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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
-------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to _____________________
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)
Registrant's telephone number, including area code (718) 446-1800
- --------------------------------------------------------------------------------
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 and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Class Outstanding as of August 12, 2002
Common Stock 12,697,105
1
STEVEN MADDEN, LTD.
FORM 10-Q
QUARTERLY REPORT
June 30, 2002
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements:
Consolidated Balance Sheets ..................................... 3
Consolidated Statements of Operations ........................... 4
Consolidated Statements of Cash Flows ........................... 5
Notes to condensed Consolidated Financial Statements ............ 6
ITEM 2. Management's Discussion and Analysis
Of Financial Condition and Results of Operations ................ 9
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings ............................................... 24
ITEM 4. Submission of Matters to a Vote of Security Holders ............. 24
ITEM 6. Exhibits and Reports on Form 8-K ................................ 25
2
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands)
June 30, December 31,
2002 2001
--------- ---------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 25,332 $ 50,179
Marketable securities 3,501
Accounts receivable - net of allowances of $306 and $257 2,814 2,072
Due from factor - net of allowances of $1,593 and $1,387 43,404 22,783
Inventories 24,817 15,818
Prepaid expenses and other current assets 1,677 836
Prepaid taxes 1,487 7,911
Deferred taxes 1,223 1,223
--------- ---------
Total current assets 104,255 100,822
Marketable securities 12,671
Property and equipment, net 15,665 15,707
Deferred taxes 3,019 3,019
Deposits and other 297 248
Cost in excess of fair value of net assets acquired - net of accumulated
amortization of $714 2,066 2,066
--------- ---------
$ 137,973 $ 121,862
========= =========
LIABILITIES
Current liabilities:
Current portion of lease payable $ 21 $ 43
Accounts payable 13,337 6,836
Accrued expenses 5,434 10,898
Accrued bonuses 1,323 412
--------- ---------
Total current liabilities 20,115 18,189
Deferred rent 1,420 1,299
Lease payable, less current portion 14
--------- ---------
21,535 19,502
--------- ---------
Contingencies (Note D)
STOCKHOLDERS' EQUITY
Common stock - $.0001 par value, 60,000 shares authorized, 12,694
and 12,194 outstanding 1 1
Additional paid-in capital 66,351 60,643
Retained earnings 60,237 50,881
Unearned compensation (2,160) (1,174)
Treasury stock at cost - 1,245 shares (7,991) (7,991)
--------- ---------
116,438 102,360
--------- ---------
$ 137,973 $ 121,862
========= =========
See notes to financial statements 3
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited)
(in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Net sales:
Wholesale $ 65,742 $ 39,494 $ 113,577 $ 77,797
Retail 22,369 20,069 41,145 35,161
--------- --------- --------- ---------
88,111 59,563 154,722 112,958
--------- --------- --------- ---------
Cost of sales:
Wholesale 44,607 25,355 76,136 49,968
Retail 10,520 8,890 19,061 15,591
--------- --------- --------- ---------
55,127 34,245 95,197 65,559
--------- --------- --------- ---------
Gross profit 32,984 25,318 59,525 47,399
Commission and licensing fee income 1,574 1,235 2,818 2,369
Operating expenses (25,602) (19,226) (46,534) (36,641)
--------- --------- --------- ---------
Income from operations 8,956 7,327 15,809 13,127
Interest income, net 218 422 843
--------- --------- --------- ---------
Income before provision for income taxes 9,174 7,669 16,231 13,970
Provision for income taxes 3,912 3,246 6,876 5,897
--------- --------- --------- ---------
Net income $ 5,262 $ 4,423 $ 9,355 $ 8,073
========= ========= ========= =========
Basic income per share $ .42 $ .38 $ .75 $ .71
===== ===== ===== =====
Diluted income per share $ .38 $ .34 $ .68 $ .63
===== ===== ===== =====
Weighted average common shares outstanding -
basic 12,571 11,496 12,464 11,329
Effect of dilutive securities - options 1,221 1,567 1,211 1,463
--------- --------- --------- ---------
Weighted average common shares outstanding -
diluted 13,792 13,063 13,675 12,792
========= ========= ========= =========
See notes to financial statements 4
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
Six Months Ended
June 30,
--------------------
2002 2001
-------- --------
Cash flows from operating activities:
Net income $ 9,355 $ 8,073
Adjustments to reconcile net income to net cash used in operating activities:
Issuance of equity compensation 655
Depreciation and amortization 1,658 1,739
Deferred compensation 966 64
Provision for bad debts 255 (106)
Deferred rent expense 121 82
Changes in:
Accounts receivable (791) 1,412
Due from factor (20,827) (13,132)
Inventories (8,999) (4,207)
Prepaid expenses and other assets 5,533 (1,701)
Accounts payable and accrued expenses 1,951 (3,970)
-------- --------
Net cash used in operating activities (10,778) (11,091)
-------- --------
Cash flows from investing activities:
Purchase of property and equipment (1,616) (1,245)
Purchases of marketable securities (16,173)
-------- --------
Net cash used in investing activities (17,789) (1,245)
-------- --------
Cash flows from financing activities:
Proceeds from options and warrants exercised 3,756 3,983
Repayments of lease obligations (36) (57)
-------- --------
Net cash provided by financing activities 3,720 3,926
-------- --------
Net decrease in cash and cash equivalents (24,847) (8,410)
Cash and cash equivalents - beginning of year 50,179 35,259
-------- --------
Cash and cash equivalents - end of year $ 25,332 $ 26,849
======== ========
See notes to financial statements 5
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Financial Statements
June 30, 2002
NOTE A - BASIS OF REPORTING
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, such
statements include all adjustments (consisting only of normal recurring items)
which are considered necessary for a fair presentation of the financial position
of Steven Madden, Ltd. and subsidiaries (the "Company") as of June 30, 2002, and
the results of their operations and cash flows for the six and three-month
periods then ended. The results of operations for the six and three-month period
ended June 30, 2002 are not necessarily indicative of the operating results for
the full year. It is suggested that these financial statements be read in
conjunction with the financial statements and related disclosures for the year
ended December 31, 2001 included in the Annual Report of Steven Madden, Ltd. on
Form 10-K.
NOTE B - INVENTORIES
Inventories, which consist of finished goods, are stated at the lower of cost
(first-in, first-out method) or market.
NOTE C - NET INCOME PER SHARE OF COMMON STOCK
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
options and the proceeds thereof were used to purchase outstanding common
shares. Diluted income per share also reflects the vested portion of shares
granted to employees which have not yet been issued.
NOTE D - PENDING LITIGATION
[1] 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. On April 4, 2002 Mr. Madden was
sentenced in the United States District Court for the Southern District
of New York to forty-one (41) months imprisonment in connection with
two of the federal charges to which he pled guilty. On May 3, 2002, Mr.
Madden was sentenced in the United States District Court for the
Eastern District of New York to forty-one (41) months imprisonment in
connection with the remaining two charges to which he pled guilty. The
sentences will run concurrently. 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
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Financial Statements
June 30, 2002
NOTE D - PENDING LITIGATION (CONTINUED)
[1] Indictment: (continued)
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.
[2] 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.
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 described above.
[3] Shareholder derivative actions:
On or about September 26, 2000, a putative shareholder 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 (JC). The Company is named as a nominal
defendant in the action. An agreement in principle has been reached to
resolve all claims in this action, subject to execution of definitive
documentation, such notice to the Company's shareholders (if any) as
may be required by the District Court, and approval by the District
Court. The Company believes, after consultation with counsel, that a
portion of 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. An agreement
in principle has been reached to resolve all claims in this action,
subject to execution of definitive documentation, such notice to the
Company's shareholders (if any) as may be required by the District
Court, and approval by the District Court. The Company believes, after
consultation with counsel, that a portion of 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.
The Company and certain of the Company's present and/or former
directors have been named in an action commenced in the United States
District Court for the Eastern District of New York by the Safeco
Surplus Lines Insurance Company captioned, Safeco Surplus Lines Ins.
Co. v. Steven Madden Ltd., et al. The complaint principally seeks
rescission of the excess insurance policy issued by Safeco to the
Company for the February 4, 2000 to June 13, 2001 period and an order
declaring that Safeco does not owe any indemnity obligation to the
Company or any of its officers and directors in connection with the
putative shareholder class action and derivative cases referred to
above.
7
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Financial Statements
June 30, 2002
NOTE D - PENDING LITIGATION (CONTINUED)
[4] SEC investigation:
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.
[5] 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 for
the Company. This matter has been settled for $250,000 and the lawsuit
has been discontinued with prejudice.
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. This
matter has been settled for a nominal amount and the lawsuit has been
discontinued with prejudice.
On or about January 22, 2002, an action was commenced against the
Company in the United States District Court for the District of Oregon,
captioned Adidas America, Inc. and Adidas Salomon AG v. Steven Madden,
Ltd. and Steve Madden Retail, Inc. The complaint seeks injunctive and
unspecified monetary damages for trademark infringement, trademark
dilution, unfair competition and deceptive trade practices. The Company
believes that it has substantial defenses to the claims asserted in the
lawsuit and has filed a motion to dismiss the complaint in lieu of an
answer. The ultimate outcome of this matter cannot be presently
determined.
8
ITEM 2.
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
-----------------------
Six Months Ended
----------------
June 30
-------
($ in thousands)
Consolidated: 2002 2001
- ------------ ---- ----
Net Sales $154,722 100% $112,958 100%
Cost of Sales 95,197 62 65,559 58
Other Operating Income 2,818 2 2,369 2
Operating Expenses 46,534 30 36,641 32
Income from Operations 15,809 10 13,127 12
Interest and Other Income Net 422 0 843 1
Income Before Income Taxes 16,231 10 13,970 12
Net Income 9,355 6 8,073 7
9
Percentage of Net Sales
-----------------------
Six Months Ended
----------------
June 30
-------
($ in thousands)
By Segment 2002 2001
---- ----
WHOLESALE DIVISIONS:
- --------------------
Steven Madden, Ltd.
- -------------------
Net Sales $ 54,213 100% $ 47,684 100%
Cost of Sales 37,786 70 30,195 63
Other Operating Income 660 1 532 1
Operating Expenses 13,350 25 12,251 26
Income from Operations 3,737 7 5,770 12
l.e.i. Footwear:
- ----------------
Net Sales $ 26,557 100% $ 18,801 100%
Cost of sales 17,232 65 12,064 64
Operating Expenses 6,444 24 4,209 22
Income from Operations 2,881 11 2,528 13
Madden Mens:
- ------------
Net Sales $ 20,614 100% $ 2,790 100%
Cost of sales 13,237 64 1,838 66
Operating Expenses 4,106 20 979 35
Income (Loss) from Operations 3,271 16 (27) (1)
Diva Acquisition Corp:
- ----------------------
Net Sales $ 5,185 100% $ 3,630 100%
Cost of sales 3,467 67 2,767 76
Operating Expenses 1,298 25 792 22
Income from Operations 420 8 71 2
Stevies Inc.:
- -------------
Net Sales $ 7,008 100% $ 4,892 100%
Cost of sales 4,414 63 3,104 63
Other Operating Income 38 1 207 4
Operating Expenses 1,491 21 1,112 23
Income from Operations 1,141 16 883 18
STEVEN MADDEN RETAIL INC.:
- --------------------------
Net Sales $ 41,145 100% $ 35,161 100%
Cost of Sales 19,061 46 15,591 44
Operating Expenses 18,712 45 16,458 47
Income from Operations 3,372 8 3,112 9
10
Percentage of Net Sales
-----------------------
Six Months Ended
----------------
June 30
-------
($ in thousands)
By Segment (Continued)
ADESSO MADDEN INC.: 2002 2000
- ------------------- ---- ----
(FIRST COST)
Other Operating Revenue $ 2,120 100% $ 1,630 100%
Operating Expenses 1,133 53 840 52
Income from Operations 987 47 790 48
11
Percentage of Net Sales
-----------------------
Three Months Ended
------------------
June 30
-------
($ in thousands)
2002 2001
---- ----
Consolidated:
- -------------
Net Sales $ 88,111 100% $ 59,563 100%
Cost of Sales 55,127 63 34,245 57
Other Operating Income 1,574 2 1,235 2
Operating Expenses 25,602 29 19,226 32
Income from Operations 8,956 10 7,327 12
Interest and Other Income Net 218 0 342 1
Income Before Income Taxes 9,174 10 7,669 13
Net Income 5,262 6 4,423 7
By Segment
WHOLESALE DIVISIONS:
- --------------------
Steven Madden, Ltd.
- ------------------
Net Sales $ 31,332 100% $ 24,608 100%
Cost of sales 22,241 71 15,527 63
Other Operating Income 339 1 310 1
Operating Expenses 7,347 23 5,944 24
Income from Operations 2,083 7 3,447 14
l.e.i. Footwear:
- ----------------
Net Sales $ 14,982 100% $ 9,056 100%
Cost of sales 9,731 65 5,728 63
Operating Expenses 3,666 24 2,336 26
Income from Operations 1,585 11 992 11
Madden Mens:
- ------------
Net Sales $ 13,165 100% $ 1,880 100%
Cost of sales 8,534 65 1,247 66
Operating Expenses 2,705 21 620 33
Income from Operations 1,926 15 13 1
Diva Acquisition Corp.:
- -----------------------
Net Sales $ 2,700 100% $ 1,851 100%
Cost of sales 1,821 67 1,524 82
Operating Expenses 763 28 405 22
Income (Loss) from Operations 116 4 (78) (4)
Stevies Inc.:
- -------------
Net Sales $ 3,563 100% $ 2,099 100%
Cost of Sales 2,280 64 1,329 63
Other Operating Income 29 1 103 5
Operating Expenses 746 21 547 26
Income from Operations 566 16 326 16
12
Percentage of Net Sales
-----------------------
Three Months Ended
------------------
June 30
-------
($ in thousands)
By Segment (Continued)
Steven Madden Retail Inc.: 2002 2001
- -------------------------- ---- ----
Net Sales $ 22,369 100% $ 20,069 100%
Cost of Sales 10,520 47 8,890 44
Operating Expenses 9,770 44 8,886 44
Income from Operations 2,079 9 2,293 11
ADESSO MADDEN INC.:
- -------------------
(FIRST COST)
Other Operating Revenue $ 1,206 100% $ 822 100%
Operating Expenses 605 50 488 59
Income from Operations 601 50 334 41
RESULTS OF OPERATIONS
($ in thousands)
Six Months Ended June 30, 2002 vs. Six Months Ended June 30, 2001
Consolidated:
- ------------
Sales for the six-month period ended June 30, 2002 were $154,722 or 37% higher
than the $112,958 in the comparable period of 2001. The increase in sales was
primarily due to a 639% increase in sales from the Madden Mens Wholesale
Division ("Madden Mens Wholesale"), which commenced shipping in the first
quarter of 2001 and double digit percentage gains in our other divisions due to
an increase in the Company's brand recognition.
Consolidated gross profit as a percentage of sales decreased from 42% in 2001 to
38% in 2002. The decrease was due to several factors including the fact that a
"broad and shallow" assortment strategy was adopted at both wholesale and
retail, wherein open to buy dollars were reserved for in-season performing
product. In connection with this strategy, the Company produced more goods in
the USA and Europe, which resulted in a higher cost of goods and increased
airfreight expenses. Also, contributing to the decrease in the Company's first
six months of 2002 gross margins was the fact that the Company's retail
division, with its attendant greater gross margins, represented a smaller
percentage of the Company's overall business for the six-month period ended June
30, 2002 (retail represented 27% of the total net sales in 2002 vs. 31% in
2001). Additionally, the Company took action earlier in 2002 than in 2001 to
clear under-performing inventories at lower gross margins in both retail and
wholesale.
Selling, general and administrative (SG&A) expenses increased to $46,534 in 2002
from $36,641 in 2001. The increase in SG&A expenses was due primarily to a 26%
increase in payroll, officers' and employee bonuses and payroll-related expenses
from $14,279 in 2001 to $17,994 in 2002. Also, the Company focused its efforts
on advertising and marketing by increasing those expenses by 16% from $2,650 in
2001 to $3,070 in 2002. Additionally, selling, designing and licensing costs
increased
13
by 50% from $5,920 in 2001 to $8,889 in 2002. 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 expansion of the Company's
corporate office facilities resulted in an increase in occupancy, telephone,
utilities and office related expenses by 20% from $5,678 in 2001 to $6,839 in
2002.
Income from operations for 2002 was $15,809, which represents an increase of
$2,682 or 20% over the income from operations of $13,127 in 2001. Net income
increased by 16% to $9,355 in 2002 from $8,073 in 2001.
Wholesale Divisions:
- -------------------
Sales from the Steve Madden Women's Wholesale Division ("Madden Women's
Wholesale") accounted for $54,213 or 35%, and $47,684 or 42%, of total sales in
2002 and 2001, respectively. The increase in sales was driven by the sales of
key styles including dress sandals, open-back euro casuals and pointy pumps.
Gross profit as a percentage of sales decreased from 37% in 2001 to 30% in 2002.
The decrease was due to several factors. At wholesale, a "broad and shallow"
assortment strategy was adopted, wherein open to buy dollars were reserved for
in-season performing product. In connection with this strategy, the Company
produced more goods in the USA and Europe, which resulted in a higher cost of
goods and increased airfreight expenses. Additionally, the Company took action
earlier in 2002 than in 2001 to clear under-performing inventories at lower
gross margins in wholesale. Operating expenses increased to $13,350 in 2002 from
$12,251 in 2001 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. Madden Women's Wholesale income from operations
decreased to $3,737 in 2002 compared to income from operations of $5,770 in
2001.
Sales from l.e.i. Wholesale accounted for $26,557 or 17%, and $18,801 or 17%, of
total sales in 2002 and 2001, respectively. The increase in sales was driven by
the sales of key styles including closed toe fashion casuals and fresh spring
dress sandals. The increase in sales was also driven by the addition of new
accounts with retailers including The Bon Marche, Dayton Hudson, Stage Stores
and Foot Action. Gross profit as a percentage of sales decreased from 36% in
2001 to 35% in 2002, due to an increase in the level of promotional activity in
the first and second quarters of 2002. Operating expenses increased to $6,444 in
2002 from $4,209 in 2001 due to increases in payroll and payroll-related
expenses. Additionally, selling expenses increased due to an increase in sales
in the current period. Income from operations for l.e.i. Wholesale increased to
$2,881 in 2002 from $2,528 in 2001.
Sales from Madden Mens Wholesale which commenced shipping in the first quarter
of 2001 accounted for $20,614 or 13%, and $2,790 or 2%, of total sales in 2002
and 2001, respectively. The increase in sales was driven by the sales of key
styles including euro casual and sport-active looks. Gross profit as a
percentage of sales increased from 34% in 2001 to 36% in 2002 due to changes in
product mix and balanced sourcing. Operating expenses increased to $4,106 in
2002 from $979 in 2001 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 Madden Mens Wholesale
was $3,271 in 2002 compared to a loss from operations of $27 in 2001.
Sales from Diva Wholesale accounted for $5,185 or 3%, and $3,630 or 3%, of total
sales in 2002 and 2001, respectively. The increase in sales was driven by the
sales of key styles including
14
pointy toe dress shoes, sport active shoes, sandals and driving mocs. Gross
profit as a percentage of sales increased from 24% in 2001 to 33% in 2002 due to
changes in product mix and balanced sourcing. Operating expenses increased to
$1,298 in 2002 from $792 in 2001 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 $420 in 2002 compared to income from operations of $71 in 2001.
Sales from Stevies Wholesale, accounted for $7,008 or 5%, and $4,892 or 4%, of
total sales in 2002 and 2001, respectively. This increase in sales was primarily
due to the growth in accounts such as Kids "R" Us and Nordstrom. Gross profit as
a percentage of sales remained the same in 2001 and 2002. Operating expenses
increased to $1,491 in 2002 from $1,112 in 2001 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
Stevies Wholesale was $1,141 in 2002 compared to income from operations of $883
in 2001.
Retail Division:
- ---------------
Sales from the Retail Division accounted for $41,145 or 27% and $35,161 or 31%
of total sales in 2002 and 2001, respectively. This increase in sales was due to
the increase in the number of Steve Madden retail stores as well as an increase
in same store sales. During 2001 and 2002, the Company closed three of its least
productive stores. As of June 30, 2002, there were 74 retail stores compared to
67 stores as of June 30, 2001. Same store sales for the six-month period ended
June 30, 2002 increased 9% over the same period of 2001. This increase was
achieved through the early delivery of fresh products to the Company's stores
and replenishing in season. Gross profit as a percentage of sales decreased from
56% in 2001 to 54% in 2002 due to greater promotional activity at retail this
year. Operating expenses for the Retail Division increased to $18,712 or 45% of
sales in 2002 from $16,458 or 47% of sales in 2001. This increase in dollars was
due to increases in payroll and payroll-related expenses and occupancy expenses
as a result of opening additional stores since June 30, 2001. Income from
operations for the Retail Division was $3,372 in 2002 compared to income from
operations of $3,112 in 2001.
Adesso-Madden Division:
- ----------------------
Adesso-Madden, Inc. generated commission revenues of $2,120 for the six-month
period ended June 30, 2002, which represents a 30% increase over commission
revenues of $1,630 during the same period in 2001. This increase was primarily
due to the growth in accounts such as Wal-Mart and Target and the addition of
children's products to the assortment mix. Operating expenses increased to
$1,133 in 2002 from $840 in 2001 due to increases in payroll and payroll-related
expenses. Income from operations for Adesso-Madden was $987 in 2002 compared to
income from operations of $790 in 2001.
Three Months Ended June 30, 2002 vs. Three Months Ended June 30, 2001
Consolidated:
- ------------
Sales for the three-month period ended June 30, 2002 were $88,111 or 48% higher
than the $59,563 in the comparable period of 2001. The increase in sales was
primarily due to a 600% increase in sales from Madden Mens Wholesale and double
digit percentage gains in our other divisions due to an increase in the
Company's brand recognition.
15
Consolidated gross profit as a percentage of sales decreased from 43% in 2001 to
37% in 2002. The decrease was due to several factors including the fact that a
"broad and shallow" assortment strategy was adopted at both wholesale and
retail, wherein open to buy dollars were reserved for in-season performing
product. In connection with this strategy, the Company produced more goods in
the USA and Europe, which resulted in a higher cost of goods and increased
airfreight expenses. Also, contributing to the decrease in the Company's second
quarter of 2002 gross margins was the fact that the Company's retail division,
with its attendant greater gross margins, represented a smaller percentage of
the Company's overall business for the three-month period ended June 30, 2002
(retail represented 25% of the total net sales in 2002 vs. 34% in 2001).
Additionally, the Company took action earlier in 2002 than in 2001 to clear
under-performing inventories at lower gross margins in both retail and
wholesale.
Selling, general and administrative (SG&A) expenses increased to $25,602 in 2002
from $19,226 in 2001. The increase in SG&A expenses was due primarily to a 23%
increase in payroll, officers' and employee bonuses and payroll-related expenses
from $7,794 in 2001 to $9,548 in 2002. Also, the Company focused its efforts on
advertising and marketing by increasing those expenses by 89% from $1,041 in
2001 to $1,970 in 2002. Additionally, selling, designing and licensing costs
increased by 55% from $3,309 in 2001 to $5,120 in 2002. 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 expansion of the Company's
corporate office and warehouse facilities resulted in an increase in occupancy,
telephone, utilities, warehouse, and office related expenses by 24% from $3,482
in 2001 to $4,309 in 2002.
Income from operations for 2002 was $8,956, which represents an increase of
$1,629 or 22% over the income from operations of $7,327 in 2001. Net income
increased by 19% to $5,262 in 2002 from $4,423 in 2001.
Wholesale Divisions:
- -------------------
Sales from Steve Madden Women's Wholesale accounted for $31,332 or 36%, and
$24,608 or 41%, of total sales in 2002 and 2001, respectively. The increase in
sales was driven by the sales of key styles including dress sandals, open-back
euro casuals and pointy pumps. Gross profit as a percentage of sales decreased
from 37% in 2001 to 29% in 2002. The decrease was due several factors. At
wholesale, a "broad and shallow" assortment strategy was adopted, wherein open
to buy dollars were reserved for in-season performing product. In connection
with this strategy, the Company produced more goods in the USA and Europe, which
resulted in a higher cost of goods and increased airfreight expenses.
Additionally, the Company took action earlier in 2002 than in 2001 to clear
under-performing inventories at lower gross margins in wholesale. Operating
expenses increased to $7,347 in 2002 from $5,944 in 2001 due to increases in
payroll and payroll-related expenses. Also, advertising and marketing expenses
increased due to the Company's expanded marketing strategy. Additionally,
selling and designing expenses increased due to an increase in sales in the
current period. Madden Women's Wholesale income from operations decreased to
$2,083 in 2002 compared to income from operations of $3,447 in 2001.
Sales from l.e.i. Wholesale accounted for $14,982 or 17%, and $9,056 or 15%, of
total sales in 2002 and 2001, respectively. The increase in sales was driven by
the addition of new accounts with retailers including The Bon Marche, Dayton
Hudson, Stage Stores and Foot Action. The increase in sales was also driven by
the sales of key styles including closed toe fashion casuals and fresh spring
dress sandals. Gross profit as a percentage of sales decreased from 37% in 2001
to 35% in 2002, due to an increase in the level of promotional activity in the
second quarter of
16
2002. Operating expenses increased to $3,666 in 2002 from $2,336 in 2001 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 increased to $1,585 in 2002 from
$992 in 2001.
Sales from Madden Mens Wholesale accounted for $13,165 or 15%, and $1,880 or 3%,
of total sales in 2002 and 2001, respectively. The increase in sales was driven
by the sales of key styles including euro casual and sport-active looks. Gross
profit as a percentage of sales increased from 34% in 2001 to 35% in 2002 due to
improved sourcing leverage. Operating expenses increased to $2,705 in 2002 from
$620 in 2001 due to increases in payroll and payroll-related expenses. Also,
advertising and marketing expenses increased due to the Company's expanded
marketing strategy. Additionally, selling and designing expenses increased due
to an increase in sales in the current period. Income from operations for Madden
Mens Wholesale was $1,926 in 2002 compared to income from operations of $13 in
2001.
Sales from Diva Wholesale accounted for $2,700 or 3%, and $1,851 or 3%, of total
sales in 2002 and 2001, respectively. The increase in sales was driven by the
sales of key styles including sandals and driving mocs. Gross profit as a
percentage of sales increased from 18% in 2001 to 33% in 2002 due to changes in
product mix and balanced sourcing. Operating expenses increased to $763 in 2002
from $405 in 2001 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 $116 in
2002 compared to a loss from operations of $78 in 2001.
Sales from Stevies Wholesale, accounted for $3,563 or 4%, and $2,099 or 4%, of
total sales in 2002 and 2001, respectively. The increase in sales was driven by
the sales of key styles including sandals with raffia uppers, fashion EVA's and
dress shoes. The increase in sales was also driven by the growth in accounts
such as Kids "R" Us and Nordstrom. Gross profit as a percentage of sales
decreased from 37% in 2001 to 36% in 2002, due to an increase in the level of
promotional activity in the second quarter of 2002. Operating expenses increased
to $746 in 2002 from $547 in 2001 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 $566 in 2002 compared to income from operations of $326 in
2001.
Retail Division:
- ---------------
Sales from the Retail Division accounted for $22,369 or 25% and $20,069 or 34%
of total sales in 2002 and 2001, respectively. This increase in sales was due to
the increase in the number of Steve Madden retail stores as well as an increase
in same store sales. During 2001 and 2002, the Company closed three of its least
productive stores. As of June 30, 2002, there were 74 retail stores compared to
67 stores as of June 30, 2001. Same store sales for the quarter ended June 30,
2002 increased 5% over the same period of 2001. This increase was achieved
through the early delivery of fresh products to the Company's stores and
replenishing in season. Gross profit as a percentage of sales decreased from 56%
in 2001 to 53% in 2002, due to greater promotional activity at retail this
quarter. Operating expenses for the Retail Division increased to $9,770 or 44%
of sales in 2002 from $8,886 or 44% of sales in 2001. This increase in dollars
was due to increases in payroll and payroll-related expenses and occupancy
expenses as a result of opening additional stores since June 30, 2001. Income
from operations for the Retail Division was $2,079 in 2002 compared to income
from operations of $2,293 in 2001.
17
Adesso-Madden Division:
- ----------------------
Adesso-Madden, Inc. generated commission revenues of $1,206 for the three-month
period ended June 30, 2002, which represents a 47% increase over commission
revenues of $822 during the same period in 2001. This increase was primarily due
to the growth in accounts such as Wal-Mart and Target and the addition of
children's products to the assortment mix. Operating expenses increased to $605
in 2002 from $488 in 2001 due to increases in payroll and payroll-related
expenses. Income from operations for Adesso-Madden was $601 in 2002 compared to
income from operations of $334 in 2001.
LICENSE AGREEMENTS
Revenues from licensing decreased to $698 in the first six months of 2002 from
$739 in 2001as a result of diminution of royalty revenue from the Company's
children's licenses. As of June 30, 2002, the Company had six license partners
covering six product categories for its Steve Madden brand. Also, as of June 30,
2002, the Company had two license partners covering two 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 $84,140 at June 30, 2002 compared to $70,546
in working capital at June 30, 2001, representing an increase of $13,594, 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 six-month period ended June 30, 2002, cash used for operating
activities was $10,778. Uses of cash arose principally from an increase in
factored accounts receivable of $20,827 and an increase in inventories of
$8,999. Cash was provided principally by net income of $9,355 and a decrease in
prepaid expenses and other assets of $5,533.
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 June 30:
2002 $ 7,508
2003 7,294
2004 7,256
2005 6,881
2006 6,869
Thereafter 19,731
---------
$ 55,539
=========
18
The Company has employment agreements with four key executives and its Creative
and Design Chief as of June 30, 2002 providing for aggregate annual salaries of
approximately $1,725 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.
A significant portion of the Company's products are 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.
INVESTING ACTIVITIES
During the six-month period ended June 30, 2002, the Company used cash of
$16,173 primarily for the investments in marketable securities and $1,616 on
leasehold improvements to its corporate office space.
FINANCING ACTIVITIES
During the six-month period ended June 30, 2002, the Company received $3,756 in
connection with the exercise of stock options.
OTHER CONSIDERATIONS
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
19
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.
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 a significant customer of the Company,
whether motivated by competitive 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 six-month
period ended June 30, 2002, approximately 80% 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
20
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 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.
21
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 eight to ten (8-10) 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
22
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 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 on the basis that they
violate 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.
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 July 31, 2002, the Company had outstanding options to
purchase an aggregate of approximately 2,230,000 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.
23
Part II
ITEM 1. LEGAL PROCEEDINGS.
The Company and certain of the Company's present and/or former directors have
been named in an action commenced in the United States District Court for the
Eastern District of New York by the Safeco Surplus Lines Insurance Company
captioned, Safeco Surplus Lines Ins. Co. v. Steven Madden Ltd., et al., 02 CV
1151 (JG). The complaint principally seeks rescission of the excess insurance
policy issued by Safeco to the Company for the February 4, 2000 to June 13, 2001
period and an order declaring that Safeco does not owe any indemnity obligation
to the Company or any of its officers and directors in connection with the
putative shareholder class action and derivative cases described in the Form 10Q
filed by the Company for the quarter ended March 31, 2002.
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. This matter has
been settled and the lawsuit has been discontinued with prejudice.
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. This matter has been
settled and the lawsuit has been discontinued with prejudice.
On or about January 22, 2002, an action was commenced against the Company in the
United States District Court for the District of Oregon, captioned Adidas
America, Inc. and Adidas Salomon AG v. Steve Madden, Ltd. and Steve Madden
Retail, Inc., CA No. CV02-0057 HU. The Complaint seeks injunctive relief and
unspecified monetary damages for trademark infringement, trademark dilution,
unfair competition and deceptive trade practices. The Company believes that it
has substantial defenses to the claims asserted in the lawsuit and has filed a
motion to dismiss the complaint in lieu of an answer.
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of the Company held on May 17, 2002 (the "Annual
Meeting"), the stockholders of the Company approved an amendment to the
Company's 1999 Stock Plan to increase the number of shares subject to awards
granted under the 1999 Stock Plan. The stockholders of the Company also approved
the appointment of Eisner LLP as independent auditors of the Company for fiscal
year 2002. In addition, at the Annual Meeting the stockholders of the Company
elected eight directors to serve until the next Annual Meeting of Stockholders
or until successors are duly elected and qualified.
The affirmative vote of the holders of a majority of the total votes cast was
required to approve the amendment to the 1999 Stock Plan and the appointment of
Eisner LLP and the affirmative
24
vote of a plurality of the votes cast by holders of shares of common stock was
required to elect the directors.
With respect to the approval of the amendment to the 1999 Stock Plan and the
appointment of Eisner LLP, set forth below is information on the results of the
votes cast at the Annual Meeting.
For Against Abstained
--- ------- ---------
Amendment to the 1999
Stock Plan 4,864,946 4,428,287 107,519
Approval of Eisner LLP 11,622,543 101,974 3,591
With respect to the election of directors, set forth below is information with
respect to the nominees elected as directors of the Company at the Annual
Meeting and the votes cast and/or withheld with respect to each such nominee.
Nominees For Withheld
-------------------- ---------- --------
Charles A. Koppelman 10,763,790 794,318
Jamieson A. Karson 10,910,244 647,864
Arvind Dharia 10,910,244 647,864
Gerald Mongeluzo 10,910,244 647,864
Marc S. Cooper 10,910,044 648,064
John L. Madden 10,910,044 648,064
Peter Migliorini 10,910,044 648,064
Heywood Wilansky 10,910,044 648,064
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(10)(a) 1999 Stock Award Plan (incorporated by reference to Exhibit
10(a) to the Form S-8 filed on August 14, 2002 (File
No.-333-860-60))
99.1 Certification of CEO pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
99.2 Certification of CFO pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
25
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report on Form 10-Q to be signed on its behalf
by the undersigned thereunto duly authorized.
DATE: August 14, 2002
STEVEN MADDEN, LTD.
/s/ JAMIESON A. KARSON
----------------------
Jamieson A. Karson
Chief Executive Officer
/s/ ARVIND DHARIA
-----------------
Arvind Dharia
Chief Financial Officer
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STEVEN MADDEN, LTD.
FORM 10-Q
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
(10)(a) 1999 Stock Award Plan (incorporated by reference to Exhibit
10(a) to the Form S-8 filed on August 14, 2002)
99.1 Certification of CEO pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
99.2 Certification of CFO pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
27