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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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, 2001 Commission File Number 0-23702
STEVEN MADDEN, LTD.
(Exact name of registrant as specified in its charter)
Delaware 13-3588231
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
52-16 Barnett Avenue, Long Island City, New York 11104
(Address of principal executive offices) (Zip Code)
(718) 446-1800
(Registrant's Telephone Number, Including Area Code)
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 26, 2002 was approximately $214,536,498.
The number of outstanding shares of the registrant's common stock as of
March 26, 2002 was 12,365,216 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 17, 2002.
TABLE OF CONTENTS
Page
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PART I
ITEM 1 BUSINESS...........................................................1
ITEM 2 PROPERTIES.........................................................7
ITEM 3 LEGAL PROCEEDINGS..................................................8
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS................10
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS..........................................................11
ITEM 6 SELECTED FINANCIAL DATA...........................................12
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS........................................13
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................24
ITEM 9 CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.............................................24
PART III
ITEM 10 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT OF
THE REGISTRANT...................................................24
ITEM 11 EXECUTIVE COMPENSATION............................................24
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....24
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................25
PART IV
ITEM 14 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.........................................................25
-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 web sites, 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
(wholesale, retail and private label). The wholesale division includes five (5)
brands: Steve Madden(R), David Aaron(R), l.e.i.(R), Stevies(R) and the 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(R)
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, which has established a reputation for its creative designs, popular
styles and quality products at accessible price points, was founded and
developed by Steven Madden, its principal designer, and former Chief Executive
Officer and Chairman of the Board. 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".
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 United States 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. 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 January 2001, the wholesale division expanded 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 $92,413,000 in sales in 2001, or approximately 38% of the
Company's total sales. 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. The Company recorded wholesale sales from the David Aaron(R)
brand of $7,454,000 for the year ended December 31, 2001, or approximately 3% of
the Company's total revenues. Revenues from the sale of David Aaron footwear
increased by approximately 106% compared to the preceding year due to the
repositioning and reorganization of the David Aaron brand.
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l.e.i. (R) - WHOLESALE DIVISION
Pursuant to the Company's license agreement with R.S.V. Sport, Inc., the
Company has 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 are targeted to attract girls
and young women ages 6 to 20 years old, a majority of which are younger than the
typical Steve Madden(R) brand customer. The l.e.i. Wholesale Division generated
revenue of $42,592,000 for the year ended December 31, 2001, or approximately
17% of the Company's total revenues.
STEVIES INC. - WHOLESALE DIVISION
The Company's Stevies Wholesale Division ("Stevies Wholesale") generated
revenue of $10,984,000 for the year ended December 31, 2001, or approximately 5%
of the Company's total revenues. Stevies(R) now sells in store groups such as
Nordstrom, Federated Department Stores, May Department Stores, Belk, Dillard's,
Limited Too, as well as independent children's stores throughout the country.
STEVEN MADDEN RETAIL, INC. - RETAIL DIVISION
As of December 31, 2001, the Company owned and operated sixty-five (65)
retail shoe stores under the Steve Madden(R) name, two (2) under the David
Aaron(R) name, five (5) outlet stores and one (1) Internet store (through the
www.stevemadden.com, www.stevies.com and www.stevemaddenmens.com web sites). In
2001, the Company opened ten (10) new stores and closed two (2) under-performing
stores. 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. The retail stores have
been successful for the Company, generating annual sales in excess of $680 per
square foot. Sales are primarily from the sale of the Company's Steve Madden(R)
product line. Same store sales decreased 1% in 2001 over 2000 sales and total
sales for the retail division were $79 million compared to $70 million for 2000.
Sales from the retail division for the year ended December 31, 2001 were
approximately 33% 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 2002 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 for shoe manufacturers in Asia and South America 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 Sears, 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 $4,200,000
million for the year ended December 31, 2001.
LICENSING
As of December 31, 2001, the Company licensed the Steve Madden trademark for
use in connection with the manufacturing, marketing and sale of outerwear
(including leather outerwear), belts, handbags, sunglasses, eyewear and hosiery.
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.
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During 2001, the Company licensed the Stevies trademark for use in
connection with manufacturing, marketing and sale of sportswear, outerwear,
belts, handbags, sunglasses and hosiery, fashion accessories. In February 2001,
the Company terminated existing licensing agreements for jewelry and hair
accessories for the Steve Madden(R) and Stevies(R) brands, and sportswear for
the Stevies(R) brand.
DESIGN
The Company has established a reputation for its creative designs, popular
styles and quality products at accessible price points. 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 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.
The Company distributes its products from two (2) third party distribution
warehouse centers located in California and New Jersey and its own distribution
facility located in Florida. The Company also distributes its Internet shipments
from a third party fulfillment center located in Michigan. 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.
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 at wholesale to
department stores, including Federated Department Stores (Bloomingdale's, 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, Marshall Field's and Nordstrom; and approximately
thirty-eight percent (38%) to specialty stores, including Journeys, Limited Too
and Mandees; and catalog retailers, including Victoria's Secret and Fingerhut.
For the year ended December 31, 2001, May Department Stores, Federated
Department Stores and Nordstrom accounted for approximately twenty-one percent
(21%), eighteen percent (18%) and eleven percent (11%) of the Company's
wholesale sales, respectively.
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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-three percent (33%) and sixty-seven percent (67%) of total sales,
respectively. The following paragraphs describe each of these distribution
channels:
STEVE MADDEN AND DAVID AARON RETAIL STORES
As of December 31, 2001, the Company operated sixty-five (65) 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 stores are used as a marketing tool which allows the
Company to strengthen brand recognition and to showcase selected items from 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 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. The David Aaron(R) store has a more sophisticated
design and format styled to appeal to its more mature target audience. 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., 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, Inc., as the President of
Shoe Biz. Shoe Biz operates the five (5) outlet stores in New Jersey and New
York, three (3) 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 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 (Macy's, Bloomingdale's, Bon
Marche, Burdine's and Rich's), May Department Stores (Filene's, Hecht's, Famous
Barr, Foley's, Kaufmann's, Meier & Frank, Lord and Taylor and Robinsons May),
Nordstrom, Dillard's and Marshall Field's.
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.
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,
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assortment and 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 weaker sell-throughs.
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
Journeys, Limited Too and Mandees. The Company offers its 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 Victoria's Secret.
INTERNET SALES
The Company operates three (3) Internet web sites: www.stevemadden.com,
www.stevies.com and www.stevemaddenmens.com. 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 2001 derived from its Internet store increased 37% to $4,900,000 from
$3,500,000 in 2000.
As a result of the increased sales activity on the Company's web sites, the
Company entered into an agreement with Progressive Distribution Services in
April 2000. Under the terms of the Agreement, Progressive Distribution Services
provides direct-to-customer and other fulfillment services for purchases made on
the Company's web sites, including validation of customer credit, picking,
packing and shipment of footwear products to customers of the Company.
MILLE 21 DISTRIBUTION AGREEMENT
On January 7, 2002, the Company and Mille 21, Inc. ("Mille 21") entered into
a written agreement whereby the Company granted Mille 21 the exclusive right to
develop Steve Madden retail stores and sell Steve Madden products in South
Korea. Under the terms of the agreement, Mille 21 is obligated to open four (4)
Steve Madden stores in South Korea in 2002 and is also obligated to purchase
minimum amounts of Steve Madden products. The Company believes that establishing
a presence in South Korea is a first step toward expanding into the pacific rim.
COMPETITION
The fashion 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 fashion 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
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 competes
with several brands that are more established with greater consumer awareness,
including Kenneth Cole, 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, www.stevies.com and www.stevemaddenmens.com) where
consumers can purchase Steve Madden(R), Stevies and Steve Madden Mens products
and interact with both the Company and other customers.
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The Company also increased the marketing of the Steve Madden brand to
college students in 2001. The Company targeted universities for a series of
lively promotions, many of them tied in with musical performances.
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. 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 fourteen 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 senior
executives, a staff of twelve account executives, two 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 2001, a new AS400 computer platform was implemented to support the
Company's retail division. After the events of September 11, 2001, the Company
reevaluated and implemented an enhanced business resumption plan. This plan
insures that all mission critical business systems are available twenty four
hours a day, seven days a week with a supporting redundant network
infrastructure in place.
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 two points below the Prime Rate (as defined in such agreement). The
agreement provides that Capital Factors is not required to purchase all the
Company's receivables and requires 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, 2001 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 and service marks
have been registered in numerous International Classes (Int'l Cl. 25 for
clothing and footwear; Int'l Cl. 18 for leather goods, such as handbags and
wallets; Int'l Cl. 9 for eyewear; Int'l Cl. 14 for jewelry; Int'l Cl. 3 for
cosmetics and fragrances; Int'l Cl. 20 for picture frames and furniture; Int'l
Cl. 16 for paper goods; Int'l Cl. 24 for bedding; and Int'l Cl. 35 for retail
store services) in the United States. The Company also has trademark
registrations in the United States for the marks EYESHADOWS BY STEVE MADDEN
(Int'l Cl. 9 for eyewear), ICE TEA (Int'l Cl. 25 for clothing and footwear),
SOHO COBBLER (Int'l. Cl. 9 for eyewear; and Int'l Cl. 25 for clothing and
footwear), and SHOE BIZ By STEVE MADDEN (Int'l Cl. 25 for clothing and footwear;
and Int'l Cl. 35 for retail store services).
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The Company further owns registrations for the STEVE MADDEN and STEVE MADDEN
plus Design trademarks and service marks in various International Classes in
Argentina, Australia, Brazil, Canada, Chile, China, Colombia, Hong Kong, Israel,
Italy, Japan, Korea, Mexico, Panama, Saudi Arabia, South Africa, Taiwan, the 15
cooperating countries of Europe and the Benelux countries and has pending
applications for registration of the STEVE MADDEN and STEVE MADDEN plus Design
trademarks and service marks in Bahrain, Kuwait, Malaysia, Oman, Peru, Qatar,
the United Arab Emirates 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 for clothing and
footwear; Int'l Cl. 18 for leather goods, such as handbags and wallets; and
Int'l Cl. 35 for retail store services), Australia, Canada, Hong Kong, Israel,
Japan, South Africa and the 15 cooperating countries in Europe and for its D.
AARON trademark in Spain. The Company further has a 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 owns several
registrations for the STEVIES trademark and service mark in two International
Classes in the United States (Int'l Cl. 18 for leather goods, such as handbags
and wallets; and Int'l Cl. 9 for eyewear) and for its STEVIES plus Design mark
for various goods in Hong Kong and the 15 cooperating countries in Europe.
Additionally, Stevies, Inc. 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 for clothing
and footwear; Int'l Cl. 18 for leather goods, such as handbags and wallets;
Int'l Cl. 9 for eyewear; Int'l Cl. 14 for jewelry; Int'l Cl. 3 for cosmetics and
fragrances; Int'l Cl. 16 for paper goods; Int'l Cl. 28 for toys; Int'l Cl. 26
for hair accessories; and Int'l Cl. 35 for retail store services) and in
Argentina, Bahrain, Brazil, Canada, China, Colombia, Indonesia, Japan, Korea,
Kuwait, Malaysia, Mexico, Oman, Panama, Peru, Qatar, Saudi Arabia, South Africa,
Thailand, Taiwan, the United Arab Emirates and Venezuela. Finally, Stevies, Inc.
also owns several pending trademark and service mark applications for
registration of the STEVIES BY STEVE MADDEN mark in various International
Classes in the United States (Int'l Cl. 25 for clothing and footwear; Int'l Cl.
14 for jewelry; Int'l Cl. 18 for leather goods, such as handbags and wallets;
Int'l Cl. 16 for paper goods; Int'l Cl. 3 for cosmetics and fragrances; Int'l
Cl. 9 for eyewear; Int'l Cl. 26 for hair accessories; Int'l Cl. 28 for toys; and
Int'l Cl. 35 for retail store services).
EMPLOYEES
At March 18, 2002, the Company employed approximately 1,023 employees, of
whom approximately 313 work on a full-time basis and approximately 710 work on a
part-time basis. The management of the Company considers relations with its
employees to be good.
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.
The Company's l.e.i.(R) showroom is located at 2300 Stemmons Freeway,
Dallas, Texas. The Company's l.e.i. brands are displayed from this 1,080 square
foot space. The lease for this showroom expires in September 2004.
7
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 January 31, 2003. In addition, the Company has
engaged three independent distributors to warehouse and distribute its products.
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 3
2004 3
2005 4
2006 2
2007 6
2008 13
2009 12
2010 11
2011 16
2012 2
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.
On June 20, 2000, Steven Madden, the Company's former Chairman and Chief
Executive Officer, was indicted in the United States District Courts for the
Southern District and Eastern District of New York. The indictments alleged 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. On May 21, 2001, Steven Madden entered into a plea agreement with the
U.S. Attorney's Office, pursuant to which he pled guilty to four of the federal
charges filed against him. In addition, Mr. Madden reached a separate settlement
agreement with the Securities and Exchange Commission regarding the allegations
contained in its complaint. As a result, Mr. Madden resigned as the Company's
Chief Executive Officer and as a member of the Company's Board of Directors
effective July 1, 2001. Mr. Madden has agreed to serve as the Company's Creative
and Design Chief, a non-executive position. It is expected that Mr. Madden will
be sentenced in April 2002. Under the settlement agreement with the Securities
and Exchange Commission, Mr. Madden has agreed to not serve as an officer or
director of a publicly traded company for 7 years. Neither the indictments nor
the Securities and Exchange Commission complaint allege any wrongdoing by the
Company or its other officers and directors.
In December 2001, the Company purchased a loss mitigation policy to cover
costs arising out of lawsuits related to the June 2000 federal indictment of
Steve Madden, the Company's former Chief Executive Officer. The policy covers
the Company's anticipated damages and legal costs in connection with such
lawsuits. The Company is obligated to pay for damages and costs in excess of the
policy limits. The cost of the policy was $6,950,000.
Class Action
Between June and August 2000, 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 (the former President and a former director of the
Company) 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
8
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. On or about October 31, 2001, plaintiffs filed a
Second Consolidated Amended Class Action Complaint. The pleading names the
Company, Steven Madden, Rhonda J. Brown and Arvind Dharia as defendants. It
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. On November 30, 2001, all of the defendants served
motions to dismiss the Consolidated Amended Complaint. The motions were fully
briefed on January 14, 2002. Since that time, a settlement in principle of these
actions has been reached, subject to execution of definitive settlement
documentation, notices to class members, a hearing and approval by the District
Court. The tentative settlement is within the limits of the Company's insurance
coverage.
Shareholder Derivative Actions
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. On October 1, 2001, plaintiff filed a Second
Amended Complaint. On November 2, 2001, the Company filed a motion to dismiss
this pleading on grounds that plaintiff had failed to make a pre-litigation
demand upon the Company's board of directors. On February 7, 2002, the
Magistrate Judge filed a Report recommending that the Company's motion to
dismiss be denied. The Company filed its objections to the Report on March 4,
2002. The Company believes, after consultation with counsel, that its defense
costs and certain attorneys fees in connection with this action will be subject
to coverage by the Company's insurance as supplemented by the loss mitigation
policy described above.
On or about November 28, 2001, a purported shareholder derivative complaint
was filed in the United States District Court for the Eastern District of New
York, captioned Herrera v. Karson, et al., 00 CV 7868. Named as defendants
therein are the Company (as nominal defendant) and certain of the Company's
present and/or former directors. The complaint alleges that the individual
defendants breached their fiduciary duties to the Company in connection with a
decision by the Board of Directors of the Company to enter into an employment
agreement with Mr. Steven Madden in or about May 2001. The complaint seeks
declaratory and other equitable relief, as well as an unspecified amount of
compensatory damages, costs and expenses. On or about February 1, 2002,
plaintiff filed an Amended Shareholder Derivative Complaint (the "Amended
Complaint"). The Amended Complaint contains substantially the same allegations
and names the same defendants as the original complaint. The Company believes,
after consultation with counsel, that its defense costs and certain attorneys
fees in connection with this action will be subject to coverage by the Company's
insurance as supplemented by the loss mitigation policy described above.
SEC Investigation
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.
Other Actions
On or about September 17, 2001, an action was commenced against the Company
in the Supreme Court, Queens County, captioned Mitch Stewart v. Steven Madden,
Ltd. Mr. Stewart is a former independent contractor
9
for the Company. The complaint seeks damages of approximately $1.3 million for
breach of contract. On December 20, 2001, the Company answered the complaint,
denying the allegations and asserting various affirmative defenses. On January
25, 2002, the plaintiff filed a motion for partial summary judgement, which is
pending. The Company believes that it has substantial defenses to the claims
asserted in the lawsuit.
On or about November 29, 2001, an action was commenced against the Company
for breach of contract in the United States District Court, Eastern District of
Texas, captioned Lina Enterprises v. Steven Madden, Ltd. Lina is a former
independent contractor for the Company. The complaint seeks damages for breach
of contract. The complaint does not specify the amount of damages being sought,
but alleges that they are greater than $75,000. On March 13, 2002, the Company
filed a motion to dismiss the complaint. The Company believes that it has
substantial defenses to the claims asserted in the lawsuit.
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, 2001.
10
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, 2001 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
------------- ------------- ------------ ------------
2001 2000
Quarter ended 15.125 7.656 Quarter ended 19 12 1/2
March 31, 2001 March 31, 2000
Quarter ended June 30, 19.050 13.350 Quarter ended June 30, 22 7/16 6 9/16
2001 2000
Quarter ended 19.890 7.450 Quarter ended 12 11/16 6 13/16
September 30, 2001 September 30, 2000
Quarter ended 14.200 8.900 Quarter ended 8 15/32 7
December 31, 2001 December 31, 2000
On March 26, 2002, the final quoted price as reported by The Nasdaq National
Market was $17.35 for each share of common stock. As of March 26, 2002, there
were 12,365,216 shares of Common Stock outstanding, held of record by 73 record
holders and approximately 3,402 beneficial owners.
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.
11
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 2001, 2000
and 1999 and the Balance Sheet Data as of December 31, 2001 and 2000 should be
read in Conjunction with the Company's audited consolidated financial statements
and notes thereto appearing elsewhere herein.
Year Ended December 31,
---------------------------------------------------------------------------
2001 2000 1999 1998 1997
----------- ----------- ----------- ---------- ----------
INCOME STATEMENT DATA:
Net sales 243,391,000 205,113,000 163,036,000 85,783,000 59,311,000
Cost of sales 143,518,000 115,495,000 94,536,000 49,893,000 34,744,000
Gross profit 99,873,000 89,618,000 68,500,000 35,890,000 24,567,000
Commissions and licensing fee 5,911,000 4,847,000 3,367,000 3,273,000 2,321,000
Operating expenses (79,472,000) (68,833,000) (52,946,000) (29,949,000) (22,262,000)
Cost of loss mitigation coverage (6,950,000)
Income from operations 19,362,000 25,632,000 18,921,000 9,214,000 4,626,000
Interest income 1,344,000 1,744,000 909,000 380,000 312,000
Interest expense (66,000 (102,000) (90,000) (235,000) (339,000)
Gain on sale of marketable securities 71,000 230,000
Income before provision for income taxes 20,711,000 27,504,000 19,740,000 9,359,000 4,599,000
Provision for income taxes 8,595,000 11,461,000 8,274,000 3,912,000 1,899,000
Net Income 12,116,000 16,043,000 11,466,000 5,447,000 2,700,000
Basic income per share $1.04 $1.42 $1.06 $.058 $0.33
Diluted income per share $0.94 $1.26 $0.92 $0.50 $0.30
Weighted average common shares
outstanding-basic income per share 11,617,862 11,310,130 10,831,250 9,436,798 8,064,604
Effect of potential common shares from
exercise of options and warrants 1,330,002 1,387,244 1,634,102 1,546,303 848,462
Weighted average common shares
outstanding 12,947,864 12,697,374 12,465,352 10,983,101 8,913,066
BALANCE SHEET DATA
Total assets 100,822,000 91,733,000 78,135,000 48,928,000 29,277,000
Working capital 82,633,000 57,207,000 48,076,000 33,627,000 16,545,000
Noncurrent liabilities 1,313,000 1,130,000 980,000 681,000 359,000
Stockholders' equity 102,360,000 76,566,000 62,435,000 44,960,000 25,793,000
12
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 SALES
-----------------------
YEAR ENDED
----------
DECEMBER 31
-----------
($ in thousands)
Consolidated: 2001 2000 1999
- ------------ ---- ---- ----
Net Sales $243,391 100% $205,113 100% $163,036 100%
Cost of Sales 143,518 59 115,495 56 94,536 58
Other Operating Income 5,911 2 4,847 2 3,367 2
Operating Expenses 79,472 33 68,833 34 52,946 32
Cost of Loss Mitigation Coverage 6,950 3 -- -- -- --
Income from Operations 19,362 8 25,632 12 18,921 12
Interest and Other Income (Expense) Net 1,349 1 1,872 1 819 1
Income Before Income Taxes 20,711 9 27,504 13 19,740 12
Net Income 12,116 5 16,043 8 11,466 7
13
PERCENTAGE OF NET SALES
-----------------------
YEAR ENDED
----------
DECEMBER 31
-----------
($ in thousands)
By Segment 2001 2000 1999
-------- -------- --------
WHOLESALE DIVISIONS:
- --------------------
Steven Madden, Ltd.
- -------------------
Net Sales $ 92,413 100% $ 87,977 100% $ 78,890 100%
Cost of Sales 60,052 65 54,707 62 49,770 63
Other Operating Income 1,462 2 959 1 807 1
Operating Expenses 24,929 27 25,422 29 22,758 29
Cost of Loss Mitigation Coverage 6,950 8 -- -- -- --
Income (Loss) from Operations 1,944 2 8,807 10 7,169 9
l.e.i. Footwear:
- ----------------
Net Sales $ 42,592 100% $ 37,741 100% $ 27,546 100%
Cost of sales 26,859 63 23,657 63 17,856 65
Operating Expenses 9,833 23 7,652 20 5,856 21
Income from Operations 5,900 14 6,432 17 3,834 14
Madden Mens:
- ------------
Net Sales $ 10,461 100% -- -- -- --
Cost of sales 6,737 64 -- -- -- --
Operating Expenses 3,340 32 -- -- -- --
Income from Operations 384 4 -- -- -- --
Diva Acquisition Corp:
- ----------------------
Net Sales $ 7,454 100% $ 3,616 100% $ 7,970 100%
Cost of sales 5,384 72 2,591 72 5,296 66
Operating Expenses 1,796 24 1,231 34 1,547 19
Income (Loss) from Operations 274 4 (206) (6) 1,127 14
Stevies Inc.:
- -------------
Net Sales $ 10,984 100% $ 6,147 100% -- --
Cost of sales 7,014 64 3,846 63 -- --
Other Operating Income 249 2 257 4 -- --
Operating Expenses 2,626 24 1,595 26 -- --
Income from Operations 1,593 15 963 16 -- --
STEVEN MADDEN RETAIL INC.:
- --------------------------
Net Sales $ 79,487 100% $ 69,632 100% $ 48,630 100%
Cost of Sales 37,472 47 30,694 44 21,614 44
Operating Expenses 34,992 44 30,937 44 21,106 43
Income from Operations 7,023 9 8,001 12 5,910 12
14
PERCENTAGE OF NET SALES
-----------------------
YEAR ENDED
----------
DECEMBER 31
-----------
($ in thousands)
By Segment (Continued)
ADESSO MADDEN INC.: 2001 2000 1999
- ------------------- -------- -------- --------
(FIRST COST)
Other Operating Revenue $ 4,200 100% $ 3,631 100% $ 2,560 100%
Operating Expenses 1,956 47 1,996 55 1,679 66
Income from Operations 2,244 53 1,635 45 881 34
RESULTS OF OPERATIONS
($ in thousands)
YEAR ENDED DECEMBER 31, 2001 VS. YEAR ENDED DECEMBER 31, 2000
CONSOLIDATED:
- -------------
Sales for the year ended December 31, 2001 were $243,391 or 19% higher than
the $205,113 in the comparable period of 2000. The increase in sales is due to
several factors, including (i) additional revenues of $10,461 from the Company's
new Madden Mens Wholesale Division which commenced shipping in the first quarter
of 2001 (ii) a 14% increase in retail sales due to the opening of additional
retail stores, (iii) a 13% increase in sales from the l.e.i. Wholesale Division
("l.e.i. Wholesale"), (iv) a 79% increase in sales from the Stevies Wholesale
Division ("Stevies Wholesale"), (v) a 106% increase in sales from the Diva
Acquisition Corp. Wholesale Division ("Diva Wholesale"), (vi) the addition in
wholesale accounts, and (vii) an increase in public awareness with respect to
the Company's brands.
Consolidated gross profit as a percentage of sales decreased from 44% in
2000 to 41% in 2001. The decrease in gross margin resulted from greater
promotional activity at retail this year due to sluggish July sales and the
tragic events of September 11th and its aftermath. Margin pressures from
wholesale large accounts prompted the Company to be early and aggressive with
markdowns in a highly promotional retail climate. Finally, the decrease in the
Company's higher margin retail business as a percentage of total sales
contributed to the margin erosion.
Selling, general and administrative (SG&A) expenses increased to $79,472 in
2001 from $68,833 in 2000. The increase in SG&A expenses is due primarily to a
28% increase in payroll, officers' bonuses and payroll-related expenses from
$24,268 in 2000 to $31,004 in 2001. Also, selling and designing expenses
increased by 19% from $10,510 in 2000 to $12,499 in 2001. This is due in part to
an increase in sales in the current period and to the Company's increased focus
on selling and designing activities. The increase in the number of retail
outlets and expanded corporate office facilities resulted in an increase in
occupancy, telephone and utilities expenses by 19% from $9,208 in 2000 to
$10,957 in 2001.
Income from operations for 2001 was $19,362, which represents a decrease of
$6,270 over the income from operations of $25,632 in 2000 due to a non-recurring
charge taken in the fourth quarter of 2001 as a result of the purchase of loss
mitigation insurance coverage in the amount of $6,950. Net income decreased to
$12,116 in 2001 from $16,043 in 2000 due to the factors mentioned above.
15
WHOLESALE DIVISIONS:
- --------------------
Sales from the Steve Madden Women's Wholesale Division ("Madden Wholesale")
accounted for $92,413 or 38%, and $87,977 or 43%, of total sales in 2001 and
2000, respectively. The increase in sales was driven by the sales of key styles
including euro-sport casuals, pointed toe and Madden slippers. Also, sales were
driven by an increase in reorders through open stock replenishment for late
spring and fall items. Gross profit as a percentage of sales decreased from 38%
in 2000 to 35% in 2001 due to margin pressures from Madden Wholesale large
accounts which prompted the Company to be early and aggressive with markdowns in
a highly promotional retail climate. Operating expenses decreased to $24,929 in
2001 from $25,422 in 2000 due to decreases in advertising and marketing
expenses. Madden Wholesale income from operations decreased to $1,944 in 2001
compared to income from operations of $8,807 in 2000 due to a non-recurring
charge taken in the fourth quarter of 2001 as a result of the purchase of loss
mitigation insurance coverage in the amount of $6,950.
Sales from l.e.i. Wholesale accounted for $42,592 or 17%, and $37,741 or
18%, of total sales in 2001 and 2000, respectively. Revenues for the year ended
December 31, 2001 increased 13% over the same period of 2000. The focus of the
l.e.i. Wholesale expansion was in the department stores such as May Department
Stores, and specialty store channels such as Journeys. Gross profit as a
percentage of sales remained the same in 2000 and 2001. Operating expenses
increased to $9,833 in 2001 from $7,652 in 2000 due to increases in payroll and
payroll-related expenses. Additionally, selling and designing expenses increased
due to an increase in sales in the current period. Income from operations for
l.e.i. Wholesale was $5,900 in 2001 compared to income from operations of $6,432
in 2000.
The Company's new Madden Mens Wholesale Division ("Madden Mens Wholesale")
commenced shipping in the first quarter of 2001. Madden Mens Wholesale generated
revenues of $10,461 for the year ended December 31, 2001. The Company is pleased
by the market's acceptance of the new mens line, particularly in the
sport-casual classification.
Sales from Diva Wholesale accounted for $7,454 or 3%, and $3,616 or 2%, of
total sales in 2001 and 2000, respectively. The Company believes that the
increase in sales was driven by placements of its new product line in major
department stores, specialty stores, and specialty catalogues. Gross profit as a
percentage of sales remained the same in 2000 and 2001. Operating expenses
increased to $1,796 in 2001 from $1,231 in 2000 due to increases in payroll and
payroll-related expenses. Additionally, selling and related expenses increased
due to an increase in sales in the current period. Income from operations for
Diva Wholesale was $274 for the year ended December 31, 2001 which represents a
233% increase over loss from operations of $206 during the same period in 2000.
Sales from the Stevies Wholesale, which commenced shipping in the second
quarter of 2000, accounted for 10,984 or 5%, and $6,147 or 3%, of total sales in
2001 and 2000, respectively. This increase was primarily due to a full year of
operation and the growth in accounts such as Limited Too and Nordstrom. Gross
profit as a percentage of sales decreased from 37% in 2000 to 36% in 2001 due to
margin pressures from some of Stevies' large accounts which prompted the Company
to be early and aggressive with markdowns in a highly promotional retail
climate. Operating expenses increased to $2,626 in 2001 from $1,595 in 2000 due
to increases in payroll and payroll-related expenses. Additionally, selling and
designing expenses increased due to an increase in sales in the current period.
Income from operations for Stevies Wholesale was $1,593 in 2001 compared to
income from operations of $963 in 2000.
RETAIL DIVISION:
- ----------------
Sales from the Retail Division accounted for $79,487 or 33% and $69,632 or
34% of total sales in 2001 and 2000, respectively. This increase in Retail
Division sales is primarily due to the increase in the number of Steve Madden
retail stores. During the year ended December 31, 2001, the Company closed two
of its least productive stores located in Coconut Grove, Florida and in Mineola,
New York. The Company is considering new sites with greater projected
productivity. As of December 31, 2001, there were 73 Steve Madden retail stores
compared to 65 stores as of December 31, 2000. Same store sales for the year
ended December 31, 2001 decreased by 1% compared to the same store sales for
2000 due to sluggish consumer traffic in the aftermath of September 11th.
Revenues from the Internet store for the year ended December 31, 2001 were in
excess of $4,000, showing an increase of 37% over such revenues in 2000. Gross
profit as a percentage of sales decreased from 56% in 2000 to 53% in 2001 due to
16
greater promotional activity at retail this year. Operating expenses for the
Retail Division increased to $34,992 or 44% of sales in 2001 from $30,937 or 44%
of sales in 2000. This increase in dollars was due to increases in payroll and
payroll-related expenses and occupancy expenses as a result of opening ten
additional stores since December 31, 2000. Income from operations for the Retail
Division was $7,023 in 2001 compared to income from operations of $8,001 in
2000.
ADESSO-MADDEN DIVISION:
- -----------------------
Adesso-Madden, Inc. generated commission revenues of $4,200 for the year
ended December 31, 2001, which represents a 16% increase over commission
revenues of $3,631 during the same period in 2000. This increase was primarily
due to the growth in accounts such as Walmart and Target and the addition of
children's products to the assortment mix. Operating expenses decreased to
$1,956 in 2001 from $1,996 in 2000. Income from operations for Adesso-Madden was
$2,244 in 2001 compared to income from operations of $1,635 in 2000.
YEAR ENDED DECEMBER 31, 2000 VS. YEAR ENDED DECEMBER 31, 1999
CONSOLIDATED:
- -------------
Sales for the year ended December 31, 2000 were $205,113 or 26% higher than
the $163,036 recorded in the comparable period of 1999. The increase in sales
was 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 increase in same store sales,
(iii) a 37% increase in sales from 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 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 2000 and
commenced engaging in e-commerce transactions in July 2000.
Consolidated gross profit as a percentage of sales in 2000 increased to 44%
as compared to 42% for 1999 due to increased retail sales which were 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 was 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 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 and warehouse facilities resulted in an increase in
occupancy, telephone, utilities, warehouse, computer, printing/supplies and
depreciation expenses of 47% from $12,162 in 1999 to $17,820 in 2000.
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 Steve Madden Women's Wholesale accounted for $87,977 or 43%, and
$78,890 or 48%, of total sales in 2000 and 1999, respectively. This increase in
sales was 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 was
due to an increase in
17
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 during 2000 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 l.e.i. Wholesale accounted for $37,741 or 18%, and $27,546 or
17%, of total sales in 2000 and 1999, 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. The l.e.i. footwear was sold 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, and in specialty store chains, such as
Journeys and Mandees. Also, during the third quarter of 2000, l.e.i. Wholesale
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 Wholesale 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 was due to the repositioning and reorganization of the David
Aaron brand. The Company intentionally planned to reduce sales volume in 2000
enabling Diva Wholesale 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.
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 sold
in over 1,200 doors including store groups such as Nordstrom, Federated
Department Stores, May Department Stores, Belk, Dillard's, Limited Too, as well
as, children's independent shoe stores throughout the country. The Stevies brand
ended the fourth quarter of 2000 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 was primarily due to the increase in the number of Steve Madden
retail stores. 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 was 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's sales generated through its websites at www.stevemadden.com and
www.stevies.com continued to increase as the Company made additional styles
available for sale on its website and usage of the Internet continued to grow.
Also, the web sites for the Madden Mens at www.stevemaddenmens.com was 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.
18
ADESSO-MADDEN DIVISION:
- -----------------------
Adesso-Madden, Inc. generated commission revenues of $3,631 for the year
ended December 31, 2000, which represented 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.
LICENSE AGREEMENTS
Revenues from licensing increased by 41% to $1,711 for the year ended 2001
from $1,216 in 2000. This increase was primarily driven by increases in
licensing income from leather sportswear and sunglasses. As of December 31,
2001, the Company had six license partners covering six product categories for
its Steve Madden brand. Also, as of December 31, 2001, the Company had three
license partners covering three product categories for its Stevies brand. The
product categories include handbags, hosiery, sunglasses, eyewear, belts and
outerwear.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $82,633 at December 31, 2001 compared to
$57,207 in working capital at December 31, 2000, representing an increase of
$25,426, which was primarily due to the Company's net income and proceeds
received from the exercise of options.
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 two points below the Prime Rate (as defined in such agreement). The
agreement with Capital Factors was renewed as of December 31, 2001 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.
OPERATING ACTIVITIES
During the year ended December 31, 2001, cash provided by operating
activities was $9,393. Uses of cash arose principally from an increase in
factored accounts receivable of $8,364 and an increase in prepaid expenses and
other assets of $7,484 principally from prepaid income taxes. Cash was provided
principally by net income of $12,116 and a decrease in accounts payables and
accrued expenses of $4,054.
The Company leases office, showroom, warehouse and retail facilities under
non-cancelable operating leases with terms expiring at various times through
2012. Future minimum annual lease payments under non-cancelable operating leases
consist of the following at December 31:
2002 $ 7,172,000
2003 6,835,000
2004 6,742,000
2005 6,346,000
2006 6,329,000
Thereafter 15,834,000
---------------
$ 49,258,000
===============
The Company has employment agreements with four key executives and its
Creative Design Chief as of December 31, 2001 providing for aggregate annual
salaries of approximately $1,625 subject to annual bonuses and annual increases
as may be determined by the Company's Board of Directors. In addition, as part
of four of the employment agreements, the Company is committed to pay incentive
bonuses based on income before interest, depreciation and taxes.
19
A significant portion of the Company's product is supplied from foreign
manufacturers, the majority of which are located in Brazil, China, Italy and
Spain. 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 makes approximately ninety-five percent (95%) of
its purchases in U.S. dollars.
CAPITAL IMPROVEMENT ACTIVITIES
During the year ended December 31, 2001, the Company used cash of $3,415
primarily for leasehold improvements on new retail stores and corporate office
space and for a new point of sale computer system for the retail stores.
FINANCING ACTIVITIES
During the year ended December 31, 2001, the Company received $8,998 from
the sale of its common stock in connection with the exercise of stock options.
On February 29, 2000, the Company announced a 1,500,000 share repurchase
program. As of December 31, 2000, the Company had repurchased 900,000 shares of
the Company's common stock at a total cost of $6,076 under this program. The
Company had a total of 600,000 shares remaining for repurchase as of September
24, 2001. On September 24, 2001 the Company announced that the share repurchase
program was increased by 3 million shares. The Company did not repurchase any
common stock during 2001.
OTHER CONSIDERATIONS
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 current Creative and Design Chief and former
Chairman and Chief Executive Officer. On June 20, 2000, Mr. Madden was indicted
in the United States District Courts for the Southern District and Eastern
District of New York. The indictments alleged 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. On May 21, 2001,
Steven Madden entered into a plea agreement with the U.S. Attorney's Office,
pursuant to which he pled guilty to four of the federal charges filed against
him. In addition, Mr. Madden reached a separate settlement agreement with the
Securities and Exchange Commission regarding the allegations contained in its
complaint. As a result, Mr. Madden resigned as the Company's Chief Executive
Officer and as a member of the Company's Board of Directors effective July 1,
2001. Mr. Madden has agreed to serve as the Company's Creative and Design Chief,
a non-executive position. It is expected that Mr. Madden will be sentenced in
April 2002. Under the settlement agreement with the Securities and Exchange
Commission, Mr. Madden has agreed to not serve as an officer or director of a
publicly traded company for 7 years. Neither the indictments nor the Securities
and Exchange Commission complaint allege any wrongdoing by the Company or its
other officers and directors.
The Company maintains a key person life insurance policy on Mr. Madden with
coverage in the amount of $10,000,000. The Company has an employment contract
with Mr. Madden that expires on June 30, 2011. Under the terms of his employment
contract, if Mr. Madden is terminated for other than cause, death or total
disability, the Company will be required to pay the remaining base salary due
under his contract, half of which must be paid upon termination. Mr. Madden is
also entitled during the term of the contract to an annual $200,000
non-accountable expense account payable in monthly installments; however, the
Company is not required to pay this non-accountable expense allowance for any
month that Mr. Madden is not actively engaged in the duties of Creative and
Design Chief. If, during the period commencing 120 days prior to a change of
control and ending on the first anniversary of a change of control, Mr. Madden's
employment is terminated by the Company (other than for cause) or by Mr. Madden
for good reason, Mr. Madden will be entitled to receive a lump sum payment equal
to three times his compensation for the preceding 12-month period ending
December 31st.
The Company believes that Mr. Madden is integral to attracting talented shoe
designers. Since Mr. Madden is involved in many material creative aspects of the
Company's business, there can be no assurance that a suitable replacement for
Mr. Madden could be found if he was unable to perform services for the Company.
As a consequence, the loss of Mr. Madden 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
20
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
markdown requests from customers could have a material adverse effect on the
Company's business, financial condition and results of operations.
The industry in which the Company operates is 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 fashion-oriented nature of the Company's industry
and the rapid changes in customer preferences leave the Company vulnerable to an
increased risk of inventory obsolescence. Thus, 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 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 sales. Presently, the Company sells
approximately sixty-two percent (62%) of its products at wholesale to department
stores, including Federated Department Stores (Bloomingdale's, Bon Marche,
Burdines, Macy's and Rich's), Dillard's, Nordstrom, Marshall Field's and May
Department Stores (Famous Barr, Filene's, Foley's, Hecht's, Kaufmann's, Meier &
Frank, Lord and Taylor and Robinsons May) and approximately thirty-eight (38%)
percent of its products at wholesale to specialty stores, including shoe
boutiques. The Company's largest customers, May Department Stores, Federated
Department Stores, and Nordstrom, 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 Department Stores, May Department
Stores, Nordstrom or any other significant customer, whether motivated by
competitive
21
conditions, financial difficulties or otherwise, to decrease the amount of
merchandise purchased from 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. Pursuant to the Factoring
Agreement between Capital Factors and the Company, Capital Factors currently
assumes the credit risk related to approximately 95% of the Company's accounts
receivables. 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.
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, 2001, approximately 90% of the Company's products were
purchased from sources outside the United States, including 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 condition 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
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
22
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, Steve Madden Mens 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 approximately ten (10) Steve Madden retail stores in 2002.
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 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 and (ii) the introduction of new products.
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 and 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
23
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 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 effect 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 effect on the Company's
business, financial condition and results of operations.
Outstanding Options. As of March 11, 2002, the Company had outstanding
options to purchase an aggregate of approximately 2,089,514 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 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.
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.
24
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:
25
STEVEN MADDEN, LTD. AND SUBSIDIARIES
CONTENTS
PAGE
----
CONSOLIDATED FINANCIAL STATEMENTS
Independent auditors' report F-2
Balance sheets as of December 31, 2001 and 2000 F-3
Statements of operations for the years ended
December 31, 2001, 2000 and 1999 F-4
Statements of changes in stockholders' equity for the
years ended December 31, 2001, 2000 and 1999 F-5
Statements of cash flows for the years ended
December 31, 2001, 2000 and 1999 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, 2001 and 2000, 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, 2001.
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, 2001 and 2000, 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, 2001 in conformity with accounting
principles generally accepted in the United States.
Richard A. Eisner & Company, LLP
New York, New York
February 22, 2002
With respect to Notes J[1] and J[2],
March 4, 2002
F-2
STEVEN MADDEN, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
------------------------------
2001 2000
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 50,179,000 $ 35,259,000
Accounts receivable - net of allowances of $257,000 and $774,000 2,072,000 2,417,000
Due from factor - net of allowances of $1,387,000 and $866,000 22,783,000 15,155,000
Inventories 15,818,000 15,824,000
Prepaid expenses and other current assets 836,000 1,145,000
Prepaid taxes 7,911,000 144,000
Deferred taxes 1,223,000 1,300,000
------------- -------------
Total current assets 100,822,000 71,244,000
Property and equipment, net 15,707,000 15,600,000
Deferred taxes 3,019,000 2,462,000
Deposits and other 248,000 222,000
Cost in excess of fair value of net assets acquired - net of accumulated
amortization of $714,000 and $575,000 2,066,000 2,205,000
------------- -------------
$ 121,862,000 $ 91,733,000
============= =============
LIABILITIES
Current liabilities:
Current portion of capital lease obligations $ 43,000 $ 128,000
Accounts payable 6,836,000 9,502,000
Accrued expenses 10,898,000 4,178,000
Accrued bonuses 412,000 229,000
------------- -------------
Total current liabilities 18,189,000 14,037,000
Deferred rent 1,299,000 1,074,000
Capital lease obligations, less current portion 14,000 56,000
------------- -------------
19,502,000 15,167,000
------------- -------------
Commitments, contingencies and other (Note J)
STOCKHOLDERS' EQUITY
Preferred stock - $.0001 par value, 5,000,000 shares authorized; none issued
Series A Junior Participating preferred stock - $.0001 par value, 60,000
shares authorized; none issued
Common stock - $.0001 par value, 60,000,000 shares authorized, 13,439,020 and
12,306,684 shares issued, 12,193,816 and 11,061,480 shares
outstanding 1,000 1,000
Additional paid-in capital 60,643,000 46,688,000
Retained earnings 50,881,000 38,765,000
Unearned compensation (1,174,000) (897,000)
Treasury stock - 1,245,204 shares at cost (7,991,000) (7,991,000)
------------- -------------
102,360,000 76,566,000
------------- -------------
$ 121,862,000 $ 91,733,000
============= =============
See Notes to Financial Statements F-3
STEVEN MADDEN, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
-----------------------------------------------
2001 2000 1999
------------- ------------- -------------
Net sales:
Wholesale $ 163,904,000 $ 135,481,000 $ 114,406,000
Retail 79,487,000 69,632,000 48,630,000
------------- ------------- -------------
243,391,000 205,113,000 163,036,000
------------- ------------- -------------
Cost of sales:
Wholesale 106,046,000 84,801,000 72,922,000
Retail 37,472,000 30,694,000 21,614,000
------------- ------------- -------------
143,518,000 115,495,000 94,536,000
------------- ------------- -------------
Gross profit 99,873,000 89,618,000 68,500,000
Commission and licensing fee income 5,911,000 4,847,000 3,367,000
Operating expenses (79,472,000) (68,833,000) (52,946,000)
Cost of loss mitigation coverage (6,950,000)
------------- ------------- -------------
Income from operations before other income (expenses) 19,362,000 25,632,000 18,921,000
Other income (expenses):
Interest income 1,344,000 1,744,000 909,000
Interest expense (66,000) (102,000) (90,000)
Gain on sale of marketable securities 71,000 230,000
------------- ------------- -------------
Income before provision for income taxes 20,711,000 27,504,000 19,740,000
Provision for income taxes 8,595,000 11,461,000 8,274,000
------------- ------------- -------------
NET INCOME $ 12,116,000 $ 16,043,000 $ 11,466,000
============= ============= =============
BASIC INCOME PER SHARE $1.04 $1.42 $1.06
===== ===== =====
DILUTED INCOME PER SHARE $0.94 $1.26 $0.92
===== ===== =====
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC
INCOME PER SHARE 11,617,862 11,310,130 10,831,250
EFFECT OF DILUTIVE SECURITIES - OPTIONS 1,330,002 1,387,244 1,634,102
------------- ------------- -------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - DILUTED
INCOME PER SHARE 12,947,864 12,697,374 12,465,352
============= ============= =============
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, 1998 10,940,643 $ 1,000 $ 36,601,000 $ 11,256,000 $ (1,661,000)
Exercise of stock options 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 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)
Exercise of stock options 1,122,336 8,998,000
Tax benefit from exercise of options 2,765,000
Compensation in connection with issuance of
stock options 2,004,000 (810,000)
Compensation in connection with issuance of
restricted stock 10,000 188,000
Net income 12,116,000
Amortization of unearned compensation 533,000
---------- ------- ------------ ------------ ------------
BALANCE - DECEMBER 31, 2001 13,439,020 $ 1,000 $ 60,643,000 $ 50,881,000 $ (1,174,000)
========== ======= ============ ============ ============
Treasury Stock Total
----------------------- Stockholders'
Shares Amount Equity
--------- ----------- -------------
BALANCE - DECEMBER 31, 1998 270,204 $(1,237,000) $ 44,960,000
Exercise of stock options 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 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
Exercise of stock options 8,998,000
Tax benefit from exercise of options 2,765,000
Compensation in connection with issuance of
stock options 1,194,000
Compensation in connection with issuance of
restricted stock 188,000
Net income 12,116,000
Amortization of unearned compensation 533,000
--------- ----------- -------------
BALANCE - DECEMBER 31, 2001 1,245,204 $(7,991,000) $ 102,360,000
========= =========== =============
See notes to financial statements F-5
STEVEN MADDEN, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
--------------------------------------------
2001 2000 1999
------------ ------------ ------------
Cash flows from operating activities:
Net income $ 12,116,000 $ 16,043,000 $ 11,466,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Compensatory stock options and restricted stock 1,382,000 766,000
Depreciation and amortization 3,447,000 3,586,000 2,950,000
Deferred taxes (480,000) (1,350,000) (1,585,000)
Deferred compensation 533,000 382,000 382,000
Tax benefit from exercise of options 2,765,000 975,000 275,000
Provision for doubtful accounts and chargebacks 219,000 506,000 757,000
Deferred rent expense 225,000 297,000 392,000
Gain on sale of marketable securities (71,000) (230,000)
Changes in:
Accounts receivable 862,000 (1,474,000) (767,000)
Due from factor (8,364,000) (3,251,000) (3,062,000)
Inventories 6,000 (5,666,000) (2,187,000)
Prepaid expenses, prepaid taxes and other assets (7,484,000) (375,000) 2,098,000
Accounts payable and accrued expenses 4,054,000 4,610,000 6,120,000
Accrued bonuses 183,000 (348,000) 346,000
Income tax payable (4,957,000) 4,957,000
------------ ------------ ------------
Net cash provided by operating activities 9,393,000 8,748,000 22,908,000
------------ ------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (3,415,000) (7,933,000) (4,902,000)
Purchases of investment securities (54,000) (257,000)
Maturity/sale of investment securities 125,000 487,000 499,000
------------ ------------ ------------
Net cash used in investing activities (3,344,000) (7,446,000) (4,660,000)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from exercise of stock options 8,998,000 2,807,000 5,264,000
Purchase of treasury stock (6,076,000) (678,000)
Payments of lease obligations (127,000) (135,000) (115,000)
------------ ------------ ------------
Net cash provided by (used in) financing activities 8,871,000 (3,404,000) 4,471,000
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 14,920,000 (2,102,000) 22,719,000
Cash and cash equivalents - beginning of year 35,259,000 37,361,000 14,642,000
------------ ------------ ------------
Cash and cash equivalents - end of year $ 50,179,000 $ 35,259,000 $ 37,361,000
============ ============ ============
Supplemental disclosure of noncash investing and financing activities:
Acquisition of leased assets $ 29,000
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 66,000 $ 102,000 $ 90,000
Income taxes $ 14,389,000 $ 16,172,000 $ 3,886,000
See notes to financial statements F-6
STEVEN MADDEN, LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
[1] ORGANIZATION:
Steven Madden, Ltd., a Delaware corporation, designs and sources women's,
girl's and men's shoes, for sale through its wholesale and retail channels
under the Steve Madden, David Aaron, Stevies, Madden Mens and Lei (under
license) brand names. Revenue is generated predominately through the sale
of the Company's brand name merchandise and certain licensed products. At
December 31, 2001 and 2000, the Company operated 73 and 65 retail stores
(including its website as a store), respectively. Such revenues are subject
to seasonal fluctuations. 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 accounting
principles generally accepted in the United States of America 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 revenue and expenses during the reporting period. Actual results
could differ from those estimates.
[4] CASH AND CASH EQUIVALENTS:
Cash equivalents at December 31, 2001 and 2000, amounted to approximately
$41,777,000 and $28,865,000, 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] INVENTORIES:
Inventories, which consist of finished goods, are stated at the lower of
cost (first-in, first-out method) or market.
[6] 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.
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.
F-7
STEVEN MADDEN, LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[7] COST IN EXCESS OF FAIR VALUE OF NET ASSETS ACQUIRED:
Cost in excess of fair value of net assets acquired relates to two
acquisitions and through December 31, 2001 is being amortized over 20 years
(see Note A[14]).
[8] 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 the proceeds (including the amount of
compensation cost, if any, attributed to future services and not yet
recognized and the amount of tax benefits, if any, that would be credited
to additional paid-in capital assuming exercise of the options) thereof
were used to purchase treasury stock at the average market price during the
period. For the years ended December 31, 2001 and 2000, options exercisable
into approximately 265,000 and 300,000 shares of common stock, respectively
have not been included in the calculation of diluted income per share as
the result would have been antidilutive.
[9] 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 approximately $6,596,000 in
2001, $6,941,000 in 2000, and $5,046,000 in 1999.
[10] 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.
[11] 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.
[12] REVENUE RECOGNITION:
Wholesale revenue, including commissions received in conjunction with
private label footwear, is recognized upon shipment and transfer of title
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.
[13] RECLASSIFICATION:
Certain reclassifications have been made to the December 31, 2000 financial
statements to conform to current year presentation.
F-8
STEVEN MADDEN, LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
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 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 Statement of Financial Accounting Standards
("SFAS") No. 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities." The standard replaces SFAS No.
125 and requires additional disclosure. The adoption of this standard had
no material effect on the financial statements.
In June 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS
No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires
business combinations initiated after June 30, 2001 to be accounted for
using the purchase method of accounting. It also specifies the types of
acquired intangible assets that are required to be recognized and reported
separately from goodwill. SFAS No. 142 will require that goodwill and
intangibles with indeterminate lives will no longer be amortized, but
instead tested for impairment. SFAS No. 142 is required to be applied
starting with fiscal years beginning after December 15, 2001, with early
application permitted in certain circumstances. The Company will adopt SFAS
No. 142 in 2002 and does not expect any impairment of goodwill upon
adoption.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. This statement supercedes SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of. The statement retains the previously existing
accounting requirements related to the recognition and measurement of the
impairment of long-lived assets to be held and used while expanding the
measurement requirements of long-lived assets to be disposed of by sale to
include discontinued operations. It also expands on the previously existing
reporting requirements for discontinued operations to include a component
of an entity that either has been disposed of or is classified as held for
sale. The Company is required to implement SFAS No. 144 on January 1, 2002.
management does not expect this statement to have a material impact on the
Company's financial position or results of operations.
F-9
STEVEN MADDEN, LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE B - PROPERTY AND EQUIPMENT
The major classes of assets and accumulated depreciation and amortization are as
follows:
December 31,
----------------------------
2001 2000
------------ ------------
Leasehold improvements $ 18,180,000 $ 16,065,000
Machinery and equipment 890,000 805,000
Furniture and fixtures 3,297,000 2,596,000
Computer equipment 4,928,000 4,414,000
Equipment under capital lease 217,000 217,000
------------ ------------
27,512,000 24,097,000
Less accumulated depreciation and amortization (11,805,000) (8,497,000)
------------ ------------
Property and equipment - net $ 15,707,000 $ 15,600,000
============ ============
NOTE C - DUE FROM FACTOR
Under the terms of its factoring agreement, as amended, 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 2%. 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, 2001 and 2000, $1,120,000 and
$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 D - 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, 2001 vest on the date of grant or up to three years from such
date.
The Company has several stock option plans. The 1993 Incentive Stock Option
Plan, the 1995 Stock Plan, The 1996 Stock Plan and the 1997 Stock Plan provide
for options to be granted to employees and directors. Each plan provides that
the option price shall not be less than the fair market value on the date of
grant and that no portion of the option may be exercised beyond ten years from
the date of grant. No incentive stock option can be granted to a stockholder
owning 10% or more of the Company's outstanding common stock.
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. In
July 2001, the stockholders approved an amendment to the 1999 Stock Plan to
increase the maximum number of shares subject to the plan to 1,600,000 shares.
Terms of the 1999 Stock Plan are not materially different from the various
existing stock option plans.
F-10
STEVEN MADDEN, LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE D - STOCK OPTIONS (CONTINUED)
Through December 31, 2001, 1,564,000 options had been granted under the 1999
Stock Plan, as amended, and as of such date 36,000 shares were available for the
granting of future options under the 1999 Stock Plan.
The Company granted options to an executive employee 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, was charged to operations during each of the years
ended December 31, 2000 and 1999.
In connection with the amended employment agreement of the former Chief
Executive Officer ("CEO"), who is now the Company's Creative and Design Chief,
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 represented 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 per annum has been
charged to operations for 2001, 2000 and 1999.
In connection with the Chief Operating Officer's employment agreement, the
Company issued options to purchase 75,000 shares of its common stock. The
options which vested quarterly through December 31, 2001, have an exercise price
of $8.00. Unearned compensation was recorded in the amount of $810,000, 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 two year term of
the employment agreement. Accordingly, $405,000 has been charged to operations
for 2001.
Activity relating to stock options granted under the Company's plans and outside
the plans during the three years ended December 31, 2001:
2001 2000 1999
---------------------- -------------------- --------------------
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Shares Price Shares Price Shares Price
--------- --------- --------- -------- --------- ---------
Outstanding at January 1 2,749,000 $6.36 2,720,000 $5.85 2,968,000 $5.16
Granted 614,000 12.68 550,000 9.09 617,000 9.57
Exercised (1,122,000) 8.02 (509,000) 5.52 (857,000) 6.14
Cancelled (10,000) 9.98 (12,000) 6.34 (8,000) 6.14
--------- --------- ---------
Outstanding at December 31 2,231,000 7.25 2,749,000 6.36 2,720,000 5.85
========= ========= =========
Exercisable 2,131,000 7.22 2,575,000 6.06 2,515,000 5.48
========= ========= =========
F-11
STEVEN MADDEN, LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE D - STOCK OPTIONS (CONTINUED)
The following table summarizes information about stock options at December 31,
2001:
Options Outstanding Options Exercisable
-------------------------------------------- --------------------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Number Life Exercise Number Exercise
Range of Exercise Price Outstanding (in Years) Price Exercisable Price
- ------------------------------ ------------- --------------- ---------- ----------- ----------
$1.50 to $3.50 820,000 4.1 $ 2.36 820,000 $2.36
$5.50 to $6.00 337,000 6.2 5.82 337,000 5.82
$6.50 to $7.97 279,000 8.2 7.12 241,000 7.14
$8.00 to $9.12 210,000 9.2 8.61 148,000 8.75
$9.55 to $10.83 230,000 7.9 10.34 230,000 10.34
$11.81 to $12.00 89,000 7.8 11.84 89,000 11.84
$18.27 to $20.80 266,000 9.5 19.01 266,000 18.75
------------- ----------
2,231,000 6.6 7.25 2,131,000 7.22
============= ==========
As set forth in Note A[11], the Company applies APB No. 25 in accounting for its
employee/director stock option incentive plans and, accordingly, recognizes
compensation expense for the difference between the fair value of the underlying
common stock and the exercise price of the option at the date of grant. Pro
forma information regarding net income and earnings per share is required by
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 2001, 2000 and 1999 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:
2001 2000 1999
-------------- ------------ --------------
Net income:
As reported $ 12,116,000 $ 16,043,000 $ 11,466,000
Pro forma $ 10,779,000 $ 14,588,000 $ 7,380,000
Basic income per share:
As reported $1.04 $1.42 $1.06
Pro forma $.93 $1.29 $.68
Diluted income per share:
As reported $.94 $1.26 $.92
Pro forma $.83 $1.15 $.59
The weighted average fair value of options granted in 2001, 2000 and 1999 was
approximately $9.44, $4.54 and $6.62, respectively, using the Black-Scholes
option-pricing model with the following assumptions:
2001 2000 1999
-------------- ------------ --------------
Dividend yield 0 0 0
Volatility 75% 60% 61%
Risk free interest rate 3.56 - 4.98% 5.97 - 6.30% 5.75 - 6.03%
Expected life in years 4 4 4
F-12
STEVEN MADDEN, LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE E - PREFERRED STOCK
The Company has authorized 5,000,000 shares of preferred stock. The Board of
Directors have designated 60,000 shares of such preferred stock as Series A
Junior Participating Preferred Stock ("Series A Preferred"). Holders of the
shares of Series A Preferred are entitled to dividends equal to 1,000 times
dividends declared or paid on the Company's common stock. Each share of Series A
preferred entitles the holder to 1,000 votes on all matters submitted to the
holders of common stock. The Series A Preferred has a liquidation preference of
a $1,000 per share, and is not redeemable by the Company or the holder. No
preferred shares have been issued.
NOTE F - RIGHTS AGREEMENT
On October 30, 2001, the Company declared a dividend distribution of one
preferred stock purchase right (a "Right") for each outstanding share of common
stock. Each Right entitles the holder to purchase from the Company one
one-thousandth (1/1,000) of a share of Series A Preferred at a price of $75 per
one one-thousandth (1/1,000) of a share. Initially, the Rights will not be
exercisable and will automatically trade with the common stock. The Rights
become exercisable, in general, ten days following the announcement of a person
or group acquiring beneficial ownership of at least 15% of the outstanding
voting stock of the Company.
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.
NOTE H - LEASES
[1] CAPITAL LEASES:
The Company leases certain equipment under capital leases. Future minimum
lease payments consist of the following at December 31:
2002 $ 46,000
2003 14,000
-----------
Total minimum lease payments 60,000
Less amounts representing interest 3,000
-----------
Present value of minimum lease payments 57,000
Less current maturities 43,000
-----------
Capital lease obligation, less current maturities $ 14,000
===========
F-13
STEVEN MADDEN, LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE H - LEASES (CONTINUED)
[2] OPERATING LEASES:
The Company leases office, showroom, warehouse and retail facilities under
noncancelable operating leases with terms expiring at various times
through 2012. Future minimum annual lease payments under noncancelable
operating leases consist of the following at December 31:
2002 $ 7,172,000
2003 6,835,000
2004 6,742,000
2005 6,346,000
2006 6,329,000
Thereafter 15,834,000
---------------
$ 49,258,000
===============
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, 2001, 2000 and 1999 was
approximately $9,142,000, $7,604,000 and $5,870,000, respectively. Included
in such amounts are contingent rents of $125,000, $122,000 and $122,000 in
2001, 2000 and 1999, 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.
NOTE I - INCOME TAXES
The income tax provision (benefit) consists of the following:
2001 2000 1999
------------ ------------ ------------
Current:
Federal $ 6,899,000 $ 9,787,000 $ 7,285,000
State and local 2,176,000 3,024,000 2,574,000
------------ ------------ ------------
9,075,000 12,811,000 9,859,000
------------ ------------ ------------
Deferred:
Federal (365,000) (1,031,000) (1,167,000)
State and local (115,000) (319,000) (418,000)
------------ ------------ ------------
(480,000) (1,350,000) (1,585,000)
------------ ------------ ------------
$ 8,595,000 $ 11,461,000 $ 8,274,000
============ ============ ============
F-14
STEVEN MADDEN, LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE I - INCOME TAXES (CONTINUED)
A reconciliation between taxes computed at the federal statutory rate and the
effective tax rate is as follows:
December 31,
---------------------
2001 2000 1999
----- ----- -----
Income taxes at federal statutory rate 35.0% 35.0% 34.0%
State income taxes - net of federal income tax benefit 6.5 6.4 8.6
Nondeductible items .3 .3 .3
Other (.3) (1.0)
----- ----- -----
Effective rate 41.5% 41.7% 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,
---------------------------
2001 2000
------------ ------------
Current deferred tax assets:
Accounts receivable allowances $ 691,000 $ 617,000
Inventory 532,000 683,000
------------ ------------
1,223,000 1,300,000
------------ ------------
Non-current deferred tax assets:
Depreciation 2,035,000 1,735,000
Nondeductible compensation 438,000 276,000
Deferred rent 546,000 451,000
------------ ------------
3,019,000 2,462,000
------------ ------------
Deferred tax assets $ 4,242,000 $ 3,762,000
============ ============
NOTE J - COMMITMENTS, CONTINGENCIES AND OTHER
[1] CLASS ACTION LITIGATION:
Between June and August 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 then President and its Chief Financial Officer.
On December 8, 2000, the court consolidated these actions and appointed a
lead plaintiff. On October 31, 2001, the plaintiffs served a second
consolidated amended class action complaint.
F-15
STEVEN MADDEN, LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE J - COMMITMENTS, CONTINGENCIES AND OTHER (CONTINUED)
[1] CLASS ACTION LITIGATION: (CONTINUED)
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. In January 2002, motions to dismiss the complaint were fully briefed.
Since that time, a settlement in principle of these actions has been
reached, subject to execution of definitive settlement documentation,
notices to class members, a hearing and approval by the District Court. The
tentative settlement is within the limits of insurance coverage (see Note
J[7]).
[2] DERIVATIVE ACTIONS:
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. On October 1, 2001, plaintiff filed a second
amended complaint. On November 2, 2001, the Company filed a motion to
dismiss this pleading on the grounds that plaintiff had failed to make a
pre-litigation demand upon the Company's board of directors. In February
2002, the magistrate judge filed a report recommending that the Company's
motion to dismiss be denied. On March 4, 2002, the Company filed its
objection to the Magistrate Judge's report. The Company believes, after
consultation with counsel, that its defense costs and certain attorney fees
in connection with this action will be subject to coverage by the Company's
insurance as supplemented by the loss mitigation policy described below.
The liability resulting from this derivative complaint, if any, cannot
presently be determined.
In November 2001, a purported shareholder derivative complaint was filed in
the United States District Court for the Eastern District of New York,
captioned Herrera v. Karson, et al. Named as defendants therein are the
Company (as nominal defendant) and certain of the Company's present and/or
former directors. The complaint alleged that the individual defendants
breached their fiduciary duties to the Company in connection with a
decision by the Board of Directors of the Company to enter into an
employment agreement with Mr. Steven Madden in May 2001. The complaint
seeks declaratory and other equitable relief, as well as an unspecified
amount of compensatory damages, costs and expenses. On or about February 1,
2002, plaintiff filed an Amended Shareholder Derivative Complaint (the
"Amended Complaint"). The Amended Complaint contains substantially the same
allegations and names the same defendants as the original complaint. The
Company believes, after consultation with counsel, that its defense costs
and certain attorney fees in connection with this action will be subject to
coverage by the Company's insurance as supplemented by the loss mitigation
policy described below. The liability resulting from this derivative
complaint, 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
prior to Mr. Madden's indictment in June 2000, as previously disclosed on
Form 4's filed with the SEC. The ultimate effects of this matter, if any,
cannot reasonably be determined at this time.
F-16
STEVEN MADDEN, LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE J - COMMITMENTS, CONTINGENCIES AND OTHER (CONTINUED)
[4] BREACH OF CONTRACT SUITS:
On or about September 17, 2001, an action was commenced against the Company
in the Supreme Court, Queens County, captioned Mitch Stewart v. Steven
Madden, Ltd. Mr. Stewart is a former independent contractor for the
Company. The complaint seeks damages of approximately $1.3 million for
breach of contract. On December 20, 2001, the Company answered the
complaint, denying the allegations and asserting various affirmative
defenses. On January 25, 2002, the plaintiff filed a motion for partial
summary judgement, which is pending. The Company believes that it has
substantial defenses to the motions and the claims asserted in the lawsuit.
The resulting liability, if any, cannot be presently determined.
On or about November 29, 2001, an action was commenced against the Company
for breach of contract in the United States District Court, Eastern
District of Texas, captioned Lina Enterprises v. Steven Madden, Ltd. Lina
is a former independent contractor for the Company. The complaint seeks
damages for breach of contract. The complaint does not specify the amount
of damages being sought, but alleges that they are greater than $75,000. In
March 2002, the Company filed a motion to dismiss the complaint. The
Company believes that it has substantial defenses to the claims asserted in
the lawsuit. The resulting liability, if any, cannot be presently
determined.
[5] INDICTMENT:
On June 20, 2000, Steven Madden, the Company's former Chairman and Chief
Executive Officer, was indicted in the United States District Courts for
the Southern District and Eastern District of New York. The indictments
alleged 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. On May 21, 2001, Steven Madden entered
into a plea agreement with the U.S. Attorney's Office, pursuant to which he
pled guilty to four of the federal charges filed against him. In addition,
Mr. Madden reached a separate settlement agreement with the Securities and
Exchange Commission regarding the allegations contained in its complaint.
As a result, Mr. Madden resigned as the Company's Chief Executive Officer
and as a member of the Company's Board of Directors effective July 1, 2001.
Mr. Madden has agreed to serve as the Company's Creative and Design Chief,
a non-executive position. It is expected that Mr. Madden will be sentenced
in April 2002. Under the settlement agreement with the Securities and
Exchange Commission, Mr. Madden has agreed to not serve as an officer or
director of a publicly traded company for 7 years. Neither the indictments
nor the Securities and Exchange Commission complaint allege any wrongdoing
by the Company or its other officers and directors.
[6] LITIGATION SETTLEMENTS:
Separate actions involving Magnum Fashions, Inc., WK Maxx Industries, Ltd.
and Lee N' Gi were settled in 2000 for approximately $175,000 and have been
included in operating expenses.
F-17
STEVEN MADDEN, LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE J - COMMITMENTS, CONTINGENCIES AND OTHER (CONTINUED)
[7] LOSS MITIGATION COVERAGE:
In December 2001, the Company purchased a loss mitigation policy to cover
costs arising out of lawsuits related to the June 2000 federal indictment
of Steve Madden, the Company's former Chief Executive Officer. The policy
covers the Company's anticipated damages and legal costs in connection with
such lawsuits. The Company is obligated to pay for damages and costs in
excess of the policy limits. The cost of the policy was $6,950,000 and has
been classified as cost of loss mitigation coverage on the accompanying
statement of operations for the year ended December 31, 2001.
[8] EMPLOYMENT AGREEMENTS:
The Company has an employment agreement with Steve Madden, its former CEO
and President to serve as the Company's Creative and Design Chief. The
employment agreement, as amended, provides for an annual salary of $700,000
through June 30, 2011. The agreement also provides for an annual
performance bonus, an annual option grant at exercise prices equal to
market on the date of grant and a non-accountable expense allowance.
The Company has employment agreements with four other executives (the
"executives") which expire between January 3, 2003 and December 31, 2005.
These agreements provide for cash bonuses based upon earnings, option
grants and non-accountable expense allowances as defined. Base salary
commitment for these four executives, subject to increases, are as follows:
2000 $ 925,000
2003 658,000
2004 422,000
2005 240,000
---------------
$ 2,245,000
===============
In connection with their employment agreements, two of the executives
received an aggregate of 20,000 shares of restricted common stock from the
Company. The restricted shares vest over one year through July 2002.
Accordingly, the Company has recorded a charge to operations in the amount
of $188,000 for the 10,000 shares that vested during the year ended
December 31, 2001 and will record a charge of $188,000 in 2002 for the
grant of such restricted shares.
[9] LETTERS OF CREDIT:
At December 31, 2001 and 2000, the Company had open letters of credit for
the purchase of imported inventories of approximately $6,252,000 and
$6,142,000, respectively.
F-18
STEVEN MADDEN, LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE J - COMMITMENTS, CONTINGENCIES AND OTHER (CONTINUED)
[10] 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, 2001, the Company purchased
approximately 28% and 21% of their merchandise from two suppliers in Brazil
and China, respectively. Total inventory purchases for the year ended
December 31, 2001 from Brazil and China were approximately 28% and 53%,
respectively.
During the year ended December 31, 2000, the Company purchased
approximately 50% and 27% of their inventory from suppliers 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.
Sales to two customers amounted to 13% and 11% of net sales for the year
ended December 31, 2001. Amounts receivable from these customers
represented 18% and 15% of accounts receivable at December 31, 2001,
respectively.
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 for the year
ended December 31, 1999. Amounts receivable from these customers
represented 22% and 14% of accounts receivable at December 31, 1999,
respectively.
Sales to such customers are included in the wholesale segment (see Note K).
Purchases are made primarily in United States dollars.
[11] CONSULTING AGREEMENT:
The Company has a consulting agreement with a financial advisory firm of
which one of the Company's Board members is a managing director. The
agreement provides for a fee of $150,000 over the one year term of the
agreement which expires in June 2002. The firm is to provide financial
advisory and investment banking services to the Company. The Company
recorded a charge to operations in the amount of $75,000 for the year ended
December 31, 2001 in connection with the agreement.
[12] 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,:
2001 2000 1999
----------- ----------- -----------
Balance at beginning of year $ 1,640,000 $ 1,510,000 $ 813,000
Charged to expense 219,000 506,000 757,000
Uncollectible accounts written off, net of recoveries (215,000) (376,000) (60,000)
----------- ----------- -----------
Balance at end of year $ 1,644,000 $ 1,640,000 $ 1,510,000
=========== =========== ===========
F-19
STEVEN MADDEN, LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE J - COMMITMENTS, CONTINGENCIES AND OTHER (CONTINUED)
[12] Valuation and qualifying accounts: (continued)
The following is a summary of property and equipment and the related
accounts of accumulated depreciation and amortization for the years ended
December 31,:
2001 2000 1999
----------- ----------- -----------
Cost basis
Balance at beginning of year $24,097,000 $16,164,000 $11,233,000
Additions 3,415,000 7,933,000 4,931,000
----------- ----------- -----------
Balance at end of year 27,512,000 24,097,000 16,164,000
----------- ----------- -----------
Accumulated depreciation and amortization
Balance at beginning of year 8,497,000 5,050,000 2,242,000
Depreciation and amortization 3,308,000 3,447,000 2,808,000
----------- ----------- -----------
Balance at end of year 11,805,000 8,497,000 5,050,000
----------- ----------- -----------
Property and equipment, net $15,707,000 $15,600,000 $11,114,000
=========== =========== ===========
The following is a summary of cost in excess of fair value and related
accumulated amortization for the years ended December 31,:
2001 2000 1999
----------- ----------- -----------
Cost basis
Balance at beginning and end of year $ 2,780,000 $ 2,780,000 $ 2,780,000
----------- ----------- -----------
Accumulated amortization
Balance at beginning of year 575,000 436,000 297,000
Amortization 139,000 139,000 139,000
----------- ----------- -----------
Balance at end of year 714,000 575,000 436,000
----------- ----------- -----------
Cost in excess of fair value of net assets acquired $ 2,066,000 $ 2,205,000 $ 2,344,000
=========== =========== ===========
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 revenue from
sales of women's, men'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 revenue from sales of branded
women's, men's and girl's footwear. In addition, the wholesale segment has a
licensing program that extends the Steve Madden and Stevies brands 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.
F-20
STEVEN MADDEN, LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE K - OPERATING SEGMENT INFORMATION (CONTINUED)
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, 2001:
Net sales to external customers (a) $ 163,904,000 $ 79,487,000 $ 243,391,000
Gross profit 57,858,000 42,015,000 99,873,000
Commissions and licensing fees 1,711,000 $ 4,200,000 5,911,000
Operating earnings (c) 10,095,000 7,023,000 2,244,000 19,362,000
Depreciation and amortization 869,000 2,577,000 1,000 3,447,000
Other significant noncash items:
Deferred compensation 533,000 533,000
Deferred rent expense (reversal) (21,000) 249,000 (3,000) 225,000
Provision for doubtful accounts 219,000 219,000
Segment assets (b) 90,061,000 30,922,000 879,000 121,862,000
Capital expenditures 551,000 2,864,000 3,415,000
Year ended December 31, 2000:
Net sales to external customers (a) 135,481,000 69,632,000 205,113,000
Gross profit 50,680,000 38,938,000 89,618,000
Commissions and licensing fees 1,216,000 3,631,000 4,847,000
Operating earnings 15,996,000 8,001,000 1,635,000 25,632,000
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 1,092,000 3,810,000 4,902,000
(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.
(c) Loss mitigation coverage expense of $6,950,000 reflected in wholesale
segment.
F-21
STEVEN MADDEN, LTD. AND SUBSIDIARIES - DRAFT SUBJECT TO REVIEW AND REVISION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE L - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the years
ended December 31, 2001 and 2000 (000's omitted):
March 31 June 30 September 30 December 31
-------- -------- ------------ -----------
2001:
Revenue $ 53,395 $ 59,563 $ 70,245 $ 60,188
Cost of sales 31,314 34,245 40,517 37,442
Commissions and licensing fee income 1,134 1,235 1,637 1,905
Net income (loss) 3,650 4,423 5,367 (1,324)
Net income (loss) per share:
Basic 0.33 0.38 0.46 (0.11)
Diluted 0.29 0.34 0.41 (0.11)
2000:
Revenue 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
F-22
(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) Report on Form 8-K dated September 21, 2001 filed with the Securities
and Exchange Commission on October 5, 2001 with respect to Item 5.
------
(1) Report on Form 8-K dated November 14, 2001 filed with the Securities
and Exchange Commission on November 16, 2001 with respect to Item 5.
------
(c) Exhibits.
EXHIBITS
3.01* Certificate of Incorporation of the Company.
3.02 Amended & Restated By-Laws of the Company.
4.01* Specimen Certificate for shares of Common Stock.
4.02* Rights Agreement between the Company and American Stock Transfer and
Trust Company.
10.07* Employment Agreement of Arvind Dharia.
10.08* Employment Agreement of Richard Olicker.
10.09* Second Amended Employment Agreement between the Company and Steven
Madden.
10.10* Employment Agreement of Charles Koppelman.
10.11* Employment Agreement of Jamieson Karson.
10.12* Amendment No. 1 to Employment Agreement of Arvind Dharia.
10.13* Employment Agreement between Adesso-Madden, Inc. and Gerald
Mongeluzo.
10.14* Employment Agreement between Steven Madden Retail, Inc. and Mark
Jankowski.
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 29, 2002
STEVEN MADDEN, LTD.
By: /s/ JAMIESON KARSON
-------------------------------------
Jamieson Karson
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 and March 29, 2002
- --------------------------- Executive Chairman
Charles Koppelman
/s/ JAMIESON KARSON Chief Executive Officer and March 29, 2002
- --------------------------- Vice Chairman of the Board
Jamieson Karson
/s/ ARVIND DHARIA Chief Financial Officer and March 29, 2002
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Arvind Dharia
/s/ GERALD MONGELUZO Director March 29, 2002
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Gerald Mongeluzo
/s/ JOHN L. MADDEN Director March 29, 2002
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John L. Madden
/s/ PETER MIGLIORINI Director March 29, 2002
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Peter Migliorini
/s/ HEYWOOD WILANSKY Director March 29, 2002
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Heywood Wilansky
/s/ MARC COOPER Director March 29, 2002
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Marc Cooper