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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 September 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 November 11, 2002
Common Stock 12,721,455
STEVEN MADDEN, LTD.
FORM 10-Q
QUARTERLY REPORT
September 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................ 10
ITEM 4. Controls and Procedures......................................... 24
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings............................................... 25
ITEM 6. Exhibits and Reports on Form 8K................................. 25
2
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands)
September 30, December 31,
2002 2001
------------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 44,896 $ 50,179
Marketable securities 5,013
Accounts receivable - net of allowances of $421 and $257 2,974 2,072
Due from factor - net of allowances of $1,658 and $1,387 33,799 22,783
Inventories 24,827 15,818
Prepaid expenses and other current assets 839 836
Prepaid taxes 7,911
Deferred taxes 1,223 1,223
--------- ---------
Total current assets 113,571 100,822
Marketable securities 9,650
Property and equipment, net 16,020 15,707
Deferred taxes 3,019 3,019
Deposits and other 297 248
Cost in excess of fair value of net assets acquired 2,066 2,066
--------- ---------
$ 144,623 $ 121,862
========= =========
LIABILITIES
Current liabilities:
Current portion of lease payable $ 16 $ 43
Accounts payable 8,740 6,836
Accrued expenses 8,570 10,898
Accrued bonuses 2,328 412
--------- ---------
Total current liabilities 19,654 18,189
Deferred rent 1,483 1,299
Lease payable, less current portion 14
--------- ---------
21,137 19,502
--------- ---------
Contingencies (Note F)
STOCKHOLDERS' EQUITY
Common stock - $.0001 par value, 60,000 shares authorized, 12,717
and 12,194 outstanding 1 1
Additional paid-in capital 68,771 60,643
Retained earnings 66,504 50,881
Other comprehensive loss:
Unrealized loss on marketable securities (51)
Unearned compensation (3,748) (1,174)
Treasury stock at cost - 1,245 shares (7,991) (7,991)
--------- ---------
123,486 102,360
--------- ---------
$ 144,623 $ 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 Nine Months Ended
------------------- -------------------
September 30, September 30,
------------------- -------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net sales:
Wholesale $ 70,742 $ 50,260 $184,319 $128,057
Retail 22,276 19,985 63,421 55,146
-------- -------- -------- --------
93,018 70,245 247,740 183,203
-------- -------- -------- --------
Cost of sales:
Wholesale 46,403 31,784 122,539 81,752
Retail 10,360 8,733 29,421 24,324
-------- -------- -------- --------
56,763 40,517 151,960 106,076
-------- -------- -------- --------
Gross profit 36,255 29,728 95,780 77,127
Commission and licensing fee income 1,819 1,637 4,637 4,006
Operating expenses 27,572 22,378 74,106 59,019
-------- -------- -------- --------
Income from operations 10,502 8,987 26,311 22,114
Interest and other income, net 348 265 770 1,108
-------- -------- -------- --------
Income before provision for income taxes 10,850 9,252 27,081 23,222
Provision for income taxes 4,582 3,885 11,458 9,782
-------- -------- -------- --------
Net income $ 6,268 $ 5,367 $ 15,623 $ 13,440
======== ======== ======== ========
Basic income per share $ .49 $ .46 $ 1.25 $ 1.17
======== ======== ======== ========
Diluted income per share $ .46 $ .41 $ 1.14 $ 1.04
======== ======== ======== ========
Weighted average common shares outstanding -
Basic 12,706 11,774 12,544 11,479
Effect of dilutive securities - options 1,057 1,392 1,134 1,426
-------- -------- -------- --------
Weighted average common shares outstanding -
Diluted 13,763 13,166 13,678 12,905
======== ======== ======== ========
See notes to financial statements
4
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
Nine Months Ended
September 30,
--------------------
2002 2001
-------- --------
Cash flows from operating activities:
Net income $ 15,623 $ 13,440
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization 2,624 2,584
Noncash compensation 1,617 1,315
Provision for bad debts 435 (51)
Deferred rent expense 184 151
Gain on sale of marketable securities (37)
Changes in:
Accounts receivable (1,066) 1,170
Due from factor (11,287) (17,028)
Inventories (9,009) (5,965)
Prepaid expenses and other assets 7,860 447
Accounts payable and accrued expenses 1,491 (3,179)
-------- --------
Net cash provided by (used in) operating activities 8,435 (7,116)
-------- --------
Cash flows from investing activities:
Purchase of property and equipment (2,937) (2,251)
Purchases of marketable securities (16,718)
Redemption of marketable securities 2,041
-------- --------
Net cash used in investing activities (17,614) (2,251)
-------- --------
Cash flows from financing activities:
Proceeds from options exercised 3,937 5,927
Repayments of lease obligations (41) (92)
-------- --------
Net cash provided by financing activities 3,896 5,835
-------- --------
Net decrease in cash and cash equivalents (5,283) (3,532)
Cash and cash equivalents - beginning of year 50,179 35,259
-------- --------
Cash and cash equivalents - end of year $ 44,896 $ 31,727
======== ========
See notes to financial statements
5
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Financial Statements
September 30, 2002
NOTE A - BASIS OF REPORTING
The accompanying unaudited financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
for interim financial information and pursuant to the rules and regulations of
the Securities and Exchange Commission. 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 September 30,
2002, and the results of their operations and cash flows for the nine and
three-month periods then ended. The results of operations for the nine and
three-month periods ended September 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 - MARKETABLE SECURITIES
Marketable securities consist primarily of corporate bonds which have strong
credit ratings and maturities greater than three months and up to 5 years at the
time of purchase. These securities, which are classified as available-for-sale,
are carried at fair value, with unrealized gains and losses, net of any tax
effect, reported in shareholders' equity as accumulated other comprehensive
income (loss). Amortization of premiums and discounts are included in interest
income and are not material. The values of these securities may fluctuate as a
result of changes in market interest rates and credit risk.
NOTE C - INVENTORIES
Inventories, which consist of finished goods, are stated at the lower of cost
(first-in, first-out method) or market.
NOTE D - 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.
NOTE E - 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.
6
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Financial Statements
September 30, 2002
NOTE F - 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. Mr. Madden began serving his sentence in
September of 2002.
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 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.
7
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Financial Statements
September 30, 2002
NOTE F - PENDING LITIGATION (CONTINUED)
[3] Shareholder derivative actions:
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 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.
[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 current
and former 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:
(a) 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. The Complaint seeks
injunctive relief and unspecified monetary damages for trademark
infringement, trademark dilution, unfair competition and deceptive
trade practices arising from the Company's use of four stripes as a
design element on footwear. On or about September 3, 2002, Adidas
commenced a second action 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. The second Complaint seeks the same injunctive relief and
unspecified monetary damages for various trademark infringement claims
arising from the Company's use of two stripes as a design element on
footwear. The Company believes it has substantial defenses to the
claims asserted in both lawsuits and has filed answers denying the
allegations of infringement in both cases. The Company is seeking to
have both cases consolidated before a single judge. The ultimate
outcome of this matter cannot be presently determined.
(b) On October 4, 2002, Skechers U.S.A., Inc. and Skechers U.S.A., Inc.
II, filed suit against Steven Madden Ltd. and R.S.V. Sport, Inc. in
the United States District Court for the Central District of
California. Skechers alleges claims for patent infringement, federal
unfair competition, federal antidilution violation, California unfair
competition, California antidilution violation, and common law unfair
competition. Skechers seeks unspecified monetary damages. The Company
has not yet answered or otherwise responded to the complaint, but
believes that it has substantial defenses to the claims asserted in
the lawsuit. The ultimate outcome of this matter cannot presently be
determined.
8
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Financial Statements
September 30, 2002
NOTE F - PENDING LITIGATION (CONTINUED)
[5] Other actions: (continued)
(c) On September 6, 2002, Ron Owen filed an action against Steven Madden
Retail, Inc., which action is pending in the United States District
Court for the Northern District of Texas - Dallas Division. Plaintiff
alleges a cause of action for breach of contract and seeks unspecified
monetary damages. On October 10, 2002, the Company answered the
complaint. The Company believes that it has substantial defenses to
the claims asserted in the lawsuit. The ultimate outcome of this
matter cannot presently be determined.
9
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
-----------------------
Nine Months Ended
-----------------
September 30
------------
($ in thousands)
Consolidated: 2002 2001
- ------------ ---- ----
Net Sales $247,740 100% $183,203 100%
Cost of Sales 151,960 61 106,076 58
Gross Profit 95,780 39 77,127 42
Other Operating Income 4,637 2 4,006 2
Operating Expenses 74,106 30 59,019 32
Income from Operations 26,311 11 22,114 12
Interest and Other Income Net 770 0 1,108 1
Income Before Income Taxes 27,081 11 23,222 13
Net Income 15,623 6 13,440 7
10
Percentage of Net Sales
-----------------------
Nine Months Ended
-----------------
September 30
------------
($ in thousands)
By Segment 2002 2001
---- ----
WHOLESALE DIVISIONS:
- --------------------
Steven Madden, Ltd.
- -------------------
(Women's Wholesale)
Net Sales $ 87,539 100% $ 75,638 100%
Cost of Sales 59,954 68 48,120 64
Gross Profit 27,585 32 27,518 36
Other Operating Income 1,207 1 939 1
Operating Expenses 21,557 25 19,730 26
Income from Operations 7,235 8 8,727 11
l.e.i. Footwear:
- ----------------
Net Sales $ 41,824 100% $ 31,999 100%
Cost of sales 26,648 64 20,111 63
Gross Profit 15,176 36 11,888 37
Operating Expenses 10,304 24 7,020 22
Income from Operations 4,872 12 4,868 15
Madden Mens:
- ------------
Net Sales $ 35,462 100% $ 6,017 100%
Cost of sales 22,796 64 $ 3,857 64
Gross Profit 12,666 36 2,160 36
Operating Expenses 7,441 21 2,149 36
Income (Loss) from Operations 5,225 15 11 0
Diva Acquisition Corp:
- ----------------------
Net Sales $ 8,572 100% $ 6,015 100%
Cost of sales 6,230 73 4,370 73
Gross Profit 2,342 27 1,645 27
Operating Expenses 1,946 23 1,299 21
Income from Operations 396 4 346 6
Stevies Inc.:
- -------------
Net Sales $ 10,922 100% $ 8,388 100%
Cost of sales 6,911 63 5,294 63
Gross Profit 4,011 37 3,094 37
Other Operating Income 71 0 236 3
Operating Expenses 2,431 22 1,916 23
Income from Operations 1,651 15 1,414 17
STEVEN MADDEN RETAIL INC.:
- --------------------------
Net Sales $ 63,421 100% $ 55,146 100%
Cost of Sales 29,421 46 24,324 44
Gross Profit 34,000 54 30,822 56
Operating Expenses 28,720 45 25,472 46
Income from Operations 5,280 9 5,350 10
11
Percentage of Net Sales
-----------------------
Nine Months Ended
-----------------
September 30
------------
($ in thousands)
By Segment (Continued)
ADESSO MADDEN INC.: 2002 2001
- ------------------- ---- ----
(FIRST COST)
Other Operating Revenue $ 3,359 100% $ 2,831 100%
Operating Expenses 1,707 51 1,433 51
Income from Operations 1,652 49 1,398 49
12
Percentage of Net Sales
-----------------------
Three Months Ended
------------------
September 30
------------
($ in thousands)
2002 2001
---- ----
Consolidated:
- -------------
Net Sales $ 93,018 100% $ 70,245 100%
Cost of Sales 56,763 61 40,517 58
Gross Profit 36,255 39 29,728 42
Other Operating Income 1,819 2 1,637 2
Operating Expenses 27,572 30 22,378 31
Income from Operations 10,502 11 8,987 13
Interest and Other Income Net 348 0 265 0
Income Before Income Taxes 10,850 11 9,252 13
Net Income 6,268 7 5,367 8
By Segment:
WHOLESALE DIVISIONS:
- --------------------
Steven Madden, Ltd.
- -------------------
(Women's Wholesale)
Net Sales $ 33,326 100% $ 27,954 100%
Cost of sales 22,168 67 17,925 64
Gross Profit 11,158 33 10,029 36
Other Operating Income 547 2 407 1
Operating Expenses 8,207 25 7,479 27
Income from Operations 3,498 10 2,957 10
l.e.i. Footwear:
- ----------------
Net Sales $ 15,267 100% $ 13,198 100%
Cost of sales 9,416 62 8,047 61
Gross Profit 5,851 38 5,151 39
Operating Expenses 3,860 25 2,811 21
Income from Operations 1,991 13 2,340 18
Madden Mens:
- ------------
Net Sales $ 14,848 100% $ 3,227 100%
Cost of sales 9,559 64 2,019 63
Gross Profit 5,289 36 1,208 37
Operating Expenses 3,335 23 1,170 36
Income from Operations 1,954 13 38 1
Diva Acquisition Corp.:
- -----------------------
Net Sales $ 3,387 100% $ 2,385 100%
Cost of sales 2,763 82 1,603 67
Gross Profit 624 18 782 33
Operating Expenses 648 19 507 21
Income (Loss) from Operations (24) (1) 275 12
Stevies Inc.:
- -------------
Net Sales $ 3,914 100% $ 3,496 100%
Cost of Sales 2,497 64 2,190 63
Gross Profit 1,417 36 1,306 37
Other Operating Income 33 `1 29 1
Operating Expenses 939 24 804 23
Income from Operations 511 13 531 15
13
Percentage of Net Sales
-----------------------
Three Months Ended
------------------
September 30
------------
($ in thousands)
By Segment (Continued)
Steven Madden Retail Inc.: 2002 2001
- -------------------------- ---- ----
Net Sales $ 22,276 100% $ 19,985 100%
Cost of Sales 10,360 47 8,733 44
Gross Profit 11,916 53 11,252 56
Operating Expenses 10,008 45 9,014 45
Income from Operations 1,908 8 2,238 11
ADESSO MADDEN INC.:
- -------------------
(FIRST COST)
Other Operating Revenue $ 1,239 100% $ 1,201 100%
Operating Expenses 574 46 593 49
Income from Operations 665 54 608 51
RESULTS OF OPERATIONS
($ in thousands)
Nine Months Ended September 30, 2002 vs. Nine Months Ended September 30, 2001
Consolidated:
- -------------
Sales for the nine-month period ended September 30, 2002 were $247,740 or 35%
higher than the $183,203 in the comparable period of 2001. The increase in sales
was partially due to a 489% increase in sales from the Madden Mens Wholesale
Division ("Madden Mens Wholesale"), which commenced shipping in the first
quarter of 2001 as well as 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
39% 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
nine months of 2002 gross margins was the mix change between wholesale and
retail business. Retail, which has higher gross margin percentage, represented
26% of the total net sales in 2002 compared to 30% 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 $74,106 in 2002
from $59,019 in 2001. The increase in SG&A expenses was partially due to a 23%
increase in payroll, officers' and employee incentives and other payroll-related
expenses from $22,589 in 2001 to $27,739 in 2002 due to growth in the business
primarily from Madden Mens Wholesale. Also, the Company focused its efforts on
advertising and marketing by increasing those expenses by 18% from $4,927 in
2001 to $5,790 in 2002. Additionally, selling, designing and licensing costs
increased by 46% from $9,780 in 2001 to $14,266 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
14
licensing activities. The expansion of the Company's corporate office facilities
resulted in an increase in occupancy, telephone, utilities and office related
expenses by 21% from $9,695 in 2001 to $11,773 in 2002.
Income from operations for 2002 was $26,311, which represents an increase of
$4,197 or 19% over the income from operations of $22,114 in 2001. Net income
increased by 16% to $15,623 in 2002 from $13,440 in 2001.
Wholesale Divisions:
- -------------------
Sales from the Steve Madden Women's Wholesale Division ("Madden Women's
Wholesale") accounted for $87,539 or 35%, and $75,638 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, pointy pumps and
classic platform round toe boots. Gross profit as a percentage of sales
decreased from 36% in 2001 to 32% in 2002. The decrease in gross profit was due
to several factors. At wholesale, the Company took earlier action to clear
slower moving styles to create open-to-buy for new best sellers and the Company
took higher markdowns because of the general softness in the economy. Operating
expenses increased to $21,557 in 2002 from $19,730 in 2001 due to increases in
payroll and other payroll-related expenses. Additionally, selling and designing
expenses increased due to an increase in sales in the current period. Income
from operations for Madden Women's Wholesale was $7,235 in 2002 compared to
income from operations of $8,727 in 2001.
Sales from l.e.i. Wholesale accounted for $41,824 or 17%, and $31,999 or 17%, of
total sales in 2002 and 2001, respectively. The increase in sales was driven by
the sales of key styles including, euro casual and log bottom casuals. 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 37% in 2001 to 36% in 2002, due
to an increase in the level of promotional activity in the first nine months of
2002. Operating expenses increased to $10,304 in 2002 from $7,020 in 2001 due to
increases in payroll and other 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 stayed flat in 2002 compared to 2001.
Sales from Madden Mens Wholesale, which commenced shipping in the first quarter
of 2001, accounted for $35,462 or 14%, and $6,017 or 3%, of total sales in 2002
and 2001, respectively. The sales increase resulted from a doubling in the
number of Madden Mens doors and deeper penetration of Mens products through
department store distribution channels. Sales were driven by key styles
including euro casual and sport-active look. Gross profit as a percentage of
sales remained the same in 2001 and 2002. Operating expenses increased to $7,441
in 2002 from $2,149 in 2001 due to increases in payroll and other
payroll-related expenses due to growth in the business. Additionally, selling
and designing expenses increased due to an increase in sales in the current
period. Madden Mens Wholesale income from operations increased to $5,225 in 2002
compared to breakeven in 2001.
Sales from Diva Wholesale accounted for $8,572 or 3%, and $6,015 or 3%, of total
sales in 2002 and 2001, respectively. The increase in sales was achieved partly
through inclusion of sales of products from the newly introduced Steven brand
(which is in its first quarter and has contributed revenue of $650) within the
Diva Wholesale division. The increase in sales was also driven by the key styles
including pointy toe dress shoes, sport active shoes, driving mocs and
15
mid-heel dress shoes. Gross profit as a percentage of sales remained the same in
2001 and 2002. Operating expenses increased to $1,946 in 2002 from $1,299 in
2001 due to increases in payroll and other payroll-related expenses due to
growth in the business. Additionally, selling and related expenses increased due
to an increase in sales in the current period. Diva Wholesale income from
operations increased to $396 in 2002 compared to income from operations of $346
in 2001.
Sales from Stevies Wholesale, accounted for $10,922 or 4%, and $8,388 or 5%, of
total sales in 2002 and 2001, respectively. The increase in sales was driven by
the addition of new accounts with retailers including Meldisco children's
departments, Zutopia, and the Wet Seals' children division. This increase in
sales was also due to the growth in accounts such as Limited Too, Journey's
Kidz, Nordstrom and Filenes. Gross profit as a percentage of sales remained the
same in 2001 and 2002. Operating expenses increased to $2,431 in 2002 from
$1,916 in 2001 due to increases in payroll and other payroll-related expenses.
Additionally, selling and related expenses increased due to an increase in sales
in the current period. Stevies Wholesale income from operations increased to
$1,651 in 2002 compared to income from operations of $1,414 in 2001.
Retail Division:
- ---------------
Sales from the Retail Division accounted for $63,421 or 26% and $55,146 or 30%
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 comparable store sales. During 2001 and 2002, the Company closed a total of
four of its least productive stores. Since September 30, 2001 the Company opened
eleven (11) new stores. As of September 30, 2002, there were 77 retail stores
compared to 68 stores as of September 30, 2001. Comparable store sales for the
nine-month period ended September 30, 2002 increased 6% over the same period of
2001. This increase was achieved through the early delivery of fresh products to
the Company's stores and the prompt replenishment of inventory in season. This
increase in sales was also driven by the increased demand for buy-now wear-now
sandals due to the warmer weather in the east. 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 $28,720 or 45% of sales in 2002 from $25,472 or 46% of sales in
2001. This increase in dollars primarily resulted from the addition of new
stores. Income from operations for the Retail Division was $5,280 in 2002
compared to income from operations of $5,350 in 2001.
Adesso-Madden Division:
- ----------------------
Adesso-Madden, Inc. generated commission revenues of $3,359 for the nine-month
period ended September 30, 2002, which represents a 19% increase over commission
revenues of $2,831 during the same period in 2001. This increase was primarily
due to the growth in accounts such as Wal-Mart, Target, JC Penney and Mervyn's
and the addition of children's products to the assortment mix. Operating
expenses increased to $1,707 in 2002 from $1,433 in 2001 due to increases in
payroll and other payroll-related expenses. Income from operations for
Adesso-Madden was $1,652 in 2002 compared to income from operations of $1,398 in
2001.
16
Three Months Ended September 30, 2002 vs. Three Months Ended September 30, 2001
Consolidated:
- -------------
Sales for the three-month period ended September 30, 2002 were $93,018 or 32%
higher than the $70,245 in the comparable period of 2001. The increase in sales
was partially due to a 360% increase in sales from Madden Mens Wholesale as well
as 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
39% in 2002. The decrease was due to several factors including the Company's
decision to clear slower moving styles at wholesale earlier to create
open-to-buy for the new best sellers, greater sales and advertising allowances
and lower average selling prices at retail due to slower than planned boot
sales. Also contributing to the decrease in the Company's third quarter of 2002
gross margins was the mix change between wholesale and retail business. Retail,
which has higher gross margin percentage, represented 24% of the total net sales
in 2002 compared to 28% in 2001.
Selling, general and administrative (SG&A) expenses increased to $27,572 in 2002
from $22,378 in 2001. The increase in SG&A expenses was partially due to a 17%
increase in payroll, officers' and employee incentives and other payroll-related
expenses from $8,311 in 2001 to $9,745 in 2002 due to growth in the business
primarily from Madden Mens Wholesale. Also, the Company focused its efforts on
advertising and marketing by increasing those expenses by 19% from $2,278 in
2001 to $2,720 in 2002. Additionally, selling, designing and licensing costs
increased by 39% from $3,860 in 2001 to $5,376 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 28% from $3,405
in 2001 to $4,349 in 2002.
Income from operations for 2002 was $10,502, which represents an increase of
$1,515 or 17% over the income from operations of $8,987 in 2001. Net income
increased by 17% to $6,268 in 2002 from $5,367 in 2001.
Wholesale Divisions:
- -------------------
Sales from Steve Madden Women's Wholesale accounted for $33,326 or 36%, and
$27,954 or 40%, 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 36% in 2001 to 33% in 2002. The decrease was due to several factors. At
wholesale, the Company took earlier action to clear slower moving styles to
create open-to-buy for new best sellers and the Company took higher markdowns
because of the general softness in the economy. Operating expenses increased to
$8,207 in 2002 from $7,479 in 2001 due to increases in payroll and other
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 increased to $3,498 in 2002
compared to income from operations of $2,957 in 2001.
Sales from l.e.i. Wholesale accounted for $15,267 or 16%, and $13,198 or 19%, of
total sales in 2002 and 2001, respectively. The increase in sales was driven by
the sales of key styles
17
including euro casual and log bottom casuals. Gross profit as a percentage of
sales decreased from 39% in 2001 to 38% in 2002, due to an increase in the level
of promotional activity in the third quarter of 2002. Operating expenses
increased to $3,860 in 2002 from $2,811 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 was $1,991 in 2002 compared to income from operations of $2,340
in 2001.
Sales from Madden Mens Wholesale accounted for $14,848 or 16%, and $3,227 or 5%,
of total sales in 2002 and 2001, respectively. The sales increase resulted from
a doubling in the number of Madden Mens doors and deeper penetration of Mens
products through department store distribution channels. Sales were driven by
key styles including euro casual and sport-active look. 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 third quarter of 2002. Operating
expenses increased to $3,335 in 2002 from $1,170 in 2001 due to increases in
payroll and other payroll-related expenses due to growth in the business. 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 $1,954 in 2002 compared to breakeven in 2001.
Sales from Diva Wholesale accounted for $3,387 or 4%, and $2,385 or 3%, of total
sales in 2002 and 2001, respectively. The increase in sales was achieved partly
through inclusion of sales of products from the newly introduced Steven brand
(which is in its first quarter and has contributed revenue of $650) within the
Diva Wholesale division. The increase in sales was also driven by the key styles
including mid-heel dress shoes. Gross profit as a percentage of sales decreased
from 33% in 2001 to 18% in 2002 due to higher markdowns and allowances taken in
third quarter of 2002. Operating expenses increased to $648 in 2002 from $507 in
2001 due to increases in payroll and other payroll-related expenses. Loss from
operations for Diva Wholesale was $24 in 2002 compared to income from operations
of $275 in 2001.
Sales from Stevies Wholesale accounted for $3,914 or 4%, and $3,496 or 5%, of
total sales in 2002 and 2001, respectively. This increase in sales was due to
the growth in accounts such as Limited Too, Journey's Kidz, Nordstrom and
Filenes. 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 third
quarter of 2002. Operating expenses increased to $939 in 2002 from $804 in 2001.
Income from operations for Stevies Wholesale was $511 in 2002 compared to income
from operations of $531 in 2001.
Retail Division:
- ---------------
Sales from the Retail Division accounted for $22,276 or 24% and $19,985 or 28%
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 comparable store sales. During 2001 and 2002, the Company closed a total of
four of its least productive stores. Since September 30, 2001 the Company opened
eleven (11) new stores. As of September 30, 2002, there were 77 retail stores
compared to 68 stores as of September 30, 2001. Comparable store sales for the
quarter ended September 30, 2002 increased 1% over the same period of 2001. This
increase in sales was driven by the increased demand for buy-now wear-now
sandals due to the warmer weather in the east. 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 $10,008 or 45% of sales in 2002 from $9,014 or 45% of sales in
2001.
18
This increase in dollars primarily resulted from the addition of new stores.
Income from operations for the Retail Division was $1,908 in 2002 compared to
income from operations of $2,238 in 2001.
Adesso-Madden Division:
- ----------------------
Adesso-Madden, Inc. generated commission revenues of $1,239 for the three-month
period ended September 30, 2002, which represents a 3% increase over commission
revenues of $1,201 during the same period in 2001. This increase was primarily
due to the growth in accounts such as Wal-Mart, Target, JC Penney and Mervyn's
and the addition of children's products to the assortment mix. Operating
expenses decreased to $574 in 2002 from $593 in 2001. Income from operations for
Adesso-Madden was $665 in 2002 compared to income from operations of $608 in
2001.
LICENSE AGREEMENTS
Revenues from licensing increased to $1,278 in the first nine months of 2002
from $1,175 in 2001. As of September 30, 2002, the Company had six license
partners covering six product categories for its Steve Madden brand. Also, as of
September 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 $93,917 at September 30, 2002 compared to
$78,348 in working capital at September 30, 2001, representing an increase of
$15,569, 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
three-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 nine-month period ended September 30, 2002, cash provided for
operating activities was $8,435. Uses of cash arose principally from an increase
in factored accounts receivable of $11,287 and an increase in inventories of
$9,009. Cash was provided principally by net income of $15,623 and a decrease in
prepaid expenses and other assets of $7,860.
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 September 30:
2002 $ 7,699
2003 7,996
2004 7,857
2005 7,489
2006 7,485
Thereafter 22,573
--------
$ 61,099
========
19
The Company has employment agreements with four key executives and its Creative
and Design Chief as of September 30, 2002 providing for aggregate annual
salaries of approximately $1,765 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 nine-month period ended September 30, 2002, the Company used cash of
$16,718 primarily for the investments in marketable securities and $2,937 on
leasehold improvements to its corporate office space.
FINANCING ACTIVITIES
During the nine-month period ended September 30, 2002, the Company received
$3,937 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
20
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. Substantial portion 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
nine-month period September 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
21
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.
22
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, Steven, Steve Madden Mens and l.e.i.(R) brands, creating new product
categories and businesses and operating Company-owned stores on a profitable
basis. During the nine month period ended September 30, 2002 the Company opened
six (6) Steve Madden retail stores and has plans to open approximately two to
four (2-4) Steve Madden retail stores in the fourth quarter of 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.
23
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 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 October 31, 2002, the Company had outstanding options
to purchase an aggregate of approximately 2,399,000 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.
ITEM 4: CONTROLS AND PROCEDURES
Under the supervision and with the participation of the Company's management,
including the Company's Chief Executive Officer and Chief Financial Officer, the
Company has evaluated the effectiveness of the design and operation of its
disclosure controls and procedures within 90 days of the filing date of this
quarterly report, and, based on their evaluation, the Chief Executive Officer
and Chief Financial Officer have concluded that these disclosure controls and
procedures are effective. There were no significant changes in our internal
controls or in other factors that could significantly affect these controls
subsequent to the date of their evaluation.
24
Part II
ITEM 1. LEGAL PROCEEDINGS.
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 arising from the Company's use
of four stripes as a design element on footwear. On or about September 3, 2002,
Adidas commenced a second action 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. CV
02-1191 KI. The second Complaint seeks the same injunctive relief and
unspecified monetary damages for various trademark infringement claims arising
from the Company's use of two stripes as a design element on footwear. The
Company believes it has substantial defenses to the claims asserted in both
lawsuits and has filed answers denying the allegations of infringement in both
cases. The Company is seeking to have both cases consolidated before a single
judge.
On October 4, 2002, Skechers U.S.A., Inc., and Skechers U.S.A., Inc. II, filed
suit against Steven Madden Ltd. and R.S.V. Sport, Inc. in the United States
District Court for the Central District of California, Case No. CV 02-0766.
Skechers alleges claims for patent infringement, federal unfair competition,
federal antidilution violation, California unfair competition, California
antidilution violation, and common law unfair competition. Skechers seeks
unspecified monetary damages. The Company has not yet answered or otherwise
responded to the complaint, but believes that it has substantial defenses to the
claims asserted in the lawsuit.
On September 6, 2002 Ron Owen filed an action against Steven Madden Retail,
Inc., which action is pending in the United States District Court for the
Northern District of Texas - Dallas Division, Civil Action No. 3-02 CV 2316-R.
Plaintiff alleges a cause of action for breach of contract and seeks unspecified
monetary damages. On October 10, 2002, the Company answered the complaint. The
Company believes that it has substantial defenses to the claims asserted in the
lawsuit.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
(10.15) Amendment No. 1 to Employment Agreement of Richard Olicker
dated as of July 1, 2002.
(10.16) Amendment No. 2 to Employment Agreement of Arvind Dharia dated
as of October 30, 2002.
(99.1) Certification of Chief Executive Officer 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 Chief Financial Officer 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: November 14, 2002
STEVEN MADDEN, LTD.
/s/ JAMIESON A. KARSON
-----------------------
Jamieson A. Karson
Chief Executive Officer
/s/ ARVIND DHARIA
-----------------------
Arvind Dharia
Chief Financial Officer
26
CERTIFICATION PURSUANT TO RULE 13A-14 OR 15D-14 OF THE SECURITIES
EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Jamieson Karson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Steven Madden, Ltd.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: November 14, 2002
By: /s/ JAMIESON KARSON
--------------------
Jamieson Karson
Chief Executive Officer
27
CERTIFICATION PURSUANT TO RULE 13A-14 OR 15D-14 OF THE SECURITIES
EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Arvind Dharia, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Steven Madden, Ltd.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: November 14, 2002
By: /s/ ARVIND DHARIA
------------------
Arvind Dharia
Chief Financial Officer
28
STEVEN MADDEN, LTD.
FORM 10-Q
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
10.15 Amendment No. 1 to Employment Agreement of Richard Olicker
dated as of July 1, 2002
10.16 Amendment No. 2 to Employment Agreement of Arvind Dharia dated
as of October 30, 2002
99.1 Certification of Chief Executive Officer 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 Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
29