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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000 Commission File Number 0-23702
STEVEN MADDEN, LTD.
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(Exact name of registrant as specified in its charter)
Delaware 13-3588231
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(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification no.)
52-16 Barnett Avenue, Long Island City, New York 11104
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(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (718) 446-1800
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $.0001 per share
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 20, 2001 was approximately $155,995,392.
The number of outstanding shares of the registrant's common stock as of
March 20, 2001 was 12,526,109 shares.
DOCUMENTS INCORPORATED BY REFERENCE:
PART III INCORPORATES CERTAIN INFORMATION BY REFERENCE FROM THE
REGISTRANT'S DEFINITIVE PROXY STATEMENT FOR THE ANNUAL MEETING OF STOCKHOLDERS
SCHEDULED FOR MAY 25, 2001.
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TABLE OF CONTENTS
BUSINESS.......................................................................2
PROPERTIES....................................................................20
LEGAL PROCEEDINGS.............................................................21
SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS............................22
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.........23
SELECTED FINANCIAL DATA.......................................................24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.....................................................25
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....................34
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................................34
CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE......................................................34
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT OF THE REGISTRANT...........34
EXECUTIVE COMPENSATION........................................................34
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................35
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................35
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K............35
PART I
Item 1. BUSINESS.
Steven Madden, Ltd. (together with its subsidiaries, the "Company")
designs, sources, markets and sells fashion-forward footwear brands for women,
men and children. The Company distributes products through its retail stores,
its e-commerce websites, catalogs and department and specialty store locations
in the United States and Canada. The Company's product line includes core
products, which are sold year-round, complemented by a broad range of updated
styles which are designed to establish or capitalize on market trends.
The Company's business is comprised of three (3) distinct segments. The
wholesale division includes five (5) brands: Steve Madden(R), David Aaron(R),
l.e.i.(R), Stevies(TM) and the recently introduced Steve Madden Mens brand.
Steven Madden Retail, Inc., the Company's wholly owned retail subsidiary,
operates Steve Madden and David Aaron retail stores as well as the Company's
outlet stores and e-commerce web sites. The Company's wholly owned private label
subsidiary, Adesso-Madden, Inc., designs and sources footwear products under
private labels for many of the country's largest mass merchandisers. The Company
also licenses its Steve Madden(R) and Stevies(TM) trademarks for several
accessory and apparel categories.
Steven Madden, Ltd., was incorporated as a New York corporation on July
9, 1990 and reincorporated under the same name in Delaware in November 1998. The
Company was founded and developed by Steven Madden, its principal designer, and
Chief Executive Officer and former Chairman of the Board, which has established
a reputation for its creative designs, popular styles and quality products at
accessible price points. The Company completed its initial public offering in
December 1993 and its shares of Common Stock currently trade on The Nasdaq
National Market under the symbol "SHOO".
RECENT DEVELOPMENTS
In January 2000, the Company announced the launch of its new
Stevies(TM) brand which is marketed to girls ages 6 to 12 years old. The new
footwear line mirrors some of the design concepts and attitudes present in the
Steve Madden(R) brand and is distributed through moderate and better department
stores and footwear specialty stores. The Company commenced shipping Stevies'
products in time for the most recent back-to-school season.
During the Spring and Summer of 2000, the Company also licensed the
Stevies(TM) trademark for additional product categories and launched the
e-commerce website, WWW.STEVIES.COM. In light of the fact that the Company
believed that licensing opportunities were not being fully exploited, in January
2001 the Company engaged Jassin O'Rourke Group, LLC, a consulting firm, to
enhance the Company's licensing efforts. In February 2001, the Company
terminated existing licensing agreements for jewelry and hair accessories for
the Steve Madden(R) and Stevies(TM) brands, and sportswear for the Stevies(TM)
brand. The Company expects that, with the assistance of Jassin O'Rourke, it will
be successful in improving its licensed product business.
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On October 2, 2000, the Company announced the engagement of Bear
Stearns & Company as financial advisor to the Company. Bear Stearns was engaged
to explore strategic alternatives for the Company.
In November 2000, the Company announced its plans to launch the Steve
Madden Mens footwear line. The line is managed by the Company's wholesale
division and is designed and marketed with the signature Steve Madden(R) brand
name. A preview of the new line debuted at the FFANY Shoe Show in December 2000
and select styles were shipped to retail customers for the Spring 2001 selling
season. The full collections were unveiled in February 2001 at the MAGIC and WSA
Shoe Shows in Las Vegas. The new men's collection is targeted towards stylish
male consumers between the ages of 20 and 35. The line incorporates similar
design themes present in the Steve Madden women's footwear collection with
retail price points ranging from $79-$99 a pair.
The Company maintains its principal executive offices at 52-16 Barnett
Avenue, Long Island City, NY 11104, telephone number (718) 446-1800.
STEVEN MADDEN - WHOLESALE DIVISION
The wholesale division sources, sells and markets the Company's Steve
Madden(R) brand to major department stores, better specialty stores, and shoe
stores throughout the country and Canada. During the last few years the Steve
Madden(R) product line has become a leading footwear brand in the fashion
conscious junior marketplace. By the end of 2000, the Steve Madden brand was
sold in approximately 3,000 doors throughout the country. To serve its customers
(primarily women ages 16 to 25), the wholesale division creates and markets
fashion forward footwear designed to appeal to customers seeking exciting, new
footwear designs at reasonable prices. In November 2000, the wholesale division
expanded its marketing plan to include a men's footwear line which targets
fashion conscious men ages 20 to 35.
As the Company's largest division, the Steve Madden(R) wholesale
division accounted for $87,977,000 in sales in 2000, or approximately 43% of the
Company's total revenues. Many of the wholesale division's newly created styles
are test marketed at the Company's retail stores. Within a few days, the Company
can determine if a test product appeals to customers. This enables the Company
to use its flexible sourcing model to rapidly respond to changing preferences
which the Company believes is essential for success in the fashion footwear
marketplace.
DIVA ACQUISITION CORP. - THE DAVID AARON(R) WHOLESALE DIVISION
Diva Acquisition Corp. ("Diva") designs and markets fashion footwear to
women under the "David Aaron(R)" trademark through major department stores and
better footwear specialty stores and two (2) Company owned retail shoe stores
located in the Soho area of Manhattan and in Paramus, NJ. Priced a tier above
the Steve Madden(R) brand, Diva's products are designed to appeal principally to
fashion conscious women, ages 26 to 45, who shop at department stores and
footwear boutiques. As of December 31, 2000, the David Aaron brand was sold in
approximately 652 doors across the country. The Company recorded sales from the
David Aaron(R) brand of $3,616,000 for the year ended December 31, 2000, or
approximately 1.8% of the Company's total revenues. Revenues from the sale of
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David Aaron footwear decreased by approximately 55% compared to the preceding
year due to the repositioning and reorganization of the David Aaron brand. The
Company intentionally planned to reduce its volume in 2000 enabling the David
Aaron Division to use its two retail stores to test the popularity of new
products. The Company intends to sell its most successful David Aaron products
at wholesale beginning in Spring 2001.
l.e.i. (R) - WHOLESALE DIVISION
In September, 2000, the Company renewed its license agreement with
R.S.V. Sport, Inc. pursuant to which the Company continues to have the right to
use the l.e.i.(R) trademark in connection with the sale and marketing of
footwear. The l.e.i.(R) trademark is well known for jeanswear in the junior
marketplace and nationally through department and specialty stores. The
Company's l.e.i.(R) footwear products were targeted to attract girls ages 6 to
11 years old and young women ages 12 to 20 years old, a majority of which are
younger than the typical Steve Madden(R) brand customer. At year end, l.e.i.
footwear products were sold in major department shores and footwear specialty
shops (approximately 3,500 doors ) across the country, an increase of 40% over
the year ending December 31, 1999. The l.e.i. Wholesale Division generated
revenue of $37,741,000 for the year ended December 31, 2000, or approximately
18.4% of the Company's total revenues.
STEVIES INC. - WHOLESALE DIVISION
In the first quarter, the Company introduced a new brand, Stevies(TM).
Stevies(TM) is a fashion brand which targets girls ages 6-9 and "tweens" ages
10-12. The Company's new Stevies Wholesale Division ("Stevies Wholesale")
commenced shipping to department stores throughout the country in the second
quarter of 2000. Stevies Wholesale generated revenue of $6,147,000 for the year
ended December 31, 2000, or approximately 3% of the Company's total revenues.
Stevies(TM) now sells in over 1,000 doors, including store groups such as
Nordstroms, Federated Department Stores, May Company stores, Belks, Dillards,
Limited Too, as well as independent children's stores throughout the country.
The Stevies(TM) brand ended the year with over 800 Stevies(TM) concept shop
locations and over 500 Stevies(TM) accessories concept locations which display
accessories and slippers. The web site for Stevies (TM) at www.stevies.com went
live in March of 2000 and commenced e-commerce operation in July 2000.
STEVEN MADDEN RETAIL, INC. - RETAIL DIVISION
As of December 31, 2000, the Company owned and operated fifty-six (56)
retail shoe stores under the Steve Madden(R) name, two (2) under the David
Aaron(R) name, six (6) outlet stores and one (1) Internet store (through the
www.stevemadden.com, www.stevies.com, and www.stevemaddenmens.com) web sites.
Most of the Steve Madden stores are located in major shopping malls in
California, Colorado, District of Columbia, Florida, Georgia, Illinois,
Maryland, Massachusetts, Michigan, Minnesota, Nevada, New Jersey, New York,
Ohio, Pennsylvania, Rhode Island, Texas and Virginia. Each of the Steve
Madden(R) stores has been designed to appeal to young fashion conscious women by
creating a "nightclub" type atmosphere. The retail stores have been very
successful for the Company, generating annual sales in excess of $700 per square
foot. Sales are primarily from the sale of the Company's Steve Madden(R) product
line. Same store sales increased 10% in 2000 over 1999 sales and total sales for
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the retail division were $70 million compared to $49 million for 1999. Sales
from the retail division for year ended December 31, 2000 were approximately 34%
of the Company's total sales.
The Company believes that the Retail Division will continue to enhance
overall sales and profits while building equity in the Steve Madden brand. It is
for these reasons that the Company intends to add approximately ten (10) new
retail stores during the 2001 calendar year. Additionally, the expansion of the
Retail Division enables the Company to test and react to new products and
classifications which strengthens the product development efforts of the Steve
Madden wholesale division.
THE ADESSO-MADDEN, INC. - PRIVATE LABEL DIVISION
In September 1995, the Company incorporated Adesso-Madden, Inc. as a
wholly owned subsidiary ("A-M"). A-M was formed to serve as a buying agent to
mass market merchandisers, shoe store chains and other off-price retailers in
connection with their purchase of private label shoes. As a buying agent, A-M
arranges with shoe manufacturers in Asia and South America for them to
manufacture private label shoes to the specifications of its clients. The
Company believes that by operating in the private label, mass merchandising
market, the Company is able to maximize additional non-branded sales
opportunities. This leverages the Company's overall sourcing, design and
distribution capabilities. Currently, this division serves as a buying agent for
the procurement of women's footwear for large retailers including J.C. Penny,
Sears, Mervyn's, Payless, Wal-Mart and Target. A-M receives commissions in
connection with the purchase of private label shoes by its clients. A-M also
sources and sells footwear under the Soho Cobbler(R) brand name. The private
label division generated commission revenue of $3.6 million for the year ended
December 31, 2000.
PRODUCTS AND LICENSING
The Company's products emphasize youthful styling and contemporary
design and are marketed at moderate to better price points. The Company's
primary products include Steve Madden(R), l.e.i.(R), Stevies (TM) and David
Aaron(R) branded footwear, and in 2001, Steve Madden Mens. In addition, the
Company has a private label shoe operation, Adesso-Madden, Inc., and has also
entered into strategic licensing agreements for Steve Madden(R) and Stevies
branded products.
STEVE MADDEN(R)
Steve Madden(R) branded products are designed to appeal to style
conscious consumers in the junior market (ages 16 to 25 years). The Steve
Madden(R) line emphasizes up-to-date fashion and includes a wide range of
women's footwear including boots, sneakers, evening shoes, slippers, casual and
tailored shoes and sandals. Steve Madden(R) brand shoes sell at retail price
points generally ranging from $48 to $70 for shoes and up to $99 for boots.
In order to reduce the impact of changes in fashion trends on the Steve
Madden(R) brand product sales, the Company designs and classifies its product
line into three categories: Core, Core-plus, and Fashion. The Company's Core
line is available year round and consists of classic products which have proven
to be consistent sellers over several seasons. The Core line currently includes
eight (8) style/color combinations each of which can be reordered using the
Company's EDI system and shipped to retailers within one to two weeks. This
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results in rapid replenishment of the most popular Steve Madden styles. The
Company's Core-plus line consists of basic styles whose patterns and colors are
updated each season to keep pace with changing trends. Finally, the Company's
Fashion line consists of styles that are designed close to or in season and
capitalize on the Company's ability to design, test, manufacture and market
products quickly. Core and Core-plus products account for a majority of Steve
Madden(R) brand sales.
STEVE MADDEN MENS
After announcing the launch of Steve Madden Mens in November 2000, the
Company's new men's footwear line of products met with enthusiastic responses
from buyers at tradeshows in November, 2000 and February, 2001. The Steve Madden
Men's footwear products will be designed to capitalize on the Company's success
for designing, sourcing and marketing popular fashion forward footwear. Many of
the men's products will be built in the same spirit as present in the Steve
Madden women's footwear line. With retail price points ranging from $79 to $99 a
pair, the Company expects to sell Steve Madden Mens to department store and
footwear specialty stores throughout the country. In order to enhance sales, the
Company expects to have at least 50 men's concept shops located in major
department stores by year end. By using appropriate signs, logos and display
fixtures, the Company has created concept shops located in department stores,
specialty stores and independent shoe stores that segregate and distinguish the
Company's products from other footwear brands.
DAVID AARON(R)
The Company acquired the David Aaron(R) brand in 1996, and David
Aaron(R) products are marketed through the Company's Diva subsidiary. David
Aaron(R) branded products are designed to appeal to more sophisticated, career
and fashion oriented consumers (ages 26 to 45 years) in the better market
segment. David Aaron(R) products are priced at a tier above the Steve Madden(R)
brand and have retail price points generally ranging from $70 to $85 for shoes
and up to $150 for boots. Similar to the Steve Madden(R) line, the Company's
David Aaron(R) line is organized into Core, Core-plus, and Fashion categories
with Core and Core-plus products accounting for a large majority of David
Aaron(R) brand sales.
l.e.i.(R)
In September 2000, the Company renewed its license agreement with
R.S.V. Sport, Inc. pursuant to which the Company has the right to use the
l.e.i.(R)trademark in connection with the sale and marketing of footwear in
exchange for which the Company is required, among other things, to make periodic
royalty payments based on its net sales of l.e.i.(R)footwear. The
l.e.i.(R)trademark is well known for jeanswear in the junior marketplace and
l.e.i.(R)jeans are sold in department and specialty stores nationwide. The
Company's l.e.i.(R)footwear products were targeted to attract girls ages 6 to 11
years old and young women ages 12 to 20 years old, the majority of which are
younger than the typical Steve Madden(R)brand customer. Despite having only
started selling l.e.i.(R) products at retail in August, 1998, sales of
l.e.i.(R)products increased considerably in 1999 and 2000. By December 31, 2000,
l.e.i. footwear products were sold in approximately 3,500 doors nationwide, an
increase of approximately 40% over 1999.
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STEVIES(TM)
Stevies(TM) is a fashion brand which targets girls ages 6-9 and
"tweens" ages 10-12. The Stevies footwear line mirrors some of the design
concepts and attitude present in the Steve Madden(R) brand and is distributed
through moderate and better department stores and footwear specialty stores. The
Company commenced shipping Stevies' products in time for the most recent
back-to-school season. By year end Stevies(TM) sold in over 1,200 doors across
the country, including store groups such as Nordstroms, Federated Department
Stores, May Company stores, Belk, Dillards, Limited Too, as well as children's
independent stores throughout the country. In addition, Stevies concept shops
have been established in approximately 815 department stores, and the Company
expects approximately 1000 Steve's concept shops to be installed by the end of
2001.
LICENSING
The Company believes that strategic licensing will enhance the Steve
Madden and Stevies(R) brands, leverage brand equity and increase customer
loyalty. During 1997, the Company began to license the Steve Madden(R) trademark
selectively while attempting to maintain strict design, merchandising and
marketing control over its licensees. In 2000, the Company commenced licensing
the Stevies trademark shortly after announcing the launch of the Stevies
footwear brand.
As of December 31, 2000, the Company licensed the Steve Madden
trademark for use in connection with the manufacturing, marketing and sale of
outerwear (including leather sportswear), belts, handbags, sunglasses, hosiery,
hair accessories and jewelry. Each license agreement requires the licensee to
pay to the Company a royalty based on net sales, a minimum royalty in the event
that net sales fail to reach specified targets and a percentage of sales for
advertising of the Steve Madden(R) brand.
As of March 15, 2000, the Company and its sportswear licensee, Iron
Will Group, Inc. executed a Termination Agreement with respect to that certain
License Agreement dated as of January 1, 1999. Iron Will Group is an affiliate
of Jordache enterprises. The Termination Agreement required that Iron Will
terminate its sale and distribution of Steve Madden Sportswear products on or
before June 15, 2000.
During 2000, the Company licensed the Stevies trademark for use in
connection with manufacturing marketing and sale of sportswear; outerwear,
belts, handbags, sunglasses, hosiery, fashion accessories, jewelry, hair
accessories. In February 2001, the Company terminated existing licensing
agreements for jewelry and hair accessories for the Steve Madden(R) and
Stevies(TM) brands, and sportswear for the Stevies(TM) brand.
In order to enhance the performance of the Company's licensing
business, in January 2001 the Company engaged Jassin O'Rourke Group, LLC, a
consulting firm specializing in marketing, management and licensing for the
apparel industry.
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DESIGN
The Company has established a reputation for its creative designs,
popular styles and quality products at accessible price points. Steve Madden has
been involved in the footwear industry for over twenty (20) years and is
responsible for the Company's overall fashion direction, maintaining direct,
day-to-day supervision of the Company's eleven (11) person product design and
development team.
The Company believes that its future success will depend in substantial
part on its ability to continue to anticipate and react to changing consumer
demands in a timely manner. To meet this objective, the Company has developed a
unique design process that allows it to recognize and adapt quickly to changing
consumer demands. The Company's design team works together to create designs
which they believe fit the Company's image, reflect current or approaching
trends and can be manufactured in a timely and cost-effective manner. Once the
initial design is complete, a prototype is developed, which is reviewed and
refined prior to the commencement of limited production. Most new Steve Madden
designs are then tested in the Steve Madden(R) retail stores. Designs that prove
popular are then scheduled for mass production overseas and wholesale and retail
distribution nationwide. The Company believes that its unique design and testing
process and flexible sourcing model is a significant competitive advantage
allowing the Company to cut mass production lead times and avoid the costly
production and distribution of unpopular designs.
PRODUCT SOURCING AND DISTRIBUTION
The Company sources each of its product lines separately based on the
individual design, styling and quality specifications of such products. The
Company does not own or operate any mass manufacturing facilities and sources
its branded products directly or indirectly through independently owned
manufacturers in Brazil, China, Italy, Mexico, Spain, Taiwan and the United
States. The Company has established relationships with a number of manufacturers
in each country. The Company believes that this sourcing of footwear products
minimizes its investment and inventory risk, and enables efficient and timely
introduction of new product designs. Although the Company has not entered into
any long-term manufacturing or supply contracts, the Company believes that a
sufficient number of alternative sources exist for the manufacture of its
products. The principal materials used in the Company's footwear are available
from any number of sources, both within the United States and in foreign
countries.
The Company's design and distribution processes are intended to be
flexible, allowing the Company to respond to and accommodate changing consumer
demand. The Company's production staff tracks warehouse inventory on a daily
basis, monitors sell through data and incorporates input on product demand from
wholesale customers. The Company can use product feedback to adjust production
or manufacture new products in as little as five weeks. Constant inventory
tracking allows the Company to manage inventory on a continuous flow basis with
the goal of optimizing inventory turns. More specifically, all inventory is
classified into three categories: Core products, which are sold year round,
Core-plus products which are in-season styles that are experiencing unusually
strong sell through, and Fashion products. The Company strives to only have
reorder inventory in selected Core and Core-plus products that are proven
best-sellers.
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The Company distributes its products primarily from three (3) third
party distribution warehouse centers located in California, Michigan and New
Jersey and its own distribution facility located in Florida. By utilizing
distribution facilities that specialize in distributing products to certain
customers (wholesale accounts, Steve Madden retail stores and Internet
fulfillment), the Company believes that its customers are better served.
In 1999, the Company expanded its use of electronic data interchange
("EDI") quick replenishment system to its department store accounts on
designated Core items and offered EDI to all of its significant wholesale
accounts. Sales resulting from EDI replenishment remained unchanged during 2000
compared to 1999. The Company believes that its flexible product introduction
schedule and perpetual inventory control system are competitive advantages in an
industry that is subject to high fashion risks.
CUSTOMERS
The Company's customers purchasing shoes consist principally of
department stores and specialty stores, including shoe boutiques. Presently, the
Company sells approximately sixty two percent (62%) of its products to
department stores, including Federated Department Stores (Bloomingdales, Bon
Marche, Burdines, Macy's and Rich's), May Department Stores (Famous Barr,
Filene's, Foley's, Hecht's, Kaufmann's, Meier & Frank, Lord and Taylor and
Robinsons May), Dillard's, Dayton-Hudson and Nordstrom; and approximately thirty
eight percent (38%) to specialty stores, including Journey's, Limited Too and
Mandees; and catalog retailers, including Victoria's Secret and Fingerhut.
Federated Department Stores, May Department Stores and Nordstrom presently
account for approximately twenty one percent (21%), and eighteen percent (18%)
and eleven percent (11%) of the Company's wholesale sales, respectively.
DISTRIBUTION CHANNELS
The Company sells it products principally through its Company-owned
retail stores, better department stores and specialty shoe stores in the United
States and abroad. Retail stores and wholesale sales account for approximately
thirty four percent (34%) and sixty six percent (66%) of total sales,
respectively. The following paragraphs describe each of these distribution
channels:
STEVE MADDEN AND DAVID AARON RETAIL STORES
As of December 31, 2000, the Company operated fifty six (56)
Company-owned retail stores under the Steve Madden(R) name and two (2) under the
David Aaron(R) name. The Company believes that its retail stores will continue
to enhance overall sales, profitability, and its ability to react to changing
consumer trends. The design, format and environment of the Steve Madden(R)
retail stores resemble a nightclub type atmosphere which has become a popular
destination and gathering place for young women. The David Aaron(R) store has a
more sophisticated design and format styled to appeal to its more mature target
audience. These stores are used as a marketing tool which allow the Company to
strengthen brand recognition and to showcase certain of its full line of branded
and licensed products. Furthermore, the retail stores provide the Company with a
venue to test and introduce new products and merchandising strategies.
Specifically, the Company often tests new designs at its Steve Madden(R) retail
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stores before scheduling them for mass production and wholesale distribution. In
addition to these test marketing benefits, the Company has been able to leverage
sales information gathered at Steve Madden(R) retail stores to assist its
wholesale accounts in order placement and inventory management.
A typical Steve Madden(R) store is approximately 1,400 to 1,600 square
feet and is located in malls and street locations which attract the highest
concentration of the Company's core demographic -- style-conscious young women
ages 16 to 25 years old. In addition to carefully analyzing mall demographics,
the Company also sets profitability guidelines for each potential store site.
Specifically, the Company targets sites at which the demographics fit the
consumer profile, the positioning of the site is well trafficked and the
projected fixed annual rent expense does not exceed a specified percentage of
sales over the life of the lease. By setting these standards, the Company
believes that each store will contribute to the Company's overall profits both
in the near- and longer-terms.
OUTLET STORES
In May 1998, Shoe Biz, Inc. (formerly known as Steven Madden Outlets,
Inc.) a wholly owned subsidiary of the Company ("Shoe Biz"), purchased certain
assets from and assumed certain liabilities of, Daniel Scott, Inc. with respect
to its Shoe Biz outlet store located in Mineola, New York. In connection with
the transaction, the Company hired Robert Schmertz, the former President and
sole stockholder of Daniel Scott, as the President of Shoe Biz. Shoe Biz
operates the six (6) outlet stores in New Jersey and New York, four (4) of which
operate under the Shoe Biz name and two (2) of which operate as Steve Madden
Outlet stores. Shoe Biz sells many product lines, including Steve Madden, David
Aaron, Stevies and l.e.i.(R) footwear, at significantly lower prices than prices
typically charged by other "full price" retailers.
DEPARTMENT STORES
The Company currently sells to over 2,500 locations of twenty (20)
better department stores throughout the United States and Canada. The Company's
top accounts include Federated Department Stores (Bloomingdale's, Bon Marche,
Burdine's, Macy's and Rich's), May Department Stores (Hecht's, Famous Barr,
Filene's, Foley's, Kaufmann's, Meier & Frank, Lord and Taylor and Robinson's
May), Dillard's, Dayton-Hudson and Nordstrom.
Department store accounts are offered merchandising support which
includes in-store fixtures and signage, supervision of displays and
merchandising of the Company's various product lines. An important development
in the Company's wholesale merchandising effort is the creation of in-store
concept shops, where a broader collection of the Company's branded products are
showcased. These in-store concept shops create an environment that is consistent
with the Company's image and enable the retailer to display and stock a greater
volume of the Company's products per square foot of retail space. In addition,
these in-store concept shops encourage longer term commitment by the retailer to
the Company's products and enhance consumer brand awareness. As of December 31,
2000, the Steve Madden(R) and Stevies brands were featured in over 1,200 and 815
in-store concept shops, respectively, in leading department and specialty
stores.
In addition to merchandising support, the Company's customer service
representatives maintain weekly communications with their accounts to guide them
in placing orders and to assist them in managing inventory, assortment and
10
retail sales. The Company leverages its sell-through data gathered at its retail
stores to assist department stores in allocating their open-to-buy dollars to
the most popular styles in the product line and to phase out styles with poor
sales records. In addition to this account order support, the Company has
implemented an electronic data interchange ("EDI") program which allows top
accounts rapid size replenishment of eight (8) style/color combinations of
certain core products within one to two weeks. EDI replenishment of key core
styles is offered to all of the Company's retail customer accounts.
INTERNET SALES
In 2000, the Company updated its web site, www.stevemadden.com, and
introduced its Stevies web site www.stevies.com in March 2000. Customers can
purchase numerous styles of the Company's Steve Madden and Stevies footwear,
accessory and clothing products. As a result of the Company's increased focus on
e-commerce, sales in 2000 derived from www.stevemadden.com increased 196%
compared with sales in 1999. For the year ended December 31, 2000, the Company's
stevemadden.com web site recorded 156.3 million hits, 866,000 unique users and a
sales conversions rate of approximately 7%. In August 1999, the Company signed
an agreement with America Online pursuant to which the Company has a significant
presence in the Shop AOL area of AOL, specifically in the footwear areas.
As a result of the increased sales activity on the Company's web sites,
[the Company] entered an agreement with Progressive Distribution in April 2000.
Under the terms of the Agreement, Progressive Distribution provides
direct-to-customer and other fulfillment services the Company's web sites
customers, including validation of customer credit, picking, packing and
shipment of footwear products to customers of the Company.
In February 2001, the Company launched the SteveMaddenMens.com web
site. Already e-commerce enabled, this newest Madden web site allows customers
to view Steve Madden Mens products three dimensionally simply by moving a
computer mouse.
SPECIALTY STORES/CATALOG SALES
The Company currently sells to specialty store locations throughout the
United States and Canada. The Company's top specialty store accounts include
Journey's, Limited Too and Mandees. The Company offers specialty store accounts
the same merchandising, sell-through and inventory tracking support offered to
its department store accounts. Sales of the Company's products are also made
through various catalogs, such as Fingerhut and Victoria's Secret.
COMPETITION
The fashionable footwear industry is highly competitive. The Company's
competitors include specialty shoe companies as well as companies with
diversified footwear product lines. The recent substantial growth in the sales
of fashionable footwear has encouraged the entry of many new competitors and
increased competition from established companies. Most of these competitors,
including Kenneth Cole, Nine West, DKNY, Skechers, Nike and Guess, may have
significantly greater financial and other resources than the Company. The
Company believes effective advertising and marketing, fashionable styling, high
11
quality and value are the most important competitive factors and intends to
continue to employ these elements as it develops its products.
In 2001, the Company launched the Steve Madden Mens brand which will
compete with several brands that are more established with greater consumer
awareness, including Kenneth Cole Reaction, Skechers Collection, Tommy Hilfiger
and Nautica.
MARKETING AND SALES
Prior to 1997, the Company's marketing plans relied heavily on its few
Steve Madden(R) retail store locations and word-of-mouth referrals. In 1998, the
Company continued to focus on creating a more integrated brand building program
to establish Steve Madden as the leading designer of fashion footwear for
style-conscious young women. As a result, the Company developed a national
advertising campaign for lifestyle and fashion magazines which was also used in
regional marketing programs such as radio advertisements, television
commercials, outdoor media, college event sponsorship and live online chat
forums. The Company also continues to promote its web sites (WWW.STEVEMADDEN.COM
and WWW.STEVIES.COM) where consumers can purchase Steve Madden(R) and Stevies
products and interact with both the Company and other customers.
In 2000, the Company reinforced the link between Steve Madden footwear
and the hip young music scene by joining with Atlantic Records, Sam Goody and
Glamour magazine for the first annual Girl Band Search: a major cross-marketing
campaign with retail stores and wholesale partners to crown the next hot girl
band. The Company assisted in marketing this year's winner, Jill Joia, who
publicized her Steve Madden affiliation on the David Letterman Show, and
performed the opening act at the launch party for Steve Madden Mens in Las Vegas
in February 2001. For the second year running, the Company also co-sponsored the
2000 Music Video Awards.
The Company also increased the marketing of the Steve Madden brand to
college students in 2000. The Company targeted universities for a series of
lively promotions, many of them tied in with musical performances, and the
Company was one of seven vendors visiting top ten universities in the Glamour
magazine sponsored "Venus Tour". Other promotional initiatives reached 40
universities.
The Company commenced an aggressive marketing campaign for the Stevies
brand with separate marketing, advertising, promotional events and in-store
displays targeting the new Stevies customer. In August, 2000, the Company
initiated a nationwide, three month Stevies Model Search featuring a six-city
mall tour and in-store promotions with Filene's, Foley, Hecht's, FAO Schwartz
and Macy's East. Supported by strong advertising and on-line promotions, these
in-store events featured Stevies fashion shows, Radio Disney personality
appearances, and performances by such crowd-drawers as the boyband, DreamStreet.
The 11-year old winner of the model search will be the subject of the 2001 ad
campaign for consumer and trade publications, and will be featured on the
Stevies website. As for Steve Madden Mens, the Company supported the brand's
roll-out with strategic marketing and advertising initiatives.
In order to service its wholesale accounts, the Company retains a sales
force of twelve independent sales representatives. These sales representatives
work on a commission basis and are responsible for placing the Company's
products with its principal customers, including better department and specialty
stores. The sales representatives are supported by the Company's Vice President,
12
a staff of twelve account executives, four merchandise coordinators and twenty
five customer service representatives who continually cultivate relationships
with wholesale customers. This staff assists accounts in merchandising and
assessing customer preferences and inventory requirements, which ultimately
serves to increase sales and profitability.
MANAGEMENT INFORMATION SYSTEMS (MIS) OPERATIONS
Sophisticated information systems are essential to the Company's
ability to maintain its competitive position and to support continued growth.
The Company operates on a dual AS/400 system which provides system support for
all aspects of its business including manufacturing purchase orders; customer
purchase orders; order allocations; invoicing; accounts receivable management;
real time inventory management; quick response replenishment; point-of-sale
support; and financial and management reporting functions. The Company has a
PKMS bar coded warehousing system which is integrated with the wholesale system
in order to provide accurate inventory positions and quick response size
replenishment for its customers. In addition, the Company has installed an EDI
system which provides a computer link between the Company and certain wholesale
customers that enables both the customer and the Company to monitor purchases,
shipments and invoicing. The EDI system also improves the Company's ability to
respond to customer inventory requirements on a weekly basis.
In 2000, a new AS400 computer platform was implemented to support the
Company's wholesale division, and at the retail division , a new system was
installed by Applied Digital Solutions, formally STR. This in-store
point-of-sale system is a fully functional system governing a broad range of
transactions including layaway, gift certificates, store credit, customer
profiles, and preferred customer packages. The Company also installed a loss
prevention system named "Trade Watch", and a retail marketing system, Corema,
which is fully integrated into the in-store POS system. A new retail inventory
management system was also installed to support the Company's just-in-time
inventory flow.
RECEIVABLES FINANCING; LINE OF CREDIT
Under the terms of a factoring agreement with Capital Factors, Inc.,
the Company is permitted to draw down 80% of its invoiced receivables at an
interest rate of one point below the Prime Rate (as defined). The agreement
provides that Capital Factors is not required to purchase all the Company's
receivables and requires that the Company to pay an unused line fee of .25% of
the average daily unused portion of the maximum amount of the credit line. On
September 1, 1998, the Company and Capital Factors amended its Factoring
Agreement to, among other things, provide the Company with a credit line of up
to $15,000,000, subject to certain limitations. The Company has not recently
borrowed funds under its credit line with Capital Factors. The agreement with
Capital Factors was renewed as of December 31, 2000 for an additional one year
term. Capital Factors maintains a lien on all of the Company's inventory and
receivables and assumes the credit risk for all assigned accounts approved by
it.
TRADEMARKS AND SERVICE MARKS
The STEVE MADDEN and STEVE MADDEN plus Design trademarks/service marks
have been registered in numerous International Classes (25 clothing and shoes;
18 leather goods, such as handbags and wallets; 9 eye wear; 14 jewelry; 3
cosmetics and perfume; 20 picture frames and furniture; 16, paper goods; 24
13
bedding; and, 35 retail store services) in the United States. The Company also
has trademark registrations in the U.S. for the marks EYESHADOWS BY STEVE MADDEN
(Int'l Cl. 9 eye wear), ICE TEA (Int'l Cl. 25 clothing), SOHO COBBLER (Int. Cl.
9; eye wear; and, 25 clothing and shoes), SHOE BIZ By STEVE MADDEN (Int'l Cls.
25 for shoes and clothing; and, Int'l Cl.
35 for retail store services)
The Company further owns registrations for the STEVE MADDEN and STEVE
MADDEN plus Design trademarks/service marks in various International Classes in
Argentina, Australia, Brazil, Canada, Chile, China, Colombia, Hong Kong, Israel,
Italy, Japan, Korea, Mexico, Panama, South Africa, Taiwan, the 15 cooperating
countries of Europe and the Benelux countries and has pending applications for
registration for the STEVE MADDEN and STEVE MADDEN plus Design
trademarks/service marks in Malaysia, Peru, Saudi Arabia, Thailand and
Venezuela. There can be no assurance, however, that the Company will be able to
effectively obtain rights to the STEVE MADDEN mark throughout all of the
countries of the world. Moreover, no assurance can be given that others will not
assert rights in, or ownership of, trademarks and other proprietary rights of
the Company or that the Company will be able to successfully resolve such
conflicts. The failure of the Company to protect such rights from unlawful and
improper appropriation may have a material adverse effect on the Company's
business and financial condition.
Additionally, the Company through its Diva Acquisition Corp. subsidiary
owns registrations for the DAVID AARON trademark and service mark in various
International Classes in the United States (Int'l Cl. 25 clothes, shoes; 18
leather goods, handbags, wallets; and, 35 retail store services), Australia,
Canada, Hong Kong, Israel, Japan, South Africa, Spain and the 15 cooperating
countries in Europe. The Company further has pending application for
registration of the DAVID AARON trademark and service mark in Panama. The
Company believes that the DAVID AARON trademark has a significant value and is
important to the marketing of the Company's products.
The Company through its Stevies, Inc. subsidiary also has several
pending trademark and service mark applications for registration of the STEVIES
and STEVIES plus Design marks in various International Classes in the United
States (Int'l Cl. 25 clothes, shoes, 18 leather goods, handbags, wallets; 9 eye
wear; 14 jewelry; and, 35 retail store services) and in Canada, Mexico and the
15 cooperating countries of Europe.
EMPLOYEES
At March 9, 2001, the Company employed approximately 1,017 employees,
of whom approximately 394 work on a full-time basis and approximately 623 work
on a part-time basis. The management of the Company considers relations with its
employees to be good.
RISK FACTORS
In addition to other information in this Annual Report on Form 10-K,
the following important factors should be carefully considered in evaluating the
Company and its business because such factors currently have a significant
impact on the Company's business, prospects, financial condition and results of
operations.
14
Dependence on Key Personnel. Although the Company has strengthened its
senior management team, the Company is dependent, in particular, upon the
services of Steven Madden, its Chief Executive Officer and chief designer, and
Rhonda Brown, its President. In June 2000, Mr. Madden was indicted in the
Southern District and Eastern District of New York for his alleged involvement
in securities fraud and money laundering activities. If Mr. Madden is convicted
of, or pleads guilty to, these charges (or related offenses), and/or is required
to devote a substantial portion of his time and attention to the defense of the
allegations contained in the indictments, the Company may be deprived of his
services for an extended period of time. In addition, the Securities and
Exchange Commission filed a complaint against Mr. Madden alleging securities law
violations and seeking certain remedies against Mr. Madden, including an
injunction prohibiting him from serving as an officer or director of a public
company. The action initiated by the Securities and Exchange Commission has been
stayed pending resolution of the indictments. If Mr. Madden is prohibited from
serving as an officer or director of the Company, the Company may be deprived of
certain or all of Mr. Madden's services. If Mr. Madden or Ms. Brown are unable
to provide services to the Company for whatever reason, the Company's business,
prospects and financial condition may be adversely affected.
The Company maintains a key person life insurance policy on Mr. Madden
with coverage in the amount of $10,000,000; however, the Company does not
maintain a policy on Ms. Brown. The Company has employment contracts with each
of Mr. Madden and Ms. Brown that expire on December 31, 2009 and December 31,
2003, respectively. Under the terms of their respective employment contracts, if
Mr. Madden or Ms. Brown are terminated for other than cause, death or total
disability, the Company will be required to pay the remaining salary due under
the contract, half of which must be paid upon termination. Mr. Madden is also
entitled during the term of the contract to an annual $50,000 non-accountable
expense account. In the event of a change in control, Mr. Madden and Ms. Brown
may choose to continue their employment with the Company or terminate employment
and receive the remaining salary under their respective contracts.
Since Mr. Madden and Ms. Brown are involved in many material aspects of
the Company's business, there can be no assurance that a suitable replacement
for either Mr. Madden or Ms. Brown could be found if either were unable to
perform services for the Company. As a consequence, the loss of Mr. Madden, Ms.
Brown or other key management personnel could have a material adverse effect
upon the Company's business, results of operations and financial condition. In
addition, the Company's ability to market its products and to maintain
profitability will depend, in large part, on its ability to attract and retain
qualified personnel. Competition for such personnel is intense and there can be
no assurance that the Company will be able to attract and retain such personnel.
The inability of the Company to attract and retain such qualified personnel
would have a material adverse effect on the Company's business, financial
condition and results of operations.
Fashion Industry Risks. The success of the Company will depend in
significant part upon its ability to anticipate and respond to product and
fashion trends as well as to anticipate, gauge and react to changing consumer
demands in a timely manner. There can be no assurance that the Company's
products will correspond to the changes in taste and demand or that the Company
will be able to successfully market products which respond to such trends. If
the Company misjudges the market for its products, it may be faced with
significant excess inventories for some products and missed opportunities with
others. In addition, misjudgments in merchandise selection could adversely
affect the Company's image with its customers and weak sales and resulting
15
markdown requests from customers could have a material adverse effect on the
Company's business, financial condition and results of operations.
The industries in which the Company operates are cyclical, with
purchases tending to decline during recessionary periods when disposable income
is low. Purchases of contemporary shoes and accessories tend to decline during
recessionary periods and also may decline at other times. While the Company has
fared well in recent years in a difficult retail environment, there can be no
assurance that the Company will be able to maintain its historical rate of
growth in revenues and earnings, or remain profitable in the future. A recession
in the national or regional economies or uncertainties regarding future economic
prospects, among other things, could affect consumer spending habits and have a
material adverse effect on the Company's business, financial condition and
results of operations.
In recent years, the retail industry has experienced consolidation and
other ownership changes. In addition, some of the Company's customers have
operated under the protection of the federal bankruptcy laws. In the future,
retailers in the United States and in foreign markets may consolidate, undergo
restructurings or reorganizations, or realign their affiliations, any of which
could decrease the number of stores that carry the Company's products or
increase the ownership concentration within the retail industry. While such
changes in the retail industry to date have not had a material adverse effect on
the Company's business or financial condition, there can be no assurance as to
the future effect of any such changes.
Inventory Management. The Company's ability to manage its inventories
properly is an important factor in its operations. Inventory shortages can
adversely affect the timing of shipments to customers and diminish brand
loyalty. Conversely, excess inventories can result in increased interest costs
as well as lower gross margins due to the necessity of providing discounts to
retailers. The inability of the Company to effectively manage its inventory
would have a material adverse effect on the Company's business, financial
condition and results of operations.
Dependence Upon Customers and Risks Related to Extending Credit to
Customers. The Company's customers purchasing shoes consist principally of
department stores and specialty stores, including shoe boutiques. Certain of the
Company's department store customers, including some under common ownership,
account for significant portions of the Company's wholesale net sales.
Presently, the Company sells approximately sixty two percent (62%) of its
products to department stores, including Federated Stores (Bloomingdales,
Burdines, Macy's and Bullocks), Dillards, Nordstrom, Dayton Hudson and May
Department Stores (Famous Barr, Filene's, Foley's, Hecht's, Kaufmann's, Meier &
Frank, Lord and Taylor and Robinson's May) and approximately [thirty eight
(38%)] percent to specialty stores, including shoe boutiques. The Company's
largest customers, Federated Stores, May Department Stores, account for
approximately twenty one percent (21%), eighteen percent (18%) and eleven
percent (11%) of the Company's wholesale sales, respectively.
The Company believes that a substantial portion of sales of the
Company's licensed products by its domestic licensing partners are also made to
the Company's largest department store customers. The Company generally enters
into a number of purchase order commitments with its customers for each of its
lines every season and does not enter into long-term agreements with any of its
customers. Therefore, a decision by Federated Stores, Nordstrom or any other
significant customer, whether motivated by competitive conditions, financial
difficulties or otherwise, to decrease the amount of merchandise purchased from
16
the Company or its licensing partners, or to change its manner of doing business
could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company sells its products primarily to
retail stores across the United States and extends credit based on an evaluation
of each customer's financial condition, usually without requiring collateral.
While various retailers, including some of the Company's customers, have
experienced financial difficulties in the past few years which increased the
risk of extending credit to such retailers, the Company's losses due to bad
debts have been limited. However, financial difficulties of a customer could
cause the Company to curtail business with such customer or require the Company
to assume more credit risk relating to such customer's receivables.
Pending Litigation. In connection with the indictments filed against
Mr. Madden in June 2000, certain class action lawsuits were commenced against
the Company, Mr. Madden, the Company's Chief Executive Officer, Rhonda Brown,
the Company's President, and Arvind Dharia, the Company's Chief Financial
Officer. The complaint alleges that the Company and the individual defendants
issued false and misleading statements and failed to disclose material adverse
information relating to matters arising from Mr. Madden's indictment. In the
event that resolution of this action exceeds coverage available under the
Company's directors and officers insurance policy, the Company's business,
prospects and financial condition could be materially and adversely affected.
Impact of Foreign Manufacturers. Substantially all of the Company's
products are currently sourced outside the United States through arrangements
with a number of foreign manufacturers in four different countries. During the
year ended December 31, 2000, approximately [90%] of the Company's products were
purchased from sources outside the United States, including Mexico, China,
Brazil, Italy and Spain.
Risks inherent in foreign operations include work stoppages,
transportation delays and interruptions, changes in social, political and
economic conditions which could result in the disruption of trade from the
countries in which the Company's manufacturers or suppliers are located, the
imposition of additional regulations relating to imports, the imposition of
additional duties, taxes and other charges on imports, significant fluctuations
of the value of the dollar against foreign currencies, or restrictions on the
transfer of funds, any of which could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
does not believe that any such economic or political conditions will materially
affect the Company's ability to purchase products, since a variety of materials
and alternative sources exist. The Company cannot be certain, however, that it
will be able to identify such alternative sources without delay or without
greater cost to the Company, if ever. The Company's inability to identify and
secure alternative sources of supply in this situation would have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company's imported products are also subject to United States
customs duties. The United States and the countries in which the Company's
products are produced or sold may, from time to time, impose new quotas, duties,
tariffs, or other restrictions, or may adversely adjust prevailing quota, duty
or tariff levels, any of which could have a material adverse effect on the
Company's business, financial condition and results of operations.
Possible Adverse Impact of Unaffiliated Manufacturers' Inability to
Manufacture in a Timely Manner, to Meet Quality Standards or to Use Acceptable
Labor Practices. As is common in the footwear industry, the Company contracts
17
for the manufacture of a majority of its products to its specifications through
foreign manufacturers. The Company does not own or operate any manufacturing
facilities and is therefore dependent upon independent third parties for the
manufacture of all of its products. The Company's products are manufactured to
its specifications by both domestic and international manufacturers. The
inability of a manufacturer to ship orders of the Company's products in a timely
manner or to meet the Company's quality standards could cause the Company to
miss the delivery date requirements of its customers for those items, which
could result in cancellation of orders, refusal to accept deliveries or a
reduction in purchase prices, any of which could have a material adverse effect
on the Company's business, financial condition and results of operations.
Although the Company enters into a number of purchase order commitments
each season specifying a time frame for delivery, method of payment, design and
quality specifications and other standard industry provisions, the Company does
not have long-term contracts with any manufacturer. As a consequence, any of
these manufacturing relationships may be terminated, by either party, at any
time. Although the Company believes that other facilities are available for the
manufacture of the Company's products, both within and outside of the United
States, there can be no assurance that such facilities would be available to the
Company on an immediate basis, if at all, or that the costs charged to the
Company by such manufacturers will not be greater than those presently paid.
The Company requires its licensing partners and independent
manufacturers to operate in compliance with applicable laws and regulations.
While the Company promotes ethical business practices and the Company's staff
periodically visits and monitors the operations of its independent
manufacturers, the Company does not control such manufacturers or their labor
practices. The violation of labor or other laws by an independent manufacturer
of the Company or by one of the Company's licensing partners, or the divergence
of an independent manufacturer's or licensing partner's labor practices from
those generally accepted as ethical in the United States, could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Intense Industry Competition. The fashionable footwear industry is
highly competitive and barriers to entry are low. The Company's competitors
include specialty companies as well as companies with diversified product lines.
The recent substantial growth in the sales of fashionable footwear has
encouraged the entry of many new competitors and increased competition from
established companies. Most of these competitors, including Kenneth Cole, Nine
West, DKNY, Skechers, Nike and Guess, may have significantly greater financial
and other resources than the Company and there can be no assurance that the
Company will be able to compete successfully with other fashion footwear
companies. Increased competition could result in pricing pressures, increased
marketing expenditures and loss of market share, and could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company believes effective advertising and marketing,
fashionable styling, high quality and value are the most important competitive
factors and plans to employ these elements as it develops its products. The
Company's inability to effectively advertise and market its products could have
a material adverse effect on the Company's business, financial condition and
results of operations.
Expansion of Retail Business. The Company's continued growth depends to
a significant degree on further developing the Steve Madden(R), David Aaron(R),
Stevies and l.e.i.(R) brands, creating new product categories and businesses and
operating Company-owned stores on a profitable basis. The Company plans to open
18
approximately ten (10) Steve Madden retail stores in 2001. The Company's recent
and planned expansion includes the opening of stores in new geographic markets
as well as strengthening existing markets. New markets have in the past
presented, and will continue to present, competitive and merchandising
challenges that are different from those faced by the Company in its existing
markets. There can be no assurance that the Company will be able to open new
stores, and if opened, that such new stores will be able to achieve sales and
profitability levels consistent with existing stores. The Company's retail
expansion is dependent on a number of factors, including the Company's ability
to locate and obtain favorable store sites, the performance of the Company's
wholesale and retail operations, and the ability of the Company to manage such
expansion and hire and train personnel. Past comparable store sales results may
not be indicative of future results, and there can be no assurance that the
Company's comparable store sales results will increase or not decrease in the
future. In addition, there can be no assurance that the Company's strategies to
increase other sources of revenue, which may include expansion of its licensing
activities, will be successful or that the Company's overall sales or
profitability will increase or not be adversely affected as a result of the
implementation of such retail strategies.
The Company's growth has increased and will continue to increase demand
on the Company's managerial, operational and administrative resources. The
Company has recently invested significant resources in, among other things, its
management information systems and hiring and training new personnel. However,
in order to manage currently anticipated levels of future demand, the Company
may be required to, among other things, expand its distribution facilities,
establish relationships with new manufacturers to produce its products, and
continue to expand and improve its financial, management and operating systems.
There can be no assurance that the Company will be able to manage future growth
effectively and a failure to do so could have a material adverse effect on the
Company's business, financial condition and results of operations.
Seasonal and Quarterly Fluctuations. The Company's quarterly results
may fluctuate quarter to quarter as a result of the timing of holidays, weather,
the timing of larger shipments of footwear, market acceptance of the Company's
products, the mix, pricing and presentation of the products offered and sold,
the hiring and training of additional personnel, the timing of inventory write
downs, the cost of materials, the mix between wholesale and licensing
businesses, the incurrence of other operating costs and factors beyond the
Company's control, such as general economic conditions and actions of
competitors. In addition, the Company expects that its sales and operating
results may be significantly impacted by (i) the opening of new retail stores,
(ii) the introduction of new products and (iii) the commencement of the
Company's new Mens brand. Accordingly, the results of operations in any quarter
will not necessarily be indicative of the results that may be achieved for a
full fiscal year or any future quarter.
Trademark and Service Mark Protection. The Company believes that its
trademarks/service marks and other proprietary rights are important to its
success and its competitive position. Accordingly, the Company devotes
substantial resources to the establishment and protection of its trademarks on a
worldwide basis. Nevertheless, there can be no assurance that the actions taken
by the Company to establish and protect its trademarks and other proprietary
rights will be adequate to prevent imitation of its products by others or to
prevent others from seeking to block sales of the Company's products as
violative of the trademarks and proprietary rights of others. Moreover, no
assurance can be given that others will not assert rights in, or ownership of,
trademarks and other proprietary rights of the Company or that the Company will
be able to successfully resolve such conflicts. In addition, the laws of certain
19
foreign countries may not protect proprietary rights to the same extent as do
the laws of the United States. The failure of the Company to establish and then
protect such proprietary rights from unlawful and improper appropriation could
have a material adverse impact on the Company's business, financial condition
and results of operations. See "Business - Trademarks and Service Marks".
Foreign Currency Fluctuations. The Company generally purchases its
products in U.S. dollars. However, the Company sources substantially all of its
products overseas and, as such, the cost of these products may be affected by
changes in the value of the relevant currencies. Changes in currency exchange
rates may also affect the relative prices at which the Company and foreign
competitors sell their products in the same market. There can be no assurance
that foreign currency fluctuations will not have a material adverse impact on
the Company's business, financial condition and results of operations.
Absence of Dividends. The Company anticipates that all of its earnings
in the foreseeable future will be retained to finance the continued growth and
expansion of its business and has no current intention to pay cash dividends.
Outstanding Options. As of March 1, 2001, the Company had outstanding
options to purchase an aggregate of approximately 2,592,900 shares of Common
Stock. Holders of such options are likely to exercise them when, in all
likelihood, the Company could obtain additional capital on terms more favorable
than those provided by the options. Further, while its options are outstanding,
they may adversely affect the terms in which the Company could obtain additional
capital.
Item 2. PROPERTIES.
The Company maintains approximately 25,000 square feet for its
executive offices and sample production facilities at 52-16 Barnett Avenue, Long
Island City, NY 11104. The lease for the Company's headquarters expires in June,
2002.
The Company's showroom is located at 1370 Avenue of the Americas, New
York, NY. All of the Company's brands are displayed for sale from this 3,762
square foot space. The lease for the Company's showroom expires in November,
2002.
All of the Company's retail stores are leased pursuant to leases that
extend for terms which average ten years in length. A majority of the leases
include clauses that provide for contingent rental payments if gross sales
exceed certain targets. In addition, a majority of the leases enable the Company
and/or the landlord to terminate the lease in the event that the Company's gross
sales do not achieve certain minimum levels during a prescribed period. Many of
the leases contain rent escalation clauses to compensate for increases in
operating costs and real estate taxes.
The current terms of the Company's retail store leases expire as
follows:
Years Lease Terms Expire Number of Stores
-------------------------------------------------------------------
2003 4
2004 4
2005 4
2006 1
2007 7
2008 13
2009 12
2010 11
2011 8
20
The Company maintains a warehouse and distribution center in Port
Everglades, Florida servicing wholesale and retail accounts. The lease for the
Florida warehouse expires on October 31, 2001. In addition, the Company has
engaged three independent distributors to warehouse and distribute its products.
Item 3. LEGAL PROCEEDINGS.
Except as set forth below, no material legal proceedings are pending to
which the Company or any of its property is subject.
As of March 14, 2001, eight putative securities fraud class action
lawsuits have been commenced in the United States District Court for the Eastern
District of New York against the Company, Steven Madden and, in five of the
actions, Rhonda J. Brown and Arvind Dharia. These actions are captioned: WILNER
v. STEVEN MADDEN, LTD., ET AL., 00 CV 3676 (filed June 21, 2000); CONNOR v.
STEVEN MADDEN, ET AL., 00 CV 3709 (filed June 22, 2000); BLUMENTHAL v. STEVEN
MADDEN, LTD., ET AL., 00 CV 3709 (filed June 23, 2000); CURRY v. STEVEN MADDEN,
LTD., ET AL., 00 CV 3766 (filed June 26, 2000); DEMPSTER v. STEVEN MADDEN LTD.,
ET AL., 00 CV 3702 (filed June 30, 2000); SALAFIA v. STEVEN MADDEN, LTD., ET
AL., 00 CV 4289 (filed July 24, 2000); FAHEY v. STEVEN MADDEN, LTD., ET AL., 00
CV 4712 (filed August 11, 2000); PROCESS ENGINEERING SERVICES, INC. v. STEVEN
MADDEN, LTD., ET AL., 00 CV 5002 (filed August 22, 2000). By Order dated
December 8, 2000, the Court consolidated these eight actions, appointed Process
Engineering, Inc., Michael Fasci and Mark and Libby Adams as lead plaintiffs and
approved their selection of lead counsel. On February 26, 2001, Plaintiffs
served a Consolidated Amended Complaint. The amended complaint principally
alleges that the Company and the individual defendants violated Sections 10(b)
and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
under the 1934 Act by issuing false and misleading statements, and failing to
disclose material adverse information, generally relating to matters arising
from Mr. Madden's June 2000 indictment. The plaintiffs seek an unspecified
amount of damages, costs and expenses on behalf of themselves and all other
purchasers of the Company's common stock during the period June 21, 1997 through
June 20, 2000. The defendants have until April 12, 2001 to answer, move or
otherwise respond to the Consolidated Amended Complaint. Although the Company
has not responded to the complaint, it believes it has substantial defenses to
the claims.
On June 20, 2000, Steven Madden, the Company's former Chairman and
current Chief Executive Officer, was indicted in the Southern District and
Eastern District of New York. The indictments allege that Mr. Madden engaged in
securities fraud and money laundering activities. In addition, the Securities
and Exchange Commission filed a complaint in the United States District Court
for the Eastern District of New York alleging that Mr. Madden violated Section
17(a) of the Securities Exchange Act of 1934, as amended.
Neither the indictments nor the SEC complaint alleges any wrongdoing by
the Company or its other officers and directors. Mr. Madden has denied any
improper conduct and has advised the Company that he will vigorously defend
himself against any and all charges.
On June 21, 2000, Steven Madden resigned as Chairman of the Board of
Directors and the Company appointed Charles Koppelman acting Chairman of the
Board. Mr. Koppelman has been a director of the Company since June 1998. Mr.
Madden continues to serve as the Company's Chief Executive Officer.
21
On or about September 26, 2000, a putative shareholders derivative
action was commenced in the United States District Court for the Eastern
District of New York, captioned HERRERA v. STEVEN MADDEN AND STEVEN MADDEN,
LTD., 00 CV 5803 (JG). The Company is named as a nominal defendant in the
action. The complaint seeks to recover alleged damages on behalf of the Company
from Mr. Madden arising from his June 2000 indictment and to require him to
disgorge certain profits, bonuses and stock option grants he received. On
January 3, 2001, plaintiff filed an Amended Shareholder's Derivative Complaint.
On February 2, 2001, both the Company and Mr. Madden filed motions to dismiss
the Amended Complaint because of plaintiff's failure to make a pre-litigation
demand upon the Company's board of directors. Briefing on the motions currently
is scheduled to be completed by March 21, 2001.
On March 14, 2001, the Company became aware that the Securities and
Exchange Commission had issued a formal order of investigation with respect to
trading in the Company's securities. The Company has reason to believe that the
Staff is investigating possible securities law violations by persons trading in
the Company's securities prior to June 20, 2000 who may have been in possession
of alleged material, non-public information. As previously disclosed on Form 4's
filed with the Securities and Exchange Commission, certain officers and
directors of the Company sold shares of the Company's common stock during 1999
and the first half of 2000. Each of such officers and directors denies having
knowledge of any material, non-public information prior to engaging in such
transactions.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.
No matters were submitted to a vote of the holders of the Company's
Common Stock during the last quarter of its fiscal year ended December 31, 2000.
22
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's shares of common stock trade on The Nasdaq National
Market. The following table sets forth the range of high and low bid quotations
for the Company's Common Stock for the two year period ended December 31, 2000
as reported by The Nasdaq National Market. The quotes represent inter-dealer
prices without adjustment or mark-ups, mark-downs or commissions and may not
necessarily represent actual transactions. The trading volume of the Company's
securities fluctuates and may be limited during certain periods. As a result,
the liquidity of an investment in the Company's securities may be adversely
affected.
COMMON STOCK
HIGH LOW HIGH LOW
---- --- ---- ---
2000 1999
---- ----
Quarter ended Quarter ended
March 31, 2000 19 12 1/2 March 31, 1999 9 7/16 7 1/8
Quarter ended Quarter ended
June 30, 2000 22 7/16 6 9/16 June 30, 1999 14 7 7/8
Quarter ended Quarter ended
September 30, 2000 12 11/16 6 13/16 September 30, 1999 14 1/8 11 1/8
Quarter ended Quarter ended
December 31, 2000 8 15/32 7 December 31, 1999 19 1/16 11 15/16
On March 20, 2001, the final quoted price as reported by The Nasdaq
National Market was $13.94 for each share of common stock. As of March 20, 2001,
there were 12,526,109 shares of Common Stock outstanding, held of record by 4
record holders and approximately 3,786 beneficial owners.
23
Item 6. SELECTED FINANCIAL DATA.
The following selected financial data has been derived from the Company's
audited financial statements. The Income Statement Data relating to 2000, 1999
and 1998 and the Balance Sheet Data as of December 31, 2000 and 1999 should be
read in Conjunction with the Company's audited consolidated financial statements
and notes thereto appearing elsewhere herein.
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------- ------------- ------------- ------------- -------------
Income Statement Data:
Net sales $ 205,113,000 $ 163,036,000 $ 85,783,000 $ 59,311,000 $ 45,823,000
Cost of sales 115,495,000 94,536,000 49,893,000 34,744,000 31,343,000
------------- ------------- ------------- ------------- -------------
Gross profit 89,618,000 68,500,000 35,890,000 24,567,000 14,480,000
Commissions and licensing fees 4,847,000 3,367,000 3,273,000 2,321,000 951,000
Operating expenses (68,833,000) (52,946,000) (29,949,000) (22,262,000) (13,998,000)
------------- ------------- ------------- ------------- -------------
Income from operations 25,632,000 18,921,000 9,214,000 4,626,000 1,433,000
Interest income 1,744,000 909,000 380,000 312,000 322,000
Interest expense (102,000) (90,000) (235,000) (339,000) (162,000)
Gain on sale of marketable securities 230,000
------------- ------------- ------------- ------------- -------------
Income before provision for income taxes 27,504,000 19,740,000 9,359,000 4,599,000 1,593,000
Provision for income taxes 11,461,000 8,274,000 3,912,000 1,899,000 534,000
============= ------------- ------------- ------------- -------------
Net Income $ 16,043,000 $ 11,466,000 $ 5,447,000 $ 2,700,000 $ 1,059,000
============= ============= ============= ============= =============
Basic income per share $ 1.42 $ 1.06 $ 0.58 $ 0.33 $ 0.14
============= ============= ============= ============= =============
Diluted income per share $ 1.26 $ 0.92 $ 0.50 $ 0.30 $ 0.13
============= ============= ============= ============= =============
Weighted average common shares outstanding-
basic income per share 11,310,130 10,831,250 9,436,798 8,064,604 7,689,848
Effect of potential common shares from
exercise of options and warrants 1,387,244 1,634,102 1,546,303 848,462 737,232
------------- ------------- ------------- ------------- -------------
Weighted average common shares outstanding-
diluted income per share 12,697,374 12,465,352 10,983,101 8,913,066 8,427,080
============= ============= ============= ============= =============
Balance Sheet Data
Total assets $ 91,733,000 $ 78,135,000 $ 48,928,000 $ 29,277,000 $ 22,361,000
Working capital 57,207,000 48,076,000 33,627,000 16,545,000 13,719,000
Noncurrent liabilities 1,130,000 980,000 681,000 359,000 166,000
Stockholders' equity 76,566,000 62,435,000 44,960,000 25,793,000 20,101,000
24
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion of the Company's financial condition and
results of operations should be read in conjunction with the Financial
Statements and Notes thereto appearing elsewhere in this document.
Statements in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere in this document as well as
statements made in press releases and oral statements that may be made by the
Company or by officers, directors or employees of the Company acting on the
Company's behalf that are not statements of historical or current fact
constitute "forward looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other unknown factors that
could cause the actual results of the Company to be materially different from
the historical results or from any future results expressed or implied by such
forward-looking statements. In addition to statements which explicitly describe
such risks and uncertainties, readers are urged to consider statements labeled
with the terms "believes", "belief", "expects", "intends", "anticipates" or
"plans" to be uncertain forward-looking statements. The forward looking
statements contained herein are also subject generally to other risks and
uncertainties that are described from time to time in the Company's reports and
registration statements filed with the Securities and Exchange Commission.
The following table sets forth information on operations for the periods
indicated:
PERCENTAGE OF NET REVENUES
TWELVE MONTHS ENDED
DECEMBER 31
-----------
($ in thousands)
CONSOLIDATED: 2000 1999 1998
- ------------ ---- ---- ----
Net Sales $205,113 100% $163,036 100% $85,783 100%
Cost of Sales 115,495 56 94,536 58 49,893 58
Other Operating Income 4,847 2 3,367 2 3,273 4
Operating Expenses 68,833 34 52,946 32 29,949 35
Income from Operations 25,632 12 18,921 12 9,214 11
Interest Income Net 1,642 1 819 1 145 0
Gain on sale of marketable securities 230 0 -- -- -- --
Income Before Income Taxes 27,504 13 19,740 12 9,359 11
Net Income 16,043 8 11,466 7 5,447 6
25
PERCENTAGE OF NET REVENUES
TWELVE MONTHS ENDED
DECEMBER 31
($ in thousands)
By Segment 2000 1999 1998
---- ---- ----
WHOLESALE DIVISIONS:
STEVEN MADDEN, LTD
Net Sales $ 87,977 100% $ 78,890 100% $ 49,891 100%
Cost of Sales 54,707 62 49,770 63 31,201 63
Other Operating Income 959 1 807 1 594 1
Operating Expenses 25,422 29 22,758 29 14,549 29
Income from Operations 8,807 10 7,169 9 4,735 9
l.e.i. FOOTWEAR
Net Sales $ 37,741 100% $ 27,546 100% $ 3,483 100%
Cost of Sales 23,657 63 17,856 65 2,200 63
Operating Expenses 7,652 20 5,856 21 828 24
Income from Operations 6,432 17 3,834 14 455 13
DIVA ACQUISITION CORP:
Net Sales $ 3,616 100% $ 7,970 100% $ 5,846 100%
Cost of sales 2,591 72 5,296 66 4,421 76
Operating Expenses 1,231 34 1,547 19 1,489 25
Income (Loss) from Operations (206) 6 1,127 14 (64) (1)
STEVIES INC.:
Net Sales $ 6,147 100% -- -- -- --
Cost of sales 3,846 63 -- -- -- --
Other Operating Income 257 4
Operating Expenses 1,595 26 -- -- -- --
Income from Operations 963 16 -- -- -- --
STEVEN MADDEN RETAIL INC.:
Net Sales $ 69,632 100% $ 48,630 100% $ 26,563 100%
Cost of Sales 30,694 44 21,614 44 12,071 45
Operating Expenses 30,937 44 21,106 43 11,751 44
Income from Operations 8,001 12 5,910 12 2,741 10
ADESSO MADDEN INC.:
(FIRST COST)
Other Operating Revenue $ 3,631 100% $ 2,560 100% $ 2,679 100%
Operating Expenses 1,996 55 1,679 66 1,332 50
Income from Operations 1,635 45 881 34 1,347 50
26
RESULTS OF OPERATIONS
($ in thousands)
YEAR ENDED DECEMBER 31, 2000 VS. YEAR ENDED DECEMBER 31, 1999
CONSOLIDATED:
Sales for the year ended December 31, 2000 are $205,113 or 26% higher than the
$163,036 in the comparable period of 1999. The increase in sales is due to
several factors, including (i) the addition of new wholesale accounts, (ii) a
43% increase in retail sales due to the opening of additional Steve Madden
retail stores during 2000 and an increases in same store sales, (iii) a 37%
increase in sales from the l.e.i. Wholesale Division ("l.e.i. Wholesale"), (iv)
an increase in the number of Steve Madden concept shops located in major
department stores and specialty stores, and (v) an increase in public awareness
with respect to the Company's brands. In turn, increased sales have enabled the
Company to expand its advertising and in store concept efforts, all of which
have contributed to the continuing increase in sales. Also in the first quarter
of 2000, the Company introduced a new brand, Stevies(TM). Positioned as a
fashion brand, Stevies(TM) targets girls ages 6-9 and "tweens" ages 10-12. The
Company's new Stevies Wholesale Division ("Stevies Wholesale") commenced
shipping to department stores throughout the country in the second quarter of
2000. Stevies Wholesale generated revenue of $6,147 for the year ended December
31, 2000. Also, during the year ended December 31, 2000, 11 licenses in 13
product classifications were signed for the Stevies(TM) brand. The web site for
Stevies at WWW.STEVIES.COM went live in March of 2000 and commence engaging in
e-commerce transactions in July 2000.
Consolidated gross profit as a percentage of sales in 2000 increased to 44% as
compared 42% for 1999 due to increased retail sales which are at higher margins,
a change in the product mix, balanced sourcing and improved inventory
management.
Selling, general and administrative (SG&A) expenses increased to $68,833 in 2000
from $52,946 in 1999. The increase in SG&A is due primarily to a 27% increase in
payroll, officers' bonuses and payroll related expenses from $19,147 in 1999 to
$24,268 in 2000. Also, the Company focused its efforts on advertising and
marketing by increasing those expenses by 38% from $5,046 in 1999 to $6,941 in
2000. Additionally, selling, designing and licensing costs increased by 21% from
$8,702 in 1999 to $10,510 in 2000. This is due in part to an increase in sales
in the current period and to the Company's increased focus on selling,
designing, and licensing activities. The increase in the number of retail
outlets and expanded office and warehouse facilities resulted in an increase in
occupancy, telephone, utilities, warehouse, computer, printing/supplies and
depreciation expenses by 47% from $12,162 in 1999 to $17,820 in 2000.
27
Income from operations for 2000 was $25,632 which represents an increase of
$6,711 or 35% over the income from operations of $18,921 in 1999. Net income
increased by 40% to $16,043 in 2000 from $11,466 in 1999.
WHOLESALE DIVISIONS:
Sales from the Steve Madden Wholesale Division ("Madden Wholesale") accounted
for $87,977 or 43%, and $78,890 or 48%, of total sales in 2000 and 1999,
respectively. This increase in sales is primarily due to the addition of new
"Madden Wholesale" accounts and an increase in the number of Steve Madden
concepts shops located in major department stores and specialty stores
throughout the country. Gross profit as a percentage of sales increased from 37%
in 1999 to 38% in 2000 due to a change in the product mix, balanced sourcing and
improved inventory management. Operating expenses increased to $25,422 in 2000
from $22,758 in 1999. This increase is due to an increase in payroll and payroll
related expenses principally due to the hiring of additional management
personnel. Also, advertising and marketing expenses increased due to the
Company's expanded marketing strategy. Additionally, selling, designing and
licensing costs increased due to an increase in sales in the current period and
to the Company's increased focus on selling, designing, and licensing
activities. Madden Wholesale income from operations was $8,807 in 2000 compared
to income from operations of $7,169 in 1999.
Sales from the l.e.i. Wholesale Division ("l.e.i. Wholesale") accounted for
$37,741or 18%, and $27,546 or 17%, of total sales in 2000 and 1999,
respectively. The increase in sales is due to the addition of new "l.e.i.
Wholesale" accounts and an increase in reorders from existing customers. l.e.i
footwear now sells in over 3,500 doors in 2000 compared to 2,500 doors in 1999,
in the United States, primarily in department stores, including Macy's East,
Burdines, Rich's, Hecht's, Filene's, Foley's, Kohl's, Belk and JC Penney's, and
in specialty store chains, such as Journey's and Mandees. Also, during the third
quarter, the l.e.i. Wholesale division shipped shoes to Kohl's for the first
time. Gross profit as a percentage of sales increased from 35% in 1999 to 37% in
2000 due to changes in product mix, balanced sourcing and improved inventory
management. Operating expenses increased to $7,652 in 2000 from $5,856 in 1999
due to increases in occupancy and payroll and payroll related expenses.
Additionally, sales commissions, selling, designing and licensing costs
increased due to an increase in sales in the current period and due to the
Company's increased focus on these activities. Income from operations for l.e.i.
Wholesale was $6,432 in 2000 compared to income from operations of $3,834 in
1999.
Sales from the Diva Acquisition Corp. Wholesale Division ("Diva Wholesale")
which markets the "David Aaron" brand name in footwear accounted for $3,616 or
2%, and $7,970 or 5%, of total sales in 2000 and 1999, respectively. The Company
believes that the decrease in sales is due to the repositioning and
reorganization of the David Aaron brand. The Company intentionally planned to
reduce sales volume in 2000 enabling the Diva Wholesale Division to use its two
retail stores to test the popularity of new products. Gross profit as a
percentage of sales decreased from 34% in 1999 to 28% in 2000 as under
performing carryover inventory was cleared at lower gross margins. Operating
expenses decreased to $1,231 in 2000 from $1,547 in 1999 due to the decrease in
sales commission expenses as a result of the decrease in sales and from
decreases in selling and designing expenses. Loss from operations from Diva
Wholesale was $206 in 2000 compared to income from operations of $1,127 in 1999.
28
The Company's new Stevies Wholesale Division ("Stevies Wholesale") commenced
shipping to department stores and specialty stores throughout the country in the
second quarter of 2000. Stevies Wholesale generated revenue of $6,147 for the
year ended December 31, 2000. Stevies now sells in over 1,200 doors including
store groups such as Nordstorms, Federated Department stores, May Company, Belk,
Dillards, Limited Too, as well as, childrens' independent shoe stores throughout
the country. The Stevies brand ended the fourth quarter with over 815 Stevies
concept shop locations and over 500 Stevies accessories concept shop locations.
Stevies accessory concept shops house Stevies licensed accessories and slippers.
Gross profit as a percentage of sales was 37% for the year ended December 31,
2000. Income from operations was $963 in 2000.
RETAIL DIVISION:
Sales from the Retail Division accounted for $69,632 or 34% and $48,630 or 30%
of total revenues in 2000 and 1999, respectively. This increase in Retail
Division sales is primarily due to the increase in number of Steve Madden retail
store. As of December 31, 2000, there were 65 Steve Madden retail stores
compared to 49 stores as of December 31, 1999. Additionally, same store sales
for the year ended December 31, 2000 increased 10% over the same period of 1999.
This increase in same store sales is largely due to the Company's ability to
track and quickly reorder bestsellers and it's strategy of testing and quickly
reordering successful new products such as athletic inspired casuals, sneakers,
boots and tailored shoes. Revenues from the internet store for the year ended
December 31, 2000 were $3,549 an increase of 196% over the same period of 1999.
The Company expects sales generated through its websites at WWW.STEVEMADDEN.COM
and WWW.STEVIES.COM to continue to increase as the Company makes additional
styles available for sale on its website and usage of the internet continues to
grow. Also, the web site for the Madden Mens at WWW.STEVEMADDENMENS.COM launched
in February 2001. Gross profit as a percentage of sales remained the same in
1999 and 2000. Operating expenses increased to $30,937 or 44% of sales in 2000
from $21,106 or 43% of sales in 1999. This increase was due to increases in
payroll and payroll related expenses such as incentive bonuses for store
managers and the corporate retail management team, marketing and operating
expenses for the internet store, occupancy, printing, computer and depreciation
expenses as a result of opening 16 additional stores since December 31, 1999.
Income from operations from the retail division was $8,001 in 2000 compared to
income from operations of $5,910 in 1999.
ADESSO-MADDEN DIVISION:
Adesso-Madden, Inc., a wholly owned subsidiary of the Company, generated
commission revenues of $3,631 for the year ended December 31, 2000 which
represents a 42% increase over commission revenues of $2,560 during the same
period in 1999. This increase was primarily due to the growth in accounts such
as Walmart, Parade of Shoes, Sears, Famous Footwear, Payless, Bass, MarMaxx,
Bakers, and Target kids. Operating expenses increased to $1,996 in 2000 from
$1,679 in 1999 primarily due to increases in payroll and payroll related
expenses. Income from operations from Adesso-Madden was $1,635 in 2000 compared
to income from operations of $881 in 1999.
29
YEAR ENDED DECEMBER 31, 1999 VS. YEAR ENDED DECEMBER 31, 1998
CONSOLIDATED:
Sales for the year ended December 31, 1999 were $163,036 or 90% higher than the
$85,783 recorded in the comparable period of 1998. The increase in sales was due
to several factors, including (i) the addition of new wholesale accounts, (ii)
an increase in reorders from existing customers, (iii) an 86% increase in
Electronic Data Interchange (EDI) size replenishment program, (iv) an 83%
increase in retail sales due to the opening of additional Steve Madden retail
stores during 1999 and increases in same store sales, (v) a full year of sales
from the l.e.i. Wholesale Division ("l.e.i. Wholesale") which was launched in
the third quarter of 1998, (vi) an increase in the number of Steve Madden
concepts shops located in major department stores, (vii) an expansion in the
number of products offered by the Company, (viii) an increase in the number of
retail locations offering the Company's products and (ix) increased public
awareness in the Company's brands. As a result, management feels that "Steve
Madden" and "l.e.i. footwear" as a brand name has increased in popularity
nationwide. In turn, increased sales have enabled the Company to expand its
advertising and in store concept efforts, all of which have contributed to the
continuing increase in sales. Gross profit as a percentage of sales in 1999
remained the same as 1998.
Selling, general and administrative (SG&A) expenses increased to $52,946 in 1999
from $29,949 in 1998. The increase in SG&A was due primarily to a 60% increase
in payroll, officers' bonuses and payroll related expenses from $11,948 in 1998
to $19,147 in 1999. Also, the Company focused its efforts on advertising and
marketing by increasing those expenses by 101% from $2,515 in 1998 to $5,046 in
1999. Additionally, selling, designing and licensing costs increased by 149%
from $3,488 in 1998 to $8,702 in 1999. This was due in part to an increase in
sales in the current period and to the Company's increased focus on selling,
designing, and licensing activities. The increase in the number of retail
outlets and expanded office facilities resulted in an increase in occupancy,
telephone, utilities, legal, computer, printing/supplies and depreciation
expenses by 88% from $6,920 in 1998 to $13,031 in 1999. In addition, in August
1999, the Company paid $600 to a former principal of the underwriter of the
Company's initial public offering. Such payment was made in settlement of a
dispute regarding an option issued in connection with the Company's initial
public offering in December 1993.
Income from operations for 1999 was $18,921, which represents an increase of
$9,707 or 105% over the income from operations of $9,214 in 1998. Net income
increased by 111% to $11,466 in 1999 from $5,447 in 1998.
WHOLESALE DIVISIONS:
Sales from the Steve Madden Wholesale Division ("Madden Wholesale"), accounted
for $78,890 or 48% and $49,891 or 58% of total sales in 1999 and 1998,
respectively. The increase in sales was due to the addition of new "Madden
Wholsale" accounts, an increase in reorders from existing customers and an 86%
increase in Electronic Data Interchange (EDI) size replenishment program. Gross
profit as a percentage of sales remained the same. Operating expenses increased
to $22,758 in 1999 from $14,549 in 1998. This increase was due to an increase in
payroll and payroll related expenses principally due to the hiring of additional
management personnel and an increase in occupancy expenses due to additional
warehouse space needed for expanding EDI size replenishment inventory.
Additionally, selling, designing and licensing costs increased due to an
increase in sales in the current period and to the Company's increased focus on
selling, designing, and licensing activities. Madden Wholesale income from
operations was $7,169 in 1999 compared to income from operations of $4,735 in
1998.
30
Sales from the l.e.i. Wholesale ("l.e.i. Wholesale") accounted for $27,546 or
17%, and $3,483 or 4%, of total sales in 1999 and 1998, respectively. The
increase in sales was due to the addition of new "l.e.i. Wholesale" accounts and
an increase in reorders from existing customers. l.e.i footwear sold in over
2400 doors in the United States, primarily in department stores, including
Macy's - east, Burdines, Rich's, Hecht's, Filene's, Foley's, Dayton Hudson, Belk
and JC Penney's, and to a lesser extent in specialty store chains, such as Wet
Seal and Journey's. Gross profit as a percentage of sales decreased from 37% in
1998 to 35% in 1999, primarily as a result of a higher markdowns experienced in
the first quarter of 1999. Operating expenses increased to $5,856 in 1999 from
$828 in 1998. Increases in sales and operating expenses are attributable to a
full year of operations ("l.e.i Wholesale" - was launched in the third quarter
of 1998). Income from operations from l.e.i. Wholesale was $3,834 in 1999
compared to income from operations of $455 in 1998.
Sales from the Diva Acquisition Corp. Wholesale Division ("Diva Wholesale")
which markets the "David Aaron" brand name in footwear accounted for $7,970 or
5%, and $5,846 or 7%, of total sales in 1999 and 1998, respectively. The
increase in sales was due to the addition of new "Diva wholesale" accounts and
an increase in reorders from existing customers. Gross profit as a percentage of
sales increased from 24% in 1998 to 34% in 1999 due to a change in the product
mix, balanced sourcing and improved inventory management. Operating expenses
increased to $1,547 in 1999 from $1,489 in 1998 due to increases in occupancy,
computer, payroll and payroll related expenses. Income from operations from Diva
was $1,127 in 1999 compared to a loss from operations of $64 in 1998.
RETAIL DIVISION:
Sales from the Retail Division accounted for $48,630 or 30 % and $26,563 or 31%
of total revenues in 1999 and 1998, respectively. The increase in Retail
Division sales was primarily due to the Company's opening of thirteen additional
Steve Madden retail stores and three additional outlet stores in 1999. Same
store sales for the year ended December 31, 1999 increased by 26% over the same
period of 1998. This increase in same store sales was driven by the
strengthening of the boot classification, the addition of the slipper
classification (known as the "Fuzzy"), the timely conversion of our warm weather
stores, EDI basic replenishment and the addition of our West Coast warehouse
facility. Also, increases in same store sales were driven by strengthening of
the Company's buying and store support staff, a revised compensation package and
a stronger marketing effort that included Mall posters, radio promotion and
in-store events. Also, during the first quarter of 1999, the Company completed
it's internet fulfillment center and expanded the number of workstations at the
Long Island City offices dedicated to Internet sales. Revenues from the internet
store increased by 700% to $1,200 in 1999 from $150 in 1998. As the Company
offered additional styles through its web site at www.stevenmadden.com, business
continued to grow. The Company signed an agreement with America Online, to sell
footwear and apparel through AOL's new shopping destination, Shop @ AOL. The
site for apparel went live in mid August and the site for footwear went live at
the end of September. Since going live, the Company's web site has experienced a
153% growth in hits and a 14% growth in unique users. The increase in gross
profit as a percentage of sales from 55% in 1998 to 56% in 1999 was due to the
high margin classification such as boots and slippers and strong upfront
marketing plans. Selling, general and administrative expenses for the Retail
Division increased to $21,106 in 1999 from $11,751 in 1998. This increase was
due to increases in payroll and related expenses, occupancy, printing, computer
and depreciation expenses as a result of opening thirteen additional stores and
three outlet stores during 1999. Income from operations from the retail division
was $5,910 in 1999 compared to income from operations of $2,741 in 1998.
31
ADESSO-MADDEN DIVISION:
Adesso-Madden, Inc., a wholly owned subsidiary of the Company, generated
commission revenues of $2,560 for the year ended December 31, 1999 which
represents a decrease from the commission revenues of $2,679 in 1998. This
decrease was primarily due to the closing of certain key accounts and a shift to
purchasing the l.e.i. brand from their private label brand by accounts such as
JC Penny, Sears and Mervyns. However, in the fourth quarter private label
division revenue increased by 31% to $702 in 1999 compared to $535 in 1998. The
increase in sales in the fourth quarter was due to the addition of new accounts
and an increase in reorders from existing customers. Also, Adesso-Madden
expanded its business by introducing additional styles in Jordache footwear, a
trademark licensed by the Company, in Kmart and Target. The first shipments of
Jordache footwear were delivered in July 1999. Operating expenses increased to
$1,679,000 in 1999 from $1,332,000 in 1998 due to increases in occupancy,
payroll and payroll related expenses. Income from operations from Adesso-Madden
was $881 in 1999 compared to income from operations of $1,347 in 1998.
LICENSE AGREEMENTS
Revenues from licensing increased by 51% to $1,216 in 2000 from $807 in 1999.
This increase was primarily driven by increases in licensing income from leather
sportswear and sunglasses. As of December 31, 2000, the Company had 8 license
partners covering 11 product categories for its Steve Madden brand. Also, during
the year 2000, the Company initiated 11 licensing agreements in 13 product
categories for its Stevies brand. The product categories include handbags,
hosiery, sunglasses, hair, fashion accessories, belts, jewelry, sportswear,
watches and plush toy. In order to enhance the performance of the Company's
licensing business, in January 2001 the Company engaged Jassin O'Rourke Group,
LLC, a consulting firm specializing in marketing, management and licensing for
the apparel industry. In February 2001, the Company signed termination
agreements with respect to jewelry and hair accessories for both the Steve
Madden(R) and Stevies(TM) brands, and sportswear for the Stevies(TM) brand. The
Company expects that, with the assistance of Jassin O'Rourke, it will be
successful in finding new licensee for such product categories.
As of March 15, 2000, the Company and its sportswear licensee, Iron Will Group,
Inc. executed a Termination Agreement with respect to that certain License
Agreement dated as of January 1, 1999. Iron Will Group is an affiliate of
Jordache Enterprises. The Termination Agreement required that Iron Will
terminate its sale and distribution of Steve Madden Sportswear products on or
before June 15, 2000. The Company is currently focusing on its leather
sportswear which goods are produced and sold by its outerwear licensee.
32
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $57,207 at December 31, 2000 compared to
$48,076 in working capital at December 31, 1999. This represents an increase of
$9,131. This increase in working capital is primarily due to increased net
income which offsets the increase in accounts receivables and inventories.
OPERATING ACTIVITIES
During the year ended December 31, 2000, cash provided by operating activities
was $8,748. Uses of cash arose principally from an increase in factored accounts
receivable of $3,251, an increase in inventory of $5,666 and a decrease in
income taxes payable of $4957. Cash was provided principally by net income of
$16,043 and an increase in accounts payable and accrued expenses of $4,610.
The Company has lease agreements for office, warehouse, and retail space,
expiring at various times through 2011. Future obligations under these lease
agreements total approximately $47,000.
The Company has employment agreements with seven officers currently providing
for aggregate annual salaries of approximately $1,775 subject to annual bonuses
and annual increases as may be determined by the Company's Board of Directors.
In addition, as part of two of the employment agreements, the Company is
committed to pay incentive bonuses based on income before interest, depreciation
and taxes to certain officers.
The Company's customers consist principally of department stores and specialty
stores, including shoe boutiques. Presently, the Company's Wholesale Division
sells approximately sixty two percent (62%) of its products to department
stores, including Federated Department Stores (Bloomingdales, Bon Marche,
Burdines, Macy's and Rich's), May Department Stores (Famous Barr, Filene's,
Foley's, Hecht's, Kaufmann's, Meier & Frank, Lord & Taylor and Robinsons May),
Dillard's, Dayton-Hudson and Nordstrom and approximately thirty eight percent
(38%) to specialty stores, including Journey's, Wet Seal and The Buckle and
catalog retailers, including Victoria's Secret and Fingerhut. Federated
Department Stores and May Department Stores presently account for approximately
twenty one percent (21%) and eighteen percent (18%) of the Company's Wholesale
Division sales, respectively.
A significant portion of the Company's product is supplied from foreign
manufacturers, the majority of which are located in Brazil, China, Italy and
Mexico. Although the Company has not entered into any manufacturing contracts
with any of these foreign companies, the Company believes that a sufficient
number of alternative sources exist outside of the United States for the
manufacture of its products if current suppliers need to be replaced. In
addition, the Company currently deals approximately ninety five percent (95%) of
its transactions in U.S. currency.
CAPITAL IMPROVEMENT ACTIVITIES
During the year ended December 31, 2000, the Company used cash of $7,446
primarily for leasehold improvements on retail stores and office space and for a
new point of sale computer system for the retail stores.
33
FINANCING ACTIVITIES
During the year ended December 31, 2000, the Company received $2,807 from the
sale of its common stock in connection with exercise of stock options. On
February 29, 2000, the Company announced a 1,500,000 stock repurchase program.
As of December 31, 2000, the Company repurchased 900,000 shares of the Company's
common stock at a total cost of $6,076.
INFLATION
The Company does not believe that inflation has had a material adverse effect on
sales or income during the past several years. Competitive pressures could limit
the extent to which such costs could be passed along in the form of increased
prices. As such, inflationary price increases in operating costs could adversely
affect the profitability of the Company's operations.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See financial statements following Item 14 of this Annual Report on
Form 10-K.
Item 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT OF THE REGISTRANT.
Incorporated herein by reference from the Company's definitive proxy
statement to be filed pursuant to Regulation 14A under the Securities Exchange
Act of 1934.
Item 11. EXECUTIVE COMPENSATION
Incorporated herein by reference from the Company's definitive proxy
statement to be filed pursuant to Regulation 14A under the Securities Exchange
Act of 1934.
34
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Incorporated herein by reference from the Company's definitive proxy
statement to be filed pursuant to Regulation 14A under the Securities Exchange
Act of 1934.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Incorporated herein by reference from the Company's definitive proxy
statement to be filed pursuant to Regulation 14A under the Securities Exchange
Act of 1934.
PART IV
Item 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
The following consolidated financial statements of Steven Madden, Ltd.
and subsidiaries are included in Item 8:
35
STEVEN MADDEN, LTD. AND SUBSIDIARIES
CONTENTS
Page
----
CONSOLIDATED FINANCIAL STATEMENTS
Independent auditors' report F-2
Balance sheets as of December 31, 2000 and 1999 F-3
Statements of operations for the years ended December 31, 2000, 1999
and 1998 F-4
Statements of changes in stockholders' equity for the years ended
December 31, 2000, 1999 and 1998 F-5
Statements of cash flows for the years ended December 31, 2000, 1999
and 1998 F-6
Notes to financial statements F-7
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Steven Madden, Ltd.
New York, New York
We have audited the accompanying consolidated balance sheets of Steven Madden,
Ltd. and subsidiaries as of December 31, 2000, and 1999, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 2000.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements enumerated above present fairly, in all
material respects, the consolidated financial position of Steven Madden, Ltd.
and subsidiaries as of December 31, 2000 and 1999, and the consolidated results
of their operations and their consolidated cash flows for each of the years in
the three-year period ended December 31, 2000 in conformity with accounting
principles generally accepted in the United States.
New York, New York
February 14, 2001
(March 14, 2001 with respect to Note J[3])
F-2
STEVEN MADDEN, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
----------------------------
2000 1999
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 35,259,000 $ 37,361,000
Investments 257,000
Accounts receivable - net of allowances of $774,000 and $886,000 2,417,000 1,207,000
Due from factor - net of allowances of $866,000 and $624,000 15,155,000 12,146,000
Inventories 15,824,000 10,158,000
Prepaid expenses and other current assets 1,289,000 867,000
Deferred taxes 1,300,000 800,000
------------ ------------
Total current assets 71,244,000 62,796,000
Property and equipment, net 15,600,000 11,114,000
Deferred taxes 2,462,000 1,612,000
Deposits and other 222,000 269,000
Cost in excess of fair value of net assets acquired - net of accumulated
amortization of $575,000 and $436,000 2,205,000 2,344,000
------------ ------------
$ 91,733,000 $ 78,135,000
============ ============
LIABILITIES
Current liabilities:
Current portion of capital lease obligations $ 128,000 $ 116,000
Accounts payable 9,502,000 6,542,000
Accrued expenses 4,178,000 2,528,000
Income tax payable 4,957,000
Accrued bonuses 229,000 577,000
------------ ------------
Total current liabilities 14,037,000 14,720,000
Deferred rent 1,074,000 777,000
Capital lease obligations, less current portion 56,000 203,000
------------ ------------
15,167,000 15,700,000
------------ ------------
Commitments, contingencies and other (Note J)
STOCKHOLDERS' EQUITY
Preferred stock - $.0001 par value, 5,000,000 shares authorized; none issued
Common stock - $.0001 par value, 60,000,000 shares authorized, 12,306,684
and 11,797,793 shares issued 1,000 1,000
Additional paid-in capital 46,688,000 42,906,000
Retained earnings 38,765,000 22,722,000
Unearned compensation (897,000) (1,279,000)
Treasury stock - 1,245,204 and 345,204 shares at cost (7,991,000) (1,915,000)
------------ ------------
76,566,000 62,435,000
------------ ------------
$ 91,733,000 $ 78,135,000
============ ============
See notes to financial statements F-3
STEVEN MADDEN, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
-----------------------------------------------
2000 1999 1998
------------- ------------- -------------
Net sales $ 205,113,000 $ 163,036,000 $ 85,783,000
Cost of sales 115,495,000 94,536,000 49,893,000
------------- ------------- -------------
Gross profit 89,618,000 68,500,000 35,890,000
Commission and licensing fee income 4,847,000 3,367,000 3,273,000
Operating expenses (68,833,000) (52,946,000) (29,949,000)
------------- ------------- -------------
Income from operations before other income (expenses) 25,632,000 18,921,000 9,214,000
Other income (expenses):
Interest income 1,744,000 909,000 380,000
Interest expense (102,000) (90,000) (235,000)
Gain on sale of marketable securities 230,000
------------- ------------- -------------
Income before provision for income taxes 27,504,000 19,740,000 9,359,000
Provision for income taxes 11,461,000 8,274,000 3,912,000
------------- ------------- -------------
NET INCOME $ 16,043,000 $ 11,466,000 $ 5,447,000
============= ============= =============
BASIC INCOME PER SHARE $ 1.42 $ 1.06 $ 0.58
============= ============= =============
DILUTED INCOME PER SHARE $ 1.26 $ 0.92 $ 0.50
============= ============= =============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC
INCOME PER SHARE 11,310,130 10,831,250 9,436,798
EFFECT OF DILUTIVE SECURITIES OPTIONS AND WARRANTS 1,387,244 1,634,102 1,546,303
------------- ------------- -------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - DILUTED
INCOME PER SHARE 12,697,374 12,465,352 10,983,101
============= ============= =============
See notes to financial statements F-4
STEVEN MADDEN, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Common Stock Additional
----------------------- Paid-in Retained Unearned
Shares Amount Capital Earnings Compensation
---------- -------- ------------ ----------- -------------
BALANCE - DECEMBER 31, 1997 8,429,073 $ 1,000 $ 21,721,000 $ 5,809,000 $ (1,281,000)
Exercise of stock options, units and warrants
net of costs of $60,000 2,447,050 13,345,000
Common stock issued in connection with acquisition 64,520 667,000
Compensation in connection with issuance of stock
options to a consultant 14,000
Tax benefit from exercise of options 198,000
Net income 5,447,000
Unearned compensation relating to issuance of
stock options 656,000 (656,000)
Amortization of unearned compensation 276,000
Common stock purchased for treasury
----------- -------- ------------ ------------ ------------
BALANCE - DECEMBER 31, 1998 10,940,643 1,000 36,601,000 11,256,000 (1,661,000)
Exercise of stock options and warrants 857,150 5,264,000
Tax benefit from exercise of options 275,000
Compensation in connection with issuance of stock
options to a director 766,000
Net income 11,466,000
Amortization of unearned compensation 382,000
Common stock purchased for treasury
----------- -------- ------------ ------------ ------------
BALANCE - DECEMBER 31, 1999 11,797,793 1,000 42,906,000 22,722,000 (1,279,000)
Exercise of stock options and warrants 508,891 2,807,000
Tax benefit from exercise of options 975,000
Net income 16,043,000
Amortization of unearned compensation 382,000
Common stock purchased for treasury
----------- -------- ------------ ------------ ------------
BALANCE - DECEMBER 31, 2000 12,306,684 $ 1,000 $ 46,688,000 $ 38,765,000 $ (897,000)
=========== ======== ============ ============ ============
Treasury Stock Total
----------------------- Stockholders'
Shares Amount Equity
--------- ----------- ------------
BALANCE - DECEMBER 31, 1997 101,800 $ (457,000) $ 25,793,000
Exercise of stock options, units and warrants
net of costs of $60,000 13,345,000
Common stock issued in connection with acquisition 667,000
Compensation in connection with issuance of stock
options to a consultant 14,000
Tax benefit from exercise of options 198,000
Net income 5,447,000
Unearned compensation relating to issuance of
stock options 0
Amortization of unearned compensation 276,000
Common stock purchased for treasury 168,404 (780,000) (780,000)
--------- ----------- ------------
BALANCE - DECEMBER 31, 1998 270,204 (1,237,000) 44,960,000
Exercise of stock options and warrants 5,264,000
Tax benefit from exercise of options 275,000
Compensation in connection with issuance of stock
options to a director 766,000
Net income 11,466,000
Amortization of unearned compensation 382,000
Common stock purchased for treasury 75,000 (678,000) (678,000)
--------- ----------- ------------
BALANCE - DECEMBER 31, 1999 345,204 (1,915,000) 62,435,000
Exercise of stock options and warrants 2,807,000
Tax benefit from exercise of options 975,000
Net income 16,043,000
Amortization of unearned compensation 382,000
Common stock purchased for treasury 900,000 (6,076,000) (6,076,000)
--------- ----------- ------------
BALANCE - DECEMBER 31, 2000 1,245,204 $(7,991,000) $ 76,566,000)
========= =========== ============
See notes to financial statements F-5
STEVEN MADDEN, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
--------------------------------------------
2000 1999 1998
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 16,043,000 $ 11,466,000 $ 5,447,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Compensatory stock options 766,000 14,000
Depreciation and amortization 3,586,000 2,950,000 1,357,000
Deferred taxes (1,350,000) (1,585,000) (426,000)
Deferred compensation 382,000 382,000 276,000
Tax benefit from exercise of options 975,000 275,000 198,000
Provision for doubtful accounts and chargebacks 506,000 757,000 228,000
Deferred rent expense 297,000 392,000 385,000
Gain on sale of marketable securities (230,000)
Changes, net of acquisitions, in:
Accounts receivable (1,474,000) (767,000) (9,000)
Due from factor (3,251,000) (3,062,000) (4,552,000)
Inventories (5,666,000) (2,187,000) (2,716,000)
Prepaid expenses and other assets (375,000) 2,098,000 717,000
Accounts payable and accrued expenses 4,610,000 6,120,000 386,000
Accrued bonuses (348,000) 346,000 (362,000)
Income tax payable (4,957,000) 4,957,000 111,000
------------ ------------ ------------
Net cash provided by operating activities 8,748,000 22,908,000 1,054,000
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (7,933,000) (4,902,000) (4,259,000)
Purchases of investment securities (257,000) (499,000)
Maturity/sale of investment securities 487,000 499,000 1,991,000
Payments in connection with acquisition of business (35,000)
------------ ------------ ------------
Net cash used in investing activities (7,446,000) (4,660,000) (2,802,000)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from options, units and warrants exercised - net 2,807,000 5,264,000 13,345,000
Purchase of treasury stock (6,076,000) (678,000) (780,000)
Payments of lease obligations (135,000) (115,000) (62,000)
------------ ------------ ------------
Net cash (used in) provided by financing activities (3,404,000) 4,471,000 12,503,000
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (2,102,000) 22,719,000 10,755,000
Cash and cash equivalents - beginning of year 37,361,000 14,642,000 3,887,000
------------ ------------ ------------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 35,259,000 $ 37,361,000 $ 14,642,000
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Acquisition of leased assets $ 32,000
Common stock issued in connection with acquisition $ 667,000
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 102,000 $ 90,000 $ 235,000
Income taxes $ 16,172,000 $ 3,886,000 $ 3,902,000
See notes to financial statements F-6
STEVEN MADDEN, LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
[1] ORGANIZATION:
Steven Madden, Ltd. was incorporated on July 9, 1990, in the state of New
York and reincorporated in the state of Delaware on November 10, 1998. The
Company is engaged primarily in the business of designing and sourcing
women's shoes and to a lesser extent, girl's shoes, for sale through its'
wholesale and retail channels. The Company markets footwear under the
Steven Madden, David Aaron, Stevies and Lei (under license) brand names.
Revenues are generated predominately through the sale of the Company's
brand name merchandise and certain licensed product. See Note K for
operating segment information.
[2] PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of Steven
Madden, Ltd. and its wholly owned subsidiaries Steven Madden Retail, Inc.,
DIVA. Acquisition Corp., Adesso-Madden, Inc. and Stevies, Inc.
(collectively referred to as the "Company"). All significant intercompany
balances and transactions have been eliminated.
[3] USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
[4] CASH AND CASH EQUIVALENTS:
Cash equivalents at December 31, 2000 and 1999, amounted to approximately
$28,865,000 and $33,557,000, respectively, and consist of certificates of
deposit and commercial paper. The Company considers all highly liquid
instruments with an original maturity of three months or less to be cash
equivalents.
[5] INVESTMENTS:
Investments held at December 31, 1999 consist of marketable equity
securities, classified as available for sale, which are stated at quoted
market price. Unrealized gains or losses, if any, are reflected as a
separate component of stockholders' equity.
[6] INVENTORIES:
Inventories, which consist of finished goods, are stated at the lower of
cost (first-in, first-out method) or market.
[7] PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is computed utilizing the straight-line method
based on estimated useful lives ranging from two to ten years. Leasehold
improvements are amortized utilizing the straight-line method over the
shorter of their estimated useful lives or the lease term. Depreciation and
amortization include amounts relating to property and equipment under
capital leases.
F-7
STEVEN MADDEN, LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[7] PROPERTY AND EQUIPMENT: (CONTINUED)
Impairment losses are recognized for long-lived assets, including certain
intangibles, used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets
are not sufficient to recover the assets' carrying amount. Impairment
losses are measured by comparing the fair value of the assets to their
carrying amount. No impairment losses have been incurred for the years
presented.
[8] COST IN EXCESS OF FAIR VALUE OF NET ASSETS ACQUIRED:
Cost in excess of fair value of net assets acquired relates to the
acquisitions of Diva International, Inc. and Daniel Scott, Inc. (Note B)
and is being amortized over 20 years.
[9] NET INCOME PER SHARE:
Basic income per share is based on the weighted average number of common
shares outstanding during the year. Diluted income per share reflects the
potential dilution assuming common shares were issued upon the exercise of
outstanding in-the-money options and warrants and the proceeds thereof were
used to purchase treasury stock at the average market price during the
period. For the year ended December 31, 2000, options exercisable into
approximately 300,000 shares of common stock have not been included in the
calculation of diluted income per share as the result would have been
antidilutive.
[10] ADVERTISING COSTS:
The Company expenses costs of print, radio and billboard advertisements as
of the first date the advertisements take place. Advertising expense
included in operating expenses amounted to $6,941,000 in 2000, $5,046,000
in 1999 and $2,515,000 in 1998.
[11] FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying value of the Company's financial instruments approximate fair
value due to their short-term nature or their underlying terms.
[12] STOCK-BASED COMPENSATION:
The Company has elected to continue to account for its stock-based
compensation plans using the intrinsic value method prescribed by
Accounting Principles Board Opinion No. 25 ("APB No. 25"), "Accounting for
Stock Issued to Employees". Under the provisions of APB No. 25, employee
compensation arising from the grant of stock options is measured as the
excess, if any, of the quoted market price of the Company's common stock at
the date of the grant over the amount an employee must pay to acquire the
stock.
[13] REVENUE RECOGNITION:
Wholesale revenues, including commissions received in conjunction with
private label footwear, are recognized upon shipment of products to
customers. Allowances for estimated discounts and returns are recognized
when sales are recorded. Retail sales are recognized when the payment is
received from customers and are recorded net of returns. Licensing revenue
is recognized on the basis of net sales reported by the licensee.
F-8
STEVEN MADDEN, LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[14] RECENTLY ISSUED ACCOUNTING STANDARDS:
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in
Financial Statements," which provides guidance related to revenue
recognition and was effective the first fiscal quarter of fiscal years
beginning after December 15, 1999, and requires companies to report any
changes in revenue recognition as a cumulative change in an accounting
principle at the time of implementation, in accordance with APB Opinion 20,
"Accounting Changes." Subsequently, SAB Nos. 101A and 101B were issued to
delay the implementation of SAB No. 101. Management believes that the
adoption had no effect on the Company's revenue recognition policies. The
Company adopted this pronouncement during the fiscal year ended December
31, 2000.
In 2000, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation," an interpretation of APB Opinion No. 25, "Stock Issued to
Employees." Interpretation No. 44 clarifies the application of APB No. 25
for the definition of an employee for purposes of applying APB No. 25, the
criteria for determining whether a plan qualifies as a non-compensatory
plan, the accounting consequences of various modifications to the terms of
previously granted stock options or awards, and the accounting for an
exchange of stock compensation awards in a business combination. The
application of this interpretation had no effect on the financial
statements for the fiscal year ended December 31, 2000.
Also in 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." The
standard revises FASB Statement No. 125 and requires additional disclosure.
The adoption of this standard will have no material effect on the financial
statements.
NOTE B - ACQUISITIONS
On May 1, 1998, the Company purchased certain assets from and assumed certain
liabilities of Daniel Scott, Inc. which operated two retail outlet stores under
the name Shoe Biz located in Mineola, N.Y. in exchange for 64,520 shares of
common stock. The acquisition was recorded at a total cost of approximately
$703,000, including related expenses, of which $635,000 was allocated to cost in
excess of fair value of the identifiable net assets acquired. The acquisition
was accounted for as a purchase and accordingly, the results of operations of
the acquired entity were included in the consolidated statements of operations
from the date of acquisition.
NOTE C - PROPERTY AND EQUIPMENT
The major classes of assets and accumulated depreciation and amortization are as
follows:
December 31,
----------------------------
2000 1999
------------ ------------
Leasehold improvements $ 16,065,000 $ 11,427,000
Machinery and equipment 805,000 628,000
Furniture and fixtures 2,596,000 1,399,000
Computer equipment 4,414,000 2,461,000
Equipment under capital lease 217,000 249,000
------------ ------------
24,097,000 16,164,000
Less accumulated depreciation and amortization (8,497,000) (5,050,000)
------------ ------------
Property and equipment - net $ 15,600,000 $ 11,114,000
============ ============
F-9
STEVEN MADDEN, LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
NOTE D - DUE FROM FACTOR
Under the terms of a factoring agreement, the Company may request advances from
the factor up to 80 percent of aggregate receivables purchased by the factor at
an interest rate of prime minus 1%. The Company also pays a fee equal to .70% of
the gross invoice amount of each receivable purchased. In addition, the factor
charges an annual unused line fee of .25% of the average daily unused portion of
the maximum credit line which is $15,000,000. The Company sells and assigns a
substantial portion of its receivables, principally without recourse, to the
factor. At December 31, 2000, $436,000 of factored receivables were sold by the
Company with recourse. The factor assumes the credit risk of all assigned
accounts approved by it, but maintains liens on all inventory, trade receivables
(whether or not assigned) and the goods represented thereby. These transfers are
recognized as sales of receivables.
NOTE E - STOCK OPTIONS
The Company established various stock option plans under which options to
purchase shares of common stock may be granted to employees, directors,
officers, agents, consultants and independent contractors. The plans provide
that the option price shall not be less than the fair market value of the common
stock on the date of grant and that no portion of the option may be exercised
beyond ten years from that date. No incentive stock option can be granted for
more than five years to a stockholder owning 10% or more of the Company's
outstanding common stock. Options granted under the plans during the three years
ended December 31, 2000 vest on the date of grant or up to three years from such
date.
In June 1999, the Company adopted the 1999 Stock Plan under which the maximum
number of shares to which awards may be granted was initially 400,000 shares. In
May 2000, the stockholders approved an amendment to the 1999 Stock Plan to
increase the maximum number of shares subject to the plan to 975,000 shares.
Terms of the 1999 Stock Plan are not materially different from the various
existing stock option plans.
Through December 31, 2000, 950,000 options had been granted under the 1999 Stock
Plan, as amended, and as of such date 25,000 shares were available for the
granting of future options under the 1999 Stock Plan.
The Company granted options to an executive to purchase 250,000 shares of the
Company's common stock at $7.50 per share in 1998. The market value of the stock
at the date of grant was $10.125 per share. The Company recorded approximately
$656,000 as unearned compensation relating to such options, of which
approximately $254,000, $254,000 and $148,000 was charged to operations during
the years ended December 31, 2000, 1999 and 1998, respectively.
In connection with the former President's amended employment agreement, in 1997,
the Company issued options to purchase 500,000 shares of its common stock. The
options, which vested in August 1998, have an exercise price of $3.31 and an
exercise period of 10 years. Unearned compensation was recorded in the amount of
$1,345,000 which represents the difference between the exercise price and the
fair value of the stock on the date of grant, and is classified as a component
of stockholders' equity. The unearned compensation is being amortized over the
ten-year term of the amended agreement. Accordingly, $128,000 has been charged
to operations for 2000, 1999 and 1998.
F-10
STEVEN MADDEN, LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
NOTE E - STOCK OPTIONS (CONTINUED)
Activity relating to stock options during the three years ended December 31,
2000:
2000 1999 1998
--------------------- --------------------- ---------------------
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Shares Price Shares Price Shares Price
--------- -------- --------- -------- --------- --------
Outstanding at January 1 2,720,000 $ 5.85 2,968,000 $ 5.16 2,300,000 $ 4.54
Granted 550,000 9.09 617,000 9.57 1,070,000 7.07
Exercised (509,000) 5.52 (857,000) 6.14 (222,000) 5.55
Cancelled (12,000) 6.34 (8,000) 6.14 (180,000) 7.44
--------- --------- ---------
Outstanding at December 31 2,749,000 6.36 2,720,000 5.85 2,968,000 5.16
========= ========= =========
Exercisable 2,575,000 6.06 2,515,000 5.48 2,530,000 4.79
========= ========= =========
The following table summarizes information about stock options at December 31,
2000:
Options Outstanding Options Exercisable
------------------------------- ------------------------
Weighted
Average
Remaining
Contractual Weighted
Life Average Average
Range of Number (in Exercise Number Exercise
Exercise Price Outstanding Years) Price Exercisable Price
- -------------- ----------- ------- -------- ----------- ---------
$1.50 to $3.50 830,000 5.1 $ 2.35 830,000 $ 2.35
$5.50 to $6.00 434,000 7.2 5.79 434,000 5.79
$6.50 to $7.97 960,000 8.1 7.31 929,000 7.33
$9.13 to $10.83 205,000 7.9 10.26 205,000 10.26
$11.81 to $12.00 300,000 9.4 11.71 157,000 11.78
$18.75 20,000 9.7 18.75 20,000 18.75
--------- ---------
2,749,000 6.36 2,575,000 6.06
========= =========
As set forth in Note A[12], the Company applies APB No. 25 in accounting for its
stock option incentive plans and, accordingly, recognizes compensation expense
for the difference between the fair value of the underlying common stock and the
grant price of the option at the date of grant. Pro forma information regarding
net income and earnings per share is required by Statement of Financial
Accounting Standards No. 123 ("SFAS No.123") "Accounting for Stock-Based
Compensation" and has been determined as if the Company had accounted for its
employee stock options under the fair value method of SFAS No.123. For purposes
of pro forma disclosures, the estimated fair value of the options is amortized
to expense over the options vesting period. Substantially all options granted in
2000, 1999 and 1998 vested on date of grant, and accordingly, the estimated fair
value of such options were charged to expense in the year of grant for pro forma
disclosures. The Company's pro forma information follows:
2000 1999 1998
---- ---- ----
Net income:
As reported $ 16,043,000 $ 11,466,000 $ 5,447,000
Pro forma $ 14,588,000 $ 7,380,000 $ 2,619,000
Basic income per share:
As reported $.1.42 $1.06 $ .58
Pro forma $.1.29 $ .68 $ .28
Diluted income per share:
As reported $.1.26 $ .92 $ .50
Pro forma $.1.15 $ .59 $ .24
F-11
STEVEN MADDEN, LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
NOTE E - STOCK OPTIONS (CONTINUED)
The weighted average fair value of options granted in 2000, 1999 and 1998 was
approximately $4.54, $6.62 and $4.57, respectively, using the Black-Scholes
option-pricing model with the following assumptions:
2000 1999 1998
---- ---- ----
Dividend yield 0 0 0
Volatility 60% 61% 79%
Risk free interest rate 5.97 - 6.30% 5.75 - 6.03% 4.22 - 5.57%
Expected life in years 4 4 3 to 5
NOTE F - WARRANTS
In connection with its initial public offering, the Company granted to the
underwriter an option to purchase an aggregate of 150,000 units exercisable for
four years commencing December 10, 1995 (one year after the effective date) at
an exercise price of $5.80 per unit. Each unit consisted of one share of common
stock, one Class A warrant and one Class B warrant. During the year ended
December 31, 1998 120,000 units were exercised and the Class A and Class B
warrants issued in connection with the units were also exercised. In connection
therewith, the Company received proceeds of $1,926,000.
During July 1998, the Board of Directors of the Company approved the redemption
of all of the Company's outstanding Class B warrants. Warrant holders had until
the close of business on August 13, 1998 to exercise their Class B warrants for
the purchase of shares of common stock at an exercise price of $5.50 per share.
Unexercised Class B warrants were redeemable on August 14, 1998 at $.05 for each
outstanding Class B warrant. The Company issued 1,859,690 shares of its common
stock resulting from the exercise of Class B warrants and received proceeds of
approximately $10,228,000. The Company redeemed 15,310 Class B warrants not
exercised.
The Company also had outstanding 150,000 Class C warrants issued in connection
with a bridge financing which expired on December 10, 1998.
NOTE G - TREASURY STOCK
On February 29, 2000, the Company announced that the Board of Directors
authorized a share repurchase program to acquire up to 1,500,000 shares of the
Company's common stock from time to time in open market transactions. In June
and July 2000, the Company purchased 900,000 shares of common stock in
connection with such program.
F-12
STEVEN MADDEN, LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
NOTE H - LEASES
[1] CAPITAL LEASES:
The Company leases certain equipment under capital leases. Future minimum
lease payments consist of the following:
2001 $ 141,000
2002 46,000
2003 14,000
-----------
Total minimum lease payments 201,000
Less amounts representing interest 17,000
-----------
Present value of minimum lease payments 184,000
Less current maturities 128,000
-----------
Capital lease obligation, less current maturities $ 56,000
===========
[2] OPERATING LEASES:
The Company leases office, showroom, warehouse and retail facilities under
noncancelable operating leases with terms expiring at various times through
2011. Future minimum annual lease payments under noncancelable operating
leases consist of the following at December 31, 2000:
2001 $ 6,339,000
2002 6,321,000
2003 5,982,000
2004 5,820,000
2005 5,383,000
Thereafter 16,839,000
------------
$ 46,684,000
============
A majority of the retail store leases provide for contingent rental
payments if gross sales exceed certain targets. In addition, many of the
leases contain rent escalation clauses to compensate for increases in
operating costs and real estate taxes.
Rent expense for the years ended December 31, 2000, 1999 and 1998 was
approximately $7,604,000, $5,870,000 and $3,561,000, respectively. Included
in such amounts are contingent rents of $122,000, $122,000 and $82,000 in
2000, 1999 and 1998, respectively.
Pursuant to certain leases, rent expense charged to operations differs from
rent paid because of scheduled rent increases. Accordingly, the Company has
recorded deferred rent. Rent expense is calculated by allocating total
rental payments, including those attributable to scheduled rent increases,
on a straight-line basis, over the lease term.
F-13
STEVEN MADDEN, LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
NOTE I - INCOME TAXES
The income tax provision consists of the following:
2000 1999 1998
------------ ------------ ------------
Current:
Federal $ 9,787,000 $ 7,285,000 $ 3,211,000
State and city 3,024,000 2,574,000 1,127,000
------------ ------------ ------------
12,811,000 9,859,000 4,338,000
------------ ------------ ------------
Deferred:
Federal (1,031,000) (1,167,000) (346,000)
State and city (319,000) (418,000) (80,000)
------------ ------------ ------------
(1,350,000) (1,585,000) (426,000)
------------ ------------ ------------
$ 11,461,000 $ 8,274,000 $ 3,912,000
============ ============ ============
A reconciliation between taxes computed at the federal statutory rate and the
effective tax rate is as follows:
December 31,
----------------------
2000 1999 1998
---- ---- ----
Income taxes at federal statutory rate 35.0% 34.0% 34.0%
State income taxes - net of federal income tax
benefit 6.4 8.6 7.9
Nondeductible items .3 .3 .1
Other (1.0) (0.1)
---- ---- ----
Effective rate 41.7% 41.9% 41.9%
==== ==== ====
The Company applies the liability method in accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that are expected to be in
effect when the differences are expected to reverse.
The components of deferred tax assets and liabilities are as follows:
December 31,
-------------------------
2000 1999
---------- ----------
Deferred tax assets:
Depreciation $1,735,000 $ 482,000
Accounts receivable allowances 617,000 619,000
Inventory 683,000 482,000
Nondeductible compensation 276,000 510,000
Deferred rent 451,000 319,000
---------- ----------
Net deferred tax asset $3,762,000 $2,412,000
========== ==========
At December 31, 2000 current deferred tax assets amounted to $1,300,000 and
non-current deferred tax assets amounted to $2,462,000.
F-14
STEVEN MADDEN, LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
NOTE J - COMMITMENTS, CONTINGENCIES AND OTHER
[1] CLASS ACTION LITIGATION:
On or about August 9, 2000, several class action lawsuits were commenced in
the United States District Court for the Eastern District of New York
against the Company, Steven Madden personally, and, in some of the actions,
the Company's President and its Chief Financial Officer.
On December 8, 2000, the court consolidated these actions and appointed a
lead plaintiff and approved the plaintiff as lead counsel. On February 26,
2001, the plaintiff served a consolidated amended complaint.
The amended complaint generally alleges that the Company and the individual
defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act
of 1934 and Rule 10b-5 promulgated thereunder by issuing false and
misleading statements, and failing to disclose material adverse information
relating, among other things, to certain matters and allegations concerning
Mr. Madden. The plaintiff seeks an unspecified amount of damages, costs and
expenses on behalf of the plaintiff and all other purchasers of the
Company's common stock during the period June 21, 1997 through June 20,
2000. The defendants have until April 12, 2001 to answer the consolidated
amended complaint. Although the Company has not yet answered or otherwise
responded to this complaint, the Company believes that it has substantial
defenses to the claims. The resulting liability, if any, cannot presently
be determined.
[2] DERIVATIVE ACTION:
On or about September 26, 2000, a shareholders derivative action was
commenced in the United States District Court for the Eastern District of
New York, captioned, HERRERA V. STEVEN MADDEN AND STEVEN MADDEN, LTD. The
Company is named as a nominal defendant in the action. The complaint seeks
to recover alleged damages on behalf of the Company from Mr. Madden's June
20, 2000 indictment and to require him to disgorge certain profits, bonuses
and stock option grants he received from the Company. On January 3, 2001,
the plaintiff filed an amended complaint. On February 2, 2001, both the
Company and Mr. Madden filed motions to dismiss the amended complaint
because of the plaintiff's failure to make a pre-litigation demand upon the
Company's Board of Directors. Briefing on the motions is scheduled to be
completed shortly. The resulting liability, if any cannot presently be
determined.
[3] OTHER MATTER:
In March 2001, the Company became aware that the SEC issued a formal order
of investigation with respect to trading in the Company's securities. The
SEC is investigating possible securities law violations. Certain officers
and directors of the Company sold shares of the Company's common stock
during 1999 and the first half of 2000 which were previously disclosed on
Form 4's filed with the Securities and Exchange Commission. The ultimate
effects of this matter, if any, cannot reasonably be determined at this
time.
[4] LITIGATION SETTLEMENTS:
The separate actions involving Magnum Fashions, Inc., WK Maxx Industries,
Ltd. and Lee N' Gi were settled in the aggregate for approximately $175,000
for the year ended December 31, 2000 and have been included in operating
expenses.
F-15
STEVEN MADDEN, LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
NOTE J - COMMITMENTS, CONTINGENCIES AND OTHER (CONTINUED)
[5] EMPLOYMENT AGREEMENTS:
The Company also has an employment agreement with its Chief Executive
Officer which was amended in February 2000 to extend the term through
December 2009. The employment agreement provides for salary commitments of
approximately $4,480,000 over the next nine years. Additionally, the
agreement provides for a discretionary bonus in cash, capital stock or
other property as the board may determine from time to time as well as an
expense allowance. The prior agreement provided for a bonus plan based on
graduated rates at specified levels of net revenue.
The Company has employment agreements with two other executives, expiring
through December 2003 which provide for aggregate annual salaries of
$575,000, subject to increases. These agreements provide for cash bonuses
based upon earnings, as defined, and the granting of options at the then
market price. One agreement provides for 100,000 options and the other is
based on the calculated amount of the cash bonus.
[6] LETTERS OF CREDIT:
At December 31, 2000 and 1999, the Company had open letters of credit for
the purchase of imported inventories of approximately $6,142,000 and
$3,163,000, respectively.
[7] CONCENTRATIONS:
The Company maintains cash and cash equivalents with various major
financial institutions which at times are in excess of the amount insured.
During the year ended December 31, 2000, the Company purchased
approximately 50% and 27% of their inventory from supplies in China and
Brazil, respectively.
During the year ended December 31, 1999, the Company purchased
approximately 44%, 24% and 19% of their inventory from suppliers in China,
Brazil and Mexico, respectively. During the year ended December 31, 1998,
the Company purchased approximately 41% of their inventory from several
suppliers in Brazil and Mexico.
Sales to two customers amounted to 14% and 12% of net sales for the year
ended December 31, 2000. Amounts receivable from these and another customer
represented 22%, 21% and 12% of accounts receivable at December 31, 2000.
Sales to two customers amounted to 15% and 10% of net sales and amounts
receivable at year end from these customers represented 22% and 14% of
accounts receivable in 1999, respectively.
Sales to one customer represented approximately 13% of net sales and
amounts receivable at year end from such customer represented 11% of
accounts receivable in 1998.
Sales to such customers are included in the wholesale segment (see Note K).
Purchases are made primarily in United States dollars.
F-16
STEVEN MADDEN, LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
NOTE J - COMMITMENTS, CONTINGENCIES AND OTHER (CONTINUED)
[8] VALUATION AND QUALIFYING ACCOUNTS:
The following is a summary of the allowance for doubtful accounts related
to accounts receivable and the allowance for chargebacks related to the
amount due from factor for the years ended December 31,:
2000 1999 1998
----------- ----------- -----------
Balance at beginning of year $ 1,510,000 $ 813,000 $ 686,000
Charged to expense 506,000 757,000 228,000
Uncollectible accounts written off, net of recoveries (376,000) (60,000) (101,000)
----------- ----------- -----------
Balance at end of year $ 1,640,000 $ 1,510,000 $ 813,000
=========== =========== ===========
The following is a summary of property and equipment and the related
accounts of accumulated depreciation and amortization for the years ended
December 31,:
2000 1999 1998
----------- ----------- -----------
COST BASIS
Balance at beginning of year $16,164,000 $11,233,000 $ 6,974,000
Additions 7,933,000 4,931,000 4,259,000
----------- ----------- -----------
Balance at end of year 24,097,000 16,164,000 11,233,000
----------- ----------- -----------
ACCUMULATED DEPRECIATION AND AMORTIZATION
Balance at beginning of year 5,050,000 2,242,000 1,013,000
Depreciation and amortization 3,447,000 2,808,000 1,229,000
----------- ----------- -----------
Balance at end of year 8,497,000 5,050,000 2,242,000
----------- ----------- -----------
Property and equipment, net $15,600,000 $11,114,000 $ 8,991,000
=========== =========== ===========
The following is a summary of cost in excess of fair value and related
accumulated amortization for the years ended December 31,:
2000 1999 1998
---------- ---------- ----------
COST BASIS
Balance at beginning of year $2,780,000 $2,780,000 $2,146,000
Additions 634,000
---------- ---------- ----------
Balance at end of year 2,780,000 2,780,000 2,780,000
---------- ---------- ----------
ACCUMULATED DEPRECIATION AND AMORTIZATION
Balance at beginning of year 436,000 297,000 170,000
Amortization 139,000 139,000 127,000
---------- ---------- ----------
Balance at end of year 575,000 436,000 297,000
---------- ---------- ----------
Cost in excess of fair value of net assets acquired $2,205,000 $2,344,000 $2,483,000
========== ========== ==========
F-17
STEVEN MADDEN, LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
NOTE K - OPERATING SEGMENT INFORMATION
The Company's reportable segments are primarily based on methods used to
distribute its products. The wholesale and retail segments derive revenues from
sales of women's and girl's footwear. The wholesale segment, through sales to
department and specialty stores, and the retail segment through operation of its
own retail stores, derive revenues from sales of branded women's and girls
footwear. In addition, the wholesale segment has a licensing program that
extends the Steve Madden brand to accessories and ready-to-wear apparel. The
other segment represents activities of a subsidiary which earns commissions for
serving as a buying agent to mass-market merchandisers, shoe chains and other
off-price retailers with respect to their purchase of private label shoes.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company evaluates performance
based on profit or loss from operations before interest income and interest
expense and before income taxes. The following is information for the Company's
reportable segments:
Wholesale Retail Other Consolidated
------------- ------------- ------------- -------------
Year ended December 31, 2000:
Net sales to external customers (a) $ 135,481,000 $ 69,632,000 $ 205,113,000
Gross profit 50,681,000 38,937,000 89,618,000
Commissions and licensing fees 1,216,000 $ 3,631,000 4,847,000
Operating earnings 17,868,000 8,001,000 1,635,000 27,504,000
Depreciation and amortization 1,000,000 2,581,000 5,000 3,586,000
Other significant noncash items:
Deferred compensation 382,000 382,000
Deferred rent (13,000) 310,000 297,000
Provision for doubtful accounts 463,000 43,000 506,000
Segment assets (b) 60,740,000 30,215,000 778,000 91,733,000
Capital expenditures 1,044,000 6,889,000 7,933,000
Year ended December 31, 1999:
Net sales to external customers (a) 114,406,000 48,630,000 163,036,000
Gross profit 41,484,000 27,016,000 68,500,000
Commissions and licensing fees 807,000 2,560,000 3,367,000
Operating earnings 12,130,000 5,910,000 881,000 18,921,000
Depreciation and amortization 1,244,000 1,703,000 3,000 2,950,000
Other significant noncash items:
Deferred compensation 382,000 382,000
Deferred rent 8,000 384,000 392,000
Provision for doubtful accounts 733,000 24,000 757,000
Segment assets (b) 61,713,000 13,500,000 2,922,000 78,135,000
Capital expenditures 974,000 3,810,000 4,784,000
Year ended December 31, 1998:
Net sales to external customers (a) 59,221,000 26,562,000 85,783,000
Gross profit 21,398,000 14,492,000 35,890,000
Commissions and licensing fees 594,000 2,679,000 3,273,000
Operating earnings 5,126,000 2,741,000 1,347,000 9,214,000
Depreciation and amortization 516,000 837,000 4,000 1,357,000
Other significant noncash items:
Deferred compensation 276,000 276,000
Deferred rent 47,000 336,000 2,000 385,000
Provision for doubtful accounts 228,000 228,000
Segment assets (b) 33,731,000 14,663,000 534,000 48,928,000
Capital expenditures 550,000 3,467,000 4,017,000
(a) Attributed to the United States, based on the location in which the sale
originated.
(b) All long-lived assets, consisting of property and equipment and cost in
excess of fair value of net assets acquired, are located in the United
States.
F-18
STEVEN MADDEN, LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
NOTE K - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the years
ended December 31, 2000 and 1999 (000's omitted):
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
2000:
Revenues $44,109 $48,057 $60,108 $52,839
Cost of sales 25,925 27,123 33,620 28,827
Commissions and licensing fee income 1,004 1,130 1,233 1,480
Net income 3,182 3,743 4,600 4,518
Net income per share:
Basic 0.28 0.32 0.42 0.41
Diluted 0.24 0.28 0.38 0.38
1999:
Revenues $26,731 $38,056 $48,963 $49,286
Cost of sales 15,789 21,888 28,962 27,897
Commissions and licensing
fees 691 802 896 978
Net income 1,411 2,364 3,448 4,243
Net income per share:
Basic 0.13 0.22 0.32 0.38
Diluted 0.12 0.19 0.27 0.33
F-19
(a)(2) FINANCIAL STATEMENT SCHEDULES
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are not applicable and therefore,
have been omitted.
(b) REPORTS ON FORM 8-K
(1) None.
(c) EXHIBITS.
EXHIBITS
3.01* Certificate of Incorporation of the Company.
3.02* By-Laws of the Company.
4.01* Specimen Certificate for shares of Common Stock.
10.01* Amended Employment Agreement between the Company and Steven
Madden.
10.04* Employment Agreement of Rhonda Brown.
10.05 Amendment No. 1 to Employment Agreement of Steven Madden.
10.06 Amendments No. 1, 2 and 3 to Employment Agreement of Rhonda Brown
10.07 Employment Agreement of Arvind Dharia
10.08 Employment Agreement of Richard Olicker
21.01 Subsidiaries of Registrant.
23.01 Consent of Richard A. Eisner & Company, LLP.
* Previously filed with the Securities and Exchange Commission.
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: New York, New York
March 30, 2001
STEVEN MADDEN, LTD.
By: /s/ STEVEN MADDEN
--------------------------------
Steven Madden
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ CHARLES KOPPELMAN Chairman of the Board March 30, 2001
- ---------------------------
Charles Koppelman
/s/ STEVEN MADDEN Chief Executive Officer March 30, 2001
- --------------------------- and Director
Steven Madden
/s/ RHONDA BROWN President and Director March 30, 2001
- ---------------------------
Rhonda Brown
/s/ ARVIND DHARIA Chief Financial Officer March 30, 2001
- --------------------------- and Director
Arvind Dharia
/s/ JAMIESON KARSON Director March 30, 2001
- ---------------------------
Jamieson Karson
/s/ JOHN L. MADDEN Director March 30, 2001
- ---------------------------
John L. Madden
/s/ PETER MIGLIORINI Director March 30, 2001
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Peter Migliorini
/s/ HEYWOOD WILANSKY Director March 30, 2001
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Heywood Wilansky
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