark Nason (www.marknason.com) and 310 Motoring (www.310motoring.com). These
+websites are designed to serve as marketing tools, properly imaging these brands while also
+informing customers about the respective product lines.
+PRODUCT DISTRIBUTION CHANNELS
+We have three reportable segments – domestic wholesale sales, international wholesale sales
+and retail sales. In addition, we report an “All other” segment, which includes our e-commerce
+sales and other miscellaneous sales. In the United States, our products are available through a
+network of wholesale accounts comprised of department, athletic and specialty stores.
+Internationally, our products are available through wholesale accounts in more than 100 countries
+and territories through our global network of distributors and our Canadian and European
+subsidiaries. Additionally, 12 distributors opened 38 distributor-owned Skechers retail stores in
+16 countries as of December 31, 2005. Skechers owns and operates retail stores both domestically
+and internationally through three integrated retail formats—concept, factory outlet and warehouse
+outlet stores. Each of these channels serves an integral function in the global distribution of our
+products.
+Domestic Wholesale. We distribute our footwear through the following domestic wholesale
+distribution channels: department stores, specialty stores, athletic shoe stores and independent
+retailers. Department stores and specialty retailers are the largest distribution channels, but we
+believe that we appeal to a variety of wholesale accounts, many of whom may operate stores within
+the same retail location due to our distinct product lines and variety of styles, from which
+retailers can select those lines and styles that best satisfy the fashion, function and price
+criteria of their customers. Management has a clearly defined growth strategy for each of our
+channels of distribution. An integral component of our strategy is to offer our accounts the
+highest level of customer service so that our products will be fully represented in existing retail
+locations and new locations within each account.
+In an effort to provide knowledgeable and personalized service to our wholesale accounts, the
+sales force is segregated by product line, each of which is headed by a vice president or national
+sales manager. Reporting to each sales manager are knowledgeable account executives and territory
+managers. Our vice president and national sales managers report to our senior vice president of
+sales. All of our vice president and national sales managers are compensated on a salary basis,
+while our account executives and territory managers are compensated on a commission basis. None of
+our domestic sales personnel sell competing products.
+We believe that we have developed a loyal customer base of wholesale accounts through a
+heightened level of customer service. We believe that our close relationships with these accounts
+help us to maximize their retail sell-throughs. Our visual merchandise coordinators 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
+that appropriate styles are purchased for specific accounts and for specific stores within those
+accounts as well as to 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
+our 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.
+International Wholesale. Our products are sold in more than 100 countries and territories
+throughout the world. We generate revenues from outside the United States from three principal
+sources: (i) direct sales to department stores and specialty retail stores through our subsidiaries
+in Canada, France, Germany, Spain, Italy, Portugal, Switzerland, Austria, the Benelux Region and
+the United Kingdom, (ii) sales of our footwear to more than 30 foreign distributors who distribute
+such footwear to department stores and specialty retail stores in countries and territories across
+Eastern Europe, Asia, Latin America, South America, Africa, the Middle East
+9
+Table of Contents 
+and Australia, among other regions and (iii) to a lesser extent, royalties from licensees who
+manufacture and distribute our non-footwear products outside the United States.
+We believe that international distribution of our products represents a significant
+opportunity to increase sales and profits. We intend to further increase our share of the
+international footwear market by heightening our marketing presence in those countries in which we
+currently have a presence through our international advertising campaigns, which are designed to
+establish Skechers as a global brand synonymous with trend-right casual shoes.
+• 
+International Subsidiaries 
+Europe 
+We currently distribute product in most of Western Europe through the following
+subsidiaries: Skechers USA Ltd., with its offices and showrooms in London, England;
+Skechers S.a.r.l., with its offices and showrooms in Lausanne, Switzerland; Skechers USA
+France S.A.S., with its offices and showrooms in Paris, France; Skechers USA Deutschland
+GmbH, with its offices and showrooms in Dietzenbach, Germany; Skechers USA Iberia, S.L.,
+with its offices and showrooms in Madrid, Spain; Skechers USA Benelux B.V., with its
+offices and showrooms in Waalwijk, the Netherlands; and Skechers USA Italia S.r.l., with
+its offices and showroom in Verona, Italy.
+In regards to our Skechers-owned retail stores in Europe, we have nine concept
+stores and one factory outlet store located in five countries, including the key
+locations of Oxford Street in London, Alstadt District in Düsseldorf and Kalverstraat
+Street in Amsterdam.
+To accommodate our European subsidiaries’ operations, we operate an approximately
+240,000 square foot distribution center in Liege, Belgium. This distribution center is
+currently used to store and deliver product to our subsidiaries and retail stores
+throughout Europe.
+Canada 
+Merchandising and marketing of our product in Canada is managed by our wholly-owned
+subsidiary, Skechers USA Canada, Inc. with its offices and showrooms outside Toronto in
+Mississauga, Ontario. Product sold in Canada is primarily sourced from our U.S.
+distribution center in Ontario, California. We have one concept store located in
+Toronto’s Eaton Centre and one factory outlet store located in Toronto.
+• 
+Distributors 
+Outside of Western Europe and Canada, our footwear is distributed through an extensive
+network of more than 30 distributors, who sell our products to department, athletic and
+specialty stores in more than 100 countries around the world. Through agreements with 12 of
+these distributors, 38 distributor-owned Skechers retail stores are open in 17 countries,
+including nine stores that were opened in 2005. One distributor-owned store was closed in
+2005.
+STORE 
+NUMBER OF 
+REGION 
+FORMAT 
+STORES 
+LOCATION (1) 
+Asia 
+Concept 
+Warehouse
+3 
+4 
+Osaka, Japan; Tokyo, Japan; South Korea 
+Osaka, Japan (2); Shizuoka, Japan; Tochigi-ken, Japan 
+Australia 
+Concept
+1 
+Sydney, Australia 
+Central America/ 
+South
+America 
+Concept
+22 
+Chile (4); Columbia (5); Ecuador; El Salvador;
+Guatemala (2); Panama (2); Peru; Venezuela (6) 
+Eastern Europe 
+Concept
+4 
+Moscow, Russia (3); Kiev, Ukraine 
+Middle East 
+Concept
+3 
+Tel Aviv, Israel; Riyadh, Saudi Arabia; Dubai, UAE 
+South Africa 
+Concept
+1 
+Sandton, South Africa 
+(1) 
+One store per location except as otherwise noted. 
+10
+Table of Contents 
+The distributors are responsible for their respective store’s operations, have ownership
+of their respective store’s assets and select the broad collection of our products to sell to
+consumers in their regions. In order to maintain a globally consistent image, we provide
+architectural, graphic and visual guidance and materials for the design of the stores, and we
+train the local staff on our products and corporate culture. We intend to expand our
+international presence and global recognition of the Skechers brand name by continuing to
+sell our footwear to foreign distributors and by opening flagship retail stores with
+distributors that have local market expertise.
+Retail Stores. We pursue our retail store strategy through our three integrated retail
+formats: the concept store, the factory outlet store and the warehouse outlet store. Our
+three-store format enables us to promote the full Skechers product offering in an attractive
+environment that appeals to a broad group of consumers. This format also allows us to manage our
+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 February 28, 2006, we
+operated 34 concept stores, 56 factory outlet stores and 32 warehouse outlet stores in the United
+States, and ten concept stores and two warehouse outlet stores internationally. We closed three
+stores and opened 11 new stores in 2005. We opened one new store in the first two months of 2006,
+with an additional 15 to 20 stores planned to open by the end of 2006.
+• 
+Concept Stores. 
+Our concept stores are located at either marquee street locations or in major shopping
+malls in large metropolitan cities. Our concept stores have a threefold purpose in our
+operating strategy. First, concept stores serve as a showcase for a wide range of our product
+offering for the current season as we estimate that our average wholesale customer carries no
+more than 5% of the complete Skechers line in any one location. Our concept stores showcase
+our products in a cutting-edge, open-floor setting, providing the customer with the complete
+Skechers story. Second, retail locations are generally chosen to generate maximum marketing
+value for the Skechers brand name through signage, store front presentation and interior
+design. Domestic locations include concept stores at Times Square and 34th Street in New
+York, Santa Monica’s Third Street Promenade, Dallas’ Northpark Center, Las Vegas’ Fashion
+Show Mall, Seattle’s Bellevue Square Mall, Woodfield Mall outside Chicago and international
+locations include Oxford Street in London, Alstadt District in Dusseldorf and Kalverstraat
+Street in Amsterdam. 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. We believe that product sell-through information and rapid customer feedback derived
+from our concept stores enables our design, 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 opened one concept store and closed three
+others in 2005.
+The typical Skechers concept store is approximately 2,500 square feet, although in
+certain markets we have opened concept stores as large as 6,400 square feet or as small as
+1,200 square feet. When deciding where to open concept stores, we identify top geographic
+markets in the larger metropolitan cities in the United States, Europe and Canada. When
+selecting a specific site, we evaluate the proposed sites’ traffic pattern, co-tenancies,
+sales volume of 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 their venues.
+In an effort to market and test our non-Skechers brands, we opened a new format of
+concept store, SoHo Lab. In 2004, we converted an existing Skechers concept store in New
+York’s SoHo District to the new format, removing all Skechers signage and graphics, replacing
+them with graphics from our fashion and street lines: Michelle K, Mark Nason, 310 Motoring,
+Unltd. by Marc Ecko and Rhino Red. In 2005, we converted two additional Skechers concept
+stores in urban and/or fashion locations to SoHo Lab stores, and in 2006, we plan to open
+four more SoHo Lab locations built from the ground up. The stores may also include more
+fashion forward Skechers styles.
+• 
+Factory Outlet Stores. 
+Our factory outlet stores are generally located in manufacturers’ direct outlet centers
+throughout the United States. In addition, we have two international outlet stores – one in
+Canada that opened in 2005 and one in England. 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 9,000 square feet. Inventory in these stores is
+11
+Table of Contents 
+supplemented by
+certain first-line styles sold at full retail price points. We opened nine domestic factory
+outlet stores in 2005, and one more in the first two months of 2006.
+• 
+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 5,200 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, which could otherwise compromise the Skechers brand image. We seek to
+open our warehouse outlet stores in areas that are in close proximity to our concept stores
+in order to facilitate the timely transfer of inventory that we want to liquidate as soon as
+practicable. We did not open any new warehouse outlet stores in 2005.
+Electronic Commerce. Our e-commerce sales represented less than 1.0% of total net sales in
+2005, 2004 and 2003. Our website, www.skechers.com , is a virtual storefront that promotes the
+Skechers brand name. Designed to provide a positive shopping experience, the website showcases our
+products in an easy-to-navigate format, allowing consumers to browse our selections and purchase
+our footwear. This virtual store has provided a convenient alternative-shopping environment, become
+an efficient and effective additional retail distribution channel, and has improved our customer
+service.
+LICENSING
+We believe that selective licensing of the Skechers brand name and our product line names to
+manufacturers may broaden and enhance the individual brands without requiring significant capital
+investments or additional incremental operating expenses. Our multiple product lines plus
+additional subcategories present many potential licensing opportunities on terms with licensees
+that we believe will provide more effective manufacturing, distribution or marketing of
+non-footwear products. We also believe that the reputation of Skechers and its history in launching
+brands has also enabled us to partner with reputable non-footwear brands in order to design and
+market their footwear.
+The first launch of Skechers licensed product was Skechers Kids apparel for boys and girls
+from the licensee, Kids Headquarters, in the United States for the 2003 back-to-school selling
+season. Due to the successful in-store launch of Skechers Kids, we
+expanded our licensing agreement with Kids Headquarters to include infant and toddler apparel, boys’
+and girls’ daywear and sleepwear, and swimwear for boys and girls. We also extended our territory
+for licensed apparel for infants, toddlers and children by signing a licensing agreement with
+MultiGroup Inc. for design and distribution of Skechers Kids in Canada.
+As of February 28, 2006, we had 14 active domestic and international licensing agreements. In
+addition to our licensing agreement with MultiGroup, we have international licensing agreements
+with other licensees for the design and distribution of men’s and women’s active apparel in Israel;
+for adult and children’s active apparel, swimwear, hosiery and accessories in Japan; and new in
+2005, bags in select Central and South American countries and watches in the Philippines. We have
+also signed an agreement for Skechers bags in China, which are expected to begin shipping in 2006.
+We have signed agreements to design, develop and market footwear for the street lifestyle
+apparel brands, Ecko Unltd., Ecko Red and Zoo York under the Marc Ecko Enterprises umbrella and for
+Kitson, the ultra-hip Hollywood boutique.
+DISTRIBUTION FACILITIES AND OPERATIONS
+We believe that strong distribution support is a critical factor in our operations. Once
+manufactured, our products are packaged in shoe boxes bearing bar codes and are shipped either (i)
+to our approximately 1.4 million square-foot internally managed distribution center located in
+Ontario, California, (ii) to our approximately 240,000 square-foot distribution center located in
+Liege, Belgium or (iii) directly from third-party manufacturers to our other international
+customers. Upon receipt at either of the distribution centers, merchandise is inspected and
+recorded in our management information system and packaged according to customers’ orders for
+delivery. Merchandise is shipped to customers by whatever means each customer requests, which is
+usually by common carrier. The 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 it includes
+direct billing and shipping information.
+12
+Table of Contents 
+The following table sets forth a summary of our distribution facilities:
+ADDRESS 
+STATUS 
+SQUARE FOOTAGE 
+Avenue du parc Industriel, Liege, Belgium 
+Leased since July 2002 
+241,700 
+4100 East Mission Blvd., Ontario, CA 
+Leased since June 2001 
+763,300 
+1670 Champagne Avenue, Ontario, CA 
+Owned since October 2000 
+263,700 
+1661 South Vintage, Avenue, Ontario, CA 
+Leased since November 1997 
+127,800 
+1777 South Vintage, Avenue, Ontario, CA 
+Leased since November 1997 
+284,600 
+1,681,100 
+We believe that we have the capacity at our Ontario distribution center to increase our
+current operations to meet any future growth, 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.
+Our lease agreement for our Liege, Belgium distribution center provides for first right of
+refusal on three remaining facilities planned for development, allowing for expansion of up to
+approximately 735,000 square feet. We believe that the capacity available to us within this lease
+agreement will allow for further growth of our international operations.
+BACKLOG
+As of December 31, 2005, our backlog was $250.5 million, compared to $220.5 million as of
+December 31, 2004. 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 2006. However, for a variety of reasons, including customer demand
+for our products, the timing of shipments, product mix of customer orders, the amount of in-season
+orders and a shift towards tighter lead times within backlog levels, backlog may not be a reliable
+measure of future sales for any succeeding period. In addition, cancellation rates that we have
+realized in the past may not be indicative of cancellation rates to be expected in the future.
+INTELLECTUAL PROPERTY RIGHTS
+We own and utilize a variety of trademarks, including the Skechers trademark. We have a
+significant number of both registrations and pending applications for our trademarks in the United
+States. In addition, we have trademark registrations and trademark applications in approximately 80
+foreign countries. We also have design patents and pending design and utility patent applications
+in both the United States and approximately 25 foreign countries. We continuously look to increase
+the number of our patents and trademarks both domestically and internationally where necessary to
+protect 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 and 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 be certain that
+we will be successful in this regard. Furthermore, we cannot be certain 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 has 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
+13
+Table of Contents 
+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. 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
+our products 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 Inc., 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, Puma AG and New Balance Athletic Shoe, Inc. Our children’s shoes compete
+with brands of children’s footwear such as those 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 been in existence for a longer period of time, 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 we do. We cannot
+be certain that we will be able to compete successfully against present or future competitors, or
+that competitive pressures will not have a material adverse effect on our business, financial
+condition and results of operations.
+EMPLOYEES
+As of February 28, 2006, we employed 2,997 persons, 1,680 of whom were employed on a full-time
+basis and 1,317 of whom were employed on a part-time basis. None of our employees are subject to a
+collective bargaining agreement. We believe that our relations with our employees are satisfactory.

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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 2005 fiscal year.

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+ITEM 9A. CONTROLS AND PROCEDURES 
+Attached as exhibits to this annual report on Form 10-K are certifications of our Chief
+Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), which are required in accordance
+with Rule 13a-14 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). This
+“Controls and Procedures” section includes information concerning the controls and controls
+evaluation referred to in the certifications.
+EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
+The term “disclosure controls and procedures” refers to the controls and other procedures of a
+company that are designed to ensure that information required to be disclosed by a company in the
+reports that it files or submits under the Exchange Act, is recorded, processed, summarized and
+reported within required time periods. We have established disclosure controls and procedures to
+ensure that material information relating to Skechers and its consolidated subsidiaries is made
+known to the officers who certify our financial reports, as well as other members of senior
+management and the Board of Directors, to allow timely decisions regarding required disclosures. As
+of the end of the period covered by this annual report on Form 10-K, we carried out an evaluation
+under the supervision and with the participation of our management, including our CEO and CFO, of
+the effectiveness of the design and operation of our disclosure controls and procedures pursuant to
+Rule 13a-15 of the Exchange Act. Based upon that evaluation, our CEO and CFO concluded that our
+disclosure controls and procedures are effective.
+63
+Table of Contents 
+MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
+Our management is responsible for establishing and maintaining adequate internal control over
+financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act. Internal
+control over financial reporting includes those policies and procedures that (i) pertain to the
+maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions
+and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions
+are recorded as necessary to permit preparation of financial statements in accordance with
+generally accepted accounting principles, and that receipts and expenditures of the company are
+being made only in accordance with authorizations of management and directors of the Company; and
+(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
+acquisition, use or disposition of the company’s assets that could have a material effect on the
+financial statements.
+We conducted an evaluation of the effectiveness of our internal control over financial
+reporting based on the framework in Internal Control – Integrated Framework issued by the Committee
+of Sponsoring Organizations of the Treadway Commission (COSO). Based on our evaluation under the
+framework in Internal Control- Integrated Framework, our management has concluded that as of
+December 31, 2005, our internal control over financial reporting is effective.
+Our independent registered public accountants, KPMG LLP, audited the financial statements
+included in this annual report on Form 10-K and have issued an attestation report on management’s
+assessment of, and the effectiveness of our internal control over financial reporting as of
+December 31, 2005, which is included in Part II, Item 8 of this annual report on Form 10-K.
+INHERENT LIMITATIONS ON EFFECTIVENESS OF CONTROLS
+Our management, including our Chief Executive Officer and Chief Financial Officer, does
+not expect that our disclosure controls and procedures or our internal control over financial
+reporting will prevent or detect all error and all fraud. A control system, no matter how well
+designed and operated, can provide only reasonable, not absolute, assurance that the control
+system’s objectives will be met. The design of a control system must reflect the fact that there
+are resource constraints, and the benefits of controls must be considered relative to their costs.
+Further, because of the inherent limitations in all control systems, no evaluation of controls can
+provide absolute assurance that misstatements due to error or fraud will not occur or that all
+control issues and instances of fraud, if any, within the company have been detected. These
+inherent limitations include the realities that judgments in decision-making can be faulty and that
+breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the
+individual acts of some persons, by collusion of two or more people, or by management override of
+the controls. The design of any system of controls is based in part on certain assumptions about
+the likelihood of future events, and there can be no assurance that any design will succeed in
+achieving its stated goals under all potential future conditions. Projections of any evaluation of
+controls effectiveness to future periods are subject to risks. Over time, controls may become
+inadequate because of changes in conditions or deterioration in the degree of compliance with
+policies or procedures.
+CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
+Although there were no significant changes to our internal controls over financial reporting
+that have materially affected, or are reasonably likely to materially affect, our internal controls
+over financial reporting during the fourth quarter of 2005, we have completed our efforts regarding
+compliance with Section 404 of the Sarbanes-Oxley Act of 2002 for year ended December 31, 2005.
+The results of our evaluation are discussed above in Management’s Report on Internal Control Over
+Financial Reporting.

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+See “Certain Relationships and Related Transactions”
+regarding arrangements between the Company and the Greenberg
+Family Trust, of which Robert Greenberg is a trustee, and
+Michael Greenberg. The Company’s Compensation Committee
+that was approved and established as of March 31, 2006 is
+currently composed of Richard Siskind and Morton D. Erlich,
+neither of whom has ever been an employee or officer of the
+Company or any of its subsidiaries.
+None of the Company’s executive officers who reviewed and
+discussed executive compensation for 2005, and neither of the
+current members of the Compensation Committee, has served or
+currently serves on the board of directors or on the
+compensation committee of any other entity, which has officers
+who served on the Company’s Board of Directors during the
+fiscal year ended December 31, 2005 or thereafter.
+Code of
+Business Conduct and Ethics 
+The Code of Business Conduct and Ethics, which applies to all
+directors, officers and employees, was adopted by the Board of
+Directors as of April 28, 2004. The purpose of the Code is
+to promote honest and ethical conduct. The Code is posted in the

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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 2007 fiscal year.

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+ITEM 9A. CONTROLS AND PROCEDURES 
+Attached as exhibits to this annual report on Form 10-K are certifications of our Chief
+Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), which are required in accordance
+with Rule 13a-14 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). This
+“Controls and Procedures” section includes information concerning the controls and controls
+evaluation referred to in the certifications.
+EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
+The term “disclosure controls and procedures” refers to the controls and other procedures of a
+company that are designed to provide reasonable assurance that information required to be disclosed
+by a company in the reports that it files or submits under the Exchange Act, is recorded,
+processed, summarized and reported within required time periods. We have established disclosure
+controls and procedures to ensure that material information relating to Skechers and its
+consolidated subsidiaries is made known to the officers who certify our financial reports, as well
+as other members of senior management and the Board of Directors, to allow timely decisions
+regarding required disclosures. As of the end of the period covered by this annual report on Form
+10-K, we carried out an evaluation under the supervision and with the participation of our
+management, including our CEO and CFO, of the effectiveness of the design and operation of our
+disclosure controls and procedures pursuant to Rule 13a-15 of the Exchange Act. Based upon that
+evaluation, our CEO and CFO concluded that our disclosure controls and procedures are effective.
+MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
+Our management is responsible for establishing and maintaining adequate internal control over
+financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act. Internal
+control over financial reporting includes those policies and procedures that (i)
+60 
+Table of Contents 
+pertain to the maintenance of records that, in reasonable detail, accurately and fairly
+reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that
+transactions are recorded as necessary to permit preparation of financial statements in accordance
+with generally accepted accounting principles, and that our receipts and expenditures are being
+made only in accordance with authorizations of our management and directors; and (iii) provide
+reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
+disposition of our assets that could have a material effect on our financial statements.
+We conducted an evaluation of the effectiveness of our internal control over financial
+reporting based on the framework in Internal Control – Integrated Framework issued by the Committee
+of Sponsoring Organizations of the Treadway Commission (COSO). Based on our evaluation under the
+framework in Internal Control- Integrated Framework, our management has concluded that as of
+December 31, 2007, our internal control over financial reporting is effective.
+Our independent registered public accountants, KPMG LLP, audited the financial statements
+included in this annual report on Form 10-K and have issued an attestation report on the
+effectiveness of our internal control over financial reporting as of December 31, 2007, which is
+included in Part II, Item 8 of this annual report on Form 10-K.
+INHERENT LIMITATIONS ON EFFECTIVENESS OF CONTROLS
+Our management, including our Chief Executive Officer and Chief Financial Officer, does not
+expect that our disclosure controls and procedures or our internal control over financial reporting
+will prevent or detect all error and all fraud. A control system, no matter how well designed and
+operated, can provide only reasonable, not absolute, assurance that the control system’s objectives
+will be met. The design of a control system must reflect the fact that there are resource
+constraints, and the benefits of controls must be considered relative to their costs. Further,
+because of the inherent limitations in all control systems, no evaluation of controls can provide
+absolute assurance that misstatements due to error or fraud will not occur or that all control
+issues and instances of fraud, if any, within the company have been detected. These inherent
+limitations include the realities that judgments in decision-making can be faulty and that
+breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the
+individual acts of some persons, by collusion of two or more people, or by management override of
+the controls. The design of any system of controls is based in part on certain assumptions about
+the likelihood of future events, and there can be no assurance that any design will succeed in
+achieving its stated goals under all potential future conditions. Projections of any evaluation of
+controls effectiveness to future periods are subject to risks. Over time, controls may become
+inadequate because of changes in conditions or deterioration in the degree of compliance with
+policies or procedures.
+CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
+There were no significant changes to our internal controls over financial reporting that have
+materially affected, or are reasonably likely to materially affect, our internal controls over
+financial reporting during the fourth quarter of 2007, we have completed our efforts regarding
+compliance with Section 404 of the Sarbanes-Oxley Act of 2002 for the year ended December 31, 2007.
+The results of our evaluation are discussed above in Management’s Report on Internal Control Over
+Financial Reporting.

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+0001065837,SKX,SKECHERS USA INC,10-K,2013-03-01,2012-12-31,2013-03-01T21:34:11.000Z,0001193125-13-087817,d456872d10k.htm,FORM 10-K,8935155,1,0,https://www.sec.gov/Archives/edgar/data/1065837/000119312513087817/d456872d10k.htm,https://www.sec.gov/Archives/edgar/data/1065837/000119312513087817/,2012,2012,1

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+ITEM 1. 
+BUSINESS 
+We were incorporated in California in 1992 and reincorporated in Delaware in 1999. Throughout this annual report, we
+refer to Skechers U.S.A., Inc., a Delaware corporation, its consolidated subsidiaries and certain variable interest entities (“VIEs”) of which it is the primary beneficiary, as “we,” “us,” “our,” “our
+company” and “Skechers” unless otherwise indicated. Our Internet address is
+www.skechers.com . Our annual report on Form 10-K,
+quarterly reports on Form 10-Q, current reports on Form 8-K, Form 3’s, 4’s and 5’s filed on behalf of directors, officers and 10% stockholders, and any amendments to those reports filed or furnished pursuant to Section 13(a) or
+15(d) of the Securities Exchange Act of 1934 are available free of charge on our corporate website,
+www.skx.com , as soon as reasonably practicable after we
+electronically file such material with, or furnish it to, the U.S. Securities and Exchange Commission (“SEC”). You can learn more about us by reviewing such filings at
+www.skx.com or at the SEC’s website at www.sec.gov . 
+GENERAL 
+We design and market Skechers-branded lifestyle footwear
+for men, women and children, and performance footwear for men and women under several unique lines. Our footwear reflects a combination of style, quality and value that appeals to a broad range of consumers. In addition to Skechers-branded lines, we
+also offer a uniquely branded junior line. Our brands are sold through department and specialty stores, athletic and independent retailers, and boutiques as well as catalog and internet retailers. Along with wholesale distribution, our footwear
+is available at our e-commerce website and our own retail stores. As of February 15, 2013, we operated 116 concept stores, 118 factory outlet stores and 61 warehouse outlet stores in the United States, and 36 concept stores and 18 factory
+outlets internationally. Our objective is to profitably grow our operations worldwide while leveraging our recognizable Skechers brand through our strong product lines, innovative advertising and diversified distribution channels. 
+We seek to offer consumers a vast array of fashionable footwear that satisfies their active, casual, dress casual and
+athletic footwear needs. Our core consumers are style-conscious men and women attracted to our youthful brand image and fashion-forward designs, and with our new performance footwear, athletes and fitness enthusiasts. Many of our best-selling and
+core styles are also developed for children with colors and materials that reflect a playful image appropriate for this demographic. 
+We believe that brand recognition is an important element for success in the footwear business. We have aggressively promoted our brands through comprehensive marketing campaigns for men, women and
+children. During 2012, our Skechers brand was supported by print, television and outdoor campaigns for men and women; animated kids’ television campaigns featuring our own action heroes and characters; marathons and other events for our
+performance division, and print, television and outdoor campaigns featuring our Skechers Performance and Skechers lifestyle endorsees. These endorsees included television personality Brooke Burke, Hall of Fame quarterback Joe Montana, Dallas
+Mavericks owner Mark Cuban, Dodgers baseball legend Tommy Lasorda, New England Patriots running back Danny Woodhead and Olympic medalist Meb. 
+Since we introduced our first line, Skechers USA Sport Utility Footwear, in December 1992, we have expanded our product offering and grown our net sales while substantially increasing the breadth and
+penetration of our account base. Our men’s, women’s and children’s Skechers-branded product lines benefit from the Skechers reputation for contemporary and progressive styling, quality, comfort and affordability. Our lines
+that are not branded with the Skechers name benefit from our marketing support, quality management and expertise. To promote innovation and brand relevance, we manage our product lines separately by utilizing dedicated sales and design 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. 
+2 
+Table of Contents 
+SKECHERS LINES 
+We offer a wide array of Skechers-branded product lines for men, women, juniors and children. Within these product lines, we also have numerous categories, some of which have developed into well-known
+names. Most of these categories are marketed and packaged with unique shoe boxes, hangtags and in-store support. Management evaluates segment performance based primarily on net sales and gross margins; however, sales and costs are not allocated to
+specific product lines. 
+Lifestyle Brands 
+Skechers USA. Our Skechers USA category for men and women includes: (i) Casuals, (ii) Dress
+Casuals, (iii) Relaxed Fit (for men only), (iv) seasonal sandals and boots and (v) Casual Fusion. This category is generally sold through mid-tier retailers, department stores and some footwear specialty shops. 
+• 
+The Casuals line for men and women is defined by lugged outsoles and utilizes value-oriented and leather materials in the uppers. For men, the
+Casuals category includes “black and brown” boots, shoes and sandals that generally have a rugged urban design — some with industrial-inspired fashion features. For women, the Casuals category includes basic “black and
+brown” oxfords and slip-ons, lug outsole and fashion boots, and casual sandals. We design and price both the men’s and women’s categories to appeal primarily to younger consumers with broad acceptance across age
+groups. 
+• 
+The Dress Casuals category for men is comprised of basic “black and brown” men’s shoes that feature shiny leathers and dress details,
+but may utilize traditional or lugged outsoles as well as value-oriented materials. The Dress Casual line for women is comprised of trend-influenced stylized boots and shoes, which may include leather uppers, shearling or faux fur lining or
+trim, and water-resistant materials. 
+• 
+Skechers Relaxed Fit is a line of trend-right casuals for men who want all-day comfort without compromising style. Characteristics of the line
+include comfortable outsoles, memory foam insoles and quality leather uppers. A category with unique features, we market and package Skechers Relaxed Fit styles in a shoe box that is distinct from that of other categories in the Skechers USA line of
+footwear. 
+• 
+Our seasonal sandals and boots collection for men and women is designed with many of our existing and proven outsoles for our Casuals, Dress Casuals
+and Casual Fusion lines, stylized with basic or core uppers as well as fresh looks. These styles are generally made with quality leather uppers, but may also be in canvas or fabric for sandals, and water-resistant materials and fur and faux fur
+linings for boots. 
+• 
+Our Casual Fusion line is comprised of low-profile, sport-influenced Euro casuals targeted to trend-conscious young men and women. The outsoles
+are primarily rubber and adopted from our men’s Sport and women’s Active lines. This collection features leather or nubuck uppers, but may also include mesh. 
+Skechers Sport. Our Skechers Sport footwear for men and women includes: (i) Lightweight Joggers,
+(ii) Trail-inspired, (iii) Athletic-inspired, (iv) Performance-inspired athletics and (v) Sport sandals and boots. Our Skechers Sport category is distinguished by its technical performance-inspired looks; however, we generally do
+not promote the technical performance features of these shoes. Skechers Sport is typically sold through specialty shoe stores, department stores and athletic footwear retailers. 
+• 
+Our Lightweight Joggers are designed with comfort and flexibility in mind. Careful attention is devoted to the cushioning, weight, materials, design
+and construction of the outsoles, which vary greatly depending on the intended use. This category features bright colors, earth tones and traditional athletic white. 
+• 
+Trail-inspired athletics are designed for city and off-road wear, some with aggressive all terrain traction lugs, external torsion stabilizer,
+abrasion-resistant toe and tuned dual-density molded EVA midsole with pronation control. Many of the uppers are in breathable materials, mesh, leather and nubuck. 
+• 
+Athletic inspired casuals are designed with the comfort of sneakers and the styling of casuals. With all-day comfort and durable rubber treads, the
+shoes are intended to go from weekend to work. Many of the designs are in natural shades with athletic accents. The uppers are designed in leather, suede, nubuck and canvas. 
+3 
+Table of Contents 
+• 
+Performance-inspired athletics take their styling and design cues from our footwear in the Skechers Performance Division, allowing consumers to wear
+similar looks without the technology and associated costs. The styles are primarily lightweight and flexible, and feature cushioned outsoles and ventilated uppers. Designed as a versatile, trend-right athletic shoe suitable for all-day wear, the
+line features leather and trubuck uppers in both bright and classic athletic colors. 
+• 
+Our Sport sandals and boots are primarily designed from existing Skechers Sport outsoles and may include many of the same sport features as our
+sneakers with the addition of new technologies geared toward making a comfortable sport sandal. Sport sandals and boots are designed as seasonal footwear for the consumer who already wears our Skechers Sport sneakers. 
+Skechers Active. A natural companion to Skechers Sport, Skechers Active has grown from a casual everyday
+line into a complete line of sneakers for active females of all ages. The line, with lace-up, Mary Janes, sandals and open back styles, is available in a multitude of colors as well as solid white or black, in fabrics, leathers and meshes, and with
+various closures – traditional laces, zig-zag and cross straps, among others. The Active line now includes low-profile, lightweight, flexible and sporty styles under the names Sport Active and Sport Flex. Active sneakers are typically available
+through specialty casual shoe stores and department stores. 
+BOBS from Skechers. Our BOBS from
+Skechers footwear for men, women and kids is an alpagarta-inspired footwear line created to help millions of children worldwide. For every pair of BOBS shoes sold, Skechers donates a pair of new shoes to a child in need around the world through
+reputable charity organizations. By the end of 2012, we had donated three million pairs to SolesforSouls and Fashion Delivers, which are our charity partners. Primarily designed with canvas and linen uppers, BOBS are also made with corduroy, boiled
+wool and Tyvek (a paper fabric) uppers. BOBS’ versatile, classic designs are available at department, specialty shoe stores and online retailers. 
+SKCH+3 from Skechers. Introduced in Fall 2012, our SKCH+3 line features a 3” hidden wedge in low-top sneakers and boots that are primarily designed for fashion savvy 20 to 34 year old
+women. The marketing used for our SKX+3 line is more stylish than that used for our other Skechers lines, and SKCH+3 is available at department stores as well as specialty independents. 
+Daddy’s Money. Introduced during the Holiday Season in 2012, Daddy’s Money is a uniquely branded
+juniors line that features a 2” hidden wedge. The collection of primarily low-top sneakers is marked by patterned and bright canvas uppers. Daddy’s Money is available at department stores as well as specialty independent stores.
+Skechers Kids. The Skechers Kids line includes: (i) Skechers Kids, which is a range of
+infants’, toddlers’, boys’ and girls’ boots, shoes and sneakers, (ii) S-Lights, Hot Lights by Skechers and Luminators by Skechers, (iii) Skechers Cali for Girls, (iv) Airators by Skechers, (v) Skechers Super
+Z-Strap, (vi) Elastika by Skechers, (vii) Bella Ballerina by Skechers, (viii) Twinkle Toes by Skechers, (ix) Sporty Shorty by Skechers, and (x) Air-Mazing by Skechers. 
+• 
+The Skechers Kids line includes embellishments or adornments such as fresh colors and fabrics from our Skechers adult shoes. Some of these styles
+are also adapted for toddlers with softer, more pliable outsoles and for infants with soft, leather-sole crib shoes. 
+• 
+S-Lights, Hot Lights and Luminators by Skechers are lighted sneakers and sandals for boys and girls. The S-Lights combine patterns of lights on the
+outsoles and sides of the shoes while Hot Lights feature lights on the front of the toe to simulate headlights as well as on other areas of the shoes. Luminators by Skechers feature glowing green lights and a marketing campaign with the Luminators
+characters. 
+• 
+Skechers Cali for Girls is a line of sneakers, skimmers and sandals for young girls designed to typify the California lifestyle. The sneakers are
+designed primarily with canvas uppers in unique prints, some with patch details, on vulcanized outsoles. The skimmers and flats are designed with many of the same upper materials and outsoles as the sneakers. 
+• 
+Airators by Skechers is a line of boys sneakers with a foot-cooling system designed to pump air from the heel through to the toes. The line is
+marketed with the character, Kewl Breeze. 
+• 
+Skechers Super Z-Strap is a line of athletic styled sneakers with a unique “z” shaped closure system for easy closure. The line is
+marketed with the character, Z-Strap. 
+• 
+Elastika by Skechers is a line of girls’ sneakers with bungee closures. The line is marketed with the character, Elastika.
+4 
+Table of Contents 
+• 
+Bella Ballerina by Skechers is a line of shoes with a disc that spins on the outsole, allowing girls to twirl like a ballerina.
+• 
+Twinkle Toes by Skechers is a line of girls’ sneakers and boots that feature bejeweled toe caps and brightly designed uppers. Some also include
+lights. The line is marketed with the character, Twinkle Toes. 
+• 
+Sporty Shorty by Skechers is a line of athletic-inspired sneakers for girls who like to wear sport-style footwear off the field. Many of the styles
+are lightweight and come in bright colors. Some also include lights. The line is marketed with the character, Sporty Shorty. 
+• 
+Air-Mazing by Skechers is a lightweight line of colorful sneakers designed for older boys. The line is marketed with the character, Air-Mazing Kid,
+who performs air tricks in his sneakers. 
+Skechers Kids and Skechers Cali for Girls are
+comprised primarily of shoes that are designed as “takedowns” of their adult counterparts, allowing the younger consumers the opportunity to wear the same popular styles as their older siblings and schoolmates. This “takedown”
+strategy maintains the product’s integrity by offering premium leathers, hardware and outsoles without the attendant costs involved in designing and developing new products. In addition, we adapt current fashions from our men’s and
+women’s lines by modifying designs and choosing colors and materials that are more suitable for the playful image that we have established in the children’s footwear market. Each Skechers Kids line is marketed and packaged separately with
+a distinct shoe box. Skechers Kids shoes are available at department stores and specialty and athletic retailers. 
+Skechers Work. Expanding on our heritage of cutting-edge utility footwear, Skechers Work offers a complete line of men’s and women’s casuals, field boots, hikers and athletic
+shoes. The Skechers Work line includes athletic-inspired, casual safety toe and non-slip safety toe categories that may feature lightweight aluminum safety toe, electrical hazard and slip-resistant technologies, as well as breathable, seam-sealed
+waterproof membranes. Designed for men and women with jobs that require certain safety requirements, these durable styles are constructed on high-abrasion, long wearing soles, and feature breathable lining, oil and abrasion resistant outsoles
+offering all-day comfort and prolonged durability. The Skechers Work line incorporates design elements from the other Skechers men’s and women’s line. The uppers are comprised of high-quality leather, nubuck, trubuck and
+durabuck. Our safety toe athletic sneakers, boots, hikers and casuals are ideal for environments requiring safety footwear and offer comfort and safety in dry or wet conditions. Our slip-resistant boots, hikers, athletics, casuals and
+clogs are ideal for the service industry. Our safety toe products have been independently tested and certified to meet ASTM standards, and our slip-resistant soles have been tested pursuant to the Mark II testing method for slip resistance.
+Skechers Work is typically sold through department stores, athletic footwear retailers and specialty shoe stores, as well as marketed directly to consumers through business-to-business channels. 
+Performance and Fitness Brands 
+Shape-ups Liv by Skechers. Shape-ups Liv by Skechers is a lightweight sneaker collection for men and women with Natural Stride technology. The curved bottom is designed to promote the
+body’s natural stride, the Resalyte® cushioning provides a cushioned base, and the flex groove bottom offers more flexibility. Uppers are in leather, breathable mesh and lightweight fabrics in classic athletic colors, whites and brights.
+Shape-ups Liv by Skechers are marketed in their own box as a stylish walking and light running shoe for men and women. The line is available at athletic footwear retailers, department stores and specialty shoe stores. 
+Skechers Performance. Skechers Performance is a collection of technical footwear designed with a focus on a
+specific activity to maximize performance and promote natural motion. Developed by the Skechers Performance Design Team, the footwear utilizes the latest advancements in materials and innovative design, including an ultra-lightweight Resalyte®
+compound for the midsole and GOimpulse sensors for responsive feedback. The footwear is available at athletic footwear retailers, department stores and specialty running stores. 
+• 
+Skechers GOrun. Skechers GOrun is an extremely flexible, minimalistic collection of running shoes that feature a midfoot strike design
+for efficient running and a low 4mm heel drop for a natural running feel. Skechers GOrun ride features a similar design with enhanced cushioning for elevated comfort and support. Skechers GOrun 2 updates the original GOrun with a lighter-weight
+design and new features including a breathable stretch mesh upper, a progressive flex outsole, and a custom fit removable insole. These lines are marketed to serious runners and recreational runners alike. 
+• 
+Skechers GOwalk. Skechers GOwalk is designed for walking and casual wear and offers performance features in a comfortable casual
+slip-on. The line is also lightweight and extremely flexible to promote natural foot movement when walking. Skechers GOwalk 2 incorporates more performance technologies with a unique V-Stride outsole designed
+5 
+Table of Contents 
+specifically to promote a natural walking stride. Skechers On-the-go footwear fuses iconic designs and premium materials with Skechers Performance technologies for comfort and style.
+• 
+Skechers GObionic. Skechers GObionic is designed for ultra-minimal running and was engineered with inspiration from nature’s
+ultimate design—the human body—to create a shoe that moves like the foot. Eighteen fully articulated bio-responsive zones offer flexibility, feel and ground conformity. It also features a zero heel drop design, which places the heel and
+forefoot at the same distance from the ground, and Resalyte® cushioning. A version of the shoe with enhanced cushioning and a 4mm heel drop is called GObionic ride. 
+• 
+Skechers GOtrail. Skechers GOtrail is designed for trail running with rugged, uneven running surfaces in mind. A proprietary
+Resagrip™ outsole increases the durability to handle wear and tear from tougher terrain and hydrophobic Skechers GOdri technology shields feet from harsh elements. 
+• 
+Skechers GOtrain. Skechers GOtrain is designed for the gym and features a wider minimal forefoot and linked high-abrasion rubber
+pillars for added stability and control at lateral and medial strike points. This shoe offers a responsive workout experience. 
+• 
+Skechers GOgolf. Skechers GOgolf is designed for the golf course and offers the zero heel drop design, which keeps feet close to the
+ground for a solid foundation on every swing. A Resagrip™ outsole helps with traction control and a soft Resamax® cushioned insole delivers comfort. 
+PRODUCT DESIGN AND DEVELOPMENT 
+Our principal goal in product
+design is to generate new and exciting footwear in all of our product lines with contemporary and progressive styles and comfort-enhancing performance features. Targeted to the active, youthful and style-savvy, we design our lifestyle line to be
+fashionable and marketable to the 12- to 24-year old consumer, while substantially all of our lines appeal to the broader range of 5- to 40-year old consumers, with an exclusive selection for infants and toddlers. Designed by the Skechers
+Performance Division, our performance products are for professional and recreational athletes who want a technical fitness shoe. 
+We believe that our products’ success is related to our ability to recognize trends in the footwear markets and to design products that anticipate and accommodate consumers’ ever-evolving
+preferences. We are able to quickly translate the latest fashion trends into stylish, quality footwear at a reasonable price by analyzing and interpreting current and emerging lifestyle trends. Lifestyle trend information is compiled and analyzed by
+our designers from various sources, including the review and analysis of modern music, television, cinema, clothing, alternative sports and other trend-setting media; traveling to domestic and international fashion markets to identify and confirm
+current trends; consulting with our retail and e-commerce customers for information on current retail selling trends; participating in major footwear trade shows to stay abreast of popular brands, fashions and styles; and subscribing to various
+fashion and color information services. In addition, a key component of our design philosophy is to continually reinterpret and develop our successful styles in our brands’ image. 
+The footwear design process typically begins about nine months before the start of a season. Our products are designed
+and developed primarily by our in-house design staff. To promote innovation and brand relevance, we utilize dedicated design teams, who report to our senior design executives and focus on each of the men’s, women’s and children’s
+categories. In addition, we utilize outside design firms on an item-specific basis to supplement our internal design efforts. The design process is extremely collaborative, as members of the design staff frequently meet with the heads of retail,
+merchandising, sales, production and sourcing to further refine our products to meet the particular needs of the target market. 
+After a design team arrives at a consensus regarding the fashion themes for the coming season, the designers then translate these themes into our products. These interpretations include variations in
+product color, material structure and embellishments, which are arrived at after close consultation with our production department. Prototype blueprints and specifications are created and forwarded to our manufacturers for a design prototype. The
+design prototypes are then sent back to our design teams. Our major retail customers may also review these new design concepts. Customer input not only allows us to measure consumer reaction to the latest designs, but also affords us an opportunity
+to foster deeper and more collaborative relationships with our customers. We also occasionally order limited production runs that 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. Our design teams can easily and quickly modify and refine a design based on customer input. Generally, the production process can take six months to nine months from design concept to
+commercialization. 
+6 
+Table of Contents 
+For disclosure of product design and development costs during the last three
+fiscal years, see note 1 to the financial statements of this annual report. 
+SOURCING 
+Factories. Our products are produced by independent contract manufacturers located primarily in China and,
+to a lesser extent, in Vietnam, Brazil and various other countries. We do not own or operate any manufacturing facilities. We believe that the use of independent manufacturers substantially increases our production flexibility and capacity while
+reducing capital expenditures and avoiding the costs of managing a large production work force. For disclosure of information regarding the risks associated with having our manufacturing operations abroad and relying on independent contract
+manufacturers, see the relevant risk factors under Item 1A of this annual report. 
+When possible, we seek
+to use 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 five different manufacturers. During 2012, five of our contract manufacturers
+accounted for approximately 61.6% of total purchases. One manufacturer accounted for 33.5%, and another accounted for 9.2% of our total purchases. To date, we have not experienced difficulty in obtaining manufacturing services or with the
+availability of raw materials. 
+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% and 1.0% for 30- to 60-day financing, depending on the factory. We believe that the use of these
+arrangements affords us additional liquidity and flexibility. We do not have any long-term contracts with any of our manufacturers; however, we have long-standing relationships with many of our manufacturers and believe our relationships to be good.
+We closely monitor sales activity after initial introduction of a product in our concept stores to determine
+whether there is substantial demand for a style, thereby aiding us in our sourcing decisions. Styles that have substantial consumer appeal are highlighted in upcoming collections or offered as part of our periodic style offerings, while less popular
+styles can be discontinued after a limited production run. We believe that sales in our concept stores can also help forecast sales in national retail stores, and we share this sales information with our wholesale customers. Sales, merchandising,
+production and allocations management analyze historical and current sales and market data from our wholesale account base and our own retail stores to develop an internal product quantity forecast that allows us to better manage our future
+production and inventory levels. For those styles with high sell-through percentages, we maintain an in-stock position to minimize the time necessary to fill customer orders by placing orders with our manufacturers prior to the time we receive
+customers’ orders for such footwear. 
+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 of all production is performed in the United States by our in-house production department
+and in Asia through an approximately 200-person staff working from our offices in China. 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 convicted, forced nor indentured labor (as defined under U.S. law) nor child labor (as defined by law in the manufacturer’s country) is used
+in the production process, and 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 not only finished goods meet our established design specifications, but also that all goods bearing our trademarks meet our standards for quality. Our quality control personnel located in China 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 production. For some of our lower volume manufacturers, our staff is on site during significant production runs or we will perform unannounced visits to their manufacturing sites to further monitor
+compliance with our manufacturing specifications. 
+7 
+Table of Contents 
+ADVERTISING AND MARKETING 
+With a marketing philosophy of “Unseen, Untold, Unsold,” we take a targeted approach to marketing to drive
+traffic, build brand recognition and properly position our diverse lines within the marketplace. Senior management is directly involved in shaping our image and the conception, development and implementation of our advertising and marketing
+activities. The focus of our marketing plan is print and television advertising, which is supported by outdoor, trend-influenced marketing, public relations, promotions, grass roots and in-store support. In addition, we utilize celebrity endorsers
+in our advertisements. We also believe our websites and trade shows are effective marketing tools to both consumers and wholesale accounts. We have historically budgeted advertising as a percentage of projected net sales. 
+The majority of our advertising is conceptualized by our in-house design team. We believe that our advertising
+strategies, methods and creative campaigns are directly related to our success. Through our lifestyle, performance-inspired and image-driven advertising, we generally seek to build and increase brand awareness by linking the Skechers brand to
+youthful attitudes for our lifestyle lines, and technology with authentic runners and athletes for our performance lines. Our ads are designed to provide merchandise flexibility and to facilitate the Skechers brand’s direction. 
+To further build brand awareness and influence consumer spending, we have selectively signed endorsement agreements with
+celebrities whom we believed would reach new markets. Our endorsees Brooke Burke, Mark Cuban, Joe Montana and Tommy Lasorda all appeared in print and television campaigns in 2012. The Skechers Performance Division launched in 2011, with a global
+marketing campaign starring elite distance runner and Olympic medalist Meb. Competing in Skechers GOrun footwear, he recently achieved two back-to-back personal best marathon times during the 2011 New York City marathon and a first place finish in
+the 2012 Olympic Trials. Meb was the fastest American at the London Games, finishing fourth overall. From time to time, we may sign other celebrities to endorse our brand name and image in order to strategically market our products among specific
+consumer groups in the future. 
+With a targeted approach, our print ads appear regularly in popular fashion
+and lifestyle consumer publications, including Runner’s World, Cosmopolitan, Shape, Lucky, In Style, Seventeen, Maxim, Men’s Fitness, and Women’s Health, as well as in weekly publications such as People, Us Weekly,
+OK!, and Sports Illustrated, among others. Our advertisements also appear in international magazines around the world. 
+Our television commercials are produced both in-house and through producers that we have utilized in the past who are familiar with our brands. In 2012, we developed commercials for men, women and
+children for our Skechers brands, including our animated spots for kids featuring our own action heroes and our performance collections. We have found these to be a cost-effective way to advertise on key national and cable programming during high
+selling seasons. In 2012, many of our television commercials were translated into multiple languages and aired in Brazil, Canada, the United Kingdom, France, the Benelux Region, Germany, Spain, Italy, Chile, Japan, Austria and Switzerland.
+Outdoor. In an effort to reach consumers where they shop and in high-traffic areas as they
+travel to and from work, we continued our multi-level outdoor campaign that included kiosks in key malls across the United States plus billboards, transportation systems and telephone kiosks in North America, Brazil, Chile, Asia and Europe. In
+addition, we advertised on perimeter boards at soccer matches in several European countries. We believe these are effective and efficient ways to reach a broad range of consumers and leave a lasting impression for our brands. 
+Trend-Influenced Marketing/Public Relations. Our public relations objectives are to secure product
+placement in key fashion magazines, place our footwear on the feet of trend-setting celebrities and their children, and gain positive and accurate press about us and our products. Through our commitment to aggressively promote our upcoming styles,
+our products are often featured in leading fashion and pop culture magazines, as well as in select films and popular television shows. Our footwear and our company have been prominently displayed and referenced on news and magazine shows. We have
+also amassed an array of prominent product placements in magazines including Seventeen, OK!, US Weekly, Runner’s World and Competitor . In addition, our brands have been associated with cutting edge events
+and various celebrities. 
+Promotions and Grass Roots. By applying creative sales techniques via
+a broad spectrum of media, our marketing team seeks to build brand recognition and drive traffic to Skechers’ retail stores, websites and our retail partners’ locations. Skechers’ promotional strategies have encompassed in-store
+specials, charity events, product tie-ins and giveaways, and collaborations with national retailers and radio stations. In 2012, we appeared at walks and at numerous marathons in Boston, London, Paris, Santiago and other cities with Skechers
+Performance branded booths to allow runners the ability to try on and often buy our products. Our products were made 
+8 
+Table of Contents 
+available to consumers directly or through key accounts at many of these events. In addition, we partnered with several key accounts for BOBS donation events in cities in the United States.
+Visual Merchandising. Our in-house visual merchandising department supports wholesale
+customers, distributors and our retail stores by developing displays that effectively leverage our products at the point of sale. Our point-of-purchase display items include signage, graphics, displays, counter cards, banners and other merchandising
+items for each of our brands. These materials mirror the look and feel of each brand and reinforce the image as well as draw consumers into stores. 
+Our visual merchandising coordinators (“VMC’s”) work with our sales force and directly with our customers to ensure better sell-through at the retail level by generating greater consumer
+awareness through Skechers brand displays. Our VMC’s communicate with and visit our wholesale customers on a regular basis to aid in proper display of our merchandise. They also run in-store promotions to enhance the sale of Skechers footwear
+and create excitement surrounding the Skechers brand. We believe that these efforts help stimulate impulse sales and repeat purchases. 
+Trade Shows. To better showcase our diverse products to footwear buyers in the United States and Europe and to distributors around the world, we regularly exhibit at leading trade shows.
+Along with specialty trade shows, we exhibit at WSA’s The Shoe Show, FFANY, ASR, MAGIC and Outdoor Retailer in the United States; GDS, MICAM, ISPO, Mess Around and Who’s Next in Europe; and Couromoda and Francal in Brazil. Our dynamic,
+state-of-the-art trade show exhibits are developed by our in-house architect to showcase our latest product offerings in a lifestyle setting reflective of each of our brands. 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, thereby optimizing commitments and sales at the retail level. 
+Internet. We promote and sell our brands through our e-commerce website www.skechers.com ,which enables fans and customers to shop, browse,
+find store locations, socially interact, post a shoe review, photo, video, or question and immerse themselves in our brands. Our website is a venue for dialog and feedback from customers about our products which enhances the Skechers brand
+experience while driving sales through all our retail channels. In addition, we established e-commerce websites in the United Kingdom and Germany in 2012. 
+PRODUCT DISTRIBUTION CHANNELS 
+We have four reportable segments
+– domestic wholesale sales, international wholesale sales, retail sales and e-commerce sales. In the United States, our products are available through a network of wholesale customers comprised of department, athletic and specialty stores.
+Internationally, our products are available through wholesale customers in more than 100 countries and territories via our global network of distributors in addition to our subsidiaries in Asia, Europe, Canada and South America. Skechers owns and
+operates retail stores both domestically and internationally through three integrated retail formats—concept, factory outlet and warehouse outlet stores. Each of these channels serves an integral function in the global distribution of our
+products. Nineteen distributors and five licensees have opened 278 distributor-owned and licensee-owned Skechers retail stores in 42 countries as of December 31, 2012. 
+Domestic Wholesale. We distribute our footwear through the following domestic wholesale distribution
+channels: department stores, specialty stores, athletic specialty shoe stores and independent retailers, as well as catalog and internet retailers. While department stores and specialty retailers are the largest distribution channels, we believe
+that we appeal to a variety of wholesale customers, many of whom may operate stores within the same retail location due to our distinct product lines, variety of styles and the price criteria of their specific customers. Management has a clearly
+defined growth strategy for each of our channels of distribution. An integral component of our strategy is to offer our accounts the highest level of customer service so that our products will be fully represented in existing retail locations and
+new locations of each customer. 
+In an effort to provide knowledgeable and personalized service to our
+wholesale customers, the sales force is segregated by product line, each of which is headed by a vice president or national sales manager. Reporting to each sales manager are knowledgeable account executives and territory managers. The vice
+presidents and national sales managers report to our senior vice president of sales. All of our vice presidents and national sales managers are compensated on a salary basis, while our account executives and territory managers are compensated on a
+commission basis. None of our domestic sales personnel sells competing products. 
+We believe that we have
+developed a loyal customer base through exceptional customer service. We believe that our close relationships with these accounts help us to maximize their retail sell-throughs. Our visual merchandise coordinators work with our
+9 
+Table of Contents 
+wholesale customers 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 that appropriate styles are purchased for specific accounts and for specific stores within those accounts as well as to 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 our wholesale customers. 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 store and the warehouse outlet store. Our three store formats enable us to promote the full Skechers product offering in an attractive environment that appeals to a broad group of consumers. In
+addition, most of our retail stores are profitable and have a positive effect on our operating results. We periodically review all of our stores for impairment. We prepare a summary of cash flows for each of our retail stores to assess potential
+impairment of the fixed assets and leasehold improvements. If the assets are considered to be impaired, the impairment we recognize is the amount by which the carrying value of the assets exceeds the fair value of the assets. In addition, we base
+the useful lives and related amortization or depreciation expense on our estimate of the period that the assets will generate revenues or otherwise be used by us. As of February 15, 2013, we owned and operated 116 concept stores, 118 factory
+outlet stores and 61 warehouse outlet stores in the United States, and 36 concept stores and 18 factory outlet stores internationally. During 2012, we opened 25 domestic stores and four international stores, and closed five domestic stores and two
+international stores. In addition, we also took over the operations of one concept store and two outlet stores from our distributor in Japan. During 2013, we plan to open 30 to 35 new stores. 
+• 
+Concept Stores 
+Our concept stores are located at marquee street locations, major tourist areas or in key shopping malls
+in metropolitan cities. Our concept stores have a threefold purpose in our operating strategy. First, concept stores serve as a showcase for a wide range of our product offering for the current season, as we estimate that our average wholesale
+customer carries no more than 5% of the complete Skechers line in any one location. Our concept stores showcase our products in an attractive, easy-to-shop open-floor setting, providing the customer with the complete Skechers story. Second, retail
+locations are generally chosen to generate maximum marketing value for the Skechers brand name through signage, store front presentation and interior design. Domestic locations include concept stores at Times Square, Union Square and 34th Street in
+New York, Powell Street in San Francisco, Hollywood and Highland in Hollywood, Santa Monica’s Third Street Promenade, and Las Vegas’ Fashion Show Mall. International locations include Covent Garden in London, Toronto’s Eaton Centre,
+Vancouver’s Pacific Centre, and Kalverstraat Street in Amsterdam. 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. We believe that product sell-through information and rapid customer feedback derived from our concept stores enables our design, 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. In 2012, we opened five domestic concept stores and four
+international concept stores and took over one concept store from our distributor in Japan. 
+The typical Skechers concept store is approximately 2,500 square feet, although in certain markets we
+have opened concept stores as large as 7,800 square feet or as small as 900 square feet. When deciding where to open concept stores, we identify top geographic markets in the larger metropolitan cities in North America, Europe, South America and
+Asia. When selecting a specific site, we evaluate the proposed sites’ traffic pattern, co-tenancies, sales volume of 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 their venues. 
+• 
+Factory Outlet Stores 
+Our factory outlet stores are generally located in manufacturers’ direct outlet centers throughout
+the United States. In addition, we have 18 international outlet stores – four in England, two each in Canada, Germany, Italy and Japan, and one each in Austria, Chile, the Netherlands, Portugal, Wales and Scotland. 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 and potentially compromise the Skechers brand image. Skechers’ factory outlet
+stores range in size from approximately 1,400 to 9,000 square feet. Unlike our warehouse outlet stores, inventory in these stores is supplemented by 
+10 
+Table of Contents 
+certain first-line styles sold at full retail price points. We opened 12 domestic factory outlet stores in 2012 and took over two outlet stores from our distributor in Japan. 
+• 
+Warehouse Outlet Stores 
+Our free-standing warehouse outlet stores, which are primarily 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 are typically larger than our factory outlet stores and typically range in size from
+approximately 5,200 to 15,000 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, which could otherwise compromise the
+Skechers brand image. We seek to open our warehouse outlet stores in areas that are in close proximity to our concept stores to facilitate the timely transfer of inventory that we want to liquidate as soon as practicable. We opened eight domestic
+warehouse outlet stores in 2012. 
+International Wholesale. Our products are sold in more than
+100 countries and territories throughout the world. We generate revenues from outside the United States from three principal sources: (i) direct sales to department stores and specialty retail stores through our subsidiaries and joint ventures
+in Canada, France, Germany, Spain, Portugal, Italy, Switzerland, Austria, Malaysia, Thailand, Singapore, Hong Kong, China, Japan, India, the Benelux Region, the United Kingdom, Brazil and Chile; (ii) sales to foreign distributors who distribute
+our footwear to department stores and specialty retail stores in countries and territories across Eastern Europe, Asia, Central America, South America, Africa, the Middle East and Australia, among other regions; and (iii) to a lesser extent,
+royalties from licensees who manufacture and distribute our non-footwear products outside the United States. 
+We believe that international distribution of our products represents a significant opportunity to increase sales and
+profits. We intend to further increase our share of the international footwear market by heightening our marketing in those countries in which we currently have a presence through our international advertising campaigns, which are designed to
+establish Skechers as a global brand synonymous with trend-right casual shoes. 
+• 
+International Subsidiaries 
+Europe 
+We currently distribute product in most of Western Europe through the following subsidiaries: Skechers
+USA Ltd., with its offices and showrooms in London, England; Skechers S.a.r.l., with its offices in Lausanne, Switzerland; Skechers USA France S.A.S., with its offices and showrooms in Paris, France; Skechers USA Deutschland GmbH, with its offices
+and showrooms in Dietzenbach, Germany; Skechers USA Iberia, S.L., with its offices and showrooms in Madrid, Spain; Skechers USA Benelux B.V., with its offices and showrooms in Waalwijk, the Netherlands; and Skechers USA Italia S.r.l., with its
+offices and showrooms in Milan, Italy. 
+Skechers-owned retail stores in Europe include nine
+concept stores and thirteen factory outlet stores located in nine countries, including the key locations of Covent Garden in London and Kalverstraat Street in Amsterdam. 
+To accommodate our European subsidiaries’ operations, we operate an approximately 490,000 square
+foot distribution center in Liege, Belgium. This distribution center is currently used to store and deliver product to our subsidiaries and retail stores throughout Europe. 
+Canada 
+Merchandising and marketing of our product in Canada is managed by our wholly-owned subsidiary, Skechers
+USA Canada, Inc. with its offices and showrooms outside Toronto in Mississauga, Ontario. Product sold in Canada is primarily sourced from our U.S. distribution center in Rancho Belago, California. We have five concept stores; Toronto Eaton Centre,
+West Edmonton Mall, Chinook Centre, Richmond Centre, and Pacific Centre; and two factory outlet stores in Toronto and Alberta. 
+Malaysia, Singapore and Thailand 
+We have
+a 50% interest in a joint venture in Malaysia and Singapore, and a 51% interest in a joint venture in Thailand that generate net sales in those countries. The joint ventures operate 18 retail stores and eight shops-in-shops in Malaysia, 12 concept
+stores and three shop-in-shops in Singapore, and seven concept stores and 11 shops-in shops in Thailand. These 
+11 
+Table of Contents 
+joint ventures are included in our consolidated financial statements. 
+China and Hong Kong 
+We have a 50%
+interest in a joint venture in China and a minority interest in a joint venture in Hong Kong that generate net sales in those countries. Under the joint venture agreements, the joint venture partners contribute capital in proportion to their
+respective ownership interests. The joint ventures operate 54 direct-owned stores and in excess of 127 shops-in-shop in China and 17 direct-owned stores and 10 shops-in-shop in Hong Kong. These stores are in key locations in Shanghai, Beijing,
+Guangzhou, Xiamen, Hong, Kong, Macau, and other cities. The joint ventures are included in our consolidated financial statements. 
+Japan 
+Merchandising and marketing of our
+product in Japan is managed by our wholly-owned subsidiary, Skechers Japan GK, with its offices located in Tokyo, Japan. Product sold in Japan is primarily shipped directly from our contract manufacturers’ factories in China. We have one
+concept store in Osaka and two factory outlet stores one each in Osaka and Toki. 
+India 
+We have a 51% interest in a joint venture in India that generates net sales in that country.
+The joint venture operates one retail store in Mumbai and supports wholesale accounts in India. Under the joint venture agreement, the joint venture partners contribute capital in proportion to their respective ownership interests. The joint venture
+is included in our consolidated financial statements. 
+Brazil 
+Merchandising and marketing of our product in Brazil is managed by our wholly-owned subsidiary, Skechers
+Do Brasil Calcados LTDA., with its offices located in Sao Paulo, Brazil. Product sold in Brazil is primarily shipped directly from our contract manufacturers’ factories in China and occasionally from our U.S. distribution center in Rancho
+Belago, California. 
+Chile 
+Our wholly-owned subsidiary, Comercializadora Skechers Chile Limitada, supports our 21 retail stores and
+wholesale accounts in Chile. Product sold in Chile is primarily shipped directly from our contract manufacturers’ factories in China and occasionally from our U.S. distribution center in Rancho Belago, California. 
+12 
+Table of Contents 
+• 
+Distributors and Licensees 
+Where we do not sell directly through our international subsidiaries and joint ventures, our footwear is
+distributed through an extensive network of more than 30 distributors who sell our products to department, athletic and specialty stores in more than 100 countries around the world. As of December 31, 2012, we also had agreements with 19 of
+these distributors and five licensees regarding 257 distributor-owned Skechers retail stores and 21 licensee-owned Skechers retail stores that are open in 42 countries, including 74 stores that were opened in 2012, while 16 distributor-owned stores
+were closed during the year. In addition, we now own three stores in Japan that were previously distributor-owned, and one store in India is now operated by our joint venture in that country. Our distributors and licensees own and operate the
+following retail stores: 
+REGION 
+STORE FORMAT 
+NUMBER OF 
+STORES 
+LOCATION (1) 
+North America 
+Concept 
+25 
+Canada (8), Mexico (17) 
+Warehouse 
+8 
+Canada (2), Mexico (6) 
+Central America 
+Concept 
+9 
+Costa Rica (2), El Salvador, Guatemala (2), Honduras, Panama (3) 
+Warehouse 
+1 
+Panama 
+South America 
+Concept 
+32 
+Aruba (2), Colombia (8), Ecuador (2), Peru (4), Venezuela (16) 
+Warehouse 
+1 
+Colombia 
+Africa 
+Concept 
+12 
+Egypt (2), Morocco (2), South Africa (8) 
+Asia 
+Concept 
+106 
+Indonesia (11), Korea (72), Mongolia, Philippines (14), Taiwan (8) 
+Warehouse 
+4 
+Korea, Taiwan (3) 
+Australia 
+Concept 
+8 
+Castle Hill, Chadstone, Sydney (3), Melbourne (2), Brisbane 
+Warehouse 
+11 
+Brisbane, Bundoora, Cairns, Canberra, Melbourne (4), Jindalee, Sydney, Biggera Waters 
+Europe 
+Concept 
+34 
+Croatia (3), Estonia (3), Greece (2), Ireland (5), Israel, Malta (3), Netherlands, Portugal (4), Russia (8), Serbia, Spain, Ukraine (4) 
+Warehouse 
+3 
+Serbia 
+Middle East 
+Concept 
+23 
+Bahrain, Kuwait, Qatar, Saudi Arabia (10), UAE (7), Mauritius, Jordan, Oman 
+Warehouse 
+1 
+UAE 
+(1) One store per location except as otherwise noted. 
+The distributors are responsible for their respective stores’ operations, have ownership of their respective stores’ assets, and select the broad collection of our products to sell to consumers
+in their regions. In order to maintain a globally consistent image, we provide architectural, graphic and visual guidance and materials for the design of the stores, and we train the local staff on our products and corporate culture. We intend to
+expand our international presence and global recognition of the Skechers brand name by continuing to sell our footwear to foreign distributors and by opening flagship retail stores with distributors that have local market expertise. 
+Electronic Commerce. Our website,
+www.skechers.com , is a virtual storefront that promotes the Skechers brands. Our website is designed to
+provide a positive shopping and brand experience, showcasing our products in an easy-to-navigate format, allowing consumers to browse our selections and purchase our footwear. This virtual store has provided a convenient alternative-shopping
+environment and brand experience. The website is an efficient and effective additional retail distribution channel, and it has improved our customer service. We also established Skechers e-commerce websites in Germany and the United Kingdom in 2012.
+For disclosure of financial information about geographic areas and segment information for our four
+reportable segments – domestic wholesale sales, international wholesale sales, retail sales and e-commerce sales—see note 12 to the financial statements of this annual report. 
+13 
+Table of Contents 
+LICENSING 
+We believe that selective licensing of the Skechers brand name and our product line names to manufacturers may broaden and enhance the individual brands without requiring significant capital investments
+or additional incremental operating expenses. Our multiple product lines plus additional subcategories present many potential licensing opportunities on terms with licensees that we believe will provide more effective manufacturing, distribution or
+marketing of non-footwear products. We also believe that the reputation of Skechers and its history in launching brands has also enabled us to partner with reputable non-footwear brands to design and market their footwear. 
+As of January 31, 2013, we had 38 active domestic and international licensing agreements in which we are the
+licensor. These include Skechers branded leather goods and backpacks, Skechers Performance and sport apparel, Skechers Scrubs for health care professionals and Skechers Eyewear. We have international licensing agreements for the design and
+distribution of men’s and women’s apparel in India, Israel, Mexico, and Korea; bags in Panama; and watches in the Philippines. 
+DISTRIBUTION FACILITIES AND OPERATIONS 
+We believe that strong distribution support is a critical factor in our operations. Once manufactured, our products are packaged in shoe boxes bearing bar codes that are shipped either: (i) to our
+approximate 1.8 million square-foot distribution center located in Rancho Belago, California, (ii) to our approximately 490,000 square-foot distribution center located in Liege, Belgium or (iii) directly from third-party manufacturers
+to our other international customers and other international third-party distribution centers. Upon receipt at either of the distribution centers, merchandise is inspected and recorded in our management information system and packaged according to
+customers’ orders for delivery. Merchandise is shipped to customers by whatever means each customer requests, which is usually by common carrier. The 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 it includes direct billing and shipping information. 
+BACKLOG 
+As of December 31, 2012, our backlog was $468.9
+million, compared to $390.2 million as of December 31, 2011. Backlog orders are subject to cancellation by customers, as evidenced by order cancellations that we have experienced in the past due to the weakened U.S. economy and shifting
+footwear trends. For a variety of reasons, including changes in the economy, customer demand for our products, the timing of shipments, product mix of customer orders, the amount of in-season orders and a shift towards tighter shipment lead times,
+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 105 foreign countries. We also have design patents and pending design and
+utility patent applications in both the United States and approximately 27 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 and trade secret protection, non-disclosure agreements and licensing arrangements to establish, protect and enforce intellectual property rights in our logos, trade names 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 and other key trademarks. Despite our efforts to safeguard and maintain our intellectual property rights, we cannot be certain that we will be
+successful in this regard. Furthermore, we cannot be certain 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 
+14 
+Table of Contents 
+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 has 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 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 our products 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 casual shoes and
+utility footwear compete with footwear offered by companies such as Columbia Sportswear Company, Converse by Nike, Inc., Crocs, Inc., Deckers Outdoor Corporation, Kenneth Cole Productions Inc., Steven Madden, Ltd., The Timberland Company, V.F.
+Corporation and Wolverine World Wide, Inc. Our athletic lifestyle and performance shoes compete with footwear offered by companies such as Nike, Inc., adidas AG, Reebok International Ltd., Puma AG, ASICS America Corporation, New Balance Athletic
+Shoe, Inc. and Under Armour, Inc. The intense competition among these companies and the rapid changes in technology and consumer preferences in the markets for performance footwear, including the walking fitness category, constitute significant risk
+factors in our operations. Our children’s shoes compete with footwear offered by these companies and others including Payless Holdings, and with other brands such as Stride Rite by Wolverine World Wide, Inc. 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 been in existence for a longer period of time, 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 we do. We cannot be certain that we will be able to compete successfully
+against present or future competitors, or that competitive pressures will not have a material adverse effect on our business, financial condition and results of operations. 
+EMPLOYEES 
+As of January 31, 2013, we employed 5,666
+persons, 2,468 of whom were employed on a full-time basis and 3,198 of whom were employed on a part-time basis, primarily in our retail stores. None of our employees are subject to a collective bargaining agreement. We believe that our relations
+with our employees are satisfactory. 
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+ITEM 13. 
+CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE 
+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 2012 fiscal year.

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+ITEM 9A. 
+CONTROLS AND PROCEDURES 
+Attached as exhibits to this annual report on Form 10-K are certifications of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), which are required in accordance
+with Rule 13a-14 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). This “Controls and Procedures” section includes information concerning the controls and controls evaluation referred to in the
+certifications. 
+EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES 
+We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by a
+company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within required time periods and that such information is accumulated and communicated to allow timely decisions regarding required
+disclosures. As of the end of the period covered by this annual report on Form 10-K, we carried out an evaluation under the supervision and with the participation of our management, including our CEO and CFO, of the effectiveness of the design and
+operation of our disclosure controls and procedures pursuant to Rule 13a-15 of the Exchange Act. Based upon that evaluation, our CEO and CFO concluded that our disclosure controls and procedures are effective, at the reasonable assurance level as of
+such time. 
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+Table of Contents 
+MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING 
+Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as
+such term is defined in Rule 13a-15(f) of the Exchange Act. Internal control over financial reporting includes those policies and procedures that: 
+(i) 
+pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
+(ii) 
+provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
+accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and 
+(iii) 
+provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have
+a material effect on our financial statements. 
+We conducted an evaluation of the
+effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our
+evaluation under the framework in Internal Control – Integrated Framework, our management has concluded that as of December 31, 2012, our internal control over financial reporting is effective. 
+Our independent registered public accountants, KPMG LLP, audited the consolidated financial statements included in this
+annual report on Form 10-K and have issued an attestation report on the effectiveness of our internal control over financial reporting as of December 31, 2012, which is set forth below. 
+INHERENT LIMITATIONS ON EFFECTIVENESS OF CONTROLS 
+Our
+management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and all fraud. A control
+system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints,
+and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not
+occur or that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple
+error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions
+about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls’ effectiveness to future periods
+are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitations in a cost-effective control system,
+misstatements as a result of error or fraud may occur and not be detected. 
+CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING 
+There were no significant changes to our internal controls over financial reporting that have materially affected, or are
+reasonably likely to materially affect, our internal controls over financial reporting during the fourth quarter of 2012. The results of our evaluation are discussed above in Management’s Report on Internal Control Over Financial Reporting.
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+Table of Contents 
+Report of Independent Registered Public Accounting Firm 
+The Board of Directors and Stockholders 
+Skechers U.S.A., Inc.: 
+We have
+audited the internal control over financial reporting of Skechers U.S.A., Inc. (the Company) as of December 31, 2012, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring
+Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial
+reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting included in Item 9A. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based
+on our audit. 
+We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
+(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an
+understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included
+performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. 
+A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
+statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that,
+in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
+accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance
+regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. 
+Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
+of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. 
+In our opinion, Skechers U.S.A., Inc. maintained, in all material respects, effective internal control over financial reporting as of
+December 31, 2012, based on criteria established in Internal Control – Integrated Framework issued by the COSO. 
+We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Skechers U.S.A., Inc. and subsidiaries as of
+December 31, 2012 and 2011, and the related consolidated statements of operations, comprehensive income (loss), equity, and cash flows for each of the years in the three-year period ended December 31, 2012, and the related financial
+statement schedule, and our report dated March 1, 2013, expressed an unqualified opinion on those consolidated financial statements and financial statement schedule. 
+/s/ KPMG LLP 
+Los Angeles, California 
+March 1, 2013 
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